424(b)(3)
33-95032
PROSPECTUS CEL-SCI CORPORATION
708,070 Shares of Common Stock
This Prospectus relates to the offer and sale of up to
708,070 shares of Common Stock by certain selling shareholders (the
"Selling Shareholders"). The Company will not receive any proceeds
from the resale of the shares by the Selling Shareholders. The
Selling Shareholders have advised the Company that they will offer
the shares through broker/dealers at market prices with customary
commissions being paid by the Selling Shareholders. The costs of
registering the shares offered by the Selling Shareholders are being
paid by the Company. The Selling Shareholders will pay all other
costs of the sale of the shares offered by them. See "Selling
Shareholders".
This Prospectus also relates to the sale by the Company of
up to 17,500 shares of Common Stock issuable upon the exercise of
Warrants issued to a Sales Agent, or its assigns. The Sales Agent's
Warrants were issued in connection with the Company's 1995 Private
Offering of Securities. See "Selling Shareholders Sales Agent".
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO
LOSE THEIR ENTIRE INVESTMENT. FOR A DESCRIPTION OF CERTAIN IMPORTANT
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK
FACTORS" BEGINNING ON PAGE 12 OF THIS PROSPECTUS AND "DILUTION".THESE
SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
On May 30, 1996 the closing prices of the Company's Common
Stock and Warrants on the NASDAQ National Market System were $11.37
and $0.63, respectively. See "Market Information".
The Date of this Prospectus is May 31, 1996
AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Securities Exchange Act of l934 and in accordance therewith is
required to file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Copies
of any such reports, proxy statements and other information filed by
the Company can be inspected and copied at the public reference
facility
maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. and at the Commission's Regional offices in New
York (7 World Trade Center, Suite 1300, York, New York 10048) and
Chicago (Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511). Copies of such material can be
obtained from the Public Reference Section of the Commission at its
office in Washington, D.C. 20549 at prescribed rates. The Company
has filed with the Commission a Registration Statement on Form S-1
(together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as
amended (the "Act"), with respect to the Units offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For
further information, reference is made to the Registration
Statement.
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PROSPECTUS SUMMARY
THIS SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND
FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
The Company
CEL-SCI Corporation (the "Company") was formed as a
Colorado corporation in 1983. The Company is involved in the
research and development of certain drugs and vaccines. The
Company's first product, MULTIKINETM, manufactured using the
Company's proprietary cell culture technologies, is a combination,
or "cocktail", of natural human interleukin-2 ("IL-2") and certain
lymphokines and cytokines. MULTIKINE is being tested to determine if
it is effective in improving the immune response of advanced cancer
pantients. The Company's second product, HGP-30, is being tested to
determine if it is an effective treatment/ vaccine against the AIDS
virus. In addition, the Company recently acquired a new patented T-
cell Modulation Process which uses "heteroconjugates" to direct the
body to chose a specific immune response. The Company intends to
use this new technology to improve the cellular immune response of
persons vaccinated with HGP30.
Before human testing can begin with respect to a drug or
biological product, preclinical studies are conducted in laboratory
animals to evaluate the potential efficacy and the safety of a
product. Human clinical studies generally involve a three-phase
process. The initial clinical evaluation, Phase I, consists of
administering the product and testing for safe and tolerable dosage
levels. Phase II trials continue the evaluation of immunogenicity
and determine the appropriate dosage for the product, identify
possible side effects and risks in a larger group of subjects, and
provide preliminary indications of efficacy. Phase III trials
consist of testing for actual clinical efficacy for safety within an
expanded group of patients at geographically dispersed test sites.
See "Business Government Regulation" for a more detailed description
of the foregoing.
Between 1983 and 1986 the Company was primarily involved in
funding pre-clinical and Phase I clinical trials of MULTIKINE. These
trials were conducted at St. Thomas's Hospital Medical School in
London, England pursuant to authority granted by England's
Department of Health and Social Security. In July, 1991 physicians
at a southern Florida medical institution began human clinical
trials using MULTIKINE. The focus of these trials was the treatment
of metastatic malignant melanoma and unresectable head and neck
cancer using MULTIKINE. The clinical trials in Florida were
conducted pursuant to approvals obtained by the medical institution
from the Florida Department of Health and Rehabilitative Services.
In March 1995, the Canadian Health Protection Branch,
Health and Welfare Ministry gave clearance to the Company to start a
phase I/II cancer study using Multikine. The study, which will
enroll up to 30 head and neck cancer patients who have failed
conventional treatments, is expected to be conducted at the Ottawa
Regional Cancer Center and Hotel-Dieu de Montreal Hospital. The
study is designed to evaluate safety, tumor responses and immune
responses in patients treated with multiple courses of Multikine.
The length of time that each patient will remain on the
investigational treatment will depend on the patient's response to
treatment. In May l995, the U.S. Food and Drug Administration (FDA)
authorized the export of the Company's Multikine drug to Canada for
purposes of this study.
In February 1996 the FDA authorized the Company to conduct
two human clinical studies using MULTIKINE. The studies will focus
on prostate and head and neck cancer. The prostate study will be
conducted at Jefferson Hospital in Philadelphia, Pennsylvania and
will involve up to 15 prostate cancer patients who have failed on
hormonal therapy. The head and neck cancer study will involve up to
30 cancer patients who have failed using conventional therapies.
The Company is currently evaluating clinical centers in the U.S. for
purposes of the study. The head and neck cancer study in the U.S.
will be conducted in conjunction with the Company's Canadian head
and neck cancer study.
In October 1995 Viral Technologies, Inc. ("VTI") became a
whollyowned subsidiary of the Company. VTI is engaged in the
development of a possible treatment/vaccine for AIDS. VTI's
technology may also have application in the treatment of AIDS-
infected individuals and the diagnosis of AIDS. VTI's AIDS
treatment/vaccine, HGP-30, has completed certain Phase I human
clinical trials. In the Phase I trials, the vaccine was
administered to volunteers who were not infected with the HIV virus
in an effort to determine safe and tolerable dosage levels.
Product licensure in a foreign country or under state
authority does not mean that the product will be licensed by the FDA
and there are no assurances that the Company or VTI will receive any
approval of the FDA or any other governmental entity for the
manufacturing and/or marketing of a product. Consequently, the
commencement of the manufacturing and marketing by the Company or
VTI of any product is, in all likelihood, many years away. See
"Business".
The lack of government approval for the Company's or VTI's
products will prevent the Company and VTI from generally marketing
their products. Delays in obtaining government approval or the
failure to obtain government approval may have a material adverse
impact upon the Company's operations. All of the Company's products
are in the early stages of development. The Company does not expect
to develop commercial products for several years, if at all. The
Company has had operating losses since its inception, has an
accumulated deficit of approximately $27,014,000 at March 31, 1996,
and expects to incur substantial losses for the foreseeable future.
The Company's executive offices are located at 66 Canal
CenterPlaza, Suite 510, Alexandria, Virginia 22314, and its
telephone number is (703) 5495293.
THE OFFERING
Shares Offered by
Company: 17,500 shares of Common Stock. See
"Selling Shareholders Sales Agent".
Securities Offered by
the Selling Shareholders: Up to 708,070 shares of Common Stock.
The Company will not receive any
proceeds from the sale of the shares
offered by the Selling Shareholders.
See "Selling Shareholders".
Common Stock Outstanding
Prior To and After
Offering: As of the date of this Prospectus, the
Company had 6,328,581 shares of Common
Stock issued and outstanding.
Assuming the Selling Shareholders
exercise Warrants to purchase an
additional 286,828 shares of Common
Stock from the Company, and assuming
the Sales Agent (or its assigns)
exercises Warrants to purchase an
additional 150,000 shares of Common
Stock, there will be 6,765,409 shares
of Common Stock issued and
outstanding. The number of
outstanding shares before and after
this Offering does not give effect to
shares which may be issued upon the
exercise of options, warrants or other
securities previously issued by the
Company. See "Dilution and Comparative
Share Data", "Selling Shareholders"
and "Description of Securities".
Risk Factors: The purchase of the Securities offered
by
this Prospectus involves a high degree
of risk. Risk factors include the
following: lack of revenues and history
of loss, need for additional capital,
government regulation, need for FDA
approval, and dilution. See "Risk
Factors."
NASDAQ Symbols: Common Stock: CELI
Warrants: CELIW
Summary Financial Data
For the Years Ended September 30,
1995 1994 1993 1992 1991
Investment Income &
Other Revenues $ 423,765 $ 624,670 $ 997,964 $ 434,180 $ 35,972
Expenses:
Research and
Development 1,824,661 2,896,l09 1,307,042 481,697 108,771
Depreciation
and Amortization 262,705 138,755 55,372 33,536 32,582
General and
Administrative 1,713,912 1,621,990 1,696,119 1,309,475 795,015
Equity in loss of
joint venture 501,125 394,692 344,423 260,388 290,166
Net
Loss $(3,878,638) $(4,426,876) $(2,404,992) $(1,650,916) $(1,190,562)
Loss per
common share $(0.89) $(1.06) $(0.58) $(0.42) $(0.35)
Weighted average
common shares
outstanding 4,342,628 4,185,240 4,155,431 3,953,233
3,400,546
Six Months Ended March 31,
1996 1995
Investment Income & Other Revenues $ 110,320 $ 207,917
Expenses:
Research and Development 1,750,694 1,149,943
Depreciation and Amortization 139,962 133,986
General and Administrative 1,219,719 778,248
Equity in loss of joint venture 3,772 290,340
Net Loss $(3,003,827) $(2,144,600)
Loss per common share $(0.52) $(0.51)
Weighted average common shares
outstanding 5,825,011 4,188,244
Balance Sheet Data:
September 30,
1995 1994 1993 1992 1991
Working Capital $3,983,699 $5,795,191 $10,296,472 $13,043,012 $682,831
Total Assets 6,359,011 8,086,670 11,633,090 13,769,504 1,611,899
Total Liabilities 1,516,978 l,407,602 688,231 467,086 672,595
Shareholders'
Equity 4,842,033 6,679,068 10,944,859 13,302,4l8 939,304
March 31, 1996
Working Capital $4,136,693
Total Assets $5,861,027
Total Liabilities $2,022,319
Shareholders' Equity $3,838,708
No dividends have been declared by the Company since its
inception.
GLOSSARY OF TECHNICAL TERMS
AIDS. Acquired Immune Deficiency Syndrome. A severe viral
di
sease of the immune system leading to other lethal
infections and malignancies.
Amino acids. Building blocks of proteins.
Antibody. A protein produced by certain white blood cells in
humans
and animals in response to a substance seen as non-
self, that is a foreign antigen (such as a virus or
bacteria). An antibody binds specifically to a single
antigen.
Antigen. Any substance seen as foreign by the immune system and
which triggers an antibody or cell-mediated response
from the body's immune system.
B-Cells. A type of lymphocyte which produces antibodies in
response
to antigens.
Cytokines. Peptides which regulate the functions and/or growth of
other cells. Lymphokines are a type of cytokine.
HIV. Human Immunodeficiency Virus. The virus responsible
for
AIDS and related diseases.
Lymphocytes. A type of white blood cells divided into two classes,
B-cells and T-cells.
Lymphyokine. A specific group of hormones which regulate and modify
the
various functions of both T-cells and B-cells. There
are many lymphokines, each of which is thought to have
distinctive chemical and functional properties. IL-2
is but one of these lymphokines.
Macrophage. A cell found in the body that has the ability to kill
vir
uses, bacteria, fungi and cancer cells, often by
engulfing the targeted organism or cell.
Peptide. Two or more amino acids joined by a linkage called a
pep
tide bond.
Proteins. A molecule composed of amino acids. There are many
types
of proteins, all carrying out a number of different
functions essential for cell growth.
T-Cells. A type of lymphocyte which will amplify or suppress
anti
body formation by B-cells, and can also directly
destroy "foreign" cells by activating "killer cells".
Virus. A submicroscopic organism that contains genetic
information
but cannot reproduce itself. To replicate, it must
invade another cell and use parts of that cell's
reproductive machinery.
RISK FACTORS
An investment in the Company's Securities involves a high degree
of risk. Prospective investors are advised that they may lose all or
part of their investment. Prospective investors should carefully review
the following risk factors.
Offering Proceeds. This Offering is being made by certain
Selling Shareholders. The Company will not receive any proceeds from the
sale of the shares by the Selling Shareholders.
Lack of Revenues and History of Loss. The Company has had only
limited revenues since it was formed in 1983. Since the date of its
formation and through March 31, 1996, the Company has incurred net losses
of approximately $27,014,000. During the years ended September 30, 1993,
1994 and 1995 the Company suffered losses of $2,404,992, $4,426,876 and
$3,878,638 respectively. The Company has relied principally upon the
proceeds of public and private sales of securities to finance its
activities to date. See "Management's Discussion and Analysis". All of
the Company's potential products are in the early stages of development,
and any commercial sale of these products will be many years away.
Accordingly, the Company expects to incur substantial losses for the
foreseeable future.
Need for Additional Capital. Clinical and other studies
necessary to obtain approval of a new drug can be time consuming and
costly, especially in the United States, but also in foreign countries.
The different steps necessary to obtain regulatory approval, especially
that of the Food and Drug Administration ("FDA"), involve significant
costs. The Company expects that it will need additional financing in
order to fund the costs of future clinical trials, related research, and
general and
administrative expenses. The Company may be forced to delay or postpone
development and research expenditures if the Company is unable to secure
adequate sources of funds. These delays in development may have an
adverse effect on the Company's ability to produce a timely and
competitive product. There can be no assurance that the Company will be
able to obtain additional funding from other sources. See "Management's
Discussion and Analysis".
Viral Technologies, Inc. ("VTI"), a wholly-owned subsididary of
the Company, is dependent upon funding from the Company for its
operations and research programs. See "Business Viral Technologies,
Inc.".
Cost Estimates. The Company's estimates of the costs associated
with future clinical trials and research may be substantially lower than
the actual costs of these activities. If the Company's cost estimates
are incorrect, the Company will need additional funding for its research
efforts. See "Management's Discussion and Analysis".
Government Regulation FDA Approval. Products which may be
developed by the Company or Viral Technologies, Inc. (or which may be
developed by affiliates or licensees) will require regulatory approvals
prior to sale. In particular, therapeutic agents and diagnostic products
are subject to approval, prior to general marketing, by the FDA in the
United States and by comparable agencies in most foreign countries. The
process of obtaining FDA and corresponding foreign approvals is costly
and time consuming,
particularly for pharmaceutical products such as those which might
ultimately be developed by the Company, Viral Technologies, Inc. or its
licensees, and there can be no assurance that such approvals will be
granted. Any failure to obtain or any delay in obtaining such approvals
may adversely affect the ability of potential licensees or the Company to
successfully market any products developed.
Also, the extent of adverse government regulations which might arise from
future legislative or administrative action cannot be predicted. The
clinical trial which the Company's affiliate, Viral Technologies, Inc.,
is conducting in California is regulated by government agencies in
California and obtaining approvals from states for clinical trials is
likewise expensive and time consuming. See "Business Government
Regulation."
Dependence on Others to Manufacture Product. The Company has an
agreement with an unrelated corporation for the production, until 1997,
of MULTIKINE for research and testing purposes. At present, this is the
Company's only source of MULTIKINE. If this corporation could not, for
any reason, supply the Company with MULTIKINE, the Company estimates that
it would take approximately six to ten months to obtain supplies of
MULTIKINE under an alternative manufacturing arrangement. The Company
does not know what cost it would incur to obtain this alternative source
of supply.
Licensed Technology Potential Conflicts of Interest. The
Company's clinical studies and research have been focused on compounds,
compositions and processes which were licensed to the Company by Sittona
Company, B.V. ("Sittona") in 1983. Maximilian de Clara, the Company's
president and a director, acquired control of Sittona in 1985. Any
commercial products developed by the Company and based upon the
technology licensed by Sittona will belong to Sittona, subject to the
Company's right to manufacture and sell such products in accordance with
the terms of the licensing agreement. The Company's license remains in
effect until the expiration or abandonment of all patent rights or until
the compounds, compositions and processes subject to the license enter
into the public domain, whichever is later. The license may be
terminated earlier for other reasons, including the insolvency of the
Company. Accordingly, a conflict of interest may arise between the
Company and Mr. de Clara concerning the Company's continued rights to the
licensed technology. Any future transactions between the Company and
Sittona will be subject to the review and approval by a majority of the
Company's disinterested directors. See "Business Compounds and Processes
Licensed to the Company", and
"Management Transactions with Related Parties".
Technological Change. The biomedical field in which the Company
is involved is undergoing rapid and significant technological change.
The successful development of therapeutic agents and diagnostic products
from the compounds, compositions and processes licensed to the Company,
through Company financed research or as a result of possible licensing
arrangements with pharmaceutical or other companies, will depend on its
ability to be in the technological forefront of this field. There can be
no assurance that the Company will achieve or maintain such a competitive
position or that other technological developments will not cause the
Company's proprietary technologies to become uneconomical or obsolete.
Patents. Since 1983 the Company, on behalf of the owners of the
compounds, compositions and processes licensed to the Company, has filed
applications for United States and foreign patents covering certain
aspects of the technology. Although the Company has paid the costs of
applying for and obtaining patents, the technology covered by the patents
is not owned by the Company, but by an affiliated party which has
licensed the technology to the Company. As of the date of this
Prospectus nine patents have been issued in
the United States and three patents have been issued in Europe. There is
no assurance that the applications still pending or which may be filed in
the future will result in the issuance of any patents. Furthermore,
there is no assurance as to the breadth and degree of protection any
issued patents might afford the owners of the patents and the Company.
Disputes may arise between the owners of the patents or the Company and
others as to the scope, validity
and ownership rights of these or other patents. Any defense of the
patents could prove costly and time consuming and there can be no
assurance that the Company or the owners of the patents will be in a
position, or will deem it advisable, to carry on such a defense. Other
private and public concerns, including universities, may have filed
applications for, or may have been issued, patents and are expected to
obtain additional patents and other proprietary rights to technology
potentially useful or necessary to the Company. The scope and validity
of such patents, if any, the extent to which the Company or the owners of
the patents may wish or need to acquire the rights to such patents, and
the cost and availability of such rights are presently unknown. Also, as
far as the Company relies upon unpatented proprietary technology, there
is no assurance that others may not acquire or independently develop the
same or similar technology. The first patent licensed to the Company
will expire in the year 2000. Since the Company's IND application
relating to MULTIKINE has only recently been cleared by the FDA, and
since the Company does not know if it will ever be able to sell Multikine
on a commercial basis, the Company cannot predict what effect the
expiration of this patent will have on the Company. Notwithstanding the
above, the Company believes that later issued patents will protect the
technology associated with Multikine past the year 2000. See "Business
Compounds and Processes Licensed to the Company".
Product Liability and Lack of Insurance. Although the Company
has product liability insurance for its HGP-30 vaccine, at the present
time, the Company does not have product liability insurance for
MULTIKINE. The successful prosecution of a product liability case
against the Company could have a materially adverse effect upon its
business.
Dependence on Management and Scientific Personnel. The Company
is dependent for its success on the continued availability of its
executive officers. The loss of the services of any of the Company's
executive officers could have an adverse effect on the Company's
business. The Company does not carry key man life insurance on any of
its officers. The Company's future success will also depend upon its
ability to attract and retain qualified scientific personnel. There can
be no assurance that the Company will be able to hire and retain such
necessary personnel. See "Management".
NASDAQ Listing. Since February, 1992, the Company's common
stock and warrants have been listed on the NASDAQ National Market System.
In May, 1996 the Company was advised by the NASD that the Company's
securities may be delisted from the National Market System. In the event
of a delisting, the Company's securities would not automatically be
eligible for trading on the NASDAQ SmallCap market. Although the Company
has requested the NASD to maintain the Company's listing on the NASDAQ
National Market System, the Company plans to file an application to have
the Company's common stock traded on the NASDAQ SmallCap Market in the
event the Company's securities were removed from the NASDAQ National
Market System. Among other requirements for an initial
listing on the NASDAQ SmallCap Market, the NASD requires the bid price of
a security be at least $3.00 per share.
Although the Company believes that it meets all requirements
necessary to have the Company's securities listed on the NASDAQ SmallCap
Market, in the event the Company's securities were removed from the
National Market System, there can be no assurance that the Company's
listing application for the NASDAQ SmallCap Market will be approved.
The NASD requires, for continued inclusion on NASDAQ, that the
Company must maintain $2,000,000 in assets, $200,000 market value of the
public float, $1,000,000 in net worth and that the bid price of the
Company's Common Stock, must be at least $1.00, or in the alternative,
that the Company have (i) a net worth of at least $2,000,000 and (ii)
that the public float be at least $1,000,000. As the Company does not
have any control over the market price of its Common Stock, the Company
cannot assure it will be able to comply with the requirements concerning
the market value of the Company's publicly traded securities. If the
Company's securities were delisted from
the NASDAQ system, the Company's securities would trade in the
unorganized interdealer over-the-counter market through the OTC Bulletin
Board which provides significantly less liquidity than the NASDAQ system.
Securities which are not traded on the NASDAQ system may be more
difficult to sell and may be subject to more price volatility than NASDAQ
listed securities.
If the Company's Common Stock and/or Warrants were delisted from
NASDAQ, trades in such securities may then be subject to Rule 15g-9 under
the Securities Exchange Act of 1934, which rule imposes certain
requirements on broker/dealers who sell securities subject to the rule to
persons other than established customers and accredited investors. For
transactions covered by the rule, brokers/dealers must make a special
suitability determination for purchasers of the securities and receive
the purchaser's written agreement to the transaction prior to sale. Rule
15g9, if applicable to sales of the Company's securities, may affect the
ability of broker/dealers to sell the Company's securities and may also
affect the ability of owners of the Company's common stock or warrants to
sell such securities in the secondary market and may otherwise affect the
trading market in the Company's securities.
The Securities and Exchange Commission has also adopted rules
that regulate broker/dealer practices in connection with transactions in
"penny stocks". Penny stocks generally are equity securities with a
price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on the NASDAQ system. The penny
stock rules require a broker/dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information
about penny stocks and the nature and level of risks in the penny stock
market. The broker/dealer also must provide the customer with current
bid and offer quotations for the penny stock, the compensation of the
broker/dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the
customer's account. The bid and offer quotations, and the broker/dealer
and salesperson compensation information, must be given to the customer
orally or in writing prior to effecting the transaction and must be given
to the customer in writing before or with the
customer's confirmation. These disclosure
requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the
penny stock rules. If the Company's securities become subject to the
penny stock rules, persons owning the Company's common stock or warrants
may find it more difficult to sell the common stock or warrants.
Shares Available for Resale. As of March 31, 1996, there were
6,328,581 shares of the Company's Common Stock issued and outstanding.
Approximately 200,000 of these shares have not been registered under the
Securities Act of l933, as amended (the "Act"), and are "restricted
securities" as defined by Rule l44 of the Act. Rule l44 provides, in
essence, that shareholders, after holding restricted securities for a
period of two years may, every three months, sell in ordinary brokerage
transactions an amount equal to the greater of 1% of the Company's then
outstanding Common stock or the average weekly trading volume, if any, of
the stock during the four calendar weeks preceding the sale.
Nonaffiliates of the Company who hold restricted securities for a period
of three years may, under certain prescribed conditions, sell their
securities without regard to any of the requirements of the Rule. As of
the date of this Offering Memorandum, substantially all shares of
restricted stock were available for resale pursuant to Rule l44. Sales
of restricted stock may have a depressive effect on the market price of
the Company's Common Stock. Such sales might also impede future financing
by the Company.
Options, Warrants and Convertible Securities. The Company has
issued options, warrants and other convertible securities ("Derivative
Securities") which allow the holders to acquire additional shares of the
Company's Common Stock. In some cases the Company has agreed that, at
its expense, will make appropriate filings with the Securities and
Exchange Commission so that the securities underlying certain Derivative
Securities will be available for public sale. Such filings could result
in substantial expense to the Company and could hinder future financings
by the Company.
For the terms of these Derivative Securities, the holders
thereof will have an opportunity to profit from any increase in the
market price of the Company's Common Stock without assuming the risks of
ownership. Holders of such Derivative Securities may exercise and/or
convert them at a time when the Company could obtain additional capital
on terms more favorable than those provided by the Derivative Securities.
The exercise or conversion of the Derivative Securities will dilute the
voting interest of the owners of presently outstanding shares of the
Company's Common Stock and may adversely affect the ability of the
Company to obtain additional capital in the future. The sale of the
shares of Common Stock issuable upon the exercise or conversion of the
Derivative Securities could adversely affect the market price of the
Company's stock. See "Dilution and Comparative Share Data".
Competition. The competition in the research, development and
commercialization of products which may be used in the prevention or
treatment of cancer and AIDS is intense. Major pharmaceutical and
chemical companies, as well as specialized genetic engineering firms, are
developing products for these diseases. Many of these companies have
substantial financial, research and development, and marketing resources
and are capable of providing significant long-term competition either by
establishing inhouse research groups or
by forming collaborative ventures with other entities. In addition, both
smaller companies and non-profit institutions are active in research
relating to cancer and AIDS and are expected to become more active in the
future.
The clinical trials sponsored to date by the Company and VTI
have not been approved by the FDA, but rather have been conducted
pursuant to approvals obtained from regulatory agencies in England,
Canada and certain states. Since the results of these clinical trials
may not be accepted by the FDA, companies which are conducting clinical
trials approved by the FDA may have a competitive advantage in that the
products of such companies are further advanced in the regulatory process
than those of the Company or
VTI.
Lack of Dividends. There can be no assurance that the Company
will
be profitable. At the present time, the Company intends to use available
funds to finance the Company's operations. Accordingly, while payment of
dividends rests within the discretion of the Board of Directors, no
dividends have been declared or paid by the Company. The Company does
not presently intend to pay dividends and there can be no assurance that
dividends will ever be paid. Pursuant to the terms of a loan agreement
with a bank, the Company may not pay any dividends without the consent of
the bank.
Dilution. Persons purchasing the securities offered by this
Prospectus will suffer an immediate dilution in the per share net
tangible book value of their Common Stock. See "Dilution and Comparative
Share Data."
Preferred Stock. The Company's Articles of Incorporation
authorize
the Company's Board of Directors to issue up to 200,000 shares of
Preferred Stock. The provisions in the Company's Articles of
Incorporation relating to the Preferred Stock allow the Company's
directors to issue Preferred Stock with multiple votes per share and
dividends rights which would have priority over any dividends paid with
respect to the Company's Common Stock. The issuance of Preferred Stock
with such rights may make the removal of management difficult 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.
DILUTION AND COMPARATIVE SHARE DATA
As of March 31, 1996, the present shareholders of the Company
owned 6,328,581 shares of Common Stock, which had a net tangible book
value of approximately $0.42 per share. The following table illustrates
the comparative stock ownership of the other stockholders of the Company
as compared to the investors in this Offering assuming all shares offered
are sold.
Shares outstanding (1) 6,328,581
Shares to be issued, assuming (i) Selling Share-
holders exercise Warrants to purchase 286,828
additional shares of Common Stock from Company and (ii) the
Sales Agent (or its assigns) exercises Warrants to purchase an
additional
150,000 shares of Common Stock 436,828
(2)
Shares outstanding (pro forma basis) 6,765,409
Net tangible book value per share
at March 31, 1996 $0.42
Equity ownership by present shareholders
after this offering 89%
Equity ownership by investors in this
Offering 11%
(1) Amount excludes shares which may be issued upon the exercise of
other options and warrants previously issued by the Company. See
"Management".
(2) Only 17,500 shares issuable upon the exercise of the Sales
Agent's Warrants are presently being registered for resale to the
public.
The purchasers of the securities offered by this Prospectus will
suffer an immediate dilution if the price paid for the securities
offered is greater than the net tangible book value of the Company's
Common Stock.
"Net tangible book value" is the amount that results from
subtracting the total liabilities and intangible assets of the
Company from its total assets. "Dilution" is the difference between
the offering price and the net tangible book value of shares
immediately after the Offering.
As of March 31, 1996 the Company had 6,328,581 shares of Common
Stock issued and outstanding. The following table reflects the
additional shares which may be issued as the result of the exercise
of outstanding options and warrants or the conversion of other
securities issued by the Company.
Number of Note
Shares
Reference
Outstanding as of March 31, 1996 6,328,581
Shares Offered By This Prospectus:
Shares issuable upon exercise of
warrants held by Investors in Company's
June and September 1995
Private Offerings 286,828 A
Shares issuable upon exercise of
warrants issued to Selling Agent, or its
assigns, in connection with
the Company's June and September 1995
Private Offerings 150,000 B
Shares outstanding after this Offering
(assuming all shares offered are sold) 6,765,409
Other Shares Which May Be Issued:
Shares issuable upon exercise of
warrants sold in Company's 1992
Public Offering 517,500 C
Shares issuable upon exercise of
warrants sold to Underwriter in connection
with Company's 1992 Public Offering 90,000 D
Shares issuable upon exercise of
options granted to Company's officers,
directors, employees and consultants 981,926 E
Shares issuable upon conversion of notes,
based on closing price of the Company's
common stock on May 30, 1996 ($11.37) 250,000 F
Shares issuable upon the conversion of
Series A Preferred Stock, based upon closing
price of Company's common stock
on May 30, 1996 ($11.37) 437,500 G
9,042,335
A. These shares are being offered by means of this Prospectus. See
"Selling Shareholders".
B. These shares are being offered by means of this Prospectus. See
"Prospectus Summary".
C. See "Description of Securities".
D. The Underwriter's Warrants provide that the Company, at its expense,
will make appropriate filings with the Securities and Exchange
Commission so that the securities underlying the Underwriter's
Warrants will be available for public sale.
E. The options are exercisable at prices ranging from $2.87 to $19.70
per share. The Company may also grant options to purchase 117,407
additional shares under its Incentive Stock Option and Non-Qualified
Stock Option Plans. See "Management Stock Option and Bonus Plans".
F. In March 1996 the Company sold $l,250,000 of Convertible Notes
("Notes") to two persons. The Notes are convertible from time to
time in whole or in part, into shares of the Company's Common Stock.
The conversion price is 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. Notwithstanding the above, the conversion price may not
be less than $2.40 per share. The Notes are payable on December 1,
1996 and accrue interest at 10% per annum. The Company has agreed to
make appropriate filings with the Securities and Exchange Commission
such that the shares issuable upon the conversion of the Notes will
be available for public sale. See "Risk Factors".
G. In May 1996 the Company sold 3,500 shares of its Series A Preferred
Stock (the "Preferred Shares") for $3,500,000 or $1,000 per share.
At the purchasers' option, up to 1,750 Preferred Shares are
convertible, on or after 60 days from the closing date of the
purchase of such shares (the "Closing"), into shares of the Company's
Common Stock on the basis of one share of Preferred Stock for shares
of Common Stock equal in number to the amount determined by dividing
$1,000 by 85% of the Closing Price of the Company's Common Stock.
All Preferred Shares are convertible, on or after 90 days from the
Closing, on the basis of one share of Preferred Stock for shares of
the Company's Common Stock equal in number to the amount determined
by dividing $1,000 by 83% of the Closing Price of the Company's
Common Stock. The term "Closing Price" is defined as the average
closing bid price of the Company's Common Stock over the five-day
trading period ending on the day prior to the conversion of the
Preferred Stock. Notwithstanding the above, the conversion price may
not be less than $3.00 nor more than $8.00, except that if the
Closing Price is less than $3.00, then the conversion price will be
equal to the Closing Price. The Preferred Shares, if issued, are
entitled to a quarterly dividend of $17.50 per share. Any Preferred
Shares which are outstanding on the second anniversary of the Closing
will be automatically converted into shares of the Company's Common
Stock. The Preferred Shares have a liquidation preference over the
Company's Common Stock. By means of a separate Registration
Statement, the shares of Common Stock issuable upon the conversion of
the Series A Preferred Stock have been registered for public sale.
MARKET INFORMATION
As of March 31, 1996, there were approximately 3,000 record
holders of the Company's Common Stock and approximately 100 record
holders of the Company's Warrants. The Company has not issued any shares
of preferred stock. The Company's Common Stock and Warrants are traded on
the National Association of Securities Dealers Automatic Quotation
("NASDAQ") System. Set forth below are the range of high and low bid
quotations for the periods indicated as reported by NASDAQ, and as
adjusted for the 10 for 1 reverse stock split which was approved by the
Company's shareholders on April 28, 1995 and became effective on May 1,
1995. The market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
Quarter
Ending Common Stock Warrants
High Low High Low
12/31/93 $20.00 $13.40 $0.94 $0.41
3/31/94 $18.10 $10.30 $0.75 $0.28
6/30/94 $10.90 $ 8.10 $0.31 $0.19
9/30/94 $10.30 $ 5.60 $0.21 $0.12
12/31/94 $ 7.50 $ 3.40 $0.25 $0.09
3/31/95 $ 4.00 $ 3.75 $0.22 $0.13
6/30/95 $ 5.30 $ 2.78 $0.15 $0.06
9/30/95 $ 5.46 $ 3.56 $0.28 $0.09
12/31/95 $ 4.75 $ 2.28 $0.25
$0.09
3/31/96 $ 7.12 $ 2.68 $0.28
$0.03
Holders of Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds
legally available therefor and, in the event of liquidation, to share
pro rata in any distribution of the Company's assets after payment of
liabilities. The Board of Directors is not obligated to declare a
dividend. The Company has not paid any dividends and the Company does
not have any current plans to pay any dividends. Pursuant to the
terms of a loan agreement with a bank, the Company may not pay any
dividends without the consent of the bank. See Note 5 to the
Company's September 30, 1995 financial statements.
The provisions in the Company's Articles of Incorporation
relating to the Company's Preferred Stock would allow the Company's
directors to issue Preferred Stock with rights to multiple votes per
share and dividends rights which would have priority over any
dividends paid with respect to the Company's Common Stock. The
issuance of Preferred Stock with such rights may make more difficult
the removal of management even if such removal would be considered
beneficial to shareholders generally, and will have the effect of
limiting shareholder participation in certain transactions such as
mergers or tender offers if such transactions are not favored by
incumbent management.
SELECTED FINANCIAL DATA
The following selected financial data should be read in
conjunction with the more detailed financial statements, related notes
and other financial information included herein. See also "Management's
Discussion and Analysis".
For the Years Ended September 30,
1995 1994 1993 1992 1991
Investment Income &
Other Revenues$ 423,765 $ 624,670 $ 997,964 $ 434,180 $ 35,972
Expenses:
Research and
Development 1,824,661 2,896,l09 1,307,042 481,697 108,771
Depreciation
and Amortization 262,705 138,755 55,372 33,536 32,582
General and
Administrative 1,713,912 1,621,990 1,696,119 1,309,475 795,015
Equity in loss of
joint venture 501,125 394,692 344,423 260,388 290,166
Net
Loss $(3,878,638) $(4,426,876) $(2,404,992) $(1,650,916) $(1,190,562)
Loss per
common share $(0.89) $(1.06) $(0.58) $(0.42) $(0.35)
Weighted average
common shares
outstanding 4,342,628 4,185,240 4,155,431 3,953,233 3,400,546
Six Months Ended March
31,
1996 1995
Investment Income & Other Revenues $ 110,320 $207,917
Expenses:
Research and Development 1,750,694 1,149,943
Depreciation and Amortization 139,962 133,986
General and Administrative 1,219,719 778,248
Equity in loss of joint venture 3,772 290,340
Net Loss $(3,003,827)$(2,144,600)
Loss per common share $(0.52) $(0.51)
Weighted average common shares
outstanding 5,825,011 4,188,244
Balance Sheet Data:
September 30,
1995 1994 1993 1992 1991
Working Capital $3,983,699 $5,795,191 $10,296,472 $13,043,012 $682,831
Total Assets 6,359,011 8,086,670 11,633,090 13,769,504 1,611,899
Total Liabilities 1,516,978 l,407,602 688,231 467,086 672,595
Shareholders'
Equity 4,842,033 6,679,068 10,944,859 13,302,4l8 939,304
March 31, 1996
Working Capital $4,136,693
Total Assets $5,861,027
Total Liabilities $2,022,319
Shareholders' Equity $3,838,708
No dividends have been declared by the Company since its inception.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Six Months Ended March 31, 1996
Interest income during the six months ending March 31, 1996
reflects interest accrued on investments.
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 three months ended December 31, 1995 to increase significantly.
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. Current research and development expenses increased due to
the inclusion of VTI's research and development expenses with those of
the Company (the Company's research and development costs, separate from
those of VTI's, decreased by approximately $100,000 due to cost savings
achieved from using the Company's laboratory which became operational in
January 1995).
3. General and administrative expenses increased due to the
inclusion of VTI's general and administrative expenses.
4. Capitalized patent costs increased significantly.
Fiscal 1995
Revenues for the year ended September 30, 1995 consisted
primarily of interest earned on funds received from the Company's
February 1992 public offering. The interest income and investment
balances have declined from the previous year as funds were used for
ongoing expenses and equipping the Company's new laboratory. Research
and development expenses decreased due to the use of the Company's
laboratory for research programs and the completion of a research and
development project relating to the Company's manufacturing process.
General and administrative expenses increased as the result of the
expenses (approximately $100,000) associated with the Company's 1995
annual meeting of shareholders. The Company did not have any meetings of
its shareholders during fiscal 1994. Significant components of general
and administrative expenses during this year were salaries and employee
benefits ($341,000), automobile, travel and expense reimbursements
($271,000), shareholder communications and investor relations ($245,000),
legal and accounting ($134,000), and officers and directors liability
insurance ($138,000). Losses associated with the Company's joint venture
interest in VTI increased due to an increase in VTI's research and
development expenditures.
Fiscal 1994
Interest income during the year ending September 30, 1994
decreased from the prior year as a portion of the Company's investments
were sold to pay for operating expenses. Research and development
expenses increased due to the commencement of several new research
projects, all of which pertained to the Company's MULTIKINE product.
Significant components of general and administrative expenses during this
year were salaries and employee benefits ($442,039), travel and expense
reimbursements ($294,217), shareholder communications and investor
relations ($267,070), legal and accounting ($151,879), and officers and
directors liability insurance ($147,564). Fiscal 1993
Investment income during the year ending September 30, 1993
increased as the Company had use of the funds from its February, 1992
public offering for twelve months in fiscal 1993 as opposed to six months
in fiscal 1992. Research and development expenses increased due to the
commencement of several new research projects, all of which pertained to
the Company's MULTIKINE drug. General and administrative expenses
increased due to an increase in the cost of Directors and Officers
insurance, the implementation of an employee 401(K) plan, and the
addition of new employees during the year. Significant components of
general and administrative expenses during this year were salaries and
employee benefits ($342,150), travel and expense reimbursements
($266,007), shareholder communications and investor relations ($341,024),
legal and accounting ($107,254), officers and directors liability
insurance ($113,690), and the cost of indemnifying an officer and
director for losses sustained as the result of actions taken on behalf of
the Company ($202,500). Losses associated with the Company's joint
venture interest in VTI increased due to an increase in VTI's research
and development expenditures.
Liquidity and Capital Resources
The Company has had only limited revenues from operations since
its inception in March l983. The Company has relied upon proceeds
realized from the public and private sale of its Common Stock to meet its
funding requirements. Funds raised by the Company have been expended
primarily in connection with the acquisition of an exclusive worldwide
license to certain patented and unpatented proprietary technology and
know-how relating to the human immunological defense system, the funding
of VTI's research and development program, patent applications, the
repayment of debt, the continuation of Company-sponsored research and
development, administrative costs and construction of laboratory
facilities. Inasmuch as the Company does not anticipate realizing
revenues until such time as it enters into licensing arrangements
regarding the technology and know-how licensed to it (which could take a
number of years), the Company is mostly dependent upon the proceeds from
the sale of its securities to meet all of its liquidity and capital
resource requirements.
In February, 1992, the Company received net proceeds of
approximately $13,800,000 from the sale, in a public offering, of 517,500
shares of Common Stock and 5,175,000 Warrants. Every ten Warrants
entitle the holder to purchase one additional share of Common Stock at a
price of $46.50 per share prior to February 7, 1997.
In June and September, l995, the Company completed private
offerings whereby it sold a total of 1,150,000 units at $2.00 per unit.
Each unit consisted of one share of Common Stock and one Warrant. Each
Warrant entitles the holder to purchase one additional share of Common
Stock at a price of $3.25 per share at any time prior to June 30, 1997.
The net proceeds to the Company from these offerings, after the payment
of Sales Agent's commissions and other offering expenses, were
approximately $2,000,000. On November 30, 1995 the Company and the
investors in these Private Offerings agreed to reduce the exercise price
of the Warrants to $1.60 per share in return for the commitment on the
part of the investors to exercise 312,500 Warrants ($500,000) prior to
December 23, 1995 and an additional 312,500 Warrants ($500,000) prior to
January 31, 1996.
In March 1996 the Company sold $l,250,000 of Convertible Notes
("Notes") to two persons. The Notes are convertible from time to time
in whole or in part, into shares of the Company's Common Stock. The
conversion price is 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.
Notwithstanding the above, the conversion price may not be less than
$2.40 per share. The Notes are payable on December 1, 1996 and accrue
interest at 10% per annum.
In May 1996 the Company sold, in a private transaction, 3,500
shares of its Series A Preferred Stock (the "Preferred Shares") for
$3,500,000 or $1,000 per share. At the purchasers' option, up to 1,750
Preferred Shares are convertible, on or after 60 days from the closing
date of the purchase of such shares (the "Closing"), into shares of the
Company's Common Stock on the basis of one share of Preferred Stock for
shares of Common Stock equal in number to the amount determined by
dividing $1,000 by 85% of the Closing Price of the Company's Common
Stock. All Preferred Shares are convertible, on or after 90 days from
the Closing, on the basis of one share of Preferred Stock for shares of
the Company's Common Stock equal in number to the amount determined by
dividing $1,000 by 83% of the Closing Price of the Company's Common
Stock. The term "Closing Price" is defined as the average closing bid
price of the Company's Common Stock over the five-day trading period
ending on the day prior to the conversion of the Preferred Stock.
Notwithstanding the above, the conversion price may not be less than
$3.00 nor more than $8.00, except that if the Closing Price is less than
$3.00, then the conversion price will be equal to the Closing Price. The
Preferred Shares, if issued, are entitled to a quarterly dividend of
$17.50 per share. Any Preferred Shares which are outstanding on the
second anniversary of the Closing will be automatically converted into
shares of the Company's Common Stock. The Preferred Shares have a
liquidation preference over the Company's Common Stock. By means of a
separate Registration Statement, the shares of Common Stock issuable upon
the conversion of the Series A Preferred Stock have been registered for
public sale.
During fiscal 1996 the Company plans to fund its U.S. and
Canadian clinical trials involving MULTIKINE. During fiscal 1996 the
Company also plans to provide VTI with the funding needed to continue
VTI's clinical trials. 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 October, 1994, the Company completed the construction of its
own research laboratory in a facility leased by the Company. The cost of
modifying the leased space and providing the equipment for the research
laboratory was approximately $1,200,000. In August 1994 the Company
obtained a loan to fund the majority of the costs for the research
laboratory. As of September 30, 1995 the Company owed approximately
$811,000 on this loan. Principal and interest on the loan is due monthly.
The loan matures in 1999
and bears interest at 2% plus the prime lending rate.
The Company expects that it will spend
approximately $2,500,000 on research and development during the twelve
month period ending September 30, 1996. This amount includes VTI's
estimated research and development expenses during fiscal 1996. Prior to
October 1995, VTI's research and development expenses were shared 50% by
the Company and 50% by Alpha 1 Biomedicals, Inc. VTI became a wholly-
owned subsidiary of the Company in October 1995 when the Company
purchased Alpha 1's 50% interest in VTI. The Company plans to use its
existing financial resources to fund its research and development program
during this period.
Other than funding its research and development program and the
costs associated with its research laboratory, the Company does not have
any material capital commitments.
The Company expects that its existing financial resources will
satisfy the Company's capital requirements at least through December
1996. In the absence of revenues, the Company will be required to raise
additional funds through the sale of securities, debt financing or other
arrangements in order to continue with its research efforts after that
date. However, there can be no assurance that such financing will be
available or be available on favorable terms.
BUSINESS
CEL-SCI Corporation (the "Company") was formed as a Colorado
corporation in 1983. The Company is involved in the research and
development of certain drugs and vaccines. The Company's first product,
MULTIKINETM, manufactured using the Company's proprietary cell culture
technologies, is a combination, or "cocktail", of natural human
interleukin2 ("IL-2") and certain lymphokines and cytokines. MULTIKINE is
being tested to determine if it is effective in improving the immune
response of advanced cancer pantients. The Company's second product, HGP-
30, is being tested to determine if it is an effective treatment/ vaccine
against the AIDS virus. In addition, the Company recently acquired a new
patented Tcell Modulation Process which uses "heteroconjugates" to direct
the body to chose a specific immune response. The Company intends to use
this new technology to improve the cellular immune response of persons
vaccinated with HGP-30.
Since its inception the focus of the Company's product
development efforts has been on conducting clinical trials to test its
proprietary technologies. The Company intends to continue testing its
MULTIKINE product in clinical trials with the objective of establishing
its efficacy as a treatment for solid tumors and possibly other diseases.
An additional aim of the Company is to further corroborate the present
data (obtained in connection with
the Company's research programs and human clinical trials) in regard to
the ability of MULTIKINE to restore the immune system of people suffering
from certain illnesses.
The cost of acquiring its exclusive license and the costs
associated with the clinical trials relating to the Company's MULTIKINE
technologies, the cost of research at various institutions and the
Company's administrative 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.
In October 1995 Viral Technologies, Inc. ("VTI") became a
whollyowned subsidiary of the Company. VTI is engaged in the development
of a possible vaccine for AIDS. VTI's technology may also have application
in the treatment of AIDS-infected individuals and the diagnosis of AIDS.
VTI's AIDS vaccine, HGP-30, has completed certain Phase I human clinical
trials. In the Phase I trials, the vaccine was administered to volunteers
who were not infected with the HIV virus in an effort to determine safe
and tolerable dosage levels.
PRODUCT DEVELOPMENT PLAN
In March l995, the Canadian Health Protection Branch, Health and
Welfare Ministry gave clearance to the Company to start a phase I/II
cancer study using Multikine. The study, which will enroll up to 30 head
and neck cancer patients who have failed conventional treatments, is
expected to be conducted at the Hotel-Dieu de Montreal Hospital, as well
as other medical centers in Canada. The study is designed to evaluate
safety, tumor responses and immune responses in patients treated with
multiple courses of Multikine. The length of time that each patient will
remain on the investigational treatment will depend on the patient's
response to treatment. In May l995, the U.S. Food and Drug
Administration (FDA) authorized the export of the Company's Multikine
drug to Canada for purposes of this study.
In February 1996 the FDA authorized the Company to conduct two
human clinical studies using MULTIKINE. The studies will focus on
prostate and head and neck cancer. The prostate study will be conducted
at Jefferson Hospital in Philadelphia, Pennsylvania and will involve up
to 15 prostate cancer patients who have failed on hormonal therapy. The
head and neck cancer study will involve up to 30 cancer patients who have
failed using conventional therapies. The Company is currently evaluating
clinical centers in the U.S. for purposes of the study. The head and
neck cancer study in the U.S. will be conducted in conjunction with the
Company's Canadian head and neck cancer study.
Viral Technologies, Inc. ("VTI") completed its Phase I trials in
California and in April 1995, with the approval of the California Food
and Drug Branch ("FDB"), started a new clinical study with the HGP-30
AIDS vaccine. The study involved HIV-negative volunteers who
participated in the 1993 Phase I study. Following vaccinations with HGP-
30, certain volunteers donated blood for a SCID mouse HIV challenge
study. Infection in the SCID mice by virus was determined and confirmed
by two different assays. A significantly larger percentage of SCID mice
given blood from vaccinated volunteers showed no HIV infection after
virus challenge when compared to mice given blood from unvacci
nated donors. In November 1995 VTI received permission from the
California FDB to begin Phase I human clinical trials with HIV-infected
volunteers. These trials began in December 1995. See "Viral
Technologies, Inc." below for additional information concerning VTI.
There can be no assurance that either the Company or VTI will be
successful in obtaining approvals from any regulatory authority to
conduct further clinical trials or to manufacture and sell their
products. The lack of 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.
BACKGROUND OF HUMAN IMMUNOLOGICAL SYSTEM
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 combatted
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 Bcells, and can also directly
destroy "foreign" cells by activating "killer cells."
It is generally recognized that the interplay among T-cells, B
cells and the macrophages determines the strength and breadth of the
body's response to infection. It is believed that the activities of T-
cells, B cells and macrophages are controlled, to a large extent, by a
specific group of hormones called lymphokines. Lymphokines regulate and
modify the various functions of both T-cells and B-cells. There are many
lymphokines, each of which is thought to have distinctive chemical and
functional properties. IL2 is but one of these lymphokines and it is on
IL-2 and its synergy with other lymphokines that the Company has focused
its attention. Scientific and medical investigation has established that
IL-2 enhances immune responses by causing activated T-cells to
proliferate. Without such proliferation no immune response can be
mounted. Other lymphokines and cytokines support Tcell and B-cell
proliferation. However, IL-2 is the only known lymphokine or cytokine
which causes the proliferation of Tcells. IL-2 is also known to activate
B-cells in the absence of B-cell growth factors.
Although IL-2 is one of the best characterized lymphokines with
anticancer potential, the Company is of the opinion that to have optimum
therapeutic value, IL-2 should be administered not as a single substance
but rather as a mixture of IL-2 and certain lymphokines and cytokines,
i.e. as a "cocktail". This approach, which was pioneered by the Company,
makes use of the synergism between these lymphokines. It should be noted
however that neither the FDA nor any other agency has determined that the
Company's MULTIKINE product will be effective against any form of cancer.
It has been reported by researchers in the field of lymphokine
research that IL-2 can increase the number of killer T-cells produced by
the body, which improves the body's capacity to selectively destroy
specific tumor cells. Research and human clinical trials sponsored by
the Company have indicated a correlation between administration of
MULTIKINE to advanced cancer patients and immunological responses. On
the basis of these experimental results, the Company believes that
MULTIKINE may have application for the treatment of solid tumors in
humans.
The Company foresees three potential anti-cancer therapeutic
uses for MULTIKINE: (i) direct administration into the human body (in
vivo) as a modulator of the immune system, (ii) activation of a patient's
white blood cells outside the body with MULTIKINE, followed by returning
these activated cells to the patient; and (iii) a combination of (i) and
(ii).
RESEARCH AND DEVELOPMENT
In the past, the Company conducted its research pursuant to
arrangements with various universities and research organizations. The
Company provided grants to these institutions for the conduct of specific
research projects as suggested by the Company's scientists based upon the
results of previously completed projects.
More recently the Company has decided to consolidate its
research activities in a Company-owned laboratory. The Company believes
that this new approach will be more effective in terms of both cost and
performance.
Between 1983 and 1986 the Company was primarily involved in
funding pre-clinical and Phase I clinical trials of its proprietary
MULTIKINE technologies. These trials were conducted at St. Thomas's
Hospital Medical School located in London, England under the direction of
Dudley C. Dumonde, M.D., PhD., a former member of the SAB, and pursuant
to approvals obtained from England's Department of Health and Social
Security.
In the Phase I trial in England (completed in 1987), forty-nine
patients suffering with various forms of solid cancers, including
malignant melanoma, breast cancer, colon cancer, and other solid tumor
types were treated with MULTIKINE. The product was administered directly
into the lymphatic system in a number of patients. Significant and
lasting lymphnode responses, which are considered to be an indication of
improvement in the patient's immune responses, were observed in these
patients. A principal conclusion of the Phase I trials was that the side
effects of the Company's products in forty-nine patients were not severe,
the treatment was well tolerated and there was no long-term toxicity.
The results of the Phase I clinical study were encouraging, and
as a result the Company, through members of its SAB and consulting
experts, established protocols for future clinical trials. In November,
1990, the Florida Department of Health and Rehabilitative Services
("DHRS") gave the physicians at a southern Florida medical institution
approval to start a clinical cancer trial in Florida using the Company's
MULTIKINE product. The focus of the trial was unresectable head and neck
cancer (which is presently untreatable) and was the first time that the
natural MULTIKINE was administered to cancer patients in a clinical trial
in the United States.
Four patients with regionally advanced squamous cell cancer of
the head and neck were treated with the Company's MULTIKINE product. The
patients had previously received radical surgery followed by x-ray
therapy but developed recurrent tumors at multiple sites in the neck and
were diagnosed with terminal cancer. The patients had low levels of
lymphocytes and evidence of immune deficiency (generally a characteristic
of this type of cancer).
Significant tumor reduction occured in three of the four
patients as a result of the treatment with MULTIKINE. Negligible side
effects were observed and the patients were treated as outpatients.
Notwithstanding the above, it should be noted that these trials were only
preliminary and were only conducted on a small number of patients. It
remains to be seen if MULTIKINE will be effective in treating any form of
cancer.
See "Product Development Plan" above for information concerning
the Company's future research and development plans.
Proof of efficacy for anti-cancer drugs is a lengthy and complex
process. At this early stage of clinical investigation, it remains to be
proven that MULTIKINE will be effective against any form of cancer. Even
if some form of MULTIKINE is found to be effective in the treatment of
cancer, commercial use of MULTIKINE may be several years away due to
extensive safety and effectiveness tests that would be necessary before
required government approvals are obtained. It should be noted that
other companies and research teams are actively involved in developing
treatments and/or cures for cancer, and 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.
Since 1983, and through September 30, 1995, approximately
$9,505,000 has been expended on Company-sponsored research and
development, including approximately $1,825,000, $2,896,000 and
$1,307,000 during the years ended September 30, 1995, 1994 and 1993,
respectively. The foregoing amounts do not include amounts spent by
Viral Technologies, Inc. on research and development. Since May, 1986
(the inception of VTI) and through September 30, 1995, VTI has spent
approximately $3,365,000 on research and development.
The Company has established a Scientific Advisory Board ("SAB")
comprised of scientists distinguished in biomedical research in the field
of lymphokines and related areas. From time to time, members of the SAB
advise the Company on its research activities. Institutions with which
members of the SAB are affiliated have and may in the future conduct
Company-sponsored research. The SAB has in the past and may in the
future, at its discretion, in vite other scientists to opine in
confidence on the merits of the Companysponsored research. Members of
the SAB receive $500 per month from the Company and have also been
granted options (for serving as members of the SAB) which collectively
allow for the purchase of up to 15,000 shares of the Company's Common
Stock. The options are exercisable at prices ranging from $13.80 to
$19.70 per share.
The members of the Company's SAB are:
Dr. Michael Chirigos former head of the Virus and Disease
Modification Section, National Institutes of Health (NIH), National
Cancer Institute (NCI) from 1966-1981 and the Immuno Pharmacology
Section, NHI, NCI, Biological Response Modifier Program until 1985.
Dr. Evan M. Hersh Vice-Chairman, Department of Internal
Medicine, Chief, Section of Hematology/Oncology, Department of Internal
Medicine, Tucson, AZ. Director of Clinical Research, Arizona Cancer
Center, Tucson.
Dr. Michael J. Mastrangelo Director, Division of Medical
Oncology, and Professor of Medicine, Jefferson Medical College,
Philadelphia, Pennsylvania.
Dr. Alan B. Morris, PhD. Professor, Department of Biological
Sciences, University of Warwick, Coventry, U.K.
VIRAL TECHNOLOGIES, INC.
Prior to October 1995, Viral Technologies, Inc. ("VTI"), a
Delaware corporation, was 50% owned by the Company and 50% owned by Alpha
1 Biomedicals, Inc. VTI is developing a vaccine technology that may
prove of commercial value in the prevention, diagnosis and treatment of
AIDS. VTI holds the proprietary rights to certain synthesized components
of the p17 gag protein, which is the outer core region of the AIDS virus
(HIV-1). In October 1995, the Company acquired Alpha 1's interest in VTI
in exchange for 159,170 shares of the Company's common stock.
VTI is involved in the development of a prototype preventive and
therapeutic vaccine against AIDS that is based on HGP-30, a thirty amino
acid synthetic peptide derived from the p17 region of the AIDS virus.
Evidence compiled by scientists at George Washington University from
toxicology studies with different animal species indicates that the HGP-
30 prototype vaccine does not appear to be toxic in animals. The HGP-30
vaccine being tested differs from most other vaccines candidates in that
its active component, the HGP-30 peptide, is derived from the p17 core
protein particles of the virus. Since HGP-30 is a totally synthetic
molecule containing no live virus, it cannot cause infection. Unlike the
envelope (i.e. outside) proteins, the p17 region of the AIDS virus
appears to be relatively nonchanging. In January, 1991, VTI was issued a
United States patent covering the production, use and sale of HGP-30.
HGP-30 may also be effective in treating persons infected with the AIDS
virus.
Approval to start Phase I human clinical trials in Great Britain
using VTI's prototype AIDS vaccine HGP-30 was granted in April 1988. The
trial, the first in the European common market, began in May 1989 with 18
healthy (HIVnegative) volunteers given three different dosages and was
completed in December 1990. The trial results indicated that five of
eight volunteers vaccinated with HGP-30, and whose blood samples were
able to be tested, produced "killer" T-cell responses. The vaccine also
elicited cellmediated immunity responses in 7 out of 9 vaccinated
volunteers and antibody responses in 15 out of 18 vaccinated volunteers.
In March, 1990, the California Department of Health Services
Food and Drug Branch (FDB) approved the first human testing (Phase I
trials) in the United States of HGP-30. The trials were conducted by
scientists at the University of Southern California and San Francisco
General Hospital. Twentyone healthy HIV-negative volunteers at medical
centers in Los Angeles and San Francisco received escalating doses of HGP-
30 with no clinically significant adverse side effects. The clinical
studies confirmed earlier clinical trials in London.
In April 1995 VTI, with the approval of the FDB, began another
clinical trial in California using volunteers who received two
vaccinations. The volunteers receiving the two lowest dosage levels were
asked to donate blood for a SCID mouse HIV challenge study. The SCID
mouse is considered to be the best available animal model for HIV because
it lacks its own immune system and therefore permits human cell growth.
White blood cells from the five (5) 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.
A significantly larger percentage of SCID mice given blood from
vaccinated volunteers showed no HIV infection after virus challenge when
compared to mice given blood from unvaccinated donors.
In November 1995 VTI received permission from the FDB to begin
Phase I human clinical trials with HIV-infected volunteers. These trials
began in December 1995. VTI's AIDS vaccine/treatment is only in the
initial stages of testing and it remains to be seen if the
vaccine/treatment will be effective against the AIDS virus.
Although there has been important independent research showing
the possible significance of the p17 region of HIV-1, there can be no
assurance that any of VTI's technology will be effective in the
prevention, diagnosis or treatment of AIDS. There can be no assurance
that other companies will not develop a product that is more effective or
that VTI ultimately will be able to develop and bring a product to market
in a timely manner that would enable it to derive commercial benefits.
VTI's research and development efforts are presently focused on
the evaluation of second generation formulations and delivery systems for
HGP-30 and related peptides to enhance HIV-specific cellular immune
responses.
In January 1991, VTI was awarded a U.S. patent covering the
exclusive production, use and sale of HGP-30. This patent is thought to
be the first U.S. patent for a portion of a "core" protein of the HIV
virus. In February 1993, VTI was awarded a European patent covering HGP-
30 and certain other peptides.
T-CELL MODULATION PROCESS
In January 1996 the Company acquired a new patented T-cell
Modulation Process which uses "heteroconjugates" to direct the body to
chose a specific immune response.
The ability to generate a specific immune response is important
because many diseases are often not combatted effectively due to the
body's selection of the "inappropriate" immune response. The capability
to specifically reprogram an immune response may offer a more effective
approach than existing vaccines and drugs in attacking an underlying
disease.
The Company intends to use this new technology to improve the
cellular immune response of VTI's HIV HGP-30 immunogen which is currently
in two clinical studies. In addition, the Company intends to use the
technology to develop a potential Tuberculosis (TB) vaccine/treatment.
TB is the largest killer of all infectious diseases worldwide and new
strains of drug resistant TB are emerging daily. The technology is also
a potential platform technology which could also work with many other
peptides. Using this new technology, the Company is currently conducting
in vitro laboratory and in vivo animal studies that have defined a
combination of components that appear to modulate T-cells identified with
specific diseases.
The technology was acquired from Cell-Med, Incorporated ("CELL-
MED") in consideration for the Company's agreement to pay certain
liabilities of CELL-MED in the amount of approximately $6,000. If the
Company elects to retain ownership in the technology after March 30,
1997, the Company must pay CELL-MED $200,000, plus additional payments
ranging between $100,000 and $600,000, depending upon the Company's
ability to obtain 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 CELLMED 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. As of February 29, 1996, CELL-MED had been issued patents in
Australia and from the European Patent Office covering the technology and
had several U.S. and foreign patent applications pending.
COMPOUNDS AND PROCESSES LICENSED TO THE COMPANY
The Company has acquired from Sittona Company, B.V., a
Netherlands corporation ("Sittona"), the exclusive worldwide rights to
patented IL-2 compounds, compositions and other processes and other
lymphokine-related compounds, compositions and processes which are the
subject of various patents, patent applications and disclosure documents
filed with the United States Patent and Trademark Office as well as
similar agencies of various foreign countries. Sittona acquired its
rights in the foregoing products and technology from Hooper Trading
Company N.V., and Shanksville Corporation N.V., both Netherland Antilles
corporations. Pursuant to the terms of the license, the Company must pay
to Sittona a royalty of l0% of all net sales received by the Company in
connection with the manufacture, use or sale of the licensed compounds,
compositions and processes and a royalty of l5% of all license fees and
royalties received by the Company in connection with the grant by the
Company of any sublicenses for the manufacture, use or sale of the
licensed compounds, compositions and processes. On November 30, l983, a
$l.4 million advance royalty was paid by the Company to Sittona to
acquire the license. The license also requires the Company to bear the
expense of preparing, filing and processing patent applications and to
obtain and maintain patents in the United States and foreign countries on
all inventions, developments and improvements made by or on behalf of the
Company relating to the licensed compounds, compositions and processes.
In this regard the Company has caused patent applications to be filed in
several foreign countries and has undertaken the processing of previously
filed patent applications. The exclusive license is to remain in effect
until the expiration or abandonment of all patent rights or until the
compounds, compositions and processes enter into the public domain,
whichever is later. Sittona may also terminate the license for breach of
the agreement, fraud on the part of the Company, or the bankruptcy or
insolvency of the Company. Sittona, Hooper Trading Company and
Shanksville Corporation are all controlled by Maximilian de Clara, the
Company's President. See "Management Transactions with Related Parties".
In 1987 a German company filed an opposition with the European
Patent Office with respect to one of the Company's European patents,
alleging that certain aspects of the patent in question were previously
disclosed to inventors during a conference held in Germany. A hearing on
the opposition was held and on October 12, 1990 the European Patent
Office rejected the opposition. The German company filing the opposition
appealed the decision of the European Patent Office. In 1992 the
Appellate Tribunal of the European Patent Office upheld the Company's
process claims in the patent, while two minor claims were denied. The
Company does not believe that the denial by the European Patent Office of
these two minor process patent claims impairs the value of this patent in
any significant degree.
In February 1996 the Company filed a lawsuit against ImmunoRx
and Dr. John Hadden for contract breach, tortious interference of
contract and patent infringement concerning the Company's Multikine drug.
The lawsuit, filed in the U.S. Distrit Court for the Middle District of
Florida, seeks damages and the termination of certain research and
clinical studies being conducted by ImmunoRx and Dr. Hadden. From 1984
to 1992, Dr. Hadden consulted with the Company, performed research on
Multikine and manufactured Multikine for the Company's head and neck
cancer study in Florida. In early 1993, Dr. Hadden signed a separation
agreement with the Company acknowledging the Company's ownership of both
Multikine and the research results. The Company has learned that Dr.
Hadden and ImmunoRx are apparently making copies of Multikine, in
contravention of the separation agreement and the patents covering
Multikine, and have begun clinical studies in a foreign country using a
copy of Multikine.
Process for the Production of IL-2 and IL-2 Product
The Company's exclusive license includes processes for the
production in high yields of natural human IL-2 using cell culture
techniques applied to normal human cells. Based upon the results of the
Company's research and human clinical trials, the Company believes that
"natural" IL-2 produced by cell culture technologies, such as the
Company's proprietary products, may have advantages over genetically
engineered, bacteria-produced IL-2 ("recombinant IL-2") manufactured by
other companies. There are basically two ways to produce IL-2 on a
commercial scale: (1) applying genesplicing techniques using bacteria or
other microorganisms to produce recombinant IL-2; or, (2) applying cell
culture technology using mammalian cells. Substantive differences exist
between recombinant IL-2 and IL-2 produced through cell culture
technology. For example: (1) cell cultured IL2 is glycosylated (has
sugars attached). Sugar attachments play a crucial role in cell
recognition and have a significant effect on how fast a body clears out
proteins. Proteins produced through bacteria have no sugar attachments
and while recombinant IL-2 products produced from recombinant yeast or
insect cells are glycosylated, they are not so to the right degree, or at
the right locations. Cell cultured IL-2 has the "right" sugar
attachments at the right places; (2) there are also structural
differences related to folding (the way human proteins work depends on
their sequence folding); and (3) the cell cultured IL-2 "cocktail" is
administered in small dosages as pioneered by Company researchers. This
formulation and dosage mimics the way immune regulators are naturally
found and function within the body. This stands in stark contrast to the
huge dosages required when recombinant IL-2 is administered to patients.
In addition, patients treated with recombinant IL-2 usually suffer severe
side effects.
Although mammalian cells (other than human cells) could be
genetically engineered to produce glycosylated IL-2 in larger quantities
than are produced by the Company's method, such mammalian cells could not
be genetically engineered to produce the combination of human lymphokines
and cytokines, which together with human glycosylated IL-2 form the
MULTIKINE product used by the Company. The Company is of the opinion
that glycosylated IL-2 genetically produced from mammalian cells must be
administered in large dosages before any benefits are observed. Even
then, the Company believes that only a small percentage of patients will
benefit from treatments consisting only of glycosylated IL-2. In
addition, large dosages of glycosylated IL-2 can, as with recombinant IL-
2, result in severe toxic reactions. In contrast, the Company believes
the synergy between glycosylated IL-2 and certain other lymphokines/
cytokines allows MULTIKINE to be administered in low dosages, thereby
avoiding the severe toxic reactions which often result when IL-2 is
administered in large dosages.
The technology licensed to the Company includes the basic
production method employing the use of normal white blood cells, an
improved production method based in part on this basic production method,
a serum-free and mitogenfree IL-2 product, and a method for using this
product in humans. Mitogens are used to stimulate cells to produce
specific materials (in this case, IL-2). Mitogens remaining in the
product of cell stimulation can cause allergic and anaphylactic reactions
if not removed from the cell product prior to introduction into the body.
The Company's license also pertains to a cell culture process
for producing interleukin-2 and another type of cell process for
producing serumfree and mitogen-free interleukin-2 preparations which
avoids a mitogen stimulation step and uses interleukin-1 and white blood
cells.
The Company's license further includes a process for suppressing
graft rejection in organ transplantation. This process employs the use
of an agent which blocks the activity of IL-2 in proliferating T-cells
which would otherwise destroy the transplanted organ. The Company
regards further research and development of this process to involve a
financial commitment beyond its present ability; thus, while the Company
intends to attempt to enter into licensing arrangements with third
parties concerning this process, it does not presently intend to conduct
further research into, or development of, this process.
The Company has an agreement with an unrelated corporation for
the production, until 1997, of MULTIKINE for research and testing
purposes. At present, this is the Company's only source of MULTIKINE.
If this corporation could not, for any reason, supply the Company with
MULTIKINE, the Company estimates that it would take approximately six to
ten months to obtain supplies of MULTIKINE under an alternative
manufacturing arrangement. The Company does not know what cost it would
incur to obtain this alternative source of supply.
GOVERNMENT REGULATION
The investigational agents and future products of the Company
are regulated in the United States under the Federal Food, Drug and
Cosmetic Act, the Public Health Service Act, and the laws of certain
states. The Federal Food and Drug Administration (FDA) exercises
significant regulatory control over the clinical investigation and
manufacture of pharmaceutical products.
Prior to the time a pharmaceutical product can be marketed in
the United States for therapeutic use, approval of the FDA must normally
be 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 approval for further 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
experiments, 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").
In addition to obtaining FDA approval for a product, a biologics
establishment license application ("ELA") must be filed in order to
obtain FDA approval of the testing and manufacturing facilities in which
the product is produced. To the extent all or a portion of the
manufacturing process for a product is handled by an entity other than
the Company, the Company must similarly receive FDA approval for the
other entity's participation in the manufacturing process. Domestic
manufacturing establishments are subject to inspections by the FDA and by
other Federal, state and local agencies and must comply with Good
Manufacturing Practices ("GMP") as appropriate for production. In
complying with GMP regulations, manufacturers must continue to expend
time, money and effort in the area of production and quality control to
ensure full technical compliance.
The process of drug development and regulatory approval requires
substantial resources and many years. There can be no assurance that
regulatory approval will ever be obtained for products developed by the
Company. Approval of drugs and biologicals by regulatory authorities of
most foreign countries must also be obtained prior to initiation of
marketing in those countries. The approval process varies from country
to country and the time period required in each foreign country to obtain
approval may be longer or shorter than that required for regulatory
approval in the United States.
The human clinical trials in Florida were authorized pursuant to
applications filed by physicians at a southern Florida medical
institution with the Florida Department of Health and Rehabilitative
Services ("DHRS"). VTI's Phase I clinical trials were conducted pursuant
to approvals obtained from the California Department of Health Services
Food and Drug Branch. None of the clinical trials involving the Company's
MULTIKINE product (including the prior trials conducted in London,
England) have been conducted under the approval of the FDA and 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 or under state authority
does not mean that the product will be licensed by the FDA and there are
no assurances that the Company will receive any approval of the FDA or
any other governmental entity for the manufacturing and/or marketing of a
product. Consequently, the commencement of the manufacturing and
marketing of any Company product is, in all likelihood, many years away.
COMPETITION AND MARKETING
Many companies, nonprofit organizations and governmental
institutions are conducting research on lymphokines. Competition in the
development of therapeutic agents and diagnostic products incorporating
lymphokines is intense. Large, well-established pharmaceutical companies
are engaged in lymphokine research and development and have considerably
greater resources than the Company has to develop products. The
establishment by these large companies of in-house research groups and of
joint research ventures with other entities is already occurring in these
areas and will probably become even more prevalent. In addition,
licensing and other collaborative arrangements between governmental and
other nonprofit institutions and commercial enterprises, as well as the
seeking of patent protection of inventions by nonprofit institutions and
researchers, could result in strong competition for the Company. Any new
developments made by such organizations may render the Company's licensed
technology and know-how obsolete.
Several biotechnology companies are producing IL-2-like compounds.
The Company believes, however, that it is the only producer of a patented
IL2 product using a patented cell-culture technology with normal human
cells. The Company foresees that its principle competition will come from
producers of genetically-engineered IL-2-like products. However, it is
the Company's belief, based upon growing scientific evidence, that its
natural IL-2 products have advantages over the genetically engineered, IL-
2-like products. Evidence indicates that genetically engineered, IL-2-
like products, which lack sugar molecules and typically are not water
soluble, may be recognized by the immunological system as a foreign
agent, leading to a measurable antibody build-up and thereby possibly
voiding their therapeutic value. Furthermore, the Company's research has
established that to have optimum therapeutic value IL-2 should be
administered not as a single substance but rather as an IL-2 rich mixture
of certain lymphokines and other proteins, i.e. as a "cocktail". If
these differences prove to be of importance, and if the therapeutic value
of its MULTIKINE product is conclusively established, the Company
believes it will be able to establish a strong competitive position in a
future market.
The Company has not established a definitive plan for marketing
nor has it established a price structure for the Company's saleable
products. However, the Company intends, if the Company is in a position
to begin commercialization of its products, to enter into written
marketing agreements with various major pharmaceutical firms with
established sales forces. The sales forces in turn would probably target
the Company's products to cancer centers, physicians and clinics involved
in immunotherapy.
Competition to develop treatments for the control of AIDS is
intense. Many of the pharmaceutical and biotechnology companies around
the world are devoting substantial sums to the exploration 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 the Company and VTI have
not been approved by the FDA, but rather have been conducted pursuant to
approvals obtained from regulatory agencies in England, Canada and
certain states. Since the results of these clinical trials may not be
accepted by the FDA, companies which are conducting clinical trials
approved by the FDA may have a competitive advantage in that the products
of such companies are further advanced in the regulatory process than
those of the Company or VTI.
PROPERTIES
The Company's MULTIKINE product used in its pre-clinical and
Phase I clinical trials in England was manufactured at a pilot plant at
St. Thomas' Hospital Medical School using the Company's patented
production methods and equipment owned by the Company. The MULTIKINE
product used in the Florida clinical trials was manufactured in Florida.
In February, 1993, the Company signed an agreement with a third party
whereby the third party constructed a facility designed to produce the
Company's MULTIKINE product. The Company paid the third party the cost
of constructing this facility (approximately $200,000) in accordance with
the Company's specifications.
In October, 1994 the Company completed the construction of a
research laboratory in space leased by the Company. The cost of
modifying and equipping this space for the Company's purposes was
approximately $1,200,000.
The Company leases office space at 66 Canal Center Plaza,
Alexandria, Virginia at a monthly rental of approximately $8,200 per
month. The Company believes this arrangement is adequate for the conduct
of its present business.
EMPLOYEES
As of March 31, 1996 the Company, together with VTI, employed 24
persons on a full-time basis.
MANAGEMENT
Officers and Directors
Name Age Position
Maximilian de Clara 65 Director and President
Geert R. Kersten, Esq. 37 Director, Chief Executive
Officer, Secretary and
Treasurer
Patricia B. Prichep 43 Vice President of
Operations
M. Douglas Winship 45 Vice President of Regulatory
Affairs and Quality Assurance
Dr. Eyal Talor 40 Vice President of Research and
Manufacturing
Dr. Prem S. Sarin 61 Vice President of Research for
Viral Technologies, Inc.
Dr. Daniel H. Zimmerman 54 Vice President of Cellular
Immunology
Mark V. Soresi 43 Director
F. Donald Hudson 62 Director
Edwin A. Shalloway 60 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 AmericanUniversity in Washington, D.C. where
he received a Juris Doctor degree.
Patricia B. Prichep has been the Company's Vice President of
Operations since March, 1994. Between December, 1992 and March, 1994,
Ms. Prichep was the Company's Director of Operations. From June, 1990 to
December, 1992, Ms. Prichep was the Manager of Quality and Productivity
for the NASD's Management, Systems and Support Department. Between 1982
and 1990, Ms. Prichep was Vice President and Operations Manager for
Source Capital, Ltd.
M. Douglas Winship has been the Company's Vice President of
Regulatory Affairs and Quality Assurance since April, 1994. Between 1988
and April, 1994, Mr. Winship held various positions with Curative
Technologies, Inc., including Vice President of Regulatory Affairs and
Quality Assurance (1991-1994).
Dr. Eyal Talor has been the Company's Vice President of Research
and Manufacturing since March, 1994. From October, 1993 until March,
1994, Dr. Talor was Director of Research, Manufacturing and Quality
Control, as well as the Director of the Clinical Laboratory, for
Chesapeake Biological Laboratories, Inc. From 1991 to 1993, Dr. Talor
was a scientist with SRA Technologies, Inc., as well as the director of
SRA's Flow Cytometry Laboratory (19911993) and Clinical Laboratory (1992-
1993). During 1992 and 1993, Dr. Talor was also the Regulatory Affairs
and Safety Officer For SRA. Since 1987, Dr. Talor has held various
positions with the John Hopkins University, including course coordinator
for the School of Continuing Studies (1989-Present), research associate
and lecturer in the Department of Immunology and Infectious Diseases
(1987-1991), and associate professor (1991Present).
Prem S. Sarin, Ph.D. has been the Vice President of Research for
Viral Technologies, Inc. (the Company's wholly-owned subsidiary) since
May 1, 1993. Dr. Sarin was an Adjunct Professor of Biochemistry at the
George Washington University School of Medicine, Washington, D.C., from
1986-1992. From 1975-1991 Dr. Sarin held the position of Deputy Chief,
Laboratory of Tumor Cell Biology at the National Cancer Institute (NCI),
NIH, Bethesda, Maryland. Dr. Sarin was a Senior Investigator (1974-1975)
and a Visiting Scientist (1972-1974) at the Laboratory of Tumor Cell
Biology at NCI, NIH. From 1971-1972 Dr. Sarin held the position of
Director, Department of Molecular Biology, Bionetics Research Laboratory,
Bethesda, Maryland.
Daniel H. Zimmerman, Ph.D. has been the Company's Vice President
of Cellular Immunology since January 1996. Dr. Zimmerman founded CELL
MED, Inc. and was its president from 1987-1995. From 1973 to 1987 Dr.
Zimmerman served in various positions at Electronucleonics, Inc.
including Scientist, Senior Scientist, Technical Director and Program
Manager. From 1969-1973 Dr. Zimmerman was a Senior Staff Fellow at NIH.
Mark V. Soresi. Mr. Soresi became a director of the Company in
July, 1989. In 1982, Mr. Soresi founded, and since that date has been
the president and Chief Executive Officer of REMAC(R), Inc. REMAC(R) is
involved in the clean-up of hazardous and toxic waste dump sites. Mr.
Soresi attended George Washington University in Washington, D.C. where he
earned a Bachelor of Science in Chemistry.
F. Donald Hudson. F. Donald Hudson has been a director of the
Company since May, 1992. From December 1994 to October 1995 Mr. Hudson
was President and Chief Executive Officer of VIMRx Pharmaceuticals, Inc.
Between 1990 and 1993, Mr. Hudson was President and Chief Executive
Officer of Neuromedica, Inc., a development stage company engaged in
neurological research. Until January, 1989, Mr. Hudson served as
Chairman and Chief Executive Officer of Transgenic Sciences, Inc. (now
TSI Corporation), a publicly held biotechnology corporation which he
founded in January, 1987. From October, 1985 until January, 1987, Mr.
Hudson was a director of Organogenesis, Inc., a publicly held
biotechnology corporation of which he was a founder, and for five years
prior thereto was Executive Vice President and a director of Integrated
Genetics, Inc., a corporation also engaged in biotechnology which he co-
founded and which was publicly traded until its acquisition in 1989 by
Genzyme, Inc.
Edwin A. Shalloway, Esq. Mr. Shalloway has been a director of
the Company since May, 1992. Mr. Shalloway is and has been since 1964, a
partner in the law firm of Sherman and Shalloway which specializes in
matters of patent law. Mr. Shalloway attended the University of Georgia
where he earned a Bachelor of Science and Bachelor of Arts degrees. Mr.
Shalloway received his law degree from the American University in
Washington, D.C. Mr. Shalloway is also the President of the
International Licensing Executive Society.
All of the Company's officers devote substantially all of their
time on the Company's business. Messrs. Soresi, Hudson and Shalloway,
as directors, devote only a minimal amount of time to the Company.
The Company has an audit committee whose members are Geert R.
Kersten, F. Donald Hudson and Edwin A. Shalloway.
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, 1995.
Annual Compensation Long Term Compensation
Re- All
Other stric- Other
Annual ted LTIP Com-
Name and Compen- Stock Options Pay pensa-
Principal Fiscal Salary Bonus sation Awards Granted outs tion
Position Year (1) (2) (3) (4) (5) (6) (7)
Maximilian
de Clara, 1995 - - $95,181 - 225,000 - -
President 1994 - - $93,752 - 70,000 - -
1993 - - $59,376 - - - -
Geert R.
Kersten, 1995 $164,801 - $ 9,426 - 224,750 - $3,911
Chief
Executive 1994 $182,539 - $ 8,183 - 50,000 - $4,497
Officer,
Secretary 1993 $163,204 - $ 6,046 - - - $3,289
and Treasurer
M. Douglas
Winship, 995 $113,500 - $ 1,200 - 22,000 - $2,100
Vice President of
Regulatory Affairs
Suzanne Beckner, 1995 $102,250 - - 25,000 - 2,830
Vice President of
Clinical Development*
* Dr. Beckner resigned her position with the Company in November
1995.
(1) The dollar value of base salary (cash and non-cash) received.
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as salary or
bonus, including perquisites and other personal benefits, securities
or property. Amounts in the table represent automobile, parking and
other transportation expenses.
(4) During the period covered by the Table, no shares of restricted
stock were issued as compensation for services to the persons listed
in the table. As of September 30, 1995, 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 5,000 $23,100
Geert R. Kersten 84,940 $392,423
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. Mr. Winship and Ms. Beckner did not own any shares
of the Company's Common Stock at September 30, 1995.
(5) The shares of Common Stock to be received upon the exercise of all
stock options granted during the period covered by the Table. The
amounts in this table include options granted in prior years but
which were repriced during the year ending September 30, 1995. See
"Ten Year Option/SAR
Repricings" table below.
(6) "LTIP" is an abbreviation for "Long-Term Incentive Plan". An LTIP is
any plan that is intended to serve as an incentive for performance to
occur over a period longer than one fiscal year. Amounts reported in
this column represent payments received during the applicable fiscal
year by the named officer pursuant to an LTIP.
(7) All other compensation received that the Company could not properly
report in any other column of the Table including annual Company
contributions or other allocations to vested and unvested defined
contribution plans, and the dollar value of any insurance premiums
paid by, or on behalf of, the Company with respect to term life
insurance for the benefit of the named executive officer, and the
full dollar value of the remainder of the premiums paid by, or on
behalf of, the Company. Amounts in the table represent contributions
made by the Company to a 401(k) pension plan on behalf of persons
named in the table.
Long Term Incentive Plans Awards in Last Fiscal Year
None.
Employee Pension, Profit Sharing or Other Retirement Plans
During 1993 the Company implemented a defined contribution
retirement plan, qualifying under Section 401(k) of the Internal Revenue
Code and covering substantially all the Company's employees. The
Company's contribution is equal to the lesser of 3% of each employee's
salary, or 50% of the employee's contribution. The 1995 expenses for
this plan were $24,913. Other than the 401(k) Plan, the Company does not
have a defined benefit, pension plan, profit sharing or other retirement
plan.
Compensation of Directors
Standard Arrangements. The Company currently pays its directors
$1,500 per quarter, plus expenses. The Company has no standard
arrangement pursuant to which directors of the Company are compensated
for any services provided as a director or for committee participation or
special assignments.
Other Arrangements. The Company has from time to time granted
options to its outside directors, Mr. Soresi, Mr. Hudson and Mr.
Shalloway. See Stock Options below for additional information concerning
options granted to the Company's directors.
Employment Contracts
Effective August 1, 1994, the Company entered into a three-year
employment agreement with Mr. Kersten. The employment agreement provides
that during the period between August 1, 1994 and July 31, 1995, the
Company will pay Mr. Kersten an annual salary of $198,985. During the
years ending August 31, 1996 and 1997, the Company will pay Mr. Kersten a
salary of $218,883 and $240,771 respectively. In the event that there is
a material reduction in Mr. Kersten's authority, duties or activities, or
in the event there is a change in the control of the Company, then the
agreement allows Mr. Kersten to resign from his position at the Company
and receive a lump-sum payment from the 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. Pursuant to the agreement, the Company also agreed
to grant Mr. Kersten, in accordance with the Company's 1994 Incentive
Stock Option Plan, options to purchase 50,000 shares of the Company's
Common Stock. Compensation Committee Interlocks and Insider Participation
The Company has a compensation committee comprised of all of the
Company's directors, with the exception of Mr. Kersten. During the year
ended September 30, 1995, Mr. de Clara was the only officer participating
in deliberations of the Company's compensation committee concerning
executive officer compensation. See "Transactions witih Related Parties"
below for information concerning transactions between the Company and Mr.
de Clara.
During the year ended September 30, 1995, 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, 1995, 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, l995
Potential
Individual Grants (1) Realizable Value at
% of Total Assumed Annual Rates
Options of Stock Price
Granted to Exercise Appreciation for
Options Employees in Price Per Expiration Option Term (3)
Name Granted(#) Fiscal Year Share(1) Date 5% 10%
Maximilian 15,000 $2.87 3/19/01 $ 14,550 $30,750
de Clara 70,000 $2.87 11/1/01 $ 67,900 $176,400
70,000 $2.87 7/29/04 $272,300 $272,300
70,000 $3.87 7/31/05 $240,100 $501,200
225,000 32%
Geert R. 50,000 (2) $2.87 1/10/98 $ 20,500 $ 42,000
Kersten 750 $2.87 3/28/98 $ 287 $ 705
4,000 $2.87 10/31/99 $ 2,440 $ 5,320
10,000 $2.87 10/31/00 $ 7,900 $17,500
10,000 $2.87 3/19/01 $ 9,700 $22,100
50,000 $2.87 11/01/01 $ 48,500 $110,700
50,000 $2.87 7/29/04 $ 79,000 $194,500
50,000 $3.87 7/31/05 $171,500 $358,000
224,750 32%
M. Douglas 2,000 (2) $2.87 1/10/98 $ 720 $1,660
Winship 15,000 $2.87 4/4/04 $ 23,700 $58,350
5,000 $3.87 7/31/05 $ 17,150 $35,800
22,000 3%
Suzanne 5,000 (2) $2.87 1/10/98 $ 1,750 $4,150
Beckner 8,000 $2.87 7/11/04 $ 12,640 $31,120
12,000 $3.87 7/31/05 $ 41,160 $85,920
25,000 3.5%
(1) Includes options granted in prior fiscal years but which were
repriced in June 1995. See "Ten-Year Option/SAR Repricings" table
below.
(2) Options were granted in accordance with the Company's 1995 salary
reduction plan. Pursuant to the salary reduction plan, any employee
of the Company was allowed to receive options in exchange for a one-
time reduction in such employee's salary.
(3) The potential realizable value of the options shown in the table
assuming the market price of the Company's Common Stock appreciates
in value from the date of the grant to the end of the option term at
5% or 10%.
Option Exercises and Year End Option Values
Value of
Unexer-
cised In-the-
Money
Number of Options
Unexercised at Fiscal
Options Year-End
Shares (3) (4)
Acquired alue
on Exercise Realized Exercisable/ Exercisable/
Name (1) (2) Unexercisable Unexercisable
Maximilian de Clara 108,334/116,666 $189,584/$134,165
Geert R. Kersten 85,750/139,000 $150,062/$193,250
M. Douglas Winship - 5,000/ 17,000 $ 8,750/$24,750
Suzanne Beckner - 2,667/ 22,333 $ 4,667/$27,083
(1) The number of shares received upon exercise of options during the
fiscal year ended September 30, 1995.
(2) With respect to options exercised during the Company's fiscal year
ended September 30, 1995, 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,
1995, separated between those options that were exercisable and those
options that were not exercisable.
(4) For all unexercised options held as of September 30, 1995, the
aggregate dollar value of the excess of the market value of the stock
underlying those options (as of September 30, 1995) over the exercise
price of those unexercised options. Values are shown separately for
those options that were exercisable, and those options that were not
yet exercisable, on September 30, 1995.
Ten-Year Option/SAR Repricings
In June 1995 the Company lowered the exercise price on options
held by all of the Company's officers, directors and employees to $2.87
per share. The options subject to this repricing allowed for the purchase
of up to 444,250 shares of the Company's Common Stock and included
options previously granted to those persons listed below. The Company's
Board of Directors lowered the exercise of these options since at the
time of repricing (June 10, 1995), the options no longer provided a
benefit to the option holders due to the difference between the exercise
price of the options and the market price of the Company's Common Stock.
The following table provides more information concerning the repricing
of these options.
Number of Length of
Securities Market Exercise Original Op-
Underlying Price of Price at tion Term
Options/ Stock at Time of Remaining at
SARs Re- Repricing Repricing New Date of Re-
priced or or Amend or Amend Exercise pricing or
Name Date Amended(#) ment($) ment($) Price($) Amendment
Maximilian 6/10/95 15,000 $2.87 $10.90 $2.87 63 mos.
de Clara 70,000 $2.87 $20.90 $2.87 70 mos.
70,000 $2.87 $8.70 $2.87 108 mos.
Geert R 6/10/95 50,000 $2.87 $4.10 $2.87 30 mos.
Kersten 750 $2.87 $11.60 $2.87 33 mos.
4,000 $2.87 $4.00 $2.87 52 mos.
10,000 $2.87 $8.40 $2.87 64 mos.
10,000 $2.87 $10.90 $2.87 68 mos.
50,000 $2.87 $20.90 $2.87 76 mos.
50,000 $2.87 $8.70 $2.87 108 mos.
M. Douglas 6/10/95 2,000 $2.87 $4.10 $2.87 30 mos.
Winship 15,000 $2.87 $11.20 $2.87 105 mos.
Suzanne 6/10/95 5,000 $2.87 $4.10 $2.87 30 mos.
Beckner 8,000 $2.87 $6.80 $2.87 107 mos.
Stock Option and Bonus Plans
The Company has two Incentive Stock Option Plans, three Non-
Qualified Stock Option Plans and a Stock Bonus Plan. A summary description
of these Plans follows. In some cases these Plans are collectively referred
to as the "Plans".
Incentive Stock Option Plan. The two Incentive Stock Option
Plans collectively authorize the issuance of up to 200,000 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 the 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 three Non-Qualified Stock
Option Plans collectively authorize the issuance of up to 960,000 shares
of the Company's Common Stock to persons that exercise options granted
pursuant to the Plans. The Company's employees, directors, officers,
consultants and advisors are eligible to be granted options pursuant to
the Plans, provided however that bona fide services must be rendered by
such consultants or advisors and such services must not be in connection
with the offer or sale of securities in a capital-raising transaction.
The option exercise price is determined by the Committee but cannot be
less than the market price of the Company's Common Stock on the date the
option is granted.
Stock Bonus Plan. Up to 40,000 shares of Common Stock may be
granted under the Stock Bonus Plan. Such shares may consist, in whole or
in part, of authorized but unissued shares, or treasury shares. Under
the Stock Bonus Plan, the Company's employees, directors, officers,
consultants and advisors are eligible to receive a grant of the Company's
shares, provided however that bona fide services must be rendered by
consultants or advisors and such services must not be in connection with
the offer or sale of securities in a capital-raising transaction.
Other Information Regarding the Plans. The Plans are
administered by the Company's Compensation Committee ("the Committee"),
each member of which is a director of the Company. The members of the
Committee were selected by the Company's Board of Directors and serve for
a one-year tenure and until their successors are elected. A member of
the Committee may be removed at any time by action of the Board of
Directors. Any vacancies which may occur on the Committee will be filled
by the Board of Directors. The Committee is vested with the authority to
interpret the provisions of the Plans and supervise the administration of
the Plans. In addition, the Committee is empowered to select those
persons to whom shares or options are to be granted, to
determine the number of shares subject to each grant of a stock bonus or
an option and to determine when, and upon what conditions, shares or
options granted under the Plans will vest or otherwise be subject to
forfeiture and cancellation.
In the discretion of the Committee, any option granted pursuant
to the Plans may include installment exercise terms such that the option
becomes fully exercisable in a series of cumulating portions. The
Committee may also accelerate the date upon which any option (or any part
of any options) is first exercisable. Any shares issued pursuant to the
Stock Bonus Plan and any options granted pursuant to the Incentive Stock
Option Plan or the NonQualified 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 nonemployee must provide services to the
Company. At the time an employee ceases working for the Company (or at
the time a nonemployee ceases to perform services for the 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.
Prior Stock Option and Bonus Plan. The Company previously had
in effect a Stock Option and Bonus Plan ("the 1987 Plan") which provided
for the grant to the Company's officers, directors, employees and
consultants of either (i) shares of the Company's Common Stock for
services rendered or (ii) options to purchase shares of Common Stock.
The 1987 Plan was terminated by the Company in 1992. Since the 1987 Plan
was terminated, no further options will be granted and no further bonus
shares will be issued pursuant to the 1987 Plan. However, options
previously granted may nevertheless still be exercised according to the
terms of the options. Prior to the termination of the 1987 Plan, the
Company granted options to purchase 189,250 shares of the Company's
Common Stock. To date, options to purchase 6,000 shares have been
exercised. In June, 1995 the Company cancelled options to purchase
176,250 shares that had previously been granted under this Plan and
reissued options for the same number of shares under the Company's other
stock option plans. See "Option Summary" below.
Option Summary. The following sets forth certain information,
as of March 31, 1996, concerning the stock options granted by the
Company. Each option represents the right to purchase one share of the
Company's Common Stock.
Total Shares
Shares Reserved for Remaining
Reserved Outstanding Options
Name of Plan Under Plan Options Under Plan
1987 Stock Option and Bonus Plan 200,000 7,000 (1)
1992 Incentive Stock Option Plan 100,000 94,050 3,283
1992 Non-Qualified Stock Option Plan 60,000 45,000
- -
1994 Incentive Stock Option Plan 100,000 100,000 -
1994 Non-Qualified Stock Option Plan 100,000 97,250
2,750
1995 Non-Qualified Stock Option Plan 800,000 638,626
111,374
TOTAL: 981,926 117,407
(1) This Plan was terminated in 1992 and as a result, no new options will
be granted pursuant to this Plan.
As of March 31, 1996, 1,500 shares had been issued pursuant to
the Company's 1992 Stock Bonus Plan. All of these shares were issued
during the fiscal year ending September 30, 1994. Transactions with
Related Parties
The technology and know-how licensed to the Company was
developed by a group of researchers under the direction of Dr. Hans-Ake
Fabricius and was assigned, during l980 and l98l, to Hooper Trading
Company, N.V., a Netherlands Antilles' corporation ("Hooper"), and
Shanksville Corporation, also a Netherlands Antilles corporation
("Shanksville"). Mr. de Clara and Dr. Fabricius own 50% and 30%,
respectively, of each of these companies. The technology and know-how
assigned to Hooper and Shanksville was licensed to Sittona Company, B.V.,
a Netherlands corporation ("Sittona"), effective September, l982 pursuant
to a licensing agreement which requires Sittona to pay to Hooper and
Shanksville royalties on income received by Sittona respecting the
technology and know-how licensed to Sittona. In l983, Sittona licensed
this technology to the Company and received from the Company a $1,400,000
advance royalty payment. At such time as the Company generates revenues
from the sale or sublicense of this technology, the Company will be
required to pay royalties to Sittona equal to l0% of net sales and l5% of
the licensing royalties received from third parties. In that event,
Sittona, pursuant to its licensing agreements with Hooper and
Shanksville, will be required to pay to those companies a minimum of l0%
of any royalty payments received from the Company.
In 1985, Mr. de Clara acquired all of the issued and outstanding
stock of Sittona. Mr. de Clara and Dr. Fabricius, because of their
ownership interests in Hooper and Shanksville, could receive
approximately 50% and 30% respectively of any royalties paid by Sittona
to Hooper and Shanksville, and Mr. de Clara, through his interest in all
three companies (Hooper, Shanksville and Sittona), will receive up to 95%
of any royalties paid by the Company.
Legal Matters
During the year ended September 30, 1993, the Company paid Mr.
de Clara approximately $23,000 for legal expenses incurred by Mr. de
Clara in defending a legal action brought against Mr. de Clara by an
unrelated third party who claimed that Mr. de Clara owed the third party
25,000 shares of the Company's Common Stock as a fee for introducing the
Company (in 1985) to persons who allegedly were willing to (but did not)
provide funds to the Company. Although the Company was not a party to
this proceeding, the Company's Board of Directors has determined, based
upon information supplied by Mr. de Clara, that the third party's claims
against Mr. de Clara arose as a result of Mr. de Clara's efforts to
obtain funding for the Company. Accordingly, the Board of Directors
determined that Mr. de Clara was entitled by law to indemnification and
in October, 1993, the Company issued 25,000 shares of its common stock to
the third party claiming the shares from Mr. de Clara.
The Securities and Exchange Commission found that between 1988
and 1991 Mr. de Clara failed to timely file reports of beneficial
ownership required by the Securities Exchange Act of 1934. In May, 1992,
the Commission entered an order requiring Mr. de Clara to file reports of
beneficial ownership on a timely basis.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of May 31, 1996, information
with respect to the only persons owning beneficially 5% or more of the
outstanding Common Stock and the number and percentage of outstanding
shares owned by each director and officer and by the officers and
directors as a group. Unless otherwise indicated, each owner has sole
voting and investment powers over his shares of Common Stock.
Number of Percent of
Name and Address Shares (1) Class (4)
Maximilian de Clara 48,334 (2) *
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 251,690 (3) 4.1%
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
Patricia B. Prichep 18,030 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
M. Douglas Winship 12,000 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
Dr. Eyal Talor 9,334 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
Dr. Prem Sarin 10,000 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 22314
Mark Soresi 14,375 *
l0l0 Wayne Ave., 8th Floor
Silver Spring, MD 209l0
F. Donald Hudson 10,500 *
53 Mt. Vernon Street
Boston, MA 02108
Edwin A. Shalloway 10,500 *
413 North Washington Street
Alexandria, VA 22314
All Officers and Directors
as a Group (10 persons) 384,763 6.0%
*Less than 1%
(1) Includes shares issuable prior to August 1, 1996 upon the
exercise of options or warrants granted to the following
persons:
Options or Warrants
Exercisable Name Prior to August 1,
1996
Maximilian de Clara 43,334
Geert R. Kersten 146,750
Patricia B. Prichep 15,000
M. Douglas Winship 12,000
Dr. Eyal Talor 7,834
Mark Soresi 12,500
F. Donald Hudson 10,500
Edwin A. Shalloway 10,500
Dr. Prem Sarin 10,000
See "Management" for information concerning outstanding
stock options.
(2) All shares are held of record by Milford Trading, Ltd., a
corporation organized pursuant to the laws of Liberia. All of the
issued and outstanding shares of Milford Trading, Ltd. are owned
beneficially by Mr. de Clara.
(3) Amount includes shares held in trust for the benefit of Mr. Kersten's
minor children. Geert R. Kersten is the stepson of Maximilian de
Clara.
(4) Amount excludes shares which may be issued upon the exercise of
options and warrants previously issued by the Company.
SELLING SHAREHOLDERS
In June and September 1995 the Company sold, in private offerings,
1,150,000 Units, at $2.00 per Unit, to five persons. Each Unit consisted
of one share of Common Stock and one Warrant. Each Warrant originally
entitled the holder to purchase one additional share of Common Stock at a
price of $3.25 per share at any time prior to June 30, 1997. The
investors in these Private Offerings are sometimes referred to as the
"Selling Shareholders". The Company agreed to register the shares of
Common Stock sold in these Private Offerings (1,150,000 shares), as well
as the shares of Common Stock issuable upon the exercise of the Warrants
(1,150,000 shares) and to pay all expenses in connection with such
registration, exclusive of commissions and the fees and expenses of
counsel for the Selling Shareholders. On November 30, 1995 the Company
and the investors in these Private Offerings agreed to reduce the
exercise price of the Warrants to $1.60 per share in return for the
commitment on the part of the investors to exercise 312,500 Warrants
($500,000) prior to December 23, 1995 and an additional 312,500 Warrants
($500,000) prior to January 31, 1996. Prior to May 31,1996 the Selling
Shareholders collectively sold 1,698,582 shares of Common Stock which
they acquired in the Private Offerings. By means of this Prospectus, the
shares of Common Stock purchased by the Selling Shareholders in the
Private Offerings, as well as the shares issuable upon the exercise of
the Warrants described above are being offered to the public by the
Selling Shareholders.
The Company will not receive any proceeds from the sale of the shares
by the Selling Shareholders. The names and addresses of the Selling
Shareholders are:
Shares Which
may be Ac Shares to Share
Shares quired Upon be Sold in Owner-
Presently Exercise of This ship After
Name and Address Owned Warrants 1) Offering(2) Offering
Laura Huberfeld 161,243 - 161,243 -
250 Longwood Crossing
Lawrence, NY 11559
Naomi Bodner 87,919 - 87,919 -
16 Grosser Lane
Monsey, NY 10952
Delton Trading SA - 173,174 173,174 -
15 Market Square
Belize City, Belize
Mueller Trading, Limited 172,080 108,174 280,254 -
120 Madison Avenue
Lakewood, NJ
Rita Folger - 5,480 5,480 -
c/o Oscar Folger
521 Fifth Avenue,
24th Floor
New York, NY 10175
421,242 286,828 708,070
(1) Represents shares issuable upon the exercise of Warrants included as
part of the Units sold in the June and September 1995 Private
Offerings.
(2) Assumes all shares owned, or which may be acquired, by the Selling
Shareholders, are sold to the public by means of this Prospectus.
Manner of Sale. The shares of Common Stock owned, or which may
be acquired, by the Selling Shareholders may be offered and sold by means
of this Prospectus from time to time as market conditions permit in the
overthecounter market, or otherwise, at prices and terms then prevailing
or at prices related to the then-current market price, or in negotiated
transactions. These shares may be sold by one or more of the following
methods, without limitation: (a) a block trade in which a broker or dealer
so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction;
(b) purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits
purchasers; and (d) face-to-face transactions between sellers and
purchasers without a broker/ dealer. In effecting sales, brokers or
dealers engaged by the Selling Shareholders may arrange for other brokers
or dealers to participate. Such brokers or dealers may receive commissions
or discounts from Selling Shareholders in amounts to be negotiated. Such
brokers and dealers and any other participating brokers or dealers may be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales.
Sales Agent. In connection with the Company's June and September
Private Offerings, Neidiger/Tucker/Bruner, Inc., the Sales Agent for these
offerings, received a commission of $230,000, a non-accountable expense
allowance of $69,000 and warrants to purchase (i) 57,500 shares of the
Company's Common Stock at $2.00 per share, (ii) 57,500 shares at $2.40 per
share, and (ii) an additional 115,000 shares at $3.25 per share. To the
extent the actual expenses of the Sales Agent were less than the non-
accountable expense allowance, the difference may constitute additional
compensation to the Sales Agent.
The Company also agreed to pay the Sales Agent a fee of 5% of the
aggregate exercise price of the Warrants sold to the Selling Shareholders
and exercised by them after the expiration of one year from the date of
this Prospectus (plus a non-accountable expense allowance equal to 2% of
the aggregate exercise price), if (i) the market price of the Company's
Common Stock on the date of exercise is greater than the exercise price of
the Warrants, (ii) the purchaser has indicated in writing that the
exercise of the Warrants was solicited by the Sales Agent and has
determined that the Selling Agent receive the commission relating to the
exercise of the warrants, (iii) the Warrants exercised are not held in
discretionary accounts, (iv) disclosure of compensation arrangements has
been made both at the time of this offering and at the time of exercise,
and (v) the solicitation of the exercise of the Warrant is not in
violation of Rule l0b6 under the Securities Exchange Act of l934.
Accordingly, it will be a condition to the receipt by the Sales Agent of
such fee that it shall not, in the two or nine business days (depending
upon the market price of the Company's Common Stock) immediately preceding
the solicitation of the exercise or the date of such exercise, have bid
for or purchased the Common Stock of the Company (or any securities of the
Company convertible into, exercisable for the purchase of, or exchangeable
for, such Common Stock) or otherwise have engaged in any activity that
would be prohibited by Rule 10b6 by one engaged in a distribution of the
Company's securities. As a result, the Sales Agent may be unable to
provide a market for the Company's securities, should it desire to do so,
during certain periods while the Warrants are exercisable.
The Company and the Sales Agent have agreed to indemnify each other
against certain liabilities including liabilities under the Securities
Act, and if such indemnification is unavailable or insufficient, the
Company and the Sales Agent have agreed to damage contribution
arrangements based upon relative benefits received from this offering and
relative fault resulting in such damages.
The Sales Agent is presently a market-maker in the Company's
securities. The Sales Agent's Warrants expire between July and September,
2000. The Sales Agent's Warrants contain provisions for adjustment of the
exercise price to prevent dilution upon the occurrence of certain events.
The Sales Agent's Warrants will be non-transferable for a period of one
year from the date of this Prospectus except to officers of the Sales
Agent, other underwriters, selected dealers, or their respective officers
or partners. The holders of the Sales Agent's Warrants will have no
voting, dividend or other rights of shareholders of the Company until
such time as the Sales Agent's Warrants are exercised. Any gain from the
sale of the Representative's Warrants or the securities issuable upon
exercise thereof may be deemed to be additional underwriting
compensation.
At the request of a majority of the holders of the Sales Agent's
Warrants and/or underlying securities during the four year period
commencing one year after the date of this Prospectus, the Company has
agreed to file, at its expense and on one occasion, and to use its best
efforts to cause to become effective, a new registration statement or
prospectus required to permit the public sale of the securities
underlying the Sales Agent's Warrants. In addition, if at any time
during the four year period commencing one year after the date of this
Prospectus, the Company registers any of its securities or exempts such
securities from registration under the provisions of Regulation A or any
equivalent thereto, the holders of the Sales Agent's Warrants will have
the right, subject to certain conditions, to include in such registration
statement at the Company's expense, all or any part of the
securities underlying the Sales Agent's Warrants.
A new registration statement will be required to be filed and
declared effective before distribution to the public of the securities
underlying the Sales Agent's Warrants. The Company will be responsible
for the cost of preparing such a registration statement.
For the life of the Sales Agent's Warrants, the holders are
given the opportunity to profit from a rise in the market price of the
Company's securities, with a resultant dilution in the interest of
existing shareholders. In addition, the terms on which the Company could
obtain additional capital may be adversely affected, and the Sales
Agent's Warrants may be exercised at a time when the Company would, in
all likelihood, be able to obtain any needed capital by a new offering of
securities on terms more favorable than those provided for by the Sales
Agent's Warrants. The Sales Agent and its transferees may be deemed to
be "underwriters" under the Securities Act with respect to the sale of
Units, Common Shares and Warrants to be received upon exercise of the
Warrants, and any profit realized upon such sale may be deemed to be
additional compensation.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 100,000,000 shares of Common
Stock, (the "Common Stock"). Holders of Common Stock are each entitled
to cast one vote for each share held of record on all matters presented
to shareholders. Cumulative voting is not allowed; hence, the holders of
a majority of the outstanding Common Stock can elect all directors.
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 is not obligated to declare a dividend. It is not anticipated
that dividends will be paid in the foreseeable future.
Holders of Common Stock do not have preemptive rights to subscribe
to additional shares if issued by the Company. There are no conversion,
redemption, sinking fund or similar provisions regarding the Common
Stock. All of the outstanding shares of Common Stock are fully paid and
nonassessable and all of the shares of Common Stock offered as a
component of the Units will be, upon issuance, fully paid and non-
assessable.
Preferred Stock
The Company is authorized to issue up to 200,000 shares of
Preferred Stock. The Company's Articles of Incorporation provide that
the Board of Directors has the authority to divide the Preferred Stock
into series and, within the limitations provided by Colorado statute, to
fix by resolution the voting power, designations, preferences, and
relative participation, special rights, and the qualifications,
limitations or restrictions of the shares of any series so established.
As the Board of Directors has authority to establish the terms of, and to
issue, the Preferred Stock without shareholder approval, the Preferred
Stock could be issued to defend against any attempted takeover of the
Company. See "Dilution and Comparative Share Data" for information
concerning the Company's Series A Preferred Stock.
Publicly Traded Warrants
In connection with the Company's February, 1992 public offering,
the Company issued 5,175,000 Warrants. Every ten Warrants entitle the
holder to purchase one share of the Company's Common Stock at a price of
$46.50 per share prior to February 7, 1997. The Company, upon 30-days
notice, may accelerate the expiration date of the Warrants, provided,
however, that at the time the Company gives such notice of acceleration
(1) the Company has in effect a current registration statement covering
the shares of Common Stock issuable upon the exercise of the Warrants and
(2) at any time during the 30 day period preceding such notice, the
average closing bid price of the Company's Common Stock has been at least
20% higher than the warrant exercise price for 15 consecutive trading
days. If the expiration date is accelerated, all Warrants not exercised
within the 30-day period will expire.
Other provisions of the Warrants are set forth below. This
information is subject to the provisions of the Warrant Certificate
representing the Warrants.
1. Holders of the Warrants may sell the Warrants rather than
exercise them. However, there can be no assurance that a market will
develop or continue as to the Warrants.
2. Unless exercised within the time provided for exercise, the
Warrants will automatically expire.
3. The exercise price of the Warrants may not be increased
during the term of the Warrants, but the exercise price may be decreased
at the discretion of the Company's Board of Directors by giving each
Warrant holder notice of such decrease. The exercise period for the
Warrants may be extended by the Company's Board of Directors giving
notice of such extension to each Warrant holder of record.
4. There is no minimum number of shares which must be
purchased upon exercise of the Warrants.
5. The holders of the Warrants in certain instances are
protected against dilution of their interests represented by the
underlying shares of Common Stock upon the occurrence of stock dividends,
stock splits, reclassifications, and mergers.
6. The holders of the Warrants have no voting power and are
not entitled to dividends. In the event of a liquidation, dissolution,
or winding up of the Company, holders of the Warrants will not be
entitled to participate in the distribution of the Company's assets.
Convertible Notes
In March 1996 the Company sold $l,250,000 of Convertible Notes
("Notes") to two persons. The Notes are convertible from time to time in
whole or in part, into shares of the Company's Common Stock. The
conversion price is 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.
Notwithstanding the above, the conversion price may not be less than
$2.40 per share. The Notes are payable on December 1, 1996 and accrue
interest at 10% per annum. The Company has agreed to make appropriate
filings with the Securities and Exchange Commission such that the shares
issuable upon the conversion of the Notes will be available for public
sale. See "Risk Factors".
Transfer Agent
American Securities Transfer, Inc., of Denver, Colorado, is the
transfer agent for the Company's Common Stock.
LITIGATION
In February 1996 the Company filed a lawsuit against ImmunoRx
and Dr. John Hadden for contract breach, tortious interference of
contract and patent infringement concerning the Company's Multikine drug.
The lawsuit, filed in the U.S. Distrit Court for the Middle District of
Florida, seeks damages and the termination of certain research and
clinical studies being conducted by ImmunoRx and Dr. Hadden. From 1984
to 1992, Dr. Hadden consulted with the Company, performed research on
Multikine and manufactured Multikine for the Company's head and neck
cancer study in Florida. In early 1993, Dr. Hadden signed a separation
agreement with the Company acknowledging the Company's ownership of both
Multikine and the research results. The Company has learned that Dr.
Hadden and ImmunoRx are apparently making copies of Multikine, in
contravention of the separation agreement and the patents covering
Multikine, and have begun clinical studies in a foreign country using a
copy of Multikine. See "Business Compounds and Processes Licensed to the
Company".
EXPERTS
The financial statements as of September 30, 1995 and 1994 and
for each of the three years in the period ended September 30, 1995
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
INDEMNIFICATION
The Company's Bylaws authorize indemnification of a director,
officer, employee or agent of the Company against expenses incurred by
him in connection with any action, suit, or proceeding to which he is
named a party by reason of his having acted or served in such capacity,
except for liabilities arising from his own misconduct or negligence in
performance of his duty. In addition, even a director, officer,
employee, or agent of the Company who was found liable for misconduct or
negligence in the performance of his duty may obtain such indemnification
if, in view of all the circumstances in the case, a court of competent
jurisdiction determines such person is fairly and reasonably entitled to
indemnification. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers,
or persons controlling the Company pursuant to the foregoing provisions,
the Company has been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20001, a Registration
Statement under the Securities Act of l933, as amended, with respect to
the securities offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement. For further
information with respect to the Company and such securities, reference is
made to the Registration Statement and to the Exhibits filed therewith.
Statements contained in this Prospectus as to the contents of any
contract or other documents are summaries which are not necessarily
complete, and in each instance reference is made to the copy of such
contract or other document filed as an Exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. Copies of each document may be inspected at the Commission's
offices at 450 Fifth Street, N.W., Washington, D.C., 20549, and at the
Northeast Regional Office, 7 World Trade Center, 13th Floor, New York,
New York 10048 and the Midwest Regional Office, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60681-2511. Copies may be obtained at
the Washington, D.C. office upon payment of the charges prescribed by the
Commission.
2243D
No dealer, salesman or other person has been authorized to give
any information or to make any representations, other than those
contained in this Prospectus. Any information or representation not
contained in this Prospectus must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, the securities offered
hereby in any state or other jurisdiction to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that there has been no change in the
affairs of the Company since the date hereof.
TABLE OF CONTENTS
Page Prospectus Summary ......................................7
Glossary of Technical Terms ..................................10
Risk Factors .................................................11
Dilution and Comparative Share Data ..........................17
Market Information ...........................................20
Selected Financial Data ......................................21
Management's Discussion and Analysis .........................22
Business .....................................................26
Management ...................................................39
Principal Shareholders .......................................51
Selling Shareholders .........................................53
Description of Securities ....................................56
Litigation ...................................................58
Experts ......................................................58
Indemnification ..............................................59
Additional Information .......................................59
Financial Statements
......................................
708,070 Shares of Common Stock
CEL-SCI CORPORATION
PROSPECTUS
CEL-SCI CORPORATION
Financial Statements for the Years Ended
September 30, 1995, 1994, and 1993, and Independent Auditors' Report
To the Board of Directors and Shareholders of
CEL-SCI Corporation:
We have audited the accompanying balance sheets of CEL-SCI Corporation
as of September 30, 1995 and 1994, and the related statements of
operations, stockholders' equity, and cash flows for each of the three
years in the period ended September 30, 1995. 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 financial statements referred to above present
fairly, in all material respects, the financial position of CEL-SCI
Corporation as of September 30, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the
period ended September 30, 1995, in conformity with generally accepted
accounting principles. As discussed in Note 1 to the financial
statements, as of September 30, 1994, the Company changed its method
of accounting for certain investments in debt and equity securities to
conform with Statement of Financial Accounting Standards No. 115.
Washington, DC
November 29, 1995, except for Note 14, as to which the date is
December 23, 1995
CEL-SCI CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993 2
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: Investments
Effective September 30, 1994, the Company adopted, on a
prospective basis, Statement of Financial Accounting Standard No.
115, "Accounting for Certain Debt and Equity Securities" (SFAS
115) and revised its policy for investments. Investments that may
be sold as part of the liquidity management of the Company or for
other factors are classified as available-forsale 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. The adoption of SFAS 115, which has not been applied
retroactively to prior years' financial statements, resulted in a
decrease in stockholders' equity of $85,753 for the net
unrealized losses on investments available forsale at September
30, 1994. As of September 30, 1995, all debt and equity
securities had been disposed of and any unrealized gains or
losses were recognized during the year ended September 30, 1995
(see Note 2).
Prior to September 30, 1994, all investments available-for-sale
were carried at the lower of aggregate amortized cost or market
value.
Research and Office Equipment Research and office equipment is
recorded at cost and depreciated using the straightline method
over five and seven years estimated useful lives.
Research and Development Costs Research and development
expenditures are expensed as incurred. Patents Patent
expenditures are capitalized and amortized using the straight
line method over 17 years. In the event changes in technology or
other circumstances impair the value or life of the patent,
appropriate adjustment in the asset value and period of
amortization will be made.
Net Loss Per Share Net loss per common share is based on the
weighted average number of common shares outstanding during the
period. Common stock equivalents, including options to purchase
common stock, are excluded from the calculation as they are
antidilutive.
Investment in Joint Venture Investment in joint venture is
accounted for by the equity method. The Company's proportionate
share of the net loss of the joint venture is included in the
respective statements of operations. Statement of Cash Flows For
purposes of the statements of cash flows, cash consists
principally of unrestricted cash on deposit, and shortterm money
market funds. The Company considers all highly liquid
investments with a maturity of less than three months to be cash
equivalents.
Prepaid Expenses The majority of prepaid expenses consist of bulk
purchases of laboratory supplies to be consumed in the
manufacturing of the Company's product for clinical studies and
for its further development. Income Taxes Effective October 1,
1993, the Company adopted Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS
109 requires an asset and liability approach
for reporting income taxes. Implementation of SFAS 109 in 1994 did
not have any effect on the Company's net earnings and reported
financial position and prior financial statements have not been
restated.
Reclassifications. Certain reclassifications have been made for
1994 and 1993 for comparative purposes.
2. INVESTMENTS
The carrying values and estimated market values of investments
available-for-sale at September 30, 1995, are as follows:
Note2a
The carrying values and estimated market values of investment
securities at September 30, 1994, are as follows:
Note2b
The gross realized gains and losses of sales of investments
availablefor-sale for the years ended September 30, 1995, 1994,
and 1993, are as follows:
Note 2c
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1995 and 1994, consist of
the following:
Note3a
4. JOINT VENTURE
In April 1986, the Company paid $200,000 cash and issued
500,000 shares of its $.01 par value common stock to acquire
half the rights to technology which may be useful in the
diagnosis, prevention and treatment of Acquired Immune
Deficiency Syndrome (AIDS) from Alpha I Biomedicals, Inc. The
Company's stock was valued at $1.50 per share on the basis of
arm's-length negotiations. At the time the transaction took
place, the stock was trading at $2.42. Because the cost of
these rights to technology is considered research and
development, the $950,000 purchase price was expensed. The
Company and Alpha 1 Biomedicals, Inc. (Alpha 1) contributed
their respective interests in the technology and $10,000 each
to capitalize a joint venture, Viral Technologies, Inc. (VTI).
VTI is wholly owned by the Company and Alpha 1, each having a
50% ownership interest. The total loaned or advanced to VTI by
CELSCI Corporation through September 30, 1995, was $1,592,584
(see Note 13).
During the three years ended September 30, 1995, VTI had no
sales. The operations of VTI were as follows:
Note4a
The balance sheets of VTI at September 30, 1995 and 1994, are
summarized as follows:
Note4b
On December 17, 1987, Viral Technologies, Inc., entered into a
licensing agreement with Nippon Zeon Company, Ltd., a Japanese
company. Under the agreement, Nippon Zeon will engage in the
development and testing and, if development is successful, the
marketing of the potential AIDS vaccine in the Pacific Rim
area. As a result, Viral Technologies, Inc., received
precommercialization payments of $850,000 during the year ended
September 30, 1988. During the year ended September 30, 1995,
VTI purchased back from Nippon Zeon the licensing agreement.
No cash or stock was exchanged; however, Nippon Zeon retains a
royalty on any future sales of the drug HGP30 in its former
exclusive licensed territories.
5. CREDIT ARRANGEMENTS
At September 30, 1995, the Company had a promissory note
outstanding with a bank in the amount of $811,263. This
promissory note was converted in November 1994 from a prior
line of credit. The line of credit outstanding at September 30,
1994, was $788,601, and the Company subsequently drew down
additional amounts during the year ended September 30, 1995,
prior to converting the line of credit to a promissory note.
The principal is being repaid over forty-eight consecutive
months beginning February 5, 1995. Interest on the outstanding
balance is calculated at the Bank's prime rate plus two
percent, which is 10.75% at September 30, 1995, and is to be
paid monthly with the principal payments. The promissory note
is secured by all corporate assets and requires the Company to
hold a certificate of deposit equal to 20% of the outstanding
balance of the line of credit with the Bank. Under the
promissory note the Company is also subject to certain minimum
equity, liquidity, and operating covenants.
6. COMMITMENTS AND CONTINGENCIES
In 1993, an officer and director of the Company was involved
in legal proceedings concerning shares of the Company's common
stock. The officer and director was acting on behalf of the
Company in trying to secure financing, and the Company paid
legal fees in connection with these proceedings and
indemnified the officer for any loss he suffered upon the
settlement of these matters. During 1992, one of the matters
was settled by the officer and director delivering 3,000
shares of the Company's common stock to one plantiff and
paying this plantiff $200,000. In the other matter, a European
Court awarded a different plantiff 25,000 shares of the
Company's common stock owned by the officer and director. In
October 1993, the Company issued 25,000 shares of common stock
to the plaintiff to satisfy the judgment and in lieu of
reimbursement to the officer and director for this claim. The
value of the shares issued, $202,500, was expensed during 1993
and was included in accrued expenses at September 30, 1993.
7. RELATED-PARTY TRANSACTIONS
The technology and know-how licensed to the Company was
developed by a group of researchers under the direction of Dr.
Hans Ake Fabricius and was assigned during 1980 and 1981 to
Hooper Trading Company, N.V., a Netherlands Antilles
corporation (Hooper) and Shanksville Corporation, also a
Netherlands Antilles corporation (Shanksville). Maximillian de
Clara, an officer and director in the Company, and Dr.
Fabricius own 50% and 30%, respectively, of each of these
companies. The technology and knowhow assigned to Hooper and
Shanksville was licensed to Sittona Company, B.V., a
Netherlands corporation (Sittona), effective September, 1982
pursuant to a licensing agreement which requires Sittona to
pay to Hooper and Shanksville royalties on income received by
Sittona respecting the technology and know-how licensed to
Sittona. In 1983, Sittona licensed this technology to the
Company. At such time as the Company generates revenues from
the sale or sublicense of this technology, the Company will be
required to pay royalties to Sittona equal to 10% of net sales
and 15% of licensing royalties received from third parties.
In that event, Sittona, pursuant to its licensing agreements
with Hooper and Shanksville, will be required to pay to those
companies a minimum of 10% of any royalty payments received
from the Company. In 1985 Mr. de Clara acquired 100% of the
issued and outstanding stock of Sittona. Mr. de Clara and Dr.
Fabricius, because of their ownership interests in Hooper and
Shanksville, could receive approximately 50% and 30%
respectively, of any royalties paid by Sittona to Hooper and
Shanksville, and Mr. de Clara, through his interest in all
three companies (Hooper, Shanksville, and Sittona), will
receive up to 95% of any royalties paid by the Company. During
1992, the Company reimbursed an officer and director for legal
fees incurred in connection with certain legal proceedings as
discussed in Note 6. In addition, during 1992 the Company paid
the officer and director $200,000, representing the amount
that he paid in connection with one of the legal proceedings
discussed in Note 6 and, in 1993, issued 3,000 shares of
common stock to the officer and director as reimbursement for
shares he delivered in connection with the proceeding. The
$200,000 payment was expensed in 1992, and the value of the
3,000 shares, $20,100 was expensed in 1993.
8. INCOME TAXES
The approximate tax effect of each type of temporary differences
and carryforward that gave rise to the Company's tax assets and
liabilities at September 30, 1995 and 1994, is as follows:
Note8a
The Company has available for income tax purposes net operating
loss carryforwards of approximately $24,370,937, expiring from
1998 through 2007.
In the event of a significant change in the ownership of the
Company, the utilization of such carryforwards could be
substantially limited.
9. STOCK OPTIONS, WARRANTS, AND BONUS PLAN
During the year ended September 30, 1995, the Board of
Directors canceled certain options under the various stock
option plans and replaced them with new options. Under this
conversion the number of options outstanding did not increase
or decrease as the conversion was an exchange of options
within the plans to maximize reserved shares in the Plans with
the options granted.
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.
On February 23, 1988, the shareholders of the Company adopted
the 1987 Nonqualified Stock Option and Stock Bonus Plan (the
1987 Plan). This 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.
On September 30, 1993, the shareholders of the Company
approved the adoption of three new plans, the 1993 Incentive
Stock Option Plan (1993 Incentive Plan), the 1993 Non
Qualified Stock Option Plan (1993 Non Qualified Plan) and the
Stock Bonus Plan (1993 Bonus Plan). Shares 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 NonQualified 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. On July 29, 1994, the Board of Directors approved the
adoption of two new plans, the 1994 Incentive Stock Option Plan
(1994 Incentive Plan) and the 1994 NonQualified Stock Option Plan
(1994 NonQualified). Shares are reserved under each plan and
total 100,000 shares for each plan. Only employees of the
Company are eligible to receive options under the 1994 Incentive
Plan, while the Company's employees, directors, officers, and
consultants or advisors are eligible to be granted options under
the 1994 Non-Qualified Plan. Terms of the options are to be
determined by the Company's Compensation Committee, which will
administer all of the plans, but in no event are options to be
granted for shares at a price below fair market value at date of
grant. Options granted under the option plans must be granted, or
shares issued under the bonus plan issued, before July 29, 2004.
Information regarding the Company's stock option plan is
summarized as follows:
Note9a
Note9b
During 1991, the Company granted a consultant an option to
purchase 50,000 shares of the Company's common stock. The
option is exercisable at $13.80 per share and expires in March
1996. The holder of the option has the right to have the
shares issuable upon the exercise of the option included in any
registration statement filed by the Company. Also during 1991,
the Company granted another consultant options to purchase
6,000 shares of the Company's common stock. Options to purchase
667 shares expired in April 1993. Options to purchase 1,333
shares at $2.50 per share were exercised in April 1994. At
September 30, 1995, options to purchase 4,000 shares were
outstanding and exercisable at prices ranging from $2.50 to
$15.00 per share. In connection with the 1992 public offering,
5,175,000 common stock purchase warrants were issued and are
outstanding at September 30, 1995. Every ten warrants entitle
the holder to purchase one share of common stock at a price of
$46.50 per share. During 1995, the expiration of these warrants
was extended to February 1996. The Company may accelerate the
expiration date of the warrants by giving 30 days notice to the
warrant holders, provided, however, that at the time the
Company gives such notice of acceleration (1) the Company has
in effect a current registration statement covering the shares
of common stock issuable upon the exercise of the warrants and
(2) at anytime during the 30-day period preceding such notice,
the average closing bid price of the Company's common stock has
been at least 20% higher than the warrant exercise price for 15
consecutive trading days.
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 are outstanding at
September 30, 1995 and are exercisable through February 8,
1997, at a price of $255.70 per unit. The common stock
warrants included in the units are exercisable at a price of
$76.70 per share. 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.
10.EMPLOYEE BENEFIT PLAN
During 1993 the Company implemented a defined contribution
retirement plan, qualifying under Section 401(k) of the
Internal Revenue Code, subject to the Employee Retirement
Income Security Act of 1974, as amended, and covering
substantially all CEL-SCI employees. The employer contributes
an amount equal to 50% of each employee's contribution not to
exceed 6% of the participant's salary. The expense for the
year ended September 30, 1995 and 1994, in connection with
this plan was approximately $24,913 and $16,160, respectively.
11.LEASE COMMITMENTS
Operating Leases The future minimum annual rental payments due
under noncancelable operating leases for office and laboratory
space are as follows:
Note11a
Rent expense for the year ended September 30, 1995,
1994, and 1993, was approximately $124,059, $122,369, and
$55,000, respectively.
12.STOCKHOLDERS' EQUITY
On April 28, 1995 the stockholders of the Company approved a 10
for1 reverse split of the Company's outstanding common stock,
which became effective on May 1, 1995. All shares and per-share
amounts have been restated to reflect the stock split. The
Company also participated in a private offering during 1995.
This offering allowed for the purchase of one share of common
stock and one warrant (a unit) for the price of $2.00 per unit.
All 1,150,000 shares authorized for the offering were purchased
during the year ended September 30, 1995. Warrants outstanding
are exercisable at $3.25 and expire on June 30, 1997. Cash of
$2,300,000 was received in June and September 1995. Commissions
of $344,150 were paid or payable relative to the offering at
September 30, 1995. During 1994, the Company granted 1,500
shares of common stock to an officer as a bonus award. The
Company also issued 25,000 shares to satisfy the judgment against
an officer and director. The issuance was to the plantiff in lieu
of reimbursement to the officer and director. The judgment was
settled in 1993 and the expense of the issuance was recorded in
1993. During 1993, the Company received $27,333 cash for 7,333
shares of common stock.
13.SUBSEQUENT EVENTS JOINT VENTURE
In October 1995, the Company purchased Alpha 1's 50 percent
interest in VTI. The Company conveyed 159,170 shares of
common stock as full consideration for all of the VTI capital
stock owned by Alpha 1. The acquisition of Alpha 1's interest
will be accounted for as purchase with substantially all of
the value of the purchase price being expensed as research and
development costs.
14.SUBSEQUENT EVENTS OTHER
On December 8, 1995, the Board of Directors authorized the
extension of the Company's warrants issued in connection with
the 1992 public offering from February 6, 1996, to February 6,
1997. On December 23, 1995, the Company entered into an
agreement with investors to reduce the exercise price of
warrants to purchase shares of the Company's common stock
issued in a 1995 private offering from $3.25 to $1.60 per
shares (Note 12). Shares which may be acquired under this
agreement with exercise of the warrants total 1,150,000. In
connection with modifying the warrant exercise price, 312,500
warrants were exercised for $500,000 in exchange for 312,500
shares of common stock on December 23, 1995. An additional
312,500 warrants are required to be exercised prior to January
31, 1996 with the remaining warrants outstanding through June
30, 1997.
15.NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121 regarding accounting for the impairment of long
lived assets. This statement is required to be adopted by the
Company in fiscal 1997. At the present time the Company does not
believe that adoption of this statement will have a material
effect on its financial position or results of its operations.
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, Accounting for Stock Based Compensation. This
statement is required to be adopted by the Company in fiscal
1997. The Company has not yet determined the impact of the
adoption of this statement on its financial position or results
of its operations.
CEL-SCI CORPORATION
BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
ASSETS
1995 1994
CURRENT ASSETS:
Cash and cash equivalents
$3,886,950 $3,370,713
Investments, net
170,000 2,694,756
Interest receivable
64,080 116,733
Prepaid expenses
341,295 67,648
Advances to officer/shareholder
and 13,234 17,381
employees
Total current assets
4,475,559 6,267,231
RECEIVABLE FROM JOINT VENTURE
522,695 351,204
RESEARCH AND OFFICE EQUIPMENT Less
accumulated depreciation of $589,897 and
$355,430 1,102,038
1,185,499
DEPOSITS
18,178 13,958
PATENT COSTS Less accumulated amortization of $239,490
and $211,253 240,541 268,778
$6,359,011 $8,086,670
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT
LIABILITIES: Accounts payable
$248,488 $324,179
Current portion of note payable
243,372 147,861
Total current
491,860 472,040
liabilities
NOTE PAYABLE
567,891 640,740
DEFERRED RENT
24,959 17,598
EQUITY IN LOSS OF SUBSIDIARY
432,268 277,224
Total liabilities 1,516,978 1,407,602
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value authorized, 200,000 shares;
none issued
- - -
Common stock, $.01 par value authorized, 100,000,000 shares;
issued and outstanding,
5,338,244 and 53,382
41,882
4,188,244 shares
Additional paid-in capital
28,799,198 26,854,848
Net unrealized loss on marketable
equity (85,753)
securities (Note 1)
Accumulated deficit
(24,010,547 (20,131,909
) )
Total stockholders' equity 4,842,033
6,679,068
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,359,011
$8,086,670 See notes to financial statements. CEL-SCI
CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1995,
1994, AND 1993
1995 1994 1993
INVESTMENT INCOME
$365,049 $624,670 $997,964
OTHER INCOME
58,716
- - -
Total income
423,765
624,670 997,964
OPERATING EXPENSES:
Research and development
1,824,661 2,896,109 1,307,042 Depreciation and amortization 262,705
138,755 55,372
General and administrative 1,713,912
1,621,990 1,696,119
Total
operating expenses
3,801,278
4,656,854 3,058,533
EQUITY IN LOSS OF
JOINT VENTURE (Note 2)
(501,125) (394,692) (344,423)
NET LOSS
$3,878,63 $4,426,87 $2,404,99
8 6 2 LOSS PER
COMMON SHARE $0.89
$1.06 $0.58
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
4,342,628 4,185,240 4,155,431
See notes to financial statements.
CEL-SCI CORPORATION
STATEMENTS OF STOCKHOLDERS'
EQUITY
YEARS ENDED SEPTEMBER 30,
1995, 1994, AND 1993
Additional
Common Paid-In
Stock Shares
Amount Capital Other Deficit Total
BALANCE, OCTOBER 1, 1992
$-
4,148,980 $41,490 $26,560,96 $(13,300,04
$13,302,41 9 1) 8
Common stock issued for:
Cash
7,333
73
27,260 - -
27,333
Reimbursement of
3,000
30
20,070 -
20,100
expenses
Net loss
- -
- -
- - -
(2,404,992) (2,404,992
)
BALANCE, SEPTEMBER 30, 1993
41,593
4,159,313 26,608,299 (15,705,033 10,944,859
)
Common stock issued for:
\ Cash
2,431
24
39,364 -
39,388
Stock bonus plan
1,500
15
4,935 - 4,950
Settlement of
25,000
250
202,250 -
202,500
lawsuit
Net unrealized loss on
marketable
securities (Note 1)
- -
- -
- - (85,753)
(85,753) Net loss -
- -
- - -
(4,426,876) (4,426,876
)
BALANCE, SEPTEMBER 30, 1994
41,882
4,188,244 26,854,848 (85,753) (20,131,909
6,679,068 )
Common stock issued for
11,500 - -
cash 1,150,000
1,944,350
1,955,850
Change in market value
of marketable
securities available -
85,753 85,753
for sale (Note 1)
Net loss -
- -
- - -
(3,878,638) (3,878,638
)
BALANCE, SEPTEMBER 30, 1995
$-
5,338,244 $53,382 $28,799,19
$(24,010,54 $4,842,033
8 7)
See notes to financial
statements.
CEL-SCI CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995,
1994, AND 1993
1995 1994
1993
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss
$(3,878,6 $(4,426,8 $(2,404,9
38) 76) 92)
Adjustments to reconcile net
loss to
net cash used in operating
activities:
Stock issued in payment of
- -
207,450 20,100
expenses
Depreciation and amortization
262,705
138,755 55,372
Equity in loss of Joint Venture
501,125 394,692 344,423
Net realized loss (gain) on sale
42,490
- -
of securities
(76,774)
Amortization of premium
6,407
25,683 18,762
Changes in assets and
liabilities:
Decrease (increase) in
4,147
- -
advances
(17,381)
Increase in prepaid
expenses, deposits, interest receivable, and
receivable from joint venture (396,705) (31,833) (292,182)
(Decrease) increase in
accounts payable,
accrued expenses, and
143,919
deferred rent
(68,330)
(111,552)
Decrease in payable to
- -
officer and shareholder
(52,370) (43,448)
Net cash used
in operating activities
(3,526,79
(3,950,20 (2,158,04
9) 6) 6)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of investments
(389,688) (1,467,81 (5,993,31
8) 0)
Sales and maturities of investments
2,951,299
6,999,273 7,745,943
Advances to Joint Venture (346,081) (300,000) (223,750)
Expenditures for property and
equipment
(151,006)
(999,807) (318,556)
Expenditures for patents
- -
- - (8,777)
Net cash provided by investing activities
2,064,524 4,231,648 1,201,550
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Issuance of note payable
184,915
788,601 -
Issuance of common stock
39,388 27,333
1,955,850 Repayment of note payable
- - -
(162,253)
Net cash 827,989 27,333
provided by financing activities 1,978,512
NET INCREASE (DECREASE) IN CASH 516,237 1,109,431 (929,163)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
3,370,713
2,261,282 3,190,445
CASH AND CASH EQUIVALENTS, END OF
YEAR
$3,886,95
$3,370,71 $2,261,28
0 3 2 SUPPLEMENTAL
DISCLOSURE OF NON-CASH
ACTIVITY:
During 1994, the net unrealized
loss on investments available-for-
sale was $85,753.
During 1994, 25,000 shares were
issued as settlement of a lawsuit at
a cost of $202,500 (see Note 6).
See notes to financial statements.
Year Ending
September 30,
Amount
1996
$135,123
1997
140,335
1998
56,160
1999
59,573
2000
62,010
Thereafter
162,728
Total minimum lease payments
$615,929
Septemb
er 30,
1995
Gross Gross Market
Value
Amortiz Unreal Unreal at
ed
ized
ized Septemb
er 30,
Cost
Gains
Losses 1995
Certificates of
$-
$-
Deposit $170,00
$170,00
0
0
September 30,
1994
Gross Gross Market
Value Amortize
Unreal
Unreali at
d
ized
zed Septembe
r 30,
Cost
Gains
Losses 1994
U.S. Government
$-
Securities $1,471,0
$46,362 $1,424,7
96
34
Corporate Debt
Securities 1,108,58
2,442
41,833 1,069,19
1
0
Certificates of
- -
- -
Deposit 200,832
200,832
$2,780,5
$2,442 $88,195 $2,694,7
09
56
1995 1994 1993
Realized gains
$-
$17,839 $128,205
Realized losses
60,329
51,431 -
Net realized gain (loss)
$-
$(42,490 $76,774
) 1995 1994 Research
equipment
$979,048 $843,187
Furniture and equipment
136,486 120,185
Leasehold improvements
576,401 577,557
1,691,935 1,540,929
Less accumulated depreciation and
amortization
(589,897) (355,430)
Net property and equipment
$1,102,03 $1,185,49
8 9
Years
Ended
September 30,
1995 1994 1993
Income $-
$-
$ -
Expenses
789,384 688,846
1,002,250
Net Income (Loss)
$(1,002,25 $(789,384 $(688,846
0) ) )
September
30,
1995 1994
Current assets
$30,484 $24,403
Noncurrent assets
$187,821 $87,822
Current liabilities
$4,275,078 $3,197,143
Equity (deficit net of initial capitalization)
$(4,056,77 $(3,084,91
3) 8)
1995 1994
Depreciation
$(16,660) $(27,325)
Prepaid expenses
(14,413) (25,680)
Net operating loss carryforward
9,251,208 7,675,907
Other
9,474 6,680
Less: Valuation allowance
(9,229,609 (7,630,772
) )
Net deferred
$- $-
Opti on Pri ce
Pe r
Outsta Exerci
Share nding sable
1987 Stock Option and Bonus
Plan
Balance, September 30, 1992
$3.40
- -
20.90 189,25 31,000
0
Became exercisable
- -
77,999
Exercised
$4.00 (6,000
(6,000
) )
Balance, September 30, 1993
$3.40
1 9 .
6 0
183,25 102,99
0 9
Became exercisable
- -
40,250
Balance, September 30, 1994
$3.40
2 0 .
9 0
183,25 143,24
0 9
Canceled
$3.40
2 0 .
9 0
176,25 1 136,24
0 3 9
6
,
2
4
9
Balance, September 30, 1995 $19.70
16.
50
7,000 7,000
1992 Incentive Stock Option
Plan
Balance, September 30, 1992
$13.40
500 -
Granted $13.80 -
- -
15.60 12,000
Balance, September 30, 1993 $13.40
15.
60
12,500 Granted $6.80 -
- -
11.90 29,500
Became exercisable
- -
4,166
Balance, September 30, 1994 $6.80
15.
60 4
42,00
0
4,166
2
0
,
0
0
0
Canceled $6.80
-
15.60
(42,00 (4,166
0) )
Granted $2.87 -
3.87
57,550 20,917
Balance, September 30, 1995 $2.87 -
3.87
4 57,550 20,917
2
0
,
0
0
0
1992 Nonqualified Stock Option
Plan
Balance, September 30, 1992 $13.40
- -
4 2,500 2 0 ,
0 0
0
Granted $13.80 -
- -
15.60 15,500
Balance, September 30, 1993
$13.40 -
18,000
Granted $8.70 -
13.80 18,000 Became exercisable
- -
18,000
Balance, September 30, 1994 $8.70 -
13.80 36,000 1 18,000
8
,
0
0
0
Canceled $8.70
- -
- -
13.40 (7,500 -
)
Granted
$2.87
- -
31,500
Became Exercisable
- -
4 42,000
2
,
0
0
0
Balance, September 30, 1995
$2.87
- -
15.60 60,000 6 60,000
0
,
0
0
0
Opt i on Pr i ce
P e r
Outsta Exerci
Share nding sable
1992 Stock Bonus Plan
Granted during 1994
$8.70 1,500 1,500
Exercised
$8.70
(1,500 (1,500
) )
Balance, September 30, 1994 and
- - -
1995
1994 Incentive Stock Option
Plan
Granted
- -
$2.87
50,000
Balance, September 30, 1994
- -
$2.87 50,000 -
Granted
$2.87 50,000
Became Exercisabe
- -
$2.87 61,000
Balance, September 30, 1995
$2.87 100,00 61,000
0
1994 Nonqualified Stock Option
Plan
Granted
- -
$2.87 70,000 -
Balance, September 30, 1995
$2.87 70,000 -
Granted
$2.87 -
3.87
27,250 -
Became exercisable
- -
48,084
Balance, September 30, 1995
$2.87 -
3.87
97,250 48,084
1995 Nonqualified Stock Option
Granted in 1995
$2.87 -
$3.87 329,25
1
Became exercisable
- -
70,000
Balance, September 30, 1995
329,25 70,000
1
Item 1. FINANCIAL STATEMENTS
CEL-SCI CORPORATION
CONSOLIDATED CONDENSED BALANCE
SHEETS
ASSETS
(unaudited)
March 31, September 30 ,
1996 1995
CURRENT ASSETS:
Cash and cash equivalents $3,803,786 $3,886,950
Investments, net 170,000 170,000
Interest receivable 86,610 64,080
Prepaid expenses 242,812 341,295
Advances to officer/shareholder
and employees 134,644 13,234
4,437,852 4,475,559
RECEIVABLE FROM JOINT VENTURE
0
522,695
RESEARCH AND OFFICE EQUIPMENT-
Less accumulated depreciation
of $740,239 and $589,897
981,823
1,102,038
DEPOSITS
18,178
18,178
PATENT COSTSless accumulated
amortization of
$325,782 and $239,490
423,174
240,541
$5,861,027 $6,359,011
See notes to
condensed financial statements.
3
CEL-SCI CORPORATION
- -------------------
CONSOLIDATED CONDENSED BALANCE
SHEETS
- ------------------------
(continued)
LIABILITIES AND STOCKHOLDERS'
EQUITY
(unaudited)
March 31, Septe mb er 30 ,
1996
1995
CURRENT LIABILITIES:
Accounts payable $57,787
$248,488
Current portion note payable 243,372
243,372
Total current liabilities 301,159
491,860
NOTE PAYABLE 446,201
567,891
CONVERTIBLE DEBENTURE 1,250,000
24,959
24,959
EQUITY IN SUBSIDIARY
0
432,268
Total liabilities
2,022,319
1,516,978
STOCKHOLDERS' EQUITY
Preferred stock, $.01
par value; authorized,
200,000 shares; none issued
-
Common stock, $.01 par
value; authorized,
100,000,000 shares;
issued and outstanding,
6,328,581 and
5,338,244 shares
63,286
53,382
Additional paid-in capital
30,904,595
28,799,198
Deficit
(27,014,373)
(24,010,547)
Short-term note receivable from (114,800)
shareholder
- -
TOTAL STOCKHOLDERS'
EQUITY
3,838,708
4,842,033
$5,861,027 $6,359,011 See
notes to
condensed financial statements.
4
CEL-SCI CORPORATION
- -------------------
CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS
- ---------------------------------
(unaudited)
Six Months
Ended
March 31,
1996
1995 REVENUES:
Interest income $84,914
$190,306
Other income 25,406
17,611
TOTAL INCOME 110,320
207,917
EXPENSES:
Research and development 1,750,694
1,149,943
Depreciation and
amortization 139,962
133,986
General and administrative 1,219,719
778,248
TOTAL OPERATING EXPENSES 3,110,375
2,062,177
EQUITY IN LOSS OF JOINT VENTURE (3,772)
(290,340)
3,114,147 2,352,517 NET LOSS
$3,003,827
$2,144,600
LOSS PER COMMON SHARE $0.52
$0.51
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 5,825,011
4,188,244
See notes to
condensed financial statements.
5
CEL-SCI CORPORATION
- -------------------
CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS
- ---------------------------------
- -
(unaudited)
Three Months Ended
March 31, 1996
1995 REVENUES:
Other income $7,326
$17,611
Interest Income 40,493
73,605
TOTAL INCOME 47,819
91,216
EXPENSES:
Research and development 512,497
531,307
Depreciation and
amortization 68,694
67,211
General and administrative 741,831
379,968
TOTAL OPERATING EXPENSES 1,323,022
978,486
EQUITY IN LOSS OF JOINT VENTURE 0
(108,761)
1,323,022
1,087,247 NET LOSS $1,275,203
$996,031
LOSS PER COMMON SHARE $ $
0.21
0.24 WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 6,196,630
4,188,244
See notes to
condensed financial statements.
6
CEL-SCI CORPORATION
- -------------------
CONSOLIDATED CONDENSED STATEMENTS
OF CASH FLOW
- ---------------------------------
(unaudited)
Six Months
Ended
March 31,
1996
1995 CASH FLOWS FROM OPERATING
ACTIVITIES:
NET LOSS
$(3,003,827)
$(2,144,600) Adjustments to reconcile net loss
to
net cash used in operating
activities:
Depreciation and amortization 139,962
133,986
Equity in loss of joint venture 3,772
290,340
Research and development
expense related
to purchase of Viral
515,617
Technologies, Inc.
Amortization of premium on -
18,722
investments
Realized loss on sale of
12,965
investments
Changes in assets and
liabilities, net of effect from purchase
of Viral Technologies, Inc.:
Decrease (increase) in interest (22,530)
6,449 receivable
Decrease (increase) in prepaid 98,483
(19,924)
expenses
Decrease (increase) in advances
(121,409) (9,356) Decrease (increase)
in
receivable from
joint venture -
(79,128)
Increase (decrease) in accounts (190,701)
(177,918) payable
NET CASH USED IN OPERATING
(2,580,633)
(1,968,464)
ACTIVITIES
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITY:
Sales of investments
- -
1,487,866
Advance to Joint Venture
- -
(208,655)
Payment on note
(121,690)
(60,845)
Purchase of research and office (2,907) (120,932)
equipment
Patent costs
(11,651)
- -
NET CASH USED IN INVESTING
(136,248)
1,097,434
ACTIVITY
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Issuance of convertible 1,250,000 205,195 debenture
Issuance of common stock
1,383,717
NET CASH PROVIDED BY FINANCING
2,633,717
205,195 ACTIVITIES
NET (DECREASE) INCREASE IN CASH
(83,164)
(665,835)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,886,950 3,370,713
End of period
$3,803,786
$2,704,878
NON-CASH TRANSACTION: In October 1995, Cel-Sci issued 159,170
shares of common stock as consideration for
the purchase of the remaining 50%
of Viral Technology, Inc. In conjunction with the acquisition, CELSCI
obtained
net assets with a fair value of approximately $170,000.
NON-CASH TRANSACTION: In March,
1996, a shareholder of the corporation exercised options to purchase
40,000 shares of common stock.
The shareholder signed a note for
the stock, agreeing to pay the
note by the
end of June, 1996.
See notes to condensed financial statements.
7 CELSCI CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
SIX MONTHS ENDED MARCH 31, 1996 AND 1995 (unaudited)
A. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in accordance
with rules established by the Securities and Exchange Commission for
Form 10-Q. Not all financial disclosures required to present the
financial position and results of operations in accordance with
generally accepted accounting principles are included herein. The
reader is referred to the Company's Financial Statements included in
the registrant's Annual Report on Form 10K for the year ended
September 30, 1995. In
the opinion of management, all accruals and adjustments (each of which
is of a normal recurring nature) necessary for a fair presentation of
the financial position as of March 31, 1996 and the results of
operations for the six-month period then ended have been made.
Significant accounting policies have been consistently applied in the
interim financial statements and the annual financial statements.
Investments
Effective September 30, 1994, the Company adopted, on a prospective
basis, Statement of Financial Accounting Standard No. 115, "Accounting
for Certain Debt and Equity Securities" (SFAS 115) and revised its
policy for 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. As of March 31, 1996, there is no
effect on the Company's financial statements.
Loss per Share
Net loss per common share is based on the weighted average number of
common shares outstanding during the period. Common stock equivalents,
including options to purchase common stock, are excluded from the
calculation as they are antidilutive.
Long-lived Assets
Statement of Accounting Standards No.
121, "Accounting for the Impairment of Longlived Assets
and for Long lived Assets to be Disposed of" is effective for
financial statements for fiscal years beginning after December 15,
1995. It is the Company's opinion that the adoption of the statement
would have no material effect on its Financial Statements.
B. JOINT VENTURE
On October 30, 1995, the Company announced it had acquired Alpha 1
Biomedical's interest in Viral Technologies, Inc. ("VTI"). VTI was
formed by the two companies in 1986. This transaction gives CEL-SCI
100% ownership of VTI. Under the terms of the agreement, CELSCI gave
Alpha 1 Biomedicals, Inc. 159,170 shares of CEL-SCI common stock as
the purchase price for net assets with a fair value of approximately
$170,000. The acquisition was accounted for under the purchase method
of accounting; and as the acquisition represents primarily
research and development costs, the purchase price was
expensed and is included as research and development expense for the
six months ended March 31, 1996. Effective October 31, 1995,
the
Company has consolidated CELSCI's and VTI's financial statements and
the consolidated financial statements reflect the results of VTI's
operations since the date of acquisition. This results in a
significant increase in patent costs on the consolidated balance
sheet. Intercompany accounts are eliminated upon consolidation.
C. CONSTRUCTION OF NEW LABORATORY AND
FUNDING
On January 31, 1994, the Company entered into a leasing agreement with
a non-affiliated landlord for 7,800 square feet in Baltimore,
Maryland. In the spring of 1994 the Company commenced construction
of the new laboratory. The cost of the laboratory buildout and
equipment was approximately $1,100,000. To fund this laboratory,
the Company borrowed
funds from a bank at a rate of prime plus 2%. The outstanding loan
balance at March 31, 1996 is $689,573.
CONVERTIBLE DEBENTURES
On March 28, 1996, the Company raised $1,250,000 in a private
placement. The placement was structured as a convertible debenture.
It is convertible into Cel-Sci common stock prior to December 1, 1996.
The money will be used for research and development and clinical
trials with the Company's cancer and HIV products.
