FORM 10-K/A
SECURITIES AND
EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13
OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-11503
CEL-SCI CORPORATION
(Exact name of registrant as specified in its
charter) COLORADO
84-0916344
(State or other jurisdiction of (I.R.S.
Employer incorporation or organization)
Identification No.)
66 Canal Center Plaza, Suite 510
Alexandria, Virginia
22314
(Address of principal executive offices) (Zip
Code)
Registrant's telephone number, including area code: (703) 549
5293
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section
12(g) of the Act: Common Stock, $.001 par
value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
The aggregate market value of the voting stock held by non-
affiliates of the Registrant, based upon the closing sale price of
the Common Stock on December 20, 1996, as quoted on the NASDAQ
System, was approximately $33,085,000. Shares of Common Stock held
by each officer, director and principal shareholder have been
excluded in that such persons may be deemed to be affiliates of the
Registrant.
Documents Incorporated by Reference: None
Indicate by check mark if disclosure of
delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein,
and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or
information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of December 17, 1996, the Registrant had
8,382,562 shares
of Common Stock issued and outstanding. PAGE 1
OF
PAGES EXHIBIT INDEX
BEGINS ON PAGE
PART I
ITEM 1. BUSINESS
CEL-SCI Corporation (the "Company") was formed as a Colorado
corporation during March l983, to acquire and finance research and
development of natural human interleukin-2 ("IL-2") and lymphokine
related products and processes using the Company's proprietary cell
culture technologies. The Company's proprietary product is sometimes
referred to as MULTIKINETM, or buffy-coat interleukins, which is a
combination, or "cocktail" of IL-2 and certain lymphokines and
cytokines. MULTIKINE is a trade name of the Company. The Company was
initially formed under the name Interleukin-2, Inc. and changed its
name to CEL-SCI Corporation in March, 1988. The compounds,
compositions and processes, to which the Company has acquired an
exclusive world-wide license, are being tested to determine if they are
effective in improving the immune re- sponse of advanced cancer
patients.
Since its inception the focus of the Company's product
development efforts has been on conducting clinical trials to test its
proprietary tech nologies. The Company intends to continue testing its
MULTIKINE product in clinical trials with the objective of establishing
its efficacy as a treatment for solid tumors and possibly other
diseases. An additional aim of the Com- pany is to further corroborate
the present data (obtained in connection with the Company's research
programs and human clinical trials) in regard to the ability of
MULTIKINE to restore the immune system of people suffering from certain
illnesses.
The cost of acquiring its exclusive license and the costs
associated with the clinical trials relating to the Company's MULTIKINE
technologies, the cost of research at various institutions and the
Company's administrative ex- penses have been funded with the public
and private sales of shares of the Company's Common Stock and
borrowings from third parties, including affiliates of the Company.
In October 1995 Viral Technologies, Inc. ("VTI") became a wholly owned
subsidiary of the Company. VTI is engaged in the development of a
possible vaccine for AIDS. VTI's technology may also have application
in the treatment of AIDS-infected individuals and the diagnosis of
AIDS. VTI is currently conducting Phase I human clinical trials using
the HGP-30 vaccine.
PRODUCT DEVELOPMENT PLAN
In March l995, the Canadian Health Protection Branch, Health
and Welfare Ministry gave clearance to the Company to start a phase
I/II cancer study using MULTIKINE. The study, which will enroll up to
30 head and neck cancer patients who have failed conventional
treatments, is designed to evaluate safety, tumor responses and immune
responses in patients treated with multiple courses of MULTIKINE. The
length of time that each patient will remain on the investigational
treatment will depend on the patient's response to treatment. In May
l995, the U.S. Food and Drug Administration (FDA) authorized the export
of the Company's MULTIKINE drug to Canada for purposes of this study.
In February 1996 the FDA authorized the Company to conduct
two human clinical studies using MULTIKINE. The studies will focus on
prostate and head and neck cancer. The prostate study is being
conducted at Jefferson Hospital in Philadelphia, Pennsylvania and will
involve up to 15 prostate cancer pa- tients who have failed on hormonal
therapy. The head and neck cancer study will involve up to 30 cancer
patients who have failed using conventional ther- apies and will be
conducted in part at Wayne State University in Detroit, Michigan. The
Company is currently evaluating additional clinical centers in the U.S.
for purposes of the study. The head and neck cancer study in the U.S.
will be conducted in conjunction with the Company's Canadian head and
neck cancer study.
Viral Technologies, Inc. ("VTI") completed its Phase I trials in
California and in April 1995, with the approval of the California Food
and Drug Branch ("FDB"), started a new clinical study with the HGP-30
AIDS vaccine. The study involved HIV-negative volunteers who
participated in the 1992 Phase I study. Following vaccinations with
HGP30, certain volunteers donated blood for a SCID mouse HIV challenge
study. Infection in the SCID mice by virus was determined and
confirmed by two different assays. Approximately 78% of the SCID mice
given blood from vaccinated volunteers showed no HIV infection after
virus challenge as compared to 13% of the mice given blood from
unvaccinated donors. In December 1995 VTI, with permission from the
FDB, began Phase I human clinical trials with HIV-infected volunteers.
See "Viral Technologies, Inc." below for additional information
concerning VTI.
There can be no assurance that either the Company or VTI will
be successful in obtaining approvals from any regulatory authority to
conduct further clinical trials or to manufacture and sell their
products. The lack of regu- latory approval for the Company's or VTI's
products will prevent the Company and VTI from generally marketing
their products. Delays in obtaining regula- tory approval or the
failure to obtain regulatory approval in one or more countries may have
a material adverse impact upon the Company's operations.
BACKGROUND OF HUMAN IMMUNOLOGICAL SYSTEM
The function of the immunological system is to protect the body
against infectious agents, including viruses, bacteria, parasites and
malig nant (cancer) cells. An individual's ability to respond to
infectious agents and to other substances (antigens) recognized as
foreign by the body's immune system is critical to health and
survival. When the immune response is adequate, infection is usually
combatted effectively and recovery follows. Severe infection can
occur when the immune response is inadequate. Such immune 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 subclass of lymphocytes, B-cells, produces
antibodies in response to antigens. Antibodies have unique combining
sites (specificities) that recognize the shape of particular antigens
and bind with them. The combination of an antibody with an antigen
sets in motion a chain of events which may neutralize the effects of
the foreign sub stance. The other sub-class of lymphocytes, T-cells,
regulates immune responses. T-cells, for example, amplify or
suppress antibody formation by Bcells, and can also directly destroy
"foreign" cells by activating "killer cells."
It is generally recognized that the interplay among T-cells,
B cells and the macrophages determines the strength and breadth of
the body's response to infection. It is believed that the activities
of T cells, B cells and mac- rophages are controlled, to a large
extent, by a specific group of hormones called lymphokines.
Lymphokines regulate and modify the various functions of both T-cells
and B-cells. There are many lymphokines, each of which is thought to
have distinctive chemical and functional properties. IL-2 is but one
of these lymphokines and it is on IL-2 and its synergy with other
lymphokines that the Company has focused its attention. Scientific
and medical investiga- tion has established that IL-2 enhances immune
responses by causing activated Tcells to proliferate. Without such
proliferation no immune response can be mounted. Other lymphokines
and cytokines support T-cell and B-cell prolifera- tion. However, IL-
2 is the only known lymphokine or cytokine which causes the
proliferation of T-cells. IL-2 is also known to activate B-cells in
the ab- sence of B-cell growth factors.
Although IL-2 is one of the best characterized lymphokines
with anticancer potential, the Company is of the opinion that to have
optimum therapeutic value, IL-2 should be administered not as a
single substance but rather as a mixture of IL-2 and certain
lymphokines and cytokines, i.e. as a "cocktail". This approach, which
was pioneered by the Company, makes use of the synergism between
these lymphokines. It should be noted however that neither the FDA
nor any other agency has determined that the Company's MULTIKINE
product will be effective against any form of cancer.
It has been reported by researchers in the field of lymphokine
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 indi- cated a correlation between
administration of MULTIKINE to advanced cancer pa- tients and
immunological responses. On the basis of these experimental re-
sults, the Company believes that MULTIKINE may have application for
the treat- ment of solid tumors in humans.
The Company foresees three potential anti-cancer therapeutic
uses for MULTIKINE: (i) direct administration into the human body (in
vivo) as a modu- lator of the immune system, (ii) activation of a
patient's white blood cells outside the body with MULTIKINE, followed
by returning these activated cells to the patient; and (iii) a
combination of (i) and (ii). RESEARCH AND DEVELOPMENT
In the past, the Company conducted its research pursuant to
arrange ments with various universities and research organizations.
The Company pro vided grants to these institutions for the conduct of
specific research pro jects as suggested by the Company's scientists
based upon the results of pre viously completed projects.
In October 1994 the Company to consolidated its research activities
in its own laboratory. See Item 2 of this report.
Between 1983 and 1986 the Company was primarily involved in
funding pre-clinical and Phase I clinical trials of its proprietary
MULTIKINE tech nologies. These trials were conducted at St. Thomas's
Hospital Medical School located in London, England under the
direction of Dudley C. Dumonde, M.D., PhD., a former member of the
SAB, and pursuant to approvals obtained from England's Department of
Health and Social Security.
In the Phase I trial in England (completed in 1987), forty-
nine pa tients suffering with various forms of solid cancers,
including malignant melanoma, breast cancer, colon cancer, and other
solid tumor types were treated with MULTIKINE. The product was
administered directly into the lymphatic system in a number of
patients. Significant and lasting lymphnode responses, which are
considered to be an indication of improvement in the patient's immune
responses, were observed in these patients. A principal conclusion
of the Phase I trials was that the side effects of the Company's
products in forty-nine patients were not severe, the treatment was
well tolerated and there was no long-term toxicity.
The results of the Phase I clinical study were encouraging,
and as a result the Company established protocols for future clinical
trials. In November, 1990, the Florida Department of Health and
Rehabilitative Services ("DHRS") gave the physicians at a southern
Florida medical institution approval to start a clinical cancer trial
in Florida using the Company's MULTIKINE 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 termi- nal cancer. The
patients had low levels of lymphocytes and evidence of immune
deficiency (generally a characteristic of this type of cancer).
Significant tumor reduction occured in three of the four
patients as a result of the treatment with MULTIKINE. Negligible
side effects were observed and the patients were treated as
outpatients. Notwithstanding the above, it should be noted that these
trials were only preliminary and were only conducted on a small
number of patients. It remains to be seen if MULTIKINE will be
effective in treating any form of cancer.
See "Product Development Plan" above for information
concerning the Company's research and development plans.
Proof of efficacy for anti-cancer drugs is a lengthy and complex
process. At this early stage of clinical investigation, it remains
to be proven that MULTIKINE will be effective against any form of
cancer. Even if some form of MULTIKINE is found to be effective in
the treatment of cancer, commercial use of MULTIKINE may be several
years away due to extensive safety and effectiveness tests that would
be necessary before required government approvals are obtained. It
should be noted that other companies and research teams are actively
involved in developing treatments and/or cures for cancer, and ac
cordingly, there can be no assurance that the Company's research
efforts, even if successful from a medical standpoint, can be
completed before those of its competitors.
Since 1983, and through September 30, 1996, approximately $12,976,000
has been expended on Company-sponsored research and development,
including ap- proximately $3,471,000, $1,825,000, and $2,896,000
during the years ended Sep- tember 30, 1996, 1995 and 1994,
respectively. Research and development expenditures prior to October
1995 do not include amounts spent by Viral Technolo- gies, Inc. on
research and development. Since May, 1986 (the inception of VTI) and
through September 30, 1996, VTI has spent approximately $3,964,000 on
research and development.
The Company has established a Scientific Advisory Board
("SAB") com prised of scientists distinguished in biomedical research
in the field of lymphokines and related areas. From time to time,
members of the SAB advise the Company on its research activities.
Institutions with which members of the SAB are affiliated have in the
past conducted and may in the future conduct Company-sponsored
research. The SAB has in the past and may in the future, at its
discretion, invite other scientists to opine in confidence on the
merits of the Company-sponsored research. Members of the SAB receive
$500 per month from the Company and have also been granted options
(for serving as members of the SAB) which collectively allow for the
purchase of up to 15,000 shares of the Company's Common Stock. The
options are exercisable at prices ranging from $13.80 to $19.70 per
share.
The members of the Company's SAB are:
Dr. Michael Chirigos - former head of the Virus and Disease Modifi-
cation Section, National Institutes of Health (NIH), National Cancer
Institute (NCI) from 1966-1981 and the Immunopharmacology Section,
NIH, NCI, Biological Response Modifier Program until 1985.
Dr. Evan M. Hersh - Vice-Chairman, Department of Internal
Medicine, Chief, Section of Hematology/Oncology, Department of
Internal Medicine, Tucson, AZ. Director of Clinical Research,
Arizona Cancer Center, Tucson.
Dr. Michael J. Mastrangelo - Director, Division of Medical
Oncolo gy; Professor of Medicine, Jefferson Medical College,
Philadelphia, Pennsylvania; and Associate Clinical Director,
Jefferson Cancer Center, Philadelphia, Pennsylvania.Dr. Alan B.
Morris, PhD. - Professor, Department of Biological Sciences,
University of Warwick, Coventry, U.K.
VIRAL TECHNOLOGIES, INC.
Prior to October 1995, Viral Technologies, Inc. ("VTI"), a
Delaware corporation, was 50% owned by the Company and 50% owned by
Alpha 1 Biomedicals, Inc. VTI is developing a vaccine technology
that may prove of commercial value in the prevention, diagnosis and
treatment of AIDS. VTI holds the proprietary rights to certain
synthesized components of the p17 gag protein, which is the outer
core region of the AIDS virus (HIV-1). In October 1995, the Company
acquired Alpha 1's interest in VTI in exchange for 159,170 shares of
the Company's common stock.
VTI is involved in the development of a prototype preventive
and therapeutic vaccine against AIDS that is based on HGP-30, a
thirty amino acid synthetic peptide derived from the p17 region of
the AIDS virus. Evidence compiled by scientists at George Washington
University from toxicology studies with different animal species
indicates that the HGP30 prototype vaccine does not appear to be
toxic in animals. The HGP-30 vaccine being tested differs from most
other vaccines candidates in that its active component, the HGP-30
peptide, is derived from the p17 core protein particles of the virus.
Since HGP-30 is a totally synthetic molecule containing no live
virus, it cannot cause infection. Unlike the envelope (i.e. outside)
proteins, the p17 region of the AIDS virus appears to be relatively
nonchanging. In January, 1991, VTI was issued a United States patent
covering the production, use and sale of HGP-30. HGP-30 may also be
effective in treating persons infected with the AIDS virus.
Approval to start Phase I human clinical trials in Great
Britain using VTI's prototype AIDS vaccine HGP-30 was granted in
April 1988. The trial, the first in the European common market,
began in May 1989 with 18 healthy (HIV- negative) volunteers given
three different dosages and was completed in December 1990. The
trial results indicated that five of eight volunteers vacci- nated
with HGP-30, and whose blood samples were able to be tested, produced
"killer" T-cell responses. The vaccine also elicited cellmediated
immunity responses in 7 out of 9 vaccinated volunteers and antibody
responses in 15 out of 18 vaccinated volunteers.
In March 1990, the California Department of Health Services Food and
Drug Branch (FDB) approved the first human testing (Phase I trials)
in the United States of HGP-30. The trials were conducted by
scientists at the University of Southern California and San Francisco
General Hospital. Twentyone healthy HIV-negative volunteers at
medical centers in Los Angeles and San Francisco received escalating
doses of HGP-30 with no clinically significant adverse side effects.
The clinical studies confirmed earlier clinical trials in London.
In April 1995 VTI, with the approval of the FDB, began
another clinical trial in California using volunteers who received
two vaccinations. The volunteers receiving the two lowest dosage
levels were asked to donate blood for a SCID mouse HIV challenge
study. The SCID mouse is considered to be the best available animal
model for HIV because it lacks its own immune system and therefore
permits human cell growth. White blood cells from the five (5) vac-
cinated volunteers and from normal donors were injected into groups
of SCID mice. They were then challenged with high levels of a
different strain of the HIV virus than the one from which HGP-30 is
derived. Infection by virus was determined and confirmed by two
different assays, p24 antigen, a component of the virus core, and
reverse transcriptase activity, an enzyme critical to HIV
replication. Approximately 78% of the SCID mice given blood from
vaccinated volunteers showed no HIV infection after virus challenge
as compared to 13% of the mice given blood from unvaccinated donors.
In December 1995 VTI, with permission from the FDB, began
Phase I human clinical trials with HIV-infected volunteers. VTI's
AIDS vaccine/treatment is only in the initial stages of testing and it
remains to be seen if the vaccine/treatment will be effective against
the AIDS virus. In December l987, VTI signed a licensing agreement
with Nippon Zeon Co., Ltd. ("Nippon Zeon"), a Japanese chemical
manufacturer, granting Nippon Zeon exclusive rights to VTI's prototype
AIDS vaccine and improvements in the Pacific Area. Under the
agreement, VTI received an initial licensing payment, as well as a pre-
commercialization payment, and was also entitled to receive additional
pre-commercialization payments dependent upon receipt of certain
regulatory approvals. In l995 Nippon Zeon released its rights to
VTI's tech- nology in consideration for VTI's agreement to pay Nippon
Zeon a royalty on sales of products made with VTI's technology in the
licensed area. In July l996 Nippon Zeon agreed to surrender its
royalty rights, as well as any other rights it may have had to VTI's
technology, in exchange for 45,000 shares of the Company's common
stock.
Although there has been important independent research
showing the possible significance of the p17 region of HIV-1, there
can be no assurance that any of VTI's technology will be effective in
the prevention, diagnosis or treatment of AIDS. There can be no
assurance that other companies will not develop a product that is more
effective or that VTI ultimately will be able to develop and bring a
product to market in a timely manner that would enable it to derive
commercial benefits.
VTI's research and development efforts are presently focused
on the evaluation of second generation formulations and delivery
systems for HGP-30 and related peptides to enhance HIV-specific
cellular immune responses.
In January 1991, VTI was awarded a U.S. patent covering the
exclusive production, use and sale of HGP-30. This patent is thought
to be the first U.S. patent for a portion of a "core" protein of the
HIV virus. In February 1993, VTI was awarded a European patent
covering HGP 30 and certain other peptides.
T-CELL MODULATION PROCESS
In January 1996 the Company acquired a new patented T-cell
Modulation Process which uses "heteroconjugates" to direct the body to
choose a specific immune response. The heteroconjugate technology is
intended to selectively stimulate the human immune system to more
effectively fight bacterial, viral and parasitic infections and
cancer, when it cannot do so on its own. Admin- istered like
vaccines, heteroconjugates combine T-cell binding ligands with small,
disease associated, peptide antigens and may provide a new method to
treat and prevent certain diseases. The ability to generate a
specific immune response is important be cause many diseases are often
not combatted effectively due to the body's selection of the
"inappropriate" immune response. The capability to specifi cally
reprogram an immune response may offer a more effective approach than
existing vaccines and drugs in attacking an underlying disease.
The Company intends to use this new technology to improve the
cellu lar immune response of VTI's HIV HGP-30 immunogen which is
currently in two clinical studies. In addition, the Company intends
to use the technology to develop a potential Tuberculosis (TB)
vaccine/treatment. TB is the largest killer of all infectious
diseases worldwide and new strains of drug resistant TB are emerging
daily. The technology is also a potential platform technology which
could also work with many other peptides. Using this new technology,
the Company is currently conducting in vitro laboratory and in vivo
animal studies.
In August 1996 the Company signed a Cooperative Research and
Development Agreement ("CRADA") with the Naval Medical Research
Institute of the U.S. Navy to jointly develop a potential malaria
vaccine using the Company's heteroconjugate technology. Malaria
affects about 300-500 million people per year and is responsible for
about 2.7 million deaths annually. It is a parasitic disease
transmitted by mosquitoes. As with tuberculosis, the emergence of
drug resistant strains is a major problem, as is the emergence of
mosquitoes which are resistant to traditional insecticides. While at
the present the number of malaria cases are not a major problem in the
continential U.S., there are an increasing number of cases involving
Americans bringing the disease home from overseas travels. Currently,
there is no approved malaria vaccine anywhere in the world.
In October 1996 the Company and Northeastern Ohio University
College of Medicine signed a Collaborative Research Agreement to
jointly identify and evaluate Herpes Simplex Virus related peptides.
This study will make use of the Company's new heteroconjugate
technology which combines T-cell binding ligands with small, disease
associated, peptide antigens. Research conducted pursuant to this
study may lead to the future development of a herpes vaccine.
Conservative estimates of those individuals who have genital
infec tions are 30-40 million in the U.S. Oral herpetic infections
are of a greater frequency. In newborns or in immunosuppressed
patients (e.g. AIDS) herpes can lead to serious illness and death.
Vaccination against herpes simplex virus may prevent or treat herpes
simplex infection. Unlike most other viruses, once infected, a herpes
virus remains in hiding within an individual and is reactivated often
by stress-inducing factors. For some individuals, recurren- ces may
take place on a monthly basis. Although there are antiviral drugs
which are used to prevent serious disease and lessen the symptoms,
there is currently no method to effectively prevent initial infection,
to eliminate the virus from an infected person, or to prevent
recurrences.
Scientists at Northeastern Ohio University College of Medicine have
been working on methods of treating and detecting the herpes virus for
over fifteen years.
The T-cell Modulation technology was acquired from Cell-Med,
Incor porated ("CELL-MED") in consideration for the Company's
agreement to pay certain liabilities of CELL-MED in the amount of
approximately $6,000. If the Company elects to retain ownership in the
technology after March 30, 1997, the Company must pay CELL-MED
$200,000, plus additional payments ranging between $100,000 and
$600,000, depending upon the Company's ability to obtain regu- latory
approval for clinical studies using the technology. In addition,
should the Company receive FDA approval for the sale of any product
incorporating the technology, the Company is obligated to pay CELL-MED
an advance royalty of $500,000, a royalty of 5% of the sales price of
any product using the technology, plus 15% of any amounts the Company
receives as a result of sublicensing the technology. So long as the
Company retains rights in the technology, the Company has also agreed
to pay the future costs associated with pursuing and or maintaining
CELLMED's patent and patent applications relating to the technology.
CELLMED has been issued patents in Australia and from the European
Patent Office covering the technology and has several U.S. and foreign
patent applications pending.
COMPOUNDS AND PROCESSES LICENSED TO THE COMPANY
The Company acquired from Sittona Company, B.V., a Netherlands
corporation ("Sittona"), the exclusive worldwide rights to patented IL-
2 com pounds, compositions and other processes and other lymphokine
related com pounds, compositions and processes which are the subject
of various patents, patent applications and disclosure documents filed
with the United States Pa tent and Trademark Office as well as similar
agencies of various foreign 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 applica- tions to be filed in several
foreign countries and has undertaken the pro- cessing of previously
filed patent applications. The exclusive license is to remain in
effect until the expiration or abandonment of all patent rights or
until the compounds, compositions and processes enter into the public
domain, whichever is later. Sittona may also terminate the license
for breach of the agreement, fraud on the part of the Company, or the
bankruptcy or insolvency of the Company. Sittona, Hooper Trading
Company and Shanksville Corporation were formerly controlled by
Maximilian de Clara, the Company's President. See Item 13 of this
report.
In 1987 a German company filed an opposition with the European Patent
Office with respect to one of the Company's European patents, alleging
that certain aspects of the patent in question were previously
disclosed to inven- tors during a conference held in Germany. A
hearing on the opposition was held and on October 12, 1990 the
European Patent Office rejected the opposi- tion. The German company
filing the opposition appealed the decision of the European Patent
Office. In 1992 the Appellate Tribunal of the European Patent Office
upheld the Company's process claims in the patent, while two minor
claims were denied. The Company does not believe that the denial by
the 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. District Court for the Middle
District of Florida, seeks damages and the termination of certain
research and clinical studies being conducted by ImmunoRx and Dr.
Hadden. From 1984 to 1992, Dr. Hadden consulted with the Company,
performed research on MULTIKINE and manufactured MULTIKINE for the
Company's head and neck cancer study in Florida. In early 1993, Dr.
Hadden signed a separation agreement with the Company acknowledging
the Company's ownership of both MULTIKINE and the research results.
The Company has learned that Dr. Hadden and ImmunoRx are apparently
making copies of MULTIKINE, in contravention of the separation
agreement and the patents covering MULTIKINE, and have begun clinical
studies in a foreign country using a copy of MULTIKINE.
Process for the Production of IL-2 and IL-2 Product The
Company's exclusive license includes processes for the production in
high yields of natural human IL-2 using cell culture techniques
applied to normal human cells. Based upon the results of the
Company's research and human clinical trials, the Company believes
that "natural" IL-2 produced by cell culture technologies, such as the
Company's proprietary products, may have advantages over genetically
engineered, bacteria-produced IL-2 ("recombi- nant IL-2") manufactured
by other companies. There are basically two ways to produce IL-2 on a
commercial scale: (1) applying genesplicing techniques using bacteria
or other microorganisms to produce recombinant IL-2; or, (2) apply-
ing cell culture technology using mammalian cells. Substantive
differences exist between recombinant IL-2 and IL-2 produced through
cell culture technology. For example: (1) cell cultured IL-2 is
glycosylated (has sugars attached). Sugar attachments play a crucial
role in cell recognition and have a significant effect on how fast a
body clears out proteins. Proteins produced through bacteria have no
sugar attachments and while recombinant IL-2 products produced from
recombinant yeast or insect cells are glycosylated, they are not so to
the right degree, or at the right locations. Cell cultured IL-2 has
the "right" sugar attachments at the right places; (2) there are also
structural differences related to folding (the way human proteins work
depends on their sequence folding); and (3) the cell cultured IL-2
"cocktail" is administered in small dosages as pioneered by Company
researchers. This formulation and dosage mimics the way immune
regulators are naturally found and function with- in the body. This
stands in stark contrast to the huge dosages required when recombinant
IL2 is administered to patients. In addition, patients treated with
recombinant
IL-2 usually suffer severe side effects.
Although mammalian cells (other than human cells) could be
genetically engineered to produce glycosylated IL-2 in larger
quantities than are produced by the Company's method, such mammalian
cells could not be genetically engineered to produce the combination
of human lymphokines and cytokines, which together with human
glycosylated IL-2 form the MULTIKINE product used by the Company. The
Company is of the opinion that glycosylated IL-2 genetically produced
from mammalian cells must be administered in large dosages before any
benefits are observed. Even then, the Company believes that only a
small per- centage of patients will benefit from treatments consisting
only of glycosy- lated IL-2. In addition, large dosages of
glycosylated IL-2 can, as with recombinant IL2, result in severe toxic
reactions. In contrast, the Company believes the synergy between
glycosylated IL-2 and certain other lymphokines/ cytokines allows
MULTIKINE to be administered in low dosages, thereby avoiding the
severe toxic reactions which often result when IL-2 is administered in
large dosages.
The technology licensed to the Company includes the basic production
method employing the use of normal white blood cells, an improved
production method based in part on this basic production method, a
serumfree and mitogenfree IL-2 product, and a method for using this
product in humans. Mitogens are used to stimulate cells to produce
specific materials (in this case, IL-2). Mitogens remaining in the
product of cell stimulation can cause allergic and anaphylactic
reactions if not removed from the cell product prior to introduc- tion
into the body.
The Company's license also pertains to a cell culture process
for producing interleukin-2 and another type of cell process for
producing serum free and mitogen-free interleukin-2 preparations which
avoids a mitogen stimulation step and uses interleukin-1 and white
blood cells.
The Company's license further includes a process for
suppressing graft rejection in organ transplantation. This process
employs the use of an agent which blocks the activity of IL-2 in
proliferating T-cells which would other- wise destroy the transplanted
organ. The Company regards further research and development of this
process to involve a financial commitment beyond its pre- sent
ability; thus, the Company does not presently intend to conduct
further research into, or development of, this process.
The Company has an agreement with an unrelated corporation
for the production, until 1997, of MULTIKINE for research and testing
purposes. At present, this is the Company's only source of MULTIKINE.
If this corporation could not, for any reason, supply the Company with
MULTIKINE, the Company estimates that it would take approximately six
to ten months to obtain supplies of MULTIKINE under an alternative
manufacturing arrangement. The Company does not know what cost it
would incur to obtain this alternative source of supply.
GOVERNMENT REGULATION
The investigational agents and future products of the Company
are regulated in the United States under the Federal Food, Drug and
Cosmetic Act, the Public Health Service Act, and the laws of certain
states. The Federal Food and Drug Administration (FDA) exercises
significant regulatory control over the clinical investigation and
manufacture of pharmaceutical products.
Prior to the time a pharmaceutical product can be marketed in
the United States for therapeutic use, approval of the FDA must
normally be ob tained. Certain states, however, have passed laws
which allow a state agency having functions similar to the FDA to
approve the testing and use of pharmaceutical products within the
state. In the case of either FDA or state regulation, preclinical
testing programs on animals, followed by three phases of clinical
testing on humans, are typically required in order to establish
product safety and efficacy.
The first stage of evaluation, preclinical testing, must be
conducted in animals. After lack of toxicity has been demonstrated,
the test results are submitted to the FDA (or state regulatory agency)
along with a request for approval for further testing which includes
the protocol that will be followed in the initial human clinical
evaluation. If the applicable regulatory auth- ority does not object
to the proposed experiments, the investigator can pro- ceed with Phase
I trials. Phase I trials consist of pharmacological studies on a
relatively few number of humans under rigidly controlled conditions in
order to establish lack of toxicity and a safe dosage range.
After Phase I testing is completed, one or more Phase II
trials are conducted in a limited number of patients to test the
product's ability to treat or prevent a specific disease, and the
results are analyzed for clinical efficacy and safety. If the results
appear to warrant confirmatory studies, the data is submitted to the
applicable regulatory authority along with the protocol for a Phase
III trial. Phase III trials consist of extensive studies in large
populations designed to assess the safety of the product and the most
desirable dosage in the treatment or prevention of a specific disease.
The results of the clinical trials for a new biological drug are
submitted to the FDA as part of a product license application ("PLA").
In addition to obtaining FDA approval for a product, a biologics
establishment license application ("ELA") must be filed in order to
obtain FDA approval of the testing and manufacturing facilities in
which the product is produced. To the extent all or a portion of the
manufacturing process for a product is handled by an entity other than
the Company, the Company must similarly receive FDA approval for the
other entity's participation in the manufacturing process. Domestic
manufacturing establishments are subject to inspections by the FDA and
by other Federal, state and local agencies and must comply with Good
Manufacturing Practices ("GMP") as appropriate for production. In
complying with GMP regulations, manufacturers must continue to expend
time, money and effort in the area of production and quality control
to ensure full technical compliance.
The process of drug development and regulatory approval requires
substantial resources and many years. There can be no assurance that
regulatory approval will ever be obtained for products developed by
the Company. Approval of drugs and biologicals by regulatory
authorities of most foreign countries must also be obtained prior to
initiation of marketing in those countries. The approval process
varies from country to country and the time period required in each
foreign country to obtain approval may be longer or shorter than that
required for regulatory approval in the United States.
There are no assurances that clinical trials conducted under
ap proval from state authorities or conducted in foreign countries
will be accepted by the FDA. Product licensure in a foreign country
or under state authority does not mean that the product will be
licensed by the FDA and there are no assurances that the Company will
receive any approval of the FDA or any other governmental entity for
the manufacturing and/or marketing of a product. Consequently, the
commencement of the manufacturing and marketing of any Company product
is, in all likelihood, many years away.
COMPETITION AND MARKETING
Many companies, nonprofit organizations and governmental
institutions are conducting research on lymphokines. Competition in
the development of therapeutic agents and diagnostic products
incorporating lymphokines is in- tense. Large, well-established
pharmaceutical companies are engaged in lymph- okine research and
development and have considerably greater resources than the Company
has to develop products. The establishment by these large compan-
ies of in-house research groups and of joint research ventures with
other en- tities is already occurring in these areas and will
probably become even more prevalent. In addition, licensing and other
collaborative arrangements be- tween governmental and other nonprofit
institutions and commercial enterprises, as well as the seeking of
patent protection of inventions by nonprofit in- stitutions and
researchers, could result in strong competition for the Com- pany.
Any new developments made by such organizations may render the
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 be- lief,
based upon growing scientific evidence, that its natural IL-2
products have advantages over the genetically engineered, IL2like
products. Evidence indicates that genetically engineered, IL-2like
products, which lack sugar molecules and typically are not water
soluble, may be recognized by the immu- nological system as a foreign
agent, leading to a measurable antibody build-up and thereby possibly
voiding their therapeutic value. Furthermore, the Com- pany's
research has established that to have optimum therapeutic value IL-2
should be administered not as a single substance but rather as an IL-
2 rich mixture of certain lymphokines and other proteins, i.e. as a
"cocktail". If these differences prove to be of importance, and if
the therapeutic value of its MULTIKINE product is conclusively
established, the Company believes it will be able to establish a
strong competitive position in a future market.
The Company has not established a definitive plan for
marketing nor has it established a price structure for the Company's
saleable products. However, the Company intends, if the Company is
in a position to begin commercialization of its products, to enter
into written marketing agreements with various major pharmaceutical
firms with established sales forces. The sales forces in turn would
probably target the Company's products to cancer centers, physicians
and clinics involved in immunotherapy.
Competition to develop treatments for the control of AIDS is
intense. Many of the pharmaceutical and biotechnology companies
around the world are devoting substantial sums to the exploration and
development of technologies useful in these areas. VTI's development
of its experimental HGP-30 AIDS Vac- cine, if successful, would
likely face intense competition from other compan- ies seeking to
find alternative or better ways to prevent and treat AIDS.
Both the Company and VTI may encounter problems, delays and
additional expenses in developing marketing plans with outside firms.
In addition, the Company and VTI may experience other limitations
involving the proposed sale of their products, such as uncertainty of
third-party reimbursement. There is no assurance that the Company or
VTI can successfully market any products which they may develop or
market them at competitive prices.
The clinical trials funded to date by VTI have not been approved by
the FDA, but rather have been conducted pursuant to approvals
obtained from certain states. Since the results of these clinical
trials may not be accepted by the FDA, companies which are conducting
clinical trials approved by the FDA may have a competitive advantage
in that the products of such companies are further advanced in the
regulatory process than those of VTI.
ITEM 2. PROPERTIES
The Company's MULTIKINE product used in its pre-clinical and
Phase I clinical trials in England was manufactured at a pilot plant
at St. Thomas' Hospital Medical School using the Company's patented
production methods and equipment owned by the Company. The MULTIKINE
product used in the Florida clinical trials was manufactured in
Florida. In February, 1993, the Company signed an agreement with a
third party whereby the third party constructed a facility designed
to produce the Company's MULTIKINE product. The Company paid the
third party the cost of constructing this facility (approximately
$200,000) in accordance with the Company's specifications.
In October, 1994 the Company completed the construction of a research
laboratory in space leased by the Company. The cost of modifying and
equipping this space for the Company's purposes was approximately
$1,200,000.
The Company leases office space at 66 Canal Center Plaza,
Alexandria, Virginia at a monthly rental of approximately $8,200 per
month. The Company believes this arrangement is adequate for the
conduct of its present business.
ITEM 3. LEGAL PROCEEDINGS
In February 1996 the Company filed a lawsuit against
ImmunoRx and Dr. John Hadden for contract breach, tortious
interference of contract and patent infringement concerning the
Company's MULTIKINE drug. The lawsuit, filed in the U.S. District
Court for the Middle District of Florida, seeks damages and the
termination of certain research and clinical studies being conducted
by ImmunoRx and Dr. Hadden. From 1984 to 1992, Dr. Hadden consulted
with the Company, performed research on MULTIKINE and manufactured
MULTIKINE for the Company's head and neck cancer study in Florida.
In early 1993, Dr. Hadden signed a separation agreement with the
Company acknowledging the Company's ownership of both MULTIKINE and
the research results. The Company has learned that Dr. Hadden and
ImmunoRx are apparently making copies of MULTIKINE, in contravention
of the separation agreement and the patents covering MULTIKINE, and
have begun clinical studies in a foreign country using a copy of
MULTIKINE. The Company believes the primary defense of Dr. Hadden and
ImmunoRx to the Company's lawsuit will be to challenge the validity
of the Company's MULTIKINE patents. See Item 1 of this report.
Other than the foregoing, the Company is not a party to any pending
legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
As of November 30, 1996, there were approximately 3,000 record
holders of the Company's Common Stock and approximately 100 record
holders of the Company's Warrants. As of November 30, 1996 the
Company had issued 3,500 shares of Series A Preferred Stock and 5,000
shares of Series B Preferred Stock. All the outstanding shares of
the Series A Preferred Stock have since been converted into 632,041
shares of the Company's Common Stock. There is no public market for
the Series B Preferred Stock. The Company's Common Stock and
Warrants are traded on the National Association of Securities Dealers
Automatic Quotation ("NASDAQ") System. Set forth below are the range
of high and low bid quotations for the periods indicated as reported
by NASDAQ, and as adjusted for the 10 for 1 reverse stock split which
was approved by the Com- pany's shareholders on April 28, 1995 and
became effective on May 1, 1995. The market quotations reflect
interdealer prices, without retail mark-up, mark-down or commissions
and may not necessarily represent actual transac- tions.
Quarter
Ending Common Stock
Warrants
High Low
High
Low
12/31/94 $ 7.50 $ 3.40
$0.25
$0.09
3/31/95 $ 4.00 $ 3.75
$0.22
$0.13 6/30/95 $ 5.30 $ 2.78
$0.15
$0.06
9/30/95 $ 5.46 $ 3.56 $0.28
$0.09
12/31/95 $ 4.75 $ 2.28 $0.25
$0.09
3/31/96 $ 7.12 $ 2.68 $0.28
$0.03
6/30/96 $14.38 $ 4.56 $0.41
$0.16
9/30/96 $12.00 $ 5.62 $0.44
$0.21
Holders of Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds
legally available therefor and, in the event of liquidation, to share
pro rata in any distribution of the Company's assets after payment of
liabilities. The Board of Directors is not obligated to declare a
dividend. The Company has not paid any dividends on its common stock
and the Company does not have any current plans to pay any common
stock dividends.
The provisions in the Company's Articles of Incorporation relating to
the Company's Preferred Stock would allow the Company's directors to
issue Preferred Stock with rights to multiple votes per share and
dividends rights which would have priority over any dividends paid
with respect to the Company's Common Stock. The issuance of
Preferred Stock with such rights may make more difficult the removal
of management even if such removal would be considered beneficial to
shareholders generally, and will have the effect of limiting
shareholder participation in certain transactions such as mergers or
tender offers if such transactions are not favored by incumbent
management.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the more detailed financial statements, related notes and other
financial information included herein.
For the Years Ended September
30, 1996 1995 1994
1993 1992
Investment Income &
Other Revenues $ 322,370 $ 423,765 $ 624,670 $ 997,964
$434,180
Expenses:
Research and
Development 3,471,477 1,824,661 2,896,l09 1,307,042
481,697
Depreciation
and Amortization 290,829 262,705 138,755 55,372
33,536
General and
Administrative 2,882,958 1,713,912 1,621,990 1,696,119
1,309,475
Equity in loss of
joint venture 3,772 501,125 394,692 344,423
260,388
Net Loss $(6,326,666) $(3,878,638) $(4,426,876)
$(2,404,992) $(1,650,916)
Loss per common share $(0.99) $(0.89) $(1.06)
$(0.58)
$(0.42)
Weighted average
common shares
outstanding 6,425,316 4,342,628 4,185,240 4,155,431
3,953,233
Balance Sheet Data:
September 30,
1996 1995 1994 1993
1992
Working Capital $10,266,104 $3,983,699 $5,795,191
$10,296,472 $13,043,012 Total Assets 11,878,370 6,359,011
8,086,670
11,633,090 13,769,504
Total Liabilities 294,048 1,516,978 l,407,602
688,231
467,086
Shareholders'
Equity 11,584,322 4,842,033 6,679,068 10,944,859
13,302,4l8
No dividends have been declared on the Company's common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Fiscal 1996
Interest income during the year ending September 30, l996 reflects
interest accrued on investments. Other revenues were derived from
commercial services provided by the Company's laboratory. Research and
development expenses increased significantly due to the Company's new
clinical trials as well as the consolidation of VTI, as explained below.
Prior to October 30, 1995, VTI was owned 50% by the Company and 50% by
Alpha 1 Biomedicals, Inc. Effective October 30, 1995 the Company acquired
Alpha 1's interest in VTI in exchange for 159,170 shares of the Company's
common stock. Prior to this acquisition the Company accounted for its
investment in VTI using the equity method of accounting. Following the
acquisition of the remaining 50% interest in VTI on October 30, 1995, the
financial statements of VTI have been consolidated with those of the
Company.
The acquisition of VTI was accounted for under the purchase method of
accounting. Since the acquisition represented primarily research and
development costs, the purchase price for the remaining 50% interest in VTI
as expensed and caused research and development expense for the year ended
September 30, 1996 to increase.
The consolidation of VTI's financial statements with those of the
Company also had the following effects:
1. Interest income declined from the comparable period in the previous
year since interest income associated with the Company's loans to VTI was
eliminated upon consolidation.
2. Research and development expenses increased due to the
inclusion of VTI's research and development expenses with those of the
Company.
3. General and administrative expenses increased due to the
inclusion of VTI's general and administrative expenses with those of the
Company.
4. Capitalized patent costs increased due to the inclusion of VTI's
patent expenditures with those of the Company.
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).
Liquidity and Capital Resources
The Company has had only limited revenues from operations since its
inception in March l983. The Company has relied upon proceeds realized from
the public and private sale of its Common Stock to meet its funding
requirements. Funds raised by the Company have been expended primarily in
connection with the acquisition of an exclusive worldwide license to certain
patented and unpatented proprietary technology and know-how relating to the
human immunological defense system, the funding of VTI's research and
development program, patent applications, the repayment of debt, the
continuation of Company-sponsored research and development, administrative
costs and construction of laboratory facilities. Inasmuch as the Company does
not anticipate realizing revenues until such time as it enters into licensing
arrangements regarding the technology and know-how licensed to it (which
could take a number of years), the Company is mostly dependent upon the
proceeds from the sale of its securities to meet all of its liquidity and
capital resource requirements.
In February, 1992, the Company received net proceeds of
approximately $13,800,000 from the sale, in a public offering, of 517,500
shares of Common Stock and 5,175,000 Warrants. Every ten Warrants entitle
the holder to purchase one additional share of Common Stock at a price of
$15.00 per share prior to February 7, 1997.
In June and September, l995, the Company completed private offerings
whereby it sold a total of 1,150,000 units at $2.00 per unit. Each unit
consisted of one share of Common Stock and one Warrant. Each Warrant
entitles the holder to purchase one additional share of Common Stock at a
price of $3.25 per share at any time prior to June 30, 1997. The net
proceeds to the Company from these offerings, after the payment of Sales
Agent's commissions and other offering expenses, were approximately
$2,000,000. On November 30, 1995 the Company and the investors in these
Private Offerings agreed to reduce the exercise price of the Warrants to
$1.60 per share in return for the commitment on the part of the investors
to exercise 312,500 Warrants ($500,000) prior to December 23, 1995 and an
additional 312,500 Warrants ($500,000) prior to January 31, 1996. All
Warrants sold in this Offering have since been exercised.
In March 1996 the Company sold $l,250,000 of Convertible Notes
("Notes") to two persons. The Notes were convertible from time to time in
whole or in part, into shares of the Company's Common Stock. The
conversion price was the lesser of (i) $5 per share or (ii) 80% of the
average closing bid price of the Company's Common Stock during the five
trading days immediately preceding the date of such conversion. The
Notes were payable on December 1, 1996 and accrued interest at 10% per
annum. All of the Notes have since been converted into 250,000 shares of
the Company's Common Stock.
In May 1996 the Company sold 3,500 shares of its Series A
Preferred Stock (the "Preferred Shares") for $3,500,000 or $1,000 per
share. At the purchasers' option, up to 1,750 Preferred Shares were
convertible, on or after 60 days from the closing date of the purchase of
such shares (the "Closing"), into shares of the Company's Common Stock on
the basis of one share of Preferred Stock for shares of Common Stock equal
in number to the amount determined by dividing $1,000 by 85% of the Closing
Price of the Company's Common Stock. All Preferred Shares were convertible,
on or after 90 days from the Closing, on the basis of one share of
Preferred Stock for shares of the Company's Common Stock equal in number to
the amount determined by dividing $1,000 by 83% of the Closing Price of
the Company's Common Stock. The term "Closing Price" was defined as the
average closing bid price of the Company's Common Stock over the five-day
trading period ending on the day prior to the conversion of the Preferred
Stock. All outstanding shares of the Series A Preferred Stock have since
been converted into 632,041 shares of the Company's Common Stock. The
shares issued upon the conversion of the Series A Preferred Stock are being
offered for public sale by means of a registration statement filed with the
Securities and Exchange Commission.
In August 1996 the Company sold, in a private transaction,
5,000 shares of its Series B Preferred Stock (the "Series B Preferred
Shares") for $5,000,000 or $1,000 per share. At the purchasers' option, up
to 2,500 Series B Preferred Shares are convertible, on or after ten days
from the date the shares have been registered for public sale (the
"Effective Date"), into shares of the Company's Common Stock on the basis
of one share of Preferred Stock for shares of Common Stock equal in number
to the amount determined by dividing $1,000 by 87% of the Closing Price of
the Company's Common Stock. All Preferred Shares are convertible, on or
after 40 days from the Effective Date, on the basis of one share of
Preferred Stock for shares of the Company's Common Stock equal in number to
the amount determined by dividing $1,000 by 85% of the Closing Price of the
Company's Common Stock. The term "Closing Price" is defined as the average
closing bid price of the Company's Common Stock over the five-day trading
period ending on the day prior to the conversion of the Preferred Stock.
Notwithstanding the above, the conversion price may not be less than $3.60
nor more than $14.75. Each Preferred Share is entitled to a quarterly
dividend, if, as, and when declared by the Board of Directors, of $17.50.
Any Series B Preferred Shares which are outstanding on the second
anniversary of the Effective Date will be automatically converted into
shares of the Company's Common Stock. By means of a Registration Statement
filed with the Securities and Exchange Commission, the shares issuable upon
the conversion of the Series B Preferred Shares have been registered for
public sale. Prior to December 20, 1996 1,900 Series B Preferred Shares
were converted into 527,774 shares of the Company's common stock. In
December 1996 the Company repurchased 2,850 Series B Preferred Shares for
$2,850,000 plus warrants which allow the holders to purchase up to 99,750
shares of the Company's common stock for $4.25 per share at any time prior
to December 15, 1999. The Company raised funds required for this
repurchase from the sale of its Series C Preferred Stock.
In December 1996 the Company raised $2,850,000 from the sale of
units consisting of 2,850 shares of the Comany's Series C Preferred Stock,
379,763 Series A Warrants and 379,763 Series B Warrants. The Series C
Preferred Shares are convertible into shares of the Company's Common Stock
on the basis of one share of Preferred Stock for shares of Common Stock
equal in number to the amount determined by dividing $1,000 by 85% of the
Closing Price of the Company's Common Stock (the "Conversion Price"). The
term "Closing Price" is defined as the average closing bid price of the
Company's Common Stock over the five day trading period ending on the day
prior to the conversion of the Preferred Stock. Notwithstanding the above,
the Conversion Price may not be more than $4.00. Beginning 90 days after
December 17, 1996 one half of the Series C Preferred Shares are convertible
into shares of the Commpany's common stock. All preferred shares are
convertible into shares of the Company's common stock beginning 180 days
after December 17, 1996 provided however that if the Company's common stock
trades for more than $8.00 at any time, then all shares of Preferred Stock
will thereafter be immediately convertible into shares of the Company's
common stock. The Preferred Shares are not entitled to any annual
dividends, provided however that if the shares of common stock issuable
upon the conversion of the Series C Preferred Stock have not been
registered for public sale within 90 days after December 17, 1996, then the
Company will pay a dividend (based upon a variable formula) with respect to
each outstanding share of the Series C Preferred Stock. Any Series C
Preferred Shares which are outstanding on December 15, 1998 will be
automatically converted into shares of the Company's Common Stock, provided
however the shares of Common Stock issuable upon the conversion of the
Series C Preferred Shares have been registered for public sale and the
Company's Common Stock is listed on the Nasdaq System. The Preferred
Shares have a liquidation preference over the Company's Common Stock. Each
Series A Warrant entitles the holder to purchase one share of the Company's
common stock at a price fo $4.50 per share at any time prior to March 15,
1998. Each Series B Warrant entitles the holder to purchase one share of
the Company's common stock at a price of $4.50 per share at any time prior
to March 15, 1999. The Company has agreed to make appropriate filings with
the Securities and Exchange Commission such that the shares issuable upon
the conversion of the Series C Preferred Shares and the exercise of the
Warrants will be available for public sale.
In October, 1994, the Company completed the construction of its
own research laboratory in a facility leased by the Company. The cost of
modifying the leased space and providing the equipment for the research
laboratory was approximately $1,200,000. In August 1994 the Company
obtained a loan to fund the majority of the costs for the research
laboratory. The Company repaid this loan during the quarter ending
September 30, 1996.
During fiscal 1997 the Company plans to fund its U.S. and Canadian
clinical trials involving MULTIKINE and the HGP-30 vaccine. It should be
noted that substantial additional funds will be needed for more extensive
clinical trials which will be necessary before the Company or VTI will be
able to apply to the FDA for approval to sell any products which may be
developed on a commercial basis throughout the United States.
The Company expects that it will spend approximately $2,500,000 on
research and development during the twelve month period ending September
30, 1997. This amount includes VTI's estimated research and development
expenses during fiscal 1997. Prior to October 1995, VTI's research and
development expenses were shared 50% by the Company and 50% by Alpha 1
Biomedicals, Inc. VTI became a whollyowned subsidiary of the Company in
October 1995 when the Company purchased Alpha 1's 50% interest in VTI. The
Company plans to use its existing financial resources to fund its research
and development program during this period.
Other than funding its research and development program and the costs
associated with its research laboratory, the Company does not have any
material capital commitments.
The Company expects that its existing financial resources, will
satisfy the Company's capital requirements at least through September 1998.
In the absence of revenues, the Company will be required to raise
additional funds through the sale of securities, debt financing or other
arrangements in order to continue with its research efforts after that
date. However, there can be no assurance that such financing will be
available or be available on favorable terms.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements included with this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Officers and Directors
Name Age Position
Maximilian de Clara 68 Director and President
Geert R. Kersten, Esq.38 Director, Chief
Executive Officer,
Secretary and Treasurer
Patricia B. Prichep 44 Vice President of
Operations
M. Douglas Winship 46 Vice President of
Regulatory Affairs and
Quality Assurance
Dr. Eyal Talor 41 Vice President of
Research and Manufac-
turing
Dr. Prem S. Sarin 62 Vice President of
Research for Viral
Technologies, Inc.
Dr. Daniel H. Zimmerman 55 Vice President of
Cellular Immunology
Mark V. Soresi 44 Director
F. Donald Hudson 63 Director
The directors of the Company serve in such capacity until the next
annual meeting of the Company's shareholders and until their successors
have been duly elected and qualified. The officers of the Company serve at
the discretion of the Company's directors.
Mr. Maximilian de Clara, by virtue of his position as an officer
and director of the Company, may be deemed to be the "parent" and "founder"
of the Company as those terms are defined under applicable rules and
regulations of the Securities and Exchange Commission.
The principal occupations of the Company's officers and directors,
during the past several years, are as follows:
Maximilian de Clara. Mr. de Clara has been a director of the
Company since its inception in March, l983, and has been president of the
Company since July, l983. Prior to his affiliation with the Company, and
since at least l978, Mr. de Clara was involved in the management of his
personal investments and personally funding research in the fields of
biotechnology and biomedicine. Mr. de Clara attended the medical school of
the University of Munich from l949 to l955, but left before he received a
medical degree. During the summers of l954 and l955, he worked as a
research assistant at the University of Istanbul in the field of cancer
research. For his efforts and dedication to research and development in
the fight against cancer and AIDS, Mr. de Clara was awarded the "Pour le
Merit" honorary medal of the Austrian Military Order "Merito Navale" as
well as the honor cross of the Austrian Albert Schweitzer Society. Geert R.
Kersten, Esq. Mr. Kersten was Director of Corporate and Investment
Relations for the Company between February, 1987 and October, 1987. In
October of 1987, he was appointed Vice President of Operations. In
December, 1988, Mr. Kersten was appointed director of the Company. Mr.
Kersten also became the Company's secretary and treasurer in 1989. In May,
1992, Mr. Kersten was appointed Chief Operating Officer and in February,
1995, Mr. Kersten became the Company's Chief Executive Officer. In
previous years, Mr. Kersten worked as a financial analyst with Source
Capital, Ltd., an investment advising firm in McLean, Virginia. Mr. Kersten
is a stepson of Maximilian de Clara, who is the President and a Director of
the Company. Mr. Kersten attended George Washington University in
Washington, D.C. where he earned a B.A. in Accounting and an M.B.A. with
emphasis on International Finance. He also attended law school at American
University in Washington, D.C. where he received a Juris Doctor degree.
Patricia B. Prichep has been the Company's Vice President of Operations
since March, 1994. Between December, 1992 and March, 1994, Ms. Prichep was
the Company's Director of Operations. From June, 1990 to December, 1992,
Ms. Prichep was the Manager of Quality and Productivity for the NASD's
Management, Systems and Support Department. Between 1982 and 1990, Ms.
Prichep was Vice President and Operations Manager for Source Capital, Ltd.
M. Douglas Winship has been the Company's Vice President of Regulatory
Affairs and Quality Assurance since April, 1994. Between 1988 and April,
1994, Mr. Winship held various positions with Curative Technologies, Inc.,
including Vice President of Regulatory Affairs and Quality Assurance (1991-
1994).
Dr. Eyal Talor has been the Company's Vice President of Research and
Manufacturing since March, 1994. From October, 1993 until March, 1994, Dr.
Talor was Director of Research, Manufacturing and Quality Control, as well
as the Director of the Clinical Laboratory, for Chesapeake Biological
Laboratories, Inc. From 1991 to 1993, Dr. Talor was a scientist with SRA
Technologies, Inc., as well as the director of SRA's Flow Cytometry
Laboratory (1991-1993) and Clinical Laboratory (1992-1993). During 1992
and 1993, Dr. Talor was also the Regulatory Affairs and Safety Officer For
SRA. Since 1987, Dr. Talor has held various positions with the John
Hopkins University, including course coordinator for the School of
Continuing Studies (1989-Present), research associate and lecturer in the
Department of Immunology and Infectious Diseases (1987-1991), and associate
professor (1991-Present).
Prem S. Sarin, Ph.D. has been the Vice President of Research for
Viral Technologies, Inc. (the Company's wholly-owned subsidiary) since May
1, 1993. Dr. Sarin was an Adjunct Professor of Biochemistry at the George
Washington University School of Medicine, Washington, D.C., from 1986-
1992. From 1975-1991 Dr. Sarin held the position of Deputy Chief,
Laboratory of Tumor Cell Biology at the National Cancer Institute (NCI),
NIH, Bethesda, Maryland. Dr. Sarin was a Senior Investigator (1974-1975)
and a Visiting Scientist (1972-1974) at the Laboratory of Tumor Cell
Biology at NCI, NIH. From 1971-1972 Dr. Sarin held the position of
Director, Department of Molecular Biology, Bionetics Research Laboratory,
Bethesda, Maryland.
Daniel H. Zimmerman, Ph.D. has been the Company's Vice President
of Cellular Immunology since January 1996. Dr. Zimmerman founded CELL
MED, Inc. and was its president from 1987-1995. From 1973 to 1987 Dr.
Zimmerman served in various positions at Electronucleonics, Inc. including
Scientist, Senior Scientist, Technical Director and Program Manager. From
1969-1973 Dr. Zimmerman was a Senior Staff Fellow at NIH.
Mark V. Soresi. Mr. Soresi became a director of the Company in
July, 1989. In 1982, Mr. Soresi founded, and since that date has been the
president and Chief Executive Officer of REMAC(R), Inc. REMAC(R) is
involved in the cleanup of hazardous and toxic waste dump sites. Mr.
Soresi attended George Washington University in Washington, D.C. where he
earned a Bachelor of Science in Chemistry.
F. Donald Hudson. F. Donald Hudson has been a director of the
Company since May, 1992. From December 1994 to October 1995 Mr. Hudson was
President and Chief Executive Officer of VIMRx Pharmaceuticals, Inc.
Between 1990 and 1993, Mr. Hudson was President and Chief Executive Officer
of Neuromedica, Inc., a development stage company engaged in neurological
research. Until January, 1989, Mr. Hudson served as Chairman and Chief
Executive Officer of Transgenic Sciences, Inc. (now TSI Corporation), a
publicly held biotechnology corporation which he founded in January, 1987.
From Oct ober, 1985 until January, 1987, Mr. Hudson was a director of Organ-
ogenesis, Inc., a publicly held biotechnology corporation of which he was a
founder, and for five years prior thereto was Executive Vice President and
a director of Integrated Genetics, Inc., a corporation also engaged in
biotechnology which he co-founded and which was publicly traded until its
acquisition in 1989 by Genzyme, Inc.
All of the Company's officers devote substantially all of their
time on the Company's business. Messrs. Soresi and Hudson, as directors,
devote only a minimal amount of time to the Company.
The Company has an audit committee whose members are Geert R. Kersten
and F. Donald Hudson.
Executive Compensation
The following table sets forth in summary form the compensation
received by (i) the Chief Executive Officer of the Company and (ii) by each
other executive officer of the Company who received in excess of $100,000
during the fiscal year ended September 30, 1996.
Annual Compensation Long Term Compensation
Re
All
Other stric-
Other
Annual ted LTIP
Com-
Compen- Stock Options Pay
pensa-
Name and Prin- Fiscal Salary Bonus sation Awards Granted outs
tion
cipal Position Year (1) (2) (3) (4) (5) (6)
(7)
Maximilian 1996 $225,000 $75,000 $85,016 - 70,000 -
$88
de Clara, 1995 - - $95,181 - 225,000 -
- -
President 1994 - - $93,752 - 70,000 -
- -
Geert R.
Kersten, 1996 $172,531 $75,000 $9,420 - 294,000 -
$8,869
Chief Exec-
utive officer 1995 $164,801 - $ 9,426 - 224,750 -
$3,911
Officer,
Secretary and 1994 $182,539 - $ 8,183 - 50,000 - $4,497
and Treasurer
M. Douglas
Winship, 1996 $119,100 - $2,400 - - - $2,488
Vice Presi-
dent of 1995 $113,500 - $ 1,200 - 22,000 - $2,100
Regulatory Affairs
Prem S. Sarin, 1996 $102,379 - - - 32,000 - $3,160
Vice President of
Research, Infectious
Deseases
Eyal Talor, 1996 $107,458 - $3,000 - 8,000 $3,312
Vice President of
Research and
Manufacturing
(1) The dollar value of base salary (cash and non-cash) received.
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as salary
or bonus, including perquisites and other personal benefits,
securities or property. Amounts in the table represent
automobile, parking and other transportation expenses.
(4) During the period covered by the Table, no shares of restricted
stock were issued as compensation for services to the persons
listed in the table. As of September 30, 1996, the number of
shares of the Company's common stock, owned by the officers
included in the table above, and the value of such shares at such
date, based upon the market price of the Company's common stock
were:
Name Shares Value
Maximilian de Clara - -
Geert R. Kersten 95,940 $551,655 M. Douglas Winship
-- -Prem S. Sarin -- -Eyal Talor
1,500 $8,625
Dividends may be paid on shares of restricted stock owned by the
Company's officers and directors, although the Company has no
plans to pay dividends.
(5) The shares of Common Stock to be received upon the exercise of
all stock options granted during the period covered by the Table.
Includes certain options issued in connection with the Company's
l996 Salary Reduction Plan as well as certain options purchased
from the Company. See "Options Granted During Fiscal Year Ending
September 30, l996" below.
(6) "LTIP" is an abbreviation for "Long-Term Incentive Plan". An
LTIP is any plan that is intended to serve as an incentive for
performance to occur over a period longer than one fiscal year.
Amounts reported in this column represent payments received
during the applicable fiscal year by the named officer pursuant
to an LTIP.
(7) All other compensation received that the Company could not
properly report in any other column of the Table including annual
Company contributions or other allocations to vested and unvested
defined contribution plans, and the dollar value of any insurance
premiums paid by, or on behalf of, the Company with respect to
term life insurance for the benefit of the named executive
officer, and the full dollar value of the remainder of the pre-
miums paid by, or on behalf of, the Company. Amounts in the table
repre- sent life insurance permiums and/or contributions made by
the Company to a 401(k) pension plan on behalf of persons named
in the table.
Long Term Incentive Plans - Awards in Last Fiscal Year
None.
Employee Pension, Profit Sharing or Other Retirement Plans
During 1993 the Company implemented a defined contribution
retire ment plan, qualifying under Section 401(k) of the Internal
Revenue Code and covering substantially all the Company's
employees. The Company's contribution is equal to the lesser of 3%
of each employee's salary, or 50% of the em- ployee's contribution.
The 1996 expenses for this plan were $29,779. Other than the
401(k) Plan, the Company does not have a defined benefit, pension
plan, profit sharing or other retirement plan.
Compensation of Directors
Standard Arrangements. The Company currently pays its
directors $1,500 per quarter, plus expenses. The Company has no
standard arrangement pursuant to which directors of the Company are
compensated for any services provided as a director or for committee
participation or special assignments.
Other Arrangements. The Company has from time to time
granted options to its outside directors: Mr. Soresi and Mr. Hudson.
See Stock Options below for additional information concerning options
granted to the Company's directors.
Employment Contracts
Effective January 2, 1996, the Company entered into a three
year employment agreement with Mr. de Clara. The employment
agreement provides that during the period between January 2, 1996 and
January 2, 1997, the Company will pay Mr. de Clara an annual salary
of $300,000. During the years ending January 2, 1998 and 1999, the
Company will pay Mr. de Clara a salary of $330,000 and $363,000
respectively. In the event that there is a material reduction in Mr.
de Clara's authority, duties or activities, or in the event there is
a change in the control of the Company, then the agreement allows Mr.
de Clara to resign from his position at the Company and receive a
lumpsum payment from the Company equal to 18 months salary. For
purposes of the employment agreement, a change in the control of the
Company means the sale of more than 50% of the outstanding shares of
the Company's Common Stock, or a change in a majority of the
Company's directors.
Effective August 1, 1994, the Company entered into a three
year em ployment agreement with Mr. Kersten. The employment
agreement provides that during the period between August 1, 1994 and
July 31, 1995, the Company will pay Mr. Kersten an annual salary of
$198,985. During the years ending August 31, 1996 and 1997, the
Company will pay Mr. Kersten a salary of $218,883 and $240,771
respectively. In the event that there is a material reduction in Mr.
Kersten's authority, duties or activities, or in the event there is a
change in the control of the Company, then the agreement allows Mr.
Kersten to resign from his position at the Company and receive a lump-
sum payment from the Com- pany equal to 18 months salary. For
purposes of the employment agreement, a change in the control of the
Company means the sale of more than 50% of the outstanding shares of
the Company's Common Stock, or a change in a majority of the
Company's directors. Pursuant to the agreement, the Company also
agreed to grant Mr. Kersten, in accordance with the Company's 1994
Incentive Stock Option Plan, options to purchase 50,000 shares of the
Company's Common Stock. Compensation Committee Interlocks and Insider
Participation
The Company has a compensation committee comprised of all of
the Company's directors, with the exception of Mr. Kersten. During
the year ended September 30, 1996, Mr. de Clara was the only officer
participating in deliberations of the Company's compensation
committee concerning executive officer compensation. See Item 13 of
this report for information concerning transactions between the
Company and Mr. de Clara.
During the year ended September 30, 1996, no director of the
Company was also an executive officer of another entity, which had an
executive officer of the Company serving as a director of such entity
or as a member of the compensation committee of such entity.
Stock Options
The following tables set forth information concerning the
options granted, during the fiscal year ended September 30, 1996, to
the persons named below, and the fiscal year-end value of all
unexercised options (regardless of when granted) held by these
persons.
Options Granted During Fiscal Year Ending September 30, l996
Potential Individual Grants Realizable
Value at
% of Total Assumed
Annual Rates
Options of Stock
Price Granted to Exercise
Appreciation for
Options Employees in Price Per Expiration Option
Term
(3)
Name Granted (#) Fiscal Year Share Date 5%
10%
Maximilian
de Clara 70,000 l6.5% $5.62 9/25/06 $247,l00
$626,500
Geert R.
Kersten 224,000 (1) 53% $2.38 1/10/00 $333,760
$848,960 20,000 (2) 4.7% $3.25 2/21/99 $
40,800
$104,800
50,000 4.8% $5.62 9/25/06 $l76,500
$447,500
M. Douglas
Winship -- -- -- -- --
- --
Prem S.
Sarin 20,000 (1) 4.7% $2.38 1/10/00 $ 29,800 $
75,000
12,000 2.8% $5.62 9/25/06 $ 42,360
$l07,400
Eyal Talor 8,000 (1) l.9% $2.38 1/10/00 $ 11,920
$
30,320
(1) Options were granted in accordance with the Company's 1996 Salary
Reduction Plan. Pursuant to the Salary Reduction Plan, any
employee of the Company was allowed to receive options in exchange
for a one time reduction in such employee's salary.
(2) Option was acquired in connection with the purchase of 20,000
shares of the Company's common stock in February l996. In this
transaction, Mr. Kersten paid $2.50 for one share of common stock
and one option. The options are exercisable at $3.25 per share and
expire on February 2l, l999.
(3) The potential realizable value of the options shown in the table
assuming the market price of the Company's Common Stock
appreciates in value from the date of the grant to the end of the
option term at 5% or 10%.
Option Exercises and Year End Option Values
Value
of
Unexer
ci se
d In
the-
Number of Money
Options
Unexercised at
Fiscal
Shares Options (3) Year
End
(4)
Acquired On Value Re- Exercisable/
Exercisable/
Name Exercise (1) alized (2) Unexercisable
Unexercisable
Maximilian de Clara 146,667 $574,486 8,334/139,999
$15,668/$164,031
Geert R. Kersten - - 183,417/335,333
$504,974/$904,686
M. Douglas Winship - - 13,667/8,333
$37,694/$20,626
Prem S. Sarin 10,000 $ 71,900 834/33,666
$1,568/$72,092
Eyal Talor 7,834 $ 32,354 5,167/21,500
$9,714/$55,506
(1) The number of shares received upon exercise of options during the
fiscal year ended September 30, 1996.
(2) With respect to options exercised during the Company's fiscal year
ended September 30, 1996, the dollar value of the difference
between the option exercise price and the market value of the
option shares purchased on the date of the exercise of the
options.
(3) The total number of unexercised options held as of September 30,
1996, separated between those options that were exercisable and
those options that were not exercisable.
(4) For all unexercised options held as of September 30, 1996, the
aggregate dollar value of the excess of the market value of the
stock underlying those options (as of September 30, 1996) over the
exercise price of those unexercised options. Values are shown
separately for those options that were exercisable, and those
options that were not yet exercisable, on September 30, 1996.
Stock Option and Bonus Plans
The Company has Incentive Stock Option Plans, Non-Qualified
Stock Option Plans and a Stock Bonus Plan. A summary description of
these Plans follows. In some cases these Plans are collectively
referred to as the "Plans".
Incentive Stock Option Plan. The Incentive Stock Option
Plans collectively authorize the issuance of up to 800,000 shares of
the Company's Common Stock to persons that exercise options granted
pursuant to the Plan. Only Company employees may be granted options
pursuant to the
Incentive Stock Option Plan.
To be classified as incentive stock options under the
Internal Reve nue Code, options granted pursuant to the Plans must be
exercised prior to the following dates:
(a) The expiration of three months after the date on which an
option holder's employment by the Company is terminated
(except if such termination is due to the death or
permanent and total disabil- ity);
(b) The expiration of 12 months after the date on which an
option holder's employment by the Company is terminated,
if such termination is due to the Employee's permanent
and total disability;
(c) In the event of an option holder's death while in the
employ of the Company, his executors or administrators
may exercise, within three months following the date of
his death, the option as to any of the shares not
previously
exercised;
The total fair market value of the shares of Common Stock
(determined at the time of the grant of the option) for which any
employee may be granted options which are first exercisable in any
calendar year may not exceed $100,000.
Options may not be exercised until one year following the
date of grant. Options granted to an employee then owning more than
10% of the Common Stock of the Company may not be exercisable by its
terms after five years from the date of grant. Any other option
granted pursuant to the Plan may not be exercisable by its terms after
ten years from the date of grant.
The purchase price per share of Common Stock purchasable under an op
tion is determined by the Committee but cannot be less than the fair
market value of the Common Stock on the date of the grant of the
option (or 110% of the fair market value in the case of a person
owning more than 10% of the Company's outstanding shares).
Non-Qualified Stock Option Plan. The Non-Qualified Stock
Option Plans collectively authorize the issuance of up to 1,360,000
shares of the Company's Common Stock to persons that exercise options
granted pursuant to the Plans. The Company's employees, directors,
officers, consultants and ad visors are eligible to be granted options
pursuant to the Plans, provided however that bona fide services must
be rendered by such consultants or advisors and such services must not
be in connection with the offer or sale of securities in a capital-
raising transaction. The option exercise price is determined by the
Committee but cannot be less than the market price of the Company's
Common Stock on the date the option is granted.
Stock Bonus Plan. Up to 40,000 shares of Common Stock may be
granted under the Stock Bonus Plan. Such shares may consist, in whole
or in part, of authorized but unissued shares, or treasury shares.
Under the Stock Bonus Plan, the Company's employees, directors,
officers, consultants and advisors are eligible to receive a grant of
the Company's shares, provided however that bona fide services must be
rendered by consultants or advisors and such services must not be in
connection with the offer or sale of securities in a capital-raising
transaction.
Other Information Regarding the Plans. The Plans are
administered by the Company's Compensation Committee ("the
Committee"), each member of which is a director of the Company. The
members of the Committee were selec ted by the Company's Board of
Directors and serve for a one-year tenure and until their successors
are elected. A member of the Committee may be removed at any time by
action of the Board of Directors. Any vacancies which may occur on the
Committee will be filled by the Board of Directors. The Committee is
vested with the authority to interpret the provisions of the Plans and
supervise the administration of the Plans. In addition, the Committee
is empowered to select those persons to whom shares or options are to
be granted, to determine the number of shares subject to each grant of
a
stock bonus or an option and to determine when, and upon what
conditions, shares or options granted under the Plans will vest or
otherwise be subject to forfeiture and cancellation.
In the discretion of the Committee, any option granted
pursuant to the Plans may include installment exercise terms such that
the option becomes fully exercisable in a series of cumulating
portions. The Committee may also accelerate the date upon which any
option (or any part of any options) is first exercisable. Any shares
issued pursuant to the Stock Bonus Plan and any options granted
pursuant to the Incentive Stock Option Plan or the NonQuali- fied
Stock Option Plan will be forfeited if the "vesting" schedule
established by the Committee administering the Plan at the time of the
grant is not met. For this purpose, vesting means the period during
which the employee must remain an employee of the Company or the
period of time a nonemployee must pro- vide services to the Company.
At the time an employee ceases working for the Company (or at the time
a nonemployee ceases to perform services for the Com- pany), any
shares or options not fully vested will be forfeited and cancelled. At
the discretion of the Committee payment
for the shares of Common Stock un- derlying options may be paid
through the delivery of shares of the Company's Common Stock having an
aggregate fair market value equal to the option price, provided such
shares have been owned by the option holder for at least one year
prior to such exercise. A combination of cash and shares of Common
Stock may also be permitted at the discretion of the Committee.
Options are generally non-transferable except upon death of
the op tion holder. Shares issued pursuant to the Stock Bonus Plan
will generally not be transferable until the person receiving the
shares satisfies the vesting requirements imposed by the Committee
when the shares were issued.
The Board of Directors of the Company may at any time, and
from time to time, amend, terminate, or suspend one or more of the
Plans in any manner they deem appropriate, provided that such
amendment, termination or suspension will not adversely affect rights
or obligations with respect to shares or op- tions previously granted.
The Board of Directors may not, without shareholder approval: make any
amendment which would materially modify the eligibility re- quirements
for the Plans; increase or decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the
case of a reclassification of the Company's capital stock or a
consolidation or merger of the Company; reduce the minimum option
price per share; extend the period for granting options; or materially
increase in any other way the benefits ac- cruing to employees who are
eligible to participate in the Plans.
Prior Stock Option and Bonus Plan. The Company previously
had in effect a Stock Option and Bonus Plan ("the 1987 Plan") which
provided for the grant to the Company's officers, directors, employees
and consultants of either (i) shares of the Company's Common Stock for
services rendered or (ii) options to purchase shares of Common Stock.
The 1987 Plan was terminated by the Company in 1992. Since the 1987
Plan was terminated, no further options will be granted and no further
bonus shares will be issued pursuant to the 1987 Plan. However,
options previously granted may nevertheless still be exercised
according to the terms of the options. Prior to the termination of the
1987 Plan, the Company granted options to purchase 189,250 shares of
the Company's Common Stock. To date, options to purchase 6,000 shares
have been exercised. In June, 1995 the Company cancelled options to
purchase 176,250 shares that had previously been granted under this
Plan and reissued options for the same number of shares under the
Company's other stock option plans. See "Option Summary" below.
Option Summary. The following sets forth certain
information, as
of December 15, 1996, concerning the stock options granted by the
Company. Each option represents the right to purchase one share of the
Company's Common Stock.
Total Shares
Shares Reserved for
Remaining Reserved
Outstanding Options
Name of Plan Under Plan Options
Under Plan
1987 Stock Option and Bonus Plan 200,000 7,000
(1)
1992 Incentive Stock Option Plan 100,000 83,216
2,783
1992 Non-Qualified Stock Option Plan 60,000 34,500
- -
1994 Incentive Stock Option Plan 100,000 100,000
- -
1994 Non-Qualified Stock Option Plan 100,000 50,583
2,750
1995 Non-Qualified Stock Option Plan 800,000 650,751
63,874
1996 Incentive Stock Option Plan 600,000 65,700
534,300
1996 Non-Qualified Stock Option Plan 400,000 170,000
230,000
TOTAL: 1,161,750
833,707
(1) This Plan was terminated in 1992 and as a result, no new options
will be granted pursuant to this Plan.
As of December 15, 1996, 1,500 shares had been issued
pursuant to the Company's 1992 Stock Bonus Plan. All of these shares
were issued during the fiscal year ending September 30, 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT The following table sets forth, as of December
15, 1996,
information with respect to the only persons owning beneficially 5%
or more of the outstanding Common Stock and the number and
percentage of outstanding shares owned by each director and officer
and by the officers and directors as a group. Unless otherwise
indicated, each owner has sole voting and investment powers over his
shares of Common Stock.
Name and Address Number of Shares (1) Percent
of Class (4)
Maximilian de Clara 8,334 (2) *
Bergstrasse 79
6078 Lungern,
Obwalden, Switzerland
Geert R. Kersten 512,357 (3)
5.8%
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
Patricia B. Prichep 47,530 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
M. Douglas Winship 13,667 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
Dr. Eyal Talor 17,167 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 223l4
Daniel H. Zimmerman 4,000 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 22314
Dr. Prem Sarin 20,834 *
66 Canal Center Plaza
Suite 510
Alexandria, VA 22314
Mark Soresi 43,375 *
l0l0 Wayne Ave., 8th Floor
Silver Spring, MD 209l0
F. Donald Hudson 29,000 *
53 Mt. Vernon Street
Boston, MA 02108
All Officers and Directors
as a Group (9 persons) 696,264
7.8%
*Less than 1%
(1) Includes shares issuable prior to February 28, 1997 upon the
exercise of options or warrants granted to the following persons:
Options or Warrants
Exercisable Name Prior to February 28,
1997
Maximilian de Clara 8,334
Geert R. Kersten
407,417
Patricia B. Prichep
44,500
M. Douglas Winship
13,667
Dr. Eyal Talor
15,667
Daniel H. Zimmerman
4,000
Dr. Prem Sarin
20,834
Mark Soresi
41,500
F. Donald Hudson
29,000
See "Management" for information concerning outstanding stock
options.
(2) All shares are held of record by Milford Trading, Ltd., a
corporation organized pursuant to the laws of Liberia. All of
the issued and outstanding shares of Milford Trading, Ltd. are
owned beneficially by Mr. de Clara.
(3) Amount includes shares held in trust for the benefit of Mr.
Kersten's minor children. Geert R. Kersten is the stepson of
Maximilian de Clara.
(4) Amount excludes shares which may be issued upon the exercise or
conversion of other options, warrants and other convertible
securities previously issued by the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The MULTIKINE technology and know-how licensed to the
Company was developed by a group of researchers under the direction
of Dr. Hans Ake
Fabricius and was assigned, during l980 and l98l, to Hooper Trading
Company, N.V., a Netherlands Antilles' corporation ("Hooper"), and
Shanksville Corporation, also a Netherlands Antilles corporation
("Shanksville"). Prior to October, 1996, Mr. de Clara and Dr.
Fabricius
owned 50% and 30%, respectively, of each of these companies. In
October, 1996, Mr. de Clara disposed of his interest in Hooper and
Shanksville. The technology and know how assigned to Hooper and
Shanksville was licensed to Sittona Company,
B.V., a Netherlands corporation ("Sittona"), effective September,
l982 pursuant to a licensing agreement which requires Sittona to pay
to Hooper and Shanksville royalties on income received by Sittona
respecting the technology and know-how licensed to Sittona. In l983,
Sittona licensed this technology to the Company and received from the
Company a $1,400,000 advance royalty payment. At such time as the
Company generates revenues
from the sale or sublicense of this technology, the Company will be
required to pay royalties to Sittona equal to l0% of net sales and l5%
of the licensing royalties received from third parties. In that
event, Sittona, pursuant to its licensing agreements with Hooper and
Shanksville, will be required to pay to those companies a minimum of
l0% of any royalty payments received from the Company.
Between 1985 and October 1996 Mr. de Clara owned all of the
issued and outstanding stock of Sittona. In October 1996, Mr. de
Clara disposed of his interest in Sittona.
The Company has reached a tentative agreement to acquire from
Sittona Company, Hooper Trading Company, and Shanksville Corporation
all rights pertaining to the MULTIKINE technology for $500,000 in cash
and shares of the Company's common stock with a value of $3,500,000.
The acquisition of this technology is subject to the execution of a
definitive agreement between the parties.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8K (a) See the Financial Statements attached to this Report.
(b) The Company did not file any reports on Form 8-K during the
quarter ended September 30, 1996.
(c) Exhibits Page Number
3(a) Articles of Incorporation Incorporated by reference to
Exhibit
3(a) of the Company's combined
Regi stration Statement on Form
S 1 and Post-Effective Amendment
("Registration Statement"),
Registration Nos. 2-85547-D and
33 7531.
(b) Amended Articles Incorporated by reference to
Exhibit 3(a) of the Company's
Registration Statement on Form S
1, Registration Nos. 2-85547-D
and 33-7531.
(c) Amended Articles Incorporated by reference to
Exhibit (Name change only) 3(c) filed with Registration
Statement
on Form S-1 (No. 33-34878).
(d) Bylaws Incorporated by reference to
Exhibit 3(b) of the Company's
Registration Statement on Form S
1, Registration Nos. 2-85547-D
and 33-7531.
4(a) Specimen copy of Incorporated by reference to
Exhibit
Stock Certificate 4(a) of the Company's
Registration
Statement on Form S-1,
Registration Nos. 2-85547-D and
337531.
4(c) Form of Common Stock Incorporated by reference to
Exhibit
Purchase Warrant 4(c) filed as an exhibit to the
Com-
pany's Registration Statement on
Form S-1 (Registration No. 33
43281).
10(a) Purchase Agreement Incorporated by reference to
Exhibit
dated April 21, 1986 10(a) of the Company's
Registration
with Alpha I Biomedical Statement on Form S-1,
Registration
Nos. 2-85547-D and 33-7531.
(b) Agreement with Sittona Incorporated by reference to
Exhibit
Company B.V. dated 10(c) of the Company's
Registration
May 3, 1983 Statement on Form S-1,
Registration
Nos. 2-85547-D and 33-7531.
(c) Addendum effective May 3, Incorporated by reference to
Exhibit 1983 to Licensing Agree- 10(e) of the Company's
Registration
ment with Sittona Company, Statement on Form S-1,
Registration
B.V. Nos. 2-85547-D and 33-7531.
(d) Addendum effective October Incorporated by reference to
Exhibit 13, 1989 to Licensing Agree- 10(d) of Company's
Annual Report on ment with Sittona Company, Form 10-K
for the year ended
September
B.V. 30, 1989.
10(e) Employment Agreement with Incorporated by reference to
Exhibit
Geert Kersten 10(e) filed as an exhibit to
the
Com-
pany's Registration Statement
on Form S-1 (Registration No.
33 43281).
l0(f) Research Agreement between Incorporated by reference to
Exhibit
Viral Technologies, Inc. 10(f) filed as an exhibit to
the
Com-
and the George Washington pany's Registration Statement
on
Form
University S-1 (Registration No. 33-
43281).
l0(g) Agreement between Viral Incorporated by reference to
Exhibit
Technologies, Inc. and 10(g) filed as an exhibit to
the
Com-
Nippon Zeon Co., Ltd. pany's Registration Statement
on
Form
S-1 (Registration No. 33
43281).
23 Consents of Experts and
Counsel
(d) Financial statement schedules.
None
SIGNATURES
Pursuant to the requirements of Section 13 of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CEL-SCI CORPORATION
Dated: December 20, 1996 By:/s/ Maximilian de Clara
Maximilian de Clara,
President By:/s/ Geert R.
Kersten
Geert R. Kersten, Chief
Executive Officer
Pursuant to the requirements of the Securities Act of l934, this
Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ MAXIMILIAN DE CLARA Director and Principal December
20,
1996
MAXIMILIAN DE CLARA Executive Officer
/s/ GEERT R. KERSTEN Director, Principal December
20,
1996
GEERT R. KERSTEN Financial Officer
and Chief Executive
Officer
/s/ MARK V. SORESI Director December
20,
1996
MARK V. SORESI
/s/ DONALD HUDSON Director December
20,
1996
F. DONALD HUDSON
2394D/l-38
CEL-SCI CORPORATION
Consolidated Financial Statements for the Years Ended September 30,
1996, 1995, and 1994,
and Independent Auditors' Report
CEL-SCI CORPORATION
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994:
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
CEL-SCI Corporation:
We have audited the accompanying consolidated balance sheets of CEL-SCI
Corporation (the Company) as of September 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our responsibi-
lity
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of CEL-SCI Corporation as of September 30, 1996 and 1995,
and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1996, in
conformity with generally acce pted accounting principles.
DELOITTE & TOUCHE LLP
Washington, DC
November 27, 1996
CEL-SCI CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
_______________________________________________________
ASSETS 1996
1995
CURRENT ASSETS:
Cash and cash equivalents $ 3,549,810
$ 3,886,950
Certificates of deposit -
170,000
Investment securities available
for sale 6,498,812
-
Interest and other receivables 76,515
64,080
Prepaid expenses 272,404
341,295
Advances to officer/shareholder and
employees 142,973
13,234
Total current assets 10,540,514
4,475,559
RECEIVABLE FROM JOINT VENTURE -
522,695
RESEARCH AND OFFICE EQUIPMENT - Less
accumulated depreciation of $863,899
and $589,987 871,983
1,102,038
DEPOSITS 18,178
18,178
PATENT COSTS - Less accumulated
amortization of $352,990 and $239,490 447,695
240,541
$11,878,370
$ 6,359,011
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 274,410
$ 248,488
Current portion of note payable -
243,372
Total current liabilities 274,410
491,860
NOTE PAYABLE -
567,891
DEFERRED RENT 19,638
24,959
EQUITY IN LOSS OF SUBSIDIARY -
432,268
Total liabilities 294,048
1,516,978
STOCKHOLDERS' EQUITY
Series A Preferred stock, $.01 par value
- authorized, 3,500 shares; issued and
outstanding, 600 shares (Liquidation
preference of $1,000) 6 -
Series B Preferred stock, $.01 par value
- authorized, 5,000 shares; issued and
outstanding, 5,000 shares (liquidation
preference of $1,000) 50 -
Common stock, $.01 par value - authorized,
100,000,000 shares; issued and
outstanding, 7,831,481 and 5,338,244
shares 78,315 53,382
Additional paid-in capital 41,918,036 28,799,198
Net unrealized loss on marketable equity
securities (16,078) -
Accumulated deficit (30,396,007) (24,010,547)
Total stockholders' equity 11,584,322 4,842,033
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 11,878,370 6,359,011
See notes to consolidated financial statements.
F-2
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDEDSEPTEMBER 30, 1996, 1995, AND 1994
______________________________________________
1996 1995 1994
INVESTMENT INCOME $ 255,053 $ 365,049 $624,670
OTHER INCOME 67,317 58,716
Total income 322,370 423,765 624,670
OPERATING EXPENSES:
Research and
development 3,471,477 1,824,661 2,896,109
Depreciation and
amortization 290,829 262,705 138,755
General and admi-
nistrative 2,882,958 1,713,912 1,621,990
Total operating
expenses 6,645,264 3,801,278 4,656,854
EQUITY IN LOSS OF
JOINT VENTURE (3,772) (501,125) (394,692)
NET LOSS $6,326,666 $3,878,638 $4,426,876
LOSS PER
COMMON SHARE $ 0.98 $ 0.89 $1.06
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 6,425,316 4,342,628 4,185,240
See notes to consolidated financial statements.
F - 3
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER
30, 1996, 1995, AND 1994
Preferred Preferred
Series A Series B
Stock Stock Common Stock
Shares Amount Shares Amount Shares Amount
BALANCE, OCTOBER 1, 1993 - - - - 4,159,313 $41,593
Common stock issued for:
Cash - - - - 2,431 24
Stock bonus plan - - - - 1,500 15
Settlement of lawsuit - - - - 25,000 250
Net unrealized loss on
marketable securities - - - - - -
Net loss - - - - - -
BALANCE, SEPTEMBER 30, 1994 - - - - 4,188,244 41,882
Common stock issued for cash - - - - 1,150,000 11,500
Change in market value of
marketable securities
available for sale - - - - - -
Net loss - - - - - -
BALANCE, SEPTEMBER 30, 1995 - - - 5,338,244 53,382
Common stock issued for cash - - - - 23,000 230
Exercise of stock options - - - - 171,711 1,717
Exercise of warrants - - - - 1,332,780 13,328
Conversion of convertible
debentures - - - - 257,480 2,575
Stock issued for acquisition
of VTI and Nippon-Zeon
rights - - - - 204,170 2,042
Issuance - Series A pre-
ferred stock 3,500 35 - - - -
Issuance - Series B pre-
ferred stock - - 5,000 50 - -
Preferred Series A Conver-
sion (2,900) (29) - - 504,096 5,041
Cash dividends on Series A and
Series B preferred stock - - - - - -
Change in market value of
marketable securities
available for sale - - - - - -
Net loss - - - - - -
BALANCE, SEPTEMBER 30, 1996 600 $ 6 5,000 $50 7,831,481 78,315
F-4(a)
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED
SEPTEMBER 30, 1996, 1995, AND 1994
Additional
Paid In
Capital Other Deficit
BALANCE, OCTOBER 1, 1993 $26,608,299 $ - $(15,705,033)
Common stock issued for:
Cash 39,364 - -
Stock bonus plan 4,935 - -
Settlement of lawsuit 202,250 - -
Net unrealized loss on
marketable securities - (85,753) -
Net loss - - (4,426,876)
BALANCE, SEPTEMBER 30, 1994 26,854,848 (85,753)
(20,131,909)
Common stock issued for cash 1,944,350 - -
Change in market value of
marketable securities
available for sale - 85,753 -
Net loss - -
(3,878,638)
BALANCE, SEPTEMBER 30, 1995 28,799,198 -
(24,010,547)
Common stock issued for cash 57,270 - -
Exercise of stock options 491,113 - -
Exercise of warrants 2,330,226 - -
Conversion of convertible
debentures 1,284,825 - -
Stock issued for acquisition
of VTI and Nippon-Zeon 834,117 - -
Issuance - Series A pre-
ferred stock 430,034 - -
Issuance - Series B pre-
ferred stock 4,799,950 - -
Preferred Series A Conversion 2,891,303 - -
Cash dividends on Series A and
Series B preferred stock - - (58,794)
Change in market value of
marketable securities
available for sale - (l6,078) -
Net loss
- - - (6,326,666)
BALANCE, SEPTEMBER 30, 1996
$41,918,036 $(16,078) $(30,396,007)
F-4(b)
CEL-SCI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY YEARS ENDED
SEPTEMBER 30, 1996, 1995, AND 1994
Total
BALANCE, OCTOBER 1, 1993 $10,944,859
Common stock issued for:
Cash 39,388
Stock bonus plan 4,950
Settlement of lawsuit 202,500
Net unrealized loss on
marketable securities (85,753)
Net loss (4,426,876)
BALANCE, SEPTEMBER 30, 1994 6,679,068
Common stock issued for cash 1,955,850
Change in market value of
marketable securities
available for sale 85,753
Net loss (3,878,638)
BALANCE, SEPTEMBER 30, 1995 4,842,033
Common stock issued for cash 57,500
Exercise of stock options 492,830
Exercise of warrants 2,343,554
Conversion of convertible
debentures 1,287,400
Stock issued for acquisition
of VTI and Nippon-Zeon 836,159
Issuance - Series A pre-
ferred stock 430,069
Issuance - Series B pre-
ferred stock 4,800,000
Preferred Series A Con-
version 2,896,315
Cash dividends on Series A and
Series B preferred stock (58,794)
Change in market value of
marketable securities
available for sale (l6,078)
Net loss (6,326,666)
BALANCE, SEPTEMBER 30, 1996 $11,584,322
See notes to consolidated financial statements.
F-4(c)
CEL-SCI CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
1996 1995 1994
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Loss $(6,326,666) $(3,878,638) $(4,426,876)
Adjustments to
reconcile net loss
to net cash used in operating
activities:
Stock issued in payment of
expense - - 207,450
Depreciation and
amortization 290,829 262,705 138,755
Equity in loss of
Joint Venture 3,772 501,125 394,692
Research and develop-
ment expenses related to
purchase of Viral Techno-
logies, Inc. 515,617 - -
Research and develop-
ment exenses
related to purchase of licensing
agreement from Nippon-Zeon 219,375 - -
Net realized loss (gain)
on sale of securities - 42,490 (76,774)
Amortization of premium 22,558 6,407 25,683
Changes in assets and lia-
bilities:
Decrease (increase
in advances) (129,739) 4,147 (17,381)
Increase in prepaid
expenses, deposits, interest receiv-
able, and receivable from
joint venture 56,456 (396,705) (31,833)
Increase (decrease) in
accounts payabe, accrued expenses,
and deferred rent 20,601 (68,330) (111,552)
Decrease in payable
to officer and shareholder - - (52,370)
Net cash used in
operating activities (5,327,197) (3,526,799) (3,950,206)
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Purchases of
investments (6,492,955) (389,688) (1,467,818)
Sales and maturities
of investments 170,000 2,951,299 6,999,273
Advances to Joint Venture - (346,081) (300,000)
Expenditures for
property and equipment (16,727) (151,006) (999,807)
Expenditures for patents (63,379) - -
Net cash provided by
investing activities (6,403,061) 2,064,524 4,231,648
F-5(a)
1996 1995 1994
CASH FLOWS PROVIDED BY
(USED IN) FINANCING ACTIVITIES:
Issuance of note payable - 184,915 788,601
Issuance of convertible
debentures 1,250,000 - -
Issuance of preferred
and common stock for cash 10,927,075 1,955,850 39,388
Repayment of note receivable
for stock option exercise 86,100 - -
Repayment of note payable (811,263) (162,253) -
Dividends paid (58,794) - -
Net cash provided by
financing activities 11,393,118 1,978,512 827,989
NET INCREASE (DECREASE)
IN CASH (337,140) 516,237 1,109,431
CASH, BEGINNING OF YEAR 3,886,950 3,370,713 2,261,282
CASH, END OF YEAR $ 3,549,810 3,886,950 $3,370,713
SUPPLEMENTAL DISCLOSURES:
In October, 1995, CEL-SCI issued 159,170 shares of common stock as
consideration for the purchase of the remaining 50% of Viral
Technology, Inc. In conjunction with this acquisition, CEL-SCI
obtained net assets with a fair value of $170,000.
In March 1996, a shareholder of the Company exercised options to
purchase 40,000 shares of common stock. The shareholder signed a
note for the stock, agreeing to pay the note by the end of June
1996. The note was repaid in June 1996.
During 1996, $1,250,000 of the convertible debentures were
converted into 250,000 shares of common stock.
During 1996 and 1994, the net unrealized loss on investments
available-for-sale was $16,078 and $85,753, respectively.
During 1994, 25,000 shares were issued as settlement of a lawsuit
at a cost of $202,500.
See notes to consolidated financial statements.
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CEL-SCI Corporation (the Company) was incorporated on March 22,
1983, in the State of Colorado, to finance research and
development in biomedical science and ultimately to engage in
marketing products.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Significant accounting policies are as follows:
Principles of Consolidation - The consolidated financial
statements include the accounts of CEL-SCI Corporation and
its wholly owned subsidiary, Viral Technologies, Inc. All
significant intercompany transactions have been eliminated
upon consolidation.
Investments - 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.
Research and Office Equipment - Research and office
equipment is recorded at cost and depreciated using the
straight-line method over estimated useful lives of five to
seven years.
Research and Development Costs - Research and development
expenditures are expensed as incurred.
Patents - Patent expenditures are capitalized and amortized
using the straight-line method over 17 years. In the event
changes in technology or other circumstances impair the
value or life of the patent, appropriate adjustment in the
asset value and period of amortization will be made.
Net Loss Per Share - Net loss per common share is computed
by dividing the net loss, after increasing the loss for the
effect of any preferred stock dividends, by the weighted
average number of common shares outstanding during the
period. Common stock equivalents, including options to
purchase common stock, were excluded from the calculation as
they were antidilutive.
Investment in Joint Venture - Through October 1995, the
investment in joint venture has been accounted for by the
equity method. The Company's proportionate share of the net
loss of the joint venture has been included in the
respective statements of operations. In October 1995, the
Company purchased the remaining 50% interest in the joint
venture, and as of October 15, 1995, the operations of the
joint venture is consolidated in the financial statements of
the Company.
Statement of Cash Flows - For purposes of the statements of
cash flows, cash consists principally of unrestricted cash
on deposit, and short-term money market funds. The Company
considers all highly liquid investments with a maturity of
less than three months to be cash equivalents.
Prepaid Expenses - The majority of prepaid expenses consist
of bulk purchases of laboratory supplies to be consumed in
the manufacturing of the Company's product for clinical
studies and for its further development.
Income Taxes - Income taxes are provided using the liability
method under which deferred tax liabilities or assets are
determined based on the difference between the financial
statement and tax bases of assets and liabilities (i.e.,
temporary differences) and are measured at the enacted tax
rates. Deferred tax expense is determined by the change in
the liability or asset for deferred taxes.
Reclassifications - Certain reclassifications have been made
for 1995 and 1994 for comparative purposes.
2. INVESTMENTS
The carrying values and estimated market values of investments
available-for-sale at September 30, 1996, are as follows:
September 30, 1996
Gross Gross Market
Value
Amortized Unrealized Unrealized at
September 30,
Cost Gains Losses 1996
U.S. Government Securities $5,012,077 $ - $(11,580)
$5,000,497
Corporate Debt Securities 1,502,813 - (4,498)
1,498,315
Total $6,514,890 $ - $(16,078)
$6,498,812
While management has classified investments at September 30,
1996, as available-for-sale, management intends to hold such
securities to maturity for the foreseeable future.
The carrying values and estimated market values of investment
securities at September 30, 1995, are as follows:
September 30, 1995
Gross Gross Market
Value Amortized Unrealized Unrealized at
September 30,
Cost Gains Losses 1995
Certificates of Deposit $170,000 $ - $ - $170,000
The gross realized gains and losses of sales of investments
available-for-sale for the years ended September 30, 1996, 1995,
and 1994, are as follows:
1996 1995 1994
Realized gains $ - $ 17,839 $
128,205
Realized losses $ - $ 60,329
$ 51,431
Net realized gain (loss) $ - $ (42,490) $
76,774
3. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 1996 and 1995,
consist of the following:
1996 1995
Research equipment $ 1,548,778 $
1,536,177
Furniture and equipment 167,832
136,486
Leasehold improvements 19,272
19,272
1,735,882
1,691,935
Less accumulated depreciation and
amortization (863,899)
(589,897)
Net research and office equipment $ 871,983 $
1,102,038
4. JOINT VENTURE
In April 1986, the Company paid $200,000 cash and issued
50,000 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 $15.00 per share on the basis of
arm's-length negotiations. At the time the transaction took
place, the stock was trading at $24.20. 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 was 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.
In October 1995, the Company purchased the remaining 50 percent
interest in VTI from Alpha 1. The Company conveyed 159,170
shares of CEL-SCI common stock as the consideration for the
net assets of VTI with a fair value of approximately $170,000.
The acquisition was accounted for under the purchase method of
accounting with substantially all of the value of the purchase
price being expensed as research and development expense for
the year ended September 30, 1996, as the acquisition
represents primarily research and development costs.
Effective October 31, 1995, the Company has consolidated CEL-
SCI's and VTI's financial statements, and the consolidated
financial statements reflect the results of VTI's operations
since the date of acquisition.
During the two years ended September 30, 1995, VTI had no
sales. A summary of the operations of VTI is as follows:
Years Ended September 30,
1995 1994
Income $ - $
- -
Expenses 1,002,250
789,384
Net Loss $(1,002,250)
$(789,384)
The balance sheet of VTI at September 30, 1995 is
summarized as follows:
1995
Current assets $ 30,484
Noncurrent assets $ 187,821
Current liabilities $4,275,078
Equity (deficit - net of initial capitalization) $(4,056,773)
In May 1995, Viral Technologies, Inc. reacquired the Far
Eastern marketing rights for HGP-30 from Nippon Zeon Co., Ltd.
No stock or cash was exchanged at that time but Nippon Zeon was
given a royalty right to HGP-30 plus the right to recover its
investment in Viral Technologies subject to certain
occurrences.
In July 1996, VTI purchased all of the remaining rights to HGP
30 in return for 45,000 shares of the Company's common stock.
5. CREDIT ARRANGEMENTS
At September 30, 1995, the Company had a promissory note
outstanding with a bank in the amount of $811,263. The
principal was being repaid over forty-eight consecutive months
beginning February 5, 1995. Interest on the outstanding
balance was based on the Bank's prime rate plus two percent,
which was 10.75% at September 30, 1995, and was to be paid
monthly with the principal payments. The promissory note was
secured by all corporate assets and required 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 was also subject to certain minimum
equity, liquidity, and operating covenants. During the year
ended September 30, 1996, the Company paid off the total
outstanding debt. This early payoff was not subject to any
prepayment penalties. There is no such borrowing arrangement
at September 30, 1996.
6. 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 owned 50% and 30%, respectively, of each of these
companies. The technology and know-how assigned to Hooper and
Shanksville was licensed to Sittona Company, B.V., a
Netherlands corporation (Sittona), effective September, 1982
pursuant to a licensing agreement which 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. In this arrangement Mr. de Clara and
Dr. Fabricius, because of their ownership interests in Hooper
and Shanksville, would have received approximately 50% and 30%,
respectively, of any royalties paid by Sittona to Hooper and
Shanksville; and Mr. de Clara, through his interest in all
three companies (Hooper, Shanksville, and Sittona), could have
received up to 95% of any royalties paid by the Company.
Between 1985 and October 1996, Mr. de Clara owned all of the
issued and outstanding stock of Sittona. In October 1996, Mr.
de Clara disposed of his interest in Sittona.
The Company has reached a tentative agreement to acquire from
Sittona Company, Hooper Trading Company, and Shanksville
Corporation all rights pertaining to the Multikine technology
for $500,000 in cash and shares of the Company's common stock
with a value of $3,500,000. The acquisition of this
technology is subject to the execution of a definitive
agreement between the parties.
During the year ended September 30, 1996, a shareholder and
officer of the Company borrowed $86,100 from the Company to
exercise the purchase of 40,000 shares of common stock, which
was evidenced by a short-term promissory note. The note was
subsequently repaid during the year. In addition, at
September 30, 1996, $138,000 was receivable from the officer
in Company advances.
7. 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, 1996, is as
follows:
1996 1995
Depreciation $ (17,989) $
(16,660)
Prepaid expenses (25,588)
(14,413)
Net operating loss carryforward 11,658,132
9,251,208
Other 7,455
9,474
Less Valuation allowance (11,622,010)
(9,229,609)
Net deferred $ - $ -
The Company has available for income tax purposes net
operating loss carryforwards of approximately $30,711,000,
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.
8. STOCK OPTIONS, WARRANTS, AND BONUS PLAN
During the year ended September 30, 1996, the shareholders of
the Company approved the adoption of two new Plans, the 1996
Incentive Stock Option Plan (1996 Incentive Plan) and the 1996
Non-Qualified Stock Option Plan (1996 Non-Qualified Plan).
Shares are reserved under each plan and total 600,000 and
400,000 shares, respectively.
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. In December 1995, the 1995 Non-Qualified Plan was
amended to provide for 800,000 shares to be reserved under the
1995 NonQualified Plan.
On July 29, 1994, the Board of Directors approved the adoption
of two new plans, subject to shareholder approval, the 1994
Incentive Stock Option Plan (1994 Incentive Plan) and the 1994
Non-Qualified Stock Option Plan (1994 Non-Qualified). 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.
On September 30, 1992, the shareholders of the Company
approved the adoption of three new plans, the 1992 Incentive
Stock Option Plan (1992 Incentive Plan), the 1992 Non-
Qualified Stock Option Plan (1992 Non-Qualified Plan) and the
Stock Bonus Plan (1992 Bonus Plan). 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 Non-Qualified
Plan or issued shares under the Bonus Plan. Terms of the
options are to be determined by the Company's Compensation
Committee, which will administer all of the plans, but in no
event are options to be granted for shares at a price below
fair market value at date of grant. Options granted under the
option plans must be granted, or shares issued under the bonus
plan issued, before August 20, 2002.
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.
Information regarding the Company's stock option plans are summarized as
follows:
Option
Price
Per Share Outstanding
Exercisable
1987 Stock Option and Bonus $ 3.40 - 20.90 183,250
102,999
Plan Balance, September 30 -
40,250
1993 Became exercisable
Balance, September 30, 1994 $ 3.40 - 20.90 183,250
143,249
Canceled $ 3.40 - 20.90 176,250
136,249
Balance, September 30,
1995 and 1996 $16.50 - 19.70 7,000
7,000
1992 Incentive Stock Option Plan
Balance, September 30, 1993
Granted $13.40 - 15.60 12,500 -
Became Exercisable $ 6.80 - 11.90 29,500 -
Balance, September 30, 1994 $ 6.80 - 15.60 42,000
4,166
Canceled $ 6.80 - 15.60 (42,000)
(4,166)
Granted $ 2.87 - 3.87 57,550
20,917
Balance, September 30, 1995 $ 2.87 - 3.87 57,550
20,917
Forfeitures $ 2.94 - 3.44 (5,833) -
Granted $ 2.87 - 3.87 45,500 -
Exercised $ 2.87 (14,001)
(14,001)
Became exercisable $ 2.87 - 3.87 -
39,102
Balance, September 30, 1996 $ 2.87 - 3.87 83,216
46,018
1992 Nonqualified Stock Option
Plan Balance, September 30, 1993 $13.40 18,000 -
Granted $ 8.70 - 13.80 18,000 -
Became exercisable $ 8.70 - 13.80 -
18,000
Balance, September 30, 1994 $ 8.70 - 13.80 36,000
18,000
Canceled $ 8.70 - 13.40 (7,500) -
Granted $ 2.87 31,500 -
Became Exercisable $ 2.87 - 15.60 -
42,000
Balance, September 30, 1995 $ 2.87 - 15.60 60,000
60,000
Granted - -
Exercised $ 2.87 (25,500)
(25,500)
Balance, September 30, 1996 $ 2.87 - 15.60 34,500
34,500
1994 Incentive Stock Option Plan $ 2.87 50,000 -
Granted
Balance, September 30, 1994 $ 2.87 50,000 -
Granted $ 2.87 50,000 -
Became Exercisable $ 2.87 -
61,000
Balance, September 30, 1995 $ 2.87 100,000
61,000
Became Exercisable $ 2.87 -
11,000
Balance, September 30, 1996 $ 2.87 100,000
72,000
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 $ 2.87 - 3.87 -
48,084
Balance, September 30, 1995 $ 2.87 - 3.87 97,250
48,084
Granted - -
Exercised $ 2.87 (46,667)
(46,667)
Became exercisable $ 2.87 -
24,167
Balance, September 30 , 1996 $ 2.87 - 3.87 50,583
25,584
1995 Nonqualified Stock Option
Granted in 1995 $ 2.87 - 3.87 329,251 -
Became exercisable $ 2.87 - 3.87 -
70,000
Balance, September 30, 1995 $ 2.87 - 3.87 329,251
70,000
Forfeitures $ 2.87 - 3.87 (12,625) -
Granted $ 2.38 - 5.62 419,500 -
Exercised $ 2.87 - 3.87 (85,375)
(85,375)
Became exercisable $ 2.87 - 3.87 -
146,628
Balance, September 30, 1996 $ 2.38 - 5.62 650,751
131,253
1996 Inventive Stock Option Plan
Granted $ 5.62 - 1100 65,700 -
Balance, September 30, 1996 $ 5.62 - 11.00 65,700 -
1996 Nonqualified Stock Option
Plan - Granted $ 5.62 70,000 -
Balance September 30, 1996 $ 5.62 70,000 -
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 expired in March 1996. The holder of the
option had the right to have the shares issuable upon the exercise of
the option included in any registration statement filed by the Company.
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, 1996, 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 $15.00 per share. During 1995, the
expiration of these warrants was extended to February 1996. In
December 1995, the expiration of the warrants was extended to February
1997. Subsequent to the year ended September 30, 1996, the expiration
date of the warrants has been extended to February 1998.
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, 1996, 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 and remain
outstanding at September 30, 1996.
In connection with a private offering in June and September 1995, the
Company issued to the underwriter warrants to purchase 230,000 equity
units. Each unit consisted of one share of the Company's common
stock. For the June 1995 private placement, 57,500 equity units were
issued at $2.00 per unit and another 57,500 equity units were issued
at $3.25 per unit. All units issued connection with June 1995
private placement were exercised at September 30, 1996. For the
September 1995 private placement, 57,500 equity units were issued at
$2.40 per unit and another 57,500 equity units were issued at $3.25
per unit. At September 30, 1996, 21,890 equity units were exercised
at $3.25 per unit and 21,890 equity units were issued at $2.40 per
unit. Remaining equity units of 71,220 were outstanding at September
30, 1996.
During 1996, the Company granted two consultants options to purchase
a total of 70,000 shares of the Company's common stock. The 50,000
options became exercisable on August 21, 1996, at $3.25. Only 24,000
of these 50,000 options were exercised, and the remaining options
expired on September 30, 1996. An additional 20,000 options became
exercisable on August 31, 1996, at $3.25 and expire in September
1997. Options of 20,000 remain outstanding at September 30, 1996.
9. 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 3% of the participant's salary. The
expense for the year ended September 30, 1996 and 1995, in connection
with this plan was approximately $29,800 and $24,900, respectively.
10.LEASE COMMITMENTS
Operating Leases - The future minimum annual rental payments due
under noncancelable operating leases for office and laboratory space
are as follows:
Year Ending September 30,
1997 $140,335
1998 56,160
1999 59,573
2000 62,010
2001 65,764
Thereafter 96,964
Total minimum lease payments $480,806
Rent expense for the years ended September 30, 1996, 1995, and 1994,
was approximately $177,858, $124,059, and $122,369, respectively.
11.STOCKHOLDERS' EQUITY
In March 1996 the Company sold $1,250,000 of Convertible Notes (the
Notes) to two persons. The Notes were convertible from time to time,
in whole or in part, into shares of the Company's Common Stock. The
conversion price was the lesser of (i) $5 per share or (ii) 80% of
the average closing bid price of the Company' Common Stock during the
five
trading days immediately preceding the date of such conversion. The
Notes were payable on December 1, 1996, and accrued interest at 10%
per annum. All of the Notes have since been converted into 250,000
shares of the Company's Common Stock.
During the year ended September 30, 1996, the Company authorized
3,500 shares of Series A Preferred Stock (Series A Stock) with a par
value of $.01 per share. The Company also authorized 5,000 shares of
Series B Preferred Stock (Series B Stock) with a par value of $.01
per share. Holders of Series A Stock and Series B Stock are entitled
to dividends, payable quarterly if declared, at the rate of $17.50
per quarter. Dividends which are not declared will not accrue nor be
cumulative.
Each share of Series A Stock was convertible into shares of common
stock equal in number to the amount determined by dividing $1,000 by
85% of the closing price of the Company's common stock on or after 60
days from issuance, and 83% of the closing price on or after 90 days
from issuance, with the conversion price not less than $3.00 nor more
than $8.00. Each share of Series B Stock is convertible into shares
of common stock equal in number to the amount determined by dividing
$1,000 by 87% of the closing price of the Company's common stock on
or after 10 days from the effective registration date of the common
shares, and 85% of the closing price on or after 40 days from the
effective date, with the conversion price not less than $3.60 nor
more than $14.75.
During 1996, the Company issued 3,500 shares of Series A Stock for
cash consideration of $3,500,000 and 5,000 shares of Series B Stock
for cash consideration of $5,000,000. Commissions of $375,000 were
paid relative to the preferred stock offerings and were recorded as a
reduction of additional paid-in capital on the transaction.
Also during 1996, 2,900 shares of Series A Stock were converted into
504,096 shares of the Company's common stock for consideration of
approximately $2,900,000. In August 1996, the Board of Directors
declared dividends on Series A Stock ($17.50 per quarter) and cash
dividends of $58,794 were paid as of September 31, 1996. Subsequent
to September 30, 1996, the Board of Directors declared dividends on
Series A Stock ($17.50 per quarter) and Series B Stock ($17.50 per
quarter).
On April 28, 1995, the stockholders of the Company approved a 10-for-
1 reverse split of the Company's outstanding common stock, which
became effective on May 1, 1995. All shares and per-share amounts
have been restated to reflect the stock split.
The Company also participated in a private offering during 1995.
This offering allowed for the purchase of one share of common stock
and one warrant (a unit) for the price of $2.00 per unit. All
1,150,000 shares authorized for the offering were purchased during
the year ended September 30, 1995. Cash of $2,300,000 was received
in June and September 1995. Commissions of $344,150 were paid or
payable relative to the offering at September 30, 1995.
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.
12.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 (SFAS
123), which provides an alternative to APB Opinion No. 25 in
accounting for stock-based compensation issued to employees. As
permitted by SFAS 123, the Company plans to continue to account for
stock-based compensation in accordance with APB Opinion No. 25. The
Company will present in its annual financial statements the
additional disclosure required by SFAS 123.
* * * * * *
Cel-Sci Corporation
Annual Report on Form 10-K
Year Ended September
30, 1996 Exhibit 23
INDEPENDANT AUDITORS' CONSENT
We consent to the incorporation by
reference in the Registration Statement
No. 33-55966 of CEL-SCI Corporation on
Form S-8 of our report dated November
27, 1996, appearing in this Annual
Report on Form 10-K of CEL-SCI
Corporation for the year ended
September 30, 1996.
DELOITTE & TOUCHE LLP
Washington, DC
December 20, 1996
