-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ERW1B6hx1Tni9sOmITT1IfrdL7Wl4M85K0TaZlun/o6yvwrjf4T73Qnxc7lsiwcV euTL1/89z3tDUlpe/iOSNw== 0001004878-99-000059.txt : 19991230 0001004878-99-000059.hdr.sgml : 19991230 ACCESSION NUMBER: 0001004878-99-000059 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CEL SCI CORP CENTRAL INDEX KEY: 0000725363 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 840916344 STATE OF INCORPORATION: CO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-72415 FILM NUMBER: 99782200 BUSINESS ADDRESS: STREET 1: 8229 BOONE BLVD STE 510 CITY: VIENNA STATE: VA ZIP: 22182 BUSINESS PHONE: 7035495293 MAIL ADDRESS: STREET 1: 8229 BOONE BLVD STE 802 CITY: VIENNA STATE: VA ZIP: 22182 FORMER COMPANY: FORMER CONFORMED NAME: INTERLEUKIN 2 INC DATE OF NAME CHANGE: 19880317 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1999. OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________. Commission file number 0-11503 CEL-SCI CORPORATION (Exact name of registrant as specified in its charter) COLORADO 84-0916344 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8229 Boone Blvd., Suite 802 Vienna, Virginia 22182 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (703) 506-9460 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on December 20, 1999, as quoted on the American Stock Exchange, was approximately $40,000,000. Shares of Common Stock held by each officer, director and principal shareholder have been excluded in that such persons may be deemed to be affiliates of the Registrant. Documents Incorporated by Reference: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of December 20, 1999, the Registrant had 18,027,982 issued and outstanding shares of Common Stock. PART I ITEM 1. BUSINESS CEL-SCI Corporation (the "Company") was formed as a Colorado corporation in 1983. The Company is involved in the research and development of certain drugs and vaccines. The Company's first, and main, product, MULTIKINE(TM), manufactured using the Company's proprietary cell culture technologies, is a combination, or "cocktail", of natural human interleukin-2 ("IL-2") and certain cytokines and cytokines. MULTIKINE is being tested to determine if it is effective in improving the immune response of cancer patients. The Company's second most advanced product, HGP-30W, is being tested to determine if it is an effective vaccine/treatment against the AIDS virus. The third technology the Company is developing, LEAPS (Ligand Epitope Antigen Presentation System), is a T-cell modulation technology which can be used to direct a specific immune response. The Company intends to use this new technology to improve the cellular immune response of persons vaccinated with HGP-30W and to develop potential treatments and/or vaccines against various diseases. Present target diseases are AIDS, herpes simplex, malaria, tuberculosis, prostate cancer and breast cancer. The costs associated with the clinical trials relating to the Company's technologies, research expenditures and the Company's administrative expenses have been funded with the public and private sales of shares of the Company's Common Stock and borrowings from third parties, including affiliates of the Company. There can be no assurance that either the Company or the Company's wholly owned subsidiary, Viral Technologies, Inc. ("VTI") will be successful in obtaining approvals from any regulatory authority to conduct further clinical trials or to manufacture and sell their products. The lack of regulatory approval for the Company's or VTI's products will prevent the Company and VTI from generally marketing their products. Delays in obtaining regulatory approval or the failure to obtain regulatory approval in one or more countries may have a material adverse impact upon the Company's operations. MULTIKINE The function of the immunological system is to protect the body against infectious agents, including viruses, bacteria, parasites and malignant (cancer) cells. An individual's ability to respond to infectious agents and to other substances (antigens) recognized as foreign by the body's immune system is critical to health and survival. When the immune response is adequate, infection is usually combated effectively and recovery follows. Severe infection can occur when the immune response is inadequate. Such immune deficiency can be present from birth but, in adult life, it is frequently acquired as a result of intense sickness or as a result of the administration of chemotherapeutic drugs and/or radiation. It is also recognized that, as people reach middle age and thereafter, the immune system grows weaker. Two classes of white blood cells, macrophages and lymphocytes, are believed to be primarily responsible for immunity. Macrophages are large cells whose principal immune activity is to digest and destroy infectious agents. Lymphocytes are divided into two sub-classes. One sub-class of lymphocytes, B-cells, produces antibodies in response to antigens. Antibodies have unique combining sites (specificities) that recognize the shape of particular antigens and bind with them. The combination of an antibody with an antigen sets in motion a chain of events which may neutralize the effects of the foreign substance. The other sub-class of lymphocytes, T-cells, regulates immune responses. T-cells, for example, amplify or suppress antibody formation by B-cells, and can also directly destroy "foreign" cells by activating "killer cells." It is generally recognized that the interplay among T-cells, B-cells and the macrophages determines the strength and breadth of the body's response to infection. It is believed that the activities of T-cells, B-cells and macrophages are controlled, to a large extent, by a specific group of hormones called cytokines. Cytokines regulate and modify the various functions of both T-cells and B-cells. There are many cytokines, each of which is thought to have distinctive chemical and functional properties. IL-2 is but one of these cytokines and it is on IL-2 and its synergy with other cytokines that the Company has focused its attention. Scientific and medical investigation has established that IL-2 enhances immune responses by causing activated T-cells to proliferate. Without such proliferation no immune response can be mounted. Other cytokines support T-cell and B-cell proliferation. However, IL-2 is the only known cytokine which causes the proliferation of T-cells. IL-2 is also known to activate B-cells in the absence of B-cell growth factors. Although IL-2 is one of the best characterized cytokines with anticancer potential, the Company is of the opinion that to have optimum therapeutic value, IL-2 should be administered not as a single substance but rather as a mixture of IL-2 and certain cytokines, i.e. as a "cocktail". This approach, which was pioneered by the Company, makes use of the synergism between these cytokines. It should be noted, however, that neither the FDA nor any other agency has determined that the Company's MULTIKINE product will be effective against any form of cancer. It has been reported by researchers in the field of cytokine research that IL-2 can increase the number of killer T-cells produced by the body, which improves the body's capacity to selectively destroy specific tumor cells. Research and human clinical trials sponsored by the Company have indicated a correlation between administration of MULTIKINE to cancer patients and immunological responses. On the basis of these experimental results, the Company believes that MULTIKINE may have application for the treatment of solid tumors in humans. In November 1990, the Florida Department of Health and Rehabilitative Services ("DHRS") gave the physicians at a southern Florida medical institution approval to start a clinical cancer trial in Florida using the Company's MULTIKINE product. The focus of the trial was unresectable head and neck cancer. In 1991, four patients with regionally advanced squamous cell cancer of the head and neck were treated with the Company's MULTIKINE product. The patients had previously received radical surgery followed by x-ray therapy but developed recurrent tumors at multiple sites in the neck and were diagnosed with terminal cancer. The patients had low levels of lymphocytes and evidence of immune deficiency (generally a characteristic of this type of cancer). Significant tumor reduction occurred in three of the four patients as a result of the treatment with MULTIKINE. Negligible side effects were observed and the patients were treated as outpatients. Notwithstanding the above, it should be noted that these trials were only preliminary and were only conducted on a small number of patients. It remains to be seen if MULTIKINE will be effective in treating any form of cancer. These results caused the Company to embark on a major manufacturing program for MULTIKINE with the goal of being able to produce a MULTIKINE that would meet the stringent regulatory requirements for advanced human studies. This program included building a pilot scale manufacturing facility. Today the Company is involved in the following clinical human studies of MULTIKINE for treatment of cancer and AIDS: ISRAEL: MULTIKINE is being tested as a presurgical treatment prior to surgery or radiation in patients with head and neck cancer. The data from the first ten patients, presented at a scientific conference by the clinical investigator, Dr. Feinmesser, indicates that all ten patients treated with MULTIKINE for only two weeks experienced regression in tumor size, with one of the patients showing a complete disappearance of the tumor and three patients showing tumor reductions of over 50%. In addition, patients had a resolution of tumor ulceration, increased tongue mobility and reduction or elimination of local pain. There were no tumor progressions or adverse local changes, nor evidence of toxicity from MULTIKINE. Recovery after operation and wound healing were normal. Additionally, microscopic evaluation of surgical specimens showed evidence of cellular immune reaction against the tumors and destruction of tumor cells. Dr. Feinmesser is currently treating another ten patients at a higher dosage as part of this study. CANADA: A Phase I/II study in Canada is also testing MULTIKINE as a presurgical treatment prior to surgery or radiation in patients with head and neck cancer. Initially, the study was designed to treat fourteen patients, but was subsequently increased to twenty-one patients, and recently increased further to twenty-eight patients. The last patient in this study completed treatment in November 1999. U.S.A. & CANADA: In this U.S. and Canadian multi-center study, sixteen patients who have failed conventional treatments were treated experimentally with MULTIKINE. The study was designed to evaluate the safety, tumor responses and immune responses of MULTIKINE in late stage head and neck cancer patients. The last patient in this study completed treatment in December 1999. U.S.A.: In 1997, a prostate cancer study was conducted at Jefferson Hospital in Philadelphia, Pennsylvania. The study involved prostate cancer patients who had failed on hormonal therapy. Five patients completed the treatment and the data from this study demonstrated the safety and feasibility of using MULTIKINE in the treatment of prostate cancer. Biopsies from the patients in the study also suggest the recruitment of inflammatory cells to the tumor site. Based on these findings, investigators have begun a 20 patient dose escalation study to test MULTIKINE as a therapy to be used prior to surgical removal of the prostate gland. In the fall of 1999 the Company announced the completion of a MULTIKINE study with fourteen HIV-positive patients. The study showed that the repeated administration of MULTIKINE to HIV infected persons over the course of two months was safe and appeared to stimulate the patients' responses to recall antigens, which is considered to be indicative of an improved immune response. HUNGARY: In 1999, a 30 patient study using MULTIKINE in head and neck cancer patients prior to surgery and/or radiation was started in Hungary. The study is expected to be completed by June 2000. POLAND/CZECH REPUBLIC: In the spring of 1999 the Company started another 30 patient study in Poland and the Czech Republic. This study is similar to the studies being conducted in Canada and Hungary. OTHER STUDIES: In addition to the foregoing, the Company is in the process of establishing other supporting human studies for MULTIKINE. STRATEGY FOR MULTIKINE: At the present time the Company plans to seek initial regulatory approval for the use of MULTIKINE in the treatment of head and neck cancer patients prior to surgery or radiation with the intent of increasing the success of subsequent surgery (and/or radiation). Success in this area is measured by the reduction in the number of tumor recurrences since recurrences usually lead to a poor prognosis for the patient. The Company believes, based upon discussions with experts in the field, that a reduction in recurrences is viewed by many clinicians as an indicator of increased survival. Head and neck cancer is the sixth most frequently occurring cancer worldwide, with an incidence of 500,000 annually. Recent statistics show no reduction in head and neck cancer mortality, but rather a dramatic increase of the disease in certain segments of the population. This cancer is most frequently found in men in their 50's or early 60's with a history of smoking and alcohol consumption. Conventional treatment calls for either surgery, which can be extremely disfiguring, or radiation and chemotherapy, both of which are associated with very unpleasant side-effects. Proof of efficacy for anti-cancer drugs is a lengthy and complex process. At this early stage of clinical investigation, it remains to be proven that MULTIKINE will be effective against any form of cancer. Even if some form of MULTIKINE is found to be effective in the treatment of cancer, commercial use of MULTIKINE may be several years away due to extensive safety and effectiveness tests that would be necessary before required government approvals are obtained. It should be noted that other companies and research teams are actively involved in developing treatments and/or cures for cancer, and accordingly, there can be no assurance that the Company's research efforts, even if successful from a medical standpoint, can be completed before those of its competitors. The Company uses an unrelated corporation for certain aspects of the production of MULTIKINE for research and testing purposes. The agreement with this corporation expires during the summer of 2000. The Company is currently in negotiations with another corporation for the use of their facility for the manufacture of the MULTIKINE product. AIDS VACCINE The Company, through its wholly-owned subsidiary Viral Technologies, Inc. (VTI), is involved in the development of a preventive vaccine against HIV infection. This vaccine is currently in Phase II human clinical trials in the Netherlands. The vaccine is primarily directed against HIV subtype C, the most prevalent HIV subtype in third world countries. The Company is also developing a therapeutic AIDS vaccine for people already infected with HIV. The purpose of this vaccine is to activate a person's immune system in such a way that the immune system will fight HIV more effectively. This therapeutic vaccine is currently being readied for early clinical trials which are projected to begin in 2001. This date however, is dependent on the Company raising funds which would be dedicated specifically for this project. Both vaccines are derived from the Company's HGP-30 technology. HGP-30 is a thirty amino acid region of the p17 core protein of HIV. The Company has decided to produce HGP-30 as a synthetic peptide because peptides are inexpensive to manufacture and cannot infect a person with HIV. VTI holds proprietary rights to certain synthesized components of the p17 core protein. The HGP-30 vaccine differs from most other vaccine candidates in that its active component, the HGP-30 peptide, is derived from the p17 core protein particles of the virus. Since HGP-30 is a totally synthetic molecule containing no live virus, it cannot cause infection. Unlike the envelope (i.e. outside) proteins, the p17 region of the AIDS virus appears to be relatively non-changing. HGP-30 may also be effective in treating persons infected with the AIDS virus. The preventive HIV vaccine, HGP-30, was tested in London, England in eighteen healthy HIV-negative volunteers at three different dosages. Subsequently it was tested in twenty-one HIV-negative volunteers in San Francisco and Los Angeles at four different dosages. Both tests showed the vaccine to be safe and able to elicit cellular immune responses and antibody responses in the majority of the volunteers. In April 1995, eleven of the original twenty-one California volunteers began another clinical trial. The volunteers received two booster vaccinations. The volunteers, who had originally received the two lowest dosage levels, were asked to donate blood for a SCID mouse HIV challenge study. The SCID mouse is considered by many to be the best available animal model for HIV because it lacks its own immune system and therefore permits human cell growth. White blood cells from the five (5) vaccinated volunteers and from normal donors were injected into groups of SCID mice. They were then challenged with high levels of a different strain of the HIV virus than the one from which HGP-30 is derived. Infection by virus was determined and confirmed by two different assays, p24 antigen, a component of the virus core, and reverse transcriptase activity, an enzyme critical to HIV replication. Of the SCID mice given blood from vaccinated volunteers, 78% showed no HIV infection after virus challenge as compared to 13% of the mice given blood from unvaccinated donors. In a study published in the September 1998 issue of AIDS Research and Human Retroviruses, the Company revealed that the improved version (HPG-30W) of the Company's HIV vaccine shows greater recognition of the most prevalent subtypes of the virus, covering over 90% of the world's AIDS cases. In addition, the article also provides additional evidence that the improved vaccine induces a stronger cellular immune response, which many scientists believe to be very important in fighting HIV infection. In the AIDS Research and Human Retroviruses paper, Dr. Prem Sarin, the Company's Senior Vice President of Research, Infectious Diseases, reported that the evaluation of blood obtained from mice immunized with HGP-30 AIDS vaccine, in the presence of the adjuvant alum, a material needed to stimulate immune response to vaccines, showed recognition of the corresponding regions of the HIV subtypes A, B, C and E. However, if alum was replaced with newer adjuvants, the recognition of some HIV subtypes was improved and the levels of antibody isotypes used as surrogate markers for cellular immune response were increased 2 to 4 fold. One major problem facing researchers involved in developing a vaccine against HIV is the virus' substantial variability and continued mutation among the different subtypes found around the world. Subtype A is found in Africa whereas the B subtype is the dominant strain in the U.S. and Europe. Subtype C is dominant in parts of Africa and Asia. Subtype E is primarily found in Thailand. In September 1997, the Company also completed a Phase I safety study of the HGP-30 preventive AIDS vaccine in 24 HIV-infected patients. The study showed that immunizations with this vaccine were safe in AIDS patients. In June 1998, the Institute for Clinical Pharmacology, Pharma BioResearch, Netherlands, started inoculating the first volunteers with the Company's HGP-30W AIDS vaccine in the only ongoing European Phase II AIDS vaccine study. In the trial, 29 healthy, HIV-negative volunteers received one of the three different dosages of the vaccine. Preliminary results suggest that the vaccine is safe and induces both cellular (i.e., T-cell) and humoral (i.e., antibody) immune responses. Although there has been important independent research showing the possible significance of the p17 region of HIV-1, there can be no assurance that any of the Company's technology will be effective in the prevention, diagnosis or treatment of AIDS. There can be no assurance that other companies will not develop a product that is more effective or that VTI ultimately will be able to develop and bring a product to market in a timely manner that would enable it to derive commercial benefits. In January 1991, VTI was awarded a U.S. patent covering the exclusive production, use and sale of HGP-30. In February 1993, VTI was awarded a European patent covering HGP-30 and certain other peptides. Prior to October 1995, Viral Technologies, Inc. ("VTI"), a Delaware corporation, was 50% owned by the Company and 50% owned by Alpha 1 Biomedicals, Inc. In October 1995, the Company acquired Alpha 1's interest in VTI in exchange for 159,170 shares of the Company's common stock. T-CELL MODULATION PROCESS In January 1997, the Company acquired a new patented T-cell Modulation Process which uses "heteroconjugates" to direct the body to choose a specific immune response. The heteroconjugate technology, referred to as LEAPS (Ligand Epitope Antigen Presentation System), is intended to selectively stimulate the human immune system to more effectively fight bacterial, viral and parasitic infections and cancer, when it cannot do so on its own. Administered like vaccines, LEAPS combines T-cell binding ligands with small, disease associated, peptide antigens and may provide a new method to treat and prevent certain diseases. The ability to generate a specific immune response is important because many diseases are often not combated effectively due to the body's selection of the "inappropriate" immune response. The capability to specifically reprogram an immune response may offer a more effective approach than existing vaccines and drugs in attacking an underlying disease. The Company intends to use this new technology with the HGP-30 immunogen which is currently in Phase II clinical studies. To this end, the Company recently entered into formulation studies with a HGP-30/LEAPS compound called LEAPS 101. The target population will be HIV-infected individuals who are already taking anti-HIV medicines. In addition, the Company intends to use the LEAPS technology to develop a potential Tuberculosis (TB) vaccine/treatment. TB is the largest killer of all infectious diseases worldwide and new strains of drug resistant TB are emerging daily. Using this new technology, the Company is currently conducting in vitro laboratory and in vivo animal studies. In August 1996, the Company signed a Cooperative Research and Development Agreement ("CRADA") with the Naval Medical Research Institute of the U.S. Navy to jointly develop a potential malaria vaccine using the Company's LEAPS technology. This agreement was extended in 1998. Malaria affects about 300-500 million people per year and is responsible for about 2.7 million deaths annually. It is a parasitic disease transmitted by mosquitoes. As with tuberculosis, the emergence of drug resistant strains is a major problem, as is the emergence of mosquitoes which are resistant to traditional insecticides. While at the present the number of malaria cases are not a major problem in the continental U.S., there are an increasing number of cases involving Americans bringing the disease home from overseas travels. Currently, there is no approved malaria vaccine anywhere in the world. In October 1996, the Company and Northeastern Ohio University College of Medicine signed a Collaborative Research Agreement to jointly identify and evaluate Herpes Simplex Virus related peptides. This study made use of the Company's new LEAPS technology which combines T-cell binding ligands with small, disease associated, peptide antigens. In the past, some vaccines have worked simply by vaccination with viral proteins (e.g. hepatitis B) to immunize patients. In the case of herpes simplex, that strategy has yet to be proven successful. The purpose of adding the T-cell binding ligand was to increase the effectiveness of the vaccine by directing the immune response to react in the way most likely to eliminate or control the disease agent. To test this hypothesis in herpes simplex, the researchers administered the vaccine with a T-cell binding ligand to one group of mice in order to direct the immune response to the cellular side, which is thought to be protective. The researchers also administered the vaccine to a separate group of mice using a different T-cell binding ligand to direct the immune response to the humoral (antibody) side, which is thought to be non-protective. For both vaccines, the herpes simplex peptide was kept the same. The results of the study indicated that the immunizations allowed the mice to resolve the infection quicker and more effectively resulting in minimal symptoms and mortality. The vaccine inducing a cellular immune response was protective while the vaccine inducing a humoral (antibody) immune response was not protective and actually accelerated disease progression. Two studies with different herpes simplex peptides also showed protection, confirming the results from the prior study. Research conducted pursuant to this study may lead to the future development of a herpes simplex vaccine. In May 1998, the Company announced the receipt of a Phase I $100,000 research grant to fund further animal studies with its herpes simplex vaccine. This grant was given pursuant to the Small Business Innovation Research Program of the National Institute of Allergy and Infectious Diseases. Conservative estimates of those individuals who have genital infections are 30-40 million in the U.S. Oral herpetic infections are of a greater frequency. In newborns or in immunosuppressed patients (e.g. AIDS) herpes can lead to serious illness and death. Vaccination against herpes simplex virus may prevent or treat herpes simplex infection. Unlike most other viruses, once infected, a herpes virus remains in hiding within an individual and is reactivated often by stress-inducing factors. For some individuals, recurrences may take place on a monthly basis. Although there are antiviral drugs which are used to prevent serious disease and lessen the symptoms, there is currently no method to effectively prevent initial infection, to eliminate the virus from an infected person, or to prevent recurrences. Scientists at Northeastern Ohio University College of Medicine have been working on methods of treating and detecting the herpes virus for over fifteen years. In November 1999 the Company announced a collaborative study for the treatment, and possible prevention, of autoimmune myorcarditis with researchers at the Department of Pathology, the Johns Hopkins Medical Institutions, Baltimore, Maryland. Myocarditis, an autoimmune disease affecting the heart muscle, is thought to be caused by an attack on the patient's heart muscle by his/her own immune cells and antibodies. Myocarditis is a precursor to dilated cardiomyopathy, which is an end stage cardiac disease usually requiring a heart transplant. The incidence of dilated cardiomyopathy is about 200,000 people in the United States alone. The current treatments are not curative. The study will use L.E.A.P.S.(TM) technology, as well as a technology recently developed at the Company and called AdapT (Antigen Directed Apoptosis). The AdapT technology is designed to lead to the removal, in an antigen specific (highly targeted) manner, of only those immune system cells that cause the disease, thereby leaving the remainder of the immune response intact and subsequently able to defend against other diseases. The goal of the first phase of this animal study is to establish the animal model of autoimmune myocarditis, using the L.E.A.P.S technology. In the second phase, AdapT and L.E.A.P.S. derived peptides may be used, in the case of the L.E.AP.S., to divert immune responses away from the disease-causing immune system cells or, in the case of AdapT, to remove the disease-causing immune system cells. If the L.E.A.P.S. or AdapT technologies are shown to work in the animal model for myocarditis, additional studies may be started to test this new approach for the treatment of other autoimmune diseases as well. In November 1999 the Company also announced that it has entered into a research collaboration agreement with research scientists at the Max-Delbruck Center for Molecular Medicine in Berlin, Germany. The goal of the collaboration is to develop a therapeutic vaccine for breast and/or colon cancer. The collaboration will make use of the L.E.A.P.S. technology, in combination with the specialized cancer antigen and animal testing model knowledge of the team in Berlin. The work is being conducted under the umbrella of the Biological Therapeutic Development Group of the European Office for Research and Treatment of Cancer. The LEAPS technology was acquired from Cell-Med, Incorporated ("CELL-MED") in consideration for the Company's payment of $56,000 plus the issuance, during 1997, of 33,378 shares of the Company's common stock. The Company must pay CELL-MED additional payments of up to $600,000, depending upon the Company's ability to obtain regulatory approval for clinical studies using the technology. In addition, should the Company receive FDA approval for the sale of any product incorporating the technology, the Company is obligated to pay CELL-MED an advance royalty of $500,000, a royalty of 5% of the sales price of any product using the technology, plus 15% of any amounts the Company receives as a result of sublicensing the technology. So long as the Company retains rights in the technology, the Company has also agreed to pay the future costs associated with pursuing and or maintaining CELL-MED's patent and patent applications relating to the technology. The technology obtained from CELL-MED is covered by several U.S. and European patents. Additional patent applications are pending. RESEARCH AND DEVELOPMENT Since 1983, and through September 30, 1999, approximately $27,263,000 has been expended on Company-sponsored research and development, including approximately $4,461,000, $3,834,000 and $6,012,000, respectively during the years ended September 30, 1999, 1998 and 1997. Research and development expenditures prior to October 1995 do not include amounts spent by Viral Technologies, Inc. on research and development. The Company has established a Scientific Advisory Board ("SAB") comprised of scientists distinguished in biomedical research in the field of cytokines and related areas. From time to time, members of the SAB advise the Company on its research activities. Institutions with which members of the SAB are affiliated have in the past conducted and may in the future conduct Company-sponsored research. The SAB has in the past and may in the future, at its discretion, invite other scientists to opine in confidence on the merits of the Company-sponsored research. Members of the SAB receive $500 per month from the Company. The members of the Company's SAB are: Evan M. Hersh, M.D. - Vice-Chairman, Department of Internal Medicine, Chief, Section of Hematology/Oncology, Department of Internal Medicine, Tucson, AZ. Director of Clinical Research, Arizona Cancer Center, Tucson. Michael J. Mastrangelo, M.D. - Director, Division of Medical Oncology; Professor of Medicine, Jefferson Medical College, Philadelphia, Pennsylvania; and Associate Clinical Director, Jefferson Cancer Center, Philadelphia, Pennsylvania. Alan B. Morris, Ph.D. - Professor, Department of Biological Sciences, University of Warwick, Coventry, U.K. Edmond C. Tramont, M.D. - Associate Director of The Institute of Human Virology, University of Maryland Biotechnology Institute. GOVERNMENT REGULATION The investigational agents and future products of the Company are regulated in the United States under the Federal Food, Drug and Cosmetic Act, the Public Health Service Act, and the laws of certain states. The Federal Food and Drug Administration (FDA) exercises significant regulatory control over the clinical investigation, manufacture and marketing of pharmaceutical and biological products. Prior to the time a pharmaceutical product can be marketed in the United States for therapeutic use, approval of the FDA must normally be obtained. Certain states, however, have passed laws which allow a state agency having functions similar to the FDA to approve the testing and use of pharmaceutical products within the state. In the case of either FDA or state regulation, preclinical testing programs on animals, followed by three phases of clinical testing on humans, are typically required in order to establish product safety and efficacy. The first stage of evaluation, preclinical testing, must be conducted in animals. After lack of toxicity has been demonstrated, the test results are submitted to the FDA (or state regulatory agency) along with a request for clearance to conduct clinical testing, which includes the protocol that will be followed in the initial human clinical evaluation. If the applicable regulatory authority does not object to the proposed study, the investigator can proceed with Phase I trials. Phase I trials consist of pharmacological studies on a relatively few number of humans under rigidly controlled conditions in order to establish lack of toxicity and a safe dosage range. After Phase I testing is completed, one or more Phase II trials are conducted in a limited number of patients to test the product's ability to treat or prevent a specific disease, and the results are analyzed for clinical efficacy and safety. If the results appear to warrant confirmatory studies, the data is submitted to the applicable regulatory authority along with the protocol for a Phase III trial. Phase III trials consist of extensive studies in large populations designed to assess the safety of the product and the most desirable dosage in the treatment or prevention of a specific disease. The results of the clinical trials for a new biological drug are submitted to the FDA as part of a product license application ("PLA"), a New Drug Application ("NDA") or Biologics License Application ("BLA"), depending on the type or derivation of the product being studied. In addition to obtaining FDA approval for a product, a biologics establishment license application ("ELA") may need to be filed in the case of biological products derived from blood, or not considered to be sufficiently well characterized, in order to obtain FDA approval of the testing and manufacturing facilities in which the product is produced. To the extent all or a portion of the manufacturing process for a product is handled by an entity other than the Company, the Company must similarly receive FDA approval for the other entity's participation in the manufacturing process. Domestic manufacturing establishments are subject to inspections by the FDA and by other Federal, state and local agencies and must comply with Good Manufacturing Practices ("GMP") as appropriate for production. In complying with GMP regulations, manufacturers must continue to expend time, money and effort in the area of production, quality control and quality assurance to ensure full technical compliance. The process of drug development and regulatory approval requires substantial resources and many years. There can be no assurance that regulatory approval will ever be obtained for products developed by the Company. Approval of drugs and biologicals by regulatory authorities of most foreign countries must also be obtained prior to initiation of clinical studies and marketing in those countries. The approval process varies from country to country and the time period required in each foreign country to obtain approval may be longer or shorter than that required for regulatory approval in the United States. There are no assurances that clinical trials conducted under approval from state authorities or conducted in foreign countries will be accepted by the FDA. Product licensure in a foreign country does not mean that the product will be licensed by the FDA and there are no assurances that the Company will receive any approval of the FDA or any other governmental entity for the manufacturing and/or marketing of a product. Consequently, the commencement of the marketing of any Company product is, in all likelihood, many years away. COMPETITION AND MARKETING Many companies, nonprofit organizations and governmental institutions are conducting research on cytokines. Competition in the development of therapeutic agents incorporating cytokines is intense. Large, well-established pharmaceutical companies are engaged in cytokine research and development and have considerably greater resources than the Company has to develop products. The establishment by these large companies of in-house research groups and of joint research ventures with other entities is already occurring in these areas and will probably become even more prevalent. In addition, licensing and other collaborative arrangements between governmental and other nonprofit institutions and commercial enterprises, as well as the seeking of patent protection of inventions by nonprofit institutions and researchers, could result in strong competition for the Company. Any new developments made by such organizations may render the Company's licensed technology and know-how obsolete. Several biotechnology companies are producing IL-2-like compounds. The Company believes, however, that it is the only producer of a patented IL-2 product using a patented cell-culture technology with normal human cells. The Company foresees that its principle competition will come from producers of genetically-engineered IL-2-like products. However, it is the Company's belief, based upon growing scientific evidence, that its natural IL-2 products have advantages over the genetically engineered, IL-2-like products. Evidence indicates that genetically engineered, IL-2-like products, which lack sugar molecules and typically are not water soluble, may be recognized by the immunological system as a foreign agent, leading to a measurable antibody build-up and thereby possibly voiding their therapeutic value. Furthermore, the Company's research has established that to have optimum therapeutic value IL-2 should be administered not as a single substance but rather as an IL-2-rich mixture of certain cytokines and other proteins, i.e. as a "cocktail". If these differences prove to be of importance, and if the therapeutic value of its MULTIKINE product is conclusively established, the Company believes it will be able to establish a strong competitive position in a future market. The Company has not established a definitive plan for marketing nor has it established a price structure for the Company's saleable products. However, the Company intends, if the Company is in a position to begin commercialization of its products, to enter into written marketing agreements with various major pharmaceutical firms with established sales forces. The sales forces in turn would probably target the Company's products to cancer centers, physicians and clinics involved in immunotherapy. Competition to develop treatments or vaccines for the control of AIDS is intense. Many of the pharmaceutical and biotechnology companies around the world are devoting substantial sums to the research and development of technologies useful in these areas. VTI's development of its experimental HGP-30 AIDS Vaccine, if successful, would likely face intense competition from other companies seeking to find alternative or better ways to prevent and treat AIDS. Both the Company and VTI may encounter problems, delays and additional expenses in developing marketing plans with outside firms. In addition, the Company and VTI may experience other limitations involving the proposed sale of their products, such as uncertainty of third-party reimbursement. There is no assurance that the Company or VTI can successfully market any products which they may develop or market them at competitive prices. The clinical trials funded to date by VTI have not been approved by the FDA, but rather have been conducted pursuant to approvals obtained from certain states and foreign countries. Since the results of these clinical trials may not be accepted by the FDA, companies which are conducting clinical trials approved by the FDA may have a competitive advantage in that the products of such companies are further advanced in the regulatory process than those of VTI. Notwithstanding the above, VTI's primary objective is to develop an AIDS vaccine for use in Africa and Asia. As such, the Company does not consider the lack of FDA approval to be important at this time. ITEM 2. PROPERTIES The Company leases office space at 8229 Boone Blvd., Suite 802, Vienna, Virginia at a monthly rental of approximately $7,600. The Company believes this arrangement is adequate for the conduct of its present business. The Company also has a fully equipped 11,000 square foot laboratory. The laboratory is located in space which is leased by the Company for approximately $5,200 per month. The laboratory lease expires in 2004, with extensions available until 2014. ITEM 3. LEGAL PROCEEDINGS On November 24, 1999 F. Donald Hudson and Mark V. Soresi, two former directors of the Company, filed a lawsuit in the United States District Court for the District of Colorado against the Company. Also named in the lawsuit were the Company's four present directors: Maximilian de Clara, Geert R. Kersten, Alexander G. Esterhazy, and John M. Jacquemin. The complaint alleges that the proxy statement filed in connection with the April 12, 1999 meeting of the Company's Shareholders was false and misleading in that it failed to disclose, among other things, (i) that Hudson and Soresi were concerned that the compensation paid to the Company's President, Maximilian de Clara was excessive, and (ii) that the proxy statement also did not disclose certain transactions between the Company and Mr. de Clara which the plaintiffs contend were improper. The complaint also alleges that Mr. de Clara and Mr. Kersten breached their fiduciary duties to the Company by improperly calling and holding the April 12, 1999 shareholders' meeting and by engaging in transactions which were unfair to the Company. Based upon the foregoing allegations the plaintiffs have requested the court to declare the election of directors at the April 12, 1999 shareholders' meeting to be void, to order a new election of directors, to award unspecified damages against the individual defendants named in the complaint and for other relief. In their answer to the plaintiffs' complaint the Company and the Company's directors intend to deny the allegations in the complaint. It is the Company's position, as well as that of the Company directors, that (i) the compensation paid to Mr. de Clara was approved by Hudson and Soresi when they were directors of the Company, (ii) the proxy statement sent to the Company's shareholders in connection with the April 12, 1999 shareholders' meeting was not false and misleading, (iii) the April 12, 1999 shareholders' meeting was properly called, (iv) the election of the Company's directors at the meeting was valid, and (v) neither Mr. de Clara nor Mr. Kersten participated in any improper transactions involving the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of December 20, 1999 there were approximately 2,680 record holders of the Company's common stock. The Company's common stock is traded on the American Stock Exchange. Set forth below are the range of high and low quotations for the Company's common stock for the periods indicated as reported the American Stock Exchange. The market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. Quarter Ending High Low 12/31/97 $10.00 $5.87 3/31/98 $ 6.56 $4.00 6/30/98 $ 6.44 $4.44 9/30/98 $ 5.94 $1.94 12/31/98 $ 3.50 $1.50 3/31/99 $ 2.75 $1.63 6/30/99 $ 3.38 $1.81 9/30/99 $ 3.81 $1.88 Holders of Common Stock are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor and, in the event of liquidation, to share pro rata in any distribution of the Company's assets after payment of liabilities. The Board of Directors is not obligated to declare a dividend. The Company has not paid any dividends on its common stock and the Company does not have any current plans to pay any common stock dividends. The provisions in the Company's Articles of Incorporation relating to the Company's Preferred Stock would allow the Company's directors to issue Preferred Stock with rights to multiple votes per share and dividend rights which would have priority over any dividends paid with respect to the Company's Common Stock. The issuance of Preferred Stock with such rights may make more difficult the removal of management even if such removal would be considered beneficial to shareholders generally, and will have the effect of limiting shareholder participation in certain transactions such as mergers or tender offers if such transactions are not favored by incumbent management. The market price of the Company's common stock, as well as the securities of other biopharmaceutical and biotechnology companies, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new therapeutic products by the Company or its competitors, governmental regulation, developments in patent or other proprietary rights, public concern as to the safety of products developed by the Company or other biotechnology and pharmaceutical companies, and general market conditions may have a significant effect on the market price of the Company's Common Stock. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the more detailed financial statements, related notes and other financial information included herein. For the Years Ended September 30, 1999 1998 1997 1996 1995 ---- ---- ------ ------ ---- Investment Income and Other Revenues $469,518 $792,994 $ 438,145 $ 322,370 $423,765 Expenses: Research and Development 4,461,051 3,833,854 6,011,670 3,471,477 1,824,661 Depreciation and Amortization 268,210 295,331 313,547 290,829 262,705 General and Administrative 3,230,982 3,106,492 2,302,386 2,882,958 1,713,912 Equity in loss of joint venture -- -- -- 3,772 501,125 ----------------------------------------------------------- Net Loss $(7,490,725)$(6,442,683)$(8,189,458) $(6,326,666)$(3,878,638) ============ ========== ============ =========== ============ Loss per common share (basic and diluted) $(0.52) $(0.74) $(1.00) $(1.16) $(0.89) Weighted average common Shares outstanding14,484,352 11,379,437 9,329,419 6,425,316 4,342,628 Balance Sheet Data: September 30, 1999 1998 1997 1996 1995 ---- ---- ----- ----- ---- Working Capital $6,152,715 $12,926,014 $4,581,247 $10,266,104 $3,983,699 Total Assets 7,559,772 14,431,813 6,334,397 11,878,370 6,359,011 Total Liabilities 461,586 456,529 508,617 294,048 1,516,978 Shareholders' Equity 7,098,186 13,975,284 5,825,780 11,584,322 4,842,033 No dividends have been declared on the Company's common stock. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Fiscal 1999 Interest income during the year ending September 30, 1999 reflects interest received and accrued on investments. Interest income decreased as the Company used the proceeds of the sale of the Series D Preferred Stock. Research and development expense in 1999 was higher than in 1998 because the Company is running more and larger clinical trials. General and administrative expenses have increased due to the addition of more employees needed for the increased activity level. Fiscal 1998 Interest income during the year ending September 30, 1998 reflects interest accrued on investments. Interest income increased from fiscal 1997 due to the investment of the proceeds of the sale of the Series D Preferred Stock. Research and development expenses in 1998 are substantially less then the prior period since the costs of acquiring the MULTIKINE license and the LEAPS technology were expensed in fiscal 1997. General and administrative expenses increased due to additional employees needed for the Company's increased activity level and charges ($587,377) for options granted to persons other than employees with exercise prices equal to prevailing market prices at the time of grant. Fiscal 1997 Interest income during the year ending September 30, l997 reflects interest earned on investments. Research and development expenses have increased due to the beginning of new clinical studies with cancer and AIDS patients. Research and development expenses also increased due to the purchase of the MULTIKINE rights from the Sittona Company ($2,250,000), which was expensed as research and development expenses, as well as the payment to to Cell-Med ($125,000) to retain ownership of the LEAPS technology. Fiscal 1996 Interest income during the year ending September 30, l996 reflects interest earned on investments. Other revenues were derived from commercial services provided by the Company's laboratory. Research and development expenses increased significantly due to the Company's new clinical trials as well as the consolidation of VTI, as explained below. Prior to October 30, 1995, VTI was owned 50% by the Company and 50% by Alpha 1 Biomedicals, Inc. Effective October 30, 1995 the Company acquired Alpha 1's interest in VTI in exchange for 159,170 shares of the Company's common stock. Prior to this acquisition the Company accounted for its investment in VTI using the equity method of accounting. Following the acquisition of the remaining 50% interest in VTI on October 30, 1995, the financial statements of VTI have been consolidated with those of the Company. The acquisition of VTI was accounted for under the purchase method of accounting. Since the acquisition represented primarily research and development costs, the purchase price for the remaining 50% interest in VTI was expensed and caused research and development expense for the year ended September 30, 1996 to increase. The consolidation of VTI's financial statements with those of the Company also had the following effects: 1. Interest income declined from the comparable period in the previous year since interest income associated with the Company's loans to VTI was eliminated upon consolidation. 2. Research and development expenses increased due to the inclusion of VTI's research and development expenses with those of the Company. 3. General and administrative expenses increased due to the inclusion of VTI's general and administrative expenses with those of the Company. 4. Capitalized patent costs increased due to the inclusion of VTI's patent expenditures with those of the Company. Restatement Subsequent to the issuance of the Company's 1997 consolidated financial statements, the Company determined that the application of a technical accounting treatment required the 1997 and 1996 loss per share calculations to include the impact of $1,062,482 and $1,039,679 respectively, for the accretion of the assumed beneficial conversion features, and $108,957 and $58,794, respectively, for preferred stock dividends, with respect to the issuance of the Series A, Series B and Series C Preferred Stock during fiscal 1997 and 1996. The effect of the accretion is a non-cash charge to additional paid-in capital and does not impact the previously reported net loss for the years ended September 30, 1997 and 1996, nor does it result in a net change to stockholders' equity at September 30, 1997 and 1996. The effect of the restatement was to increase net loss per share by $0.12 to $1.00 for the year ended September 30, 1997, and $0.18 to $1.16 for the year ended September 30, 1996. Liquidity and Capital Resources The Company has had only limited revenues from operations since its inception in March l983. The Company has relied upon proceeds realized from the public and private sale of its Common Stock to meet its funding requirements. Funds raised by the Company have been expended primarily in connection with the acquisition of an exclusive worldwide license to certain patented and unpatented proprietary technology and know-how relating to the human immunological defense system, the funding of VTI's research and development program, patent applications, the repayment of debt, the continuation of Companysponsored research and development, administrative costs and construction of laboratory facilities. Inasmuch as the Company does not anticipate realizing revenues until such time as it enters into licensing arrangements regarding the technology and know-how licensed to it (which could take a number of years), the Company is mostly dependent upon the proceeds from the sale of its securities to meet all of its liquidity and capital resource requirements. In May 1996, the Company sold 3,500 shares of its Series A Convertible Preferred Stock for $3,500,000 or $1,000 per share. All outstanding shares of the Series A Preferred Stock have since been converted into 632,041 shares of the Company's Common Stock. In August 1996, the Company sold, in a private transaction, 5,000 shares of its Series B Convertible Preferred Stock for $5,000,000 or $1,000 per share. Prior to December 20, 1996, 1,900 Series B Preferred Shares were converted into 527,774 shares of the Company's common stock. In December 1996 the Company repurchased 2,850 Series B Preferred Shares for $2,850,000 plus warrants which allowed the holders to purchase up to 99,750 shares of the Company's common stock for $4.25 per share at any time prior to December 15, 1999. The Company raised funds required for this repurchase from the sale of its Series C Preferred Stock. In May 1997 all remaining 250 shares of the Series B Preferred Stock were converted into 69,444 shares of common stock. In October 1997 17,500 warrants were exercised at $4.25 per share. On December 15, 1999 the remaining 82,250 warrants expired. In December 1996, the Company authorized the issuance of 3,500 shares of Series C Preferred Stock with a par value of $.01 per share. Subsequent to the establishment of the Series C Preferred Stock the Company raised $2,850,000 from the sale of units consisting of 2,850 shares of the Company's Series C Convertible Preferred Stock, 379,763 Series A Warrants and 379,763 Series B Warrants. Each Series A Warrant entitled the holder to purchase one share of the Company's common stock at a price of $4.50 per share at any time prior to March 15, 1998. Each Series B Warrant entitled the holder to purchase one share of the Company's common stock at a price of $4.50 per share at any time prior to March 15, 1999. By June 30, 1997 all Series C Preferred Shares had been converted into 915,271 shares of the Company's common stock and all Series A Warrants and 253,175 Series B Warrants had been exercised. The remaining Series B Warrants expired in March 1999. In December 1997, the Company sold 10,000 shares of its Series D Convertible Preferred Stock, 550,000 Series A Warrants and 550,000 Series B Warrants, to ten institutional investors for $10,000,000. Each Series A Warrant allows the holder to purchase one share of the Company's common stock for $8.62 at any time prior to December 22, 2001. Each Series B Warrant allows the holder to purchase one share of the Company's Common Stock for $9.31 at any time prior to December 22, 2001. The Company has filed a registration statement with the Securities and Exchange Commission covering the sale of the common stock issuable upon the conversion of the Series D Preferred Stock and/or the exercise of the Series A and Series B Warrants. As of December 15, 1999 all Series D Preferred Shares had been converted into 5,201,460 shares of the Company's common stock. None of the Series A or Series B warrants have been exercised. In December 1999, the Company sold 1,025,641 shares of its common stock, plus warrants for the purchase of an additional 358,974 shares of common stock to a group of private investors for $2,500,000. The warrants are exercisable at a price of $2.925 per share at any time prior to December 8, 2002. The investors in this private offering also received warrants which allow the investors, under certain circumstances, to acquire additional shares of the Company's common stock at a nominal price in the event (i) the price of the Company's common stock falls below $2.44 per share or (ii) the Company raises in excess of $1,000,000 at a price which is below either the then prevailing market price of the Company's common stock or $2.44 per share. During fiscal 2000, the Company expects that it will spend between $3,500,000 and $4,500,000 on research, development, and clinical trials. However, the Company's expenditures in this area are difficult to predict since the Company, as of December 15, 1999, was preparing to begin a Phase III study with respect to the use of Multikine in the treatment of head and neck cancer. The Company plans to use its existing financial resources to fund its research and development program during this period. Other than funding its research and development program, the Company does not have any material capital commitments. It should be noted that substantial additional funds will be needed for more extensive clinical trials which will be necessary before the Company or VTI will be able to apply to the FDA for approval to sell any products which may be developed on a commercial basis throughout the United States. In the absence of revenues, the Company will be required to raise additional funds through the sale of securities, debt financing or other arrangements in order to continue with its research efforts. However, there can be no assurance that such financing will be available or be available on favorable terms. Year 2000. The Company has modified its computer hardware and software systems to recognize the year 2000. These modifications did not have a significant effect on the Company's operations and the costs of the modifications were insignificant. The Company continues to evaluate significant vendors and other third parties which could have an effect on the Company's operations to ensure year 2000 compliance. If the Company's computer systems fail during the year 2000, the Company may need to have independent laboratories perform some of the research that is presently being conducted by the Company's laboratory. Since the Company believes its computer systems are compliant with the year 2000, the Company has not developed any contingency plans in the event the Company's computer systems fail to be year 2000 compliant. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Financial Statements included with this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Officers and Directors Name Age Position Maximilian de Clara 69 Director and President Geert R. Kersten, Esq. 40 Director, Chief Executive Officer, Secretary and Treasurer Patricia B. Prichep 48 Senior Vice President of Operations M. Douglas Winship 50 Senior Vice President of Regulatory Affairs and Quality Assurance Dr. Eyal Talor 43 Senior Vice President of Research and Manufacturing Dr. Prem S. Sarin 65 Senior Vice President of Research, Infectious Diseases Dr. Daniel H. Zimmerman 58 Senior Vice President of Research, Cellular Immunology Michael Luecke 57 Senior Vice President of Business Development Alexander G. Esterhazy 55 Director John M. Jacquemin 52 Director The directors of the Company serve in such capacity until the next annual meeting of the Company's shareholders and until their successors have been duly elected and qualified. The officers of the Company serve at the discretion of the Company's directors. Mr. Maximilian de Clara, by virtue of his position as an officer and director of the Company, may be deemed to be the "parent" and "founder" of the Company as those terms are defined under applicable rules and regulations of the Securities and Exchange Commission. The principal occupations of the Company's officers and directors, during the past several years, are as follows: Maximilian de Clara. Mr. de Clara has been a Director of the Company since its inception in March l983, and has been President of the Company since July l983. Prior to his affiliation with the Company, and since at least l978, Mr. de Clara was involved in the management of his personal investments and personally funding research in the fields of biotechnology and biomedicine. Mr. de Clara attended the medical school of the University of Munich from l949 to l955, but left before he received a medical degree. During the summers of l954 and l955, he worked as a research assistant at the University of Istanbul in the field of cancer research. For his efforts and dedication to research and development in the fight against cancer and AIDS, Mr. de Clara was awarded the "Pour le Merit" honorary medal of the Austrian Military Order "Merito Navale" as well as the honor cross of the Austrian Albert Schweitzer Society. Geert R. Kersten, Esq. Mr. Kersten was Director of Corporate and Investment Relations for the Company between February 1987 and October 1987. In October of 1987, he was appointed Vice President of Operations. In December 1988, Mr. Kersten was appointed Director of the Company. Mr. Kersten also became the Company's Secretary and Treasurer in 1989. In May 1992, Mr. Kersten was appointed Chief Operating Officer and in February 1995, Mr. Kersten became the Company's Chief Executive Officer. In previous years, Mr. Kersten worked as a financial analyst with Source Capital, Ltd., an investment advising firm in McLean, Virginia. Mr. Kersten is a stepson of Maximilian de Clara, who is the President and a Director of the Company. Mr. Kersten attended George Washington University in Washington, D.C. where he earned a B.A. in Accounting and an M.B.A. with emphasis on International Finance. He also attended law school at American University in Washington, D.C. where he received a Juris Doctor degree. Patricia B. Prichep has been the Company's Senior Vice President of Operations since March 1994. Between December 1992 and March 1994, Ms. Prichep was the Company's Director of Operations. From June 1990 to December 1992, Ms. Prichep was the Manager of Quality and Productivity for the NASD's Management, Systems and Support Department. Between 1982 and 1990, Ms. Prichep was Vice President and Operations Manager for Source Capital, Ltd. M. Douglas Winship has been the Company's Senior Vice President of Regulatory Affairs and Quality Assurance since April 1994. Between 1988 and April 1994, Mr. Winship held various positions with Curative Technologies, Inc., including Vice President of Regulatory Affairs and Quality Assurance (1991-1994). Eyal Talor, Ph.D. has been the Company's Senior Vice President of Research and Manufacturing since March 1994. From October 1993 until March 1994, Mr. Talor was Director of Research, Manufacturing and Quality Control, as well as the Director of the Clinical Laboratory, for Chesapeake Biological Laboratories, Inc. From 1991 to 1993, Mr. Talor was a scientist with SRA Technologies, Inc., as well as the director of SRA's Flow Cytometry Laboratory (1991-1993) and Clinical Laboratory (1992-1993). During 1992 and 1993, Mr. Talor was also the Regulatory Affairs and Safety Officer For SRA. Since 1987, Mr. Talor has held various positions with the John Hopkins University, including course coordinator for the School of Continuing Studies (1989-Present), research associate and lecturer in the Department of Immunology and Infectious Diseases (1987-1991), and associate professor (1991-Present). Prem S. Sarin, Ph.D. has been the Company's Senior Vice President of Research, Infectious Diseases since October 1995. From May 1993 to September 1995 Dr. Sarin was the Vice President of Research for Viral Technologies, Inc. (the Company's wholly-owned subsidiary). Dr. Sarin was an Adjunct Professor of Biochemistry at the George Washington University School of Medicine, Washington, D.C., from 1986-1992. From 1975-1991 Dr. Sarin held the position of Deputy Chief, Laboratory of Tumor Cell Biology at the National Cancer Institute (NCI), NIH, Bethesda, Maryland. Dr. Sarin was a Senior Investigator (1974-1975) and a Visiting Scientist (1972-1974) at the Laboratory of Tumor Cell Biology at NCI, NIH. From 1971-1972 Dr. Sarin held the position of Director, Department of Molecular Biology, Bionetics Research Laboratory, Bethesda, Maryland. Daniel H. Zimmerman, Ph.D. has been the Company's Senior Vice President of Cellular Immunology since January 1996. Dr. Zimmerman founded CELL-MED, Inc. and was its president from 1987-1995. From 1973 to 1987 Dr. Zimmerman served in various positions at Electronucleonics, Inc. including Scientist, Senior Scientist, Technical Director and Program Manager. From 1969-1973 Dr. Zimmerman was a Senior Staff Fellow at NIH. Michael Luecke joined the Company as Senior Vice President of Business Development in June 1998. Mr. Luecke has over 20 years of business experience in pharmaceutical and biotechnology companies. He has held senior-level business development/licensing positions with Bristol-Myers, SmithKline and Ciba-Geigy, as well as several small biopharmaceutical companies. Alexander G. Esterhazy has been an independent financial advisor since November 1997. Between July 1991 and October 1997 Mr. Esterhazy was a senior partner of Corpofina S.A. Geneva, a firm engaged in mergers, acquisitions and portfolio management. Between January 1988 and July 1991 Mr. Esterhazy was a managing director of DG Bank in Switzerland. During this period Mr. Esterhazy was in charge of the Geneva, Switzerland branch of the DG Bank, founded and served as vice president of DG Finance (Paris) and was the President and Chief Executive officer of DG-Bourse, a securities brokerage firm. John M. Jacquemin has, since 1982, been the President of Mooring Financial Corporation, a company specializing in the origination, purchase and administration of commercial loan portfolios, equipment leases and real estate mortgages. Between 1977 and 1982 Mr. Jacquemin was Vice President of CFC Corporation, a company involved in title insurance, fire and casualty insurance, equipment leasing and real estate development. All of the Company's officers devote substantially all of their time on the Company's business. Messrs. Esterhazy and Jacquemin, as directors, devote only a minimal amount of time to the Company. The Company has an audit committee and compensation committee. The members of the audit committee are Geert Kersten, Alexander Esterhazy, and John Jacquemin. The members of the compensation committee are Maximilian de Clara, Alexander Esterhazy, and John Jacquemin. Executive Compensation The following table sets forth in summary form the compensation received by (i) the Chief Executive Officer of the Company and (ii) by each other executive officer of the Company who received in excess of $100,000 during the fiscal year ended September 30, 1999. Re- All Other stric- Other Annual ted Com- Compen- Stock Options pensa- Name and Princi- Fiscal Salary Bonus sation Awards Granted tion pal Position Year (1) (2) (3) (4) (5) (6) Maximilian 1999 $335,292 -- $72,945 $435,625 145,000 $ 63 de Clara, 1998 $315,021 -- $81,709 -- 164,000 $ 73 President 1997 $319,104 -- $76,290 -- 333,000 $ 88 Geert R. Kersten, 1999 $268,480 $15,154 $10,000 145,000 $4,113 Chief Executive 1998 $229,533 -- $15,180 $7,500 164,000 $5,310 Officer, Secretary 1997 $228,888 -- $12,314 -- 313,000 $8,888 and Treasurer Patricia B. Prichep 1999 $107,936 -- $3,000 $6,476 79,500 $ 63 Senior Vice President of Operations M. Douglas Winship, 1999 $146,609 -- $2,400 $8,797 27,500 $ 63 Senior Vice Presi- 1998 $136,918 -- $2,400 $6,240 -- $1,060 dent of Regulatory 1997 $129,926 -- $2,400 -- 45,000 $3,152 Affairs and Quality Assurance Eyal Talor, Ph.D. 1999 $139,085 -- $3,000 $8,345 30,000$ 63 Senior Vice Presi- 1998 $130,845 -- $3,000 $5,769 27,000 $ 958 dent of Research 1997 $119,333 -- $3,000 -- 58,000 $3,668 and Manufacturing Prem S. Sarin, Ph.D. 1999 $124,199 $7,452 42,000 $ 63 Senior Vice Presi- 1998 $117,035 -- -- $5,326 39,000 $ 929 Dent of Research, 1997 $113,385 -- -- -- 34,000 $3,473 Infectious Diseases Daniel Zimmerman, 1999 $114,806 -- $3,000 $6,888 45,000 $ 63 Ph.D., 1998 $106,360 -- $3,000 $4,882 39,000 822 Senior Vice 1997 $104,000 -- -- -- 34,000 $3,208 President of Cellular Immunology Michael Luecke, 1999 $150,000 -- -- $8,875 -- $ 63 Senior Vice President of Business Development (1) The dollar value of base salary (cash and non-cash) received. (2) The dollar value of bonus (cash and non-cash) received. (3) Any other annual compensation not properly categorized as salary or bonus, including perquisites and other personal benefits, securities or property. Amounts in the table represent automobile, parking and other transportation expenses, plus, in the case of Maximilian de Clara and Geert Kersten, director's fees of $8,000. (4) During the periods covered by the table, the value of the shares of restricted stock issued as compensation for services to the persons listed in the table. In the case of Mr. de Clara, the shares were issued in consideration for past services rendered to the Company. In the case of all other persons listed in the table, the shares were issued as the Company's contribution on behalf of the named officer to the Company's 401(k) retirement plan. As of September 30, 1999, the number of shares of the Company's common stock, owned by the officers included in the table above, and the value of such shares at such date, based upon the market price of the Company's common stock were: Name Shares Value Maximilian de Clara 100,000 $269,000 Geert R. Kersten 111,737 $300,573 Patricia B. Prichep 7,336 $ 19,734 M. Douglas Winship 5,867 $ 15,782 Eyal Talor, Ph.D. 7,038 $ 18,932 Prem S. Sarin, Ph.D. 4,993 $ 13,431 Daniel Zimmerman, Ph.D. 24,602 $ 66,179 Michael Luecke 5,074 $ 13,649 Dividends may be paid on shares of restricted stock owned by the Company's officers and directors, although the Company has no plans to pay dividends. (5) The shares of Common Stock to be received upon the exercise of all stock options granted during the periods covered by the Table. Includes certain options issued in connection with the Company's Salary Reduction Plans as well as certain options purchased from the Company. See "Options Granted During Fiscal Year Ending September 30, l999" below. (6) All other compensation received that the Company could not properly report in any other column of the Table including annual Company contributions or other allocations to vested and unvested defined contribution plans, and the dollar value of any insurance premiums paid by, or on behalf of, the Company with respect to term life insurance for the benefit of the named executive officer, and the full dollar value of the remainder of the premiums paid by, or on behalf of, the Company. Amounts in the table represent life insurance premiums. Long Term Incentive Plans - Awards in Last Fiscal Year None. Employee Pension, Profit Sharing or Other Retirement Plans During 1993 the Company implemented a defined contribution retirement plan, qualifying under Section 401(k) of the Internal Revenue Code and covering substantially all the Company's employees. Prior to January 1, 1998 the Company's contribution was equal to the lesser of 3% of each employee's salary, or 50% of the employee's contribution. Effective January 1, 1998 the plan was amended such that the Company's contribution is now made in shares of the Company's common stock as opposed to cash. Each participant's contribution is matched by the Company with shares of common stock which have a value equal to 100% of the participant's contribution, not to exceed the lesser of $1,000 or 6% of the participant's total compensation. The Company's contribution of common stock is valued each quarter based upon the closing price of the Company's common stock. The fiscal 1999 expenses for this plan were $86,954. Other than the 401(k) Plan, the Company does not have a defined benefit, pension plan, profit sharing or other retirement plan. Compensation of Directors Standard Arrangements. The Company currently pays its directors $2,000 per quarter, plus expenses. The Company has no standard arrangement pursuant to which directors of the Company are compensated for any services provided as a director or for committee participation or special assignments. Other Arrangements. The Company has from time to time granted options to its outside directors. See Stock Options below for additional information concerning options granted to the Company's directors. Employment Contracts Effective April 12, 1999, the Company entered into a three-year employment agreement with Mr. de Clara. The employment agreement provides that the Company will pay Mr. de Clara an annual salary of $363,000 during the term of the agreement. In the event that there is a material reduction in Mr. de Clara's authority, duties or activities, or in the event there is a change in the control of the Company, then the agreement allows Mr. de Clara to resign from his position at the Company and receive a lump-sum payment from the Company equal to 18 months salary. For purposes of the employment agreement, a change in the control of the Company means the sale of more than 50% of the outstanding shares of the Company's Common Stock, or a change in a majority of the Company's directors. Effective August 1, 1997, the Company entered into a three-year employment agreement with Mr. Kersten. The employment agreement provides that during the period between August 1, 1997 and July 31, 1998, the Company will pay Mr. Kersten an annual salary of $264,848. During the years ending July 31, 1999 and 2000, the Company will pay Mr. Kersten a salary of $291,333 and $320,466 respectively. In the event that there is a material reduction in Mr. Kersten's authority, duties or activities, or in the event there is a change in the control of the Company, the agreement allows Mr. Kersten to resign from his position at the Company and receive a lump-sum payment from the Company equal to 18 months salary. For purposes of the employment agreement, a change in the control of the Company means the sale of more than 50% of the outstanding shares of the Company's Common Stock, or a change in a majority of the Company's directors. Compensation Committee Interlocks and Insider Participation The Company has a compensation committee comprised of all of the Company's directors, with the exception of Mr. Kersten. During the year ended September 30, 1999, Mr. de Clara was the only officer participating in deliberations of the Company's compensation committee concerning executive officer compensation. During the year ended September 30, 1999, no director of the Company was also an executive officer of another entity, which had an executive officer of the Company serving as a director of such entity or as a member of the compensation committee of such entity. Stock Options The following tables set forth information concerning the options granted during the fiscal year ended September 30, 1999, to the persons named below, and the fiscal year-end value of all unexercised options (regardless of when granted) held by these persons. Options Granted During Fiscal Year Ending September 30, l999 Individual Grants Potential - --------------------------------------------------------------- Realizable Value at % of Total Assumed Annual Options Rates of Stock Price Granted to Exercise Appreciation for Options Employees in Price Per Expiration Option Term (2) Name Granted (#) Fiscal Year Share Date 5% 10% - ------- ---------- ------------ --------- --------- ----- ----- Maximilian 95,000 (1) $1.94 8/31/03 $38,950 $ 85,500 de Clara 50,000 $2.06 4/12/09 $65,000 $164,000 -------- 145,000 21.4% Geert R. 95,000 (1) $1.94 8/31/03 $38,950 $ 85,500 Kersten 50,000 $2.06 4/12/09 $65,000 $164,000 -------- 145,000 21.4% Patricia B. 47,500 (1) $1.94 8/31/03 $19,145 $42,750 Prichep 17,000 $2.31 12/01/08 $24,650 $62,560 15,000 $2.06 4/12/99 $19,500 $49,200 ------- 79,500 11.8% ======= M. Douglas 12,500 (1) $1.94 8/31/03 $ 5,125 $11,250 Winship 15,000 $2.06 4/12/09 $19,500 $49,200 ------- 27,500 4% ======== Eyal 10,000 (1) $1.94 8/31/03 $ 4,100 $ 9,000 Talor, Ph.D. 20,000 $2.06 8/2/09 $26,000 $65,600 ------- 30,000 4.4% Prem S. 30,000 (1) $1.94 8/31/03 $12,300 $27,000 Sarin, Ph.D. 12,000 $2.50 5/3/09 $18,840 $47,812 ------- 42,000 6.2% Daniel 30,000 (1) $1.94 8/31/03 $12,300 $27,000 Zimmerman, 15,000 $2.06 4/12/09 $19,500 $49,200 ------- Ph.D. 45,000 6.6% Michael -- -- -- -- -- -- Luecke -- -- -- -- -- --
(1) Options were granted in accordance with the Company's Salary Reduction Plan. Pursuant to the Salary Reduction Plan, any employee of the Company was allowed to receive options (exercisable at market price at time of grant) in exchange for a one-time reduction in such employee's salary. (2) The potential realizable value of the options shown in the table assuming the market price of the Company's Common Stock appreciates in value from the date of the grant to the end of the option term at 5% or 10%. Option Exercises and Year-End Option Values Value (in $) of Unexercised In-the- Number of Money Options Unexercised at Fiscal Shares Options (3) Year-End ( Acquired On Value Exercisable/ Exercisable/ Name Exercise (1) Realized (2) Unexercisable Unexercisable - ---- --------- ---------- ------------ ------------- Maximilian de Clara -- -- 483,667/234,999 0/102,750 Geert R. Kersten -- -- 892,417/228,333 69,440/102,750 Patricia Prichep -- -- 137,334/92,166 6,200/51,535 M. Douglas Winship -- -- 52,000/42,500 0/18,825 Eyal Talor -- -- 73,834/6,666 0/20,100 Prem S. Sarin -- -- 94,167/55,333 6,200/24,780 Daniel Zimmerman -- -- 71,667/58,333 0/31,950 Michael Luecke -- -- 25,000/75,000 -/- (1) The number of shares received upon exercise of options during the fiscal year ended September 30, 1999. (2) With respect to options exercised during the Company's fiscal year ended September 30, 1999, the dollar value of the difference between the option exercise price and the market value of the option shares purchased on the date of the exercise of the options. (3) The total number of unexercised options held as of September 30, 1999, separated between those options that were exercisable and those options that were not exercisable. (4) For all unexercised options held as of September 30, 1999, the market value of the stock underlying those options as of September 30, 1999. Stock Option and Bonus Plans The Company has Incentive Stock Option Plans, Non-Qualified Stock Option Plans and Stock Bonus Plans. A summary description of these Plans follows. In some cases these Plans are collectively referred to as the "Plans". Incentive Stock Option Plan. The Incentive Stock Option Plans collectively authorize the issuance of up to 1,100,000 shares of the Company's Common Stock to persons that exercise options granted pursuant to the Plan. Only Company employees may be granted options pursuant to the Incentive Stock Option Plan. To be classified as incentive stock options under the Internal Revenue Code, options granted pursuant to the Plans must be exercised prior to the following dates: (a) The expiration of three months after the date on which an option holder's employment by the Company is terminated (except if such termination is due to death or permanent and total disability); (b) The expiration of 12 months after the date on which an option holder's employment by the Company is terminated, if such termination is due to the Employee's permanent and total disability; (c) In the event of an option holder's death while in the employ of the Company, his executors or administrators may exercise, within three months following the date of his death, the option as to any of the shares not previously exercised; The total fair market value of the shares of Common Stock (determined at the time of the grant of the option) for which any employee may be granted options which are first exercisable in any calendar year may not exceed $100,000. Options may not be exercised until one year following the date of grant. Options granted to an employee then owning more than 10% of the Common Stock of the Company may not be exercisable by its terms after five years from the date of grant. Any other option granted pursuant to the Plan may not be exercisable by its terms after ten years from the date of grant. The purchase price per share of Common Stock purchasable under an option is determined by the Committee but cannot be less than the fair market value of the Common Stock on the date of the grant of the option (or 110% of the fair market value in the case of a person owning more than 10% of the Company's outstanding shares). Non-Qualified Stock Option Plan. The Non-Qualified Stock Option Plans collectively authorize the issuance of up to 2,760,000 shares of the Company's Common Stock to persons that exercise options granted pursuant to the Plans. The Company's employees, directors, officers, consultants and advisors are eligible to be granted options pursuant to the Plans, provided however that bona fide services must be rendered by such consultants or advisors and such services must not be in connection with the offer or sale of securities in a capital-raising transaction. The option exercise price is determined by the Committee but cannot be less than the market price of the Company's Common Stock on the date the option is granted. Stock Bonus Plan. Up to 340,000 shares of Common Stock may be granted under the Stock Bonus Plan. Such shares may consist, in whole or in part, of authorized but unissued shares, or treasury shares. Under the Stock Bonus Plan, the Company's employees, directors, officers, consultants and advisors are eligible to receive a grant of the Company's shares, provided however that bona fide services must be rendered by consultants or advisors and such services must not be in connection with the offer or sale of securities in a capital-raising transaction. Other Information Regarding the Plans. The Plans are administered by the Company's Compensation Committee ("the Committee"), each member of which is a director of the Company. The members of the Committee were selected by the Company's Board of Directors and serve for a one-year tenure and until their successors are elected. A member of the Committee may be removed at any time by action of the Board of Directors. Any vacancies which may occur on the Committee will be filled by the Board of Directors. The Committee is vested with the authority to interpret the provisions of the Plans and supervise the administration of the Plans. In addition, the Committee is empowered to select those persons to whom shares or options are to be granted, to determine the number of shares subject to each grant of a stock bonus or an option and to determine when, and upon what conditions, shares or options granted under the Plans will vest or otherwise be subject to forfeiture and cancellation. In the discretion of the Committee, any option granted pursuant to the Plans may include installment exercise terms such that the option becomes fully exercisable in a series of cumulating portions. The Committee may also accelerate the date upon which any option (or any part of any options) is first exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock Option Plan will be forfeited if the "vesting" schedule established by the Committee administering the Plan at the time of the grant is not met. For this purpose, vesting means the period during which the employee must remain an employee of the Company or the period of time a non-employee must provide services to the Company. At the time an employee ceases working for the Company (or at the time a non-employee ceases to perform services for the Company), any shares or options not fully vested will be forfeited and cancelled. At the discretion of the Committee payment for the shares of Common Stock underlying options may be paid through the delivery of shares of the Company's Common Stock having an aggregate fair market value equal to the option price, provided such shares have been owned by the option holder for at least one year prior to such exercise. A combination of cash and shares of Common Stock may also be permitted at the discretion of the Committee. Options are generally non-transferable except upon death of the option holder. Shares issued pursuant to the Stock Bonus Plan will generally not be transferable until the person receiving the shares satisfies the vesting requirements imposed by the Committee when the shares were issued. The Board of Directors of the Company may at any time, and from time to time, amend, terminate, or suspend one or more of the Plans in any manner they deem appropriate, provided that such amendment, termination or suspension will not adversely affect rights or obligations with respect to shares or options previously granted. The Board of Directors may not, without shareholder approval: make any amendment which would materially modify the eligibility requirements for the Plans; increase or decrease the total number of shares of Common Stock which may be issued pursuant to the Plans except in the case of a reclassification of the Company's capital stock or a consolidation or merger of the Company; reduce the minimum option price per share; extend the period for granting options; or materially increase in any other way the benefits accruing to employees who are eligible to participate in the Plans. Summary. The following sets forth certain information, as of November 30, 1999, concerning the stock options and stock bonuses granted by the Company. Each option represents the right to purchase one share of the Company's Common Stock. Total Shares Shares Reserved for Shares Remaining Reserved Outstanding Issued as Options/Shares Name of Plan Under Plans Options Stock Bonus Under Plans Incentive Stock Option Plans 1,100,000 929,350 N/A 152,483 Non-Qualified Stock Option Plans 2,760,000 2,224,090 N/A 177,526 Stock Bonus Plans 340,000 N/A 261,804 78,196 Of the shares issued pursuant to the Company's Stock Bonus Plans 58,400 shares were issued as part of the Company's contribution to its 401(k) plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of November 30, 1999, information with respect to the only persons owning beneficially 5% or more of the outstanding Common Stock and the number and percentage of outstanding shares owned by each director and officer and by the officers and directors as a group. Unless otherwise indicated, each owner has sole voting and investment powers over his shares of Common Stock. Name and Address Number of Shares (1) Percent of Class (3) - ---------------- ----------------- ---------------- Maximilian de Clara Bergstrasse 79 6078 Lungern, Obwalden, Switzerland 493,667 2.6% Geert R. Kersten 8229 Boone Blvd. Suite 802 Vienna, VA 22182 1,004,154 5.3% Patricia B. Prichep 8229 Boone Blvd. Suite 802 Vienna, VA 22182 151,337 * M. Douglas Winship 8229 Boone Blvd. Suite 802 Vienna, VA 22182 57,867 * Eyal Talor, Ph.D. 8229 Boone Blvd. Suite 802 Vienna, VA 22182 80,872 * Prem Sarin, Ph.D. 8229 Boone Blvd. Suite 802 Vienna, VA 22182 99,160 * Name and Address Number of Shares (1) Percent of Class (3) - ---------------- ----------------- ---------------- Daniel H. Zimmerman, Ph.D. 8229 Boone Blvd. Suite 802 Vienna, VA 22182 102,269 * Michael Luecke 8229 Boone Blvd. Suite 802 Vienna, VA 22182 30,074 * Alexander G. Esterhazy 20 Chemin du Pre-Poiset CH- 1253 Vandoeuvres Geneve, Switzerland 10,000 * John M. Jacquemin 8614 Westwood Center Drive Vienna, VA 22182 98,000 * All Officers and Directorsas a Group (10 persons) 2,127,400 10.5% *Less than 1% (1) Includes shares issuable prior to February 28, 2000 upon the exercise of options or warrants granted to the following persons: Options or Warrants Exercisable Name Prior to February 28, 2000 Maximilian de Clara 483,667 Geert R. Kersten 892,417 Patricia B. Prichep 144,001 M. Douglas Winship 52,000 Eyal Talor, Ph.D. 73,834 Prem Sarin, Ph.D. 94,167 Daniel H. Zimmerman, Ph.D. 77,667 Michael Luecke 25,000 Alexander G. Esterhazy 10,000 John M. Jacquemin 10,000 See Item 11 of this report for information concerning outstanding stock options. (2) Amount includes shares held in trust for the benefit of Mr. Kersten's minor children. Geert R. Kersten is the stepson of Maximilian de Clara. (3) Amount excludes shares which may be issued upon the exercise or conversion of other options, warrants and other convertible securities previously issued by the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) See the Financial Statements attached to this Report. (b) The Company did not file any reports on Form 8-K during the quarter ended September 30, 1999. (c) Exhibits Page Number 3(a) Articles of Incorporation Incorporated by reference to Exhibit 3(a) of the Company's combined Registration Statement on Form S-1 and Post-Effective Amendment ("Registration Statement"), Registration Nos. 2-85547-D and 33-7531. (b) Amended Articles Incorporated by reference to Exhibit3(a) of the Company's Registration Statement on Form S-1 Registration Nos. 2-85547-D and 33-7531. (c) Amended Articles Incorporated by reference to Exhibit (Name change only) 3(c) filed with Registration Statement on Form S-1 (No. 33-34878). (d) Bylaws Incorporated by reference to Exhibit 3(b) of the Company's Registration Statement on Form S-1, Registration Nos. 2-85547-D and 33-7531. 4(a) Specimen copy of Stock Certificate Incorporated by reference to Exhibit 4(a) of the Company's Registration Statement on Form S-1, Registration Nos. 2-85547-D and 33-7531. 4(c) Form of Common Stock Incorporated by reference to Exhibit Purchase Warrant 4(c) filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-43281). 10(a) Purchase Agreement Incorporated by reference to Exhibit dated April 21, 1986 10(a) of the Company's Registration with Alpha I Biomedical Statement on Form S-1, Registration Nos. 2-85547-D and 33-7531. (b) Agreement with Sittona Incorporated by reference to Exhibit Company B.V. dated 10(c) of the Company's Registration May 3, 1983 Statement on Form S-1, Registration Nos. 2-85547-D and 33-7531. (c) Addendum effective May 3, Incorporated by reference to Exhibit 1983 to Licensing Agreement 10(e) of the Company's Registration with Sittona Company, B.V. Statement of Form S-1, Registration Nos. 2-85547-D and 33-7531. (d) Addendum effective October Incorporated by reference to Exhibit 13, 1989 to Licensing Agree- 10(d) of Company's Annual Report ment with Sittona Company, on Form 10-K for the year ended B.V. September 30, 1989. 10(e) Employment Agreement with Incorporated by reference to Exhibit Geert Kersten 10(e) filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-43281). l0(f) Research Agreement between Incorporated by reference to Exhibit Viral Technologies, Inc. and the 10(f) filed as an exhibit to the Com- George Washington University pany's Registration Statement on Form S-1 (Registration No. 33-43281). l0(g) Agreement between Viral Incorporated by reference to Exhibit Technologies, Inc. and 10(g) filed as an exhibit to the Com- Nippon Zeon Co., Ltd. pany's Registration Statement on Form S-1 (Registration No. 33-43281). 23 Consent of accountants Filed with this report 27 Financial data schedule Filed with this report (d) Financial statement schedules. None CEL-SCI CORPORATION Consolidated Financial Statements for the Years Ended September 30, 1999, 1998, and 1997, and Independent Auditors' Report CEL-SCI CORPORATION TABLE OF CONTENTS - ------------------------------------------------------------------------------- Page INDEPENDENT AUDITORS' REPORT F-1 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997: Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-3 Consolidated Statements of Comprehensive Loss F-4 Consolidated Statements of Stockholders' Equity F-6 Consolidated Statements of Cash Flows F-7 - F-8 Notes to Consolidated Financial Statements F-9- F-24 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of CEL-SCI Corporation: We have audited the accompanying consolidated balance sheets of CEL-SCI Corporation and subsidiaries (the Company) as of September 30, 1999 and 1998, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CEL-SCI Corporation and its subsidiaries as of September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. Deloitte & Touche McLean, Virginia December 6, 1999 F-1 CEL-SCI CORPORATION CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND 1998 ASSETS 1999 1998 ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 2,746,531 $2,813,225 Investment securities available for sale 3,192,604 9,675,311 Interest and other receivables 62,825 69,809 Prepaid expenses 514,572 723,834 Advances to officer/shareholder and employees 69,448 70,982 -------------- ----------- Total current assets 6,585,980 13,353,161 RESEARCH AND OFFICE EQUIPMENT - Less accumulated depreciation of $1,563,586 and $1,352,165 468,627 619,496 DEPOSITS 14,828 14,828 PATENT COSTS - Less accumulated amortization of $511,118 and $454,328 490,337 444,328 ------------------------- $ 7,559,772 $14,431,813 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 433,265$ 427,147 ------------------------ Total current liabilities 433,265 427,147 DEFERRED RENT 28,321 29,382 --------------------------- Total liabilities 461,586 456,529 ------------------------- STOCKHOLDERS' EQUITY: Series D Preferred stock, $0.01 par value - authorized, 10,000 shares; issued and out- standing, 9,002 shares in 1998 -- 90 Common stock, $.01 par value - authorized, 100,000,000 shares; issued and outstanding, 17,002,341 and 11,972,695 shares 170,023 119,726 Additional paid-in capital 59,672,652 59,040,864 Accumulated other comprehensive loss (116,659) (48,291) Accumulated deficit (52,627,830) (45,137,105) ------------ ------------ Total stockholders' equity 7,098,186 13,975,284 -------------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,559,772 $14,431,813 ============== ============ See notes to consolidated financial statements. F-2 CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997 1999 1998 1997 ---- ---- ---- INVESTMENT INCOME $ 402,831 $ 728,421 $ 386,547 OTHER INCOME 66,687 64,573 51,598 ------------ ------------ ------------- Total income 469,518 792,994 438,145 ----------- ----------- ------------ OPERATING EXPENSES: Research and development 4,461,051 3,833,854 6,011,670 Depreciation and amortization 268,210 295,331 313,547 General and administrative 3,230,982 3,106,492 2,302,386 ----------- ----------- ------------ Total operating expenses 7,960,243 7,235,677 8,627,603 ----------- --------- ------------ NET LOSS $7,490,725 $ 6,442,683 $ 8,189,458 ========== =========== ============ ACCRETION OF PREFERRED STOCK -- 1,980,000 1,062,482 PREFERRED STOCK DIVIDENDS -- -- 108,957 ------------------------------------------ NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 7,490,725 $8,422,683 $ 9,360,897 =========== ========== ============ LOSS PER COMMON SHARE (BASIC) $ 0.52 $ 0.74 $ 1.00 =========== ========== =========== LOSS PER COMMON SHARE (DILUTED) $ 0.52 $ 0.74 $ 1.00 =========== ========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 14,484,352 11,379,437 9,329,419 ========== ========== ========== See notes to consolidated financial statements. F-3 CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997 1999 1998 1997 ---- ---- ---- NET LOSS $7,490,725 $4,822,683 $9,360,897 OTHER COMPRENENSIVE LOSS - Unrealized (gain) loss on investments 68,368 44,792 (12,579) -------------------------- -------------- COMPREHENSIVE LOSS $7,559,093 $4,867,475 $9,348,318 ========== ========== ========== See notes to consolidated financial statements. F-4 CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997 Preferred Preferred Preferred Preferred Series A Stock Series B Stock Series C Stock Series D Stock Common Stock Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount BALANCE, OCTOBER 1, 1996 600 $ 6 5,000 $ 50 -- $ -- -- $ -- 7,831,481 $78,315 Exercise of stock options -- -- -- -- -- -- -- -- 127,500 1,275 Exercise of warrants -- -- -- -- -- -- -- -- 61,220 612 Stock issued for acquisition of Multikine and Cell-Med's Heteroconjugate rights -- -- -- -- -- -- -- -- 785,056 7,851 Stock options issued to non- employees for services -- -- -- -- -- -- -- -- -- -- Issuance - Series C preferred stock -- -- -- -- 2,850 29 -- -- -- -- Repurchase of Preferred B shares -- -- (2,850) (29) -- -- -- -- -- -- Preferred Series A conversion (600) (6) -- -- -- -- -- 127,945 1,279 Preferred Series B conversion -- -- (2,150) (21) -- -- -- -- 597,218 5,972 Preferred Series C conversion -- -- -- -- (2,850) (29) -- -- 915,271 9,153 Cash dividends on Series A and B -- -- -- -- -- -- -- -- -- Change in market value of marketable securities available for sale -- -- -- -- -- -- -- -- -- -- Net loss -- -- -- -- -- -- -- -- -- -- ---------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1997 -- -- -- -- -- -- -- -- 10,445,691 104,457 Exercise of stock options -- -- -- -- -- -- -- -- 300,048 3,000 Exercise of warrants -- -- -- -- -- -- -- -- 768,243 7,682 Stock options issued to non- employees for services -- -- -- -- -- -- -- -- -- -- Issuance - Series D preferred stock, net of offering costs -- -- -- -- -- -- 10,000 100 -- -- Preferred Series D conversion -- -- -- -- -- -- (998) (10) 441,333 4,413 401(k) contributions -- -- -- -- -- -- -- -- 17,380 174 Change in market value of marketable securities available for sale -- -- -- -- -- -- -- -- -- -- Net loss -- -- -- -- -- -- -- -- -- -- ------------------------------------------------------------------------------------------------ BALANCE, SEPTEMBER 30, 1998 -- -- -- -- -- -- 9,002 90 11,972,695 19,726 Exercise of stock options -- -- -- -- -- -- -- -- 28,500 285 Stock options issued to non- employees for services -- -- -- -- -- -- -- -- -- -- Preferred Series D conversion -- -- -- -- -- -- (9,002) (90) 4,760,126 47,602 401(k) contributions -- -- -- -- -- -- -- -- 41,020 410 Stock bonus to officer -- -- -- -- -- -- -- -- 200,000 2,000 Change in market value of marketable securities available for sale -- -- -- -- -- -- -- -- -- -- Net loss -- -- -- -- -- -- -- -- -- -- ------------------------------------------------------------------------------------------------ BALANCE, SEPTEMBER 30, 1999 $ -- -- $ -- -- $ -- -- $ -- 17,002,341 $170,023 ================================================================================================
F-5 CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997 (cont'd) Accumulated Additional Other Paid-In Comprehensive Accumulated Capital Loss Deficit Total BALANCE, OCTOBER 1, 1996 $41,918,036 $ (16,078) $(30,396,007) $11,584,322 Exercise of stock options 427,650 -- -- 428,925 Exercise of warrants 168,084 -- -- 168,696 Stock issued for acquisition of Multikine and Cell-Med's Heteroconjugate rights 1,817,149 -- -- 1,825,000 Stock options issued to nonemployees for services 104,673 -- -- 104,673 Issuance - Series C preferred stock 2,849,971 -- -- 2,850,000 Repurchase of Preferred B shares (2,849,971) -- -- (2,850,000) Preferred Series A conversion (1,273) -- -- -- Preferred Series B conversion (5,951) -- -- -- Preferred Series C conversion (9,124) -- -- -- Cash dividends on Series A and B -- -- (108,957) (108,957) Change in market value of marketable securities available for sale -- 12,579 -- 12,579 Net loss -- -- (8,189,458 (8,189,458) ------------------------------------------------------- BALANCE, SEPTEMBER 30, 1997 44,419,244 (3,499) (38,694,422) 5,825,780 Exercise of stock options 882,372 -- -- 885,372 Exercise of warrants 3,621,744 -- -- 3,629,426 Stock options issued to nonemployees for services 564,031 -- -- 564,031 Issuance - Series D preferred stock, net of offering costs 9,499,900 -- -- 9,500,000 Preferred Series D conversion (4,403) -- -- -- 401(k) contributions 57,976 -- -- 58,150 Change in market value of marketable securities available for sale -- (44,792) -- (44,792) Net loss -- -- (6,442,683) (6,442,683) --------------------------------------------------------- BALANCE, SEPTEMBER 30, 1998 59,040,864 (48,291) (45,137,105) 13,975,284 Exercise of stock options 70,965 -- -- 71,250 Stock options issued to nonemployees for services 88,166 -- -- 88,166 Preferred Series D conversion (47,512) -- -- -- 401(k) contributions 86,544 -- -- 86,954 Stock bonus to officer 433,625 -- -- 435,625 Change in market value of marketable securities available for sale -- (68,368) -- (68,368) Net loss -- -- (7,490,725) (7,490,725) ---------------------------------------------------------- BALANCE, SEPTEMBER 30, 1999 $ 59,672,652 $(116,659) $(52,627,830) $7,098,186 ============ ========== ============ ==========
F-6 CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(7,490,725) $(6,442,683) $(8,189,458) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 268,210 295,331 313,547 Issuance of stock options for services 88,166 564,031 104,673 Stock bonus granted to officer 435,625 -- -- Stock contributed to 401(k) plan 86,954 58,150 -- Research and development expenses related to stock purchase of Cell-Med -- -- 75,000 Research and development expenses related to stock purchase of Multikine rights from Sittona -- -- 1,750,000 Amortization of investment premiums and discounts -- -- (158,825) Net realized loss on sale of securities 151,349 9 -- Changes in assets and liabilities: Decrease (increase) in interest and other receivables 6,984 36,625 (29,928) Decrease (increase) in prepaid expenses 209,262 (313,046) (138,384) (Increase) decrease in advances (69,275) 4,733 137,567 Decrease in deposits -- 3,350 -- Decrease (increase) in accounts payable and accrued expenses 6,118 (54,440) 207,177 (Increase) decrease in deferred rent (1,061) 2,352 7,392 Net cash used in operating activities (6,308,393) (5,845,588)(5,921,239) CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Purchases of investments (236,811) (13,480,816)(1,700,000) Sales and maturities of investments 6,499,801 4,501,828 7,625,000 Repayment on note receivable from shareholder 70,809 216,066 13,625 Issuance of note receivable to shareholder -- -- (300,000) Expenditures for property and equipment (60,552) (70,559) (184,543) Expenditures for patents (102,798) (35,211) (62,762) Net cash provided by (used in) investing activities 6,170,449 (8,868,692) 5,391,320 (Continued) F-7 CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997 1999 1998 1997 ---- ---- ---- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Cash proceeds from issuance of preferred and common stock and warrant conversion for cash 71,250 14,018,899 597,672 Dividends paid -- -- (108,957) -------------- ----------- --------- Net cash provided by financing activities 71,250 14,018,899 488,715 NET DECREASE IN CASH (66,694) (695,381) (41,204) CASH, BEGINNING OF YEAR 2,813,225 3,508,606 3,549,810 ------------ ------------ ---------- CASH, END OF YEAR $ 2,746,531 $ 2,813,225 $3,508,606 =========== ============ ========== SUPPLEMENTAL DISCLOSURES: During 1999, 1998, and 1997, the net unrealized loss on investments available-for-sale was $116,659 $48,291, and $3,499, respectively. During the year ended September 30, 1997, 600 shares of Series A Preferred Stock were converted into 127,945 shares of common stock, 2,150 shares of Series B Preferred Stock were converted into 597,218 shares of common stock, and 2,850 shares of Series B Preferred Stock were converted into 915,271 shares of common stock. During the years ended September 30, 1999 and 1998, 9,002 and 998 shares of Series D Preferred Stock were converted into 4,760,126 and 441,333 shares of common stock, respectively. In March 1997, CEL-SCI issued 751,678 shares of common stock as consideration for the purchase of the rights to its Multikine technology. In addition, the Company paid $500,000 in cash for the rights, included in research and development expense. In April 1997, CEL-SCI issued 33,378 shares of common stock to Cell-Med as a payment for the company's heteroconjugate technology. CEL-SCI also paid $50,000 in cash to Cell-Med, included in research and development expense. (Concluded) See notes to consolidated financial statements. F-8 CEL-SCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 - ------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CEL-SCI Corporation (the Company) was incorporated on March 22, 1983, in the State of Colorado, to finance research and development in biomedical science and ultimately to engage in marketing products. Significant accounting policies are as follows: Principles of Consolidation - The consolidated financial statements include the accounts of CEL-SCI Corporation and its wholly owned subsidiaries, Viral Technologies, Inc., and MaxPharma. All significant intercompany transactions have been eliminated upon consolidation. Investments - Investments that may be sold as part of the liquidity management of the Company or for other factors are classified as available-for-sale and are carried at fair market value. Unrealized gains and losses on such securities are reported as a separate component of stockholders' equity. Realized gains and losses on sales of securities are reported in earnings and computed using the specific identified cost basis. Research and Office Equipment - Research and office equipment is recorded at cost and depreciated using the straight-line method over estimated useful lives of five to seven years. Research and Development Costs - Research and development expenditures are expensed as incurred. The Company has an agreement with an unrelated corporation for the production of MULTIKINE, for research and testing purposes, which is the Company's only product source. Research and Development Grant Revenues - The Company's grant arrangements are handled on a reimbursement basis. Costs incurred under the arrangements are expensed as incurred. Subsequent reimbursements from the granting agency are applied against such expenses. Patents - Patent expenditures are capitalized and amortized using the straight-line method over 17 years. In the event changes in technology or other circumstances impair the value or life of the patent, appropriate adjustment in the asset value and period of amortization is made. Net Loss Per Share - Net loss per common share is computed by dividing the net loss, after increasing the loss for the effect of any preferred stock dividends, by the weighted F-9 average number of common shares outstanding during the period. Common stock equivalents, including options to purchase common stock, were excluded from the calculation for all periods presented as they were antidilutive. Prepaid Expenses - The majority of prepaid expenses consist of bulk purchases of laboratory supplies to be consumed in the manufacturing of the Company's product for clinical studies and for its further development, and the cost of options for nonemployee services. Income Taxes - Income taxes are accounted for using the liability method under which deferred tax liabilities or assets are determined based on the difference between the financial statement and tax bases of assets and liabilities (i.e., temporary differences) and are measured at the enacted tax rates. Deferred tax expense is determined by the change in the liability or asset for deferred taxes. Statement of Cash Flows - For purposes of the statements of cash flows, cash consists principally of unrestricted cash on deposit, and short-term money market funds. The Company considers all highly liquid investments with a maturity of less than three months to be cash equivalents. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications - Certain reclassifications have been made to the 1998 and 1997 financial statements for comparative purposes with the 1999 financial statements. 2. INVESTMENTS The carrying values and estimated market values of investments available-for-sale at September 30, 1998 and 1997, are as follows: September 30, 1999 ------------------------------------------------- Gross Gross Market Value Amortized Unrealized Unrealized at September 30, Cost Gains Losses 1999 Fixed income mutual funds $3,309,263 $ -- $(116,659) $3,192,604 ---------- ------ ---------- ---------- Total $3,309,263 $ -- $(116,659) $3,192,604 ========== ====== ========== ========== F-10 September 30, 1998 -------------------------------------------------- Gross Gross Market Value Amortized Unrealized Unrealized at September 30, Cost Gains Losses 1999 Fixed income mutual funds $9,723,602 $2,036 $(50,327) $9,675,311 ---------- ------ --------- ---------- Total $9,723,602 $2,036 $(50,327) $9,675,311 ========== ====== ========= ========== The gross realized gains and losses on sales of investments available-for-sale for the years ended September 30, 1999, 1998, and 1997, are as follows: 1999 1998 1997 Realized gains $ -- $ 1,485$ -- Realized losses 151,349 1,494 -- ---------- ------ -------- Net realized (loss) gain $(151,349) $ (9) $ -- ========== ======= ======== 3. RESEARCH AND OFFICE EQUIPMENT Research and office equipment at September 30, 1999 and 1998, consist of the following: 1999 1998 Research equipment $1,781,666 $1,728,968 Furniture and equipment 245,154 237,579 Leasehold improvements 5,393 5,114 ------------- ------------ 2,032,213 1,971,661 Less accumulated depreciation and amortization (1,563,586) (1,352,165) Net research and office equipment $ 468,627 $ 619,496 =========== =========== 4. JOINT VENTURE In October 1996, the Company purchased the remaining 50 percent interest in VTI from Alpha 1. Prior to this date, VTI was wholly owned by the Company and Alpha 1, each having a 50% ownership interest. The Company conveyed 159,170 shares of CEL-SCI common stock as the consideration for the net assets of VTI with a fair value of approximately $170,000. The acquisition was accounted for under the purchase method of accounting with substantially all of the value of the purchase price being expensed as research and development expense for the year ended September 30, 1997, as the acquisition represents primarily research and development costs. F-11 5. RELATED-PARTY TRANSACTIONS On March 10, 1997, the Company purchased from Sittona Company, B.V., Netherlands, all rights to its MULTIKINE technology, including all patents and trade secrets. The previous agreement with Sittona required CEL-SCI to pay a 10% royalty on sales and a 15% royalty on sublicenses for the use of the technology, know-how, and trade secrets. The Company purchased these rights with $500,000 in cash and 751,678 shares of its common stock. The total purchase price of $2,250,000 was charged to expense as purchased research and development. In October 1996, the Company loaned $300,000 to an officer and shareholder. The loan carried an interest rate of 5% and was due on December 31, 1996. At that time, the loan was extended and the balance was due in full as of March 31, 1998. The loan was subsequently extended, and the balance was due in full on October 1, 1998. Payments were made on the note, and the balance outstanding on September 30, 1998, was $70,809. The loan was paid in full on October 1, 1998. 6. INCOME TAXES The approximate tax effect of each type of temporary difference and carryforward that gave rise to the Company's deferred tax assets and liabilities at September 30, 1999 and 1998, is as follows: 1999 1998 Depreciation $ (18,536) $ (17,089) Prepaid expenses (101,769) (227,795) Net operating loss carryforward 17,082,000 17,346,440 Other 10,751 8,347 Less: Valuation allowance (16,972,446) (17,109,902) ------------ ------------ Net deferred $ -- $ -- =============== ============ The Company has available for income tax purposes net operating loss carryforwards of approximately $50,242,000, expiring from 2000 through 2019. In the event of a significant change in the ownership of the Company, the utilization of such carryforwards could be substantially limited. The difference in the Company's U.S. Federal statutory income tax rate and the Company's effective rate is primarily attributed to the recording of a valuation allowance due to the uncertainty of the amount of future tax benefits that is more likely than not that future taxable income will not be sufficient to realize a tax benefit. F-12 7. STOCK OPTIONS, WARRANTS, AND BONUS PLAN 1998 Plans: During the year ended September 30, 1998, the shareholders of the Company approved the adoption of three new Plans, the 1998 Incentive Stock Option Plan (1998 Incentive Plan), the 1998 Non-Qualified Stock Option Plan (1998 Non-Qualified Plan), and the 1998 Stock Bonus Plan. Shares are reserved under each plan and total 300,000, 300,000 and 100,000 shares, respectively. Subsequently the Company's Board of Directors amended the Stock Bonus Plan such that the Plan now authorizes the issuance of up to 300,000 common shares of Company stock. 1996 Plans: During the year ended September 30, 1996, the shareholders of the Company approved the adoption of two new Plans, the 1996 Incentive Stock Option Plan (1996 Incentive Plan) and the 1996 Non-Qualified Stock Option Plan (1996 Non-Qualified Plan). Shares are reserved under each plan and total 600,000 and 400,000 shares, respectively. In August 1997, the 1996 Non-Qualified Plan was amended to provide for 1,500,000 shares to be reserved under the 1996 Non-Qualified Plan. 1995 Plans: The shareholders of the Company approved the adoption of the 1995 Non-Qualified Stock Option Plan (1995 Non-Qualified Plan) and reserved 400,000 shares under the plan. Terms of the options are to be determined by the Company's Compensation Committee, but in no event are options to be granted for shares at a price below fair market value at the date of grant. In December 1995, the 1995 Non-Qualified Plan was amended to provide for 800,000 shares to be reserved under the 1995 Non-Qualified Plan. 1994 Plans: Shares are reserved under the 1994 Incentive Stock Option Plan (1994 Incentive Plan) and the 1994 Non-Qualified Stock Option Plan (1994 Non-Qualified) and total 100,000 shares in each plan. Only employees of the Company are eligible to receive options under the 1994 Incentive Plan, while the Company's employees, directors, officers, and consultants or advisors are eligible to be granted options under the 1994 Non-Qualified Plan. Terms of the options are to be determined by the Company's Compensation Committee, which will administer all of the plans, but in no event are options to be granted for shares at a price below fair market value at date of grant. Options granted under the option plans must be granted before July 29, 2004. 1992 Plans: The 1992 Incentive Stock Option Plan (1992 Incentive Plan), the 1992 Non-Qualified Stock Option Plan (1992 Non-Qualified Plan), and the Stock Bonus Plan (1992 Bonus Plan) include shares that are reserved under each plan and total 100,000, 60,000, and 40,000 shares, respectively. Only employees of the Company are eligible to receive options under the Incentive Plan, while the Company's employees, directors, officers, and consultants or advisors are eligible to be granted options under the Non-Qualified Plan or issued shares under the Bonus Plan. Terms of the options are to be determined by the Company's Compensation Committee, which will administer all of the plans, but in no event are options to be granted for shares at a price below fair market value at date of grant. Options granted under the option plans must be granted, or shares issued under the bonus plan issued, before August 20, 2002. F-13 1987 Plan: The 1987 Nonqualified Stock Option and Stock Bonus Plan (the 1987 Plan) reserved 200,000 shares of the Company's previously unissued common stock to be granted as incentive stock options to employees. The 1987 Plan reserved 50,000 shares of the Company's previously unissued common stock to be granted as stock bonuses to employees. The exercise price of the options could not be established at less than fair market value on the date of grant and the option period could not be greater than ten years. During 1993, the 1987 Plan was terminated and no further options will be granted and no further bonus shares will be issued pursuant to the 1987 Plan. In June 1997, all options outstanding under the 1987 Plan expired. Information regarding the Company's stock option plans are summarized as follows: Outstanding Exercisable Range Weighted Weighted of Average Average Option Exercise Exercise Prices Shares Prices Shares Prices 1987 Stock Option and Bonus Plan: Balance, October 1, 1996 $16.50-19.70 7,000 $ 17.41 7,000 $17.41 Forfeitures $16.50-19.70 (7,000) 17.41 (7,000) 17.41 Balance, September 30, 1997 -- -- -- -- ------ ----- ------ ----- 1992 Incentive Stock Option Plan: Balance, October 1, 1996 $2.87-3.87 83,216 3.16 46,018 3.12 Forfeitures $2.87 (500) 2.87 -- -- Exercised $2.87 (1,000) 2.87 (1,000) 2.87 Became exercisable $2.87-3.87 -- -- 19,516 3.12 Balance, September 30, 1997 81,716 3.16 64,534 3.13 Exercised $2.87 (3,166) 2.87 (3,166) 2.87 Became exercisable $2.94-3.87 -- -- 9,848 3.38 Balance, September 30, 1998 78,550 3.16 71,216 3.17 Forfeitures $3.87 (900) 3.87 (900) 3.87 Became exercisable $2.94-3.44 -- -- 7,334 3.21 --------- ----- ---- ----- ---- Balance, September 30, 1999 77,650 $3.16 77,650 $ 3.16 ======= ===== ====== ====== 1992 Nonqualified Stock Option Plan: Balance, October 1, 1996 $2.87-15.60 34,500 6.44 34,500 6.44 Forfeitures $13.40 (2,500) 13.40 (2,500) 13.40 Exercised $2.87 (11,500) 2.87 (11,500) 2.87 Balance, September 30, 1997 $2.87-15.60 20,500 7.59 20,500 7.59 Forfeitures $13.80-15.60 (8,000) 14.96 (8,000) 14.96 Exercised $2.87 (9,000) 2.87 (9,000) 2.87 ------ ----- ------ ----- Balance, September 30, 1998 $2.87 3,500 $ 2.87 3,500 $2.87 Forfeitures $2.87 (3,500) 2.87 (3,500) 2.87 Granted $1.63-2.50 13,500 2.12 -- -- ------ ------ ---- ----- Balance, September 30, 1999 $1.63-2.50 13,500 $2.12 -- $ -- ====== ===== ====== ====== (Continued) F-14 Outstanding Exercisable Range Weighted Weighted of Average Average Option Exercise Exercise Prices Shares Prices Shares Prices 1994 Incentive Stock Option Plan: Balance, October 1, 1996 $2.87 100,000 2.87 72,000 2.87 Became exercisable $2.87 -- -- 11,000 2.87 ------- ---- ------ ----- Balance, September 30, 1997 $2.87 100,000 2.87 83,000 2.87 Became exercisable $2.87 -- -- 11,000 2.87 ------- ----- ------ -------- Balance, September 30, 1998 $2.87 100,000 $ 2.87 94,000 $ 2.87 Became exercisable $2.87 -- -- 6,000 2.87 ------- ----- ----- ----- Balance, September 30, 1999 $2.87 100,000 $ 2.87 100,000 $ 2.87 ======== ======= ======= ======= 1994 Nonqualified Stock Option Plan: Balance, October 1, 1996 $2.87-3.87 50,583 2.92 25,584 2.90 Became exercisable $2.87-3.87 -- -- 24,166 2.90 ------ ----- ------- ----- Balance, September 30, 1997 $2.87-3.87 50,583 2.92 49,750 2.90 Exercised $2.87 (23,333) 2.87 (23,333) 2.87 Became exercisable -- -- 833 2.87 ------ ---- ------- ---- Balance, September 30, 1998 $2.87-3.87 27,250 $ 2.96 27,250 $ 2.96 Granted $2.81 1,000 2.81 -- -- ------- ---- ------ --- Balance, September 30, 1999 $2.87-3.87 28,250 $ 2.96 27,250 $ 2.96 ======== ====== ====== ===== 1995 Nonqualified Stock Option Plan: Balance, October 1, 1996 $2.38-5.62 650,751 2.97 131,253 2.75 Granted $5.25 20,000 5.50 -- 0.00 Exercised $2.38-3.87 (19,000) 3.56 (19,000) 3.56 Became exercisable $2.38-5.62 -- -- 449,501 2.74 ------ ---- ------- ------ Balance, September 30, 1997 651,751 3.02 561,754 2.72 Forfeitures $5.62 (7,500) 5.62 (7,500) 5.62 Exercised $2.38-3.87 (121,334) 2.89 (121,334) 2.88 Became exercisable $3.87-5.62 -- -- 79,997 4.48 Balance, September 30, 1998 522,917 3.01 512,917 2.92 Forfeitures $3.87 5.62 (75,250) 5.17 (65,250) 5.17 Granted $1.94 125,000 1.94 -- -- -------- ----- ------- ----- Balance, September 30, 1999 $1.94-3.87 572,667 $2.58 447,667 $2.76 ===== ====== ======= ======= (Continued) F-15 Outstanding Exercisable Range Weighted Weighted of Average Average Option Exercise Exercise Prices Shares Prices Shares Prices 1996 Incentive Stock Option Plan: Balance, October 1, 1996 $5.62-11.00 65,700 5.70 -- -- Forfeitures $3.25-6.88 (5,500) 4.08 -- -- Granted $3.25-5.18 331,800 3.89 -- -- Became exercisable $5.62-11.00 -- -- 21,234 5.57 ------ ----- ------- ----- Balance, September 30, 1997 392,000 4.19 21,234 5.57 Granted $3.31-5.12 205,500 4.76 -- -- Forfeitures $3.62-7.12 (3,666) 5.34 (3,666) 5.34 Became exercisable -- -- 128,838 4.19 -------- ---- ------- ----- Balance, September 30, 1998 $3.25-11.00 593,834 4.38 146,406 4.36 Forfeitures $3.25-3.94 (1,134) 3.57 (1,134) 3.57 Became exercisable $3.25-11.00 -- -- 192,766 4.36 ------- --- ------ ---- Balance, September 30, 1999 $3.25-11.00 592,700 $4.38 338,038 $ 4.38 ======== ==== ====== ====== 1996 Nonqualified Stock Option Plan: Balance, October 1, 1996 $5.62 70,000 5.62 -- -- Granted $3.12-5.25 880,000 3.52 -- -- Became exercisable $5.62 -- -- 23,334 5.62 ------- ---- ------ ----- Balance, September 30, 1997 950,000 3.67 23,334 5.62 Granted $2.50-8.13 474,700 2.98 -- Exercised $3.25 (16,667) 3.25 (16,667) 3.25 Forfeitures (2,000) 3.12 -- -- Became exercisable $3.12-5.62 -- -- 764,668 3.13 -------- --- ------- ----- Balance, September 30, 1998 1,406,033 3.44 771,335 3.23 Forfeitures $2.94-8.13 (226,352) 4.56 -- Granted $1.94-2.69 297,000 1.98 (186,868) 4.56 Became exercisable $2.50 6.25 -- -- 489,384 3.17 ------- ---- ------- ---- Balance, September 30, 1999 $1.94-6.25 1,476,681 $3.03 1,073,851 $3.26 ========= ===== ========= ====== 1998 Incentive Stock Option Plan: Granted in 1999 $2.06-2.94 159,000 $ 2.20 - $ -- ------- ------ ---- ----- Balance, September 30, 199 $2.06-2.94 159,000 $ 2.20 -- $ -- ======= ===== ===== ===== 1998 Nonqualified Stock Option Plan: Granted in 1999 $1.94-2.06 83,000 $2.20 -- $ -- Became exercisable $2.06 -- -- 20,000 2.06 ------ ------- ------ ---- Balance, September 30, 1999 $1.94-2.06 83,000 $2.20 20,000 $2.06 ====== ==== ======= ====== F-16 The Company extended the expiration date on 35,334 options at $2.87 from the 1995 Nonqualified Stock Option Plan. The options were to expire March 30, 1999, and were extended to March 30, 2000. The options had originally been granted in December 1994. The Company extended the expiration date on 23,000 options at $3.25 from the 1992 Incentive Stock Option Plan. The options were to expire February 21, 1999, and were extended to February 21, 2000. The options had originally been granted in February 1996. The Company extended the expiration date on 750 options at $2.87 from the 1994 Nonqualified Stock Option Plan. The options were to expire March 31, 1999, and were extended to March 31, 2000. The options had originally been granted in March 1988. No compensation expense was recorded on any of the extensions as the exercise price exceeded the fair market value at the new measurement date. The weighted average remaining contractual life for options outstanding at September 30, 1998, is as follows: Weighted Average Remaining Contractual Plan Life (Years) 1992 Incentive Stock Option Plan 3.80 1992 Nonqualified stock Option Plan 9.41 1994 Incentive Stock Option Plan 3.46 1994 Nonqualified Stock Option Plan 2.31 1995 Nonqualified Stock Option Plan 2.57 1996 Incentive Stock Option Plan 7.86 1996 Nonqualified Stock Option Plan 3.57 1998 Incentive Stock Option Plan 7.58 1998 Nonqualified Stock Option Plan 6.82 Other Options and Warrants - In connection with the 1992 public offering, 5,175,000 common stock purchase warrants were issued and outstanding at September 30, 1997. Every ten warrants entitled the holder to purchase one share of common stock at a price of $15.00 per share. Subsequently, the expiration date of the warrants was extended to February 1998. Effective June 1, 1997, the exercise price of warrants was lowered from $15 to $6 and only five warrants rather than 10 warrants were required to purchase one share of common stock. Subsequent to September 30, 1997, warrant holders who tendered five warrants and $6.00 between January 9, 1998, and February 7, 1998, would receive one share of the Company's F-17 common stock and one new warrant. The new warrants would permit the holder to purchase one share of the Company's common stock at a price of $10.00 per share prior to February 7, 2000. During 1998, the expiration date of the original warrants was extended to July 31, 1998, and 582,025 original warrants were tendered for 116,405 common shares. As of September 30, 1998, the remaining 4,592,975 original warrants had expired. Also in connection with the 1992 offering, the Company issued to the underwriter warrants to purchase 9,000 equity units, each unit consisting of 5 shares of common stock and 5 warrants entitling the holder to purchase one additional share of common stock. The equity unit warrants were outstanding at September 30, 1996, and were exercisable through February 8, 1997, at a price of $255.70 per unit. The common stock warrants included in the units were exercisable at a price of $76.70 per share. As of September 30, 1997, all warrants had expired. During 1995, the Company granted another consultant options to purchase 17,858 shares of the Company's common stock. These shares became exercisable on November 2, 1995, and will expire November 1, 1999. These options are exercisable at $5.60 per share, and as of September 30, 1999, all 17,858 options remain outstanding. In June and September 1995, the Company completed private offerings whereby it sold a total of 1,150,000 units at $2.00 per unit. Each unit consisted of one share of Common Stock and one Warrant. Each Warrant entitles the holder to purchase one additional share of Common Stock at a price of $3.25 per share at any time prior to June 30, 1997. All Warrants sold in this Offering were exercised during 1996. Additionally, the Company issued to the underwriter warrants to purchase 230,000 equity units. Each unit consisted of one share of the Company's common stock. For the June 1995 private placement, 57,500 equity units were issued at $2.00 per unit and another 57,500 equity units were issued at $3.25 per unit. All units issued in the June 1995 private placement were exercised at September 30, 1996. For the September 1995 private placement, 57,500 equity units were issued at $2.40 per unit and another 57,500 equity units were issued at $3.25 per unit. As of September 30, 1996, 21,890 equity units had been exercised at $3.25 per unit and 21,890 equity units had been exercised at $2.40 per unit. As of September 30, 1997, 35,610 equity units had been exercised at $2.40 per unit and 25,610 equity units were exercised at $3.25 per unit. All remaining 10,000 equity units will expire on December 31, 1999. During 1996, the Company granted two consultants options to purchase a total of 70,000 shares of the Company's common stock. The fair value of the options is expensed over the life of the consultants' contracts. The 70,000 options became exercisable on August 21, 1996, at $3.25. Of the 70,000 options, 24,000 shares were exercised in August 1996 and 46,000 were exercised in February 1997. During 1997, the Company granted four consultants options to purchase a total of 268,000 shares of the Company's common stock. The fair value of the options is expensed over the life of the consultants' contracts. Of the 268,000 options, 218,000 options became exercisable during 1997 at prices ranging from $3.50 to $4.50. The remaining 50,000 options F-18 options became exercisable during 1998 at $5.00. During 1997, 50,000 options were exercised at $3.50. During 1998, 114,500 options were exercised at prices ranging from $3.50 to $4.50. During 1999, 18,500 options were exercised at prices ranging from $3.50 to $4.50. At September 30, 1999, 88,500 options related to the four consultants remained outstanding. During 1998, the Company granted seven consultants options to purchase a total of 282,000 shares of the Company's common stock. The fair value of the options is expensed over the life of the consultants' contracts. All options became exercisable during 1998 and were exercisable at prices ranging from $3.50 to $7.31. During 1998, 22,000 options were exercised at prices ranging from $3.50 to $4.50. During 1999, 75,000 options expired ranging in price from $5.06 to $7.31, and 10,000 options were exercised at a price of $2.50. At September 30, 1999, 175,000 options related to the consultants remain outstanding. During 1999, the Company granted one consultant options to purchase a total of 50,000 shares of the Company's common stock. The fair value of the options is expensed over the life of the consultant's contracts. All 50,000 options became exercisable during 1999 at $2.50 per share. At September 30, 1999, all 50,000 options remained outstanding. In January 1999, the Company revised the terms of 23,500 and 125,000 options granted to consultants in 1997 and 1998, respectively. The original terms of the agreements set the exercise price of the 148,500 options at $4.00 and set the expiration date of the options at March 31, 1999. The terms were revised so that the exercisable price is set at $2.50 and the options expire on December 31, 1999. During 1999, 28,500 options to purchase shares were exercised at $2.50 per share. In connection with the December 1997 private offering, the Company issued to the underwriters warrants to purchase 50,000 shares of common stock at $8.63 per share. The warrants are exercisable at any time prior to December 22, 2000. At September 30, 1999, all warrants remained outstanding. In October 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). This statement encourages but does not require companies to account for employee stock compensation awards based on their estimated fair value at the grant date with the resulting cost charged to operations. The Company has elected to continue to account for its employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. If the Company had elected to recognize compensation expense based on the fair value of the awards granted in 1999, 1998, and 1997, consistent with the provisions of SFAS 123, the Company's net loss and net loss per common share would have been increased to the pro forma amounts indicated below: F-19 Year Ended September 30, 199 1998 1997 (In thousands) Net Loss: As reported $(7,490,725) $(6,442,638) $(8,189,458) Pro forma (8,124,159) (7,018,634) (9,687,999) Loss per common share: As reported 0.52 $ 0.74 $ 1.00 Pro forma $ 0.56 $ 0.79 $ 1.17 The weighted average fair value at the date of grant for options granted during 1999, 1998, and 1997, was $1.21, $2.17, and $1.16 per option, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: 1999 1998 1997 Expected stock price volatility 91% 79% 74% Risk-free interest rate 5.48% 5.49% 5.36% Expected life options 3.23 2 2 Expected dividend yield 0 0 0 The effects of applying SFAS 123 in this pro forma disclosure are not necessarily indicative of the effect on future amounts. The Company's stock options are not transferable, and the actual value of the stock options that an employee may realize, if any, will depend on the excess of the market price on the date of exercise over the exercise price. The Company has based its assumption for stock price volatility on the variance of monthly closing prices of the Company's stock from its initial offering date to the present. The risk-free rate of return used equals the yield on one to three year zero-coupon U.S. Treasury issues on the grant date. No discount was applied to the value of the grants for nontransferability or risk of forfeiture. 8. EMPLOYEE BENEFIT PLAN The Company maintains a defined contribution retirement plan, qualifying under Section 401(k) of the Internal Revenue Code, subject to the Employee Retirement Income Security Act of 1974, as amended, and covering substantially all CEL-SCI employees. Prior to January 1, 1998, the employer contributed an amount equal to 50% of each employee's contribution not to exceed 3% of the participant's salary. Effective January 1, 1998, the plan was amended such that the Company's contribution is now made in shares of the Company's common stock as opposed to cash. Each participant's contribution is matched by the Company with shares of common stock that have a value equal to 100% of the participant's F-20 contribution, not to exceed the lesser of $10,000 or 6% of the participant's total compensation. The Company's contribution of common stock is valued each quarter based upon the closing price of the Company's common stock. The expense for the years ended September 30, 1999, 1998, and 1997, in connection with this plan was approximately $86,954, $70,519, and $35,800, respectively. 9. LEASE COMMITMENTS Operating Leases - The future minimum annual rental payments due under noncancelable operating leases for office and laboratory space are as follows: Year Ending September 30, 2000 $133,892 2001 139,175 2002 143,818 2003 112,390 2004 7,605 ----------- Total minimum lease payments $536,880 Rent expense for the years ended September 30, 1999, 1998, and 1997, was approximately $214,205, $165,067, and $185,776, respectively. 10. STOCKHOLDERS' EQUITY On December 17, 1996, the Company authorized 3,500 shares of Series C Preferred Stock (Series C Stock) with a par value of $.01 per share and sold 2,850 shares of Series C for $1,000 per share. The issuance of the Series C stock resulted in a beneficial conversion feature of $502,941 that was accreted over 180 days from the sale of issuance. Series C Stock was convertible into shares of the Company's common stock on the basis of one share of Series C Stock for shares of common stock equal in number to the amount determined by dividing $1,000 by 85% of the average closing price of the Company's common stock over the five-day trading period ending on the day prior to the conversion of the Series C Stock. The conversion price could not be more than $4.00. Beginning 90 days after December 17, 1996, one-half of the Series C Stock was convertible into shares of the Company's common stock. All preferred shares are convertible into shares of the Company's common stock beginning 180 days after December 17, 1996. During the year ended September 30, 1997, 2,850 shares of Series C stock were converted into 915,271 shares of the Company's common stock. In addition, 379,793 Series A warrants and 379,763 Series B warrants were sold with the Series C Preferred Stock. The Series A warrants entitle the holder to purchase one share of F-21 the Company's common stock at a price of $4.50 per share at any time prior to March 15, 1998. Each Series B warrant entitles the holder to purchase one share of the Company's common stock at a price of $4.50 per share at any time prior to March 15, 1999. During 1998, all 379,765 Series A warrants were exercised and 272,073 Series B warrants were exercised. The remaining Series B warrants expired on March 15, 1999. In April 1997, the Company purchased the rights to Cell-Med's LEAPS technology for consideration of $50,000 in cash and 33,378 shares of the Company's common stock. The total purchase price of $125,000 was expensed as research and development expense. Additional payments to Cell-Med for such rights of up to $600,000 are contingent upon the development and viability of the technology. In addition, royalty payments of 5% of the sales price of any technology using the product plus 15% of any amounts for sublicensing are contingent. In March 1996 the Company sold $1,250,000 of Convertible Notes (the Notes) to two persons. The Notes were convertible from time to time, in whole or in part, into shares of the Company's Common Stock. The conversion price was the lesser of (i) $5 per share or (ii) 80% of the average closing bid price of the Company's Common Stock during the five trading days immediately preceding the date of such conversion. The Notes were payable on December 1, 1996, and accrued interest at 10% per annum. All of the Notes have since been converted into 257,480 shares of the Company's Common Stock. The Company authorized 3,500 shares of Series A Preferred Stock (Series A Stock) with a par value of $.01 per share. The Company also authorized 5,000 shares of Series B Preferred Stock (Series B Stock) with a par value of $.01 per share. Holders of Series A Stock and Series B Stock are entitled to dividends, payable quarterly if declared, at the rate of $17.50 per quarter. Dividends which are not declared will not accrue nor be cumulative. During 1996, the Company issued 3,500 shares of Series A Stock for cash consideration of $3,500,000 and 5,000 shares of Series B Stock for cash consideration of $5,000,000. The issuance of the Series A and Series B stock resulted in beneficial conversion features of $716,857 and $882,353, respectively, which were accreted over 90 days and 123 days, respectively, from the dates of issuance. Commissions of $375,000 were paid relative to the preferred stock offerings and were recorded as a reduction of additional paid-in capital on the transaction. Each share of Series A Stock was convertible into shares of common stock equal in number to the amount determined by dividing $1,000 by 85% of the closing price of the Company's common stock. All Series A Stock was convertible on or after 90 days from the closing on the basis of one share of Preferred Stock for shares of the Company's Common Stock equal in number to the amount determined by dividing $1,000 by 83% of the Closing Price of the Company's Common Stock. All Series B stock was convertible on or after 40 days from the Effective Date on the basis of one share of Preferred Stock for shares of the Company's Common Stock equal in number to the amount determined by dividing $1,000 by 85% of the Closing Price of the Company's Common Stock with the conversion price not less than $3.60 nor more than $14.75. F-22 Also during 1996, 2,900 shares of Series A Stock were converted into 504,096 shares of the Company's common stock. In August 1996, the Board of Directors declared dividends on Series A Stock ($17.50 per quarter) and cash dividends of $58,794 were paid as of September 30, 1996. In November 1996, the Board of Directors declared dividends on Series A Stock ($17.50 per quarter) and Series B Stock ($17.50 per quarter) and cash dividends of $108,957 were paid. In December 1996, the Company repurchased 2,850 shares of Series B Preferred Shares for $2,850,000 plus warrants which allow the holders to purchase up to 99,750 shares of the Company's common stock for $4.25 per share prior to December 15, 1999. During 1997, the remaining 2,150 and 600 shares, respectively, of Series B and A stock were converted into 597,218 and 127,945 shares of the Company's common stock, respectively. During December 1997, the Company issued 10,000 shares of Series D Preferred Stock for $10,000,000. The issuance included 550,000 Series A Warrants and 550,000 Series B Warrants. The number of common shares issuable upon conversion of the Preferred Shares is determinable by dividing $1,000 by $8.28 prior to September 19, 1998, or at any time at which the Company's common stock is $3.45 or less for five consecutive days. On or after September 19, 1998, the number of common shares to be issued upon conversion is determined by dividing $1,000 by the lesser of (1) $8.28 or (2) the average price of the stock for any two trading days during the ten trading days preceding the conversion date. The Series A Warrants are exercisable at any time for $8.62 prior to December 22, 2001, and the Series B Warrants are exercisable at any time for $9.31 prior to December 22, 2001. Each warrant converts into one share of common stock. At September 30, 1998, 998 shares of Series D Preferred Stock had been converted into 441,333 shares of common stock. At September 30, 1999, 9,002 shares of Series D Preferred Stock had been converted into 4,760,127 shares of common stock. There are no remaining shares of Series D Preferred Stock. All Series A and Series B Warrants issued remain outstanding at September 30, 1999. In connection with the Company's December 1997 $10,000,000 Series D Preferred Stock offering, the Series A and Series B warrants were assigned a relative fair value of $1,980,000 in accordance with APB No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, and have been recorded as additional paid-in capital. The $1,980,000 allocated to the warrants was accredited immediately. 11. LOSS PER SHARE Basic EPS excludes dilution and is computed by dividing net income or loss attributable to common stockholders by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (convertible preferred stock, warrants to purchase common stock and common stock options using the treasury stock method) were exercised or converted into common stock. Potential common shares in the diluted EPS computation are excluded in net loss periods as their effect would be antidilutive. The loss attributable to common stockholders includes the impact of the accretion of Series A, Series B and Series C Preferred Stock beneficial conversion features, the accretion of Series D Preferred Stock warrants and F-23 preferred stock dividends. The statement is effective for financial statements issued for periods ending after December 15, 1997. The Company adopted this statement during the year ended September 30, 1998. Loss per common share for all periods have been computed in accordance with SFAS No. 128. 1999 1998 1997 Loss per common share (basic and diluted $ 0.52 $0.74 $1.00 ======= ======= ======= 12. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, FASB issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. The Company does not believe that the adoption of SFAS 133 will have a material effect on its financial position or results of operation 13. SEGMENT REPORTING The Company adopted Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information (SFAS No. 131) in the fiscal year ended September 30, 1999. SFAS 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions how to allocate resources and assess performance. The Company's chief decision maker, as defined under SFAS No. 131, is the Chief Executive Officer. To date, the Company has viewed its operations as principally one segment, the research and development of certain drugs and vaccines. As a result, the financial information disclosed herein, materially represents all of the financial information related to the Company's principal operating segment. F-24 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CEL-SCI CORPORATION Dated: December 28, 1999 By: /s/ Maximilian de Clara ------------------------------------- Maximilian de Clara, President By: /s/ Geert R. Kersten Geert R. Kersten, Chief Executive Officer Pursuant to the requirements of the Securities Act of l934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Maximillian de Clara Director and Principal December 28, 1999 MAXIMILIAN DE CLARA Executive Officer /s/ Geert R. Kersten Director, Principal December 28, 1999 GEERT R. KERSTEN Financial Officer and Chief Executive Officer /s/ Alexander G. Esterhazy Director December 28, 1999 ALEXANDER G. ESTERHAZY /s/ John M. Jacquemin Director December 28, 1999 JOHN M. JACQUEMIN CEL-SCI CORPORATION FORM 10-K FISCAL YEAR ENDING SEPTEMBER 30, 1999 EXHIBITS EX-23 2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-55966 and No. 333-90775 of Cel-Sci Corporation on Form S-8 of our report dated December 6, 1999, appearing in this Annual Report on Form 10-K of Cel-Sci Corporation for the year ended September 30, 1999. Deloitte & Touche LLP McLean, Virginia December 28, 1999 EX-27 3 FDS --
5 0000725363 Cel-Sci Corporation 1 US 12-MOS SEP-30-1999 OCT-1-1998 SEP-30-1999 1 2,746,531 3,192,604 132,273 0 0 6,585,980 2,032,213 1,563,586 7,559,772 433,265 0 0 0 170,023 6,928,163 7,559,772 0 469,518 0 7,960,243 0 0 0 (7,490,725) 0 (7,490,725) 0 0 0 (7,490,725) (0.52) (0.52)
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