CEL-SCI CORPORATION
Financial Statements for the Years
Ended September 30, 1995, 1994, and
1993, and Independent Auditors' Report
CELSCI CORPORATION
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT
F1
FINANCIAL STATEMENTS FOR THE YEARS
ENDED
SEPTEMBER 30, 1995, 1994, AND 1993: Balance
Sheets
F2 Statements of Operations
F-3 Statements of Stockholders' Equity
F-4 Statements of Cash Flows F-
5 Notes to Financial Statements
F-6 F-
16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
CEL-SCI Corporation:
We have audited the accompanying balance sheets of CEL-SCI
Corporation as of September 30, 1995 and 1994, and the related
statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended September 30,
1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of CEL-SCI Corporation as of September 30, 1995 and 1994, and the
results of its operations and its cash flows for each of the
three years in the period ended September 30, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, as of
September 30, 1994, the Company changed its method of accounting
for certain investments in debt and equity securities to conform
with Statement of Financial Accounting Standards No. 115.
Washington, DC
November 29, 1995
CEL-SCI CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CEL-SCI Corporation (the Company) was incorporated on March 22, 1983,
in the State of Colorado, to finance
research and development in biomedical science and ultimately to
engage in marketing products. Significant accounting policies are as
follows: Investments Effective September 30, 1994, the Company
adopted, on a prospective basis, Statement of Financial Accounting
Standard No. 115, "Accounting for
Certain Debt and Equity Securities" (SFAS 115) and revised its policy
for investments. Investments that may be sold as part of the liquidity
management of the Company or for other factors are classified as
available 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. The adoption of SFAS 115, which has not been
applied
retroactively to prior years' financial statements, resulted in a
decrease in stockholders' equity of $85,753 for
the net unrealized losses on investments availableforsale at September
30, 1994. As of
September 30, 1995, all debt and equity securities had been disposed
of and any unrealized gains or losses were recognized during the year
ended September 30, 1995 (see Note 2).
Prior to September 30, 1994, all investments available-
for sale
were carried at the lower of aggregate amortized
cost or market value.
Research and Office Equipment Research and office equipment
is recorded at cost and depreciated using the straight line method
over five and seven years
estimated useful lives.
Research and Development Costs Research and development
expenditures are expensed as incurred.
Patents Patent expenditures are capitalized and
amortized using
the straight-line method over 17 years. In the
event changes in technology or other circumstances impair the value
or life of the patent, appropriate adjustment in the asset value and
period of amortization will be made.
Net Loss Per Share Net loss per common share is based on
the weighted average number of common shares outstanding during the
period. Common stock
equivalents, including options to purchase common stock, are excluded
from the calculation as they are antidilutive.
Investment in Joint Venture Investment in joint venture is accounted
for by the equity method.
The Company's proportionate share of the net loss
of the joint
venture is included in the respective statements
of operations.
Statement of Cash Flows For purposes of the statements of cash
flows, cash consists principally of unrestricted cash on deposit, and
shortterm money market funds. The Company considers all highly
liquid investments with a maturity of less than three months to be
cash equivalents.
Prepaid Expenses The majority of prepaid expenses consist of bulk
purchases of laboratory supplies to be
consumed in the manufacturing of the Company's product for clinical
studies and for its further development.
Income Taxes Effective October 1, 1993, the Company adopted Statement
of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" (SFAS 109). SFAS 109 requires an asset and liability approach
for reporting income taxes. Implementation of SFAS 109 in 1994 did
not have any effect on the Company's net earnings and reported
financial position and prior financial statements have not been
restated.
Reclassifications Certain reclassifications have been made for 1994
and 1993 for comparative purposes.
2. INVESTMENTS
The carrying values and estimated market values of investments
available for-sale at September 30, 1995, are as follows:
The carrying values and estimated market
values of investment securities at
September 30, 1994, are as follows:
The gross realized gains and losses of
sales of investments available-for-sale
for the years
ended September 30, 1995, 1994, and 1993, are as follows:
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1995 and 1994, consist of
the following:
4. JOINT VENTURE
In April 1986, the Company paid $200,000 cash and issued 500,000
shares of its $.01 par value common stock to acquire half the
rights to technology which may be useful in the diagnosis,
prevention and treatment of Acquired Immune Deficiency Syndrome
(AIDS) from Alpha I Biomedicals, Inc. The Company's stock was
valued at $1.50 per share on the basis of arm'slength
negotiations. At the time the transaction took place, the stock
was trading at $2.42. Because the cost of these rights to
technology is considered research and development, the $950,000
purchase price was expensed.
The Company and Alpha 1 Biomedicals, Inc. (Alpha 1) contributed
their respective interests in the technology and $10,000 each to
capitalize a joint venture, Viral Technologies, Inc. (VTI). VTI
is wholly owned by the Company and Alpha 1, each having a 50%
ownership interest. The total loaned or advanced to VTI by CEL-SCI
Corporation through September 30, 1995, was $1,592,584 (see Note
13).
During the three years ended September 30, 1995, VTI had no sales.
The operations of VTI were as follows:
The balance sheets of VTI at September 30, 1995 and 1994, are
summarized as follows:
On December 17, 1987, Viral Technologies, Inc., entered into a
licensing agreement with Nippon Zeon Company, Ltd., a Japanese
company. Under the agreement, Nippon Zeon will engage in the
development and testing and, if development is successful, the
marketing of the potential AIDS vaccine in the Pacific Rim area.
As a result,
Viral Technologies, Inc., received precommercialization payments
of $850,000 during the year ended September 30, 1988.
During the year ended September 30, 1995, VTI purchased back from
Nippon Zeon the licensing agreement. No cash or
stock was exchanged; however, Nippon Zeon retains a royalty on
any future sales of the drug HGP-30 in its former exclusive
licensed territories.
5. CREDIT ARRANGEMENTS
At September 30, 1995, the Company had a promissory note
outstanding with a bank in the amount of $811,263. This
promissory note was converted in November
1994 from a prior line of credit. The line of credit
outstanding at September 30, 1994, was $788,601, and the
Company subsequently drew down
additional amounts during the year ended September 30, 1995,
prior to converting the line of credit to a promissory note.
The principal is being repaid over forty-eight consecutive
months beginning February 5, 1995. Interest on the
outstanding balance is calculated at the Bank's prime rate
plus two percent, which is 10.75% at September 30, 1995, and
is to be paid monthly with the principal payments. The
promissory note is secured by all corporate assets and
requires the Company to hold a certificate of deposit equal
to 20% of the outstanding balance of the line of credit with
the Bank. Under the promissory note the Company is also
subject to certain minimum equity, liquidity, and operating
covenants.
6. COMMITMENTS AND CONTINGENCIES
In 1993, an officer and director of the Company was involved
in legal proceedings concerning shares of the
Company's common stock. The officer and director was acting
on behalf of the Company in trying to secure financing, and
the Company paid legal fees in connection with these
proceedings and indemnified the officer for any loss he
suffered upon the settlement of these matters.
During 1992, one of the matters was settled by the officer
and director delivering 3,000 shares of the Company's common
stock to one plantiff and paying this plantiff $200,000. In
the other matter, a European Court awarded a different
plantiff 25,000 shares of the Company's common stock owned by
the officer and director. In October 1993, the Company issued
25,000 shares of common stock to the plaintiff to satisfy the
judgment and in lieu of reimbursement to the officer and
director for this claim. The value of the shares issued,
$202,500, was expensed during 1993 and was included in
accrued expenses at September 30, 1993.
7. RELATED-PARTY TRANSACTIONS
The technology and know-how licensed to the Company was
developed by a group of researchers under the direction of
Dr. Hans-Ake Fabricius and was assigned during 1980 and 1981
to Hooper Trading Company, N.V., a Netherlands Antilles
corporation (Hooper) and Shanksville Corporation, also a
Netherlands Antilles corporation (Shanksville). Maximillian
de Clara, an officer and director in the Company, and Dr.
Fabricius own 50% and 30%, respectively, of each of these
companies. The technology and know how assigned to Hooper and
Shanksville was licensed to Sittona Company, B.V., a
Netherlands corporation (Sittona), effective September, 1982
pursuant to a licensing agreement which requires Sittona to
pay to Hooper and Shanksville royalties on income received by
Sittona respecting the technology and knowhow licensed to
Sittona. In 1983, Sittona licensed this technology to the
Company. At such time as the
Company generates revenues from the sale or sublicense of
this
technology, the Company will be required to pay royalties to
Sittona equal to 10% of net sales and 15% of licensing
royalties received from third parties. In that event,
Sittona, pursuant to
its licensing agreements with
Hooper and Shanksville, will be required to pay to those
companies a minimum of 10% of any royalty payments received
from the Company.
In 1985 Mr. de Clara acquired 100% of the issued and
outstanding stock of Sittona. Mr. de Clara and Dr. Fabricius,
because of their ownership interests in Hooper and
Shanksville, could receive approximately 50% and 30%
respectively, of any royalties paid by Sittona to Hooper and
Shanksville, and Mr. de Clara, through his interest in all
three companies (Hooper, Shanksville, and Sittona), will
receive up to 95% of any royalties paid by the Company.
During 1992, the Company reimbursed an officer and director
for legal fees incurred in connection with certain legal
proceedings as discussed in Note 6. In addition, during 1992
the Company paid the officer and director $200,000,
representing the amount that he paid in connection with one
of the legal proceedings discussed in Note 6 and, in 1993,
issued 3,000 shares of common stock to the officer and
director as reimbursement for shares he delivered in
connection with the proceeding. The $200,000 payment was
expensed in 1992, and the value of the 3,000 shares, $20,100
was expensed in 1993.
8. INCOME TAXES
The approximate tax effect of each type of temporary
differences and carryforward that gave rise to the Company's
tax assets and liabilities at September 30, 1995,
is as follows:
The Company has available for income tax purposes net
operating loss carryforwards of approximately $24,370,937,
expiring from 1998 through 2007.
In the event of a significant change in the ownership of the
Company, the utilization of such carryforwards could be
substantially limited.
9. STOCK OPTIONS, WARRANTS, AND BONUS PLAN
During the year ended September 30, 1995, the Board of Directors
canceled certain options under the various stock option plans and
replaced them with new options. Under this conversion the number of
options outstanding did not increase or decrease as the conversion
was an exchange of options within the plans to maximize reserved
shares in the Plans with the options granted.
The shareholders of the Company approved the adoption of the 1995
Non Qualified Stock Option Plan (1995 NonQualified Plan) and
reserved 400,000 shares under the plan. Terms of the options are to
be determined by the Company's Compensation Committee, but in no
event are options to be granted for shares at a price below fair
market value at the date of grant.
On February 23, 1988, the shareholders of the Company adopted the
1987 Nonqualified Stock Option and Stock Bonus Plan (the 1987 Plan).
This plan reserved 200,000 shares of the Company's previously
unissued common stock to be granted as incentive stock options to
employees.
The 1987 Plan reserved 50,000 shares of the Company's previously
unissued common stock to be granted as stock bonuses to employees.
The exercise price of the options could not be established at less
than fair market value on the date of grant and the option period
could not be greater than ten
years. During 1993, the 1987 Plan was terminated and no further
options will be granted and no further bonus shares will be issued
pursuant to the 1987 Plan.
On September 30, 1993, the shareholders of the Company approved the
adoption of three new plans, the 1993 Incentive Stock Option Plan
(1993 Incentive Plan), the 1993 NonQualified Stock Option Plan (1993
NonQualified Plan) and the Stock Bonus Plan (1993 Bonus Plan).
Shares are reserved under each plan and total 100,000, 60,000 and
40,000 shares, respectively. Only employees of the Company are
eligible to receive options under the Incentive Plan, while the
Company's employees, directors, officers, and consultants or
advisors are eligible to be granted options under the NonQualified
Plan or issued shares under the Bonus Plan. Terms of the options
are to be determined by the Company's Compensation Committee, which
will administer all of the plans, but in no event are options to be
granted for shares at a price below fair market value at date of
grant. Options granted under the option plans must be granted, or
shares issued under the bonus plan issued, before August 20, 2002.
On July 29, 1994, the Board of Directors approved the adoption of
two new plans, subject to shareholder approval, the 1994 Incentive
Stock Option Plan (1994 Incentive Plan) and the 1994 Non-Qualified
Stock Option Plan (1994 Non-Qualified). Shares are reserved under
each plan and total 100,000 shares for each plan. Only employees of
the Company are eligible to receive options under the 1994 Incentive
Plan, while the Company's employees, directors, officers, and
consultants or advisors are eligible to be granted options under the
1994 NonQualified Plan. Terms of the options are to be determined
by the Company's Compensation Committee, which will administer all
of the plans, but in no event are options to be granted for shares
at a price below fair market value at date of grant. Options granted
under the option plans must be granted, or shares issued under the
bonus plan issued, before July 29, 2004.
Information regarding the Company's stock option plan is summarized
as follows:
During 1991, the Company granted a consultant an option to purchase
50,000 shares of the Company's common stock. The option is
exercisable at $13.80 per share
and expires in March 1996. The holder of the option has the right
to have the shares issuable upon the exercise of the option included
in any registration statement filed by the Company.
Also during 1991, the Company granted another consultant options to
purchase 6,000 shares of the Company's common stock. Options to
purchase 667 shares expired in April 1993. Options to purchase
1,333 shares at $2.50 per share were exercised in April 1994. At
September 30, 1995, options to purchase 4,000 shares were
outstanding and exercisable at prices ranging from $2.50 to $15.00
per share.
In connection with the 1992 public offering, 5,175,000 common stock
purchase warrants were issued and are outstanding at September 30,
1995. Every ten warrants entitle the holder to purchase one share of
common stock at a price of $46.50 per share. During 1995, the
expiration of these warrants was extended to February 1996. The
Company may accelerate the expiration date of the warrants by giving
30 days notice to the warrant holders, provided, however, that at
the time the Company gives such notice of acceleration (1) the
Company has in effect a current registration statement covering the
shares of common stock
issuable upon the exercise of the warrants and (2) at anytime during
the 30-day period preceding such notice, the average closing bid
price of the Company's common stock has been at least 20% higher
than the warrant exercise price for 15 consecutive trading days.
Also in connection with the 1992 offering, the Company issued to the
underwriter warrants to purchase 9,000 equity units, each unit
consisting of 5 shares of common
stock and 5 warrants entitling the
holder to purchase one additional share of common
stock. The equity unit warrants are outstanding at
September 30, 1995 and are exercisable through
February 8, 1997, at a price of $255.70 per unit.
The common stock warrants included in the units are
exercisable at a price of $76.70 per share.
During 1995, the Company granted another consultant
options to purchase 17,858 shares of the Company's
common stock. These shares became exercisable on
November 2, 1995, and will expire November 1, 1999.
These options are exercisable at $5.60 per share.
10.EMPLOYEE BENEFIT PLAN
During 1993 the Company implemented a defined
contribution retirement plan,
qualifying under Section 401(k)
of the Internal Revenue Code, subject to the
Employee Retirement Income Security Act of 1974, as
amended, and covering substantially all CELSCI
employees. The employer contributes an amount
equal to 50% of each employee's contribution not to
exceed 6% of the participant's salary. The expense
for the year ended September 30, 1995 and 1994, in
connection with this plan was approximately $24,913
and $16,160, respectively.
11.LEASE COMMITMENTS
Operating Leases The future minimum
annual rental payments due under
noncancelable operating leases for
office and laboratory space are as
follows:
Rent expense for the year ended September 30, 1995, 1994, and
1993, was approximately $124,059, $122,369, and $55,000,
respectively.
12.STOCKHOLDERS' EQUITY
On April 28, 1995 the stockholders of the Company approved a
10for1 reverse split of the Company's outstanding common stock,
which became effective on May 1, 1995. All shares and per-share
amounts have been restated to reflect the stock split.
The Company also participated in a private offering during 1995.
This offering allowed for the purchase of one share of common
stock
and one warrant (a unit) for the
price of $2.00 per unit. All 1,150,000 shares authorized for
the offering were purchased during the year ended September 30,
1995. Cash of $2,300,000 was received in June and September
1995. Commissions of $344,150 were paid or payable relative to
the offering at September 30, 1995.
During 1994, the Company granted 1,500 shares of common stock
to an officer as a bonus award. The Company also issued 25,000
shares to satisfy the judgment against an officer and
director. The issuance was to the
plantiff in lieu of reimbursement to
the
officer and director. The judgment was
settled in 1993 and the expense of the
issuance was
recorded in 1993.
During 1993, the Company received $27,333 cash for 7,333
shares of common stock.
13.SUBSEQUENT EVENTS
In October 1995, the Company purchased Alpha 1's 50 percent
interest in VTI. The Company conveyed 159,170 shares of
common stock as full consideration for all of the VTI capital
stock owned by Alpha 1. The acquisition of Alpha 1's
interest will be accounted for as purchase with substantially
all of the value of the purchase price being expensed as
research and development costs.
On December 8, 1995, the Board of Directors authorized the
extension of the Company's warrants from
February 6, 1996, to February 6, 1997.
14.NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board
issued Statement No. 121 regarding accounting for the
impairment of long lived assets. This statement is required
to be adopted by the Company in fiscal 1997. At the present
time the Company does not believe that adoption of this
statement will have a material effect on its financial
position or results of its operations.
In October 1995, the Financial Accounting Standards Board
issued Statement No. 123, Accounting for Stock Based
Compensation. This statement is required to be adopted by
the Company in fiscal 1997. The Company has not yet
determined the impact of the adoption
of this statement on its financial
position or results of its operations.