CEL-SCI CORPORATION
Financial Statements for the Years Ended
September 30, 1995, 1994, and 1993,
and Independent Auditors' Report
CEL-SCI CORPORATION
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F-
1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
SEPTEMBER 30, 1995, 1994, AND 1993:
Balance Sheets F-
2
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 available-for-sale 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-
forsale 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 short-term money market funds. The
Company considers all highly liquid investments with a
maturity of less than three months to be cash
equivalents.
Prepaid Expenses - The majority of prepaid expenses
consist of bulk purchases of laboratory supplies to be
consumed in the manufacturing of the Company's product
for clinical studies and for its further development.
Income Taxes - 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's-length negotiations. At the time the
transaction took place, the stock was trading at $2.42.
Because the cost of these rights to technology is considered
research and development, the $950,000 purchase price was
expensed.
The Company and Alpha 1 Biomedicals, Inc. (Alpha 1)
contributed their respective interests in the technology and
$10,000 each to capitalize a joint venture, Viral
Technologies, Inc. (VTI). VTI is wholly owned by the
Company and Alpha 1, each having a 50% ownership interest.
The total loaned or advanced to VTI by 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
fortyeight 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 know-how licensed
to Sittona. In 1983, Sittona licensed this technology to
the Company. At such time as the Company generates revenues
from the sale or sublicense of this technology, the Company
will be required to pay royalties to Sittona equal to 10% of
net sales and 15% of licensing royalties received from third
parties. In that event, Sittona, pursuant to its licensing
agreements with Hooper and Shanksville, will be required to
pay to those companies a minimum of 10% of any royalty
payments received from the Company.
In 1985 Mr. de Clara acquired 100% of the issued and
outstanding stock of Sittona. Mr. de Clara and Dr.
Fabricius, because of their ownership interests in Hooper
and Shanksville, could receive approximately 50% and 30%
respectively, of any royalties paid by Sittona to Hooper and
Shanksville, and Mr. de Clara, through his interest in all
three companies (Hooper, Shanksville, and Sittona), will
receive up to 95% of any royalties paid by the Company.
During 1992, the Company reimbursed an officer and director
for legal fees incurred in connection with certain legal
proceedings as discussed in Note 6. In addition, during
1992 the Company paid the officer and director $200,000,
representing the amount that he paid in connection with one
of the legal proceedings discussed in Note 6 and, in 1993,
issued 3,000 shares of common stock to the officer and
director as reimbursement for shares he delivered in
connection with the proceeding. The $200,000 payment was
expensed in 1992, and the value of the 3,000 shares, $20,100
was expensed in 1993.
8. INCOME TAXES
The approximate tax effect of each type of temporary
differences and carryforward that gave rise to the Company's
tax assets and liabilities at September 30, 1995, 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 Non-Qualified
Plan) and reserved 400,000 shares under the plan. Terms of
the options are to be determined by the Company's
Compensation Committee, but in no event are options to be
granted for shares at a price below fair market value at the
date of grant.
On February 23, 1988, the shareholders of the Company
adopted the 1987 Nonqualified Stock Option and Stock Bonus
Plan (the 1987 Plan). This plan reserved 200,000 shares of
the Company's previously unissued common stock to be granted
as incentive stock options to employees. The 1987 Plan
reserved 50,000 shares of the Company's previously unissued
common stock to be granted as stock bonuses to employees.
The exercise price of the options could not be established
at less than fair market value on the date of grant and the
option period could not be greater than ten years. During
1993, the 1987 Plan was terminated and no further options
will be granted and no further bonus shares will be issued
pursuant to the 1987 Plan.
On September 30, 1993, the shareholders of the Company
approved the adoption of three new plans, the 1993 Incentive
Stock Option Plan (1993 Incentive Plan), the 1993 Non
Qualified Stock Option Plan (1993 Non-Qualified Plan) and
the Stock Bonus Plan (1993 Bonus Plan). Shares are reserved
under each plan and total 100,000, 60,000 and 40,000 shares,
respectively. Only employees of the Company are eligible to
receive options under the Incentive Plan, while the
Company's employees, directors, officers, and consultants or
advisors are eligible to be granted options under the Non-
Qualified Plan or issued shares under the Bonus Plan. Terms
of the options are to be determined by the Company's
Compensation Committee, which will administer all of the
plans, but in no event are options to be granted for shares
at a price below fair market value at date of grant.
Options granted under the option plans must be granted, or
shares issued under the bonus plan issued, before August 20,
2002.
On 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 CEL-SCI employees. The employer
contributes an amount equal to 50% of each employee's
contribution not to exceed 6% of the participant's salary.
The expense for the
year ended September 30, 1995 and 1994, in connection with
this plan was approximately $24,913 and $16,160,
respectively.
11.LEASE COMMITMENTS
Operating Leases - The future minimum annual rental payments
due under noncancelable operating leases for office and
laboratory space are as follows:
Rent expense for the year ended September 30, 1995, 1994, and
1993, was approximately $124,059, $122,369, and $55,000,
respectively.
12.STOCKHOLDERS' EQUITY
On April 28, 1995 the stockholders of the Company approved a
10-for-1 reverse split of the Company's outstanding common
stock, which became effective on May 1, 1995. All shares
and per-share amounts have been restated to reflect the
stock split.
The Company also participated in a private offering during
1995. This offering allowed for the purchase of one share
of common stock and one warrant (a unit) for the price of
$2.00 per unit. All 1,150,000 shares authorized for the
offering were purchased during the year ended September 30,
1995. Cash of $2,300,000 was received in June and September
1995. Commissions of $344,150 were paid or payable relative
to the offering at September 30, 1995.
During 1994, the Company granted 1,500 shares of common
stock to an officer as a bonus award. The Company also
issued 25,000 shares to satisfy the judgment against an
officer and director. The issuance was to the plantiff in
lieu of reimbursement to the officer and director. The
judgment was settled in 1993 and the expense of the issuance
was recorded in 1993.
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.
* * * * * *