CEL-SCI CORPORATION
Consolidated Financial Statements for the Years Ended September 30,
1996, 1995, and 1994,
and Independent Auditors' Report
CEL-SCI CORPORATION
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER
30, 1996, 1995, AND 1994: Consolidated Balance Sheets
F-2 Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-
16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
CEL-SCI Corporation:
We have audited the accompanying consolidated balance sheets of CEL-SCI Corpora-
tion (the
Company) as of September 30, 1996 and 1995, and the related consolidated state-
ments of
operations, stockholders' equity, and cash flows for each of the three years in
the
period ended September 30, 1996. These financial statements are the responsibi-
lity of
th
e 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 stan-
dards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstate-
ment. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly,
in all material respects, the financial position of CEL-SCI Corporation as of
September
30, 1996 and 1995, and the results of its operations and its cash flows for each
of the
three years in the period ended September 30, 1996, in conformity with generally
acce
pted accounting principles.
DELOITTE & TOUCHE LLP
Washington, DC
November 27, 1996
CEL-SCI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER
30, 1996, 1995, AND 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
CEL-SCI Corporation (the Company) was incorporated on March 22, 1983, in the
State of Colorado, to finance research and development in biomedical science
and ultimately to engage in
marketing products.
Use of Estimates - The preparation of financial statements in conformity with
generally
accepted accounting principles requires management to make estimates and
assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could
differ from those estimates.
Significant accounting policies are as follows:
Principles of Consolidation - The consolidated financial
statements include the accounts of CEL-SCI Corporation and its wholly
owned subsidiary, Viral Technologies, Inc. All significant intercompany
transactions have been eliminated upon consolidation.
Investments - Effective September 30, 1994, the Company adopted, on a
prospective
basis, Statement of Financial Accounting Standard No. 115, "Accounting for
Certain Debt
and Equity Securities" (SFAS 115) and revised its policy for investments.
Investments
that may be sold as part of the liquidity management of the Company or for other
fac
tors are classified as available-for-sale and are carried at
fair market value. Unrealized gains and losses on such
securities are reported as a separate component of
stockholders' equity. Realized gains and losses on sales
of securities are reported in earnings and computed using
the specific identified cost basis.
Research and Office Equipment - Research and
office equipment is recorded at cost and depreciated using
the straight-line method over estimated useful lives of
five to seven years.
Research and Development Costs - Research and
development expenditures are expensed as incurred.
Patents - Patent expenditures are capitalized and amortized
using the straight-line method over 17 years. In the event changes in
technology or other circumstances impair the value or life of the
patent, appropriate adjustment in the asset value and period of
amortization will be made.
Net Loss Per Share - Net loss per common share is computed by dividing
the net
loss, after increasing the loss for the effect of any preferred stock dividends,
by the
weighted average number of common shares outstanding during the period. Common
stock
equivalents, including options to purchase common stock, were excluded from the
calculat
ion as they were antidilutive.
Investment in Joint Venture - Through October 1995, the investment in
joint
venture has been accounted for by the equity method. The Company's propor-
tionate share
of the net loss of the joint venture has been included in the respective state-
ments of
operations. In October 1995, the Company purchased the remaining 50% interest
in the
join
t venture, and as of October 15, 1995, the operations of the joint venture is
consolidated
in the financial statements of the Company.
Statement of Cash Flows - For purposes of the statements of cash
flows, cash consists principally of unrestricted cash on deposit, and
short-term money market funds. The Company considers all highly liquid
investments with a maturity of less than three months to be cash
equivalents.
Prepaid Expenses - The majority of prepaid expenses consist of bulk
purchases of laboratory supplies to be consumed in the manufacturing of the
Company's product for clinical studies and for its
further development.
Income Taxes - Income taxes are provided using the liability method
under which
deferred tax liabilities or assets are determined based on the difference
between the
financial statement and tax bases of assets and liabilities (i.e., temporary
differences) and are measured at the enacted tax rates. Deferred tax expense is
determined by the
change in the liability or asset for deferred taxes.
Reclassifications - Certain reclassifications have been made for 1995
and 1994
for comparative purposes.
2. INVESTMENTS
The carrying values and estimated market values of investments available-for-
sale at
September 30, 1996, are as follows:
While management has classified investments at September 30, 1996, as available-
for-
sale, management intends to hold such securities to maturity for the foreseeable
future.
The carrying values and estimated market values of investment securities at
September
30, 1995, are as follows:
The gross realized gains and losses of sales of investments available-for-sale
for the
years ended September 30, 1996, 1995, and 1994, are as follows:
3. RESEARCH AND OFFICE EQUIPMENT
Research and office equipment at September 30, 1996 and 1995, consist of the
following:
4. JOINT VENTURE
In April 1986, the Company paid $200,000 cash and issued 50,000 shares of its
$.01 par
value common stock to acquire half the rights to technology which may be useful
in the
diagnosis, prevention and treatment of Acquired Immune Deficiency Syndrome
(AIDS) from
Alpha I Biomedicals, Inc. The Company's stock was valued at $15.00 per share on
the
bas is of arm's-length negotiations. At the time the transaction took
place, the stock was trading at $24.20. Because the cost of these
rights to technology is considered research and development, the
$950,000 purchase price was expensed.
The Company and Alpha 1 Biomedicals, Inc. (Alpha 1) contributed their respective
interests in the technology and $10,000 each to capitalize a joint venture,
Viral
Technologies, Inc. (VTI). VTI was wholly owned by the Company and Alpha 1, each
having
a 50% ownership interest. The total loaned or advanced to VTI by CEL-SCI
Corporation
through Sept
ember 30, 1995, was $1,592,584.
In October 1995, the Company purchased the remaining 50 percent interest in VTI
from
Alpha 1. The Company conveyed 159,170 shares of CEL-SCI common stock as the
consideration for the net assets of VTI with a fair value of approximately
$170,000.
The acquisition was accounted for under the purchase method of accounting with
substantially all of t
he value of the purchase price being expensed as research and development
expense for
the year ended September 30, 1996, as the acquisition represents primarily
research and
development costs. Effective October 31, 1995, the Company has consolidated
CEL-SCI's
and VTI's financial statements, and the consolidated financial statements
reflect the re
sults of VTI's operations since the date of acquisition.
During the two years ended September 30, 1995, VTI had no sales. A summary of
the
operations of VTI is as follows:
The balance sheet of VTI at September 30, 1995 is summarized as follows:
In May 1995, Viral Technologies, Inc. reacquired the
Far Eastern marketing rights for HGP-30 from Nippon
Zeon Co., Ltd. No stock or cash was exchanged at
that time but Nippon Zeon was given a royalty right
to HGP-30 plus the right to recover its investment
in Viral Technologies subject to certain
occurrences. In July 1996, VTI purchased all of the
remaining rights to HGP-30 in return for 45,000
shares of the Company's common stock.
5. CREDIT ARRANGEMENTS
At September 30, 1995, the Company had a promissory note outstanding with a bank
in
the
amount of $811,263. The principal was being repaid over forty-eight consecutive
months beginning February 5, 1995. Interest on the outstanding balance was
based on
the Bank's prime rate plus two percent, which was 10.75% at September 30, 1995,
and
was to be p
aid monthly with the principal payments. The promissory note was secured by all
corporate assets and required the Company to hold a certificate of deposit equal
to 20%
of the outstanding balance of the line of credit with the Bank. Under the
promissory
note the Company was also subject to certain minimum equity, liquidity, and
operating
covenant
s. During the year ended September 30, 1996, the Company paid off the total
outstanding debt. This early payoff was not subject to any prepayment
penalties. There is no such borrowing arrangement at September
30, 1996. 6. RELATED-PARTY TRANSACTIONS
The technology and know-how licensed to the Company was developed by a group of
researchers
under the direction of Dr. Hans-Ake Fabricius and was assigned during 1980 and
1981 to
Hooper Trading Company, N.V., a Netherlands Antilles corporation (Hooper) and
Shanksville
Corporation, also a Netherlands Antilles corporation (Shanksville). Maximillian
de Clara, an officer and director in the Company, and Dr. Fabricius owned 50%
and 30%,
respectively, of each of these companies. The technology and know-how assigned
to Hooper
and Shanksville was licensed to Sittona Company, B.V., a Netherlands corporation
(Sittona), effective September, 1982 pursuant to a licensing agreement which
requires
Sitt
ona to pay to Hooper and Shanksville royalties on income received by Sittona
respecting
the technology and know-how licensed to Sittona. In 1983, Sittona licensed this
technology to the Company. At such time as the Company generates revenues from
the sale
or sublicense of this technology, the Company will be required to pay royalties
to
Sittona
equal to 10% of net sales and 15% of licensing royalties received from
third parties. In that event, Sittona, pursuant to its licensing
agreements with Hooper and Shanksville, will be required to pay to those
companies a minimum of 10% of any royalty payments received from the
Company.
In 1985 Mr. de Clara acquired 100% of the issued and outstanding stock of
Sittona. In
this arrangement Mr. de Clara and Dr. Fabricius, because of their ownership
interests in
Hooper and Shanksville, would have received approximately 50% and 30%,
respectively, of
any royalties paid by Sittona to Hooper and Shanksville; and Mr. de Clara,
through hi
s interest in all three companies (Hooper, Shanksville, and Sittona), could have
received
up to 95% of any royalties paid by the Company.
Between 1985 and October 1996, Mr. de Clara owned all of the issued and out-
standing stock
of Sittona. In October 1996, Mr. de Clara disposed of his interest in Sittona.
The Company has reached a tentative agreement to acquire from Sittona Company,
Hooper
Trading Company, and Shanksville Corporation all rights pertaining to the
Multikine
technology for $500,000 in cash and shares of the Company's common stock with a
value of
$3,500,000. The acquisition of this technology is subject to the execution of a
definitiv
e agreement between the parties.
During the year ended September 30, 1996, a shareholder and officer of the Com-
pany
borrowed $86,100 from the Company to exercise the purchase of 40,000 shares of
common
stock, which was evidenced by a short-term promissory note. The note was sub-
sequently
repaid during the year. In addition, at September 30, 1996, $138,000 was
receivable from
the
officer in Company advances.
7. INCOME TAXES
The approximate tax effect of each type of temporary differences and carry
forward that
gave rise to the Company's tax assets and liabilities at September 30, 1996, is
as
follows:
The Company has available for income tax purposes net operating loss carry
forwards of
approximately $30,711,000, expiring from 1998 through 2007.
In the event of a significant change in the ownership of the Company, the utili-
zation of such carryforwards could be
substantially limited. 8. STOCK OPTIONS, WARRANTS, AND BONUS PLAN
During the year ended September 30, 1996, the shareholders of the Company
approved the adoption of two new Plans, the 1996 Incentive Stock Option
Plan (1996 Incentive Plan) and the 1996 Non-Qualified Stock Option Plan
(1996 Non-Qualified Plan). Shares are reserved under each plan and
total 600,000 and 400,000 shares, respectively.
During the year ended September 30, 1995, the Board of Directors canceled
certain options
under the various stock option plans and replaced them with new options. Under
this
conversion the number of options outstanding did not increase or decrease as the
conversion was an exchange of options within the plans to maximize reserved
shares in the
Pla
ns 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
da
te 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.
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
a
re 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
eve
nt are options to be granted for shares at a price below fair market value at
date of grant. Options granted under the option plans must be granted, or
shares issued under the bonus plan issued, before July
29, 2004.
On September 30, 1992, the shareholders of the Company approved the adoption of
three new
plans, the 1992 Incentive Stock Option Plan (1992 Incentive Plan), the 1992 Non-
Qualified Stock Option Plan (1992 Non-Qualified Plan) and the Stock Bonus Plan
(1992
Bonus Plan). Shares are reserved under each plan and total 100,000, 60,000 and
40,000
shares,
respectively. Only employees of the Company are eligible to receive options
under the
Incentive Plan, while the Company's employees, directors, officers, and
consultants or
advisors are eligible to be granted options under the Non-Qualified Plan or
issued
shares under the Bonus Plan. Terms of the options are to be determined by the
Company's Co mpensation Committee, which will administer all of the plans, but
in no
event are options to be granted for shares at a price below fair market
value at date of grant. Options granted under the option plans must be
granted, or shares issued under the bonus plan issued, before August 20,
2002.
On February 23, 1988, the shareholders of the Company adopted the 1987 Nonquali-
fied
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 pre-
viously
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 is sued pursuant to the 1987 Plan.
Information regarding the Company's stock option plans are 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
expired
in March 1996. The holder of the option had the right to have the shares issu-
able
upon the exercise of the option included in any registration statement filed by
the
Company.
Also during 1991, the Company granted another consultant options to purchase
6,000
shares of the Company's common stock. Options to purchase 667 shares expired in
April
1993. Options to purchase 1,333 shares at $2.50 per share were exercised in
April 1994.
At September 30, 1996, options to purchase 4,000 shares were outstanding and
exercisable at prices ranging from $2.50 to $15.00 per share.
In connection with the 1992 public offering, 5,175,000 common stock purchase
warrants
were issued and are outstanding at September 30, 1995. Every ten warrants
entitle the
holder to purchase one share of common stock at a price of $15.00 per share.
During 1995,
the expiration of these warrants was extended to February 1996. In December
1995, the
expiration of the warrants was extended to February 1997. Subsequent to the
year ended
September 30, 1996, the expiration date of the warrants has been extended to
February
1998. Also in connection with the 1992 offering, the Company issued to the
underwriter
warrants to purchase 9,000 equity units, each unit consisting of 5 shares of
common stock
and 5 warrants entitling the holder to purchase one additional share of common
stock.
The equity unit warrants are outstanding at September 30, 1996, and are exer-
cisablethrough
February 8, 1997, at a price of $255.70 per unit. The common stock warrants in-
cluded in
the units are exercisable at a price of $76.70 per share.
During 1995, the Company granted another consultant options to purchase
17,858 shares of the Company's common stock. These shares became
exercisable on November 2, 1995, and will expire November 1, 1999. These
options are exercisable at $5.60 per share and remain outstanding at
September 30, 1996.
In connection with a private offering in June and September 1995, the Company
issued to
the underwriter warrants to purchase 230,000 equity units. Each unit consisted
of one
share of the Company's common stock. For the June 1995 private placement,
57,500 equity
units were issued at $2.00 per unit and another 57,500 equity units were issued
at $3
.25 per unit. All units issued connection with June 1995 private placement were
exercised at September 30, 1996. For the September 1995 private placement,
57,500 equity
units were issued at $2.40 per unit and another 57,500 equity units were issued
at $3.25
per unit. At September 30, 1996, 21,890 equity units were exercised at $3.25
per unit an
d 21,890 equity units were issued at $2.40 per unit. Remaining equity units of
71,220
were outstanding at September 30, 1996.
During 1996, the Company granted two consultants options to purchase a total of
70,000
shares of the Company's common stock. The 50,000 options became exercisable on
August
21, 1996, at $3.25. Only 24,000 of these 50,000 options were exercised, and the
remaining options expired on September 30, 1996. An additional 20,000 options
became
exercisa
ble on August 31, 1996, at $3.25 and expire in September 1997. Options of
20,000
remain outstanding at September 30, 1996.
9. EMPLOYEE BENEFIT PLAN
During 1993 the Company implemented a defined contribution retirement plan,
qualifying
under Section 401(k) of the Internal Revenue Code, subject to the Employee
Retirement
Income Security Act of 1974, as amended, and covering substantially all CEL-SCI
employees. The employer contributes an amount equal to 50% of each employee's
contribution not
to exceed 3% of the participant's salary. The expense for the year ended
September 30, 1996 and 1995, in connection with this plan was approximately
$29,800 and
$24,900, respectively.
10. LEASE COMMITMENTS
Operating Leases - The future minimum annual rental payments due under
noncancelable operating leases for office and laboratory space are as follows:
Rent expense for the years ended September 30, 1996, 1995, and 1994, was
approximately $177,858, $124,059, and $122,369, respectively.
11. STOCKHOLDERS' EQUITY
In March 1996 the Company sold $1,250,000 of Convertible Notes (the Notes) to
two persons.
The Notes were convertible from time to time, in whole or in part, into shares
of the
Company's Common Stock. The conversion price was the lesser of (i) $5 per share
or
(ii) 80% of the average closing bid price of the Company' Common Stock during
the
five trading days immediately preceding the date of such conversion. The
Notes were payable on December 1, 1996, and accrued interest at 10%
per annum. All of the Notes have since been converted into 250,000
shares of the Company's Common Stock.
During the year ended September 30, 1996, the Company authorized 3,500 shares of
Series
A Preferred Stock (Series A Stock) with a par value of $.01 per share. The
Company
also authorized 5,000 shares of Series B Preferred Stock (Series B Stock) with a
par
value of $.01 per share. Holders of Series A Stock and Series B Stock are
entitled to
divid ends, payable quarterly if declared, at the rate of $17.50 per quarter.
Dividends which are not declared will not accrue nor be cumulative.
Each share of Series A Stock was convertible into shares of common stock equal
in number
to the amount determined by dividing $1,000 by 85% of the closing price of the
Company's
common stock on or after 60 days from issuance, and 83% of the closing price on
or after
90 days from issuance, with the conversion price not less than $3.00 nor more
than
$8.00. Each share of Series B Stock is convertible into shares of common stock
equal in
number to the amount determined by dividing $1,000 by 87% of the closing price
of the
Company's common stock on or after 10 days from the effective registration date
of the
common shares, and 85% of the closing price on or after 40 days from the effec-
tive dat
e, with the conversion price not less than $3.60 nor more than $14.75.
During 1996, the Company issued 3,500 shares of Series A Stock for cash
consideration of $3,500,000 and 5,000 shares of Series B Stock for cash
consideration of $5,000,000. Commissions of $375,000 were paid relative
to the preferred stock offerings and were recorded as a reduction of
additional paid-in capital on the transaction.
Also during 1996, 2,900 shares of Series A Stock were converted into 504,096
shares of
the Company's common stock for consideration of approximately $2,900,000. In
August
1996, the Board of Directors declared dividends on Series A Stock ($17.50 per
quarter)
and cash dividends of $58,794 were paid as of September 31, 1996. Subsequent to
September
30, 1996, the Board of Directors declared dividends on Series A Stock ($17.50
per
quarter)
and Series B Stock ($17.50 per quarter).
On April 28, 1995, the stockholders of the Company approved a 10-for-1
reverse split of the Company's outstanding common stock, which became
effective on May 1, 1995. All shares and per-share amounts have been
restated to reflect the stock split.
The Company also participated in a private offering during 1995. This offering
allowed
for the purchase of one share of common stock and one warrant (a unit) for the
price of
$2.00 per unit. All 1,150,000 shares authorized for the offering were purchased
during
the year ended September 30, 1995. Cash of $2,300,000 was received in June and
Septe
mber 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 r
ecorded in 1993.
12. NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement No. 121
regarding accounting for the impairment of long-lived assets. This statement is
required
to be adopted by the Company in fiscal 1997. At the present time the Company
does not
believe that adoption of this statement will have a material effect on its
financial
positi
on or results of its operations.
In October 1995, the Financial Accounting Standards Board issued Statement No.
123,
Accounting for Stock Based Compensation (SFAS 123), which provides an alterna-
tive to APB
Opinion No. 25 in accounting for stock-based compensation issued to employees.
As
permitted by SFAS 123, the Company plans to continue to account for stock-based
compensation in accordance with APB Opinion No. 25. The Company will present in
its
annual financial statements the additional disclosure required by SFAS 123.
* * * * * *