10-K 1 0001.txt 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, 2000. 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 22, 2000, as quoted on the American Stock Exchange, was approximately $21,000,000. 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 22, 2000, the Registrant had 20,459,700 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 the drugs and vaccines described below. MULTIKINE 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 lymphokines and cytokines. MULTIKINE is being tested to determine if it is effective in improving the immune response of cancer patients. MULTIKINE has been tested in over 140 patients in the past few years in clinical trials conducted in the U.S., Canada, Europe and Israel. Most of these patients were head and neck cancer patients, but some studies were also conducted in prostate cancer patients and HIV-infected patients. The safety profile was found to be very good and the Company believes that the tumor response data suggest that further studies are warranted. The Company's primary focus for the development of MULTIKINE is to prove its usefulness in the treatment of head and neck cancer, which constitutes about 6% of all cancer worldwide. The Company is currently conducting three additional head and neck cancer studies to determine the best regimen for treating the patients. With a secondary focus, the Company is also conducting studies with MULTIKINE in prostate cancer patients and is planning to start a cervical cancer study by the first quarter of 2001. Although the Company has the approval to start a 20 patient breast cancer study in Israel, given the current problems in that region, the Company may not pursue this study at the present time. 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 drug that would meet the stringent regulatory requirements for advanced human studies. This program included building a pilot scale manufacturing facility. Since that time, MULTIKINE has been well tolerated in clinical studies involving more than 140 patients. Some of the more recent clinical data were presented at the 5th International Congress on Head and Neck Cancer in San Francisco in August, 2000. The study enrolled advanced primary head and neck cancer patients who were treated prior to surgery and/or radiation for 2 weeks. Dr. Dudkevitch from the Department of Otolaryngology at the Rabin Medical Center, Israel, presented data showing that, of the 12 patients treated, two patients had a complete tumor response (100% tumor reduction) following the 2-week treatment with the MULTIKINE regimen. He also noted that upon histopathological examination of the tissue removed during surgery, no tumor residues were found in those patients. Another 4 patients showed a partial (greater than 50%) tumor reduction and six patients had tumor reductions of less than 50%. Two patients refused surgery after treatment with MULTIKINE. The researcher also reported that several of the patients had increased tongue mobility and/or reduction or elimination of local pain. These are considered to be important indicators for the patient's quality of life. There were no tumor progressions or adverse local changes, nor was there evidence of toxicity from MULTIKINE. Both recovery after operation and wound healing were normal. A substantial part of the oral presentation was spent on a discussion of the pathology findings. The researchers reported that from biopsy samples of 10 patients analyzed before and after treatment, an increase in the degree of lymphocytic infiltration was noted in 5 patients. Of special interest was the new post-treatment appearance of multinucleated histiocytes in 5 patients with significant tumor reductions. The multinucleated histiocytes were detected in two specific locations, namely around the keratin debris and in the tumor-stroma interface, and they appear to be actively engulfing the tumor cells. Promising results were also seen in other clinical studies, most of which tested different dosages and routes of administration, although tumor reductions were not as significant as those noted in the Israeli study. The focus of three new studies involving an additional 60 patients is to define the best treatment regimen for Multikine. The Company also plans to start a Phase I clinical trial with Edmund Tramont, M.D., of the University of Maryland Biotechnology Institute's (UMBI) in the first quarter of 2001 in HIV and HPV (Human Papilloma Virus) co-infected women with cervical cancer. The goal of the study is to obtain safety and preliminary efficacy data on Multikine as a treatment for pre-cancerous lesions of the cervix (dysplasia) and human cancer/neoplasia. Most cervical dysplasia and cancer is due to infection with HPV. The rationale for using MULTIKINE in the treatment of cervical cancer is that MULTIKINE will help correct this defect and safely boost the patients' immune systems to a point where their immune systems can fight and eliminate the virally induced cancer. Similar efforts are underway in prostate and breast cancer. However, due to the size of the Company's clinical department, the Company has been unable to move aggressively in these areas. In November 2000, the Company concluded a development, supply and distribution agreement with Orient Europharma of Taiwan. The agreement gives Orient Europharma the exclusive marketing rights to Multikine for all cancer indications in Taiwan, Singapore, Hong Kong and Malaysia. The agreement provides for Orient Europharma to fund the clinical trials needed to obtain marketing approvals in the four countries for head and neck cancer, nasal pharyngeal cancer and potentially cervical cancer, which are very prevalent in Far East Asia. The Company may use the clinical data generated in these trials to support applications for marketing approvals for Multikine in other parts of the world. Under the agreement, the Company will manufacture Multikine and Orient Europharma will purchase the product from the Company for distribution in the territory. Both parties will share in the revenue from the sale of Multikine. 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 in 2006. 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 L.E.A.P.S. (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, L.E.A.P.S. 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 technology to develop potential treatments and/or vaccines against various diseases. Present target diseases are herpes simplex, AIDS, prostate cancer and breast cancer. 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 L.E.A.P.S. technology. This agreement was extended in 1998 and again in 2000. 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 present the number of malaria cases is 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. The large majority of the malaria studies were conducted in outbred CD-1 mice, which may be more representative of a human population than inbred mice. Protection against rodent malaria in those experiments was observed in 62-70% of the vaccinated animals compared to protection levels between 0-30% observed in the control groups. The L.E.A.P.S. construct used in this study was a combination of a peptide representing a mouse malaria epitope linked to another peptide, called the T-cell binding ligand, which was designed to specifically stimulate the immune system. Each of these two peptides was given individually as a control. In all experiments, the level of protection achieved after immunization with the L.E.A.P.S. construct was significantly higher than when the two peptides were given individually. The studies showed that the protective immune responses required the presence of T- cells having a marker called CD4, typically found on helper T- cells, as well as the presence of gamma Interferon, which suggests that a cellular immune response may be involved in protection. 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 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. In October 2000, the Company received approval for funding of a Phase II grant from the National Institute of Allergy and Infectious Diseases. This grant was awarded following the successful completion of studies, funded by the Phase I grant, which showed increased protection from death in an animal challenge model of herpes simplex. The Phase II grant, worth about $764,000 over two years, will support the further development of a herpes simplex virus vaccine based on the Company's L.E.A.P.S. technology. 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 L.E.A.P.S. 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 patents 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. AIDS VACCINE The Company is involved in the development of a preventive vaccine against HIV infection. This vaccine has completed Phase II human clinical trials in the Netherlands. The vaccine, which is derived from the Company's HGP-30 technology, is primarily directed against HIV subtype C, the most prevalent HIV subtype in Africa and other third world countries. Currently the Company is no longer pursuing further development of an AIDS vaccine because of the political position of certain African governments towards an AIDS vaccine. 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. The Company 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 former 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 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. Following the completion of the current Phase II study involving HPG-30W, the Company will no longer commit its resources toward the further development of this vaccine. Although the Company will attempt to continue the development of HPG-30W by means of joint ventures or licensing arrangements with third parties, the Company will focus its efforts on the further development of MULTIKINE. Although there has been important independent research showing the possible significance of the p17 region of HIV-1, there can be no assurance that 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 the Company 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, the Company's wholly owned subsidiary, Viral Technologies, Inc. ("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, VTI 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. RESEARCH AND DEVELOPMENT Since 1983, and through September 30, 2000, approximately $32,245,000 has been expended on Company-sponsored research and development, including approximately $4,982,000, $4,461,000 and $3,834,000, respectively during the years ended September 30, 2000, 1999 and 1998. 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. The Company has 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. - Professor of Medicine, Microbiology and Immunology, Assistant Director of Experimental Therapeutics and Translational Research, Arizona Cancer Center, Tucson. Michael J. Mastrangelo, M.D. - 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. 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. There can be no assurance that the Company will be successful in obtaining approvals from any regulatory authority to conduct further clinical trials or to manufacture and sell its products. The lack of regulatory approval for the Company's products will prevent the Company from generally marketing its 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. 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. The Company's 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. The Company may encounter problems, delays and additional expenses in developing marketing plans with outside firms. In addition, the Company may experience other limitations involving the proposed sale of its products, such as uncertainty of third-party reimbursement. There is no assurance that the Company can successfully market any products which they may develop or market them at competitive prices. Some of the clinical trials funded to date by the Company have not been approved by the FDA, but rather have been conducted pursuant to approvals obtained from certain states and foreign countries. Conducting clinical studies in foreign countries is normal industry practice since these studies can often be completed in less time and are less expensive than studies conducted in the U.S. Conducting clinical studies in foreign countries is also beneficial since the Company will need the approval from a foreign country prior to the time the Company can market any of its drugs in the foreign country. However, since the results of these clinical trials may not be accepted by the FDA, competitors which are conducting clinical trials approved by the FDA may have an advantage in that the products of such competitors are further advanced in the regulatory process than those of the Company. The Company is conducting its trials in compliance with internationally recognized standards, which by following the Company anticipates obtaining acceptance from world regulatory bodies, including the FDA. 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. In October 2000, the Company expanded its fully-equipped laboratory facilities by 6,200 square feet to 17,900 square feet. This space is leased by the Company for approximately $10,450 per month. The laboratory lease expires in 2004, with extensions available until 2014. ITEM 3. LEGAL PROCEEDINGS None. 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 22, 2000 there were approximately 2,600 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 -------------- ---- --- 12/31/98 $ 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 12/31/99 $ 3.06 $2.18 3/31/00 $ 9.87 $2.25 6/30/00 $ 6.37 $2.75 9/30/00 $ 3.56 $2.20 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, ----------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Investment Income and Other Revenues: $442,551 $469,518 $792,994 $438,145 $ 322,370 Expenses: Research and Development 4,978,714 4,461,051 3,833,854 6,011,670 3,471,477 Depreciation and Amortization 220,994 268,210 295,331 313,547 290,829 General and Administrative 3,721,240 3,230,982 3,106,492 2,302,386 2,882,958 Equity in loss of joint venture -- -- -- -- 3,772 --------------------------------------------------------- Net Loss $(8,478,397)$(7,490,725)$(6,442,683)$(8,189,458)$(6,326,666) =========== =========== ========== =========== =========== Loss per common share (basic and diluted) $(0.44) $(0.52) $(0.74) $(1.00) $(1.16) Weighted average common Shares outstanding 19,259,190 14,484,352 11,379,437 9,329,419 6,425,316 Balance Sheet Data: ------------------ September 30, ------------------------------------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Working Capital $11,725,940 $6,152,715 $12,926,014 $4,581,247 $10,266,104 Total Assets 13,808,882 7,559,772 14,431,813 6,334,397 11,878,370 Total Liabilities 847,423 461,586 456,529 508,617 294,048 Shareholders' Equity 12,961,459 7,098,186 13,975,284 5,825,780 11,584,322 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 2000 Interest income during the year ended September 30, 2000 reflects interest received and accrued on investments. Research and development expense in 2000 is higher than in 1999 because the Company is running more and larger clinical trials. General and administrative expenses have increased due to the lawsuit brought by former directors which was settled in May of 2000. 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 L.E.A.P.S. 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. 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, patent applications, the repayment of debt, the continuation of Company-sponsored research and development, administrative costs and construction of laboratory facilities. Inasmuch as the Company does not anticipate realizing revenues until such time as it enters into licensing arrangements regarding the technology and know-how licensed to it (which could take a number of years), the Company is mostly dependent upon the proceeds from the sale of its securities to meet all of its liquidity and capital resource requirements. In 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 and January 2000, the Company sold 1,148,592 shares of its common stock, plus warrants for the purchase of an additional 402,007 shares of common stock to a group of private investors for $2,800,000. 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. As of December 31, 2000 the investors in the private offering were entitled to receive 213,834 shares of common stock upon the exercise of the warrants. In March 2000, the Company sold 1,026,666 shares of its common stock, plus warrants for the purchase of an additional 413,334 shares of common stock, to the same private investors referred to above for $7,700,000. The warrants are exercisable at a price of $8.50 per share at any time prior to March 21, 2003. 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 $7.50 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 $7.50 per share. During fiscal 2001, the Company expects that it will spend approximately $5,000,000 on research, development, and clinical trials. 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. 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 70 Director and President Geert R. Kersten, Esq. 41 Director, Chief Executive Officer, Secretary and Treasurer Patricia B. Prichep 49 Senior Vice President of Operations M. Douglas Winship 51 Senior Vice President of Regulatory Affairs and Quality Assurance Dr. Eyal Talor 44 Senior Vice President of Research and Manufacturing Dr. Daniel H. Zimmerman 59 Senior Vice President of Research, Cellular Immunology Michael Luecke 58 Senior Vice President of Business Development Alexander G. Esterhazy 56 Director John M. Jacquemin 53 Director F. Donald Hudson 67 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, Dr. Talor was Director of Research, Manufacturing and Quality Control, as well as the Director of the Clinical Laboratory, for Chesapeake Biological Laboratories, Inc. From 1991 to 1993, Dr. Talor was a scientist with SRA Technologies, Inc., as well as the director of SRA's Flow Cytometry Laboratory (1991-1993) and Clinical Laboratory (1992-1993). During 1992 and 1993, Dr. Talor was also the Regulatory Affairs and Safety Officer For SRA. Since 1987, Dr. Talor has held various positions with the John Hopkins University, including course coordinator for the School of Continuing Studies (1989-Present), research associate and lecturer in the Department of Immunology and Infectious Diseases (1987-1991), and associate professor (1991-Present). 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. F. Donald Hudson has been a director of the Company since May 19, 2000. Mr. Hudson was previously a director of the Company between May 1992 and March 1999. Since October 1995 Mr. Hudson has been a consultant in the biotechnology field. From December 1994 to October 1995 Mr. Hudson was President and Chief Executive Officer of VIMRx Pharmaceuticals, Inc. (now Nexell Corp.). Mr. Hudson was reappointed as a director on May 19, 2000 in connection with the settlement of litigation brought by Mr. Hudson and a former director of the Company All of the Company's officers devote substantially all of their time to the Company's business. Messrs. Esterhazy, Jacquemin and Hudson, 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 G. 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, 2000. All Other Other Annual Restric- Com- Compen- ted Stock Options pensa- Name and Princi- Fiscal Salary Bonus sation Awards Granted tion pal Position Year (1) (2) (3) (4) (5) (6) --------------- ------ ------ ----- ------ --------- ------- ------ Maximilian de Clara, 2000 $345,583 -- $72,945 $550,000 60,000 $64 President 1999 $335,292 -- $72,945 $435,625 145,000 $63 1998 $315,021 -- $81,709 -- 164,000 $73 Geert R. Kersten, 2000 $303,049 -- $15,349 $10,375 60,000 $4,114 Chief Executive 1999 $268,480 $15,154 $10,000 145,000 $4,113 Officer, Secretary 1998 $229,533 -- $15,180 $ 7,500 164,000 $5,310 and Treasurer Patricia B. Prichep 2000 $114,430 -- $3,000 $6,998 23,000 $63 Senior Vice 1999 $107,936 -- $3,000 $6,476 79,500 $63 President of Operations M. Douglas Winship, 2000 $154,658 -- $2,400 $9,280 20,000 $64 Senior Vice 1999 $146,609 -- $2,400 $8,797 27,500 $63 President of 1998 $136,918 -- $2,400 $6,240 -- $1,060 Regulatory Affairs and Quality Assurance Eyal Talor, Ph.D. 2000 $150,334 -- $3,000 $9,020 50,000 $63 Senior Vice 1999 $139,085 -- $3,000 $8,345 30,000 $63 President of 1998 $130,845 -- $3,000 $5,769 27,000 $958 Research and Manufacturing Daniel Zimmerman, 2000 $124,165 -- $3,000 $7,450 20,000 $64 Ph.D., 1999 $114,806 -- $3,000 $6,888 45,000 $63 Senior Vice 1998 $106,360 -- $3,000 $4,882 39,000 $822 President of Cellular Immunology Michael Luecke, 2000 $150,000 -- -- $9,000 -- $64 Senior Vice 1999 $150,000 -- -- $8,875 -- $63 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, 2000, the number of shares of the Company's common stock, owned by the officers included in the table above, and the value of such shares at such date, based upon the market price of the Company's common stock were: Name Shares Value Maximilian de Clara -- -- Geert R. Kersten 137,088 $300,223 Patricia B. Prichep 12,791 $ 28,012 M. Douglas Winship 9,116 $ 19,964 Eyal Talor, Ph.D. 10,182 $ 22,299 Daniel Zimmerman, Ph.D. 27,207 $ 59,583 Michael Luecke 8,209 $ 17,978 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, 2000" 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 2000 expenses for this plan were $102,559. 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, 2000, the Company entered into a three-year employment agreement with Mr. Kersten. The employment agreement provides that during the term of the employment agreement the Company will pay Mr. Kersten an annual salary of $336,132, subject to the minimum annual increases of 5% per year. 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 24 months salary. For purposes of the employment agreement a change in the control of the Company means: (1) the merger of the Company with another entity if after such merger the shareholders of the Company do not own at least 50% of voting capital stock of the surviving corporation; (2) the sale of substantially all of the assets of the Company; (3) the acquisition by any person of more than 50% of the Company's common stock; or (4) a change in a majority of the Company's directors which has not been approved by the incumbent 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, 2000, 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, 2000, 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, 2000, 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, 2000 ------------------------------------------------------------ Individual Grants -------------------------------------------------------------------------------- Potential Realizable Value at Assumed % of Total Annual Rates of Options Stock Price Granted to Exercise Appreciation Options Employees in Price Per Expiration for Option Name Granted (#) Fiscal Year Share Date Term (1) ------ ----------- ------------ --------- ---------- ------------- 5% 10% --- --- Maximilian de Clara 60,000 15% $3.06 4/19/10 $115,200 $292,611 Geert R. Kersten 60,000 15% $3.06 4/19/10 $115,200 $292,611 Patricia B. Prichep 23,000 5.8% $4.00 2/02/10 $ 57,858 $146,510 Eyal Talor, Ph.D. 50,000 12.6% $2.56 11/27/09 $ 80,000 $204,000 M. Douglas Winship 20,000 5% $5.37 4/03/10 $ 67,543 $171,160 Daniel Zimmerman, Ph.D. 20,000 5% $4.00 2/02/10 $ 50,300 $127,400 (1) 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 Number of In-the-Money Unexercised Options at Fiscal Shares Options (3) Year-End (4) ------------ ----------------- Acquired On Value Exercisable/ Exercisable/ Name Exercise (1) Realized (2) Unexercisable Unexercisable ---- ------------ ------------ ------------- ----------------- Maximilian de Clara 373,667 $1,436,548 295,000/109,999 25,916/4,333 Geert R. Kersten 50,750 $137,310 1,020,001/109,999 25,916/4,333 Patricia Prichep 23,000 $89,900 190,834/38,666 12,525/1,300 M. Douglas Winship 2,000 $4,510 82,500/30,000 3,775/1,300 Eyal Talor 91,334 $274,626 70,833/18,333 3,366/1,733 Daniel Zimmerman 24,000 $141,120 91,000/35,000 8,150/1,300 Michael Luecke 10,000 $44,425 40,000/50,000 --/-- (1) The number of shares received upon exercise of options during the fiscal year ended September 30, 2000. (2) With respect to options exercised during the Company's fiscal year ended September 30, 2000, 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, 2000, separated between those options that were exercisable and those options that were not exercisable. (4) For all unexercised options held as of September 30, 2000, the market value of the stock underlying those options as of September 30, 2000. 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 1,600,000 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 3,260,000 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 840,000 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, 2000, 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 1,600,000 1,046,766 N/A 466,649 Non-Qualified Stock Option Plans 3,260,000 1,839,806 N/A 272,733 Stock Bonus Plans 840,000 N/A 496,293 343,707 Of the shares issued pursuant to the Company's Stock Bonus Plans 92,889 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, 2000, information with respect to the only persons owning beneficially 5% or more of the outstanding Common Stock and the number and percentage of outstanding shares owned by each director and officer and by the officers and directors as a group. Unless otherwise indicated, each owner has sole voting and investment powers over his shares of Common Stock. Name and Address Number of Shares (1) Percent of Class (4) ---------------- ----------------- ---------------- Maximilian de Clara 295,000 * Bergstrasse 79 6078 Lungern, Obwalden, Switzerland Geert R. Kersten 1,157,089 (2) 5.4% 8229 Boone Blvd., Suite 802 Vienna, VA 22182 Patricia B. Prichep 203,625 * 8229 Boone Blvd., Suite 802 Vienna, VA 22182 M. Douglas Winship 91,616 * 8229 Boone Blvd., Suite 802 Vienna, VA 22182 Eyal Talor, Ph.D. 81,015 * 8229 Boone Blvd., Suite 802 Vienna, VA 22182 Daniel H. Zimmerman, Ph.D. 118,207 * 8229 Boone Blvd., Suite 802 Vienna, VA 22182 Michael Luecke 58,209 * 8229 Boone Blvd., Suite 802 Vienna, VA 22182 Alexander G. Esterhazy 20,000 * 20 Chemin du Pre-Poiset CH- 1253 Vandoeuvres Geneve, Switzerland John M. Jacquemin 424,894 (3) * 8614 Westwood Center Drive Vienna, VA 22182 F. Donald Hudson 127,200 * 40 Moorings Road Marion, MA 02738 All Officers and Directors 2,576,855 11.4% as a Group (10 persons) * Less than 1% (1) Includes shares issuable prior to February 28, 2001 upon the exercise of options or warrants granted to the following persons: Options or Warrants Exercisable Name Prior to February 28, 2001 ---- ----------------------------------- Maximilian de Clara 295,000 Geert R. Kersten 1,020,001 Patricia B. Prichep 198,501 M. Douglas Winship 82,500 Eyal Talor, Ph.D. 70,833 Daniel H. Zimmerman, Ph.D. 102,667 Michael Luecke 50,000 Alexander G. Esterhazy 20,000 John M. Jacquemin 140,610 F. Donald Hudson 127,000 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) Includes shares held by Mooring Capital, a company controlled by Mr. Jacquemin (4) Amount includes shares referred to in (1) above but 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, 2000. (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 Exhibit 3(a) of the Company's Registration Statement on Form S-1, Registration Nos. 2-85547-D and 33-7531. (c) Amended Articles Incorporated by reference to Exhibit (Name change only) 3(c) filed with Registration Statement on Form S-1 (No. 33-34878). (d) Bylaws Incorporated by reference to Exhibit 3(b) of the Company's Registration Statement on Form S-1, Registration Nos. 2-85547-D and 33-7531. 4(a) Specimen copy of 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(e) Employment Agreement with _______________________________ Geert Kersten 10(i) Securities Purchase Agreement Incorporated by reference to Exhibit (with schedule) 10(i) to Cel-Sci Registration Statement on Form S-3 (Commission File Number 333-94675). 10(j) Form of Callable (Series A) Warrant Incorporated by reference to Exhibit 10(j) to Cel-Sci Registration Statement on Form S-3 (Commission File Number 333-94675). 10(k) Form of Adjustable (Series B) Incorporated by reference to Exhibit Warrant 10(k) to Cel-Sci Registration Statement on Form S-3 (Commission File Number 333-94675). 10(l) Registration Rights Agreement Incorporated by reference to Exhibit 10(l) to Cel-Sci Registration Statement on Form S-3 (Commission File Number 333-34604). 10(m) Securities Purchase Agreement, Incorporated by reference to Exhibit together with Schedule required 10(m) to Cel-Sci Registration by Instruction 2 to Item 601 of Statement on Form S-3 (Commission Regulation S-K File Number 333-34604) 10(n) Form of Callable (Series C) Warrant Incorporated by reference to Exhibit 10(n) to Cel-Sci Registration Statement on Form S-3 (Commission File Number 333-34604). 10(o) Form of Adjustable (Series D) Warrant Incorporated by reference to Exhibit 10(o) to Cel-Sci Registration Statement on Form S-3 (Commission File Number 333-34604). 10(p) Registration Rights Agreement Incorporated by reference to Exhibit 10(p) to Cel-Sci Registration Statement on Form S-3 (Commission File Number 333-34604). 23 Consent of accountants ________________________________ 27 Financial data schedule ________________________________ (d) Financial statement schedules. None CEL-SCI CORPORATION Consolidated Financial Statements for the Years Ended September 30, 2000, 1999, and 1998, 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, 2000, 1999, AND 1998: Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-3 Consolidated Statements of Comprehensive Loss F-4 Consolidated Statements of Stockholders' Equity F-5 Consolidated Statements of Cash Flows F-6 - F-7 Notes to Consolidated Financial Statements F-8 - F-17 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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with generally accepted accounting principles in the United States of America. Deloitte & Touche LLP McLean, Virginia November 17, 2000 CEL-SCI CORPORATION CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2000 AND 1999 -------------------------------------------------------------------------------- ASSETS 2000 1999 CURRENT ASSETS: Cash and cash equivalents $6,909,263 $2,747,644 Investment securities available for sale 3,760,922 3,191,491 Interest and other receivables 39,252 62,825 Prepaid expenses 1,838,376 514,572 Advances to officer/shareholder and employees 728 69,448 Total current assets 12,548,541 6,585,980 RESEARCH AND OFFICE EQUIPMENT - Less accumulated depreciation of $1,721,336 and $1,563,586 594,919 468,627 DEPOSITS 139,828 14,828 PATENT COSTS - Less accumulated amortization of $574,362 and $511,118 525,594 490,337 ---------- --------- $13,808,882 $7,559,772 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 822,601 $ 433,265 ---------- --------- Total current liabilities 822,601 433,265 DEFERRED RENT 24,822 28,321 ---------- --------- Total liabilities 847,423 461,586 ---------- --------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value - authorized, 100,000,000 shares; issued and outstanding, 20,459,700 and 17,002,341 shares 204,597 170,023 Additional paid-in capital 73,924,653 59,672,652 Accumulated other comprehensive loss (61,564) (116,659) Accumulated deficit (61,106,227) (52,627,830) ----------- ------------ Total stockholders' equity 12,961,459 7,098,186 ----------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,808,882 $ 7,559,772 ============ ============ See notes to consolidated financial statements. CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998 -------------------------------------------------------------------------------- 2000 1999 1998 INVESTMENT INCOME $ 402,011 $ 402,831 $ 728,421 OTHER INCOME 40,540 66,687 64,573 -------- -------- -------- Total income 442,551 469,518 792,994 -------- -------- -------- OPERATING EXPENSES: Research and development 4,978,714 4,461,051 3,833,854 Depreciation and amortization 220,994 268,210 295,331 General and administrative 3,721,240 3,230,982 3,106,492 --------- --------- ---------- Total operating expenses 8,920,948 7,960,243 7,235,677 --------- --------- ---------- NET LOSS 8,478,397 7,490,725 6,442,683 ACCRETION OF PREFERRED STOCK - - 1,980,000 --------- --------- ---------- NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $8,478,397 $7,490,725 $8,422,683 ========== ========== =========== LOSS PER COMMON SHARE (BASIC) $ 0.44 $ 0.52 $ 0.74 ========== ========== =========== LOSS PER COMMON SHARE (DILUTED) $ 0.44 $ 0.52 $ 0.74 ========== ========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 19,259,190 14,484,352 11,379,437 ========== ========== =========== See notes to consolidated financial statements. CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998 -------------------------------------------------------------------------------- 2000 1999 1998 NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $8,478,397 $7,490,725 $8,422,683 OTHER COMPREHENSIVE LOSS - Unrealized (gain) loss on investments (55,095) 68,368 44,792 ----------- ---------- ----------- COMPREHENSIVE LOSS 8,423,302 7,559,093 8,467,475 =========== ========== =========== See notes to consolidated financial statements. CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998 -------------------------------------------------------------------------------- Accumulated Preferred Additional Other Series D Stock Common Stock Paid-In Comprehensive Accumulated Shares Amount Shares Amount Capital (Loss) Income Deficit Total BALANCE, OCTOBER 1, 1997 - - 10,445,691 $104,457 $44,419,244 $(3,499) $(38,694,422) $5,825,780 Exercise of stock options - - 300,048 3,000 882,372 - - 885,372 Exercise of warrants - - 768,243 7,682 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 10,000 100 - - 9,499,900 - - 9,500,000 Preferred Series D conversion (998) (10) 441,333 4,413 (4,403) - - - 401(k) contributions - - 17,380 174 57,976 - - 58,150 Change in unrealized gain (loss) of marketable securities available for sale - - - - - (44,792) - (44,792) Net loss - - - - - - (6,442,683) (6,442,683) ------------------------------------------------------------------------------------------------------ BALANCE, SEPTEMBER 30, 1998 9,002 90 11,972,695 119,726 59,040,864 (48,291) (45,137,105) 13,975,284 Exercise of stock options - - 28,500 285 70,965 - - 71,250 Stock options issued to nonemployees for services - - - - 88,166 - - 88,166 Preferred Series D conversion (9,002) (90) 4,760,126 47,602 (47,512) - - - 401(k) contributions - - 41,020 410 86,544 - - 86,954 Stock bonus to officer - - 200,000 2,000 433,625 - - 435,625 Change in unrealized gain (loss) of marketable securities available for sale - - - - - (68,368) - (68,368) Net loss - - - - - - (7,490,725) (7,490,725) ------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1999 - - 17,002,341 170,023 59,672,652 (116,659) (52,627,830) 7,098,186 Exercise of stock options - - 1,047,612 10,476 3,646,991 - - 3,657,467 Issuance - common stock - - 2,175,258 21,753 9,958,247 - - 9,980,000 401(k) contributions - - 34,489 345 98,762 - - 99,107 Stock bonus to officer - - 200,000 2,000 548,000 - - 550,000 Change in unrealized gain (loss) of marketable securities available for sale - - - - - 55,095 - 55,095 Net loss - - - - - - (8,478,397) (8,478,397) ------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 2000 - $- 20,459,700 $204,597 $73,924,653 $(61,564) $(61,106,227) $12,961,459 ======================================================================================================= See notes to consolidated financial statements. CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998 -------------------------------------------------------------------------------- 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(8,478,396) (7,490,725)(6,442,683) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 220,994 268,210 295,331 Issuance of stock options for services - 88,166 564,031 Stock bonus granted to officer 550,000 435,625 - Stock contributed to 401(k) plan 99,107 86,954 58,150 Net realized loss on sale of securities 49,962 151,349 9 Changes in assets and liabilities: Increase in interest and other receivables 23,573 6,984 36,625 (Increase) decrease in prepaid expenses (1,323,804) 209,262 (313,046) Decrease (increase) in advances 68,720 (69,275) 4,733 (Increase) decrease in deposits (125,000) - 3,350 Decrease (increase) in accounts payable and accrued expenses 389,336 6,118 (54,440) (Increase) decrease in deferred rent (3,499) (1,061) 2,352 -------- -------- ----- Net cash used in operating activities (8,529,007) (6,308,393)(5,845,588) CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Purchases of investments (2,000,587) (235,698) (13,480,816) Sales and maturities of investments 1,436,289 6,499,801 4,501,828 Repayment on note receivable from shareholder - 70,809 216,066 Expenditures for property and equipment (284,043) (60,552) (70,559) Expenditures for patents (98,500) (102,798) (35,211) --------- ---------- -------- Net cash (used in) provided by investing activities (946,841) 6,171,562 (8,868,692) --------- --------- ----------- (Continued) CEL-SCI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998 -------------------------------------------------------------------------------- 2000 1999 1998 CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Cash proceeds from issuance of preferred and common stock and warrant conversion for cash 13,637,467 71,250 14,018,899 ------------ -------- ---------- Net cash provided by financing activities 13,637,467 71,250 14,018,899 ------------ -------- ---------- NET INCREASE (DECREASE) IN CASH 4,161,619 (65,581) (695,381) CASH, BEGINNING OF YEAR 2,747,644 2,813,225 3,508,606 --------- --------- ----------- CASH, END OF YEAR $6,909,263 $2,747,644 $2,813,225 ========== ========== ========== SUPPLEMENTAL DISCLOSURES: At September 30, 2000, 1999, and 1998, the net unrealized gain (loss) on investments available-for-sale was $61,564, $(116,659), and (48,291), respectively. During the year ended September 30, 1999, 9,002 shares of Series D Preferred Stock were converted into 4,760,126 shares of common stock. (Concluded) See notes to consolidated financial statements. CEL-SCI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998 -------------------------------------------------------------------------------- 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 AG. 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, 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 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 manufacturing production advances, bulk purchases of laboratory supplies to be consumed in the manufacturing of the Company's product for clinical studies 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 accounting principles generally accepted in the United States of America 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 1999 and 1998 financial statements to conform with the current-year presentation. 2. INVESTMENTS The carrying values and estimated market values of investments available-for-sale at September 30, 2000 and 1999, are as follows: September 30, 2000 Gross Gross Market Value Amortized Unrealized Unrealized at September 30, Cost Gains Losses 2000 Bonds $ 2,000,000 $4,720 $- $ 2,004,720 Fixed income mutual funds 1,822,486 - (66,284) 1,756,202 ---------- -- --------- --------- Total $3,822,486 $4,720 $(66,284) $3,760,922 ========== ====== ========= ========== September 30, 1999 Gross Gross Market Value Amortized Unrealized Unrealized at September 30, Cost Gains Losses 1999 Fixed income mutual funds $3,308,150 $ - $(116,659) $3,191,491 ---------- -- ---------- --------- Total $3,308,150 $ - $(116,659) $3,191,491 ============ ======== =========== ========== The gross realized gains and losses of sales of investments available-for-sale for the years ended September 30, 2000, 1999, and 1998, are as follows: 2000 1999 1998 ---- ---- ---- Realized gains $ - $ - $1,485 Realized losses 49,962 151,349 1,494 ------ -------- ------- Net realized loss $(49,962) $(151,349) $ (9) ========= ========== === 3. RESEARCH AND OFFICE EQUIPMENT Research and office equipment at September 30, 2000 and 1999, consist of the following: 2000 1999 Research equipment $ 2,052,082 $ 1,781,666 Furniture and equipment 258,780 245,154 Leasehold improvements 5,393 5,393 ----------- ---------- 2,316,255 2,032,213 Less accumulated depreciation and amortization (1,721,336) (1,563,586) ------------ ----------- Net research and office equipment $ 594,919 $ 468,627 ============ ========== 4. 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, 2000 and 1999, is as follows: 2000 1999 Depreciation $ (28,964) $(18,536) Prepaid expenses (697,848) (101,769) Net operating loss carryforward 22,905,872 17,082,000 Other 9,422 10,751 Less: Valuation allowance (22,188,482) (16,972,446) -------------------------- Net deferred - - ========================== The Company has available for income tax purposes net operating loss carryforwards of approximately $50,242,000, expiring from 2001 through 2020. 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 will be realized because it is more likely than not that future taxable income will not be sufficient to realize such tax benefits. 5. STOCK OPTIONS, BONUS PLAN, AND WARRANTS Non-Qualified Stock Option Plan - At September 30, 2000, the Company has collectively authorized the issuance of 3,260,000 shares of common stock under the Non-Qualified Plan. Options typically vest over a three-year period and expire no later than ten years after the grant date. Terms of the options are to be determined by the Company's Compensation Committee, which administers all of the plans. The Company's employees, directors, officers, and consultants or advisors are eligible to be granted options under the Non-Qualified Plan. Information regarding the Company's Non-Qualified Stock Option Plan is summarized as follows: Outstanding Exercisable ------------------- ------------------ Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price Options outstanding, October 1, 1997 1,672,834 $3.44 Options granted 474,700 2.98 Options exercised (170,334) 2.92 Options forfeited (17,500) 6.23 --------- Options outstanding, September 30, 1998 1,959,700 3.32 1,315,002 $3.10 Options granted 470,959 2.02 Options forfeited (56,602) 4.78 ----------- Options outstanding, September 30, 1999 2,374,057 2.80 1,595,934 3.09 Options granted 262,500 3.09 Options exercised (789,085) 3.41 Options forfeited (46,266) 2.34 ---------- Options outstanding, September 30, 2000 1,801,206 3.18 1,547,445 3.19 ========== At September 30, 2000, options outstanding and exercisable were as follows: Weighted Average Weighted Average Weighted Average Range of Number Exercise Price- Remaining Number Exercise Price- Exercise Prices Outstanding Outstanding Contractual Life Exercisable Exerciseble $1.87-$2.50 688,327 $2.11 3.0 years 633,263 $2.15 $2.56-$3.75 793,246 3.07 3.4 years 625,015 3.06 $3.87-$4.68 174,833 4.13 5.9 years 146,667 4.07 $5.00-$7.25 144,800 5.50 4.3 years 142,500 5.49 During 1999, the Company extended the expiration date on 35,000 options at $2.87 from the Non-qualified 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. As of March 30, 2000, all options had been exercised. During 1999, the Company extended the expiration date on 750 options at $2.87 from the Non-qualified 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. As of March 31, 2000, all options had been exercised. During March 2000, the Company agreed to restore and vest 40,000 options at prices ranging from $5.25 to $5.62, to one former Director and one Director as part of a settlement agreement. The options will expire on September 25, 2006. As of September 30, 2000, 20,000 options had been exercised. Incentive Stock Option Plan - At September 30, 2000, the Company has collectively authorized the issuance of 1,600,000 shares of common stock under the Incentive Stock Option Plan. Options vest after one year to three-year period and expire no later than ten years after the grant date. Terms of the options are to be determined by the Company's Compensation Committee, which administers all of the plans. Only the Company's employees are eligible to be granted options under the Incentive Plan. Information regarding the Company's Incentive Stock Option Plan is summarized as follows: Outstanding Exercisable ----------------- ---------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price Options outstanding, October 1, 1997 573,716 $3.81 Options granted 205,500 4.76 Options exercised (3,166) 2.87 Options forfeited (3,666) 5.34 ---------- Options outstanding, September 30, 1998 772,384 4.06 311,622 $3.64 Options granted 206,500 2.14 Options forfeited (2,034) 3.70 ---------- Options outstanding, September 30, 1999 976,850 3.71 520,688 3.86 Options granted 140,000 3.77 Options exercised (68,418) 4.47 Options forfeited (1,666) 3.38 ---------- Options outstanding, September 30, 2000 1,046,766 3.62 722,435 3.98 ========== At September 30, 2000, options outstanding and exercisable were as follows: Weighted Weighted Weighted Average Average Average Range of Number Exercise Remaining Number Exercise Price - Price - Exercise OutstandinOutstanding Contractual ExercisabExercisable Prices Life ------------ --------------------- ----------- -------------------- $1.94 - $2.39 5.4 years $2.51 $2.87 322,500 223,168 $2.94 - 3.45 7.4 years 3.47 $4.31 406,900 290,567 $4.50 - 5.07 7.3 years 5.11 $6.00 316,766 208,100 $11.00 600 11.00 5.7 years 600 11.00 During 1999, the Company extended the expiration date on 23,000 options at $3.25 from the 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. All options were exercised as of September 30, 2000. Stock Bonus Plan - At September 30, 2000, the Company has authorized the issuance of 840,000 shares of common stock under the Stock Bonus Plan. All employees, directors, officers, consultants, and advisors are eligible to be granted options. 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 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. During 1995, the Company granted a consultant options to purchase 17,858 shares of the Company's common stock. These shares became exercisable on November 2, 1995, and were to expire November 1, 1999. In February 2000, the Company extended the expiration date on the options by one year to February 6, 2001. These options are exercisable at $5.60 per share and as of September 30, 2000, 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 entitled 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 February 6, 2001. 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 $2.50 to $4.50. The remaining 50,000 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. In December 1999, the Company extended the expiration date on 10,000 options exercisable at $3.25 per share to June 30, 2000. Subsequently, the expiration date was extended to June 30, 2001. During 2000, 25,000 options were exercised at prices ranging from $2.50 to $3.94. At September 30, 2000, 60,000 options related to the four consultants remained outstanding at prices ranging from $3.50 to $5.00. 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 that 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. In December 1999, the Company extended the expiration date on 20,000 options exercisable at $3.94 per share and 10,000 options exercisable at $3.50 per share to June 30, 2000. Subsequently, the expiration date was extended to June 30, 2001. During 2000, 165,000 options were exercised at prices ranging from $2.50 to $5.62. At September 30, 2000, 5,000 options related to the consultants remained outstanding at a price of $3.50 per common share. 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 contract. All 50,000 options became exercisable during 1999 at $2.50 per share. At September 30, 2000, 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 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 December 31, 1999. During 1999, 28,500 options to purchase shares were exercised at $2.50 per share. The options were further revised in December 1999 to extend the expiration date to June 30, 2001. During 2000, all 120,000 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, 2000, all warrants remained outstanding. In connection with the December 1999 private offering, the Company issued 402,007 common stock purchase warrants. Each warrant entitled the holder to purchase one share of common stock at $2.925 per share, expiring December 2002. The investors in this private offering also received warrants that allow investors under certain circumstances to acquire additional shares of the Company's common stock at a nominal price. At September 30, 2000, all warrants remained outstanding. In connection with the March 2000 private offering, the Company issued 413,334 common stock purchase warrants. Each warrant entitled the holder to purchase one share of common stock at $8.50 per share, expiring March 2003. The investors in this private offering also received warrants that allow investors under certain circumstances to acquire additional shares of the Company's common stock at a nominal price. At September 30, 2000, 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 No. 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, consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per common share would have been increased to the pro forma amounts indicated below: Year Ended September 30, -------------------------------------- 2000 1999 1998 ---- ---- ---- (In Thousands) Net loss: As reported $(8,478,396)$(7,490,725) $(6,442,638) Pro forma (8,908,999) (8,124,159) (7,018,634) Loss per common share: As reported $ 0.44 $ 0.52 $ 0.74 Pro forma 0.46 0.56 0.79 The weighted average fair value at the date of grant for options granted during 2000, 1999, and 1998, was $2.57, $1.21, and $2.17 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: 2000 1999 1998 ---- ---- ---- Expected stock risk volatility 98 % 91 % 79 % Risk-free interest rate 6.32 % 5.48 % 5.49 % Expected life options 4.91 3.23 2 Expected dividend yield - - - The effects of applying SFAS No. 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. 6. 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 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, 2000, 1999, and 1998, in connection with this plan was $99,107, $86,954, and $70,519, respectively. 7. 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, 2001 $202,934 2002 209,490 2003 180,035 2004 36,565 2005 - Total minimum lease payments $629,024 ======== Rent expense for the years ended September 30, 2000, 1999, and 1998, was approximately $233,559, $214,205, and $165,067, respectively. 8. STOCKHOLDERS' EQUITY 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 entitles the holder to purchase 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, 2000. 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. 9. 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 D Preferred Stock warrants and preferred stock dividends. 2000 1999 1998 ---- ---- ---- Loss per common share (basic and diluted) $0.44 $0.52 $0.74 ====== ====== ===== 10. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, FASB issued SFAS No. 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 No. 133 will have a material effect on its financial position or results of operation. 11. 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 No. 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. 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 22, 2000 By: /s/ Maximilian de Clara ----------------------------------- Maximilian de Clara, President By: /s/ Geert R. Kersten ----------------------------------- Geert R. Kersten, Chief Executive Officer Pursuant to the requirements of the Securities Act of l934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Maximilian de Clara Director and Principal December 22, 2000 ------------------------ Maximilian de Clara Executive Officer /s/ Geert R. Kersten Director, Principal December 22, 2000 ------------------------ Financial Officer and Geert R. Kersten Chief Executive Officer ------------------------ Director Alexander G. Esterhazy /s/ John M. Jacquemin Director December 22, 2000 ----------------------- John M. Jacquemin /s/ Donald Hudson Director December 22, 2000 ------------------------ F. Donald Hudson