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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
July 31, 2000 0-11088
For the fiscal year ended Commission file number
ALFACELL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2369085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Belleville Avenue, Bloomfield, New Jersey 07003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 748-8082
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
required 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 __
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 any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock, par value $.001 per share,
held by non-affiliates based upon the average of the high and low sale prices as
reported by the OTC Bulletin Board on October 24, 2000 was $17,031,321. As of
October 24, 2000 there were 18,816,691 shares of common stock, par value $.001
per share, outstanding.
The Index to Exhibits appears on page 23.
Documents Incorporated by Reference
None
Table of Contents
PART I Page
----
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a
Vote of Security Holders 10
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 12
Item 7A. Quantitative and Qualitative
Disclosure About Market Risk 15
Item 8. Financial Statements and
Supplementary Data 15
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure 15
PART III
Item 10. Directors and Executive Officers
of the Registrant 16
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain
Beneficial Owners and Management 21
Item 13. Certain Relationships and
Related Transactions 22
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 23
The following trademark appear in this Annual Report: ONCONASE(R) is the
registered trademark of Alfacell Corporation, exclusively for the anti-cancer
indications.
(i)
Information contained herein contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. All statements,
other than statements of historical fact, regarding our financial position,
potential, business strategy, plans and objectives for future operations are
"forward-looking statements." These statements are commonly identified by the
use of forward-looking terms and phrases as "anticipates," "believes,"
"estimates," "expects," "intends," "may," "seeks," "should," or "will' or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. We cannot assure that the future results covered by
these forward-looking statements will be achieved. The matters set forth in
Exhibit 99.1 hereto constitute cautionary statements identifying important
factors with respect to these forward- looking statements, including certain
risks and uncertainties, that could cause actual results to vary significantly
from the future results indicated in these forward-looking statements. Other
factors could also cause actual results to differ significantly from the future
results indicated in these forward-looking statements.
Part I
Item 1. BUSINESS.
Overview
We are a biopharmaceutical company organized in 1981 that went public in 1983
and are primarily engaged in the discovery and development of a new class of
anti-cancer drugs from amphibian ribonucleases. Ribonucleases degrade
ribonucleic acids causing an interruption in protein synthesis resulting in the
inhibition of cell growth and induction of apoptosis (programmed cell death).
Our first product under development is ONCONASE(R) which targets a variety of
cancers, most of which are known to become resistant to other chemotherapeutic
drugs.
ONCONASE(R) is a novel amphibian ribonuclease that has been isolated from the
eggs of the leopard frog (Rana pipiens). Ribonucleases mediate several important
biological functions in nature, including regulation of angiogenesis (formation
of new blood vessels that supply tumors), anti-viral and anti-parasitic
defenses. In addition to taking advantage of the natural biological functions of
ribonucleases, amphibian ribonucleases may be more therapeutically effective in
humans than mammalian ribonucleases because they do not appear to be adversely
affected by inhibitors found in mammals. Therefore, developing amphibian
ribonucleases into therapeutics, and thereby taking advantage of the natural
role of ribonucleases, may result in a new class of compounds for proliferative
diseases such as cancer and AIDS. We hold a number of patents and retain all
commercial rights to compounds resulting from this program.
ONCONASE(R) has many potential commercial uses. Based on years of preclinical
and clinical testing, it is believed that ONCONASE(R) and related compounds may
have utility:
o as a single anti-cancer agent;
o in combination with other anti-cancer agents;
o as an active ingredient or payload, in a targeted conjugate or fusion
protein (new compound resulting from chemically joining two different
molecules with targeted specificity); and
o in a delivery system such as standard or "stealth" liposomes.
1
To date, over 700 patients have been treated with ONCONASE(R) and a favorable
safety profile has been demonstrated. Side effects associated with ONCONASE(R)
treatment have been modest and reversible. Patients treated with ONCONASE(R)
have shown virtually no evidence of myelosuppression (bone marrow suppression),
alopecia (hair loss), or other severe organ toxicities frequently observed after
treatment with most other chemotherapeutic drugs.
ONCONASE(R) has been used to treat patients with advanced stages of cancer.
Based upon the Phase II and Phase III clinical data, ONCONASE(R) has been
observed to be clinically active in treating unresectable (not surgically
removable) malignant mesothelioma (a cancer found in the lining of the lung and
abdomen associated with exposure to asbestos). Unresectable malignant
mesothelioma afflicts approximately 2,500-3,500 newly diagnosed patients in the
U.S. each year. Epidemiologists have predicted that during the next 35 years,
over 250,000 people will die from this disease in Europe alone. Additionally,
other pilot clinical studies have been conducted and produced promising results
in non-small cell lung cancer, metastatic breast cancer and renal cell cancer.
In June 1997, we initiated a Phase III randomized, controlled clinical trial
comparing ONCONASE(R) as a single therapeutic agent to doxorubicin (a widely
used chemotherapy drug) in patients with unresectable malignant mesothelioma.
This multicenter clinical trial was designed to compare the efficacy (survival)
and safety of ONCONASE(R) versus doxorubicin for this indication (disease). In
April 1999, the patient enrollment for this trial was completed. Thereafter, the
trial was amended to compare the efficacy and safety of ONCONASE(R) and
doxorubicin versus doxorubicin as a single therapeutic agent, and is currently
ongoing. Our regulatory strategy for the amendment of this Phase III trial was:
o to expand the visibility and interest in ONCONASE(R) worldwide;
o to confirm the observed synergism in vivo (studies performed on living
animals) previously reported by National Cancer Institute, or NCI;
o to provide confirmatory survival data; and
o to provide meaningful clinical data for potential marketing extension in
this indication.
Currently, there is no standard Food and Drug Administration, or FDA, approved
therapy for unresectable malignant mesothelioma.
We have produced a modified recombinant (cloned), version of ranpirnase which
enables other molecules to be attached to it, including molecules with directed
specificity, such as monoclonal antibodies, growth factors and specific peptides
(which are short sequences of amino acids). This has resulted in the development
of potential new product lines of ranpirnase conjugates. Our collaboration with
NCI has produced a potential new product. A conjugate of ranpirnase with a
monoclonal antibody has demonstrated preclinical activity in non- Hodgkin's
lymphoma. Manufacturing scale-up and pre-clinical studies are ongoing at NCI in
preparation for commencing clinical trials for the treatment of non-Hodgkin's
lymphoma.
We have discovered a number of other biologically active proteins. In vitro
studies (performed in established cell lines in test tubes) of these proteins
have shown them to be involved in the regulation of both early embryonic and
malignant cell growth and differentiation. However, it will require significant
additional research and funding to develop these proteins into therapeutics. At
this time, we are unable to fund such research and we do not know if we will be
able to raise sufficient capital in the future.
We believe that ranpirnase may also be developed as an anti-viral agent. The
National Institutes of Health have performed independent in vitro studies of
ONCONASE(R) against the HIV virus type 1. The results show ONCONASE(R) to
inhibit replication of HIV by up to 99.9%. In addition, the National Institutes
of Health -
2
Division of AIDS found ONCONASE(R) to have in vitro anti-viral activity. Subject
to the availability of the required capital, we plan to conduct further research
concerning anti-viral activity and in other viral indications such as hepatitis
C . We may not have sufficient capital to engage in further development for this
application.
ONCONASE(R) (Ranpirnase) Profile
In 1987, we completed the molecular characterization of a specific protein,
which we have trademarked as ONCONASE(R). In October 1998, the United States
Adopted Names Council adopted the generic name ranpirnase as the United States
adoptive name for ONCONASE(R). Based upon the complete amino acid sequence
analysis (a protein structure blueprint), it has been established that
ranpirnase has a unique structure. The unique nature of our protein was
established after comparing its structure to those of over 10,000 protein
sequences registered with the National Biomedical Research Foundation Protein
Identification Resource, Georgetown University, Washington, DC.
Preclinical research
There is significant in vitro and in vivo data which indicates that the use of
ONCONASE(R) with the number of drugs is synergistic, which means that the effect
of ONCONASE(R) with certain drugs acting together is greater than the effect of
them acting alone and greater than the sum of their effects. Results of these
studies have been presented at scientific meetings as well as published in peer
reviewed journals.
In Vitro:
NCI's in vitro screen has determined that ONCONASE(R) demonstrates a broad
spectrum of anti-tumor activity. Scientists at the Harvard Medical School
demonstrated that ONCONASE(R) can counteract the biological activity of
angiogenin. Angiogenin is a protein which promotes angiogenesis (new blood
vessel formation). Anti-angiogenic activity is the process in which a chemical
interferes with the blood supply to cells, particularly tumors.
Drug Combination Cancer
ONCONASE(R) + Tamoxifen Prostatic, Ovarian, Renal Cell Carcinoma
ONCONASE(R) + Phenothiazine Non-Small Cell Lung Carcinoma
ONCONASE(R) + Lovastatin Non-Small Cell Lung, Ovarian
ONCONASE(R) + Cisplatin Ovarian
ONCONASE(R) + All-trans-retinoic acid Glioma
ONCONASE(R) + Vincristine Colorectal, Breast
ONCONASE(R) + Doxorubicin Colorectal, Resident Breast
ONCONASE(R) + Taxol Resident Breast
3
In Vivo:
There is in vivo data which indicates ONCONASE(R) with the following drugs is
synergistic:
o vincristine,
o doxorubicin, and
o tamoxifen.
These synergisms suggest a potential for the therapeutic utility of ONCONASE(R)
in patients with chemotherapy- resistant tumors.
The National Cancer Institute reported the ability of ONCONASE(R) to overcome
multiple drug resistance both in vitro and in vivo. Moreover, ONCONASE(R) has
also been shown to overcome other forms of drug resistance such as that to
cisplatin.
ONCONASE(R) as a Radiosensitizing and Anti-Angiogenic Agent
Collaborative research at the University of Medicine and Dentistry of New Jersey
at Camden and University of Pennsylvannia Medical Center, Department of
Radiation Oncology, revealed potential radiosensitizing (an increasing
sensitivity to ionizing radiation) and co-antiangiogenic effects of ONCONASE(R).
This research showed that systemic administration of ONCONASE(R) resulted in the
diminution of interstitial tumor fluid pressure which could promote increased
penetration of various drugs into tumor tissue.
Regulatory Strategy
We have been very selective in our product development strategy, which is
focused on the use of ONCONASE(R) alone or in combination with drugs which have
shown evidence of preclinical and clinical efficacy on tumor types for which
median survivals are typically less than a year and there are no approved
treatments.
Clinical Trials
ONCONASE(R) has been tested as a single agent in patients with a variety of
cancers and in combination with tamoxifen in cancers such as prostate, advanced
pancreatic and renal cell carcinoma.
In June 1997, we initiated a Phase III randomized, controlled clinical trial
comparing ONCONASE(R) as a single therapeutic agent to doxorubicin (a widely
used chemotherapy drug) in patients with unresectable malignant mesothelioma in
35 cancer centers across the United States, including major centers such as
Columbia-Presbyterian, University of Chicago, M.D. Anderson and Cedars-Sinai
Cancer Centers. This multicenter clinical trial was designed to compare the
efficacy and safety of ONCONASE(R) versus doxorubicin for this indication. In
April 1999, the patient enrollment for this trial was completed. Thereafter, the
trial was amended to compare the efficacy and safety of ONCONASE(R) and
doxorubicin versus doxorubicin as a single therapeutic agent, and is currently
ongoing. Our regulatory strategy for the amendment of this Phase III trial was:
o to expand the visibility and interest in ONCONASE(R) worldwide;
o to confirm the observed synergism in vivo previously reported by NCI;
o to provide confirmatory survival data; and
o to provide meaningful clinical data for potential marketing extension in
this indication.
Most patients with advanced unresectable malignant mesothelioma die of this
progressive disease within 6 to 12 months of diagnosis. No standard FDA-approved
therapy exists to treat this deadly cancer.
4
Gaining Marketing Approval
In order to gain marketing approval for ONCONASE(R) for the treatment of
unresectable malignant mesothelioma, its safety and efficacy must be
demonstrated. A pre-NDA (New Drug Application) meeting with the FDA was held to
discuss the preliminary efficacy and safety results as well as the scope and
details of the proposed NDA filing. Our preliminary survival results indicated a
subset of patients defined as the Treatment Target Group, or TTG, demonstrated a
clear survival benefit for ONCONASE(R)-treated patients compared to
doxorubicin-treated patients. No safety concerns related to treatment with
ONCONASE(R) were identified from the analyses of over 700 patients. Following
the pre-NDA meeting, we met and communicated with the FDA to establish mutually
agreed upon parameters for the NDA submission. In order to file the NDA, we must
complete all chemistry, manufacturing and controls requirements, pharmacology
studies and provide confirmatory survival data in the TTG patient population
from the ongoing trial. Since survival results are determined only from dead
patients, we cannot accurately project the date of the NDA filing at this time.
In addition, we are taking steps to insure a timely European marketing
registration for ONCONASE(R). We cannot assure you that marketing approval for
ONCONASE(R) as a treatment for malignant mesothelioma will be granted by the FDA
or by other foreign regulatory agencies.
A Phase I/II clinical trial testing ONCONASE(R) in combination with
13-cis-retinoic acid and alpha-interferon in metastatic renal cell carcinoma has
been conducted. A metastatic renal cell carcinoma is a cancer of the kidney
which originates in the kidney and spreads to the other parts of the body. The
Phase I results have led to the modification of the trial design. The new study
has not yet been initiated.
We initially focused our development efforts on clinical trials in advanced
pancreatic cancer. However, due to the lack of a demonstrated statistically
significant survival benefit, in July 1998 we discontinued two Phase III
clinical trials testing ONCONASE(R) in combination with tamoxifen in pancreatic
cancer.
Research and Development Programs
Research and development expenses for the fiscal years ended July 31, 2000,
1999, and 1998 were $1,880,000, $2,402,000, and $5,265,000, respectively. Our
research and development programs focus primarily on the development of
therapeutics from amphibian ribonucleases. Ribonucleases are enzymes which have
been shown to be involved in the regulation of cell proliferation, maturation,
differentiation and apoptosis. Apoptosis is programmed cell death. Therefore,
ribonucleases may be ideal candidates for the development of therapeutics for
the treatment of cancer and other life-threatening diseases, including HIV
infection, that require anti- proliferative and pro-apoptotic properties.
The following table outlines our research and development program. We are
pursuing some of these programs independently, while others are being undertaken
in collaboration with NCI.
Program Disease
Cancer:
ONCONASE(R)(ranpirnase) Mesothelioma (ongoing clinical trials)
and other solid tumors
Ranpirnase conjugate(1) Non-Hodgkin's lymphoma(1)
Other novel amphibian
ribonuclease variants Broad spectrum of cancers
Proteasome inhibitors Broad spectrum of cancers
Ranpirnase variant conjugate
and fusion protein Broad spectrum of cancers
Gene therapy Broad spectrum of cancers
5
Viral Disease:
ONCONASE(R)(ranpirnase) HIV infection
Anti-inflammatory Diseases:
Ranpirnase variant conjugate Anti-inflammatory and autoimmune diseases
(1) In collaboration with the National Institutes of Health - National Cancer
Institute
Ranpirnase Conjugates and Fusion Proteins
In addition to use in its native form, ranpirnase is being combined with
targeting molecules to ensure its delivery to specific targets. We have
developed a number of ONCONASE(R) conjugates which demonstrate significant bio-
activity. In addition, several genes of ranpirnase, its variants and other
amphibian ribonucleases are being synthesized using "state-of-the-art"
recombinant technologies. We intend to use these genes to develop novel
therapeutics that selectively target specific tumors. Production of these
engineered genes and products may also lead to their use in gene therapy and
other therapeutic applications such as cancer and other pathological conditions.
In collaboration with the National Cancer Institute, we are developing a
ranpirnase conjugate for the treatment of patients with non-Hodgkin's lymphoma.
The National Cancer Institute is preparing for the initiation of clinical trials
by doing manufacturing scale up and preclinical studies. However, we cannot
ascertain at this time when the clinical trials will commence.
Proteasome Inhibitors
Cyclins and cyclin-dependent kinases are two major groups of protein regulators
of cell cycle progression. Cancer can be defined as the uncontrolled growth and
proliferation of cells often associated with a de-regulated pattern of the
expression of these proteins. In vitro studies of ONCONASE(R) have shown its
ability to inhibit cell cycle progression. Given that ONCONASE(R) and proteasome
inhibitors both have been shown in vitro to modulate fundamental mechanisms
governing tumor cell growth, proliferation and death, we are testing ONCONASE(R)
and proteasome inhibitors in combination and have discovered synergistic
anti-tumor effects. We believe that a new class of anti-cancer compounds can be
developed combining ranpirnase and its variants with proteasome inhibitors.
HIV Infection
The drugs currently approved in the United States for the treatment of the HIV
infection consist primarily of reverse transcriptase inhibitors and protease
inhibitors. There is a high rate of resistance developing to several currently
available anti-viral drugs, primarily due to the exponentially increasing rate
of mutations of HIV that occur during infection, and drug non-compliance.
Experimental data shows that anti-HIV effects of ONCONASE(R) are quite
selective, independent of the HIV envelope and therefore likely to inhibit
replication of the different HIV-1 subtypes. In vitro studies have been
performed by independent scientific collaborators, including the National
Institutes of Health - Division of AIDS. Ranpirnase is an enzyme highly
specialized in the breakdown of RNA molecules and might be an effective anti-HIV
agent, irrespective of viral mutations that may render other antiviral agents
ineffective. Other viral indications such as hepatitis C will be further
investigated as resources allow.
6
Ranpirnase Variant Conjugates
We have developed a variant of ranpirnase and conjugated it to a variety of
proteins and peptides which are potentially important from a clinical viewpoint.
These conjugates are designed to specifically target relevant molecules in the
body. These conjugates may have therapeutic applications in the treatment of
anti- inflammatory diseases, such as arthritis and other autoimmune diseases.
However, we cannot assure you that these products will be successfully
developed.
Raw Materials
The major active ingredient derived from leopard frog eggs is the protein
ranpirnase. Although we currently acquire our natural source material from a
single supplier, we believe that it is abundantly available from other sources.
We have sufficient egg inventory on hand to produce enough ONCONASE(R) to
complete the current clinical trials and supply ONCONASE(R) for up to two years
after commercialization. We have successfully cloned the gene of the natural
protein ranpirnase. The use of recombinant technology may not be more cost
effective than the natural source.
Manufacturing
We have signed an agreement with Scientific Protein Laboratories, or SPL, a
subsidiary of a division of American Home Products Corp., which will perform the
intermediary manufacturing process of purifying ranpirnase. Subsequently, the
intermediate product will be sent to a contract filler for the final
manufacturing step and vial filling. Other than these arrangements, no specific
arrangements have been made for the manufacture of our product. Compliance with
Current Good Manufacturing Practices, or cGMP, is a requirement for products
manufactured for use in Phase III clinical trials and for commercial sale. Both
SPL, and the contract filler to whom the intermediate product is sent,
manufacture in accordance with cGMP. For the foreseeable future, we intend to
rely on these manufacturers, or substitute manufacturers, if necessary, to
manufacture our product. We cannot assure you that we would be able to find
substitute manufacturers, if necessary. We are dependent upon our contract
manufacturers to comply with cGMPs and to meet our production requirements.
There can be no assurance that our contract manufacturers will comply with cGMPs
or timely deliver sufficient quantities of our products.
Marketing
We intend to market products for which we gain approval, either directly or
through co-promotion or other licensing arrangements with pharmaceutical,
biopharmaceutical or biotechnology companies. We may:
o grant exclusive marketing rights to corporate partners in return for such
corporate partners' assuming further research and development costs,
up-front fees, milestone payments and royalties on sales; or
o build or rent a targeted oncology sales force to market ONCONASE(R) and
subsequent products; or
o establish a strategic relationship with a larger biopharmaceutical company
to co-promote ONCONASE(R) in the United States and other territories.
However, we cannot assure you that any of these arrangements will materialize.
7
Government Regulation
The manufacturing and marketing of pharmaceutical products in the United States
requires the approval of the FDA under the Federal Food, Drug and Cosmetic Act.
Similar approvals by comparable regulatory agencies are required in most foreign
countries. The FDA has established mandatory procedures and safety standards
which apply to the clinical testing, manufacturing and marketing of
pharmaceutical products. Obtaining FDA approval for a new therapeutic may take
many years and involve substantial expenditures. State, local and other
authorities also regulate pharmaceutical manufacturing facilities.
As an initial step in the FDA regulatory approval process, preclinical studies
are conducted in laboratory dishes and animal models to assess the drug's
efficacy and to identify potential safety problems. The results of these studies
are submitted to the FDA as a part of the Investigational New Drug application,
or IND, which is filed to obtain approval to begin human testing. The human
clinical testing program typically involves up to three phases. Data from human
trials as well as other regulatory requirements such as chemistry, manufacturing
and controls; pharmacology and toxicology sections, are submitted to the FDA in
a New Drug Application or Biologics License Application, or BLA. Preparing an
NDA or BLA involves considerable data collection, verification and analysis.
We have not received United States or other marketing approval for any of our
product candidates and may not receive any approvals. We may encounter
difficulties or unanticipated costs in our effort to secure necessary
governmental approvals, which could delay or preclude us from marketing our
products.
With respect to patented products, delays imposed by the governmental approval
process may materially reduce the period during which we may have the exclusive
right to exploit them. See "Patents and Trademarks."
Patents and Trademarks
We believe it is important to develop new technology and to improve our existing
technology. When appropriate, we file patent applications to protect inventions
in which we have an ownership interest.
We own six legally effective United States patents:
o U.S. Patent No. 4,888,172 issued in 1989, which covers a pharmaceutical
produced from fertilized frog eggs (Rana pipiens) and methodology for so
producing it.
o U.S. Patent No. 5,559,212 issued in 1996, which covers the amino acid
sequence of ONCONASE(R).
o U.S. Patents Nos. 5,529,775 and 5,540,925 issued in 1996 and U.S. Patent
No. 5,595,734 issued in 1997, which cover combinations of ONCONASE(R) with
certain other pharmaceuticals.
o U.S. Patent No. 5,728,805 issued in 1998 which covers a family of variants
of ONCONASE(R).
We own three European patents, which have been validated in certain European
countries. These European patents cover ONCONASE(R), process technology for
making ONCONASE(R), and combinations of ONCONASE(R) with certain other
chemotherapeutics. We also own other patent applications, which are pending in
the United States, Europe, and Japan. Additionally, we own one Japanese patent
and an undivided interest in two applications that are pending in the United
States. Each of these applications relate to a Subject Invention, as that term
is defined in Collaborative Research and Development Agreements to which we and
the National Institutes of Health are parties.
8
Patents covering biotechnological inventions have an uncertain scope, and we are
subject to this uncertainty. Our patent applications may not issue as patents.
Moreover, our patents may not provide us with competitive advantages and may not
withstand challenges by others. Likewise, patents owned by others may adversely
affect our ability to do business. Furthermore, others may independently develop
similar products, may duplicate our products, and may design around patents
owned by us.
We also rely on proprietary know-how and on trade secrets to develop and
maintain our competitive position. Others may independently develop such
know-how or trade secrets or may otherwise obtain access thereto. Although our
employees and consultants have access to proprietary information and are
required to sign agreements which require them to keep such information
confidential. However, such agreements may be breached or held to be
unenforceable.
Competition
There are several companies, universities, research teams and scientists, both
private and government- sponsored, which engage in research similar, or
potentially similar, to that performed by us. Most of these entities and
associations have far greater financial resources, larger research staffs and
more extensive physical facilities. These competitors may develop products that
are more effective than ours and may be more successful than us at producing and
marketing their products. We are not aware of any product currently being
marketed which has the same mechanism of action as ONCONASE(R) or of any FDA
approved drug for the treatment of malignant mesothelioma.
Employees
As of October 24, 2000, we employed 14 persons, of whom 12 were engaged in
research and development activities and 2 were engaged in administration and
management. We have 5 employees who hold Ph.D. or M.D. degrees. All of our
employees are covered by confidentiality agreements. We consider relations with
our employees to be very good. None of our employees are covered by a collective
bargaining agreement.
Environmental Matters
Our operations are subject to comprehensive regulation with respect to
environmental, safety and similar matters by the United States Environmental
Protection Agency and similar state and local agencies. Failure to comply with
applicable laws, regulations and permits can result in injunctive actions,
damages and civil and criminal penalties. If we expand or change our existing
operations or propose any new operations, we may need to obtain additional or
amend existing permits or authorizations. We spend time, effort and funds in
operating our facilities to ensure compliance with environmental and other
regulatory requirements. Such efforts and expenditures are common throughout the
biotechnology industry and generally should have no material adverse effect on
our financial condition. The principal environmental regulatory requirements and
matters known to us requiring or potentially requiring capital expenditures by
us do not appear likely, individually or in the aggregate, to have a material
adverse effect on our financial condition. We believe that we are in compliance
with all current laws and regulations.
Item 2. PROPERTIES.
We lease a total of approximately 17,000 square feet in an industrial office
building located in Bloomfield, New Jersey. We lease the facility under a
five-year operating lease which is due to expire December 31, 2001. The
9
annual rental obligation, which commenced January 1, 1997, is $96,775 and is
subject to escalation amounts. We believe that the facility is sufficient for
our needs in the foreseeable future.
Item 3. LEGAL PROCEEDINGS.
We are presently not involved in any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the OTC Bulletin Board, or OTCBB, under the symbol
"ACEL". At the close of business April 27, 1999, we were delisted from The
Nasdaq SmallCap Market, or Nasdaq, for failing to meet the minimum bid price
requirements set forth in the NASD Marketplace Rules. As of October 24, 2000,
there were approximately 1,265 stockholders of record of our common stock.
The following table sets forth the range of high and low sale prices of the
common stock for the two fiscal years ended July 31, 2000 and 1999. The prices
for the periods commencing April 28, 1999 were obtained from OTCBB and the
prices for the periods prior to such date were obtained from Nasdaq. These
prices are believed to be representative of inter-dealer quotations, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
High Low
---- ---
Year Ended July 31, 2000:
First Quarter 15/16 13/32
Second Quarter 1-15/16 3/8
Third Quarter 3-7/8 23/32
Fourth Quarter 2-5/8 11/16
Year Ended July 31, 1999:
First Quarter 1-1/4 13/32
Second Quarter 1/2 7/32
Third Quarter 7/8 13/64
Fourth Quarter 9/16 3/16
We have not paid dividends on our common stock since inception and we do not
plan to pay dividends in the foreseeable future. Any earnings we may realize
will be retained to finance our growth.
Recent Sales of Unregistered Securities
In August 2000, we issued 11,800 shares of common stock for payment of services
rendered, in a private transaction consummated pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
10
In August and September 2000, we sold an aggregate of 333,332 shares of common
stock to private investors at a price of $1.50 per share resulting in gross
proceeds of $499,998. In addition, the private investors were granted five-year
warrants to purchase an aggregate of 166,666 shares of common stock at per share
exercise price of $3.00. These transactions were consummated as a private sale
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
In September 2000, we issued 40,000 shares of common stock upon the exercise of
stock options by a related party resulting in gross proceeds of $16,100, in a
transaction consummated as a private sale pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
Item 6. SELECTED FINANCIAL DATA.
Set forth below is the selected financial data for our company for the five
fiscal years ended July 31.
Year Ended July 31,
- ----------- ----------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
Revenue $51,144 $168,372 $311,822 $442,572 $184,250
Net Loss (1) $(1,722,298) $(3,156,636) $(6,387,506) $(5,018,867) $(2,942,152)
Net Loss Per Basic
and Diluted Share $(.10) $(.18) $(.40) $(.34) $(.25)
Dividends None None None None None
At Year End: July 31,
- ----------- ----------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
Total Assets $488,099 $1,728,648 $5,516,678 $8,034,954 $8,487,711
Long-term 30,251 None $6,727 $15,902 $1,398,760
Obligations
Total Equity
(Deficiency) $(131,860) $757,200 $3,691,838 $5,566,091 $6,650,266
(1) Included in the net loss of $(1,722,298) for fiscal year ended July 31,
2000 is a tax benefit of $755,854 related to the sale of certain state tax
operating loss carryforwards.
11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
Since our inception, we have devoted the majority of our resources to the
research and development of ONCONASE(R). After we obtained the results of our
preliminary analysis of the Phase III clinical trial results for advanced
pancreatic cancer, we closed the pancreatic cancer trials and redirected our
resources towards the completion of the ongoing Phase III clinical trial for
unresectable malignant mesothelioma. We have presented our preliminary results
of the Phase III trial in patients with malignant mesothelioma to the FDA and
have begun a series of meetings and communications with the FDA to establish
mutually agreed upon parameters for the NDA submission. We must complete all
chemistry, manufacturing and controls and pharmacology requirements of the NDA,
as well as provide confirmatory survival data from the ongoing trial. We are
also exploring various strategic alternatives for our business and our research
and development operations.
We are currently funding the research and development of our products from cash
reserves resulting from the previous sales of our securities. The termination of
the Phase III clinical trials for advanced pancreatic cancer had a significant
and detrimental impact on the price of our common stock and our ability to raise
additional capital for future operations. We may not have, or be able to obtain,
the financial resources required to pay for all the associated costs of the
malignant mesothelioma program to file a Unites States and/or foreign
registration for the marketing approval of ONCONASE(R) for this indication.
Results of Operations
Fiscal Years Ended July 31, 2000, 1999 and 1998
Revenues
We are a development stage company as defined in the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 7. We are
devoting substantially all our present efforts to establishing a new business
and developing new drug products. Our planned principal operations of marketing
and/or licensing of new drugs have not commenced and, accordingly, we have not
derived any significant revenue from these operations. We focus most of our
productive and financial resources on the development of ONCONASE(R). We have
not had any sales in fiscal 2000, 1999 and 1998. Investment income for fiscal
2000 was $51,000 compared to $168,000 for fiscal 1999, a decrease of $117,000.
This decrease was due to lower balances of cash and cash equivalents. Investment
income for fiscal 1999 was $168,000 compared to $312,000 for fiscal 1998, a
decrease of $144,000. This decrease was due to lower balances of cash and cash
equivalents.
Research and Development
Research and development expense for fiscal 2000 was $1,880,000 compared to
$2,402,000 for fiscal 1999, a decrease of $522,000 or 22%. This decrease was
primarily due to an 80% decrease in costs in support of ongoing clinical trials,
primarily due to lower clinical costs related to the Phase III clinical trials
for malignant mesothelioma and pancreatic cancer, an 82% decrease in costs
related to the preclinical research studies of ONCONASE(R) and a 44% decrease in
costs related to the manufacture of clinical supplies of ONCONASE(R). These
decreases were offset by an increase in expenses in preparation of an NDA filing
for ONCONASE(R) and an 82% increase in expenses associated with the new patent
and trademark applications for ONCONASE(R).
Research and development expense for fiscal 1999 was $2,402,000 compared to
$5,265,000 for fiscal 1998, a decrease of $2,863,000 or 54%. This decrease was
primarily due to a 96% decrease in costs related to the manufacture of clinical
supplies of ONCONASE(R), a 47% decrease in costs in support of ongoing clinical
trials,
12
an 82% decrease in expenses for preparation of an NDA for ONCONASE(R) and a 4%
decrease in personnel costs. These decreases were primarily due to the
completion of the patient enrollment of the Phase III clinical trial for
malignant mesothelioma in April 1999 and the closing of the Phase III clinical
trials for pancreatic cancer in July 1998.
General and Administrative
General and administrative expense for fiscal 2000 was $645,000 compared to
$921,000 for fiscal 1999, a decrease of $276,000 or 29%. This decrease was
primarily due to a 45% reduction in administrative personnel costs, primarily
due to the resignation of our chief financial officer, a 46% decrease in
consulting fees and a 55% decrease in public relations expenses, offset by a
$20,000 increase in legal fees.
General and administrative expense for fiscal 1999 was $921,000 compared to
$1,413,000 for fiscal 1998, a decrease of $492,000 or 35%. This decrease was
primarily due to a 94% decrease in legal costs, a 25% reduction in
administrative personnel costs and a 56% decrease in public relations expenses,
offset by an $84,000 increase in consulting fees.
Interest
Interest expense for fiscal 2000 was $5,000 compared to $2,000 in fiscal 1999,
an increase of $3,000. The increase was primarily due to the financing of office
equipment during the fiscal year ended July 31, 2000.
Interest expense for fiscal 1999 was $2,000 compared to $22,000 in fiscal 1998,
a decrease of $20,000 or 91%. The decrease was primarily due to the payment of
the entire principal amount of our $1.4 million term loan agreement with our
bank during the fiscal year ended July 31, 1998.
Income Taxes
New Jersey has enacted legislation permitting certain corporations located in
New Jersey to sell state tax loss carryforwards and state research and
development credits or tax benefits. Approximately $2.4 million of our tax
benefits were approved for sale by the state in December 1999, of which
approximately $1 million was allocated to be sold between July 1, 1999 and June
30, 2000. In December 1999, we received $755,854 from the sale of $1 million of
our tax benefits which was recognized as a tax benefit for fiscal year 2000. We
will attempt to sell the remaining balance of our tax benefits in the amount of
approximately $1.4 million between July 1, 2000 and June 30, 2001, subject to
all existing laws of the State of New Jersey. However, we cannot assure you that
we will be able to find a buyer for our tax benefits or that such funds will be
available in a timely manner.
Net Loss
We have incurred net losses during each year since our inception. The net loss
for fiscal 2000 was $1,722,000 as compared to $3,157,000 in fiscal 1999 and
$6,388,000 in fiscal 1998. The cumulative loss from the date of inception,
August 24, 1981, to July 31, 2000 amounted to $56,677,000. Such losses are
attributable to the fact that we are still in the development stage and
accordingly have not derived sufficient revenues from operations to offset the
development stage expenses.
Liquidity and Capital Resources
We have financed our operations since inception primarily through equity and
debt financing, research product sales and interest income. During the fiscal
year 2000, we had a net decrease in cash and cash equivalents of $1,126,000.
This decrease primarily resulted from net cash used in operating activities of
$1,713,000 and net
13
cash used in investing activities of $38,000, offset by net cash provided by
financing activities in the amount of $625,000, primarily from the private
placement of common stock and warrants and proceeds from the exercise of stock
options. Total cash resources as of July 31, 2000 were $257,000 compared to
$1,383,000 at July 31, 1999.
Our current liabilities as of July 31, 2000 were $590,000 compared to $971,000
at July 31, 1999, a decrease of $375,000 or 39%. The decrease was primarily due
to a reduction in our accrued expenses, primarily due to the reduction of an
accrual related to the Phase III clinical trials for pancreatic cancer and
decrease in costs in support of ongoing clinical trials, offset by an increase
in expenses for the preparation of an NDA filing for ONCONASE(R) and an increase
in legal fees, primarily due to the filing of an S-1 registration statement to
register the resale of up to 3,764,671 shares of our common stock. As of July
31, 2000 our current liabilities exceeded our current assets and we had a
working capital deficit of $304,000.
New Jersey has enacted legislation permitting certain corporations located in
New Jersey to sell state tax loss carryforwards and state research and
development credits or tax benefits. Approximately $2.4 million of our tax
benefits were approved for sale by the state in December 1999, of which
approximately $1 million was allocated to be sold between July 1, 1999 and June
30, 2000. In December 1999, we received $755,854 from the sale of a portion of
our tax benefits. We will attempt to sell the remaining balance of our tax
benefits in the amount of approximately $1.4 million between July 1, 2000 and
June 30, 2001, subject to all existing laws of the State of New Jersey. However,
we cannot assure you that we will be able to find a buyer for our tax benefits
or that such funds will be available in a timely fashion.
Our continued operations will depend on our ability to raise additional funds
through various potential sources such as equity and debt financing,
collaborative agreements, strategic alliances, sale of tax benefits, revenues
from the commercial sale of ONCONASE(R) and our ability to realize the full
potential of our technology and our drug candidates. Such additional funds may
not become available as we need them or be available on acceptable terms. To
date, a significant portion of our financing has been through private placements
of common stock and warrants, the issuance of common stock for stock options and
warrants exercised and for services rendered, debt financing and financing
provided by our Chief Executive Officer. Additionally, we have raised capital
through the sale of our tax benefits. Until our operations generate significant
revenues, we will continue to fund operations from cash on hand and through the
sources of capital previously described. In August and September 2000, we
received gross proceeds of approximately $516,000 from the private placement of
various individual investors and an exercise of stock options by a related
party. After taking into account the net proceeds received and the anticipated
proceeds from the sale of the balance of our tax benefits, we believe that our
cash and cash equivalents as of July 31, 2000 will be sufficient to meet our
anticipated cash needs through February 2001. We may not be able to receive such
funds in a timely manner. If we are unable to obtain funds from the sale of our
tax benefits in a timely basis, our current cash reserves will be exhausted in
December 2000. The report of our independent auditors on our financial
statements includes an explanatory paragraph which states that our recurring
losses, working capital deficit and limited liquid resources raise substantial
doubt about our ability to continue as a going concern. Our financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
We will continue to incur costs in conjunction with our U.S. and foreign
registrations for marketing approval of ONCONASE(R). We are currently in
discussion with several potential strategic alliance partners including major
international biopharmaceutical companies to further the development and
marketing of ONCONASE(R) and other related products in our pipeline. However, we
cannot assure you that any such alliances will materialize. We intend to seek
foreign marketing approvals for ONCONASE(R) for the treatment of malignant
mesothelioma. Clinical data is required in certain European countries for
registration. Therefore, we have initiated a plan to expand our ongoing clinical
trial internationally.
14
Our common stock was delisted from The Nasdaq SmallCap Market effective at the
close of business April 27, 1999 for failing to meet the minimum bid price
requirements set forth in the NASD Marketplace Rules. As of April 28, 1999, our
common stock trades on the OTC Bulletin Board under the symbol "ACEL". Delisting
of our common stock from Nasdaq could have a material adverse effect on our
ability to raise additional capital, our stockholders' liquidity and the price
of our common stock.
The market price of our common stock is volatile, and the price of the stock
could be dramatically affected one way or another depending on numerous factors.
The market price of our common stock could also be materially affected by the
marketing approval or lack of approval of ONCONASE.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item is submitted as a separate section of this report
commencing on Page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 1, 1993, certain shareholders of Armus Harrison & Co., or AHC,
terminated their association with AHC, or AHC termination, and AHC ceased
performing accounting and auditing services, except for limited accounting
services to be performed on our behalf. In June 1996, AHC dissolved and ceased
all operations. The report of KPMG LLP with respect to our financial statements
from inception to July 31, 2000 is based on the report of AHC for the period
from inception to July 31, 1992, although AHC has not consented to the use of
such report herein and will not be available to perform any subsequent review
procedures with respect to such report. Accordingly, investors will be barred
from asserting claims against AHC under Section 11 of the Securities Act on the
basis of the use of such report in any registration statement into which such
report is incorporated by reference. In addition, in the event any persons seek
to assert a claim against AHC for false or misleading financial statements and
disclosures in documents previously filed by us, such claim will be adversely
affected and possibly barred. Furthermore, as a result of the lack of a consent
from AHC to the use of its audit report herein, or to its incorporation by
reference into a registration statement, our officers and directors will be
unable to rely on the authority of AHC as experts in auditing and accounting in
the event any claim is brought against such persons under Section 11 of the
Securities Act based on alleged false and misleading Financial Statements and
disclosures attributable to AHC. The discussion regarding certain effects of the
AHC termination is not meant and should not be construed in any way as legal
advice to any party and any potential purchaser should consult with his, her or
its own counsel with respect to the effect of the AHC termination on a potential
investment in our common stock or otherwise.
15
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Name Age Director Since Position with the Company
- ---- --- -------------- -------------------------
Kuslima Shogen 55 1981 Chairman of the Board, Chief Executive
Officer and Acting Chief Financial Officer
Stanislaw M. Mikulski, M.D. 56 1986 Executive Vice President, Medical Director
and Director
Stephen K. Carter, M.D.(1) 62 1997 Director and Chairman of the Scientific
Advisory Board
Donald R. Conklin(1)(2) 64 1997 Director
Martin F. Stadler(1)(2) 58 1997 Director
(1) Member of Compensation Committee
(2) Member of Audit Committee
Business Experience of Directors and Executive Officers
Kuslima Shogen has served as our Chief Executive Officer since September 1986,
as Chairman of the Board since August 1996, as a Director since our inception
and as Acting Chief Financial Officer since June 23, 1999. She also served as
our Chief Financial Officer from September 1986 through July 1994 and as our
President from September 1986 through July 1996. Ms. Shogen formed the company
in 1981 to pursue research that she had initiated while a biology student in the
University Honors Program at Fairleigh Dickenson University. Prior to our
founding, from 1976 to 1981 she was founder and president of a biomedical
research consortium specializing in Good Laboratory Practices and animal
toxicology. During that time, she also served as a consultant for the Lever
Brothers Research Group. Ms. Shogen has received numerous awards for
achievements in biology, including the Sigma Xi first prize from the Scientific
Research Society of North America in 1974 and first prize for the most
outstanding research paper in biology at the Eastern College Science Conferences
competitions in 1972, 1973, and 1974. She earned a B.S. degree in 1974 and an
M.S. degree in 1976 in biology from Fairleigh Dickenson University, or FDU, and
also completed graduate studies in 1978 in embryology. She is a Phi Beta Kappa
graduate. In April 1998, Ms. Shogen received the Pinnacle Award from FDU, the
highest honor the University bestows on its graduates.
Stanislaw M. Mikulski, M.D., F.A.C.P. has served as our Executive Vice President
and Medical Director since 1987 and as a Director since 1986. Prior to his
affiliation with us, Dr. Mikulski was Special Assistant to the Chief of the
Investigational Drug Branch of the National Cancer Institute, and the
Coordinator for Immunotherapy Trials in Cancer for the Division of Cancer
Treatment. Prior to joining us, he maintained a private practice in medical
oncology for over eight years. He is a diplomate of the American Board of
Internal Medicine and Medical Oncology as well as a Fellow of the American
College of Physicians and a member of the American Society of Clinical Oncology,
The American Association for Cancer Research and the American Association for
the Advancement of Science. Dr. Mikulski is currently a clinical assistant
Professor of Medicine at the University of Medicine and Dentistry of New Jersey.
He received his M.D. in 1967 from the Medical School of Warsaw, Poland and
subsequently performed post-doctoral studies in human tumor immunology at the
University of California in Los Angeles.
16
Stephen K. Carter, M.D. joined the Board of Directors in May 1997 and serves as
Chairman of our Scientific Advisory Board. In addition to his positions with us,
Dr. Carter also serves as a senior clinical consultant to Sugen, Inc. From 1995
through 1997, he served as Senior Vice President of Research and Development for
Boehringer-Ingelheim Pharmaceuticals. Before this, Dr. Carter spent over 13
years with Bristol-Myers Squibb, an international leader in the development of
innovative anti-cancer and anti-viral therapies. He held a variety of senior
executive research and development positions while at Bristol-Myers, including
serving for five years as Senior Vice President of worldwide clinical research
and development of its Pharmaceutical Research Institute. From 1976 to 1982, he
established and directed the Northern California Cancer Program. Prior to this,
he held a number of positions during a nine-year tenure at the National Cancer
Institute, including the position of Deputy Director at the National Institutes
of Health. He has also been a member of the faculties of the medical schools of
Stanford University, the University of California at San Francisco and New York
University. Dr. Carter has published extensively on the development of
anti-cancer drugs, was the co-founding editor of journals devoted to cancer
therapeutics or immunology, and has served on the editorial boards of a number
of additional journals dedicated to cancer treatment. He is a member of the
American Society of Clinical Oncology, the American Association for Cancer
Research, and the Society of Surgical Oncology, as well as several other medical
societies. Dr. Carter earned his B.A. from Columbia University and his M.D. from
New York Medical College. He currently serves on the Board of Directors of Allos
Therapeutics.
Donald R. Conklin joined the Board of Directors in May 1997. Prior to his
retirement in May 1997, Mr. Conklin was a senior executive with Schering-Plough,
a major worldwide pharmaceutical firm. During his more than 35 years with
Schering-Plough, he held a variety of key management positions within the firm.
From 1986 to 1994, he served as President of Schering-Plough Pharmaceuticals and
Executive Vice-President of Schering-Plough Corporation. In this position, he
was responsible for worldwide pharmaceutical operations, including the launch of
INTRON A(R) (interferon alfa-2b). Prior to this, Mr. Conklin had served as
President of Schering USA and had held a variety of executive marketing
positions in the United States, Europe, and Latin America. Immediately preceding
his retirement, he was Chairman of Schering-Plough Health Care Products and an
Executive Vice President of Schering-Plough Corporation. Mr. Conklin received
his B.A. with highest honors from Williams College and his M.B.A. degree from
the Rutgers University School of Business. He currently serves on the Board of
Directors of Vertex Pharmaceuticals, Inc. and BioTransplant, Inc.
Martin F. Stadler joined the Board of Directors in November 1997. At the end of
1996, Mr. Stadler retired from Hoffmann La-Roche, Inc. after 32 years of
pharmaceutical, chemical and diagnostic experience. Mr. Stadler served as senior
vice president and chief financial officer, and was a member of the Hoffmann La-
Roche, Inc. Board of Directors from 1985 through 1996. His responsibilities
included finance, information technology, human resources, quality control and
technical services. Prior to 1985, Mr. Stadler served as vice- president of
strategic planning and business development. Mr. Stadler received his B.S.
degree from Rutgers University and his M.B.A. from Fairleigh Dickenson
University. In April 1999, he received the Pinnacle Award from FDU, the highest
honor the University bestows on its graduates. Mr. Stadler is a member of the
Finance Council of the American Management Association, a trustee of Fairleigh
Dickenson University and a member of the Advisory Board for Horton
International.
Section 16(a) Beneficial Ownership Reporting Compliance
Ownership of and transactions in our stock by our executive officers and
directors and owners of 10% or more of our outstanding common stock are required
to be reported to the Securities and Exchange Commission pursuant to Section
16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
During the fiscal year ended July 31, 2000, all reports required to be filed
pursuant to Section 16(a) of the Exchange Act were filed in a timely manner.
17
Item 11. EXECUTIVE COMPENSATION.
Directors' Compensation
Directors receive no cash compensation in consideration for their serving on the
Board of Directors.
In November 1993 and January 1994, the Board of Directors and the stockholders,
respectively, approved our 1993 Stock Option Plan or 1993 Plan which, among
other things, provides for automatic grants of options under a formula to
non-employee directors or independent directors on an annual basis.
The formula provides that (i) on each December 31st each independent director
receives automatically an option to purchase 15,000 shares of our common stock,
or the regular grant; and (ii) on the date of each independent director's
initial election to the Board of Directors, the newly elected independent
director automatically receives an option to purchase the independent director's
pro rata share of the regular grant which equals the product of 1,250 multiplied
by the number of whole months remaining in the calendar year, or the pro rata
grant. Each option granted pursuant to a regular grant and a pro rata grant
vests and becomes exercisable on December 30th following the date of grant. An
option will not become exercisable as to any shares unless the independent
director has served continuously on the Board during the year preceding the date
on which such options are scheduled to vest and become exercisable, or from the
date the independent director joined the Board until the date on which the
options are scheduled to vest and become exercisable. However, if an independent
director does not fulfill such continuous service requirement due to the
independent director's death or disability all options held by the independent
director nonetheless vest and become exercisable as described herein. An option
granted pursuant to the formula remains exercisable for a period of five years
after the date the option first becomes exercisable. The per share exercise
price of an option granted under the formula is equal to the average of the high
and low trade prices of our common stock for the twenty (20) trading days
preceding the date of grant.
During the fiscal year ended July 31, 2000, the following independent directors
were granted the options listed below pursuant to the formula under the 1993
Plan. The exercise prices of the options are equal to the formula set forth
above.
Name Number of Options Exercise Price Expiration
- ---- ----------------- -------------- ----------
Stephen K. Carter 15,000 $ 0.48 12/30/05
Donald R. Conklin 15,000 $ 0.48 12/30/05
Martin F. Stadler 15,000 $ 0.48 12/30/05
Additionally, in December 1999 our compensation committee approved the issuance
of an aggregate total of 75,000 stock options to our outside board of directors,
which vested on the date of grant. The exercise price of the stock options was
$0.47 per share which was based on the average of the high and low trade prices
of our common stock for the twenty (20) trading days preceding the date of
grant.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended July 31, 2000, the members of our Board of
Directors who served on the Compensation Committee were Stephen K. Carter,
Donald R. Conklin and Martin F. Stadler, all of whom are non-employee directors.
18
Summary Compensation Table
The following table provides a summary of cash and non-cash compensation for
each of the last three fiscal years ended July 31, 2000, 1999 and 1998 earned by
our Chief Executive Officer and Executive Vice President or our executive
officers during the last fiscal year.
Long Term
Annual Compensation Compensation
--------------------------------------------------------------- -----------------
Securities
Other Annual Underlying All Other
Name and Salary Bonus Compensation Options/SARs Compensation
Principal Position Year ($) ($) ($)(1) (#) ($)(2)
- --------------------- -------- ------------ ----------- ---------------- ----------------- ----------------
Kuslima Shogen 2000 $150,000 - 0 - - 0 - 215,000 3,615
Chief Executive 1999 150,000 - 0 - - 0 - - 0 - 3,289
Officer, Chairman 1998 150,000 - 0 - - 0 - - 0 - - 0 -
of the Board of
Directors and
Acting Chief
Financial Officer
Stanislaw M. 2000 $130,000 - 0 - - 0 - 130,000 3,600
Mikulski 1999 130,000 - 0 - - 0 - 50,000 2,850
Executive Vice 1998 130,000 - 0 - - 0 - - 0 - - 0 -
President and
Medical Director
(1) Excludes perquisites and other personal benefits which in the aggregate do
not exceed 10% of our executive officers' total annual salary and bonus.
(2) Consists of our contributions to a 401(k) plan.
Option Grants in Last Fiscal Year
The following table contains information concerning the grant of stock options
to our executive officers during the fiscal year ended July 31, 2000:
Individual Grants
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Option Term(2)
- ----------------------------------------------------------------------------------------- -----------------------------------
Number of
Securities % of Total
Underlying Options Granted Exercise or
Options to Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Share)(1) Date
0%($) 5%($) 10%($)
- -------------------- --------------- ------------------ -------------- --------------- --------- ----------- ------------
Kuslima Shogen 23,000(3) 3.25% $.54 10/15/04 -- $ 621 $ 1,242
23,000(3) 3.25% .54 10/15/05 -- 621 1,242
23,000(3) 3.25% .54 10/15/06 -- 621 1,242
23,000(3) 3.25% .54 10/15/07 -- 621 1,242
23,000(3) 3.25% .54 10/15/08 -- 621 1,242
100,000(4) 14.14% .48 12/31/01(4) -- 2,400 4,800
19
Individual Grants
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Option Term(2)
- ------------------------------------------------------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options Granted Exercise or
Options to Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Share)(1) Date
0%($) 5%($) 10%($)
- -------------------- --------------- ------------------ -------------- --------------- --------- ----------- ------------
Stanislaw M. 11,000(3) 1.56% $.54 10/15/04 -- $ 297 $ 594
Mikulski 11,000(3) 1.56% .54 10/15/05 -- 297 594
11,000(3) 1.56% .54 10/15/06 -- 297 594
11,000(3) 1.56% .54 10/15/07 -- 297 594
11,000(3) 1.56% .54 10/15/08 -- 297 594
75,000(4) 10.61% .48 12/31/01(4) -- 1,800 3,600
(1) The exercise prices of these options were based on the average of the high
and low trade prices of our common stock for the twenty (20) trading days
preceding the date of grant.
(2) The amounts set forth in the three columns represent hypothetical gains
that might be achieved by the optionees if the respective options are
exercised at the end of their terms. These gains are based on assumed rates
of stock price appreciation of 0%, 5% and 10%. The 0% appreciation column
is included because the exercise prices of the options equal the market
price of the underlying common stock on the date the options were granted,
and thus the options will have no value unless our stock price increases
above the exercise prices.
(3) These options vested and became exercisable as to 20% of the shares on the
date of the grant and 20% of the shares each year thereafter.
(4) These options will vest and become exercisable upon FDA approval of
ONCONASE(R) for malignant mesothelioma provided that ONCONASE(R) must be
approved on or before December 31, 2001, or these options will terminate,
and the executive officers must be actively employed by Alfacell through
the date of the approval. These options will expire five years after the
vesting date.
Option Exercises and Fiscal Year-End Values
The following table sets forth the information with respect to our executive
officers concerning the exercise of options during the fiscal year ended July
31, 2000 and unexercised options held as of July 31, 2000.
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Options at Fiscal Year-End at Fiscal Year-End($)(1)
(#)
Shares Value
Name Acquired on Realized Exercisable Unexercisable Exercisable Unexercisable
Exercise (#) ($)
- --------------------- ----------------- ------------ -------------- ------------------ -------------- ------------------
Kuslima Shogen None None 1,127,723 192,000 $8,510 $77,040
Stanislaw M. Mikulski None None 339,845 119,000 $28,070 $48,530
20
(1) The fair market value of the common stock at the fiscal year end was based
on the average of the high and low trade prices ($0.91) for the common
stock obtained from the OTC Bulletin Board on the last trading day of the
fiscal year July 31, 2000.
Employment and Termination Agreements
On August 31, 1999 we entered into a separation agreement and general release
with Ms. Gail E. Fraser pursuant to which:
o Ms. Fraser confirmed her resignation as vice president, finance, chief
financial officer, director and employee effective as of June 23, 1999,
o we agreed to pay Ms. Fraser her regular salary for the period commencing on
the date of resignation through July 31, 1999,
o we agreed with Ms. Fraser that an aggregate of 395,000 options granted to
Ms. Fraser under our 1993 Stock Option Plan, all of which had vested as of
the date of her resignation, will remain vested and exercisable until
December 30, 2000 and an aggregate of 70,000 options granted under our 1993
Stock Option Plan, which had not vested on the date of her resignation,
will be deemed vested as of the date of resignation and will remain
exercisable until December 30, 2000,
o we agreed to pay for health insurance for Ms. Fraser and her dependents
until July 1999,
o we and Ms. Fraser released each other from all claims and,
o Ms. Fraser agreed not to compete with us until December 30, 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information concerning stock ownership of
each person who is the beneficial owner of five percent or more of our
outstanding common stock, each of the current directors, each of our executive
officers and all directors and executive officers as a group as of September 30,
2000. Except as otherwise noted, each person has sole voting and investment
power with respect to the shares shown as beneficially owned.
Number Percentage of Common
Directors, Officers or 5% Stockholders(1) of Shares(2) Stock Outstanding(3)
- ------------------------------------------ --------- ---------------------
Kuslima Shogen 2,442,343(4) 12.2%
Stanislaw M. Mikulski 723,095(5) 3.8%
Stephen K. Carter 103,750(6) *
Donald R. Conklin 169,250(7) *
Martin F. Stadler 161,250(8) *
All executive officers and directors
as a group (five persons) 3,599,688(9) 17.5%
* Less than one percent.
(1) The address of all officers and directors listed above is in the care of
the company.
21
(2) All shares listed are common stock. Except as discussed below, none of
these shares are subject to rights to acquire beneficial ownership, as
specified in Rule 13d-3(d)(1) under the Exchange Act, and the beneficial
owner has sole voting and investment power, subject to community property
laws where applicable.
(3) The percentage of stock outstanding for each stockholder is calculated by
dividing (i) the number of shares of Common Stock deemed to be beneficially
held by such stockholder as of September 30, 2000 by (ii) the sum of (A)
the number of shares of common stock outstanding as of September 30, 2000
plus (B) the number of shares issuable upon exercise of options or warrants
held by such stockholder which were exercisable as of September 30, 2000 or
which will become exercisable within 60 days after September 30, 2000.
(4) Includes 1,173,723 shares underlying options which were exercisable as of
September 30, 2000 or which will become exercisable within 60 days after
September 30, 2000.
(5) Includes 361,845 shares underlying options which were exercisable as of
September 30, 2000 or which will become exercisable within 60 days after
September 30, 2000.
(6) Includes 103,750 shares underlying options which were exercisable as of
September 30, 2000 or which will become exercisable within 60 days after
September 30, 2000.
(7) Includes 103,750 shares underlying options which were exercisable as of
September 30, 2000 or which will become exercisable within 60 days after
September 30, 2000.
(8) Includes 46,250 shares underlying options which were exercisable as of
September 30, 2000 or which will become exercisable within 60 days after
September 30, 2000 and 25,000 shares underlying warrants which were
exercisable as of September 30, 2000 or which will become exercisable
within 60 days after September 30, 2000.
(9) Includes all shares owned beneficially by the directors and the executive
officers named in the table.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On July 23, 1991, the Board of Directors authorized us to pay Kuslima Shogen an
amount equal to 15% of any gross royalties which may be paid to us from any
license(s) with respect to our principal product, ONCONASE(R), or any other
products derived from amphibian source extract, produced either as a natural,
synthesized, and/or genetically engineered drug for which we own or are a
co-owner of the patent, or acquire such rights in the future, for a period not
to exceed the life of the patents. If we manufacture and market the drugs
ourselves, we will pay an amount equal to 5% of gross sales from any products
sold during the life of the patents.
In August 1998, Ms. Shogen and Dr. Mikulski settled, and the court approved the
settlement of a claim brought against them in the United States District Court,
District of New Jersey at Newark, New Jersey, by a shareholder under Section
16(b) of the Securities Exchange Act of 1934, as amended, for profits alleged to
have been realized by Ms. Shogen and Dr. Mikulski in transactions involving our
securities in 1988 and 1989. Claims under Section 16(b) are for profits
calculated under such statute to have been realized for sales and purchases of
our securities made within a six month period. In this case the purchases which
formed the basis for this claim were issuances of shares of stock to Ms. Shogen
and Dr. Mikulski under employment agreements with us based upon our achievement
of certain milestones. No allegations of fraud were made. Ms. Shogen
22
agreed to pay us $91,971.00 and Dr. Mikulski agreed to pay us $72,903.00. Such
payments are to be made in a form acceptable to us whether in cash, shares of
our common stock or options to purchase our common stock, with 25% of such
payments having been made in August 1998 and the remainder of such amounts
payable in three equal installments in August 1999, 2000 and 2001. The August
1998 payments were made by the cancellation of options to purchase 44,999 shares
of common stock owned by Ms. Shogen and the cancellation of options to purchase
35,669 shares of common stock owned by Dr. Mikulski. In August 1999, Ms. Shogen
paid the balance in full by the cancellation of options to purchase 134,995
shares owned by Ms. Shogen and Dr. Mikulski paid an installment equal to
one-third of the balance by the cancellation of options to purchase 35,367
shares owned by Dr. Mikulski. In February 2000 Dr. Mikulski paid the balance in
full by the cancellation of options to purchase 31,599 shares owned by him.
In December 1999, our compensation committee approved the issuance of an
aggregate total of 75,000 stock options to our outside board of directors, which
vested on the date of grant. The exercise price of the stock options was $0.47
per share which was based on the average of the high and low trade prices of our
common stock for the twenty (20) trading days preceding the date of grant.
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) The response to these portions of Item 14 is submitted as
a separate section of this report commencing on page F-1.
(a)(3) and (4) Exhibits (numbered in accordance with Item 601 of Regulation
S-K).
Exhibit No.
or
Exhibit Incorporation
No. Item Title by Reference
- ------- ---------- -------------
3.1 Certificate of Incorporation *
3.2 By-Laws *
3.3 Amendment to Certificate of Incorporation #
3.4 Amendment to Certificate of Incorporation +++
4.1 Form of Convertible Debenture **
10.1 Form of Stock and Warrant Purchase Agreements used in private placements
completed in April 1996 and June 1996 ##
10.2 Lease Agreement - 225 Belleville Avenue, Bloomfield, New Jersey ###
10.3 Form of Stock Purchase Agreement and Certificate used in connection with
various private placements ***
10.4 Form of Stock and Warrant Purchase Agreement and Warrant Agreement
used in Private Placement completed on March 21, 1994 ***
10.5 1993 Stock Option Plan and Form of Option Agreement *****
10.6 Debt Conversion Agreement dated March 30, 1994 with Kuslima Shogen ****
10.7 Accrued Salary Conversion Agreement dated March 30, 1994 with Kuslima
Shogen ****
10.8 Accrued Salary Conversion Agreement dated March 30, 1994 with Stanislaw
Mikulski ****
23
Exhibit No.
or
Exhibit Incorporation
No. Item Title by Reference
- ------- ---------- -------------
10.9 Option Agreement dated March 30, 1994 with Kuslima Shogen ****
10.10 Amendment No. 1 dated June 20, 1994 to Option Agreement dated March
30, 1994 with Kuslima Shogen ****
10.11 Form of Amendment No. 1 dated June 20, 1994 to Option Agreement dated
March 30, 1994 with Kuslima Shogen *****
10.12 Form of Amendment No. 1 dated June 20, 1994 to Option Agreement dated
March 30, 1994 with Stanislaw Mikulski *****
10.13 Form of Stock and Warrant Purchase Agreement and Warrant Agreement
used in Private Placement completed on September 13, 1994 +
10.14 Form of Subscription Agreements and Warrant Agreement used in Private
Placements closed in October 1994 and September 1995 #
10.15 1997 Stock Option Plan ###
10.16 Separation Agreement with Michael C. Lowe dated October 9, 1997 ++
10.17 Form of Subscription Agreement and Warrant Agreement used in Private
Placement completed on February 20, 1998 +++
10.18 Form of Warrant Agreement issued to the Placement Agent in connection
with the Private Placement completed on February 20, 1998 +++
10.19 Placement Agent Agreement dated December 15, 1997 +++
10.20 Separation Agreement with Gail Fraser dated August 31, 1999 ####
10.21 Form of Subscription Agreement and Warrant Agreement used in Private
Placements completed in February 2000 #####
21.1 Subsidiaries of Registrant **
23.1 Consent of KPMG LLP #####
27.1 Financial Data Schedule #####
99.1 Factors to Consider in Connection with Forward-Looking Statements #####
* Previously filed as exhibit to the Company's Registration Statement on
Form S-18 (File No. 2-79975-NY) and incorporated herein by reference
thereto.
** Previously filed as exhibits to the Company's Annual Report on Form 10-K
for the year ended July 31, 1993 and incorporated herein by reference
thereto.
*** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended January 31, 1994 and incorporated herein by
reference thereto.
**** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1994 and incorporated herein by
reference thereto.
***** Previously filed as exhibits to the Company's Registration Statement Form
SB-2 (File No. 33-76950) and incorporated herein by reference thereto.
+ Previously filed as exhibits to the Company's Registration Statement on
Form SB-2 (File No. 33-83072) and incorporated herein by reference
thereto.
24
++ Previously filed as exhibits to the Company's Quarterly Report on Form
10-Q for the quarter ended October 31, 1997 and incorporated herein by
reference thereto.
+++ Previously filed as exhibits to the Company's Quarterly Report on Form
10-Q for the quarter ended January 31, 1998 and incorporated herein by
reference thereto.
# Previously filed as exhibits to the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1995 and incorporated herein by reference
thereto.
## Previously filed as exhibits to the Company's Registration statement on
Form SB-2 (File No. 333- 11575) and incorporated herein by reference
thereto.
### Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1997 and incorporated herein by
reference thereto.
#### Previously filed as exhibits to the Company's Annual Report on Form 10-K
for the year ended July 31, 1999 and incorporated herein by reference
thereto.
##### Filed herewith.
(b) Reports on Form 8-K.
None
25
Signature
Pursuant to the requirements of Section 13 or 15(d) 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.
ALFACELL CORPORATION
Dated: October 27, 2000 By: /s/ KUSLIMA SHOGEN
Kuslima Shogen, Chief Executive
Officer, Acting Chief Financial
Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: October 27, 2000 /s/ KUSLIMA SHOGEN
Kuslima Shogen, Chief Executive
Officer, Acting Chief Financial
Officer (Principal Executive
Officer, Principal Accounting
Officer) and Chairman of the Board
Dated: October 27, 2000 /s/ STANISLAW M. MIKULSKI
Stanislaw M. Mikulski, M.D.,
Executive Vice President and Director
Dated: October 27, 2000 /s/ STEPHEN K. CARTER
Stephen K. Carter, M.D., Director
Dated: October 27, 2000 /s/ DONALD R. CONKLIN
Donald R. Conklin, Director
Dated: October 27, 2000 /s/ MARTIN F. STADLER
Martin F. Stadler, Director
26
ALFACELL CORPORATION
(A Development Stage Company)
Index
Page
----
Independent Auditors' Report of KPMG LLP........................................................................F-2
Independent Auditors' Report of Armus, Harrison & Co. ..........................................................F-3
Financial Statements:
Balance Sheets - July 31, 2000 and 1999..............................................................F-5
Statements of Operations - Years ended July 31, 2000, 1999
and 1998 and the Period from August 24, 1981 (Date of
Inception) to July 31, 2000........................................................................F-6
Statement of Stockholders' Equity (Deficiency) - Period from
August 24, 1981 (Date of Inception) to July 31, 2000................................................F-7
Statements of Cash Flows - Years ended July 31, 2000, 1999
and 1998 and the Period from August 24, 1981 (Date of
Inception) to July 31, 2000........................................................................F-12
Notes to Financial Statements - Years ended July 31, 2000,
1999 and 1998 and the Period from August 24, 1981
(Date of Inception) to July 31, 2000...............................................................F-15
F-1
Independent Auditors' Report
The Stockholders and Board of Directors
Alfacell Corporation:
We have audited the accompanying balance sheets of Alfacell Corporation (a
development stage company) as of July 31, 2000 and 1999, and the related
statements of operations, stockholders' equity (deficiency), and cash flows for
each of the years in the three-year period ended July 31, 2000 and the period
from August 24, 1981 (date of inception) to July 31, 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. The financial statements of Alfacell Corporation (a development
stage company) for the period from August 24, 1981 (date of inception) to July
31, 1992 were audited by other auditors whose report dated December 9, 1992,
except as to note 18 which is July 19, 1993 and note 3 which is October 28,
1993, expressed an unqualified opinion on those statements with an explanatory
paragraph regarding the Company's ability to continue as a going concern.
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, based on our audits and, for the effect on the period from
August 24, 1981 (date of inception) to July 31, 2000 of the amounts for the
period from August 24, 1981 (date of inception) to July 31, 1992, on the report
of other auditors, the financial statements referred to above present fairly, in
all material respects, the financial position of Alfacell Corporation (a
development stage company) as of July 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the years in the three-year period
ended July 31, 2000 and the period from August 24, 1981 (date of inception) to
July 31, 2000 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital deficit and has limited liquid resources which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
KPMG LLP
Short Hills, New Jersey
October 4, 2000
F-2
On December 1, 1993, certain shareholders of Armus Harrison & Co. ("AHC")
terminated their association with AHC (the "AHC termination"), and AHC ceased
performing accounting and auditing services, except for limited accounting
services to be performed on behalf of the Company. In June 1996, AHC dissolved
and ceased all operations. The report of AHC with respect to the financial
statements of the Company from inception to July 31, 1992 is included herein,
although AHC has not consented to the use of such report herein and will not be
available to perform any subsequent review procedures with respect to such
report. Accordingly, investors will be barred from asserting claims against AHC
under Section 11 of the Securities Act of 1933, as amended (the "Securities
Act") on the basis of the use of such report in any registration statement of
the Company into which such report is incorporated by reference. In addition, in
the event any persons seek to assert a claim against AHC for false or misleading
financial statements and disclosures in documents previously filed by the
Company, such claim will be adversely affected and possibly barred. Furthermore,
as a result of the lack of a consent from AHC to the use of its audit report
herein, or, to its incorporation by reference into a registration statement, the
officers and directors of the company will be unable to rely on the authority of
AHC as experts in auditing and accounting in the event any claim is brought
against such persons under Section 11 of the Securities Act based on alleged
false and misleading financial statements and disclosures attributable to AHC.
The discussion regarding certain effects of the AHC termination is not meant and
should not be construed in any way as legal advice to any party and any
potential purchaser should consult with his, her or its own counsel with respect
to the effect of the AHC termination on a potential investment in the Common
Stock of the Company or otherwise.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Alfacell Corporation
Bloomfield, New Jersey
We have audited the balance sheets of Alfacell Corporation (a Development Stage
Company) as of July 31, 1992 and 1991, as restated, and the related statements
of operations, stockholders' deficiency, and cash flows for the three years
ended July 31, 1992, as restated, and for the period from inception August 24,
1981 to July 31, 1992, as restated. In connection with our audit of the 1992 and
1991 financial statements, we have also audited the 1992, 1991 and 1990
financial statement schedules as listed in the accompanying index. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly in all
material respects, the financial position of Alfacell Corporation as of July 31,
1992 and 1991, as restated, and for the three years ended July 31, 1992, as
restated, and for the period from inception August 24, 1981 to July 31, 1992, as
restated, and the results of operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.
F-3
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the statement of
operations, the Company has incurred substantial losses in each year since its
inception. In addition, the Company is a development stage company and its
principal operation for production of income has not commenced. The Company's
working capital has been reduced considerably by operating losses, and has a
deficit net worth. These factors, among others, as discussed in Note 2 of the
Notes to Financial Statements, indicates the uncertainties about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts and the amount of classification of liabilities that might be
necessary should the Company be unable to continue its existence.
-------------------------
Armus, Harrison & Co.
Mountainside, New Jersey
December 9, 1992
Except as to Note 18 which
is July 19, 1993 and Note 3
which is October 28, 1993
F-4
ALFACELL CORPORATION
(A Development Stage Company)
Balance Sheets
July 31, 2000 and 1999
ASSETS 2000 1999
------------ ------------
Current assets:
Cash and cash equivalents $ 257,445 $ 1,383,133
Other assets 28,617 87,308
------------ ------------
Total current assets 286,062 1,470,441
Property and equipment, net of accumulated depreciation and
amortization of $1,006,808 in 2000 and $944,830 in 1999 142,170 198,807
Other assets 59,867 59,400
------------ ------------
Total assets $ 488,099 $ 1,728,648
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of long-term debt $ 7,074 $ 6,727
Accounts payable 170,788 186,071
Accrued expenses 411,846 778,650
------------ ------------
Total current liabilities 589,708 971,448
Long-term debt, less current portion 30,251 --
------------ ------------
Total liabilities 619,959 971,448
------------ ------------
Commitments and contingencies
Stockholders' equity (deficiency)
Preferred stock, $.001 par value. Authorized and unissued,
1,000,000 shares at July 31, 2000 and 1999 -- --
Common stock $.001 par value. Authorized 40,000,000 shares;
issued and outstanding 18,431,559 shares and 17,286,594
shares at July 31, 2000 and 1999, respectively 18,431 17,286
Capital in excess of par value 56,526,288 55,694,195
Deficit accumulated during development stage (56,676,579) (54,954,281)
------------ ------------
(131,860) 757,200)
Total stockholders' equity (deficiency) ------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 488,099 $ 1,728,648
============ ============
See accompanying notes to financial statements.
F-5
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Operations
Years ended July 31, 2000, 1999 and 1998,
and the Period from August 24, 1981
(Date of Inception) to July 31, 2000
August 24,
1981
(date of
inception)
to
July 31,
2000 2000 1999 1998
------------ ------------ ------------ ------------
Revenues:
Sales $ 553,489 -- -- --
Investment income 1,359,164 51,144 168,372 311,822
Other income 60,103 -- -- --
------------ ------------ ------------ ------------
1,972,756 51,144 168,372 311,822
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 336,495 -- -- --
Research and development 35,968,357 1,879,728 2,401,945 5,264,578
General and administrative 20,159,648 644,588 920,686 1,412,968
Interest:
Related parties 1,033,960 -- -- --
Others 1,906,729 4,980 2,377 21,782
------------ ------------ ------------ ------------
Total costs and expenses 59,405,189 2,529,296 3,325,008 6,699,328
------------ ------------ ------------ ------------
Net (loss) before state tax benefit (57,432,433) (2,478,152) (3,156,636) (6,387,506)
State tax benefit 755,854 755,854 -- --
------------ ------------ ------------ ------------
Net (loss) $(56,676,579) (1,722,298) (3,156,636) (6,387,506)
============ ============ ============ ============
Loss per basic and diluted
common share $ (0.10) $ (0.18) (0.40)
============ ============ ============
Weighted average number of shares
outstanding 17,812,000 17,271,000 15,926,000
============ ============ ============
See accompanying notes to financial statements
F-6
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 2000
Deficit
Common Stock accumulated
------------------------ Capital in Common during
Number of excess of par stock to be development
Shares Amount value issued stage
---------- ---------- ------------- ----------- -----------
Issuance of shares to officers and
stockholders for equipment, research
and development, and expense reimbursement 712,500 $ 713 $ 212,987 $ -- $ --
Issuance of shares for organizational legal services 50,000 50 4,950 -- --
Sale of shares for cash, net 82,143 82 108,418 -- --
Adjustment for 3 for 2 stock split declared
September 8, 1982 422,321 422 (422) -- --
Net loss -- -- -- -- (121,486)
---------- ---------- ---------- --------- -----------
Balance at July 31, 1982 1,266,964 1,267 325,933 -- (121,486)
Issuance of shares for equipment 15,000 15 13,985 -- --
Sale of shares to private investors 44,196 44 41,206 -- --
Sale of shares in public offering, net 660,000 660 1,307,786 -- --
Issuance of shares under stock grant program 20,000 20 109,980 -- --
Exercise of warrants, net 1,165 1 3,494 -- --
Net loss -- -- -- -- (558,694)
---------- ----------- ---------- --------- -----------
Balance at July 31, 1983 2,007,325 2,007 1,802,384 -- (680,180)
Exercise of warrants, net 287,566 287 933,696 -- --
Issuance of shares under stock grant program 19,750 20 101,199 -- --
Issuance of shares under stock bonus plan for
directors and consultants 130,250 131 385,786 -- --
Net loss -- -- -- -- (1,421,083)
---------- ---------- ---------- --------- -----------
Balance at July 31, 1984 2,444,891 2,445 3,223,065 -- (2,101,263)
Issuance of shares under stock grant program 48,332 48 478,057 -- --
Issuance of shares under stock bonus plan for
directors and consultants 99,163 99 879,379 -- --
Shares canceled (42,500) (42) (105,783) -- --
Exercise of warrants, net 334,957 335 1,971,012 -- --
Net loss -- -- -- -- (2,958,846)
---------- ---------- ---------- --------- -----------
Balance at July 31, 1985 2,884,843 2,885 6,445,730 -- (5,060,109)
Issuance of shares under stock grant program 11,250 12 107,020 -- --
Issuance of shares under stock bonus plan for
directors and consultants 15,394 15 215,385 -- --
Exercise of warrants, net 21,565 21 80,977 -- --
Net loss -- -- -- -- (2,138,605)
---------- ---------- ---------- --------- -----------
Balance at July 31, 1986 (carried forward) 2,933,052 2,933 6,849,112 -- (7,198,714)
Deferred
Compens-
sation Total stock-
Subscription restricted holders' equity
Receivable stock (deficiency)
---------- ----------- -----------
Issuance of shares to officers and
stockholders for equipment, research
and development, and expense reimbursement $ -- $ -- $ 213,700
Issuance of shares for organizational legal services -- -- 5,000
Sale of shares for cash, net -- -- 108,500
Adjustment for 3 for 2 stock split declared
September 8, 1982 -- -- --
Net loss -- -- (121,486)
---------- -------- -----------
Balance at July 31, 1982 -- -- 205,714
Issuance of shares for equipment -- -- 14,000
Sale of shares to private investors -- -- 41,250
Sale of shares in public offering, net -- -- 1,308,446
Issuance of shares under stock grant program -- -- 110,000
Exercise of warrants, net -- -- 3,495
Net loss -- -- (558,694)
---------- -------- -----------
Balance at July 31, 1983 -- -- 1,124,211
Exercise of warrants, net -- -- 933,983
Issuance of shares under stock grant program -- -- 101,219
Issuance of shares under stock bonus plan for
directors and consultants -- -- 385,917
Net loss -- -- (1,421,083)
---------- -------- -----------
Balance at July 31, 1984 -- -- 1,124,247
Issuance of shares under stock grant program -- -- 478,105
Issuance of shares under stock bonus plan for
directors and consultants -- -- 879,478
Shares canceled -- -- (105,825)
Exercise of warrants, net -- -- 1,971,347
Net loss -- -- (2,958,846)
---------- -------- -----------
Balance at July 31, 1985 -- -- 1,388,506
Issuance of shares under stock grant program -- -- 107,032
Issuance of shares under stock bonus plan for
directors and consultants -- -- 215,400
Exercise of warrants, net -- -- 80,998
Net loss -- -- (2,138,605)
---------- -------- -----------
Balance at July 31, 1986 (carried forward) -- -- (346,669)
F-7
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Deficit
Common Stock accumulated
-------------------------- Capital in Common during
Number of excess of par stock to be development
Shares Amount value issued stage
----------- ----------- ------------- ----------- ------------
Balance at July 31, 1986 (brought forward) 2,933,052 $ 2,933 $ 6,849,112 $ -- $ (7,198,714)
Exercise of warrants at $10.00 per share 14,745 15 147,435 -- --
Issuance of shares under stock bonus plan
for directors and consultants 5,000 5 74,995 -- --
Issuance of shares for services 250,000 250 499,750 -- --
Sale of shares to private investors, net 5,000 5 24,995 -- --
Net loss -- -- -- -- (2,604,619)
----------- ----------- ------------ ------- ------------
Balance at July 31, 1987 3,207,797 3,208 7,596,287 -- (9,803,333)
Issuance of shares for legal and consulting services 206,429 207 724,280 -- --
Issuance of shares under employment incentive program 700,000 700 2,449,300 -- --
Issuance of shares under stock grant program 19,000 19 66,481 -- --
Exercise of options at $3.00 per share 170,000 170 509,830 -- --
Issuance of shares for litigation settlement 12,500 12 31,125 -- --
Exercise of warrants at $7.06 per share 63,925 64 451,341 -- --
Sale of shares to private investors 61,073 61 178,072 -- --
Amortization of deferred compensation, restricted stock -- -- -- -- --
Net loss -- -- -- -- (3,272,773)
----------- ----------- ------------ ------- ------------
Balance at July 31, 1988 4,440,724 4,441 12,006,716 -- (13,076,106)
Sale of shares for litigation settlement 135,000 135 1,074,703 -- --
Conversion of debentures at $3.00 per share 133,333 133 399,867 -- --
Sale of shares to private investors 105,840 106 419,894 -- --
Exercise of options at $3.50 per share 1,000 1 3,499 -- --
Issuance of shares under employment agreement 750,000 750 3,749,250 -- --
Issuance of shares under the 1989 Stock Plan 30,000 30 149,970 -- --
Amortization of deferred compensation, restricted stock -- -- -- -- --
Net loss -- -- -- -- (2,952,869)
----------- ----------- ------------ ------- ------------
Balance at July 31, 1989 5,595,897 5,596 17,803,899 -- (16,028,975)
Issuance of shares for legal and consulting services 52,463 52 258,725 -- --
Issuance of shares under the 1989 Stock Plan 56,000 56 335,944 -- --
Sale of shares for litigation settlement 50,000 50 351,067 -- --
Exercise of options at $3.00 - $3.50 per share 105,989 106 345,856 -- --
Sale of shares to private investors 89,480 90 354,990 -- --
Issuance of shares under employment agreement 750,000 750 3,749,250 -- --
Conversion of debentures at $5.00 per share 100,000 100 499,900 -- --
Amortization of deferred compensation, restricted stock -- -- -- -- --
Net loss -- -- -- -- (4,860,116)
----------- ----------- ------------ ------- ------------
Balance at July 31, 1990 (carried forward) 6,799,829 6,800 23,699,631 -- (20,889,091)
(Continued)
Deferred
Compens-
sation Total stock-
Subscription restricted holders' equity
Receivable stock (deficiency)
------------ ---------- --------------
Balance at July 31, 1986 (brought forward) $ -- $ -- $ (346,669)
Exercise of warrants at $10.00 per share -- -- 147,450
Issuance of shares under stock bonus plan
for directors and consultants -- -- 75,000
Issuance of shares for services -- -- 500,000
Sale of shares to private investors, net -- -- 25,000
Net loss -- -- (2,604,619)
------- ----------- ------------
Balance at July 31, 1987 -- -- (2,203,838)
Issuance of shares for legal and consulting services -- -- 724,487
Issuance of shares under employment incentive program -- (2,450,000) --
Issuance of shares under stock grant program -- -- 66,500
Exercise of options at $3.00 per share -- -- 510,000
Issuance of shares for litigation settlement -- -- 31,137
Exercise of warrants at $7.06 per share -- -- 451,405
Sale of shares to private investors -- -- 178,133
Amortization of deferred compensation, restricted stock -- 449,167 449,167
Net loss -- -- (3,272,773)
------- ----------- ------------
Balance at July 31, 1988 -- (2,000,833) (3,065,782)
Sale of shares for litigation settlement -- -- 1,074,838
Conversion of debentures at $3.00 per share -- -- 400,000
Sale of shares to private investors -- -- 420,000
Exercise of options at $3.50 per share -- -- 3,500
Issuance of shares under employment agreement -- (3,750,000) --
Issuance of shares under the 1989 Stock Plan -- (150,000) --
Amortization of deferred compensation, restricted stock -- 1,050,756 1,050,756
Net loss -- -- (2,952,869)
------- ----------- ------------
Balance at July 31, 1989 -- (4,850,077) (3,069,557)
Issuance of shares for legal and consulting services -- -- 258,777
Issuance of shares under the 1989 Stock Plan -- (336,000) --
Sale of shares for litigation settlement -- -- 351,117
Exercise of options at $3.00 - $3.50 per share -- -- 345,962
Sale of shares to private investors -- -- 355,080
Issuance of shares under employment agreement -- (3,750,000) --
Conversion of debentures at $5.00 per share -- -- 500,000
Amortization of deferred compensation, restricted stock -- 3,015,561 3,015,561
Net loss -- -- (4,860,116)
------- ----------- ------------
Balance at July 31, 1990 (carried forward) -- (5,920,516) (3,103,176)
F-8
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
(Continued)
Deficit
Common Stock accumulated
-------------------------- Capital in Common during
Number of excess of par stock to be development
Shares Amount value issued stage
----------- ----------- ------------- ----------- ------------
Balance at July 31, 1990 (brought forward) 6,799,829 $ 6,800 $ 23,699,631 $ -- $(20,889,091)
Exercise of options at $6.50 per share 16,720 16 108,664 -- --
Issuance of shares for legal consulting services 87,000 87 358,627 -- --
Issuance of shares under the 1989 Stock Plan 119,000 119 475,881 -- --
Amortization of deferred compensation, restricted stock -- -- -- -- --
Net loss -- -- -- -- (5,202,302)
---------- ---------- ------------ --------- ------------
Balance at July 31, 1991 7,022,549 7,022 24,642,803 -- (26,091,393)
Exercise of options at $3.50 per share 1,000 1 3,499 -- --
Sale of shares to private investors 70,731 71 219,829 -- --
Conversion of debentures at $5.00 per share 94,000 94 469,906 -- --
Issuance of shares for services 45,734 46 156,944 -- --
Issuance of shares under the 1989 Stock Plan 104,000 104 285,896 -- --
Amortization of deferred compensation, restricted stock -- -- -- -- --
Net loss -- -- -- -- (4,772,826)
---------- ---------- ------------ --------- ------------
Balance at July 31, 1992 7,338,014 7,338 25,778,877 -- (30,864,219)
Sale of share to private investors 352,667 353 735,147 -- --
Issuance of shares for legal services 49,600 50 132,180 -- --
Issuance of shares for services 5,000 5 9,995 -- --
Issuance of shares under the 1989 Stock Plan 117,000 117 233,883 -- --
Amortization of deferred compensation, restricted stock -- -- -- -- --
Net loss -- -- -- -- (2,357,350)
---------- ---------- ------------ --------- ------------
Balance at July 31, 1993 7,862,281 7,863 26,890,082 -- (33,221,569)
Conversion of debentures at $2.75 per
share to $6.00 per share 425,400 425 1,701,575 -- --
Sale of shares to private investors, net 743,000 743 1,710,048 -- --
Conversion of short-term borrowings 72,800 73 181,927 -- --
Issuance of shares for services 16,200 16 43,334 -- --
Issuance of shares under the 1989 Stock Plan, for services 5,000 5 14,995 -- --
Issuance of options to related parties upon conversion of
accrued interest, payroll and expenses -- -- 3,194,969 -- --
Repurchase of stock options from related party -- -- (198,417) -- --
Issuance of options upon conversion of accrued interest -- -- 142,441 -- --
Common stock to be issued -- -- -- 50,000 --
Amortization of deferred compensation, restricted stock -- -- -- -- --
Net loss -- -- -- -- (2,234,428)
---------- ---------- ------------ --------- ------------
Balance at July 31, 1994 (carried forward) 9,124,681 9,125 33,680,954 50,000 (35,455,997)
Deferred
Compens-
sation Total stock-
Subscription restricted holders' equity
Receivable stock (deficiency)
------------ ---------- --------------
Balance at July 31, 1990 (brought forward) $ -- $ (5,920,516) $ (3,103,176)
Exercise of options at $6.50 per share -- -- 108,680
Issuance of shares for legal consulting services -- -- 358,714
Issuance of shares under the 1989 Stock Plan -- (476,000) --
Amortization of deferred compensation, restricted stock -- 2,891,561 2,891,561
Net loss -- -- (5,202,302)
------- ------------ ------------
Balance at July 31, 1991 -- (3,504,955) (4,946,523)
Exercise of options at $3.50 per share -- -- 3,500
Sale of shares to private investors -- -- 219,900
Conversion of debentures at $5.00 per share -- -- 470,000
Issuance of shares for services -- -- 156,990
Issuance of shares under the 1989 Stock Plan -- (286,000) --
Amortization of deferred compensation, restricted stock -- 3,046,726 3,046,726
Net loss -- -- (4,772,826)
------- ------------ ------------
Balance at July 31, 1992 -- (744,229) (5,822,233)
Sale of share to private investors -- -- 735,500
Issuance of shares for legal services -- -- 132,230
Issuance of shares for services -- (10,000) --
Issuance of shares under the 1989 Stock Plan -- (234,000) --
Amortization of deferred compensation, restricted stock -- 664,729 664,729
Net loss -- -- (2,357,350)
------- ------------ ------------
Balance at July 31, 1993 -- (323,500) (6,647,124)
Conversion of debentures at $2.75 per
share to $6.00 per share -- -- 1,702,000
Sale of shares to private investors, net -- -- 1,710,791
Conversion of short-term borrowings -- -- 182,000
Issuance of shares for services -- -- 43,350
Issuance of shares under the 1989 Stock Plan, for services -- -- 15,000
Issuance of options to related parties upon conversion of
accrued interest, payroll and expenses -- -- 3,194,969
Repurchase of stock options from related party -- -- (198,417)
Issuance of options upon conversion of accrued interest -- -- 142,441
Common stock to be issued -- -- 50,000
Amortization of deferred compensation, restricted stock -- 265,000 265,000
Net loss -- -- (2,234,428)
------- ------------ ------------
Balance at July 31, 1994 (carried forward) -- (58,500) (1,774,418)
(Continued)
F-9
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Deficit
Common Stock accumulated
-------------------------- Capital in Common during
Number of excess of par stock to be development
Shares Amount value issued stage
----------- ------------ ------------- ----------- ------------
Balance at July 31, 1994 (brought forward) 9,124,681 $ 9,125 $33,680,954 $ 50,000 $(35,455,997)
Sale of shares to private investors, net 961,000 961 2,023,241 (50,000) --
Conversion of short-term borrowings 17,600 17 43,983 -- --
Issuance of shares for services 30,906 31 77,234 -- --
Exercise of options at $2.27 - $2.50 per share 185,000 185 437,015 -- --
Common stock to be issued -- -- -- 339,008 --
Common stock to be issued, for services -- -- -- 4,800 --
Amortization of deferred compensation,
restricted stock -- -- -- -- --
Net loss -- -- -- -- (1,993,123)
----------- ----------- ----------- ---------- ------------
Balance at July 31, 1995 10,319,187 10,319 36,262,427 343,808 (37,449,120)
Sale of shares to private investors, net 2,953,327 2,953 8,969,655 (339,008) --
Issuance of shares for services 19,995 20 70,858 (4,800) --
Exercise of options at $2.50 - $3.87 per share 566,700 567 1,657,633 -- --
Sale of warrants -- -- 12,084 -- --
Issuance of options/warrants for services -- -- 50,872 -- --
Common stock to be issued -- -- -- 258,335 --
Subscription receivable -- -- -- -- --
Net loss -- -- -- -- (2,942,152)
----------- ----------- ----------- ---------- ------------
Balance at July 31, 1996 13,859,209 13,859 47,023,529 258,335 (40,391,272)
Sale of shares to private investors, net 112,000 112 503,888 -- --
Issuance of options for services -- -- 76,504 -- --
Exercise of options at $2.45 - $4.00 per share, net 729,134 729 2,620,359 (258,335) --
Exercise of warrants at $5.00 per share, net 147,450 148 737,102 -- --
Net loss -- -- -- -- (5,018,867)
----------- ----------- ----------- ---------- ------------
Balance at July 31, 1997 14,847,793 14,848 50,961,382 -- (45,410,139)
Sale of shares to private investors, net 2,337,150 2,337 4,199,877 -- --
Issuance of options for services -- -- 199,954 -- --
Exercise of warrants at $2.20 - $2.50 per share 4,950 5 11,080 -- --
Issuance of shares for services, net 50,000 50 99,950 -- --
Net loss -- -- -- -- (6,387,506)
----------- ----------- ----------- ---------- ------------
Balance at July 31, 1998 17,239,893 17,240 55,472,243 -- (51,797,645)
Issuance of options for services -- -- 205,593 -- --
Issuance of shares for services, net 46,701 46 16,359 -- --
Net loss -- -- -- -- (3,156,636)
----------- ----------- ----------- ---------- ------------
Balance at July 31, 1999 (carried forward) 17,286,594 $ 17,286 $55,694,195 $ -- $(54,954,281)
Deferred
Compens-
sation Total stock-
Subscription restricted holders' equity
Receivable stock (deficiency)
------------ ---------- --------------
Balance at July 31, 1994 (brought forward) $ -- $ (58,500) $(1,774,418)
Sale of shares to private investors, net -- -- 1,974,202
Conversion of short-term borrowings -- -- 44,000
Issuance of shares for services -- -- 77,265
Exercise of options at $2.27 - $2.50 per share -- -- 437,200
Common stock to be issued -- -- 339,008
Common stock to be issued, for services -- -- 4,800
Amortization of deferred compensation, restricted stock -- 58,500 58,500
Net loss -- -- (1,993,123)
--------- ----------- ----------
Balance at July 31, 1995 -- -- (832,566)
Sale of shares to private investors, net -- -- 8,633,600
Issuance of shares for services -- -- 66,078
Exercise of options at $2.50 - $3.87 per share -- -- 1,658,200
Sale of warrants -- -- 12,084
Issuance of options/warrants for services -- -- 50,872
Common stock to be issued -- -- 258,335
Subscription receivable (254,185) -- (254,185)
Net loss -- -- (2,942,152)
--------- ----------- ----------
Balance at July 31, 1996 (254,185) -- 6,650,266
Sale of shares to private investors, net -- -- 504,000
Issuance of options for services -- -- 76,504
Exercise of options at $2.45 - $4.00 per share, net 254,185 -- 2,616,938
Exercise of warrants at $5.00 per share, net -- -- 737,250
Net loss -- -- (5,018,867)
--------- ----------- ----------
Balance at July 31, 1997 -- -- 5,566,091
Sale of shares to private investors, net -- -- 4,202,214
Issuance of options for services -- -- 199,954
Exercise of warrants at $2.20 - $2.50 per share -- -- 11,085
Issuance of shares for services, net -- -- 100,000
Net loss -- -- (6,387,506)
--------- ----------- ----------
Balance at July 31, 1998 -- -- 3,691,838
Issuance of options for services -- -- 205,593
Issuance of shares for services, net -- -- 16,405
Net loss -- -- (3,156,636)
--------- ----------- ----------
Balance at July 31, 1999 (carried forward) $ -- $ -- $ 757,200
F-10
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Deficit
Common Stock accumulated
-------------------------- Capital in Common during
Number of excess of par stock to be development
Shares Amount value issued stage
----------- ------------ ------------- ----------- ------------
Balance at July 31, 1999 (brought forward) 17,286,594 $ 17,286 $ 55,694,195 $ -- $(54,954,281)
Sale of shares to private investors, net 875,000 875 547,417 -- --
Exercise of options at $0.43 to $1.43 per share 95,000 95 45,755 -- --
Issuance of shares for services, net 174,965 175 92,009 -- --
Vesting of options previously issued for services -- -- 146,912 -- --
Net loss -- -- -- -- (1,722,298)
----------- ------------ ------------ ----------- ------------
Balance at July 31, 2000 18,431,559 $ 18,431 $ 56,526,288 $ -- $(56,676,579)
=========== ============ ============ =========== ============
Deferred
Compens-
sation Total stock-
Subscription restricted holders' equity
Receivable stock (deficiency)
------------ ----------- --------------
Balance at July 31, 1999 (brought forward) $ -- $ -- $ 757,200
Sale of shares to private investors, net -- -- 548,292
Exercise of options at $0.43 to $1.43 per share -- -- 45,850
Issuance of shares for services, net -- -- 92,184
Vesting of options previously issued for services -- -- 146,912
Net loss -- -- (1,722,298)
----------- ----------- -----------
Balance at July 31, 2000 $ -- $ -- $ (131,860)
=========== =========== ===========
See accompanying notes to financial statements.
F-11
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows
Years ended July 31, 2000, 1999
and 1998, and the Period from
August 24, 1981
(Date of Inception) to July 31, 2000
August 24,
1981 (date
of incep-
tion) to
July 31,
2000 2000 1999 1998
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss $(56,676,579) $ (1,722,298) $ (3,156,636) $ (6,387,506)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of marketable securities (25,963) -- -- --
Depreciation and amortization 1,417,843 93,748 101,231 102,836
Loss on disposal of property and equipment 18,926 -- -- --
Noncash operating expenses 5,519,384 146,912 208,053 199,954
Amortization of deferred compensation 11,442,000 -- -- --
Amortization of organization costs 4,590 -- -- --
Changes in assets and liabilities:
(Increase) decrease in loan receivable, related party -- -- -- --
(Increase) decrease in other current assets (88,484) 58,224 (29,521) 47,919
Decrease in other assets 36,184 -- -- --
Increase in loans and interest payable, related party 744,539 -- -- --
Increase (decrease) in accounts payable 456,868 76,901 (513,338) 438,336
Increase in accrued payroll and expenses, related parties 2,348,145 -- -- --
Increase (decrease) in accrued expenses 953,359 (366,804) (314,248) 399,057
------------ ------------ ------------ ------------
Net cash used in operating activities (33,849,188) (1,713,317) (3,704,459) (5,199,404)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of marketable securities (290,420) -- -- --
Proceeds from sale of marketable equity securities 316,383 -- -- --
Purchase of property and equipment (1,406,836) (37,575) -- (75,315)
Patent costs (97,841) -- -- --
------------ ------------ ------------ ------------
Net cash used in investing activities (1,478,714) (37,575) -- (75,315)
------------ ------------ ------------ ------------
F-12
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24,
1981 (date
of incep-
tion) to
July 31,
2000 2000 1999 1998
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from short-term borrowings $ 849,500 $ -- $ -- $ --
Payment of short-term borrowings (623,500) -- -- --
Increase in loans payable, related party, net 2,628,868 -- -- --
Proceeds from bank debt and other long-term debt,
net of deferred debt costs 2,452,460 41,577 -- --
Reduction of bank debt and long-term debt (2,929,243) (10,515) (9,175) (1,381,416)
Proceeds from issuance of common stock, net 27,353,739 548,292 (2,686) 4,202,214
Proceeds from exercise of stock options and warrants, net 5,506,523 45,850 -- 11,085
Proceeds from issuance of convertible debentures 347,000 -- -- --
------------ ------------ ------------ ------------
Net cash provided by financing activities 35,585,347 625,204 (11,861) 2,831,883
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 257,445 (1,125,688) (3,716,320) (2,442,836)
Cash and cash equivalents at beginning of period -- 1,383,133 5,099,453 7,542,289
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 257,445 $ 257,445 $ 1,383,133 $ 5,099,453
============ ============ ============ ============
Supplemental disclosure of cash flow information - interest paid $ 1,653,713 $ 4,980 $ 2,378 $ 21,782
============ ============ ============ ============
Noncash financing activities:
Issuance of convertible subordinated debenture for loan
payable to officer $ 2,725,000 $ -- $ -- $ --
============ ============ ============ ============
Issuance of common stock upon the conversion of convertible
subordinated debentures, related party $ 2,945,000 $ -- $ -- $ --
============ ============ ============ ============
Conversion of short-term borrowings to common stock $ 226,000 $ -- $ -- $ --
============ ============ ============ ============
F-13
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24,
1981 (date
of incep-
tion) to
July 31,
2000 2000 1999 1998
----------- -------- -------- -----------
Conversion of accrued interest, payroll and
expenses by related parties to stock options $ 3,194,969 $ -- $ -- $ --
=========== ======== ======== ===========
Repurchase of stock options from related party $ (198,417) $ -- $ -- $ --
=========== ======== ======== ===========
Conversion of accrued interest to stock options $ 142,441 $ -- $ -- $ --
=========== ======== ======== ===========
Conversion of accounts payable to common stock $ 286,170 $ 92,184 $ 16,631 $ 100,000
=========== ======== ======== ===========
Conversion of notes payable, bank and accrued
interest to long-term debt $ 1,699,072 $ -- $ -- $ --
=========== ======== ======== ===========
Conversion of loans and interest payable, related party
and accrued payroll and expenses, related parties to
long-term accrued payroll and other, related party $ 1,863,514 $ -- $ -- $ --
=========== ======== ======== ===========
Issuance of common stock upon the conversion of
convertible subordinated debentures, other $ 127,000 $ -- $ -- $ --
=========== ======== ======== ===========
Issuance of common stock for services rendered $ 94,644 $ 92,184 $ 2,460 $ --
=========== ======== ======== ===========
See accompanying notes to financial statements.
F-14
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements
Years ended July 31, 2000, 1999 and 1998
and the Period From August 24, 1981
(Date of Inception) to July 31, 2000
(1) Summary of Significant Accounting Policies
Business Description
Alfacell Corporation (the "Company") was incorporated in Delaware on August
24, 1981 for the purpose of engaging in the discovery, investigation and
development of a new class of anti-cancer drugs and anti- viral agents. The
Company is a development stage company as defined in the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 7. The Company is devoting substantially all of its present efforts to
establishing its business. Its planned principal operations have not
commenced and, accordingly, no significant revenue has been derived
therefrom.
The Company's current operations encompass all the risks inherent in
discovering and developing a new drug, including: an uncertainty regarding
the timing and amount of future revenues to be derived from the Company's
technology; obtaining future capital as needed; attracting and retaining
key personnel; and a business environment with heightened competition,
rapid technological change and strict government regulations.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect reported amounts and disclosures in
these financial statements. Actual results could differ from those
estimates.
Certain reclassifications to the prior year financial information were made
to conform with the July 31, 2000 presentation.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets ranging from three to seven years. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in
operations for the period.
The cost of repairs and maintenance is charged to operations as incurred;
significant renewals and betterments are capitalized.
Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less, at the time of purchase, to be cash equivalents.
(Continued)
F-15
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (Continued)
Research and Development
Research and development costs are expensed as incurred.
Fair Value of Financial Instruments
For all financial instruments, their carrying value approximates fair value
due to the short maturity of those instruments.
Comprehensive Income (Loss)
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income.
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. The net loss of $1,722,000,
$3,157,000 and $6,388,000, recorded for the years ended July 31, 2000, 1999
and 1998, respectively, is equal to the comprehensive loss for those
periods.
Earnings Per Common Share
"Basic" earnings per common share equals net income divided by weighted
average common shares outstanding during the period. "Diluted" earnings per
common share equals net income divided by the sum of weighted average
common shares outstanding during the period plus common stock equivalents.
The Company's Basic and Diluted per share amounts are the same since the
assumed exercise of stock options and warrants are all anti-dilutive. The
number of options and warrants excluded from the calculation was 6,156,195,
5,894,875 and 5,911,557 at July 31, 2000, 1999 and 1998, respectively.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances occur that indicate that the carrying
amount of the assets may not be recoverable. The Company assesses the
recoverability of long-lived assets held and to be used based on
undiscounted cash flows, and measures the impairment, if any, using
discounted cash flows. SFAS No. 121 has not had a material impact on the
Company's financial position, operating results or cash flows.
Stock Option Plans
Prior to August 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On August 1, 1996, the Company adopted SFAS
No. 123, Accounting for Stock-Based Compensation, which permits
(Continued)
F-16
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (Continued)
entities to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants as if the fair-value method
defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma disclosure in accordance with the provisions of SFAS No. 123.
(2) Liquidity
The Company has reported net losses of $1,722,000, $3,157,000, and
$6,388,000 for the fiscal years ended July 31, 2000, 1999 and 1998,
respectively. The loss from date of inception, August 24, 1981, to July 31,
2000 amounts to $56,677,000. Also, the Company has a working capital
deficit and limited liquid resources. These factors raise substantial doubt
about its ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and
classification of reported asset amounts or the amounts or classification
of liabilities which might result from the outcome of this uncertainty.
The Company's continued operations will depend on its ability to raise
additional funds through various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances, sale of tax
benefits, revenues from the commercial sale of ONCONASE(R) and its ability
to realize the full potential of its technology and its drug candidates.
Such additional funds may not become available or be available on
acceptable terms. To date, a significant portion of the Company's financing
has been through private placements of common stock and warrants, the
issuance of common stock for stock options and warrants exercised and for
services rendered, debt financing and financing provided by the Company's
Chief Executive Officer. Additionally, the Company raised capital through
the sale of a portion of its tax benefits. Until the Company's operations
generate significant revenues, the Company will continue to fund operations
from cash on hand and through the sources of capital previously described.
In August and September 2000, the Company received gross proceeds of
approximately $516,000 from the private placement of various individual
investors and exercise of stock options by a related party.
The Company will continue to incur costs in conjunction with its U.S. and
foreign registrations for marketing approval of ONCONASE(R). The Company is
currently in discussion with several potential strategic alliance partners
including major international biopharmaceutical companies to further the
development and marketing of ONCONASE(R) and other related products in its
pipeline. However, there can be no assurance that any such alliances will
materialize. The Company intends to seek foreign marketing approvals for
ONCONASE(R) for the treatment of malignant mesothelioma. Clinical data is
required in certain European countries for registration. Therefore, the
Company has initiated a plan to expand its ongoing clinical trial
internationally. However, there can be no assurance that any such plan will
materialize. The Company's ability to raise funding at this time may be
dependent upon other factors including, without limitation, market
conditions, and such funds may not be available or be available on
acceptable terms.
(Continued)
F-17
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(2) Liquidity, (Continued)
The Company's common stock was delisted from The Nasdaq SmallCap Market
effective at the close of business April 27, 1999 for failing to meet the
minimum bid price requirements set forth in the NASD Marketplace Rules. As
of April 28, 1999, the Company's common stock trades on the OTC Bulletin
Board under the symbol "ACEL". Delisting of the Company's common stock from
Nasdaq could have a material adverse effect on its ability to raise
additional capital, its stockholders' liquidity and the price of its common
stock.
(3) Property and Equipment
Property and equipment, at cost, consists of the following at July 31:
2000 1999
---- ----
Laboratory equipment $ 755,040 755,040
Office equipment 296,105 290,764
Leasehold improvements 97,833 97,833
---------- ----------
$1,148,978 1,143,637
========== ==========
(4) Long-term Debt
Long-term debt consists of the following at July 31:
2000 1999
------- -------
Note payable, in monthly installments of $1,459, including
principal and interest commencing April 2000 and each
month thereafter until March 2005, secured by equipment. $37,325 $ --
Note payable in monthly installments of $729, including
principal and interest commencing April 1996 and each
month thereafter until May 2000, secured by equipment. -- 6,727
------- -------
37,325 6,727
Less current portion 7,074 6,727
------- -------
$30,251 $ --
======= =======
(5) Leases
The Company leases its facility under a five-year operating lease which is
due to expire on December 31, 2001. The annual rental obligation, which
commenced January 1, 1997, is $96,775 and is subject to annual escalation
amounts. Rent expense charged to operations was $127,000, $108,000, and
$97,000 in 2000, 1999 and 1998, respectively.
(Continued)
F-18
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(5) Leases, Continued
Future minimum lease payments under noncancellable leases for the next two
years ending July 31 are as follows:
Operating leases
----------------
2001 136,000
2002 56,667
(6) Stockholders' Equity
On September 1, 1981, the Company issued 712,500 shares of common stock
(1,068,750 shares adjusted for the stock split on September 8, 1982) to
officers and stockholders in exchange for equipment, research and
development services, stock registration costs, reimbursement of expenses
and other miscellaneous services. The common stock issued for services was
recorded at the estimated fair value of services rendered based upon the
Board of Directors' determination and ratification of the value of
services. Equipment received in exchange for common stock was recorded at
the transferor's cost. Common stock issued for reimbursement of expenses
was recorded based upon expenses incurred. All values assigned for expenses
and services rendered have been charged to operations except for stock
registration costs which were charged against proceeds.
On July 30, 1982, the Company sold 82,143 shares of common stock (123,214
shares adjusted to reflect the stock split on September 8, 1982) to a
private investor at a price of $1.40 per share, resulting in net proceeds
to the Company of approximately $108,500.
On September 8, 1982, the Company declared a 3-for-2 stock split. Shares
previously issued by the Company have been restated in accordance with the
stock split.
On September 8, 1982, the Company issued 15,000 shares of common stock to
an officer and stockholder in exchange for equipment. The equipment
received in exchange for the common stock was recorded at the transferor's
cost.
On November 1, 1982 and January 3, 1983, the Company sold 28,125 and 16,071
shares of common stock, respectively, to private investors at $.93 per
share, resulting in net proceeds to the Company of approximately $41,250.
On January 17, 1983, the Company sold 660,000 shares of its common stock
and 330,000 common stock purchase warrants in a public offering at a price
of $2.50 per share, resulting in net proceeds to the Company of
approximately $1,308,446. The warrants were to expire 12 months after
issuance; however, the Company extended the expiration date to July 16,
1984. During the fiscal years ended July 31, 1983 and 1984, the net
proceeds to the Company from the exercise of the warrants amounted to
$934,000. Each common stock purchase warrant was not detachable from its
common stock or exercisable until six months after the issuance date of
January 17, 1983. Each warrant entitled the holder to purchase one share of
common stock at an exercise price of $3.00 after six months and prior to
nine months after issuance. The exercise price increased to $3.50 after
nine months and prior to 12 months after issuance.
(Continued)
F-19
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
In connection with the public offering, the Company sold 60,000 five-year
purchase warrants to the underwriters at a price of $.001 per warrant. Each
warrant entitled the holder to purchase one share of common stock at an
exercise price of $3.00. Pursuant to the antidilution provisions of the
warrants, the underwriters received warrants to purchase 67,415 shares at
an exercise price of $2.67 per share. As of July 31, 1986, all such
warrants were exercised and the Company received proceeds of approximately
$180,000.
On February 22, 1984, the Company filed a registration statement with the
Securities and Exchange Commission for the issuance of two series of new
warrants, each to purchase an aggregate of 330,000 shares (hereinafter
referred to as one-year warrants and two-year warrants). The one-year
warrants had an exercise price of $6.50 per share and expired July 17,
1985. The two-year warrants had an exercise price of $10.00 per share and
were to expire July 17, 1986. However, the Company extended the expiration
date to August 31, 1987. The one-year warrants and two-year warrants were
issued as of July 17, 1984 on a one-for-one basis to those public offering
warrant holders who exercised their original warrants, with the right to
oversubscribe to any of the warrants not exercised. During the fiscal years
ended July 31, 1985, 1986, 1987 and 1988, the Company received net proceeds
of approximately $2,471,000 as a result of the exercise of the warrants.
On January 2, 1987, the Company issued 250,000 shares of common stock to
officers and stockholders, including the President and Chief Executive
Officer, in recognition of services performed for the Company. The fair
value of such shares was recorded as compensation expense.
On February 3, 1987, the Company sold 5,000 shares of common stock to a
private investor for $5.00 per share, resulting in net proceeds to the
Company of approximately $25,000.
On September 1, 1987, the Board of Directors approved new wage contracts
for three officers. The contracts provided for the issuance of 700,000
shares of common stock as an inducement for signing. The fair value of
these shares was recorded as deferred compensation and was amortized over
the term of the employment agreements. The contracts also provided for the
issuance of 1,500,000 shares of common stock in 750,000 increments upon the
occurrence of certain events. These shares were issued during the fiscal
years ended July 31, 1989 and 1990 and the fair value of such shares was
recorded as deferred compensation and was amortized over the remaining term
of the employment agreements. The contracts also provided for five-year
options to purchase 750,000 shares of common stock at $3.00 per share;
options for the purchase of 170,000 shares were exercised on June 16, 1988
and the remaining options for the purchase of 580,000 shares expired on
September 2, 1992.
During the fiscal year ended July 31, 1988, the Company issued 206,429
shares of common stock for payment of legal and consulting services. The
fair value of such shares was charged to operations.
During the fiscal year ended July 31, 1988, the Company issued 12,500
shares of common stock in connection with the settlement of certain
litigation. The fair value of these shares was charged to operations.
(Continued)
F-20
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 1988, the Company sold 61,073 shares
of common stock to private investors at $2.92 per share resulting in net
proceeds to the Company of approximately $178,133.
On September 21, 1988, the Company entered into a stipulation of settlement
arising from a lawsuit wherein it agreed to pay a total of $250,000 in 12
monthly installments. Under the agreement, the Company authorized the
issuance on September 7, 1988 and October 18, 1988 of 85,000 and 50,000
shares, respectively, to an escrow account to secure payment of the
$250,000 due under the stipulation of settlement. During the fiscal year
ended July 31, 1989, the Company issued and sold the 135,000 shares of
common stock for $1,074,838. On February 14, 1989, the Board of Directors
authorized the issuance of an additional 50,000 shares. During the year
ended July 31, 1990, the shares were sold for $351,117. The proceeds from
the above transactions were used to pay the settlement and related legal
costs, reduce loans from and interest due to the Company's Chief Executive
Officer, and for working capital.
During the fiscal year ended July 31, 1989, the Company sold 105,840 shares
of common stock to private investors at $3.97 per share resulting in net
proceeds to the Company of approximately $420,000.
During the fiscal year ended July 31, 1990, the Company issued 52,463
shares of common stock for payment of legal and consulting services. The
fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1990, the Company issued 50,000
shares of common stock in connection with the settlement of certain
litigation. The fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1990, the Company sold 89,480 shares
of common stock to private investors at $3.97 per share resulting in net
proceeds to the Company of approximately $355,080.
During the fiscal year ended July 31, 1991, the Company issued 87,000
shares of common stock for payment of legal and consulting services. The
fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1992, the Company sold 70,731 shares
of common stock to private investors at $2.75 to $3.50 per share resulting
in net proceeds to the Company of approximately $219,900.
During the fiscal year ended July 31, 1992, the Company issued 45,734
shares of common stock as payment for services rendered to the Company. The
fair value of the common stock was charged to operations.
During the fiscal years ended July 31, 1992 and 1990, 94,000 and 50,000
shares of common stock, respectively, were issued to the Company's Chief
Executive Officer upon the conversion of outstanding debentures.
(Continued)
F-21
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 1993, the Company sold 352,667 shares
of common stock to private investors at prices ranging from $2.00 to $3.00
per share resulting in net proceeds to the Company of approximately
$735,500. In addition, the private investors were granted options to
purchase common stock totaling 587,167 shares at prices ranging from $3.00
to $7.00. During the fiscal years ended July 31, 1995 and 1996, 322,500 and
228,833 options expired, respectively. A total of 42,167 options due to
expire on July 31, 1995 were extended to July 31, 1996 and their exercise
price was reduced to $2.50. During the fiscal year ended July 31, 1996,
35,834 options were exercised resulting in net proceeds to the Company of
approximately $89,600.
During the fiscal year ended July 31, 1993, the Company issued 54,600
shares of common stock as payment for legal and other services performed
for the Company. The fair value of 49,600 shares was charged to operations.
The remaining 5,000 shares were recorded as deferred compensation and were
amortized over a one-year period, beginning in February 1993, in accordance
with the agreement entered into with the recipient.
During the fiscal year ended July 31, 1994, the Company issued 7,000 shares
of common stock as payment for services performed for the Company. The fair
value of the common stock was charged to operations.
During the fiscal year ended July 31, 1994, the Company sold 25,000 shares
of common stock to a private investor at $2.00 per share resulting in net
proceeds to the Company of $50,000. In addition, the private investor was
granted options to purchase common stock totaling 25,000 shares at $4.00
per common share. These options were exercised in September 1996 resulting
in net proceeds to the Company of $100,000.
During the fiscal year ended July 31, 1994, the Company sold 800,000 shares
of common stock to private investors at $2.50 per share resulting in net
proceeds to the Company of $1,865,791. In addition, the private investors
were granted warrants to purchase common stock totaling 800,000 shares at
$5.00 per common share. Warrants for the purchase of 147,450 shares were
exercised during fiscal 1997 resulting in net proceeds to the Company of
$737,250. The remaining 652,550 warrants expired during fiscal 1997.
During the fiscal year ended July 31, 1994, 400,000 shares of common stock
were issued to the Company's Chief Executive Officer upon the conversion of
outstanding debentures.
During the fiscal year ended July 31, 1994, 25,400 shares of common stock
were issued upon the conversion of other outstanding debentures.
In September 1994, the Company completed a private placement resulting in
the issuance of 288,506 shares of common stock and three-year warrants to
purchase 288,506 shares of common stock at an exercise price of $5.50 per
share. The warrants expired during fiscal 1998. The common stock and
warrants were sold in units consisting of 20,000 shares of common stock and
warrants to purchase 20,000
(Continued)
F-22
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
shares of common stock. The price per unit was $50,000. The Company
received proceeds of approximately $545,000, net of costs associated with
the placement of approximately $55,000 and the conversion of certain debt
by creditors of $121,265 into equivalent private placement units of 17,600
shares for conversion of short-term borrowings and 30,906 shares issued for
services rendered. In October 1994, an additional two units at $50,000 per
unit were sold to a private investor under the same terms as the September
1994 private placement resulting in the issuance of 40,000 shares of common
stock and warrants to purchase 40,000 shares of common stock. The warrants
expired during fiscal 1998.
During the fiscal year ended July 31, 1995, 185,000 shares of common stock
were issued upon the exercise of stock options by unrelated parties
resulting in net proceeds to the Company of $437,200. The exercise prices
of the options ranged from $2.27 to $2.50, which had been reduced from
$3.50 and $5.00, respectively, during fiscal 1995.
During the fiscal year ended July 31, 1995, the Company sold 681,000 shares
of common stock to private investors resulting in net proceeds to the
Company of approximately $1,379,000. The shares were sold at prices ranging
from $2.00 to $2.25.
During the fiscal year ended July 31, 1995, the Company sold 139,080 shares
of common stock and 47,405 three-year warrants to purchase shares of common
stock at an exercise price of $4.00 per share to private investors. The
stock and warrants were sold at prices ranging from $2.25 to $2.73 per
share and resulted in net proceeds to the Company of $343,808, of which
$4,800 was for services rendered. The common shares were issued to the
investors subsequent to July 31, 1995.
On August 4, 1995, the Company issued 6,060 shares of common stock as
payment for services rendered to the Company. The fair value of the common
stock was charged to operations.
On September 29, 1995, the Company completed a private placement resulting
in the issuance of 1,925,616 shares of common stock and three-year warrants
to purchase an aggregate of 55,945 shares of common stock at an exercise
price of $4.00 per share. Of these shares 1,935 were issued for services
rendered to the Company. The common stock was sold alone at per share
prices ranging from $2.00 to $3.70, and in combination with warrants at per
unit prices ranging from $4.96 to $10.92, which related to the number of
warrants contained in the unit. The Company received proceeds of
approximately $4.1 million, including $1,723,000 for approximately 820,000
shares received during the fiscal year ended July 31, 1995. The warrants
expired in October 1998.
As consideration for the extension of the Company's term loan agreement
with its bank, the Company granted the bank a warrant to purchase 10,000
shares of common stock at an exercise price of $4.19. The warrants were
issued as of October 1, 1995 and expired on August 31, 1997.
(Continued)
F-23
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
In June 1996, the Company sold in a private placement 1,515,330 shares of
common stock and three-year warrants to purchase 313,800 shares of common
stock at an exercise price of $7.50 per share. Of these shares, 12,000 were
issued for services rendered to the Company. The common stock was sold
alone at a per share price of $3.70, in combination with warrants at a per
unit price of $12.52 and warrants were sold alone at a per warrant price of
$1.42. Each unit consisted of three shares of common stock and one warrant.
The Company received proceeds of approximately $5.7 million. The warrants
expired during the fiscal year ended July 31, 2000.
In June 1996, the Company issued 10,000 five-year stock options as payment
for services rendered. The options vested immediately and have an exercise
price of $4.95 per share. The Company recorded research and development
expense of $28,260 which was the fair value of the stock options on the
date of issuance.
During the fiscal year ended July 31, 1996, 207,316 shares of common stock
were sold from October 1995 to April 1996 at per share prices ranging from
$3.60 to $4.24 resulting in proceeds of approximately $808,000.
During the fiscal year ended July 31, 1996, 656,334 stock options were
exercised by both related and unrelated parties resulting in net proceeds
of approximately $1.9 million to the Company. Of these shares, 89,634 were
issued subsequent to July 31, 1996. The exercise prices of the options
ranged from $2.50 to $3.87 per share.
In August 1996, the Company issued 10,000 stock options with an exercise
price of $4.69 per share exercisable for five years as payment for services
to be rendered. An equal portion of these options vested monthly for one
year commencing September 1, 1996. The Company recorded general and
administrative expense of $27,900 which was the fair value of the stock
options on the date of issuance.
In March 1997, the Company issued 112,000 shares of common stock at $4.50
per share in a private placement to a single investor resulting in net
proceeds of $504,000 to the Company.
In May 1997, the Company issued 100,000 stock options to a director with an
exercise price of $5.20 per share as payment for serving as Chairman of the
Scientific Advisory Board (the "SAB"). These options will vest as follows
provided the director is then serving as Chairman of the SAB at the time of
vesting: 10,000 vested immediately, 10,000 after one full calendar year,
10,000 annually for each of the following three years and 50,000 on May 13,
2002. The vesting of the 50,000 options which vest in May 2002 may be
accelerated upon the occurrence of the following events: 25,000 options
upon the good faith determination by the Company's Board of Directors that
a substantive collaborative agreement with a major biopharmaceutical
company was a result of Dr. Carter's efforts and 25,000 options upon the
good faith determination by the Company's Board of Directors that Dr.
Carter made a material contribution towards the approval by the United
States Food and Drug Administration of a New Drug Application for the
marketing of ONCONASE in the United States. The Company recorded research
and development expense of $263,800 which was the fair value on the date of
issuance of that portion of the stock options that had vested as of July
31, 2000.
(Continued)
F-24
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 1997, 639,500 stock options were
exercised by both related and unrelated parties resulting in net proceeds
of approximately $2.6 million to the Company. The exercise prices of the
options ranged from $2.45 to $4.00 per share.
During the fiscal year ended July 31, 1997, 147,450 warrants were exercised
by both related and unrelated parties resulting in net proceeds of
approximately $737,250 to the Company. The exercise price of the warrants
was $5.00 per share.
In October 1997, the Company issued 75,000 stock options to a director with
an exercise price of $3.66 per share as payment for non-board related
services to be rendered. These options will vest as follows provided he has
been serving continuously on the Company's board of directors at the time
of vesting: 10,000 vested immediately; 10,000 after one full calendar year;
10,000 annually for each of the following three years; and 25,000 on
October 31, 2002. The vesting and exercisability of the 25,000 options
which vest in October 2002 may be accelerated upon the good faith
determination of the Company's Board of Directors that a substantive
collaborative agreement with a major pharmaceutical/biotechnology company
was a direct result of the director's efforts. A total general and
administrative expense of $185,600 is being amortized over a five-year
period which commenced in October 1997. As of July 31, 2000, the Company
recorded general and administrative expense of $124,600, based upon the
fair value of such 75,000 options on the date of issuance, amortized on a
straight-line basis over the vesting period of the grant.
In October 1997, the Company issued 12,000 five-year stock options to a
consultant with an exercise price of $3.91 per share as payment for
services to be rendered. An equal portion of these options vest monthly and
are to be amortized over a one-year period which commenced in October 1997.
In May 1998, the Company terminated the services of the consultant which
resulted in the cancellation of 5,000 options. The Company recorded a total
research and development expense for the remaining 7,000 options in the
amount of $15,800, based upon the fair value of such options on the date of
issuance, amortized on a straight-line basis over the vesting period of the
grant.
On December 9, 1997, the stockholders authorized the amendment of the
Company's Certificate of Incorporation to increase the number of authorized
shares of common stock, par value $.001 from 25,000,000 shares to
40,000,000 shares.
On December 9, 1997, the stockholders approved the 1997 Stock Option Plan
(the "1997 Plan"). The total number of shares of common stock authorized
for issuance upon exercise of options granted under the 1997 Plan is
2,000,000. Options are granted at fair market value on the date of the
grant and generally are exercisable in 20% increments annually over five
years starting one year after the date of grant and terminate five years
from their initial exercise date.
(Continued)
F-25
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
On January 23, 1998 the Securities and Exchange Commission (the "SEC")
declared effective a registration statement on Form S-3 for the offer and
sale by certain stockholders of up to 3,734,541 shares of common stock. Of
these shares (i) an aggregate of 2,737,480 shares were issued to private
placement investors in private placement transactions which were completed
during the period from March 1994 through March 1997 (the "Earlier Private
Placements"), (ii) an aggregate of 409,745 shares are issuable upon
exercise of warrants which were issued to private placement investors in
the Earlier Private Placements and (iii) an aggregate of 587,316 shares may
be issued, or have been issued, upon exercise of options which were issued
to option holders in certain other private transactions. As a result of the
delisting of the Company's Common Stock from the Nasdaq SmallCap Market,
the Company no longer qualified for the use of a Form S-3 registration
statement for this offering when it filed its Annual Report on Form 10-K
for the fiscal year ended July 31, 1999 and thus, this registration
statement was no longer effective. The Company filed a registration
statement on Form S-1 to register these shares, which has not yet been
declared effective.
In February 1998, the Company completed the February 1998 Private Placement
primarily to institutional investors which resulted in the issuance of
1,168,575 units at a unit price of $4.00. Each unit consisted of two (2)
shares of the Company's common stock, par value $.001 per share and one (1)
three-year warrant to purchase one (1) share of common stock at an exercise
price of $2.50 per share. The Company received proceeds of approximately
$4,202,000, net of costs associated with the private placement of
approximately $472,000. The placement agent also received warrants to
purchase an additional 116,858 units comprised of the same securities sold
to investors at an exercise price of $4.40 per unit as part of its
compensation.
In March 1998, the Company entered into a conversion agreement with one of
its raw material suppliers (the "Supplier") for the conversion of an
outstanding payable (the "Conversion Agreement") into 50,000 shares of the
Company's Common Stock. Pursuant to the Conversion Agreement, the Company
issued 50,000 shares of Common Stock to the Supplier. The fair value of the
Common Stock approximated the outstanding payable amount of $100,000.
In March 1998, the Company issued 75,000 stock options to a director
with an exercise price of $2.80 per share as payment for non-board related
services to be rendered. These options will vest as follows provided
he has been serving continuously on the Company's board of directors at
the time of vesting: 10,000 vested immediately; 10,000 after one full
calendar year; 10,000 annually for each of the following three years; and
25,000 on March 24, 2003. The vesting and exercisability of the 25,000
options which vest in March 2003 may be accelerated upon the good faith
determination of the Company's Board of Directors that a substantive
collaborative agreement and licensing or financing arrangement with a major
pharmaceutical/biotechnology company was a direct result of the director's
efforts. A total general and administrative expense of $138,100 is being
amortized over a five-year period which commenced in March 1998. As of July
31, 2000, the Company recorded general and administrative expense of
$81,100, based upon the fair value of such 75,000 options on the date of
issuance, amortized on a straight-line basis over the vesting period of the
grant.
(Continued)
F-26
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
On April 20, 1998 the SEC declared effective a registration statement on
Form S-3 for the offer and sale by certain stockholders of up to 3,918,299
shares of common stock. Of these shares (i) an aggregate of 2,337,150
shares of Common Stock were issued to the private placement investors in
the February 1998 Private Placement, (ii) an aggregate of 1,168,575 shares
may be issued upon exercise of the Warrants which were issued to the
private placement investors in the February 1998 Private Placement, (iii)
350,574 shares may be issued upon the exercise of the Placement Agent
Warrant which was issued to the placement agent in the February 1998
Private Placement and the Warrants issuable upon exercise of the Placement
Agent Warrant, (iv) 50,000 shares of Common Stock were issued to a Supplier
in connection with conversion of an outstanding accounts payable, and (v)
12,000 shares may be issued upon the exercise of options which were issued
as payment for services to be rendered. As a result of the delisting of the
Company's Common Stock from the Nasdaq SmallCap Market, the Company no
longer qualified for the use of a Form S-3 registration statement for this
offering when it filed its Annual Report on Form 10-K for the fiscal year
ended July 31, 1999 and thus, this registration statement was no longer
effective. The Company filed a registration statement on Form S-1 to
register these shares, which has not yet been declared effective.
During the fiscal year ended July 31, 1998, the Company issued 833
three-year stock options as payment for services rendered in August 1997.
The options vested thirty days from the issuance date and have an exercise
price of $4.47 per share. The total general and administrative expense
recorded for these options was $1,700, based upon the fair value of such
options on the date of issuance.
During the fiscal year ended July 31, 1998, the Company issued 15,000
three-year stock options with an exercise price of $4.15 per share as
payment for services to be rendered. An equal portion of these options vest
monthly and a total general and administrative expense of $30,000 is being
amortized over a one-year period which commenced September 1997. The
Company also issued 5,000 three-year stock options with an exercise price
of $4.15 per share as payment for services to be rendered. Of these
options, 833 vested monthly for five months commencing September 30, 1997
and 835 vested on the last day of the sixth month. Total general and
administrative expense of $9,700 is being amortized over a six-month period
which commenced September 1997. As of July 31, 1998, the Company recorded
general and administrative expense of $37,100, based upon the fair value of
the 20,000 stock options on the date of the issuance, amortized on a
straight-line basis over the vesting periods of the grants.
During the fiscal year ended July 31, 1998, 4,950 shares of Common Stock
were issued upon the exercise of warrants by unrelated parties resulting in
net proceeds of approximately $11,100 to the Company. The exercise prices
of the warrants ranged from $2.20 to $2.50 per share.
On October 1, 1998 (the "Effective Date"), the Company entered into an
agreement with a consultant (the "Agreement"), resulting in the issuance of
200,000 five-year stock options with an exercise price of $1.00
(Continued)
F-27
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
per share as payment for services to be rendered. These options will vest
as follows: an aggregate of 20,000 shall vest on October 1, 1999 or upon
signing of the first corporate partnering deal, whichever shall occur
first; an aggregate of 2,500 of such options shall vest on the last day of
each month over the first twelve months after the Effective Date of the
Agreement; the remaining 150,000 options will vest on the third anniversary
of the Effective Date of the Agreement provided that the consultant is
still providing consulting services to the Company under the Agreement at
that time. The vesting of such remaining options shall be accelerated as
follows: 50,000 of such options or the remainder of the unvested options,
whichever is less, shall vest upon the signing of each corporate partnering
deal in which the total consideration provided in the Agreement is less
than $5,000,000; 100,000 of such options or the remainder of the unvested
options, whichever is less, shall vest upon the signing of each corporate
partnering deal in which the total consideration provided in the Agreement
is greater than $5,000,000 but less than $10,000,000; 200,000 of such
options or the remainder of the unvested options, whichever is less, shall
vest upon the signing of each corporate partnering deal in which the total
consideration provided in the Agreement is greater than $10,000,000. Should
the Company sell a controlling interest in its assets and/or equity at any
time after the signature of the Agreement, all options will vest. The
Company has recorded approximately $49,300 of general and administrative
expense based upon the fair value of the vested options through July 31,
2000. Additional expense will be recorded in subsequent periods through
October 1, 2001 as the remainder of the options vest. During the fiscal
year ended July 31 2000, the Agreement was terminated which resulted in the
cancellation of 150,000 options.
During the fiscal year ended July 31, 1999, the Company issued 5,000
three-year stock options as payment for services rendered. The options
vested immediately and have an exercise price of $1.43 per share. The total
general and administrative expense recorded for these options was $4,200,
based upon the fair value of such options on the date of issuance.
During the fiscal year ended July 31, 1999, the Company issued 40,701
shares of common stock for payment of legal services. The fair value of the
common stock in the amount of $16,631 was charged to operations.
During the fiscal year ended July 31, 1999, the Company issued 6,000 shares
of common stock for payment of services rendered. The fair value of the
common stock in the amount of $2,460 was charged to operations.
During the fiscal year ended July 31, 2000, the Company issued 174,965
shares of common stock for payment of services rendered. The fair value of
the common stock in the amount of $92,184 was charged to operations.
During the fiscal year ended July 31, 2000, the Company issued 95,000
shares of common stock upon the exercise of stock options by unrelated
parties which resulted in gross proceeds of $45,850 to the Company. The
exercise prices of the options ranged from $0.43 to $1.43.
(Continued)
F-28
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 2000, the Company sold an aggregate
of 875,000 shares of common stock to private investors at prices ranging
from $0.50 to $1.00 per share resulting in net proceeds of $548,300 to the
Company. In addition, the private investors were granted warrants to
purchase an aggregate of 875,000 shares of common stock, inclusive of
additional warrants issued so that all investors in the private placements
received substantially the same securities, at per share exercise prices
ranging from $1.03 to $4.55. The warrants will expire during the period
commencing May 2003 and ending in May 2005.
(7) Common Stock Warrants
During the fiscal years 1988 and 1991, the Board of Directors granted stock
purchase warrants to acquire a maximum of 400,000 shares of common stock at
$5.00 per share which were not exercised and expired.
The following table summarizes the activity of common stock warrants issued
in connection with the Private Placements completed in fiscal years 1994
through 2000:
Exercise
Warrants Price Expiration
-------- -------- ----------
Sold in March 1994 Private Placement 800,000 $ 5.00 3/21/97 to 6/21/97
Outstanding at July 31, 1994 800,000 5.00 3/21/97 to 6/21/97
Sold in September 1994 Private Placement 288,506 5.50 12/9/97 to 12/14/97
Sold in October 1994 Private Placement 40,000 5.50 1/21/98
Sold in September 1995 Private Placement 47,405 4.00 10/1/98
----------
Outstanding and exercisable at July 31, 1995 1,175,911 4.00 - 5.50 3/21/97 to 10/1/98
Issued to bank in connection with an amendment
to the Company's term loan 10,000 4.19 8/31/97
Sold in September 1995 Private Placement 8,540 4.00 10/1/98
Sold in June 1996 Private Placement 313,800 7.50 8/29/99 to 9/10/99
----------
Outstanding and exercisable at July 31, 1996 1,508,251 4.00 - 7.50 3/21/97 to 9/10/99
Exercised 147,450 5.00 3/21/97 to 6/21/97
Expired 652,550 5.00 3/21/97 to 6/21/97
----------
Outstanding and exercisable at July 31, 1997 708,251 4.00 - 7.50 12/9/97 to 9/10/99
Sold in February 1998 Private Placement 1,168,575 2.50 5/19/01
(Continued)
F-29
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Common Stock Warrants, (Continued)
Exercise
Warrants Price Expiration
-------- -------- ----------
Issued to the Placement Agent in connection
with the February 1998 Private Placement
(see note 6) 350,574 2.20 - 2.50 5/19/01
Exercised 4,950 2.20 - 2.50 5/19/01
Expired 338,506 4.19 - 5.50 8/31/97 to 1/21/98
---------
Outstanding and exercisable at July 31, 1998 1,883,944 2.20 - 7.50 10/1/98 to 5/19/01
Expired 55,945 4.00 10/1/98
---------
Outstanding and exercisable at July 31, 1999 1,827,999 2.20 - 7.50 10/1/98 to 5/19/01
Sold in February 2000 Private Placement 875,000 1.03 - 4.55 5/28/03 to 5/28/05
Expired 313,800 7.50 8/30/99 to 9/11/99
---------
Outstanding and exercisable at July 31, 2000 2,389,199 1.03 - 4.55 5/19/01 to 5/28/05
========= ===========
(8) Stock Options
1993 Stock Option Plan
The Company's stockholders approved the 1993 stock option plan totaling
3,000,000 shares, which provide that options may be granted to employees,
directors and consultants. Options are granted at market value on the date
of the grant and generally are exercisable in 20% increments annually over
five years starting one year after the date of grant and terminate five
years from their initial exercise date.
1997 Stock Option Plan
The Company's stockholders approved the 1997 stock option plan totaling
2,000,000 shares, which provide that options may be granted to employees,
directors and consultants. Options are granted at market value on the date
of the grant and generally are exercisable in 20% increments annually over
five years starting one year after the date of grant and terminate five
years from their initial exercise date.
The following table summarizes stock option activity for the period August
1, 1994 to July 31, 2000:
Weighted Average
Shares Available Number of Exercise Price Per
for Grant Shares Share
---------------- --------- ------------------
Balance August 1, 1994 1,926,841 5,935,337 $ 3.76
Granted (818,850) 818,850 2.60
(Continued)
F-30
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
Weighted Average
Shares Available Number of Exercise Price Per
for Grant Shares Share
---------------- --------- ------------------
Exercised -- (185,000) 2.36
Canceled -- (1,897,500) 4.30
---------- ----------
Balance July 31, 1995 1,107,991 4,671,687 3.39
Granted (296,205) 296,205 3.99
Exercised -- (656,334) 2.92
Canceled 6,500 (235,333) 4.89
---------- ----------
Balance July 31, 1996 818,286 4,076,225 3.43
1997 Plan 2,000,000 -- --
Granted (932,500) 932,500 4.90
Exercised -- (639,500) 3.82
Canceled 484,845 (484,845) 4.70
---------- ----------
Balance July 31, 1997 2,370,631 3,884,380 3.56
Granted (234,333) 234,333 3.31
Canceled 91,100 (91,100) 3.81
---------- ----------
Balance July 31, 1998 2,227,398 4,027,613 3.54
Granted (595,000) 595,000 0.62
Canceled 443,934 (555,737) 3.97
---------- ----------
Balance July 31, 1999 2,076,332 4,066,876 3.05
Granted (827,000) 827,000 0.52
Exercised -- (95,000) 0.48
Canceled 638,395 (1,031,880) 2.73
---------- ----------
Balance July 31, 2000 1,887,727 3,766,996 2.65
========== ========== ====
The stock options granted in fiscal year ended July 31, 2000 included an
aggregate total of 75,000 stock options issued to the Company's outside
board of directors and an aggregate total of 350,000 stock options issued
to the employees of the Company, which will vest and become exercisable
upon FDA approval of ONCONASE(R) for malignant mesothelioma provided that
ONCONASE(R) must be approved on or before December 31, 2001, or these
options will terminate, and the employees must be actively employed by
Alfacell through the date of the approval. Compensation expense, if any,
will be determined based on the Company's stock price on the vesting date
relative to the options exercise price. The options outstanding at July 31,
2000 will expire between August 4, 2000 and October 18, 2008.
In August 1998, Ms. Shogen and Dr. Mikulski settled, and the court approved
the settlement, of a claim brought against them in the United States
District Court, District of New Jersey at Newark, New Jersey, by a
shareholder under Section 16(b) of the Securities Exchange Act of 1934 for
profits alleged to have been realized by Ms. Shogen and Dr. Mikulski in
transactions involving the Company's securities in 1988 and 1989. Claims
under section 16(b) are for profits calculated under such statute to have
been realized
(Continued)
F-31
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
for sales and purchases of the Company's securities made within a six month
period. In this case the purchases which formed the basis for this claim
were issuances of shares of stock to Ms. Shogen and Dr. Mikulski under
employment agreements with the Company based upon the Company's achievement
of certain milestones. No allegations of fraud were made. Ms. Shogen agreed
to pay the Company $91,971.00 and Dr. Mikulski agreed to pay the Company
$72,903.00. Such payments are to be made in a form acceptable to the
Company whether in cash, shares of the Company's common stock or options to
purchase the Company's common stock, with 25% of such payments having been
made in August 1998 and the remainder of such amounts payable in three
equal installments in August 1999, 2000 and 2001. The initial payments were
made by the cancellation of options to purchase 44,999 shares of common
stock owned by Ms. Shogen and the cancellation of options to purchase
35,669 shares of common stock owned by Dr. Mikulski. The obligation to make
the remaining payments is secured by the pledge to the Company of options
to purchase 154,908 and 122,136 shares of common stock by Ms. Shogen and
Dr. Mikulski, respectively. In August 1999, Ms. Shogen paid the balance in
full by the cancellation of options to purchase 134,995 shares owned by Ms.
Shogen and Dr. Mikulski paid an installment equal to one-third of the
balance by the cancellation of options to purchase 35,367 shares owned by
Dr. Mikulski. In February 2000 Dr. Mikulski paid the balance in full by the
cancellation of options to purchase 31,599 shares owned by him.
On August 31, 1999 the Company entered into a separation agreement and
general release with Ms. Gail E. Fraser, former Chief Financial Officer
pursuant to which the Company and Ms. Fraser agreed that an aggregate of
395,000 options granted to Ms. Fraser under the 1993 Plan, all of which had
vested as of the date of resignation will remain vested and exercisable
until December 30, 2000 and an aggregate of 70,000 options granted under
the 1993 Plan which had not vested on the date of resignation will be
deemed vested as of the date of resignation and will remain exercisable
until December 30, 2000. As of July 31, 2000, 90,000 of these options were
exercised.
The weighted-average fair value per option at the date of grant for options
granted during the fiscal years 2000, 1999 and 1998 were $0.45, $0.36 and
$2.03, respectively. The fair value was estimated using the Black-Scholes
options pricing model based on the following assumptions:
2000 1999 1998
------ ------ ------
Expected dividend yield 0% 0% 0%
Risk-free interest rate 6.00% 6.00% 6.00%
Expected stock price volatility 114.50% 93.99% 88.15%
Expected term until exercise (years) 6.37 5.59 6.17
Pro forma net loss and loss per share reflecting approximate compensation
cost for the fair value of stock options awarded are as follows:
(Continued)
F-32
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
2000 1999 1998
---- ---- ----
Net Loss:
As reported $(1,722,298) $(3,156,636) $(6,387,506)
Pro forma (1,956,667) (3,429,057) (6,697,066)
Loss per common share:
As reported $ (0.10) $ (0.18) $ (0.40)
Pro forma (0.12) (0.22) (0.42)
The pro forma effects on net loss and loss per share for 2000, 1999 and
1998 may not be representative of the pro forma effects in future years
since compensation cost is allocated on a straight-line basis over the
vesting periods of the grants, which extend beyond the reported years.
The following table summarizes information concerning options outstanding
at July 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------------------------------- ---------------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Term (Years) Price Shares Price
------ ------ ------------ ----- ------ -----
$0.00 - 1.99 1,148,000 6.17 $0.51 487,400 $0.53
2.00 - 2.99 204,000 3.08 2.59 139,000 2.54
3.00 - 3.99 1,639,318 1.96 3.21 1,594,318 3.20
4.00 - 4.99 563,178 1.20 4.29 541,178 4.27
5.00 - 5.99 167,500 4.38 5.17 97,500 5.17
6.00 - 6.99 45,000 2.42 6.97 45,000 6.97
=========== ---------- ==== ==== --------- ====
3,766,996 2,904,396
========= =========
Stock option activity prior to adoption of SFAS No. 123 is as follows:
1981 Non-Qualified Stock Option Plan
In 1981, the Board of Directors adopted a non-qualified stock option plan
and had reserved 300,000 shares for issuance to key employees or
consultants. Options were nontransferable and expired if not exercised
within five years. Option grants of 60,000 shares expired unexercised by
July 31, 1991.
Non-Qualified Stock Options
The Board of Directors issued non-qualified stock options which were not
part of the 1981 non-qualified stock option plan or the 1989 Stock Plan as
follows:
(Continued)
F-33
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
Shares Price Range
------ -----------
Granted 1,782,000 $ 3.00-3.87
Exercised (276,989) 3.00-3.50
Canceled (106,000) 3.00-3.50
Expired (649,011) 3.00-3.50
Granted pursuant to conversion of certain liabilities:
Related party 1,324,014 3.20
Unrelated party 73,804 3.20
Repurchased stock options (102,807) 3.20
---------
Balance at July 31, 1994 2,045,011 3.20-3.87
========= =========
In connection with certain private placements, the Board of Directors had
included in the agreements, options to purchase additional shares of the
Company's common stock as follows:
Shares Price Range
-------- -----------
Granted (42,167 options were repriced 894,887 $2.50-7.00
and extended as described in note 8)
Exercised (81,000) 3.97-6.50
Expired (201,720) 3.97-6.50
--------
Balance at July 31, 1994 612,167 2.50-7.00
======== ==========
1989 Stock Plan
On February 14, 1989, the Company adopted the Alfacell Corporation 1989
Stock Plan (the "1989 Stock Plan"), pursuant to which the Board of
Directors could issue awards, options and grants. The maximum number of
shares of common stock that could have been issued pursuant to the option
plan was 2,000,000.
No more options are being granted pursuant to this plan. The per share
option exercise price was determined by the Board of Directors. All options
and shares issued upon exercise were nontransferable and forfeitable in the
event employment was terminated within two years of the date of hire. In
the event the option was exercised and said shares were forfeited, the
Company would return to the optionee the lesser of the current market value
of the securities or the exercise price paid.
The stock option activity is as follows:
Shares Price Range
------ -----------
Granted, February 14, 1989 3,460,000 $3.50-5.00
Options issued in connection with share
purchase 36,365 2.75
(Continued)
F-34
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
Shares Price Range
------ -----------
Expired (1,911,365) 2.75-5.00
Canceled (10,000) 5.00
----------
Balance at July 31, 1994 1,575,000 3.50-5.00
========== =========
As of fiscal year ended July 31, 1994, 1,703,159 options were granted under
the 1993 stock option plan.
(9) Stock Grant and Compensation Plans
The Company had adopted a stock grant program effective September 1, 1981,
and pursuant to said plan, had reserved 375,000 shares of its common stock
for issuance to key employees. The stock grant program was superseded by
the 1989 Stock Plan and no further grants will be given pursuant to the
grant plan. The following stock transactions occurred under the Company's
stock grant program:
Year Amount
ended Fair of
July 31, Shares Value Compensation
-------- -------- ----- -------------
1983 20,000 $ 5.50 $ 110,000
1984 19,750 5.125 101,219
1985 48,332 5.125-15.00 478,105
1986 11,250 5.125-15.00 107,032
1988 19,000 3.50 6,500
====== ============ ==========
On January 26, 1984, the Company adopted a stock bonus plan for directors
and consultants. The plan was amended on October 6, 1986, to reserve
500,000 shares for issuance under the plan and to clarify a requirement
that stock issued under the Plan could not be transferred until three years
after the date of the grant. The stock bonus plan for directors and
consultants was superseded by the 1989 Stock Plan and no further grants
will be given pursuant to the stock bonus plan for directors and
consultants. The following stock transactions occurred under the Company's
stock bonus plan:
Year Amount
ended Fair of
July 31, Shares Value Compensation
-------- ------ ----- ------------
1984 130,250 2.50-3.88 $ 385,917
1985 99,163 3.50-15.00 879,478
1985 (42,500) 2.50 (105,825)*
1986 15,394 9.65-15.00 215,400
1987 5,000 15.00 75,000
======= =========== ==========
* Shares granted in 1984 were renegotiated in 1985 and canceled as a result
of the recipient's termination.
(Continued)
F-35
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Grant and Compensation Plans, (Continued)
1989 Stock Plan
Under the 1989 Stock Plan, one million shares of the Company's common stock
were reserved for issuance as awards to employees. The 1989 Stock Plan also
provides for the granting of options to purchase common stock of the
Company (see note 8). In addition, the 1989 Stock Plan provided for the
issuance of 1,000,000 shares of the Company's common stock as grants. To be
eligible for a grant, grantees must have made substantial contributions and
shown loyal dedication to the Company.
Awards and grants were authorized under the 1989 Stock Plan during the
following fiscal years:
Year ended Amount of
July 31, Shares Fair Value Compensation
---------- ------ ---------- ------------
1989 30,000 $5.00 $150,000
1990 56,000 6.00 336,000
1991 119,000 4.00 476,000
1992 104,000 2.75 286,000
1993 117,000 2.00 234,000
1994 5,000 3.00 15,000
======= ===== ========
Compensation expense is recorded for the fair value of all stock awards and
grants over the vesting period. The 1994 stock award was immediately
vested. There were no stock awards in fiscal 2000, 1999 or 1998.
(10) Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
No. 109). Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect for all years in which the temporary differences are expected to
reverse.
New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell state tax loss carryforwards and state research and
development credits or tax benefits. Approximately $2.4 million of the
Company's tax benefits were approved for sale by the state in December
1999, of which approximately $1 million was allocated to be sold between
July 1, 1999 and June 30, 2000. In December 1999, the Company received
$755,854 from the sale of $1 million of its tax benefits. The Company will
attempt to sell the remaining balance of its tax benefits in the amount of
approximately $1.4 million between July 1, 2000 and June 30, 2001, subject
to all existing laws of the State of New Jersey. However, there is no
assurance that the Company will be able to find a buyer for its tax
benefits or that such funds will be available in a timely manner.
At July 31, 2000 and 1999, the tax effects of temporary differences that
give rise to the deferred tax assets are as follows:
(Continued)
F-36
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) Income Taxes, (Continued)
2000 1999
------------ ------------
Deferred tax assets:
Excess of book over tax depreciation $ 72,248 $ 37,035
Accrued expenses 171,916 311,458
Federal and state net operating loss carryforwards 14,838,624 15,227,316
Research and experimentation and investment tax
credit carry forwards 922,785 843,418
------------ ------------
Total gross deferred tax assets 16,005,573 16,419,227
Valuation allowance (16,005,573) (16,419,227)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
At July 31, 2000, the Company has federal net operating loss carryforwards
of approximately $39,920,910 that expire in the years 2001 to 2020. The
Company also has investment tax credit carryforwards of $26,867 and
research and experimentation tax credit carryforwards of $818,308 that
expire in the years 2001 to 2020. Ultimate utilization/availability of such
net operating losses and credits may be significantly curtailed if a
significant change in ownership occurs in accordance with the provisions of
the Tax Reform Act of 1986.
(11) Other Financial Information
Accrued expenses as of July 31, consist of the following:
2000 1999
---- ----
Payroll and payroll taxes $ 34,926 $ 50,160
Professional fees 43,000 28,000
Clinical trial grants 308,070 683,515
Other 25,851 16,975
-------- --------
$411,847 $778,650
======== ========
Other current assets as of July 31, consist of the following:
2000 1999
---- ----
Insurance $ 15,963 $ 65,330
NIH research -- 14,579
Other 12,654 7,399
-------- --------
$ 28,617 $ 87,308
======== ========
(Continued)
F-37
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(12) Commitments and Contingencies
On July 23, 1991, the Board of Directors authorized the Company to pay to
the Chief Executive Officer of the Company an amount equal to 15% of any
gross royalties which may be paid to the Company from any license(s) with
respect to the Company's principal product, ONCONASE, or any other products
derived from amphibian source extract, produced either as a natural,
synthesized, and/or genetically engineered drug for which the Company is
the owner or co-owner of the patents, or acquires such rights in the
future, for a period not to exceed the life of the patent. If the Company
manufactures and markets its own drugs, then the Company will pay to the
Chief Executive Officer an amount equal to 5% of gross sales from any
products sold during the life of the patents. In addition, the agreement
provides for a reduction of any indebtedness to the Chief Executive Officer
in the amount of $200,000 upon the Company entering into a licensing
agreement for its principal product.
The Company has product liability insurance coverage in the amount of
$6,000,000 for clinical trials. No product liability claims have been filed
against the Company. If a claim arises and the Company is found liable in
an amount that significantly exceeds the policy limits, it may have a
material adverse effect upon the financial condition of the Company.
(13) Research and Development Agreement
In November 1992, the Company entered into a CRADA with the NIH. In
accordance with this CRADA, the NIH will perform research for the Company
on potential uses for its drug technology. During the term of this research
and development agreement, which expired in July 31, 1999, the Company was
obligated to pay approximately $5,300 per month to the NIH. Total research
and development expenses under this arrangement amounted to $64,000 for the
years ended July 31, 1999 and 1998.
In August 1995, the Company entered into a CRADA with the NCI. In
accordance with this CRADA, the NCI will perform research for the Company
on potential uses for its drug technology. During the term of this research
and development agreement, which expired in August 1999, the Company was
obligated to pay approximately $5,200 per month to the NCI. In September
1999, this research and development agreement was amended to expire in
August 2000 and in June 2000 the expiration was extended to expire in
August 2001. Both extensions were without additional cost for the Company.
Total research and development expenses under this arrangement amounted to
$5,200, $62,400 and $60,400 for the fiscal years ended July 31, 2000, 1999
and 1998, respectively.
(14) 401 (K) Savings Plan
Effective October 1, 1998, the Company adopted a 401(K) Savings Plan (the
"Plan"). Qualified employees may participate by contributing up to 6% of
their gross earnings to the Plan subject to certain Internal Revenue
Service restrictions. The Company will match an amount equal to 50% of the
first 6% of each participant's contribution. The Company's contribution is
subject to a vesting schedule of 0%, 25%, 50%, 75% and 100% for employment
of less than one year, one year, two years, three years and four years,
respectively, except for existing employees which vesting schedule was
based from the date the Plan was adopted. For the fiscal years ended July
31, 2000 and 1999, the Company's contribution to the Plan amounted to
$21,714 and $16,052, respectively.
F-38