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, 2001 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. [ ]
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 25, 2001 was $12,279,537. As of
October 25, 2001 there were 19,971,501 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.
2
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 such 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. Actual future results may vary from expectations set
forth in these forward-looking statements. 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, primarily engaged in the
discovery and development of new drugs for the treatment of cancer and other
pathological conditions. In 1987, we completed the molecular characterization
(which is the determination of the molecular structure and other physical and
chemical characteristics) of a specific protein, which we named P-30 Protein. In
October 1998, the United States Adapted Names Council adapted the name
ranpirnase as the United States adaptive name for P-30 Protein, which we have
trademarked as ONCONASE(R).
ONCONASE(R), which has been isolated from the eggs of the leopard frog, is a
novel ribonuclease that is unique among the superfamily of pancreatic
ribonuclease. We have determined that, thus far, ranpirnase is the smallest
known protein belonging to the superfamily of pancreatic ribonuclease.
Ribonucleases are enzymes that break certain bonds of ribonucleic acids.
Ribonucleases serve several important biological functions in nature, including
regulation of angiogenesis, which is the formation of new blood vessels,
anti-viral and anti-parasitic defenses, and restrictive pollination in plants.
In addition to taking advantage of the natural biological functions of
ribonucleases, frog ribonucleases may be more therapeutically effective in
humans than human ribonuclease as they do not appear to be inhibited by human
ribonuclease inhibitors. Therefore, the development of amphibian ribonucleases
into therapeutics may result in a new class of compounds for the treatment of
diseases such as cancer and AIDS.
Based on our preclinical and clinical testing, we believe that ONCONASE(R) and
related compounds may have utility:
o as a single agent,
o in combination with other anti-cancer agents,
o as the active ingredient in a targeted conjugate, which is a new
compound resulting from chemically joining two different molecules
with targeted specificity, and
o in a variety of delivery systems.
During clinical trials, patients with advanced stages of solid tumors have been
treated with ONCONASE(R) on a weekly basis. Data from these clinical trials show
that the most significant clinical results to date have been observed in
unresectable malignant mesothelioma, an inoperable cancer found in the lining of
the lung and abdomen. Unresectable malignant mesothelioma is often linked to
asbestos exposure and afflicts approximately 3,500 to 5,000 newly diagnosed
patients in the United States each year. Epidemiologists have predicted that
over the next 35 years over 250,000 people will die from malignant mesothelioma
in Europe alone. There is currently no standard approved drug for this disease.
We have also conducted pilot clinical trials in non-small cell lung cancer,
3
metastatic breast cancer and renal cell cancer. We intend to initiate trials of
ONCONASE(R) in other cancer indications.
Side effects associated with ONCONASE(R), as observed in over 700 patients
treated to date, have been modest. The most significant side effect has been in
kidney function, which has been observed to be reversible upon the reduction of
dose or temporary or permanent discontinuation of treatment. Patients treated
with ONCONASE(R) have shown little evidence of bone marrow suppression, hair
loss or other severe organ damage frequently observed after treatment with most
other chemotherapeutic drugs. This safety profile may result from the fact that
ranpirnase is structurally similar to several human ribonucleases.
We are currently conducting a two-part Phase III clinical trial of ONCONASE(R)
as a treatment for malignant mesothelioma. The first part compares ONCONASE(R)
to doxorubicin in patients with unresectable malignant mesothelioma. Doxorubicin
is considered by opinion leaders to be the most effective drug for the treatment
of malignant mesothelioma. The second part of the trial compares the combination
of ONCONASE(R) and doxorubicin versus doxorubicin by itself. The patient
enrollment for the first part of the clinical trial has been completed however,
the trial is still ongoing. The second part of the trial is still in the
enrollment phase.
We have had a series of meetings with the Food and Drug Administration (FDA) to
establish mutually agreed upon parameters for the New Drug Application (NDA) to
obtain marketing approval for ONCONASE(R). In order to file the NDA, we have to
complete the current clinical trial, as well as provide the FDA with information
regarding the methods used to manufacture ONCONASE(R), evaluation of the
therapeutic and toxic doses of ONCONASE(R) in animals and studies regarding the
detection of ONCONASE(R) in human blood and antibody formation. We cannot
estimate if or when we will file the NDA. Even if we file an NDA, marketing
approval for ONCONASE(R) as a treatment for malignant mesothelioma may not be
granted by the FDA.
In February 2001, we received an Orphan Medicinal Product Designation for
ONCONASE(R) from The European Agency for the Evaluation of Medicinal Products
(EMEA). We are currently in discussions with the EMEA regarding the Marketing
Authorization Application (MAA) registration requirements of ONCONASE(R) for the
treatment of malignant mesothelioma. We must establish or designate a legal
partner in the European Union (EU), which is considered to be a qualified
pharmaceutical company (has qualified individuals) for at least three months
prior to filing the MAA. We cannot predict whether this marketing approval will
be granted.
We have established a scientific collaboration with the National Cancer
Institute (NCI). This collaboration has produced a conjugate, or chemical
construct, of ranpirnase with a monoclonal antibody that demonstrated activity
in treating non-Hodgkin's lymphoma in preclinical studies. Additionally,
preclinical studies are ongoing at the NCI in preparation for commencing
clinical trials for the treatment of patients with non-Hodgkin's lymphoma with
this new conjugate.
We believe that ranpirnase may also be used in the development of an anti-viral
agent. The National Institutes of Health (NIH) have performed an independent in
vitro screen of ONCONASE(R) against the HIV virus type 1. In vitro studies are
those performed in artificial laboratory vessels. The results showed ONCONASE(R)
to inhibit replication of HIV by up to 99.9% after a four-day incubation period
at concentrations not toxic to uninfected cells. In vitro findings by the NIH
revealed that ONCONASE(R) significantly inhibited production of HIV in several
persistently infected human cell lines, preferentially breaking down viral RNA
and cellular transfer RNA while not affecting normal cellular ribosomal RNA and
messenger RNAs. Moreover, the NIH - Division of AIDS found that ONCONASE(R) has
in vitro anti-viral effects. Subject to the availability of the required
capital, we plan to conduct further research concerning anti-viral effects.
4
Other Products
We have also discovered another series of proteins that may have therapeutic
uses. These proteins appear to be involved in the regulation of both early
embryonic and malignant cell growth. 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 for such research; however, we
are in early discussions with potential collaborators for the development of
these new compounds.
Research and Development Programs
Research and development expenses for the fiscal years ended July 31, 2001,
2000, and 1999 were $1,901,000, $1,880,000, and $2,402,000, respectively. Our
research and development programs focus primarily on the development of
therapeutics from amphibian ribonucleases. Because ribonucleases have been shown
to be involved in the regulation of cell proliferation, maturation,
differentiation and programmed cell death known as apoptosis, 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.
Our research and development programs relate to the development of drugs to
treat the following cancers and other diseases:
o unresectable malignant mesothelioma,
o renal cell carcinoma,
o other cancers (epithelial malignancies),
o non-Hodgkin's lymphoma,
o primary brain tumors,
o viral diseases,
o anti-inflammatory diseases, and
o other pathological conditions such as organ transplantation.
We are pursuing some of these programs independently, while others are being
undertaken in collaboration with the NIH and other institutions.
Clinical Development and Clinical Trials
ONCONASE(R) has been tested in Phase I, Phase II and Phase III clinical trials
in more than 35 cancer centers across the United States and Europe, including
major centers such as Columbia-Presbyterian, University of Chicago, M.D.
Anderson and Cedars-Sinai Cancer Centers. Due to limited capital, 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 few or no approved treatments.
ONCONASE(R) has been tested as a single agent in patients with a variety of
solid tumors and in combination with tamoxifen in patients with prostate cancer,
advanced pancreatic cancer and renal cell carcinoma.
ONCONASE(R) is currently in a Phase III clinical trial for unresectable
malignant mesothelioma, comparing ONCONASE(R) alone to doxorubicin and comparing
ONCONASE(R) with doxorubicin to doxorubicin alone. The trial is a randomized,
controlled study. No standard approved therapy exists to treat this deadly
cancer, and most advanced, unresectable malignant mesothelioma patients die of
progressive disease within six to 12 months of diagnosis.
5
We have had a series of meetings with the FDA to establish mutually agreed upon
parameters for the NDA to obtain marketing approval for ONCONASE(R). In February
2001, we received an Orphan Medicinal Product Designation for ONCONASE(R) from
the EMEA. We are currently in discussions with the EMEA on the MAA registration
requirements for ONCONASE(R) for the malignant mesothelioma indication. We
cannot predict whether marketing approval of ONCONASE(R) for the treatment of
unresectable malignant mesothelioma will be granted by the FDA or foreign
regulatory agencies.
ONCONASE(R) has demonstrated to be synergistic with tamoxifen in inhibiting
tumor cell growth in prostate and renal cell cancers in in vitro tests. We
completed Phase I/II clinical studies testing ONCONASE(R) in combination with
tamoxifen in prostate cancer and renal cell carcinoma. Reported toxicities in
these trials were primarily renal, dose-related and reversible. There has been
little evidence of bone marrow suppression, hair loss or other severe organ
damage frequently observed after treatment with most other chemotherapeutic
drugs. We intend to proceed with prostate and renal cell cancer research in the
future either on our own or in collaboration with others however, at this time
we are not certain if we will have the financings for such research.
A collaboration with the NCI has produced a conjugate of ranpirnase with a
monoclonal antibody which has been deemed active in vivo for non-Hodgkin's
lymphoma. The conjugate is currently being evaluated by the NCI for clinical
trials.
Preclinical Research
The results of our preclinical research have been presented at scientific
meetings or have been published in peer-reviewed journals.
In Vitro Anti-Cancer Activity
ONCONASE(R) has demonstrated a broad spectrum of anti-tumor effects in vitro.
The NCI Cancer Screen has determined that ONCONASE(R) kills cancer cells,
therefore, was judged to be what is called an "active" drug in accordance with
NCI criteria. Scientists at Harvard Medical School demonstrated in vitro that
ONCONASE(R) interferes with new blood vessel formation in tumors.
In vitro, ONCONASE(R), in combination with other drugs shown below, has been
shown to have a synergistic effect, which means that the effect of ONCONASE(R)
with these drugs acting together is greater than if used alone with respect to
the following:
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 Carcinoma, Ovarian
ONCONASE(R) + Cisplatin Ovarian
ONCONASE(R)+ All-trans-retionoic acid Glioma
6
Drug Combination Cancer
---------------- ------
ONCONASE(R) + Vincristine Colorectal, Breast
ONCONASE(R) + Doxorubicin Colorectal, Resistant Breast
ONCONASE(R) + Taxol Resistant Breast
In Vivo Anti-Cancer Activity
There is in vivo data which indicates that the use of ONCONASE(R) with the
following drugs is synergistic:
o vincristine,
o doxorubicin, and
o tamoxifen.
These synergisms suggest a potential for broader therapeutic utility of
ONCONASE(R) in cancer treatments. The NCI reported the ability of ONCONASE(R) to
overcome multiple drug resistance as well as other forms of drug resistance
(referring to a drug that no longer kills cancer cells) both in vitro and in
vivo.
ONCONASE(R) as a Radiosensitizing and Anti-Angiogenic Agent
Collaborative research at the University of Medicine and Dentistry of New Jersey
at Camden and the University of Pennsylvania Medical Center, Department of
Radiation Oncology, demonstrated that ranpirnase makes tumors more susceptible
to be killed by radiation treatment and interferes with tumor blood vessel
supply.
Ranpirnase Conjugates and Fusion Proteins
In addition to using it in its native form, we are conjugating, or chemically
linking, ranpirnase with targeting molecules, resulting in various conjugates,
to ensure its delivery to specific tissue targets. Several conjugates are being
developed by the NIH in collaboration with our scientists and have demonstrated
significant anti-tumor activity, reflecting significant prolongation of survival
of treated animals as compared to untreated animals. In addition, we are
synthesizing several genes of ranpirnase, its variants and other amphibian
ribonucleases using recombinant, or cloning, 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 in cancer and other
diseases.
Ranpirnase Variant Conjugates
We have developed a variant of ranpirnase and conjugated, or linked, it to a
variety of clinically important proteins and peptides. These conjugates are
designed to specifically target selected molecular structures in the body. These
conjugates may have therapeutic applications in the treatment of
anti-inflammatory diseases, such as arthritis, and other autoimmune diseases.
Proteasome Inhibitors
Cyclins and cyclin-dependent kinases are two major groups of protein regulators
of the cell cycle progression. This means that each dividing cell, such as a
tumor (malignant) cell, undergoes cyclical metabolic and morphological
(structural) changes which are defined as the cell cycle. Cancer can be defined
as the uncontrolled growth and proliferation of cells often associated with a
de-regulated pattern of cell growth maturation and division. In vitro
7
studies of ONCONASE(R) have shown its ability to interrupt 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 an extremely 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 to patients
not taking drugs as prescribed.
Experimental data shows that anti-HIV effects of ONCONASE(R) are quite
selective, resulting in a likelihood to inhibit replication of the different
HIV-1 subtypes. In vitro studies have been performed by independent scientific
collaborators, including the NIH - 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 render other antiviral
agents ineffective.
We do not currently possess the funds necessary to conduct further research
relating to most, if not all, of our preclinical research and cannot be certain
that we will be able to obtain the financing to do so.
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 Phase III clinical trial for malignant mesothelioma and
supply ONCONASE(R) for up to two years after commercialization. In addition, we
have successfully completed the cloning of the gene of the natural protein
ranpirnase; however, the use of this recombinant technology may not be more cost
effective than the natural source.
Manufacturing
We have signed an agreement with Scientific Protein Laboratories, a subsidiary
of a division of American Home Products Corp., which will perform the
intermediary manufacturing process of purifying ranpirnase. Scientific Protein
Laboratories sends the intermediate product to a contract filler for the final
manufacturing step and vial filling. Other than these arrangements, we do not
have specific arrangements for the manufacture of our product. Products
manufactured for use in Phase III clinical trials and for commercial sale must
be manufactured in compliance with Current Good Manufacturing Practices. Both
Scientific Protein Laboratories and the contract filler to whom the intermediate
product is sent, manufacture in accordance with Current Good Manufacturing
Practices. For the foreseeable future, we intend to rely on these manufacturers,
or substitute manufacturers, if necessary, to manufacture our product. We might
not be able to find substitute manufacturers, if necessary. We are dependent
upon our contract manufacturers to comply with Current Good Manufacturing
Practices and to meet our production requirements. It is possible that our
contract manufacturers may not comply with Current Good Manufacturing Practices
or timely deliver sufficient quantities of our products.
Marketing
Neither we nor any of our officers or employees has pharmaceutical marketing
experience. If we were to market our products ourselves, we would need
significant additional expenditures and management resources to develop an
internal sales force. We may not be able to successfully penetrate the markets
for any products developed or develop internal marketing capabilities. We
intend, in some instances, to enter into development and marketing
8
agreements with third parties. We expect that under such arrangements we would
act as a co-marketing partner or would grant exclusive marketing rights to our
corporate partners in return for possibly assuming further research and
development cost, up-front fees, milestone payments and royalties on sales.
Under these agreements, our marketing partner may have the responsibility for a
significant portion of development of the product and regulatory approval. In
the event that our marketing partner fails to develop a marketable product or
fails to market a product successfully, our business may be adversely affected.
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 IND, which is filed to obtain approval
to begin human clinical 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 an NDA or Biologics License
Application, or BLA. Preparing an NDA or BLA involves considerable data
collection, verification and analysis. A similar process in accordance with EMEA
regulations is required to gain marketing approval in Europe. Moreover, a
commercial entity must be established and approved by the EMEA in a member state
of the EU at least three months prior to filing the MAA in the EU in preparation
for the commercialization of ONCONASE(R).
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.
Patents
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 nine patents in the United States:
o U.S. Patent No. 4,888,172, issued in 1989, which covers a
pharmaceutical produced from fertilized frog eggs (Rana pipiens) and
the methodology for 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).
o Patent No. US 6,175,003 B1, issued January 16, 2001, which covers the
genes of ONCONASE(R)and a variant of ONCONASE(R).
o Patent No. US 6,239,257 B1, issued on May 29, 2001, which covers a
family of variants of ONCONASE(R).
o Patent No. US 6,290,951 B1 issued in September 18, 2001, which covers
alteration of the cell cycle in vivo, particularly for inducing
apoptosis of tumor cells.
9
We own four European patents, which have been validated in certain European
countries. These patents cover ONCONASE(R), a variant of ONCONASE(R), process
technology for making ONCONASE(R), and combinations of ONCONASE(R) with certain
other chemotherapeutics. We also have patent applications pending in the United
States, Europe, and Japan. Additionally, we own one Japanese patent and have 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 CRADAs to which we and the NIH are parties).
The scope of protection afforded by patents for biotechnological inventions can
be uncertain, and such uncertainty may apply to our patents as well. The patent
applications we have filed, or that we may file in the future, may not result in
patents. Our patents may not give us competitive advantages, may be wholly or
partially invalidated or held unenforceable, or may be held uninfringed by
products that compete with our products. Patents owned by others may adversely
affect our ability to do business. Furthermore, others may independently develop
products that are similar to our products or that duplicate our products, and
may design around the claims of our patents. Although we believe that our
patents and patent applications are of substantial value to us, we cannot assure
you that such patents and patent applications will be of commercial benefit to
us, will adequately protect us from competing products or will not be
challenged, declared invalid, or declared uninfringed. We also rely on
proprietary know-how and on trade secrets to develop and maintain our
competitive position. Others may independently develop or obtain access to such
know-how or trade secrets. Although our employees and consultants having access
to proprietary information are required to sign agreements which require them to
keep such information confidential, our employees or consultants may breach
these agreements or these agreements may be held to be unenforceable.
Competition
Currently, there are no approved systemic treatments for malignant mesothelioma.
To our knowledge, no other company is developing a product with the same
mechanism of action as ONCONASE(R). 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.
These include Eli Lilly and Sugen which are developing agents for the malignant
mesothelioma indication. Eli Lilly is conducting a Phase III trial of the
combination of the multi-targeted antifolate (MTA) with cisplatin vs. cisplatin
alone, and Sugen is conducting a Phase II trial of the VEGF antagonist. There is
no comparable survival data available on the foregoing studies at this time.
Some of our competitors 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, however, of any
product currently being marketed that has the same mechanism of action as our
proposed anti-tumor agent, ONCONASE(R). Search of scientific literature reveals
no published information which would indicate that others are currently
employing this method or producing such an anti-tumor agent. There are several
chemotherapeutic agents currently used to treat the forms of cancer which
ONCONASE(R) is being used to treat. ONCONASE(R) may not prove to be as safe and
as effective as currently-used drugs. Others may develop new treatments which
are more effective than ONCONASE(R).
Employees
As of October 26, 2001, we employed 14 persons, of whom 11 were engaged in
research and development activities and three were engaged in administration and
management. We have five 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.
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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. We will be
negotiating our new lease agreement under similar terms. The annual rental
obligation is $136,000. 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 25, 2001,
there were approximately 1,216 stockholders of record of our common stock.
The following table sets forth the range of high and low sale prices of our
common stock for the two fiscal years ended July 31, 2001 and 2000. The prices
were obtained from OTCBB and 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, 2001:
First Quarter $1.56 $0.75
Second Quarter 1.38 0.53
Third Quarter 2.19 0.72
Fourth Quarter 1.59 0.81
Year Ended July 31, 2000:
First Quarter 0.94 0.41
Second Quarter 1.94 0.38
11
High Low
---- ---
Year Ended July 31, 2000:
Third Quarter 3.88 0.72
Fourth Quarter 2.63 0.69
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 April and July 2001, we sold an aggregate of 529,999 shares of common stock
to private investors at a price of $0.90 per share resulting in gross proceeds
of $477,000. In addition, the private investors were granted three-year and
five-year warrants to purchase an aggregate of 529,999 shares of common stock at
per share exercise prices ranging from $1.50 to $2.50. These transactions were
consummated as a private sale pursuant to Section 4(2) of the Securities Act of
1933, as amended.
In July 2001, we issued 330,000 shares of common stock upon the conversion of
convertible notes by related parties. In addition, upon conversion, the related
parties were granted three-year warrants to purchase an aggregate of 330,000
shares of common stock at an exercise price of $2.50 per share. These
transactions were consummated as a private sale pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
In August 2001, we sold an aggregate of 115,000 shares of common stock to
private investors at a price of $0.90 per share resulting in gross proceeds of
$103,500. In addition, the private investors were granted five-year warrants to
purchase an aggregate of 103,500 shares of common stock at per share exercise
price of $1.50. These transactions were 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,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Interest Income $ 13,121 $ 51,144 $ 168,372 $ 311,822 $ 442,572
Net Loss (1) $(2,294,936) $(1,722,298) $(3,156,636) $(6,387,506) $(5,018,867)
Net Loss Per Basic
and Diluted Share $ (.12) $ (.10) $ (.18) $ (.40) $ (.34)
Dividends None None None None None
As of July 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Total Assets $ 201,609 $ 488,099 $ 1,728,648 $ 5,516,678 $ 8,034,954
Long-term Debt $ 23,663 $ 30,251 None $ 6,727 $ 15,902
Total Equity
(Deficiency) $ (740,378) $ (131,860) $ 757,200 $ 3,691,838 $ 5,566,091
(1) Included in the net loss of $2,294,936 for fiscal year ended July 31, 2001
and $1,722,298 for fiscal year ended July 31, 2000 are tax benefits of
$451,395 and $755,854, respectively related to the sale of certain state
tax operating loss carryforwards.
12
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 had a series of meetings and
communications with the FDA and EMEA to establish mutually agreed upon
parameters for the NDA/MAA submissions. We must complete the current clinical
trial for the FDA filing, as well as provide the FDA and EMEA with information
regarding the methods used to manufacture ONCONASE(R), evaluation of the
therapeutic and toxic doses of ONCONASE(R) in animals and studies regarding the
detection of ONCONASE(R) in human blood and antibody formation. Additionally,
for the MAA submission, we must establish or designate a legal partner in the
EU, which is considered to be a qualified pharmaceutical company (has qualified
individuals) for at least three months prior to filing the MAA. 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
receipts resulting from the private sales of our securities and from certain
debt financings. 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 may not 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, 2001, 2000 and 1999
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 did not
have any sales in fiscal 2001, 2000 and 1999. Investment income for fiscal 2001
was $13,000 compared to $51,000 for fiscal 2000, a decrease of $38,000. This
decrease was due to lower balances of cash and cash equivalents. 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.
Research and Development
Research and development expense for fiscal 2001 was $1,901,000 compared to
$1,880,000 for fiscal 2000, an increase of $21,000, or 1%. This increase was
primarily due to an increase in costs in support of ongoing clinical trials and
increase in costs related to ONCONASE(R) clinical supplies, both primarily due
to the expansion of our Phase III clinical trials for malignant mesothelioma in
Europe. These increases were offset by a decrease in expenses related to the NDA
filing for ONCONASE(R) with the FDA.
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
13
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).
General and Administrative
General and administrative expense for fiscal 2001 was $706,000 compared to
$645,000 for fiscal 2000, an increase of $61,000, or 9%. This increase was
primarily due to a 58% increase in costs related to public relations activities,
a 30% increase in non-cash expense relating to stock options issued for
consulting services, a 12% increase in personnel costs and an 87% increase in
costs associated with business development activities.
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.
Interest
Interest expense for fiscal 2001 was $153,000 compared to $5,000 in fiscal 2000,
an increase of $148,000. The increase was primarily due to the interest expense
on convertible notes and related warrants issued in April 2001 to related and
unrelated parties. The interest expense was based on the value of the warrants
using the Black-Scholes options-pricing model, amortized on a straight-line
basis over the life of the notes.
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.
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. For the state fiscal year 2001 (July 1,
2000 to June 30, 2001), we have $1,774,000 total available tax benefits of which
$602,000 was allocated to be sold between July 1, 2000 and June 30, 2001. In
December 2000, we received $451,000 from the sale of an aggregate of $602,000
tax benefits which was recognized as a tax benefit for our fiscal 2001. In
December 1999, we received $756,000 from the sale of our tax benefits which was
recognized as a tax benefit for our fiscal 2000. We will attempt to sell the
remaining balance of our tax benefits in the amount of approximately $1,172,000
between July 1, 2001 and June 30, 2002, subject to all existing laws of the
State of New Jersey. However, we may not be able to find a buyer for our tax
benefits or that such funds may not be available in a timely manner.
Net Loss
We have incurred net losses during each year since our inception. The net loss
for fiscal 2001 was $2,295,000 as compared to $1,722,000 in fiscal 2000 and
$3,157,000 in fiscal 1999. The cumulative loss from the date of inception,
August 24, 1981, to July 31, 2001 amounted to $58,971,000. 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 2001, we had a net decrease in cash and cash equivalents of $213,000.
14
This decrease primarily resulted from net cash used in operating activities of
$1,613,000 offset by net cash provided by financing activities in the amount of
$1,400,000, 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, 2001 were $45,000 compared to $257,000 at July 31, 2000.
Our current liabilities as of July 31, 2001 were $918,000 compared to $590,000
at July 31, 2000, an increase of $328,000. The increase was primarily due to an
increase in expenses related to the expansion of our Phase III clinical trials
for malignant mesothelioma in Europe. As of July 31, 2001 our current
liabilities exceeded our current assets and we had a working capital deficit of
$831,000.
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. For the state fiscal year 2001 (July 1,
2000 to June 30, 2001), we have $1,774,000 total available tax benefits of which
$602,000 was allocated to be sold between July 1, 2000 and June 30, 2001. In
December 2000, we received $451,000 from the sale of an aggregate of $602,000
tax benefits which was recognized as a tax benefit for our fiscal 2001. In
December 1999, we received $756,000 from the sale of our tax benefits which was
recognized as a tax benefit for our fiscal 2000. We will attempt to sell the
remaining balance of our tax benefits in the amount of approximately $1,172,000
between July 1, 2001 and June 30, 2002, subject to all existing laws of the
State of New Jersey. However, we may not be able to find a buyer for our tax
benefits or that such funds may not be available in a timely manner.
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. From August through October 2001, we
received gross proceeds of approximately $178,500 from the private placement of
various individual investors and $100,000 from a note payable upon demand from
an unrelated party. After taking into account these net proceeds and the
possible proceeds from the sale of the balance of our tax benefits, we believe
that our cash and cash equivalents will be sufficient to meet our anticipated
cash needs through January 2002. 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 2001. 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
discussions 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 be certain that any such alliances will materialize.
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. Since April 28, 1999, our
common stock has traded 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(R).
15
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 the 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.
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Name Age Director Since Position with the Company
------------------------------ ---- --------------- ----------------------------------------------------
Kuslima Shogen 56 1981 Chairman of the Board, Chief Executive Officer and
Acting Chief Financial Officer
Stanislaw M. Mikulski, M.D. 57 1986 Executive Vice President, Medical Director and
Director
Stephen K. Carter, M.D.(1) 63 1997 Director and Chairman of the Scientific Advisory
Board
Donald R. Conklin (1)(2) 65 1997 Director
Martin F. Stadler (1)(2) 59 1997 Director
========================================================================================================
(1) Member of Compensation Committee
(2) Member of Audit Committee
16
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.
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
17
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 and a trustee of
Fairleigh Dickenson University.
In March 1998 the SEC approved the settlement previously disclosed in our
November 1997 Proxy Statement of allegations by the SEC of violations of
Sections 13 and 16 of the Securities Exchange Act of 1934, as amended (the
Exchange Act) by Kuslima Shogen, Chairman and Chief Executive Officer and
Stanislaw Mikulski, Executive Vice President. Ms. Shogen and Dr. Mikulski agreed
to the entry of a cease and desist order and the payment of monetary penalties
totaling $40,000 (payable by us under our indemnity agreements with these
individuals) without admitting or denying any of the SEC's allegations
concerning certain allegedly late filings required to be made by them pursuant
to Sections 13 and 16 of the Exchange Act with respect to changes in beneficial
ownership of our securities. With the exception of one late filing by Ms. Shogen
in 1996, each of the allegedly unreported transactions occurred during the years
1983 to 1994. The alleged reporting violations relate solely to the filings of
required forms. There was no allegation by the SEC of any fraudulent or willful
misconduct. No action was brought against us.
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, 2001, all reports required to be filed
pursuant to Section 16(a) of the Exchange Act were filed in a timely manner,
except for Kuslima Shogen who filed two Form 4's late. One late filing by Ms.
Shogen was due to an oversight when a Form 4 was filed in connection with the
exercise of options. The options were granted earlier in the year but the option
grant was not required to be reported on Form 4. The exercise was required to be
reported and this was done in a timely manner by filing a Form 4; however, in
such Form 4, the grant of the options exercised should have been reported as
well as the exercise itself. The grant was later reported by filing a Form 4.
The other late filing was due to the failure of Ms. Shogen's brokerage firm to
inform her in a timely manner of a sale of stock held in her account, which
stock had originally been purchased by Ms. Shogen in the open market.
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 (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.
18
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, 2001, the following independent directors
listed below were granted options under our 1997 Stock Option Plan (1997 Plan)
pursuant to the same formula under the 1993 Plan as set forth above. 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 $0.82 12/30/06
Donald R. Conklin 15,000 $0.82 12/30/06
Martin F. Stadler 15,000 $0.82 12/30/06
Additionally, in April 2001 our board of directors approved the issuance of
50,000 stock options under the 1997 Plan to Martin Stadler, which vested on the
date of grant. The exercise price of the stock options was $0.90 per share which
was based on the average of the high and low trade prices of our common stock
for the ten trading days preceding the date of grant.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended July 31, 2001, the members of our Board of
Directors who served on the Compensation Committee were Stephen K. Carter,
Donald R. Conklin and Martin F. Stadler, all of whom are non-employee directors.
As more fully described under Item 13 "Certain Relationships and Related
Transactions", Messrs. Conklin and Stadler were issued convertible notes which
were converted into common stock and warrants to purchase common stock.
Summary Compensation Table
The following table provides a summary of cash and non-cash compensation for
each of the last three fiscal years ended July 31, 2001, 2000 and 1999 earned by
our Chief Executive Officer and Executive Vice President or our executive
officers during the last fiscal year.
19
Long Term
Annual Compensation Compensation
-------------------------------------------------------------------------------------------------- ----------------
Securities
Other Annual Underlying All Other
Name and Salary Bonus Compensation Options/SARs(#) Compensation
Principal Position Year ($) ($) ($)(1) ($)(2)
--------------------------------------------------------------------------------------------------------------------
Kuslima Shogen 2001 $150,000 - 0 - - 0 - 115,000 $4,154
Chief Executive 2000 150,000 - 0 - - 0 - 215,000 3,615
Officer, Chairman of 1999 150,000 - 0 - - 0 - - 0 - - 0 -
the Board of
Directors and Acting
Chief Financial
Officer
Stanislaw M. Mikulski 2001 $130,000 - 0 - - 0 - 55,000 $3,900
Executive Vice 2000 130,000 - 0 - - 0 - 130,000 3,600
President and 1999 130,000 - 0 - - 0 - - 0 - - 0 -
Medical Director
(1) Excludes perquisites and other personal benefits which in the aggregate do
not exceed 10% of our executive officers' total annual salary and bonus.
(2) Consists of our contributions to a 401(k) plan.
Option Grants in Last Fiscal Year
The following table contains information concerning the grant of stock options
to our executive officers during the fiscal year ended July 31, 2001:
==================================================================================== ===============================
Potential Realizable Value at
Assumed Annual Rates of Stock
Individual Grants Price Appreciation for Option
Term(2)
------------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options Granted Exercise or
Options to Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Share)(1) Date
-------------------------------
0%($) 5%($) 10%($)
--------------------- --------------- ----------------- -------------- ------------- -------- ---------- -----------
Kuslima Shogen 115,000(3) 32.67% $.85 (4) - $ 4,888 $ 9,775
Stanislaw M. 55,000(3) 15.63% $.85 (4) - $ 2,338 $ 4,675
Mikulski
====================================================================================================================
(1) The exercise price of these options was based on the average of the high
and low trade prices of our common stock for the twenty 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
20
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. An aggregate
23,000 options issued to Kuslima Shogen were exercised in March 2001.
(4) 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, 2001 and unexercised options held as of July 31, 2001.
=================================================== ================================ ===============================
Number of Securities Value of Unexercised
Underlying Unexercised Options In-The-Money Options
at Fiscal Year-End (#) at Fiscal Year-End($)(2)
---------------------------------------------------
Shares Value
Name Acquired on Realized Exercisable Unexercisable Exercisable Unexercisable
Exercise (#) ($) (1)
--------------------- ----------------- ----------- ------------- ------------------ ------------- -----------------
Kuslima Shogen 55,555 $12,870 780,926 261,000 $4,639 $67,525
Stanislaw M. Mikulski None None 275,563 152,000 $30,725 $43,300
====================== ================= ========== ============= ================== ============= =================
(1) Based upon the fair market value of the purchased shares on the option
exercise date less the exercise price paid for the shares.
(2) 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 ($0.89) for the common
stock obtained from the OTC Bulletin Board on the last trading day of the
fiscal year July 31, 2001.
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,
2001. Except as otherwise noted, each person has sole voting and investment
power with respect to the shares shown as beneficially owned.
Percentage of
Number of Common Stock
Directors, Officers or 5% Stockholders (1) Shares(2) Outstanding(3)
-------------------------------------------------------------- ------------ --------------
Kuslima Shogen 2,295,546(4) 11.0%
Stanislaw M. Mikulski 658,813(5) 3.3%
Stephen K. Carter 128,750(6) *
21
Percentage of
Number of Common Stock
Directors, Officers or 5% Stockholders (1) Shares(2) Outstanding(3)
-------------------------------------------------------------- ------------ --------------
Donald R. Conklin 414,250(7) 2.1%
Martin F. Stadler 441,250(8) 2.2%
All executive officers and directors as a group (five persons) 3,599,688(9) 18.1%
* Less than one percent.
(1) The address of all officers and directors listed above is in the care of
the company.
(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, 2001 by (ii) the sum of (A)
the number of shares of common stock outstanding as of September 30, 2001
plus (B) the number of shares issuable upon exercise of options or warrants
held by such stockholder which were exercisable as of September 30, 2001 or
which will become exercisable within 60 days after September 30, 2001.
(4) Includes 826,926 shares underlying options which were exercisable as of
September 30, 2001 or which will become exercisable within 60 days after
September 30, 2001 and 110,000 shares underlying warrants which were
exercisable as of September 30, 2001 or which will become exercisable
within 60 days after September 30, 2001.
(5) Includes 297,563 shares underlying options which were exercisable as of
September 30, 2001 or which will become exercisable within 60 days after
September 30, 2001.
(6) Includes 128,750 shares underlying options which were exercisable as of
September 30, 2001 or which will become exercisable within 60 days after
September 30, 2001.
(7) Includes 73,750 shares underlying options which were exercisable as of
September 30, 2001 or which will become exercisable within 60 days after
September 30, 2001 and 110,000 shares underlying warrants which were
exercisable as of September 30, 2001 or which will become exercisable
within 60 days after September 30, 2001.
(8) Includes 106,250 shares underlying options which were exercisable as of
September 30, 2001 or which will become exercisable within 60 days after
September 30, 2001 and 110,000 shares underlying warrants which were
exercisable as of September 30, 2001 or which will become exercisable
within 60 days after September 30, 2001.
(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 patents, or acquire such rights in the future,
22
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 net sales from any
products sold during the life of the patents. On April 16, 2001, this agreement
was amended and clarified to provide that Ms. Shogen would receive the 15%
royalty payment relating to licensees or the 5% fee relating to sales but not
both, unless we and a licensee both market the licensed product.
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 trading days preceding the date of grant. An
aggregate 50,000 of these options were exercised.
In April 2001, our board of directors approved the issuance of 50,000 stock
options under the 1997 Plan to Martin Stadler, which vested on the date of
grant. The exercise price of the stock options was $0.90 per share which was
based on the average of the high and low trade prices of our common stock for
the ten trading days preceding the date of grant.
In April 2001, we issued convertible notes to Kuslima Shogen, our Chief
Executive Officer and a director, two of our directors, Donald Conklin and
Martin Stadler, and unrelated parties in the aggregate amount of $366,993.
Messrs. Conklin and Stadler are members of our Compensation Committee. The notes
are due within ninety days unless the lenders elect to exercise an option to
convert their note into common stock at the conversion price of $0.90 per share.
The related parties named above have elected to convert their notes into an
aggregate 330,000 shares of common stock. In addition, upon conversion, they
received three-year warrants to purchase an aggregate 330,000 shares of common
stock at an exercise price of $2.50 per share that will expire on July 7, 2004.
The notes issued to unrelated parties with an aggregate balance of $69,993 were
renewed for one hundred twenty (120) days for the same conversion price of $0.90
per share. In addition, upon conversion, they will receive five-year warrants to
purchase an aggregate 77,770 shares of common stock at an exercise price of
$1.50 per share.
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
23
Exhibit No. or
Exhibit Incorporation
No. Item Title by Reference
----- ---------- ------------
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 ****
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 ++++
10.22 Form of Subscription Agreement and Warrant Agreement used in the August and
September 2000 Private Placements +++++
10.23 Form of Subscription Agreement and Warrant Agreement used in the April 2001
Private Placements ^
10.24 Form of Convertible Note entered into in April 2001 ^
10.25 Form of Subscription Agreement and Warrant Agreement used in the July 2001 Private
Placements ^
21.1 Subsidiaries of Registrant **
23.1 Consent of KPMG LLP #####
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.
24
*** 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.
++ 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-K
for the year ended July 31, 2000 and incorporated herein by reference
thereto.
+++++Previously filed as exhibits to the Company's Quarterly Report on Form
10-Q for the quarter ended October 31, 2000 and incorporated herein by
reference thereto.
^ Previously filed as exhibits to the Company's Registration Statement on
Form S-1 (File No. 333-38236) 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 29, 2001 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 29, 2001 /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 29, 2001 /s/ STANISLAW M. MIKULSKI
Stanislaw M. Mikulski, M.D., Executive
Vice President and Director
Dated: October 29, 2001 /s/ STEPHEN K. CARTER
Stephen K. Carter, M.D., Director
Dated: October 29, 2001 /s/ DONALD R. CONKLIN
Donald R. Conklin, Director
Dated: October 29, 2001 /s/ MARTIN F. STADLER
Martin F. Stadler, Director
26
Index
Page
Audited Financial Statements:
Independent Auditors' Report of KPMG LLP ........................... F-2
Independent Auditors' Report of Armus, Harrison & Co. .............. F-3
Balance Sheets - July 31, 2001 and 2000 ............................ F-5
Statements of Operations - Years ended July 31, 2001, 2000, and 1999
and the Period from August 24, 1981
(Date of Inception) to July 31, 2001 .......................... F-6
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 2001 .......................... F-7
Statements of Cash Flows - Years ended July 31, 2001, 2000, and 1999
and Period from August 24, 1981
(Date of Inception) to July 31, 2001 .......................... F-12
Notesto Financial Statements - Years ended July 31, 2001, 2000 and
1999 and the Period from August 24, 1981
(Date of Inception) to July 31, 2001 .......................... 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, 2001 and 2000, 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, 2001 and the period
from August 24, 1981 (date of inception) to July 31, 2001. 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 for the period from
August 24, 1981 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 to July 31, 2001 of the amounts for the period from August 24,
1981 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 as of July 31, 2001 and 2000, and the results
of its operations and its cash flows for each of the years in the three-year
period ended July 31, 2001 and the period from August 24, 1981 to July 31, 2001
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
Short Hills, New Jersey
October 12, 2001
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
liability 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 to the
Notes of 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.
/s/ Armus, Harrison & Co.
-------------------------
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, 2001 and 2000
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 44,781 $ 257,445
Other assets 42,933 28,617
------------ ------------
Total current assets 87,714 286,062
Property and equipment, net of accumulated depreciation and
amortization of $1,081,423 in 2001 and $1,006,808 in 2000 67,555 142,170
Other assets 46,340 59,867
------------ ------------
Total assets $ 201,609 $ 488,099
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 7,057 $ 7,074
Note payable - convertible debt - unrelated party, less debt
discount of $34,511 35,482 --
Accounts payable 409,972 170,788
Accrued expenses 465,813 411,846
------------ ------------
Total current liabilities 918,324 589,708
Long-term debt, less current portion 23,663 30,251
------------ ------------
Total liabilities 941,987 619,959
------------ ------------
Stockholders' deficiency:
Preferred stock, $.001 par value. Authorized and unissued,
1,000,000 shares at July 31, 2001 and 2000 -- --
Common stock $.001 par value. Authorized 40,000,000 shares;
issued and outstanding 19,802,245 shares and 18,431,559
shares at July 31, 2001 and 2000, respectively 19,802 18,431
Capital in excess of par value 58,211,335 56,526,288
Deficit accumulated during development stage (58,971,515) (56,676,579)
------------ ------------
Total stockholders' deficiency (740,378) (131,860)
------------ ------------
Total liabilities and stockholders' deficiency $ 201,609 $ 488,099
============ ============
See accompanying notes to financial statements.
F-5
Statements of Operations
Years ended July 31, 2001, 2000 and 1999,
and the Period from August 24, 1981
(Date of Inception) to July 31, 2001
August 24, 1981
(date of
inception)
to July 31, 2001 2001 2000 1999
------------ ----------- ----------- ----------
Revenues:
Sales $ 553,489 -- -- --
Investment income 1,372,285 13,121 51,144 168,372
Other income 60,103 -- -- --
------------ ----------- ----------- ----------
1,985,877 13,121 51,144 168,372
------------ ----------- ----------- ----------
Cost and expenses:
Cost of sales 336,495 -- -- --
Research and development 37,869,035 1,900,678 1,879,728 2,401,945
General and administrative 20,865,393 705,745 644,588 920,686
Interest:
Related parties 1,142,860 108,900 -- --
Others 1,950,858 44,129 4,980 2,377
------------ ----------- ----------- ----------
62,164,641 2,759,452 2,529,296 3,325,008
------------ ----------- ----------- ----------
Net loss before state tax benefit $(60,178,764) (2,746,331) (2,478,152) (3,156,636)
State tax benefit 1,207,249 451,395 755,854 --
------------ ----------- ----------- ----------
Net loss $(58,971,515) (2,294,936) (1,722,298) (3,156,636)
============ =========== =========== ==========
Loss per basic and diluted common share $ (0.12) $ (0.10) $ (0.18)
=========== =========== ==========
Weighted average number of shares outstanding 18,927,000 17,812,000 17,271,000
=========== =========== ==========
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, 2001
Common Stock
----------------------
Deficit
Accumulated
Capital In Common During
Number Excess of par Stock to Development
of Shares Amount Value be 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 service 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 Total
compensation, Stockholders'
Subscription restricted 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 service -- -- 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)
Period from August 24, 1981
(Date of Inception) to July 31, 2001
Common Stock
----------------------
Deficit
Accumulated
Capital In Common During
Number Excess of par Stock to Development
of Shares Amount Value be 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)
Deferred Total
compensation, Stockholders'
Subscription restricted 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)
Period from August 24, 1981
(Date of Inception) to July 31, 2001
Common Stock
----------------------
Deficit
Accumulated
Capital In Common During
Number Excess of par Stock to Development
of Shares Amount Value be 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 Total
compensation, Stockholders'
Subscription restricted 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)
F-9
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 2001
Common Stock
----------------------
Deficit
Accumulated
Capital In Common During
Number Excess of par Stock to Development
of Shares Amount Value be 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 Total
compensation, Stockholders'
Subscription restricted 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)
Period from August 24, 1981
(Date of Inception) to July 31, 2001
Common Stock
----------------------
Deficit
Accumulated
Capital In Common During
Number Excess of par Stock to Development
of Shares Amount Value be 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 - $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)
Sale of shares to private investors, net 863,331 863 955,561 -- --
Exercise of options at $0.29 - $0.85 per share 165,555 166 83,565 -- --
Issuance of shares for services, net 11,800 12 10,018 -- --
Exercise of convertible debentures at $0.90 per share 330,000 330 296,670 -- --
Issuance of warrants with convertible debt -- -- 178,807 -- --
Issuance of options for services -- -- 160,426 -- --
Net loss -- -- -- -- (2,294,936)
----------- -------- ------------ --------- ------------
Balance at July 31, 2001 19,802,245 $ 19,802 $ 58,211,335 $ -- $(58,971,515)
=========== ======== ============ ========= ============
Deferred Total
compensation, Stockholders'
Subscription restricted 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 - $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)
Sale of shares to private investors, net -- -- 956,424
Exercise of options at $0.29 - $0.85 per share -- -- 83,731
Issuance of shares for services, net -- -- 10,030
Exercise of convertible debentures at $0.90 per share -- -- 297,000
Issuance of warrants with convertible debt -- -- 178,807
Issuance of options for services -- -- 160,426
Net loss -- -- (2,294,936)
----------- ----------- -----------
Balance at July 31, 2001 $ -- $ -- $ (740,378)
=========== =========== ===========
See accompanying notes to financial statements.
F-11
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows
Years ended July 31, 2001, 2000 and 1999,
and the Period from August 24, 1981
(Date of Inception) to July 31, 2001
August 24, 1981
(date of
inception) to
July 31,
2001 2001 2000 1999
------------ ----------- ----------- -----------
Cash flows from operating activities:
Net loss $(58,971,515) $(2,294,936) $(1,722,298) $(3,156,636)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on sale of marketable securities (25,963) -- -- --
Depreciation and amortization 1,492,458 74,615 93,748 101,231
Loss on disposal of property and equipment 18,926 -- -- --
Noncash operating expenses 5,824,106 304,722 146,912 208,053
Amortization of deferred compensation 11,442,000 -- -- --
Amortization of organization costs 4,590 -- -- --
Changes in assets and liabilities:
(Increase) decrease in other current assets (102,800) (14,316) 58,224 (29,521)
Decrease in other assets 49,711 13,527 -- --
Increase in loans and interest payable, related party 744,539 -- -- --
Increase (decrease) in accounts payable 706,082 249,214 76,901 (513,338)
Increase in accrued payroll and expenses, related parties 2,348,145 -- -- --
Increase (decrease) in accrued expenses 1,007,326 53,967 (366,804) (314,248)
------------ ----------- ----------- -----------
Net cash used in operating activities (35,462,395) (1,613,207) (1,713,317) (3,704,459)
------------ ----------- ----------- -----------
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) --
Patent costs (97,841) -- -- --
------------ ----------- ----------- -----------
Net cash used in investing activities (1,478,714) -- (37,575) --
------------ ----------- ----------- -----------
F-12
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24, 1981
(date of
inception) to
July 31,
2001 2001 2000 1999
------------ ----------- ----------- -----------
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 (2,935,848) (6,605) (10,515) (9,175)
Proceeds from issuance of common stock, net 28,310,163 956,424 548,292 (2,686)
Proceeds from exercise of stock options and warrants, net 5,590,254 83,731 45,850 --
Proceeds from issuance of convertible debentures, related party 297,000 297,000 -- --
Proceeds from issuance of convertible debentures, unrelated party 416,993 69,993 -- --
------------ ----------- ----------- -----------
Net cash provided by financing activities 36,985,890 1,400,543 625,204 (11,861)
------------ ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 44,781 (212,664) (1,125,688) (3,716,320)
Cash and cash equivalents at beginning of period -- 257,445 1,383,133 5,099,453
------------ ----------- ----------- -----------
Cash and cash equivalents at end of period $ 44,781 $ 44,781 $ 257,445 $ 1,383,133
============ =========== =========== ===========
Supplemental disclosure of cash flow information - interest paid $ 1,662,446 $ 8,733 $ 4,980 $ 2,378
============ =========== =========== ===========
Noncash financing activities:
Issuance of convertible subordinated debenture for
loan payable $ 2,725,000 $ -- $ -- $ --
============ =========== =========== ===========
Issuance of common stock upon the conversion of convertible
subordinated debentures, related party $ 3,242,000 $ 297,000 $ -- $ --
============ =========== =========== ===========
Conversion of short-term borrowings to common stock $ 226,000 $ -- $ -- $ --
============ =========== =========== ===========
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 $ -- $ -- $ --
============ =========== =========== ===========
Conversions of accounts payable to common stock $ 296,200 $ 10,030 $ 92,184 $ 16,631
============ =========== =========== ===========
Conversion of notes payable, bank and accrued interest to
long-term debt $ 1,699,072 $ -- $ -- $ --
============ =========== =========== ===========
F-13
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
August 24, 1981
(date of
inception) to
July 31,
2001 2001 2000 1999
------------ ----------- ----------- -----------
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 $ 2,460 $ -- $ -- $ 2,460
============ =========== =========== ===========
See accompanying notes to financial statements.
F-14
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements
Years ended July 31, 2001, 2000 and 1999
and the Period From August 24, 1981
(Date of Inception) to July 31, 2001
(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.
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.
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. The debt has been issued at
rates which represent prevailing market rates for similar financings.
F-15
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (Continued)
Comprehensive Income (Loss)
The net loss of $2,295,000, $1,722,000 and $3,157,000, recorded for the
years ended July 31, 2001, 2000 and 1999, respectively, is equal to the
comprehensive loss for those periods in accordance with Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income.
Earnings (Loss) 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
Company is in a loss position and the assumed exercise of stock options and
warrants would be all anti-dilutive. The number of outstanding options and
warrants that could dilute earnings per share in future periods was
6,445,748, 6,156,195 and 5,894,875 at July 31, 2001, 2000 and 1999,
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
Stock based compensation is recognized using the intrinsic value method.
For disclosure purposes, proforma net income (loss) and net income (loss)
per share data are provided in accordance with Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" as if the fair
value method had been applied.
The Company records compensation expense equal to the value of stock
options granted for consulting services rendered to the Company by
non-employees. The value of the options granted to non-employees is
determined by the Black Scholes option pricing model.
(2) Liquidity
The Company has reported net losses of $2,295,000, $1,722,000, and
$3,157,000 for the fiscal years ended July 31, 2001, 2000 and 1999,
respectively. The loss from date of inception, August 24, 1981, to July 31,
2001 amounts to $58,971,000. 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.
F-16
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(2) Liquidity, (Continued)
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.
From August through October 4, 2001, the Company received gross proceeds of
approximately $178,500 from the private placement of various individual
investors and $100,000 note payable upon demand from an unrelated party. No
assurances can be provided that the additional capital will be sufficient
to meet the Company's needs.
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. Therefore, the
Company expanded its ongoing clinical trial internationally. 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.
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:
2001 2000
--------- ------
Laboratory equipment $ 755,040 755,040
Office equipment 296,105 296,105
Leasehold improvements 97,833 97,833
---------- ---------
Total 1,148,978 1,148,978
Less accumulated depreciation 1,081,423 1,006,808
---------- ---------
Property and equipment, net $ 67,555 142,170
========== =========
F-17
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(4) Long-term Debt
Long-term debt consists of the following at July 31:
2001 2000
------- -------
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 $30,720 $37,325
Less current portion 7,057 7,074
------- -------
$23,663 $30,251
======= =======
(5) Note Payable - Convertible Note
In April 2001, the Company entered into convertible notes payable with
certain related and unrelated parties in the aggregate amount of $366,993.
The notes were due within ninety (90) unless the lenders elect to exercise
an option to convert the note into Alfacell common stock, par value $.001
per share at a conversion price of $0.90 per share (the estimated fair
market value of the stock based on the average of the high and low trade
prices of the Company's common stock for the ten (10) trading days
preceding the loan date). In addition, upon conversion, the lender would
receive a three-year warrant for each share of converted Alfacell common
stock at an exercise price of $2.50 per share that will expire on July 7,
2004. The estimated value of the warrants of $133,793, using the
Black-Scholes options-pricing model, was recorded as interest expense over
the ninety day note term. In July 2001, an aggregate of $297,000 note
payables were converted which resulted in the issuance of 330,000 shares of
the Company's common stock. In addition, upon conversion, the Company
issued the agreed to three-year warrants to purchase an aggregate of
330,000 shares of common stock at an exercise price of $2.50 per share. An
aggregate balance of the convertible notes in the amount of $69,993 was
renewed for one hundred twenty (120) days for the same conversion price of
$0.90 per share. In addition, upon conversion, the lender would receive a
five-year warrant for each share of converted Alfacell common stock at an
exercise price of $1.50 per share. The estimated value of the warrants of
$45,000, using the Black-Scholes options-pricing model, was treated as a
debt discount which will accrete as interest expense over the one hundred
twenty day note term through October 31, 2001.
(6) Leases
The Company leases its facility under a five-year operating lease which is
due to expire on December 31, 2001 and will be negotiating a new lease
agreement under similar terms. 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 $136,000, $127,000, and
$108,000 in 2001, 2000 and 1999, respectively.
Future minimum lease payments under noncancellable leases for the next year
ending July 31 are as follows:
Operating leases
2002 56,667
F-18
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) 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.
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.
F-19
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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.
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.
F-20
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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.
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.
F-21
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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 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.
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 2000.
F-22
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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. The options expired during the fiscal year ended July 31,
2001.
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. Of these options, an aggregate total of
1,666 expired in September and October 2001.
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(R) in the United States. The Company recorded
research and development expense of $326,500 which was the fair value on
the date of issuance of that portion of the stock options that had vested
as of July 31, 2001.
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.
F-23
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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, 2001, the Company
recorded general and administrative expense of $162,500, 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.
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.
F-24
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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 May 2001, the expiration date of these warrants was
extended from May 19, 2001 to August 17, 2001. The warrants expired on
August 17, 2001.
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, 2001, the Company recorded general and administrative expense of
$109,300, 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.
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. These options expired in August 2000.
F-25
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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 was 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. These options
expired three years after it vested.
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 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.
F-26
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Stockholders' Equity, (Continued)
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.
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.
During the fiscal year ended July 31, 2001, the Company issued 11,800
shares of common stock for payment of services rendered. The fair value of
the common stock in the amount of $10,030 was charged to operations.
During the fiscal year ended July 31, 2001, the Company sold an aggregate
of 863,331 shares of common stock to private investors at prices ranging
from $0.90 to $1.50 per share resulting in net proceeds of $956,000 to the
Company. In addition, the private investors were granted warrants to
purchase an aggregate of 696,665 shares of common stock at per share
exercise prices ranging from $1.50 to $3.00. The warrants will expire
during the period commencing July 2004 and ending in October 2006.
During the fiscal year ended July 31, 2001, the Company issued 165,555
shares of common stock upon the exercise of stock options by related
parties which resulted in gross proceeds of $83,700 to the Company. The per
share exercise prices of the options ranged from $0.29 to $0.85.
During the fiscal year ended July 31, 2001, the Company issued 50,000
five-year stock options to a director as payment for non-board related
services. These options vested immediately and have an exercise price of
$0.90 per share. The Company recorded general and administrative expense of
$31,600 which was the fair market value of the options, using the
Black-Scholes options-pricing model, on the date of issuance. In addition,
the director will receive a contingent award of 50,000 shares of the
Company's common stock should the Company complete a strategic partnership
or receive an investment from the prospective partner or its affiliates.
During the fiscal year ended July 31, 2001, the Company issued 330,000
shares of common stock upon the conversion of convertible notes from
related parties. In addition, upon conversion, the related parties were
granted three-year warrants to purchase an aggregate of 330,000 shares of
common stock at an exercise price of $2.50 per share. The estimated value
of these warrants in the amount of $108,900 was recorded by the Company as
interest expense during the fiscal year ended July 31, 2001.
(8) 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 2001:
F-27
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Common Stock Warrants, (Continued)
----------------------------------
Warrants Exercise 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
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 8/17/01
Issued to the Placement Agent in connection with
the February 1998 Private placement (see note 7) 350,574 2.20 - 2.50 8/17/01
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 8/17/01
Expired 55,945 4.00 10/1/98
------
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
Sold in various private placements 696,665 1.50 - 3.00 7/07/04 to 10/30/06
Issued to related parties upon conversion of note
payable 330,000 2.50 7/07/04
-------
Outstanding at July 31, 2001 3,415,864 1.03 - 4.55 8/17/01 to 10/30/06
========= ===========
F-28
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) 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, 2001:
Shares Available Number of Weighted Average Exercise
for Grant Shares Price Per Share
---------- ---------- ---------------
Balance August 1, 1994 1,926,841 5,935,337 $ 3.76
Granted (818,850) 818,850 2.60
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
Granted (447,000) 447,000 0.85
Exercised -- (165,555) 0.51
Canceled 774,315 (1,018,557) 3.42
--------- ---------- --------
Balance July 31, 2001 2,215,042 3,029,884 2.24
========== ========== ========
F-29
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Options, (Continued)
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 certain milestones, 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. No
compensation expense was issued in 2000 and 2001. An aggregate 50,000
options issued to the Company's outside board of directors were exercised
during the fiscal year 2001. The options outstanding at July 31, 2001 will
expire between August 1, 2001 and August 21, 2009.
The weighted-average fair value per option at the date of grant for options
granted during the fiscal years 2001, 2000 and 1999 were $0.74, $0.45 and
$0.36, respectively. The fair value was estimated using the Black-Scholes
options pricing model based on the following assumptions:
2001 2000 1999
------ ------ ------
Expected dividend yield 0% 0% 0%
Risk-free interest rate 5.50% 6.00% 6.00%
Expected stock price volatility 104.25% 114.50% 93.99%
Expected term until exercise (years) 6.00 6.37 5.59
Pro forma net loss and loss per share reflecting approximate compensation cost
for the fair value of stock options awarded are as follows:
2001 2000 1999
------------- ------------- -------------
Net Loss:
As reported $ (2,294,936) $ (1,722,298) $ (3,156,636)
Pro forma (2,522,656) (1,956,667) (3,429,057)
Loss per common share:
As reported $ (0.12) $ (0.10) $ (0.18)
Pro forma (0.13) (0.11) (0.20)
The following table summarizes information concerning options outstanding at
July 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------- --------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Term (Years) Price Shares Price
--------------- --------- ----------- ----- --------- -----
$0.00 - 1.99 1,404,445 5.66 $0.62 528,645 $0.61
2.00 - 2.99 96,550 5.14 2.73 41,550 2.80
3.00 - 3.99 1,132,794 1.57 3.20 1,097,794 3.19
4.00 - 4.99 183,595 1.78 4.60 183,595 4.60
5.00 - 5.99 167,500 3.38 5.17 117,500 5.16
6.00 - 6.99 45,000 1.42 6.97 45,000 6.97
=============== --------- ==== ===== --------- =====
3,029,884 2,014,084
========= =========
F-30
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Options, (Continued)
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:
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 and extended 894,887 $2.50-7.00
as described in note 9)
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
======== ==========
All of the above options are expired as of July 31, 2001.
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.
F-31
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Options, (Continued)
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
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.
(10) 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 ended Fair Amount 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 ended Fair Amount 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.
F-32
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 2001, 2000 or 1999.
(11) 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. For the state fiscal year 2001 (July
1, 2000 to June 30, 2001), the Company had $1,774,000 total available tax
benefits of which $602,000 was allocated to be sold between July 1, 2000 to
June 30, 2001. In December 2000, the Company received $451,000 from the
sale of an aggregate of $602,000 tax benefits which was recognized as a tax
benefit for the fiscal year 2001. In December 1999, the Company received
$756,000 from the sale of its allocated tax benefits which was recognized
as a tax benefit for the fiscal year 2000. The Company will attempt to sell
the remaining balance of its tax benefits in the amount of approximately
$1,172,000 between July 1, 2001 and June 30, 2002, 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.
F-33
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(11) Income Taxes, (Continued)
At July 31, 2001 and 2000, the tax effects of temporary differences that
give rise to the deferred tax assets are as follows:
2001 2000
------------ ------------
Deferred tax assets:
Excess of book over tax depreciation
and amortization $ 83,946 $ 72,248
Accrued expenses 131,098 171,916
Federal and state net operating
loss carryforwards 14,666,868 14,838,624
Research and experimentation and
investment tax credit carry forwards 1,203,536 922,785
------------ ------------
Total gross deferred tax assets 16,085,448 16,005,573
Valuation allowance (16,085,448) (16,005,573)
------------ ------------
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. The tax
benefit assumed using the federal statutory tax rate of 34% has been
reduced to an actual benefit of zero due principally to the aforementioned
valuation allowance.
At July 31, 2001, the Company has federal net operating loss carryforwards
of approximately $40,185,440 that expire in the years 2002 to 2021. The
Company also has investment tax credit carryforwards of $17,719 and
research and experimentation tax credit carryforwards of $913,149 that
expire in the years 2002 to 2021. 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.
(12) Other Financial Information
Accrued expenses as of July 31, consist of the following:
2001 2000
-------- --------
Payroll and payroll taxes $ 43,876 $ 34,926
Professional fees 50,690 51,007
Clinical trial grants 327,745 308,070
Other 43,502 17,844
-------- --------
$465,813 $411,847
======== ========
Other current assets as of July 31, consist of the following:
2001 2000
------- -------
Prepaid insurance $35,380 $15,963
Other 7,553 12,654
------- -------
$42,933 $28,617
======= =======
F-34
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(13) Commitments and Contingencies
On July 23, 1991, the Board of Directors authorized the Company to pay
Kuslima Shogen 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(R), 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 patents. If the Company manufactures and markets its
own drugs, then the Company will pay an amount equal to 5% of net sales
from any products sold during the life of the patents. On April 16, 2001,
this agreement was amended and clarified to provide that Ms. Shogen would
receive the 15% royalty payment relating to licensees or the 5% fee
relating to sales but not both, unless the Company and the licensee both
market the licensed product.
The Company has product liability insurance coverage in the amount of
$6,000,000 for clinical trials in the U.S. Additionally, the Company also
maintains product liability insurance in Europe in the amount of
DM20,000,000. 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.
(14) Research and Development Agreement
In November 1992, the Company entered into a CRADA with the NIH. In
accordance with this CRADA, the NIH performed 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
year ended July 31, 1999.
In August 1995, the Company entered into a CRADA with the NCI. In
accordance with this CRADA, the NCI performed 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 and $62,400 for the fiscal years ended July 31, 2000 and 1999,
respectively.
(15) 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, 2001, 2000 and 1999, the Company's contribution to the Plan amounted to
$23,826, $21,714 and $16,052, respectively.
F-35
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(16) Quarterly Financial Data (Unaudited)
(In thousands, except per share amounts)
2001 2000
First Second Third Fourth Totals First Second Third Fourth Totals
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Interest
income $3.8 $3.0 $1.5 $4.8 $13.1 $15.0 $11.3 $13.0 $11.8 $51.1
Operating loss (511.9) (688.4) (762.2) (783.8) (2,746.3) (714.2) (731.5) (728.2) (304.2) (2,478.1)
-----------------------------------------------------------------------------------------------------------------------------------
Net income
(loss) (60.5) (688.4) (762.2) (783.8) (2,294.9) (714.2) 24.3 (728.2) (304.2) (1,722.3)
Loss per
share - basic
and diluted $0.00 $(0.04) $(0.04) $(0.04) $(0.12) $(0.04) $0.00 $(0.04) $(0.02) $(0.10)
F-36