U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
July 31, 1996 0-11088
For the fiscal year ended Commission file number
ALFACELL CORPORATION
(Name of small business issuer 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)
Issuer's telephone number: (201) 748-8082
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
[X] Issuer's revenues for the fiscal year ended July 31, 1996 were $184,250.
The aggregate market value of the Common Stock, par value $.001 per
share, held by non-affiliates based upon the average of the bid and asked prices
as reported by the National Quotation Bureau on September 23, 1996 was
$57,295,203. As of September 23, 1996 there were 14,446,193 shares of Common
Stock, par value $.001 per share, outstanding.
The Index to Exhibits appears on page 12.
Documents Incorporated by Reference
The registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on November 21, 1996, to be filed with the
Commission not later than 120 days after the close of the registrant's fiscal
year, has been incorporated by reference, in whole or in part, into Part III,
Items 9, 10, 11 and 12 of this Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format: Yes No X
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Table of Contents
PART I Page
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security
Holders 7
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters 7
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 7. Financial Statements 10
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 10
PART III
Item 9. Directors and Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act 10
Item 10. Executive Compensation 10
Item 11. Security Ownership of Certain Beneficial Owners
and Management 10
Item 12. Certain Relationships and Related Transactions 10
Item 13. Exhibits and Reports on Form 8-K 11
The following trademarks appear in this Annual Report: ONCONASE(registered
trademark) is a registered trademark of Alfacell Corporation; Gemzar(registered
trademark) is a registered trademark of Eli Lilly & Co.
(i)
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Part I
Item 1. BUSINESS.
Overview
Alfacell Corporation ("Alfacell" or the "Company") is a biopharmaceutical
company organized in 1981 to engage in the discovery, investigation and
development of a new class of anti-cancer drugs isolated from leopard frog eggs
and early embryos. The Company's first product under development is
ONCONASE(registered trademark) which targets solid tumors, most of which are
known to ultimately become resistant to other chemotherapeutic drugs. To date,
the most significant clinical results with ONCONASE have been observed in
advanced pancreatic, non-small cell lung, malignant mesothelioma and metastatic
breast cancer. According to the American Cancer Society in 1996, approximately
388,000 people in the United States will be diagnosed with lung, breast and
pancreatic cancer and approximately 231,000 will die.
ONCONASE has been used to treat patients with advanced stages of pancreatic,
non-small cell lung, malignant mesothelioma and metastatic breast cancer on a
weekly basis. Encouraging results have been observed in Phase I and II clinical
trials in patients with these tumor types, warranting further trials, some of
which are underway. Side effects associated with ONCONASE have been modest, are
primarily renal and are reversible upon reduction of dose, or temporary or
permanent discontinuation of treatment. Patients treated with ONCONASE have
shown no evidence of myelosuppression (bone marrow suppression), alopecia (hair
loss) or other severe toxicities frequently observed after treatment with most
other chemotherapeutic drugs. In November 1995, Alfacell began a randomized
multi-center Phase III clinical trial to test the combination of ONCONASE and
tamoxifen versus 5-fluorouracil ("5-FU") in approximately 200 patients with
advanced pancreatic cancer. A subsequent Phase III clinical trial was initiated
in August 1996, to compare ONCONASE and tamoxifen with Gemzar(registered
trademark), a Food and Drug Administration ("FDA") approved drug for pancreatic
cancer, in approximately 100 patients.
The Company believes that ONCONASE may also be used as an anti-viral agent. The
National Institutes of Health ("NIH") has performed an independent in vitro
screen of ONCONASE against the HIV virus type 1 ("HIV virus"). The results
showed ONCONASE to inhibit replication of the HIV virus 99.9% after a four day
incubation period at concentrations not toxic to uninfected H9 leukemic cells.
In addition, in vitro findings by NIH scientists revealed that ONCONASE
significantly inhibited production of the HIV virus in several persistently
infected human cell lines, preferentially degrading viral RNA while not
affecting normal cellular ribosomal RNA and messenger RNAs. Although the Company
plans to conduct further research concerning ONCONASE's anti-viral activity,
there can be no assurance that ONCONASE will show any level of anti-HIV activity
in humans.
Beyond the development of ONCONASE, Alfacell has also discovered a series of
biologically active proteins from the same natural source from which ONCONASE
was discovered. These proteins appear to be involved in the regulation of both
early embryonic and malignant cell growth. However, significant additional
research will be required in order to develop them into therapeutics. ONCONASE
is a novel compound and represents a new class of therapeutic compounds whose
mechanism of action may be important in treating resistant solid tumors, as well
as potentially having anti-viral applications. There can be no assurance that
development of these proteins into effective and approvable therapeutics will be
accomplished.
Information contained herein contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions
of strategy. No
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assurance can be given that the future results covered by the forward-looking
statements will be achieved. The matters set forth in Exhibit 99.1 hereto
constitute cautionary statements identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results indicated
in such forward-looking statements. Other factors could also cause actual
results to vary materially from the future results indicated in such
forward-looking statements.
ONCONASE(registered trademark)
Originally, the Company developed an unpurified biological extract from early
stage leopard frog embryos and eggs. This extract was found to possess a unique
bioactive profile. In 1987, the Company isolated a specific protein, P-30
Protein, (herein referred to by its registered trade name ONCONASE). Based upon
the complete amino acid sequence analysis (comparison of the amino acid sequence
of ONCONASE with that of over 10,000 protein sequences registered with the
National Biomedical Research Foundation Protein Identification Resource,
Georgetown University, Washington, DC), it has been established that ONCONASE
has a novel structure. It has also been determined that, thus far, ONCONASE is
the smallest protein belonging to the superfamily of pancreatic ribonucleases.
Postulated Mechanism of Action
Although the full mechanism of ONCONASE's anti-tumor activity has not been fully
delineated, the following processes have been identified experimentally:
Binding of ONCONASE to cell surface receptors followed by:
. Cellular internalization;
. Ribonucleolytic degradation of RNAs;
. Inhibition of protein synthesis;
. Inhibition of the cell growth; and
. Cell death.
Pre-clinical and clinical data to date have shown that ONCONASE has the capacity
to enter chemotherapy resistant cells, overcomes multiple drug resistance
("MDR") and other mechanisms of drug resistance, and is synergistic with many
other chemotherapies against numerous tumor cell lines.
Clinical Trials
ONCONASE was tested as a single agent in patients with a variety of solid tumors
and in combination with tamoxifen in advanced pancreatic patients. In vitro
results showed ONCONASE to be synergistic with tamoxifen in inhibiting
pancreatic carcinoma tumor cell growth.
Reported toxicities in Phase I and II clinical trials, were primarily renal,
dose-related and reversible. There has been no evidence of myelosuppression
(bone marrow suppression), alopecia (hair loss) or other severe toxicities
frequently observed after treatment with most other chemotherapeutic drugs.
Alfacell has two on-going Phase III clinical trials in advanced pancreatic
cancer patients. The Company began a randomized
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multi-center Phase III clinical trial in November 1995. In May 1996, the FDA
approved Gemzar for the treatment of advanced pancreatic cancer; therefore, in
August 1996 the Company broadened the criteria for inclusion in its study to
include patients previously treated with Gemzar. The trial is designed to
compare the survival and quality of life of patients treated with the
combination of ONCONASE and tamoxifen versus 5- fluorouracil (5-FU), an FDA
approved chemotherapy. Additionally, Alfacell initiated a new Phase III
multicenter clinical trial in August 1996, comparing ONCONASE plus tamoxifen
with Gemzar in newly diagnosed pancreatic patients.
ONCONASE is being tested in a Phase II clinical trial for malignant
mesothelioma. No standard therapy exists to treat this deadly cancer, and most
advanced malignant mesothelioma patients die of progressive disease within 6-12
months of diagnosis. Results to date have been encouraging; however, there can
be no assurance that previous clinical trial results will be reflective of
future clinical results or will be sufficient to obtain FDA approval.
Research and Development
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Research and development expenses for the fiscal years ended July 31, 1996,
1995, and 1994 were $2,188,890, $1,205,523 and $1,114,455, respectively. During
fiscal 1996, the Company's research and development efforts were focused on
manufacturing ONCONASE under cGMP conditions ("current Good Manufacturing
Practices") for the Phase III clinical trials, commencing the Phase III clinical
trial in advanced pancreatic cancer and monitoring on-going activity of the
Phase II clinical trial in malignant mesothelioma.
The Company has a Cooperative Research and Development Agreement ("CRADA") with
the NIH. Areas of research include studies of anti-HIV activity; the study of
the mechanism of action of ONCONASE at the cellular and subcellular levels;
tests of the anti-tumor activities of ONCONASE conjugates; ONCONASE gene therapy
and investigation of anti-tumor activity of ONCONASE against primary brain
tumors.
The Company also has a CRADA with the National Cancer Institute's ("NCI")
Biological Response Modifier and Developmental Therapeutics Programs. Areas of
research include characterization of the inhibition of tumor cell growth by
ONCONASE in animal models and in vitro and in vivo studies of chemical
conjugates of ONCONASE with anti-tumor antibodies.
Management of the Company believes it has discovered a family of proteins from
the same source as ONCONASE which plays a role in cell maturation and cell
proliferation and may play a role in developing other treatments for cancer. At
present, the Company is defining a number of active proteins from the natural
source material, in addition to ONCONASE, which may exhibit cytotoxic,
cytostatic, and other pharmacological effects.
Raw Materials
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The major active ingredient in the original extract derived from early stage
leopard frog embryos and eggs is the protein, ONCONASE. Although Alfacell
currently acquires its natural source material from a single supplier,
management believes that it is abundantly available from other sources. In
addition, the Company is conducting research concerning the alternative of
manufacturing ONCONASE through recombinant technology. However, there can be no
assurance that alternative manufacturing methods will be viable.
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Manufacturing
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The Company has signed an agreement with Scientific Protein Laboratories
("SPL"), a subsidiary of a division of American Home Products Corp., which will
perform the intermediary manufacturing process which entails purifying ONCONASE.
Subsequently, the intermediate product is sent to a contract filler for the
final manufacturing step and vial filling. Other than these arrangements, no
specific arrangements have been made for the manufacture of the Company's
product. Compliance with cGMP is a requirement for product manufactured for use
in Phase III clinical trials and for commercial sale. Both SPL, and the contract
filler to whom the intermediate product is sent for the final manufacturing step
and vial filling, manufacture in accordance with cGMP. For the foreseeable
future, the Company intends to rely on these manufacturers, or substitute
manufacturers, if necessary, to manufacture its product. If the Company were to
establish a manufacturing facility, which it currently does not intend to do,
the Company would require substantial additional funds and would be required to
hire and retain significant additional personnel to comply with the extensive
cGMP regulations of the FDA applicable to such a facility. No assurance can be
given that the Company would be able to make the transition successfully to
commercial production, if it chose, or were required, to do so.
Marketing
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Neither the Company nor any of its officers or employees has pharmaceutical
marketing experience. If the Company were to market its products itself,
significant additional expenditures and management resources would be required
to develop an internal sales force and there can be no assurance that the
Company would be successful in penetrating the markets for any products
developed or that internal marketing capabilities would be developed at all. The
Company intends, in some instances, to enter into development and marketing
agreements with third parties. The Company expects that under such arrangements
it would act as a comarketing partner or would grant exclusive marketing rights
to its corporate partners in return for up-front fees, milestone payments and
royalties on sales. Under these agreements, the Company's marketing partner may
have the responsibility for a significant portion of development of the product
and regulatory approval. In the event that the marketing partner fails to
develop a marketable product or fails to market a product successfully, the
Company's business may be adversely affected.
Government Regulation
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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 agencies are required in most foreign countries.
The FDA has established mandatory procedures and safety standards which apply to
the clinical testing, manufacture and marketing of pharmaceutical products.
Obtaining FDA approval for a new therapeutic may take many years and involve
substantial expenditures. Pharmaceutical manufacturing facilities are also
regulated by state, local and other authorities.
As an initial step in the FDA regulatory approval process, pre-clinical studies
are conducted in animal models to assess the drug's efficacy and to identify
potential safety problems. The results of these studies are submitted to the FDA
as a part of the Investigational New Drug Application ("IND"), which is filed to
obtain approval to begin human clinical testing. The human clinical testing
program may involve up to three phases. Data from human trials are submitted to
the FDA in a New Drug Application ("NDA") or Product License Application
("PLA"). Preparing an NDA or PLA involves considerable data collection,
verification and analysis.
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The Company has not received FDA or other marketing approval for any products.
Difficulties or unanticipated costs may be encountered by the Company in its
effort to secure necessary governmental approvals, which could delay or preclude
the Company from marketing its products. There can be no assurance that any of
the Company's products will be approved by the FDA or any foreign country.
With respect to patented products, delays imposed by the governmental approval
process may materially reduce the period during which the Company may have the
exclusive right to exploit them. See --"Patents."
Patents
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The Company believes it is important to develop new technology and improve its
existing technology. When appropriate, the Company files patent applications to
protect such inventions.
The Company owns four U.S. Patents:
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a) U.S. Patent No. 4,888,172 issued in 1989, which covers pharmaceuticals
derived from an amphibian source;
b) U.S. Patent No. 5,559,212 issued in 1996, which covers ONCONASE; and
c) U.S. Patents Nos. 5,529,775 and 5,540,925 issued in 1996, which cover
combinations of ONCONASE with certain other chemotherapeutics.
The Company owns U.S. Patent No. 4,882,421, which has now been disclaimed and
is therefore legally unenforceable. This disclaimer permitted the Company to
obtain U.S. Patents Nos. 5,529,775, 5,540,925 and 5,559,212.
The Company also owns two European patents. These European patents cover
ONCONASE, process technology for making ONCONASE, and combinations of ONCONASE
with certain other chemotherapeutics. The Company also owns other patent
applications, which are pending in the United States, Europe, and Japan. The
Company owns an undivided interest in each of two applications that are pending
in the United States. Each application relates to a Subject Invention (as that
term is defined in CRADAs to which the Company and the NIH are parties).
Patents covering biotechnological inventions have an uncertain scope, and the
Company is subject to this uncertainty. The Company's patent applications may
not issue as patents. Moreover, the Company's patents may not provide the
Company with competitive advantages and may not withstand challenges by others.
Likewise, patents owned by others may adversely affect the ability of the
Company to do business. Furthermore, others may independently develop similar
products, may duplicate the Company's products, and may design around patents
owned by the Company.
The Company also relies on proprietary know-how and on trade secrets to develop
and maintain its competitive position. Others may independently develop such
know-how or trade secrets or may otherwise obtain access thereto. Although
Company employees and consultants having access to proprietary information are
contractually required to keep such information confidential, such agreements
may be breached or held unenforceable.
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Pursuant to the Term Loan (as hereinafter defined), the Company's bank acquired
a security interest in the Company's patent portfolio. The bank has agreed to
subordinate its interest to licensees of the Company if certain conditions are
met.
Competition
- -----------
There are several companies, universities, research teams and scientists, both
private and governmentsponsored, which engage in research similar, or
potentially similar, to that performed by the Company. Many of such entities and
associations have far greater financial resources, larger research staffs and
more extensive physical facilities than the Company. These competitors may
succeed in their research and development of products which are more effective
than any developed by the Company and may be more successful than the Company in
their production and marketing of such products. The Company is not aware,
however, of any product currently being marketed which is similar to the
Company's proposed anti-tumor agent, ONCONASE. A search by the Company of
scientific literature reveals no published information which would indicate that
others are currently employing its methods or producing such an anti-tumor
agent. There are several chemotherapeutic agents currently used to treat the
forms of cancer which ONCONASE is being used to treat. There can be no assurance
that ONCONASE will prove to be as safe and as effective as currently used drugs
or that new treatments will not be developed which are more effective than
ONCONASE.
Employees
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As of September 23, 1996, Alfacell employed thirteen persons, of whom nine were
engaged in research and development activities and four were engaged in
administration and management. The Company has five employees who hold Ph.D. or
M.D. degrees. All of the Company's employees are covered by confidentiality
agreements. Alfacell considers relations with its employees to be very good.
None of the Company's employees are covered by a collective bargaining
agreement.
Environmental Matters
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The Company's operations are subject to comprehensive regulation with respect to
environmental, safety and similar matters by the United States Environmental
Protection Agency ("EPA") 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 the Company expands or
changes its existing operations or proposes any new operations, it may be
required to obtain additional or amended permits or authorizations. The Company
spends time, effort and funds in operating its 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 the Company. The principal regulatory
requirements and matters known to the Company requiring or potentially requiring
capital expenditures by the Company do not appear likely, individually or in the
aggregate, to have a material adverse effect on the Company's financial
condition. The Company believes that it is in compliance with all current laws
and regulations.
Item 2. PROPERTIES.
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The Company owns no real property. The Company subleases a total of
approximately 12,600 square feet in an industrial and office building located in
Bloomfield, New Jersey. The Company subleases its facility under a five year
operating sublease which was due to expire October 31, 1993, but was extended to
November 11, 1996 at a reduced annual rental obligation commencing April 1, 1993
of $66,000. In addition to the basic rent, the Company is obligated to pay its
pro rata share of increases in municipal real estate taxes
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and utilities over the base year 1988. The Company expects to lease its current
facility directly from the owners of the building upon expiration of its
sublease in November 1996. An agreement in principle has been reached, however,
there can be no assurance that such lease will be consummated. The Company
believes that the facility is sufficient for its current needs.
Item 3. LEGAL PROCEEDINGS.
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None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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None.
Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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The Company's Common Stock is traded under the symbol "ACEL". At the present
time, the Company's Common Stock is quoted on the Bulletin Board. On September
23, 1996, the high bid and low asked quotations for the Company's Common Stock
were $4-1/2 and $4-3/4, respectively. As of September 23, 1996, there were
approximately 1,551 stockholders of record of the Company's Common Stock.
The following table sets forth the range of high and low closing bid quotations
obtained from the National Quotation Bureau for the Common Stock for the two
fiscal years ended July 31, 1995 and 1996. These quotes 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, 1995:
First Quarter 3-1/8 1-5/8
Second Quarter 4 1
Third Quarter 4 1-1/2
Fourth Quarter 2-3/4 1-3/8
Year Ended July 31, 1996:
First Quarter 6-13/16 2-1/8
Second Quarter 5-5/8 2-7/8
Third Quarter 5-3/8 3-3/16
Fourth Quarter 5-7/8 3-7/8
The Company has paid no dividends on its Common Stock since its inception and
does not plan to pay dividends on its Common Stock in the foreseeable future.
Any earnings which the Company may realize will be retained to finance the
growth of the Company. Pursuant to the term loan agreement dated May 31, 1993
entered into between the Company and its bank in connection with the
restructuring of the Company's bank loan, as amended in October 1995, for so
long as any portion of the note representing the indebtedness under the loan
agreement remains unpaid, the Company may not declare or pay any dividends or
set apart any sum for the payment of dividends without the prior written consent
of the bank.
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Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
----------------------
Results of Operations
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Fiscal Years Ended July 31, 1996, 1995 and 1994
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Revenues
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The Company is a development stage company as defined in the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 7.
As such, the Company is devoting substantially all of its present efforts to
establishing a new business and developing new drug products. The Company's
planned principal operations of marketing and/or licensing of new drugs have not
commenced and, accordingly, no significant revenue has been derived therefrom.
The Company continues to marshall all its productive and financial resources to
proceed with its development of ONCONASE and as such has not had any sales in
fiscal 1996, 1995 and 1994. Investment income for fiscal 1996 was $184,250
compared to $14,992 for fiscal 1995, an increase of $169,258. This increase was
due to higher balances of cash and cash equivalent. Investment income for fiscal
1995 was $14,992 compared to $6,064 for fiscal 1994, an increase of $8,928.
Research and Development
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Research and development expense for fiscal 1996 was $2,189,000 compared to
$1,206,000 for fiscal 1995, an increase of $983,000 or 82%. This increase was
primarily due to an increase in costs associated with manufacturing clinical
supplies of ONCONASE and costs in support of on-going clinical trials, including
the initial Phase III clinical trial for pancreatic cancer and the Phase II
clinical trial for malignant mesothelioma.
Research and development expense for fiscal 1995 was $1,206,000 compared to
$1,114,000 for fiscal 1994, an increase of $92,000 or 8%. This increase was
primarily due to an increase in consulting fees for the preparation of
chemistry, manufacturing and clinical submissions to the FDA in preparation for
Phase III clinical trials and a write-off of previously capitalized patent
costs, which were partially offset by a decrease in non-cash compensation
expense attributable to the amortization of expense related to stock awards made
in prior years to the Company's Chief Executive Officer and Medical Director.
General and Administrative
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General and administrative expense for fiscal 1996 was $807,000 compared to
$664,000 for fiscal 1995, an increase of $143,000 or 22%. This increase was
primarily due to an increase in public relations activities and legal and
accounting fees.
General and administrative expense for fiscal 1995 was $664,000 compared to
$903,000 for fiscal 1994, a decrease of $239,000 or 26%. This decrease was
primarily due to a decrease over the same period last year in legal and
accounting fees and a decrease in non-cash compensation expense attributable to
the amortization of expenses related to stock awards made in prior years to the
Company's Chief Executive Officer.
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Interest
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Interest expense for fiscal 1996 was $131,000 compared to $144,000 in fiscal
1995, a decrease of $13,000 or 9%. The decrease in fiscal 1996 was primarily due
to the conversion of convertible subordinated debentures to common stock and a
reduction in short-term loans payable over the prior period.
Interest expense for fiscal 1995 was $144,000 compared to $223,000 in fiscal
1994, a decrease of $79,000 or 35%. The decrease in fiscal 1995 was primarily
due to the conversion of convertible subordinated debentures to common stock.
Net Loss
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The Company has incurred net losses during each year since its inception. The
net loss for fiscal 1996 was $2,942,000 as compared to $1,993,000 in fiscal 1995
and $2,234,000 in fiscal 1994. The cumulative loss from the date of inception,
August 24, 1981, to July 31, 1996 amounted to $40,391,000. Such losses are
attributable to the fact that the Company is still in the development stage and
accordingly has not derived sufficient revenues from operations to offset the
development stage expenses.
Liquidity and Capital Resources
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During fiscal 1996, the Company had a net increase in cash of $5,783,000. This
increase resulted from net cash provided by financing activities of $10,184,000,
primarily from private placements of common stock and warrants to purchase
common stock and proceeds from the exercise of stock options offset by net cash
used in operating activities of $3,405,000 and net cash used in investing
activities of $996,000 principally due to the purchase of marketable securities.
Total cash resources, including marketable securities, as of July 31, 1996 were
$8,131,000 compared to $1,398,000 at July 31, 1995. In addition, approximately
$2,200,000 was received in the aggregate in August and September 1996 in
connection with option exercises.
The Company's term loan agreement with its bank, (the "Term Loan") was amended
effective as of October 1, 1995. Among other things, the amendment extended the
maturity date of the Term Loan from May 31, 1996 to August 31, 1997, which has
enabled the Company to reflect substantially the entire principal amount of the
Term Loan outstanding as of July 31, 1996 as long-term debt. This is the primary
reason for the significant decrease in current liabilities as of July 31, 1996
compared to July 31, 1995 and the significant increase in long-term debt as of
July 31, 1996 compared to July 31, 1995. It is estimated that the outstanding
balance on August 31, 1997 will be $1,369,000. At that time, the Company intends
to refinance the Term Loan or use its current cash resources to pay off the
unpaid balance. However, there can be no assurance that the Company will be able
to successfully conclude a refinancing.
Pursuant to the terms of the Term Loan, without the bank's consent, the Company
is prohibited from incurring any additional indebtedness except as follows: (i)
additional indebtedness to the bank, (ii) indebtedness having a priority of
payment which is expressly junior to and inferior in right of payment to the
prior payment in full to the bank, (iii) indebtedness arising as a result of
obligations of the Company over the life of its leases which in the aggregate do
not exceed $200,000, and (iv) unsecured indebtedness arising in the ordinary
course of the Company's business which at no time exceeds $1,452,000. Pursuant
to the Term Loan, the Company is required to make prepayments to the extent its
gross revenues exceed certain levels. Pursuant to a pledge agreement, the
Company's Chief Executive Officer has pledged the shares of the Company's Common
Stock owned by her to secure the repayment of the Term Loan. The pledgor may
from time to time request that the bank release a portion of the pledged stock
when market conditions are favorable in order to permit the
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sale of such stock whereupon the proceeds will be used to make payments under
the pledgor's term loan agreement with the bank. The Term Loan prohibits the
issuance of any shares, or right to purchase any shares of the Company's stock
if the result of such issuance would be to decrease the ratio of the market
value of such pledged stock to the aggregate outstanding debt of the Company and
the Company's Chief Executive Officer, as pledgor, to the bank, below 1:1.
The Company's continued operations will depend on its ability to raise
additional funds through a combination of equity or debt financing,
collaborative agreements, strategic alliances and revenues from the commercial
sale of ONCONASE. The Company is in discussions with several potential
collaborative partners for further development and marketing of ONCONASE,
however there can be no assurance that any such arrangements will be
consummated. In addition, the Company expects that its cash needs in the future
will increase due to the on-going clinical trials. The Company believes that its
cash on hand, including marketable securities, as of July 31, 1996 coupled with
the proceeds from the exercise of stock options in August and September 1996
will be sufficient to meet its anticipated cash needs for approximately the next
two years. 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 services rendered, debt financing and financing provided by the
Company's Chief Executive Officer. The Company's long-term liquidity will depend
on its ability to raise substantial additional funds. There can be no assurance
that such funds will be available to the Company on acceptable terms, if at all.
The Company's working capital and capital requirements may depend upon numerous
factors including the progress of the Company's research and development
programs, the timing and cost of obtaining regulatory approvals, and the levels
of resources that the Company devotes to the development of manufacturing and
marketing capabilities.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation. This statement establishes an alternative method of
accounting for stock-based compensation awarded to employees, such as stock
options granted by the Company to employees. SFAS No. 123 provides for the
recognition of compensation expense based on the fair value of the stock-based
award, but allows companies to continue to measure compensation costs in
accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees. Companies electing to retain this method must make
pro forma disclosures of net income and earnings per share as if the fair market
value based method had been applied. The Company plans to continue to use the
APB No. 25 which does not require the Company to record compensation expense for
the stock options it awards to employees. In 1997, the Company will disclose the
pro forma effect of the fair value method on 1996 and 1997 net income and
earnings per share.
Item 7. FINANCIAL STATEMENTS.
- ------- ---------------------
The response to this Item is submitted as a separate section of this report
commencing on Page F-1.
10
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
---------------------
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.
Part III
The information required by Item 9 - Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section 16(a) of the Exchange Act; Item 10
- - Executive Compensation; Item 11 - Security Ownership of Certain Beneficial
Owners and Management; and Item 12 - Certain Relationships and Related
Transactions is incorporated into Part III of this Annual Report on Form 10-KSB
by reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on November 21, 1996.
11
<PAGE>
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-B).
<TABLE>
<CAPTION>
Exhibit No.
or
Exhibit Incorporation
No. Item Title by Reference
----- ---------- ------------
<C> <S> <C>
3.1 Certificate of Incorporation *
3.2 By-Laws *
3.3 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, as amended - 225 Belleville Avenue, Bloomfield, New Jersey **
10.3 Amendment to Lease - 225 Belleville Avenue, Bloomfield, New Jersey #
10.4 Term Loan Agreement dated as of May 31, 1993 by and between the
Company and First Fidelity Bank, N.A., New Jersey **
10.5 Term Note dated as of May 31, 1993 issued by the Company to First
Fidelity Bank, N.A., New Jersey **
10.6 Patent Security Agreement dated as of May 31, 1993 by and between the
Company and First Fidelity Bank, N.A., New Jersey **
10.7 Security Agreement dated as of May 31, 1993 by and between the Company
and First Fidelity Bank, N.A., New Jersey **
10.8 Subordination Agreement dated as of May 31, 1993 by and among the
Company, Kuslima Shogen, and First Fidelity Bank, N.A., New
Jersey **
10.9 Amendment to Subordination Agreement dated as of May 31, 1993 by and
among the Company, Kuslima Shogen, and First Fidelity Bank, N.A., New
Jersey dated June 30, 1995 #
10.10 Form of Stock Purchase Agreement and Certificate used in connection with
various private placements ***
10.11 Form of Stock and Warrant Purchase Agreement and Warrant Agreement
used in Private Placement completed on March 21, 1994 ***
10.12 The Company's 1993 Stock Option Plan and Form of Option Agreement *****
10.13 Debt Conversion Agreement dated March 30, 1994 with Kuslima Shogen ****
10.14 Accrued Salary Conversion Agreement dated March 30, 1994 with Kuslima
Shogen ****
10.15 Accrued Salary Conversion Agreement dated March 30, 1994 with
Stanislaw Mikulski ****
10.16 Debt Conversion Agreement dated March 30, 1994 with John Schierloh ****
10.17 Option Agreement dated March 30, 1994 with Kuslima Shogen ****
10.18 Amendment No. 1 dated June 20, 1994 to Option Agreement dated March
30, 1994 with Kuslima Shogen ****
10.19 Amendment No. 1 dated June 17, 1994 to Term Loan Agreement dated May
31, 1993 between Kuslima Shogen and First Fidelity Bank, N.A., New
Jersey ****
10.20 Second Pledge Agreement dated June 17, 1994 by and among the Company,
Kuslima Shogen and First Fidelity Bank, N.A., New Jersey ****
</TABLE>
12
<TABLE>
<CAPTION>
<C> <S> <C>
10.21 Form of Amendment No. 1 dated June 20, 1994 to Option Agreement dated
March 30, 1994 with Kuslima Shogen *****
10.22 Form of Amendment No. 1 dated June 20, 1994 to Option Agreement dated
March 30, 1994 with Stanislaw Mikulski *****
10.23 Form of Stock and Warrant Purchase Agreement and Warrant Agreement
used in Private Placement completed on September 13, 1994 +
10.24 Form of Subscription Agreements and Warrant Agreement used in Private
Placements closed in October 1994 and September 1995. #
10.25 Amendment No. 1 dated as of October 1,1995 to Term Loan Agreement
dated as of May 31, 1993 by and between the Company and First Fidelity
Bank, N.A. New Jersey ####
10.26 Amended and Restated Term Note dated as of October 1, 1995 issued by the
Company to First Fidelity Bank, N.A. New Jersey ####
10.27 Warrant dated as of October 1, 1995 issued by the Company to First
Fidelity Bank, N.A. New Jersey ####
21.1 Subsidiaries of Registrant **
23.1 Consent of KPMG Peat Marwick LLP ###
27.1 Financial Data Schedule ###
99.1 Factors to Consider in Connection with Forward-Looking Statements ###
</TABLE>
* Previously filed as exhibit to the Company's Registration Statement
on Form S-18 (File No. 2-79975- NY) and incorporated herein by
reference thereto.
** Previously filed as exhibits to the Company's Annual Report on Form
10-K for the year ended July 31, 1993 and incorporated herein by
reference thereto.
*** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended January 31, 1994 and incorporated herein
by reference thereto.
**** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1994 and incorporated herein by
reference thereto.
***** Previously filed as exhibits to the Company's Registration
Statement Form SB-2 (File No. 33-76950) and incorporated herein by
reference thereto.
+ Previously filed as exhibits to the Company's Registration Statement
on Form SB-2 (File No. 33-83072) and incorporated herein by reference
thereto.
++ Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1995 and incorporated herein by
reference thereto.
#### Previously filed as exhibits to the Company's Registration
Statement on Form SB-2 (File No. 33- 63341) and incorporated herein by
reference thereto.
13
<PAGE>
# 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 files as exhibits to the Company's Registration
statement on Form SB-2 (File No. 333- 11575) and incorporated herein
by reference thereto.
### Filed herewith.
(b) Reports on Form 8-K.
On July 16, 1996, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K dated June 11, 1996 (Item 5).
14
<PAGE>
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 18, 1996 By: /s/ KUSLIMA SHOGEN
Kuslima Shogen, Chief
Executive Officer
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 18, 1996 /s/ KUSLIMA SHOGEN
Kuslima Shogen, Chief
Executive Officer
(Principal Executive
Officer) and Chairman
of the Board
Dated: October 18, 1996 /s/ MICHAEL C. LOWE
Michael C. Lowe,
President and Director
Dated: October 18, 1996 /s/ GAIL E. FRASER
Gail E. Fraser, Chief
Financial Officer, Vice
President of Finance,
(Principal Financial
Officer and Principal
Accounting Officer)
and Director
Dated: October 18, 1996 /s/ STANISLAW M. MIKULSKI
Stanislaw M. Mikulski, M.D.,
Executive Vice President
and Director
Dated: October 18, 1996 /s/ ALLEN SIEGEL
Allen Siegel, D.D.S.,
Director
Dated: October 18, 1996 /s/ ALAN BELL
Alan Bell, Director
Dated: October 18, 1996 /s/ ROBERT R. HENRY
Robert R. Henry, Director
15
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Index
Page
Independent Auditors' Report of KPMG Peat Marwick LLP.......................F-2
Independent Auditors' Report of Armus, Harrison & Co. ......................F-3
Financial Statements:
Balance Sheets - July 31, 1996 and 1995..........................F-5
Statements of Operations - Years ended July 31, 1996, 1995
and 1994 and the Period from August 24, 1981 (Date of
Inception) to July 31, 1996....................................F-6
Statement of Stockholders' Equity (Deficiency) - Period from
August 24, 1981 (Date of Inception) to July 31, 1996............F-7
Statements of Cash Flows - Years ended July 31, 1996, 1995
and 1994 and the Period from August 24, 1981 (Date of
Inception) to July 31, 1996....................................F-11
Notes to Financial Statements - Years ended July 31, 1996,
1995 and 1994 and the Period from August 24, 1981
(Date of Inception) to July 31, 1996...........................F-14
F-1
<PAGE>
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, 1996 and 1995, 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, 1996 and the period
from August 24, 1981 (date of inception) to July 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Alfacell Corporation (a development
stage company) for the period from August 24, 1981 (date of inception) to July
31, 1992 were audited by other auditors whose report dated December 9, 1992,
except as to note 18 which is July 19, 1993 and note 3 which is October 28,
1993, expressed an unqualified opinion on those statements with an explanatory
paragraph regarding the Company's ability to continue as a going concern.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for the effect on the period from
August 24, 1981 (date of inception) to July 31, 1996 of the amounts for the
period from August 24, 1981 (date of inception) to July 31, 1992, on the report
of other auditors, the financial statements referred to above present fairly, in
all material respects, the financial position of Alfacell Corporation (a
development stage company) as of July 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the years in the three-year period
ended July 31, 1996 and the period from August 24, 1981 (date of inception) to
July 31, 1996 in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
September 24, 1996
F-2
<PAGE>
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.
F-3
<PAGE>
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.
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the statement of
operations, the Company has incurred substantial losses in each year since its
inception. In addition, the Company is a development stage company and its
principal operation for production of income has not commenced. The Company's
working capital has been reduced considerably by operating losses, and has a
deficit net worth. These factors, among others, as discussed in Note 2 of the
Notes to Financial Statements, indicates the uncertainties about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts and the amount of classification of liabilities that might be
necessary should the Company be unable to continue its existence.
-------------------------
Armus, Harrison & Co.
Mountainside, New Jersey
December 9, 1992
Except as to Note 18 which
is July 19, 1993 and Note 3
which is October 28, 1993
F-4
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
<TABLE>
<CAPTION>
Balance Sheets
July 31, 1996 and 1995
ASSETS 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,431,442 $ 648,027
Marketable securities 1,700,000 750,000
Loan receivable, related party 112,250 -
Prepaid expenses 63,850 38,607
------ ----------
Total current assets 8,307,542 1,436,634
--------- ---------
Property and equipment, net of accumulated depreciation and
amortization of $688,325 in 1996 and $666,261 in 1995 127,930 104,301
------- -------
Other assets:
Deferred debt costs, net 20,362 31,500
Other 31,877 43,735
---------- ----------
52,239 75,235
------- ----------
Total assets $ 8,487,711 $ 1,616,170
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Current liabilities:
Current portion of long-term debt $ 86,936 $ 1,602,974
Loans and interest payable, related party - 138,638
Accounts payable 189,536 183,222
Accrued payroll and expenses, related parties - 414,996
Accrued expenses 162,213 101,777
----------- -----------
Total current liabilities 438,685 2,441,607
Long-term debt, less current portion 1,398,760 7,129
--------- -----------
Total liabilities 1,837,445 2,448,736
--------- ---------
Commitments and contingencies Stockholders' equity (deficiency):
Preferred stock, $.001 par value. Authorized and unissued,
1,000,000 shares at July 31, 1996 and 1995 - -
Common stock $.001 par value. Authorized 25,000,000 shares;
issued and outstanding 13,859,209 shares in 1996 and
10,319,187 shares in 1995 13,859 10,319
Capital in excess of par value 47,023,529 36,262,427
Common stock to be issued, 89,634 shares in 1996 and 139,080
shares in 1995 258,335 343,808
Subscription receivable, 89,634 shares in 1996 (254,185) -
Deficit accumulated during development stage (40,391,272) (37,449,120)
------------ ------------
6,650,266 (832,566)
Total stockholders' equity (deficiency)
Total liabilities and stockholders' equity (deficiency) $ 8,487,711 $ 1,616,170
-------------- ------------
See accompanying notes to financial statements.
</TABLE>
F-5
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Operations
Years ended July 31, 1996, 1995
and 1994, and the Period
from August 24, 1981
(Date of Inception) to July 31, 1996
<TABLE>
<CAPTION>
August 24,
1981
(date of
inception)
to
July 31,
1996 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Sales $ 553,489 - - -
Investment income 385,254 184,250 14,992 6,064
Other income 60,103 - 6,000 -
----------- ---------- ------- -----
998,846 184,250 20,992 6,064
----------- ----------- ------- -------
Costs and expenses:
Cost of sales 336,495 - - -
Research and development 22,559,390 2,188,890 1,205,523 1,114,455
General and administrative 15,705,782 806,962 664,435 903,350
Interest:
Related parties 1,033,960 1,801 14,982 74,221
Others 1,754,491 128,749 129,175 148,466
---------- ---------- ---------- ---------
41,390,118 3,126,402 2,014,115 2,240,492
---------- --------- --------- ---------
Net loss $ (40,391,272) (2,942,152) (1,993,123) (2,234,428)
========== ========= ========= =========
Loss per common share $ (7.58) (.25) (.21) (.26)
============== ============= ============= ==========
Weighted average number of shares
outstanding 5,327,000 11,969,000 9,598,000 8,466,000
=========== =========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
F-6
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 1996
<TABLE>
<CAPTION>
Common Stock Capital in Common
------------------------- excess of stock to be
Number of par value issued
Shares Amount
<S> <C> <C> <C> <C>
Issuance of shares to officers and stockholders for equipment, research and
development, and expense reimbursement 712,500 $ 713 212,987 -
Issuance of shares for organizational legal services 50,000 50 4,950 -
Sale of shares for cash, net 82,143 82 108,418 -
Adjustment for 3 for 2 stock split declared September 8, 1982 422,321 422 (422) -
Net loss -- -- -- -
---------- ---------- ---------- -
Balance at July 31, 1982 1,266,964 1,267 325,933 -
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 -- -- -- -
---------- ---------- ---------- -
Balance at July 31, 1983 2,007,325 2,007 1,802,384 -
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 -- -- -- -
---------- ---------- ---------- -
Balance at July 31, 1984 2,444,891 2,445 3,223,065 -
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 -- -- -- -
---------- ---------- ---------- -
Balance at July 31, 1985 2,884,843 2,885 6,445,730 -
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 -- -- -- -
---------- ---------- ---------- -
Balance at July 31, 1986 (carried forward) 2,933,052 2,933 6,849,112 -
Deficit Subscription Deferred Total stock-
accumulated Receivable compen- holders'
during sation, equity
development restricted (deficiency)
stage stock
----- -----
Issuance of shares to officers and stockholders for equipment, research and
development, and expense reimbursement -- - - 213,700
Issuance of shares for organizational legal services -- - - 5,000
Sale of shares for cash, net -- - - 108,500
Adjustment for 3 for 2 stock split declared September 8, 1982 -- - - --
Net loss (121,486) - - (121,486)
---------- - - ----------
Balance at July 31, 1982 (121,486) - - 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) - - (558,694)
---------- - - ----------
Balance at July 31, 1983 (680,180) - - 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) - - (1,421,083)
---------- - - ----------
Balance at July 31, 1984 (2,101,263) - - 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) - - (2,958,846)
---------- - - ----------
Balance at July 31, 1985 (5,060,109) - - 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) - - (2,138,605)
---------- - - ----------
Balance at July 31, 1986 (carried forward) (7,198,714) - - (346,669)
(Continued)
</TABLE>
F-7
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
<TABLE>
<CAPTION>
Common Stock Capital in Common
------------------------- excess of stock to be
Number of par value issued
Shares Amount
<S> <C> <C> <C> <C>
Balance at July 31, 1986 (brought forward) 2,933,052 2,933 6,849,112 -
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 -- -- -- -
----------- ----------- ----------- -
Balance at July 31, 1987 3,207,797 3,208 7,596,287 -
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 -- -- -- -
----------- ----------- ----------- -
Balance at July 31, 1988 4,440,724 4,441 12,006,716
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 -- -- -- -
----------- ----------- ----------- -
Balance at July 31, 1989 5,595,897 5,596 17,803,899
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 -- -- -- -
----------- ----------- ----------- -
Balance at July 31, 1990 (carried forward) 6,799,829 6,800 23,699,631
Deficit Subscription Deferred Total stock-
accumulated Receivable compen- holders'
during sation, equity
development restricted (deficiency)
stage stock
----- -----
Balance at July 31, 1986 (brought forward) (7,198,714) -- -- (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) -- -- (2,604,619)
----------- ----------- ----------- -----------
Balance at July 31, 1987 (9,803,333) -- -- (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) -- -- (3,272,773)
----------- ----------- ----------- -----------
Balance at July 31, 1988 -- (13,076,106) -- (2,000,833)
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) -- -- (2,952,869)
----------- ----------- ----------- -----------
Balance at July 31, 1989 -- (16,028,975) -- (4,850,077)
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) -- -- (4,860,116)
----------- ----------- ----------- -----------
Balance at July 31, 1990 (carried forward) -- (20,889,091) -- (5,920,516)
(Continued)
</TABLE>
F-8
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
<TABLE>
<CAPTION>
Common Stock Capital in Common
------------------------- excess of stock to be
Number of par value issued
Shares Amount
<S> <C> <C> <C> <C>
Balance at July 31, 1990 (brought forward) 6,799,829 6,800 23,699,631 --
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 -- -- -- --
----------- ----------- ----------- -----------
Balance at July 31, 1991 7,022,549 7,022 24,642,803 --
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 -- -- -- --
----------- ----------- ----------- -----------
Balance at July 31, 1992 7,338,014 7,338 25,778,877 --
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 -- -- -- --
----------- ----------- ----------- -----------
Balance at July 31, 1993 7,862,281 7,863 26,890,082 --
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 -- -- -- --
----------- ----------- ----------- -----------
Balance at July 31, 1994 (carried forward) 9,124,681 9,125 33,680,954 50,000
Deficit Subscription Deferred Total stock-
accumulated Receivable compen- holders'
during sation, equity
development restricted (deficiency)
stage stock
----- -----
<C> <C> <C> <C>
Balance at July 31, 1990 (brought forward) (20,889,091) - (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) - -- (5,202,302)
----------- - ----------- -----------
Balance at July 31, 1991 (26,091,393) -- (3,504,955)
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) - -- (4,772,826)
----------- - ----------- -----------
Balance at July 31, 1992 (30,864,219) - (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) - -- (2,357,350)
----------- - ----------- -----------
Balance at July 31, 1993 (33,221,569) - (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) - -- (2,234,428)
----------- - ----------- -----------
Balance at July 31, 1994 (carried forward) (35,455,997) - (58,500) (1,774,418)
(Continued)
</TABLE>
F-9
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
<TABLE>
<CAPTION>
Common Stock Capital in Common
------------------------- excess of stock to be
Number of par value issued
Shares Amount
<S> <C> <C> <C> <C>
Balance at July 31, 1994 (brought forward) 9,124,681 9,125 33,680,954 50,000
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 -- -- -- --
----------- ----------- ----------- -----------
Balance at July 31, 1995 10,319,187 10,319 36,262,427 343,808
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 -- -- -- --
----------- ----------- ----------- -----------
Balance at July 31, 1996 13,859,209 13,859 47,023,529 258,335
=========== =========== =========== ===========
Deficit Subscription Deferred Total stock-
accumulated Receivable compen- holders'
during sation, equity
development restricted (deficiency)
stage stock
----- -----
Balance at July 31, 1994 (brought forward) (35,455,997) -- (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) -- -- (1,993,123)
----------- ----------- ----------- -----------
Balance at July 31, 1995 (37,449,120) -- -- (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) -- -- (2,942,152)
----------- ----------- ----------- -----------
Balance at July 31, 1996 (40,391,272) (254,185) -- 6,650,266
=========== =========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
F-10
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows
Years ended July 31, 1996, 1995
and 1994, and the Period from
August 24, 1981
(Date of Inception) to July 31, 1996
<TABLE>
<CAPTION>
August 24,
1981 (date
of incep-
tion) to
July 31,
1996 1996 1995 1994
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(40,391,272) (2,942,152) (1,993,123) (2,234,428)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on sale of marketable securities (25,963) - - -
Depreciation and amortization 1,047,229 69,236 69,699 75,157
Loss on disposal of property and equipment 18,926 - - -
Noncash operating expenses 4,887,961 116,950 4,800 58,350
Amortization of deferred compensation 11,442,000 - 58,500 265,000
Amortization of organization costs 4,590 - - -
Changes in assets and liabilities:
Increase in loan receivable, related party (112,250) (112,250) - -
Increase (decrease) in prepaid expenses (63,850) (25,243) 30,060 (13,091)
(Increase) decrease in other assets 4,307 (24,176) 39,877 (1,723)
Increase (decrease) in loans and interest payable,
related party 744,539 (138,638) (65,085) 5,306
Increase (decrease) in accounts payable 266,801 6,314 (152,538) (61,388)
Increase (decrease) in accrued payroll and expenses,
related parties 2,348,145 (414,996) 256,731 386,246
Increase (decrease) in accrued expenses 703,726 60,436 48,944 (10,318)
------------ ----------- ----------- -----------
Net cash used in operating activities (19,125,111) (3,404,519) (1,702,135) (1,530,889)
------------ ----------- ----------- -----------
Cash flows from investing activities:
Purchase of marketable securities (1,990,420) (950,000) (750,000) (251,209)
Proceeds from sale of marketable equity securities 316,383 - 251,209 -
Purchase of property and equipment (1,041,880) (45,693) (31,879) (13,660)
Patent costs (97,841) - - (37,251)
------------ ----------- ----------- -----------
Net cash used in investing
activities (2,813,758) (995,693) (530,670) (302,120)
------------ ----------- ----------- -----------
(Continued)
</TABLE>
F-11
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Cash Flows, Continued
<TABLE>
<CAPTION>
August 24,
1981 (date
of incep-
tion) to
July 31,
1996 1996 1995 1994
---- ---- ---- -----
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from short-term borrowings $ 849,500 - - 169,500
Payment of short-term borrowings (623,500) - - -
Increase (decrease) in loans payable, related party,
net 2,628,868 - - 175,798
Proceeds from bank debt and other long-term debt,
net of deferred debt costs 2,406,683 29,540 17,595 4,028
Reduction of bank debt and long-term debt (1,435,559) (153,947) (89,827) (67,285)
Proceeds from common stock to be issued 433,358 44,350 339,008 50,000
Proceeds from issuance of common stock and warrants,
net 21,668,561 8,605,484 1,974,202 1,710,791
Proceeds from exercise of stock options 2,095,400 1,658,200 437,200 -
Proceeds from issuance of convertible debentures 347,000 - - -
(Decrease) increase in bank overdraft - - - (7,169)
-------------- ------------- ------------ --------------
Net cash provided by financing
activities 28,370,311 10,183,627 2,678,178 2,035,663
-------------- ------------- ------------ --------------
Net increase (decrease) in cash 6,431,442 5,783,415 445,373 202,654
Cash and cash equivalents at beginning of period - 648,027 202,654 -
-------------- ------------- ------------ --------------
Cash and cash equivalents at end of period $ 6,431,442 6,431,442 648,027 202,654
============== ============= ============ ==============
Supplemental disclosure of cash flow information -
interest paid $ 1,489,728 130,224 129,477 144,322
============== ============= ============ ==============
Noncash financing activities:
Issuance of convertible subordinated debenture for
loan payable to officer $ 2,725,000 - - -
============== ============= ============ ==============
Issuance of common stock upon the conversion of
convertible subordinated debentures, related party $ 2,945,000 - - 1,575,000
============== ============= ============ ==============
Conversion of short-term borrowings to common stock $ 226,000 - 44,000 182,000
============== ============= ============ ==============
(Continued)
</TABLE>
F-12
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Cash Flows, Continued
<TABLE>
<CAPTION>
August 24,
1981 (date
of incep-
tion) to
July 31,
1996 1996 1995 1994
--------- ------- ------- ----------
<S> <C> <C> <C> <C>
Conversion of accrued interest, payroll and expenses by related parties to
stock options $ 3,194,969 - - 3,194,969
============ ======= ======= ==========
Repurchase of stock options from related party $ (198,417) - - (198,417)
============ ======= ======= ==========
Conversion of accrued interest to stock options $ 142,441 - - 142,441
============ ======= ======= ==========
Conversion of accounts payable to common stock $ 77,265 - 77,265 -
============ ======= ======= ==========
Conversion of notes payable, bank and accrued interest to
long-term debt $ 1,699,072 - - -
============ ======= ======= ==========
Conversion of loans and interest payable, related party and accrued
payroll and expenses, related parties to long-term accrued
payroll and other, related party $ 1,863,514 - - -
============ ======= ======= ==========
Issuance of common stock upon the conversion of convertible subordinated
debentures, other $ 127,000 - - 127,000
============ ======= ======= ==========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements
Years ended July 31, 1996, 1995 and 1994
and the Period From August 24, 1981
(Date of Inception) to July 31, 1996
(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 anticancer drugs and
antiviral agents. To date, the Company is in the initial stage of its
operations and has not yet engaged in any significant commercial
activities.
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.
Basis of Financial Statements
-----------------------------
As shown in the financial statements, the Company has reported net losses
of $2,942,152, $1,993,123, and $2,234,428 for the fiscal years ended July
31, 1996, 1995 and 1994, respectively. The loss from date of inception,
August 24, 1981, to July 31, 1996 amounts to $40,391,272.
The Company's continued operations will depend on its ability to raise
additional funds through a combination of equity or debt financings,
collaborative agreements, strategic alliances and revenues from the
commercial sale of ONCONASE. The Company believes that its current
resources (including proceeds from the exercise of stock options in August
and September 1996, see note 6), will be sufficient to meet its
anticipated cash needs for the next two years. To date, a significant
portion of the Company's financing has been through private placements of
common stock and warrants to purchase common stock, the issuance of common
stock for services rendered, debt financing and financing provided by the
Company's Chief Executive Officer.
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.
(Continued)
F-14
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (Continued)
- --- -------------------------------------------------------
Property and Equipment
----------------------
Property and equipment is stated at cost. Depreciation is computed using
the straightline 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.
Marketable Securities
---------------------
The Company's investments in marketable securities are available for sale
to fund current operations. The Company, subject to changes in market
conditions, does not intend to hold all marketable securities to their
maturity dates and, accordingly, the portfolio has been classified as a
current asset. The portfolio primarily consists of U.S. government
securities and preferred equity securities. The market value approximates
cost due to the variable interest rate and short term reset period. As of
July 31, 1996 and 1995, there were no unrealized holding gains or losses.
Patents
-------
Costs related to patents are expensed when incurred. Previously, costs
related to approved patents were capitalized and were amortized using the
straightline method over the life of the patent, usually 17 years. As a
result of this change in policy, the Company wrote-off $76,807 of
capitalized patent costs during the fiscal year ended July 31, 1995.
Deferred Debt Costs
-------------------
Deferred debt costs associated with the Company's long-term debt are being
amortized using the straightline method over the life of the debt
agreement. Accumulated amortization as of July 31, 1996 and 1995 was
$137,588 and $90,416 respectively.
Research and Development
------------------------
Research and development costs are expensed as incurred.
(Continued)
F-15
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (Continued)
- --- -------------------------------------------------------
Fair Value of Financial Instruments
-----------------------------------
The fair value of the long-term debt approximates its carrying value due
to its short term maturity and the interest rate approximates current
market rates. For all other financial instruments, their carrying value
approximates fair value due to the short maturity of those instruments.
Net Loss Per Share
------------------
Net loss per share is based on the weighted average number of common
shares outstanding during the period and shares to be issued at the end of
the period. Common stock equivalents are not included in the computations
since the effect would be antidilutive for all periods presented.
(2) Property and Equipment
- --- ----------------------
Property and equipment consists of the following at July 31:
1996 1995
---- ----
Laboratory equipment $ 593,408 587,443
Office equipment 169,871 130,143
Leasehold improvements 52,976 52,976
-------- --------
$ 816,255 770,562
======= =======
(Continued)
F-16
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(3) Long-term Debt
- --- --------------
Long-term debt consists of the following at July 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
First Union National Bank, New Jersey, payable in monthly installments of
$16,213, including principal and interest of 8.375% which commenced on
October 1, 1993. The term loan was amended effective as of October 1, 1995
to extend the maturity date from May 31, 1996 to August 31, 1997. Subject to
other provisions, the entire unpaid amount shall be due and payable on
August 31, 1997. The note is secured by substantially all of the assets of
the Company and contains restrictive covenants including restrictions on the
payment of dividends to stockholders. The Chief Executive Officer of the
Company has personally guaranteed the note and has pledged certain
additional collateral including substantially all of the shares of common
stock and options to purchase common
stock of the Company owned by her. $ 1,453,290 $ 1,577,049
Notes payable, interest at 6.3%-10.4%, maturing through
January 1997, secured by equipment. 4,822 33,054
Note payable in monthly installments of $729, including principal and interest
commencing April 1996 and each month
thereafter until May 2000, secured by equipment. 27,584 -
------------- -----------
1,485,696 1,610,103
Less current portion 86,936 1,602,974
------------- -----------
$ 1,398,760 $ 7,129
============ =============
</TABLE>
Principal maturities for the next four years ending July 31, are as
follows:
1997 $ 86,936
1998 1,377,651
1999 14,382
2000 6,727
----------
$ 1,485,696
(Continued)
F-17
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(4) Related Party Transactions
- --- --------------------------
Loans and Interest Payable, Related Parties
-------------------------------------------
From time to time, the Company's Chief Executive Officer has advanced sums
of money to the Company in the form of unsecured obligations, payable on
demand. The following table provides a summary of the related-party loan
activity involving the Chief Executive Officer at July 31:
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Loans and interest payable, related party at beginning
of year $ 138,638 $ 203,723
Reduction in loan balance and interest paid (140,439) (80,067)
Accrued interest 1,801 14,982
---------- ----------
Loans and interest payable, related party at end of year $ - $ 138,638
============ ==========
</TABLE>
On May 1, 1994, the Company, with its bank's consent, reinstituted certain
advances of $198,417 from the Company's Chief Executive Officer as
short-term debt that was previously converted into 102,807 options on
March 30, 1994. Such options were returned to the Company. During fiscal
year 1996 and 1995, $139,512 and $80,067 were repaid respectively. The
Company's bank has consented to allow repayment of such advances including
interest under certain circumstances.
During the year ended July 31, 1996, the Company paid $414,996 to related
parties as payment in full of accrued salaries.
Loans Receivable, Related Party
-------------------------------
In July 1996, the Company advanced its Chief Executive Officer $112,250 in
anticipation of proceeds due her from the exercise of stock options. The
principal amount plus interest were repaid in full.
(5) Leases
- --- ------
The Company leases its facility under a five-year operating lease which
was due to expire on October 31, 1993, but has been extended to November
11, 1996 at a reduced annual rental obligation commencing April 1, 1993,
of $66,000. In addition to the basic rent, the Company is obligated to pay
its pro rata share of increases in real estate taxes and utilities over
the base year 1988. Rent expense charged to operations was $66,000,
$66,000, and $66,500 in 1996, 1995 and 1994, respectively.
(Continued)
F-18
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(5) Leases, (Continued)
- --- -------------------
Future minimum lease payments under noncancellable leases are
approximately as follows:
Operating
leases
Year ending July 31, 1997 $ 16,500
======
The Company expects to lease its current facility directly from the owner
of the building upon expiration of its sublease in November 1996. An
agreement in principle has been reached; however, there can be no
assurance that such lease will be consummated.
(6) Stockholders' Equity (Deficiency)
- --- ---------------------------------
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
(Continued)
F-19
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Deficiency), (Continued)
- --- ----------------------------------------------
and 1984, the net proceeds to the Company from the exercising 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 exercising of the
warrants.
On January 2, 1987, the Company issued 250,000 shares of common stock to
officers and stockholders, including the President and Chief Executive
Officer, in recognition of services performed for the Company. The fair
value of such shares was recorded as compensation expense.
On February 3, 1987, the Company sold 5,000 shares of common stock to a
private investor for $5.00 per share, resulting in net proceeds to the
Company of approximately $25,000.
On September 1, 1987, the Board of Directors approved new wage contracts
for three officers. The contracts provided for the issuance of 700,000
shares of common stock as an inducement for signing; the shares of common
stock were issued on November 16, 1987. The fair value of these shares has
been 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 on 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 has been 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.
(Continued)
F-20
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Deficiency), (Continued)
- --- ----------------------------------------------
During the 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 fiscal 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 these shares was charged to operations.
During the fiscal year ended July 31, 1990, the Company sold 89,480 shares
of common stock to private investors at $3.97 per share resulting in net
proceeds to the Company of approximately $355,080.
During the fiscal year ended July 31, 1991, the Company issued 87,000
shares of common stock for payment of legal and consulting services. The
fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1992, the Company sold 70,731 shares
of common stock to private investors at $2.75 to $3.50 per share resulting
in net proceeds to the Company of approximately $219,900.
(Continued)
F-21
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Deficiency), (Continued)
- --- ----------------------------------------------
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 this 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 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 year ended July 31, 1995, 322,500 options
expired. A total of 30,167 options due to expire on July 31, 1995 were
extended to July 31, 1996, their exercise price was reduced to $2.50.
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 shares issued 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. The options expire during fiscal 1997.
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. The warrants expire 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.
(Continued)
F-22
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Deficiency), (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 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.
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 this
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.
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 expire on August 31, 1997.
(Continued)
F-23
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity (Deficiency), (Continued)
- --- ----------------------------------------------
In June 1996, the Company sold in a private placement (the "June 1996
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.
On 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.
On September 13, 1996, the Securities and Exchange Commission declared
effective a registration statement for the offer and sale by certain
stockholders of up to 2,042,506 shares of common stock. Of these shares
(i) 1,722,646 were issued in several private placement transactions during
the period October 1995 through April 1996 and in the June 1996 Private
Placement, (ii) 313,800 are issuable upon exercise of the warrants which
were issued in the June 1996 Private Placement, and (iii) 6,060 were
issued to one of the Company's raw material suppliers.
Also on September 13, 1996, the Securities and Exchange Commission
declared effective another registration statement for the offer and sale
by certain stockholders of up to 3,767,787 shares of common stock of the
Company. Of these shares (i) an aggregate of 1,951,020 shares were issued
to the private placement investors in the private placement transactions
which were completed during the period from March 1994 through September
1995 (the "Earlier Private Placements"), (ii) an aggregate of 1,184,451
shares are issuable upon exercise of the warrants which were issued to the
private placement investors in the Earlier Private Placements, (iii) an
aggregate of 622,316 shares may be issued, or have been issued, upon
exercise of the options which were issued to the option holders in certain
other private transactions and (iv) up to 10,000 shares may be issued to
the Company's bank upon exercise of the bank warrant issued in connection
with the term loan amendment.
During the fiscal year ended July 31, 1996, 207,316 shares of common stock
were sold from October 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.
In August and September 1996, a total of 576,000 shares of common stock
were issued to related parties upon the exercise of stock options. The
exercise price of the options was $3.87, resulting in net proceeds to the
Company of approximately $2.2 million.
(Continued)
F-24
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Common Stock Warrants
- --- ---------------------
The following table summarizes the activity of the common stock warrants
issued in connection with the public stock offering during 1983:
Shares Price Range
------ -----------
Sold in public offering 330,000 $3.00-3.50
Sold to underwriters 60,000 3.00
Exercised (1,165) 3.00
---------
Outstanding at July 31, 1983 388,835 3.00-3.50
Exercised (287,566) 2.00-3.50
Expired (41,269) 3.50
Issued (one-year warrants) 288,731 6.50
Issued (two-year warrants) 288,731 10.00
---------
Outstanding at July 31, 1984 637,462 3.00-10.00
Additional underwriters' warrants
pursuant to antidilution provisions 7,415 2.67
Exercised (334,957) 2.67-10.00
Expired (4,359) 6.50
---------
Outstanding and exercisable at July 31, 1985 305,561 2.67-10.00
Reinstated 2,000 6.50
Exercised (21,565) 2.67-10.00
---------
Outstanding and exercisable at July 31, 1986 285,996 10.00
Exercised (14,745) 10.00
---------
Outstanding and exercisable at July 31, 1987 271,251 10.00
Exercised (63,925) $ 7.06
====
Expired (207,236)
---------
Outstanding at July 31, 1988 -
=========
Stock Purchase Warrants
-----------------------
On July 28, 1988, the Board of Directors granted stock purchase warrants
to acquire a maximum of 200,000 shares of common stock at $5.00 per share
which were not exercised and expired.
On July 23, 1991, the Board of Directors granted stock purchase warrants
to purchase 200,000 shares of common stock at $5.00 per share which were
not exercised and expired.
(Continued)
F-25
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Common Stock Warrants, (Continued)
- --- ----------------------------------
Warrants sold in 1994, 1995 and 1996 Private Placements
-------------------------------------------------------
<TABLE>
<CAPTION>
Warrants Exercise Price Expiration
-------- -------------- ----------
<S> <C> <C> <C>
Sold in March 1994 Private Placement 800,000 $ 5.00 3/21/97 to 6/21/97
----------- ------------
Outstanding at July 31, 1994 800,000 5.00 3/21/97 to 6/21/97
Sold in September 1994 Private Placement 288,506 5.50 12/9/97 to 12/14/97
Sold in October 1994 Private Placement 40,000 5.50 1/21/98
Sold in September 1995 Private Placement 47,405 4.00 10/1/98
----------- ------------
Outstanding and exercisable at July 31, 1995 1,175,911 4.00 - 5.50 3/21/97 to 10/1/98
Issued to bank in connection with an amendment to
the Company's term loan 10,000 4.19 8/31/97
Sold in September 1995 Private Placement 8,540 4.00 10/1/98
Sold in June 1996 Private Placement 313,800 7.50 8/29/99 to 9/10/99
----------- ------------
Outstanding and exercisable at July 31, 1996 1,508,251 $ 4.00 - 7.50 3/21/97 to 9/10/99
=========== ============
</TABLE>
(8) Stock Options
- --- -------------
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. The maximum amount exercisable in any one year was
one-fifth of the options granted which accumulated if not exercised. The
options were issuable in such amounts as determined by the Board of
Directors and such prices as determined by the Board of Directors, except
that no single recipient would be granted options to purchase more than
15,000 shares.
The following table summarizes stock options outstanding:
Shares Price Range
------ -----------
Granted, August 24, 1984 15,000 $ 5.00
Granted, August 1, 1985 45,000 15.00
------
------------------
Subtotal 60,000 5.00-15.00
Cancelled (45,000) 5.00-15.00
------
Outstanding, July 31, 1990 15,000 15.00
Expired (15,000) $ 15.00
------
==================
Outstanding, July 31, 1991 -
=====
(Continued)
F-26
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
- --- --------------------------
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:
<TABLE>
<CAPTION>
Shares Price Range
------ -----------
<S> <C> <C>
Granted 1,032,000 $ 3.00-3.50
Exercised (170,000) 3.00
Cancelled (6,000) 3.50
--------------- --------------
Balance at July 31, 1988 856,000 3.00-3.50
Exercised (1,000) 3.50
--------------- --------------
Balance at July 31, 1989 855,000 3.00-3.50
Cancelled (100,000) 3.00
Expired (59,011) 3.50
Exercised (105,989) 3.00-3.50
--------------- --------------
Balance at July 31, 1990, 1991 and 1992 590,000 3.00-3.50
Expired (590,000) 3.00-3.50
Granted 750,000 3.87
--------------- --------------
Balance at July 31, 1993 750,000 3.87
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 and 1995 2,045,011 3.20 - 3.87
Exercised (174,000) 3.87
--------------- --------------
Balance at July 31, 1996 1,871,011 $ 3.20 - 3.87
=============== ==============
Exercisable at July 31, 1996 1,306,593 $ 3.20 - 3.87
=============== ==============
</TABLE>
The options outstanding at July 31, 1996 will expire between September 16,
1996 and March 30, 2004.
(Continued)
F-27
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
- --- --------------------------
In connection with certain private placements, the Board of Directors have
included in the agreements, options to purchase additional shares of the
Company's common stock as follows:
<TABLE>
<CAPTION>
Shares Price Range
------ -----------
<S> <C> <C>
Granted 126,000 $ 3.97
Exercised (included in 1989 proceeds from sale to
private investors) (25,200) 3.97
-----------
Balance at July 31, 1989 100,800
Granted 61,720 6.50
Exercised (included in 1990 proceeds from sale to
private investors) (39,080) 3.97
Expired (61,720) 3.97
-----------
Balance at July 31, 1990 61,720
Granted 45,000 6.50
Exercised (included in 1991 proceeds from sale to
private investors) (16,720) 6.50
Expired (45,000) 6.50
-----------
Balance at July 31, 1991 45,000
Granted 50,000 5.00
Expired (45,000) 6.50
-----------
Balance at July 31, 1992 50,000
Granted (30,167 options were repriced and extended 587,167 2.50-7.00
as described in note 8)
Expired (50,000) 5.00
-----------
Balance at July 31, 1993 587,167
Granted 25,000 4.00
-----------
Balance at July 31, 1994 612,167 2.50-7.00
Expired (322,500) 3.00
-----------
Balance outstanding and exercisable at July 31, 1995 289,667 2.50-7.00
Expired (228,833) 2.50-5.00
Exercised (35,834) 2.50
----------- -------------
Balance outstanding and exercisable at July 31, 1996 25,000 $ 4.00
=========== =============
</TABLE>
The options outstanding at July 31, 1996 were due to expire and were
exercised on September 9, 1996.
(Continued)
F-28
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
- --- --------------------------
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 shall issue awards, options and grants. The maximum amount of
shares of common stock that may be issued pursuant to the option plan is
2,000,000. The per share option exercise price shall be determined by the
Board of Directors. All options and shares issued upon exercise are
nontransferable and forfeitable in the event employment is terminated
within two years of the date of hire. In the event the option is exercised
and said shares are forfeited, the Company will return to the optionee the
lesser of the current market value of the securities or the exercise price
paid.
The stock option activity is as follows:
Shares Price Range
------ -----------
Granted, February 14, 1989 230,000 $ 5.00
Granted, April 27, 1990 450,000 5.00
Granted, November 2, 1990 260,000 5.00
Granted, April 23, 1991 945,000 5.00
----------
1,885,000
Options issued in connection with
share purchase 36,365 2.75
Expired (680,000) 5.00
Cancelled (10,000) 5.00
----------
Balance at July 31, 1992 1,231,365 2.75-5.00
Expired (1,195,000) 5.00
Granted 1,575,000 3.50-5.00
-----------
Balance at July 31, 1993 1,611,365 2.75-5.00
Expired (36,365) 2.75
---------
Balance at July 31, 1994 1,575,000 3.50-5.00
Expired (945,000) 3.50-5.00
Exercised (185,000) 2.27-2.50
-----------
Balance at July 31, 1995 445,000 2.50-2.68
Exercised (445,000) $ 2.50-2.68
------- =========
Balance at July 31,1996 -
======
(Continued)
F-29
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
- --- --------------------------
In order to induce the exercise of options due to expire, the Board of
Directors approved the extension and repricing of certain options. Except
as indicated, all options were repriced at the fair market value or above
the common stock price at the time of extension.
<TABLE>
<CAPTION>
Exercise Price
------------------------------------------
No. of Options
No. of Options Original Revised Exercised Expiration Date
-------------- -------- ------- --------- ---------------
<S> <C> <C> <C> <C>
110,000 $ 3.50 $ 2.27 110,000 January 9, 1995
*320,000 5.00 2.50 320,000 July 31, 1996
200,000 5.00 2.68 200,000 July 31, 1996
750,000 3.50 3.87 174,000 September 16, 1996
--------- ---------
1,380,000 804,000
========= =========
</TABLE>
*Options held by unrelated parties were repriced slightly below fair
market value at time of extension.
1993 Stock Option Plan
----------------------
The Company's Board of Directors adopted the 1993 Stock Option Plan (the
"Plan") in November 1993 and the stockholders ratified the plan in January
1994. The total number of shares of common stock authorized for issuance
upon exercise of options granted under the Plan is 3,000,000.
The stock options activity is as follows:
Options Price Range
------- -----------
Granted 1,371,750 $ 2.71 - 5.00
Granted pursuant to conversion of certain
liabilities, related party 331,409 3.12
---------
Balance at July 31, 1994 1,703,159 2.71 - 5.00
Granted 188,850 2.27 - 5.00
---------
Balance at July 31, 1995 1,892,009 2.27 - 5.00
Granted 296,205 2.23 - 4.95
Exercised (1,500) 3.12 - 3.51
Expired (6,500) 3.12 - 3.51
--------- -----------
Balance at July 31, 1996 2,180,214 $ 2.23 - 5.00
========= ===========
Exercisable at July 31, 1996 1,263,661 $ 2.23 - 5.00
========= ===========
These options become exercisable over five years starting at various dates
from date of grant, up to one year after the grant date.
The options outstanding at July 31, 1996 will expire from November 10,
1997 to February 26, 2006.
(Continued)
F-30
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
- --- --------------------------
On August 1, 1996, the Company hired a new President who was granted five
year options under the 1993 Stock Option Plan to purchase 650,000 shares
of common stock at an exercise price of $4.70 per share, the fair market
value of the common stock on the date of grant. Of these options, 100,000
shares vested immediately, 75,000 shares vest each year for the next four
years starting one year from the date of the grant and 250,000 vest upon
Food and Drug Administration approval of ONCONASE.
(9) Stock Grant and Compensation Plans
- --- ----------------------------------
The Company had adopted a stock grant program effective September 1, 1981,
and pursuant to said Plan, had reserved 375,000 shares of its common stock
for issuance to key employees. The stock grant program was superseded by
the 1989 Stock Plan and no further grants will be given pursuant to the
grant plan. The following stock transactions occurred under the Company's
stock grant program:
Year Amount
ended Fair of
July 31, Shares Value Compensation
-------- ------ ----- ------------
1983 20,000 $ 5.50 $ 110,000
1984 19,750 5.125 101,219
1985 48,332 5.125-15.00 478,105
1986 11,250 5.125-15.00 107,032
1988 19,000 $ 3.50 $ 6,500
====== ====== =======
On January 26, 1984, the Company adopted a stock bonus plan for directors
and consultants. The plan was amended on October 6, 1986, to reserve
500,000 shares for issuance under the plan and to clarify a requirement
that a stock cannot be transferred until three years after the date of the
grant. The stock bonus plan for directors and consultants was superseded
by the 1989 Stock Plan and no further grants will be given pursuant to the
stock bonus plan for directors and consultants. The following stock
transactions occurred under the Company's stock bonus plan:
Year Amount
ended Fair of
July 31, Shares Value Compensation
-------- ------ ----- ------------
1984 130,250 $ 2.50-3.88 $ 385,917
1985 99,163 3.50-15.00 879,478
1985 (42,500) 2.50 (105,825)*
1986 15,394 9.65-15.00 215,400
1987 5,000 $ 15.00 $ 75,000
===== ====== ========
* Shares granted in 1984 were renegotiated in 1985 and cancelled as a
result of the recipient's termination.
(Continued)
F-31
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Grant and Compensation Plans, (Continued)
- --- -----------------------------------------------
Alfacell Corporation 1989 Stock Plan
------------------------------------
Under the 1989 Stock Plan, one million shares of the Company's common
stock have been 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 10). In addition, the 1989 Stock Plan
provides for the issuance of one million 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 and be
ineligible to receive an award or option.
During the fiscal years ended, the following awards and grants were
authorized under the 1989 Stock Plan:
Year Amount
ended Fair of
July 31, Shares 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 1995 or 1996.
(10) Income Taxes
- ---- ------------
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109). Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax
rates in effect for all years in which the temporary differences are
expected to reverse.
(Continued)
F-32
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) Income Taxes, (Continued)
- ---- -------------------------
At July 31, 1996 and 1995, the tax effects of temporary differences that
give rise to the deferred tax assets are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Excess of book over tax depreciation $ 23,141 $ 26,223
Deferred compensation - 165,999
Other 1,032 7,993
Federal and state net operating loss carry forwards 10,312,089 8,926,338
Research and experimentation and investment tax
credit carry forwards 479,287 473,287
--------- ---------
Total gross deferred tax assets 10,815,549 9,599,840
Valuation allowance (10,815,549) (9,599,840)
---------- ---------
Net deferred tax assets $ - $ -
============= ========
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
At July 31, 1996, the Company has federal net operating loss carry
forwards of approximately $27,660,000 that expire in the years 1997 to
2011. The Company also has investment tax credit carry forwards of $63,076
and research and experimentation tax credit carry forwards of $416,211
that expire in the years 1998 to 2011. Ultimate utilization/availability
of such net operating losses and credits may be significantly curtailed if
a significant change in ownership occurs in accordance with the provisions
of the Tax Reform Act of 1986.
(11) Other Financial Information
- ---- ---------------------------
Accrued expenses as of July 31, consist of the following:
1996 1995
---- ----
Payroll and payroll taxes $ 90,347 $ 27,539
Interest 10,496 10,196
Professional fees 23,581 23,800
Other 37,789 40,242
------ -------
$ 162,213 $ 101,777
======= =======
(Continued)
F-33
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(11) Other Financial Information, (Continued)
- ---- ----------------------------------------
Prepaid expenses as of July 31, consist of the following:
1996 1995
---- ----
Insurance $ 31,092 $ 31,607
NIH research 4,824 -
Other 27,934 7,000
------ -----
$ 63,850 $ 38,607
====== ======
(12) Commitments and Contingencies
- ---- -----------------------------
On July 23, 1991, the Board of Directors authorized the Company to pay to
the Chief Executive Officer of the Company an amount equal to 15% of any
gross royalties which may be paid to the Company from any license(s) with
respect to the Company's principal product, ONCONASE, or any other
products derived from amphibian source extract, produced either as a
natural, synthesized, and/or genetically engineered drug for which the
Company is the owner or co-owner of the patents, or acquires such rights
in the future, for a period not to exceed the life of the patent. If the
Company manufactures and markets its own drugs, then the Company will pay
an amount equal to 5% of gross sales from any products sold during the
life of the patents. In addition, the agreement provides for a reduction
of any indebtedness to the Chief Executive Officer in the amount of
$200,000 upon the Company entering into a licensing agreement for its
principal product.
The Company has product liability insurance coverage in the amount of
$6,000,000 for clinical trials. No product liability claims have been
filed against the Company. If a claim arises and the Company is found
liable in an amount that significantly exceeds the policy limits, it may
have a material adverse effect upon the financial condition of the
Company.
(13) Research and Development Agreement
- ---- ----------------------------------
In November 1992, the Company entered into a Cooperative Research and
Development Agreement (CRADA) with the National Institutes of Health
(NIH). In accordance with this CRADA, the NIH will perform research for
the Company on potential uses for its drug technology. During the term of
this research and development agreement, which expires in January 1999,
the Company is obligated to pay approximately $5,000 per month to the NIH.
Total research and development expenses under this arrangement amounted to
$64,000, $64,000, and $43,000 during the years ended July 31, 1996, 1995,
and 1994, respectively.
In August 1995, the Company entered into a CRADA with the National Cancer
Institute (NCI). In accordance with this CRADA, the NCI will perform
research for the Company on potential uses for its drug technology. During
the term of this research and development agreement, which expires in
August 1998, the Company is obligated to pay approximately $4,825 per
month to the NCI. Total research and development expenses under this
arrangement amounted to $58,000 during the fiscal year ended July 31,
1996.
F-34
Exhibit 21.1
Subsidiaries of Registrant
None.
<PAGE>
Exhibit 23.1
------------
Independent Auditors' Consent
-----------------------------
The Board of Directors
Alfacell Corporation:
We consent to incorporation by reference in the registration statement (No.
33-81308) on Form S-8 of Alfacell Corporation of our report dated September 24,
1996, relating to the balance sheets of Alfacell Corporation as of July 31, 1996
and 1995, 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, 1996 and the period from August 24, 1981 (date of inception) to
July 31, 1996, which report appears in the July 31, 1996 annual report on Form
10-KSB of Alfacell Corporation.
Our report dated September 24, 1996 as it relates to the financial statements
for the period from August 24, 1981 (date of inception) to July 31, 1996, is
based on the report of other auditors as to the amounts included therein for the
period from August 24, 1981 (date of inception) to July 31, 1992.
/S/KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
October 18, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Alfacell
Corporation Balance Sheet as of July 31, 1996 and the Statement of Operations
for the year ended July 31, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
<CASH> $6,431,442
<SECURITIES> 1,700,000
<RECEIVABLES> 112,250
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,307,542
<PP&E> 816,255
<DEPRECIATION> 688,325
<TOTAL-ASSETS> 8,487,711
<CURRENT-LIABILITIES> 438,685
<BONDS> 0
0
0
<COMMON> 13,859
<OTHER-SE> 7,027,679
<TOTAL-LIABILITY-AND-EQUITY> 8,487,711
<SALES> 0
<TOTAL-REVENUES> 184,250
<CGS> 0
<TOTAL-COSTS> 2,995,852
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130,550
<INCOME-PRETAX> 2,942,152
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,942,152
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,942,152
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
EXHIBIT 99.1
------------
FACTORS TO CONSIDER IN CONNECTION WITH FORWARD LOOKING STATEMENTS
Accumulated Deficit, Stockholders' Deficiency and Uncertainty of Future
Profitability. The Company was originally incorporated in 1981. To date, a
significant source of cash for the Company has been public and private
placements of its securities. Cash obtained from these sources has not been
sufficient to cover operating expenses. At July 31, 1996, the Company had an
accumulated deficit of approximately $40,400,000 and a total stockholders'
equity of approximately $6,700,000. The Company anticipates that it will
continue to incur substantial losses in the future. The Company is pursuing
licensing, marketing and development arrangements that may result in contract
revenue to the Company prior to its receiving revenues from commercial sales of
ONCONASE. There can be no assurance, however, that the Company will be able to
successfully consummate any such arrangements. The Company's profitability will
depend upon its success in developing, obtaining regulatory approvals for, and
effectively marketing ONCONASE. ONCONASE has not been approved by the Food and
Drug Administration (the "FDA"). Potential investors should be aware of the
difficulties a development stage enterprise encounters, especially in view of
the intense competition in the pharmaceutical industry in which the Company
competes. There can be no assurance that the Company's plans will either
materialize or prove successful, that its product under development will be
successfully developed or that such product will generate revenues sufficient to
enable the Company to earn a profit.
Need for, and Uncertainty of, Future Financing. The Company will be
required to expend significant funds on the further development of ONCONASE and
its continued operations will depend on its ability to raise additional funds
through equity or debt financings, collaborative agreements, strategic alliances
and revenues from the commercial sale of ONCONASE. To date, the Company has had
several preliminary discussions regarding potential collaborative agreements and
strategic alliances, however there can be no assurance that any such
arrangements will be consummated. There can be no assurance that such funds will
be available to the Company on acceptable terms, if at all. The Company believes
that its cash on hand, including marketable securities, as of July 31, 1996
coupled with the proceeds from the exercise of stock options in August and
September 1996 will be sufficient to meet its anticipated cash needs for
approximately the next two years. The Company will be required to raise
additional funds to meet its cash needs upon exhaustion of its current cash
resources. The Company continues to be primarily financed by proceeds from
private placements of Common Stock and investments in its equity securities. If
the Company is unable to secure sufficient future financing or refinance its
<PAGE>
bank debt it may be necessary for the Company to curtail or discontinue its
research and development activities.
Government Regulation. The pharmaceutical industry in the United States
is subject to stringent governmental regulation and the sale of ONCONASE for use
in humans in the United States will require the prior approval of the FDA.
Similar approvals by comparable agencies are required in most foreign countries.
The FDA has established mandatory procedures and safety standards which apply to
the clinical testing, manufacture and marketing of pharmaceutical products.
Pharmaceutical manufacturing facilities are also regulated by state, local and
other authorities. Obtaining FDA approval for a new therapeutic drug may take
several years and involve substantial expenditures. ONCONASE has not been
approved for sale in the United States or elsewhere. There can be no assurance
that the Company will be able to obtain FDA approval for ONCONASE or any of its
future products. Failure to obtain requisite governmental approvals or failure
to obtain approvals of the scope requested will delay or preclude the Company
from marketing its products while under patent protection, or limit the
commercial use of the products, and thereby may have a material adverse effect
on the Company's liquidity and financial condition. Further, even if
governmental approval is obtained, new drugs are subject to continual review and
a later discovery of previously unknown problems may result in restrictions on
the particular product, including withdrawal of such product from the market.
Patents and Proprietary Technology. The Company believes it is important to
develop new technology and improve its existing technology. When appropriate,
the Company files patent applications to protect such inventions. The Company
owns four U.S. Patents: (i) U.S. Patent No. 4,888,172 issued in 1989, which
covers pharmaceuticals derived from an amphibian source; (ii) U.S. Patent No.
5,559,212 issued in 1996, which covers ONCONASE; and (iii) U.S. Patents Nos.
5,529,775 and 5,540,925 issued in 1996, which cover combinations of ONCONASE
with certain other chemotherapeutics. The Company also owns U.S. Patent No.
4,882,421, which has now been disclaimed and is therefore legally unenforceable.
This disclaimer permitted the Company to obtain U.S. Patents Nos. 5,529,775,
5,540,925 and 5,559,212. The Company owns two European patents. These European
patents cover ONCONASE, process technology for making ONCONASE, and combinations
of ONCONASE with certain other chemotherapeutics. The Company also owns other
patent applications, which are pending in the United States, Europe, and Japan.
Additionally, the Company owns an undivided interest in each of two applications
that are pending in the United States. Each application relates to a Subject
Invention (as that term is defined in cooperative research and development
agreements to which the Company and the National Institutes of Health are
parties). Patents covering biotechnological inventions have an uncertain scope,
and the Company is subject to this uncertainty.
- 2 -
<PAGE>
The Company's patent applications may not issue as patents. Moreover, the
Company's patents may not provide the Company with competitive advantages and
may not withstand challenges by others. Likewise, patents owned by others may
adversely affect the ability of the Company to do business. Furthermore, others
may independently develop similar products, may duplicate the Company's
products, and may design around patents owned by the Company. The Company's
patent protection is limited to that afforded under the claims of its issued
patents, unless and until other patent protection is available to the Company.
Although the Company believes that its patents and patent applications are of
substantial value to the Company, there can be no assurance that such patents
will be of substantial commercial benefit to the Company, will afford the
Company adequate protection from competing products or will not be challenged or
declared invalid. The Company expects that there will continue to be significant
litigation in the industry regarding patents and other proprietary rights and,
if the Company were to become involved in such litigation, there could be no
assurance that the Company would have the resources necessary to litigate
effectively the contested issues. Pursuant to its loan agreement with the
Company, the Company's bank has a security interest in the Company's patent
portfolio. The bank has agreed, however, to subordinate its interest to
licensees of the Company if certain conditions are met.
Intense Competition and Technological Obsolescence. There are several
companies, universities, research teams and scientists, both private and
government-sponsored, which engage in developing products for the same
indications as the Company. Many of these entities and associations have far
greater financial resources, larger research staffs and more extensive physical
facilities than the Company. Several competitors are more experienced and have
substantially greater clinical, marketing and regulatory capabilities and
managerial resources than the Company. Such competitors may succeed in their
research and development of products for the same indications as the Company
prior to the Company achieving any measure of success in its efforts.
The number of persons skilled in the research and development of
pharmaceutical products is limited and significant competition exists for such
individuals. As a result of this competition and the Company's limited
resources, the Company may find it difficult to attract skilled individuals to
research, develop and investigate anti-cancer drugs in the future.
The business in which the Company is engaged is highly competitive and
involves rapid changes in the technologies of discovering, investigating and
developing new drugs. Rapid technological development by others may result in
the Company's products becoming obsolete before the Company recovers a
- 3 -
<PAGE>
significant portion of the research, development and commercialization expenses
incurred with respect to those products. Competitors of the Company are numerous
and are expected to increase as new technologies become available. The Company's
success depends upon developing and maintaining a competitive position in the
development of new drugs and technologies in its area of focus. There can be no
assurance that, if attained, the Company will be able to maintain a competitive
position in the pharmaceutical industry.
Dependence on Reimbursement. Sales of the Company's products, if any,
will be dependent in part on the availability of reimbursement from third party
payors, such as governmental and private insurance plans. Third party payors are
increasingly challenging the prices charged for medical products and services.
Additionally, the containment of health care costs has become a priority and
pharmaceutical and biotechnology drug prices have been targeted in this effort.
If the Company succeeds in bringing any of its products to market, there can be
no assurance that such products will be considered cost-effective, that
reimbursement will be available or, if available, that the level of
reimbursement will be sufficient to allow the Company to sell its products on a
profitable basis.
Potential Product Liability. The use of the Company's products during
testing or after regulatory approval entails an inherent risk of adverse effects
which could expose the Company to product liability claims. The Company
maintains product liability insurance coverage in the total amount of $6,000,000
for claims arising from the use of its products in clinical trials prior to FDA
approval. There can be no assurance that the Company will be able to maintain
its existing insurance coverage or obtain coverage for the use of its products
in the future. Management believes that the Company maintains adequate insurance
coverage for the operation of its business at this time, however, there can be
no assurance that such insurance coverage and the resources of the Company would
be sufficient to satisfy any liability resulting from product liability claims.
Dependence Upon Key Personnel. The Company is currently managed by a
small number of key management and operating personnel, whose efforts will
largely determine the Company's success. The loss of key management personnel,
particularly Kuslima Shogen, the Company's Chairman and Chief Executive Officer,
would likely have a material adverse effect on the Company. The bank may call
due all amounts payable under the its term loan agreement with the Company (the
"Term Loan") in the event Ms. Shogen ceases for any reason, except death, to be
a full time employee, officer or director of the Company. The Company carries
key person life insurance on the life of Ms. Shogen with a face value of
$1,000,000. The Company's bank has
- 4 -
<PAGE>
been assigned this policy as security for the approximately $1,500,000
outstanding under the Term Loan.
No Dividends. The Company has not paid any dividends on its Common
Stock since its inception and does not currently foresee the payment of cash
dividends in the future. Furthermore, under the Term Loan the Company is
prohibited from paying any dividends without the bank's consent. The Company
currently intends to retain all earnings, if any, to finance its operations.
Limited Public Market and Liquidity. The Company's Common Stock is
traded on the Bulletin Board and is not traded on any exchange nor quoted on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). As a consequence, trading of the Common Stock in the
over-the-counter market is limited. A limited trading market could result in an
investor being unable to liquidate his or her investment.
Preferred Stock; Anti-takeover Device. The Company is currently
authorized to issue 1,000,000 shares of preferred stock, par value $.001 per
share. The Company's Board of Directors is authorized, without any approval of
the stockholders, to issue the preferred stock and determine the terms of such
preferred stock. As of July 31, 1996, there were no shares of preferred stock
outstanding. The authorized and unissued shares of preferred stock may be
classified as an "anti-takeover" measure and may discourage attempted takeovers
of the Company which are not approved by the Board of Directors. The authorized
shares of preferred stock will remain available for general corporate purposes,
may be privately placed and can be used to make a change in control of the
Company more difficult. Under certain circumstances, the Board of Directors
could create impediments to, or frustrate, persons seeking to effect a takeover
or transfer in control of the Company by causing such shares to be issued to a
holder or holders who might side with the Board of Directors in opposing a
takeover bid that the Board of Directors determines is not in the best interests
of the Company and its stockholders, but in which unaffiliated stockholders may
wish to participate. Under Delaware law, the Board of Directors is permitted to
use a depositary receipt mechanism which enables the Board to issue an unlimited
number of fractional interests in each of the authorized and unissued shares of
preferred stock without stockholder approval. Consequently, the Board of
Directors, without further stockholder approval, could issue authorized shares
of preferred stock or fractional interests therein with rights that could
adversely affect the rights of the holders of the Company's Common Stock to a
holder or holders which when voted together with other securities held by
members of the Board of Directors and the executive officers and their families
could prevent the majority stockholder vote required by the Company's
certificate of incorporation or Delaware law to effect certain matters.
- 5 -
<PAGE>
Furthermore, the existence of such authorized shares of preferred stock might
have the effect of discouraging any attempt by a person, through the acquisition
of a substantial number of shares of Common Stock, to acquire control of the
Company. Accordingly, the accomplishment of a tender offer may be more
difficult. This may be beneficial to management in a hostile tender offer, but
have an adverse impact on stockholders who may want to participate in such
tender offer.
Control By Present Management. The Company's officers and directors, as
a group, beneficially owned 23.1% of the outstanding Common Stock of the Company
as of October 10, 1996 and thus could in some instances exercise effective
control over the Company.
Volatility and Possible Reduction in Price of Common Stock. The market
price of the Common Stock, like that of the common stock of many other
development stage biotechnology companies, has been and may continue to be,
highly volatile. Factors such as announcements of technological innovations or
new commercial products by the Company or its competitors, disclosure of results
of clinical testing or regulatory proceedings, governmental regulation and
approvals, developments in patent or other proprietary rights, public concern as
to the safety of products developed by the Company and general market conditions
may have a significant effect on the market price of the Common Stock. In
addition, the stock market has experienced and continues to experience extreme
price and volume fluctuations which have effected the market price of many
biotechnology companies. These broad market fluctuations, as well as general
economic and political conditions, may adversely effect the market price of the
Company's Common Stock.
Dependence on Third Parties for Manufacturing. The Company currently
does not have facilities capable of manufacturing its product in commercial
quantities and, for the foreseeable future, the Company intends to rely on third
parties to manufacture its product. If the Company were to establish a
manufacturing facility, which it currently does not intend to do, the Company
would require substantial additional funds and would be required to hire and
retain significant additional personnel to comply with the extensive current
Good Manufacturing Practices ("cGMP") regulations of the FDA applicable to such
a facility. No assurance can be given that the Company would be able to make the
transition successfully to commercial production, if it chose to do so.
Dependence on Third Parties for Marketing; No Marketing Experience.
Neither the Company nor any of its officers or employees has pharmaceutical
marketing experience. The Company intends to enter into development and
marketing agreements with third parties. The Company expects that under such
arrangements
- 6 -
<PAGE>
it would act as a co-marketing partner or would grant exclusive marketing rights
to its corporate partners in return for up-front fees, milestone payments and
royalties on sales. Under these agreements, the Company's marketing partner may
have the responsibility for a significant portion of development of the product
and regulatory approval. In the event that the marketing partner fails to
develop a marketable product or fails to market a product successfully, the
Company's business may be adversely affected. If the Company were to market its
products itself, significant additional expenditures and management resources
would be required to develop an internal sales force and there can be no
assurance that the Company would be successful in penetrating the markets for
any products developed or that internal marketing capabilities would be
developed at all.
Utilization of Carryforwards. At July 31, 1996, the Company had federal
net operating loss carryforwards of approximately $27,660,000 that expire in the
years 1997 to 2011. The Company also had investment tax credit carryforwards of
approximately $63,000 and research and experimentation tax credit carryforwards
of approximately $416,000 that expire in the years 1998 to 2011. Ultimate
utilization/availability of such net operating losses and credits may be
significantly curtailed if a significant change in ownership occurs.
- 7 -
