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FILE NO. 333-11575
Filed pursuant to Rule 424(b)(3)
PROSPECTUS
2,042,506 Shares
Alfacell Corporation
COMMON STOCK, PAR VALUE $.001 PER SHARE
The Registration Statement, of which this Prospectus forms a part,
registers the offer and sale of up to 2,042,506 shares of Common Stock, par
value $.001 per share (the "Common Stock"), of Alfacell Corporation (the
"Company" or "Alfacell") by certain stockholders (the "Selling Stockholders").
Of these 2,042,506 shares, 1,728,706 shares are outstanding and held by the
Selling Stockholders and 313,800 shares are issuable upon the exercise of
outstanding warrants to purchase Common Stock (the "Warrants") held by the
Selling Stockholders. The Selling Stockholders acquired the outstanding shares
of Common Stock offered hereby and the Warrants directly from the Company (i)
in several private placement transactions during the period of October 1995 to
April 1996 (the "1995/1996 Private Placements"); (ii) in a private placement
transaction completed on June 11, 1996 (the "June 1996 Private Placement"); and
(iii) in connection with a raw material purchasing agreement dated October 5,
1995 (the "Supply Agreement"). See "Selling Stockholders" and "Certain
Transactions". One of the Selling Stockholders is a director of the Company.
See "Selling Stockholders." The Company will not receive any of the proceeds
from the sale of Common Stock by the Selling Stockholders. To the extent the
Warrants are exercised the Company will apply the proceeds thereof to its
general corporate purposes. See "Use of Proceeds."
The Company's Common Stock is traded in the over-the-counter market. On
August 30, 1996 the high bid and low asked quotations of the Common Stock were
$4 31/32 and $5 1/16, respectively, as reported by the National Quotations
Bureau.
The Selling Stockholders may sell the shares of Common Stock from time to
time in transactions in the open market, in negotiated transactions, or by a
combination of these methods, at fixed prices that may be changed, at market
prices at the time of sale, at prices related to market prices or at negotiated
prices. The Selling Stockholders may effect these transactions by selling the
Common Stock to or through broker-dealers, who may receive compensation in the
form of discounts or commissions from the Selling Stockholders or from the
purchasers of the Common Stock for whom the broker-dealers may act as agent or
to whom they may sell as principal, or both. See "Plan of Distribution."
The Company will bear all of the expenses in connection with the
registration of the Common Stock offered hereby, which expenses are estimated
to be $24,000. The Selling Stockholders will pay any brokerage compensation in
connection with their sale of the Common Stock.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" WHICH COMMENCES ON PAGE 5 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is September 13, 1996
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such
reports and proxy and information statements and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at its regional offices located at Seven World
Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511;
and copies of such material can be obtained from the Public Reference
Section of the Commission in Washington, D.C., at prescribed rates.
The Company has filed with the Commission a Registration Statement on
Form SB-2 (the "Registration Statement") under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the shares of Common
Stock offered hereby. This Prospectus (the "Prospectus") does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to
the Company and the shares of Common Stock offered hereby, reference is
hereby made to the Registration Statement, exhibits and schedules.
The following trademarks appear in this Prospectus:
ONCONASE<reg-trade-mark> is a registered trademark of Alfacell Corporation;
Gemzar<reg-trade-mark> is a registered trademark of Eli Lilly & Co.
No dealer, salesman or any other person has been authorized to give
any information or to make any representation other than those contained in
this Prospectus in connection with the offering herein contained and, if
given or made, such information or representation must not be relied upon
as having been authorized by the Company. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the facts herein
set forth since the date hereof.
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TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY........................................................1
RISK FACTORS..............................................................5
USE OF PROCEEDS..........................................................15
DIVIDEND POLICY..........................................................15
CAPITALIZATION...........................................................16
PRICE RANGE OF COMMON STOCK..............................................17
SELECTED FINANCIAL DATA..................................................18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................19
BUSINESS ................................................................24
MANAGEMENT...............................................................33
EXECUTIVE COMPENSATION...................................................38
CERTAIN TRANSACTIONS.....................................................42
PRINCIPAL STOCKHOLDERS...................................................46
SELLING STOCKHOLDERS.....................................................47
PLAN OF DISTRIBUTION.....................................................52
DESCRIPTION OF SECURITIES................................................53
SHARES ELIGIBLE FOR FUTURE SALE..........................................56
LEGAL MATTERS............................................................60
EXPERTS..................................................................60
INDEX TO FINANCIAL STATEMENTS...........................................F-1
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PROSPECTUS SUMMARY
The following is a summary of certain information contained in the
body of this Prospectus and should be read in conjunction with the detailed
information and financial statements appearing elsewhere herein.
THE COMPANY
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<reg-trade-mark> which targets solid tumors,
most of which are known to be resistant to other chemotherapeutic drugs.
To date, the most significant clinical results with ONCONASE have been
observed in pancreatic, non-small cell lung, mesothelioma and metastatic
breast cancer. In 1996, the American Cancer Society estimates that 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 over 300 cancer patients on a weekly
basis, including 175 patients with advanced stages of pancreatic, non-small
cell lung, mesothelioma and metastatic breast cancer. Encouraging results
have been observed in Phase I and II clinical trials with 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 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 plus tamoxifen against
Gemzar<reg-trade-mark>, 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
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to uninfected H9 leukemic cells. In addition, IN VITRO findings by NIH
scientists revealed that ONCONASE significantly inhibited production of the
HIV-1 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 further
research ONCONASE and its 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 early embryonic and malignant cell growth. However,
significant additional research will be required in order to develop these
proteins into therapeutics. There can be no assurance that the development
of these proteins will be accomplished.
On March 21, 1994 the Company completed a private placement (the
"March 1994 Private Placement") of 40 units consisting of an aggregate of
800,000 shares of restricted Common Stock and warrants to purchase an
aggregate of 800,000 shares of Common Stock at an exercise price of $5.00
per share. The units were sold for $50,000 per unit. The per share price
of the Common Stock was $2.50. The Company received net proceeds of
approximately $1,865,791 (including the purchase of 4.1 units by the
conversion of $182,000 of outstanding Company debt plus $23,000 of
outstanding payables by an unaffiliated creditor and after the payment of
certain offering expenses) which has been used primarily for general
corporate purposes, including the funding of research and development
activities, which include collaborations with the NIH and the National
Cancer Institute ("NCI") and Phase II/III clinical trials. In December
1995, the Commission declared effective a registration statement filed by
the Company with respect to the 772,000 shares of such Common Stock and all
800,000 shares of Common Stock underlying such warrants which remained
unsold by the March 1994 Private Placement investors as of such date.
On September 13, 1994 the Company completed a private placement (the
"September 1994 Private Placement") of an aggregate of 288,506 shares of
restricted Common Stock and 288,506 warrants to purchase an aggregate of
288,506 shares of Common Stock at an exercise price of $5.50 per share.
The shares of Common Stock and warrants to purchase Common Stock were sold
in units consisting of 20,000 shares of Common Stock and 20,000 warrants.
An aggregate of 14.4 units were sold at $50,000 per unit. The per share
price of the Common Stock was $2.50. The Company received net proceeds of
approximately $545,000 (after giving effect to the purchase of 2.4 units by
the conversion of $44,000 of outstanding Company debt plus $77,265 of
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outstanding payables by certain unaffiliated creditors and the payment of
certain offering expenses). The Company utilized these net proceeds
primarily for general corporate purposes, including the funding of research
and development activities, which include collaborations with the NIH and
the NCI and Phase II/III clinical trials. In December 1995, the Commission
declared effective a registration statement filed by the Company with
respect to 230,906 shares of such Common Stock and all 288,506 shares of
Common Stock underlying such warrants which remained unsold by the
September 1994 Private Placement investors as of such date.
On October 21, 1994 the Company completed a private placement (the
"October 1994 Private Placement") of 40,000 shares of restricted Common
Stock at a per share price of $2.50 and three-year warrants to purchase
40,000 shares of Common Stock at an exercise price of $5.50 per share to a
single investor. On September 29, 1995 the Company completed a private
placement (the "September 1995 Private Placement") of an aggregate of
1,925,616 shares of restricted Common Stock and three-year warrants to
purchase 55,945 shares of Common Stock at an exercise price of $4.00 per
share. The Common Stock was sold alone at per share prices ranging from
$2.00 to $3.70, and in combination with warrants at per share prices
ranging from $4.96 to $10.92, which related to the number of warrants
contained in the unit. After taking into account expenses of the
offerings, the Company received net proceeds of approximately $4.2 million
from the October 1994 and September 1995 Private Placements. The Company
utilized these net proceeds primarily for general corporate purposes,
including the funding of research and development activities, which include
collaborations with the NIH and the NCI and Phase II/III clinical trials.
In December 1995, the Commission declared effective a registration
statement filed by the Company with respect to such 1,965,616 shares of
such Common Stock and 95,945 shares of Common Stock underlying such
warrants.
On November 29, 1995, the Company amended and restated a promissory
note and amended the term loan agreement with its bank (the "Term Loan")
effective as of October 1, 1995. The amendment to the Term Loan provides
for, among other things, the issuance to the bank of a Warrant to purchase
10,000 shares of Common Stock through August 31, 1997 at a per share
exercise price of $4.19. In December 1995, the Commission declared
effective a registration statement filed by the Company with respect to
10,000 shares of Common Stock underlying such warrant.
On April 4, 1996 the Company completed the 1995/1996 Private
Placements for an aggregate of 207,316 shares of restricted Common Stock at
per share prices ranging from $3.60 to $4.24. On June 11, 1996 the Company
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completed the June 1996 Private Placement for an aggregate of 1,515,330
shares of restricted Common Stock and three-year Warrants to purchase
313,800 shares of Common Stock at an exercise price of $7.50 per share.
The Common Stock was sold alone at a per share price of $3.70 and in
combination with Warrants at a per unit price of $12.52. Each unit
consisted of three shares of Common Stock and one Warrant. The Warrants
were also sold alone at a per Warrant price of $1.42. After taking into
account expenses of the offerings, the Company received aggregate net
proceeds of approximately $6.5 million from the 1995/1996 Private
Placements and the June 1996 Private Placement. The Company intends to
utilize these net proceeds primarily for general corporate purposes,
including the funding of research and development of its product ONCONASE.
This prospectus relates to the offer and sale by the Selling Stockholders
of such 1,722,646 shares of Common Stock and the 313,800 shares of Common
Stock underlying such Warrants sold in the aggregate in the 1995/1996
Private Placements and the June 1996 Private Placement.
On October 5, 1995 the Company entered into an agreement with one of
its raw material suppliers for the purchase of leopard frog eggs and
embryos. Pursuant to the agreement the Company issued 3,030 shares of
Common Stock to each of Gerald and Doris L. Graska (the "Graskas"). This
Prospectus relates to the offer and sale by the Graskas as Selling
Stockholders of an aggregate of 6,060 shares of Common Stock.
Alfacell, a Delaware corporation, was incorporated in 1981. The
Company's executive offices are located at 225 Belleville Avenue,
Bloomfield, New Jersey 07003, telephone (201) 748-8082.
THE OFFERING
Securities Offered......... This Prospectus relates to an offering by the
Selling Stockholders of up to 2,042,506
shares of Common Stock. Of these shares (i)
1,722,646 were issued in the 1995/1996
Private Placements and the June 1996 Private
Placement, (ii) 313,800 underlie Warrants
which were issued in the June 1996 Private
Placement, which shares may be issued upon
exercise of the Warrants, and (iii) 6,060
were issued to one of the Company's raw
material suppliers. See "Selling
Stockholders" and "Certain Transactions."
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Securities Outstanding..... As of July 31, 1996 the Company had
13,858,909 shares of Common Stock
outstanding. Assuming that all of the
Warrants are exercised and no other shares of
Common Stock are issued subsequent to July
31, 1996 the Company would have 14,172,709
shares of Common Stock outstanding.
Use of Proceeds............ The Company will not receive any proceeds
from the sale of the shares of Common Stock
offered by the Selling Stockholders. To date
the Company has received no proceeds from the
exercise of the Warrants. If all of the
Warrants are exercised, the Company will
receive estimated additional net proceeds of
$2,353,500. The Company intends to utilize
any proceeds received from the exercise of
the Warrants for general corporate purposes,
including the funding of research and
development activities. There can be no
assurance that any of the Warrants will be
exercised. See "Use of Proceeds."
Risk Factors............... See "Risk Factors" for a discussion of
certain risk factors that should be
considered by prospective investors in
connection with an investment in the shares
of Common Stock offered hereby.
RISK FACTORS
The shares of Common Stock offered hereby are speculative and involve
a high degree of risk. They should not be purchased by anyone who cannot
afford the loss of his or her entire investment. In analyzing this
offering, prospective investors should consider the matters set forth
below, among others, and carefully read this Prospectus. Information
contained in this Prospectus 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
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negative thereof or other variations thereon or comparable terminology, or
by discussion of strategy or future plans. See, e.g. "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Prospectus Summary - The Company," "Risk Factors" and "Business". No
assurance can be given that the future results covered by the forward-
looking statements will be achieved. The following matters include
cautionary statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results
covered in such forward-looking statements. Other factors could also cause
actual results to vary materially from the future results covered in such
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 April 30, 1996, the
Company had an accumulated deficit of approximately $39,600,000 and a total
stockholders' equity of approximately $400,000. 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 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.
SUBSTANTIAL DOUBT CONCERNING THE COMPANY'S ABILITY TO CONTINUE AS A
GOING CONCERN. The opinion of KPMG Peat Marwick LLP, the independent
auditors of the Company's July 31, 1995 financial statements contained an
explanatory paragraph stating that the Company's recurring losses from
operations, its working capital deficiency and net capital deficiency raise
substantial doubt about the Company's ability to continue as a going
concern.
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LEVERAGE. The Company is highly leveraged. At April 30, 1996, the
Company had total assets of approximately $2,600,000 and total liabilities
of approximately $2,200,000. Of such liabilities, approximately $1,500,000
is owed to a bank pursuant to the Term Loan, and is secured by a lien on
substantially all of the Company's assets, including its patents. The Term
Loan agreement contains restrictive covenants which could make it more
difficult to operate the Company's business. In the event the Company
defaults on the debt it owes to such bank, the bank may foreclose on the
assets which secure its debt and utilize such assets to satisfy such debt.
Upon a liquidation of the Company, the Company's assets would first be used
to repay its secured creditors and then its unsecured creditors, before any
distribution would be made to holders of the Company's equity securities.
Given the current levels of the Company's assets and its liabilities, it is
highly unlikely that the holders of the Company's Common Stock would
receive any significant distribution in the event the Company is
liquidated. The Company's bank debt matures in August 1997, at which time
a principal payment of approximately $1,400,000 will be due.
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 April 30, 1996 coupled with the
proceeds of the June 1996 Private Placement will be sufficient to meet its
anticipated cash needs for 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 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. The FDA has established mandatory procedures and
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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 has been issued four
patents in the United States and two patents in Europe, and has other
patent applications pending. The U.S. Patents are Nos. 4,882,421,
4,888,172, 5,529,775 and 5,540,925, and the European patents are Nos. 0 440
633 and 0 500 589. The Company's U.S. Patent No. 4,882,421 contains a
disclosure that in certain respects is erroneous and that complicated the
prosecution of other Company patent applications pending before the U.S.
Patent and Trademark Office ("USPTO"). Because the Company considered
those pending patent applications to be more important than U.S. Patent No.
4,882,421, the Company has disclaimed U.S. Patent No. 4,882,421.
Accordingly, U.S. Patent No. 4,882,421 is not legally enforceable against
anyone. The Company's patent protection is limited to that afforded under
the claims of U.S. Patent Nos. 4,888,172, 5,529,775 and 5,540,925, unless
and until other U.S. 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. There can be no assurance that
additional United States patents or foreign patent equivalents will be
issued to the Company. The scope of protection afforded by patents to
biotechnological inventions is uncertain and the Company is subject to this
uncertainty. 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
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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 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
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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. See "Management". The bank may call due all amounts payable
under 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 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.
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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. 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 26.0% of the outstanding Common Stock of the
Company as of July 31, 1996 and thus could in some instances exercise
effective control over the Company.
11
<PAGE>
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 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
12
<PAGE>
for any products developed or that internal marketing capabilities would be
developed at all.
UTILIZATION OF CARRYFORWARDS. At July 31, 1995, the Company had
federal net operating loss carryforwards of approximately $23,460,000 that
expire in the years 1997 to 2010. The Company also had investment tax
credit carryforwards of approximately $63,000 and research and
experimentation tax credit carryforwards of approximately $410,000 that
expire in the years 1998 to 2010. Ultimate utilization/ availability of
such net operating losses and credits may be significantly curtailed if a
significant change in ownership occurs.
SHARES ELIGIBLE FOR FUTURE SALE. The Company had 13,858,909 shares of
Common Stock outstanding as of July 31, 1996. Of these outstanding shares,
approximately 5,722,547 shares are "restricted securities" as defined in
Rule 144 adopted under the Securities Act. Of these restricted shares,
approximately 1,939,540 were eligible to be sold under Rule 144 as of July
31, 1996. Additionally, of these restricted shares, an aggregate of
1,722,646 are covered by this Registration Statement and were sold in the
1995/1996 Private Placements and the June 1996 Private Placement, 6,060 are
covered by this Registration Statement and were issued pursuant to the
Supply Agreement, an aggregate of 1,924,101 were issued and sold in the
March 1994 Private Placement, September 1994 Private Placement, October
1994 Private Placement and September 1995 Private Placement and 130,200
were issued pursuant to the exercise of options, all of which are included
on registration statements which the Company has filed with the Commission.
Such 3,783,007 shares of restricted Common Stock included in registration
statements filed with the Commission, will, if sold pursuant to their
respective registration statements, be freely tradeable without restriction
under the Securities Act, except that any shares held by an "affiliate," as
that term is defined under the Securities Act, will be subject to the
resale limitations of Rule 144. In addition to the Warrants to purchase
313,800 shares of Common Stock issued in the June 1996 Private Placement
and covered by this Registration Statement, as of July 31, 1996 there were
outstanding (i) options to purchase an aggregate of 3,597,743 shares of
Common Stock, which are covered by an effective Registration Statement on
Form S-8, (ii) warrants to purchase an aggregate of 1,088,506 shares of
Common Stock, which were issued and sold in the March 1994 Private
Placement and the September 1994 Private Placement, (iii) warrants to
purchase an aggregate of 105,945 shares of Common Stock, which were issued
and sold in the October 1994 Private Placement, the September 1995 Private
Placement and to the bank in connection with the amendment of the Term
Loan, and (iv) options to purchase an aggregate of 478,482 shares, all of
which underlying shares of Common Stock are included in registration
13
<PAGE>
statements filed by the Company with the Commission. Such 5,584,476 shares
of Common Stock underlying such warrants and options will, if issued upon
exercise of such warrants and options and sold pursuant to their respective
registration statements, be freely tradeable without restriction under the
Securities Act, except that any shares held by an "affiliate," as that term
is defined under the Securities Act, will be subject to the resale
limitations of Rule 144. The future sale of a substantial number of shares
of Common Stock by existing holders of Common Stock and holders of warrants
and options exercisable for Common Stock pursuant to Rule 144 under the
Securities Act or through effective registration statements may have an
adverse impact on the market price of the Common Stock. See "Shares
Eligible for Future Sale."
TERMINATION OF COMPANY'S AUDITORS. The financial statements of the
Company from inception to July 31, 1992 included in this Registration
Statement, were audited by the independent accounting firm of Armus,
Harrison & Co. ("AHC"). On December 1, 1993, certain shareholders of 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 in this Registration Statement, although AHC has not
consented to the use of such report herein and will not be available to
perform any subsequent review procedures with respect to such report.
Accordingly, investors will be barred from asserting claims against AHC
under Section 11 of the Securities Act on the basis of the use of such
report herein. 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 claims 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 in this
Prospectus, 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 any 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.
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<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares
of Common Stock offered herein by the Selling Stockholders. If all of the
Warrants are exercised, the Company will receive estimated net proceeds of
approximately $2,353,500. The Company intends to utilize any proceeds
received from the exercise of the Warrants primarily to fund research and
development activities and for general corporate purposes. There can be no
assurance that any of the Warrants will be exercised.
DIVIDEND POLICY
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, the Company's loan agreement with its bank
prohibits the payment of any dividends without the bank's consent. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The Company currently
intends to retain any earnings to finance its operations.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
April 30, 1996 and as adjusted solely to reflect the net proceeds received
subsequent to April 30, 1996 from the issuance and sale of the Common Stock
and Warrants in the June 1996 Private Placement.
<TABLE>
<CAPTION>
APRIL 30, 1996
<S> <C> <C> <C> <C>
ACTUAL AS ADJUSTED
Long-term debt 1,418,448 1,418,448
Stockholders' equity:
Preferred stock, $.001 par value.
Authorized and unissued, 1,000,000 shares at April 30, 1996 -- --
Common stock, $.001 par value.
Authorized 25,000,000 shares; issued and outstanding
11,900,679 shares at April 30, 1996(1) 11,901 --
Issued and outstanding 13,416,009 shares as adjusted(2) -- 13,416
Capital in excess of par value 39,996,257 45,690,446
Deficit accumulated during development stage (39,605,328) (39,605,328)
Total stockholders' equity 402,830 6,098,534
Total capitalization $ 1,821,278 $ 7,516,982
</TABLE>
______________________
(1) Excludes 5,696,903 shares of Common Stock reserved as of April 30, 1996 for
issuance pursuant to outstanding options and warrants to purchase Common
Stock.
(2) Excludes 5,584,476 shares of Common Stock reserved as of July 31, 1996 for
issuance pursuant to outstanding options and warrants to purchase Common
Stock.
16
<PAGE>
PRICE RANGE OF COMMON STOCK
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 August 30, 1996 the high bid and low asked quotations for the Company's
Common Stock were $4 31/32 and $5 1/16, respectively. As of August 30,
1996, there were approximately 1,540 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 Quotations Bureau for the Common
Stock for the periods indicated. 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
Year Ended July 31, 1997:
First Quarter (Through
August 30, 1996) 4 31/32 4 3/8
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<PAGE>
SELECTED FINANCIAL DATA
Set forth below is the selected financial data for the Company for the
nine month periods ended April 30, 1996 and 1995 and for each of the fiscal
years in the five year period ended July 31, 1995. The financial
statements of the Company for the fiscal years ended July 31, 1992 and 1991
from which certain of the selected financial data presented below were
derived, were audited by the independent accounting firm of Armus, Harrison
& Co. ("AHC"). AHC has not performed any audits on behalf of the Company
since completion of the audit for the fiscal year ended July 31, 1992, and
KPMG Peat Marwick LLP, independent public accountants, was engaged to audit
and report on the Company's financial statements for the fiscal years ended
July 31, 1995, 1994 and 1993. The selected financial data is qualified in
its entirety by, and should be read in conjunction with, the more detailed
information and financial statements and the accompanying notes included in
this Registration Statement. See "Index to Financial Statements."
On December 1, 1993, certain shareholders of AHC terminated their
association with AHC, 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 in this Registration Statement,
although AHC has not consented to the use of such report herein and will
not be available to perform any subsequent review procedures with respect
to such report. Accordingly, investors will be barred from asserting
claims against AHC under Section 11 of the Securities Act on the basis of
the use of such report herein. 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 in this
Prospectus, 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 any 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.
18
<PAGE>
<TABLE>
<CAPTION>
Nine Month Periods Ended Year Ended July 31,
APRIL 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1995 1994 1993 1992 1991
Revenue $ 105,563 9,653 20,992 $ 6,064 $ 489 $ 0 $ 1,161
Net Loss $ (2,156,208) (1,386,862) (1,993,123) $(2,234,428) $ (2,357,350) $ (4,772,826) $ (5,202,302)
Net Loss per share (.19) (.15) (.21) $ (.26) $ (.31) $ (.67) $ (.76)
Dividends NONE NONE NONE NONE NONE NONE NONE
AT END OF
PERIOD:
Total Assets $ 2,615,907 727,197 1,616,170 $ 779,763 $ 335,332 $ 266,962 $ 178,364
Long-Term $ 1,418,448 1,532,328 7,129(1) $ 1,593,976 $ 5,439,531 $ 1,427,000 $ 1,397,000
Obligations
</TABLE>
(1) Excludes $1,577,049 of long-term debt which was initially due to
mature on May 31, 1996 and was classified as a current liability at July 31,
1995. In November 1995, the Term Loan agreement related to this debt was
amended, effective October 1, 1995, to extend the maturity date of the Term
Loan to August 31, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED APRIL 30, 1996 AND 1995
REVENUES. 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
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 the nine months ended April
30, 1996 and 1995. Investment income increased by $96,000 to $106,000 for
the nine month period ended April 30, 1996 compared to the same period last
year.
RESEARCH AND DEVELOPMENT. Research and development expense for the
three months ended April 30, 1996 was $521,000 compared to $243,000 for the
same period last year, an increase of $278,000 or 114%. Research and
development expense for the nine months ended April 30, 1996 was $1,542,000
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<PAGE>
compared to $800,000 for the same period last year, an increase of $742,000
or 93%. These increases were primarily due to increases in costs
associated with manufacturing clinical supplies of ONCONASE and costs in
support of on-going clinical trials, including the Phase III clinical trial
for pancreatic cancer and the Phase II clinical trial for malignant
mesothelioma.
GENERAL AND ADMINISTRATIVE. General and administrative expense for
the three months ended April 30, 1996 was $197,000 compared to $154,000 for
the same period last year, an increase of $43,000 or 28%. This increase
was primarily due to costs associated with the Company's expansion of
activities associated with public relations. General and administrative
expense for the nine months ended April 30, 1996 was $622,000 compared to
$488,000 for the same period last year, an increase of $134,000 or 27%.
This increase was primarily due to the Company's expansion of activities
associated with public relations and business development.
INTEREST. Interest expense for the three months ended April 30, 1996
was $31,000 compared to $34,000 for the same period last year, a decrease
of $3,000 or 9%. Interest expense for the nine months ended April 30, 1996
was $98,000 compared to $108,000 for the same period last year, a decrease
of $10,000 or 9%. The decrease 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.
NET LOSS. The Company has incurred net losses during each year since
its inception. The net loss for the three months ended April 30, 1996 was
$718,000 as compared to $430,000 for the same period last year. The net
loss for the nine months ended April 30, 1996 was $2,156,000 as compared to
$1,387,000 for the same period last year. The cumulative loss from the
date of inception, August 24, 1981, to April 30, 1996 amounted to
$39,605,000. 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. The
increases in the net loss for the current period were attributable
generally to the increase in expenses discussed above.
FISCAL YEARS ENDED JULY 31, 1995, 1994 AND 1993
REVENUES. 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
20
<PAGE>
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 1995,
1994 and 1993.
RESEARCH AND DEVELOPMENT. 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 Executive Vice
President and Medical Director.
Research and development expense for fiscal 1994 was $1,114,000
compared to $1,092,000 in fiscal 1993, an increase of $22,000 or 2%. The
increase in fiscal 1994 can be attributed to an increase in expenses for
collection and analysis of the ONCONASE Phase I and II clinical trial data
which was partially offset by a decrease in fiscal 1994 as compared to
fiscal 1993 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 and Executive Vice President and Medical
Director.
GENERAL AND ADMINISTRATIVE. 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 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.
General and administrative expense remained constant at approximately
$904,000 for fiscal 1994 and fiscal 1993. An increase in legal fees was
offset by a decrease in fiscal 1994 as compared to fiscal 1993 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.
21
<PAGE>
INTEREST. 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 which took place in fiscal 1994.
Interest expense for fiscal 1994 was $223,000 compared to $362,000 in
fiscal 1993, a decrease of $139,000 or 38%. The decrease in fiscal 1994
was primarily due to the conversion of convertible subordinated debentures
to Common Stock which took place in fiscal 1994.
NET LOSS. The Company has incurred net losses during each year since
its inception. The net loss for fiscal 1995 was $1,993,000 as compared to
$2,234,000 in fiscal 1994 and $2,357,000 in fiscal 1993. The cumulative
loss from the date of inception, August 24, 1981, to April 30, 1996
amounted to approximately $39,600,000. 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
Alfacell has financed its operations since inception primarily through
equity and debt financing, research product sales and interest income.
During the nine months ended April 30, 1996, the Company had a net increase
in cash of $9,000. This increase resulted from net cash provided by
financing activities of $3,262,000, primarily from a private placement of
Common Stock and Common Stock warrants completed in September 1995 and
proceeds from the exercise of stock options offset by net cash used in
operating activities of $2,277,000 and net cash used in investing
activities of $976,000 principally due to the purchase of marketable
securities. Total cash resources, including marketable securities, as of
April 30, 1996 were $2,357,000 compared to $1,398,000 at July 31, 1995.
The Term Loan agreement 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 April 30, 1996 as long-term debt. This is the primary
reason for the significant decrease in current liabilities as of April 30,
1996 compared to July 31, 1995 and the significant increase in long-term
debt as of April 30, 1996 compared to July 31, 1995. It is estimated that
the outstanding balance on August 31, 1997 will be $1,369,000. At that
22
<PAGE>
time, the Company intends to refinance the Term Loan or raise sufficient
equity to pay off the unpaid balance. However, there can be no assurance
that the Company will be able to successfully conclude a refinancing or
raise sufficient equity to pay off the unpaid balance.
The Company's continued operations will depend on its ability to raise
additional funds through a combination of equity and 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 Phase III clinical trial.
The Company believes that its cash on hand, including marketable
securities, as of April 30, 1996 coupled with the approximately $5,700,000
net proceeds from the June 1996 Private Placement 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, 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.
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 CEO 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 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 agreement prohibits the
23
<PAGE>
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 pledger to the bank, below 1:1.
The Company's working capital and capital requirements 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.
BUSINESS
OVERVIEW
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 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 1996 Facts and Figures, approximately 388,000
people per year 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 over 300 cancer patients on a weekly
basis, including 175 patients with advanced stages of pancreatic, non-small
cell lung, mesothelioma and metastatic breast cancer. 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 plus tamoxifen
against Gemzar, an FDA approved drug for pancreatic cancer, in
approximately 100 patients.
24
<PAGE>
The Company believes that ONCONASE may also be used as an anti-viral
agent. The NIH has performed an independent IN VITRO screen of ONCONASE
against the 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-1 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 further
research ONCONASE and its 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.
ONCONASE
Originally, the Company developed an unpurified biological extract
from early stage leopard frog embryos and eggs. This extract was found to
possess an unusual bioactive profile and to be of a unique nature. In
1987, the Company isolated a specific protein, P-30 Protein (herein
referred to by its registered tradename 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:
25
<PAGE>
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
Alfacell has tested ONCONASE in over 300 patients in its Phase I and
II clinical trials. ONCONASE as a single agent was tested in 230 patients
with a variety of solid tumors and an additional 71 advanced pancreatic
patients were treated with ONCONASE in combination with tamoxifen. 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, after treating
more than 300 patients, 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 began a randomized 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 multi-center clinical
trial in August 1996, comparing ONCONASE plus tamoxifen with Gemzar.
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 mesotheliomas 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
26
<PAGE>
will be reflective of future clinical results or will be sufficient to
obtain FDA approval.
RESEARCH AND DEVELOPMENT
Research and development expenses for the fiscal years ended July 31,
1995, 1994 and 1993 were $1,205,523, $1,114,455 and $1,091,762,
respectively. During fiscal 1995, the Company's research and development
efforts were focused in clinical and regulatory affairs, which included the
preparation of chemistry, manufacturing and clinical submissions to the FDA
in preparation for Phase III clinical trials. In January 1995, the FDA
agreed to the Company's Phase III protocol design for advanced pancreatic
cancer and Phase III clinical trials commenced in November 1995.
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 play 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
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.
27
<PAGE>
MANUFACTURING
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 to do so.
MARKETING
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 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.
28
<PAGE>
GOVERNMENT REGULATION
The manufacturing and marketing of pharmaceutical products in the
United States requires the approval of the FDA under the Federal Food, Drug
and Cosmetic Act. Similar approvals by comparable 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.
The Company has not received FDA 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.
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
The Company has been issued four patents in the United States and two
patents in Europe, and has other patent applications pending. The U.S.
Patents are Nos. 4,882,421, 4,888,172, 5,529,775 and 5,540,925, and the
European patents are Nos. 0 440 633 and 0 500 589. The Company's U.S.
Patent No. 4,882,421 contains a disclosure that in certain respects is
erroneous and that complicated the prosecution of other Company patent
applications pending before the U.S. Patent and Trademark Office ("USPTO").
Because the Company considered those pending patent applications to be more
important than U.S. Patent No. 4,882,421, the Company has disclaimed U.S.
29
<PAGE>
Patent No. 4,882,421. Accordingly, U.S. Patent No. 4,882,421 is not
legally enforceable against anyone. The Company's patent protection is
limited to that afforded under the claims of U.S. Patent Nos. 4,888,172,
5,529,775 and 5,540,925, unless and until other U.S. patent protection is
available to the Company.
The Company presently owns two (2) European Patents: No. 0 440 633
filed March 31, 1989 and No. 0 500 589 filed October 26, 1990. Both
European patents have been validated in selected European nations. For
each of these European patents, the Company has filed a counterpart
application in Japan; both Japanese patent applications are presently
pending.
The Company owns a European patent application covering certain
combination therapies that use ONCONASE in addition to other approved
pharmaceuticals. The Company has requested examination of this European
patent application. A Japanese counterpart to this European patent
application has been filed and is presently pending.
The Company owns an undivided interest in each of two applications
which are pending in the USPTO and relate to a Subject Invention (as that
term is defined in CRADAs to which the Company and the NIH and NCI are
parties).
The Company pursues a policy of filing patent applications in the
United States and in selected foreign countries for certain of its
proprietary technology. The scope of protection afforded by patents to
biotechnological inventions is uncertain and the Company is subject to this
uncertainty. There can be no assurance that any of the Company's patent
applications will be approved, that any issued patents will provide the
Company with competitive advantages or will not be challenged by others, or
that the patents of others will not have an adverse effect on the ability
of the Company to do business. Furthermore, there can be no assurance that
others will not independently develop similar products, will not duplicate
any of the Company's products or, if patents are issued to the Company,
will not design around the Company's existing patent rights or patents that
may issue in the future, if any.
The Company also relies on trade secrets, proprietary know-how and
continuing technological innovation to develop and maintain its competitive
position. There can be no assurance that others will not independently
develop such know-how or otherwise obtain access to Alfacell's technology.
While the Company's employees and consultants with access to proprietary
information are generally required to enter into confidentiality
agreements, there can be no assurance that these agreements will be honored
or can be enforced.
30
<PAGE>
Pursuant to the Term Loan agreement, the Company's bank acquired 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.
COMPETITION
There are several companies, universities, research teams and
scientists, both private and government-sponsored, which engage in research
similar or potentially similar to that performed by 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 then
ONCONASE.
EMPLOYEES
As of July 31, 1996 Alfacell employed ten persons, of whom seven were
engaged in research and development activities and three were engaged in
administration and management. The Company has three 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
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
31
<PAGE>
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.
PROPERTIES
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 pays its pro rata share of increases in municipal real
estate taxes and utilities over the base year 1988. The Company expects to
lease its current facility directly from the owner of the building upon
expiration of its sublease in November 1996. Negotiations are currently
underway; however, there can be no assurance that such lease will be
consummated. The Company believes that the facility is sufficient for its
current needs.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
is a party, or to which any of its properties or assets is subject.
32
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY With
Company
SINCE
<S> <C> <C> <C>
Kuslima Shogen 50 Chairman, Chief Executive Officer and 1981
Director
Michael C. Lowe 54 President 1996
Gail E. Fraser 38 Vice President, Finance, Chief 1994
Financial Officer and Director
Stanislaw M. Mikulski, M.D. 51 Executive Vice President, Medical 1986
Director and Director
Allen Siegel(1) 60 Director 1982
Alan Bell(1)(2) 70 Director 1986
Robert R. Henry(1)(2) 55 Director 1994
</TABLE>
(1) Member of Compensation Committee
(2) Member of Audit Committee
BUSINESS EXPERIENCE
KUSLIMA SHOGEN has served the Company as Chief Executive Officer since
September 1986, Chairman of the Board of Directors since August 1996 and as
a director since the Company's inception. Ms. Shogen also served as the
Company's Chief Financial Officer from September 1986 through July 14, 1994
and as the Company's President from September 1986 through July 31, 1996.
Ms. Shogen formed the Company in 1981 to pursue research which she
initiated as a biology student in the University Honors Program at
Fairleigh Dickinson University ("F.D.U."). She was Executive Vice
President of the Company from 1984 until 1986 when she became President.
Prior to organizing the Company, Ms. Shogen was founder and president from
1976 to 1981 of a biomedical research consortium specializing in GLP (Good
Laboratory Practices) and animal toxicology. During that time, she was
also a consultant for Lever Brothers Research Group. Ms. Shogen has
received numerous awards for achievements in biology, including Sigma Xi
first prize from the Scientific Research Society of North America in 1974
33
<PAGE>
and first prize at the Eastern College Science Conferences competition for
most outstanding research paper in biology in each of 1972, 1973, and 1974.
Ms. Shogen received her B.S. in 1974 and M.S. in 1976 (both magna cum
laude) from F.D.U. and was the first teaching fellow from F.D.U.'s
Rutherford campus. Among other honors, she was a Phi Beta Kappa graduate.
Ms. Shogen continued graduate studies until 1978. She devotes her full-
time to the Company.
MICHAEL C. LOWE, PH.D., became the Company's President on August 1,
1996. From 1988 to July 1996 Dr. Lowe was a principal of The Weinberg
Group Inc. which specializes in assisting clients with applications to the
FDA for human trials of new agents and in gaining marketing approvals. He
has demonstrated expertise in the areas of pharmacology, toxicology,
morphology and pathology for chemotherapeutic agents. Prior to joining The
Weinberg Group, Dr. Lowe was a corporate vice president and director of
toxicology for ICF/Clement, a health scientist administrator at the NIH,
the acting chief of the toxicology branch at the NCI and head of the
pathopharmacology section of the intramural laboratory of chemical
pharmacology at the NCI. There, he oversaw the pre-clinical toxicology
studies of oncolytic drugs emerging from the drug development program of
the NCI, and made risk assessments of the drugs prior to Phase I trials.
Before joining the NIH he was on the faculty of the department of pathology
at the University of Washington. Dr. Lowe received a B.S. in Zoology from
Washington State University, a M.S. and a Ph.D. in Pharmacology from the
University of Washington and postdoctoral training in experimental
pathology at the University of Washington. Dr. Lowe served on the
Company's Scientific Advisory Board and acted as an advisor to the board of
directors through August 31, 1996.
GAIL E. FRASER became the Company's Chief Financial Officer on July
15, 1994 and became a director in April 1995. From August 1993 to July
1994, Ms. Fraser served as a consultant to the Company and was the
Company's business, financial and accounting advisor. From April 1989 to
February 1993, Ms. Fraser was Vice President, Finance and Chief Financial
Officer of Enzon, Inc., a biopharmaceutical company located in Piscataway,
New Jersey. From 1982 to 1989, Ms. Fraser served as Vice President,
Finance and Controller for Sidmak Laboratories, Inc., a generic drug
manufacturer located in East Hanover, New Jersey. She received a B.S. in
accounting from Kean College of New Jersey and an M.B.A. from the Wharton
School of the University of Pennsylvania in 1993. Ms. Fraser is a
certified public accountant and devotes her full-time to the Company.
34
<PAGE>
STANISLAW M. MIKULSKI, M.D. F.A.C.P., has served the Company as
Executive Vice President and Medical Director since 1987 and as a director
since 1986. Previously, Dr. Mikulski was Special Assistant to the Chief,
Investigational Drug Branch, National Cancer Institute, and Coordinator for
Immunotherapy Trials in Cancer for the Division of Cancer Treatment,
following his post-doctoral studies at the University of California, Los
Angeles in human tumor immunology. Prior to joining the Company, Dr.
Mikulski maintained a medical practice in medical oncology for over eight
years. He is a diplomate of the American Board of Internal Medicine and
Medical Oncology, as well as a fellow of the American College of Physicians
and a member of the American Society of Clinical Oncology. Dr. Mikulski is
a clinical assistant professor of medicine at the University of Medicine
and Dentistry of New Jersey. He received his M.D., cum laude, in 1967 from
the Medical School in Warsaw, Poland. Dr. Mikulski devotes his full-time
to the Company.
ALLEN SIEGEL, D.D.S., has been a director of the Company since 1982.
He was a dentist in private practice from 1961 until his retirement from
active practice in August 1989. He received a D.D.S. in 1959 from the
University of Buffalo.
ALAN BELL has been a director of the Company since 1986. He founded
the international public relations agency, Bell and Stanton, in 1956 and
served as its chairman until 1976. From 1976 to 1983 he was vice-chairman
of Manning Selvage & Lee, Inc., a major public relations firm. In 1983 he
established a new firm, Alan W. Bell Co., Inc. He specializes in financial
public relations and in economic and tourism development counselling.
ROBERT R. HENRY has been a director of the Company since March 1994.
Mr. Henry served as Partner and Managing Director of Morgan Stanley & Co.
Inc. ("Morgan Stanley") from 1977 through 1989. Since 1989 he has been
President of Robert R. Henry & Co., Inc., a financial advisory firm. Mr.
Henry continues to serve as an Advisory Director for Morgan Stanley.
No director or officer is related to any other director or officer by
blood, marriage or adoption. No arrangement or understanding exists
between an officer or director and any other person under which any officer
or director was elected; however, the Company's bank may call due all
amounts payable under its loan to the Company in the event Ms. Shogen
ceases for any reason, except death, to be a full time employee, officer or
director of the Company.
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<PAGE>
The Company's scientific advisory board is composed of scientists and
doctors whom management of the Company believes can contribute to the
proper development of its anti-tumor agent. The individuals selected are
highly respected in the national and international fields of oncology and
drug development. The advisory board is made up of the following
individuals.
JOHN J. COSTANZI, M.D., has served as a principal investigator in the
Onconase clinical trials program since its inception. He is currently in
the practice of oncology and hematology in Austin, Texas. He formerly
served as Medical Director of the Thompson Cancer Survival Center in
Knoxville, Tennessee, and as professor of medicine and director of the
cancer center for the University of Texas Medical Branch in Galveston. Dr.
Costanzi is board certified in medical oncology and internal medicine and
has participated in many professional and community organizations including
the Southwest Oncology Group, American Cancer Society, and American
Association for Cancer Research. Dr. Costanzi has authored over 140
papers, books and chapters of books in the area of clinical oncology. He
received his M.D. in 1961 from Georgetown University School of Medicine,
Washington, D.C. He completed his post-graduate training at Walter Reed
General Hospital, Washington, D.C. and Wilford Hall Medical Center, San
Antonio, Texas. Dr. Costanzi has received numerous awards in the field of
oncology. He is a frequent lecturer and visiting professor throughout the
United States and abroad. He also serves as a Brigadier General in the
United States Air Force Reserve Medical Corp.
ZBIGNIEW DARZYNKIEWICZ, M.D., PH.D., is the director of the Cancer
Research Institute at the New York Medical College and a professor of
medicine at New York Medical College. Formerly, Dr. Darzynkiewicz was a
professor of cell biology and genetics at Cornell University Medical
School, a member of Sloan-Kettering Institute for Cancer Research, the head
of the Experimental Cell Research Laboratory, and a director of the Flow
Cytometry Core Facility Network. In addition, Dr. Darzynkiewicz is an
editor of The Cell Proliferation and Cytometry Journals, past president of
The Cell Kinetics Society and past president of the International Society
for Analytical Cytology. Dr. Darzynkiewicz's research concentrates on cell
biology with particular focus on cancer cell growth and the regulatory
mechanisms associated with cell growth and progression through the cell
cycle. He has developed several techniques that have world-wide
application, to analyze metabolic parameters of the cell related to the
cell cycle kinetics, cell sensitivity to anti-tumor drugs and apoptosis.
Most recently, he received a grant from NASA to develop new technologies
for cell staining and analysis applicable to the micro-gravity conditions
of Space Station Freedom. Dr. Darzynkiewicz has authored over 300 original
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<PAGE>
publications and over 50 chapters and reviews in books devoted to the
subject of cell growth, the regulation of the cell cycle and apoptosis.
Dr. Darzynkiewicz received his M.D. in 1960 and Ph.D. in 1966 from the
Medical School of Warsaw, Warsaw, Poland. He completed his post-graduate
studies at the State University of New York at Buffalo and the Medical
Nobel Institute of Karolinska Institute, Stockholm, Sweden. Since 1974, he
has been associated with the Sloan-Kettering Institute for Cancer Research,
and since 1990, he has been with New York Medical College, Elmsford, New
York.
DAVID N. MESCHES, M.D., is professor and chairman of the Department of
Family Medicine at New York Medical College and has held these positions
for the past 16 years. He is the Chief Executive Officer of the Mid-Hudson
Family Health Services Institute, a not-for-profit health care and
education corporation responsible for the primary care of patients and
training of medical students and family practice residents. The original
Onconase Phase I (daily schedule) clinical trials were initiated and
completed under the direction of Dr. Mesches. Dr. Mesches graduated from
the University of Buffalo School of Medicine in 1960. Following his
internship at Mount Sinai Hospital in Detroit, Michigan, he served as a
Captain in the United States Air Force.
ABRAHAM MITTELMAN, M.D., is associate professor of medicine and
director of experimental oncology at New York Medical College in Valhalla,
New York. Dr. Mittelman graduated from the Autonomous University of
Guadalajara in 1977. Following his residency at Downstate Medical Center,
he became an instructor in medicine at New York - Cornell Medical Center as
well as a fellow in Oncology at Memorial Sloan-Kettering from 1981 through
1983. Dr. Mittelman is an oncologist and hematologist who has been the
principal investigator of numerous cancer trials. Dr. Mittelman has
published over 130 papers on a variety of oncologic topics. He is a member
of the New York State Society of Hematologists and Oncologists.
37
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides a summary of cash and non-cash
compensation for each of the last three fiscal years ended July 31, 1996,
1995 and 1994 with respect to Alfacell's Chief Executive Officer and the
only two other executive officers of the Company (the "Named Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
NAME AND YEAR SALARY($) BONUS($) OTHER SECURITIES ALL OTHER
PRINCIPAL POSITION ANNUAL UNDERLYING COMPENSATION ($)
COMPENSATION ($)(1) OPTIONS/
SARS(#)
Kuslima Shogen 1996 $150,000 - 0 - - 0 - - 0 -(3) - 0 -
Chief Executive Officer and 1995 150,000 - 0 - - 0 - - 0 -(3) - 0 -
Chairman of the Board of 1994 150,000 - 0 - - 0 - 1,306,529(2) - 0 -
Directors(2)
Gail E. Fraser(4) 1996 $130,000 - 0 - - 0 - - 0 -(3) - 0 -
Vice President, 1995 121,163 - 0 - - 0 - - 0 -(3) - 0 -
Finance and Chief 1994 8,333 - 0 - - 0 - 475,000(5) - 0 -
Financial Officer
Stanislaw M. Mikulski(6) 1996 $130,000 - 0 - - 0 - - 0 -(3) - 0 -
Executive Vice President 1995 130,000 - 0 - - 0 - - 0 -(3) - 0 -
and Medical Director 1994 130,000 - 0 - - 0 - 431,409(6) - 0 -
</TABLE>
(1) Excludes perquisites and other personal benefits that in the aggregate
do not exceed 10% of the Named Officers' total annual salary and
bonus.
(2) Ms. Shogen resigned from her position as the Company's President in
August 1996 and Chief Financial Officer in July 1994. No salary was
paid to Ms. Shogen in fiscal 1995 and 1994 and these salary amounts
were accrued on the Company's financial statements as obligations owed
to Ms. Shogen. During fiscal 1996, Ms. Shogen was paid $225,978
representing payment in full of accrued back salary. Ms. Shogen was
paid her salary in full for fiscal 1996. In consideration for her
services to the Company through January 31, 1994 and Ms. Shogen's
agreement to release the Company from its obligation to pay her
$1,624,151 in accrued salary on the Company's balance sheet as of
January 31, 1994, in March 1994 the Company granted Ms. Shogen options
38
<PAGE>
to purchase 841,529 shares of the Company's Common Stock at an
exercise price of $3.20 per share.
(3) No options were granted to the Named Officers during the fiscal years
ended July 31, 1996 and July 31, 1995.
(4) Ms. Fraser became an employee of the Company on July 15, 1994.
$96,163 of Ms. Fraser's salary in fiscal 1995 was paid to Ms. Fraser.
That portion of Ms. Fraser's salary which was not paid to her was
accrued on the Company's financial statements as obligations owed to
Ms. Fraser. During fiscal 1996, Ms. Fraser was paid $25,000
representing payment in full of accrued back salary. Ms. Fraser was
paid her salary in full for fiscal 1996.
(5) Prior to Ms. Fraser joining the Company, Ms. Fraser received under a
consulting agreement an option to purchase 50,000 and 75,000 shares of
the Company's Common Stock at exercise prices of $3.22 and $5.00,
respectively. On July 15, 1994, Ms. Fraser was granted options to
purchase 350,000 shares of Common Stock under the 1993 Stock Option
Plan at an exercise price of $4.11 per share.
(6) No salary was paid to Dr. Mikulski in fiscal 1994. $5,000 of Dr.
Mikulski's salary in fiscal 1995 was paid to Dr. Mikulski. During
fiscal 1996, Dr. Mikulski was paid $194,996 representing payment in
full of accrued back salary. Dr. Mikulski was paid his salary in full
for fiscal 1996. Those portions of Dr. Mikulski's salaries which were
not paid to him were accrued on the Company's financial statements as
obligations owed to Dr. Mikulski. In consideration for his services
to the Company and Dr. Mikulski's agreement to release the Company
from its obligation to pay him $639,619 in accrued salary on the
Company's balance sheet as of January 31, 1994, in March 1994 the
Company granted Dr. Mikulski options to purchase 331,409 shares of the
Company's Common Stock at an exercise price of $3.20 per share.
39
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth the information with respect to the
Named Officers concerning the exercise of options during the fiscal year
ended July 31, 1996 and unexercised options held as of July 31, 1996.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Options at Fiscal Year-End at Fiscal Year-End($)(2)
(#)
<S> <C> <C> <C> <C> <C> <C>
Shares Acquired on Value
Name Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
Kuslima Shogen 87,500 $82,576 1,255,289 843,418 $1,721,863 $1,354,920
Gail E. Fraser None None 265,000 210,000 $171,800 $140,700
Stanislaw M. Mikulski 86,500 $77,940 402,346 192,563 $545,269 $319,655
</TABLE>
(1) Based upon the fair market value of the purchased shares on the option
exercise date less the exercise price paid for the shares.
(2) Based upon fair market value of the common stock at fiscal year end
($4.78 per share) less the option exercise price payable per share.
DIRECTORS' COMPENSATION
Members of the Company's board of directors receive no cash
compensation in consideration for their serving on the board of directors.
In November 1993 and January 1994, the board of directors and the
stockholders, respectively, approved the Company's 1993 Stock Option Plan
(the "Plan") which, among other things, provides for automatic grants of
options ("Automatic Grants") under a formula (the "Formula") to non-
employee directors ("Independent Directors") on an annual basis.
The Formula provides that (i) on each December 31st each Independent
(non-employee) Director receives automatically an option to purchase 15,000
shares of the Company's Common Stock (the "Regular Grant"); and (ii) on the
date of each Independent Director's initial election to the board of
directors, pursuant to a vote of the board, such newly elected Independent
Director automatically receives an option to purchase such Independent
Director's pro rata share of the Regular Grant which equals the product of
40
<PAGE>
1,250 multiplied by the number of whole months remaining in the calendar
year (the "Pro Rata Grant"). Each option granted pursuant to a Regular
Grant and a Pro Rata Grant vests and becomes exercisable on the December
30th following the date of grant. Notwithstanding the foregoing, an option
will not become exercisable as to any shares unless such Independent
Director has served continuously on the board during the year preceding the
date on which such options are scheduled to vest and become exercisable, or
from the date such Independent Director joined the board until the date on
which such options are scheduled to vest and become exercisable; PROVIDED,
HOWEVER, that if an Independent Director does not fulfill such continuous
service requirement due to such Independent Director's death or disability
all options held by such Independent Director nonetheless vest and become
exercisable as described herein. An option granted pursuant to the Formula
remains exercisable for a period of five years after the date the option
first becomes exercisable.
During the fiscal year ended July 31, 1996, the following directors
were granted the options listed below pursuant to the Formula under the
Plan in consideration for serving on the board of directors. The exercise
prices of the options granted to directors in fiscal 1996 are equal to the
fair market value of the Common Stock on the date of grant.
<TABLE>
<CAPTION>
Number of EXPIRATION DATE
NAME OPTIONS EXERCISE PRICE
12/31/01
Allen Siegel 15,000 $4.66
<S> <C> <C> <C>
Alan Bell 15,000 $4.66 12/31/01
Robert R. Henry 15,000 $4.66 12/31/01
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The Compensation Committee was formed in November 1993 and is
comprised of Allen Siegel, Alan Bell and Robert R. Henry. All decisions
regarding executive compensation were made by the Compensation Committee
during the fiscal year ended July 31, 1996.
41
<PAGE>
CERTAIN TRANSACTIONS
Effective May 31, 1993, the Company restructured a pre-existing bank
note (the "Note") to include the principal balance of $1,300,000, accrued
interest of $349,072, and legal fees of $50,000 into a new Term Loan of
$1,699,072. Interest was to be computed at a rate of seven and one-half
percent (7.5%) per annum. The Term Loan is secured by substantially all of
the assets of the Company. Ms. Shogen has personally guaranteed the Note
and has pledged certain collateral, including a substantial portion of the
shares of Common Stock of the Company owned by her and certain options, as
additional collateral. Substantially all of the obligations owed by the
Company to Ms. Shogen are subordinated to the Note. In order to satisfy
the Company's obligations to the bank, Ms. Shogen, from time to time,
pursuant to a pledge agreement ("Pledge Agreement"), has sold portions of
the shares of Common Stock pledged to the bank. Through February 28, 1994,
the monthly payments of interest and principal under the Term Loan were
paid primarily pursuant to this procedure, and subsequent to such time,
have been paid directly by the Company. The Term Loan agreement 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 Ms. Shogen's pledged stock to the aggregate
outstanding debt of the Company and herself to the bank, below 1:1. In
June 1994, Ms. Shogen's term loan agreement with the bank and the related
Pledge Agreement were amended to provide for, among other things, the
issuance to Ms. Shogen, and subsequent pledge to the bank, of the options
discussed below. Based upon the average of the closing bid and asked
prices on July 31, 1996, the shares of the Company's Common Stock pledged
by Ms. Shogen to secure the Term Loan were valued at $6,419,540 (excluding
the value of shares of Common Stock underlying certain options pledged to
the bank) and the aggregate outstanding debt of the Company and Ms. Shogen
to the bank as of July 31, 1996 was $2,189,855. In connection with the
Term Loan, Ms. Shogen also assigned to the bank her right to payment of up
to $200,000 of outstanding debt owed to her by the Company which amount has
been paid to Ms. Shogen by the Company and paid to the bank by Ms. Shogen.
In November 1995, the Note was amended and restated and the Term Loan
agreement was amended to provide for, effective as of October 1, 1995,
among other things (i) the extension of the term of the Term Loan from May
31, 1996 to August 31, 1997, (ii) a re-amortization of the payment of
principal and interest based on a one hundred fifty (150) month
amortization schedule, (iii) an increase in the interest rate from seven
and one-half percent (7.5%) per annum to eight and three eighths percent
(8.375%) per annum, and (iv) the issuance to the bank of a warrant to
purchase 10,000 shares of Common Stock through August 31, 1997 at an
42
<PAGE>
exercise price of $4.19 per share. For more information concerning the
Term Loan see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
During the fiscal years ended July 31, 1996, July 31, 1995 and July
31, 1994, the Company paid to The Weinberg Group $77,060, $158,649 and
$6,759, respectively, for consulting services provided to the Company by
The Weinberg Group. Michael C. Lowe was a principal of the Weinberg Group
from 1988 through July 1996.
From time to time Kuslima Shogen has advanced sums of money to the
Company in the form of unsecured obligations payable on demand (the "demand
loans"). Ms. Shogen has at various times converted portions of the demand
loans into convertible debentures. At July 31, 1993, (i) the Company owed
Ms. Shogen $14,000 pursuant to loans which were previously demand loans,
but which were subordinated to the Company's bank debt in connection with
the restructuring of such debt and consequently, reclassified as long-term
debt, and (ii) Ms. Shogen owned convertible debentures in the aggregate
principal amount of $1,575,000.
During the fiscal year ended July 31, 1994, Ms. Shogen converted the
outstanding debentures held by her with an aggregate face value of
$1,575,000 into 400,000 shares of the Company's Common Stock at the stated
conversion rates ranging from $2.75 to $6.00 per share. In March 1994, an
aggregate of $931,197 of advances and interest owed by the Company to Ms.
Shogen was converted by Ms. Shogen into options to purchase an aggregate of
482,485 shares of the Company's Common Stock at an exercise price of $3.20
per share. In March 1994, in consideration for her services to the Company
and Ms. Shogen's agreement to release the Company from its obligation to
pay her $1,624,151 in accrued salary on the Company's balance sheet as of
January 31, 1994 (which salary had been accruing since 1986), the Company
granted Ms. Shogen options to purchase 841,529 shares of the Company's
Common Stock at an exercise price of $3.20 per share. In June 1994, the
Company, with its bank's consent, reinstituted certain advances of $198,417
from Ms. Shogen as long term debt that was previously converted into
102,807 of options on March 30, 1994. Such options were returned to the
Company and cancelled. The Company's bank has consented to allow repayment
of such advances under certain conditions. During the fiscal year ended
July 31, 1994 Ms. Shogen advanced the Company $184,417 pursuant to demand
loans. At July 31, 1994 the Company owed Ms. Shogen an aggregate of
$203,723 pursuant to demand loans and accrued interest on the demand loans
owed to Ms. Shogen.
43
<PAGE>
During the fiscal year ended July 31, 1995 the Company, with its
bank's consent, repaid $80,067 of the principal amount on the demand loans.
At July 31, 1995, the Company owed Ms. Shogen an aggregate of $138,638
pursuant to demand loans and accrued interest on the demand loans.
During the nine month period ended April 30, 1996, the Company, with
its bank's consent, repaid $118,350 in principal representing payment in
full of principal of Ms. Shogen's demand loans to the Company. At April
30, 1996, the Company owed Ms. Shogen an aggregate of $1,250, pursuant to
accrued interest on demand loans.
In March 1994, in consideration for his services to the Company and
Dr. Mikulski's agreement to release the Company from its obligation to pay
him $639,619 in accrued salary on the Company's balance sheet as of January
31, 1994, the Company granted Dr. Mikulski options to purchase 331,409
shares of the Company's Common Stock at an exercise price of $3.20 per
share.
On July 23, 1991, the board of directors authorized the Company to pay
to Kuslima Shogen an amount equal to 15% of any gross royalties which may
be paid to the Company from any license(s) with respect to the Company's
principal product, ONCONASE, or any other products derived from amphibian
source extract, produced either as a natural, synthesized, and/or
genetically engineered drug for which the Company owns or is co-owner of
the patent, or acquires such rights in the future, for a period not to
exceed the life of the patents. If the Company manufactures and markets
the drugs by itself, then the Company will pay an amount equal to 5% of
gross sales from any products sold during the life of the patents.
On November 11, 1993, the Company entered into a consulting agreement
(the "Tartan Consulting Agreement") with The Tartan Group ("Tartan"), an
independent consulting firm of which Ms. Gail E. Fraser, the Company's Vice
President, Finance and Chief Financial Officer, is an officer and principal
stockholder. The Tartan Consulting Agreement was effective as of August 1,
1993 and terminated by agreement of both parties on April 30, 1994.
Pursuant to the Tartan Consulting Agreement Ms. Fraser performed
administrative, financial and accounting services for the Company.
Pursuant to the Tartan Consulting Agreement, the Company granted
indemnification to Ms. Fraser with respect to any and all claims, damages
or costs which arise out of her performance of consulting services to the
Company. Tartan received a consulting fee of $45,000.
44
<PAGE>
On May 1, 1994, upon the termination of the Tartan Consulting
Agreement, Ms. Fraser entered into a consulting agreement (the "Fraser
Consulting Agreement") with the Company which terminated by its terms on
June 30, 1994. Under the Fraser Consulting Agreement, Ms. Fraser received
$15,000 and (i) an option to purchase 50,000 shares of the Company's Common
Stock at an exercise price of $3.22 per share at any time during the period
commencing on May 1, 1994 and terminating on November 10, 1997 at 5.00 p.m.
local time and (ii) an option to purchase 75,000 shares of the Company's
Common Stock at an exercise price of $5.00 per share at any time during the
four year period commencing on November 11, 1994 and terminating on
November 10, 1998 at 5.00 p.m. local time. Pursuant to the Fraser
Consulting Agreement, the Company granted indemnification to Ms. Fraser
with respect to any and all claims, damages or costs which arise out of her
performance of consulting services to the Company.
Robert R. Henry purchased an aggregate of 187,100 shares of Common
Stock and warrants to purchase 60,000 shares of Common Stock in the March
1994 Private Placement, the September 1994 Private Placement and the June
1996 Private Placement on the same terms and conditions as the other
participants in such private placements. Certain of the shares purchased
by Mr. Henry in the June 1996 Private Placement were purchased on behalf of
his children.
45
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning stock
ownership of each person who is the beneficial owner of five percent or
more of the Company's outstanding Common Stock and of each director and
each Named Officer and all directors and executive officers as a group as
of July 31, 1996. Except as otherwise noted, each person has sole voting
and investment power with respect to the shares shown as beneficially
owned.
<TABLE>
<CAPTION>
DIRECTORS, OFFICERS OR NUMBER OF PERCENTAGE OF COMMON
5% STOCKHOLDERS(1) SHARES(2) STOCK
OUTSTANDING(3)
<S> <C> <C> <C> <C>
Kuslima Shogen 2,598,289(4) 17.2%
Stanislaw Mikulski 763,596(5) 5.4%
Allen Siegel 206,562(6) 1.5%
Alan Bell 50,929(7) *
Robert R. Henry 262,550(8) 1.9%
Gail E. Fraser 265,000(9) 1.9%
All officers and directors as 4,146,926(10) 26.0%
a group (six persons)
</TABLE>
* Less than one percent.
(1) The address of all officers and directors listed above is in the care
of the Company.
(2) All shares listed are Common Stock. Except as discussed below, none
of these shares are subject to rights to acquire beneficial ownership,
as specified in Rule 13d-3(d)(1) under the Exchange Act, and the
beneficial owner has sole voting and investment power, subject to
community property laws where applicable.
(3) The percentage of stock outstanding for each stockholder is calculated
by dividing (i) the number of shares of Common Stock deemed to be
beneficially held by such stockholder as of July 31, 1996 by (ii) the
sum of (A) the number of shares of Common Stock outstanding as of July
31, 1996 plus (B) the number of shares issuable upon exercise of
options or warrants held by such stockholder which were exercisable as
of July 31, 1996 or which will become exercisable within 60 days after
July 31, 1996.
46
<PAGE>
(4) Includes 1,255,289 shares subject to options which were exercisable as
of July 31, 1996 or which will become exercisable within 60 days after
July 31, 1996.
(5) Includes 402,346 shares subject to options which were exercisable as
of July 31, 1996 or which will become exercisable within 60 days after
July 31, 1996.
(6) Includes 30,000 shares subject to options which were exercisable as of
July 31, 1996 or which will become exercisable within 60 days after
July 31, 1996 owned by Dr. Siegel, 53,785 shares owned by Dr. Siegel's
wife, who was an employee of the Company and 20,000 shares subject to
options which were exercisable as of July 31, 1996 or will become
exercisable within 60 days of July 31, 1996 owned by Dr. Siegel's
wife. Dr. Siegel disclaims beneficial ownership as to the shares
owned by his wife.
(7) Includes 30,000 shares subject to options which were exercisable as of
July 31, 1996 or which will become exercisable within 60 days after
July 31, 1996 owned by Mr. Bell, 20,429 shares owned jointly by Mr.
and Mrs. Bell and 500 shares owned by Mrs. Bell. Mr. Bell disclaims
beneficial ownership as to the shares owned by his wife.
(8) Includes 26,250 shares subject to options which were exercisable as of
July 31, 1996 or which will become exercisable within 60 days after
July 31, 1996 and 60,000 shares underlying warrants which were
exercisable as of July 31, 1996 or which will become exercisable
within 60 days after July 31, 1996.
(9) Includes 265,000 shares underlying options which were exercisable as
of July 31, 1996 or which will become exercisable within 60 days after
July 31, 1996.
(10) Includes all shares owned beneficially by the directors and the
executive officers named in the table.
SELLING STOCKHOLDERS
GENERAL
On April 4, 1996 the Company completed the 1995/1996 Private
Placements for an aggregate of 207,316 shares of restricted Common Stock at
per share prices ranging from $3.60 to $4.24. On June 11, 1996 the Company
completed the June 1996 Private Placement for an aggregate of 1,515,330
47
<PAGE>
shares of restricted Common Stock and three-year Warrants to purchase
313,800 shares of Common Stock at an exercise price of $7.50 per share.
The Common Stock was sold alone at a per share price of $3.70 and in
combination with Warrants at a per unit price of $12.52. The Warrants were
also sold alone at a per Warrant price of $1.42. After taking into account
expenses of the offerings, the Company received aggregate net proceeds of
approximately $6.5 million from the 1995/1996 Private Placements and the
June 1996 Private Placement. The Company intends to utilize these net
proceeds primarily for general corporate purposes, including the funding of
research and development of its product ONCONASE. This prospectus relates
to the offer and sale by the Selling Stockholders of such 1,722,646 shares
of Common stock and the 313,800 shares of Common Stock underlying such
Warrants sold in the aggregate in the 1995/1996 Private Placements and the
June 1996 Private Placement.
On October 5, 1995 the Company entered into the Supply Agreement with
the Graskas. Pursuant to the Supply Agreement, the Company issued 3,030
shares of Common Stock to each of the Graskas. This Prospectus relates to
the offer and sale by the Graskas as Selling Stockholders of an aggregate
of 6,060 shares of Common Stock.
The Company's sale of Common Stock and Warrants to accredited
investors (as that term is defined in Rule 501 under the Securities Act)
and a non-accredited investor in the 1995/1996 Private Placements and the
June 1996 Private Placement was effected in reliance upon Rule 506
promulgated under the Securities Act and/or Section 4(2) thereof. The
Company's issuance of 6,060 shares of Common Stock to the Graskas pursuant
to the Supply Agreement was effected in reliance upon Section 4(2) of the
Securities Act. Pursuant to stock purchase agreements entered into by the
Company with each of the private placement investors (the "Agreements"),
the Company agreed to indemnify each of the private placement investors
(all of whom are Selling Stockholders) against any liabilities, under the
Securities Act or otherwise, arising out of or based upon any untrue or
alleged untrue statement of a material fact in the Registration Statement
or this Prospectus or by any omission of a material fact required to be
stated therein except to the extent that such liabilities arise out of or
are based upon any untrue or alleged untrue statement or omission in any
information furnished in writing to the Company by the private placement
investors or the bank expressly for use in the Registration Statement.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to its certificate of incorporation and by-laws, the Company has
been informed that in the opinion of the Securities and Exchange Commission
48
<PAGE>
such indemnification is against public policy as expressed in the Act and
is therefore unenforceable.
The private placement investors have the right, at the Company's
expense, to have the shares of Common Stock offered hereby registered for
the offer and sale to the public under the Securities Act for a period of
three years commencing with the initial effective date of this Registration
Statement. The Company has determined to include the Graska's shares of
Common Stock in this Registration Statement, although it has no obligation
to do so.
In connection with the registration of the shares of Common Stock
offered hereby, the Company will supply prospectuses to the Selling
Stockholders, use its best efforts to qualify the Common Stock for sale in
the states of New York and New Jersey and indemnify the Selling
Stockholders for certain liabilities relating thereto.
STOCK OWNERSHIP
The table below sets forth the number of shares of Common Stock (i)
owned beneficially by each of the Selling Stockholders; (ii) being offered
by each Selling Stockholder pursuant to this Prospectus; (iii) to be owned
beneficially by each Selling Stockholder after completion of the offering,
assuming that all of the Warrants held by the Selling Stockholders are
exercised and all of the shares offered hereby are sold and that none of
the other shares held by the Selling Stockholders, if any, are sold and
(iv) the percentage to be owned by each Selling Stockholder after
completion of the offering, assuming that all of the shares offered hereby
are sold and that none of the other shares held by the Selling
Stockholders, if any, are sold. For purposes of this table each Selling
Stockholder is deemed to own beneficially (i) the shares of Common Stock
underlying the Warrants, (ii) the issued and outstanding shares of Common
Stock owned by the Selling Stockholder as of July 31, 1996, and (iii) the
shares of Common Stock underlying any other options or warrants owned by
the Selling Stockholder which are exercisable as of July 31, 1996 or which
will become exercisable within 60 days after July 31, 1996. Except as
otherwise noted, none of such persons or entities has had any material
relationship with the Company during the past three years.
49
<PAGE>
<TABLE>
<CAPTION>
Number of Number of Number of Shares to Percentage of
Shares Beneficially Shares OFFERED be Owned Outstanding Shares to
SELLING STOCKHOLDERS(1) OWNED Beneficially After be Owned Beneficially
Completion OF After Completion of
OFFERING OFFERING(1)
<S> <C> <C> <C> <C>
Auer & Company 200,000 200,000 0 *
Barlow, Marie 110,100(2) 26,316 83,784 *
Bloom, Walter Dr. 24,000 24,000 0 *
Camp, Herbert L. 80,000 80,000 0 *
Chaikin, Marc 32,000 32,000 0 *
Dung, Lili B.L. 30,000 5,000 25,000 *
Factor, Mallory 80,000 80,000 0 *
Falk, Martin 13,800 13,800 0 *
Foundation Danonia 256,000 256,000 0 *
Foundation Zemara 64,000 64,000 0 *
Goldsmith, Joel 8,000 8,000 0 *
Graska, Doris L.(3) 3,030 3,030 0 *
Graska, Gerald(3) 3,030 3,030 0 *
Henry, Heather J.(4) 5,400 5,400 0 *
Henry, Kimberly A.(4) 5,400 5,400 0 *
Henry, Robert R.(4) 262,550 16,300 246,250 1.80%
Heritage Finance & Trust Co. 220,000 30,000 190,000 1.40%
Jacob, David 29,000 5,000 24,000 *
Katz, Robert 19,000 16,000 3,000 *
Kimberly Computer Group Inc. 40,000 40,000 0 *
Knakal, Jeffrey R. 8,000 8,000 0 *
Madsen, MADS Peter 32,000 32,000 0 *
Manna, Timothy J. 53,000 13,000 40,000 *
Maraist, Michael P. 73,393 32,000 41,393 *
Marden, Bernard A. 320,000 320,000 0 *
Maronde, John & Gretchen JT TEN 56,650 27,100 29,550 *
Merrion Investors LLC 100,000 100,000 0 *
Miller, Janet 10,000 10,000 0 *
50
<PAGE>
Miller, Kristin 15,000 15,000 0 *
Miller, Kara A. 15,000 15,000 0 *
Miller, Donald W. 15,000 15,000 0 *
Morton III, Thruston B. & Patricia R. TEN COM 37,000 13,000 24,000 *
Osso, Rizziero 10,000 8,000 2,000 *
Parallax Partners 80,000 80,000 0 *
Pictet & CIE 40,000 40,000 0 *
Pisani, B. Michael(5) 297,500 150,000 147,500 1.10%
Rankin, Carlton 35,500 25,000 10,500 *
Roberts, Daniel W. & Maureen M. JT TEN 63,000 52,000 11,000 *
Sands, Marvin 24,000 24,000 0 *
Thall, Richard S. & Alice TEN COM 21,000 16,000 5,000 *
Thieme Fonds 27,030 27,030 0 *
Tierney, James G. & Shirley A. TTEES 31,400 27,100 4,300 *
Windsor Partners L.P. 80,000 80,000 0 *
</TABLE>
(*) Less than one percent.
(1) The last name of individual Selling Stockholders is listed first.
(2) Includes 80,784 shares owned by Ms. Barlow's husband.
(3) Doris L. and Gerald Graska are parties to the Companies' Supply Agreement.
(4) Mr. Henry is a Director of the Company and is a member of both the
compensation committee and audit committee. Heather Henry and Kimberly
Henry are Mr. Henry's daughters. See "Management" and "Principal
Stockholders."
(5) Mr. Pisani's beneficial ownership includes shares underlying options he
received for services rendered.
51
<PAGE>
PLAN OF DISTRIBUTION
Shares of Common Stock currently outstanding and shares of Common
Stock issuable upon exercise of the Warrants may be sold pursuant to this
Prospectus by the Selling Stockholders. These sales may occur in privately
negotiated transactions or in the over-the-counter market through brokers
and dealers as agents or to brokers and dealers as principals, who may
receive compensation in the form of discounts or commissions from the
Selling Stockholders or from the purchasers of the Common Stock for whom
the broker-dealers may act as agent or to whom they may sell as principal,
or both. The Company has been advised by the Selling Stockholders that
they have not made any arrangements relating to the distribution of the
shares of Common Stock covered by this Prospectus. In effecting sales,
broker-dealers engaged by the Selling Stockholders may arrange for other
broker-dealers to participate. Broker-dealers will receive commissions or
discounts from the Selling Stockholders in amounts to be negotiated
immediately prior to the sale.
Upon being notified by a Selling Stockholder that any material
arrangement (other than a customary brokerage account agreement) has been
entered into with a broker or dealer for the sale of shares through a block
trade, purchase by a broker or dealer, or similar transaction, the Company
will file a supplemented Prospectus pursuant to Rule 424(c) under the
Securities Act disclosing (a) the name of each such broker-dealer, (b) the
number of shares involved, (c) the price at which such shares were sold,
(d) the commissions paid or discounts or concessions allowed to such
broker-dealer(s), (e) if applicable, that such broker-dealer(s) did not
conduct any investigation to verify the information set out or incorporated
by reference in the Prospectus, as supplemented, and (f) any other facts
material to the transaction.
Certain of the Selling Stockholders and any broker-dealers who execute
sales for the Selling Stockholders may be deemed to be "underwriters"
within the meaning of the Securities Act by virtue of the number of shares
of Common Stock to be sold or resold by such persons or entities or the
manner of sale thereof, or both. If any of the Selling Stockholders,
broker-dealers or other holders were determined to be underwriters, any
discounts or commissions received by them or by brokers or dealers acting
on their behalf and any profits received by them on the resale of their
shares of Common Stock might be deemed underwriting compensation under the
Securities Act.
52
<PAGE>
The Selling Stockholders have represented to the Company that any
purchase or sale of the Common Stock by them will be in compliance with
Rules 10b-6 and 10b-7 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). In general, Rule 10b-6 under the Exchange Act
prohibits any person connected with a distribution of the Company's Common
Stock (the "Distribution") from directly or indirectly bidding for, or
purchasing for any account in which he has a beneficial interest, any
Common Stock or any right to purchase Common Stock, or attempting to induce
any person to purchase Common Stock or rights to purchase Common Stock,
until after he has completed his participation in the Distribution (the
"Distribution Period").
During the Distribution Period, Rule 10b-7 under the Exchange Act
prohibits the Selling Stockholders and any other person engaged in the
Distribution from engaging in any stabilizing bid or purchasing the Common
Stock except for the purpose of preventing or retarding a decline in the
open market price of the Common Stock. No such person may effect any
stabilizing transaction to facilitate any offering at the market. Inasmuch
as the Selling Stockholders will be reoffering and reselling the Common
Stock at the market, Rule 10b-7 prohibits them from effecting any
stabilizing transaction with respect to the Common Stock.
DESCRIPTION OF SECURITIES
An aggregate of 2,042,506 shares of the Company's Common Stock are
being included in the Registration Statement of which this Prospectus forms
a part.
COMMON STOCK
The Company is currently authorized to issue 25,000,000 shares of
Common Stock, par value $.001 per share. As of July 31, 1996, there were
13,858,909 shares of Common Stock issued and outstanding and held of record
by approximately 1,540 stockholders.
As of July 31, 1996, 2,180,214 shares of Common Stock were reserved
for issuance pursuant to options issued and outstanding under the 1993
Stock Option Plan, 1,896,011 shares of Common Stock were reserved for
issuance pursuant to outstanding options which were not issued under the
1993 Stock Option Plan, 800,000 shares of Common Stock were reserved for
issuance pursuant to the warrants sold in the March 1994 Private Placement,
288,506 shares of Common Stock were reserved for issuance pursuant to the
warrants sold in the September 1994 Private Placement, 95,945 shares were
reserved for issuance pursuant to the warrants sold in the October 1994 and
53
<PAGE>
September 1995 Private Placements, 10,000 shares were reserved for issuance
pursuant to the warrant issued to the bank in connection with the amendment
of the Term Loan, and 313,800 shares were reserved for issuance pursuant to
the Warrants issued in the June 1996 Private Placement.
A majority of the issued and outstanding shares of the Company's
Common Stock must be present at a duly called stockholders' meeting in
order to have a quorum under the Company's By-Laws. In most cases, if a
quorum is present the affirmative vote of the majority of the shares
represented at the meeting constitutes the act of the stockholders.
Consequently, the holders of one share more than one-quarter of the
outstanding Common Stock could exercise effective control over the Company.
The affirmative vote of a majority of all shares entitled to vote, however,
is required to amend the Company's Certificate of Incorporation, as well as
to accomplish certain other matters.
All shares of Common Stock are equal to each other with respect to
voting, liquidation, dividend and other rights. Owners of shares of Common
Stock are entitled to one vote for each share they own at any stockholders'
meeting. Holders of shares of Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor, and upon liquidation are entitled to participate pro
rata in a distribution of assets available for such a distribution to
stockholders. The Term Loan agreement restricts the payment of dividends
to stockholders without the bank's consent. There are no preemptive rights
or privileges with respect to any shares of Common Stock. The Common Stock
of the Company does not have cumulative voting rights which means that the
holders of more than 50% of the shares voting for the election of the
directors may elect all of the directors if they choose to do so. In such
event, the holders of the remaining shares aggregating less than 50% would
not be able to elect any directors.
PREFERRED STOCK
The Company is currently authorized to issue 1,000,000 shares of
Preferred Stock, par value $.001 per share. As of July 31, 1996, there
were no shares of Preferred Stock outstanding. The Board of Directors is
empowered, without stockholder approval, to issue one or more series of
Preferred Stock and to determine the rights, preferences, privileges and
restrictions to be granted to, or imposed upon, any such series, including
the voting rights, redemption provisions (including sinking fund
provisions), dividend rights, dividend rates, liquidation preferences and
conversion rights and the description and number of shares constituting any
wholly unissued series of Preferred Stock. Under Delaware law, the Board
of Directors is permitted to use a depositary receipt mechanism which
54
<PAGE>
enables the Board to issue an unlimited number of fractional interests in
each share of Preferred Stock without stockholder approval. Consequently,
the Board of Directors, without further stockholder approval, can issue
Preferred Stock or fractional interests therein, with rights that could
adversely affect the rights of the holders of the Company's Common Stock.
All shares of any one series of Preferred Stock shall be identical in all
respects with all other shares of such series, except that shares of any
one series issued at different times may differ as to the dates from which
dividends thereof shall be cumulative.
WARRANTS
At July 31, 1996, there were outstanding (i) warrants to purchase
800,000 shares of the Company's Common Stock at an exercise price of $5.00
per share issued in the March 1994 Private Placement; (ii) warrants to
purchase 288,506 shares of the Company's Common Stock at an exercise price
of $5.50 per share issued in the September 1994 Private Placement; (iii)
warrants to purchase 95,945 shares of the Company's Common Stock at
exercise prices ranging from $4.00 to $5.50 per share issued in the October
1994 and September 1995 Private Placements; (iv) warrants to purchase
10,000 shares of the Company's Common Stock at an exercise price of $4.19
per share issued in connection with the amendment to the Company's Term
Loan with its bank; and (v) Warrants to purchase 313,800 shares of Common
Stock at an exercise price of $7.50 per shares issued in the June 1996
Private Placement. Each of the foregoing warrants is exercisable for a
period of three (3) years commencing three (3) months after the date of its
issuance except that the Warrant issued in connection with the amendment to
the Term Loan is exercisable immediately for a period of approximately two
(2) years from the date of its issuance. Issuance dates range from
December 21, 1993 through June 11, 1996.
OPTIONS
At July 31, 1996, there were outstanding options to purchase 4,076,225
shares of the Company's Common Stock with exercise prices ranging from
$2.27 to $7.00 and expiration dates ranging from September 9, 1996 to
February 26, 2006.
TRANSFER AGENT
The Transfer Agent for the Common Stock is American Stock Transfer and
Trust Company.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company had 13,858,909 shares of Common Stock outstanding as of
July 31, 1996. Of these outstanding shares, approximately 5,722,547 shares
are "restricted securities" as defined in Rule 144 adopted under the
Securities Act. Of these restricted shares, approximately 1,939,540 were
eligible to be sold under Rule 144 as of July 31, 1996. Additionally, of
these restricted shares, an aggregate of 1,722,646 are covered by this
Registration Statement and were sold in the 1995/1996 Private Placements
and the June 1996 Private Placement, 6,060 are covered by this Registration
Statement and were issued pursuant to the Supply Agreement, an aggregate of
1,924,101 were issued and sold in the March 1994 Private Placement,
September 1994 Private Placement, October 1994 Private Placement and
September 1995 Private Placement and 130,200 were issued pursuant to the
exercise of options, all of which are included on registration statements
which the Company has filed with the Commission. Such 3,783,007 shares of
restricted Common Stock included in registration statements filed with the
Commission, will, if sold pursuant to their respective registration
statements, be freely tradeable without restriction under the Securities
Act, except that any shares held by an "affiliate," as that term is defined
under the Securities Act, will be subject to the resale limitations of Rule
144. In addition to the Warrants to purchase 313,800 shares of Common
Stock issued in the June 1996 Private Placement and covered by this
Registration Statement, as of July 31, 1996 there were outstanding (i)
options to purchase an aggregate of 3,597,743 shares of Common Stock, which
are covered by an effective Registration Statement on Form S-8, (ii)
warrants to purchase an aggregate of 1,088,506 shares of Common Stock,
which were issued and sold in the March 1994 Private Placement and the
September 1994 Private Placement, (iii) warrants to purchase an aggregate
of 105,945 shares of Common Stock, which were issued and sold in the
October 1994 Private Placement, the September 1995 Private Placement and to
the bank in connection with the amendment of the Term Loan, and (iv)
options to purchase an aggregate of 478,482 shares, all of which underlying
shares of Common Stock are included in registration statements filed by the
Company with the Commission. Such 5,584,476 shares of Common Stock
underlying such warrants and options will, if issued upon exercise of such
warrants and options and sold pursuant to their respective registration
statements, be freely tradeable without restriction under the Securities
Act, except that any shares held by an "affiliate," as that term is defined
under the Securities Act, will be subject to the resale limitations of Rule
144. In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated), including affiliates, who have
beneficially owned shares for at least two years is entitled to sell,
within any three-month period, a number of shares that does not exceed the
56
<PAGE>
greater of one percent of the then outstanding shares of the Company's
Common Stock or the weekly trading volume in the Company's Common Stock
during the four calendar weeks preceding such sale. A person (or persons
whose shares are aggregated), who is not deemed an affiliate of the
Company, and who has beneficially owned shares for at least three years is
entitled to sell such shares under Rule 144 without regard to the
limitations described above.
REGISTRATION RIGHTS
The Company is required to use its best efforts to register, no later
than September 1, 1996, on behalf of the private placement investors in the
June 1996 Private Placement the 2,036,446 shares (including shares
underlying Warrants) of Common Stock issued in such offering and the shares
of Common Stock underlying the Warrants issued in such offering, at the
Company's expense, for the offer and sale by such investors to the public
under the Securities Act. The Company shall not, however, be required to
maintain the effectiveness of a registration statement beyond three (3)
years of the initial effective date thereof. The private placement
investors in the 1995/1996 Private Placements were granted the right to
piggy-back on registration statements filed by the Company with the
Commission. In connection with such registration, the Company has agreed to
supply prospectuses to the investors, use its best efforts to qualify the
Common Stock for sale in the states of New York and New Jersey and to
indemnify the investors for certain liabilities relating thereto.
The private placement investors in the October 1994 and September 1995
Private Placements who acquired an aggregate of 2,061,561 shares (including
shares underlying warrants) have the right to have the shares of Common
Stock issued in the offering and the shares of Common Stock underlying the
warrants issued in such offerings, registered at the Company's expense, for
the offer and sale by such investors to the public under the Securities
Act. The Company shall not, however, be required to maintain the
effectiveness of a registration statement beyond December 11, 1998. In
connection with such registration, the Company has agreed to supply
prospectuses to the investors, use its best efforts to qualify the Common
Stock for sale in the states of New York, New Jersey, Massachusetts and
certain additional states that may be designated and to indemnify the
investors for certain liabilities relating thereto. In December 1995, a
registration statement was declared effective by the Commission with
respect to those shares remaining unsold as of such date.
57
<PAGE>
The bank has the right, at the Company's expense, to have the shares
of Common Stock underlying the warrant issued to it in connection with the
amendment of the Term Loan registered on a registration statement for the
offer and sale to the public under the Securities Act until the earlier of
October 1, 1999 or the date on which all of the shares underlying such
Warrant are sold. In connection with such registration, the Company has
agreed to supply prospectuses to the bank and, in connection with any
demand registration, use its best efforts to qualify the Common Stock in
such states as the bank may reasonably request and to indemnify the bank
for certain liabilities relating thereto. A registration statement with
respect to such shares was declared effective by the Commission in December
1995.
The Company's Debt Conversion Agreement dated March 30, 1994 (the
"Conversion Agreement") with Ms. Shogen requires the Company, at the
request of Ms. Shogen, to file a registration statement under the
Securities Act, with respect to all or part of the Common Stock to which
the 379,678 options granted to Ms. Shogen under the Conversion Agreement
are then exercisable. The Company agreed to bear all of the costs of
registering the shares of Common Stock under the Securities Act and
registering or qualifying such shares of Common Stock with the States of
New York and New Jersey. A registration statement with respect to such
shares was declared effective by the Commission in December 1995.
The Company's Debt Conversion Agreement dated March 30, 1994 with a
certain investor (the "Investor Agreement") requires the Company to permit
such investor the opportunity to include the shares of Common Stock
underlying the 73,804 options granted to him pursuant to the Investor
Agreement, in any registration statement filed by the Company pursuant to
the Conversion Agreement of Ms. Shogen, prior to the expiration of the
options granted to the investor under the Investor Agreement or the sale of
all of the shares of Common Stock underlying such options. A registration
statement with respect to such shares was declared effective by the
Commission in December 1995.
Pursuant to the Company's pledge agreements with First Fidelity Bank,
N.A., New Jersey, the bank has the right under certain circumstances to
require the Company to register, at the Company's expense, the shares of
Common Stock owned by Ms. Shogen which have been pledged to the bank. In
connection with such registration, the Company agreed to obtain the
effectiveness of a registration statement and maintain the effectiveness of
such registration statement for a period of one (1) year from the date of
the first offering of the pledged shares of Common Stock or until such
shares are sold. The Company must also register or qualify the pledged
shares of Common Stock in such states as the bank requests.
58
<PAGE>
The Company has on file with the Commission a registration statement
on Form S-8 relating to 2,992,000 shares of Common Stock underlying
outstanding options issued under, or which may be issued under, the 1993
Stock Option Plan and 1,417,529 shares underlying additional outstanding
options granted to Ms. Shogen and Dr. Mikulski.
The private placement investors in the March 1994 Private Placement
have the right to have the shares of Common Stock and the shares of Common
Stock underlying warrants, issued in such offering registered, at the
Company's expense, for the offer and sale to the public under the
Securities Act. The Company shall not, however, be required to maintain
the effectiveness of a registration statement for such shares beyond August
3, 1997. In connection with such registration, the Company has agreed to
supply prospectuses to the investors, use its best efforts to qualify the
Common Stock for sale in such states as any holder of same reasonably
designates and indemnify the investors for certain liabilities relating
thereto. In December 1995, the Commission declared effective a
registration statement filed by the Company to cover 772,000 shares of
Common Stock and 800,000 shares of Common Stock underlying warrants issued
in the March 1994 Private Placement which remained unsold on such date.
The private placement investors in the September 1994 Private
Placement have the right, to have the shares of Common Stock, and the
shares of Common Stock underlying the Warrants, issued in such offering,
registered at the Company's expense, for the offer and sale to the public
under the Securities Act. The Company shall not, however, be required to
maintain the effectiveness of a registration statement for such shares
beyond September 14, 1997. In connection with such registration, the
Company has agreed to supply prospectuses to the investors, use its best
efforts to qualify the Common Stock for sale in the states of New York and
New Jersey and to indemnify the investors for certain liabilities relating
thereto. In December 1995, the Commission declared effective a
registration statement filed by the Company to cover 230,906 shares of
Common Stock and 288,506 shares of Common Stock underlying warrants issued
in the September 1994 Private Placement which remained unsold on such date.
59
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be
passed upon for the Company by Ross & Hardies, New York, New York.
EXPERTS
The financial statements of Alfacell Corporation (a development stage
company) as of July 31, 1995 and 1994, and for each of the years in the
three-year period ended July 31, 1995, and for the period from August 24,
1981 (date of inception) to July 31, 1995, have been included herein and in
the Registration Statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of KPMG Peat Marwick LLP, as experts in accounting
and auditing. The report of KPMG Peat Marwick LLP covering the July 31,
1995 financial statements contains an explanatory paragraph stating that
the Company's recurring losses from operations, its working capital
deficiency and net capital deficiency raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty. Further, the report of KPMG Peat Marwick LLP as it relates to
the financial statements for the period from August 24, 1981 (date of
inception) to July 31, 1995 is based on the report of AHC as to the amounts
included therein for the period from August 24, 1981 (date of inception) to
July 31, 1992. As discussed further under "Selected Financial Data" and
"Risk Factors - Termination of the Company's Auditors", on December 1,
1993, certain shareholders of AHC terminated their association with AHC,
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 in the Registration Statement, although AHC has not
consented to the use of such report herein and will not be able to perform
any subsequent review procedures with respect to such report.
60
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
<TABLE>
<CAPTION>
Index
PAGE
<S> <C>
Independent Auditors' Report of KPMG Peat Marwick LLP...........................................................F-2
Independent Auditors' Report of Armus, Harrison & Co. ..........................................................F-4
Financial Statements:
Balance Sheets - July 31, 1995 and 1994..............................................................F-6
Statements of Operations - Years ended July 31, 1995, 1994
and 1993 and the Period from August 24, 1981 (Date of
Inception) to July 31, 1995........................................................................F-7
Statement of Stockholders' Deficiency - Period from
August 24, 1981 (Date of Inception) to July 31, 1995................................................F-8
Statements of Cash Flows - Years ended July 31, 1995, 1994
and 1993 and the Period from August 24, 1981 (Date of
Inception) to July 31, 1995....................................................................... F-12
Notes to Financial Statements - Years ended July 31, 1995,
1994 and 1993 and the Period from August 24, 1981
(Date of Inception) to July 31, 1995...............................................................F-15
Balance Sheet as of April 30, 1996 (unaudited)......................................................F-36
Statements of Operations for the three and nine months ended
April 30, 1996 and 1995 (unaudited)
and for the Period from August 24, 1981 (Date of
Inception) to April 30, 1996 (unaudited)...........................................................F-37
Statements of Cash Flows for the nine months ended
April 30, 1996 and 1995 (unaudited) and for the Period from August
24, 1981 (Date of Inception) to
April 30, 1996 (unaudited).........................................................................F-38
Notes to Unaudited Financial Statements.............................................................F-40
</TABLE>
<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, 1995 and 1994, and the related
statements of operations, stockholders' deficiency, and cash flows for each of
the years in the three-year period ended July 31, 1995 and the period from
August 24, 1981 (date of inception) to July 31, 1995. 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, 1995 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, 1995 and 1994, and the results of its
operations and its cash flows for each of the years in the three-year period
ended July 31, 1995 and the period from August 24, 1981 (date of inception) to
July 31, 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Alfacell
Corporation (a development stage company) will continue as a going concern. As
discussed in note 1 to the financial statements, the Company's recurring losses
from operations, its working capital deficiency and net capital deficiency raise
substantial doubt about the entity's ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
F-2
<PAGE>
/s/KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
September 29, 1995
F-3
<PAGE>
ON DECEMBER 1, 1993, CERTAIN SHAREHOLDERS OF 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 IN THIS REGISTRATION STATEMENT, ALTHOUGH
AHC HAS NOT CONSENTED TO THE USE OF SUCH REPORT HEREIN AND WILL NOT BE AVAILABLE
TO PERFORM ANY SUBSEQUENT REVIEW PROCEDURES WITH RESPECT TO SUCH REPORT.
ACCORDINGLY, INVESTORS WILL BE BARRED FROM ASSERTING CLAIMS AGAINST AHC UNDER
SECTION 11 OF THE SECURITIES ACT ON THE BASIS OF THE USE OF SUCH REPORT HEREIN.
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 IN THIS PROSPECTUS, 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 ANY SUCH PERSONS UNDER SECTION 11 OF
THE SECURITIES ACT BASED ON ALLEGED FALSE AND MISLEADING FINANCIAL STATEMENTS
AND DISCLOSURES ATTRIBUTABLE TO AHC. THE DISCUSSION REGARDING CERTAIN EFFECTS OF
THE AHC TERMINATION IS NOT MEANT AND SHOULD NOT BE CONSTRUED IN ANY WAY AS LEGAL
ADVICE TO ANY PARTY AND ANY POTENTIAL PURCHASER SHOULD CONSULT WITH HIS, HER OR
ITS OWN COUNSEL WITH RESPECT TO THE EFFECT OF THE AHC TERMINATION ON A POTENTIAL
INVESTMENT IN THE COMMON STOCK OF THE COMPANY OR OTHERWISE.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Alfacell Corporation
Bloomfield, New Jersey
We have audited the balance sheets of Alfacell Corporation (a Development Stage
Company) as of July 31, 1992 and 1991, as restated, and the related statements
of operations, stockholders' deficiency, and cash flows for the three years
ended July 31, 1992, as restated, and for the period from inception August 24,
1981 to July 31, 1992, as restated. In connection with our audit of the 1992 and
1991 financial statements, we have also audited the 1992, 1991 and 1990
financial statement schedules as listed in the accompanying index. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly in all
material respects, the financial position of Alfacell Corporation as of July 31,
1992 and 1991, as restated, and for the three years ended July 31, 1992, as
restated, and for the period from inception August 24, 1981 to July 31, 1992, as
restated, and the results of operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.
F-4
<PAGE>
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, indicate substantial doubt 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-5
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
<TABLE>
<CAPTION>
Balance Sheets
July 31, 1995 and 1994
ASSETS 1995 1994
------ ---- ----
<S> <C> <C>
Current assets:
Cash $ 648,027 $ 202,654
Marketable securities 750,000 251,209
Prepaid expenses 38,607 68,667
---------- ---------
Total current assets 1,436,634 522,530
--------- --------
Property and equipment, net of accumulated depreciation and
amortization of $666,261 in 1995 and $644,316 in 1994 104,301 94,367
---------- ---------
Other assets:
Patents, net - 82,562
Deferred debt costs, net 31,500 73,500
Other 43,735 6,804
---------- ---------
75,235 162,866
---------- --------
Total assets $ 1,616,170 $ 779,763
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 1,602,974 $ 88,359
Loans payable, other - 44,000
Loans and interest payable, related party 138,638 203,723
Accounts payable 183,222 413,025
Accrued payroll and expenses, related parties 414,996 158,265
Accrued expenses 101,777 52,833
---------- ----------
Total current liabilities 2,441,607 960,205
Long-term debt, less current portion 7,129 1,593,976
----------- ---------
Total liabilities 2,448,736 2,554,181
--------- ---------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock, $.001 par value. Authorized and unissued,
1,000,000 shares at July 31, 1995 and 1994 - -
Common stock $.001 par value. Authorized 25,000,000 shares;
issued and outstanding 10,319,187 shares in 1995 and
9,124,681 shares in 1994 10,319 9,125
Capital in excess of par value 36,262,427 33,680,954
Common stock to be issued, 139,080 shares in 1995 and 20,000
shares in 1994 343,808 50,000
Deficit accumulated during development stage (37,449,120) (35,455,997)
------------ ------------
(832,566) (1,715,918)
Deferred compensation, restricted stock - (58,500)
---------------- ---------------
Total stockholders' deficiency (832,566) (1,774,418)
Total liabilities and stockholders' deficiency $ 1,616,170 $ 779,763
------------ ------------
See accompanying notes to financial statements.
</TABLE>
F-6
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
<TABLE>
<CAPTION>
Statements of Operations
Years ended July 31, 1995, 1994 and
1993, and the Period from August
24, 1981 (Date of Inception) to
July 31, 1995
August 24,
1981
(date of
inception)
to
July 31,
1995 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Sales $ 553,489 - - -
Investment income 201,004 14,992 6,064 489
Other income 60,103 6,000 - -
----------- ----- --------- --------
814,596 20,992 6,064 489
----------- ------ --------- --------
Costs and expenses:
Cost of sales 336,495 - - -
Research and development 20,370,500 1,205,523 1,114,455 1,091,762
General and administrative 14,898,820 664,435 903,350 903,955
Interest:
Related parties 1,032,159 14,982 74,221 198,330
Others 1,625,742 129,175 148,466 163,792
---------- ---------- ---------- ----------
38,263,716 2,014,115 2,240,492 2,357,839
----------
Net loss $ (37,449,120) (1,993,123) (2,234,428) (2,357,350)
========== ========== ============== ============
Loss per common share $ (7.72) (.21) (.26) (.31)
============ ============= ============== ============
Weighted average number of shares
outstanding 4,853,000 9,598,000 8,466,000 7,602,000
=========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Deficiency
Period from August 24, 1981
(Date of Inception) to July 31, 1995
Common Stock
------------------------ Capital in Common
Number of Excess of stock to be
Shares Amount par value issued
------ ------ --------- ------
<S> <C> <C> <C> <C>
Issuance of shares to officers and stockholders for equipment, research and 712,500
development, and expense reimbursement $ 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 -
</TABLE>
<TABLE>
<CAPTION>
Deficit Deferred
accumulated compen-
during sation, Total stock-
devlopment restricted holders'
stage stock deficiency
----- ----- ----------
<S> <C> <C> <C>
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-8
<PAGE>
<TABLE>
<CAPTION>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Deficiency, Continued
Common Stock
------------------------ Capital in Common
Number of Excess of stock to be
Shares Amount par value issued
------ ------ --------- ------
<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 -
</TABLE>
<TABLE>
<CAPTION>
Deficit Deferred
accumulated compen-
during sation, Total stock-
devlopment restricted holders'
stage stock deficiency
----- ----- ----------
<S> <C> <C> <C>
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) (3,065,782)
Sale of shares for litigation settlement - - 1,074,838
Conversion of debentures at $3.00 per share - - 400,000
Sale of shares to private investors - - 420,000
Exercise of options at $3.50 per share - - 3,500
Issuance of shares under employment agreement - (3,750,000) -
Issuance of shares under the 1989 Stock Plan - (150,000) -
Amortization of deferred compensation, restricted stock - 1,050,756 1,050,756
Net loss (2,952,869) - (2,952,869)
----------- ---------- -----------
Balance at July 31, 1989 (16,028,975) (4,850,077) (3,069,557)
Issuance of shares for legal and consulting services - - 258,777
Issuance of shares under the 1989 Stock Plan - (336,000) -
Sale of shares for litigation settlement - - 351,117
Exercise of options at $3.00 - $3.50 per share - - 345,962
Sale of shares to private investors - - 355,080
Issuance of shares under employment agreement - (3,750,000) -
Conversion of debentures at $5.00 per share - - 500,000
Amortization of deferred compensation, restricted stock - 3,015,561 3,015,561
Net loss (4,860,116) - (4,860,116)
----------- --------- -----------
Balance at July 31, 1990 (carried forward) (20,889,091) (5,920,516) (3,103,176)
(Continued)
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Deficiency, Continued
Common Stock
------------------------ Capital in Common
Number of Excess of stock to be
Shares Amount par value issued
------ ------ --------- ------
<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 49,000 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 72,000 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
</TABLE>
<TABLE>
<CAPTION>
Deficit Deferred
accumulated compen-
during sation, Total stock-
devlopment restricted holders'
stage stock deficiency
----- ----- ----------
<S> <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) (3,091,393) (4,946,523)
Exercise of options at $3.50 per share - - 3,500
Sale of shares to private investors - - 219,900
Conversion of debentures at $5.00 per share - - 470,000
Issuance of shares for services - - 156,990
Issuance of shares under the 1989 Stock Plan - (286,000) -
Amortization of deferred compensation, restricted stock - 3,046,726 3,046,726
Net loss (4,722,826) - (4,722,826)
----------- --------- -----------
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 - - 3,194,969
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-10
<PAGE>
<TABLE>
<CAPTION>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Deficiency, Continued
Common Stock
------------------------ Capital in Common
Number of Excess of stock to be
Shares Amount par value issued
------ ------ --------- ------
<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
=========== ======== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Deficit Deferred
accumulated compen-
during sation, Total stock-
devlopment restricted holders'
stage stock deficiency
----- ----- ----------
<S> <C> <C> <C>
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)
=========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
<TABLE>
<CAPTION>
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows
Years ended July 31, 1995, 1994
and 1993, and the Period from
August 24, 1981
(Date of Inception) to July 31, 1995
August 24,
1981 (date
of incep-
tion) to
July 31,
1995 1995 1994 1993
------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(37,449,120) (1,993,123) (2,234,428) (2,357,350)
Adjustments to reconcile net loss to net cash used in operating
activities:
Gain on sale of marketable securities (25,963) - - -
Depreciation and amortization 977,993 69,699 75,157 42,923
Loss on disposal of property and equipment 18,926 - - -
Noncash operating expenses 4,771,011 4,800 58,350 132,230
Amortization of deferred compensation 11,442,000 58,500 265,000 664,729
Amortization of organization costs 4,590 - - -
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses (38,607) 30,060 (13,091) 45,490
(Increase) decrease in other assets 28,483 39,877 (1,723) 5,586
Increase (decrease) in loans and interest payable, related party 883,177 (65,085) 5,306 198,330
Increase (decrease) in accounts payable 260,487 (152,538) (61,388) 161,691
Increase in accrued payroll and expenses, related parties 2,763,141 256,731 386,246 301,979
Increase (decrease) in accrued expenses 643,290 48,944 (10,318) 228,152
------------ ----------- ----------- ---------
Net cash used in operating (15,720,592) (1,702,135) (1,530,889) (576,240)
activities
------------ ----------- ----------- ---------
Cash flows from investing activities:
Purchase of marketable equity securities (1,040,420) (750,000) (251,209) -
Proceeds from sale of marketable equity securities 316,383 251,209 - -
Purchase of property and equipment (996,187) (31,879) (13,660) (97,049)
Patent costs (97,841) - (37,251) -
------------ ----------- ----------- ---------
Net cash used in investing
activities (1,818,065) (530,670) (302,120) (97,049)
------------ ----------- ----------- ---------
(Continued)
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Cash Flows, Continued
August 24,
1981 (date
of incep-
tion) to
July 31,
1995 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from short-term borrowings $ 849,500 - 169,500 56,500
Payment of short-term borrowings (623,500) - - -
Increase (decrease) in loans payable, related party, net 2,628,868 - 175,798 (107,080)
Proceeds from bank debt and other long-term debt, net of
deferred debt costs 2,377,143 17,595 4,028 (68,980)
Reduction of bank debt and long-term debt (1,281,612) (89,827) (67,285) -
Proceeds from common stock to be issued 389,008 339,008 50,000 -
Proceeds from issuance of common stock, net 13,063,077 1,974,202 1,710,791 735,500
Proceeds from exercise of stock options 437,200 437,200 - -
Proceeds from issuance of convertible debentures 347,000 - - -
(Decrease) increase in bank overdraft - - (7,169) 7,169
-------------- ------------ ------------- -------------
Net cash provided by financing
activities 18,186,684 2,678,178 2,035,663 623,109
-------------- ------------ ------------- -------------
Net increase (decrease) in cash 648,027 445,373 202,654 (50,180)
Cash at beginning of period - 202,654 - 50,180
-------------- ------------ ------------- -------------
Cash at end of period $ 648,027 648,027 202,654 -
============== ============ ============= =============
Supplemental disclosure of cash flow information -
interest paid $ 1,359,504 129,477 144,322 -
============== ============ ============= =============
Noncash financing activities:
Issuance of convertible subordinated debenture for
loan payable to officer $ 2,725,000 - - 275,000
============== ============ ============= =============
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-13
<PAGE>
<TABLE>
<CAPTION>
August 24,
1981 (date
of incep-
tion) to
July 31,
1995 1995 1994 1993
------------ ------- ---------- ----------
<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 - - 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 - - 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-14
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements
Years ended July 31, 1995, 1994 and 1993
and the Period From August 24, 1981
(Date of Inception) to July 31, 1995
(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.
BASIS OF FINANCIAL STATEMENTS
The Company's 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 financial statements, the Company has reported net losses
of $1,993,123, $2,234,428 and $2,357,350 for the fiscal years ended July
31, 1995, 1994 and 1993, respectively. The loss from date of inception,
August 24, 1981, to July 31, 1995 amounts to $37,449,120. As of July 31,
1995, the Company had a working capital deficit of $1,004,973, liabilities
exceeded its assets and there is a deficit in stockholders' equity of
$832,566. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
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 of the recently completed private placement,
see note 16), will be sufficient to meet its anticipated cash needs
through August 1996. To date, a significant portion of the Company's
financing has been provided by its President and Chief Executive Officer
and through private placements of common stock, the issuance of common
stock for services rendered and debt financing.
(Continued)
F-15
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
BASIS OF FINANCIAL STATEMENTS, (CONTINUED)
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.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets ranging from five to ten 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.
MARKETABLE SECURITIES
The Company's investments in marketable securities are available for sale
to fund its operations. The Company, subject to changes in market
conditions, does not intend to hold the marketable securities for an
extended period of time and, accordingly, they have been classified as
current assets and are carried at fair value.
PATENTS
Costs related to patents are expensed when incurred. Previously, costs
related to approved patents were capitalized and were amortized using the
straight-line 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 straight-line method over the life of the debt
agreement. Accumulated amortization as of July 31, 1995 and 1994 was
$90,416 and $48,416, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(Continued)
F-16
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
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.
(2) MARKETABLE SECURITIES
Effective July 31, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Investments in Debt and Equity Securities." There was no effect upon
adopting this Statement. Under this new accounting standard, securities
for which there is not the positive intent and ability to hold to maturity
are classified as available-for-sale and are carried at fair value.
Unrealized holding gains and losses on securities classified as
available-for-sale are carried as a separate component of stockholders'
equity. The Company considers its marketable securities to be
available-for-sale. The Company's marketable securities were purchased
during July 1995 for the current fiscal year and June 1994 for the prior
fiscal year. The market value approximates cost due to the short holding
period. As of July 31, 1995 and 1994, there were no unrealized holding
gains or losses.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at July 31:
1995 1994
---- ----
Laboratory equipment $ 587,443 568,672
Office equipment 130,143 117,035
Leasehold improvements 52,976 52,976
-------- --------
$ 770,562 738,683
======= =======
(Continued)
F-17
<PAGE>
(4) LONG-TERM DEBT
Long-term debt consists of the following at July 31:
<TABLE>
<CAPTION>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
1995 1994
---- ----
<S> <C> <C>
First Fidelity Bank, N.A., New Jersey, payable in monthly installments of
$15,945, including principal and interest at 7.5% commencing on October 1,
1993. Subject to other provisions, the entire unpaid amount shall be due and
payable on May 31, 1996. 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 President and
Chief Executive Officer of the Company has personally guaranteed the note
and has pledged certain additional collateral including a majority of the
shares of common stock and options to purchase common stock of the Company
owned by her. Certain obligations owed by the Company to the President and
Chief Executive Officer are subordinated to the bank debt. $ 1,577,049 $ 1,645,513
Note payable in monthly installments of $600, including principal and interest
at 6.3%, commencing September 1993 and each month thereafter until September
1996, secured by equipment. 9,833 16,193
Note payable in monthly installments of $164, including principal and
interest, commencing May 1994 and each month
thereafter until September 1996, secured by equipment. 2,411 3,559
Note payable in monthly installments of $822, including principal and interest
at 10.4%, commencing May 1993 and each month thereafter until April 1996,
secured by equipment. 8,586 17,070
Note payable in monthly installments of $728, including principal and interest
at 8.5%, commencing February 1995 and each month thereafter until January
1997, secured by equipment. 12,224 -
----------- ---------
1,610,103 1,682,335
Less current portion 1,602,974 88,359
---------- ----------
$ 7,129 $ 1,593,976
=========== =========
</TABLE>
(Continued)
F-18
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(4) LONG-TERM DEBT, (CONTINUED)
Principal maturities for the next two years ending July 31, are as
follows:
1996 $ 1,602,974
1997 7,129
-----------
$ 1,610,103
(5) LOANS AND INTEREST PAYABLE, RELATED PARTY
From time to time, the Company's President and 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 President and Chief
Executive Officer at July 31:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Loans and interest payable, related party at beginning
of year $ 203,723 $ -
Reduction in loan balance (80,067) -
Accrued interest 14,982 5,306
Repurchase of stock options - 198,417
---------- ----------
Loans and interest payable, related party at end of year $ 138,638 $ 203,723
========== ==========
</TABLE>
In March 1994, the following liabilities were converted into options to
purchase common stock: the long-term liability at July 31, 1993 of
$2,061,844, accrued payroll and expenses, related parties of $729,346 at
July 31, 1993, additional advances by the President and Chief Executive
Officer and accrued interest during the period from August 1, 1993 to
January 31, 1994 of $260,353 and accrued salaries and expense for that
period owed to the President and Chief Executive Officer and to the
Executive Vice President and Medical Director aggregating $143,426. These
liabilities as of January 31, 1994 were converted into 5-year options to
purchase 1,655,423 shares of common stock at an exercise price of $3.20.
Certain options were issued pursuant to the 1993 Stock Option Plan (see
note 10).
On May 1, 1994, the Company, with its bank's consent, reinstituted certain
advances of $198,417 from the Company's President and 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. The
Company's bank has consented to allow repayment of such advances under
certain circumstances and $80,067 was repaid during fiscal 1995.
(6) LOANS PAYABLE, OTHER
At July 31, 1994, a Company stockholder had a loan outstanding to the
Company of $44,000. The loan, which was payable on demand, did not have
any stated interest rate. During fiscal 1995, this loan was converted into
17,600 shares of common stock.
(Continued)
F-19
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) 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. The Company has an option to further extend its lease, subject
to certain conditions, through October 31, 1998, at the current rent. In
addition to the basic rent, the Company pays its pro rata share of
increases in real estate taxes and utilities over the base year. Rent
expense charged to operations was $66,000, $66,500 and $61,334 in 1995,
1994 and 1993, respectively.
Future minimum lease payments under noncancellable leases are
approximately as follows:
Operating
LEASES
------
Year ending July 31:
1996 $ 66,000
1997 16,500
------
Total minimum lease payments $ 82,500
======
(8) STOCKHOLDERS' 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.
(Continued)
F-20
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) STOCKHOLDERS' DEFICIENCY, (CONTINUED)
On September 8, 1982, the Company issued 15,000 shares of common stock to
an officer and stockholder in exchange for equipment. The equipment
received in exchange for the common stock was recorded at the transferor's
cost.
On November 1, 1982 and January 3, 1983, the Company sold 28,125 and
16,071 shares of common stock, respectively, to private investors at $.93
per share, resulting in net proceeds to the Company of approximately
$41,250.
On January 17, 1983, the Company sold 660,000 shares of its common stock
and 330,000 common stock purchase warrants in a public offering at a price
of $2.50 per share, resulting in net proceeds to the Company of
approximately $1,308,446. The warrants were to expire 12 months after
issuance; however, the Company extended the expiration date to July 16,
1984. During the fiscal years ended July 31, 1983 and 1984, the net
proceeds to the Company from the 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.
(Continued)
F-21
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) STOCKHOLDERS' 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.
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 is being 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 is being amortized over the
remaining term of the employment agreements. The contracts also provided
for five-year options to purchase 750,000 shares of common stock at $3.00
per share; options for the purchase of 170,000 shares were exercised on
June 16, 1988 and the remaining options for the purchase of 580,000 shares
expired on September 2, 1992.
During 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 President and 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.
(Continued)
F-22
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) STOCKHOLDERS' DEFICIENCY, (CONTINUED)
During the fiscal year ended July 31, 1990, the Company sold 89,480 shares
of common stock to private investors at $3.97 per share resulting in net
proceeds to the Company of approximately $355,080.
During the fiscal year ended July 31, 1991, the Company issued 87,000
shares of common stock for payment of legal and consulting services. The
fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1992, the Company sold 70,731 shares
of common stock to private investors at $2.75 to $3.50 per share resulting
in net proceeds to the Company of approximately $219,900.
During the fiscal year ended July 31, 1992, the Company issued 45,734
shares of common stock as payment for services rendered to the Company.
The fair value of 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
President and 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 and
they are currently outstanding. The remaining 234,500 options are
currently outstanding and will expire during fiscal 1996.
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.
(Continued)
F-23
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) STOCKHOLDERS' DEFICIENCY, (CONTINUED)
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 President and Chief Executive Officer upon
the conversion of outstanding debentures.
During the fiscal year ended July 31, 1994, 25,400 shares of common stock
were issued upon the conversion of other outstanding debentures.
In September 1994, the Company completed a private placement resulting in
the issuance of 288,506 shares of common stock and three-year warrants to
purchase 288,506 shares of common stock at an exercise price of $5.50 per
share. The 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.
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.
(9) 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-24
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) COMMON STOCK WARRANTS, (CONTINUED)
WARRANTS SOLD IN 1994 AND 1995 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
=========== ===========
</TABLE>
(10) 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-25
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) 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 3.50
---------
Balance at July 31, 1993 750,000 3.50
Granted pursuant to conversion of certain liabilities:
related party 1,324,014 3.20
unrelated party 73,804 3.20
Repurchased stock options (102,807) 3.20
-----------
Balance at July 31, 1994 and 1995 2,045,011 $ 3.20-3.50
=========== =============
Exercisable at July 31, 1995 1,143,982 $ 3.20-3.50
=========== =============
</TABLE>
The options outstanding at July 31, 1995 will expire between September 16,
1996 and March 30, 2004. Subsequent to July 31, 1995, certain of these
options were extended, see Note 16.
(Continued)
F-26
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) 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 6.50
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
=========== =============
</TABLE>
The options outstanding at July 31, 1995, will expire during the fiscal
years ending July 31, 1996 and 1997.
(Continued)
F-27
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) 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 are nontransferable and forfeitable in the
event employment is terminated within two years of the date an option is
exercised or prior to an option being exercised. 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 outstanding and
exercisable at July 31, 1995 445,000 $ 2.50-2.68
========= ==========
(Continued)
F-28
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) 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 as
follows:
<TABLE>
<CAPTION>
Exercise Price
------------------------------------------
No. of Options
NO. OF OPTIONS ORIGINAL REVISED EXERCISED EXPIRATION DATE
-------------- -------- ------- --------- ---------------
<S> <C> <C> <C> <C>
110,000 $ 3.50 $ 2.2 110,000 January 9, 1995
320,000 5.00 2.50 75,000 July 31, 1996
200,000* 5.00 2.68 - July 31, 1996
-------- ------------
630,000 185,000
========= ============
</TABLE>
* Options to related parties were repriced at the fair market value of
the common stock at the 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 331,409 3.12
of certain liabilities, related
party
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
=========== ===========
Exercisable at July 31, 1995 771,864 $ 2.71 - 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, 1995 will expire from November 10,
1997 to March 13, 2005.
(Continued)
F-29
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(11) 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 recipient's termination.
(Continued)
F-30
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(11) 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.
(12) INCOME TAXES
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) for the
year ended July 31, 1993. 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-31
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(12) INCOME TAXES, (CONTINUED)
At July 31, 1995 and 1994, the tax effects of temporary differences that
give rise to the deferred tax assets are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Excess of book over tax depreciation $ 26,223 $ 56,116
Deferred compensation 165,999 55,916
Other 7,993 1,996
Federal and state net operating loss carryforwards 8,926,338 8,662,634
Research and experimentation and investment tax
credit carryforwards 473,287 471,234
--------- ---------
Total gross deferred tax assets 9,599,840 9,247,896
Valuation allowance (9,599,840) (9,247,896)
--------- ---------
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, 1995, the Company has federal net operating loss carryforwards
of approximately $23,460,000 that expire in the years 1997 to 2010. The
Company also has investment tax credit carryforwards of $63,076 and
research and experimentation tax credit carryforwards of $410,211 that
expire in the years 1998 to 2010. Ultimate utilization/availability of
such net operating losses and credits may be significantly curtailed if a
significant change in ownership occurs.
(13) OTHER FINANCIAL INFORMATION
Accrued expenses as of July 31, consist of the following:
1995 1994
---- ----
Payroll and payroll taxes $ 27,539 $ 12,535
Interest 10,196 10,623
Professional fees 23,800 29,675
Other 40,242 -
------- --
$ 101,777 $ 52,833
======= ======
(Continued)
F-32
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(13) OTHER FINANCIAL INFORMATION, (CONTINUED)
Prepaid expenses as of July 31, consist of the following:
1995 1994
---- ----
Insurance $ 31,607 $ 26,223
NIH research - 32,000
Other 7,000 10,444
----- ------
$ 38,607 $ 68,667
====== ======
(14) COMMITMENTS AND CONTINGENCIES
On July 23, 1991, the Board of Directors authorized the Company to pay to
the President and 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 indebtedness to the President and 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.
(15) 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 1996,
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, $43,000 and $17,000 during the years ended July 31, 1995, 1994
and 1993, respectively.
(16) SUBSEQUENT EVENTS
In order to preserve stock options as a source of financing which were
granted during fiscal year 1993 and due to expire, the Board of Directors
approved effective September 15, 1995, a one-year extension for 750,000
options which were held by officers and due to expire on that day. The
exercise price was increased from $3.50 to $3.87, the fair market value of
the common stock at the time of the extension.
F-33
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
(16) SUBSEQUENT EVENTS, (CONTINUED)
On September 29, 1995, the Company completed a private placement resulting
in the issuance of 1,105,536 shares of common stock and 8,540 three-year
warrants to purchase shares of common stock at an exercise price of $4.00
per share to private and institutional investors. The stock and warrants
were sold at prices ranging from $2.00 to $3.70 per share and resulted in
net proceeds to the Company of approximately $2.3 million.
F-34
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Balance Sheet
April 30, 1996
<TABLE>
<CAPTION>
April 30,
1996
ASSETS (UNAUDITED)
<S> <C>
Current assets:
Cash $ 657,043
Marketable securities (at cost which approximates fair value) 1,700,000
Prepaid expenses 90,746
----------
Total current assets 2,447,789
---------
Property and equipment, net of accumulated depreciation and amortization of $682,190 at
April 30, 1996 114,602
---------
Other assets:
Deferred debt costs, net 25,062
Other 28,454
53,516
Total assets $ 2,615,907
=========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current liabilities:
Current portion of long-term debt $ 93,280
Loans and interest payable, related party 1,250
Accounts payable 351,764
Accrued payroll and expenses, related parties 209,046
Accrued expenses 139,289
---------
Total current liabilities 794,629
Long-term debt, less current portion 1,418,448
Total liabilities 2,213,077
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value
Authorized and unissued, 1,000,000 shares at April 30, 1996 --
Common stock $.001 par value
Authorized 25,000,000 shares at April 30, 1996;
Issued and outstanding 11,900,679 shares at April 30, 1996 11,901
Capital in excess of par value 39,996,257
Deficit accumulated during development stage (39,605,328)
------------
Total stockholders' equity 402,830
---------
Total liabilities and stockholders' equity $ 2,615,907
===========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
<TABLE>
<CAPTION>
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Three months and nine months ended
April 30, 1996 and 1995 and the
Period from August 24, 1981
(Date of Inception) to April 30, 1996
(Unaudited)
Three Months Ended Nine Months Ended August 24,
APRIL 30 APRIL 30, 1981
(date of
inception)
to
1996 1995 1996 1995 APRIL 30, 1996
------ ------ ------ ------ --------------
REVENUE
<S> <C> <C> <C> <C> <C>
Sales $ -- $ -- $ -- $ -- $ 553,489
Investment income 31,083 1,377 105,563 9,653 306,567
Other income -- -- -- -- 60,103
------- ------- ------- ------- -------
TOTAL REVENUE 31,083 1,377 105,563 9,653 920,159
------- ------- ------- ------- -------
COSTS AND EXPENSES
Costs of sales -- -- -- -- 336,495
Research and development 520,826 243,423 1,541,826 800,101 21,912,326
General and administrative 197,138 153,803 621,627 488,478 15,520,447
Interest
Related parties 45 3,967 1,801 11,547 1,033,960
Other 31,205 30,519 96,517 96,389 1,722,259
------ ------ ------ ------ ---------
TOTAL COSTS AND EXPENSES 749,214 431,712 2,261,771 1,396,515 40,525,487
------- ------- --------- --------- ----------
NET LOSS $ (718,131) $ (430,335) $(2,156,208) $(1,386,862) $(39,605,328)
=========== =========== ============ ============ =============
Loss per common share $ (.06) $ (.05) $ (.19) $ (.15) $ (7.34)
============= ============= =============== ============= =============
Weighted average number of
common shares outstanding 11,798,079 9,580,030 11,595,982 9,443,411 5,392,511
==========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Ninemonths ended April 30, 1996
and 1995, and the Period from
August 24, 1981
(Date of Inception) to April 30, 1996
(Unaudited)
AUGUST 24, 1981
NINE MONTHS ENDED (DATE OF INCEPTION)
APRIL 30, TO
1996 1995 APRIL 30, 1996
----------- ---------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss $ (2,156,208) (1,386,862) (39,605,328)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Gain on sale of marketable securities - - (25,963)
Depreciation and amortization 58,398 51,224 1,036,391
Loss on disposal of property and
equipment - - 18,926
Noncash operating expenses 15,997 - 4,787,008
Amortization of deferred compensation - 58,500 11,442,000
Amortization of organization costs - - 4,590
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses (52,139) 14,701 (90,746)
(Increase) decrease in other assets (5,651) (32,190) 22,832
Increase (decrease) in interest payable
related party (137,388) 11,547 745,789
Increase (decrease) in accounts payable 168,542 (71,261) 429,029
Increase (decrease) in accrued payroll
and expenses, related parties (205,950) 191,732 2,557,191
Increase (decrease) in accrued expenses 37,512 (10,228) 680,802
--------- ---------- ---------
Net cash used in operating activities (2,276,887) (1,172,837) (17,997,479)
------------ ------------- -------------
Cash flows from investing activities:
Purchase of marketable securities (950,000) - (1,990,420)
Proceeds from sale of marketable equity
securities - 251,209 316,383
Purchase of property and equipment (26,228) (24,993) (1,022,415)
Patent costs - - (97,841)
------ ------ --------
Net cash provided by (used in) investing
activities (976,228) 226,216 (2,794,293)
--------- ------- -----------
See accompanying notes to financial statements. (continued)
</TABLE>
F-37
<PAGE>
<TABLE>
<CAPTION>
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS, Continued
Nine months ended April 30 1996 and 1995,
and the Period from August 24, 1981
(Date of Inception) to April 30, 1996
(Unaudited)
AUGUST 24, 1981
NINE MONTHS ENDED (DATE OF INCEPTION)
APRIL 30, TO
1996 1995 APRIL 30, 1996
----------- ---------- --------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from short-term borrowings $ - - 849,500
Payment of short-term borrowings - - (623,500)
Increase in loans payable - related party, net - - 2,628,868
Proceeds from bank debt and other long-
term debt, net of deferred debt costs 29,540 17,595 2,406,683
Reduction of bank debt and long-term debt (127,915) (66,907) (1,409,527)
Proceeds from common stock to be issued - - 389,008
Proceeds from issuance of common stock, net 3,033,876 1,203,318 16,096,953
Proceeds from exercise of stock options 326,630 - 763,830
Proceeds from issuance of convertible debentures - - 347,000
-------- --------- ----------
Net cash provided by financing activities 3,262,131 1,154,006 21,448,815
--------- --------- ----------
Net increase (decrease) in cash 9,016 207,385 657,043
Cash at beginning of period 648,027 202,654 -
-------- --------- -----
Cash at end of period 657,043 410,039 657,043
$ ========= ========= =========
Supplemental disclosure of cash flow information -
interest paid $ 96,446 97,039 1,455,950
========= ========= =========
Noncash financing activities:
Issuance of warrants/options for services rendered 15,100 - 15,100
====== ========= ======
Issuance of convertible subordinated
debenture for loan payable to officer $ - - 2,725,000
========= ========= =========
Issuance of common stock upon the conversion of
convertible subordinated debentures, related party $ - - 2,945,000
========= ========= =========
Conversion of short-term borrowings to common stock $ - - 226,000
========= ========= =========
Conversion of accrued interest, payroll and expenses by
related parties to stock options $ - - 3,194,969
========= ========= =========
Repurchase of stock options from related party $ - - (198,417)
========= ========= ==========
Conversion of accrued interest to stock options $ - - 142,441
========= ========= =========
Conversion of accounts payable to common stock $ - - 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
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the Company's financial position as of April 30,
1996 and the results of operations for the nine month periods ended April 30,
1996 and 1995 and the period from August 24, 1981 (date of inception) to April
30, 1996. The results of operations for the nine months ended April 30, 1996 are
not necessarily indicative of the results to be expected for the full year.
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
a new business. Its planned principal operations have not commenced and,
accordingly, no significant revenue has been derived therefrom.
2. CAPITAL STOCK
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 August 8, 1995, options to purchase 10,000 shares of common stock
were exercised resulting in gross proceeds to the Company of $25,000.
On September 29, 1995, the Company completed a private placement
resulting in the issuance of 1,925,616 shares of restricted 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. 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 received prior to the fiscal year ended July
31, 1995, and incurred net costs associated with the placement of approximately
$18,000.
F-39
<PAGE>
In October 1995, a private placement of 30,000 shares of common stock
at $3.60 per share was made to a single investor for a total of $108,000.
As consideration for the extension of the Company's term loan agreement
with its bank, the Company granted the bank 10,000 warrants 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.
On December 11, 1995, the Securities and Exchange Commission declared
effective a registration statement for the offer and sale of up to 2,071,561
shares of common stock by shareholders and warrant holders of the Company. Of
these shares (i) 1,965,616 were issued in private placements closed in October
1994 and September 1995, (ii) 95,945 underlie warrants issued in such private
placements closed in October 1994 and September 1995 and may be issued upon
exercise of the warrants, and (iii) 10,000 underlie a warrant issued to the
Company's bank in connection with the amendment of its term loan agreement with
the bank and may be issued upon exercise of such warrant.
Also, on December 11, 1995, the Securities and Exchange Commission
declared effective another registration statement for the offer and sale of up
to 3,299,561 shares of common stock by shareholders and option holders of the
Company. Of these shares, (i) an aggregate of 1,002,906 shares were issued to
private placement investors in private placements closed in March 1994 and
September 1994, (ii) an aggregate of 30,000 shares were issued pursuant to the
exercise of options, (iii) an aggregate of 1,088,506 shares may be issued upon
exercise of warrants which were issued to private placement investors in such
private placements closed in March 1994 and September 1994, and (iv) an
aggregate of 1,178,149 shares may be issued upon exercise of certain outstanding
options to purchase shares of common stock.
In November 1995, options to purchase 500 shares of common stock were
exercised resulting in gross proceeds to the Company of $1,560.
In December 1995, a private placement of 102,316 shares of Common Stock
at $3.80 per share was made to several investors for a total of $388,801.
In December 1995, options to purchase 4,000 shares of Common Stock were
exercised resulting in gross proceeds to the Company of $10,000.
In February 1996, options to purchase 10,000 shares of Common Stock
were exercised resulting in gross proceeds to the Company of $26,800.
F-40
<PAGE>
In March 1996, options to purchase 48,000 shares of Common Stock were
exercised resulting in gross proceeds to the Company of $127,670.
In March 1996, a private placement of 50,000 shares of Common Stock at
$4.10 per share was made to an investor for a total of $205,000.
In April 1996, options to purchase 51,000 shares of Common Stock were
exercised resulting in gross proceeds to the Company of $135,600.
In April 1996, a private placement of 25,000 shares of Common Stock at
$4.24 per share was made to an investor for a total of $106,000.
3. SUBSEQUENT EVENT
In June 1996, the Company completed a private placement (the "June 1996
Private Placement") resulting in the issuance of approximately 1,600,000 shares
of Common Stock and approximately 325,000 three-year warrants each to purchase
one share of Common Stock at an exercise price of $7.50 per share (the
"Warrants") to private and institutional investors. The Common Stock was sold
alone for $3.70 per share and in combination with Warrants at a per unit price
of $12.52. The Warrants were also sold alone at a per Warrant price of $1.42.
Each unit consists of one Warrant and three Common Shares. The June 1996 Private
Placement resulted in net proceeds to the Company of approximately $6,000,000.
F-41
