U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
July 31, 1999 0-11088
For the fiscal year ended Commission file number
ALFACELL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2369085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Belleville Avenue, Bloomfield, New Jersey 07003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 748-8082
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock, par value $.001 per share,
held by non-affiliates based upon the average of the high and low sale prices as
reported by the OTC Bulletin Board on November 8, 1999 was $7,922,302. As of
November 8, 1999 there were 17,326,594 shares of Common Stock, par value $.001
per share, outstanding.
The Index to Exhibits appears on page 26.
Documents Incorporated by Reference
None
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Table of Contents
PART I Page
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Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners
and Management 24
Item 13. Certain Relationships and Related Transactions 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 26
The following trademark appear in this Annual Report: ONCONASE(R) is the
registered trademark of Alfacell Corporation, exclusively for the anti-cancer
indications.
(i)
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Part I
Item 1. BUSINESS.
Overview
Alfacell Corporation ("Alfacell" or the "Company") is a biopharmaceutical
company organized in 1981 and is primarily engaged in the discovery and
development of a new class of anti-cancer drugs from amphibian ribonucleases
("RNases"). RNases degrade ribonucleic acids ("RNA") causing an interruption in
protein synthesis resulting in inhibition of cell growth and induction of
apoptosis (programmed cell death). The Company's first product under development
is ONCONASE(R) (ranpirnase) which targets solid tumors, most of which are known
to become resistant to other chemotherapeutic drugs.
ONCONASE(R) (ranpirnase*) is a novel amphibian RNase that has been isolated from
the eggs of the leopard frog (Rana pipiens). RNases are enzymes that catalyze
the cleavage of phosphodiester bonds of RNAs. RNases mediate several important
biological functions in nature including regulation of angiogenesis, anti-viral
and anti- parasitic defenses, interstrain competition in bacteria and
restrictive pollination in plants. In addition to taking advantage of the
natural biological functions of RNases, amphibian ribonucleases may be more
therapeutically effective in humans than mammalian RNases as they do not appear
to be inhibited by endogenous mammalian RNase inhibitors. Therefore, developing
amphibian ribonucleases into therapeutics, and thereby taking advantage of the
natural role of RNases, may result in a new class of compounds for proliferative
diseases such as cancer and AIDS. The Company retains all commercial rights to
compounds resulting from this program.
ONCONASE has been used to treat patients with advanced stages of solid tumors on
a weekly basis. Based upon Phase II and Phase III clinical data, the most
significant clinical results to date with ONCONASE have been observed in
unresectable malignant mesothelioma. Pilot clinical trials have also been
conducted in non- small cell lung cancer, metastatic breast and renal cell
cancer.
ONCONASE, Alfacell's flagship product, is a novel ribonuclease unique among the
superfamily of pancreatic ribonucleases. Ranpirnase is structurally homologous
to several human RNases, such as pancreatic RNase and angiogenin, which may
account for its relatively low immunogenicity and a favorable safety profile
which has been observed in over 700 patients treated to date. 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 little evidence of
myelosuppression (bone marrow suppression), alopecia (hair loss) or other severe
toxicities frequently observed after treatment with most other chemotherapeutic
drugs.
Based on years of preclinical and clinical testing, it is believed that ONCONASE
and related compounds may have utility:
o as a single agent;
o in combination with other anticancer agents;
o as the payload in a targeted conjugate or fusion protein; and
o in a delivery system such as standard or "stealth" liposomes.
*Ranpirnase is the active component of the finished product ONCONASE(R)
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In June 1997, a Phase III clinical trial was initiated comparing ONCONASE as a
single agent to doxorubicin in patients with unresectable malignant
mesothelioma. Unresectable malignant mesothelioma is a cancer often linked to
asbestos exposure and afflicts approximately 2,500-3,500 newly-diagnosed
patients in the U.S. each year. Epidemiologists have predicted that over the
next 35 years over 250,000 people will die from malignant mesothelioma in Europe
alone. This disease is found in the lining of the lungs and the abdomen. There
is currently no standard Food and Drug Administration ("FDA") approved drug for
this disease. In April 1999, the enrollment for this trial was completed.
Subsequently, the trial was amended to allow for the comparison of the
combination of ONCONASE and doxorubicin versus doxorubicin as a single
therapeutic agent. In July 1998, the Company discontinued two Phase III clinical
trials testing ONCONASE in combination with tamoxifen in pancreatic cancer. This
drug combination did not demonstrate a statistically significant survival
benefit in this indication.
In March 1999, a Phase I/II study was initiated to evaluate the safety and
efficacy of the combination regimen of ONCONASE and 13-cis-retinoic acid and
alpha-interferon under an Investigator IND at MD Anderson Cancer Center, Houston
Texas. No meaningful data from this study are yet available.
Alfacell has established two major scientific collaborations with the National
Institutes of Health (the "NIH"): i) in 1989, a collaboration with the National
Institute of Neurological Disorders and Stroke (the "NINDS") and ii) in 1992, a
collaboration with the National Cancer Institute (the "NCI"). Research primarily
focuses on ONCONASE mechanism of action studies, in vivo synergisms of ONCONASE
with other anti-cancer agents and other routes of administration.
Alfacell has produced a modified recombinant version of ranpirnase which enables
other moieties to be attached to it. This has resulted in a potential new
product line. Ranpirnase conjugate produced by the NINDS which is being
developed for the treatment of patients with primary brain tumors. The NINDS is
also in preclinical testing of ONCONASE as a single agent in primary brain
tumors. The NCI collaboration has also produced a potential new product, a
conjugate of ranpirnase with a monoclonal antibody which has demonstrated
preclinical activity in Non-Hodgkin's lymphoma. Further preclinical testing by
the NINDS and NCI is ongoing (in vivo) in preparation for commencing clinical
trials for these two indications.
Alfacell has also discovered a series of biologically active proteins. These
proteins appear to be involved in the regulation of both early embryonic and
malignant cell growth. However, significant additional research and funding will
be required in order to develop them into therapeutics.
The Company believes that ranpirnase may also be developed as an anti-viral
agent. The NIH has performed an independent in vitro screen of ONCONASE against
the HIV virus type 1 ("HIV"). The results showed ONCONASE to inhibit replication
of HIV by up to 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 HIV in
several persistently infected human cell lines, preferentially degrading viral
RNA and cellular transfer RNA while not affecting normal cellular ribosomal RNA
and messenger RNAs. In addition, the NIH - Division of AIDS found ONCONASE to
have in vitro anti- viral activity. Subject to the availability of the resources
required to do so, the Company plans to conduct further research concerning
anti-viral activity. There can be no assurance that ranpirnase will show any
level of anti-HIV activity in humans.
Information contained herein contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The
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matters set forth in Exhibit 99.1 hereto constitute cautionary statements
identifying important factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual results to
vary materially from the future results indicated in such forward-looking
statements. Other factors could also cause actual results to vary materially
from the future results indicated in such forward-looking statements.
ONCONASE(R) (Ranpirnase) Profile
Originally, the Company developed a biological extract from early stage leopard
frog embryos and eggs which demonstrated potent anti-tumor activity. In 1987,
the Company isolated a specific protein, P-30 Protein (herein referred to as
ranpirnase). In October 1998, the United States Adopted Names Council (USAN)
adopted ranpirnase as the United States adopted name for Alfacell's
antineoplastic P30 protein (trademarked ONCONASE(R)) intended for use in the
treatment of solid tumors. Ranpirnase is the active ingredient (drug substance)
of the finished registered trademarked product ONCONASE. Based upon the complete
amino acid sequence analysis (comparison of the amino acid sequence of
ranpirnase 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 ranpirnase
has a novel structure. It has also been determined that, thus far, ranpirnase is
the smallest protein belonging to the superfamily of pancreatic ribonucleases.
The Company retains all commercial rights to ONCONASE.
Chemistry
ONCONASE (ranpirnase) is a single peptide chain containing 104 amino acids.
Ranpirnase has a molecular mass of approximately 12,000 daltons and an
isoelectric point of approximately 9.5.
Formulation
Each vial of the finished product ONCONASE(R) for Injection contains 1 mg + 15%
of lyophilized ONCONASE and 40 mg + 15% of mannitol. Storage below -15o C is
recommended. Stability testing is on-going to support refrigerated storage.
Postulated Mechanism of Action
Anti-Tumor Activity
Although the mechanism of action of ONCONASE has not been fully elucidated, a
series of studies have been performed and the results imply that ONCONASE has
several mechanisms of actions. The enzymatic activity of ONCONASE appears to be
essential for its broad spectrum of biological activities. In the 9L glioma cell
system, ONCONASE is able to induce a chain of events that lead to inhibition of
tumor cell proliferation and tumor cell destruction. ONCONASE:
binds to tumor cell surface receptors
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becomes internalized by energy-dependent process
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reaches the cytosol
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degrades various species of intracellular RNA (preferentially tRNA)
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inhibits protein synthesis
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inhibits cell growth and proliferation (primarily blocking the G1
phase of the cell cycle)
|
may induce tumor cell differentiation and/or programmed cell death (apoptosis)
The inhibitory effects of ONCONASE in the G1 phase of the cell cycle appear to
be due to its inhibition of the expression of cyclin D3 and an increase in the
expression of several inhibitors of cyclin-dependent kinases ("CDKs") such as
p16INK4A, p21WAF1, p27KIP1 and hypophosphorylated form of pRb protein, as
demonstrated in the human U937 lymphoma cell line. Inhibiting cell cycle
progression in the G1 phase prevents cells from entering the proliferative
DNA-synthetic phase (S-phase) of the cell cycle. Thus, the cell cycle regulatory
effects of ONCONASE include both down-regulatory and up-regulatory mechanisms.
This pattern of activity may partly explain why tumor cells with their
de-regulated cell cycle control may be more susceptible to ONCONASE than
normally regulated somatic cells. The parallel ONCONASE-induced cell
differentiation and apoptosis observed in this model may reflect a shift in
growth signal transduction pathways from primarily anti-apoptotic to
differentiation-inducing and pro-apoptotic.
Preclinical research
In Vitro Anti-Cancer Activity
ONCONASE has demonstrated a broad spectrum of anti-tumor activity in vitro and
was determined to be active in the NCI Cancer Screen. Scientists at Harvard
Medical School demonstrated that ONCONASE has anti- angiogenic activity. It
antagonizes the pro-angiogenic activity of human angiogenin in the endothelial
cells.
Several synergistic interactions between ONCONASE and other drugs have been
established. The in vitro results are shown in the table below:
SYNERGISMS IN VITRO
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Regimen Cell Line
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ASPC-1 Pancreatic
ONCONASE + Tamoxifen DU-145 Prostatic
OVCAR-3 Ovarian
ACHN Renal Cell Carcinoma
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ONCONASE + Phenothiazine A-549 Non-Small Cell Lung Carcinoma
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ASPC-1 Pancreatic
ONCONASE + Lovastatin A-549 Non-Small Cell Lung
OVCAR -3 Ovarian
HT-520 NSCLC
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ONCONASE + Cisplatin OVCAR-3 Ovarian
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ONCONASE + All-trans-retinoic acid 9L Glioma
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ONCONASE + Vincristine HT-29 mdr-1 Colorectal
MCF-7 AdrRes Breast
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ONCONASE + Doxorubicin HT-29 mdr-1 Colorectal
MDA.MB-231 Res. Breast
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ONCONASE + Taxol MDA.MB-231 Res. Breast
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In Vivo Anti-Cancer Activity
There are in vivo data for the synergistic use of ONCONASE with:
o vincristine,
o doxorubicin, and
o tamoxifen.
These synergisms suggest a potential for the therapeutic utility of ONCONASE in
patients with chemotherapy- resistant tumors. NCI reported the ability of
ONCONASE to overcome multiple drug resistance (MDR), both in vitro and in vivo.
Previously, it was shown that ONCONASE could overcome other forms of drug
resistance.
ONCONASE as a Radiosensitizing and Anti-Angiogenic Agent
Collaborative research at the University of Medicine and Dentistry of New Jersey
at Camden and University of Pennsylvannia Medical Center, Department of
Radiation Oncology, revealed:
o radiosensitizing potential of ONCONASE,
o potential co-antiangiogenic activity of ONCONASE, and
o diminution of tumor interstitial fluid pressure by systemically
administered ONCONASE.
Further in vivo studies are planned.
Clinical Development
Alfacell's regulatory strategy for gaining initial marketing approval of
ONCONASE is to demonstrate its safety and efficacy in unresectable malignant
mesothelioma. If successful, the Company would then seek to initiate trials in
other solid tumor indications where:
o median survivals are typically less than a year,
o there are smaller patient populations and thus, smaller clinical
trials would be required, and
o there are few or no approved treatments.
Clinical Trials
ONCONASE has been tested as a single agent in patients with a variety of solid
tumors and in combination with tamoxifen in prostate cancer and advanced
pancreatic and renal cell carcinoma patients. In vitro results showed ONCONASE
to be synergistic with tamoxifen in inhibiting tumor cell growth in the tumor
cell lines originating from these types of cancers.
Reported toxicities in Phase I and II clinical trials, were primarily renal,
dose-related and reversible. There has been little evidence of myelosuppression
(bone marrow suppression), alopecia (hair loss) or other severe toxicities
frequently observed after treatment with most other chemotherapeutic drugs. Due
to its limited funding, the Company has had to be very selective in designing
its Phase III regulatory strategy for gaining FDA approval. Therefore, the
selection criteria focused on those tumor types, which in addition to showing
evidence of preclinical and clinical efficacy, that: i) have small patient
populations, resulting in the number of patients required for Phase III studies
to be small; ii) have a median survival time of 6-12 months from diagnosis, and
iii) are life-threatening with limited competition.
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In June 1997, Alfacell initiated a Phase III clinical trial for unresectable
malignant mesothelioma comparing ONCONASE to doxorubicin. No standard FDA
approved therapy exists to treat this deadly cancer, and most advanced,
unresectable malignant mesothelioma patients die of progressive disease within
6-12 months of diagnosis. The Company is in the process of analyzing the Phase
III data from this clinical trial in preparation for a pre-NDA meeting with the
FDA.
The table below indicates the status of the various clinical programs:
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Form Clinical Status
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As a single agent ONCONASE is currently in a Phase III
clinical trial for malignant
mesothelioma (originating from the
lining of the lungs and abdomen). The
trial is a randomized, controlled
study. Patient accrual was completed in
April 1999.
Phase II clinical trial results for
this indication have been encouraging;
however, there can be no assurance that
previous clinical trial results will be
reflective of future clinical results
or will be sufficient to obtain FDA
approval.
ONCONASE has been tested in Phase I-III
clinical trials in approximately 35
cancer centers across the U.S.,
including major centers such as
Columbia-Presbyterian, University of
Chicago, M.D. Anderson and Cedars-Sinai
Cancer Centers.
ONCONASE is in preclinical testing for
primary brain tumors at the National
Institute of Neurological Disorders and
Strokes ("NINDS").
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In combination with other anti-
cancer agents Phase I/II clinical studies testing
ONCONASE in combination with tamoxifen
in prostate cancer and renal cell
carcinoma have been completed.
Phase I/II trial testing ONCONASE in
combination with 13-cis-retinoic acid
and alpha-interferon in metastatic
renal cell carcinoma is ongoing at MD
Anderson Cancer Center.
ONCONASE in combination with
doxorubicin in patients with
unresectable malignant mesothelioma is
being evaluated.
In July 1998, Alfacell discontinued two
Phase III clinical trials testing
ONCONASE in combination with tamoxifen
in pancreatic cancer based on the lack
of a demonstrated statistically
significant survival benefit.
Although further clinical trials may be
warranted in other indications,
Alfacell lacks the financial resources
for further studies at this time.
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As the payload in a targeted
conjugate A collaboration with the NINDS has
produced a ranpirnase which conjugate
is currently being evaluated for
clinical testing at the NINDS for
primary brain tumors.
A collaboration with the National
Cancer Institute has produced a
conjugate of ranpirnase and a
monoclonal antibody which has been
deemed active in vivo for Non-Hodgkin's
Lymphoma. The conjugate is being
evaluated by the NCI for clinical
trials starting next year.
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Research and Development Programs
Research and development expenses for the fiscal years ended July 31, 1999,
1998, and 1997 were $2,402,000, $5,265,000, and $3,863,000, respectively.
Alfacell's research and development programs focus primarily on the development
of therapeutics from amphibian ribonucleases. These proteins have been shown to
be involved in the regulation of cell proliferation, maturation, differentiation
and apoptosis. Therefore, they may be ideal candidates for the development of
therapeutics, in treatments for cancer and other life-threatening diseases
(including HIV infections), that require anti-proliferative and pro-apoptotic
properties.
The following table outlines the various programs in the Company's research and
development portfolio. Alfacell is pursuing some of these programs
independently, while others are being undertaken in collaboration with the NIH.
<TABLE>
<CAPTION>
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Program Indication
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<S> <C>
Cancer:
ONCONASE(R) (ranpirnase) Unresectable malignant mesothelioma
Primary Brain Tumors (1)
AC-RD-3002 (2) Non-Hodgkin's Lymphoma ("NHL")
AC-RD-3003 (1) Primary Brain Tumors
Other Novel Amphibian Ribonuclease Variants Solid Tumors
Proteasome Inhibitors Solid Tumors and NHL
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Viral Disease:
ONCONASE(R) (ranpirnase) HIV Infection
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Anti-inflammatory Diseases:
Ranpirnase Variant-Conjugate Anti-inflammatory and autoimmune diseases
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</TABLE>
(1) In collaboration with the NIH - NINDS
(2) In collaboration with the NIH - NCI
Ranpirnase Conjugates and Fusion Proteins: AC-RD-3002 and AC-RD-3003
In addition to use in its native form, ranpirnase is being conjugated to
targeting molecules to ensure its specificity. Several conjugates are being
developed by the NIH in collaboration with Alfacell scientists and have
demonstrated significant activity. In addition, several genes of ranpirnase, its
variants and other amphibian ribonucleases are being synthesized using
"state-of-the-art" recombinant technologies. The Company intends to focus its
efforts on developing novel therapeutics from these genes that selectively
target specific tumors. Production of these engineered genes and products may
also lead to their use in gene therapy applications.
AC-RD-3002 is comprised of ranpirnase conjugated to an anti-CD22 monoclonal
antibody for the treatment of Non-Hodgkin's Lymphoma. The Company, in
collaboration with the NCI, is developing this product. AC-RD- 3002 is in
preclinical testing at the NCI in preparation for commencing clinical trials.
AC-RD-3003 is a recombinant variant of ranpirnase conjugated to a specific
protein. The receptors for this particular protein tend to be expressed at
higher concentrations in proliferating cells, such as tumor cells. Studies have
shown that AC-RD-3003 targets malignant glial cells on primary brain tumors. The
Company, in collaboration with the NINDS, is developing this product. In
preclinical studies performed by the NINDS, ONCONASE as a single agent has shown
activity in primary brain tumors.
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Proteasome Inhibitors
Cyclins and CDKs are two major groups of protein regulators of cell cycle
progression. Cancer can be defined as the uncontrolled growth and proliferation
of cells often associated with a de-regulated pattern of expression of cyclins
and other regulatory proteins, and the deficient elimination of cells by
apoptosis. In vitro studies of ONCONASE have shown its ability to perturb cell
cycle progression by decreasing expression of cyclin D3 and by increasing
expression of several inhibitors of CDKs.
Cell growth and viability are dependent on the function of the proteasome.
Proteasomal activity is necessary for cell growth by regulating the entry and
exit to and from the mitotic cycle through timely degradation of cyclins and
other regulatory proteins. Proteasome inhibitors interfere with normal
proteasome function, resulting in interruption of cell cycle progression and
induction of apoptosis. Given that ONCONASE and proteasome inhibitors both have
been shown in vitro to modulate fundamental mechanisms governing tumor cell
growth, proliferation and death, Alfacell is testing these two classes of
compounds in combination with ranpirnase and has discovered synergistic
anti-tumor effects. The Company believes that a new class of anti- cancer
compounds can be developed combining ranpirnase and its variants with proteasome
inhibitors. The Company retains all commercial rights to compounds resulting
from this program.
HIV Infection
The drugs currently approved in the United States for treatment of HIV infection
consist primarily of reverse transcriptase inhibitors and protease inhibitors.
There is an extremely high rate of resistance developing to several currently
available anti-viral drugs, primarily due to the exponentially increasing rate
of mutations of HIV that occur during infection. Experimental data shows that
anti-HIV effects of ONCONASE, are quite selective, independent of the HIV
envelope and therefore likely to inhibit replication of the different HIV-1
subtypes. In vitro studies performed by independent scientific collaborators
(including the NIH - Division of AIDS) have demonstrated that ONCONASE:
o acts directly by degrading viral genomic RNA during the pre-integration
complex phase and indirectly by degrading the tRNALys3 isoform which
functions as a primer for viral reverse transcriptase;
o degrades viral RNA of HIV-1 intracellularly, with a dramatic reduction in
the levels of viral transcripts which is sustained for 2-4 days;
o inhibits replication of HIV-1 in a dose-dependent manner by up to 99.9%, as
measured by the p24 antigen capture assay, in acutely and persistently
infected cells, at concentrations that are only minimally cytotoxic to
uninfected H9 cells;
o has highly significant anti-HIV activity in the monocyte/macrophage system.
Ranpirnase, as an enzyme highly specialized in the degradation of RNA molecules,
might be an anti-HIV agent that could be effective, irrespective of viral
mutations that render other antiviral agents ineffective. Ranpirnase could be
particularly useful in targeting the monocyte/macrophage cellular reservoir of
HIV, and may significantly contribute to the control of HIV replication in its
post-integrational phase of the virus life-cycle (e.g., when RT inhibitors are
ineffective) and prevent the emergence of resistant strains of HIV. The Company
retains all commercial rights to compounds resulting from this program. However,
the Company does not currently possess the funds necessary to conduct further
research for this indication.
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Ranpirnase Variant Conjugates
Alfacell has developed a variant of ranpirnase and conjugated it to a variety of
clinically important proteins. These conjugates are designed to specifically
target relevant molecules in the body and inactivate them. These new products
may have therapeutic applications in the treatment of anti-inflammatory
diseases, e.g. arthiritis and other autoimmune diseases. However, there can be
no assurance that these products will be successfully developed.
Raw Materials
The major active ingredient derived from leopard frog eggs is the protein,
ranpirnase. Although Alfacell currently acquires its natural source material
from a single supplier, management believes that it is abundantly available from
other sources. The Company has sufficient egg inventory on hand to produce
enough ONCONASE to complete the current clinical trials and supply ONCONASE for
up to two years after commercialization. In addition, the Company has
successfully completed the cloning of the natural source product (ranpirnase).
However, there can be no assurance that using the recombinant technology will be
more cost effective over the natural source.
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
ranpirnase. 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 Current Good Manufacturing Practices ("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. There can be no assurance that the
Company would be able to find substitute manufacturers, if necessary. The
Company is dependent upon its contract manufacturers to comply with cGMPs and to
meet production requirements. There can be no assurance that the Company's
contract manufacturers will comply with cGMPs or timely deliver sufficient
quantities of the Company's products.
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.
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Government Regulation
The manufacturing and marketing of pharmaceutical products in the United States
requires the approval of the FDA under the Federal Food, Drug and Cosmetic Act.
Similar approvals by comparable regulatory agencies are required in most foreign
countries. The FDA has established mandatory procedures and safety standards
which apply to the clinical testing, 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, preclinical 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 typically involves up to three phases. Data from human trials are
submitted to the FDA in a New Drug Application ("NDA") or Biologics License
Application ("BLA"). Preparing an NDA or BLA involves considerable data
collection, verification and analysis.
The Company has not received FDA or other marketing approval for any products.
Difficulties or unanticipated costs may be encountered by the Company in its
effort to secure necessary governmental approvals, which could delay or preclude
the Company from marketing its products. There can be no assurance that any of
the Company's products will be approved by the FDA or any foreign country.
With respect to patented products, delays imposed by the governmental approval
process may materially reduce the period during which the Company may have the
exclusive right to exploit them. See --"Patents."
Patents and Trademarks
The Company believes it is important to develop new technology and to improve
its existing technology. When appropriate, the Company files patent applications
to protect inventions in which it has an ownership interest.
The Company owns six U.S. Patents:
a) U.S. Patent No. 4,888,172 issued in 1989, which covers a
pharmaceutical produced from fertilized frog eggs (Rana pipiens) and
the methodology for producing it.
b) U.S. Patent No. 5,559,212 issued in 1996, which covers the amino acid
sequence of ONCONASE.
c) U.S. Patents Nos. 5,529,775 and 5,540,925 issued in 1996 and U.S.
Patent No. 5,595,734 issued in 1997, which cover combinations of
ONCONASE with certain other pharmaceuticals.
d) U.S. Patent No. 5,728,805 issued in 1998 which covers a family of
variants of ONCONASE.
The Company owns three European patents, which have been validated in certain
European countries. These European patents cover ONCONASE, process technology
for making ONCONASE, and combinations of ONCONASE with certain other
chemotherapeutics. The Company also owns other patent applications, which are
pending in the United States, Europe, and Japan. Additionally, the Company owns
one Japanese patent and an undivided interest in two applications that are
pending in the United States. Each of these applications relate to a Subject
Invention (as that term is defined in CRADAs to which the Company and the NIH
are parties).
10
<PAGE>
Patents covering biotechnological inventions have an uncertain scope, and the
Company is subject to this uncertainty. The Company's patent applications may
not issue as patents. Moreover, the Company's patents may not provide the
Company with competitive advantages and may not withstand challenges by others.
Likewise, patents owned by others may adversely affect the ability of the
Company to do business. Furthermore, others may independently develop similar
products, may duplicate the Company's products, and may design around patents
owned by the Company.
The Company also relies on proprietary know-how and on trade secrets to develop
and maintain its competitive position. Others may independently develop such
know-how or trade secrets or may otherwise obtain access thereto. Although
Company employees and consultants having access to proprietary information are
required to sign agreements which require them to keep such information
confidential, such agreements may be breached or held to be unenforceable.
Competition
There are several companies, universities, research teams and scientists, both
private and government- sponsored, which engage in research similar, or
potentially similar, to that performed by 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 has the same mechanism of
action as the Company's proposed anti- tumor agent, ONCONASE. A search by the
Company of scientific literature reveals no published information which would
indicate that others are currently employing its methods or producing such an
anti-tumor agent. There are several chemotherapeutic agents currently used to
treat the forms of cancer which ONCONASE is being used to treat. There can be no
assurance that ONCONASE will prove to be as safe and as effective as currently
used drugs or that new treatments will not be developed which are more effective
than ONCONASE.
Employees
As of November 8, 1999, Alfacell employed fifteen persons, of whom twelve were
engaged in research and development activities and three were engaged in
administration and management. The Company has four 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 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
environmental 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.
11
<PAGE>
Item 2. PROPERTIES.
The Company owns no real property. The Company leases a total of approximately
17,000 square feet in an industrial and office building located in Bloomfield,
New Jersey. The Company leases its facility under a five year operating lease
which is due to expire December 31, 2001. The annual rental obligation, which
commenced January 1, 1997 is $96,775 and is subject to escalation amounts. The
Company believes that the facility is sufficient for its needs in the
foreseeable future.
Item 3. LEGAL PROCEEDINGS.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the OTC Bulletin Board ("OTCBB") under
the symbol "ACEL". At the close of business April 27, 1999, it was delisted from
The Nasdaq SmallCap Market ("Nasdaq") for failing to meet the minimum bid price
requirements set forth in the NASD Marketplace Rules. As of November 8, 1999,
there were approximately 1,323 stockholders of record of the Company's Common
Stock.
The following table sets forth the range of high and low sale prices of the
Common Stock for the two fiscal years ended July 31, 1999 and 1998. The price
for the periods commencing April 28, 1999 were obtained from OTCBB and the price
for the periods prior to such date were obtained from Nasdaq. These prices are
believed to be representative of inter-dealer quotations, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.
High Low
---- ---
Year Ended July 31, 1999:
First Quarter 1 - 1/25 13/32
Second Quarter 1/2 7/32
Third Quarter 7/8 13/64
Fourth Quarter 9/16 3/16
Year Ended July 31, 1998:
First Quarter 4 - 5/8 3
Second Quarter 3 - 25/32 2 - 1/4
Third Quarter 4 - 1/2 2 - 1/4
Fourth Quarter 4 - 5/8 3/8
The Company has paid no dividends on its Common Stock since its inception and
does not plan to pay dividends on its Common Stock in the foreseeable future.
Any earnings which the Company may realize will be retained to finance the
growth of the Company.
12
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
Set forth below is the selected financial data for the Company for the five
fiscal years ended July 31, 1999.
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $ 168,372 $ 311,822 $ 442,572 $ 184,250 $ 20,992
Net Loss $(3,156,636) $(6,387,506) $(5,018,867) $(2,942,152) $(1,993,123)
Net Loss Per Basic
and Diluted Share $ (.18) $ (.40) $ (.34) $ (.25) $ (.21)
Dividends None None None None None
<CAPTION>
At Year End: July 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total Assets $ 1,728,648 $ 5,516,678 $ 8,034,954 $ 8,487,711 $ 1,616,170
Long-term
Obligations None $ 6,727 $ 15,902 $ 1,398,760 $ 7,129
Total Equity
(Deficiency) $ 757,200 $ 3,691,838 $ 5,566,091 $ 6,650,266 $ (832,566)
</TABLE>
13
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
Alfacell has focused the majority of its resources since inception on the
research and development of ONCONASE. After it obtained the results of its
preliminary analysis of the Phase III clinical trial results for advanced
pancreatic cancer, the Company closed the pancreatic cancer trials and
redirected its resources towards the completion of the ongoing Phase III
clinical trial for unresectable malignant mesothelioma. The Company is in the
process of analyzing the Phase III data of its clinical trial for unresectable
malignant mesothelioma in preparation for a Pre-NDA meeting with the FDA. The
Company is also exploring various strategic alternatives for its business and
its research and development operations.
The Company is currently funding research and development of its products from
cash reserves. The termination of the Phase III clinical trials for advanced
pancreatic cancer has had a significant and detrimental impact on the Company's
Common Stock price and its ability to raise additional capital for future
operations. The Company may not have, or be able to obtain the financial
resources necessary to complete the Phase III clinical trial for unresectable
malignant mesothelioma or to file an NDA for ONCONASE for this indication if the
results from such clinical trial were to support such a filing. See
"Management's Discussion and Analysis - Liquidity and Capital Resources."
Results of Operations
Fiscal Years Ended July 31, 1999, 1998 and 1997
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 significant revenue has been derived therefrom.
The Company focuses most of its productive and financial resources on the
development of ONCONASE and as such has not had any sales in fiscal 1999, 1998
and 1997. Investment income for fiscal 1999 was $168,000 compared to $312,000
for fiscal 1998, a decrease of $144,000. This decrease was due to lower balances
of cash and cash equivalents. Investment income for fiscal 1998 was $312,000
compared to $443,000 for fiscal 1997, a decrease of $131,000. This decrease was
due to lower balances of cash and cash equivalents.
Research and Development
Research and development expense for fiscal 1999 was $2,402,000 compared to
$5,265,000 for fiscal 1998, a decrease of $2,863,000 or 54%. This decrease was
primarily due to a 96% decrease in costs related to the manufacture of clinical
supplies of ONCONASE, a 47% decrease in costs in support of on-going clinical
trials, an 82% decrease in expenses for preparation of an NDA for ONCONASE and a
4% decrease in personnel costs. These decreases were primarily due to the
completion of the patient enrollment of the Phase III clinical trial for
malignant mesothelioma in April 1999 and the closing of the Phase III clinical
trials for pancreatic cancer in July 1998.
14
<PAGE>
Research and development expense for fiscal 1998 was $5,265,000 compared to
$3,863,000 for fiscal 1997, an increase of $1,402,000 or 36%. This increase was
primarily due to a 74% increase in costs in support of on-going clinical trials,
including the Phase III clinical trials for pancreatic cancer which were closed
in July 1998 and the Phase II and III clinical trials for unresectable malignant
mesothelioma, a 42% increase in costs related to the manufacture of clinical
supplies of ONCONASE and an 86% increase in expenses in preparation for an NDA
for ONCONASE, offset by a 5% decrease in personnel costs.
General and Administrative
General and administrative expense for fiscal 1999 was $921,000 compared to
$1,413,000 for fiscal 1998, a decrease of $492,000 or 35%. This decrease was
primarily due to a 94% decrease in legal costs, a 25% reduction in
administrative personnel costs and a 56% decrease in public relations expenses,
offset by an $84,000 increase in consulting fees.
General and administrative expense for fiscal 1998 was $1,413,000 compared to
$1,476,000 for fiscal 1997, a decrease of $63,000 or 4%. This decrease was
primarily due to a 28% decrease in personnel costs and a 28% decrease in public
relations activities, offset by a 26% increase in legal costs and a 72% increase
in insurance expense.
Interest
Interest expense for fiscal 1999 was $2,000 compared to $22,000 in fiscal 1998,
a decrease of $20,000 or 91%. The decrease was primarily due to the payment of
the entire principal amount of the Company's $1.4 million term loan agreement
with its bank during the fiscal year ended July 31, 1998.
Interest expense for fiscal 1998 was $22,000 compared to $123,000 in fiscal
1997, a decrease of $101,000 or 82%. The decrease was primarily due to the
payment of the entire principal amount of the Company's term loan on October 3,
1997.
Net Loss
The Company has incurred net losses during each year since its inception. The
net loss for fiscal 1999 was $3,157,000 as compared to $6,388,000 in fiscal 1998
and $5,019,000 in fiscal 1997. The cumulative loss from the date of inception,
August 24, 1981, to July 31, 1999 amounted to $54,954,000. 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
During fiscal 1999, the Company had a net decrease in cash and cash equivalents
of $3,716,000. This decrease primarily resulted from net cash used in operating
activities of $3,704,000 and a reduction of long-term debt of $9,000. Total cash
resources as of July 31, 1999 were $1,383,000 compared to $5,099,000 at July 31,
1998.
The Company's current liabilities as of July 31, 1999 were $971,000 compared to
$1,818,000 at July 31, 1998, a decrease of $847,000 or 47%. The decrease was
primarily due to a $530,000 decrease in the Company's accounts payable and a
$314,000 decrease in accrued expenses, both primarily due to decreases in costs
associated with the purchase of raw materials and the manufacture of ONCONASE,
decreased legal fees and a decrease in costs in support of on-going clinical
trials, due to the completion of the patient enrollment of the Phase III
clinical trial for malignant mesothelioma and the closing of the Phase III
clinical trials for pancreatic cancer.
15
<PAGE>
Until the Company's operations generate significant revenues, cash reserves will
continue to fund operations. To date, a significant portion of the Company's
financing has been through private placements of common stock and warrants, the
issuance of common stock for stock options exercised and services rendered, debt
financing and financing provided by the Company's Chief Executive Officer. The
Company believes that its cash and cash equivalents as of July 31, 1999 will be
sufficient to meet its anticipated cash needs through January 2000. The report
of the Company's independent auditors on the Company's financial statements,
included elsewhere herein, includes an explanatory paragraph which states that
the Company's recurring losses and limited liquid resources 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.
The Company's continued operations will depend on its ability to raise
additional funds through various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances, sale of tax loss
carryforwards and research and development tax credits and revenues from the
commercial sale of ONCONASE, however there can be no assurance that such
additional funds will become available. The Company is currently in discussion
with several potential strategic alliance partners for further development and
marketing of ONCONASE and the other potential new products in the Company's
pipeline, however there can be no assurance that any such alliances will
materialize. The ability of the Company to raise additional capital through the
sale of its securities will primarily be dependent on the outcome of the Phase
III clinical trial for unresectable malignant mesothelioma. However, the ability
to raise funding at that time maybe dependent upon other factors including
without limitation, market conditions, and there can be no assurance that such
funds will be available. The Company is in the process of analyzing the Phase
III data of its clinical trial for unresectable malignant mesothelioma in
preparation for a Pre-NDA meeting with the FDA.
New Jersey has enacted legislation permitting certain New Jersey corporations to
sell tax loss carryforwards and research and development credits (the "NOLs").
The Company has state NOLs available for sale. In October 1999, the Company was
notified by the state that it has qualified to sell their NOLs. The Company
expects to receive net proceeds of approximately $675,000 by January 2000.
However, there can be no assurance that the Company will be able to find a buyer
for its NOLs or that such funds will be available in a timely manner.
The Company's Common Stock was delisted from The Nasdaq SmallCap Market
effective at the close of business April 27, 1999 for failing to meet the
minimum bid price requirements set forth in the NASD Marketplace Rules. As of
April 28, 1999, the Company's Common Stock was traded on the OTC Bulletin Board
under the symbol "ACEL". Delisting of the Company's Common Stock from Nasdaq,
could have a material adverse effect on the Company including its ability to
raise additional capital, stockholder liquidity and price of the Company's
Common Stock.
The market price of the Company's common stock is volatile, and the price of the
stock could be dramatically affected one way or another depending on numerous
factors. The market price of the Company's common stock could also be materially
affected by the results of the Phase III clinical trial for unresectable
malignant mesothelioma.
Year 2000
The Company has completed its review of its business systems, including its
computer systems and computer controlled equipment, and is in the process of
querying its suppliers and vendors as to their progress in identifying and
addressing problems that their systems may face in correctly interpreting and
processing date information as the Year 2000 approaches and is reached. Based on
this review, the Company has implemented
16
<PAGE>
a plan to achieve Year 2000 compliance. While there may be other areas that may
affect the Company's operations upon commercialization of the Company's products
under development, the Company has identified three major areas where Year 2000
compliance is critical for the normal functioning of the Company's business:
Business and Accounting Computer Systems, Clinical Data Management Systems and
Product Manufacturing Systems.
Business and Accounting Computer Systems
The Company utilizes standard, widely-available software packages to perform its
word processing, spreadsheet and accounting duties. Inquiries have revealed that
software upgrades are available to ensure Year 2000 compliance. The Company had
completed the upgrade of its Business and Accounting Computer Systems. While
there is no assurance at this time that such upgrades will be Year 2000
compliant, the Company does not believe that non-compliance would have a
material effect on the Company's business. Since the risks of non- compliance
are minimal, the Company does not plan to create a contingency plan for these
systems at this time.
Clinical Data Management Systems
The Company utilizes the services of an outside vendor to handle all of its data
management needs with regard to collection and reporting of its clinical trial
data. This vendor has completed the testing of its computer system for Year 2000
compliance. While it appears that the computer systems utilized to process the
Company's clinical trial data are Year 2000 compliant, non-compliance could have
a material adverse impact on the Company's ability to process the data in a
timely manner for submission to the FDA, if necessary. Since the likelihood of
non-compliance is minimal, the Company does not plan to create a contingency
plan for these systems at this time.
Product Manufacturing Systems
The Company utilizes the services of outside suppliers to manufacture ONCONASE
and perform many of the FDA-required related testing of such product. These
suppliers reported that they are in the process of completing their Year 2000
programs and expect to be ready before year 2000. However, there can be no
assurance that these suppliers' remediation efforts will effectively address all
of their Year 2000 problems. Due to regulatory restrictions, the Company does
not believe it would be feasible to locate and retain the services of alternate
suppliers at this time. However, if during the first half of 2000, it became
apparent that a supplier would not be able to support commercialization of
ONCONASE, if approved by the FDA, the Company will then undergo the expense of
transferring its manufacturing processes to alternate suppliers. While the
Company believes that alternate suppliers are available for the manufacture of
ONCONASE, there can be no assurance that the Company can complete the transition
to a new supplier in a timely manner.
Year 2000 Summary
The Company has determined that Year 2000 compliance should not have a material
adverse effect on the Company, including the Company's financial condition,
results of operations or cash flow. The Company estimates the cost to address
its Year 2000 issues to be approximately $30,000. The total cost estimate is
based on management's current assessment and is subject to change.
The Company may encounter problems with vendors and suppliers which could
adversely affect the Company's financial condition, results of operations or
cash flow. The Company cannot accurately predict the occurrence and or outcome
of any such problems, nor can the cost of such problems be estimated. In
addition, there can be no assurance that the failure to ensure Year 2000
compliance by a third party would not have a material effect on the Company.
17
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item is submitted as a separate section of this report
commencing on Page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 1, 1993, certain shareholders of Armus Harrison & Co. ("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 KPMG LLP with respect to the financial
statements of the Company from inception to July 31, 1999 is based on the report
of AHC for the period from inception to July 31, 1992, although AHC has not
consented to the use of such report herein and will not be available to perform
any subsequent review procedures with respect to such report. Accordingly,
investors will be barred from asserting claims against AHC under Section 11 of
the Securities Act on the basis of the use of such report in any registration
statement of the Company into which such report is incorporated by reference. In
addition, in the event any persons seek to assert a claim against AHC for false
or misleading financial statements and disclosures in documents previously filed
by the Company, such claim will be adversely affected and possibly barred.
Furthermore, as a result of the lack of a consent from AHC to the use of its
audit report herein, or to its incorporation by reference into a registration
statement, the officers and directors of the Company will be unable to rely on
the authority of AHC as experts in auditing and accounting in the event any
claim is brought against such persons under Section 11 of the Securities Act
based on alleged false and misleading Financial Statements and disclosures
attributable to AHC. The discussion regarding certain effects of the AHC
termination is not meant and should not be construed in any way as legal advice
to any party and any potential purchaser should consult with his, her or its own
counsel with respect to the effect of the AHC termination on a potential
investment in the Common Stock of the Company or otherwise.
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
<TABLE>
<CAPTION>
Name Age Director Since Position with the Company
- ---- --- -------------- -------------------------
<S> <C> <C> <C>
Kuslima Shogen 54 1981 Chief Executive Officer, Acting Chief
Financial Officer,Chairman of the Board
Stanislaw M. Mikulski, M.D. 55 1986 Executive Vice President, Medical Director
and Director
Stephen K. Carter, M.D.(1) 61 1997 Director and Chairman of the Scientific
Advisory Board
Donald R. Conklin (1)(2) 63 1997 Director
Martin F. Stadler (1)(2) 57 1997 Director
</TABLE>
18
<PAGE>
(1) Member of Compensation Committee
(2) Member of Audit Committee
Business Experience of Directors and Executive Officers
Kuslima Shogen has served as the Company's Chief Executive Officer since
September 1986, as Chairman of the Board since August 1996, as a Director since
the inception of the Company and as Acting Chief Financial Officer since June
23, 1999. She also served as the Company's Chief Financial Officer from
September 1986 through July 1994 and as its President from September 1986
through July 1996. Ms. Shogen formed the Company in 1981 to pursue research that
she had initiated while a biology student in the University Honors Program at
Fairleigh Dickenson University. Prior to founding Alfacell, from 1976 to 1981
she was founder and president of a biomedical research consortium specializing
in Good Laboratory Practices and animal toxicology. During that time, she also
served as a consultant for the Lever Brothers Research Group. Ms. Shogen has
received numerous awards for achievements in biology, including the Sigma Xi
first prize from the Scientific Research Society of North America in 1974 and
first prize for the most outstanding research paper in biology at the Eastern
College Science Conferences competitions in 1972, 1973, and 1974. She earned a
B.S. degree in 1974 and an M.S. degree in 1976 in biology from Fairleigh
Dickenson University ("FDU"), and also completed graduate studies in 1978 in
embryology. She is a Phi Beta Kappa graduate. In April 1998, Ms. Shogen received
the Pinnacle Award from FDU, the highest honor the University bestows on its
graduates.
Stanislaw M. Mikulski, M.D., F.A.C.P. has served the Company as Executive Vice
President and Medical Director since 1987 and as a Director since 1986. Prior to
his affiliation with Alfacell, Dr. Mikulski was Special Assistant to the Chief
of the Investigational Drug Branch of the National Cancer Institute ("NCI") and
the Coordinator for Immunotherapy Trials in Cancer for the Division of Cancer
Treatment. Prior to joining the Company, he maintained a private practice in
medical oncology for over eight years. He is a diplomate of the American Board
of Internal Medicine and Medical Oncology as well as a fellow of the American
College of Physicians and a member of the American Society of Clinical Oncology.
Dr. Mikulski is currently a clinical assistant Professor of Medicine at the
University of Medicine and Dentistry of New Jersey. He received his M.D. in 1967
from the Medical School of Warsaw, Poland and subsequently performed
post-doctoral studies in human tumor immunology at the University of California
in Los Angeles.
Stephen K. Carter, M.D. joined the Board of Directors in May 1997 and serves as
Chairman of the Company's Scientific Advisory Board. In addition to his
positions with Alfacell, Dr. Carter also serves as a senior clinical consultant
to Sugen, Inc. From 1995 through 1997, he served as Senior Vice President of
Research and Development for Boehringer-Ingelheim Pharmaceuticals. Before this,
Dr. Carter spent over 13 years with Bristol-Myers Squibb, an international
leader in the development of innovative anti-cancer and anti-viral therapies. He
held a variety of senior executive research and development positions while at
Bristol-Myers, including serving for five years as Senior Vice President of
worldwide clinical research and development of its Pharmaceutical Research
Institute. From 1976 to 1982, he established and directed the Northern
California Cancer Program. Prior to this, he held a number of positions during a
nine-year tenure at the NCI, including the position of Deputy Director at the
National Institutes of Health. He has also been a member of the faculties of the
medical schools of Stanford University, the University of California at San
Francisco and New York University. Dr. Carter has published extensively on the
development of anti-cancer drugs, was the co-founding editor of journals devoted
to cancer therapeutics or immunology, and has served on the editorial boards of
a number of additional journals dedicated to cancer treatment. He is a member of
the American Society of Clinical Oncology, the American Association for Cancer
Research, and the Society of Surgical Oncology, as well as several other medical
societies. Dr. Carter earned his B.A. from Columbia University and his M.D. from
New York Medical College. He currently serves on the Board of Directors of Allos
Therapeutics.
19
<PAGE>
Donald R. Conklin joined the Board of Directors in May 1997. Prior to his
retirement in May 1997, Mr. Conklin was a senior executive with Schering-Plough,
a major worldwide pharmaceutical firm. During his more than 35 years with
Schering-Plough, he held a variety of key management positions within the firm.
From 1986 to 1994, he served as President of Schering-Plough Pharmaceuticals and
Executive Vice-President of Schering-Plough Corporation. In this position, he
was responsible for worldwide pharmaceutical operations, including the launch of
INTRON A(R) (interferon alfa-2b). Prior to this, Mr. Conklin had served as
President of Schering USA and had held a variety of executive marketing
positions in the United States, Europe, and Latin America. Immediately preceding
his retirement, he was Chairman of Schering-Plough Health Care Products and an
Executive Vice President of Schering-Plough Corporation. Mr. Conklin received
his B.A. with highest honors from Williams College and his M.B.A. degree from
the Rutgers University School of Business. He currently serves on the Board of
Directors of Vertex Pharmaceuticals, Inc. and BioTransplant, Inc.
Martin F. Stadler joined the Board of Directors in November 1997. At the end of
1996, Mr. Stadler retired from Hoffmann La-Roche, Inc. after 32 years of
pharmaceutical, chemical and diagnostic experience. Mr. Stadler served as senior
vice president and chief financial officer, and was a member of the Hoffmann La-
Roche, Inc. Board of Directors from 1985 through 1996. His responsibilities
included finance, information technology, human resources, quality control and
technical services. Prior to 1985, Mr. Stadler served as vice- president of
strategic planning and business development. Mr. Stadler received his B.S.
degree from Rutgers University and his M.B.A. from Fairleigh Dickenson
University. In April 1999, he received the Pinnacle Award from FDU, the highest
honor the University bestows on its graduates. Mr. Stadler is a member of the
Finance Council of the American Management Association, a trustee of Fairleigh
Dickenson University and a member of the Advisory Board for Horton
International.
Section 16(a) Beneficial Ownership Reporting Compliance
Ownership of and transactions in the Company's stock by executive officers and
directors of the Company and owners of 10% or more of the Company's outstanding
Common Stock are required to be reported to the Securities and Exchange
Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). During the fiscal year ended July 31, 1999, all
reports required to be filed pursuant to Section 16(a) of the Exchange Act were
filed in a timely manner, except that one Form 5 reporting changes in beneficial
ownership for the fiscal year ended July 31, 1998 was filed by each of Mr.
Conklin and Mr. Stadler four months late and by Dr. Carter five months late.
Item 11. EXECUTIVE COMPENSATION.
Directors' Compensation
Directors receive no cash compensation in consideration for their serving on the
Board of Directors.
In November 1993 and January 1994, the Board of Directors and the stockholders,
respectively, approved the Company's 1993 Stock Option Plan (the "1993 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 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, 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 1,250 multiplied by the number of whole months remaining in the
calendar
20
<PAGE>
year (the "Pro Rata Grant"). Each option granted pursuant to a Regular Grant and
a Pro Rata Grant vests and becomes exercisable on December 30th following the
date of grant. 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. The
per share exercise price of an option granted under the Formula is required to
be equal to the fair market value of a share of Common Stock on the date of
grant.
During the fiscal year ended July 31, 1999, the following Independent Directors
were granted the options listed below pursuant to the Formula under the 1993
Plan. The exercise prices of the options are equal to the fair market value of
the Common Stock on the date of grant.
Name Number of Options Exercise Price Expiration
- ---- ----------------- -------------- ----------
Stephen K. Carter 15,000 $ 0.29 12/30/04
Donald R. Conklin 15,000 $ 0.29 12/30/04
Martin F. Stadler 15,000 $ 0.29 12/30/04
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended July 31, 1999, the members of the Board of
Directors who served on the Compensation Committee of the Board of Directors
were Stephen K. Carter, Donald R. Conklin and Martin F. Stadler.
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, 1999, 1998 and 1997 earned by
the Chief Executive Officer and the only two other executive officers of the
Company during the last fiscal year (the "Named Executive Officers").
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
---------------------------------------------------------------- ---------------
Securities
Other Annual Underlying All Other
Name and Compensation Options/ Compensation
Principal Position Year Salary($) Bonus($) ($)(1) SARs(#) ($)
- --------------------- -------- ------------ ------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Kuslima Shogen 1999 $150,000 - 0 - - 0 - - 0 - - 0 -
Chief Executive 1998 150,000 - 0 - - 0 - - 0 - - 0 -
Officer and 1997 150,000 - 0 - - 0 - - 0 - - 0 -
Chairman of the
Board of Directors
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
---------------------------------------------------------------- ---------------
Securities
Other Annual Underlying All Other
Name and Compensation Options/ Compensation
Principal Position Year Salary($) Bonus($) ($)(1) SARs(#) ($)
- --------------------- -------- ------------ ------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Gail E. Fraser(2) 1999 $130,000 - 0 - - 0 - 115,000(3) - 0 -
Vice President, 1998 130,000 - 0 - - 0 - - 0 - - 0 -
Finance and Chief 1997 130,000 - 0 - - 0 - - 0 - - 0 -
Financial Officer
Stanislaw M. 1999 $130,000 - 0 - - 0 - 50,000(4) - 0 -
Mikulski 1998 130,000 - 0 - - 0 - - 0 - - 0 -
Executive Vice 1997 130,000 - 0 - - 0 - - 0 - - 0 -
President and
Medical Director
</TABLE>
(1) Excludes perquisites and other personal benefits which in the aggregate do
not exceed 10% of the Named Executive Officers' total annual salary and
bonus.
(2) Ms. Fraser resigned as the Company's Vice President, Finance and Chief
Financial Officer effective as of June 23, 1999.
(3) These options were granted under the 1993 Plan on December 1, 1998, vested
immediately, have an exercise price of $0.43 per share and will expire on
December 30, 2000 pursuant to a separation agreement between Ms. Fraser and
the Company. See "Employment and Termination Agreements". The price of the
options was based on the fair market value of the Company's Common Stock on
the date of grant.
(4) These options were granted under the 1993 Plan on December 1, 1998, vested
immediately, have an exercise price of $0.43 per share and will expire on
December 1, 2003. The price of the options was based on the fair market
value of the Company's Common Stock on the date of grant.
Option Grants in Last Fiscal Year
The following table contains information concerning the grant of stock options
to the Named Executive Officers during the fiscal year ended July 31, 1999:
22
<PAGE>
<TABLE>
<CAPTION>
Individual Grants
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Term (1)
- -------------------------------------------------------------------------------------- -------------------------------------
Number of
Securities % of Total
Underlying Options Granted Exercise
Options to Employees in or Base Expiration
Name Granted (#) Fiscal Year Price Date
($/Share) 0%($) 5%($) 10%($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kuslima Shogen -- -- -- -- -- -- --
Stanislaw M. 50,000 (2) 14.49% $0.43 12/01/03 -- $1,075 $2,150
Mikulski
Gail E. Fraser 115,000 (3) 33.33% $0.43 12/30/00 -- $2,473 $4,945
=============================================================================================================================
</TABLE>
(1) The amounts set forth in the three columns represent hypothetical gains
that might be achieved by the optionees if the respective options are
exercised at the end of their terms. These gains are based on assumed rates
of stock price appreciation of 0%, 5% and 10%. The 0% appreciation column
is included because the exercise price of the options equals the market
price of the underlying Common Stock on the date the options were granted,
and thus the options will have no value unless the Company's stock price
increases above the exercise price.
(2) These options were granted under the 1993 Plan on December 1, 1998.
(3) These options were granted under the 1993 Plan on December 1, 1998. Ms.
Fraser resigned as the Company's Vice President, Finance and Chief
Financial Officer effective as of June 23, 1999.
Option Exercises and Fiscal Year-End Values
The following table sets forth the information with respect to the Named
Executive Officers concerning the exercise of options during the fiscal year
ended July 31, 1999 and unexercised options held as of July 31, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Options at Fiscal Year-End at Fiscal Year-End($)(2)
(#)
- -----------------------------------------------------
Shares Value
Name Acquired on Realized
Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kuslima Shogen None None 1,631,208 - 0 - - 0 - - 0 -
Stanislaw M. None None 445,740 - 0 - - 0 - - 0 -
Mikulski
Gail E. Fraser None None 465,000 - 0 - - 0 - - 0 -
========================================================================================================================
</TABLE>
23
<PAGE>
(1) Based upon the fair market value of the purchased shares on the option
exercise date less the exercise price paid for the shares.
(2) The fair market value of the Common Stock at the fiscal year end was based
on the average of the high and low trade prices ($0.51) for the Common
Stock obtained from the OTC Bulletin Board on the last trading day of the
fiscal year July 31, 1999.
Employment and Termination Agreements
On August 31, 1999 the Company entered into a separation agreement and general
release with Ms. Gail E. Fraser pursuant to which (i) Ms. Fraser confirmed her
resignation as vice president, finance, chief financial officer, director and
employee of the Company effective as of June 23, 1999 ("Date of Resignation"),
(ii) the Company agreed to pay Ms. Fraser her regular salary for the period
commencing on the Date of Resignation through July 31, 1999, (iii) the Company
and Ms. Fraser agreed that an aggregate of 395,000 options granted to Ms. Fraser
under the 1993 Plan, all of which had vested as of the Date of Resignation will
remain vested and exercisable until December 30, 2000 and an aggregate of 70,000
options granted under the 1993 Plan which had not vested on the Date of
Resignation will be deemed vested as of the Date of Resignation and will remain
exercisable until December 30, 2000, (iv) the Company agreed to pay for health
insurance for Ms. Fraser and her dependents until July 1999, (v) Ms. Fraser and
the Company released each other from all claims and, (vi) Ms. Fraser agreed not
to compete with the Company until December 30, 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information concerning stock ownership of
each person who is the beneficial owner of five percent or more of the Company's
outstanding Common Stock, each of the current directors, each of the Named
Executive Officers and all directors and executive officers as a group as of
October 31, 1999. Except as otherwise noted, each person has sole voting and
investment power with respect to the shares shown as beneficially owned.
<TABLE>
<CAPTION>
Percentage of Common
Directors, Officers or 5% Stockholders (1) Number of Shares (2) Stock Outstanding (3)
- ------------------------------------------ -------------------- ---------------------
<S> <C> <C> <C>
Kuslima Shogen 2,703,585 (4) 14.4%
Stanislaw M. Mikulski 782,623 (5) 4.4%
Gail E. Fraser 481,500 (6) 2.7%
Stephen K. Carter 68,750 (7) *
Donald R. Conklin 134,250 (8) *
Martin F. Stadler 126,250 (9) *
All executive officers and directors as a group
(six persons) 4,296,958 (10) 21.6%
</TABLE>
* Less than one percent.
(1) The address of all officers and directors listed above is in the care of
the Company.
24
<PAGE>
(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 October 31, 1999 by (ii) the sum of (A) the
number of shares of Common Stock outstanding as of October 31, 1999 plus
(B) the number of shares issuable upon exercise of options or warrants held
by such stockholder which were exercisable as of October 31, 1999 or which
will become exercisable within 60 days after October 31, 1999.
(4) Includes 1,454,965 shares underlying options which were exercisable as of
October 31, 1999 or which will become exercisable within 60 days after
October 31, 1999.
(5) Includes 421,373 shares underlying options which were exercisable as of
October 31, 1999 or which will become exercisable within 60 days after
October 31, 1999.
(6) Includes 465,000 shares underlying options which were exercisable as of
October 31, 1999 or which will become exercisable within 60 days after
October 31, 1999 owned by Ms. Fraser and 16,500 shares owned by her
husband. Ms. Fraser disclaims beneficial ownership as to the shares owned
by her husband. Ms. Fraser resigned as the Company's Vice President,
Finance, Chief Financial Officer and Director effective as of June 23,
1999.
(7) Includes 68,750 shares underlying options which were exercisable as of
October 31, 1999 or which will become exercisable within 60 days after
October 31, 1999.
(8) Includes 68,750 shares underlying options which were exercisable as of
October 31, 1999 or which will become exercisable within 60 days after
October 31, 1999.
(9) Includes 51,250 shares underlying options which were exercisable as of
October 31, 1999 or which will become exercisable within 60 days after
October 31, 1999 and 25,000 shares underlying warrants which were
exercisable as of October 31, 1999 or which will become exercisable within
60 days after October 31, 1999.
(10) Includes all shares owned beneficially by the directors and the executive
officers named in the table.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On July 23, 1991, the board of directors authorized the Company to pay Kuslima
Shogen an amount equal to 15% of any gross royalties which may be paid to the
Company from any license(s) with respect to the Company's principal product,
ONCONASE, 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.
25
<PAGE>
In August 1998, Ms. Shogen and Dr. Mikulski settled, and the court approved the
settlement, of a claim brought against them in the United States District Court,
District of New Jersey at Newark, New Jersey, by a shareholder under Section
16(b) of the Securities Exchange Act of 1934 for profits alleged to have been
realized by Ms. Shogen and Dr. Mikulski in transactions involving the Company's
securities in 1988 and 1989. Claims under Section 16(b) are for profits
calculated under such statute to have been realized for sales and purchases of
the Company's securities made within a six month period. In this case the
purchases which formed the basis for this claim were issuances of shares of
stock to Ms. Shogen and Dr. Mikulski under employment agreements with the
Company based upon the Company's achievement of certain milestones. No
allegations of fraud were made. Ms. Shogen agreed to pay the Company $91,971.00
and Dr. Mikulski agreed to pay the Company $72,903.00. Such payments are to be
made in a form acceptable to the Company whether in cash, shares of the
Company's common stock or options to purchase the Company's common stock, with
25% of such payments having been made in August 1998 and the remainder of such
amounts payable in three equal installments in August 1999, 2000 and 2001. The
initial payments were made by the cancellation of options to purchase 44,999
shares of common stock owned by Ms. Shogen and the cancellation of options to
purchase 35,669 shares of common stock owned by Dr. Mikulski. The obligation to
make the remaining payments is secured by the pledge to the Company of options
to purchase 154,908 and 122,136 shares of common stock by Ms. Shogen and Dr.
Mikulski, respectively. In August 1999, Ms. Shogen paid the balance in full by
the cancellation of options to purchase 134,995 shares owned by Ms. Shogen and
Dr. Mikulski paid an installment equal to one-third of the balance by the
cancellation of options to purchase 35,367 shares owned by Dr. Mikulski.
In December 1998, the Company issued 115,000 and 50,000 stock options to Gail E.
Fraser and Stanislaw M. Mikulski, respectively, with an exercise price of $0.43
per share, the fair market value of the Company's Common Stock on the date of
grant. These options which vested immediately was approved by the Compensation
Committee. Ms. Fraser resigned as the Company's Vice President, Finance, Chief
Financial Officer and director effective as of June 23, 1999.
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) The response to these portions of Item 14 is submitted as a
separate section of this report commencing on page F-1.
(a)(3) and (4) Exhibits (numbered in accordance with Item 601 of Regulation
S-K).
<TABLE>
<CAPTION>
Exhibit No.
or
Exhibit Incorporation
No. Item Title by Reference
- ---------- ---------- ------------
<S> <C> <C>
3.1 Certificate of Incorporation *
3.2 By-Laws *
3.3 Amendment to Certificate of Incorporation #
3.4 Amendment to Certificate of Incorporation +++
4.1 Form of Convertible Debenture **
10.1 Form of Stock and Warrant Purchase Agreements used in private placements
completed in April 1996 and June 1996 ##
10.2 Lease Agreement - 225 Belleville Avenue, Bloomfield, New Jersey ###
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.
or
Exhibit Incorporation
No. Item Title by Reference
- ---------- ---------- ------------
<S> <C> <C>
10.3 Form of Stock Purchase Agreement and Certificate used in connection with
various private placements ***
10.4 Form of Stock and Warrant Purchase Agreement and Warrant Agreement
used in Private Placement completed on March 21, 1994 ***
10.5 1993 Stock Option Plan and Form of Option Agreement *****
10.6 Debt Conversion Agreement dated March 30, 1994 with Kuslima Shogen ****
10.7 Accrued Salary Conversion Agreement dated March 30, 1994 with Kuslima
Shogen ****
10.8 Accrued Salary Conversion Agreement dated March 30, 1994 with Stanislaw
Mikulski ****
10.9 Option Agreement dated March 30, 1994 with Kuslima Shogen ****
10.10 Amendment No. 1 dated June 20, 1994 to Option Agreement dated March
30, 1994 with Kuslima Shogen ****
10.11 Form of Amendment No. 1 dated June 20, 1994 to Option Agreement dated
March 30, 1994 with Kuslima Shogen *****
10.12 Form of Amendment No. 1 dated June 20, 1994 to Option Agreement dated
March 30, 1994 with Stanislaw Mikulski *****
10.13 Form of Stock and Warrant Purchase Agreement and Warrant Agreement
used in Private Placement completed on September 13, 1994 +
10.14 Form of Subscription Agreements and Warrant Agreement used in Private
Placements closed in October 1994 and September 1995 #
10.15 1997 Stock Option Plan ###
10.16 Separation Agreement with Michael C. Lowe dated October 9, 1997 ++
10.17 Form of Subscription Agreement and Warrant Agreement used in Private
Placement completed on February 20, 1998 +++
10.18 Form of Warrant Agreement issued to the Placement Agent in connection
with the Private Placement completed on February 20, 1998 +++
10.19 Placement Agent Agreement dated December 15, 1997 +++
10.20 Separation Agreement with Gail Fraser dated August 31, 1999 ####
21.1 Subsidiaries of Registrant **
23.1 Consent of KPMG LLP ####
27.1 Financial Data Schedule ####
99.1 Factors to Consider in Connection with Forward-Looking Statements ####
</TABLE>
* Previously filed as exhibit to the Company's Registration Statement on Form
S-18 (File No. 2-79975-NY) and incorporated herein by reference thereto.
** Previously filed as exhibits to the Company's Annual Report on Form 10-K
for the year ended July 31, 1993 and incorporated herein by reference
thereto.
*** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended January 31, 1994 and incorporated herein by
reference thereto.
27
<PAGE>
**** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1994 and incorporated herein by
reference thereto.
*****Previously filed as exhibits to the Company's Registration Statement Form
SB-2 (File No. 33-76950) and incorporated herein by reference thereto.
+ Previously filed as exhibits to the Company's Registration Statement on
Form SB-2 (File No. 33-83072) and incorporated herein by reference thereto.
++ Previously filed as exhibits to the Company's Quarterly Report on Form 10-Q
for the quarter ended October 31, 1997 and incorporated herein by reference
thereto.
+++ Previously filed as exhibits to the Company's Quarterly Report on Form 10-Q
for the quarter ended January 31, 1998 and incorporated herein by reference
thereto.
# Previously filed as exhibits to the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1995 and incorporated herein by reference
thereto.
## Previously filed as exhibits to the Company's Registration statement on
Form SB-2 (File No. 333- 11575) and incorporated herein by reference
thereto.
### Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1997 and incorporated herein by
reference thereto.
#### Filed herewith.
(b) Reports on Form 8-K.
On July 13, 1999, the Company filed a report on Form 8-K which reported
under Item 5 thereof, the resignation of its Vice President, Finance, Chief
Financial Officer and Director.
28
<PAGE>
Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALFACELL CORPORATION
Dated: November 15, 1999 By: /s/ KUSLIMA SHOGEN
--------------------------------
Kuslima Shogen, Chief Executive
Officer, Acting
Chief Financial Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: November 15, 1999 /s/ KUSLIMA SHOGEN
--------------------------------
Kuslima Shogen, Chief Executive
Officer, Acting
Chief Financial Officer
(Principal Executive Officer,
Principal Accounting Officer)
and Chairman of the Board
Dated: November 15, 1999 /s/ STANISLAW M. MIKULSKI
--------------------------------
Stanislaw M. Mikulski, M.D.,
Executive Vice
President and Director
Dated: November 15, 1999 /s/ STEPHEN K. CARTER
--------------------------------
Stephen K. Carter, M.D.,
Director
Dated: November 15, 1999 /s/ DONALD R. CONKLIN
--------------------------------
Donald R. Conklin, Director
Dated: November 15, 1999 /s/ MARTIN F. STADLER
--------------------------------
Martin F. Stadler, Director
29
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Index
Page
Independent Auditors' Report of KPMG LLP.....................................F-2
Independent Auditors' Report of Armus, Harrison & Co. .......................F-3
Financial Statements:
Balance Sheets - July 31, 1999 and 1998...........................F-5
Statements of Operations - Years ended July 31, 1999, 1998
and 1997 and the Period from August 24, 1981 (Date of
Inception) to July 31, 1999.....................................F-6
Statement of Stockholders' Equity (Deficiency) - Period from
August 24, 1981 (Date of Inception) to July 31, 1999.............F-7
Statements of Cash Flows - Years ended July 31, 1999, 1998
and 1997 and the Period from August 24, 1981 (Date of
Inception) to July 31, 1999.................................... F-11
Notes to Financial Statements - Years ended July 31, 1999,
1998 and 1997 and the Period from August 24, 1981
(Date of Inception) to July 31, 1999............................F-14
F-1
<PAGE>
Independent Auditors' Report
The Stockholders and Board of Directors
Alfacell Corporation:
We have audited the accompanying balance sheets of Alfacell Corporation (a
development stage company) as of July 31, 1999 and 1998, and the related
statements of operations, stockholders' equity (deficiency), and cash flows for
each of the years in the three-year period ended July 31, 1999 and the period
from August 24, 1981 (date of inception) to July 31, 1999. 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, 1999 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year period
ended July 31, 1999 and the period from August 24, 1981 (date of inception) to
July 31, 1999 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has limited liquid resources which raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
KPMG LLP
Short Hills, New Jersey
November 2, 1999
F-2
<PAGE>
On December 1, 1993, certain shareholders of Armus Harrison & Co. ("AHC")
terminated their association with AHC (the "AHC termination"), and AHC ceased
performing accounting and auditing services, except for limited accounting
services to be performed on behalf of the Company. In June 1996, AHC dissolved
and ceased all operations. The report of AHC with respect to the financial
statements of the Company from inception to July 31, 1992 is included herein,
although AHC has not consented to the use of such report herein and will not be
available to perform any subsequent review procedures with respect to such
report. Accordingly, investors will be barred from asserting claims against AHC
under Section 11 of the Securities Act of 1933, as amended (the "Securities
Act") on the basis of the use of such report in any registration statement of
the Company into which such report is incorporated by reference. In addition, in
the event any persons seek to assert a claim against AHC for false or misleading
financial statements and disclosures in documents previously filed by the
Company, such claim will be adversely affected and possibly barred. Furthermore,
as a result of the lack of a consent from AHC to the use of its audit report
herein, or, to its incorporation by reference into a registration statement, the
officers and directors of the company will be unable to rely on the authority of
AHC as experts in auditing and accounting in the event any claim is brought
against such persons under Section 11 of the Securities Act based on alleged
false and misleading financial statements and disclosures attributable to AHC.
The discussion regarding certain effects of the AHC termination is not meant and
should not be construed in any way as legal advice to any party and any
potential purchaser should consult with his, her or its own counsel with respect
to the effect of the AHC termination on a potential investment in the Common
Stock of the Company or otherwise.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Alfacell Corporation
Bloomfield, New Jersey
We have audited the balance sheets of Alfacell Corporation (a Development Stage
Company) as of July 31, 1992 and 1991, as restated, and the related statements
of operations, stockholders' deficiency, and cash flows for the three years
ended July 31, 1992, as restated, and for the period from inception August 24,
1981 to July 31, 1992, as restated. In connection with our audit of the 1992 and
1991 financial statements, we have also audited the 1992, 1991 and 1990
financial statement schedules as listed in the accompanying index. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly in all
material respects, the financial position of Alfacell Corporation as of July 31,
1992 and 1991, as restated, and for the three years ended July 31, 1992, as
restated, and for the period from inception August 24, 1981 to July 31, 1992, as
restated, and the results of operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.
F-3
<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, indicates the uncertainties about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts and the amount of classification of liabilities that might be
necessary should the Company be unable to continue its existence.
-------------------------
Armus, Harrison & Co.
Mountainside, New Jersey
December 9, 1992
Except as to Note 18 which
is July 19, 1993 and Note 3
which is October 28, 1993
F-4
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Balance Sheets
July 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,383,133 $ 5,099,453
Other assets 146,708 117,187
------------ ------------
Total current assets 1,529,841 5,216,640
Property and equipment, net of accumulated depreciation and
amortization of $944,830 in 1999 and $843,599 in 1998 198,807 300,038
------------ ------------
Total assets $ 1,728,648 $ 5,516,678
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 6,727 $ 9,175
Accounts payable 186,071 716,040
Accrued expenses 778,650 1,092,898
------------ ------------
Total current liabilities 971,448 1,818,113
Long-term debt, less current portion -- 6,727
------------ ------------
Total liabilities 971,448 1,824,840
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value. Authorized and unissued,
1,000,000 shares at July 31, 1999 and 1998 -- --
Common stock $.001 par value. Authorized 40,000,000 shares;
issued and outstanding 17,286,594 shares and 17,239,893
shares at July 31, 1999 and 1998, respectively 17,286 17,240
Capital in excess of par value 55,694,195 55,472,243
Deficit accumulated during development stage (54,954,281) (51,797,645)
------------ ------------
757,200 3,691,838
Total stockholders' equity
Total liabilities and stockholders' equity $ 1,728,648 $ 5,516,678
============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Operations
Years ended July 31, 1999, 1998 and 1997,
and the Period from August 24, 1981
(Date of Inception) to July 31, 1999
<TABLE>
<CAPTION>
August 24,
1981
(date of
inception)
to
July 31,
1999 1999 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 553,489 -- -- --
Investment income 1,308,020 168,372 311,822 442,572
Other income 60,103 -- -- --
------------ ------------ ------------ ------------
1,921,612 168,372 311,822 442,572
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 336,495 -- -- --
Research and development 34,088,629 2,401,945 5,264,578 3,862,716
General and administrative 19,515,060 920,686 1,412,968 1,475,624
Interest:
Related parties 1,033,960 -- -- --
Others 1,901,749 2,377 21,782 123,099
------------ ------------ ------------ ------------
56,875,893 3,325,008 6,699,328 5,461,439
------------ ------------ ------------ ------------
Net loss $(54,954,281) (3,156,636) (6,387,506) (5,018,867)
============ ============ ============ ============
Loss per basic and diluted
common share $ (0.18) (0.40) (0.34)
============ ============ ============
Weighted average number of shares
outstanding 17,271,000 15,926,000 14,597,000
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
Statement of Stockholders' Equity (Deficiency)
Period from August 24, 1981
(Date of Inception) to July 31, 1999
<TABLE>
<CAPTION>
Common Stock
---------------------------- Capital in
Number of excess of par
Shares Amount value
----------- ----------- -----------
<S> <C> <C> <C>
Issuance of shares to officers and stockholders for equipment, research and
development, and expense reimbursement 712,500 $ 713 $ 212,987
Issuance of shares for organizational legal services 50,000 50 4,950
Sale of shares for cash, net 82,143 82 108,418
Adjustment for 3 for 2 stock split declared September 8, 1982 422,321 422 (422)
Net loss -- -- --
----------- ----------- -----------
Balance at July 31, 1982 1,266,964 1,267 325,933
Issuance of shares for equipment 15,000 15 13,985
Sale of shares to private investors 44,196 44 41,206
Sale of shares in public offering, net 660,000 660 1,307,786
Issuance of shares under stock grant program 20,000 20 109,980
Exercise of warrants, net 1,165 1 3,494
Net loss -- -- --
----------- ----------- -----------
Balance at July 31, 1983 2,007,325 2,007 1,802,384
Exercise of warrants, net 287,566 287 933,696
Issuance of shares under stock grant program 19,750 20 101,199
Issuance of shares under stock bonus plan for directors and consultants 130,250 131 385,786
Net loss -- -- --
----------- ----------- -----------
Balance at July 31, 1984 2,444,891 2,445 3,223,065
Issuance of shares under stock grant program 48,332 48 478,057
Issuance of shares under stock bonus plan for directors and consultants 99,163 99 879,379
Shares canceled (42,500) (42) (105,783)
Exercise of warrants, net 334,957 335 1,971,012
Net loss -- -- --
----------- ----------- -----------
Balance at July 31, 1985 2,884,843 2,885 6,445,730
Issuance of shares under stock grant program 11,250 12 107,020
Issuance of shares under stock bonus plan for directors and consultants 15,394 15 215,385
Exercise of warrants, net 21,565 21 80,977
Net loss -- -- --
----------- ----------- -----------
Balance at July 31, 1986 (carried forward) 2,933,052 2,933 6,849,112
<CAPTION>
Deficit
accumulated
Common during
stock to be development Subscription
issued stage Receivable
----------- ----------- -----------
<S> <C> <C> <C>
Issuance of shares to officers and stockholders for equipment, research and
development, and expense reimbursement $ -- $ -- $ --
Issuance of shares for organizational legal services -- -- --
Sale of shares for cash, net -- -- --
Adjustment for 3 for 2 stock split declared September 8, 1982 -- -- --
Net loss -- (121,486) --
----------- ----------- -----------
Balance at July 31, 1982 -- (121,486) --
Issuance of shares for equipment -- -- --
Sale of shares to private investors -- -- --
Sale of shares in public offering, net -- -- --
Issuance of shares under stock grant program -- -- --
Exercise of warrants, net -- -- --
Net loss -- (558,694) --
----------- ----------- -----------
Balance at July 31, 1983 -- (680,180) --
Exercise of warrants, net -- -- --
Issuance of shares under stock grant program -- -- --
Issuance of shares under stock bonus plan for directors and consultants -- -- --
Net loss -- (1,421,083) --
----------- ----------- -----------
Balance at July 31, 1984 -- (2,101,263) --
Issuance of shares under stock grant program -- -- --
Issuance of shares under stock bonus plan for directors and consultants -- -- --
Shares canceled -- -- --
Exercise of warrants, net -- -- --
Net loss -- (2,958,846) --
----------- ----------- -----------
Balance at July 31, 1985 -- (5,060,109) --
Issuance of shares under stock grant program -- -- --
Issuance of shares under stock bonus plan for directors and consultants -- -- --
Exercise of warrants, net -- -- --
Net loss -- (2,138,605) --
----------- ----------- -----------
Balance at July 31, 1986 (carried forward) -- (7,198,714) --
<CAPTION>
Deferred
compen-
sation, Total stock-
restricted holders' equity
stock (deficiency)
----------- -----------
<S> <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)
----------- -----------
Balance at July 31, 1982 -- 205,714
Issuance of shares for equipment -- 14,000
Sale of shares to private investors -- 41,250
Sale of shares in public offering, net -- 1,308,446
Issuance of shares under stock grant program -- 110,000
Exercise of warrants, net -- 3,495
Net loss -- (558,694)
----------- -----------
Balance at July 31, 1983 -- 1,124,211
Exercise of warrants, net -- 933,983
Issuance of shares under stock grant program -- 101,219
Issuance of shares under stock bonus plan for directors and consultants -- 385,917
Net loss -- (1,421,083)
----------- -----------
Balance at July 31, 1984 -- 1,124,247
Issuance of shares under stock grant program -- 478,105
Issuance of shares under stock bonus plan for directors and consultants -- 879,478
Shares canceled -- (105,825)
Exercise of warrants, net -- 1,971,347
Net loss -- (2,958,846)
----------- -----------
Balance at July 31, 1985 -- 1,388,506
Issuance of shares under stock grant program -- 107,032
Issuance of shares under stock bonus plan for directors and consultants -- 215,400
Exercise of warrants, net -- 80,998
Net loss -- (2,138,605)
----------- -----------
Balance at July 31, 1986 (carried forward) -- (346,669)
</TABLE>
F-7
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
(Continued)
<TABLE>
<CAPTION>
Common Stock
---------------------------- Capital in
Number of excess of par
Shares Amount value
------------ ------------ ------------
<S> <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
<CAPTION>
Deficit
accumulated
Common during
stock to be development Subscription
issued stage Receivable
------------ ------------ ------------
<S> <C> <C> <C>
Balance at July 31, 1986 (brought forward) $ -- $ (7,198,714) $ --
Exercise of warrants at $10.00 per share -- -- --
Issuance of shares under stock bonus plan for directors and consultants -- -- --
Issuance of shares for services -- -- --
Sale of shares to private investors, net -- -- --
Net loss -- (2,604,619) --
------------ ------------ ------------
Balance at July 31, 1987 -- (9,803,333) --
Issuance of shares for legal and consulting services -- -- --
Issuance of shares under employment incentive program -- -- --
Issuance of shares under stock grant program -- -- --
Exercise of options at $3.00 per share -- -- --
Issuance of shares for litigation settlement -- -- --
Exercise of warrants at $7.06 per share -- -- --
Sale of shares to private investors -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (3,272,773) --
------------ ------------ ------------
Balance at July 31, 1988 -- (13,076,106) --
Sale of shares for litigation settlement -- -- --
Conversion of debentures at $3.00 per share -- -- --
Sale of shares to private investors -- -- --
Exercise of options at $3.50 per share -- -- --
Issuance of shares under employment agreement -- -- --
Issuance of shares under the 1989 Stock Plan -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (2,952,869) --
------------ ------------ ------------
Balance at July 31, 1989 -- (16,028,975) --
Issuance of shares for legal and consulting services -- -- --
Issuance of shares under the 1989 Stock Plan -- -- --
Sale of shares for litigation settlement -- -- --
Exercise of options at $3.00 - $3.50 per share -- -- --
Sale of shares to private investors -- -- --
Issuance of shares under employment agreement -- -- --
Conversion of debentures at $5.00 per share -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (4,860,116) --
------------ ------------ ------------
Balance at July 31, 1990 (carried forward) -- (20,889,091) --
<CAPTION>
Deferred
compen-
sation, Total stock-
restricted holders' equity
stock (deficiency)
------------ ------------
<S> <C> <C>
Balance at July 31, 1986 (brought forward) $ -- $ (346,669)
Exercise of warrants at $10.00 per share -- 147,450
Issuance of shares under stock bonus plan for directors and consultants -- 75,000
Issuance of shares for services -- 500,000
Sale of shares to private investors, net -- 25,000
Net loss -- (2,604,619)
------------ ------------
Balance at July 31, 1987 -- (2,203,838)
Issuance of shares for legal and consulting services -- 724,487
Issuance of shares under employment incentive program (2,450,000) --
Issuance of shares under stock grant program -- 66,500
Exercise of options at $3.00 per share -- 510,000
Issuance of shares for litigation settlement -- 31,137
Exercise of warrants at $7.06 per share -- 451,405
Sale of shares to private investors -- 178,133
Amortization of deferred compensation, restricted stock 449,167 449,167
Net loss -- (3,272,773)
------------ ------------
Balance at July 31, 1988 (2,000,833) (3,065,782)
Sale of shares for litigation settlement -- 1,074,838
Conversion of debentures at $3.00 per share -- 400,000
Sale of shares to private investors -- 420,000
Exercise of options at $3.50 per share -- 3,500
Issuance of shares under employment agreement (3,750,000) --
Issuance of shares under the 1989 Stock Plan (150,000) --
Amortization of deferred compensation, restricted stock 1,050,756 1,050,756
Net loss -- (2,952,869)
------------ ------------
Balance at July 31, 1989 (4,850,077) (3,069,557)
Issuance of shares for legal and consulting services -- 258,777
Issuance of shares under the 1989 Stock Plan (336,000) --
Sale of shares for litigation settlement -- 351,117
Exercise of options at $3.00 - $3.50 per share -- 345,962
Sale of shares to private investors -- 355,080
Issuance of shares under employment agreement (3,750,000) --
Conversion of debentures at $5.00 per share -- 500,000
Amortization of deferred compensation, restricted stock 3,015,561 3,015,561
Net loss -- (4,860,116)
------------ ------------
Balance at July 31, 1990 (carried forward) (5,920,516) (3,103,176)
</TABLE>
F-8
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
(Continued)
<TABLE>
<CAPTION>
Common Stock
----------------------------- Capital in
Number of excess of par
Shares Amount value
------------ ------------ ------------
<S> <C> <C> <C>
Balance at July 31, 1990 (brought forward) 6,799,829 $ 6,800 $ 23,699,631
Exercise of options at $6.50 per share 16,720 16 108,664
Issuance of shares for legal consulting services 87,000 87 358,627
Issuance of shares under the 1989 Stock Plan 119,000 119 475,881
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- -- --
------------ ------------ ------------
Balance at July 31, 1991 7,022,549 7,022 24,642,803
Exercise of options at $3.50 per share 1,000 1 3,499
Sale of shares to private investors 70,731 71 219,829
Conversion of debentures at $5.00 per share 94,000 94 469,906
Issuance of shares for services 45,734 46 156,944
Issuance of shares under the 1989 Stock Plan 104,000 104 285,896
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- -- --
------------ ------------ ------------
Balance at July 31, 1992 7,338,014 7,338 25,778,877
Sale of share to private investors 352,667 353 735,147
Issuance of shares for legal services 49,600 50 132,180
Issuance of shares for services 5,000 5 9,995
Issuance of shares under the 1989 Stock Plan 117,000 117 233,883
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- -- --
------------ ------------ ------------
Balance at July 31, 1993 7,862,281 7,863 26,890,082
Conversion of debentures at $2.75 per share to $6.00 per share 425,400 425 1,701,575
Sale of shares to private investors, net 743,000 743 1,710,048
Conversion of short-term borrowings 72,800 73 181,927
Issuance of shares for services 16,200 16 43,334
Issuance of shares under the 1989 Stock Plan, for services 5,000 5 14,995
Issuance of options to related parties upon conversion of
accrued interest, payroll and expenses -- -- 3,194,969
Repurchase of stock options from related party -- -- (198,417)
Issuance of options upon conversion of accrued interest -- -- 142,441
Common stock to be issued -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- -- --
------------ ------------ ------------
Balance at July 31, 1994 (carried forward) 9,124,681 9,125 33,680,954
<CAPTION>
Deficit
accumulated
Common during
stock to be development Subscription
issued stage Receivable
------------ ------------ -----------
<S> <C> <C> <C>
Balance at July 31, 1990 (brought forward) $ -- $(20,889,091) $ --
Exercise of options at $6.50 per share -- -- --
Issuance of shares for legal consulting services -- -- --
Issuance of shares under the 1989 Stock Plan -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (5,202,302) --
------------ ------------ -----------
Balance at July 31, 1991 -- (26,091,393) --
Exercise of options at $3.50 per share -- -- --
Sale of shares to private investors -- -- --
Conversion of debentures at $5.00 per share -- -- --
Issuance of shares for services -- -- --
Issuance of shares under the 1989 Stock Plan -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (4,772,826) --
------------ ------------ -----------
Balance at July 31, 1992 -- (30,864,219) --
Sale of share to private investors -- -- --
Issuance of shares for legal services -- -- --
Issuance of shares for services -- -- --
Issuance of shares under the 1989 Stock Plan -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (2,357,350) --
------------ ------------ -----------
Balance at July 31, 1993 -- (33,221,569) --
Conversion of debentures at $2.75 per share to $6.00 per share -- -- --
Sale of shares to private investors, net -- -- --
Conversion of short-term borrowings -- -- --
Issuance of shares for services -- -- --
Issuance of shares under the 1989 Stock Plan, for services -- -- --
Issuance of options to related parties upon conversion of
accrued interest, payroll and expenses -- -- --
Repurchase of stock options from related party -- -- --
Issuance of options upon conversion of accrued interest -- -- --
Common stock to be issued 50,000 -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (2,234,428) --
------------ ------------ -----------
Balance at July 31, 1994 (carried forward) 50,000 (35,455,997) --
<CAPTION>
Deferred
compen-
sation, Total stock-
restricted holders' equity
stock (deficiency)
------------ ------------
<S> <C> <C>
Balance at July 31, 1990 (brought forward) $ (5,920,516) $ (3,103,176)
Exercise of options at $6.50 per share -- 108,680
Issuance of shares for legal consulting services -- 358,714
Issuance of shares under the 1989 Stock Plan (476,000) --
Amortization of deferred compensation, restricted stock 2,891,561 2,891,561
Net loss -- (5,202,302)
------------ ------------
Balance at July 31, 1991 (3,504,955) (4,946,523)
Exercise of options at $3.50 per share -- 3,500
Sale of shares to private investors -- 219,900
Conversion of debentures at $5.00 per share -- 470,000
Issuance of shares for services -- 156,990
Issuance of shares under the 1989 Stock Plan (286,000) --
Amortization of deferred compensation, restricted stock 3,046,726 3,046,726
Net loss -- (4,772,826)
------------ ------------
Balance at July 31, 1992 (744,229) (5,822,233)
Sale of share to private investors -- 735,500
Issuance of shares for legal services -- 132,230
Issuance of shares for services (10,000) --
Issuance of shares under the 1989 Stock Plan (234,000) --
Amortization of deferred compensation, restricted stock 664,729 664,729
Net loss -- (2,357,350)
------------ ------------
Balance at July 31, 1993 (323,500) (6,647,124)
Conversion of debentures at $2.75 per share to $6.00 per share -- 1,702,000
Sale of shares to private investors, net -- 1,710,791
Conversion of short-term borrowings -- 182,000
Issuance of shares for services -- 43,350
Issuance of shares under the 1989 Stock Plan, for services -- 15,000
Issuance of options to related parties upon conversion of
accrued interest, payroll and expenses -- 3,194,969
Repurchase of stock options from related party -- (198,417)
Issuance of options upon conversion of accrued interest -- 142,441
Common stock to be issued -- 50,000
Amortization of deferred compensation, restricted stock 265,000 265,000
Net loss -- (2,234,428)
------------ ------------
Balance at July 31, 1994 (carried forward) (58,500) (1,774,418)
</TABLE>
F-9
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
<TABLE>
<CAPTION>
Common Stock
----------------------------- Capital in
Number of excess of par
Shares Amount value
------------ ------------ ------------
<S> <C> <C> <C>
Balance at July 31, 1994 (brought forward) 9,124,681 $ 9,125 $ 33,680,954
Sale of shares to private investors, net 961,000 961 2,023,241
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 -- -- --
Common stock to be issued, for services -- -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- -- --
------------ ------------ ------------
Balance at July 31, 1995 10,319,187 10,319 36,262,427
Sale of shares to private investors, net 2,953,327 2,953 8,969,655
Issuance of shares for services 19,995 20 70,858
Exercise of options at $2.50 - $3.87 per share 566,700 567 1,657,633
Sale of warrants -- -- 12,084
Issuance of options/warrants for services -- -- 50,872
Common stock to be issued -- -- --
Subscription receivable -- -- --
Net loss -- -- --
------------ ------------ ------------
Balance at July 31, 1996 13,859,209 13,859 47,023,529
Sale of shares to private investors, net 112,000 112 503,888
Issuance of options for services -- -- 76,504
Exercise of options at $2.45 - $4.00 per share, net 729,134 729 2,620,359
Exercise of warrants at $5.00 per share, net 147,450 148 737,102
Net loss -- -- --
------------ ------------ ------------
Balance at July 31, 1997 14,847,793 14,848 50,961,382
Sale of shares to private investors, net 2,337,150 2,337 4,199,877
Issuance of options for services -- -- 199,954
Exercise of warrants at $2.20 - $2.50 per share 4,950 5 11,080
Issuance of shares for services, net 50,000 50 99,950
Net loss -- -- --
------------ ------------ ------------
Balance at July 31, 1998 17,239,893 17,240 55,472,243
Issuance of options for services -- -- 205,593
Issuance of shares for services, net 46,701 46 16,359
Net loss -- -- --
------------ ------------ ------------
Balance at July 31, 1999 17,286,594 $ 17,286 $ 55,694,195
============ ============ ============
<CAPTION>
Deficit
accumulated
Common during
stock to be development Subscription
issued stage Receivable
------------ ------------ ------------
<S> <C> <C> <C>
Balance at July 31, 1994 (brought forward) $ 50,000 $(35,455,997) $ --
Sale of shares to private investors, net (50,000) -- --
Conversion of short-term borrowings -- -- --
Issuance of shares for services -- -- --
Exercise of options at $2.27 - $2.50 per share -- -- --
Common stock to be issued 339,008 -- --
Common stock to be issued, for services 4,800 -- --
Amortization of deferred compensation, restricted stock -- -- --
Net loss -- (1,993,123) --
------------ ------------ ------------
Balance at July 31, 1995 343,808 (37,449,120) --
Sale of shares to private investors, net (339,008) -- --
Issuance of shares for services (4,800) -- --
Exercise of options at $2.50 - $3.87 per share -- -- --
Sale of warrants -- -- --
Issuance of options/warrants for services -- -- --
Common stock to be issued 258,335 -- --
Subscription receivable -- -- (254,185)
Net loss -- (2,942,152) --
------------ ------------ ------------
Balance at July 31, 1996 258,335 (40,391,272) (254,185)
Sale of shares to private investors, net -- -- --
Issuance of options for services -- -- --
Exercise of options at $2.45 - $4.00 per share, net (258,335) -- 254,185
Exercise of warrants at $5.00 per share, net -- -- --
Net loss -- (5,018,867) --
------------ ------------ ------------
Balance at July 31, 1997 -- (45,410,139) --
Sale of shares to private investors, net -- -- --
Issuance of options for services -- -- --
Exercise of warrants at $2.20 - $2.50 per share -- -- --
Issuance of shares for services, net -- -- --
Net loss -- (6,387,506) --
------------ ------------ ------------
Balance at July 31, 1998 -- (51,797,645) --
Issuance of options for services -- -- --
Issuance of shares for services, net -- -- --
Net loss -- (3,156,636) --
------------ ------------ ------------
Balance at July 31, 1999 $ -- $(54,954,281) $ --
============ ============ ============
<CAPTION>
Deferred
compen-
sation, Total stock-
restricted holders' equity
stock (deficiency)
------------ ------------
<S> <C> <C>
Balance at July 31, 1994 (brought forward) $ (58,500) $ (1,774,418)
Sale of shares to private investors, net -- 1,974,202
Conversion of short-term borrowings -- 44,000
Issuance of shares for services -- 77,265
Exercise of options at $2.27 - $2.50 per share -- 437,200
Common stock to be issued -- 339,008
Common stock to be issued, for services -- 4,800
Amortization of deferred compensation, restricted stock 58,500 58,500
Net loss -- (1,993,123)
------------ ------------
Balance at July 31, 1995 -- (832,566)
Sale of shares to private investors, net -- 8,633,600
Issuance of shares for services -- 66,078
Exercise of options at $2.50 - $3.87 per share -- 1,658,200
Sale of warrants -- 12,084
Issuance of options/warrants for services -- 50,872
Common stock to be issued -- 258,335
Subscription receivable -- (254,185)
Net loss -- (2,942,152)
------------ ------------
Balance at July 31, 1996 -- 6,650,266
Sale of shares to private investors, net -- 504,000
Issuance of options for services -- 76,504
Exercise of options at $2.45 - $4.00 per share, net -- 2,616,938
Exercise of warrants at $5.00 per share, net -- 737,250
Net loss -- (5,018,867)
------------ ------------
Balance at July 31, 1997 -- 5,566,091
Sale of shares to private investors, net -- 4,202,214
Issuance of options for services -- 199,954
Exercise of warrants at $2.20 - $2.50 per share -- 11,085
Issuance of shares for services, net -- 100,000
Net loss -- (6,387,506)
------------ ------------
Balance at July 31, 1998 -- 3,691,838
Issuance of options for services -- 205,593
Issuance of shares for services, net -- 16,405
Net loss -- (3,156,636)
------------ ------------
Balance at July 31, 1999 $ -- $ 757,200
============ ============
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
Statements of Cash Flows
Years ended July 31, 1999, 1998 and 1997,
and the Period from August 24, 1981
(Date of Inception) to July 31, 1999
<TABLE>
<CAPTION>
August 24,
1981 (date
of incep-
tion) to
July 31,
1999 1999 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(54,954,281) $ (3,156,636) $ (6,387,506) $ (5,018,867)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of marketable securities (25,963) -- -- --
Depreciation and amortization 1,324,095 101,231 102,836 72,799
Loss on disposal of property and equipment 18,926 -- -- --
Noncash operating expenses 5,372,472 208,053 199,954 76,504
Amortization of deferred compensation 11,442,000 -- -- --
Amortization of organization costs 4,590 -- -- --
Changes in assets and liabilities:
(Increase) decrease in loan receivable, related party -- -- -- 112,250
(Increase) decrease in other current assets (146,708) (29,521) 47,919 (101,256)
Decrease in other assets 36,184 -- -- 31,877
Increase in loans and interest payable, related party 744,539 -- -- --
Increase (decrease) in accounts payable 379,967 (513,338) 438,336 188,168
Increase in accrued payroll and expenses, related parties 2,348,145 -- -- --
Increase (decrease) in accrued expenses 1,320,163 (314,248) 399,057 531,628
------------ ------------ ------------ ------------
Net cash used in operating activities (32,135,871) (3,704,459) (5,199,404) (4,106,897)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of marketable securities (290,420) -- -- --
Proceeds from sale of marketable equity securities 316,383 -- -- --
Purchase of property and equipment (1,369,261) -- (75,315) (252,066)
Patent costs (97,841) -- -- --
------------ ------------ ------------ ------------
Net cash used in investing activities (1,441,139) -- (75,315) (252,066)
------------ ------------ ------------ ------------
</TABLE>
(Continued)
F-11
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
August 24,
1981 (date
of incep-
tion) to
July 31,
1999 1999 1998 1997
------------ ------------ ------------ ------------
<S> <C> <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 cost 2,410,883 -- -- 4,200
Reduction of bank debt and long-term debt (2,918,728) (9,175) (1,381,416 (92,578)
Proceeds from issuance of common stock, net 26,805,447 (2,686) 4,202,214 504,000
Proceeds from exercise of stock options and warrants, net 5,460,673 -- 11,085 3,354,188
Proceeds from issuance of convertible debentures 347,000 -- -- --
------------ ------------ ------------ ------------
Net cash provided by financing activities 34,960,143 (11,861) 2,831,883 3,769,810
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,383,133 (3,716,320) (2,442,836) (589,153)
Cash and cash equivalents at beginning of period -- 5,099,453 7,542,289 8,131,442
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,383,133 $ 1,383,133 $ 5,099,453 $ 7,542,289
============ ============ ============ ============
Supplemental disclosure of cash flow information - interest paid $ 1,648,733 $ 2,378 $ 21,782 $ 134,845
============ ============ ============ ============
Noncash financing activities:
Issuance of convertible subordinated debenture for
loan payable to officer $ 2,725,000 $ -- $ -- $ --
============ ============ ============ ============
Issuance of common stock upon the conversion of
convertible subordinated debentures, related party $ 2,945,000 $ -- $ -- $ --
============ ============ ============ ============
Conversion of short-term borrowings to common stock $ 226,000 $ -- $ -- $ --
============ ============ ============ ============
</TABLE>
(Continued)
F-12
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
August 24,
1981 (date
of incep-
tion) to
July 31,
1999 1999 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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 $ 193,986 $ 16,631 $ 100,000 $ --
============ ============ ============ ============
Conversion of notes payable, bank and accrued
interest to long-term debt $ 1,699,072 $ -- $ -- $ --
============ ============ ============ ============
Conversion of loans and interest payable, related party
and accrued payroll and expenses, related parties
to long-term accrued payroll and other, related party $ 1,863,514 $ -- $ -- $ --
============ ============ ============ ============
Issuance of common stock upon the conversion of
convertible subordinated debentures, other $ 127,000 $ -- $ -- $ --
============ ============ ============ ============
Issuance of common stock for services rendered $ 2,460 $ 2,460 $ -- $ --
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
Years ended July 31, 1999, 1998 and 1997
and the Period From August 24, 1981
(Date of Inception) to July 31, 1999
(1) Summary of Significant Accounting Policies
Business Description
Alfacell Corporation (the "Company") was incorporated in Delaware on August
24, 1981 for the purpose of engaging in the discovery, investigation and
development of a new class of anti-cancer drugs and anti- viral agents. The
Company is a development stage company as defined in the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 7. The Company is devoting substantially all of its present efforts to
establishing its business. Its planned principal operations have not
commenced and, accordingly, no significant revenue has been derived
therefrom.
The Company's current operations encompass all the risks inherent in
discovering and developing a new drug, including: an uncertainty regarding
the timing and amount of future revenues to be derived from the Company's
technology; obtaining future capital as needed; attracting and retaining
key personnel; and a business environment with heightened competition,
rapid technological change and strict government regulations.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect reported amounts and disclosures in
these financial statements. Actual results could differ from those
estimates.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets ranging from three to seven years. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in
operations for the period.
The cost of repairs and maintenance is charged to operations as incurred;
significant renewals and betterments are capitalized.
Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less, at the time of purchase, to be cash equivalents.
Research and Development
Research and development costs are expensed as incurred.
(Continued)
F-14
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (Continued)
Fair Value of Financial Instruments
For all financial instruments, their carrying value approximates fair value
due to the short maturity of those instruments.
Comprehensive Income (Loss)
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income.
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. The net loss of $3,157,000,
$6,388,000 and $5,019,000, recorded for the years ended July 31, 1999, 1998
and 1997, respectively, is equal to the comprehensive loss for those
periods.
Earnings Per Common Share
"Basic" earnings per common share equals net income divided by weighted
average common shares outstanding during the period. "Diluted" earnings per
common share equals net income divided by the sum of weighted average
common shares outstanding during the period plus common stock equivalents.
The Company's Basic and Diluted per share amounts are the same since the
assumed exercise of stock options and warrants are all anti-dilutive. The
amount of options and warrants excluded from the calculation was 5,894,875,
5,911,557 and 4,592,631 at July 31, 1999, 1998 and 1997, respectively.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances occur that indicate that the carrying
amount of the assets may not be recoverable. The Company assesses the
recoverability of long-lived assets held and to be used based on
undiscounted cash flows, and measures the impairment, if any, using
discounted cash flows. SFAS No. 121 has not had a material impact on the
Company's financial position, operating results or cash flows.
Stock Option Plans
Prior to August 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On August 1, 1996, the Company adopted SFAS
No. 123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants as if the fair-value method
defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma disclosure in accordance with the provisions of SFAS No. 123.
(Continued)
F-15
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(2) Liquidity
The Company has reported net losses of $3,156,636, $6,387,506, and
$5,018,867 for the fiscal years ended July 31, 1999, 1998 and 1997,
respectively. The loss from date of inception, August 24, 1981, to July 31,
1999 amounts to $54,954,281. Also, the Company has limited liquid
resources. These factors raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of reported
asset amounts or the amounts or classification of liabilities which might
result from the outcome of this uncertainty.
Until the Company's operations generate significant revenues, cash reserves
will continue to fund operations. To date, a significant portion of the
Company's financing has been through private placements of common stock and
warrants, the issuance of common stock for stock options exercised and
services rendered, debt financing and financing provided by the Company's
Chief Executive Officer. The Company believes that its cash and cash
equivalents as of July 31, 1999 will be sufficient to meet its anticipated
cash needs through January 2000. The report of the Company's independent
auditors on the Company's financial statements, included elsewhere herein,
includes an explanatory paragraph which states that the Company's recurring
losses and limited liquid resources 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.
The Company's continued operations will depend on its ability to raise
additional funds through various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances, sale of tax loss
carryforwards and research and development tax credits and revenues from
the commercial sale of ONCONASE, however there can be no assurance that
such additional funds will become available. The Company is currently in
discussion with several potential strategic alliance partners for further
development and marketing of ONCONASE and the other potential new products
in the Company's pipeline, however there can be no assurance that any such
alliances will materialize. The ability of the Company to raise additional
capital through the sale of its securities will primarily be dependent on
the outcome of the Phase III clinical trial for unresectable malignant
mesothelioma. However, the ability to raise funding at that time maybe
dependent upon other factors including without limitation, market
conditions, and there can be no assurance that such funds will be
available. The Company is in the process of analyzing the Phase III data of
its clinical trial for unresectable malignant mesothelioma in preparation
for a Pre-NDA meeting with the FDA.
New Jersey has enacted legislation permitting certain New Jersey
corporations to sell NOLs. The Company has state NOLs available for sale.
In October 1999, the Company was notified by the state that it has
qualified to sell their NOLs. The Company expects to receive net proceeds
of approximately $675,000 by January 2000. However, there can be no
assurance that the Company will be able to find a buyer for its NOLs and
that such funds will be available in a timely manner.
The Company's Common Stock was delisted from The Nasdaq SmallCap Market
effective at the close of business April 27, 1999 for failing to meet the
minimum bid price requirements set forth in the NASD Marketplace Rules. As
of April 28, 1999, the Company's Common Stock was traded on the OTC
Bulletin
(Continued)
F-16
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(2) Liquidity, (Continued)
Board under the symbol "ACEL". Delisting of the Company's Common Stock from
Nasdaq, could have a material adverse effect on the Company including its
ability to raise additional capital, stockholder liquidity and price of the
Company's Common Stock.
(3) Property and Equipment
Property and equipment, at cost, consists of the following at July 31:
1999 1998
---------- ----------
Laboratory equipment $ 755,040 755,040
Office equipment 290,764 290,764
Leasehold improvements 97,833 97,833
---------- ----------
$1,143,637 1,143,637
========== ==========
(4) Long-term Debt
Long-term debt consists of the following at July 31:
1999 1998
------- -------
Notes payable, interest at 8.45%, maturing through
July 1999, secured by equipment $ -- $ 1,520
Note payable in monthly installments of $729, including
principal and interest commencing April 1996 and each
month thereafter until May 2000, secured by equipment 6,727 14,382
------- -------
6,727 15,902
Less current portion 6,727 9,175
------- -------
$ -- $ 6,727
======= =======
(5) Leases
The Company leases its facility under a five-year operating lease which is
due to expire on December 31, 2001. The annual rental obligation, which
commenced January 1, 1997, is $96,775 and is subject to annual escalation
amounts. Rent expense charged to operations was $108,000, $97,000, and
$76,000 in 1999, 1998 and 1997, respectively.
Future minimum lease payments under noncancellable leases for the next
three years ending July 31 are as follows:
(Continued)
F-17
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(5) Leases, (Continued)
Operating leases
----------------
2000 $ 127,497
2001 136,000
2002 56,667
(6) Stockholders' Equity
On September 1, 1981, the Company issued 712,500 shares of common stock
(1,068,750 shares adjusted for the stock split on September 8, 1982) to
officers and stockholders in exchange for equipment, research and
development services, stock registration costs, reimbursement of expenses
and other miscellaneous services. The common stock issued for services was
recorded at the estimated fair value of services rendered based upon the
Board of Directors' determination and ratification of the value of
services. Equipment received in exchange for common stock was recorded at
the transferor's cost. Common stock issued for reimbursement of expenses
was recorded based upon expenses incurred. All values assigned for expenses
and services rendered have been charged to operations except for stock
registration costs which were charged against proceeds.
On July 30, 1982, the Company sold 82,143 shares of common stock (123,214
shares adjusted to reflect the stock split on September 8, 1982) to a
private investor at a price of $1.40 per share, resulting in net proceeds
to the Company of approximately $108,500.
On September 8, 1982, the Company declared a 3-for-2 stock split. Shares
previously issued by the Company have been restated in accordance with the
stock split.
On September 8, 1982, the Company issued 15,000 shares of common stock to
an officer and stockholder in exchange for equipment. The equipment
received in exchange for the common stock was recorded at the transferor's
cost.
On November 1, 1982 and January 3, 1983, the Company sold 28,125 and 16,071
shares of common stock, respectively, to private investors at $.93 per
share, resulting in net proceeds to the Company of approximately $41,250.
On January 17, 1983, the Company sold 660,000 shares of its common stock
and 330,000 common stock purchase warrants in a public offering at a price
of $2.50 per share, resulting in net proceeds to the Company of
approximately $1,308,446. The warrants were to expire 12 months after
issuance; however, the Company extended the expiration date to July 16,
1984. During the fiscal years ended July 31, 1983 and 1984, the net
proceeds to the Company from the 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.
(Continued)
F-18
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
In connection with the public offering, the Company sold 60,000 five-year
purchase warrants to the underwriters at a price of $.001 per warrant. Each
warrant entitled the holder to purchase one share of common stock at an
exercise price of $3.00. Pursuant to the antidilution provisions of the
warrants, the underwriters received warrants to purchase 67,415 shares at
an exercise price of $2.67 per share. As of July 31, 1986, all such
warrants were exercised and the Company received proceeds of approximately
$180,000.
On February 22, 1984, the Company filed a registration statement with the
Securities and Exchange Commission for the issuance of two series of new
warrants each to purchase an aggregate of 330,000 shares (hereinafter
referred to as one-year warrants and two-year warrants). The one-year
warrants had an exercise price of $6.50 per share and expired July 17,
1985. The two-year warrants had an exercise price of $10.00 per share and
were to expire July 17, 1986. However, the Company extended the expiration
date to August 31, 1987. The one-year warrants and two-year warrants were
issued as of July 17, 1984 on a one-for-one basis to those public offering
warrant holders who exercised their original warrants, with the right to
oversubscribe to any of the warrants not exercised. During the fiscal years
ended July 31, 1985, 1986, 1987 and 1988, the Company received net proceeds
of approximately $2,471,000 as a result of the exercise of the warrants.
On January 2, 1987, the Company issued 250,000 shares of common stock to
officers and stockholders, including the President and Chief Executive
Officer, in recognition of services performed for the Company. The fair
value of such shares was recorded as compensation expense.
On February 3, 1987, the Company sold 5,000 shares of common stock to a
private investor for $5.00 per share, resulting in net proceeds to the
Company of approximately $25,000.
On September 1, 1987, the Board of Directors approved new wage contracts
for three officers. The contracts provided for the issuance of 700,000
shares of common stock as an inducement for signing. The fair value of
these shares was recorded as deferred compensation and was amortized over
the term of the employment agreements. The contracts also provided for the
issuance of 1,500,000 shares of common stock in 750,000 increments upon the
occurrence of certain events. These shares were issued during the fiscal
years ended July 31, 1989 and 1990 and the fair value of such shares was
recorded as deferred compensation and was amortized over the remaining term
of the employment agreements. The contracts also provided for five-year
options to purchase 750,000 shares of common stock at $3.00 per share;
options for the purchase of 170,000 shares were exercised on June 16, 1988
and the remaining options for the purchase of 580,000 shares expired on
September 2, 1992.
During the fiscal year ended July 31, 1988, the Company issued 206,429
shares of common stock for payment of legal and consulting services. The
fair value of such shares was charged to operations.
During the fiscal year ended July 31, 1988, the Company issued 12,500
shares of common stock in connection with the settlement of certain
litigation. The fair value of these shares was charged to operations.
(Continued)
F-19
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 1988, the Company sold 61,073 shares
of common stock to private investors at $2.92 per share resulting in net
proceeds to the Company of approximately $178,133.
On September 21, 1988, the Company entered into a stipulation of settlement
arising from a lawsuit wherein it agreed to pay a total of $250,000 in 12
monthly installments. Under the agreement, the Company authorized the
issuance on September 7, 1988 and October 18, 1988 of 85,000 and 50,000
shares, respectively, to an escrow account to secure payment of the
$250,000 due under the stipulation of settlement. During the fiscal year
ended July 31, 1989, the Company issued and sold the 135,000 shares of
common stock for $1,074,838. On February 14, 1989, the Board of Directors
authorized the issuance of an additional 50,000 shares. During the year
ended July 31, 1990, the shares were sold for $351,117. The proceeds from
the above transactions were used to pay the settlement and related legal
costs, reduce loans from and interest due to the Company's Chief Executive
Officer, and for working capital.
During the fiscal year ended July 31, 1989, the Company sold 105,840 shares
of common stock to private investors at $3.97 per share resulting in net
proceeds to the Company of approximately $420,000.
During the fiscal year ended July 31, 1990, the Company issued 52,463
shares of common stock for payment of legal and consulting services. The
fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1990, the Company issued 50,000
shares of common stock in connection with the settlement of certain
litigation. The fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1990, the Company sold 89,480 shares
of common stock to private investors at $3.97 per share resulting in net
proceeds to the Company of approximately $355,080.
During the fiscal year ended July 31, 1991, the Company issued 87,000
shares of common stock for payment of legal and consulting services. The
fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1992, the Company sold 70,731 shares
of common stock to private investors at $2.75 to $3.50 per share resulting
in net proceeds to the Company of approximately $219,900.
During the fiscal year ended July 31, 1992, the Company issued 45,734
shares of common stock as payment for services rendered to the Company. The
fair value of the common stock was charged to operations.
During the fiscal years ended July 31, 1992 and 1990, 94,000 and 50,000
shares of common stock, respectively, were issued to the Company's Chief
Executive Officer upon the conversion of outstanding debentures.
(Continued)
F-20
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 1993, the Company sold 352,667 shares
of common stock to private investors at prices ranging from $2.00 to $3.00
per share resulting in net proceeds to the Company of approximately
$735,500. In addition, the private investors were granted options to
purchase common stock totaling 587,167 shares at prices ranging from $3.00
to $7.00. During the fiscal years ended July 31, 1995 and 1996, 322,500 and
228,833 options expired, respectively. A total of 42,167 options due to
expire on July 31, 1995 were extended to July 31, 1996 and their exercise
price was reduced to $2.50.
During the fiscal year ended July 31, 1996, 35,834 options were exercised
resulting in net proceeds to the Company of approximately $89,600.
During the fiscal year ended July 31, 1993, the Company issued 54,600
shares of common stock as payment for legal and other services performed
for the Company. The fair value of 49,600 shares was charged to operations.
The remaining 5,000 shares were recorded as deferred compensation and were
amortized over a one-year period, beginning in February 1993, in accordance
with the agreement entered into with the recipient.
During the fiscal year ended July 31, 1994, the Company issued 7,000 shares
of common stock as payment for services performed for the Company. The fair
value of the common stock was charged to operations.
During the fiscal year ended July 31, 1994, the Company sold 25,000 shares
of common stock to a private investor at $2.00 per share resulting in net
proceeds to the Company of $50,000. In addition, the private investor was
granted options to purchase common stock totaling 25,000 shares at $4.00
per common share. These options were exercised in September 1996 resulting
in net proceeds to the Company of $100,000.
During the fiscal year ended July 31, 1994, the Company sold 800,000 shares
of common stock to private investors at $2.50 per share resulting in net
proceeds to the Company of $1,865,791. In addition, the private investors
were granted warrants to purchase common stock totaling 800,000 shares at
$5.00 per common share. Warrants for the purchase of 147,450 shares were
exercised during fiscal 1997 resulting in net proceeds to the Company of
$737,250. The remaining 652,550 warrants expired during fiscal 1997.
During the fiscal year ended July 31, 1994, 400,000 shares of common stock
were issued to the Company's Chief Executive Officer upon the conversion of
outstanding debentures.
During the fiscal year ended July 31, 1994, 25,400 shares of common stock
were issued upon the conversion of other outstanding debentures.
In September 1994, the Company completed a private placement resulting in
the issuance of 288,506 shares of common stock and three-year warrants to
purchase 288,506 shares of common stock at an exercise price of $5.50 per
share. The warrants expired during fiscal 1998. The common stock and
warrants were sold in units consisting of 20,000 shares of common stock and
warrants to purchase 20,000
(Continued)
F-21
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
shares of common stock. The price per unit was $50,000. The Company
received proceeds of approximately $545,000, net of costs associated with
the placement of approximately $55,000 and the conversion of certain debt
by creditors of $121,265 into equivalent private placement units of 17,600
shares for conversion of short-term borrowings and 30,906 shares issued for
services rendered. In October 1994, an additional two units at $50,000 per
unit were sold to a private investor under the same terms as the September
1994 private placement resulting in the issuance of 40,000 shares of common
stock and warrants to purchase 40,000 shares of common stock. The warrants
expired during fiscal 1998.
During the fiscal year ended July 31, 1995, 185,000 shares of common stock
were issued upon the exercise of stock options by unrelated parties
resulting in net proceeds to the Company of $437,200. The exercise prices
of the options ranged from $2.27 to $2.50, which had been reduced from
$3.50 and $5.00, respectively, during fiscal 1995.
During the fiscal year ended July 31, 1995, the Company sold 681,000 shares
of common stock to private investors resulting in net proceeds to the
Company of approximately $1,379,000. The shares were sold at prices ranging
from $2.00 to $2.25.
During the fiscal year ended July 31, 1995, the Company sold 139,080 shares
of common stock and 47,405 three-year warrants to purchase shares of common
stock at an exercise price of $4.00 per share to private investors. The
stock and warrants were sold at prices ranging from $2.25 to $2.73 per
share and resulted in net proceeds to the Company of $343,808, of which
$4,800 was for services rendered. The common shares were issued to the
investors subsequent to July 31, 1995.
On August 4, 1995, the Company issued 6,060 shares of common stock as
payment for services rendered to the Company. The fair value of the common
stock was charged to operations.
On September 29, 1995, the Company completed a private placement resulting
in the issuance of 1,925,616 shares of common stock and three-year warrants
to purchase an aggregate of 55,945 shares of common stock at an exercise
price of $4.00 per share. Of these shares 1,935 were issued for services
rendered to the Company. The common stock was sold alone at per share
prices ranging from $2.00 to $3.70, and in combination with warrants at per
unit prices ranging from $4.96 to $10.92, which related to the number of
warrants contained in the unit. The Company received proceeds of
approximately $4.1 million, including $1,723,000 for approximately 820,000
shares received during the fiscal year ended July 31, 1995. The warrants
expired in October 1998.
As consideration for the extension of the Company's term loan agreement
with its bank, the Company granted the bank a warrant to purchase 10,000
shares of common stock at an exercise price of $4.19. The warrants were
issued as of October 1, 1995 and expired on August 31, 1997.
(Continued)
F-22
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
In June 1996, the Company sold in a private placement 1,515,330 shares of
common stock and three-year warrants to purchase 313,800 shares of common
stock at an exercise price of $7.50 per share. Of these shares, 12,000 were
issued for services rendered to the Company. The common stock was sold
alone at a per share price of $3.70, in combination with warrants at a per
unit price of $12.52 and warrants were sold alone at a per warrant price of
$1.42. Each unit consisted of three shares of common stock and one warrant.
The Company received proceeds of approximately $5.7 million. The warrants
have expired in August and September 1999.
In June 1996, the Company issued 10,000 five-year stock options as payment
for services rendered. The options vested immediately and have an exercise
price of $4.95 per share. The Company recorded research and development
expense of $28,260 which was the fair value of the stock options on the
date of issuance.
During the fiscal year ended July 31, 1996, 207,316 shares of common stock
were sold from October to April 1996 at per share prices ranging from $3.60
to $4.24 resulting in proceeds of approximately $808,000.
During the fiscal year ended July 31, 1996, 656,334 stock options were
exercised by both related and unrelated parties resulting in net proceeds
of approximately $1.9 million to the Company. Of these shares, 89,634 were
issued subsequent to July 31, 1996. The exercise prices of the options
ranged from $2.50 to $3.87 per share.
In August 1996, the Company issued 10,000 stock options with an exercise
price of $4.69 per share exercisable for five years as payment for services
to be rendered. An equal portion of these options vested monthly for one
year commencing September 1, 1996. The Company recorded general and
administrative expense of $27,900 which was the fair value of the stock
options on the date of issuance.
In March 1997, the Company issued 112,000 shares of common stock at $4.50
per share in a private placement to a single investor resulting in net
proceeds of $504,000 to the Company.
In May 1997, the Company issued 100,000 stock options to a director with an
exercise price of $5.20 per share as payment for serving as Chairman of the
Scientific Advisory Board (the "SAB"). These options will vest as follows
provided the director is then serving as Chairman of the SAB at the time of
vesting: 10,000 vested immediately, 10,000 after one full calendar year,
10,000 annually for each of the following three years and 50,000 on May 13,
2002. The vesting of the 50,000 options which vest in May 2002 may be
accelerated upon the occurrence of the following events: 25,000 options
upon the good faith determination by the Company's Board of Directors that
a substantive collaborative agreement with a major biopharmaceutical
company was a result of Dr. Carter's efforts and 25,000 options upon the
good faith determination by the Company's Board of Directors that Dr.
Carter made a material contribution towards the approval by the United
States Food and Drug Administration of a New Drug Application for the
marketing of ONCONASE in the United States. The Company recorded research
and development expense of $192,100 which was the fair value on the date of
issuance of that portion of the stock options that had vested as of July
31, 1999.
(Continued)
F-23
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
During the fiscal year ended July 31, 1997, 639,500 stock options were
exercised by both related and unrelated parties resulting in net proceeds
of approximately $2.6 million to the Company. The exercise prices of the
options ranged from $2.45 to $4.00 per share.
During the fiscal year ended July 31, 1997, 147,450 warrants were exercised
by both related and unrelated parties resulting in net proceeds of
approximately $737,250 to the Company. The exercise price of the warrants
was $5.00 per share.
In October 1997, the Company issued 75,000 stock options to a director with
an exercise price of $3.66 per share as payment for non-board related
services to be rendered. These options will vest as follows provided he has
been serving continuously on the Company's board of directors at the time
of vesting: 10,000 vested immediately; 10,000 after one full calendar year;
10,000 annually for each of the following three years; and 25,000 on
October 31, 2002. The vesting and exercisability of the 25,000 options
which vest in October 2002 may be accelerated upon the good faith
determination of the Company's Board of Directors that a substantive
collaborative agreement with a major pharmaceutical/biotechnology company
was a direct result of the director's efforts. A total general and
administrative expense of $185,600 is being amortized over a five-year
period which commenced in October 1997. As of July 31, 1999, the Company
recorded general and administrative expense of $86,800, based upon the fair
value of such 75,000 options on the date of issuance, amortized on a
straight-line basis over the vesting period of the grant.
In October 1997, the Company issued 12,000 five-year stock options to a
consultant with an exercise price of $3.91 per share as payment for
services to be rendered. An equal portion of these options vest monthly and
are to be amortized over a one-year period which commenced in October 1997.
In May 1998, the Company terminated the services of the consultant which
resulted in the cancellation of 5,000 options. The Company recorded a total
research and development expense for the remaining 7,000 options in the
amount of $15,800, based upon the fair value of such options on the date of
issuance, amortized on a straight-line basis over the vesting period of the
grant.
On December 9, 1997, the stockholders authorized the amendment of the
Company's Certificate of Incorporation to increase the number of authorized
shares of common stock, par value $.001 from 25,000,000 shares to
40,000,000 shares.
On December 9, 1997, the stockholders approved the 1997 Stock Option Plan
(the "1997 Plan"). The total number of shares of common stock authorized
for issuance upon exercise of options granted under the 1997 Plan is
2,000,000. Options are granted at fair market value on the date of the
grant and generally are exercisable in 20% increments annually over five
years starting one year after the date of grant and terminate five years
from their initial exercise date.
On January 23, 1998 the Securities and Exchange Commission (the "SEC")
declared effective a registration statement on Form S-3 for the offer and
sale by certain stockholders of up to 3,734,541 shares
(Continued)
F-24
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
of common stock. Of these shares (i) an aggregate of 2,737,480 shares were
issued to private placement investors in private placement transactions
which were completed during the period from March 1994 through March 1997
(the "Earlier Private Placements"), (ii) an aggregate of 409,745 shares are
issuable upon exercise of warrants which were issued to private placement
investors in the Earlier Private Placements and (iii) an aggregate of
587,316 shares may be issued, or have been issued, upon exercise of options
which were issued to option holders in certain other private transactions.
As a result of the delisting of the Company's Common Stock from the Nasdaq
SmallCap Market, upon the filing of the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1999 the Company no longer
qualified for the use of a Form S-3 registration statement for this
offering and thus, this registration statement is no longer effective.
In February 1998, the Company completed the February 1998 Private Placement
primarily to institutional investors which resulted in the issuance of
1,168,575 units at a unit price of $4.00. Each unit consisted of two (2)
shares of the Company's common stock, par value $.001 per share and one (1)
three-year warrant to purchase one (1) share of common stock at an exercise
price of $2.50 per share. The Company received proceeds of approximately
$4,202,000, net of costs associated with the private placement of
approximately $472,000. The placement agent also received warrants to
purchase an additional 116,858 units comprised of the same securities sold
to investors at an exercise price of $4.40 per unit as part of its
compensation.
In March 1998, the Company entered into a conversion agreement with one of
its raw material suppliers (the "Supplier") for the conversion of an
outstanding payable (the "Conversion Agreement") into 50,000 shares of the
Company's Common Stock. Pursuant to the Conversion Agreement, the Company
issued 50,000 shares of Common Stock to the Supplier. The fair value of the
Common Stock approximated the outstanding payable amount of $100,000.
In March 1998, the Company issued 75,000 stock options to a director with
an exercise price of $2.80 per share as payment for non-board related
services to be rendered. These options will vest as follows provided he has
been serving continuously on the Company's board of directors at the time
of vesting: 10,000 vested immediately; 10,000 after one full calendar year;
10,000 annually for each of the following three years; and 25,000 on March
24, 2003. The vesting and exercisability of the 25,000 options which vest
in March 2003 may be accelerated upon the good faith determination of the
Company's Board of Directors that a substantive collaborative agreement and
licensing or financing arrangement with a major
pharmaceutical/biotechnology company was a direct result of the director's
efforts. A total general and administrative expense of $138,100 is being
amortized over a five-year period which commenced in March 1998. As of July
31, 1999, the Company recorded general and administrative expense of
$52,900, based upon the fair value of such 75,000 options on the date of
issuance, amortized on a straight-line basis over the vesting period of the
grant.
(Continued)
F-25
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
On April 20, 1998 the SEC declared effective a registration statement on
Form S-3 for the offer and sale by certain stockholders of up to 3,918,299
shares of common stock. Of these shares (i) an aggregate of 2,337,150
shares of Common Stock were issued to the private placement investors in
the February 1998 Private Placement, (ii) an aggregate of 1,168,575 shares
may be issued upon exercise of the Warrants which were issued to the
private placement investors in the February 1998 Private Placement, (iii)
350,574 shares may be issued upon the exercise of the Placement Agent
Warrant which was issued to the placement agent in the February 1998
Private Placement and the Warrants issuable upon exercise of the Placement
Agent Warrant, (iv) 50,000 shares of Common Stock were issued to a Supplier
in connection with conversion of an outstanding accounts payable, and (v)
12,000 shares may be issued upon the exercise of options which were issued
as payment for services to be rendered. As a result of the delisting of the
Company's Common Stock from the Nasdaq SmallCap Market, upon the filing of
the Company's Annual Report on Form 10-K for the fiscal year ended July 31,
1999 the Company no longer qualified for the use of a Form S-3 registration
statement for this offering and thus, this registration statement is no
longer effective.
During the fiscal year ended July 31, 1998, the Company issued 833
three-year stock options as payment for services rendered in August 1997.
The options vested thirty days from the issuance date and have an exercise
price of $4.47 per share. The total general and administrative expense
recorded for these options was $1,700, based upon the fair value of such
options on the date of issuance.
During the fiscal year ended July 31, 1998, the Company issued 15,000
three-year stock options with an exercise price of $4.15 per share as
payment for services to be rendered. An equal portion of these options vest
monthly and a total general and administrative expense of $30,000 is being
amortized over a one-year period which commenced September 1997. The
Company also issued 5,000 three-year stock options with an exercise price
of $4.15 per share as payment for services to be rendered. Of these
options, 833 vested monthly for five months commencing September 30, 1997
and 835 vested on the last day of the sixth month. Total general and
administrative expense of $9,700 is being amortized over a six-month period
which commenced September 1997. As of July 31, 1998, the Company recorded
general and administrative expense of $37,100, based upon the fair value of
the 20,000 stock options on the date of the issuance, amortized on a
straight-line basis over the vesting periods of the grants.
During the fiscal year ended July 31, 1998, 4,950 shares of Common Stock
were issued upon the exercise of warrants by unrelated parties resulting in
net proceeds of approximately $11,100 to the Company. The exercise prices
of the warrants ranged from $2.20 to $2.50 per share.
On October 1, 1998 (the "Effective Date"), the Company entered into an
agreement with a consultant (the "Agreement"), resulting in the issuance of
200,000 five-year stock options with an exercise price of $1.00 per share
as payment for services to be rendered. These options will vest as follows:
an aggregate of20,000 shall vest on October 1, 1999 or upon signing of the
first corporate partnering deal, whichever shall occur first; an aggregate
of 2,500 of such options shall vest on the last day of each month over the
first twelve months after the Effective Date of the Agreement; the
remaining 150,000 options will vest on
(Continued)
F-26
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (Continued)
the third anniversary of the Effective Date of the Agreement provided that
the consultant is still providing consulting services to the Company under
the Agreement at that time. The vesting of such remaining options shall be
accelerated as follows: 50,000 of such options or the remainder of the
unvested options, whichever is less, shall vest upon the signing of each
corporate partnering deal in which the total consideration provided in the
Agreement is less than $5,000,000; 100,000 of such options or the remainder
of the unvested options, whichever is less, shall vest upon the signing of
each corporate partnering deal in which the total consideration provided in
the Agreement is greater than $5,000,000 but less than $10,000,000; 200,000
of such options or the remainder of the unvested options, whichever is
less, shall vest upon the signing of each corporate partnering deal in
which the total consideration provided in the Agreement is greater than
$10,000,000. Should the Company sell a controlling interest in its assets
and/or equity at any time after the signature of the Agreement, all options
will vest. The Company has recorded approximately $40,200 of general and
administrative expense based upon the fair value of the vested options
through July 31, 1999. Additional expense will be recorded in subsequent
periods through October 1, 2001 as the remainder of the options vest.
During the fiscal year ended July 31, 1999, the Company issued 5,000
three-year stock options as payment for services rendered. The options
vested immediately and have an exercise price of $1.43 per share. The total
general and administrative expense recorded for these options was $4,200,
based upon the fair value of such options on the date of issuance.
During the fiscal year ended July 31, 1999, the Company issued 40,701
shares of common stock for payment of legal services. The fair value of the
common stock in the amount of $16,631 was charged to operations.
During the fiscal year ended July 31, 1999, the Company issued 6,000 shares
of common stock for payment of services rendered. The fair value of the
common stock in the amount of $2,460 was charged to operations.
(7) Common Stock Warrants
During the fiscal years 1988 and 1991, the Board of Directors granted stock
purchase warrants to acquire a maximum of 400,000 shares of common stock at
$5.00 per share which were not exercised and expired.
The following table summarizes the activity of common stock warrants issued
in connection with the Private Placements completed in fiscal years 1994
through 1999:
(Continued)
F-27
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(7) Common Stock Warrants, (Continued)
<TABLE>
<CAPTION>
Warrants Exercise Price Expiration
-------- -------------- ----------
<S> <C> <C> <C>
Sold in March 1994 Private Placement 800,000 $ 5.00 3/21/97 to 6/21/97
Outstanding at July 31, 1994 800,000 5.00 3/21/97 to 6/21/97
Sold in September 1994 Private Placement 288,506 5.50 12/9/97 to 12/14/97
Sold in October 1994 Private Placement 40,000 5.50 1/21/98
Sold in September 1995 Private Placement 47,405 4.00 10/1/98
----------
Outstanding and exercisable at July 31, 1995 1,175,911 4.00 - 5.50 3/21/97 to 10/1/98
Issued to bank in connection with an amendment
to the Company's term loan 10,000 4.19 8/31/97
Sold in September 1995 Private Placement 8,540 4.00 10/1/98
Sold in June 1996 Private Placement 313,800 7.50 8/29/99 to 9/10/99
----------
Outstanding and exercisable at July 31, 1996 1,508,251 4.00 - 7.50 3/21/97 to 9/10/99
Exercised 147,450 5.00 3/21/97 to 6/21/97
Expired 652,550 5.00 3/21/97 to 6/21/97
----------
Outstanding and exercisable at July 31, 1997 708,251 4.00 - 7.50 12/9/97 to 9/10/99
Sold in February 1998 Private Placement 1,168,575 2.50 5/19/01
Issued to the Placement Agent in connection
with the February 1998 Private Placement
(see note 6) 350,574 2.20 - 2.50 5/19/01
Exercised 4,950 2.20 - 2.50 5/19/01
Expired 338,506 4.19 - 5.50 8/31/97 to 1/21/98
----------
Outstanding and exercisable at July 31, 1998 1,883,944 2.20 - 7.50 10/1/98 to 5/19/01
Expired 55,945 4.00 10/1/98
----------
Outstanding and exercisable at July 31, 1999 1,827,999 2.20 - 7.50 8/29/99 to 5/19/01
========= ===========
</TABLE>
(Continued)
F-28
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options
1993 Stock Option Plan
The Company's stockholders approved the 1993 stock option plan totaling
3,000,000 shares, which provide that options may be granted to employees,
directors and consultants. Options are granted at market value on the date
of the grant and generally are exercisable in 20% increments annually over
five years starting one year after the date of grant and terminate five
years from their initial exercise date.
1997 Stock Option Plan
The Company's stockholders approved the 1997 stock option plan totaling
2,000,000 shares, which provide that options may be granted to employees,
directors and consultants. Options are granted at market value on the date
of the grant and generally are exercisable in 20% increments annually over
five years starting one year after the date of grant and terminate five
years from their initial exercise date.
The following table summarizes stock option activity for the period August
1, 1994 to July 31, 1999 including options issued under the 1997 and 1993
stock option plans and the 1989 stock plan:
<TABLE>
<CAPTION>
Weighted Average
Shares Available Exercise Price Per
for Grant Shares Share
--------- ------ -----
<S> <C> <C> <C>
Balance August 1, 1994 1,926,841 5,935,337 $ 3.76
Granted (818,850) 818,850 2.60
Exercised -- (185,000) 2.36
Canceled -- (1,897,500) 4.30
------------- -----------
Balance July 31, 1995 1,107,991 4,671,687 3.39
Granted (296,205) 296,205 3.99
Exercised - (656,334) 2.92
Canceled 6,500 (235,333) 4.89
----------- ---------
Balance July 31, 1996 818,286 4,076,225 3.43
1997 Plan 2,000,000 - -
Granted (932,500) 932,500 4.90
Exercised - (639,500) 3.82
Canceled 484,845 (484,845) 4.70
---------- ----------
Balance July 31, 1997 2,370,631 3,884,380 3.56
Granted (234,333) 234,333 3.31
Canceled 91,100 (91,100) 3.81
---------- -----------
Balance July 31, 1998 2,227,398 4,027,613 3.54
Granted (595,000) 595,000 .62
Canceled 443,934 (555,737) 3.97
---------- -----------
Balance July 31, 1999 2,076,332 4,066,876 3.05
========= ========= ====
</TABLE>
(Continued)
F-29
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
The options outstanding at July 31, 1999 will expire between September 1,
1999 and March 24, 2008.
In August 1998, Ms. Shogen and Dr. Mikulski settled, and the court approved
the settlement, of a claim brought against them in the United States
District Court, District of New Jersey at Newark, New Jersey, by a
shareholder under Section 16(b) of the Securities Exchange Act of 1934 for
profits alleged to have been realized by Ms. Shogen and Dr. Mikulski in
transactions involving the Company's securities in 1988 and 1989. Claims
under section 16(b) are for profits calculated under such statute to have
been realized for sales and purchases of the Company's securities made
within a six month period. In this case the purchases which formed the
basis for this claim were issuances of shares of stock to Ms. Shogen and
Dr. Mikulski under employment agreements with the Company based upon the
Company's achievement of certain milestones. No allegations of fraud were
made. Ms. Shogen agreed to pay the Company $91,971.00 and Dr. Mikulski
agreed to pay the Company $72,903.00. Such payments are to be made in a
form acceptable to the Company whether in cash, shares of the Company's
common stock or options to purchase the Company's common stock, with 25% of
such payments having been made in August 1998 and the remainder of such
amounts payable in three equal installments in August 1999, 2000 and 2001.
The initial payments were made by the cancellation of options to purchase
44,999 shares of common stock owned by Ms. Shogen and the cancellation of
options to purchase 35,669 shares of common stock owned by Dr. Mikulski.
The obligation to make the remaining payments is secured by the pledge to
the Company of options to purchase 154,908 and 122,136 shares of common
stock by Ms. Shogen and Dr. Mikulski, respectively. In August 1999, Ms.
Shogen paid the balance in full by the cancellation of options to purchase
134,995 shares owned by Ms. Shogen and Dr. Mikulski paid an installment
equal to one-third of the balance by the cancellation of options to
purchase 35,367 shares owned by Dr. Mikulski.
On August 31, 1999 the Company entered into a separation agreement and
general release with Ms. Gail E. Fraser, former Chief Financial Officer
pursuant to which the Company and Ms. Fraser agreed that an aggregate of
395,000 options granted to Ms. Fraser under the 1993 Plan, all of which had
vested as of the Date of Resignation will remain vested and exercisable
until December 30, 2000 and an aggregate of 70,000 options granted under
the 1993 Plan which had not vested on the Date of Resignation will be
deemed vested as of the Date of Resignation and will remain exercisable
until December 30, 2000.
The weighted-average fair value per option at the date of grant for options
granted during the fiscal years 1999, 1998 and 1997 were $0.36, $2.03 and
$3.02, respectively. The fair value was estimated using the Black-Scholes
options pricing model based on the following assumptions:
1999 1998 1997
------- ------- -------
Expected dividend yield 0% 0% 0%
Risk-free interest rate 6.00% 6.00% 6.00%
Expected stock price volatility 93.99% 88.15% 59.78%
Expected term until exercise (years) 5.59 6.17 6.20
(Continued)
F-30
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
Pro forma net loss and loss per share reflecting approximate compensation
cost for the fair value of stock options awarded are as follows:
1999 1998 1997
------------- ------------- -------------
Net Loss:
As reported $ (3,156,636) $ (6,387,506) $ (5,018,867)
Pro forma (3,429,057) (6,697,066) (5,724,076)
Loss per common share:
As reported $ (0.18) $ (0.40) $ (0.34)
Pro forma (0.22) (0.42) (0.39)
The pro forma effects on net loss and loss per share for 1999, 1998 and
1997 may not be representative of the pro forma effects in future years
since compensation cost is allocated on a straight-line basis over the
vesting periods of the grants, which extend beyond the reported years.
The following table summarizes information concerning options outstanding
at July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------- ----------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 7/31/99 Term (Years) Price at 7/31/99 Price
------ ---------- ------------ ----- ---------- -----
<S> <C> <C> <C> <C> <C>
$ 0.29 - 1.99 595,000 4.59 $ 0.62 375,000 $ 0.48
2.00 - 2.99 335,250 2.41 2.61 260,250 2.58
3.00 - 3.99 2,360,948 2.34 3.21 2,305,948 3.19
4.00 - 4.99 563,178 2.20 4.29 514,178 4.26
5.00 - 5.99 167,500 4.58 5.17 102,500 5.18
6.00 - 6.99 45,000 3.42 6.97 45,000 6.97
=========== --------- ==== ==== --------- ====
4,066,876 3,602,876
========= =========
</TABLE>
Stock option activity prior to adoption of SFAS No. 123 is as follows:
1981 Non-Qualified Stock Option Plan
In 1981, the Board of Directors adopted a non-qualified stock option plan
and had reserved 300,000 shares for issuance to key employees or
consultants. Options were nontransferable and expired if not exercised
within five years. Option grants of 60,000 shares expired unexercised by
July 31, 1991.
(Continued)
F-31
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
Non-Qualified Stock Options
The Board of Directors issued non-qualified stock options which were not
part of the 1981 non-qualified stock option plan or the 1989 Stock Plan as
follows:
Shares Price Range
------ -----------
Granted 1,782,000 $ 3.00-3.87
Exercised (276,989) 3.00-3.50
Canceled (106,000) 3.00-3.50
Expired (649,011) 3.00-3.50
Granted pursuant to conversion of
certain liabilities:
Related party 1,324,014 3.20
Unrelated party 73,804 3.20
Repurchased stock options (102,807) 3.20
---------
Balance at July 31, 1994 2,045,011 3.20-3.87
========= ===========
In connection with certain private placements, the Board of Directors had
included in the agreements, options to purchase additional shares of the
Company's common stock as follows:
Shares Price Range
------ -----------
Granted (42,167 options were repriced and extended 894,887 $2.50-7.00
as described in note 8)
Exercised (81,000) 3.97-6.50
Expired (201,720) 3.97-6.50
--------
Balance at July 31, 1994 612,167 2.50-7.00
======== ==========
1989 Stock Plan
On February 14, 1989, the Company adopted the Alfacell Corporation 1989
Stock Plan (the "1989 Stock Plan"), pursuant to which the Board of
Directors could issue awards, options and grants. The maximum number of
shares of common stock that could have been issued pursuant to the option
plan was 2,000,000.
No more options are being granted pursuant to this plan. The per share
option exercise price was determined by the Board of Directors. All options
and shares issued upon exercise were nontransferable and forfeitable in the
event employment was terminated within two years of the date of hire. In
the event the option was exercised and said shares were forfeited, the
Company would return to the optionee the lesser of the current market value
of the securities or the exercise price paid.
The stock option activity is as follows:
(Continued)
F-32
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (Continued)
Shares Price Range
------ -----------
Granted, February 14, 1989 3,460,000 $ 3.50-5.00
Options issued in connection
with share purchase 36,365 2.75
Expired (1,911,365) 2.75-5.00
Canceled (10,000) 5.00
----------
Balance at July 31, 1994 1,575,000 3.50-5.00
========== ===========
As of fiscal year ended July 31, 1994, 1,703,159 options were granted under
the 1993 stock option plan.
(9) Stock Grant and Compensation Plans
The Company had adopted a stock grant program effective September 1, 1981,
and pursuant to said plan, had reserved 375,000 shares of its common stock
for issuance to key employees. The stock grant program was superseded by
the 1989 Stock Plan and no further grants will be given pursuant to the
grant plan. The following stock transactions occurred under the Company's
stock grant program:
Year Amount
ended Fair of
July 31, Shares Value Compensation
-------- ------ ----- ------------
1983 20,000 $ 5.50 $ 110,000
1984 19,750 5.125 101,219
1985 48,332 5.125-15.00 478,105
1986 11,250 5.125-15.00 107,032
1988 19,000 3.50 6,500
====== ==== =====
On January 26, 1984, the Company adopted a stock bonus plan for directors
and consultants. The plan was amended on October 6, 1986, to reserve
500,000 shares for issuance under the plan and to clarify a requirement
that stock issued under the Plan could not be transferred until three years
after the date of the grant. The stock bonus plan for directors and
consultants was superseded by the 1989 Stock Plan and no further grants
will be given pursuant to the stock bonus plan for directors and
consultants. The following stock transactions occurred under the Company's
stock bonus plan:
Year Amount
ended Fair of
July 31, Shares Value Compensation
-------- ------ ----- ------------
1984 130,250 $ 2.50-3.88 $ 385,917
1985 99,163 3.50-15.00 879,478
1985 (42,500) 2.50 (105,825)*
1986 15,394 9.65-15.00 215,400
1987 5,000 15.00 75,000
====== ===== =======
* Shares granted in 1984 were renegotiated in 1985 and canceled as a
result of the recipient's termination.
(Continued)
F-33
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Grant and Compensation Plans, (Continued)
1989 Stock Plan
Under the 1989 Stock Plan, one million shares of the Company's common stock
were reserved for issuance as awards to employees. The 1989 Stock Plan also
provides for the granting of options to purchase common stock of the
Company (see note 8). In addition, the 1989 Stock Plan provided for the
issuance of 1,000,000 shares of the Company's common stock as grants. To be
eligible for a grant, grantees must have made substantial contributions and
shown loyal dedication to the Company.
Awards and grants were authorized under the 1989 Stock Plan during the
following fiscal years:
Year ended Amount of
July 31, Shares Fair Value Compensation
-------- ------ ---------- ------------
1989 30,000 $ 5.00 $ 150,000
1990 56,000 6.00 336,000
1991 119,000 4.00 476,000
1992 104,000 2.75 286,000
1993 117,000 2.00 234,000
1994 5,000 3.00 15,000
===== ==== ======
Compensation expense is recorded for the fair value of all stock awards and
grants over the vesting period. The 1994 stock award was immediately
vested. There were no stock awards in fiscal 1999, 1998 or 1997.
(10) Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
No. 109). Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect for all years in which the temporary differences are expected to
reverse.
At July 31, 1999 and 1998, the tax effects of temporary differences that
give rise to the deferred tax assets are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Excess of book over tax depreciation $ 37,035 $ 21,035
Accrued expenses 311,458 159,623
Federal and state net operating loss carryforwards 15,227,316 14,407,990
Research and experimentation and investment tax
credit carry forwards 843,418 753,314
------------ ------------
Total gross deferred tax assets 16,419,227 15,341,962
Valuation allowance (16,419,227) (15,341,962)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
F-34
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(10) Income Taxes, (Continued)
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, 1999, the Company has federal net operating loss carryforwards
of approximately $40,296,000 that expire in the years 2000 to 2019. The
Company also has investment tax credit carryforwards of $33,015 and
research and experimentation tax credit carryforwards of $810,403 that
expire in the years 2000 to 2019. Ultimate utilization/availability of such
net operating losses and credits may be significantly curtailed if a
significant change in ownership occurs in accordance with the provisions of
the Tax Reform Act of 1986.
(11) Other Financial Information
Accrued expenses as of July 31, consist of the following:
1999 1998
-------- ----------
Payroll and payroll taxes $ 50,160 $ 38,147
Professional fees 28,000 98,568
Clinical trial grants 683,515 781,883
Clinical supplies -- 171,600
Other 16,975 2,700
-------- ----------
$778,650 $1,092,898
======== ==========
Other current assets as of July 31, consist of the following:
1999 1998
-------- --------
Insurance $ 65,330 $ 65,661
NIH research 14,579 31,625
Other 66,799 19,901
-------- --------
$146,708 $117,187
======== ========
(12) Commitments and Contingencies
On July 23, 1991, the Board of Directors authorized the Company to pay to
the Chief Executive Officer of the Company an amount equal to 15% of any
gross royalties which may be paid to the Company from any license(s) with
respect to the Company's principal product, ONCONASE, or any other products
derived from amphibian source extract, produced either as a natural,
synthesized, and/or genetically engineered drug for which the Company is
the owner or co-owner of the patents, or acquires such rights in the
future, for a period not to exceed the life of the patent. If the Company
manufactures and markets its own drugs, then the Company will pay to the
Chief Executive Officer an amount equal to 5% of gross sales from any
products sold during the life of the patents. In addition, the agreement
provides for a reduction of any indebtedness to the Chief Executive Officer
in the amount of $200,000 upon the Company entering into a licensing
agreement for its principal product.
(Continued)
F-35
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(12) Commitments and Contingencies, (Continued)
The Company has product liability insurance coverage in the amount of
$6,000,000 for clinical trials. No product liability claims have been filed
against the Company. If a claim arises and the Company is found liable in
an amount that significantly exceeds the policy limits, it may have a
material adverse effect upon the financial condition of the Company.
(13) Research and Development Agreement
In November 1992, the Company entered into a CRADA with the NIH. In
accordance with this CRADA, the NIH will perform research for the Company
on potential uses for its drug technology. During the term of this research
and development agreement, which expired in July 31, 1999, the Company is
obligated to pay approximately $5,300 per month to the NIH. Total research
and development expenses under this arrangement amounted to $64,000 for the
three years ended July 31, 1999, 1998 and 1997.
In August 1995, the Company entered into a CRADA with the NCI. In
accordance with this CRADA, the NCI will perform research for the Company
on potential uses for its drug technology. During the term of this research
and development agreement, which expired in August 1999, the Company was
obligated to pay approximately $5,200 per month to the NCI. In September
1999, this research and development agreement was amended to expire in
August 2000 without additional cost for the Company. Total research and
development expenses under this arrangement amounted to $62,400, $60,400
and $59,100 for the fiscal years ended July 31, 1999, 1998 and 1997,
respectively.
(14) 401 (K) Savings Plan
Effective October 1, 1998, the Company adopted a 401(K) Savings Plan (the
"Plan"). Qualified employees may participate by contributing up to 6% of
their gross earnings to the Plan subject to certain Internal Revenue
Service restrictions. The Company will match an amount equal to 50% of the
first 6% of each participant's contribution. The Company's contribution is
subject to a vesting schedule of 0%, 25%, 50%, 75% and 100% for employment
of less than one year, one year, two years, three years and four years,
respectively, except for existing employees which vesting schedule was
based from the date the Plan was adopted. For the fiscal year ended July
31, 1999, the Company's contribution to the Plan amounted to $16,052.
F-36
Exhibit 10.20
PLEASE READ CAREFULLY
IF YOU DO NOT UNDERSTAND THE DOCUMENT FULLY,
DO NOT SIGN IT
CONSULT WITH AN ATTORNEY BEFORE SIGNING
THIS SEPARATION AGREEMENT AND GENERAL RELEASE
INCLUDES A RELEASE OF ANY AND
ALL KNOWN AND UNKNOWN CLAIMS AGAINST THE COMPANY
SEPARATION AGREEMENT and GENERAL RELEASE (the "Agreement") made as of this
31st day of August 1999, between Gail Fraser ("Fraser") and Alfacell
Corporation, a Delaware Corporation, and related and/or affiliated companies
(the "Company").
WHEREAS, the Company and Fraser wish to resolve and to fully and finally
settle, compromise and forever discharge any and all claims and issues that were
raised, or which could have been raised, or which Fraser has now or may ever
have had against the Company;
NOW THEREFORE, in consideration of the mutual promises contained herein, it
is agreed as follows:
1. Fraser has resigned as Vice President Finance, Chief Financial Officer,
Director and an employee of the Company, and for purposes of this Agreement the
parties agree that her resignation was effective as of June 23, 1999 (the "Date
of Resignation"). The parties agree that Fraser is not entitled to any
compensation from the Company subsequent to the Date of Resignation, except as
specifically set forth herein.
2. In full satisfaction of the Company's obligations to Fraser and in
consideration for all of Fraser's agreements and covenants set forth herein, the
Company agrees:
a) For the period commencing on the Date of Resignation and terminating
July 31, 1999, the Company shall pay Fraser the salary which would otherwise be
payable to her during that period based on her annual salary as of the Date of
Resignation. Such salary shall be payable in accordance with the Company's
standard payroll procedures (less customary statutory withholdings). It is
understood and agreed that all payments made by the Company to Fraser for
payroll periods subsequent to the Date of Resignation (except for the two weeks
vacation pay paid to Fraser on July 30, 1999) shall be credited to the Company's
obligation to Fraser under this Section 2(a).
b) The Company and Fraser acknowledge that as of the Date of Resignation
(i) Fraser owned options to purchase an aggregate of 395,000 shares of the
Common Stock, $0.001 par value of the Company (the "Common Stock")which were
granted to Fraser under the Company's 1993 Stock Option Plan, as amended (the
"Plan") and all of which had vested as of the Date of Resignation (the "Vested
Options"), and (ii) pursuant to the terms of the Plan, the Vested Options would
terminate in their entirety on various dates on or before December 30, 1999. The
Company and Fraser agree that, notwithstanding the foregoing, the Vested Options
will remain exercisable until, and will terminate on, December 30, 2000. The
Company and Fraser agree that options to purchase an aggregate of 70,000 shares
of Common Stock (the "Unvested Options") which were granted to Fraser under the
Plan and which were not vested as of the Date of Resignation, will be deemed to
have vested as of the Date of Resignation and will remain exercisable until, and
will terminate on, December 30, 2000. The Company represents that the
Compensation Committee of its board of directors has specifically waived the
provisions of the Plan that would prohibit the Unvested Options from vesting in
accordance with the preceding sentence and which would have caused both the
Vested Options and the Unvested Options to terminate on the 190th day after the
termination of Fraser's employment with the Company. Except for the forgoing
modifications, the terms of the Vested Options, the Unvested Options and the
Plan shall remain unchanged.
- 1 -
<PAGE>
c) The Company will continue and assume the payments for Fraser's and/or
her dependents' (who are qualified beneficiaries) health insurance until July
27, 1999 under the terms and conditions currently applicable to full-time
employees of the Company to the extent available to full-time employees during
this period, and under the terms and conditions of the New Jersey Group
Continuation ("NJGC"), provided, however, that if Fraser receives or is offered
health insurance pursuant to a new employment arrangement and she accepts that
employment, the Company's obligation under this Section 2(c) will terminate. All
coverage provided to Fraser and/or her dependents pursuant to this Section 2(c)
shall be subject to the provisions of the applicable insurance policies and the
continuation provisions of NJGC (and any changes or amendments with respect to
such plans, policies or statute).
3. Fraser agrees that the benefit package set forth in Section 2 is more
than the Company is required to pay under its normal policies and procedures.
4. This Agreement is not an admission of wrongdoing or liability of any
kind by the Company or any of its principals or representatives and any such
wrongdoing and liability is expressly denied.
5. (a) As consideration for the performance of promises of the Company
herein, Fraser, for herself, her heirs, successors, and assigns, does hereby
release and forever discharge the Company and its officers, directors, agents,
employees, successors and assigns (the "Releasees") from any and all liability,
damages, claims, complaints, suits in equity and actions at law, of any nature
whatever, tort or contract, and in any forum whatever, whether such claims are
known to exist or hereinafter become known, arising out of or related to
Fraser's employment with the Company and the cessation of her employment with
the Company including but not limited to claims of wrongful discharge, breach of
contract, breach of an implied covenant of good faith and fair dealing, fraud,
misrepresentation, defamation, slander, libel, personal injury, negligent or
intentional infliction of emotional harm or distress, wrongful denial of
severance pay and/or discrimination based on race, national origin, sex,
religion and/or disability, and including but not limited to claims arising
under or based upon the Age Discrimination in Employment Act of 1967, as amended
("ADEA"), Title VII of the Civil Rights Act of 1964, as amended, the Civil
Rights Act of 1991, the Equal Pay Act of 1963, the Americans With Disabilities
Act of 1990, the New Jersey Law Against Discrimination, N.J.S.A. 10:5-12a, and
any other laws or regulations, state or federal.
Fraser agrees to discharge, indemnify and hold harmless the Company and its
officers, directors, agents, employees, successors and assigns from any and all
liability from such claims asserted by Fraser, or by another on behalf of Fraser
at Fraser's specific request.
(b) Fraser further agrees that she will not institute or authorize any
other party, either governmental or otherwise, to institute any administrative
or legal proceedings against the Company, its officers, agents, employees,
successors and assigns as a result of, or in connection with, any claims arising
out of or related to Fraser's employment with the Company and the cessation of
her employment with the Company.
c) The Company for itself and fo r its affiliates, successors and assigns
does hereby fully release and forever discharge Fraser, her heirs, executors,
administrators, successors and assigns, of and from any and all claims arising
out of or related to Fraser's employment with the Company and the cessation of
her employment with the Company, whether or not now known or suspected, by
reason of any actual or alleged act, omission, transaction, practice or
occurrence, or other matter up to and including the date of this Agreement.
6. Each party further understands and agrees that the other party is in no
way liable or responsible for such party's attorney's fees and costs, if any, in
this matter.
- 2 -
<PAGE>
7. Fraser represents that she has not filed and agrees that she will not
file any claims or causes of action of any kind against the Releasees arising
out of or related to Fraser's employment with the Company and the cessation of
her employment with the Company with any local, state or federal agency, court
or tribunal, nor does she have any knowledge or reason to believe that anyone
else has filed such a charge or complaint on her behalf. If Fraser should file
such a charge or complaint, or if a charge or complaint is filed on her behalf,
or if any such agency shall ever assume jurisdiction against the Releasees on
behalf of Fraser, Fraser agrees that the compensation and benefits provided to
her by the Company under this Agreement shall be her sole remedy against the
Releasees and she shall not seek or accept any further compensation or damages
from the Company or the Releasees. Fraser agrees not to assist or aid any other
person in bringing, prosecuting, or maintaining any claim, charge, action or
proceeding against the Releasees unless required by law to do so, and then only
to the extent required by law.
8. a) The terms of this Agreement are to be kept strictly confidential by
each party. Unless compelled to testify at a deposition, administrative
proceeding, trial, or as required by law, government rule or regulation, each
party shall refrain from issuing to the public, including without limitation,
other potential or present plaintiffs, claimants or complainants, press or
media, any article, memorandum, release, publicity or statement, whether oral or
written, concerning the terms or conditions of this Agreement, except that each
party may discuss such terms with its respective legal counsel, tax advisor,
accountant, and financial institution or potential lenders, and Fraser may
discuss such terms with her husband, provided that all such persons abide by the
confidentiality provisions herein applicable to the party making such disclosure
to such person. Notwithstanding the foregoing, the parties acknowledge that the
Company may be required to publicly disclose the terms of this Agreement and to
file this Agreement as an exhibit with the SEC in order to comply with its
disclosure obligations under applicable securities laws and regulations.
Notwithstanding the foregoing, either party can discuss this Agreement publicly
to the extent its terms are disclosed in a filing by the Company with the SEC.
b) Fraser agrees that the Company has issued a press release and may make
further public statements it deems necessary to inform the public of her
resignation which shall refer to such resignation as based on the mutual
agreement of Fraser and the Company.
9. a) The Company agrees not to make any disparaging or negative comments
concerning Fraser. Fraser agrees that she will not make any disparaging or
negative comments concerning the Company, any officers, directors, employees and
consultants to the Company, or concerning the Company's drug products, clinical
trials, technologies or therapies in any stage of development, nor will he take
any action which could have reasonably been viewed as to be intended to be
detrimental to the Company.
b) Fraser expressly agrees that should she breach any of the material
covenants and provisions contained herein, the Company's obligation to make the
payments provided in Section 2(a) shall terminate immediately, the Unvested
Options described in Section 2(b) and then held by Fraser shall terminate
immediately and the Vested Options Described in Section 2(b) and then held by
Fraser shall be exercisable only to the extent provided under their original
terms and subject to the provisions of the Plan. Any such breach shall be
subject to the dispute resolution provisions in Section 11. The foregoing shall
not be the Company's exclusive remedy for any such breach.
c) The Company expressly agrees that should it breach any of the material
covenants and provisions contained herein, Fraser's obligations hereunder shall
terminate immediately. Any such breach shall be subject to the dispute
resolution provisions in Section 11. The foregoing shall not be Fraser's
exclusive remedy for any such breach.
d) Notwithstanding the foregoing, Fraser may provide testimony to the FDA
or any other federal agency if required to by an administrative or judicial
subpoena.
- 3 -
<PAGE>
10. a) Fraser agrees to keep secret and shall not use all confidential
information of the Company and its subsidiaries, including, without limitation,
information regarding trade secrets, "know- how," information concerning
clinical trials, consultant contracts, details of author or consultant
contracts, operational methods, marketing plans or strategies, product
development techniques or plans, business acquisition plans, new personnel
acquisition plans, methods of manufacture, technical processes, designs and
design projects, investigations, searches, other confidential documents, whether
or not so labeled, and other business affairs of the Company and its
subsidiaries learned by her at any time, and shall not disclose them to anyone
outside of the Company.
b) All memoranda, notes, lists, records, work product and other documents
whether or not labeled "Confidential" (and all copies thereof), made or compiled
by Fraser or made available to Fraser, concerning the Company, shall be the
Company's property and shall be delivered to the Company promptly upon the
execution of this Agreement.
c) Employee agrees that all methods, analyses, reports, plans and all
similar or related information which (i) relate to the Company and which (ii)
were conceived, developed or made by Fraser in the course of her relationship
with the Company belong to the Company. Fraser will promptly disclose such work
product to the Company and perform all actions reasonably requested by the
Company to establish and conform such ownership by the Company.
d) Fraser agrees that she shall not for the period commencing on the Date
of Resignation through December 30, 2000, directly or indirectly, for her own
account or jointly with another, or for or on behalf of any current or potential
competitor of the Company, employer or other entity, solicit, induce or
encourage any person to leave the employment of the Company or any of its
parents, subsidiaries, affiliates, divisions, related entities and their
successors or assigns, or solicit, induce or encourage any business or account
of the Company in which Fraser has participated or in any way been active prior
to the termination of Fraser's employment to terminate their employment of, or
otherwise terminate their relations with, the Company.
e) For the period commencing on the Date of Resignation through December
30, 2000, Fraser shall not engage directly or indirectly in or become employed
by, serve as an agent or consultant to, or become a partner, principal,
affiliate, representative or stockholder of any partnership, corporation or any
other entity which conducts research on, manufactures, distributes, or develops
RNase-based pharmaceuticals provided, however, that Fraser's ownership of less
than five percent of the issued and outstanding stock of any corporation whose
stock is traded on an established securities market shall not constitute a
breach of this provision; and provided further, however, that the restriction
set forth in this Section 10(e) shall not apply to any company which has
acquired a license for the Company's Onconase product from the Company.
11. a) If either party believes that the other party has committed or is
about to commit a breach of the Agreement, counsel for such party shall notify
counsel for such other party of the substance of the information which forms the
basis for such belief. Counsel for such other party shall provide a response and
both counsel shall attempt to reach an amicable resolution of the matter prior
to pursuing the remedies set forth herein.
b) If Fraser breaches or threatens to commit a breach of any of the
provisions of Section 10, the Company shall have, without limitation, the
following rights and remedies, severally enforceable, in addition to any other
rights and remedies available to the Company under this Agreement or otherwise:
(i) The right to have the covenants contained in Section 10
specifically enforced by any court having equity jurisdiction, it being
agreed that any such breach or threatened breach will cause irreparable
injury to the Company and that money damages will not provide an adequate
remedy to the Company.
(ii) The right to require Fraser to account for and pay over to the
Company all compensation, profits, monies, accruals, increments or other
benefits (collectively, "Benefits") derived or received by Fraser as the
result of any transaction(s) constituting a breach of any of the covenants
contained in Section 10.
- 4 -
<PAGE>
(iii) Fraser will forfeit all benefits received under this Agreement
(except for the two weeks vacation pay paid to Fraser on July 30, 1999),
the Company's obligation to make the payments provided in Section 2(a)
shall terminate immediately, the Unvested Options described in Section 2(b)
and then held by Fraser shall terminate immediately and the Vested Options
described in Section 2(b) and then held by Fraser shall be exercisable only
to the extent provided under their original terms and subject to the
provisions of the Plan, except in each case with respect to those benefits
and payments covered by the Employees Retirement Investment Security Act.
c) The Company and Fraser agree that if any court determines that any of
the covenants contained in Section 10, or any part thereof, are unenforceable
because of the duration or geographic scope of such provision, such court shall
have the power to reduce the duration or scope of such provision, as the case
may be, and, in its reduced form, such provision shall then be enforceable.
12. Fraser hereby represents that she has been advised by the Company (a)
that the execution of this Agreement is a very important decision which should
not be made before discussing it with her family, and (b) Fraser agrees that the
Company has recommended that she consult with an attorney before signing this
Agreement. Fraser also acknowledges that she received a copy of this Agreement
on August 31, 1999 and that she has been given up to 22 calendar days to review
and consider it.
13. Fraser expressly states that she has carefully reviewed the Company's
proposals concerning Fraser's separation from the Company and acknowledges and
agrees that she fully understands the terms and conditions of this Agreement,
and expressly agrees that the signing of this document is done voluntarily.
14. This Agreement is made and entered into in the State of New Jersey and
shall in all respects be interpreted, governed and by the laws of the State of
New Jersey and to be enforced by the federal or state courts in the State of New
Jersey.
15. This Agreement sets forth the entire agreement between the parties, and
fully supersedes any and all prior agreements or understandings which may have
existed between the parties, and may not be modified except by a writing signed
by all parties; provided that nothing in this Agreement shall affect or modify
Fraser's Indemnity Agreement with the Company dated July 21, 1995, attached
hereto as Exhibit A, which shall continue in full force and effect in accordance
with its terms. The Company shall continue to include Fraser as a covered person
under its directors' and officers' insurance policy for as long as such coverage
is provided for the Company's officers and directors, provided that the
Company's obligation to provide such coverage to Fraser shall terminate on
December 31, 2005.
16. THIS AGREEMENT MAY BE REVOKED BY FRASER BY DELIVERING A SIGNED WRITTEN
NOTICE OF SUCH REVOCATION TO THE COMPANY, ATTENTION OF KUSLIMA SHOGEN WITHIN
EIGHT (8) DAYS AFTER THIS AGREEMENT IS SIGNED (THE "REVOCATION PERIOD").
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT, THE PLAN
OR THE AGREEMENTS REPRESENTING THE VESTED OPTIONS AND THE UNVESTED OPTIONS,
NEITHER THE VESTED OPTIONS NOR THE UNVESTED OPTIONS MAY BE EXERCISED BY FRASER
UNTIL THE REVOCATION PERIOD HAS EXPIRED. IN THE EVENT FRASER SHALL REVOKE THIS
AGREEMENT PRIOR TO THE REVOCATION PERIOD THE VESTED OPTIONS AND UNVESTED OPTIONS
SHALL REVERT TO THEIR ORIGINAL TERMS.
ALFACELL CORPORATION:
/s/ GAIL FRASER By: /s/ KUSLIMA SHOGEN
Gail Fraser Kuslima Shogen
Chairman and Chief Executive Officer
- 5 -
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Alfacell Corporation:
We consent to incorporation by reference in the registration statements (No.
33-81308) on Form S-8 and (Nos. 333-29313 and 333-48975) on Form S-3 of Alfacell
Corporation of our report dated November 2, 1999, relating to the balance sheets
of Alfacell Corporation as of July 31, 1999 and 1998, and the related statements
of operations, stockholders' equity (deficiency), and cash flows for each of the
years in the three-year period ended July 31, 1999 and the period from August
24, 1981 (date of inception) to July 31, 1999, which report appears in the July
31, 1999 annual report on Form 10-K of Alfacell Corporation. Our report dated
November 2, 1999, as it relates to the financial statements for the period from
August 24, 1981 (date of inception) to July 31, 1999, is based on the report of
other auditors as to the amounts included therein for the period from August 24,
1981 (date of inception) to July 31, 1992.
Our report dated November 2, 1999 contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations and has limited
liquid resources which raise substantial doubt about its ability to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
/s/ KPMG LLP
KPMG LLP
Short Hills, New Jersey
November 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Alfacell
Corporation Balance Sheet as of July 31, 1999 and the Statements of Operations
for the year ended July 31, 1999 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Jul-31-1999
<PERIOD-END> Jul-31-1999
<CASH> 1,383,133
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,529,841
<PP&E> 1,143,637
<DEPRECIATION> 944,830
<TOTAL-ASSETS> 1,728,648
<CURRENT-LIABILITIES> 971,448
<BONDS> 0
0
0
<COMMON> 17,286
<OTHER-SE> 739,914
<TOTAL-LIABILITY-AND-EQUITY> 1,728,648
<SALES> 0
<TOTAL-REVENUES> 168,372
<CGS> 0
<TOTAL-COSTS> 3,322,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,377
<INCOME-PRETAX> (3,156,636)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,156,636)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,156,636)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
Exhibit 99.1
FACTORS TO CONSIDER IN CONNECTION WITH FORWARD LOOKING STATEMENTS
Development Stage Company, Accumulated Deficit, Stockholders' Deficienc and
Uncertainty of Future Profitability. The Company is a development stage company
which is subject to all of the risks and uncertainties of such a company,
including uncertainties of product development, constraints on financial and
personnel resources and dependence upon and need for third party financing. The
Company's profitability will depend primarily upon its success in developing,
obtaining regulatory approvals for, and effectively marketing ONCONASE. ONCONASE
has not been approved by the United States Food and Drug Administration ("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
products under development will be successfully developed or that such products
will generate revenues sufficient to enable the Company to earn a profit. Since
the Company's incorporation in 1981, a significant source of cash for the
Company has been public and private placements of its securities. At July 31,
1999, the Company had an accumulated deficit of approximately $54,954,000, and a
total stockholders' equity of approximately $757,000. 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. To date, the Company has not received any such revenues.
There can be no assurance, however, that the Company will be able to
successfully consummate any such arrangements.
Need for, and Uncertainty of, Future Financing. The Company is currently funding
research and development of its products from cash reserves. Until the Company's
operations generate significant revenues, cash reserves will continue to fund
operations. The Company believes that its cash and cash equivalents as of July
31, 1999 will be sufficient to meet its anticipated cash needs through January
2000. The report of the Company's independent auditors on the Company's
financial statements, included elsewhere herein, includes an explanatory
paragraph which states that the Company's recurring losses and limited liquid
resources 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 various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances, sales of tax
carryforwards and research and development tax credits and revenues from the
commercial sale of ONCONASE, however there can be no assurance that such
additional funds will become available. The ability of the Company to raise
additional capital through the sale of its securities will primarily depend on
the outcome of the Phase III clinical trial for ONCONASE for treating
unresectable malignant mesothelioma. However, the ability to raise funding at
that time may be dependent upon other factors including without limitation,
market conditions, and there can be no assurance that such funds will be
available. The Company is in the process of analyzing the Phase III data of its
clinical trial for unresectable malignant mesothelioma in preparation for a
Pre-NDA meeting with the FDA.
Uncertainty Associated with Clinical Testing. Historical results of clinical
testing of approved products and those under development are not necessarily
predictive of future results. There can be no assurance that clinical studies of
products under development will demonstrate the safety and efficacy of such
products. The failure to adequately demonstrate the safety and efficacy of a
therapeutic product could
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delay or prevent regulatory approval of the product. There can be no assurance
that unacceptable toxicities or side effects will not occur at any time in the
course of human clinical trials. The appearance of any such unacceptable
toxicities or side effects could interrupt, limit, delay or abort the
development of any of the Company's drugs. Furthermore, there can be no
assurance that disease resistance will not limit the efficacy of the Company's
current and future drugs, if any. Delays in planned patient enrollment in the
Company's current clinical trials or future clinical trials may result in
increased costs, program delays or both.
Government Regulation; No Assurance of FDA Approval. The pharmaceutical industry
in the United States is subject to stringent governmental regulation. The sale
of ONCONASE for use in humans in the United States will require the prior
approval of the FDA. Similar approvals by comparable regulatory agencies are
required in most foreign countries. The FDA has established mandatory procedures
and safety standards which apply to the clinical testing, 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 data from the Phase II and Phase
III clinical trials for unresectable malignant mesothelioma will be sufficient
for an NDA approval, or 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.
Uncertain Ability to Protect Patents and Proprietary Technology. The Company
believes it is important to develop new technology and improve its existing
technology. When appropriate, the Company files patent applications to protect
inventions in which it has an ownership interest. The Company owns six U.S.
Patents: (i) U.S. Patent No. 4,888,172 issued in 1989, which covers a
pharmaceutical produced from fertilized frog eggs and the methodology for
producing it; (ii) U.S. Patent No. 5,559,212 issued in 1996 which covers the
amino acid sequence of ONCONASE; (iii) U.S. Patents Nos. 5,529,775 and 5,540,925
issued in 1996 and U.S. Patent No. 5,595,734 issued in 1997, which cover
combinations of ONCONASE with certain other pharmaceuticals; and (iv) U.S.
Patent No. 5,728,805 issued in 1998 which covers a family of variants of
ONCONASE. The Company owns three European patents which have been validated in
certain European countries. These European patents cover ONCONASE, process
technology for making ONCONASE, and combinations of ONCONASE with certain other
chemotherapeutics. The Company also owns other patent applications, which are
pending in the United States, Europe, and Japan. Additionally, the Company owns
one Japanese patent and an undivided interest in two applications that are
pending in the United States. Each of these applications relate to a Subject
Invention (as that term is defined in cooperative research and development
agreements to which the Company and the National Institutes of Health are
parties). Patents covering biotechnological inventions have an uncertain scope,
and the Company is subject to this uncertainty. The Company's patent
applications may not issue as patents. Moreover, the Company's patents may not
provide the Company with competitive advantages and may not withstand challenges
by others. Likewise, patents owned by others may adversely affect the ability of
the Company to do business. Furthermore, others may independently develop
similar products, may duplicate the Company's products, and may design around
patents owned by the Company. The Company's patent protection is limited to that
afforded
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<PAGE>
under the claims of its issued patents, unless and until other patent protection
is available to the Company. Although the Company believes that its patents and
patent applications are of substantial value to the Company, there can be no
assurance that such patents will be of substantial commercial benefit to the
Company, will afford the Company adequate protection from competing products or
will not be challenged or declared invalid. The Company expects that there will
continue to be significant litigation in the industry regarding patents and
other proprietary rights and, if the Company were to become involved in such
litigation, there could be no assurance that the Company would have the
resources necessary to litigate the contested issues effectively.
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 and retain 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.
Uncertain Availability of Health Care Reimbursement. The Company's ability to
commercialize its product candidates may depend in part on the extent to which
reimbursement for the costs of such product will be available from government
health administration authorities, private health insurers and others.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products. There can be no assurance of the availability of adequate
third-party insurance reimbursement coverage that enables the Company to
establish and maintain price levels sufficient for realization of an appropriate
return on its investment in developing its products. Government and other
third-party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new therapeutic
products approved for marketing by the FDA and by refusing, in some cases, to
provide any coverage for uses of approved products for disease indications for
which the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by government and third-party payors for
uses of the Company's product candidates, the market acceptance of these
products would be adversely affected.
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<PAGE>
Potential Product Liability. The use of the Company's products during testing or
after regulatory approval entails an inherent risk of adverse effects which
could expose the Company to product liability claims. The Company maintains
product liability insurance coverage in the total amount of $6,000,000 for
claims arising from the use of its products in clinical trials prior to FDA
approval. There can be no assurance that the Company will be able to maintain
its existing insurance coverage or obtain coverage for the use of its products
in the future. Management believes that the Company maintains adequate insurance
coverage for the operation of its business at this time, however, there can be
no assurance that such insurance coverage and the resources of the Company would
be sufficient to satisfy any liability resulting from product liability claims.
Dependence Upon Key Personnel. The Company is currently managed by a small
number of key management and operating personnel, whose efforts will largely
determine the Company's success. The loss of key management personnel,
particularly Kuslima Shogen, the Company's Chairman and Chief Executive Officer,
would likely have a material adverse effect on the Company. The Company carries
key person life insurance on the life of Ms. Shogen with a face value of
$1,000,000.
Dependence on Third Parties for Manufacturing. The Company does not currently
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 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-promotion partner or would grant exclusive marketing rights
to its corporate partners in return for upfront fees, milestone payments and
royalties on sales. Under these agreements, the Company's marketing partner may
have the responsibility for a significant portion of development of the product
and regulatory approval. In the event that the marketing partner fails to
develop a marketable product or fails to market a product successfully, the
Company's business may be adversely affected. If the Company were to market its
products itself, significant additional expenditures and management resources
would be required to develop an internal sales force and there can be no
assurance that the Company would be successful in penetrating the markets for
any products developed or that internal marketing capabilities would be
developed at all.
Limited Public Market and Liquidity. As of April 28, 1999, the Company Common
Stock was traded on the OTC Bulletin Board and is not traded on any exchange nor
quoted on the National Association of Securities Dealers Automated Quotation
("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.
Volatility of Stock Price. The market price of the Company's common stock is
volatile, and the price of the stock could be dramatically affected one way or
another depending on numerous factors. Following the Company's announcement on
July 15, 1998 of the termination of the Phase III clinical trials for pancreatic
cancer, the price of the Company's stock price dropped by approximately 70
percent. The
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<PAGE>
market price of the Company's common stock could also be materially affected by
the results of the Phase III clinical trial for unresectable malignant
mesothelioma. Announcements by the Company or others regarding its operating
results, corporate reorganization matters, existing and future collaborations,
results of clinical trials, scientific discoveries, technological innovations,
commercial products, patents or proprietary rights or regulatory actions may
have a significant effect on the market price of the Common Stock. Fluctuations
in financial performance from period to period also may have a significant
impact on the market price of the Common Stock.
Use of Hazardous Materials. The Company's research and development activities
involve the controlled use of hazardous materials, chemicals, and various
radioactive compounds. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any liability could have an adverse effect on the Company.
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