As filed with the Securities and Exchange Commission on June 30, 2000
Registration No. 333-38236
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALFACELL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 325410 22-2369085
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
225 Belleville Avenue, Bloomfield, New Jersey 07003
(973)748-8082
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
--------------
Kuslima Shogen
Chief Executive Officer
Alfacell Corporation
225 Belleville Avenue, Bloomfield, New Jersey 07003
(973)748-8082
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------
Copies to:
Kevin T. Collins, Esq.
Dorsey & Whitney LLP
250 Park Avenue, New York, New York 10177
(212) 415-9200
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the securities
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Securities to be Offering Price per Share Aggregate Amount of
to be Registered Amount to be Registered (1) Offering Price Registration Fee
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock $.001 par value per share 1,090,666 $1.72125 $1,887,636 $ 499
------------------------------------------------------------------------------------------------------------------------------------
Common Stock $.001 par value per share 2,389,199(2) $1.72125 $4,112,409 $ 1,086
------------------------------------------------------------------------------------------------------------------------------------
Common Stock $.001 par value per share 284,806(3) $1.72125 $ 490,222 $ 130
----------
------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,715
==========
PREVIOUSLY PAID $ 1,715
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457(c) under the Securities Act,
based on the average of the high and low sale price for the common stock,
$.001 par value per share, as reported by the OTC Bulletin Board on May 30,
2000.
(2) To be offered and sold by certain of the selling stockholders upon the
exercise of outstanding warrants.
(3) To be offered and sold by certain of the selling stockholders upon the
exercise of outstanding options.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
================================================================================
SUBJECT TO COMPLETION, DATED JUNE 30, 2000
PROSPECTUS
ALFACELL CORPORATION
3,764,671 Shares
Common Stock
---------------
Our securityholders listed in this prospectus are offering an aggregate of
3,764,671 shares of our common stock. Of such shares, 1,090,666 shares were
outstanding on June 28, 2000 and the 2,674,005 share balance offered by this
prospectus are issuable upon the exercise of outstanding options and warrants
held by some of the securityholders listed in this prospectus.
The shares of common stock being offered by the selling securityholders may
be sold from time to time in transactions in the over-the-counter market or in
negotiated transactions. The selling securityholders directly, through agents or
dealers designated from time to time, may sell the common stock offered by them
at fixed prices, at prevailing market prices at the time of sale, at varying
prices determined at the time of sale or at negotiated prices.
Our common stock is traded on the OTC Bulletin Board under the symbol
"ACEL." On June 29, 2000, the reported last sale price of our common stock on
the OTC Bulletin Board was $0.9375 per share.
The common stock offered by this prospectus was, or, in the case of the
shares offered by this prospectus issuable upon exercise of warrants or options,
the warrants and options were issued to the selling securityholders in
transactions exempt from registration under the Securities Act. We will not
receive any of the proceeds from the sale of our common stock offered hereby.
INVESTING IN OUR COMMON STOCK IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
July [ ], 2000
<PAGE>
TABLE OF CONTENTS
page
----
PROSPECTUS SUMMARY.............................................................1
THE OFFERING...................................................................2
RISK FACTORS...................................................................4
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS ............................
USE OF PROCEEDS...............................................................11
PRICE RANGE OF COMMON STOCK...................................................11
COMMON STOCK PRICE ...........................................................
DIVIDEND POLICY...............................................................11
SELECTED FINANCIAL DATA.......................................................12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.........................................................13
BUSINESS......................................................................18
MANAGEMENT....................................................................27
SELLING SECURITYHOLDERS.......................................................34
DESCRIPTION OF SECURITIES.....................................................38
PLAN OF DISTRIBUTION..........................................................39
LEGAL MATTERS.................................................................40
EXPERTS.......................................................................40
AVAILABLE INFORMATION.........................................................40
FINANCIAL STATEMENTS.........................................................F-1
<PAGE>
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read this entire prospectus carefully,
including the section entitled "Risk Factors" and our financial statements and
the notes thereto, before making an investment decision.
OUR COMPANY
We are a biopharmaceutical company primarily engaged in the discovery and
development of new drugs for the treatment of cancer and other pathological
conditions. These drugs are developed from frog ribonucleases. Ribonucleases are
enzymes which degrade ribonucleic acids, inhibit cell growth and induce cell
death by interrupting protein synthesis.
Our product that is furthest along in the development process is
ONCONASE(R), our trademarked name for ranpirnase, which is the active ingredient
of the finished product. ONCONASE(R) is a novel ribonuclease isolated from the
eggs of the leopard frog. Based on our preclinical and clinical testing, we
believe that ONCONASE(R) and related compounds may be used to treat various
solid tumors as a single agent, in combination with other anti-cancer agents, as
the payload in targeted conjugates or fusion proteins, and in a variety of
delivery systems. A conjugate is a compound resulting from chemically joining
two different molecules which are targeted to specific cells in the body. A
fusion protein is a hybrid protein resulting from the fusion of two distinct
genes.
ONCONASE(R) has been used to treat patients with advanced stages of solid
tumors on a weekly basis. Data from Phase II and Phase III clinical trials of
ONCONASE(R) show that the most significant clinical results to date have been
observed in unresectable malignant mesothelioma, an inoperable cancer found in
the lining of the lung and abdomen. Pilot clinical trials have also been
conducted in non-small cell lung cancer, metastatic breast cancer and renal cell
cancer.
Our current strategy for gaining initial marketing approval of ONCONASE(R)
is to demonstrate its safety and efficacy in unresectable malignant
mesothelioma. There is currently no standard FDA-approved drug for this disease.
Based upon the results of Phase I and II clinical trials of ONCONASE(R) as
a treatment for malignant mesothelioma, we received permission from the FDA to
commence a Phase III clinical trial for this indication. The clinical trial
began in June 1997 to compare ONCONASE(R) to doxorubicin as a single therapeutic
agent for this indication. Thereafter, the clinical trial was amended to add a
comparison of ONCASASE(R) in combination with doxorubicin against doxorubicin
alone. In April 1999, the patient enrollment for the first part of the clinical
trial was completed. The second part of the clinical trial is on-going. Based on
the preliminary results of the trial, in March 2000, we had a pre-NDA meeting
with the FDA to discuss these preliminary results and the scope and details of a
proposed NDA filing. Following that meeting, we initiated a series of meetings
with the FDA to establish mutually agreed parameters necessary for the
submission of the NDA. In order to file the NDA, we have to complete the
clinical trial, chemistry, manufacturing and controls, toxicology and
pharmacology studies. If the preliminary data is confirmed by the continuing
study, and other requirements for filing an NDA are satisfied, we intend to file
an NDA. We cannot estimate when the NDA may be filed. We cannot assure you that
an NDA will be filed or, if an NDA is filed, that marketing approval for
ONCONASE(R) as a treatment for malignant mesothelioma will be granted by the
FDA. Additionally, we intend to seek non-U.S. marketing approval for
ONCONASE(R). However, we cannot assure you that such approvals will be granted.
We intend to initiate trials in other solid tumor indications. Prior to
July 1998 our strategy was to gain marketing approval for ONCONASE(R) in
combination with tamoxifen as a treatment for pancreatic cancer. However, in
July 1998, we discontinued two Phase III clinical trials testing this
combination because it did not show a statistically significant survival
benefit.
Our corporate headquarters are located at 225 Belleville Avenue,
Bloomfield, New Jersey 07003 and our telephone number is (973) 748-8082.
<PAGE>
THE OFFERING
SECURITIES OFFERED: Up to 3,764,671 shares of our common stock, of such
shares, 1,090,666 shares were outstanding on June 28,
2000 and the 2,674,005 share balance offered by this
prospectus are issuable upon the exercise of outstanding
options and warrants held by some of the securityholders
listed in this prospectus.
SECURITIES OUTSTANDING 21,105,564 shares of common stock, based upon 18,431,559
AFTER THE OFFERING: shares outstanding on May 31, 2000 and assuming all
options and warrants offered herein are exercised. This
does not include an aggregate of 6,177,195 shares which
may be issued on the exercise of outstanding options and
warrants as of May 31, 2000.
USE OF PROCEEDS: We will not receive any proceeds from the sale of the
shares of common stock offered by the holders of those
shares. We will receive proceeds from the exercise of
options or warrants, if any, and will apply these
proceeds for general corporate purposes, including the
funding of research and development activities.
RISK FACTORS: An investment in our common stock is speculative and
involves a high degree of risk. See "Risk Factors"
beginning on page 4 for a discussion of risk factors
that you should consider in connection with an
investment in our common stock.
2
<PAGE>
SUMMARY FINANCIAL DATA
The financial data set forth below should be read in conjunction with the
sections entitled "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the financial
statements and notes included in this prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended July 31, April 30,
----------------------------------------------------------------------- --------------------------
1999 1998 1997 1996 1995 2000 1999
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenue $ 168,372 $ 311,822 $ 422,572 $ 184,250 $ 20,992 $ 39,206 $ 140,847
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss (3,156,636) (6,387,506) (5,018,867) (2,942,152) (1,993,123) (1,418,147) (2,327,059)
Net loss per common share:
Basic and diluted (.18) (.40) (.34) (.25) (.21) (.08) (.13)
Weighted average number of
common shares:
Basic and diluted 17,271,000 15,926,000 14,597,000 11,969,000 9,598,000 7,603,454 7,265,936
Dividends 0 0 0 0 0 0 0
</TABLE>
--------------------
As of April 30, 2000
--------------------
(unaudited)
Balance Sheet Data:
Total assets............................................. $1,188,567
Cash and cash equivalents................................ 895,134
Long-term liabilities.................................... 0
Total stockholders equity................................ 198,686
3
<PAGE>
RISK FACTORS
An investment in our common stock is speculative and involves a high degree
of risk. You should carefully consider the risks and uncertainties described
below and the other information in this prospectus before deciding whether to
purchase shares of our common stock. The risks described below are not the only
ones facing our company. Additional risks not presently known to us or that we
currently believe to be immaterial may also adversely affect our business. If
any of the following risks actually occur, our business and operating results
could be harmed. This could cause the trading price of our common stock to
decline, and you may lose all or part of your investment.
RISKS RELATED TO OUR COMPANY
We have incurred losses since inception and anticipate that we will incur
continued losses for the foreseeable future. We do not have a current
source of product revenue and may never be profitable.
We are a development stage company with no current source of revenue. We
have incurred significant losses in each year since our inception. As of April
30, 2000, our accumulated deficit was $56,372,000. We have funded our activities
primarily through public and private sales of our stock.
We expect to continue to incur substantial operating losses in the future.
Our profitability will depend on our ability to develop, obtain regulatory
approvals for, and market ONCONASE(R). The FDA has not approved ONCONASE(R) and
we cannot assure you that it will. We may never successfully develop our
products or sell sufficient product to generate enough revenues to enable us to
earn a profit.
We will seek to generate revenue through licensing, marketing and
development arrangements prior to receiving revenue from the sale of our
product. We cannot assure you that we will be able to successfully consummate
any licensing, marketing or development arrangements.
We do not know when or if we will complete our product development efforts,
receive regulatory approval of any of our product candidates or successfully
commercialize any approved products. As a result, we are unable to predict the
extent of any future losses or the time required to achieve profitability, if at
all.
We need additional financing to continue operations and this financing may
not be available when we need it, if it is available at all.
We estimate that our existing capital will enable us to fund operations
through July 2000. We need financing immediately in order to continue the Phase
III trials and to file an NDA. If the results of the continuation of the Phase
III trials do not indicate the efficacy and safety of ONCONASE(R) for malignant
mesothelioma, our ability to raise additional capital will be adversely
affected. Even if an NDA is filed, we will need additional financing to complete
the approval process. We may not be successful in obtain additional financing as
funds are needed to continue operations.
There is doubt regarding our ability to continue as a going concern.
We incurred a net loss of $3,156,636 for the year ended July 31, 1999, and
$1,418,147 for the nine-months ended April 30, 2000. In addition, we had working
capital of $558,393 and $71,106 as of July 31, 1999 and April 30, 2000,
respectively, and an accumulated deficit of $56,372,428 as of April 30, 2000.
The report of our independent auditors on our July 31, 1999 financial statements
included an explanatory paragraph which states that our recurring losses and
limited liquid resources raise substantial doubt about our ability to continue
as a going concern. The financial statements at July 31, 1999 or April 30, 2000
do not include any adjustments that might result from the outcome of this
uncertainty. In order to continue to operate our company, develop ONCONASE(R),
complete the necessary clinical testing, realize the full potential of our
technology, seek U.S. and non-U.S. regulatory approvals and develop marketing
and distribution channels for our products, we will need to raise significant
additional funds through equity or debt financing, strategic alliances or the
sale of ONCONASE(R). We believe that our cash and cash equivalents will be
sufficient to meet our expected cash needs through the fiscal year ending July
31, 2000. If we are unable to secure sufficient future financing, we may need to
curtail or discontinue our research and development activities or cease
operations.
4
<PAGE>
Our clinical trials could take longer to complete and cost more than we
expect.
We are currently continuing our Phase III clinical trial of ONCONASE(R) for
the treatment of malignant mesothelioma. The rate of completion of our clinical
trial depends upon many factors, including the rate of enrollment of patients.
If we are unable to accrue sufficient additional patients in our trial during
the appropriate period, such trials may be delayed and will likely incur
significant additional costs. In addition, the FDA or institutional review
boards may require us to delay, restrict, or discontinue our clinical trials on
various grounds.
The cost of human clinical trials varies dramatically based on a number of
factors, including:
o the order and timing of clinical indications pursued,
o the extent of development and financial support from corporate
collaborators,
o the number of patients required for enrollment,
o the difficulty of obtaining clinical supplies of the product
candidate, and
o the difficulty in obtaining sufficient patient populations.
All statutes and regulations governing the conduct of clinical trials are
subject to change in the future, which could affect the cost of our clinical
trials. Any unanticipated costs or delays in our clinical studies would harm our
business and financial condition.
The results of larger scale clinical trials may not show the same promising
results as earlier trials resulting in the abandonment of a failed
candidate after the expenditure of significant additional funds.
During the course of our research and development, we may find that
products that initially appeared promising no longer appear promising in
larger-scale Phase III clinical trials. Like many companies in the
pharmaceutical and biotechnology industries, we have experienced negative
results in clinical trials after experiencing promising results in earlier
trials. For example, in July 1998, we discontinued two Phase III clinical trials
testing ONCONASE(R) with tamoxifen as a treatment for pancreatic cancer due to
the lack of a statistically significant survival benefit. If we experience
negative results in our current Phase III clinical trial in the future, we may
have to curtail, redirect or eliminate our product development programs.
We cannot assure you that we will be able to successfully develop our
products.
Our research and development programs are at various stages of development,
from the preclinical stage to Phase III clinical trials. We will need to do
substantial additional research and development in order to develop and obtain
regulatory approval for our products. We cannot assure you that our research and
development programs will lead to products that:
o are shown to be safe and effective in clinical trials,
o are commercially viable,
o meet regulatory standards,
o receive FDA marketing approval,
o are eligible for third party reimbursement from governmental or
private insurers, or
o are successfully marketed.
5
<PAGE>
We cannot assure you that the FDA will approve our product candidates.
The sale of ONCONASE(R) for use in humans in the United States will require
the approval of the FDA. Most foreign countries also require the approval of
comparable agencies for the sale of pharmaceutical products in those countries.
State, local and other authorities also regulate pharmaceutical manufacturing
facilities. It may take several years and significant expenditures to obtain FDA
approval of a new pharmaceutical product. ONCONASE(R) has not been approved for
sale in the United States or elsewhere. We cannot assure you that we will be
able to get FDA approval for ONCONASE(R) or any other product. Inability to
obtain the approval of the FDA or other agencies may adversely affect our
financial condition by delaying or precluding us from marketing our products
while the products are under patent protection or limiting the commercial use of
the products. Even if we do obtain the approval of the FDA and other agencies,
it is possible that the subsequent review of a new drug will lead to the
discovery of a previously unknown problem.
Our product candidates may not be accepted by the market, which would harm
our business and results of operations.
Even if approved by the FDA and other regulatory authorities, our product
candidates may not achieve market acceptance and we may not receive revenues
from these products as anticipated. The degree of market acceptance will depend
upon a number of factors, including:
o the receipt and timing of regulatory approvals,
o the availability of third-party reimbursement, and
o the establishment and demonstration in the medical community of the
clinical safety, efficacy and cost-effectiveness of drug candidates,
as well as their advantages over existing technologies and
therapeutics.
We may not be able to successfully market our products even if they perform
successfully in clinical trials. Furthermore, physicians or the medical
community in general may not accept and utilize any of our products.
We may not be able to protect our proprietary technology or enforce our
patents.
We currently own six U.S. patents, three European patents and one Japanese
patent. We also have patent applications that are pending in the United States,
Europe and Japan, and an undivided interest in two patent applications that are
pending in the United States. The scope of protection afforded by patents for
biotechnological inventions can be uncertain, and such uncertainty may apply to
our patents as well. The patent applications we have filed, or that we may file
in the future, may not result in patents. Our patents may not give us
competitive advantages, may be wholly or partially invalidated or held
unenforceable, or may be held uninfringed by products that compete with our
products. Patents owned by others may adversely affect our ability to do
business. Furthermore, others may independently develop products that are
similar to our products, and may design around the claims of our patents.
Although we believe that our patents and patent applications are of substantial
value to us, we cannot assure you that our patents and patent applications will
be of commercial benefit to us, will adequately protect us from competing
products or will not be challenged, declared invalid or declared infringed.
Patent litigation and intellectual property litigation are expensive, and if we
were to become involved in such litigation, we could not assure you that we
would have the funds necessary to carry on the litigation in an effective
manner.
We are uncertain of the availability of health care reimbursement.
Our ability to sell our products will depend in part on whether government
health administration authorities, private health insurers and others will
reimburse the costs of our products. We cannot assure you that adequate
third-party reimbursement coverage will be available to maintain price levels
sufficient to
6
<PAGE>
achieve an appropriate return on the investment we have made in developing our
products. Government and others are increasingly trying to contain health care
costs by limiting coverage and the amount of reimbursement for new drug products
approved by the FDA and refusing to provide coverage for the use of FDA-approved
products for the treatment of medical conditions for which the FDA has not
granted marketing approval. If the government and other third parties do not
provide adequate insurance coverage and reimbursement amounts for uses of our
product candidates, our ability to sell our products will be adversely affected.
We are and will be dependent on third parties for manufacturing.
Our facilities are not large enough or equipped to manufacture our products
in commercial quantities. For the foreseeable future, we intend to rely on third
parties to manufacture our products. To acquire our own facility, we would need
significant additional funds and additional personnel to comply with the FDA's
extensive regulations applicable to pharmaceutical manufacturing facilities.
Even if we decided to develop our own manufacturing facilities, we could not
assure you that we would be able to make a successful transition to commercial
production.
We will be dependent on third parties for marketing.
None of our officers or employees have marketing experience in the
pharmaceutical industry. We intend to enter into development and marketing
agreements with third parties. We expect that under the marketing agreements we
would act as a co-marketing partner or would grant exclusive marketing rights to
our corporate partners in return for up-front fees, milestone payments and
royalties on sales. Under these marketing agreements, our marketing partner may
be responsible for a significant portion of development of the product and
regulatory approval. If the marketing partner is unable to develop a marketable
product or market a product successfully, our business may be adversely
affected. If we were to market our products ourselves, we would need to invest
significant additional management time and money to develop an internal sales
force. We cannot assure you that an internal sales force would be successful in
marketing our products.
We are and will remain dependent upon key personnel.
We are managed by a very small number of key management and operating
personnel. The loss of key management personnel, particularly Kuslima Shogen,
our Chairman and Chief Executive Officer, would most likely have a material
adverse effect on our business. We carry key person life insurance on the life
of Ms. Shogen with a face value of $1,000,000.
We used the services of an accounting firm that has since ceased
operations.
Our financial statements from inception to July 31, 1992 were audited by
the independent accounting firm of Armus Harrison. On September 1, 1993, some of
the shareholders of Armus Harrison terminated their association with Armus
Harrison, and Armus Harrison ceased performing accounting and auditing services,
except for limited accounting services for us. In June 1996, Armus Harrison
dissolved and ceased all operations. The report of KPMG LLP with respect to our
financial statements from inception to July 31, 1999 is based on the report of
Armus Harrison for the period from inception to July 31, 1992, although Armus
Harrison has not consented to the use of its report in connection with this
Registration Statement and will not be available to perform any subsequent
review procedures with respect to its report. Accordingly, based upon the
provisions of Section 11(a)(4) of the Securities Act, we believe that investors
may be limited to asserting claims against Armus Harrison under Section 11 of
the Securities Act on the basis of the use of the Armus Harrison report in any
registration statement of ours into which the report is used directly or as the
basis for a report used in any registration statement of ours. In addition, in
the event any person seeks to assert a claim against Armus Harrison for false or
misleading financial statements and disclosures in documents previously filed by
us, the claim may also be adversely affected and possibly barred. Furthermore,
as a result of the lack
7
<PAGE>
of a consent from Armus Harrison to the use of its audit report in this
registration statement, our officers and directors will be unable to rely on the
authority of Armus Harrison as experts in auditing and accounting in the event
any claim is brought against those persons under Section 11 of the Securities
Act based on alleged false and misleading financial statements and disclosures
attributable to Armus Harrison. To our knowledge, Armus Harrison is not, and has
not been, the subject of any proceeding under any federal or state bankruptcy or
insolvency laws. We have not investigated, and have no knowledge concerning, the
assets of Armus Harrison or its shareholders, if any, which may be available to
satisfy claims brought by any investors. In addition, we have not investigated
the status and nature of the liability of any of the shareholders of Armus
Harrison and it may be that any such obligation may be limited or precluded
under applicable law. The discussion regarding the effects of the Armus Harrison
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 Armus Harrison termination on a
potential investment in our common stock or otherwise. We believe that the Armus
Harrison report is correct and accurate in all material respects.
We may not be able to utilize all of our net operating loss carryforwards.
At July 31, 1999, we had federal net operating loss carryforwards of
approximately $40,296,000 that expire from 2000 to 2019. We also had investment
tax credit carryforwards of approximately $33,015 and research and
experimentation tax credit carryforwards of approximately $810,403 that expire
from 2000 to 2019. New Jersey approved for sale approximately $2.4 million of
our state tax loss carryforwards and state research and development credits or
tax benefits, of which approximately $1 million was allocated to be sold between
July 1, 1999 and June 30, 2000. In December 1999, we realized net proceeds of
$755,854 from the sale of our allocated tax benefits. We will attempt to sell
the remainder between July 1, 2000 and June 30, 2001, but there is no assurance
we will be successful. Additionally, ultimate utilization/availability of the
net operating losses and credits may be significantly curtailed if a significant
change in ownership occurs.
RISKS RELATED TO OUR INDUSTRY
We are subject to intense competition and technological obsolescence.
Several companies, universities, research teams and scientists are
developing products to treat the same medical conditions our products are
intended to treat. Many of these entities have greater financial resources,
larger staffs and larger facilities than ours. Most of our competitors are more
experienced and have greater clinical, marketing and regulatory capabilities and
managerial resources than we do. Our competitors may develop products to treat
the same medical conditions our products are intended to treat before we are
able to complete the development of our competing product.
Our business is very competitive and involves rapid changes in the
technologies involved in developing new drugs. If others experience rapid
technological development, our products may become obsolete before we are able
to recover expenses incurred in developing our products. We will probably face
new competitors as new technologies develop. Our success depends on our ability
to remain competitive in the development of new drugs. We cannot assure you that
we will be able to compete successfully.
We may be sued for product liability.
The use of our products by humans during testing of those products or after
regulatory approval entails a risk of adverse effects which could expose us to
product liability claims. We maintain product liability insurance in the amount
of $6,000,000 for claims arising from the use of our products in clinical trials
prior to FDA approval. We cannot assure you that we will be able maintain our
existing insurance coverage or obtain coverage for the use of our products in
the future. While we believe that we maintain adequate insurance coverage, we
cannot assure you that our current insurance coverage and our financial
resources would be
8
<PAGE>
sufficient to pay any liability arising from a product liability claim. A
product liability claim may have a material adverse effect on our business,
financial condition or results of operations.
RISKS RELATED TO THIS OFFERING
Our stock is thinly traded.
Our common stock has been quoted on the OTC Bulletin Board since April 28,
1999, and is currently thinly traded. You may be unable to sell our common stock
if the trading market continues to be limited.
We have not paid, and do not intend to pay, any dividends in the
foreseeable future.
We have not paid any dividends on our common stock sin0ce our inception. We
do not expect to pay cash dividends on our common stock in the future. We
currently intend to retain all earnings, if any, to finance the growth of our
operations.
The price of our common stock has been, and may continue to be, volatile.
The market price of our common stock, like that of the securities of many
other development stage biotechnology companies, has fluctuated over a wide
range and it is likely that the price of our common stock will fluctuate in the
future. The market price of our common stock could be impacted by a variety of
factors, including:
o announcements of technological innovations or new commercial products
by us or our competitors,
o disclosure of the results of pre-clinical testing and clinical trials
by us or our competitors,
o disclosure of the results of regulatory proceedings,
o changes in government regulation,
o developments in the patents or other proprietary rights owned or
licensed by us or our competitors,
o public concern as to the safety and efficacy of products developed by
us or others,
o litigation, and
o general market conditions in our industry.
In addition, the stock market continues to experience extreme price and
volume fluctuations. These fluctuations have especially affected the market
price of many biotechnology companies. Such fluctuations have often been
unrelated to the operating performance of these companies. Nonetheless, these
broad market fluctuations may negatively affect the market price of our common
stock.
Our charter documents and Delaware law may discourage a takeover of our
company.
We are currently authorized to issue 1,000,000 shares of preferred stock,
par value $.001 per share. Our Board of Directors is authorized, without any
approval of the stockholders, to issue the preferred stock and determine the
terms of the preferred stock. There are no shares of preferred stock
outstanding. The authorized
9
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shares of preferred stock will remain available for general corporate purposes,
may be privately placed and can be used to make a change in control of our
company more difficult. Under certain circumstances, our Board of Directors
could create impediments to or frustrate persons seeking to effect a takeover or
transfer in control of our company by causing shares of preferred stock to be
issued to a stockholder who might side with the Board of Directors in opposing a
takeover bid that the Board of Directors determines is not in the best interests
of our company and its stockholders, but in which unaffiliated stockholders may
wish to participate. Furthermore, the existence of authorized shares of
preferred stock might have the effect of discouraging any attempt by a person,
through the acquisition of a substantial number of shares of common stock to
acquire control of our company. Accordingly, the accomplishment of a tender
offer may be more difficult. This may be beneficial to management in a hostile
tender offer, but have an adverse impact on stockholders who may want to
participate in the tender offer. Under the General Corporation Law of Delaware,
the Board of Directors is permitted to use a depositary receipt mechanism that
enables the Board to issue an unlimited number of fractional interests in each
of the authorized and unissued shares of preferred stock without stockholder
approval. Consequently, the Board of Directors, without further stockholder
approval, could issue authorized shares of preferred stock or fractional
interests in preferred stock with rights that could adversely affect the rights
of the holders of our common stock to a stockholder which, when voted together
with other securities held by members of the Board of Directors and the
executive officers and their families, could prevent the majority stockholder
vote required by our certificate of incorporation or Delaware General
Corporation Law to effect certain matters.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. All statements, other than
statements of historical fact, regarding our financial position, potential,
business strategy, plans and objectives for future operations are "forward
looking statements." These statements are commonly identified by the use of such
terms and phrases as "intends," "expects," "anticipates," "estimates," "seeks"
and "believes." You are urged to note the description of our plans and
objectives for future operations, assumptions underlying these plans and
objectives and other forward-looking statements included in "Prospectus
Summary," "Use of Proceeds," "Management's Discussion And Analysis" and
"Business" in this prospectus. These descriptions and statements are based on
management's current expectations. Our actual results may differ significantly
from the results discussed in these forward-looking statements as a result of
certain factors, including those set forth in the "Risk Factors" section and
elsewhere in this prospectus.
10
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of our common stock in this
offering. We will receive estimated net proceeds of approximately $6,868,022 if
all of the options and warrants offered under this prospectus are exercised. We
intend to use any proceeds received from the exercise of the options and
warrants for general corporate purposes, including the funding of research and
development activities. We cannot assure you that any of the options or warrants
will be exercised. We expect to incur expenses of approximately $51,715 in
connection with this offering.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the symbol
"ACEL." At the close of business on April 27, 1999, we were delisted from The
Nasdaq SmallCap Market for failing to meet the minimum bid price requirements
set forth in the NASD Marketplace Rules. As of June 28, 2000, we had
approximately 1,267 stockholders of record of our common stock.
The following table sets forth the range of high and low sale prices of our
common stock. The price for the periods commencing April 28, 1999 were obtained
from the OTC Bulletin Board and the price for the periods prior to April 28,
1999 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.
Common Stock Price
-------------------
Low High
----- -------
Year Ending July 31, 2000
First Quarter .................................. 13/32 15/16
Second Quarter ................................. 3/8 1-15/16
Third Quarter .................................. 23/32 3-7/8
Fourth Quarter (through June 23, 2000) ......... 29/32 2-5/8
Year Ended July 31, 1999
First Quarter .................................. 13/32 1-1/4
Second Quarter ................................. 7/32 1/2
Third Quarter .................................. 13/64 7/8
Fourth Quarter ................................. 3/16 9/16
Year Ended July 31, 1998
First Quarter .................................. 3 4-5/8
Second Quarter ................................. 2-1/4 3-25/32
Third Quarter .................................. 2-1/4 4-1/2
Fourth Quarter ................................. 3/8 4-5/8
DIVIDEND POLICY
We have not paid dividends on our common stock since inception and we do
not plan to pay dividends in the foreseeable future. If we realize any earnings,
they will be retained to finance our growth.
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SELECTED FINANCIAL DATA
The following selected financial data should be read together with the
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. The selected statement of operations data shown below for the years
ended July 31, 1999, 1998 and 1997 and the balance sheet data as of July 31,
1999 and 1998 are derived from our audited financial statements included
elsewhere in this prospectus, and have been audited by KPMG LLP, independent
certified public accountants. The selected statement of operations data shown
below for the years ended July 31, 1996 and 1995 and the balance sheet data as
of July 31, 1997, 1996 and 1995 are derived from our audited financial
statements which were also audited by KPMG LLP, but are not included elsewhere
in this prospectus or incorporated by reference. The selected financial data as
of and for the nine months ended April 30, 2000 and 1999 are unaudited and, in
our opinion, contain all adjustments, consisting only of normal, recurring
accruals, which are necessary for a fair statement of the results of those
periods. Results for the nine months ended April 30, 2000 are not necessarily
indicative of results that may be expected for the entire year.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended July 31, April 30,
----------------------------------------------------------------------- --------------------------
1999 1998 1997 1996 1995 2000 1999
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations ..
Data:
Total revenue ............ $ 168,372 $ 311,822 $ 422,572 $ 184,250 $ 20,992 $ 39,206 $ 140,847
Net loss ................. (3,156,636) (6,387,506) (5,018,867) (2,942,152) (1,993,123) (1,418,147) (2,327,055)
Net loss per common share:
Basic and diluted ...... (.18) (.40) (.34) (.25) (.21) (.08) (.13)
Weighted average number of
common shares:
Basic and diluted 17,271,000 15,926,000 14,597,000 11,969,000 9,598,000 17,603,454 7,265,936
Dividends ................ 0 0 0 0 0 0 0
<CAPTION>
Year Ended July 31, As of April 30,
----------------------------------------------------------------------- ---------------
1999 1998 1997 1996 1995 2000
----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets............ $ 1,728,648 $ 5,516,678 $ 8,034,954 $ 8,487,711 $ 1,616,170 1,188,567
Cash and cash
equivalents........... 1,383,133 5,099,453 7,542,289 8,131,442 1,398,027 895,134
Working capital......... 558,393 3,398,527 5,254,434 7,868,857 (1,004,973) 71,106
Long-term liabilities... 0 6,727 15,902 1,398,760 7,129 0
Total stockholders equity 757,200 3,691,838 5,566,091 6,650,266 (832,566) 198,686
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS0
GENERAL
Since our inception, we have devoted the majority of our resources to the
research and development of ONCONASE(R). After we obtained the results of our
preliminary analysis of the Phase III clinical trial results for advanced
pancreatic cancer, we closed the pancreatic cancer trials and redirected our
resources towards the completion of the ongoing Phase III clinical trials for
unresectable malignant mesothelioma. We have presented our preliminary results
of the ongoing Phase III trial in patients with malignant mesothelioma to the
FDA and will begin a series of meetings with the FDA to establish mutually
agreed upon contents of the clinical, chemistry and manufacturing and controls
sections, as well as the toxicology and pharmacology sections of the NDA. We are
also exploring various strategic alternatives for our business and our research
and development operations.
We are currently funding the research and development of our products from
cash reserves resulting from the previous sales of our securities. The
termination of the Phase III clinical trials for advanced pancreatic cancer had
a significant and detrimental impact on the price of our common stock and our
ability to raise additional capital for future operations. We may not have, or
be able to obtain, the financial resources required to pay for all the
associated costs of the malignant mesothelioma program to file a Unites States
registration for the marketing approval of ONCONASE(R) for this indication, if
there is support for such a filing.
RESULTS OF OPERATIONS
NINE MONTH PERIODS ENDED APRIL 30, 2000 AND 1999
Revenues
We are a development stage company as defined in the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 7. We are
devoting substantially all of our present efforts to establishing a new business
and developing new drug products. Our planned principal operations of marketing
and/or licensing of new drugs have not commenced and, accordingly, we have not
derived any significant revenue from these operations. We focus most of our
productive and financial resources on the development of ONCONASE(R). We have
not had any sales in the nine months ended April 30, 2000 and 1999. Investment
income for the nine months ended April 30, 2000 was $39,000 compared to $141,000
for the same period last year, a decrease of $102,000. This decrease was due to
lower balances of cash and cash equivalents.
Research and Development
Research and development expense for the nine months ended April 30, 2000
was $1,767,000 compared to $1,804,000 for the same period last year, a decrease
of $37,000 or 2%. This decrease was primarily due to a 37% decrease in costs in
support of ongoing clinical trials, primarily due to the completion of the
patient enrollment of the first part of the Phase III clinical trial for
malignant mesothelioma, a 52% decrease in costs related to the preclinical
research studies of ONCONASE(R), a 54% decrease in costs associated with the
manufacture of clinical supplies of ONCONASE(R) and a 4% decrease in personnel
costs. These decreases were offset by an increase in expenses in preparation for
a pre-NDA meeting with the FDA and a 54% increase in expenses associated with
new patent and trademark applications for ONCONASE(R).
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<PAGE>
General and Administrative
General and administrative expense for the nine months ended April 30, 2000
was $443,000 compared to $662,000 for the same period last year, a decrease of
$219,000 or 33%. This decrease was primarily due to a 47% reduction in
administrative personnel costs, a 69% decrease in public relations expenses and
a 41% decrease in consulting fees.
Income Taxes
New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell state tax loss carryforwards and state research and
development credits or tax benefits. Approximately $2.4 million of our tax
benefits were approved for sale by the state in December 1999, of which
approximately $1 million was allocated to be sold between July 1, 1999 and June
30, 2000. In December 1999, we realized net proceeds of $755,854 from the sale
of our allocated tax benefits. We will attempt to sell the remaining balance of
our tax benefits in the amount of approximately $1.4 million between July 1,
2000 and June 30, 2001, subject to all existing laws of the State of New Jersey.
However, we cannot assure you that we will be able to find a buyer for our tax
benefits or that such funds will be available in a timely fashion.
Net Loss
We have incurred net losses during each year since our inception. The net
loss for the nine months ended April 30, 2000 was $1,418,000 as compared to
$2,327,000 for the same period last year, a decrease of $909,000 or 39%,
primarily due to the result of the sale of our tax benefits. Such losses are
attributable to the fact that we are still in the development stage and
accordingly have not derived sufficient revenues from operations to offset the
development stage expenses.
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<PAGE>
FISCAL YEARS ENDED JULY 31, 1999, 1998 AND 1997
Revenues
We have 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(R), a 47% decrease in costs in support of ongoing clinical
trials, an 82% decrease in expenses for preparation of an NDA for ONCONASE(R)
and a 4% decrease in personnel costs. These decreases were primarily due to the
completion of the patient enrollment of the Phase III clinical trial for
malignant mesothelioma in April 1999 and the closing of the Phase III clinical
trials for pancreatic cancer in July 1998.
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<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 ongoing clinical trials,
including the Phase III clinical trials for pancreatic cancer that 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(R) and an 86% increase in expenses in preparation for an
NDA for ONCONASE(R), 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 our $1.4 million term loan agreement
with our 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 our term loan on October 3, 1997.
Net Loss
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 we are still in the development stage
and have not derived sufficient revenues from operations to offset the
development stage expenses.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through equity
and debt financing, research product sales and interest income. During the nine
months ended April 30, 2000, we had a net decrease in cash and cash equivalents
of $488,000, which resulted primarily from net cash used in operating activities
of $1,137,000 offset by net cash provided by financing activities of $649,000.
Total cash resources as of April 30, 2000 were $895,000 compared to $1,383,000
for the same period last year.
Our current liabilities as of April 30, 2000 were $990,000 compared to
$971,000 at July 31, 1999, an increase of $19,000 or 2%. The increase was
primarily due to an increase in expenses in preparation of a pre-NDA meeting
with the FDA and an increase in legal fees, primarily due to the filing of the
S-1 registration statement offset by a decrease in costs in support of on-going
clinical trials for ONCONASE(R), primarily due to the completion of the patient
enrollment of the first part of the Phase III clinical trial for malignant
mesothelioma and a decrease in consulting fees.
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<PAGE>
In February 2000, we sold an aggregate of 875,000 shares of common stock to
private investors at prices ranging from $0.50 to $1.00 per share, resulting in
net proceeds of $625,000. In addition, the private investors were issued
warrants to purchase an aggregate of 875,000 shares of common stock at per share
exercise prices ranging from $1.03 to $4.55. The warrants will expire during the
period commencing May 2003 and ending in May 2005.
To date, a significant portion of our financing has been through private
placements of common stock and warrants, the issuance of common stock for stock
options and warrants exercised and for services rendered, debt financing and
financing provided by our Chief Executive Officer. Additionally, we have raised
capital through the sale of our tax benefits. Until our operations generate
significant revenues, we will continue to fund operations from cash on hand and
through the sources of capital previously described. We believe that our cash
and cash equivalents as of April 30, 2000 will be sufficient to meet our
anticipated cash needs through July 2000. The report of our independent auditors
on our July 31, 1999 financial statements included an explanatory paragraph
which states that our recurring losses and limited liquid resources raise
substantial doubt about our ability to continue as a going concern. The
financial statements at July 31, 1999 or April 30, 2000 do not include any
adjustments that might result from the outcome of this uncertainty.
Our continued operations will depend on our ability to raise additional
funds through various potential sources such as equity and debt financing,
collaborative agreements, strategic alliances, sale of tax benefits, revenues
from the commercial sale of ONCONASE(R) and our ability to realize the full
potential of our technology and drug candidates. There can be no assurance that
such additional funds will become available.
We had a pre-NDA meeting with the FDA to discuss the preliminary results of
the Phase III clinical trial in patients with malignant mesothelioma and the
scope and detail of the proposed NDA filing. We have begun a series of meetings
with the FDA to establish mutually agreed upon parameters necessary for the
submission of the NDA. If the preliminary results of the Phase III trial are
confirmed by the ongoing study and all other requirements such as chemistry,
manufacturing and controls, toxicology and pharmacology studies are completed,
we intend to file on NDA. We cannot estimate when the NDA may be filed. We
cannot assure you that an NDA will be filed or, if an NDA is filed, that
marketing approval for ONCONASE(R) as a treatment for malignant mesothelioma
will be granted by the FDA.
We will continue to incur costs in conjunction with our NDA filing. We are
currently in discussion with several potential strategic alliance partners for
further development and marketing of ONCONASE(R) and the other potential new
products in our pipeline. In addition, we envision generating revenue through
named-patient sales outside the United States. However, there can be no
assurance that any such alliances or named-patient sales will materialize. Our
ability to raise funding at this time may be dependent upon other factors
including, without limitation, market conditions, and there can be no assurance
that such funds will be available.
Our common stock was delisted from The Nasdaq SmallCap Market effective at
the close of business April 27, 1999 for failing to meet the minimum bid price
requirements set forth in the NASD Marketplace Rules. As of April 28, 1999, our
common stock trades on the OTC Bulletin Board under the symbol "ACEL." Delisting
of our common stock from Nasdaq could have a material adverse effect on our
ability to raise additional capital, our stockholders' liquidity and the price
of our common stock.
The market price of our common stock is volatile, and the price of the
stock could be dramatically affected one way or another depending on numerous
factors. The market price of our common stock could also be materially affected
by the marketing approval or lack of approval of ONCONASE(R).
CHANGES IN ACCOUNTANTS
On December 1, 1993, some of the shareholders of Armus Harrison & Co.
terminated their association with Armus Harrison, and Armus Harrison ceased
performing accounting and auditing services, except for limited accounting
services to be performed on our behalf. In June 1996, Armus Harrison dissolved
and ceased all operations. The report of KPMG LLP with respect to our financial
statements from inception to July 31, 1999 is based on the report of Armus
Harrison for the period from inception to July 31, 1992, although Armus Harrison
has not consented to the use of its report in the registration statement of
which this prospectus is a part and will not be available to perform any
subsequent review procedures with respect to its report. Accordingly, investors
will be barred from asserting claims against Armus Harrison under Section 11 of
the Securities Act on the basis of the use of its report in any of our
registration statements into which the report is used directly on as the basis
for a report used in any registration statement of ours. In addition, if anyone
seeks to assert a claim against Armus Harrison for false or misleading financial
statements and disclosures in documents previously filed by us, the claim will
be adversely affected and possibly barred. Furthermore, due to the lack of a
consent from Armus Harrison to the use of its audit report in the registration
statement of which this prospectus is a part, our officers and directors will be
unable to rely on the authority of Armus Harrison as experts in auditing and
accounting if 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 Armus Harrison. The discussion regarding certain
effects of the Armus Harrison 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 Armus Harrison termination on a potential investment in our common stock or
otherwise.
17
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BUSINESS
OVERVIEW
We are a biopharmaceutical company, organized in 1981, primarily engaged in
the discovery and development of new drugs for the treatment of cancer and other
pathological conditions. In 1987, we completed the molecular characterization of
a specific protein, which we named P-30 Protein. In October 1998, the United
States Adapted Names Council adapted the name ranpirnase as the United States
adaptive name for P-30 Protein, which we have trademarked as ONCONASE(R). Based
upon the complete amino acid sequence analysis, a protein structure blueprint,
it has been established that ranpirnase has a unique structure. The unique
nature of ranpirnase was established after comparing its structure to those of
over 10,000 protein sequences registered with the National Biomedical Research
Foundation Protein Identification Resource, Georgetown University, Washington,
DC.
ONCONASE(R) has been isolated from the eggs of the leopard frog.
ONCONASE(R) is a novel ribonuclease that is unique among the superfamily of
pancreatic ribonuclease. Ribonucleases are enzymes that break certain bonds of
ribonucleic acids. Ribonucleases serve several important biological functions in
nature, including regulation of angiogenesis, which is the formation of new
blood vessels, anti-viral and anti-parasitic defenses, inter-strain competition
in bacteria, and restrictive pollination in plants. In addition to taking
advantage of the natural biological functions of ribonucleases, frog
ribonucleases may be more therapeutically effective in humans than mammalian
ribonucleases as they do not appear to be adversely affected by inhibitors found
in a mammal's ribonuclease. Therefore, developing amphibian ribonucleases into
therapeutics, and thereby taking advantage of the natural role of ribonucleases,
may result in a new class of compounds for the treatment of diseases such as
cancer and AIDS. We retain all commercial rights to compounds resulting from
this effort.
ONCONASE(R) has been used to treat patients with advanced stages of solid
tumors on a weekly basis. Data from Phase II and Phase III clinical trials of
ONCONASE(R) show that the most significant clinical results to date have been
observed in unresectable malignant mesothelioma, an inoperable cancer found in
the lining of the lung and abdomen. Pilot clinical trials have also been
conducted in non-small cell lung cancer, metastatic breast cancer and renal cell
cancer.
Side effects associated with ONCONASE(R), as observed in over 650 patients
treated to date, have been modest, primarily affect the kidneys and are
reversible upon the reduction of dose or temporary or permanent discontinuation
of treatment. Patients treated with ONCONASE(R) have shown little evidence of
bone marrow suppression, hair loss or other severe organ toxicities frequently
observed after treatment with most other chemotherapeutic drugs. This safety
profile may result from the fact that ranpirnase is structurally similar to
several human ribonucleases.
Based on our preclinical and clinical testing, we believe that ONCONASE(R)
and related compounds may have utility:
o as a single agent,
o in combination with other anti-cancer agents,
o as the active ingredient, or payload, in a targeted conjugate, which
is a new compound resulting from chemically joining two different
molecules with targeted specificity, and
o in a delivery system such as standard or "stealth" liposomes.
In June 1997, we initiated a Phase III clinical trial comparing ONCONASE(R)
as a single agent to doxorubicin in patients with unresectable malignant
mesothelioma. Unresectable malignant mesothelioma is
18
<PAGE>
often linked to asbestos exposure and afflicts approximately 2,500 to 3,500
newly diagnosed patients in the United States each year. This disease is found
in the lining of the lungs and the abdomen. Epidemiologists have predicted that
over the next 35 years over 250,000 people will die from malignant mesothelioma
in Europe alone. There is currently no standard FDA-approved drug for this
disease.
Thereafter, the clinical trial was amended to allow for the comparison of
the combination of ONCONASE(R) and doxorubicin versus doxorubicin as a single
therapeutic agent. In April 1999, the patient enrollment for the first part of
the clinical trial was completed. In addition, we have to complete the clinical
trial, chemistry, manufacturing and controls, toxicology and pharmacology
studies for the NDA. Based on the preliminary results of the trial, in March
2000, we had a pre-NDA meeting with the FDA to discuss these preliminary results
and the scope and details of a proposed NDA filing. Following that meeting, we
initiated a series of meetings with the FDA to establish mutually agreed
parameters necessary for the submission of the NDA. If the preliminary data is
confirmed by the continuing study, and other requirements for filing an NDA are
satisfied, we intend to file an NDA. We cannot estimate when the NDA may be
filed. We cannot assure you that an NDA will be filed or, if an NDA is filed,
that marketing approval for ONCONASE(R) as a treatment for malignant
mesothelioma will be granted by the FDA. Additionally, we intend to seek
non-U.S. marketing approvals for ONCONASE(R). However, there is no assurance
that such approval will be granted.
In July 1998, we discontinued two Phase III clinical trials testing
ONCONASE(R) 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 to evaluate the safety and efficacy of
the combination regimen of ONCONASE(R) and 13-cis-retinoic acid and
alpha-interferon under an Investigational New Drug Application or IND at MD
Anderson Cancer Center, Houston, Texas. The Phase I results have led to a
modification of the trial design. The new study has not yet been initiated. No
meaningful data from this study are yet available.
We have established two major scientific collaborations with the National
Institutes of Health: (a) in 1989, a collaboration with the National Institute
of Neurological Disorders and Stroke, and (b) in 1992, a collaboration with the
National Cancer Institute. Our research primarily focuses on ONCONASE(R)
mechanism of action studies, in vivo synergisms of ONCONASE(R) with other
anti-cancer agents and other routes of administration. In vivo studies are
performed on living animals.
We have produced a modified cloned, or recombinant version of ranpirnase
which enables other molecules to be attached to it with directed specificity,
such as monoclonal antibodies, growth factors and specific peptides, which are
short sequence of amino acids. This has resulted in a potential new product
line, ranpirnase conjugates. The National Cancer Institute collaboration has
also produced a potential new product, a conjugate of ranpirnase with a
monoclonal antibody that has demonstrated preclinical activity in non-Hodgkin's
lymphoma. Pre-clinical studies at the National Cancer Institute are ongoing in
preparation for commencing clinical trials for the treatment of non-Hodgkin's
lymphoma.
We believe that ranpirnase may also be used in the development of an
anti-viral agent. The National Institutes of Health have performed an
independent in vitro screen of ONCONASE(R) against the HIV virus type 1. In
vitro studies are those performed in artificial laboratory vessels. The results
showed ONCONASE(R) to inhibit replication of HIV by up to 99.9% after a four-day
incubation period at concentrations not toxic to uninfected H9 leukemic cells.
In addition, in vitro findings by National Institutes of Health scientists
revealed that ONCONASE(R) significantly inhibited production of HIV in several
persistently infected human cell lines, preferentially breaking down viral RNA
and cellular transfer RNA while not affecting normal cellular ribosomal RNA and
messenger RNAs. In addition, the National Institutes of Health - Division of
AIDS found ONCONASE(R) to have in vitro anti-viral activity. Subject to the
availability of the required capital, we plan to conduct further research
concerning anti-viral activity. We cannot assure you that we will have
sufficient capital to engage in further development for this application or that
ranpirnase will show any level of anti-viral HIV activity in humans.
We have also discovered another series of biologically active proteins.
These proteins appear to be involved in the regulation of both early embryonic
and malignant cell growth. However, it will require significant additional
research and funding to develop these proteins into therapeutics. At this time,
we are unable to fund such research and we do not know if we will be able to
raise sufficient capital in the future.
19
<PAGE>
ONCONASE(R) (RANPIRNASE) PROFILE
Originally, we developed a biological extract from early stage leopard frog
embryos and eggs which demonstrated potent anti-tumor activity. In 1987, we
completed the molecular identification of a specific protein, P-30 Protein. In
October 1998, the United States Adopted Names Council adopted ranpirnase as the
United States adopted name for our P-30 protein, which we have trademarked as
ONCONASE(R), intended for use in the treatment of solid tumors. Based upon the
complete amino acid sequence analysis, 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 ribonuclease. We
retain all commercial rights to ONCONASE(R).
PRECLINICAL RESEARCH
In Vitro Anti-Cancer Activity
ONCONASE(R) has demonstrated a broad spectrum of anti-tumor activity in
vitro and was determined to be active in the National Cancer Institute Cancer
Screen. Scientists at Harvard Medical School demonstrated that ONCONASE(R) has
anti-angiogenic activity. Anti-angiogenic activity is the process in which a
chemical interferes with the blood supply to cells, particularly tumors.
In vitro, ONCONASE(R), in combination with other drugs shown below, has
been shown to have a synergistic effect:
Drug Combination Cancer
-------------------------- -----------------------------------------
ONCONASE(R)+ Tamoxifen Prostatic, Ovarian, Renal Cell Carcinoma
ONCONASE(R)+ Phenothiazine Non-Small Cell Lung Carcinoma
ONCONASE(R)+ Lovastatin Non-Small Cell Lung Carcinoma, Ovarian
ONCONASE(R)+ Cisplatin Ovarian
ONCONASE(R)+ Vincristine Colorectal, Breast
ONCONASE(R)+ Doxorubicin Colorectal, [Res.] Breast
ONCONASE(R)+ Taxol [Res.] Breast
In Vivo Anti-Cancer Activity
There is in vivo data which indicates that the use of ONCONASE(R) with the
following drugs is synergistic, which means that the effect of ONCONASE(R) with
each of the following drugs acting together is greater than the effect of them
acting alone and greater than the sum of their effects:
o vincristine,
o doxorubicin, and
o tamoxifen.
These synergisms suggest a potential for the therapeutic utility of
ONCONASE(R) in patients with chemotherapy-resistant tumors. The National Cancer
Institute reported the ability of ONCONASE(R) to overcome multiple drug
resistance, both in vitro and in vivo. Previously, it was shown that ONCONASE(R)
could overcome other forms of drug resistance.
20
<PAGE>
ONCONASE(R)AS A RADIOSENSITIZING AND ANTI-ANGIOGENIC AGENT
Collaborative research at the University of Medicine and Dentistry of New
Jersey at Camden and the University of Pennsylvania Medical Center, Department
of Radiation Oncology, revealed potential radiosensitizing, an increasing
sensitivity to ionizing radiation, and co-antiangiogenic effects of ONCONASE(R).
This research also indicated that systemically administered ONCONASE(R) resulted
in diminution of tumor interstitial fluid pressure. Results of these studies
have been presented at scientific meetings as well as published in peer reviewed
journals.
CLINICAL DEVELOPMENT AND CLINICAL TRIALS
ONCONASE(R) has been tested in Phase I-III clinical trials in approximately
35 cancer centers across the United States, including major centers such as
Columbia-Presbyterian, University of Chicago, M.D. Anderson and Cedars-Sinai
Cancer Centers. Due to limited capital, we have been very selective in our
product development strategy, which is focused on the use of ONCONASE(R) alone
or in combination with drugs which have shown evidence of preclinical and
clinical efficacy on tumor types for which:
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.
ONCONASE(R) 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. ONCONASE(R) as a single agent is
currently in a Phase III clinical trial, initiated in June 1997, for
unresectable malignant mesothelioma, comparing ONCONASE(R) to doxorubicin. The
trial is a randomized, controlled study. Patient accrual was completed in April
1999. No standard FDA-approved therapy exists to treat this deadly cancer, and
most advanced, unresectable malignant mesothelioma patients die of this
progressive disease within six to 12 months of diagnosis. We are in the process
of analyzing the Phase III data from this clinical trial and have presented the
preliminary results to the FDA. We will begin a series of meetings with the
agency to establish mutually agreed upon parameters for the NDA to seek to
obtain marketing approval for ONCONASE(R). We are also evaluating the use of
ONCONASE(R) in combination with doxorubicin in patients with unresectable
malignant mesothelioma. In addition, we are taking steps to insure timely
European marketing registration. We cannot assure you that ONCONASE(R) will gain
marketing approval for the treatment of unresectable malignant mesothelioma.
In vitro results showed ONCONASE(R) to be synergistic with tamoxifen in
inhibiting tumor cell growth in prostate and renal cell cancers. Phase I/II
clinical studies testing ONCONASE(R) in combination with tamoxifen in prostate
cancer and renal cell carcinoma have been completed. Reported toxicities in
Phase I/II clinical trials were primarily renal, dose-related and reversible.
There has been little evidence of bone marrow suppression, hair loss or other
severe toxicities frequently observed after treatment with most other
chemotherapeutic drugs.
A Phase I/II clinical trial testing ONCONASE(R) in combination with
13-cis-retinoic acid and alpha-interferon in metastatic renal cell carcinoma has
been conducted. A metastatic renal cell carcinoma is a cancer of the kidney
which originated in the kidney, and spread to the other parts of the body. The
Phase I results have led to the modification of the trial design. The new study
has not yet been initiated.
We initially focused our development efforts on clinical trials in
pancreatic cancer. However, due to the lack of a demonstrated statistically
significant survival benefit, in July 1998 we discontinued two Phase III
clinical trials testing ONCONASE(R) in combination with tamoxifen in pancreatic
cancer.
A collaboration with the National Cancer Institute has produced a conjugate
of ranpirnase with a monoclonal antibody which has been deemed active in vivo
for non-Hodgkin's lymphoma. The conjugate is currently being evaluated by the
National Cancer Institute for clinical trials.
21
<PAGE>
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.
Research and development expenses for the nine-months ended April 30, 2000 were
$1,767,000. Our research and development programs focus primarily on the
development of therapeutics from amphibian ribonucleases. Ribonucleases are
enzymes which have been shown to be involved in the regulation of cell
proliferation, maturation, differentiation and apoptosis. Apoptosis is
programmed cell death. Therefore, they may be ideal candidates for the
development of therapeutics for the treatment of cancer and other
life-threatening diseases, including HIV infections, that require
anti-proliferative and pro-apoptotic properties.
Our research and development programs relate to the development of drugs to
treat the following cancers and other diseases:
o unresectable malignant mesothelioma,
o renal cell carcinoma,
o non-Hodgkin's lymphoma,
o primary brain tumors,
o viral diseases,
o anti-inflammatory diseases, and
o other pathological conditions such as organ transplantation.
We are pursuing some of these programs independently, while others are being
undertaken in collaboration with the National Institutes of Health, or other
institutions such as the University of Pennsylvania.
Ranpirnase Conjugates and Fusion Proteins
In addition to use in its native form, ranpirnase is being combined with
targeting molecules to ensure its delivery to specific tissue targets. Several
conjugates are being developed by the National Institutes of Health in
collaboration with our 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. We intend to use these genes to develop novel therapeutics that
selectively target specific tumors. Production of these engineered genes and
products may also lead to their use in gene therapy and other therapeutic
applications in cancer and other pathological conditions.
We, in collaboration with the National Cancer Institute, are developing a
ranpirnase conjugate for the treatment of patients with non-Hodgkin's lymphoma.
This potential product is in preclinical testing at the National Cancer
Institute.
Proteasome Inhibitors
Cyclins and cyclin-dependent kinases are two major groups of protein
regulators of cell cycle progression. Cancer can be defined as the uncontrolled
growth and proliferation of cells often associated with a de-regulated pattern
of the expression of these proteins. In vitro studies of ONCONASE(R) have shown
its ability to interrupt cell cycle progression. Given that ONCONASE(R) and
proteasome inhibitors both have been shown in vitro to modulate fundamental
mechanisms governing tumor cell growth, proliferation and death, we are testing
ONCONASE(R) and proteasome inhibitors in combination and have discovered
synergistic anti-tumor effects. We believe that a new class of anti-cancer
compounds can be developed combining ranpirnase and its variants with proteasome
inhibitors. We retain all commercial rights to compounds resulting from these
studies.
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<PAGE>
HIV Infection
The drugs currently approved in the United States for the treatment of the
HIV infection consist primarily of reverse transcriptase inhibitors and protease
inhibitors. There is an extremely high rate of resistance developing to several
currently available anti-viral drugs, primarily due to the exponentially
increasing rate of mutations of HIV that occur during infection.
Experimental data shows that anti-HIV effects of ONCONASE(R) are quite
selective, independent of the HIV envelope and therefore likely to inhibit
replication of the different HIV-1 subtypes. In vitro studies have been
performed by independent scientific collaborators, including the National
Institutes of Health - Division of AIDS. Ranpirnase is an enzyme highly
specialized in the breakdown of RNA molecules and might be an effective anti-HIV
agent, irrespective of viral mutations that render other antiviral agents
ineffective. We retain all commercial rights to compounds resulting from this
study. However, we do not currently possess the funds necessary to conduct
further research for this indication.
Ranpirnase Variant Conjugates
We have developed a variant of ranpirnase and conjugated it to a variety of
clinically important proteins and peptides. These conjugates are designed to
specifically target relevant molecules in the body and inactivate them. These
conjugates may have therapeutic applications in the treatment of
anti-inflammatory diseases, such as arthritis and other autoimmune diseases.
However, we cannot assure you that these products will be successfully
developed.
RAW MATERIALS
The major active ingredient derived from leopard frog eggs is the protein
ranpirnase. Although we currently acquire our natural source material from a
single supplier, we believe that it is abundantly available from other sources.
We have sufficient egg inventory on hand to produce enough ONCONASE(R) to
complete the current clinical trials and supply ONCONASE(R) for up to two years
after commercialization. In addition, we have successfully completed the cloning
of the gene of natural protein ranpirnase. However, we cannot assure you that
using the recombinant technology will be more cost effective than the natural
source.
MANUFACTURING
We have signed an agreement with Scientific Protein Laboratories, a
subsidiary of a division of American Home Products Corp., which will perform the
intermediary manufacturing process of purifying ranpirnase. Subsequently, the
intermediate product will be sent to a contract filler for the final
manufacturing step and vial filling. Other than these arrangements, no specific
arrangements have been made for the manufacture of our product. Compliance with
Current Good Manufacturing Practices is a requirement for products manufactured
for use in Phase III clinical trials and for commercial sale. Both Scientific
Protein Laboratories, and the contract filler to whom the intermediate product
is sent, manufacture in accordance with Current Good Manufacturing Practices.
For the foreseeable future, we intend to rely on these manufacturers, or
substitute manufacturers, if necessary, to manufacture our product. We cannot
assure you that we would be able to find substitute manufacturers, if necessary.
We are dependent upon our contract manufacturers to comply with Current Good
Manufacturing Practices and to meet our production requirements. There can be no
assurance that our contract manufacturers will comply with Current Good
Manufacturing Practices or timely deliver sufficient quantities of our products.
MARKETING
Neither our company nor any of our officers or employees has pharmaceutical
marketing experience. If we were to market our products ourselves, significant
additional expenditures and management resources
23
<PAGE>
would be required to develop an internal sales force. We cannot assure you that
if we were to market our product ourselves we would successfully penetrate the
markets for any products developed or that internal marketing capabilities would
be developed at all. We intend, in some instances, to enter into development and
marketing agreements with third parties. We expect that under such arrangements
we would act as a co-marketing partner or would grant exclusive marketing rights
to our corporate partners in return for i.e., assuming further research and
development cost, up-front fees, milestone payments and royalties on sales.
Under these agreements, our marketing partner may have the responsibility for a
significant portion of development of the product and regulatory approval. In
the event that our marketing partner fails to develop a marketable product or
fails to market a product successfully, our business may be adversely affected.
GOVERNMENT REGULATION
The manufacturing and marketing of pharmaceutical products in the United
States requires the approval of the FDA under the Federal Food, Drug and
Cosmetic Act. Similar approvals by comparable regulatory agencies are required
in most foreign countries. The FDA has established mandatory procedures and
safety standards which apply to the clinical testing, manufacturing and
marketing of pharmaceutical products. Obtaining FDA approval for a new
therapeutic may take many years and involve substantial expenditures. State,
local and other authorities also regulate pharmaceutical manufacturing
facilities.
As an initial step in the FDA regulatory approval process, preclinical
studies are conducted in laboratory dishes and animal models to assess the
drug's efficacy and to identify potential safety problems. The results of these
studies are submitted to the FDA as a part of the IND, which is filed to obtain
approval to begin human clinical testing. The human clinical testing program
typically involves up to three phases. Data from human trials as well as other
regulatory requirements such as chemistry, manufacturing and controls;
pharmacology and toxicology sections, are submitted to the FDA in an NDA or
Biologics License Application. Preparing an NDA or BLA involves considerable
data collection, verification and analysis.
We have not received United States or other marketing approval for any of
our product candidates. We may encounter difficulties or unanticipated costs in
our effort to secure necessary governmental approvals, which could delay or
preclude us from marketing our products. There can be no assurance that the FDA
or any foreign country will approve any of our products.
With respect to patented products, delays imposed by the governmental
approval process may materially reduce the period during which we may have the
exclusive right to exploit them.
PATENTS
We believe it is important to develop new technology and to improve our
existing technology. When appropriate, we file patent applications to protect
inventions in which we have an ownership interest.
We own six patents in the United States:
o U.S. Patent No. 4,888,172, issued in 1989, which covers a
pharmaceutical produced from fertilized frog eggs (Rana pipiens) and
the methodology for producing it.
o U.S. Patent No. 5,559,212, issued in 1996, which covers the amino acid
sequence of ONCONASE(R).
o U.S. Patents Nos. 5,529,775 and 5,540,925, issued in 1996 and U.S.
Patent No. 5,595,734, issued in 1997, which cover combinations of
ONCONASE(R)with certain other pharmaceuticals.
o U.S. Patent No. 5,728,805, issued in 1998, which covers a family of
variants of ONCONASE(R).
We own three European patents, which have been validated in certain
European countries. These patents cover ONCONASE(R), process technology for
making ONCONASE(R), and combinations of
24
<PAGE>
ONCONASE(R) with certain other chemotherapeutics. We also have patent
applications pending in the United States, Europe, and Japan. Additionally, we
own one Japanese patent and have an undivided interest in two applications that
are pending in the United States. Each of these applications relate to a Subject
Invention (as that term is defined in CRADAs to which we and the National
Institutes of Health are parties).
The scope of protection afforded by patents for biotechnological inventions
can be uncertain, and such uncertainty may apply to our patents as well. The
patent applications we have filed, or that we may file in the future, may not
result in patents. Our patents may not give us competitive advantages, may be
wholly or partially invalidated or held unenforceable, or may be held
uninfringed by products that compete with our products. Patents owned by others
may adversely affect our ability to do business. Furthermore, others may
independently develop products that are similar to our products or that
duplicate our products, and may design around the claims of our patents.
Although we believe that our patents and patent applications are of substantial
value to us, we cannot assure you that such patents and patent applications will
be of commercial benefit to us, will adequately protect us from competing
products or will not be challenged, declared invalid, or declared uninfringed.
We also rely on proprietary know-how and on trade secrets to develop and
maintain our competitive position. Others may independently develop or obtain
access to such know-how or trade secrets. Although our employees and consultants
having access to proprietary information are required to sign agreements which
require them to keep such information confidential, such agreements may be
breached or held to be unenforceable.
COMPETITION
There are several companies, universities, research teams and scientists,
both private and government-sponsored, which engage in research similar, or
potentially similar, to that performed by us. Many of these entities and
associations have far greater financial resources, larger research staffs and
more extensive physical facilities. These competitors may develop products that
are more effective than ours and may be more successful than us at producing and
marketing their products. We are not aware, however, of any product currently
being marketed that has the same mechanism of action as our proposed anti-tumor
agent, ONCONASE(R). Search of scientific literature reveals no published
information which would indicate that others are currently employing this method
or producing such an anti-tumor agent. There are several chemotherapeutic agents
currently used to treat the forms of cancer which ONCONASE(R) is being used to
treat. There can be no assurance that ONCONASE(R) 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(R).
EMPLOYEES
As of April 30, 2000, we employed 14 persons, of whom 11 were engaged in
research and development activities and three were engaged in administration and
management. We have four employees who hold Ph.D. degrees and one holds a M.D.
degree. All of our employees are covered by confidentiality agreements. We
consider relations with our employees to be very good. None of our employees are
covered by a collective bargaining agreement.
ENVIRONMENTAL MATTERS
Our operations are subject to comprehensive regulation with respect to
environmental, safety and similar matters by the United States Environmental
Protection Agency and similar state and local agencies. Failure to comply with
applicable laws, regulations and permits can result in injunctive actions,
damages and civil and criminal penalties. If we expand or change our existing
operations or propose any new operations, we may need to obtain additional or
amend existing permits or authorizations. We spend time, effort and funds in
operating our facilities to ensure compliance with environmental and other
regulatory requirements. Such efforts and expenditures are common throughout the
biotechnology industry and generally should have no material adverse effect on
our financial condition. The principal environmental regulatory requirements and
25
<PAGE>
matters known to us requiring or potentially requiring capital expenditures by
us do not appear likely, individually or in the aggregate, to have a material
adverse effect on our financial condition. We believe that we are in compliance
with all current laws and regulations.
PROPERTIES
We lease a total of approximately 17,000 square feet in an industrial
office building located in Bloomfield, New Jersey. We lease the facility under a
five-year operating lease which is due to expire December 31, 2001. The annual
rental obligation, which commenced January 1, 1997, is $96,775 and is subject to
escalation amounts. We believe that the facility is sufficient for our needs in
the foreseeable future.
LEGAL PROCEEDINGS
We are presently not involved in any legal proceedings.
26
<PAGE>
MANAGEMENT
Directors And Executive Officers
Our directors and executive officers are:
<TABLE>
<CAPTION>
Name Age Director Since Position with the Company
--------------------------- --- -------------- ------------------------------------------------------
<S> <C> <C> <C>
Kuslima Shogen 54 1981 Chairman of the Board, Chief Executive Officer,
Acting Chief Financial Officer
Stanislaw M. Mikulski, M.D. 55 1986 Executive Vice President, Medical Director and
Director
Stephen K. Carter, M.D.(1) 64 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>
----------
(1) Member of Compensation Committee
(2) Member of Audit Committee
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
Kuslima Shogen has served as our Chief Executive Officer since September
1986, as Chairman of the Board since August 1996, as a Director since our
inception and as Acting Chief Financial Officer since June 23, 1999. She also
served as our Chief Financial Officer from September 1986 through July 1994 and
as our President from September 1986 through July 1996. Ms. Shogen formed the
company in 1981 to pursue research that she had initiated while a biology
student in the University Honors Program at Fairleigh Dickinson University.
Prior to our founding, from 1976 to 1981 she was founder and president of a
biomedical research consortium specializing in Good Laboratory Practices and
animal toxicology. During that time, she also served as a consultant for the
Lever Brothers Research Group. Ms. Shogen has received numerous awards for
achievements in biology, including the Sigma Xi first prize from the Scientific
Research Society of North America in 1974 and first prize for the most
outstanding research paper in biology at the Eastern College Science Conferences
competitions in 1972, 1973, and 1974. She earned a B.S. degree in 1974 and an
M.S. degree in 1976 in biology from Fairleigh Dickinson University, 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 Farleigh
Dickinson University, the highest honor the University bestows on its graduates.
Stanislaw M. Mikulski, M.D., F.A.C.P. has served as our Executive Vice
President and Medical Director since 1987 and as a Director since 1986. Prior to
his affiliation with us, Dr. Mikulski was Special Assistant to the Chief of the
Investigational Drug Branch of the National Cancer Institute and the Coordinator
for Immunotherapy Trials in Cancer for the Division of Cancer Treatment. Prior
to joining us, he maintained a private practice in medical oncology for over
eight years. He is a diplomate of the American Board of Internal Medicine and
Medical Oncology as well as a fellow of the American College of Physicians and a
member of the American Society of Clinical Oncology. 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.
27
<PAGE>
Stephen K. Carter, M.D. joined the Board of Directors in May 1997 and
serves as Chairman of our Scientific Advisory Board. In addition to his
positions with us, Dr. Carter also serves as a senior clinical consultant to
Sugen, Inc. From 1995 through 1997, he served as Senior Vice President of
Research and Development for Boehringer-Ingelheim Pharmaceuticals. Before this,
Dr. Carter spent over 13 years with Bristol-Myers Squibb, an international
leader in the development of innovative anti-cancer and anti-viral therapies. He
held a variety of senior executive research and development positions while at
Bristol-Myers, including serving for five years as Senior Vice President of
worldwide clinical research and development of its Pharmaceutical Research
Institute. From 1976 to 1982, he established and directed the Northern
California Cancer Program. Prior to this, he held a number of positions during a
nine-year tenure at the National Cancer Institute, including the position of
Deputy Director at the National Institutes of Health. He has also been a member
of the faculties of the medical schools of Stanford University, the University
of California at San Francisco and New York University. Dr. Carter has published
extensively on the development of anti-cancer drugs, was the co-founding editor
of journals devoted to cancer therapeutics or immunology, and has served on the
editorial boards of a number of additional journals dedicated to cancer
treatment. He is a member of the American Society of Clinical Oncology, the
American Association for Cancer Research, and the Society of Surgical Oncology,
as well as several other medical societies. Dr. Carter earned his B.A. from
Columbia University and his M.D. from New York Medical College. He currently
serves on the board of directors of Allos Therapeutics.
Donald R. Conklin joined the Board of Directors in May 1997. Prior to his
retirement in May 1997, Mr. Conklin was a senior executive with Schering-Plough,
a major worldwide pharmaceutical firm. During his more than 35 years with
Schering-Plough, he held a variety of key management positions within the firm.
From 1986 to 1994, he served as President of Schering-Plough Pharmaceuticals and
Executive Vice-President of Schering-Plough Corporation. In this position, he
was responsible for worldwide pharmaceutical operations, including the launch of
INTRON A(R) (interferon alfa-2b). Prior to this, Mr. Conklin had served as
President of Schering USA and had held a variety of executive marketing
positions in the United States, Europe, and Latin America. Immediately preceding
his retirement, he was Chairman of Schering-Plough Health Care Products and an
Executive Vice President of Schering-Plough Corporation. Mr. Conklin received
his B.A. with highest honors from Williams College and his M.B.A. degree from
the Rutgers University School of Business. He currently serves on the board of
directors of Vertex Pharmaceuticals, Inc. and BioTransplant, Inc.
Martin F. Stadler joined the Board of Directors in November 1997. At the
end of 1996, Mr. Stadler retired from Hoffmann La-Roche, Inc. after 32 years of
pharmaceutical, chemical and diagnostic experience. Mr. Stadler served as senior
vice president and chief financial officer, and was a member of the Hoffmann
La-Roche, Inc. board of directors, from 1985 through 1996. His responsibilities
included finance, information technology, human resources, quality control and
technical services. Prior to 1985, Mr. Stadler served as vice- president of
strategic planning and business development. Mr. Stadler received his B.S.
degree from Rutgers University and his M.B.A. from Fairleigh Dickinson
University. In April 1999, he received the Pinnacle Award from Fairleigh
Dickinson University, 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 Dickinson University and a member of the
Advisory Board for Horton International.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides a summary of cash and non-cash compensation
for each of the last three fiscal years ended July 31, 1999, 1998 and 1997
earned by our Chief Executive Officer and our only two other executive officers
during the last fiscal year.
<TABLE>
<CAPTION>
Securities
Other Annual Underlying All other
Name and Compensation Options/SARs Compensation
Principal Position Year Salary ($) Bonus ($) ($)(1) (#) ($)
------------------ ---- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Kuslima Shogen, 1999 $150,000 -0- -0- -0- -0-
Chief Executive Officer and Chairman 1998 150,000 -0- -0- -0- -0-
of the Board of Directors ................. 1997 150,000 -0- -0- -0- -0-
Gail E. Fraser (2) 1999 $130,000 -0- -0- 115,000(3) -0-
Vice President, Finance and Chief 1998 130,000 -0- -0- -0- -0-
Financial Officer ......................... 1997 130,000 -0- -0- -0- -0-
Stanislaw M. Mikulski 1999 130,000 -0- -0- 50,000(4) -0-
Executive Vice President and Medical 1998 130,000 -0- -0- -0- -0-
Director .................................. 1997 130,000 -0- -0- -0- -0-
</TABLE>
----------
(1) Excludes perquisites and other personal benefits which in the aggregate do
not exceed 10% of such executive officer's total annual salary and bonus.
(2) Ms. Fraser resigned as our Vice President, Finance and Chief Financial
Officer effective as of June 23, 1999.
(3) These options were granted under our 1993 Stock Option 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 our common
stock on the date of grant.
(4) These options were granted under our 1993 Stock Option Plan on December 1,
1998, vested immediately, have an exercise price of $0.43 per share and
will expire on December 1, 2003. The price of the options was based on the
fair market value of our common stock on the date of grant.
29
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of
stock options to our executive officers during the fiscal year ended July 31,
1999:
<TABLE>
<CAPTION>
Number of % of Total
Securities Options Exercise Potential Realizable Value at
Underlying Granted to or Base Assumed Annual Rates of Stock
Options Employees in Price Expiration Price Appreciation for Option Term (1)
Name Granted (#) Fiscal Year ($/Share) Date 0%($) 5%($) 10%($)
--------------------------------- ------------ ------------- --------- ---------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Kuslima Shogen ................. -- -- -- -- -- -- --
Stanislaw M. Mikulski .......... 50,000(2) 14.49% $0.43 12/01/03 -- $ 1,075 $ 2,150
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 our stock price increases
above the exercise price.
(2) These options were granted under our 1993 Stock Option Plan on December 1,
1998.
(3) These options were granted under our 1993 Stock Option Plan on December 1,
1998. Ms. Fraser resigned as our 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 our
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 Underlying Value of Unexercised In-The-
Unexercised Options at Fiscal Money Options at Fiscal Year-
Year-End(#) End ($)(2)
Shares Value ------------------------------- -----------------------------
Acquired on Realized
Name Exercise(#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kuslima Shogen ........................ -0- -0- 1,631,208 -0- -0- -0-
Stanislaw M. Mikulski ................. -0- -0- 445,740 -0- -0- -0-
Gail E. Fraser ........................ -0- -0- 465,000 -0- -0- -0-
</TABLE>
----------
(1) Based upon the fair market value of the purchased shares on the option
exercise date less the exercise price paid for the shares.
(2) The fair market value of our common stock at the fiscal year end was based
on the average of the high and low trade prices ($0.51) for our common
stock obtained from the OTC Bulletin Board on the last trading day of the
fiscal year July 31, 1999.
30
<PAGE>
EMPLOYMENT AND TERMINATION AGREEMENTS
On August 31, 1999 we entered into a separation agreement and general
release with Ms. Gail E. Fraser pursuant to which (i) Ms. Fraser confirmed her
resignation as our vice president, finance, chief financial officer, director
and employee effective as of June 23, 1999, (ii) we agreed to pay Ms. Fraser her
regular salary for the period commencing on the date of resignation through July
31, 1999, (iii) we agreed with Ms. Fraser that an aggregate of 395,000 options
granted to Ms. Fraser under our 1993 Stock Option Plan, all of which had vested
as of the date of her resignation, will remain vested and exercisable until
December 30, 2000 and an aggregate of 70,000 options granted under our 1993
Stock Option Plan, which had not vested on the date of her resignation, will be
deemed vested as of the date of resignation and will remain exercisable until
December 30, 2000, (iv) we 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 us until
December 30, 2000.
DIRECTORS' COMPENSATION
Directors receive no cash compensation in consideration for their serving
on our Board of Directors. In November 1993 and January 1994, the Board of
Directors and the stockholders, respectively, approved our 1993 Stock Option
Plan which, among other things, provides for automatic grants of options under a
formula to non-employee directors on an annual basis.
The formula provides that (i) on each December 31st each non-employee
director receives automatically an option to purchase 15,000 shares of our
common stock or the regular grant; and (ii) on the date of each non-employee
director's initial election to the Board of Directors, the newly elected
non-employee director automatically receives an option to purchase the
non-employee director's pro rata share of the regular grant which equals the
product of 1,250 multiplied by the number of whole months remaining in the
calendar year or the pro rata grant. Each option granted pursuant to a regular
grant and a pro rata grant vests and becomes exercisable on December 30th
following the date of grant. An option will not become exercisable as to any
shares unless the non-employee director has served continuously on the Board of
Directors during the year preceding the date on which the options are scheduled
to vest and become exercisable, or from the date the non-employee director
joined the Board of Directors until the date on which the options are scheduled
to vest and become exercisable. However, if a non-employee director does not
fulfill the continuous service requirement due to the non-employee director's
death or disability all options held by the non-employee 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 the average of the high and low trade prices for
the twenty (20) days prior to the grant.
During the fiscal year ended July 31, 1999, the following non-employee
directors were granted the options listed below pursuant to the formula under
the 1993 Stock Option Plan. The exercise prices of the options are equal to the
formula set forth above.
<TABLE>
<CAPTION>
Name Number of Options Exercise Price Expiration
----------------------------------------------- ---------------------------- ----------------------- -------------------
<S> <C> <C> <C>
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
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended July 31, 1999, the members of our Board of
Directors who served on the Compensation Committee were Stephen K. Carter,
Donald R. Conklin and Martin F. Stadler.
31
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 23, 1991, the Board of Directors authorized us to pay Kuslima
Shogen an amount equal to 15% of any gross royalties which may be paid to us
from any license(s) with respect to our principal product, ONCONASE(R), or any
other products derived from amphibian source extract, produced either as a
natural, synthesized, and/or genetically engineered drug for which we own or are
a co-owner of the patent, or acquire such rights in the future, for a period not
to exceed the life of the patents. If we manufacture and market the drugs
ourselves, we will pay an amount equal to 5% of gross sales from any products
sold during the life of the patents.
In August 1998, Ms. Shogen and Dr. Mikulski settled, and the court approved
the settlement, of a claim brought against them in the United States District
Court, District of New Jersey at Newark, New Jersey, by a shareholder under
Section 16(b) of the Securities Exchange Act of 1934, as amended, for profits
alleged to have been realized by Ms. Shogen and Dr. Mikulski in transactions
involving our securities in 1988 and 1989. Claims under Section 16(b) are for
profits calculated under such statute to have been realized for sales and
purchases of our securities made within a six month period. In this case the
purchases which formed the basis for this claim were issuances of shares of
stock to Ms. Shogen and Dr. Mikulski under employment agreements with us based
upon our achievement of certain milestones. No allegations of fraud were made.
Ms. Shogen agreed to pay us $91,971.00 and Dr. Mikulski agreed to pay us
$72,903.00. Such payments are to be made in a form acceptable to us whether in
cash, shares of our common stock or options to purchase our common stock, with
25% of such payments having been made in August 1998 and the remainder of such
amounts payable in three equal installments in August 1999, 2000 and 2001. The
August 1998 payments were made by the cancellation of options to purchase 44,999
shares of common stock owned by Ms. Shogen and the cancellation of options to
purchase 35,669 shares of common stock owned by Dr. Mikulski. In August 1999,
Ms. Shogen paid the balance in full by the cancellation of options to purchase
134,995 shares owned by Ms. Shogen and Dr. Mikulski paid an installment equal to
one-third of the balance by the cancellation of options to purchase 35,367
shares owned by Dr. Mikulski. In February 2000 Dr. Mikulski paid the balance in
full by the cancellation of options to purchase 31,599 shares owned by him.
In December 1998, we 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 our common stock on the date of grant. Our
Compensation Committee approved the grant of these options, which vested
immediately. Ms. Fraser resigned as our Vice President, Finance, Chief Financial
Officer and director effective as of June 23, 1999. As of May 31, 2000, Ms.
Fraser exercised 90,000 of the 115,000 options.
32
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning stock
ownership of each person who is the beneficial owner of five percent or more of
our outstanding common stock, each of the current directors, our Chief Executive
Officer and each of our other executive officers with annual compensation of
more than $100,000 and all directors and executive officers as a group as of May
31, 2000. Except as otherwise noted, each person has sole voting and investment
power with respect to the shares shown as beneficially owned.
<TABLE>
<CAPTION>
Number Percentage of
Directors, Officers or 5% Stockholders(1)(2) of Shares(3) Stock Outstanding
--------------------------------------------------------------- ------------ -----------------
<S> <C> <C>
Kuslima Shogen................................................. 2,396,343(4) 12.3%
Stanislaw M. Mikulski.......................................... 701,095(5) 3.7%
Stephen K. Carter.............................................. 103,750(6) *
Donald R. Conklin.............................................. 159,250(7) *
Martin F. Stadler.............................................. 161,250(8) *
All executive officers and directors as a group
(five persons) ................................................ 3,521,688(9) 17.4%
</TABLE>
----------
* Less than one percent.
(1) The address of all officers and directors listed above is in the care of
the company.
(2) 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 May 31, 2000 by (ii) the sum of (A) the
number of shares of common stock outstanding as of May 31, 2000 plus (B)
the number of shares issuable upon exercise of options or warrants held by
such stockholder which were exercisable as of May 31, 2000 or which will
become exercisable within 60 days after May 31, 2000.
(3) 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.
(4) Includes 1,127,723 shares underlying options which were exercisable as of
May 31, 2000 or which will become exercisable within 60 days after May 31,
2000.
(5) Includes 339,845 shares underlying options which were exercisable as of May
31, 2000 or which will become exercisable within 60 days after May 31,
2000.
(6) Includes 103,750 shares underlying options which were exercisable as of May
31, 2000 or which will become exercisable within 60 days after May 31,
2000.
(7) Includes 93,750 shares underlying options which were exercisable as of May
31, 2000 or which will become exercisable within 60 days after May 31,
2000.
(8) Includes 86,250 shares underlying options which were exercisable as of May
31, 2000 or which will become exercisable within 60 days after May 31, 2000
and 25,000 shares underlying warrants which were exercisable as of May 31,
2000 or which will become exercisable within 60 days after May 31, 2000.
(9) Includes all shares owned beneficially by the directors and the executive
officers named in the table.
33
<PAGE>
SELLING SECURITYHOLDERS
On February 20, 1998, we completed a private placement that resulted in the
issuance of an aggregate of 2,337,150 shares of restricted common stock and
1,168,575 three-year warrants to purchase an aggregate of 1,168,575 shares of
common stock at an exercise price of $2.50 per share. We filed a registration
statement on Form S-3 registering the shares of common stock and the shares of
common stock underlying the warrants both issued in connection with the February
1998 private placement on March 31, 1998. The shares of common stock and the
shares of common stock underlying the warrants registered in connection with the
February 1998 private placement were de-registered effective October 31, 1999.
This prospectus relates to the offer and resale of 1,168,575 shares of common
stock underlying the warrants issued in the February 1998 private placement by
the holders.
Sanders Morris Harris Inc. (formerly known as Harris, Webb & Garrison,
Inc.), an investment banking firm located in Houston, Texas, acted as placement
agent in the February 1998 private placement and received as part of its
compensation a three-year warrant to purchase 116,858 units at an exercise price
of $4.40 per unit. Each unit consists of two shares of our common stock and one
three-year warrant to purchase one share of common stock at an exercise price of
$2.50 per share. In May 1998, warrants to purchase 1,500 of such units were
exercised and the 3,000 shares of common stock underlying the units were
subsequently sold. The warrants issued upon the exercise of these units has not
been exercised or sold. Warrants to purchase an additional 650 units were
exercised in June 1998 and the 1,300 shares of common stock underlying the unit
were sold as well as the 650 shares that were issued upon the exercise of the
warrants included in such units. This prospectus relates to the offer and sale
by the placement agent of the 345,624 shares of common stock underlying the
placement agent warrant.
On October 10, 1997, we issued options to purchase 12,000 shares of common
stock at an exercise price of $3.91 per share to Expert Medical Consultants as
payment for services to be rendered. 5,000 of such options have since been
cancelled. The remaining options vested as to 1,000 shares per month from
October 10, 1997 through April 10, 1998 and expire five years from the
respective vesting date. As of the date hereof, all of the options are fully
vested and remain outstanding. This prospectus relates to the offer and sale by
the option holder of 7,000 shares of common stock underlying the options.
On October 1, 1998, we issued options to purchase 200,000 shares of common
stock at an exercise price of $1.00 per share to Sage Partners as payment for
services to be rendered. 150,000 of such options were cancelled in November 1999
upon the cancellation of the contract with Sage Partners. The remaining options
vested as to 2,500 shares per month from October 31, 1998 through September 30,
1999 and as to 20,000 shares on October 1, 1999. The options expire five years
from the respective vesting date. As of the date hereof, all of the options are
fully vested and remain outstanding. This prospectus relates to the offer and
sale by the option holder of 50,000 shares of common stock underlying the
options.
On March 30, 1994, we issued options to purchase 379,678 shares of common
stock at an exercise price of $3.20 per share to Kuslima Shogen in satisfaction
for money loaned to us. A total of 151,872 of such options have since terminated
or were cancelled. The remaining options expire as to 75,936 shares on March 30,
2001 and as to 75,935 shares on each of March 30, 2002 and March 30, 2003. As of
the date hereof, the remaining 227,806 options remain outstanding. This
prospectus relates to the offer and sale by the option holder of 227,806 shares
of common stock underlying the options by the holders.
In August 1999 and January 2000, we issued 40,000 and 100,000 shares of
common stock, respectively, to DZS Computer Solutions, Inc. as payment for
services rendered. This prospectus relates to the offer and resale by DZS
Computer Solutions, Inc. of 140,000 shares of common stock.
34
<PAGE>
In September 1998, January 1999, September 1999 and January 2000, we issued
13,717, 26,984, 14,600 and 20,365 shares of common stock, respectively, to Mark
Jay for payment of legal services. This prospectus relates to the offer and
resale by Mr. Jay of 75,666 shares of common stock.
In February 2000, we completed two private placements. The first resulted
in the issuance of 187,500 units for an aggregate of $375,000, each unit
consisting of two shares of our common stock, one three-year warrant to purchase
one share of common stock at $3.25 per share and one five-year warrant to
purchase one share of common stock at $4.55 per share. The second private
placement resulted in the issuance of 250,000 units for an aggregate $250,000,
each unit consisting of two shares of our common stock, one three-year warrant
to purchase one share of common stock at $1.03 per share and one five-year
warrant to purchase one share of common stock at $2.50 per share. We will use
the net proceeds for general corporate purposes, including the funding of
research and development activities. This prospectus relates to the offer and
sale of 875,000 shares of common stock and 875,000 shares issuable upon the
exercise of warrants to purchase common stock issued in the February 2000
private placements.
We are required to maintain the effectiveness of this registration
statement for a period of two years from the date this prospectus is declared
effective.
STOCK OWNERSHIP
The table below sets forth the number of shares of common stock (a) owned
beneficially by each of the selling stockholders, (b) offered by each selling
stockholder pursuant to this prospectus, (c) to be owned beneficially by each
selling stockholder after completion of the offering, assuming that all of the
warrants and options held by the selling stockholders are exercised and all of
the shares offered in this prospectus are sold and that none of the other shares
held by the selling stockholders, if any, are sold, and (d) the percentage to be
owned by each selling stockholder after completion of the offering, assuming
that all of the warrants and options held by the selling stockholders are
exercised and all of the shares offered in this prospectus are sold and that
none of the other shares held by the selling stockholders, if any, are sold. For
purposes of this table each selling stockholder is deemed to own beneficially
(a) the shares of common stock underlying the warrants and options (b) the
issued and outstanding shares of common stock owned by the selling stockholder
as of May 31, 2000 and (c) the shares of common stock underlying any other
options or warrants owned by the selling stockholder which are exercisable as of
May 31, 2000 or which will become exercisable within 60 days after May 31, 2000.
Except as otherwise noted, none of such persons or entities has had any material
relationship with us during the past three years.
In connection with the registration of the shares of common stock offered
in this prospectus, we will supply prospectuses to the selling stockholders.
<TABLE>
<CAPTION>
Shares Owned
Shares Upon % of Shares
Owned Prior Shares Being Completion Owned After
Name(1) To Offering Offered Of Offering Offering(2)
----------------------------------------------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Aries Domestic Fund, L.P. 247,500 247,500 -- *
The Aries Fund, A Cayman Island Trust 502,500 502,500 -- *
Berkley Corporation 12,500 12,500 -- *
Bridgewater Partners, L.P. 25,000 25,000 -- *
Burke Jr., William R 3,000 3,000 -- *
Champagne, Corinne M 94,140 68,000 26,140 *
C.S.L. Associates, L.P. 25,000 25,000 -- *
Cobbs, Jerald(3)(4) 63,549 63,549 -- *
Cranshire Capital, L.P. 31,250 31,250 -- *
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Shares Owned
Shares Upon % of Shares
Owned Prior Shares Being Completion Owned After
Name(1) To Offering Offered Of Offering Offering(2)
----------------------------------------------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Curran Partners, L.P. 61,875 61,875 -- *
Davis, Richard H 5,000 5,000 -- *
Duncan, Robert D 5,000 5,000 -- *
DZS Computer Solutions, Inc.(5) 140,000 140,000 -- *
EC Investment Ltd. 128,000 50,000 78,000 *
Expert Medical Consultants, Inc. 7,000 7,000 -- *
Garcia, Ray R 500 500 -- *
Garrison II, Robert E. (3) 35,058 35,058 -- *
Henry, Heather 20,400 5,000 15,400 *
Henry, Kimberly A 20,400 5,000 15,400 *
Henry, Robert R. (6) 166,300 15,000 151,300 *
Huque, Khundker Selim 3,000 1,000 2,000 *
Jay, Mark(7) 169,272 75,666 93,606 *
Khondker, Zia (3) 420 420 -- *
Cowen & Co. Cust. FBO Brit W. King 1,000 1,000 -- *
King, Brit (3) 120 120 -- *
Knutsen, A. Roy 11,250 11,250 -- *
Delaware Charter Guarantee and Trust
Company Trustee F/B/O Richard T. LeBuhn 16,000 5,000 11,000 *
First Trust Corp Robert LeBuhn Keogh (8) 52,500 12,500 40,000 *
Lowe, Colleen A 97,640 68,000 29,640 *
McCash, James O. (9) 1,035,485 275,000 600,485 3.25%
McCash, Donna M.(10) 1,035,485 160,000 600,485 3.25%
McCash, David J 93,640 68,000 25,640 *
McCash, Michael J 99,140 68,000 31,140 *
Muniz, Charles(11) 1,110,000 750,000 110,000 *
Muniz, Melba(12) 1,110,000 250,000 110,000 *
Odin Partners, L.P. 56,250 18,750 37,500 *
Paul L. Trump Trust U/A/Dtd 10/10/80,
Revised and Amended 1/9/96 75,000 25,000 50,000 *
Phillips, Charles B. & Deidre JT TEN 250 250 -- *
Pisani, B. Michael (13) 148,750 45,000 103,750 *
Ramsey III, J. Daniel (3) 74,670 74,670 -- *
Reza, Mashud M 2,500 2,500 -- *
Sanders Morris Harris Inc. (3)(14) 171,363 171,363 0 *
Shogen, Kuslima (15) 2,396,343 227,806 2,168,537 11.09%
Stadler, Martin & Kristine JT TEN (16) 161,250 25,000 136,250 *
Sage Partners 50,000 50,000 -- *
Thompson, Mary M 97,640 68,000 29,640 *
Raymond James & Associates Inc., CSDN
FBO David F Willardson 1,200 1,200 -- *
Willardson, David K. (17) 1,444 1,444 -- *
</TABLE>
----------
(*) Less than one percent.
(1) The last name of the individual selling stockholders is listed first.
(2) Based upon shares of common stock underlying as of January 14, 2000 after
giving effect to the exercise of shares of common stock underlying options
or warrants.
36
<PAGE>
(3) The shares offered represent shares underlying the placement agent warrant
issued in the February 1998 Private Placement.
(4) Mr. Jerald Cobbs is a principal of HWG who acted as the placement agent in
the February 1998 Private Placement.
(5) DZS Computer Solutions, Inc. is our data management firm. The 140,000
shares offered represent shares issued for services rendered.
(6) Mr. Robert Henry was one of our former directors. His share ownership gives
effect to shares underlying options he received as a director.
(7) Mark Jay is our intellectual property attorney. The 75,666 shares offered
represent shares issued for services rendered.
(8) Includes 15,000 shares held by First Trust Corp. C/F Robert Le Buhn Keogh.
(9) Includes 152,500 shares of common stock, of which 80,000 shares are held in
a irrevocable trust, and 80,000 shares of common stock underlying warrants
held in a irrevocable trust in the name of Mr. McCash's wife, Donna M.
McCash.
(10) Includes 652,985 shares of common stock, of which 125,000 shares are held
in an IRA account and 150,000 shares of common stock underlying warrants,
of which 125,000 are held in an IRA account in the name of Mrs. McCash's
husband, James McCash.
(11) Mr. Charles Muniz is deemed to beneficially own 250,000 shares of common
stock that are currently held in the name of his wife, Melba Muniz, and
110,000 shares owned by Digital Creations, Inc, which is a corporation
controlled by Mr. Muniz and his wife.
(12) Mrs. Melba Muniz is deemed to beneficially own 250,000 shares of common
stock and 500,000 shares of common stock underlying warrants that are
currently held in the name of her husband, Charles Muniz, and 110,000
shares owned by Digital Creations, Inc, which is a corporation controlled
by Mrs. Muniz and her husband.
(13) B. Michael Pisani was one of our consultants and his beneficial ownership
includes shares underlying options he received for services rendered.
(14) Sanders Morris Harris Inc. (formerly known as Harris, Webb & Garrison,
Inc.) acted as placement agent in the February 1998 private placement. The
shares offered represent shares underlying the placement agent warrant.
(15) Kuslima Shogen is our Chief Executive Officer and Chairman of the Board.
Ms. Shogen is also one of our principal stockholders. Her beneficial
ownership includes shares underlying options for services rendered and
money loaned to us.
(16) Mr. Martin F. Stadler is one of our directors and his share ownership gives
effect to shares underlying options he received as a director.
(17) Mr. David K. Willardson's offering includes 444 shares of common stock
underlying the placement agent warrant.
37
<PAGE>
DESCRIPTION OF SECURITIES
Our certificate of incorporation provides for authorized capital stock of
41,000,000 shares, including 40,000,000 shares of common stock, par value $.001
per share, and 1,000,000 shares of preferred stock, par value $.001 per share.
COMMON STOCK
Holders of our common stock are entitled to one vote per share in the
election of directors and on all other matters on which stockholders are
entitled or permitted to vote. Holders of our common stock are not entitled to
cumulative voting rights. Therefore, holders of a majority of the shares voting
for the election of directors can elect all of the directors. Subject to the
terms of any outstanding series of preferred stock, the holders of common stock
are entitled to dividends in amounts and at times as may be declared by the
Board of Directors out of funds legally available. Upon liquidation of
dissolution, holders of our common stock are entitled to share ratably in all
net assets available for distribution to stockholders after payment of any
liquidation preferences to holders of our preferred stock. Holders of our common
stock have no redemption, conversion or preemptive rights.
WARRANTS
1,168,575 shares of common stock covered by this prospectus are issuable
upon the exercise of warrants sold in the February 1998 private placement. All
of these shares of common stock underlying the warrants are exercisable at a
price of $2.50 per share for a period of three years from the date of grant.
345,624 shares of common stock covered by this prospectus are issuable upon
the exercise of warrants issued to the placement agent in the February 1998
private placement. 114,708 warrants are exercisable at an exercise price of
$4.40 per unit which consists of two (2) shares of common stock and one (1)
three-year warrant to purchase one (1) share of common stock at an exercise
price of $2.50 per share.
875,000 shares of common stock covered by this prospectus are issuable upon
the exercise of warrants issued in the February 2000 private placements. 187,500
and 250,000 shares of common stock underlying the warrants are exercisable at a
price of $3.25 and $1.03 per share, respectively, for a period of three years
from the date of grant. 187,500 and 250,000 shares of common stock underlying
warrants are exercisable at a price of $4.55 and $2.50 per share, respectively,
for a five-year period from the date of grant. We currently have outstanding
warrants to purchase an aggregate of 2,201,699 shares of common stock.
OPTIONS
284,806 shares of common stock covered by this prospectus are issuable upon
the exercise of options. Options to purchase 7,000 shares of common stock are
issuable upon the exercise of options which are exercisable at a price of $3.91
per share for a period of five years from the vesting date. Options to purchase
227,806 shares of common stock are exercisable at a price of $3.20 per share for
a period of five years from the vesting date. Options to purchase 50,000 shares
of common stock are exercisable at a price of $1.00 per share for a period of
five years from the vesting date. At May 31, 2000, we had outstanding options
issued to purchase 3,503,190 shares of common stock, in addition to the 284,806
shares underlying options covered by this prospectus, at an average purchase
price of $2.62 per share.
38
<PAGE>
PLAN OF DISTRIBUTION
Shares of common stock currently outstanding and shares of common stock
issuable upon exercise of the warrants and options covered by this prospectus
may be sold pursuant to this prospectus by the selling stockholders. These sales
may occur in privately negotiated transactions or in the over-the-counter market
through brokers and dealers as agents or to brokers and dealers as principals,
who may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders or from the purchasers of the common
stock for whom the broker-dealers may act as agent or to whom they may sell as
principal, or both. Some of the selling stockholders may also sell some of their
shares of common stock pursuant to Rule 144 under the Securities Act. We have
been advised by the selling stockholders that they have not made any
arrangements relating to the distribution of the shares of common stock covered
by this prospectus. In effecting sales, broker-dealers engaged by the selling
stockholders may arrange for other broker-dealers to participate. Broker-dealers
will receive commissions or discounts from the selling stockholders in amounts
to be negotiated immediately prior to the sale.
Upon being notified by a selling stockholder that any material arrangement
(other than a customary brokerage account agreement) has been entered into with
a broker or dealer for the sale of shares through a block trade, purchase by a
broker or dealer, or similar transaction, we will file a supplemented prospectus
pursuant to Rule 424(c) under the Securities Act disclosing (a) the name of each
such broker-dealer, (b) the number of shares involved, (c) the price at which
such shares were sold, (d) the commissions paid or discounts or concessions
allowed to such broker-dealer(s), (e) if applicable, that such broker-dealer(s)
did not conduct any investigation to verify the information set out or
incorporated by reference in the prospectus, as supplemented, and (f) any other
facts material to the transaction.
Some of the selling stockholders and any broker-dealers who execute sales
for the selling stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act by virtue of the number of shares of common stock
to be sold or resold by such persons or entities or the manner of sale thereof,
or both. If any of the selling stockholders, broker-dealers or other holders
were determined to be underwriters, any discounts, concessions or commissions
received by them or by brokers or dealers acting on their behalf and any profits
received by them on the resale of their shares of common stock might be deemed
underwriting discounts and commissions under the Securities Act.
The selling stockholders have represented to us that any purchase or sale
of our common stock by them will be in compliance with the Exchange Act. In
general, Rule 102 under Regulation M under the Exchange Act prohibits any person
connected with a distribution of our common stock from directly or indirectly
bidding for, or purchasing for any account in which he has a beneficial
interest, any common stock or any right to purchase common stock, or attempting
to induce any person to purchase common stock or rights to purchase common
stock, for a period of one business day prior to and subsequent to completion of
his participation in the distribution.
During the distribution period, Rule 104 under Regulation M prohibits the
selling stockholders and any other person engaged in the distribution from
engaging in any stabilizing bid or purchasing the common stock except for the
purpose of preventing or retarding a decline in the open market price of the
common stock. No such person may effect any stabilizing transaction to
facilitate any offering at the market. Inasmuch as the selling stockholders will
be reoffering and reselling the common stock at the market, Rule 104 prohibits
them from effecting any stabilizing transaction in contravention of Rule 104
with respect to the common stock.
39
<PAGE>
LEGAL MATTERS
The validity of the shares to be offered by this prospectus will be passed
upon for us by Dorsey & Whitney, LLP, New York, New York.
EXPERTS
Our financial statements as of July 31, 1999 and 1998 and for each of the
years in the three-year period ended July 31, 1999, and the period from August
24, 1981 (the date of inception) to July 31, 1999, have been included herein and
in the registration statement in reliance on the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing. The report of KPMG LLP with
respect to our financial statements from inception to July 31, 1999 is based on
the report of Armus Harrison for the period from inception to July 31, 1992.
The report of KPMG LLP covering the July 31, 1999 financial statements
contains an explanatory paragraph that states that our recurring losses from
operations and net capital deficiency raise substantial doubt about our ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act and,
accordingly, file reports, proxy statements and other information with the SEC.
These reports, proxy statements and other information filed with the SEC are
available for inspection and copying at the public reference facilities
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. The public may obtain information on the operation of the public
reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a site on
the World Wide Web at http://www.sec.gov that contains reports, proxy statements
and other information regarding registrants that filed electronically with the
SEC.
We have filed with the SEC a registration statement under the Securities
Act on Form S-1 to register with the SEC the securities offered by this
prospectus. This prospectus is a part of that registration statement. As allowed
by SEC rules, this prospectus does not contain all of the information contained
in the registration statement or the exhibits to that registration statement.
40
<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 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
Unaudited Balance Sheet - April 30, 2000.............................F-38
Statements of Operations (unaudited) - Nine Months ended
April 30, 2000 and 1999 and the Period from
August 24, 1981 (Date of Inception) to January 31, 2000.........F-39
Statements of Cash Flows (unaudited) - Nine Months ended
April 30, 2000 and 1999 and the Period from
August 24, 1981 (Date of Inception) to January 31, 2000.........F-40
Notes to Unaudited Financial Statement...............................F-42
F-1
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
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>
ALFACELL CORPORATION
(A Development Stage Company)
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>
ALFACELL CORPORATION
(A Development Stage Company)
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liability in the normal course of business. As shown in the statement of
operations, the Company has incurred substantial losses in each year since its
inception. In addition, the Company is a development stage company and its
principal operation for production of income has not commenced. The Company's
working capital has been reduced considerably by operating losses, and has a
deficit net worth. These factors, among others, as discussed in Note 2 to the
Notes of Financial Statements, indicates the uncertainties about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts and the amount of classification of liabilities that might be
necessary should the Company be unable to continue its existence.
/s/ Armus, Harrison & Co.
-----------------------------------
Armus, Harrison & Co.
Mountainside, New Jersey
December 9, 1992
Except as to Note 18 which
is July 19, 1993 and Note 3
which is October 28, 1993
F-4
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Balance Sheets
July 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
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)
------------ ------------
Total stockholders' equity ............................. 757,200 3,691,838
------------ ------------
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
------------ ------------ ------------ ------------
Cost 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)
Period from August 24, 1981
(Date of Inception) to July 31, 1999
<TABLE>
<CAPTION>
Common Stock
-------------------------- Capital In Common
Excess of Stock to
Number of par be
Shares Amount Value Issued
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Issuance of shares to officers and stockholders for
equipment, research and development, and expense
reimbursement 712,500 $ 713 $ 212,987 --
Issuance of shares for organizational legal service 50,000 50 4,950 --
Sale of shares for cash, net 82,143 82 108,418 --
Adjustment for 3 for 2 stock split declared September 8, 1982 422,321 422 (422) --
Net loss -- -- -- --
----------- ----------- ----------- -----------
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 Deferred Total
During compensation, Stockholders'
Development Subscription restricted Equity
Stage Receivable stock (Deficiency)
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Issuance of shares to officers and stockholders for
equipment, research and development, and expense
reimbursement $ -- $ -- $ -- 213,700
Issuance of shares for organizational legal service -- -- -- 5,000
Sale of shares for cash, net -- -- -- 108,500
Adjustment for 3 for 2 stock split declared September 8, 1982 -- -- -- --
Net loss (121,486) -- -- (121,486)
----------- ---------- ----------- -----------
Balance at July 31, 1982 (121,486) -- -- 205,714
Issuance of shares for equipment -- -- -- 14,000
Sale of shares to private investors -- -- -- 41,250
Sale of shares in public offering, net -- -- -- 1,308,446
Issuance of shares under stock grant program -- -- -- 110,000
Exercise of warrants, net -- -- -- 3,495
Net loss (558,694) -- -- (558,694)
----------- ---------- ----------- -----------
Balance at July 31, 1983 (680,180) -- -- 1,124,211
Exercise of warrants, net -- -- -- 933,983
Issuance of shares under stock grant program -- -- -- 101,219
Issuance of shares under stock bonus plan for directors
and consultants -- -- -- 385,917
Net loss (1,421,083) -- (1,421,083)
----------- ---------- ----------- -----------
Balance at July 31, 1984 (2,101,263) -- -- 1,124,247
Issuance of shares under stock grant program -- -- -- 478,105
Issuance of shares under stock bonus plan for directors
and consultants -- -- -- 879,478
Shares canceled -- -- -- (105,825)
Exercise of warrants, net -- -- 1,971,347
Net loss (2,958,846) -- -- (2,958,846)
----------- ---------- ----------- -----------
Balance at July 31, 1985 (5,060,109) -- -- 1,388,506
Issuance of shares under stock grant program -- -- -- 107,032
Issuance of shares under stock bonus plan for directors
and consultants -- -- -- 215,400
Exercise of warrants, net -- -- -- 80,998
Net loss (2,138,605) -- (2,138,605)
----------- ---------- ----------- -----------
Balance at July 31, 1986 (carried forward) (7,198,714) -- -- (346,669)
</TABLE>
F-7
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
<TABLE>
<CAPTION>
Common Stock
--------------------------- Capital In Common
Excess of Stock to '
Number of par be
Shares Amount Value Issued
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at July 31, 1986 (brought forward) 2,933,052 $ 2,933 $ 6,849,112 --
Exercise of warrants at $10.00 per share 14,745 15 147,435 --
Issuance of shares under stock bonus plan for directors
and consultants 5,000 5 74,995 --
Issuance of shares for services 250,000 250 499,750 --
Sale of shares to private investors, net 5,000 5 24,995 --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at July 31, 1987 3,207,797 3,208 7,596,287 --
Issuance of shares for legal and consulting services 206,429 207 724,280 --
Issuance of shares under employment incentive program 700,000 700 2,449,300 --
Issuance of shares under stock grant program 19,000 19 66,481 --
Exercise of options at $3.00 per share 170,000 170 509,830 --
Issuance of shares for litigation settlement 12,500 12 31,125 --
Exercise of warrants at $7.06 per share 63,925 64 451,341 --
Sale of shares to private investors 61,073 61 178,072 --
Amortization of deferred compensation, restricted stock -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at July 31, 1988 4,440,724 4,441 12,006,716 --
Sale of shares for litigation settlement 135,000 135 1,074,703 --
Conversion of debentures at $3.00 per share 133,333 133 399,867 --
Sale of shares to private investors 105,840 106 419,894 --
Exercise of options at $3.50 per share 1,000 1 3,499 --
Issuance of shares under employment agreement 750,000 750 3,749,250 --
Issuance of shares under the 1989 Stock Plan 30,000 30 149,970 --
Amortization of deferred compensation, restricted stock -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at July 31, 1989 5,595,897 5,596 17,803,899 --
Issuance of shares for legal and consulting services 52,463 52 258,725 --
Issuance of shares under the 1989 Stock Plan 56,000 56 335,944 --
Sale of shares for litigation settlement 50,000 50 351,067 --
Exercise of options at $3.00 - $3.50 per share 105,989 106 345,856 --
Sale of shares to private investors 89,480 90 354,990 --
Issuance of shares under employment agreement 750,000 750 3,749,250 --
Conversion of debentures at $5.00 per share 100,000 100 499,900 --
Amortization of deferred compensation, restricted stock -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at July 31, 1990 (carried forward) 6,799,829 6,800 23,699,631 --
<CAPTION>
Deficit
Accumulated Deferred Total
During compensation, Stockholders'
Development Subscription restricted Equity
Stage Receivable stock (Deficiency)
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at July 31, 1986 (brought forward) $ (7,198,714) -- -- $ (346,669)
Exercise of warrants at $10.00 per share -- -- -- 147,450
Issuance of shares under stock bonus plan for directors
and consultants -- -- -- 75,000
Issuance of shares for services -- -- -- 500,000
Sale of shares to private investors, net -- -- -- 25,000
Net loss (2,604,619) -- -- (2,604,619)
------------ ---------- ------------ ------------
Balance at July 31, 1987 (9,803,333) -- -- (2,203,838)
Issuance of shares for legal and consulting services -- -- -- 724,487
Issuance of shares under employment incentive program -- -- (2,450,000) --
Issuance of shares under stock grant program -- -- -- 66,500
Exercise of options at $3.00 per share -- -- -- 510,000
Issuance of shares for litigation settlement -- -- -- 31,137
Exercise of warrants at $7.06 per share -- -- -- 451,405
Sale of shares to private investors -- -- -- 178,133
Amortization of deferred compensation, restricted stock -- -- 449,167 449,167
Net loss (3,272,773) -- -- (3,272,773)
------------ ---------- ------------ ------------
Balance at July 31, 1988 (13,076,106) -- (2,000,833) (3,065,782)
Sale of shares for litigation settlement -- -- -- 1,074,838
Conversion of debentures at $3.00 per share -- -- -- 400,000
Sale of shares to private investors -- -- -- 420,000
Exercise of options at $3.50 per share -- -- -- 3,500
Issuance of shares under employment agreement -- -- (3,750,000) --
Issuance of shares under the 1989 Stock Plan -- -- (150,000) --
Amortization of deferred compensation, restricted stock -- -- 1,050,756 1,050,756
Net loss (2,952,869) -- -- (2,952,869)
------------ ---------- ------------ ------------
Balance at July 31, 1989 (16,028,975) -- (4,850,077) (3,069,557)
Issuance of shares for legal and consulting services -- -- -- 258,777
Issuance of shares under the 1989 Stock Plan -- -- (336,000) --
Sale of shares for litigation settlement -- -- -- 351,117
Exercise of options at $3.00 - $3.50 per share -- -- -- 345,962
Sale of shares to private investors -- -- -- 355,080
Issuance of shares under employment agreement -- -- (3,750,000) --
Conversion of debentures at $5.00 per share -- -- -- 500,000
Amortization of deferred compensation, restricted stock -- -- 3,015,561 3,015,561
Net loss (4,860,116) -- -- (4,860,116)
------------ ---------- ------------ ------------
Balance at July 31, 1990 (carried forward) (20,889,091) -- (5,920,516) (3,103,176)
</TABLE>
F-8
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
<TABLE>
<CAPTION>
Common Stock
--------------------------- Capital In Common
Excess of Stock to
Number of par be
Shares Amount Value Issued
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at July 31, 1990 (brought forward) 6,799,829 $ 6,800 $ 23,699,631 --
Exercise of options at $6.50 per share 16,720 16 108,664 --
Issuance of shares for legal consulting services 87,000 87 358,627 --
Issuance of shares under the 1989 Stock Plan 119,000 119 475,881 --
Amortization of deferred compensation, restricted stock -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at July 31, 1991 7,022,549 7,022 24,642,803 --
Exercise of options at $3.50 per share 1,000 1 3,499 --
Sale of shares to private investors 70,731 71 219,829 --
Conversion of debentures at $5.00 per share 94,000 94 469,906 --
Issuance of shares for services 45,734 46 156,944 --
Issuance of shares under the 1989 Stock Plan 104,000 104 285,896 --
Amortization of deferred compensation, restricted stock -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at July 31, 1992 7,338,014 7,338 25,778,877 --
Sale of share to private investors 352,667 353 735,147 --
Issuance of shares for legal services 49,600 50 132,180 --
Issuance of shares for services 5,000 5 9,995 --
Issuance of shares under the 1989 Stock Plan 117,000 117 233,883 --
Amortization of deferred compensation, restricted stock -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at July 31, 1993 7,862,281 7,863 26,890,082 --
Conversion of debentures at $2.75 per share to $6.00 per
share 425,400 425 1,701,575 --
Sale of shares to private investors, net 743,000 743 1,710,048 --
Conversion of short-term borrowings 72,800 73 181,927 --
Issuance of shares for services 16,200 16 43,334 --
Issuance of shares under the 1989 Stock Plan, for services 5,000 5 14,995 --
Issuance of options to related parties upon conversion of
accrued interest, payroll and expenses -- -- 3,194,969 --
Repurchase of stock options from related party -- -- (198,417) --
Issuance of options upon conversion of accrued interest -- -- 142,441 --
Common stock to be issued -- -- -- 50,000
Amortization of deferred compensation, restricted stock -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at July 31, 1994 (carried forward) 9,124,681 9,125 33,680,954 50,000
<CAPTION>
Deficit
Accumulated Deferred Total
During compensation, Stockholders'
Development Subscription restricted Equity
Stage Receivable stock (Deficiency)
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at July 31, 1990 (brought forward) $(20,889,091) $ -- $ (5,920,516) $ (3,103,176)
Exercise of options at $6.50 per share -- -- -- 108,680
Issuance of shares for legal consulting services -- -- -- 358,714
Issuance of shares under the 1989 Stock Plan -- -- (476,000) --
Amortization of deferred compensation, restricted stock -- -- 2,891,561 2,891,561
Net loss (5,202,302) -- -- (5,202,302)
------------ ---------- ------------ ------------
Balance at July 31, 1991 (26,091,393) -- (3,504,955) (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) -- -- (4,772,826)
------------ ---------- ------------ ------------
Balance at July 31, 1992 (30,864,219) -- (744,229) (5,822,233)
Sale of share to private investors -- -- -- 735,500
Issuance of shares for legal services -- -- -- 132,230
Issuance of shares for services -- -- (10,000) --
Issuance of shares under the 1989 Stock Plan -- -- (234,000) --
Amortization of deferred compensation, restricted stock -- -- 664,729 664,729
Net loss (2,357,350) -- -- (2,357,350)
------------ ---------- ------------ ------------
Balance at July 31, 1993 (33,221,569) -- (323,500) (6,647,124)
Conversion of debentures at $2.75 per share to $6.00 per
share -- -- -- 1,702,000
Sale of shares to private investors, net -- -- -- 1,710,791
Conversion of short-term borrowings -- -- -- 182,000
Issuance of shares for services -- -- -- 43,350
Issuance of shares under the 1989 Stock Plan, for services -- -- -- 15,000
Issuance of options to related parties upon conversion of
accrued interest, payroll and expenses -- -- -- 3,194,969
Repurchase of stock options from related party -- -- -- (198,417)
Issuance of options upon conversion of accrued interest -- -- -- 142,441
Common stock to be issued -- -- -- 50,000
Amortization of deferred compensation, restricted stock -- -- 265,000 265,000
Net loss (2,234,428) -- -- (2,234,428)
------------ ---------- ------------ ------------
Balance at July 31, 1994 (carried forward) (35,455,997) -- (58,500) (1,774,418)
</TABLE>
F-9
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency), Continued
<TABLE>
<CAPTION>
Common Stock
--------------------------- Capital In Common
Excess of Stock to
Number of par be
Shares Amount Value Issued
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at July 31, 1994 (brought forward) 9,124,681 $ 9,125 $ 33,680,954 $ 50,000
Sale of shares to private investors, net 961,000 961 2,023,241 (50,000)
Conversion of short-term borrowings 17,600 17 43,983 --
Issuance of shares for services 30,906 31 77,234 --
Exercise of options at $2.27 - $2.50 per share 185,000 185 437,015 --
Common stock to be issued -- -- -- 339,008
Common stock to be issued, for services -- -- -- 4,800
Amortization of deferred compensation, restricted stock -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at July 31, 1995 10,319,187 10,319 36,262,427 343,808
Sale of shares to private investors, net 2,953,327 2,953 8,969,655 (339,008)
Issuance of shares for services 19,995 20 70,858 (4,800)
Exercise of options at $2.50 - $3.87 per share 566,700 567 1,657,633 --
Sale of warrants -- -- 12,084 --
Issuance of options/warrants for services -- -- 50,872 --
Common stock to be issued -- -- -- 258,335
Subscription receivable -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at July 31, 1996 13,859,209 13,859 47,023,529 258,335
Sale of shares to private investors, net 112,000 112 503,888 --
Issuance of options for services -- -- 76,504 --
Exercise of options at $2.45 - $4.00 per share, net 729,134 729 2,620,359 (258,335)
Exercise of warrants at $5.00 per share, net 147,450 148 737,102 --
Net loss -- -- -- --
------------ ------------ ------------ ------------
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 Deferred Total
During compensation, Stockholders'
Development Subscription restricted Equity
Stage Receivable stock (Deficiency)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at July 31, 1994 (brought forward) $(35,455,997) $ -- $ (58,500) $ (1,774,418)
Sale of shares to private investors, net -- -- -- 1,974,202
Conversion of short-term borrowings -- -- -- 44,000
Issuance of shares for services -- -- -- 77,265
Exercise of options at $2.27 - $2.50 per share -- -- -- 437,200
Common stock to be issued -- -- -- 339,008
Common stock to be issued, for services -- -- -- 4,800
Amortization of deferred compensation, restricted stock -- -- 58,500 58,500
Net loss (1,993,123) -- -- (1,993,123)
------------ ------------ ------------ ------------
Balance at July 31, 1995 (37,449,120) -- -- (832,566)
Sale of shares to private investors, net -- -- -- 8,633,600
Issuance of shares for services -- -- -- 66,078
Exercise of options at $2.50 - $3.87 per share -- -- -- 1,658,200
Sale of warrants -- -- -- 12,084
Issuance of options/warrants for services -- -- -- 50,872
Common stock to be issued -- -- -- 258,335
Subscription receivable -- (254,185) -- (254,185)
Net loss (2,942,152) -- -- (2,942,152)
------------ ------------ ------------ ------------
Balance at July 31, 1996 (40,391,272) (254,185) -- 6,650,266
Sale of shares to private investors, net -- -- -- 504,000
Issuance of options for services -- -- -- 76,504
Exercise of options at $2.45 - $4.00 per share, net -- 254,185 -- 2,616,938
Exercise of warrants at $5.00 per share, net -- -- -- 737,250
Net loss (5,018,867) -- -- (5,018,867)
------------ ------------ ------------ ------------
Balance at July 31, 1997 (45,410,139) -- -- 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) -- -- (6,387,506)
------------ ------------ ------------ ------------
Balance at July 31, 1998 (51,797,645) -- -- 3,691,838
Issuance of options for services -- -- -- 205,593
Issuance of shares for services, net -- -- -- 16,405
Net loss (3,156,636) -- -- (3,156,636)
------------ ------------ ------------ ------------
Balance at July 31, 1999 $(54,954,281) $ -- $ -- $ 757,200
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-10
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
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
inception) to
July 31,
1999 1999 1998 1997
------------ ------------ ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
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>
F-11
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
August 24, 1981
(date of
inception) to
July 31,
1999 1999 1998 1997
------------ ------------ ------------ ------------
Cash flows from financing
<S> <C> <C> <C> <C>
Proceeds from short-term borrowings $ 849,500 $ -- $ -- $ --
Payment of short-term borrowings (623,500) -- -- --
Increase in loans payable, related party, net 2,628,868 -- -- --
Proceeds from bank debt and other long-term debt, net of
deferred debt costs 2,410,883 -- -- 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 $ -- $ -- $ --
============ ============ ============ ============
Conversion of accrued interest, payroll and expenses by
related parties to stock options $ 3,194,969 $ -- $ -- $ --
============ ============ ============ ============
Repurchase of stock options from related party $ (198,417) $ -- $ -- $ --
============ ============ ============ ============
Conversion of accrued interest to stock options $ 142,441 $ -- $ -- $ --
============ ============ ============ ============
Conversions of accounts payable to common stock $ 193,986 $ 16,631 $ 100,000 $ --
============ ============ ============ ============
</TABLE>
F-12
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
August 24, 1981
(date of
inception) to
July 31,
1999 1999 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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)
Noted 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
(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.
F-14
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (continued)
Research and Development
Research and development costs are expensed as incurred.
Fair Value of Financial Instruments
For all financial instruments, their carrying value approximates fair value
due to the short maturity of those instruments.
Comprehensive Income (Loss)
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income.
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. The net loss of $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
F-15
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, (continued)
fair-value method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma disclosure in accordance with the provisions of SFAS No.
123.
(2) Liquidity
The Company has reported net losses of $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.
F-16
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(2) Liquidity, (continued)
The Company's Common Stock was delisted from The Nasdaq SmallCap Market
effective at the close of business April 27, 1999 for failing to meet the
minimum bid price requirements set forth in the NASD Marketplace Rules. As
of April 28, 1999, the Company's Common Stock 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.
(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
------ -------
$6,727 $ 9,175
====== =======
(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:
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
F-18
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (continued)
price of $3.00 after six months and prior to nine months after issuance.
The exercise price increased to $3.50 after nine months and prior to 12
months after issuance.
In connection with the public offering, the Company sold 60,000 five-year
purchase warrants to the underwriters at a price of $.001 per warrant. Each
warrant entitled the holder to purchase one share of common stock at an
exercise price of $3.00. Pursuant to the antidilution provisions of the
warrants, the underwriters received warrants to purchase 67,415 shares at
an exercise price of $2.67 per share. As of July 31, 1986, all such
warrants were exercised and the Company received proceeds of approximately
$180,000.
On February 22, 1984, the Company filed a registration statement with the
Securities and Exchange Commission for the issuance of two series of new
warrants each to purchase an aggregate of 330,000 shares (hereinafter
referred to as one-year warrants and two-year warrants). The one-year
warrants had an exercise price of $6.50 per share and expired July 17,
1985. The two-year warrants had an exercise price of $10.00 per share and
were to expire July 17, 1986. However, the Company extended the expiration
date to August 31, 1987. The one-year warrants and two-year warrants were
issued as of July 17, 1984 on a one-for-one basis to those public offering
warrant holders who exercised their original warrants, with the right to
oversubscribe to any of the warrants not exercised. During the fiscal years
ended July 31, 1985, 1986, 1987 and 1988, the Company received net proceeds
of approximately $2,471,000 as a result of the exercise of the warrants.
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.
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 issued 12,500
shares of common stock in connection with the settlement of certain
litigation. The fair value of these shares was charged to operations.
During the fiscal year ended July 31, 1988, the Company sold 61,073 shares
of common stock to private investors at $2.92 per share resulting in net
proceeds to the Company of approximately $178,133.
On September 21, 1988, the Company entered into a stipulation of settlement
arising from a lawsuit wherein it agreed to pay a total of $250,000 in 12
monthly installments. Under the agreement, the Company authorized the
issuance on September 7, 1988 and October 18, 1988 of 85,000 and 50,000
shares, respectively, to an escrow account to secure payment of the
$250,000 due under the stipulation of settlement. During the fiscal year
ended July 31, 1989, the Company issued and sold the 135,000 shares of
common stock for $1,074,838. On February 14, 1989, the Board of Directors
authorized the issuance of an additional 50,000 shares. During the year
ended July 31, 1990, the shares were sold for $351,117. The proceeds from
the above transactions were used to pay the settlement and related legal
costs, reduce loans from and interest due to the Company's Chief Executive
Officer, and for working capital.
During the fiscal year ended July 31, 1989, the Company sold 105,840 shares
of common stock to private investors at $3.97 per share resulting in net
proceeds to the Company of approximately $420,000.
During the fiscal year ended July 31, 1990, the Company issued 52,463
shares of common stock for payment of legal and consulting services. The
fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1990, the Company issued 50,000
shares of common stock in connection with the settlement of certain
litigation. The fair value of the common stock was charged to operations.
During the fiscal year ended July 31, 1990, the Company sold 89,480 shares
of common stock to private investors at $3.97 per share resulting in net
proceeds to the Company of approximately $355,080.
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.
F-20
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (continued)
During the fiscal years ended July 31, 1992 and 1990, 94,000 and 50,000
shares of common stock, respectively, were issued to the Company's Chief
Executive Officer upon the conversion of outstanding debentures.
During the fiscal year ended July 31, 1993, the Company sold 352,667 shares
of common stock to private investors at prices ranging from $2.00 to $3.00
per share resulting in net proceeds to the Company of approximately
$735,500. In addition, the private investors were granted options to
purchase common stock totaling 587,167 shares at prices ranging from $3.00
to $7.00. During the fiscal years ended July 31, 1995 and 1996, 322,500 and
228,833 options expired, respectively. A total of 42,167 options due to
expire on July 31, 1995 were extended to July 31, 1996 and their exercise
price was reduced to $2.50.
During the fiscal year ended July 31, 1996, 35,834 options were exercised
resulting in net proceeds to the Company of approximately $89,600.
During the fiscal year ended July 31, 1993, the Company issued 54,600
shares of common stock as payment for legal and other services performed
for the Company. The fair value of 49,600 shares was charged to operations.
The remaining 5,000 shares were recorded as deferred compensation and were
amortized over a one-year period, beginning in February 1993, in accordance
with the agreement entered into with the recipient.
During the fiscal year ended July 31, 1994, the Company issued 7,000 shares
of common stock as payment for services performed for the Company. The fair
value of the common stock was charged to operations.
During the fiscal year ended July 31, 1994, the Company sold 25,000 shares
of common stock to a private investor at $2.00 per share resulting in net
proceeds to the Company of $50,000. In addition, the private investor was
granted options to purchase common stock totaling 25,000 shares at $4.00
per common share. These options were exercised in September 1996 resulting
in net proceeds to the Company of $100,000.
During the fiscal year ended July 31, 1994, the Company sold 800,000 shares
of common stock to private investors at $2.50 per share resulting in net
proceeds to the Company of $1,865,791. In addition, the private investors
were granted warrants to purchase common stock totaling 800,000 shares at
$5.00 per common share. Warrants for the purchase of 147,450 shares were
exercised during fiscal 1997 resulting in net proceeds to the Company of
$737,250. The remaining 652,550 warrants expired during fiscal 1997.
During the fiscal year ended July 31, 1994, 400,000 shares of common stock
were issued to the Company's Chief Executive Officer upon the conversion of
outstanding debentures.
During the fiscal year ended July 31, 1994, 25,400 shares of common stock
were issued upon the conversion of other outstanding debentures.
F-21
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (continued)
In September 1994, the Company completed a private placement resulting in
the issuance of 288,506 shares of common stock and three-year warrants to
purchase 288,506 shares of common stock at an exercise price of $5.50 per
share. The warrants expired during fiscal 1998. The common stock and
warrants were sold in units consisting of 20,000 shares of common stock and
warrants to purchase 20,000 shares of common stock. The price per unit was
$50,000. The Company received proceeds of approximately $545,000, net of
costs associated with the placement of approximately $55,000 and the
conversion of certain debt by creditors of $121,265 into equivalent private
placement units of 17,600 shares for conversion of short-term borrowings
and 30,906 shares issued for services rendered. In October 1994, an
additional two units at $50,000 per unit were sold to a private investor
under the same terms as the September 1994 private placement resulting in
the issuance of 40,000 shares of common stock and warrants to purchase
40,000 shares of common stock. The warrants expired during fiscal 1998.
During the fiscal year ended July 31, 1995, 185,000 shares of common stock
were issued upon the exercise of stock options by unrelated parties
resulting in net proceeds to the Company of $437,200. The exercise prices
of the options ranged from $2.27 to $2.50, which had been reduced from
$3.50 and $5.00, respectively, during fiscal 1995.
During the fiscal year ended July 31, 1995, the Company sold 681,000 shares
of common stock to private investors resulting in net proceeds to the
Company of approximately $1,379,000. The shares were sold at prices ranging
from $2.00 to $2.25.
During the fiscal year ended July 31, 1995, the Company sold 139,080 shares
of common stock and 47,405 three-year warrants to purchase shares of common
stock at an exercise price of $4.00 per share to private investors. The
stock and warrants were sold at prices ranging from $2.25 to $2.73 per
share and resulted in net proceeds to the Company of $343,808, of which
$4,800 was for services rendered. The common shares were issued to the
investors subsequent to July 31, 1995.
On August 4, 1995, the Company issued 6,060 shares of common stock as
payment for services rendered to the Company. The fair value of the common
stock was charged to operations.
On September 29, 1995, the Company completed a private placement resulting
in the issuance of 1,925,616 shares of common stock and three-year warrants
to purchase an aggregate of 55,945 shares of common stock at an exercise
price of $4.00 per share. Of these shares 1,935 were issued for services
rendered to the Company. The common stock was sold alone at per share
prices ranging from $2.00 to $3.70, and in combination with warrants at per
unit prices ranging from $4.96 to $10.92, which related to the number of
warrants contained in the unit. The Company received proceeds of
approximately $4.1 million, including $1,723,000 for approximately 820,000
shares received during the fiscal year ended July 31, 1995. The warrants
expired in October 1998.
As consideration for the extension of the Company's term loan agreement
with its bank, the Company granted the bank a warrant to purchase 10,000
shares of common stock at an exercise price of $4.19. The warrants were
issued as of October 1, 1995 and expired on August 31, 1997.
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.
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.
F-24
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (continued)
On January 23, 1998 the Securities and Exchange Commission (the "SEC")
declared effective a registration statement on Form S-3 for the offer and
sale by certain stockholders of up to 3,734,541 shares of common stock. Of
these shares (i) an aggregate of 2,737,480 shares were issued to private
placement investors in private placement transactions which were completed
during the period from March 1994 through March 1997 (the "Earlier Private
Placements"), (ii) an aggregate of 409,745 shares are issuable upon
exercise of warrants which were issued to private placement investors in
the Earlier Private Placements and (iii) an aggregate of 587,316 shares may
be issued, or have been issued, upon exercise of options which were issued
to option holders in certain other private transactions. As a result of the
delisting of the Company's Common Stock from the Nasdaq SmallCap Market,
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.
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.
F-26
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(6) Stockholders' Equity, (continued)
On October 1, 1998 (the "Effective Date"), the Company entered into an
agreement with a consultant (the "Agreement"), resulting in the issuance of
200,000 five-year stock options with an exercise price of $1.00 per share
as payment for services to be rendered. These options will vest as follows:
an aggregate of 20,000 shall vest on October 1, 1999 or upon signing of the
first corporate partnering deal, whichever shall occur first; an aggregate
of 2,500 of such options shall vest on the last day of each month over the
first twelve months after the Effective Date of the Agreement; the
remaining 150,000 options will vest on the third anniversary of the
Effective Date of the Agreement provided that the consultant is still
providing consulting services to the Company under the Agreement at that
time. The vesting of such remaining options shall be accelerated as
follows: 50,000 of such options or the remainder of the unvested options,
whichever is less, shall vest upon the signing of each corporate partnering
deal in which the total consideration provided in the Agreement is less
than $5,000,000; 100,000 of such options or the remainder of the unvested
options, whichever is less, shall vest upon the signing of each corporate
partnering deal in which the total consideration provided in the Agreement
is greater than $5,000,000 but less than $10,000,000; 200,000 of such
options or the remainder of the unvested options, whichever is less, shall
vest upon the signing of each corporate partnering deal in which the total
consideration provided in the Agreement is greater than $10,000,000. Should
the Company sell a controlling interest in its assets and/or equity at any
time after the signature of the Agreement, all options will vest. The
Company has recorded approximately $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.
F-27
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
The following table summarizes the activity of common stock warrants issued
in connection with the Private Placements completed in fiscal years 1994
through 1999:
<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>
(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.
F-28
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (continued)
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:
Weighted
Average
Exercise
Shares Available Price Per
for Grant Shares Share
---------------- ------------ ---------
Balance August 1, 1994 1,926,841 5,935,337 $ 3.76
Granted................... (818,850) 818,850 2.60
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
=========== ========== ====
The options outstanding at July 31, 1999 will expire between September 1,
1999 and March 24, 2008.
F-29
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (continued)
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.................. 0.00% 0.00% 0.00%
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
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.
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 as described in note 8)........ 894,887 $ 2.50 - 7.00
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.
F-32
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(8) Stock Options, (continued)
The stock option activity is as follows:
Shares Price Range
----------- -------------
Granted, February 14, 1989............... 3,460,000 $3.50 - 5.00
Options issued in connection with
share purchase......................... 36,365 2.75
Expired.................................. (1,911,365) 2.75 - 5.00
Canceled................................. (10,000) 5.00
----------
Balance at July 31, 1994................. 1,575,000 3.50 - 5.00
========== ============
As of fiscal year ended July 31, 1994, 1,703,159 options were granted under
the 1993 stock option plan.
(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:
F-33
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(9) Stock Grant and Compensation Plans, (continued)
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.
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 Amount
ended Fair of
July 31 Shares Value Compensation
--------- ----------- ----------- ----------------------
1989 30,000 $5.00 $150,000
1990 56,000 6.00 336,000
1991 119,000 4.00 476,000
1992 104,000 2.75 286,000
1993 117,000 2.00 234,000
1994 5,000 3.00 15,000
======= ===== ========
Compensation expense is recorded for the fair value of all stock awards and
grants over the vesting period. The 1994 stock award was immediately
vested. There were no stock awards in fiscal 1999, 1998 or 1997.
F-34
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(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:
1999 1998
------------ -----------
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........................ $ -- $ --
============ ===========
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
========== ============
F-35
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(11) Other Financial Information, (continued)
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.
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.
F-36
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
Notes to Financial Statements, Continued
(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-37
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
BALANCE SHEET
April 30, 2000
April 30,
2000
(Unaudited)
------------
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 895,134
Other assets ............................................. 165,853
------------
Total current assets ............................... 1,060,987
------------
Property and equipment, net of accumulated depreciation and
amortization of $1,016,057 at April 30, 2000 ............... 127,580
Total assets ....................................... $ 1,188,567
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................ $ 464
Accounts payable ......................................... 246,577
Accrued expenses ......................................... 742,840
------------
Total current liabilities .......................... 989,881
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value
Authorized and unissued, 1,000,000 shares
at April 30, 2000 ............................ --
Common stock $.001 par value
Authorized 40,000,000 shares at April 30, 2000 and
July 31, 1999; Issued and outstanding 18,421,559
shares at April 30, 2000 ......................... 18,421
Capital in excess of par value ........................... 56,552,693
Deficit accumulated during development stage ............. (56,372,428)
------------
Total stockholders' equity ......................... 198,686
------------
Total liabilities and stockholders' equity ......... $ 1,188,567
============
See accompanying notes to financial statements.
F-38
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Nine months ended April 30, 2000 and 1999,
and the Period from August 24, 1981
(Date of Inception) to April 30, 2000
(Unaudited)
August 24, 1981
Nine Months ended (Date of Inception)
April 30, to
2000 1999 April 30, 2000
---------------------------------------------
REVENUE:
Sales $ -- $ -- $ 553,489
Investment 39,206 140,847 1,347,226
Other income -- -- 60,103
------------ ------------ ------------
TOTAL REVENUE 39,206 140,847 1,960,818
------------ ------------ ------------
COSTS AND EXPENSES:
Costs of sales -- -- 336,495
Research and development 1,767,128 1,804,115 35,855,757
General and administrative 443,479 662,359 19,958,539
Interest:
Related parties -- -- 1,033,960
Others 2,600 1,432 1,904,349
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 2,213,207 2,467,906 59,089,100
------------ ------------ ------------
NET INCOME (LOSS) BEFORE
STATE TAX BENEFIT $ (2,174,001) $ (2,327,059) $(57,128,282)
STATE TAX BENEFIT 755,854 -- 755,854
------------ ------------ ------------
NET LOSS $ (1,418,147) $ (2,327,059) $(56,372,428)
============ ============ ============
Loss per basic and diluted
common share $ (.08) $ (.13) $ (7.27)
============ ============ ============
Weighted average number of
shares outstanding 17,603,454 17,265,936 7,749,872
============ ============ ============
See accompanying notes to financial statements.
F-39
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Nine months ended April 30, 2000 and 1999,
and the Period from August 24, 1981
(Date of Inception) to April 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
August 24, 1981
Nine Months ended (Date of Inception)
April 30, to
2000 1999 April 30, 2000
--------------------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss $ (1,418,147) $ (2,327,059) $(56,372,428)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of marketable securities -- -- (25,963)
Depreciation and amortization 71,227 75,960 1,395,322
Loss on disposal of property and equipment -- -- 18,926
Noncash operating expenses 112,459 142,244 5,484,931
Amortization of deferred compensation -- -- 11,442,000
Amortization of organization costs -- -- 4,590
Changes in assets and liabilities:
Increase (decrease) in other current assets (19,145) (130,135) (165,853)
Decrease in other assets -- -- 36,184
Increase in interest payable, related party -- -- 744,539
Increase (decrease) in accounts payable 152,690 (448,912) 532,657
Increase in accrued payroll and expenses, related parties -- -- 2,348,145
Increase (decrease) in accrued expenses (35,810) (344,119) 1,284,353
------------ ------------ ------------
Net cash used in operating activities (1,136,726) (3,072,021) (33,272,597)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of marketable equity securities -- -- (290,420)
Proceeds from sale of marketable equity securities -- -- 316,383
Purchase of property and equipment -- -- (1,369,261)
Patent costs -- -- (97,841)
------------ ------------ ------------
Net cash used in investing activities -- -- (1,441,139)
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS, Continued
Nine months ended April 30, 2000 and 1999,
and the Period from August 24, 1981
(Date of Inception) to April 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended August 24, 1981
April 30, (Date of Inception)
to
----------------------------- ----------------
2000 1999 April 30, 2000
------------ ------------ ----------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from short-term borrowings $ -- $ -- $ 849,500
Payment of short-term borrowings -- -- (623,500)
Increase in loans payable-- related party, net -- -- 2,628,868
Proceeds from bank debt and other long-term debt, net of
deferred debt costs -- -- 2,410,883
Reduction of bank debt and long-term debt (6,263) (6,797) (2,924,991)
Proceeds from issuance of common stock, net 613,653 (766) 27,419,100
Proceeds from exercise of stock options and warrants, net 41,337 -- 5,502,010
Proceeds from issuance of convertible debentures -- -- 347,000
------------ ------------ ------------
Net cash provided (used) by financing activities 648,727 (7,563) 35,608,870
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (487,999) (3,079,584) 895,134
Cash and cash equivalents at beginning of period 1,383,133 5,099,453 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 895,134 $ 2,019,869 $ 895,134
============ ============ ============
Supplemental disclosure of cash flow information -
interest paid $ 2,600 $ 1,432 $ 1,651,333
============ ============ ============
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
============ ============ ============
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 $ 92,184 $ 16,631 $ 286,170
============ ============ ------------
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-41
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the Company's financial position as
of April 30, 2000 and the results of operations for the three and nine
month periods ended April 30, 2000 and the period from August 24, 1981
(date of inception) to April 30, 2000. The results of operations for the
nine months ended April 30, 2000 are not necessarily indicative of the
results to be expected for the full year.
The Company is a development stage company as defined in the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 7. The Company is devoting substantially all of its present efforts to
establishing a new business. Its planned principal operations have not
commenced and, accordingly, no significant revenue has been derived
therefrom.
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income.
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. The net loss of $1,418,000 and
$2,327,000, recorded for the nine months ended April 30, 2000 and 1999,
respectively, is equal to the comprehensive loss for those periods.
The Company has reported net losses since its inception. Also, the Company
has limited liquid resources. The report of the Company's independent
auditors on the Company's July 31, 1999 financial statements included 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 at July
31, 2000 or April 30, 2000 do not include any adjustments that might result
from the outcome of this uncertainty.
2. EARNINGS PER COMMON SHARE
"Basic" earnings (loss) per common share equals net income (loss) divided
by weighted average common shares outstanding during the period. "Diluted"
earnings (loss) 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 6,180,945 and 5,927,875 at April 30, 2000 and 1999,
respectively.
3. CAPITAL STOCK
In August 1999, the Company issued 40,000 shares of common stock for
payment of services rendered. The fair value of the common stock in the
amount of $18,400 was charged to operations.
F-42
<PAGE>
ALFACELL CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, continued
3. CAPITAL STOCK, (continued)
In September 1999, the Company issued 14,600 shares of common stock for
payment of legal services. The fair value of the common stock in the amount
of $8,176 was charged to operations.
In December 1999, the Company issued an aggregate total of 75,000 stock
options to its outside board of directors.
In January 2000, the Company issued 120,365 shares of common stock for
payment of services rendered. The fair value of the common stock in the
amount of $65,608 was charged to operations.
In January 2000, the Company issued 10,000 shares of common stock upon the
exercise of stock options by an unrelated party resulting in gross proceeds
of $4,300 to the Company.
In February 2000, the Company issued 35,000 shares of common stock upon the
exercise of stock options by unrelated parties resulting in gross proceeds
of $20,050 to the Company.
In February 2000, the Company sold an aggregate of 875,000 shares of common
stock to private investors at prices ranging from $0.50 to $1.00 per share
resulting in a net proceeds of $625,000 to the Company. In addition, the
private investors were granted warrants to purchase an aggregate of 875,000
shares of common stock, inclusive of additional warrants issued so that all
investors in the private placements received substantially the same
securities, at per share exercise prices ranging from $1.03 to $4.55. The
warrants will expire during the period commencing May 2003 and ending in
May 2005.
In March 2000, the Company issued 30,000 shares of common stock upon the
exercise of stock options by an unrelated party resulting in gross proceeds
of $12,900 to the Company.
In April 2000, the Company issued 10,000 shares of common stock upon the
exercise of stock options by an unrelated party resulting in gross proceeds
of $4,300 to the Company.
4. SALE OF NET OPERATING LOSSES
New Jersey has enacted legislation permitting certain New Jersey
corporations to sell state tax loss carryforwards and research and
development credits (the "Tax Benefits"). Approximately $2.4 million of the
Company's Tax Benefits were approved for sale by the state, of which
approximately $1 million was allocated to be sold for the State Fiscal Year
2000 (July 1, 1999 to June 30, 2000). In December 1999, the Company
realized net proceeds of $755,854 from the sale of its allocated Tax
Benefits. The Company will attempt to sell the remaining balance of its Tax
Benefits in the amount of approximately $1.4 million for the State Fiscal
Year 2001 (July 1, 2000 to June 30, 2001), subject to all existing laws of
the State of New Jersey.
F-43
<PAGE>
PART II
Item 13. Expenses of Issuance and Distribution
The following table sets forth an itemized estimate of fees and expenses
payable by the Registrant in connection with the offering of the securities
described in this registration statement.
SEC registration fee ............................... $ 1,715
Legal fees and expenses ............................ $25,000
Accounting fees and expenses ....................... $15,000
Printing expenses .................................. $ 5,000
Miscellaneous ...................................... $ 5,000
-------
Total ................................... $51,715
Item 14. Indemnification of Directors and Officers
Under the General Corporation Law of Delaware a corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation), by reason of the fact that he or she is or was our
director, officer, employee or agent, or is or was serving at our request
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to our best interests, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful.
In addition, the Delaware GCL also provides that we also may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in our right to procure a
judgment in our favor by reason of the fact that he or she is or was our
director, officer, employee or agent, or is or was serving at our request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection with the defense or
settlement of such action or suit if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to our best
interests. However, in such an action by or on our behalf, no indemnification
may be made in respect of any claim, issue or matter as to which the person is
adjudged liable to us unless and only to the extent that the court determines
that, despite the adjudication of liability but in view of all the
circumstances, the person is fairly and reasonably entitled to indemnity for
such expenses which the court shall deem proper.
Our certificate of incorporation is consistent with the Delaware GCL and
our by-laws provide that each of our directors, officers, employees and agents
shall be indemnified to the extent permitted by the Delaware GCL.
We have entered into indemnification agreements with each of our directors.
The indemnity agreements are consistent with our by-laws and our policy to
indemnify directors to the fullest extent permitted by law. The indemnity
agreements provide for indemnification of directors for liabilities arising out
of claims against such persons acting as our directors (or any entity
controlling, controlled by or under common control with us) due to any actual or
alleged breach of duty, neglect, error, misstatement, misleading statement,
omission or other act done, or suffered or wrongfully attempted by such
directors, except as prohibited by law. The indemnity agreements also provide
for the advancement of costs and expenses, including attorneys' fees, reasonably
incurred by directors in defending or investigating any action, suit, proceeding
or claim, subject to
II-1
<PAGE>
an undertaking by such directors to repay such amounts if it is ultimately
determined that such directors are not entitled to indemnification. The
indemnity agreements cover future acts and omissions of directors for which
actions may be brought.
The indemnity agreements also provide that directors, officers, employees
and agents are entitled to indemnification against all expenses (including
attorneys' fees) reasonably incurred in seeking to collect an indemnity claim or
to obtain advancement of expenses from us. The rights of directors under the
indemnity agreements are not exclusive of any other rights directors may have
under Delaware GCL, any liability insurance policies that may be obtained, our
by-laws or otherwise. We would not be required to indemnify a director for any
claim based upon the director gaining in fact a personal profit or advantage to
which such director was not legally entitled, any claim for an accounting of
profits made in connection with a violation of Section 16(b) of the Securities
Exchange Act of 1934 or a similar state or common law provision or any claim
brought about or contributed to by the dishonesty of the director.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities
The following is a summary of transactions involving our securities during
the last three years. Each of the following was exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended, based upon the fact that
each issuance was to an accredited investor.
On February 20, 1998, we completed a private placement that resulted in the
issuance of an aggregate of 2,337,150 shares of restricted common stock and
1,168,575 three-year warrants to purchase an aggregate of 1,168,575 shares of
common stock at an exercise price of $2.50 per share. We filed a registration
statement on Form S-3 registering the shares of common stock issued in
connection with the February 1998 private placement and the shares of common
stock underlying the warrants issued in connection with the February 1998
private placement on March 31, 1998. The shares of common stock and the shares
of common stock underlying the warrants registered in connection with the
February 1998 private placement were de-registered on November 15, 1999. This
prospectus relates to the offer and resale of 1,168,575 shares of common stock
underlying the warrants issued in the February 1998 private placement by the
holders.
Sanders Morris Harris Inc. (formerly known as Harris, Webb & Garrison,
Inc.), an investment banking firm located in Houston, Texas acted as placement
agent in the February 1998 private placement and received as part of its
compensation a three-year warrant to purchase 116,858 units at an exercise price
of $4.40 per unit. Each unit consists of two shares of our common stock and one
three-year warrant to purchase one share of common stock at an exercise price of
$2.50 per share. In May 1998, 1,500 of such units were exercised and the 3,000
shares of common stock underlying the units were subsequently sold. The warrant
issued upon the exercise of these units have not been exercised or sold. An
additional 650 units were exercised in June 1998 and the 1,300 shares of common
stock underlying the unit were sold as well as the 650 shares that were issued
upon the exercise of the warrant. This prospectus relates to the offer and sale
by the placement agent of the 345,624 shares of common stock underlying the
placement agent warrant.
II-2
<PAGE>
On October 10, 1997, we issued options to purchase 12,000 shares of common
stock at an exercise price of $3.91 per share to Expert Medical Consultants as
payment for services to be rendered. 5,000 of such options have since been
cancelled. The remaining options vested as to 1,000 shares per month from
October 10, 1997 through April 10, 1998 and expire five years from the
respective vesting date. As of the date hereof, all of the options are fully
vested and remain outstanding. This prospectus relates to the offer and sale by
the option holder of 7,000 shares of common stock underlying the options.
On October 1, 1998, we issued options to purchase 200,000 shares of common
stock at an exercise price of $1.00 per share to Sage Partners as payment for
services to be rendered. 150,000 of such options were cancelled in November 1999
upon the cancellation of the contract with Sage Partners. The remaining options
vested as to 2,500 shares per month from October 31, 1998 through September 30,
1999 and as to 20,000 shares on October 1, 1999. The options expire five years
from the vesting date. As of the date hereof, all of the options are fully
vested and remain outstanding. This prospectus relates to the offer and sale by
the option holder of 50,000 shares of common stock underlying the options.
On March 30, 1994, we issued options to purchase 379,678 shares of common
stock at an exercise price of $3.20 per share to Kuslima Shogen in satisfaction
for money loaned to us. A total of 151,872 of such options have since terminated
or were cancelled. The remaining options expire as to 75,936 shares on March 30,
2001 and as to 75,935 shares on each of March 30, 2002 and March 30, 2003. As of
the date hereof, the remaining 227,806 options remain outstanding. This
prospectus relates to the offer and sale by the option holder of 227,806 shares
of common stock underlying the options by the holders.
In August 1999 and January 2000, we issued 40,000 and 100,000 shares of
common stock, respectively, to DZS Computer Solutions, Inc. as payment for
services rendered. This prospectus relates to the offer and resale by DZS
Computer Solutions, Inc. of 140,000 shares of common stock.
In September 1998, January 1999, September 1999 and January 2000, we issued
13,717, 26,984, 14,000 and 20,365 shares of common stock, respectively, to Mark
Jay for payment of legal services. This prospectus relates to the offer and
resale by Mr. Jay of 75,666 shares of common stock.
In February 2000, we completed two private placements. The first resulted
in the issuance of 187,500 units for an aggregate $375,000, each unit consisting
of two shares of our common stock, one three-year warrant to purchase one share
of common stock at $3.25 per share and one five-year warrant to purchase one
share of common stock at $4.55 per share. The second private placement resulted
in the issuance of 250,000 units for an aggregate $250,000, each unit consisting
of two shares of our common stock, one three-year warrant to purchase one share
of common stock at $1.03 per share and one five-year warrant to purchase one
share of common stock at $2.50 per share. We will use the net proceeds for
general corporate purposes, including the funding of research and development
activities. This prospectus relates to the offer and sale of 875,000 shares of
common stock and 875,000 shares issuable upon the exercise of warrants to
purchase common stock issued in the February 2000 private placements.
II-3
<PAGE>
Item 16. Exhibits, Financial Statement Schedules
<TABLE>
<CAPTION>
Exhibit No. Title Exhibit No.
----------- ------------------------------------------------- ------------------------------
(or Exhibit Incorporation No. Reference) (or Incorporated 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
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
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C>
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 23.1
99.1 Factors to Consider in Connection with ####
Forward-Looking Statements
</TABLE>
* Previously filed as exhibit to the Company's Registration Statement on Form
S-18 (File No. 2-79975-NY) and incorporated herein by reference thereto.
** Previously filed as exhibits to the Company's Annual Report on Form 10-K for
the year ended July 31, 1993 and incorporated herein by reference thereto.
*** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended January 31, 1994 and incorporated herein by
reference thereto.
**** Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1994 and incorporated herein by reference
thereto.
***** Previously filed as exhibits to the Company's Registration Statement Form
SB-2 (File No. 33-76950) and incorporated herein by reference thereto.
+ Previously filed as exhibits to the Company's Registration Statement on Form
SB-2 (File No. 33-83072) and incorporated herein by reference thereto.
++ Previously filed as exhibits to the Company's Quarterly Report on Form 10-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.
II-5
<PAGE>
## Previously filed as exhibits to the Company's Registration Statement on Form
SB-2 (File No. 333-11575) and incorporated herein by reference thereto.
### Previously filed as exhibits to the Company's Quarterly Report on Form
10-QSB for the quarter ended April 30, 1997 and incorporated herein by reference
thereto.
#### Previously filed as exhibit to the Company's Annual Report on Form 10-K for
the year ended July 31, 1999 and incorporated herein by reference thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in the volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement:
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in the periodic reports filed by the Registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
II-6
<PAGE>
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-7
<PAGE>
SIGNATURES
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: June 30, 2000
By: /s/ KUSLIMA SHOGEN
----------------------------------------------
Kuslima Shogen, Chief Executive Officer,
Acting Chief Financial Officer and Chairman of the
Board.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the indicated capacities
on June 30, 2000.
/s/ KUSLIMA SHOGEN
----------------------------------------
Kuslima Shogen, Chief Executive Officer,
Acting Chief Financial Officer
Principal Executive Officer, Principal Accounting Officer
and Chairman of the Board
*
----------------------------------------
Stanislaw M. Mikulski, M.D.,
Executive Vice President and Director
*
----------------------------------------
Stephen K. Carter, M.D., Director
*
----------------------------------------
Donald R. Conklin, Director
*
----------------------------------------
Martin F. Stadler, Director
* The undersigned by signing her name hereto, does hereby sign this
Registration Statement or amendment thereto on behalf of the above indicated
directors and officers of Alfacell Corporation pursuant to the power of attorney
executed on behalf of each such director and officer.
By: /s/ KUSLIMA SHOGEN
----------------------------------------
Kuslima Shogen
Attorney-in-fact
II-8
