<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 3, 1996
REGISTRATION NO. 333-00845
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERFERON SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 22-2313648
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
783 JERSEY AVENUE
NEW BRUNSWICK, NEW JERSEY 08901
(908) 249-3250
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
LAWRENCE M. GORDON, ESQ.
CHIEF EXECUTIVE OFFICER AND GENERAL COUNSEL
INTERFERON SCIENCES, INC.
9 WEST 57TH STREET
NEW YORK, NEW YORK 10019
(212) 230-9513
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
ROBERT J. HASDAY, ESQ. KENNETH R. KOCH, ESQ.
DUANE, MORRIS & HECKSCHER SQUADRON, ELLENOFF, PLESENT & SHEINFELD, LLP
SUITE 2125 551 FIFTH AVENUE
122 EAST 42ND STREET NEW YORK, NEW YORK 10176
NEW YORK, NEW YORK 10168
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the 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, check the following box: /X/
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box: / /
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 Act
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. / /
------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share................ 6,000,000 shares $2 7/16(1) $14,625,000(1) $5,043.11(2)
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share................ 1,000,000 shares $2.00(3) $ 2,000,000(3) $ 689.66
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee based
on the average of the high and low prices of the Common Stock on February 9,
1996 as reported by NASDAQ, pursuant to Rule 457(c).
(2) Previously paid.
(3) Estimated solely for purpose of calculating the registration fee.
------------------------
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.
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- --------------------------------------------------------------------------------
<PAGE> 2
INTERFERON SCIENCES, INC.
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS OF FORM S-2
<TABLE>
<CAPTION>
REGISTRATION STATEMENT
ITEM AND HEADING LOCATION IN PROSPECTUS
------------------------------------------ ----------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front and Outside Back Cover Pages of
Prospectus; Additional Information
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........ Prospectus Summary; Summary Financial
Information; Risk Factors; and Selected
Financial Information
4. Use of Proceeds........................... Prospectus Summary; Use of Proceeds; Risk
Factors
5. Determination of Offering Price........... Outside Front Cover Page; Risk Factors;
Underwriting
6. Dilution.................................. Dilution
7. Selling Security Holders.................. Not Applicable
8. Plan of Distribution...................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be
Registered................................ Prospectus Summary; Description of Securities;
Underwriting
10. Interests of Named Experts and Counsel.... Not Applicable
11. Information with Respect to the
Registrant................................ Inside Front Cover Page of Prospectus;
Prospectus Summary; The Company; Risk Factors;
Dilution; Use of Proceeds; Price Range of
Common Stock; Dividend Policy; Capitalization;
Selected Financial Information; Management's
Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Principal
Stockholders; Certain Transactions;
Description of Securities; Financial
Statements
12. Incorporation of Certain Information by
Reference................................. Documents Incorporated by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 3, 1996
PROSPECTUS
INTERFERON SCIENCES, INC.
MINIMUM: 5,000,000 SHARES OF COMMON STOCK
MAXIMUM: 7,000,000 SHARES OF COMMON STOCK
The shares of Common Stock, par value $.01 per share (the "Common Stock"),
of Interferon Sciences, Inc., a Delaware corporation (the "Company"), being
offered hereby are being sold by the Company. See "Underwriting" for information
relating to the factors considered in determining the public offering price.
The Common Stock is quoted on the NASDAQ SmallCap Market under the symbol
"IFSC." On April 2, 1996, the last reported sale price of the Common Stock on
the NASDAQ SmallCap Market was $2 1/2 per share.
------------------------
INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 9-17 OF THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
=====================================================================================================
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO COMPANY(2)(3)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................ $2.00 $.14 $1.86
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Total Minimum............ $10,000,000 $700,000 $ 9,300,000
- -----------------------------------------------------------------------------------------------------
Total Maximum............ $14,000,000 $980,000 $13,020,000
=====================================================================================================
</TABLE>
(1) Excludes additional compensation to be received by Sunrise Securities Corp.,
the underwriter for the Offering (the "Underwriter"), including (i) a
non-accountable expense allowance of 1.5% of the gross proceeds of the
Offering and (ii) options to purchase up to a number of shares of Common
Stock equal to 10% of the number of shares of Common Stock sold in the
Offering, exercisable over a period of four years commencing one year from
the date of this Prospectus at an exercise price equal to 120% of the public
offering price of the shares offered hereby (the "Underwriter's Purchase
Options"). The Company has also agreed to indemnify the Underwriter against
certain liabilities, including liabilities arising under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses payable by the Company of $300,000 if
the minimum number of shares are sold and $360,000 if the maximum number of
shares are sold, including the Underwriter's expense allowance. See
"Underwriting."
(3) The shares of Common Stock are being offered by the Underwriter as the agent
for the Company on a "best efforts" 5,000,000 share minimum, 7,000,000 share
maximum, basis for 30 days from the date of this Prospectus (which period
may be extended for an additional 30 days by the Underwriter). There is no
minimum number of shares required to be purchased by any investor. The
Company's officers, directors, employees, and principal stockholders may
purchase shares of Common Stock in the Offering, but any such purchases will
not be used to satisfy the 5,000,000 share minimum. Pending the sale of the
5,000,000 share minimum, all proceeds will be deposited into an escrow
account with Bank of Montreal Trust Company, Escrow Agent for the Offering.
After the sale of the initial 5,000,000 shares, the remaining 2,000,000
shares will also be offered on a "best efforts" basis. In the event the
minimum number of shares is not sold within the offering period or any
extension thereof, the Offering will terminate and all funds will be
returned promptly to subscribers by the Escrow Agent without any deduction
therefrom or interest thereon.
The shares of Common Stock are being offered on a "best efforts" 5,000,000
share minimum, 7,000,000 share maximum, basis by the Underwriter, subject to
prior sale, withdrawal, or cancellation of the Offering without notice. Any
modification to the Offering will be made by means of an amendment to this
Prospectus. The Company reserves the right to modify, withdraw, or cancel the
Offering without notice, and to reject any orders for the shares of Common Stock
offered hereby, in whole or in part. It is expected that delivery of the
certificates representing the shares of Common Stock will be made at the offices
of the Underwriter, 919 Third Avenue, New York, New York 10022.
------------------------
SUNRISE SECURITIES CORP.
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE> 4
AVAILABLE INFORMATION
This Prospectus omits certain of the information contained in the
Registration Statement relating to the securities offered hereby (the
"Registration Statement") which is on file with the Securities and Exchange
Commission (the "Commission"). The Company is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files periodic reports, proxy statements, and
other information with the Commission. Such Registration Statement, reports,
proxy statements, and other information can be inspected, without charge, and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at its regional offices located at 7 World Trade Center, 13th Floor, New York,
New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60061. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1995 filed by the Company with the Commission is incorporated in this Prospectus
by reference.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
modifies, supersedes, or replaces such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus. Any person receiving a copy of this
Prospectus may obtain without charge, upon written or oral request, a copy of
any of the documents incorporated by reference herein, except for exhibits to
such documents (unless such exhibits are specifically incorporated by reference
into the documents which this Prospectus incorporates). Requests should be
directed to: Corporate Secretary, Interferon Sciences, Inc., 783 Jersey Avenue,
New Brunswick, New Jersey 08901, telephone number (908) 249-3250.
------------------------
ALFERON(R) and ALFERON LDO(R) are registered trademarks of the Company.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus.
THE COMPANY
General
Interferon Sciences, Inc. (the "Company") is a biopharmaceutical company
currently engaged in the manufacture and sale of ALFERON N Injection, the only
product approved by the United States Food and Drug Administration ("FDA") that
is based upon a natural source, multi-species alpha interferon ("Natural Alpha
Interferon"). ALFERON N Injection is approved for the treatment by injection of
certain types of genital warts and is being developed by the Company for the
potential treatment of hepatitis C, hepatitis B, HIV, multiple sclerosis,
cancers, and other indications. The Company believes that the existing FDA
approval of ALFERON N Injection for one indication should facilitate obtaining
approvals for other indications. The Company also is developing ALFERON N Gel
and ALFERON LDO, the Company's topical and oral formulations of Natural Alpha
Interferon.
Interferons are a group of proteins produced and secreted by cells to
combat diseases. Currently, various alpha interferon products, approved for 17
different medical uses in over 60 countries, are, as a group, one of the largest
selling of all biopharmaceuticals, with estimated 1994 sales in excess of $1.5
billion worldwide. A substantial majority of these sales are for the treatment
of hepatitis C, a liver disease affecting several million people worldwide,
including two to three million people in the United States and three million
people in Japan. As described below, the Company has recently completed two
multi-center Phase 2 trials using Natural Alpha Interferon for the treatment of
hepatitis C, and is presently conducting one additional such trial.
Natural Alpha Interferon
A substantial portion of worldwide sales of interferon consists of sales of
alpha interferon produced from genetically engineered cells (recombinant alpha
interferon). Based on laboratory studies and clinical trials involving Natural
Alpha Interferon, the Company believes that Natural Alpha Interferon has certain
potential advantages over recombinant alpha interferon including:
Efficacy. Natural Alpha Interferon is used at significantly lower doses
than the competing recombinant alpha interferon product for the
treatment of genital warts and, in laboratory studies, was shown to be
10 to 100 times more effective than equal concentrations of recombinant
alpha interferon in blocking replication of HIV. This unusually potent
anti-HIV activity may be due to specific members of the interferon
family of proteins which are present in Natural Alpha Interferon but not
found in the presently marketed recombinant interferons.
Side effects. The principal side effects of alpha interferon are
flu-like symptoms, which are dose dependent. The approved treatment with
ALFERON N Injection utilizes lower doses than the treatment with
recombinant alpha interferon, which may account, in part, for fewer side
effects being observed in patients being treated with Natural Alpha
Interferon. Based on a double-blind study of normal healthy adults, the
Company believes there is evidence that even when given at the same
doses as recombinant alpha interferon, the side effects are lower with
Natural Alpha Interferon. Furthermore, in a Phase 1 clinical trial on 20
asymptomatic HIV-infected patients, investigators at Walter Reed Army
Institute of Research ("Walter Reed") reported that significantly fewer
of the typical side effects associated with recombinant alpha interferon
were observed with Natural Alpha Interferon. In addition,
interferon-neutralizing antibodies, which may limit alpha interferon's
therapeutic benefit, have not been observed to date in clinical trials
with Natural Alpha Interferon in patients not previously treated with
recombinant alpha interferon, even in HIV and hepatitis C patients
treated with high doses of Natural Alpha Interferon three times a week
for up to six months. In contrast, there have been reports of antibodies
to recombinant alpha interferons developing in patients being treated
with such interferons.
3
<PAGE> 6
Although, as described above, the Company believes that Natural Alpha
Interferon may have certain advantages over recombinant alpha interferon, there
can be no assurance that these advantages will enable the Company to obtain a
significant market share for products made with Natural Alpha Interferon.
Moreover, at the present time, the Company is limited in its ability to make
product marketing claims related to these potential advantages until additional
data are available and, in certain instances, until further FDA approvals are
obtained. Additionally, the Company derives Natural Alpha Interferon from human
white blood cells, the cost and availability of which are subject to
fluctuation, in part because the Company does not presently have long-term
agreements for the supply of such cells. Recombinant alpha interferon products
are not dependent on a source of human white blood cells and, therefore, can be
produced in greater volume and at a lower cost per unit than the Company's
formulations of Natural Alpha Interferon products. See "Business -- Scientific
Background."
Marketing, Distribution, and Production
ALFERON N Injection is approved for sale in the United States for the
intralesional treatment of adults with refractory (resistant to other treatment)
or recurring external genital warts, and is currently marketed and distributed
in the United States exclusively by Purdue Pharma L.P. ("Purdue Pharma" and,
collectively with its affiliates, "Purdue"). The Company has an option to
repurchase the marketing rights for ALFERON N Injection in the United States and
Canada from Purdue. See "Business -- ALFERON N Injection -- Approved Indication"
and "Business -- ALFERON N Injection -- Marketing and Distribution -- Agreements
with Purdue."
In the first quarter of 1995, the Company entered into an agreement with
Fujimoto Diagnostics, Inc. ("Fujimoto") for the development and marketing of
ALFERON N Injection and ALFERON N Gel in Japan. Japan is currently the world's
largest market for interferon products, with estimated 1994 annual sales
approaching $900 million. Under the terms of the agreement, Fujimoto agreed to
purchase $2,000,000 of the Company's Common Stock (of which $1,500,000 has been
purchased to date) and to use its best efforts to develop, and obtain Japanese
regulatory approvals for, ALFERON N Injection and ALFERON N Gel products. To
date, Fujimoto has incurred higher than anticipated development expenses, and
Fujimoto has determined that there may be greater difficulties in obtaining
Japanese regulatory approval than originally anticipated. Fujimoto has,
therefore, requested that the Company renegotiate the agreement. The Company
intends to meet with Fujimoto to consider its request. In addition, the
Company's Natural Alpha Interferon injectable product was recently approved for
sale in Mexico for the treatment of genital warts and is marketed under the
trade name ALTEMOL(R) by Industria Farmaceutica Andromaco, S.A. De C.V.
("Andromaco"). See "Business -- ALFERON N Injection -- Marketing and
Distribution -- Other Marketing and Distribution Arrangements."
The Company is also exploring development and marketing arrangements that
would involve the potential use of Natural Alpha Interferon for the treatment of
hepatitis B and C, multiple sclerosis, HIV, and cancer. See "Risk
Factors -- Dependence on Certain Distributors; Limited Marketing Program."
The purified drug concentrate utilized in the formulation of ALFERON N
Injection is manufactured in a Company-owned, FDA-approved facility located in
New Brunswick, New Jersey. ALFERON N Injection is formulated and packaged for
the Company by Sanofi Winthrop, Inc. ("Sanofi") at a production facility located
in McPherson, Kansas. See "Business -- ALFERON N Injection -- Manufacturing."
Recently Expanded License
As of March 31, 1995, the Company obtained a non-exclusive license from
Hoffmann-LaRoche, Inc. ("Hoffmann") and F. Hoffmann-LaRoche Ltd. ("Roche") which
grants the Company the worldwide rights to make, use, and sell, without a
potential patent infringement claim from Hoffmann or Roche, any formulation of
Natural Alpha Interferon. The 1995 license replaced a 1988 non-exclusive license
from Hoffmann which granted the Company the rights to make, use, and sell in the
United States, without a potential patent infringement claim from Hoffmann,
injectable formulations of Natural Alpha Interferon for the treatment of genital
warts or patients with diseases refractory to recombinant interferon therapy.
The 1995 license will enable the Company, if successful in obtaining necessary
regulatory approvals, to expand the
4
<PAGE> 7
formulations of Natural Alpha Interferon it makes, uses, and sells in the United
States and the rest of the world and to market its products for the treatment of
additional indications. See "Risk Factors -- Potential Patent Infringement
Claims," "Business -- ALFERON N Injection -- Patents and Licenses," and
"Business -- ALFERON N Injection -- Royalty Obligations."
Clinical Trials
The Company has conducted and is conducting or planning various clinical
trials in an effort to obtain approval to market ALFERON N Injection for
additional indications in the United States and around the world.
The Company has recently completed two multi-center, randomized,
open-label, dose-ranging Phase 2 clinical trials in patients infected with
hepatitis C virus (HCV) and is presently conducting one additional such trial.
The objective of these HCV clinical studies is to compare the safety and
efficacy of different doses of Natural Alpha Interferon injected subcutaneously
in naive (previously untreated), refractory (unsuccessfully treated with
recombinant alpha interferon), and relapsing (initially responded to recombinant
alpha interferon but later relapsed) patients. The Company believes that the
results of the two completed trials are promising, and therefore intends to
commence a Phase 3 multi-center, controlled clinical trial in the second quarter
of 1996.
In a follow-up analysis of patients in the Walter Reed Phase 1 clinical
trial, it was found that an average of 16 months after treatment, CD4 lymphocyte
levels (the white blood cells which normally decline in HIV-infected patients)
remained essentially unchanged or were higher than at the onset of the trial in
11 of 20 patients. In addition, the amount of HIV detectable in the patients'
blood, as measured by a quantitative PCR (Polymerase Chain Reaction) technique,
declined in a dose dependent manner (the greatest declines were observed in the
highest dose group). Although there can be no assurance that the results of
laboratory studies and the Phase 1 clinical trial will be reproduced in a
large-scale, controlled clinical trial, based upon the foregoing, the Company
believes that Natural Alpha Interferon may have potential clinical value in the
treatment of HIV-infected patients. The Company is planning to conduct a
multi-center clinical trial with HIV-infected patients, which is expected to
commence in 1996.
Two additional Phase 2 clinical studies are in progress. One is for the
treatment of Kaposi's sarcoma in patients with AIDS and the other is a
multi-center study in small cell lung cancer patients following successful
treatment by conventional chemotherapy. The goal of the small cell lung cancer
study is to see if Natural Alpha Interferon can alter the high relapse rate in
this disease.
Based upon encouraging anecdotal data, the Company is planning, subject to
obtaining funding or a sponsor, to conduct clinical trials utilizing Natural
Alpha Interferon for the treatment of multiple sclerosis, which affects more
than 250,000 Americans. See "Business -- ALFERON N Injection -- Clinical Trials
for New Indications."
Commercial sales in the United States or Mexico of ALFERON N Injection for
any indication other than the treatment of certain types of genital warts,
commercial sales outside of the United States and Mexico of ALFERON N Injection
for any indication, and commercial sales anywhere in the world of either ALFERON
N Gel or ALFERON LDO will be contingent upon the completion of necessary studies
and the approval of such products for such uses by the FDA and foreign
regulatory authorities. Submissions for regulatory approval to sell ALFERON N
Injection for the treatment of genital warts have been filed in various other
countries. See "Business -- Governmental Regulation," "Risk
Factors -- Regulatory Approvals," and "Risk Factors -- Foreign Regulatory
Approvals."
Although the Company received FDA approval to market ALFERON N Injection in
1989, to date it has had only limited revenue from the sale of ALFERON N
Injection. The Company has experienced significant operating losses since its
inception in 1980. As of December 31, 1995, the Company had an accumulated
deficit of approximately $70.2 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
5
<PAGE> 8
August/September Offering
In August and September 1995, the Company completed the sale of 12,000,000
shares of Common Stock for an aggregate of $14,400,000. Such shares were sold
pursuant to a best efforts public offering (the "August/September Offering"),
underwritten by Sunrise Securities Corp. ("Sunrise"), of a minimum of 6,500,000
and a maximum of 12,000,000 shares of Common Stock at a public offering price of
$1.20 per share.
Of the $12,494,000 of net proceeds from the August/September Offering, the
Company has used $1,870,000 to repay indebtedness to certain principal
stockholders and anticipates that it will use approximately $7,000,000 for
research, product development, and clinical trials of the Company's products and
the balance for working capital and general corporate purposes. As of April 1,
1996, the Company had an aggregate of $4,600,000 in cash and cash equivalents.
Until utilized, such cash and cash equivalents are being invested principally in
short-term, interest-bearing investments. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
6
<PAGE> 9
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby............... A minimum of 5,000,000 shares and a
maximum of 7,000,000 shares, on a best
efforts basis.
Common Stock to be outstanding after the
Offering................................ A minimum of 39,448,768 shares and a
maximum of 41,448,768 shares(1).
Use of Proceeds........................... The Company anticipates that if the
minimum number of shares are sold,
approximately $ , and if the
maximum number of shares are sold,
approximately $ , of the net
proceeds of the Offering will be used for
research, product development, and
clinical trials; and the balance will be
used for working capital and general
corporate purposes. See "Use of Proceeds."
NASDAQ SmallCap Market Symbol............. IFSC.
Risk Factors.............................. Purchase of the Common Stock offered
hereby involves a high degree of risk.
Prospective purchasers should consider
carefully the factors specified under
"Risk Factors."
</TABLE>
- ---------------
(1) Does not include (i) 3,155,320 shares of Common Stock reserved for issuance
upon the exercise of options currently outstanding under the Company's stock
option plan, (ii) 1,112,941 shares reserved for issuance upon the exercise
of currently outstanding warrants, (iii) 1,123,333 shares reserved for
issuance upon the exercise of options issued to Sunrise in connection with
the August/September Offering, and (iv) 700,000 shares reserved for issuance
upon exercise of the Underwriter's Purchase Options. See "Underwriting."
7
<PAGE> 10
SUMMARY FINANCIAL INFORMATION
(In thousands except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues(1)............................................ $ 1,296 $ 1,166 $ 51
Research and development costs, net.................... 3,726 5,196 4,151
Loss from operations................................... (7,447) (11,782) (8,347)
Net loss............................................... (7,372) (12,078) (8,460)
Net loss per share of Common Stock..................... (.28) (.62) (.55)
Weighted average number of shares of Common Stock
outstanding.......................................... 26,647 19,594 15,432
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------
AS ADJUSTED(2)
--------------------
ACTUAL MINIMUM MAXIMUM
------- ------- -------
<S> <C> <C> <C>
BALANCE SHEET DATA
Total assets........................................ $13,953 $22,953 $26,613
Working capital (deficiency)........................ 7,062 16,062 19,722
Stockholders' equity................................ 12,827 21,827 25,487
</TABLE>
- ---------------
(1) Substantially all of the Company's revenues in 1994 and 1995 were from sales
of ALFERON N Injection to Purdue. Purdue did not purchase ALFERON N
Injection from the Company in 1993. Purdue has informed the Company that
during 1993, 1994, and 1995, Purdue sold approximately 23,000, 25,000, and
23,900 vials, respectively, and distributed as free samples approximately
2,800, 2,000, and 400 vials, respectively, of ALFERON N Injection from its
inventory. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
(2) Adjusted to give effect to the sale of the minimum and maximum number of
shares in the Offering.
8
<PAGE> 11
THE COMPANY
The Company, which was incorporated in Delaware in May 1980, commenced
operations in January 1981 by obtaining from National Patent Development
Corporation ("NPDC"), a principal stockholder of the Company and then its
parent, assets relating to NPDC's programs in human alpha interferon. The
Company's principal offices and research and production facilities are located
at 783 Jersey Avenue, New Brunswick, New Jersey 08901 and its telephone number
is (908) 249-3250.
RISK FACTORS
Prospective investors should consider carefully the following factors,
together with the other information contained in this Prospectus, in evaluating
an investment in the Common Stock offered hereby.
CONTINUING AND INCREASING OPERATING LOSSES; ACCUMULATED DEFICIT. The
Company has experienced significant operating losses since its inception in
1980. As of December 31, 1995, the Company had an accumulated deficit of
approximately $70.2 million. For the years ended December 31, 1995, 1994, and
1993, the Company had losses from operations of approximately $7.4 million,
$11.8 million, and $8.3 million, respectively.
Although the Company received approval to market ALFERON N Injection for
the treatment of genital warts from the FDA in October 1989 and from the
comparable Mexican regulatory authority in December 1994, it has had only
limited revenue from the sale of ALFERON N Injection to date. In order for the
Company to operate profitably, the Company must sell significantly more ALFERON
N Injection. Increased sales will depend primarily upon the expansion of
existing markets and/or successful attainment of FDA approval to market ALFERON
N Injection for additional uses, of which there can be no assurance. See
"Products Under Development" below in this section. There can be no assurance
that sufficient quantities of ALFERON N Injection will be sold to allow the
Company to operate profitably. Moreover, the Company cannot market ALFERON N
Injection in other markets or for such other uses unless appropriate regulatory
approvals are obtained.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company will
require substantial funds to conduct research and development and preclinical
and clinical testing, to market its products, and, if it decides to do so, to
exercise an option, which is exercisable until December 31, 1996, to repurchase
certain marketing rights from Purdue. The cash required to exercise such option
and to repurchase certain shares of Common Stock from Purdue (which repurchase
is required in connection with the exercise of the option) is $5,029,133,
subject to reduction under certain circumstances. See "Business -- ALFERON N
Injection -- Marketing and Distribution -- Agreements with Purdue." For the
years ended December 31, 1995, 1994, and 1993, the cash utilized by the
Company's operations was approximately $7.1 million, $7.8 million, and $7.8
million, respectively. In January 1994, the Company amended certain agreements
with Purdue pursuant to which the Company agreed to bear the costs of conducting
clinical trials required to develop new indications for ALFERON N Injection,
most of which costs previously had been borne by Purdue. The Company's future
capital requirements will depend on many factors, including: continued
scientific progress in its drug development programs; the magnitude of these
programs; progress with preclinical testing and clinical trials; the time and
costs involved in obtaining regulatory approvals; the costs involved in filing,
prosecuting, and enforcing patent claims; competing technological and market
developments; changes in its existing research relationships; the ability of the
Company to establish collaborative arrangements; and effective commercialization
activities and arrangements.
Management believes that the cash currently available will be sufficient to
enable the Company to continue operations until approximately December 1996,
although no assurance can be given in this regard. To fund the Company's
operations beyond such date and, if it decides to do so, to exercise the option
to repurchase certain marketing rights from Purdue and to repurchase certain
shares of Common Stock from Purdue, the Company will require additional funding,
whether through financial markets (including through the Offering) or
collaborative or other arrangements with corporate partners or from other
sources, which may
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not be available when needed or on terms acceptable to the Company. Insufficient
funds will require the Company further to delay, scale back, or eliminate
certain or all of its research and development programs or to license third
parties to commercialize products or technologies that the Company would
otherwise seek to develop itself or to shut down or curtail its manufacturing
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
NO GUARANTEED SOURCE OF REQUIRED MATERIALS. The Company uses a number of
essential materials in the production of Natural Alpha Interferon, including
human white blood cells, and has limited sources from which to procure such
materials. The Company does not have long-term agreements for the supply of most
of such materials. There can be no assurance that long-term supply agreements
covering essential materials can be entered into on commercially reasonable
terms, if at all. Although the Company currently obtains human white blood cells
from several sources, the loss of any one source of supply could have a material
adverse effect on the Company. In such event, the Company may be required to
scale back its operations or stop manufacturing such product. The costs and
availability of products and materials required by the Company for the
commercial production of ALFERON N Injection and other products which the
Company may commercially produce are subject to fluctuation depending on a
variety of factors beyond the Company's control, including competitive factors,
changes in technology, and FDA and other governmental regulation and there can
be no assurance that the Company will be able to obtain such products and
materials on terms acceptable to the Company or at all.
DEPENDENCE ON CERTAIN DISTRIBUTORS; LIMITED MARKETING PROGRAM. The Company
currently has marketing arrangements for the distribution of ALFERON N Injection
in North America and several countries outside of North America. Unless the
Company enters into marketing arrangements with other companies or develops its
own sales force, the Company will be dependent on the ability of its current
distributors to sell sufficient quantities of ALFERON N Injection to allow the
Company to operate profitably. There can be no assurance that the Company will
be able to enter into any such marketing arrangements on acceptable terms, if at
all. See "Business -- ALFERON N Injection -- Marketing and Distribution" and
"Business -- Products under Development -- ALFERON N Gel and ALFERON
LDO -- Sales and Marketing Staff."
The Company has obtained an option, exercisable until December 31, 1996, to
reacquire from Purdue marketing rights for ALFERON N Injection in the United
States and Canada. The Company is exploring the possibility of entering into a
marketing arrangement with a new marketing partner for ALFERON N Injection in
the United States and Canada. However, there can be no assurance that a new
marketing partner will be found. If the Company exercises such option and
another such arrangement is not entered into, the Company would be left without
a marketing arrangement for ALFERON N Injection in the United States and Canada.
See "Business -- ALFERON N Injection -- Marketing and Distribution -- Agreements
with Purdue."
PRODUCTS UNDER DEVELOPMENT. The Company's products under development
include (i) ALFERON N Injection for the potential treatment of HIV, hepatitis C,
hepatitis B, multiple sclerosis, cancers, and other indications, (ii) ALFERON N
Gel for the potential treatment of cervical dysplasia, recurrent genital herpes,
other viral diseases, and cancers, and (iii) ALFERON LDO for the potential
treatment of certain symptoms of patients infected with the HIV virus and the
treatment of other viral diseases. However, there can be no assurance that these
products will be cost-effective, safe, and effective treatments for these
diseases, and there is no assurance of receiving regulatory approvals to market
these products. The Company cannot market such products until such approvals are
obtained. Even if such approvals are obtained, there can be no assurance that
any of these products will be successful or will produce significant revenues or
profits for the Company. The ability of the Company to become profitable depends
on the successful commercial development of these products.
POTENTIAL ADVERSE SIDE EFFECTS. The Company is engaged in the manufacture
and sale of a single FDA approved product, ALFERON N Injection for the treatment
of refractory or recurring external genital warts in adults. In clinical trials
conducted for the treatment of genital warts with ALFERON N Injection, patients
have not experienced serious adverse side effects; however, there can be no
assurance that unexpected or unacceptable adverse side effects will not be found
in the future for this use or other potential uses of this
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product or for any other product the Company might develop which could threaten
or limit such product's usefulness. See "Risk of Product Liability" below.
SUBSTANTIAL COMPETITION. In the United States and Mexico, the Company
currently competes with Schering-Plough Corp.'s ("Schering") injectable
recombinant interferon product and other therapies in the treatment of genital
warts. If and when the Company obtains additional approvals of uses of its
products, it expects to compete primarily on the basis of product performance
and price with Schering and a number of additional pharmaceutical companies,
both in the United States and abroad, including Hoffmann, Roche, Amgen Inc., and
Glaxo Wellcome Inc. The Company's potential competitors have developed or may
develop products (containing either alpha interferon or other therapeutic
compounds) or other treatment modalities for those uses. Many of the Company's
potential competitors are among the largest pharmaceutical companies in the
world, are well known to the public and the medical community, and have
substantially greater financial resources, product development, and
manufacturing and marketing capabilities than the Company or its marketing
partners. Schering's recombinant interferon product has achieved market
dominance for the treatment of hepatitis C and hepatitis B in the United States
and other markets, and there can be no assurance that, if the Company is able to
obtain regulatory approval of ALFERON N Injection for the treatment of those
diseases, it will be able to achieve any significant penetration into those
markets. In addition, because certain of the competitive products are not
dependent on a source of human blood cells, such products may be able to be
produced in greater volume and at a lower cost than ALFERON N Injection and the
Company's other Natural Alpha Interferon formulations. Currently, the Company's
wholesale price on a per unit basis of ALFERON N Injection is substantially
higher than that of the competitive recombinant alpha interferon products. Other
companies may succeed in developing products earlier than the Company, obtaining
approvals for such products from the FDA more rapidly than the Company, or
developing products that are more effective than those proposed to be developed
by the Company. While the Company will seek to expand its technological
capabilities in order to remain competitive, there can be no assurance that
research and development by others or other medical advances will not render the
Company's technology or products obsolete or non-competitive or result in
treatments or cures superior to any therapy developed by the Company, or that
any therapy developed by the Company will be preferred to any existing or newly
developed technologies. See "Business -- ALFERON N Injection -- Competition,"
"Business -- Products under Development -- ALFERON N Gel," and
"Business -- Products under Development -- ALFERON LDO."
POTENTIAL PATENT INFRINGEMENT CLAIMS. On March 5, 1985, the United States
Patent and Trademark Office issued a patent to Hoffmann claiming purified human
alpha (leukocyte) interferon (regardless of how it is produced). On May 6, 1994,
the United States Patent and Trademark Office issued an Office Action in
Reexamination on the Hoffmann patent and rejected all of the 14 claims in the
Hoffmann patent. Claims in a patent under reexamination are valid and
enforceable until such time as a final disposition on the claims is reached. On
July 11, 1994, Hoffmann filed a response objecting to the Patent Office's
rejection of such claims. On July 20, 1995, the Patent Office issued another
Office Action in Reexamination on the Hoffmann patent and rejected three of the
claims in the Hoffmann patent and concluded that the remaining 11 claims are
patentable. In November 1995, Hoffmann filed another response objecting to the
Patent Office's rejection of such three claims. The outcome of such
reexamination of the Hoffmann patent cannot be determined at this time. Roche,
the parent of Hoffmann, also has been issued patents covering human alpha
interferon in many countries throughout the world. As of March 31, 1995, the
Company obtained a non-exclusive license from Hoffmann and Roche which grants
the Company the worldwide rights to make, use, and sell, without a potential
patent infringement claim from Hoffmann or Roche, any formulation of Natural
Alpha Interferon. If Hoffmann's United States patent, or the claims in such
patent which the marketing of Natural Alpha Interferon products by the Company
might infringe, were found to be invalid, the royalty payable by the Company to
Hoffmann and Roche on net sales of Natural Alpha Interferon products in the
United States would be eliminated, but potential competitors of the Company may
be more likely to enter the market. The license permits the Company to grant
marketing rights with respect to Natural Alpha Interferon products to third
parties, except that the Company cannot grant marketing rights with respect to
injectable products in any country in which Hoffmann or Roche has patent rights
covered by the license to any third party not listed on a schedule of
approximately 50 potential marketing partners without the consent of Hoffmann
and Roche, which consent cannot be unreasonably withheld. There can be no
assurance that the Company will not want to
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<PAGE> 14
grant such marketing rights to a third party not listed on such schedule, or
that Hoffmann and Roche will not withhold the required consent. In addition, if
such license were terminated, the Company may be subject to a patent
infringement lawsuit by Hoffmann and Roche if it continued to market Natural
Alpha Interferon products. If such a suit were brought, the Company would have
to either counterclaim to attempt to invalidate the Hoffmann and Roche patents
or prove that it did not infringe such patents. See "Business -- ALFERON N
Injection -- Patents and Licenses" and "Business -- ALFERON N
Injection -- Royalty Obligations."
In addition, there may have been other patent applications filed in the
United States and in foreign countries, some of which may have been filed by
potential competitors of the Company, with respect to the technologies and/or
products which may be required by the Company to produce its current and
proposed products. If any of such patents issue in the United States or in
foreign countries in a form which covers the Company's products or processes,
the Company would be required to obtain licenses under such patents in
connection with the domestic and international commercialization of such
products. There can be no assurance that the Company could obtain licenses under
any of such patents if so issued, particularly if they were issued to companies
directly in competition with the Company, or that, even if the Company could
obtain licenses, it could do so on commercially reasonable terms.
If the sale or use of any of the Company's products were to become the
basis of a patent infringement lawsuit, assuming the Company could not obtain a
license on satisfactory terms, the Company may be required to incur substantial
litigation expenses, and such litigation could also consume substantial
management time, which could have a material adverse effect upon the financial
condition of the Company even if it were to be successful in the litigation. If
the Company proved unsuccessful in such litigation, it may be required to pay a
royalty for the use of the claimed patents or cease producing the products and
redevelop the products in such a way as to avoid infringing any claimed patent
rights. There can be no assurance in such case that the Company could obtain a
license under such patents on commercially reasonable terms or at all, or that
it could successfully redevelop the products to fall outside the scope of the
claim.
It is the Company's policy to seek licenses if it believes that the terms
of such licenses, when weighed against the expense and uncertainties of
potential litigation, are cost effective.
POSSIBLE INABILITY TO PROTECT TECHNOLOGY. To a significant extent, the
ability of the Company to protect its rights in any products or technology it
may develop depends upon its ability to obtain suitable patent or similar
protection. The ability of the Company to obtain patents, and the nature,
extent, and enforceability of the intellectual property rights that are obtained
as a result of the Company's research, involve complex legal and factual issues.
New technology and products developed by the Company may not qualify for patent
protection or, if they do qualify, may be subject to challenge or to protracted
judicial proceedings. In addition, the Company may determine not to seek
additional patent or other protection for its technology or products. It is not
certain that other patents will be issued or, if issued, that they will afford
the Company protection from competitive products. Although the Company's
practice is to require its technical and scientific employees and consultants to
execute confidentiality agreements covering proprietary information, there can
be no assurance that others will not independently make similar discoveries or
otherwise obtain access to proprietary information of the Company. In addition,
the Company has a non-exclusive license agreement with Hoffmann and Roche which
enables the Company to sell its products. There can be no assurance that
Hoffmann or Roche has not granted or will not grant a similar license to another
company with considerably greater financial, technical, and marketing resources
than the Company or that Hoffmann or Roche will not enter the market itself with
a competitive product.
While the Company has several patent applications pending, it does not
currently have significant patent protection for its products or technology. In
addition, even if such protection were obtained, it is possible that others have
or may develop equivalent or superior products or technologies which would not
fall within the scope of the Company's patent claims or which might involve
inventions similar in scope to those of the Company for which patent or similar
rights are obtained by others prior to the time that the Company is able to do
so. See "Business -- ALFERON N Injection -- Patents and Licenses" and
"Business -- Products under Development -- ALFERON N Gel and ALFERON
LDO -- Patents and Licenses."
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REGULATORY APPROVALS. The production and marketing of the Company's
products in the United States, as well as its ongoing research and development
activities, are subject to regulation by governmental agencies, most
significantly the FDA. Such regulation includes requirements for obtaining FDA
approval prior to marketing each of its products in the United States. In order
to obtain such FDA approval, the Company must demonstrate, among other things,
the safety and efficacy of each product through pre-clinical and clinical
testing. Obtaining such approvals is a time-consuming process and requires the
expenditure of substantial resources. Each facility in which the products are
produced and packaged, whether operated by the Company or a third party, must
meet the FDA's standards for current good manufacturing practices and must also
be approved prior to marketing any product produced or packaged in such
facility. Any significant change in the production process which may be
commercially required, including changes in sources of certain raw materials, or
any change in the location of the production facilities will also require FDA
approval. To the extent a portion of the manufacturing process for a product is
handled by an entity other than the Company, the Company must similarly receive
FDA approval for the participation by such third party in the manufacturing
process. For example, the Company has entered into an agreement with Sanofi
pursuant to which Sanofi formulates and packages ALFERON N Injection. The
Company presently has a biologic establishment license for the facilities in
which it produces ALFERON N Injection, which includes the facilities in which
Sanofi formulates and packages ALFERON N Injection. If the Company's or Sanofi's
present manufacturing facilities were damaged or destroyed or the Company's
arrangements with Sanofi were terminated, there can be no assurance that FDA
approval could be obtained for another facility or that another facility could
be built and approved on a timely basis or on commercially reasonable terms.
Delays in obtaining, or the failure to obtain, any necessary regulatory
approvals could have a material adverse effect on the Company's ability to
develop, produce, and sell its products. In addition, failure of the Company to
comply in any respect with FDA requirements with respect to the production and
marketing of drug products can subject the Company to potential civil and
criminal penalties and its products to seizure and other civil enforcement
action. Because of the uncertain nature of many of these requirements, there can
be no assurance that regulatory problems of this type will not occur. See
"Business -- Governmental Regulation."
FOREIGN REGULATORY APPROVALS. To market its products outside of the United
States, the Company is subject to numerous and varying foreign regulatory
requirements, implemented by foreign health authorities, governing the design
and conduct of human clinical trials and marketing approval. The approval
procedure varies among countries and can involve additional testing, and the
time required to obtain approval may differ from that required to obtain FDA
approval. At present, foreign marketing authorizations are applied for at a
national level, although certain registration procedures are available within
the European Union (the "EU") to companies wishing to market a product in more
than one EU member country. If a regulatory authority is satisfied that adequate
evidence of safety, quality, and efficacy has been presented, marketing
authorization is usually granted. The foreign regulatory approval process
includes all of the risks associated with obtaining FDA approval set forth
above. Approval by the FDA does not ensure approval by other countries. There
can be no assurance that the Company's products will receive such approvals. In
addition, in most cases, the Company may not export its products for commercial
sale for any use other than an FDA-approved use except that the FDA may under
certain circumstances authorize exportation of such products to one or more of
21 specifically-approved countries. However, these FDA export restrictions
generally do not apply if the Company's products are manufactured outside the
United States. At the present time, the Company does not have any foreign
manufacturing facilities.
In May 1990, the Company's licensee applied for a product license in the
United Kingdom for the use of ALFERON N Injection for the intralesional
treatment of refractory or recurring external genital warts in patients 18 years
of age or older. In October 1991, the Committee on Safety of Medicines informed
the Company's licensee that it might be unable to advise the Licensing Authority
to grant a product license. Subsequent oral and written representations made by
the Company to the Committee resolved certain of the issues raised by the
Committee, but the Committee believed that additional information and possibly
clinical work would be necessary to resolve certain other quality and safety
issues and determined to advise the Licensing Authority not to grant a product
license at that time. The Company's licensee was entitled to appeal this
recommendation and has done so. The Company can appear before or make written
representations to the Committee about such advice, but has not done so because
of a lack of funds. The Company is
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considering whether to continue to pursue this appeal or to have the Company's
licensee withdraw the product license application. The Company could submit a
new application for the same use or for another use if and when sufficient
clinical data is available. There can be no assurance, however, that approval of
the use of ALFERON N Injection for the treatment of genital warts or any other
indication will be obtained even if it is pursued.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS; NEED FOR
REIMBURSEMENT. The future revenues and profitability of, and availability of
capital for, biotechnology companies may be affected by the continuing efforts
of governmental and third-party payors to contain or reduce the costs of health
care through various means. For example, in certain foreign markets, the pricing
and profitability of prescription pharmaceuticals is subject to government
control. In Japan, which is currently the world's largest market for interferon
products, the government imposed price cuts ranging from 13.5% to 22.7% in 1994
on certain interferon products then being marketed in Japan. The Company cannot
predict whether similar price cuts will be imposed on any of the Company's
products in Japan or in any other country at such time as such products are
being marketed in such country or the size or duration of any cuts that may be
imposed. However, there can be no assurance that any such cuts will not have a
material adverse effect on the Company's future results of operations. There
have been, and the Company expects there to continue to be, a number of United
States federal and state proposals to implement similar government control. It
is uncertain what form any health care reform legislation may take or what
actions the federal, state, and private payors may take in response to the
suggested reforms. The Company cannot predict when any suggested reforms will be
implemented, if ever, or the effect of any implemented reform on the Company's
business. There can be no assurance, however, that any implemented reform will
not have a material adverse effect on the Company's future results of
operations. The Company's long-term ability to market its products successfully
may depend in part on the extent to which reimbursement for the cost of such
products and related treatment will be available from public and private health
insurers and other organizations. Third-party payors are increasingly
challenging the prices of medical products and services. The reimbursement
status of newly-approved health care products is highly uncertain, and there can
be no assurance that third-party coverage will be available or that available
third-party coverage will enable the Company to maintain price levels sufficient
to realize an appropriate return on its investment in product development. While
recombinant alpha interferon products can be produced at a lower cost per unit
than the Company's formulations of Natural Alpha Interferon products, until dose
regimens and treatment durations are determined, the Company is unable to
determine whether the cost of treatment with the Company's products will be
greater, equal to, or less than the cost of competing treatments.
ROYALTY OBLIGATIONS. The Company is a party to certain license agreements
pursuant to which it is obligated to pay royalties based upon the commercial
exploitation of its products. Royalty payments under such license agreements
with respect to ALFERON N Injection, ALFERON N Gel, and ALFERON LDO could
aggregate up to 9.5%, 13.5%, and 19.5%, respectively, of the Company's net sales
of such products. See "Business -- ALFERON N Injection -- Royalty Obligations"
and "Business -- Products under Development -- ALFERON N Gel and ALFERON LDO --
Royalty Obligations." In addition, under the terms of a marketing agreement, the
Company may be obligated to pay an additional royalty equal to a maximum of 3%
of the net sales of ALFERON N Injection in certain territories. See
"Business -- ALFERON N Injection -- Marketing and Distribution." Such royalty
obligations, together with any additional royalties which may be payable by the
Company, may limit the Company's marketing strategies and prevent it from
obtaining adequate profit margins and could have a material adverse effect on
the commercial exploitation of the Company's products.
In connection with the acquisition of certain intellectual property and
technology rights from NPDC, the Company agreed to pay NPDC a royalty of $1
million. Such amount is payable if and when the Company generates income before
income taxes, limited to 25% of such income before income taxes per year until
such amount is paid in full. See "Certain Transactions -- Agreements with
NPDC -- Transfer Agreement."
LIMITED PRODUCTION EXPERIENCE. Although the Company has produced ALFERON N
Injection in accordance with its commercial requirements, it has never produced
ALFERON N Injection at levels which would allow the Company to operate
profitably. There can be no assurance that, if the Company's commercial
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<PAGE> 17
requirements increase to such levels, the Company will be able to produce
ALFERON N Injection at such levels and at a competitive price.
RISK OF PRODUCT LIABILITY. The Company's products have undergone or will
undergo extensive clinical testing prior to the granting of any regulatory
approval for the purpose, among other things, of determining the safety of such
products. The Company may sell products which cause unexpected adverse reactions
or result in an allergic or other reaction or which are alleged to have
unacceptable adverse side effects. Product liability risk is inherent in the
testing, manufacture, marketing, and sale of the Company's products, and there
can be no assurance that the Company will be able to avoid significant product
liability exposure. Such liability might result from claims made directly by
consumers or by pharmaceutical companies or others selling such products. It is
impossible to predict the scope of injury or liability from such unexpected
reactions, or the measure of damages which might be imposed as a result of any
claims or the cost of defending such claims. The Company has a product liability
insurance policy in the amount of $10,000,000. Although the Company believes
this amount is sufficient, there is no assurance that the Company will be able
to maintain such coverage, and even if it does maintain it, in the event that
the Company becomes subject to liability claims in excess of any insurance
coverage it may have in effect, the Company may not have sufficient assets or
liquidity to satisfy such claims which could result in the Company's inability
to continue its operations. Furthermore, any published reports or rumors
suggesting a link between a Company product and injury to a person could be
expected to materially impair the Company's ability to market such product.
RETENTION OF KEY PERSONNEL. Because of the specialized scientific nature
of the Company's business, it is necessary to attract and retain personnel with
a wide variety of scientific capabilities. Competition for such personnel is
intense. There can be no assurance that the Company will continue to attract and
retain personnel of high scientific caliber. None of the Company's key employees
have employment agreements. The Company does not maintain key man life insurance
for any of its key employees and does not intend to obtain such insurance. The
Company's loss of services of certain of its employees or other members of its
staff could have a material adverse effect on the Company's operations. See
"Business -- Research Staff and Employees" and "Management."
CONTROL BY PRINCIPAL STOCKHOLDERS; CONFLICTS OF INTEREST. Based, in part,
on Schedule 13Ds filed by beneficial owners of the Company's securities with the
Commission, as of April 1, 1996, NPDC, David Blech, five trusts of which Mr.
Blech is the income beneficiary but not the trustee (the "Blech Trusts"), and
Biotechnology Investment Group L.L.C. beneficially owned approximately 21.7%,
2.3%, 7.3%, and 7.9%, respectively, of the outstanding shares of Common Stock,
certain of which shares have been pledged to their respective banks as
collateral to secure indebtedness owed to such banks.
Certain conflicts of interest may arise as a result of NPDC's stock
ownership in the Company and certain related transactions between the Company
and NPDC. Furthermore, certain officers of the Company also serve as officers of
NPDC and may have conflicts of interests in allocating management time,
services, and functions between the Company and NPDC. Presently, Samuel H.
Ronel, Ph.D., Vice Chairman, Stanley G. Schutzbank, Ph.D., President, Lawrence
M. Gordon, Chief Executive Officer, Drew R. Stoudt, Vice President Regulatory
Affairs and Quality, and Donald W. Anderson, Controller, devote a portion of
their time to the business of NPDC, which includes some overlapping
responsibilities for the benefit of the Company. In addition, certain directors
of NPDC also serve as directors of the Company. Transactions in which certain
members of the Board of Directors or principal stockholders of the Company may
have a conflict of interest must be approved by a majority of the disinterested
directors. See "Principal Stockholders," "Certain Transactions," "Description of
Securities," and "Business -- ALFERON N Injection -- Marketing and
Distribution -- Agreements with Purdue."
PREFERRED STOCK. The Company's charter provides for 5,000,000 authorized
but unissued shares of Preferred Stock, the rights, preferences, qualifications,
limitations, and restrictions of which may be fixed by the Board of Directors
without any further vote or action by the stockholders. The ability to issue the
Preferred Stock could have the effect of delaying, deferring, or preventing a
change of control of the Company.
SHARES AVAILABLE FOR FUTURE SALE; UNDERWRITER'S PURCHASE OPTIONS. The
Company, the Company's directors and officers (who own in the aggregate 18,100
shares of Common Stock and options and warrants to
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<PAGE> 18
purchase 2,181,000 shares of Common Stock), and the Company's principal
stockholders (who own in the aggregate 13,513,816 shares of Common Stock and no
options and warrants to purchase shares of Common Stock), have agreed (subject
to certain exceptions) not to sell, directly or indirectly, any of their shares
of Common Stock or other equity securities of the Company for periods ranging
from six to 24 months from August 14, 1995, without the consent of Sunrise and
the Company. On February 14, 1996, such agreement not to sell lapsed with
respect to an aggregate of 1,500 shares of Common Stock and options and warrants
to purchase 377,000 shares of Common Stock owned by certain of the Company's
officers. In addition, certain of such principal stockholders have pledged an
aggregate of 9,685,482 shares of Common Stock beneficially owned by them to
their respective banks as collateral to secure indebtedness owed to such banks.
Any shares acquired by lenders pursuant to such pledge arrangements would not be
subject to any agreements not to sell. Also, any shares held by a principal
stockholder who was in bankruptcy proceedings might be released, in the
discretion of the bankruptcy court, from any agreement not to sell. Moreover,
Sunrise and the Company may, in their sole discretion and at any time without
notice, release all or any portion of the securities subject to agreements not
to sell. On the expiration of the agreements not to sell, and subject to the
pledge arrangements, the principal stockholders may sell certain of the shares
of Common Stock held by them pursuant to Rule 144 under the Securities Act of
1933, as amended (the "Securities Act"), or otherwise. In addition, certain of
the principal stockholders have certain demand and/or "piggyback" registration
rights with respect to the Common Stock beneficially owned by them. The sale of
a significant number of shares of Common Stock, whether by the principal
stockholders, the lenders pursuant to such pledge arrangements, or otherwise,
may adversely affect the market price of the Common Stock. See "Principal
Stockholders" and "Certain Transactions."
The Company currently has outstanding options to purchase 4,278,653 shares
(including options held by Sunrise for 1,123,333 shares) and warrants to
purchase 1,112,941 shares of Common Stock. Moreover, the Company will sell to
the Underwriter and/or its designees, for nominal consideration, the
Underwriter's Purchase Options to purchase up to 700,000 shares of Common Stock.
For the life of the outstanding options and warrants and the Underwriter's
Purchase Options, the holders are given, at nominal cost, the opportunity to
profit if the price for the Common Stock in the public market exceeds the
exercise price of the options, warrants, or Underwriter's Purchase Options,
without assuming the risk of ownership, with a resulting dilution in the
interest of other security holders. If the public market price of the Common
Stock does not rise above the exercise price of the options, warrants, or
Underwriter's Purchase Options during the exercise period, then such securities
will expire worthless. As long as the outstanding options, warrants, and the
Underwriter's Purchase Options remain unexercised, the terms under which the
Company could obtain additional capital may be adversely affected. Moreover, the
holders of these securities may be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital by a new
offering of its securities on terms more favorable than those provided by these
securities.
In addition, if the Company exercises its option to repurchase certain
marketing rights from Purdue, the Company will issue 750,000 shares of Common
Stock to Purdue which the Company has agreed to utilize its best efforts to
ensure will be registered and freely tradeable. See "Business -- ALFERON N
Injection -- Marketing and Distribution -- Agreements with Purdue."
REGISTRATION RIGHTS
The Company has granted demand and/or "piggyback" registration rights with
respect to an aggregate of 9,087,424 shares (or options or warrants to purchase
shares) of Common Stock. In March 1995, holders exercised demand registration
rights with respect to an aggregate of 610,000 shares of Common Stock. Upon
exercise of such rights, the Company was required, as expeditiously as
reasonably possible, to prepare and file with the Commission a registration
statement with respect to such shares. Such shares were included in a
registration statement (the "Selling Stockholders' Registration Statement") that
was declared effective by the Commission on December 26, 1995 and the Company
believes that it has complied with its obligations; however, the holders of such
shares may commence litigation alleging that the Company has breached its
obligations. In addition, the holder of warrants to purchase 61,000 shares of
Common Stock at a purchase price of $2.70 per share had the right to receive
notice from the Company of the August/September Offering
16
<PAGE> 19
and of this Offering and to have its warrants or the underlying shares of Common
Stock included in the related registration statements. The Company did not
furnish such notice to such holder, and such holder may commence litigation as a
result, even though such shares also are included in the Selling Stockholders'
Registration Statement. The Company is unable to predict whether any such
litigation will be commenced and, if it is, the outcome of such litigation.
VOLATILITY OF SHARE PRICE; LACK OF LIQUIDITY. There has been significant
volatility in the market prices for publicly traded shares of biotechnology
companies, including the Company. There can be no assurance that the price of
the Common Stock will remain at or exceed current levels. Factors, such as
announcements of technological or product developments by the Company or its
competitors, governmental regulation, or patent or proprietary rights
developments, may have a significant impact on the market price of the Common
Stock.
Effective August 3, 1995, the trading market for the Common Stock was
changed from the NASDAQ National Market System to the NASDAQ SmallCap Market
because of the failure of the Company to satisfy the listing requirements for
the NASDAQ National Market System. The liquidity of the Common Stock may be
adversely affected by such change.
DILUTION. Based on the net tangible book value per share of the Common
Stock as of December 31, 1995, investors in the Offering will likely experience
substantial dilution per share from the public offering price. See "Dilution."
DIVIDENDS ON COMMON STOCK UNLIKELY. The Company does not, in the
foreseeable future, anticipate paying any dividends on the Common Stock. See
"Price Range of Common Stock and Dividend Policy."
NO MARKET MAKING ACTIVITY BY UNDERWRITER. The Underwriter has indicated
that it does not intend to act as a market maker in the Common Stock, which may
adversely affect the price and liquidity of the Common Stock. While 23 firms
currently make a market in the Common Stock, all or some of such firms may
discontinue such activities at any time or from time to time.
LIMITED UNDERWRITING HISTORY. The Underwriter was first registered as a
broker-dealer in February 1992 and has previously participated in only a limited
number of public offerings as an underwriter, though it has acted as syndicate
member, sole placement agent, co-placement agent, selected dealer, or sole
participating broker in more than a dozen public and private offerings.
Prospective purchasers of the Common Stock offered hereby should consider the
Underwriter's limited experience in evaluating an investment in the Common
Stock. See "Underwriting."
17
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be $9,000,000 if the minimum number of shares is sold
and $12,660,000 if the maximum number of shares is sold.
The Company anticipates that of the estimated net proceeds of $9,000,000 if
the minimum number of shares is sold, it will use approximately $ for
research, product development, and clinical trials of the Company's products and
the balance for working capital and general corporate purposes. The Company
anticipates that of the estimated net proceeds of $12,660,000 if the maximum
number of shares is sold, it will use approximately $ for research,
product development, and clinical trials of the Company's products and the
balance for working capital and general corporate purposes. The Company reserves
the right to reapportion the net proceeds of the Offering among the foregoing
categories or to other uses if it determines that to do so would be in the best
interests of the Company.
Until utilized, the proceeds of the Offering are expected to be invested
principally in short-term, interest-bearing investments.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded in the over-the-counter market and is quoted on
the NASDAQ SmallCap Market under the symbol IFSC. Effective August 3, 1995, the
trading market for the Common Stock was changed from the NASDAQ National Market
System to the NASDAQ SmallCap Market because of the failure of the Company to
satisfy the listing requirements for the NASDAQ National Market System. The
following table sets forth for each period indicated the high and low sales
prices for the Common Stock as reported on the NASDAQ National Market System
through August 2, 1995 and on the NASDAQ SmallCap Market commencing August 3,
1995.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1994
First Quarter................................................ $ 5 3/8 $ 3 5/8
Second Quarter............................................... 4 1/8 2 3/4
Third Quarter................................................ 3 7/8 1 1/2
Fourth Quarter............................................... 2 5/8 1 1/4
1995
First Quarter................................................ 3 1 5/16
Second Quarter............................................... 2 1/2 1 11/16
Third Quarter................................................ 2 3/4 1 11/16
Fourth Quarter............................................... 3 3/32 1 9/16
1996
First Quarter................................................ 21 1/32 1 1/2
Second Quarter (through April 2, 1996)....................... 2 1/2 2 1/16
</TABLE>
On April 2, 1996, the last reported sale price of the Common Stock was
$2 1/2 per share. As of April 2, 1996, the Company had 833 stockholders of
record.
The Company has not paid any dividends on the Common Stock since its
inception and does not contemplate paying dividends on the Common Stock in the
foreseeable future.
18
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
December 31, 1995 and (ii) as adjusted to give effect to the sale of the minimum
and maximum number of shares of Common Stock in the Offering (assuming no other
changes in the capitalization after December 31, 1995).
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------
AS ADJUSTED
----------------------------
ACTUAL MINIMUM MAXIMUM
------------ ------------ ------------
<S> <C> <C> <C>
Stockholders' equity:
Preferred Stock, par value $.01 per share,
5,000,000 shares authorized; none issued and
outstanding................................... -- -- --
Common Stock, par value $.01 per share,
55,000,000 shares authorized; 34,448,768
shares issued and outstanding; 39,448,768 and
41,448,768 shares issued and outstanding, as
adjusted(1)................................... $ 344,488 $ 394,488 $ 414,488
Capital in excess of par value..................... 82,641,859 91,591,859 95,231,859
Accumulated deficit................................ (70,159,571) (70,159,571) (70,159,571)
------------ ------------ ------------
Total stockholders' equity............... $ 12,826,776 $ 21,826,776 $ 25,486,776
------------ ------------ ------------
Total capitalization............................. $ 12,826,776 $ 21,826,776 $ 25,486,776
============ ============ ============
</TABLE>
- ---------------
(1) Does not include (i) 3,155,320 shares of Common Stock reserved for issuance
upon the exercise of options outstanding under the Company's stock option
plan, (ii) 1,112,941 shares reserved for issuance upon the exercise of
currently outstanding warrants, (iii) 1,123,333 shares reserved for issuance
upon the exercise of options issued to Sunrise in connection with the
August/September Offering, and (iv) 700,000 shares reserved for issuance
upon exercise of the Underwriter's Purchase Options. See "Underwriting.".
The Company has no short-term or long-term debt or material long-term lease
obligations.
19
<PAGE> 22
DILUTION
As of December 31, 1995, the net tangible book value of the Company was
$12,485,180, or $.36 per share of Common Stock outstanding. Net tangible book
value per share is determined by dividing the tangible net worth of the Company
(tangible assets less liabilities) by the number of shares of Common Stock
outstanding. After giving effect to the sale of the minimum number of shares in
the Offering (assuming no other changes in the net tangible book value after
December 31, 1995), the adjusted net tangible book value of the Company as of
December 31, 1995 would have been $21,485,180 ($25,145,180 if the maximum number
of shares are sold in the Offering) or $.54 ($.61 if the maximum number of
shares are sold in the Offering) per share. This represents an immediate
increase in net tangible book value of $.18 ($.25 if the maximum number of
shares are sold in the Offering) per share to current stockholders and an
immediate dilution of $1.46 ($1.39 if the maximum number of shares are sold in
the Offering) per share to new investors purchasing shares of Common Stock in
the Offering.
The following table summarizes such per share dilutive effect:
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
-------------- --------------
<S> <C> <C>
Offering price(1)............................................. $2.00 $2.00
Net tangible book value per share before the Offering....... $.36 $.36
Increase attributable to shares offered hereby(2)........... .18 .25
---- ----
Adjusted net tangible book value per share after the
Offering.................................................... .54 .61
----- -----
Dilution to new investors(3).................................. $1.46 $1.39
===== =====
</TABLE>
- ---------------
(1) Before deduction of underwriting discounts and commissions and other
estimated expenses of the Offering to be paid by the Company.
(2) After deduction of underwriting discounts and commissions and other
estimated expenses of the Offering to be paid by the Company.
(3) Dilution represents the difference between the offering price per share and
the adjusted net tangible book value per share after giving effect to the
Offering.
20
<PAGE> 23
SELECTED FINANCIAL INFORMATION
The following table sets forth the selected financial data of the Company
as of December 31, 1995, 1994, 1993, 1992, and 1991 and for the years ended
December 31, 1995, 1994, 1993, 1992, and 1991 and should be read in conjunction
with the consolidated financial statements and notes thereto contained elsewhere
in this Prospectus. The financial data have been derived from the audited
financial statements of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993 1992 1991
------- -------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(1)........................................................... $ 1,296 $ 1,166 $ 51 $ 3,306 $ 2,503
Research and development costs, net................................... 3,726 5,196 4,151 3,983 3,162
General and administrative expense.................................... 1,940 4,974(2) 2,367 2,113 1,872
Loss from operations.................................................. (7,447) (11,782) (8,347) (5,953) (5,087)
Interest and other income (expense), net.............................. 75 (295) (113) (44) (809)
Net loss.............................................................. (7,372) (12,078) (8,460) (5,997) (5,896)
Net loss per share of common stock.................................... (.28) (.62) (.55) (.42) (.62)
Dividends............................................................. -- -- -- -- --
Weighted average number of shares of Common Stock outstanding......... 26,647 19,594 15,432 14,357 9,501
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993 1992 1991
------- -------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................................................... $13,953 $ 8,182 $20,301 $21,096 $25,035
Current maturities of long-term debt.................................. -- 409 1,999 2,001 1,188
Long-term debt, net of current maturities............................. -- -- 138 1,679 3,680
Common Stock subject to repurchase commitment(3)...................... -- 2,730 -- -- --
Working capital (deficiency).......................................... 7,062 (782) 7,985 7,706 12,002
Stockholders' equity.................................................. 12,827 2,979 17,131 16,157 19,045
</TABLE>
- ---------------
(1) Substantially all of the revenues in 1991, 1992, 1994, and 1995 were from
sales of ALFERON N Injection to Purdue. Purdue did not purchase ALFERON N
Injection from the Company in 1993. Purdue has informed the Company that
during 1993, 1994, and 1995 Purdue sold approximately 23,000, 25,000, and
23,900 vials, respectively, and distributed as free samples approximately
2,800, 2,000, and 400 vials, respectively, of ALFERON N Injection from its
inventory. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations -- Liquidity and Capital Resources."
(2) Includes $2,100,000 resulting from the write-off of certain prepaid
royalties. See Note 4 of "Notes to Consolidated Financial Statements."
(3) Represents the Company's commitment as of December 31, 1994 to purchase
shares of Common Stock from Purdue, which commitment terminated upon
completion of the August/September Offering. However, the Company still has
the obligation to repurchase 619,994 shares from Purdue for $2,479,976 if
the Company decides to exercise an option, which is exercisable until
December 31, 1996, to repurchase certain marketing rights from Purdue. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- ALFERON N
Injection -- Marketing and Distribution -- Agreements with Purdue."
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since January 1981, the Company has been primarily engaged in the research
and development of pharmaceutical products containing Natural Alpha Interferon
for the treatment of viral diseases, cancers, and diseases of the immune system.
The Company has experienced significant operating losses since its inception.
Although the Company received FDA approval in October 1989 to market ALFERON N
Injection in the United States for the treatment of certain genital warts, it
has had limited revenues from the sale of ALFERON N Injection to date. ALFERON N
Injection currently is marketed and sold in the United States by Purdue and was
approved for sale in Mexico in December 1994. In order for the Company to
operate profitably, the Company must sell significantly more ALFERON N
Injection. Increased sales will depend primarily upon the expansion of existing
markets and/or successful attainment of FDA approval to market ALFERON N
Injection for additional indications. The future revenues and profitability of,
and availability of capital for, biotechnology companies may be affected by the
continuing efforts of governmental and third-party payors to contain or reduce
the costs of health care through various means. The Company has primarily
financed its operations to date through private placements and public offerings
of the Company's securities.
LIQUIDITY AND CAPITAL RESOURCES
As of April 1, 1996, the Company had an aggregate of $4,600,000 in cash and
cash equivalents. Until utilized, such cash and cash equivalents are being
invested principally in short-term interest-bearing investments.
Management believes that the cash currently available will be sufficient to
enable the Company to continue operations until approximately December 1996,
although no assurance can be given in this regard. To fund the Company's
operations beyond such date and, if it decides to do so, to exercise the option
to repurchase certain marketing rights from Purdue and to repurchase certain
shares of Common Stock from Purdue, the Company will require additional funding,
whether from financial markets (including through the Offering) or collaborative
or other arrangements with corporate partners or from other sources, which may
not be available when needed, or on terms acceptable to the Company.
Insufficient funds will require the Company further to delay, scale back, or
eliminate certain or all of its research and development programs or license
third parties to commercialize products or technologies that the Company would
otherwise seek to develop itself or to shut down or curtail its manufacturing
facility. In addition to the Offering, management is actively pursuing raising
required additional capital by licensing rights to its injectable, topical, or
oral formulations of alpha interferon, or entering into collaborative or other
arrangements with corporate partners.
In August and September 1995, the Company completed the sale of 12,000,000
shares of Common Stock for an aggregate of $14,400,000 pursuant to the
August/September Offering. Of the $12,494,000 of net proceeds from the
August/September Offering, the Company has used $1,870,000 to repay indebtedness
to certain principal stockholders and anticipates that it will use approximately
$7,000,000 for research, product development, and clinical trials of the
Company's products and the balance for working capital and general corporate
purposes.
Between May and August 1995, three principal stockholders of the Company
loaned the Company an aggregate of $1,870,000. Such loans bore interest at prime
plus 2% and were repaid with a portion of the proceeds of the August/September
Offering. See "Certain Transactions -- Other Transactions."
In April 1995, Amarillo Cell Culture Company, Incorporated and its licensee
agreed to purchase an aggregate of $750,000 of the Company's Common Stock at
$2.00 per share, all of which cash was received during the second quarter of
1995. See "Business -- Products Under Development -- ALFERON LDO."
In the first quarter of 1995, the Company concluded an agreement with
Fujimoto, a pharmaceutical company located in Osaka, Japan, for the
commercialization of the Company's ALFERON N Injection and ALFERON N Gel in
Japan. In connection with the agreement, Fujimoto purchased $1,500,000 of the
Company's Common Stock at $1.45 per share (the then market price), all of which
cash was received during the first quarter of 1995, and agreed to purchase an
additional $500,000 of Common Stock on February 6, 1996 at the then market
price. Such additional $500,000 of Common Stock has to date not been purchased.
22
<PAGE> 25
To date, Fujimoto has incurred higher than anticipated development expenses, and
Fujimoto has determined that there may be greater difficulties in obtaining
Japanese regulatory approval than originally anticipated. Fujimoto has,
therefore, requested that the Company renegotiate such investment agreement and
the related commercialization agreement. The Company intends to meet with
Fujimoto to consider its request. See "Business -- ALFERON N
Injection -- Marketing and Distribution -- Other Marketing and Distribution
Arrangements."
In connection with the amendments to agreements with Purdue as described
below, during January 1994, Purdue ordered 45,000 vials of ALFERON N Injection
at an agreed upon price. With respect to this order, approximately
three-quarters of the purchase price of the vials was payable upon shipment by
the Company to Purdue and the balance was payable upon sale by Purdue. A portion
of the shipments to fill this order was made on a consignment basis, i.e. the
purchase was subject to a right of return until notification by Purdue that such
vials have been resold. In June and August 1994, the Company began to fill this
order by making shipments of 10,000 and 10,735 vials, respectively, of ALFERON N
Injection to Purdue on a consignment basis. In addition, shipments of 5,718,
9,040, and 3,562 vials of ALFERON N Injection were made to Purdue in September
1994, April 1995, and September 1995, respectively, on a non-consignment basis.
The 5,945 vial balance of this order was shipped in November 1995 on a
non-consignment basis. In June 1995, the Company received purchase orders from
Purdue totalling 22,744 vials of ALFERON N Injection on a non-consignment basis,
of which 4,431 vials were shipped in November 1995 and the balance will be
shipped in 1996.
Purdue has informed the Company that from June 1994 through December 31,
1994, it had sold or distributed as free samples approximately 15,800 vials of
the 20,735 vials purchased on a consignment basis, and that as of March 1995,
Purdue had sold or distributed as free samples the balance of such consignment
inventory. Purdue has also informed the Company that during the years ended
December 31, 1995 and 1994, it sold approximately 23,900 vials and 25,000 vials,
respectively, and distributed as free samples approximately 400 vials and 2,000
vials, respectively, of ALFERON N Injection from its inventory.
In January 1994, the Company amended its marketing and distribution
agreements with Purdue and related parties. See "Business -- ALFERON N
Injection -- Marketing and Distribution -- Agreements with Purdue." Pursuant to
such amended agreements, the Company assumed sole responsibility to conduct and
fund clinical trials required to obtain FDA approval for additional indications
for ALFERON N Injection. Prior to these amendments, Purdue was responsible for
the payment of the costs of such clinical trials. The Company anticipates that
the expansion of its research and development efforts and clinical trial
activities and its assuming responsibility for the conduct and funding thereof
will increase operating expenses. The Company intends to seek to enter into
joint ventures or other arrangements with strategic partners who agree to bear
all or part of such expenses.
In connection with the amendments to the agreements with Purdue, the
Company agreed to purchase an aggregate of 994,994 shares of its Common Stock
for $3,979,976 ($4.00 per share) from Purdue and two related entities over a
period of 19 months. The Company purchased 62,500 of such shares of Common Stock
for $250,000 in January 1994 and was obligated to purchase an additional 250,000
shares of Common Stock for $1,000,000 in 1994. In 1994, the Company and Purdue
agreed to offset $700,000 owed to the Company by Purdue, for the purchase of
ALFERON N Injection during 1994, against the Company's obligation to purchase
$1,000,000 of the Company's Common Stock from Purdue in 1994. As of December 31,
1994, $300,000 of this obligation to Purdue had not been paid and was reflected
as a current liability on the balance sheet. In addition, as of March 31, 1995,
the Company had an additional $67,783 of offsets based upon additional sales of
ALFERON N Injection by Purdue leaving $232,217 of this obligation outstanding as
of such date. In April 1995, the Company was required to purchase 62,500 shares
of Common Stock for $250,000 and on August 31, 1995 (or such earlier date on
which the August/September Offering shall have terminated prior to the sale of
minimum number of shares of Common Stock) was obligated to purchase 619,994
shares of Common Stock for $2,479,976. As of July 31, 1995, the Company had
generated sufficient additional offsets based upon additional sales of ALFERON N
Injection to and by Purdue to repay the $232,217 owed to Purdue as of March 31,
1995 and to pay $200,843 of the $250,000 owed to Purdue for the April 1995 stock
repurchase. In July 1995, the Company entered into a further amendment to the
agreements with Purdue, which became effective upon the sale on August 22, 1995
of more than the minimum number of
23
<PAGE> 26
shares of Common Stock in the August/September Offering, pursuant to which the
balance owed to Purdue for the April 1995 stock repurchase (which had been
reduced by further offsets) was forgiven and the Company obtained an option,
exercisable until December 31, 1996, to reacquire the remaining marketing and
distribution rights from Purdue. The exercise price of the option is $5,029,133,
subject to reduction as set forth below, plus 750,000 shares of Common Stock
(350,000 shares of Common Stock if the option had been exercised on or before
December 31, 1995). The option may not be exercised unless the Company
simultaneously purchases any of the 619,994 shares of Common Stock described
above then held by Purdue for $4.00 per share. The cash exercise price of the
option will be reduced by the aggregate of (i) the amount paid by the Company to
Purdue to repurchase any of such 619,994 shares then held by Purdue, (ii) if
Purdue sells any or all of such 619,994 shares, which may only be done with the
consent of the Company, the amount received by Purdue from such sale, and (iii)
the amount by which the transfer price for vials sold by the Company to Purdue
exceeds $25 per vial. If the option is not exercised, the Company will no longer
have the obligation to repurchase the 619,994 shares. In addition, the parties
agreed that the transfer price for each vial will be payable $25 in cash and the
balance as an offset to the cash exercise price of the option. If the option is
not exercised, such offsets will have no value. See "Business -- ALFERON N
Injection -- Marketing and Distribution -- Agreements with Purdue."
RESULTS OF OPERATIONS
Year Ended December 31, 1995 versus Year Ended December 31, 1994
For the year ended December 31, 1995 (the "1995 Period"), the Company's
revenues of $1,295,662 included $1,260,933 from the sale of ALFERON N Injection
and the balance from sales of research products and other revenues. Revenues of
$1,165,931 for the year ended December 31, 1994 (the "1994 Period") included
$979,425 from the sale of ALFERON N Injection and the balance from sales of
research products, contract research, and other revenues. Cost of goods sold and
excess/idle production costs totalled $3,076,249 in the 1995 Period and
$2,778,109 in the 1994 Period. The inventory which was sold in the 1995 Period
and the 1994 Period had been written down to its net realizable value. For the
portion of the 1995 Period and the 1994 Period during which the facility was
operating, excess/idle production costs primarily represented current production
costs in excess of the estimated net realizable value of inventory produced
which resulted from limited production volumes. Excess/idle production costs
were reduced by suspending ALFERON N Injection production during a portion of
both the 1995 Period and the 1994 Period.
Research and development expenses during the 1995 Period of $3,726,230
decreased by $1,469,469 from $5,195,699 for the 1994 Period, principally because
the Company reduced its level of research and product development on ALFERON N
Injection. The Company received $181,992 and $150,000 during the 1995 Period and
1994 Period, respectively, as rental income from NPDC for the use of a portion
of the Company's facilities, which offset research and development expenses.
General and administrative expenses for the 1995 Period were $1,939,864 as
compared to $4,974,224 for the 1994 Period. The decrease of $3,034,360 was
principally due to the amortization and subsequent write-off of prepaid
royalties totalling $2,100,000 in the 1994 Period and decreases in payroll and
other expenses in the 1995 Period. NPDC provides certain administrative services
for which the Company paid NPDC $120,000 for each of the 1995 Period and the
1994 Period. In addition, during the 1995 Period and the 1994 Period, NPDC
provided to the Company, at its estimated cost, certain personnel and services
which the Company used in its operations. For the 1995 Period and the 1994
Period, such charges amounted to $1,121,145 and $1,194,380, respectively.
Commencing January 1, 1996, the NPDC personnel who had been providing such
services to the Company became employees of the Company, and will provide
certain services to NPDC at the Company's estimated cost.
Interest and other income for the 1995 Period was $155,478 as compared to
$157,929 for the 1994 Period.
For the 1994 Period, the Company realized a net loss of $300,430 on the
sales of marketable securities which resulted from declines in the fair value of
the Company's investments in obligations of agencies of the United States
Government.
24
<PAGE> 27
Interest expense for the 1995 Period and the 1994 Period was $80,511 and
$152,935, respectively. The decrease of $72,424 was due to reduced long-term
debt.
As a result of the foregoing, the Company incurred net losses of $7,371,714
and $12,077,537 for the 1995 Period and the 1994 Period, respectively.
Year Ended December 31, 1994 versus Year Ended December 31, 1993
For the 1994 Period, the Company's revenues of $1,165,931 included $979,425
from the sale of ALFERON N Injection and the balance from sales of research
products, contract research, and other revenues. The revenues of $51,323 for the
year ended December 31, 1993 (the "1993 Period') were derived from sales of
research products. Cost of goods sold and excess/idle production costs totalled
$2,778,109 in the 1994 Period and $1,880,563 in the 1993 Period. The inventory
which was sold in the 1994 Period had been written down to its net realizable
value. For the portion of the 1994 Period and the 1993 Period during which the
facility was operating, excess/idle production costs primarily represented
current production costs in excess of the estimated net realizable value of
inventory produced which resulted from limited production volumes. Excess/idle
production costs were reduced by suspending ALFERON N Injection production
during a portion of both the 1994 Period and the 1993 Period.
Research and development expenses during the 1994 Period of $5,195,699
increased by $1,044,541 from $4,151,158 for the 1993 Period, principally
because, effective January 1994, the Company took over the responsibility for
conducting and funding the hepatitis C clinical studies from Purdue and
increased its level of research and product development of ALFERON N Injection.
The Company received $150,000 and $138,996 during the 1994 Period and 1993
Period, respectively, as rental income from NPDC for the use of a portion of the
Company's facilities, which offset research and development expenses.
General and administrative expenses for the 1994 Period were $4,974,224 as
compared to $2,366,897 for the 1993 Period. The increase of $2,607,327 was
principally due to the amortization and subsequent write-off of prepaid
royalties totalling $2,100,000, increases in payroll, and certain costs related
to a proposed public stock offering which was not consummated. NPDC provides
certain administrative services for which the Company paid NPDC $120,000 for
each of the 1994 Period and the 1993 Period. In addition, during the 1994 Period
and the 1993 Period, NPDC provided to the Company, at its estimated cost,
certain personnel and services which the Company used in its operations. For the
1994 Period and the 1993 Period, such charges amounted to $1,194,380 and
$895,700, respectively.
Interest and other income for the 1994 Period was $157,929 as compared to
$255,344 for the 1993 Period. The decrease of $97,415 was due to less funds
available for investment in the 1994 Period.
For the 1994 Period, the Company realized a net loss of $300,430 from sales
of marketable securities which resulted from declines in the fair value of the
Company's investments in obligations of agencies of the United States
Government. During the 1993 Period, the Company realized a net gain of $3,297
from sales of such investments.
Interest expense for the 1994 Period and 1993 Period was $152,935 and
$371,208, respectively. The decrease of $218,273 was due to reduced long-term
debt.
As a result of the foregoing, the Company incurred net losses of
$12,077,537 and $8,459,862 for the 1994 Period and the 1993 Period,
respectively.
RECENT TAX AND ACCOUNTING DEVELOPMENTS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Statement 121 requires the
Company to estimate the future cash flows expected to result from the use and
eventual disposition of its property, plant and equipment, and if the sum of
such cash flows is less than the carrying amount of these assets, to recognize
an impairment loss to the extent, if any, that the carrying amount of the assets
exceeds their fair values. The Company believes that, although it has a current
period operating loss and a history of operating losses, expected future cash
flows derived from these assets will be at least equal
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<PAGE> 28
to their carrying values, and that no impairment loss will be indicated. The
Company bases this assessment both upon expected future product revenues and
upon the fact that it completed a major manufacturing facility expansion and
purchase of manufacturing equipment in 1991, the cost of which constitutes a
major portion of the carrying value of its property, plant and equipment. The
Company believes that this expanded facility will be suitable for a number of
years without significant repairs.
In December 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), effective for
years beginning after December 15, 1995. Under SFAS 123, the Company may elect
either a "fair value" based method or the current "intrinsic value" based method
of accounting prescribed by APB No. 25, "Accounting for Stock Issued to
Employees," for its stock-based compensation arrangements. Under the "intrinsic
value" based method, the Company will be required to disclose in the footnotes
to the consolidated financial statements net income and earnings per share
computed under the "fair value" based method. The Company has elected to
continue accounting for stock-based compensation arrangements using the
"intrinsic value" based method; therefore, the adoption of SFAS 123 will not
impact the Company's results of operations or financial condition.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements reflecting
management's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements, including, but not limited to, uncertainty of
obtaining additional funding for the Company; uncertainty of obtaining United
States regulatory approvals for the Company's products under development and
foreign regulatory approvals for the Company's FDA-approved product and products
under development and, if such approvals are obtained, uncertainty of the
successful commercial development of such products; substantial competition from
companies with substantially greater resources than the Company in the Company's
present and potential businesses; no guaranteed source of required materials for
the Company's products; dependence on certain distributors to market the
Company's products; potential adverse side effects from the use of the Company's
products; potential patent infringement claims against the Company; possible
inability of the Company to protect its technology; uncertainty of
pharmaceutical pricing; substantial royalty obligations payable by the Company;
limited production experience of the Company; risk of product liability; and
risk of loss of key management personnel, all of which are difficult to predict
and many of which are beyond the control of the Company. See "Risk Factors."
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<PAGE> 29
BUSINESS
THE COMPANY
The Company is a biopharmaceutical company currently engaged in the
manufacture and sale of ALFERON N Injection, the only product approved by the
FDA that is based upon Natural Alpha Interferon. ALFERON N Injection is approved
for the treatment by injection of certain types of genital warts and is being
developed by the Company for the potential treatment of hepatitis C, hepatitis
B, HIV, multiple sclerosis, cancers, and other indications. The Company believes
that the existing FDA approval of ALFERON N Injection for one indication should
facilitate obtaining approvals for other indications. The Company also is
developing ALFERON N Gel and ALFERON LDO, the Company's topical and oral
formulations of Natural Alpha Interferon.
Interferons are a group of proteins produced and secreted by cells to
combat diseases. Currently, various alpha interferon products, approved for 17
different medical uses in over 60 countries, are, as a group, one of the largest
selling of all biopharmaceuticals with estimated 1994 sales in excess of $1.5
billion worldwide. A substantial majority of these sales are for the treatment
of hepatitis C, a liver disease affecting several million people worldwide,
including two to three million people in the United States and three million
people in Japan. As described below, the Company has recently completed two
multi-center Phase 2 trials using Natural Alpha Interferon for the treatment of
hepatitis C and is presently conducting one other such trial.
Natural Alpha Interferon
A substantial portion of worldwide sales of interferon consists of sales of
alpha interferon produced from genetically engineered cells (recombinant alpha
interferon). Based on laboratory studies and clinical trials involving Natural
Alpha Interferon, the Company believes that Natural Alpha Interferon has certain
potential advantages over recombinant alpha interferon including:
Efficacy. Natural Alpha Interferon is used at significantly lower doses
than the competing recombinant alpha interferon product for the
treatment of genital warts and, in laboratory studies, was shown to be
10 to 100 times more effective than equal concentrations of recombinant
alpha interferon in blocking replication of HIV. This unusually potent
anti-HIV activity may be due to specific members of the interferon
family of proteins which are present in Natural Alpha Interferon but not
found in the presently marketed recombinant interferons.
Side effects. The principal side effects of alpha interferon are
flu-like symptoms, which are dose dependent. The approved treatment with
ALFERON N Injection utilizes lower doses than the treatment with
recombinant alpha interferon, which may account, in part, for fewer side
effects being observed in patients being treated with Natural Alpha
Interferon. Based on a double-blind study of normal healthy adults, the
Company believes there is evidence that even when given at the same
doses as recombinant alpha interferon, the side effects are lower with
Natural Alpha Interferon. Furthermore, in a Phase 1 clinical trial on 20
asymptomatic HIV-infected patients, investigators at Walter Reed
reported that significantly fewer of the typical side effects associated
with recombinant alpha interferon were observed with Natural Alpha
Interferon. In addition, interferon-neutralizing antibodies, which may
limit alpha interferon's therapeutic benefit, have not been observed to
date in clinical trials with Natural Alpha Interferon in patients not
previously treated with recombinant alpha interferon, even in HIV and
hepatitis C patients treated with high doses of Natural Alpha Interferon
three times a week for up to six months. In contrast, there have been
reports of antibodies to recombinant alpha interferons developing in
patients being treated with such interferons.
Although, as described above, the Company believes that Natural Alpha
Interferon may have certain advantages over recombinant alpha interferon, there
can be no assurance that these advantages will enable the Company to obtain a
significant market share for products made with Natural Alpha Interferon.
Moreover, at the present time, the Company is limited in its ability to make
product marketing claims related to these potential advantages until additional
data are available and, in certain instances, until further FDA approvals are
obtained. Additionally, the Company derives Natural Alpha Interferon from human
white blood cells, the cost and availability of which are subject to
fluctuation, in part because the Company does not presently have
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<PAGE> 30
long-term agreements for the supply of such cells. Recombinant alpha interferon
products are not dependent on a source of human white blood cells and,
therefore, can be produced in greater volume and at a lower cost per unit than
the Company's formulations of Natural Alpha Interferon products. See
"Business -- Scientific Background."
Marketing, Distribution, and Production
ALFERON N Injection is approved for sale in the United States for the
intralesional treatment of adults with refractory (resistant to other treatment)
or recurring external genital warts, and is currently marketed and distributed
in the United States exclusively by Purdue. The Company has an option to
repurchase the marketing rights for ALFERON N Injection in the United States and
Canada from Purdue. See "Business -- ALFERON N Injection -- Approved Indication"
and "Business -- ALFERON N Injection -- Marketing and Distribution -- Agreements
with Purdue."
In the first quarter of 1995, the Company entered into an agreement with
Fujimoto for the development and marketing of ALFERON N Injection and ALFERON N
Gel in Japan. Japan is currently the world's largest market for interferon
products, with estimated 1994 annual sales approaching $900 million. Under the
terms of the agreement, Fujimoto agreed to purchase $2,000,000 of the Company's
Common Stock (of which $1,500,000 has been purchased to date) and to use its
best efforts to develop, and obtain Japanese regulatory approvals for, ALFERON N
Injection and ALFERON N Gel products. To date, Fujimoto has incurred higher than
anticipated development expenses, and Fujimoto has determined that there may be
greater difficulties in obtaining Japanese regulatory approval than originally
anticipated. Fujimoto has, therefore, requested that the Company renegotiate the
agreement. The Company intends to meet with Fujimoto to consider its request. In
addition, the Company's Natural Alpha Interferon injectable product was recently
approved for sale in Mexico for the treatment of genital warts and is marketed
under the trade name ALTEMOL(R) by Andromaco. See "Business -- ALFERON N
Injection -- Marketing and Distribution -- Other Marketing and Distribution
Arrangements."
The Company is also exploring development and marketing arrangements that
would involve the potential use of Natural Alpha Interferon for the treatment of
hepatitis B and C, multiple sclerosis, HIV, and cancer. See "Risk
Factors -- Dependence on Certain Distributors; Limited Marketing Program."
The purified drug concentrate utilized in the formulation of ALFERON N
Injection is manufactured in a Company-owned, FDA-approved facility located in
New Brunswick, New Jersey. ALFERON N Injection is formulated and packaged for
the Company by Sanofi at a production facility located in McPherson, Kansas. See
"Business -- ALFERON N Injection -- Manufacturing."
Recently Expanded License
As of March 31, 1995, the Company obtained a non-exclusive license from
Hoffmann and Roche which grants the Company the worldwide rights to make, use,
and sell, without a potential patent infringement claim from Hoffmann or Roche,
any formulation of Natural Alpha Interferon. The 1995 license replaced a 1988
non-exclusive license from Hoffmann which granted the Company the rights to
make, use, and sell in the United States, without a potential patent
infringement claim from Hoffmann, injectable formulations of Natural Alpha
Interferon for the treatment of genital warts or patients with diseases
refractory to recombinant interferon therapy. The 1995 license will enable the
Company, if successful in obtaining necessary regulatory approvals, to expand
the formulations of Natural Alpha Interferon it makes, uses, and sells in the
United States and the rest of the world and to market its products for the
treatment of additional indications. See "Risk Factors -- Potential Patent
Infringement Claims," "Business -- ALFERON N Injection -- Patents and Licenses,"
and "Business -- ALFERON N Injection -- Royalty Obligations."
Clinical Trials
The Company has conducted and is conducting or planning various clinical
trials in an effort to obtain approval to market Natural Alpha Interferon for
additional indications in the United States and around the world.
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<PAGE> 31
ALFERON N Injection. The Company has recently completed two multi-center,
randomized, open-label, dose-ranging Phase 2 clinical trials in patients
infected with hepatitis C virus (HCV) and is presently conducting one additional
such trial. The objective of these HCV clinical studies is to compare the safety
and efficacy of different doses of Natural Alpha Interferon injected
subcutaneously in naive (previously untreated), refractory (unsuccessfully
treated with recombinant alpha interferon), and relapsing (initially responded
to recombinant alpha interferon but later relapsed) patients. The Company
believes that the results of the two completed trials are promising, and
therefore intends to commence a Phase 3 multi-center, controlled clinical trial
in the second quarter of 1996.
In a follow-up analysis of patients in the Walter Reed Phase 1 clinical
trial, it was found that an average of 16 months after treatment, CD4 lymphocyte
levels (the white blood cells which normally decline in HIV-infected patients)
remained essentially unchanged or were higher than at the onset of the trial in
11 of 20 patients. In addition, the amount of HIV detectable in the patients'
blood, as measured by a quantitative PCR (Polymerase Chain Reaction) technique,
declined in a dose dependent manner (the greatest declines were observed in the
highest dose group). Although there can be no assurance that the results of
laboratory studies and the Phase 1 clinical trial will be reproduced in a
large-scale, controlled clinical trial, based upon the foregoing, the Company
believes that Natural Alpha Interferon may have potential clinical value in the
treatment of HIV-infected patients. The Company is planning to conduct a
multi-center clinical trial with HIV-infected patients, which is expected to
commence in 1996.
Two additional Phase 2 clinical studies are in progress. One is for the
treatment of Kaposi's sarcoma in patients with AIDS and the other is a
multi-center study in small cell lung cancer patients following successful
treatment by conventional chemotherapy. The goal of the small cell lung cancer
study is to see if Natural Alpha Interferon can alter the high relapse rate in
this disease.
Based upon encouraging anecdotal data, the Company is planning, subject to
obtaining funding or a sponsor, to conduct clinical trials utilizing Natural
Alpha Interferon for the treatment of multiple sclerosis, which affects more
than 250,000 Americans. See "Business -- ALFERON N Injection -- Clinical Trials
for New Indications."
ALFERON N Gel. ALFERON N Gel is a topical Natural Alpha Interferon
preparation which the Company believes has potential in the treatment of
cervical dysplasia, recurrent genital herpes, other viral diseases, and cancers.
The Company has completed a Phase 2 dose ranging study using ALFERON N Gel
at the Columbia Presbyterian Medical Center in New York for the treatment of
mild cervical dysplasia. Based upon Pap Smears, identification tests for the
presence of virus and cervical biopsies, ALFERON N Gel appears to have the
potential for improving the course of cervical dysplasia in the majority of
patients who completed the treatment course. However, since this study utilized
small numbers of patients, there can be no assurance that these results will be
reproduced in a large scale placebo-controlled trial.
In light of the above results, a physician-sponsored study in HIV-infected
women with cervical dysplasia commenced in 1995.
ALFERON LDO. ALFERON LDO is a low dose oral liquid Natural Alpha
Interferon preparation which the Company believes has potential for treating
certain symptoms of patients infected with the HIV virus and treating other
viral diseases.
At New York's Mount Sinai Hospital, the Company conducted two clinical
trials using ALFERON LDO on patients infected with the HIV virus. Based in part
upon information from these trials, The National Institute of Allergy and
Infectious Disease ("NIAID") is planning to open for enrollment in the second
quarter of 1996 a randomized, double-blind, placebo-controlled clinical study
with low dose alpha interferons administered orally (including ALFERON LDO) to
determine interferon's effect on HIV-related symptoms. See "Business -- Products
under Development."
Commercial sales in the United States or Mexico of ALFERON N Injection for
any indication other than the treatment of certain types of genital warts,
commercial sales outside of the United States and Mexico of ALFERON N Injection
for any indication, and commercial sales anywhere in the world of either ALFERON
N Gel or ALFERON LDO will be contingent upon the completion of necessary studies
and the
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<PAGE> 32
approval of such products for such uses by the FDA and foreign regulatory
authorities. Submissions for regulatory approval to sell ALFERON N Injection for
the treatment of genital warts have been filed in various other countries. See
"Business -- Governmental Regulation," "Risk Factors -- Regulatory Approvals,"
and "Risk Factors -- Foreign Regulatory Approvals."
Although the Company received FDA approval to market ALFERON N Injection in
1989, to date, it has had only limited revenue from the sale of ALFERON N
Injection. The Company has experienced significant operating losses since its
inception in 1980. As of December 31, 1995, the Company had an accumulated
deficit of approximately $70.2 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
CLINICAL TRIALS SUMMARY
The table appearing below summarizes the more detailed information
contained elsewhere in this Prospectus concerning clinical trials of ALFERON N
Injection, ALFERON N Gel, and ALFERON LDO being conducted or proposed to be
conducted and is qualified in its entirety by reference to that information.
<TABLE>
<CAPTION>
POTENTIAL STATUS OF CLINICAL
PRODUCT APPLICATION/INDICATIONS TRIALS(1) SPONSOR
- -------------------- ------------------------- ------------------------- -----------------
<S> <C> <C> <C>
ALFERON N Injection HIV-infected patients Initial Phase 1 completed (2)
Phase 3 in final stages Company(3)
of planning
Comparison of side Phase 1 completed Purdue
effects in healthy
subjects with recombinant
alpha interferon
Hepatitis C Three multi-center Company(4)
Phase 2 -- two completed,
one in progress
Hepatitis C Phase 2 in Mexico Andromaco(5)
expected to commence in
the near future
Hepatitis C Phase 3 being planned Company(3)
Kaposi's sarcoma Phase 2 in progress Company
(in AIDS patients)
Small cell lung cancer Phase 2 open for Investigator(6)
enrollment
Multiple sclerosis Phase 2 proposed Company(7)
Hepatitis B Phase 2 proposed (7)
ALFERON N Gel Cervical dysplasia Phase 2 completed Company
Cervical dysplasia Phase 2 open for Investigator(6)
(in HIV-infected enrollment
patients)
Mucocutaneous herpes in Phase 2 proposed (7)
immunocompromised
patients
Recurrent genital herpes Phase 2 proposed (7)
ALFERON LDO HIV-infected patients Initial Phase 2 completed Company
HIV-infected patients Phase 2 in final stages NIAID(5)(6)
of planning
</TABLE>
- ---------------
(1) Generally, clinical trials for pharmaceutical products are conducted in
three phases. In Phase 1, studies are conducted to determine safety and
tolerance. In Phase 2, studies are conducted to gain preliminary evidence as
to the efficacy of the product as well as additional safety data. In Phase
3, studies are conducted to provide sufficient data to establish safety and
statistical proof of efficacy in a specific dose. Phase 3 is the final stage
of such clinical studies prior to the submission of an application for
approval of a new drug or licensure of a biological product or for new uses
of a previously-approved product. See "Business -- Governmental Regulation."
(2) Sponsored by Walter Reed. Funded by Purdue and the Company.
(3) This trial may be funded in whole or in part from the Company's working
capital or the proceeds of the Offering. If not funded in whole from the
Company's working capital or the proceeds of the Offering, the
(footnotes continued on next page)
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<PAGE> 33
timing of this trial will be dependent upon the Company's ability to obtain
additional funding or a sponsor.
(4) Previously funded by Purdue; currently funded by the Company.
(5) United States Notice of Claimed Investigational Exemption for a New Drug
("IND") has been filed.
(6) The Company provides clinical supplies.
(7) This trial will not be funded from the Company's working capital or the
proceeds of the Offering. The timing of this trial will be dependent upon
the Company's ability to obtain additional funding or a sponsor.
SCIENTIFIC BACKGROUND
Interferons are a group of proteins produced and secreted by cells to
combat diseases. Researchers have identified four major classes of human
interferon: alpha, beta, gamma, and omega. The Company's three ALFERON products
contain a form of alpha interferon. The worldwide market for injectable alpha
interferon-based products has experienced rapid growth and various alpha
interferon injectable products are approved for 17 different medical uses in
more than 60 countries.
Alpha interferons are manufactured commercially in three ways: by genetic
engineering, by cell culture, and from human white blood cells. In the United
States, only two types of alpha interferon are approved for commercial sale:
recombinant (genetically engineered) alpha interferon and Natural Alpha
Interferon, which is manufactured from human white blood cells. Outside of the
United States, sales of alpha interferon produced by cell culture account for a
significant portion of the market.
The Company believes that the potential advantages of Natural Alpha
Interferon over recombinant interferon may be based upon their respective
molecular compositions. An analysis of Natural Alpha Interferon shows that it is
composed of a family of proteins containing many different molecular species of
interferon. In contrast, recombinant alpha interferons each contain only a
single species. Researchers have reported that the various species of interferon
may have differing anti-viral activity depending upon the strain of virus.
Natural Alpha Interferon presents a broad complement of species which the
Company believes may account for its higher efficacy in laboratory studies with
the HIV virus compared with that of single species recombinant alpha interferon.
Natural Alpha Interferon is also glycosylated, or partially covered with sugar
molecules, which does not occur with recombinant alpha interferon. The Company
believes that the absence of glycosylation may be responsible for the production
of interferon-neutralizing antibodies seen in patients treated with recombinant
alpha interferon.
The production of Natural Alpha Interferon is dependent upon a supply of
human white blood cells and other essential materials. The Company currently
obtains white blood cells from FDA-licensed blood donor centers. The Company
currently has no long-term commitments for a supply of such white blood cells.
ALFERON N INJECTION
Approved Indication. On October 10, 1989, the FDA approved ALFERON N
Injection for the intralesional treatment of refractory (resistant to other
treatment) or recurring external genital warts in patients 18 years of age or
older. Substantially all of the Company's revenues, to date, have been generated
from the sale of ALFERON N Injection for such treatment. Genital warts, a
sexually transmitted disease, are caused by certain types of human papilloma
viruses. A published report estimates that approximately eight million new and
recurrent cases of genital warts occur annually in the United States alone.
Genital warts are usually treated using caustic chemicals or through physical
removal methods. These procedures can be quite painful and effective treatment
is often difficult to achieve.
In the second quarter of 1996, the Company plans to actively pursue FDA
approval to label and promote ALFERON N Injection for use in combination with
traditional primary treatment (with surgical or chemical methods) as a way to
reduce the recurrence of genital and anal warts.
Clinical Trials for New Indications. In an effort to obtain approval to
market Natural Alpha Interferon for additional indications in the United States
and around the world, the Company is focusing its research program on conducting
and planning various clinical trials for new indications.
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Hepatitis C. Chronic viral hepatitis is a liver infection caused by
various hepatitis viruses. The United States Centers for Disease Control
estimates that approximately two to three million people in the United States
are presently infected with the hepatitis C virus ("HCV") and an estimated
170,000 persons become newly infected each year, a majority of whom become
chronic carriers and will suffer gradual deterioration of their liver and
possibly cancer of the liver. Several brands of recombinant and cell-cultured
interferon have been approved by various regulatory agencies worldwide for the
treatment of hepatitis C, including a recombinant product in the United States.
See "Business -- ALFERON N Injection -- Competition." However, reports have
indicated that many patients either do not respond to treatment with the
recombinant product or relapse after treatment. The Company has recently
completed two multi-center, randomized, open-label, dose-ranging Phase 2
clinical trials utilizing ALFERON N Injection with patients chronically infected
with HCV and is presently conducting one additional such trial. The objective of
the Company's HCV clinical studies is to compare the safety and efficacy of
different doses of Natural Alpha Interferon injected subcutaneously in naive
(previously untreated), refractory (unsuccessfully treated with recombinant
interferon), and relapsing (initially responded to recombinant interferon but
later relapsed) patients.
Enrollment of naive patients has been completed at six centers, and all
patients have now finished the 24-week treatment and 24-week follow-up periods.
Patients were treated with one of four dose levels of ALFERON N Injection
administered subcutaneously three times per week. 77 patients were enrolled in
the study with 66 patients completing the 24 weeks of treatment. Of the 66, 63
completed follow-up. In general, treatment was well tolerated, even at the
highest dose.
Results based on ALT values (ALT is a liver enzyme whose change is used to
determine the effectiveness of the therapy) indicated a significant
dose-dependent response at the end of treatment. Complete response rates
(normalization of ALT) ranged from 11% (2 of 18) for the lowest dose group to
67% (12 of 18) for the highest. At the end of the follow-up period, complete
response rates ranged from 8% (1 of 13)for the second to lowest dose group to
44% (8 of 18) for the highest. 33% (6 of 18) of the patients receiving the
highest dose exhibited a sustained complete response (normal ALT at the end of
treatment and throughout the follow-up period).
In addition to the ALT testing, the quantity of HCV in the bloodstream of
patients was measured by polymerase chain reaction (PCR) testing. Such testing
also indicated a significant dose-dependent response as measured by the
proportion of patients having no detectable HCV in the bloodstream at the end of
treatment. The percent of patients with no detectable HCV in the bloodstream
ranged from 0% (0 of 17) for the lowest dose group to 59% (10 of 17) for the
highest. At the end of the follow-up period, the percent of patients with no
detectable HCV in the bloodstream ranged from 0% (0 of 15) for the lowest dose
group to 24% (4 of 17) for the highest. 18% (3 of 17) of the patients receiving
the highest dose had no detectable HCV in the bloodstream at the end of
treatment and throughout the follow-up period. There was a high correlation
among patients between ALT response and detectable HCV in the bloodstream at the
end of treatment and at the end of the follow-up period.
Based on an abstract of the results submitted to the American Association
for the Study of Liver Diseases ("AASLD"), this study was selected for an oral
presentation at the AASLD meeting that took place in early November 1995.
Enrollment of refractory patients has been completed at seven centers, and
all patients have finished the 24-week treatment period and the 24-week
follow-up period. Patients were treated with one of three dose levels of ALFERON
N Injection administered subcutaneously three times per week. 69 patients were
enrolled in the study with 63 patients completing the 24 weeks of treatment. Of
the 63, 58 completed follow-up . Again, in general, treatment was well
tolerated, even at the highest dose.
Preliminary results based on ALT values indicated a significant response at
the end of treatment, as measured by normalization or near normalization (ALT
less than 150% of the upper limit of normal) of ALT, in the highest dose group.
At the end of treatment, the complete or near complete response rates were 14%
for the lowest (3 of 22) and middle (3 of 21) dose groups and 25% (5 of 20) for
the highest. 12% of the patients who have completed follow-up (7 of 58) had
complete or near complete response rates at the end of follow-up, including 20%
of the patients (4 of 20) in the lowest dose group, 5% (1 of 19) in the middle
dose group, and
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<PAGE> 35
11% (2 of 19) in the highest dose group. Two patients with antibodies at the
commencement of the study to the recombinant interferon product approved in the
United States for treatment of hepatitis C had complete responses: one at the
end of treatment (the patient relapsed during the follow-up period) and the
other at the end of the follow-up period.
In addition to the ALT testing, the quantity of HCV in the bloodstream of
patients was measured by PCR testing. Such testing also indicated a significant
response at the end of treatment, as measured by the proportion of patients
having at least a 90% reduction in detectable HCV in the bloodstream, in the
highest dose group. At the end of treatment, the percent of patients with at
least a 90% reduction in detectable HCV in the bloodstream ranged from 6% (1 of
18) for the middle dose group to 37% (7 of 19) for the highest. 3% of the
patients who have completed follow-up and for whom data are available (1 of 36,
such patient being in the lowest dose group) showed at least a 90% reduction in
detectable HCV in the bloodstream at the end of follow-up.
At the end of treatment, the percent of patients with either normalization
or near normalization of ALT, or at least a 90% reduction in detectable HCV in
the bloodstream, was 23% (5 of 22) for the lowest dose group, 14% (3 of 21) for
the middle, and 45% (9 of 20) for the highest.
Based on an abstract of the available results submitted to the AASLD, this
study was selected for a poster presentation at the AASLD meeting that took
place in early November 1995.
Enrollment is actively continuing in five centers for relapsing patients.
The original study protocol only permitted patients who had been previously
treated with a single six-month course of recombinant interferon therapy.
However, since so many patients have a disease relapse after a single course of
recombinant interferon therapy, many of them had been treated with two or more
courses of this therapy, and therefore did not qualify for this study. The
inability to enroll qualified patients has delayed the trial and led the Company
recently to amend its protocol to allow for enrollment of patients who have
received up to three six-month courses of recombinant interferon therapy. This
protocol change should help to accelerate enrollment.
The Company believes that the results of the trial with naive patients are
promising. In addition, treatment of naive patients with ALFERON N Injection did
not produce any interferon-neutralizing antibodies. The Company also believes
that the preliminary results of the trial with refractory patients are
promising. Therefore, the Company intends to commence a Phase 3 multi-center,
controlled clinical trial in the second quarter of 1996. However, there can be
no assurance that the use of ALFERON N Injection for the treatment of patients
with hepatitis C will be cost-effective, safe, and effective or that the Company
will be able to obtain FDA approval for such use. Furthermore, even if such
approval is obtained, there can be no assurance that such product will be
commercially successful or will produce significant revenues or profits for the
Company. See "Risk Factors -- Products Under Development."
In addition to the Company's HCV clinical studies, Andromaco has agreed to
sponsor, under an IND, a Phase 2 clinical trial in Mexico of the use of ALFERON
N Injection in patients infected with HCV. See "ALFERON N Injection -- Marketing
and Distribution -- Other Marketing and Distribution Arrangements."
HIV-infected patients. The Human Immunodeficiency Virus ("HIV") infection
is at epidemic levels in the world. The World Health Organization projects that
this virus will affect 30 to 40 million people by the year 2000. HIV infection
usually signals the start of a progressive disease that compromises the immune
systems, ultimately resulting in Acquired Immune Deficiency Syndrome or AIDS.
HIV-infected patients can be asymptomatic for many years before being afflicted
by opportunistic infections or cancer. The Company believes that slowing the
progression of the HIV infection in healthier patients may help fight against
the development of opportunistic infections and cancer.
An article published in AIDS Research and Human Retroviruses in 1993 by
investigators at Walter Reed in collaboration with the Company's scientists
indicated that the various interferon species display vast differences in their
ability to affect virus replication. Walter Reed researchers found that the
Company's Natural Alpha Interferon was 10 to 100 times more effective than equal
concentrations of recombinant interferons in blocking the replication of HIV-1,
the AIDS virus, in infected human cells in vitro.
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Moreover, the Company's scientists were able to separate members of the
interferon family in single protein fractions or clusters of proteins using
advanced fractionation techniques. The individual fractions were tested for
their ability to block HIV replication in the laboratory by researchers at
Walter Reed. They found that the unusual anti-HIV activity was attributable to
very specific fractions in the Company's product. The most active fractions are
not present in marketed recombinant interferon.
This information provided additional support for a long-held belief of the
Company that its Natural Alpha Interferon has unique anti-viral properties
distinguishing it from recombinant interferon products. In addition, published
reports of trials using recombinant alpha interferon in asymptomatic
HIV-infected patients indicated that while high doses blocked virus production
in many cases, such doses resulted in high levels of adverse reactions, thereby
limiting the usefulness of the recombinant product. These facts led the Walter
Reed researchers to conduct a Phase 1 clinical trial with the Company's product
in asymptomatic HIV-infected patients.
In March 1992, Walter Reed launched a Phase 1 clinical trial with
asymptomatic HIV-infected patients to investigate the safety and tolerance, at
several dose regimens, of Natural Alpha Interferon, self-injected subcutaneously
for periods of up to 24 weeks. The investigators concluded that the treatment
was "surprisingly" well tolerated by patients, at all dose regimens. Preliminary
findings were reported by Walter Reed at the IXth International Conference on
AIDS in Berlin in 1993. The investigators also reported that CD4 white blood
cell counts either stabilized or improved in most patients while on therapy and
that the expected interferon side effects, such as flu-like symptoms, were rare
or absent in the majority of patients treated with the Company's product.
Although this Phase 1 clinical trial was designed primarily to provide
safety information on various doses of Natural Alpha Interferon used for
extended periods of time, there were encouraging indications that certain
disease parameters had stabilized or even improved in certain patients by the
end of the experimental treatment.
In a recent follow-up analysis of patients' blood testing data, it was
found that after an average of 16 months after treatment, CD4 lymphocyte levels
(the white blood cells which normally decline in HIV infected patients) remained
essentially unchanged or were higher than at the onset of the trial in 11 of 20
patients. In addition, the amount of HIV detectable in the patients' blood, as
measured by PCR testing, declined in a dose dependent manner (the greatest
declines were observed in the highest dose group). Also, none of the patients
were found to have developed neutralizing antibodies to Natural Alpha
Interferon, even after being treated three times weekly for many months. These
results were reported at the Third International Congress on Biological Response
Modifiers held in Cancun, Mexico in January 1995, and were selected for a poster
presentation at the 35th Interscience Conference on Antimicrobial Agents and
Chemotherapy held in San Francisco in September 1995. An extensive report has
been accepted for publication in the Journal of Infectious Diseases.
It is important to note that, because of the small number of study
participants and the absence of a control group, no firm conclusions can be
drawn from these observations. However, the information obtained from this trial
has been helpful in designing a multi-center Phase 2 clinical trial of Natural
Alpha Interferon in HIV-infected patients.
Kaposi's sarcoma (in AIDS patients). Kaposi's sarcoma is a cancerous
growth characterized by vascular skin tumors and affects approximately 10% of
AIDS patients in the United States. It is often the first notable manifestation
of AIDS, and as the tumors become more widely disseminated on the skin, it is
associated with visceral lesions and lymph node involvement. Traditional
treatment involves single agent or combination chemotherapy, but the typical
side effects of chemotherapy can be severe. In the United States, recombinant
alpha interferon has been approved for the treatment of Kaposi's sarcoma in AIDS
patients. However, response has been limited and often followed by relapse. To
determine its utility at substantially lower doses than currently approved
recombinant therapies, the Company presently is conducting a Phase 2 clinical
trial in Mexico utilizing ALFERON N Injection for the treatment of Kaposi's
sarcoma in patients with AIDS.
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Small Cell Lung Cancer. Small Cell Lung Cancer ("SCLC") represents
approximately 25% of all newly-diagnosed cases of lung cancer and affected
approximately 42,000 people in 1992. Although patients with SCLC initially
respond to high-dose combination chemotherapy regimens, the rate of relapse is
high and such patients have a median survival rate of only 7 to 16 months,
depending upon the extent of disease.
The Company has agreed to supply Natural Alpha Interferon for a
multi-center, physician-initiated, Phase 2 study which is being conducted at
Allegheny General Hospital and at the University of Pittsburgh. Patients who are
in remission following successful treatment with standard chemotherapy will be
entered into this study. They will first receive high dose combination
chemotherapy, followed by peripheral blood stem cell augmentation. One month
after hematologic recovery, patients will then be given Natural Alpha Interferon
injections until evidence of disease progression or intolerable toxicity occurs.
The expected duration of treatment is up to 12 months. The goal of this study is
to investigate Natural Alpha Interferon's potential to extend the disease-free
period and overall survival of these patients.
Multiple Sclerosis. Multiple sclerosis ("MS") is a chronic, sometimes
progressive, immune-mediated disease of the central nervous system that is
believed to occur in genetically predisposed individuals following exposure to
an environmental factor, such as virus infection. The disease affects an
estimated 250,000 to 350,000 people in the United States, primarily young
adults. Symptoms of MS, including vision problems, muscle weakness, slurred
speech, and poor coordination, are believed to occur when the patient's own
cells attack and ultimately destroy the insulating myelin sheath surrounding the
brain and spinal cord nerve fibers, resulting in improper transmission of
signals throughout the nervous system.
In the United States, a recombinant form of beta interferon has been
approved for the treatment of relapsing-remitting MS. However, reports in the
scientific literature and elsewhere have indicated that the significant adverse
reactions associated with the treatment may limit its usefulness. In December
1995, an FDA advisory panel recommended approval of another recombinant form of
beta interferon for the treatment of MS. Such alternate form appeared to be
effective in halting the progression of the disease in certain patients
(something the approved form has not been shown to do) and to cause less severe
adverse reactions than the approved form. The Company is planning to conduct a
clinical trial in order to investigate the potential use of Natural Alpha
Interferon for MS, but will not start such trials unless additional funding
(from a source other than the Offering) or a sponsor is secured.
Chronic Viral Hepatitis B. Hepatitis B is currently the most common form
of hepatitis. Approximately three and a half to four million people in the
United States are infected with the hepatitis B virus ("HBV"), with some 300,000
new infections occurring annually and over 200 million infected people
worldwide. HBV is transmitted through contact with infected blood, sexual
intercourse, and needle-sharing among intravenous drug users. Infants born to
infected mothers may become infected as they pass through the birth canal.
According to the Centers for Disease Control, approximately 25% of hepatitis B
patients develop irreversible chronic liver conditions, and about 10% of all
patients become lifetime carriers and can transmit the virus to others. The
Company is currently planning clinical trials using ALFERON N Injection in
persons infected with hepatitis B; however, the Company does not anticipate
starting the clinical trials unless additional funding (from a source other than
the Offering) or a sponsor is secured.
Marketing and Distribution.
Agreements with Purdue. In 1988, the Company entered into exclusive
marketing and distribution agreements with Mundipharma Pharmaceutical Company
("Mundipharma"), a related entity of Purdue Pharma, with respect to ALFERON N
Injection, which agreements have been amended from time to time (as amended, the
"Purdue Marketing Agreements"). In 1991, Mundipharma assigned the right to
market and distribute ALFERON N Injection in the United States to Purdue Pharma
and retained the right to market and distribute ALFERON N Injection in Canada,
Western Europe, Israel, India, Japan, and Australia. In 1993, the Company
reacquired the right to market and distribute ALFERON N Injection in Japan.
In 1994, an amendment to these agreements was entered into (the "1994
Purdue Amendment") pursuant to which the Company reacquired the right to market
ALFERON N Injection in Western Europe and other countries and took over from
Purdue the conduct and funding of clinical trials. Specifically, the 1994
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Purdue Amendment provided, among other things, that (i) the Company reacquired
the right to market ALFERON N Injection in Western Europe, Israel, India, and
Australia (the "Returned Territories"), subject to the payment to Mundipharma of
a royalty equal to 3% of net sales (as defined) in the Returned Territories
until Mundipharma has received royalty payments equal to $3 million ($5 million
under certain circumstances) and 1% of net sales thereafter; (ii) the Company
assumed responsibility for the conduct and funding of clinical trials to develop
new indications for ALFERON N Injection; Purdue was granted the right to obtain
marketing and distribution rights for each additional indication of ALFERON N
Injection at such time as the Company files a product license application or
receives FDA approval for any such additional indication, by reimbursing the
Company for some or all of its clinical costs plus an additional lump-sum
payment; and the Company was given the right to reacquire the rights to market
and distribute ALFERON N Injection in the United States and Canada after each of
the first three additional indications if Purdue does not exercise its right to
obtain marketing and distribution rights for such indication, at a price based
on a percentage of total sales or gross profit during a specified period of all
products subject to the agreement; (iii) the Company agreed to purchase for
$4.00 per share 994,994 shares of Common Stock held by Purdue and certain
related parties over a period of 18 months; (iv) Purdue Pharma and Mundipharma
retained the right to market and distribute ALFERON N Injection in the United
States and Canada, respectively, subject to the Company's option (the "First
Option") to reacquire such rights at a price of $12 million until July 25, 1995
($10 million if the First Option had been exercised before January 1995);
provided that the First Option could not have been exercised unless the Company
simultaneously paid the unpaid balance of the purchase price for the 994,994
shares referred to above, which payment would have reduced the First Option
exercise price; and (v) Purdue ordered 45,000 vials of ALFERON N Injection at an
agreed upon price. Unless certain minimum purchase levels are reached during
certain annual periods, or minimum payments are made to the Company in lieu of
such minimum purchases, the Company can terminate Purdue Pharma and
Mundipharma's exclusive marketing and distribution rights. All marketing and
distribution costs are borne by Purdue Pharma and Mundipharma in their
respective territories.
In March 1995, the Company entered into an amendment to the 1994 Purdue
Amendment (the "March 1995 Purdue Amendment") pursuant to which the Company
obtained an option, exercisable until June 30, 1995 (the "Second Option"), to
reacquire the remaining marketing and distribution rights from Purdue Pharma and
Mundipharma. The exercise price of the Second Option was 2.5 million shares of
Common Stock; provided that the Option could not have been exercised unless the
Company simultaneously paid the unpaid balance of the purchase price for the
994,994 shares referred to above. If, 18 months from the date of exercise of the
Second Option by the Company (the "Valuation Date"), the 2.5 million shares of
Common Stock did not have a value of at least $9,037,807 (which value was
calculated using the average of the closing bid and asked prices of the Common
Stock as quoted by the NASDAQ National Market System for the ten trading days
ending on the day prior to the Valuation Date), the Company was required to
issue a note for the shortfall. Such note was required to bear interest at the
prime rate and became due and payable 24 months from the Valuation Date. The
Company agreed that it would utilize its best efforts to ensure that the 2.5
million shares of Common Stock would be registered and freely tradeable 18
months from the date of exercise of the Second Option. If the Second Option were
exercised, the First Option, the royalty obligations, and Purdue's right to
obtain marketing and distribution rights for new indications contained in the
1994 Purdue Amendment would have terminated.
In July 1995, the Company entered into an amendment to the 1994 Purdue
Amendment and the March 1995 Purdue Amendment (the "July 1995 Purdue
Amendment"), which became effective upon the sale on August 22, 1995 of more
than the minimum number of shares of Common Stock in the August/September
Offering, pursuant to which the balance owed to Purdue for the 62,500 shares of
Common Stock required to be repurchased in April 1995 was forgiven and the
Company obtained an option, exercisable until December 31, 1996 (the "Third
Option"), to reacquire the remaining marketing and distribution rights from
Purdue Pharma and Mundipharma. The exercise price of the Third Option is
$5,029,133, subject to reduction as set forth below, plus 750,000 shares of
Common Stock (350,000 shares of Common Stock if the Third Option had been
exercised on or before December 31, 1995). The Company has agreed that it will
utilize its best efforts to ensure that such shares will be registered and
freely tradeable upon issuance. The Third Option may not be exercised unless the
Company simultaneously pays the unpaid balance of the purchase price for
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any of the 994,994 shares referred to above then held by Purdue. As of April 1,
1996, Purdue held 619,994 of such shares and such unpaid balance was $2,479,976.
The cash exercise price of the Third Option will be reduced by the aggregate of
(i) the amount paid by the Company to Purdue to repurchase any of such 619,994
shares then held by Purdue, (ii) if Purdue sells any or all of such 619,994
shares, which may only be done until December 31, 1996 with the consent of the
Company, the amount received by Purdue from such sale, and (iii) the amount by
which the transfer price for vials sold by the Company to Purdue Pharma or
Mundipharma exceeds $25 per vial. If the Third Option is exercised, the royalty
obligations and Purdue's right to obtain marketing and distribution rights for
new indications contained in the 1994 Purdue Amendment will terminate. If the
Third Option is not exercised, the Company will no longer have the obligation to
repurchase the 619,994 shares. In July 1995, the Company and Purdue also agreed
to extend the date on which the Company was obligated to repurchase the final
619,994 shares of Common Stock if the July 1995 Purdue Amendment did not become
effective from July 25, 1995 to August 31, 1995 (or such earlier date on which
the August/September Offering shall have terminated prior to the sale of the
minimum number of shares of Common Stock).
The Company entered into the 1994 Purdue Amendment, the March 1995 Purdue
Amendment, and the July 1995 Purdue Amendment to provide it with greater
financial flexibility and control over the worldwide marketing and distribution
of ALFERON N Injection. The July 1995 Purdue Amendment provides the Company with
the flexibility to enter into a strategic alliance with a multinational
marketing partner if it elects to exercise the Third Option.
Under the terms of the Purdue Marketing Agreements, the Company receives a
transfer price for the sale of vials of ALFERON N Injection to Purdue Pharma or
Mundipharma. Such transfer price is calculated based on either a manufacturing
cost formula or a fixed price formula (subject to consumer price index
adjustments); provided, however, that if the Company chooses the fixed price
formula, the Company may be entitled to additional payments if the net sales
price received by Purdue Pharma or Mundipharma for ALFERON N Injection exceeds
certain levels. Pursuant to the July 1995 Purdue Amendment, the transfer price
for each vial will be payable $25 in cash and the balance as an offset to the
cash exercise price of the Third Option. If the Third Option is not exercised,
such offsets will have no value. The Company may choose the applicable formula
every six months. Except as described below, Purdue Pharma and Mundipharma have
no recourse against the Company in the event that they are unable to resell
ALFERON N Injection to third parties.
In January 1994, pursuant to the 1994 Purdue Amendment, Purdue ordered
45,000 vials of ALFERON N Injection at an agreed upon price. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." In addition, the Company agreed,
under certain circumstances, to replace up to 15,000 vials of ALFERON N
Injection from Purdue's existing inventory at an agreed upon discounted price.
The Company also granted Purdue an option, exercisable (in whole only) until
July 25, 1995, to purchase an additional 100,000 vials of ALFERON N Injection at
an agreed upon discounted price. The option was not exercised.
Purdue Pharma utilizes its affiliate's, The Purdue Frederick Company's,
sales force in the United States. The Purdue Frederick Company's principal
products include BETADINE(R) antiseptics, UNIPHYL(R) controlled release
theophylline, TRILISATE(R) analgesic/anti-inflammatory products, and M.S.
CONTIN(R) tablets for the prolonged relief of pain in cancer patients.
Other Marketing and Distribution Arrangements. In the first quarter of
1995, the Company concluded an agreement with Fujimoto for the commercialization
of ALFERON N Injection and ALFERON N Gel in Japan (the "Fujimoto Agreement").
Fujimoto is affiliated with Fujimoto Pharmaceutical Company, a 60-year old
company with facilities in central Japan. The Fujimoto Agreement grants Fujimoto
exclusive rights to develop, distribute, and sell ALFERON N Injection and
ALFERON N Gel in Japan. Pursuant to the terms of the Fujimoto Agreement,
Fujimoto agreed to fund and conduct all preclinical and clinical studies
required for Japanese regulatory approval. The Company will supply Fujimoto with
ALFERON N Injection and will also manufacture and supply Fujimoto with ALFERON N
Gel. Fujimoto will also purchase certain quantities of ALFERON N Injection and
ALFERON N Gel at agreed-upon prices during the preclinical and clinical
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phases. For the injectable product, ALFERON N Injection, Fujimoto has advised
the Company that it will initially focus on the use of the product for the
treatment of patients infected with HCV. The first indication to be developed
for ALFERON N Gel has not yet been determined. In connection with the Fujimoto
Agreement, Fujimoto purchased $1,500,000 of Common Stock for $1.45 per share
(the then current market price), and agreed to purchase an additional $500,000
of Common Stock on February 6, 1996 at the then current market price. Such
additional $500,000 of Common Stock has to date not been purchased. To date,
Fujimoto has incurred higher than anticipated development expenses, and Fujimoto
has determined that there may be greater difficulties in obtaining Japanese
regulatory approval than originally anticipated. Fujimoto has, therefore,
requested that the Company renegotiate the Fujimoto Agreement and the agreement
to purchase an additional $500,000 of Common Stock on February 6, 1996. The
Company intends to meet with Fujimoto to consider its request.
In February 1994, the Company entered into an exclusive distribution
agreement for ALFERON N Injection in Mexico with Andromaco, a privately-held
pharmaceutical company headquartered in Mexico City which specializes in
oncology and immunology products. Under the agreement, Andromaco applied for and
recently obtained approval from the Mexican regulatory authorities to sell
ALFERON N Injection for the treatment of genital warts, which will be marketed
under the trade name ALTEMOL(R). Andromaco has also agreed to sponsor, under an
IND, a clinical trial in Mexico of the use of ALFERON N Injection in patients
infected with HCV. The agreement establishes performance milestones for the
maintenance of distribution rights by Andromaco in Mexico. In addition, the
Company has a buy-out option to reacquire the marketing and distribution rights
in Mexico under certain terms and conditions.
The Company is also exploring other development and marketing arrangements
that would involve the potential use of Natural Alpha Interferon for the
treatment of hepatitis B and C, multiple sclerosis, HIV-infected patients, and
cancer.
Although the Company has exclusive marketing and distribution agreements
with Purdue Pharma, Mundipharma, Fujimoto, and Andromaco, and has the right to
sell ALFERON N Injection in the Returned Territories, no sales of ALFERON N
Injection can be made in Canada, Japan, or the Returned Territories until such
product is approved for sale in these countries. Submissions for regulatory
approval to sell ALFERON N Injection for treatment of genital warts have been
filed in a number of countries other than the United States and regulatory
approval has been obtained in Mexico. There can be no assurance, however, that
any additional approvals will be granted. See "Business -- Governmental
Regulation," "Risk Factors -- Regulatory Approvals," and "Risk
Factors -- Foreign Regulatory Approvals."
Manufacturing. The purified drug concentrate utilized in the formulation
of ALFERON N Injection is manufactured in the Company's facility located in New
Brunswick, New Jersey, and ALFERON N Injection is formulated and packaged at a
production facility located in McPherson, Kansas and operated by Sanofi pursuant
to a processing and supply agreement entered into in September 1994. Under the
terms of the agreement with Sanofi, the Company pays Sanofi an agreed price to
formulate and package ALFERON N Injection in accordance with specifications
provided by the Company. These facilities received FDA approval in October 1989.
Subsequently, the Company developed process improvements and completed an
expansion of its manufacturing facility, both of which were approved by the FDA
in June 1991. The process improvements and expanded facility enabled the Company
to reduce the manufacturing costs of ALFERON N Injection and gave the Company
increased production capacity for ALFERON N Injection. See "Risk
Factors -- Regulatory Approvals" and "Business -- Governmental Regulation."
Competition. Presently, INTRON(R) A, manufactured by Schering, is the one
other injectable interferon product approved by the FDA for the treatment of
genital warts. INTRON(R) A is made from recombinant alpha interferon. ALFERON N
Injection also competes with surgical, chemical, and other methods of treating
genital warts. The Company cannot assess the impact products developed by the
Company's competitors or advances in other methods of the treatment of genital
warts will have on the commercial viability of its product.
If and when the Company obtains approvals for additional indications of
ALFERON N Injection and its proposed products, it expects to compete primarily
on the basis of product performance and price with a
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number of pharmaceutical companies (such as Hoffmann, Roche, Schering, Amgen
Inc., and Glaxo Wellcome Inc.), both in the United States and abroad. In
addition, the Company's potential competitors have developed or may develop
products (containing either alpha interferon or other therapeutic compounds) or
other treatment modalities which may compete with the Company's products. For
example, Schering's recombinant interferon product is already approved for the
treatment of hepatitis C and hepatitis B in the United States and other markets,
as well as for many other medical uses, and there is no assurance that, if the
Company is able to obtain regulatory approval of ALFERON N Injection for the
treatment of those diseases, it will be able to achieve any significant
penetration into those markets. In addition, since production of the competitive
products is not dependent on a source of human blood cells, such products may be
able to be produced in greater volume and at a lower cost than ALFERON N
Injection. Currently, the Company's wholesale price on a per unit basis of
ALFERON N Injection is substantially higher than that of the competitive
recombinant alpha interferon products. Many of the Company's potential
competitors are among the largest pharmaceutical companies in the world, are
well known to the public and the medical community, and have substantially
greater financial resources and product development, manufacturing, and
marketing capabilities than the Company or its marketing partners.
Patents and Licenses. On March 5, 1985, the United States Patent and
Trademark Office issued a patent to Hoffmann claiming purified human alpha
(leukocyte) interferon (regardless of how it is produced). In 1988, the Company
obtained a non-exclusive license from Hoffmann which allowed the Company to
make, use, and sell in the United States, without a potential patent
infringement claim from Hoffmann, (i) ALFERON N Injection for the treatment of
genital warts and (ii) injectable formulations of interferon alfa-n3 (which is
the same active ingredient contained in ALFERON N Injection), for the treatment
of patients with diseases which are refractory to recombinant interferon
therapy. On May 6, 1994, the United States Patent and Trademark Office issued an
Office Action in Reexamination on the Hoffmann patent and rejected all of the 14
claims in the Hoffmann patent. Claims in a patent under reexamination are valid
and enforceable until such time as a final disposition on the claims is reached.
On July 11, 1994, Hoffmann filed a response objecting to the Patent Office's
rejection of such claims. On July 20, 1995, the Patent Office issued another
Office Action in Reexamination on the Hoffmann patent and rejected three of the
claims in the Hoffmann patent and concluded that the remaining 11 claims are
patentable. In November 1995, Hoffmann filed another response objecting to the
Patent Office's rejection of such three claims. The outcome of such
reexamination of the Hoffmann patent cannot be determined at this time. Roche
also has been issued patents covering human alpha interferon in many countries
throughout the world. As of March 31, 1995, the Company obtained a non-exclusive
license from Hoffmann and Roche (the "Hoffmann Agreement") which grants the
Company the worldwide rights to make, use, and sell, without a potential patent
infringement claim from Hoffmann or Roche, any formulation of Natural Alpha
Interferon. The Hoffmann Agreement permits the Company to grant marketing rights
with respect to Natural Alpha Interferon products to third parties, except that
the Company cannot grant marketing rights with respect to injectable products in
any country in which Hoffmann or Roche has patent rights covered by the Hoffmann
Agreement (the "Hoffmann Territory") to any third party not listed on a schedule
of approximately 50 potential marketing partners without the consent of Hoffmann
and Roche, which consent cannot be unreasonably withheld. The Hoffmann Agreement
will enable the Company, if it is successful in obtaining necessary regulatory
approvals, to expand the formulations of Natural Alpha Interferon it makes,
uses, and sells in the United States and the rest of the world and to market its
products for the treatment of additional indications. See "Risk Factors --
Potential Patent Infringement Claims" and "Business -- ALFERON N
Injection -- Royalty Obligations."
Royalty Obligations. The Company is a party to certain license agreements
pursuant to which it is obligated to pay royalties based upon the commercial
exploitation of Natural Alpha Interferon products. Under the terms of the
Hoffmann Agreement, the Company is obligated to pay Hoffmann and Roche an
aggregate royalty on net sales (as defined) of Natural Alpha Interferon products
by the Company in an amount equal to (i) 8% of net sales in the Hoffmann
Territory, and 2% of net sales outside the Hoffmann Territory of products
manufactured in the Hoffmann Territory, up to $75,000,000 of net sales in any
calendar year and (ii) 9.5% of net sales in the Hoffmann Territory, and 2% of
net sales outside the Hoffmann Territory of products manufactured in the
Hoffmann Territory, in excess of $75,000,000 of net sales in any calendar year,
provided that the total royalty payable in any calendar year shall not exceed
$8,000,000. The Hoffmann
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Agreement can be terminated by the Company on 30 days' notice with respect to
the United States patent, any individual foreign patent, or all patents owned by
Hoffmann or Roche. If the Hoffmann Agreement is terminated with respect to the
patents owned by Hoffmann or Roche in a specified country, such country is no
longer included in the Hoffmann Territory. If Hoffmann's United States patent,
or the claims in such patent which the marketing of Natural Alpha Interferon
products by the Company might infringe, were found to be invalid, the Company
intends to terminate the Hoffmann Agreement with respect to Hoffmann's United
States patent, which would eliminate the royalty payable to Hoffmann and Roche
on net sales in the United States of products manufactured in the United States.
When the Company received FDA approval for ALFERON N Injection for the treatment
of genital warts in 1989, the Company became obligated to issue shares of Common
Stock to Hoffmann as a prepaid royalty against future net sales by the Company.
Under the terms of the Hoffmann Agreement, certain payments previously made to
Hoffmann (including the value of the Common Stock previously issued to Hoffmann)
are available as offsets against 50% of the Company's future royalty obligations
to Hoffmann until the Company obtains an FDA approval to market ALFERON N
Injection for an indication other than genital warts. As of December 31, 1995,
the Company had approximately $719,437 of credits available to offset its future
royalty obligations to Hoffmann.
Under the terms of the Purdue Marketing Agreements, unless the Third Option
is exercised and the royalty obligation is terminated as provided in the July
1995 Purdue Amendment, the Company is obligated to pay Mundipharma a royalty
equal to 3% of the net sales of ALFERON N Injection in the Returned Territories
until Mundipharma has received royalty payments equal to $3 million ($5 million
under certain circumstances) and 1% of the Company's net sales in the Returned
Territories thereafter. See "Business -- ALFERON N Injection -- Marketing and
Distribution -- Agreements with Purdue."
In addition, the Company agreed to pay NPDC a royalty of $1 million in
connection with the acquisition of certain intellectual property and technology
rights from NPDC. Such amount is payable if and when the Company generates
income before taxes, limited to 25% of such income before income taxes per year
until the amount is paid in full. See "Risk Factors -- Royalty Obligations" and
"Certain Transactions -- Agreements with NPDC -- Transfer Agreement."
PRODUCTS UNDER DEVELOPMENT
ALFERON N Gel.
ALFERON N Gel is a topical Natural Alpha Interferon preparation which the
Company has developed and believes has potential in the treatment of cervical
dysplasia, vaginal human papilloma virus infection, recurrent genital herpes,
other viral diseases, and cancers.
Clinical Trials for ALFERON N Gel. The Company has completed one clinical
trial and plans to conduct various other clinical trials for its ALFERON N Gel
formulation to develop applications and obtain initial approvals for such
products.
Cervical Dysplasia. Affecting approximately 500,000 to one million women
each year in the United States alone, cervical dysplasia, or abnormal cervical
cells, has been identified as a potential precursor to cervical cancer. Cervical
cancer strikes approximately 13,000 women in the United States each year,
causing 5,000 deaths, and is responsible for more than half a million deaths
worldwide. Cervical dysplasia is caused by certain strains of the human
papilloma virus ("HPV"), the same family of viruses that causes genital warts.
The Company has completed a Phase 2 dose-ranging study using ALFERON N Gel at
the Columbia Presbyterian Medical Center in New York for the treatment of mild
cervical dysplasia. In this pilot study, patients were treated with either a
high or low dose of ALFERON N Gel, both of which were well-tolerated. From both
the high and low dose groups, cytological analyses of Pap smears, identification
tests for the presence of HPV, and cervical biopsies indicated that ALFERON N
Gel potentially improved the course of cervical dysplasia in the majority of
patients who completed the treatment course. Based upon these initial results, a
physician-sponsored study in HIV-infected women with cervical dysplasia
commenced in August 1995, as described below.
Cervical Dysplasia (in HIV-infected patients). Cervical dysplasia is
particularly difficult to treat in HIV-infected women. These women have a high
recurrence rate of cervical dysplasia after their initially
40
<PAGE> 43
successful surgical treatment. As a result of the preliminary results in the
initial cervical dysplasia study described above, the investigator at
Columbia-Presbyterian Medical Center is conducting this physician-sponsored,
multi-center study in which ALFERON N Gel is being used as an adjuvant to
surgical treatment in HIV-infected women with mild and more severe forms of
cervical dysplasia.
Other widespread dermatological lesions potentially treatable with ALFERON
N Gel therapy. Nearly 30 million people in the U.S. are infected with the
herpes simplex type II virus, which is the infectious virus that causes genital
herpes. Up to 500,000 new cases are reported each year, according to the Alan
Guttmacher Institute. To date, there is no cure for genital herpes. Preliminary
findings with a previous formulation of recombinant interferon in the Company's
proprietary gel showed significant shortening of the contagious period and
relief of symptoms, but the Company will not start clinical trials unless
additional funding (from a source other than the Offering) or a sponsor is
secured. ALFERON N Gel may also be of benefit to immunocompromised patients with
mucocutaneous herpes. Patients with this form of herpes suffer from persistent
skin lesions which have become resistant to existing therapies. While this
disease represents an important potential target for ALFERON N Gel treatment,
additional studies will be dependent upon securing additional funding (from a
source other than the Offering) or a sponsor.
Competition. The Company believes that only one product presently sold in
the United States is indicated for the treatment of recurrent genital herpes.
This product, ZOVIRAX(R), produced by Glaxo Wellcome Inc., contains a drug
called acyclovir which is administered orally in either solution or capsule form
for the management of recurrent episodes of genital herpes. Two other ZOVIRAX(R)
formulations, one of which is an ointment and the other of which is an
intravenous product, also are sold by Glaxo Wellcome Inc. in the United States
for this use. The only current treatment for cervical dysplasia in the United
States is surgery.
ALFERON LDO.
ALFERON LDO is a low dose oral liquid Natural Alpha Interferon preparation.
In October 1989, the Company entered into an agreement (as amended, the "ACC
Agreement") with Amarillo Cell Culture Company, Incorporated ("ACC"), a
privately-held company located in Amarillo, Texas, engaged in the research and
development of animal health products. Under the terms of the ACC Agreement, the
Company has a non-exclusive license under all of ACC's issued patents, patent
applications, and "know-how" relating to the treatment of humans by the oral
administration of Natural Alpha Interferon in low doses. The Company will be
obligated to pay ACC royalties of 10% on the sales of Natural Alpha Interferon
products using ACC's patented technology as determined under the ACC Agreement.
In addition, ACC has the right to purchase the Company's Natural Alpha
Interferon for use in the animal health market and is obligated to pay royalties
to the Company based upon sales using the Company's Natural Alpha Interferon. In
April 1995, in connection with certain amendments to the ACC Agreement, ACC
agreed to purchase 312,500 shares of Common Stock at $2.00 per share and Pharma
Pacific Management Pty. Ltd. ("PPM"), a company which has also obtained a
license from ACC, agreed to purchase 62,500 shares of Common Stock at $2.00 per
share, all of which shares were purchased during the second quarter of 1995.
Clinical Trials for ALFERON LDO. The Company has conducted and plans to
conduct various clinical trials for its ALFERON LDO formulation to develop
applications and obtain initial approvals for such products.
HIV-infected patients. The Company has completed two studies at Mount
Sinai Medical Center in New York involving ALFERON LDO. One was a
placebo-controlled study in AIDS-related complex ("ARC") patients, and the other
was a dose ranging study in AIDS or ARC patients. The results from the
placebo-controlled study did not demonstrate a significant improvement or
alteration in the expected progression of the disease, although patients
receiving ALFERON LDO reported greater energy and appetite than those given the
placebo. Preliminary results from the dose ranging study indicate that one of
the doses may promote weight gain and increased energy.
At the insistence of AIDS groups and community-based physicians who had
been using low-dose formulations of interferon in their practice, the NIAID
agreed to launch a trial of low-dose oral interferon in the United States. An
advisory committee comprised of representatives from interferon manufacturers,
AIDS
41
<PAGE> 44
support groups, FDA, and National Institutes of Health was organized to design a
nationwide, controlled study. This study will investigate the effect of a number
of oral dosage forms of alpha interferon on several quality-of-life parameters
of importance to patients infected with the AIDS virus.
The Company has been active in helping plan this trial, and has agreed to
make clinical quantities of ALFERON LDO available for use in the study. An IND
for the study was submitted by the NIAID to the FDA in July 1995. The first
batch of clinical supplies for the study is being completed, and the study is
scheduled to open for enrollment in the second quarter of 1996.
Competition. Under the terms of the ACC Agreement, (i) the Company has the
exclusive right to sell ALFERON LDO, containing Natural Alpha Interferon, in the
United States and all foreign countries other than Japan, (ii) ACC and PPM each
has the right to sell any interferon other than Natural Alpha Interferon in the
United States and all foreign countries other than Japan, and (iii) Hayashibara
Biochemical Laboratory has the right to sell its low dose alpha interferon in
Japan. Therefore, with respect to low dose oral interferon products, the Company
will potentially compete with ACC and PPM in the United States and in the rest
of the world except Japan and with Hayashibara Biochemical Laboratory in Japan.
ALFERON N Gel and ALFERON LDO.
Sales and Marketing Staff. The Company does not have a marketing or sales
staff nor does it have a marketing agreement with respect to ALFERON N Gel
(other than the Fujimoto Agreement) or ALFERON LDO and, if FDA marketing
approval of ALFERON N Gel or ALFERON LDO is obtained, no assurance can be given
that the Company will be able to enter into a marketing agreement for such
products on terms satisfactory to the Company. In February 1995, the Company
entered into the Fujimoto Agreement which, among other things, grants Fujimoto
the exclusive right to develop, distribute, and sell ALFERON N Gel in Japan. See
"Business -- ALFERON N Injection -- Other Marketing and Distribution
Agreements."
Patents and Licenses. The United States Patent and Trademark Office issued
two patents to the Company which disclose and claim topical interferon
preparations. The patents encompass interferon preparations for the topical
delivery of one or more interferons to the site of a disease which responds
therapeutically to interferon, and a system for delivering interferon topically
which prevents oxidation of the protein. The inventions specifically encompass
the topical treatment for treating viral diseases, such as herpes genitalis,
with alpha interferon. The Company has various other issued patents and patent
applications pending in the field of biotechnology, purification processes, and
therapeutics. See "Business -- ALFERON N Injection -- Patents and Licenses."
Royalty Obligations. The Company is a party to certain license agreements,
including the Hoffmann Agreement, pursuant to which it is obligated to pay
royalties based upon commercial exploitation of ALFERON N Gel and ALFERON LDO.
Under the terms of such license agreements, the Company would pay royalties of
up to 13.5% and 19.5% of net sales of ALFERON N Gel and ALFERON LDO,
respectively. See "Risk Factors -- Royalty Obligations."
GOVERNMENTAL REGULATION
Regulations imposed by U.S. federal, state, and local authorities, as well
as their counterparts in other countries, are a significant factor in the
conduct of the research, development, manufacturing, and marketing activities
for present and proposed products developed by the Company.
The Company's or its licensees' potential products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human medical products are subject to rigorous pre-clinical and clinical testing
and other approval procedures by the FDA in the United States and similar health
authorities in foreign countries. Various federal and, in some cases, state
statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, record keeping, and marketing of such products, including the
use, manufacture, storage, handling, and disposal of hazardous materials and
certain waste products. The process of obtaining these approvals and the
subsequent compliance with applicable federal and
42
<PAGE> 45
foreign statutes and regulations involves a time-consuming process and requires
the expenditure of substantial resources.
The effect of government regulation may be to delay for a considerable
period of time or prevent the marketing of any product that the Company may
develop and/or impose costly procedures on the Company's activities, the result
of which may be to furnish an advantage to the Company's competitors. Any delay
in obtaining or failure to obtain such approvals would adversely affect the
marketing of the Company's products and the ability to earn product revenue.
Before testing of any agents with potential therapeutic value in healthy
human test subjects or patients may begin, stringent government requirements for
pre-clinical data must be satisfied. These data, obtained from studies in
several animal species, as well as from laboratory studies, are submitted in an
IND or its equivalent in countries outside the U.S. where clinical studies are
to be conducted. If the necessary authorizations are received, the Company then
conducts clinical tests of its products on human beings at various unaffiliated
medical centers and institutions. Initial trials (Phase 1) are conducted on a
small number of volunteers to determine whether the drug is safe for human
beings. If the initial trials demonstrate the safety of the product, trials
(Phase 2) are then conducted on patients affected with the disease or condition
under investigation to establish the proper dose and dosing interval. The
findings of these trials are then used to design and implement large-scale
controlled trials (Phase 3) to provide statistical proof of effectiveness and
adequate evidence of safety to meet FDA and/or foreign approval requirements.
The FDA closely monitors the progress of each of the phases of clinical
testing and may, at its discretion, re-evaluate, alter, suspend, or terminate
the testing based on the data which have been accumulated to that point and its
assessment of the risk/benefit ratio to the patient. Estimates of the total time
required for completing clinical testing vary between four and ten years. Upon
successful completion of clinical testing of a new drug, a company typically
submits a New Drug Application ("NDA"), or for biological products such as
Natural Alpha Interferon, a Product and Establishment License Applications
("PLA/ELA") to the FDA summarizing the results and observations of the drugs
during the clinical trials.
Each facility in which products are produced and packaged, whether operated
by the Company or a third party, must meet the FDA's standards for current good
manufacturing practices and must also be approved prior to marketing any product
produced or packaged in such facility. Any significant change in the production
process which may be commercially required, including changes in sources of
certain raw materials, or any change in the location of the production
facilities will also require FDA approval. To the extent a portion of the
manufacturing process for a product is handled by an entity other than the
Company, the Company must similarly receive FDA approval for the other entity's
participation in the manufacturing process. The Company has entered into an
agreement with Sanofi, pursuant to which Sanofi formulates and packages ALFERON
N Injection. The Company presently has a biologic establishment license for the
facilities in which it produces ALFERON N Injection, which includes the
facilities in which Sanofi formulates and packages ALFERON N Injection. In
addition, FDA approval would have to be obtained if the Company should choose to
use an outside formulator and/or packager for ALFERON N Gel or ALFERON LDO.
Once the manufacture and sale of a product is approved, various FDA
regulations govern the production processes and marketing activities of such
product. A post-marketing testing, surveillance, and reporting program may be
required to monitor the product's usage and effects. Product approvals may be
withdrawn, or other actions may be ordered, if compliance with regulatory
standards is not maintained.
Each individual lot of Natural Alpha Interferon produced must be tested for
compliance with specifications and released for sale by the FDA prior to
distribution in the marketplace. Even after initial FDA marketing approval for a
product has been granted, further studies may be required to provide additional
data on safety or efficacy; to obtain approval for marketing a product as a
treatment for specific diseases other than those for which the product was
originally approved; to change the dosage levels of a product; to support new
safety or efficacy claims for the product; or to support changes in
manufacturing methods, facilities, sources of raw materials, or packaging.
In many markets, effective commercialization also requires inclusion of the
product in national, state, provincial, or institutional formularies or cost
reimbursement systems. The impact of new or changed laws or regulations cannot
be predicted with any accuracy. The Company uses its own staff of regulatory
affairs
43
<PAGE> 46
professionals and outside consultants to enable it to monitor compliance, not
only with FDA laws and regulations, but also with state and foreign government
laws and regulations. See "Risk Factors -- Regulatory Approvals."
Promotional and educational communications by the Company and its
distributors also are regulated by the FDA and are governed by statutory and
regulatory restrictions and FDA policies regarding the type and extent of data
necessary to support claims that may be made. The Company currently does not
have data adequate to satisfy FDA requirements with respect to potential
comparative claims between Natural Alpha Interferon and competing recombinant
interferon products.
For marketing outside the United States, the Company will also be subject
to foreign regulatory requirements governing human clinical trials,
manufacturing, and marketing approval for drugs and other medical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing, and reimbursement vary widely from country to country. See "Risk
Factors -- Foreign Regulatory Approvals" and "Risk Factors -- Uncertainty of
Pharmaceutical Pricing and Related Matters; Need for Reimbursement."
RESEARCH STAFF AND EMPLOYEES
As of April 1, 1996, the Company had approximately 69 full-time employees,
of whom approximately 12 hold Ph.D. degrees and 35 hold other degrees in
scientific or technical fields. Of such employees, approximately 18 were engaged
in research and product development, 21 were engaged in manufacturing and
quality control, and the remainder were general and administrative personnel.
Certain direct and indirect management services are provided to the Company by
employees of NPDC and its other subsidiaries pursuant to a Management Agreement
(the "Management Agreement") at a cost to the Company of $120,000 per annum. In
addition, beginning in 1996, certain services, such as legal, maintenance,
shipping and receiving, purchasing, secretarial work, informational retrieval,
and regulatory compliance, are provided by approximately 12 employees of the
Company to NPDC on an "as used" basis at the Company's approximate cost. See
"Certain Transactions -- Agreements with NPDC -- Management Agreement."
RESEARCH AND DEVELOPMENT
During the fiscal years ended December 31, 1995, 1994, and 1993, the
Company expended approximately $3.7 million, $5.2 million, and $4.2 million,
respectively for research and development. Substantially all of these
expenditures were for Company-sponsored research and development programs.
PROPERTIES
The Company's executive offices and its research and production facilities
are located at 783 Jersey Avenue, New Brunswick, New Jersey 08901, and its
telephone number is (908) 249-3250. The Company also maintains offices at 9 West
57th Street, New York, New York 10019, the cost of which is included in the
Management Agreement.
The Company owns two free standing buildings comprising approximately
44,000 square feet located in New Brunswick, New Jersey. The Company occupies
approximately 25,000 square feet for staff offices, for the production and
purification of interferon, for quality control and research activities, and for
the storage of raw, in process, and finished materials. The Company also shares
approximately 9,000 square feet with NPDC and leases approximately 10,000 feet
to NPDC. The Company believes that its current facilities are (i) suitable and
adequate for research and development and commercial production of purified
interferon, (ii) well maintained, and (iii) in good condition. Substantially all
equipment owned by the Company has been acquired over the past ten years and is
in good working condition.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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<PAGE> 47
MANAGEMENT
As of April 1, 1996, the directors and officers of the Company and their
ages and positions are as set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ ---- ------------------------------------------------------
<S> <C> <C>
Martin M. Pollak(1)(2)(3)........... 68 Chairman of the Board
Jerome I. Feldman(1)(2)(3).......... 67 Chairman of the Board's Executive Committee,
Treasurer, and a Director
Samuel H. Ronel, Ph.D............... 59 Vice Chairman
Lawrence M. Gordon.................. 42 Chief Executive Officer and a Director
Stanley G. Schutzbank, Ph.D......... 50 President and a Director
Leon Botstein, Ph.D................. 47 Director
Sheldon L. Glashow, Ph.D(4)......... 63 Director
Scott N. Greenberg.................. 39 Director
Roald Hoffmann, Ph.D.(4)............ 57 Director
Ogden R. Reid(1)(3)(4).............. 70 Director
Donald W. Anderson.................. 46 Controller (Principal Accounting and Financial
Officer) and Secretary
Drew Stoudt......................... 48 Vice President, Regulatory Affairs and Quality
Mei-June Liao, Ph.D................. 44 Vice President, Research and Development
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of Stock Option Committee.
(4) Member of the Audit Committee.
All directors are serving a current term of office which continues until
the next annual meeting of stockholders, and all officers are serving a current
term of office which continues until the next annual meeting of directors.
Martin M. Pollak has been Chairman of the Board since 1981. He is a founder
of NPDC (a holding company) and has been Executive Vice President, Treasurer,
and a director of NPDC since 1959. Mr. Pollak is Chief Executive Officer,
President, and a director of American Drug Company ("ADC"), a subsidiary of NPDC
which markets American-made generic pharmaceutical products in Russia. He has
been Chairman of the Board of General Physics Corporation ("GPC"), a subsidiary
of NPDC which provides engineering, environmental training, and technical
support services to commercial nuclear and fossil power utilities and to the
United States Departments of Defense and Energy, since 1988, and a director
since 1987; Chairman of the Executive Committee of GTS Duratek, Inc.
("Duratek"), a company which provides waste treatment solutions for radioactive,
hazardous, mixed, and other wastes, from 1985 to January 1995 and a director
since 1982; Chairman of the Board and a director of SGLG, Inc. ("SGLG"), a
subsidiary of NPDC, which is a holding company with a 19% interest in GSE
Systems, Inc. ("GSE"), a software simulator company, since May 1991; and a
director of GSE since 1994. Mr. Pollak is Chairman of the Czech and Slovak
United States Economic Council, a trustee of the Board of Trustees of the
Worcester Foundation for Experimental Biology and a director of Brandon Systems
Corporation, a personnel recruiting company, since 1986.
Jerome I. Feldman has been Chairman of the Board's Executive Committee and
a director of the Company since 1981. He has also been the Treasurer of the
Company since 1984. Mr. Feldman is a founder of, and since 1959 has been
President, Chief Executive Officer, and a director of, NPDC. Mr. Feldman is
Chairman of the Board of and a consultant to ADC. He has been Chairman of the
Executive Committee of GPC since 1988 and a director of GPC since 1987; Chairman
of the Board of Duratek from 1985 to January 1995 and a director since 1982 and
Chairman of the Executive Committee and a director of SGLG since May 1991; and a
director of GSE since 1994. He has been a director of Hamilton Financial
Services, Inc., a financial service company, since 1983. He is a trustee of the
New England Colleges Fund and of Bard College.
45
<PAGE> 48
Samuel H. Ronel, Ph.D. has been Vice Chairman of the Board since January
1996 and was President, Chief Executive Officer, and a director of the Company
from 1981 to January 1996. He was responsible for the interferon research and
development program since its inception in 1979. Dr. Ronel joined NPDC in 1970
and has served as the Vice President of Research and Development of NPDC since
1976 and as the President of Hydro Med Sciences, a division of NPDC, since 1976.
Dr. Ronel served as President of the Association of Biotechnology Companies, an
international organization representing United States and foreign biotechnology
firms, from 1986-88 and has served as a member of its Board of Directors until
1993. Dr. Ronel was elected to the Board of Directors of The Biotechnology
Industry Organization in 1993.
Lawrence M. Gordon has been Chief Executive Officer and a director of the
Company since January 1996, Vice President of the Company from June 1991 to
January 1996, General Counsel of the Company from 1984 to January 1996, General
Counsel of NPDC since November 1986, and Vice President of NPDC since June 1991.
He was Associate General Counsel of NPDC from 1983 through November 1986. Mr.
Gordon has been a director of GPC since October 1994.
Stanley G. Schutzbank, Ph.D. has been President of the Company since
January 1996, Executive Vice President of the Company from 1987 to January 1996,
and a director of the Company since 1981 and has been associated with the
interferon research and development program since its inception in 1979. He is
involved with all facets of administration and planning of the Company and has
coordinated compliance with FDA regulations governing manufacturing and clinical
testing of interferon, leading to the approval of ALFERON N Injection in 1989.
Dr. Schutzbank joined NPDC in 1972 and has served as the Corporate Director of
Regulatory and Clinical Affairs of NPDC since 1976 and as Executive Vice
President of Hydro Med Sciences since 1982. Dr. Schutzbank is a member of the
Regulatory Affairs Professionals Society and has served as Chairman of the
Regulatory Affairs Certification Board from its inception until 1994. Dr.
Schutzbank received the 1991 Richard E. Greco Regulatory Affairs Professional of
the Year Award for his leadership in developing the United States Regulatory
Affairs Certification Program. In September 1995, Dr. Schutzbank was elected to
serve as President-elect in 1996, President in 1997, and Chairman of the Board
in 1998 of the Regulatory Affairs Professionals Society.
Leon Botstein, Ph.D. has been a director of the Company since 1981 and has
been the President of Bard College, Annandale-on Hudson, New York since 1975.
Dr. Botstein has been a director of Intelogic Trace, Inc., a computer
maintenance and support service company since 1985.
Sheldon L. Glashow, Ph.D. has been a director of the Company since October
1991. He has been a director of GPC since January 1987, a director of GSE since
August 1995, a director of CalCol, Inc., a pharmaceutical company, since 1994,
and was a director of Duratek from 1985 to January 1995. Dr. Glashow is the
Higgins Professor of Physics of Harvard University and was a Distinguished
Professor and Visiting Professor of Physics at Boston University. In 1971, he
received the Nobel Prize in Physics.
Scott N. Greenberg has been a director of the Company since January 1996,
Vice President, Chief Financial Officer, and a director of NPDC since 1989, a
director of GPC since 1987, a director of SGLG since 1991, and chief financial
officer and a director of ADC since January 1994.
Roald Hoffmann, Ph.D. has been a director of the Company since 1991 and a
director of NPDC since 1988. Dr. Hoffmann has been the John A. Newman Professor
of Physical Science at Cornell University since 1974 and is a member of the
National Academy of Sciences and the American Academy of Arts and Sciences. In
1981 he shared the Nobel Prize in Chemistry with Dr. Kenichi Fukui.
Ogden R. Reid has been a director of the Company since 1982, a director of
NPDC since 1979, a director of GPC since January 1988, and Vice Chairman of the
Board of GPC since 1992. He was Vice Chairman and a director of Duratek from
1991 to January 1995. He has also been a director of Royce Laboratories, Inc., a
generic drug company, since 1995. Mr. Reid was Editor and Publisher of the New
York Herald Tribune and of its International Edition, an United States
Ambassador to Israel, a six-term member of the United States Congress and a New
York State Environmental Commissioner.
Donald W. Anderson has been the Controller of the Company since 1981 and
Corporate Secretary of the Company since 1988. He has been an officer of various
subsidiaries of NPDC since 1976.
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<PAGE> 49
Drew Stoudt has been Vice President, Regulatory Affairs and Quality of the
Company since March 1991. He was Vice President, Quality Assurance and Quality
Control from February 1990 to March 1991. Mr. Stoudt has served as Director of
Quality Assurance for the Company and other divisions of NPDC from 1985 to 1990.
Mei-June Liao, Ph.D., has been Vice President, Research and Development of
the Company since March 1995. She has served as a Director, Research &
Development since 1987, and held senior positions in the Company's Research &
Development Department since 1983. Dr. Liao received her Ph.D. from Yale
University and completed a three-year post doctoral appointment at the
Massachusetts Institute of Technology under the direction of Nobel Laureate in
Medicine, Professor H. Gobind Khorana. Dr. Liao has authored many scientific
publications and invention disclosures.
47
<PAGE> 50
PRINCIPAL STOCKHOLDERS
The following table sets forth the number of shares of the Common Stock
beneficially owned as of April 1, 1996, by each person who is known by the
Company to own beneficially more than 5% of the Company's outstanding Common
Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE
OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS(1)
- ----------------------------------------------------------- ------------------ -----------
<S> <C> <C>
National Patent Development Corporation.................... 7,475,148(2) 21.7%
Martin M. Pollak........................................... 7,957,648(2)(3) 22.8%
Jerome I. Feldman.......................................... 7,971,598(2)(4) 22.8%
David Blech................................................ 800,000(5) 2.3%
Nicholas L. Madonia, Trustee............................... 2,287,500(6)(7) 6.6%
Mordechai Jofen, Trustee................................... 240,834(8) 0.7%
Biotechnology Investment Group, L.L.C...................... 2,710,334(9) 7.9%
</TABLE>
- ---------------
(1) The percentage of class calculation assumes for each beneficial owner that
all of the options or warrants are exercised in full only by the named
beneficial owner and that no other options or warrants are deemed to be
exercised by any other stockholders.
(2) Includes (i) 5,300,148 shares of Common Stock owned by NPDC, (ii) 1,359,375
shares of Common Stock owned by Five Star Group, Inc. ("FSGI"), and (iii)
815,625 shares of Common Stock owned by MXL Industries, Inc. ("MXL"). FSGI
and MXL each is a wholly-owned subsidiary of NPDC. Based upon the common
stock and Class B Stock of NPDC outstanding at February 9, 1996, Martin M.
Pollak and Jerome I. Feldman, officers and directors of NPDC, and directors
of the Company, controlled in the aggregate approximately 10.2% of the
voting power of all voting securities of NPDC. This percentage for Mr.
Pollak and Mr. Feldman would increase to approximately 45.8% if they
exercised all of the presently outstanding and currently exercisable stock
options to purchase shares of the common stock and Class B Stock of NPDC
held by them. Accordingly, Messrs. Pollak and Feldman, through their
ownership of NPDC common stock, may be deemed to beneficially own the
shares of Common Stock beneficially owned by NPDC, FSGI, and MXL. However,
Messrs. Pollak and Feldman disclaim beneficial ownership of such 7,475,148
shares. 6,975,148 of the shares of Common Stock owned by NPDC, FSGI, and
MXL have been pledged to a bank as collateral to secure indebtedness owed
to such bank. The address of NPDC and Messrs. Pollak and Feldman is 9 West
57th Street, Suite 4170, New York, New York 10019.
(3) Includes (i) 7,475,148 shares of Common Stock beneficially owned by NPDC,
(ii) 1,000 shares of Common Stock held by Mr. Pollak's wife, and (iii)
480,000 shares of Common Stock issuable upon exercise of currently
exercisable stock options held by Mr. Pollak. Mr. Pollak disclaims
beneficial ownership of the shares of Common Stock owned by NPDC and his
wife.
(4) Includes (i) 7,475,148 shares of Common Stock beneficially owned by NPDC,
(ii) 2,950 shares of Common Stock held by certain members of Mr. Feldman's
family, and (iii) 480,000 shares of Common Stock issuable upon exercise of
currently exercisable stock options held by Mr. Feldman. Mr. Feldman
disclaims beneficial ownership of the shares of Common Stock owned by NPDC
and his family.
(5) Excludes (i) 1,130,000 shares of Common Stock held by Freedom Charitable
Remainder Trust ("Freedom") of which David Blech is the income beneficiary
but not the trustee, (ii) 480,000 shares of Common Stock held by Frontier
Charitable Remainder Trust ("Frontier") of which David Blech is the income
beneficiary but not the trustee, (iii) 430,000 shares of Common Stock held
by Sentinel Charitable Remainder Trust ("Sentinel") of which David Blech is
the income beneficiary but not the trustee, (iv) 247,500 shares of Common
Stock held by the Blech Family Trust ("Blech Family Trust") of which David
Blech is the income beneficiary but not the trustee, and (v) 240,834 shares
of Common Stock held by the Edward A. Blech Charitable Remainder Trust
("Edward Blech Trust") of which David Blech is the income beneficiary but
not the trustee. Mr. Blech disclaims beneficial ownership of the shares of
Common Stock held by Freedom, Frontier, Sentinel, Blech Family Trust, and
Edward Blech Trust. Mr. Blech's address is 225 Lafayette Street, Suite
1206, New York, New York 10012.
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<PAGE> 51
(6) Based, in part, on a Schedule 13D filed by the beneficial owner with the
Commission.
(7) Includes 1,130,000 shares of Common Stock held by Freedom, 480,000 shares
of Common Stock held by Frontier, 430,000 shares of Common Stock held by
Sentinel, and 247,500 held by Blech Family Trust, of which trusts Mr. Blech
is the income beneficiary but not the trustee. As sole trustee of each of
the trusts, Mr. Madonia has the right to vote and dispose of the shares
held by such trusts. Mr. Blech disclaims beneficial ownership of such
shares of Common Stock. Mr. Madonia's address is c/o Madonia, Pilles & Co.,
P.A., 30 Outwater Lane, Garfield, New Jersey 07026.
(8) Includes 240,834 shares of Common Stock held by Edward Blech Trust. As sole
trustee of such trust, Mr. Jofen has the right to vote and dispose of the
shares held by such trust. Mr. Blech disclaims the beneficial ownership of
such shares of Common Stock. Mr. Jofen's address is 418 Avenue I, Brooklyn,
New York 11231.
(9) The members of Biotechnology Investment Group, L.L.C. ("BIG"), which is a
limited liability company, are: Collinson Howe Venture Partners, Inc.
(formerly known as Schroder Venture Advisers, Inc.) (Jeffrey J. Collinson
is its president and its sole director and majority owner); Mordechai
Jofen, 418 Avenue I, Brooklyn, New York 11231, as trustee of the Edward
Blech Trust; and Wilmington Trust Company, 1100 N. Market Street,
Wilmington, Delaware 19890, as voting trustee. Such persons may have shared
voting and dispositive power over these shares. All of the shares of Common
Stock owned by BIG have been pledged to Citibank, N.A. as collateral to
secure indebtedness owed to such bank. The address of BIG is 1055
Washington Blvd. Stamford, CT 06901.
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<PAGE> 52
CERTAIN TRANSACTIONS
AGREEMENTS WITH NPDC
Transfer Agreement. As of January 1, 1981, NPDC entered into an agreement
(the "Transfer Agreement") with the Company pursuant to which NPDC (i) licensed
to the Company in perpetuity all of its right, title and interest in and to
certain intellectual property and technology rights (the "Intangible Assets")
relating to its programs in human leukocyte interferon and recombinant DNA and
hybridoma technology and (ii) transferred to the Company its rights under
certain consulting, supply, and research agreements (the "Agreements"). In
consideration of the license and transfer of the Intangible Assets and the
Agreements, the Transfer Agreement provides that the Company will pay to NPDC a
royalty of $1,000,000. Such amount is payable if and when the Company generates
income before income taxes, and is limited to 25% of such income before taxes
per year until the amount is paid in full. See "Risk Factors -- Royalty
Obligations."
Management Agreement. As of January 1, 1981, NPDC entered into the
Management Agreement with the Company pursuant to which certain legal,
financial, and administrative services have been provided by employees of NPDC.
The fee for such services is $120,000 per annum. In addition, the Management
Agreement provided that certain other services provided by NPDC's employees,
such as maintenance, shipping and receiving, purchasing, secretarial work,
information retrieval, and regulatory compliance, would be paid for by the
Company on an "as used" basis at NPDC's approximate cost. During 1995, NPDC
charged $1,121,145 to the Company for such other services. Commencing January 1,
1996, the Management Agreement was amended to provide that such other services
will be provided by employees of the Company to NPDC on an "as used" basis at
the Company's approximate cost. The Company is also covered under certain of
NPDC's insurance policies and pays its proportionate share of insurance costs.
Lease Agreement. The Company owns two free standing buildings aggregating
approximately 44,000 square feet located in New Brunswick, New Jersey. The
Company and NPDC have entered into an agreement for the sharing of the office,
warehouse, and laboratory facility. The Company occupies approximately 25,000
square feet, shares approximately 9,000 square feet with NPDC, and leases
approximately 10,000 square feet of space to NPDC at such location. During 1995,
NPDC paid the Company as rent NPDC's proportionate share of such occupancy costs
(based on both square feet occupied and number of personnel), which amounted to
$181,992.
While the above-described agreements were negotiated with a principal
stockholder of the Company which was then its parent, the Company nevertheless
believes that such agreements are equivalent economically to arms-length
transactions with a third party.
AGREEMENTS WITH DAVID BLECH AND RELATED PARTIES
On May 28, 1993, David Blech, the Chief Executive Officer, sole
shareholder, and a director of D. Blech & Company, Incorporated ("DBC"), and the
Company entered into a Purchase Agreement (the "Purchase Agreement"), pursuant
to which Mr. Blech or his designees purchased for $4.00 per unit, an aggregate
of 2,500,000 units ("Units"), each Unit consisting of two shares of the
Company's Common Stock, one Class A Warrant (the "Class A Warrants") to purchase
one share of Common Stock at an exercise price of $3.25 per share, and one Class
B Warrant (the "Class B Warrants") to purchase one share of Common Stock at an
exercise price of $5.00 per share. The Class A Warrants and the Class B Warrants
expire on August 31, 2000. The following acquisitions were made in installments
pursuant to the Purchase Agreement: (i) two charitable remainder trusts, of
which Mr. Blech is the income beneficiary but not the trustee, purchased an
aggregate of 1,050,000 Units, (ii) Mr. Blech purchased 1,187,500 Units, (iii)
Mark S. Germain, a Managing Director of DBC, purchased 250,000 Units, and (iv)
an unaffiliated purchaser purchased 12,500 Units. The purchasers have certain
demand registration rights as to the securities acquired by them under the
Purchase Agreement. Under the Purchase Agreement, Mr. Blech had the right (which
was never exercised) to cause the Company to nominate two designees of Mr. Blech
(the "Blech Nominees") to the Board of Directors of the Company as long as Mr.
Blech and the other purchasers under the Purchase Agreement beneficially owned,
in the aggregate, at least 2,000,000 shares of Common Stock. In 1993, the
Company paid DBC a $500,000 fee for its services in connection with the Purchase
Agreement.
Pursuant to the Purchase Agreement, a 10-year Voting Agreement (the "Voting
Agreement") among David Blech, NPDC, FSGI, and MXL became effective as of May
28, 1993 pursuant to which NPDC, FSGI,
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<PAGE> 53
and MXL agreed to (a) vote all their shares of Common Stock for the election of
the Blech Nominees as directors of the Company unless Mr. Blech and the other
purchasers under the Purchase Agreement dispose of more than 1,000,000 shares of
Common Stock and (b) restrict transfer of the Common Stock held by them for one
year, subject to certain exceptions. Pursuant to the Voting Agreement, Mr. Blech
and the other purchasers under the Purchase Agreement agreed to vote for the
election of two nominees of NPDC as directors of the Company unless NPDC, MXL
and FSGI disposed of any shares of Common Stock (other than up to 2,000,000
shares disposed of in exchange for debt obligations of NPDC, MXL, or FSGI).
Concurrently with the execution of the Purchase Agreement, the Company entered
into a consulting agreement with DBC under which the Company agreed to pay
$100,000 per year, payable monthly, to DBC for advisory services with respect to
the Company's field of interest and business, strategic, and commercial matters
related to the biotechnology industry. The term of the consulting agreement was
for one year commencing on June 1, 1993, and was renewed on the same terms for
an additional one-year period which expired on June 1, 1995. David Blech and the
Company were unaffiliated prior to the transactions described above, which were
negotiated on an arm's-length basis.
On May 13, 1994, the Company filed a registration statement with the
Securities and Exchange Commission, which statement was amended on July 1, 1994
and was subsequently amended again on August 10, 1994, covering a proposed
public offering of 2,000,000 shares of the Company's Common Stock to be managed
by DBC as underwriter. On September 22, 1994, DBC could not meet certain minimum
capital requirements and was forced to discontinue its operations. Consequently,
the Company had to cancel the proposed public offering of Common Stock.
On December 6, 1994, the Company entered into a Purchase and Exchange
Agreement with Mr. Blech and certain other parties pursuant to which Sentinel
Charitable Remainder Trust, a trust of which Mr. Blech is the income beneficiary
but not the trustee, purchased 430,000 shares of Common Stock for $1 per share
or an aggregate purchase price of $430,000. The purchase price was negotiated on
an arms-length basis and the shares were sold at a discount to market value as a
result of the Company's need for additional working capital. In addition,
pursuant to such agreement, David Blech and certain other parties agreed to
exchange 2,250,000 Class A Warrants and 2,250,000 Class B Warrants for 900,000
shares of Common Stock. The issuance and exchange of the shares of Common Stock
pursuant to the Purchase and Exchange Agreement were completed in April 1995. In
connection with and in consideration for the Purchase and Exchange Agreement
described above, Mr. Blech and certain other parties and the Company entered
into an agreement (i) terminating and cancelling the Voting Agreement discussed
above, (ii) deleting in its entirety a provision of the Purchase Agreement with
respect to conflicting "piggyback" registration rights, and (iii) deleting in
its entirety the provision of the Purchase Agreement with respect to Board
representation and nomination rights of the Blech Designees.
OTHER TRANSACTIONS
On May 3, 1995, NPDC, BIG, and Edward Blech Trust committed to loan the
Company $600,000, $220,000, and $100,000, respectively. All of such loans were
made by July 6, 1995. Such loans bore interest at prime plus 2% and matured on
the earlier of (i) the first date that the Company receives gross proceeds of at
least $7,500,000 from a public offering (the "Public Offering") of Common Stock
and (ii) November 2, 1995. If the indebtedness matured as a result of a Public
Offering, repayment of principal of the indebtedness was permitted to be made,
at the option of the Company, by delivery of shares of Common Stock valued at
the public offering price per share in the Public Offering. On July 17, 1995,
NPDC and BIG loaned the Company an additional $500,000 and $150,000,
respectively, and between July 17 and August 22, 1995 NPDC loaned the Company an
additional $300,000 on the same terms as the terms of the earlier loans except
that the Company did not have the option to repay the principal of such
additional indebtedness by delivery of shares of Common Stock. All such
indebtedness was repaid out of the proceeds of the August/September Offering.
NPDC, BIG, and Edward Blech Trust used a portion of such funds to purchase
500,000, 183,334, and 83,334 shares of Common Stock, respectively, in the
August/September Offering.
The Company has forgiven a $150,000 loan to Lawrence M. Gordon, Chief
Executive Officer and a director of the Company, and also has forgiven $18,000
of accrued interest on such loan. Such loan had been due July 9, 1997 and bore
interest at a rate of 6% per annum.
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<PAGE> 54
UNDERWRITING
The Company has entered into an underwriting agreement (the "Underwriting
Agreement") with Sunrise Securities Corp. to serve as the Underwriter in
connection with the Offering. Pursuant to the Underwriting Agreement, the
Company has retained the Underwriter to conduct, as its exclusive agent, an
offering of shares of its Common Stock on a 5,000,000 share minimum, 7,000,000
share maximum, "best efforts" basis, for a period terminating 30 days from the
date hereof, unless extended for up to 30 additional days by the Underwriter.
The Company's officers, directors, employees, and principal stockholders may
purchase shares of Common Stock in the Offering, but any such purchases will not
be used to satisfy the 5,000,000 share minimum. Payments shall be made by wire
transfer to an escrow account with Bank of Montreal Trust Company, as escrow
agent (the "Escrow Agent"), pursuant to an escrow agreement entered into by the
Company, the Underwriter, and the Escrow Agent. If at least 5,000,000 shares
offered hereby are sold within the initial 30 day period (or extended period),
all funds received, less the Underwriter's discounts and commissions and expense
allowance, will be delivered to the Company and certificates representing the
shares purchased will be delivered promptly to or for the account of
subscribers. In the event that the minimum number of shares is not sold within
the designated period, all funds will be returned to subscribers without any
deduction therefrom or interest thereon. Until such time as funds have been
released from escrow and the securities delivered to the purchasers thereof,
such purchasers will be deemed subscribers and not security holders.
The Company and the Underwriter shall have an initial closing once at least
5,000,000 shares (and up to the maximum number of shares) have been sold in
order to disburse the proceeds therefrom. Once such shares are sold, the
Offering shall continue either until the Company and the Underwriter agree to
terminate the Offering or until up to the maximum of 7,000,000 shares are sold
or until the Offering period terminates. If any additional shares are sold after
the initial closing, there shall be subsequent closings to disburse the
additional funds received.
The public offering price for the Common Stock has been determined by
negotiation between the Company and the Underwriter. Among the factors
considered in determining the public offering price were the Company's results
of operations, current financial condition, and future prospects, the state of
the markets for its products, the experience of its management, the economics of
its industry in general, the market price and trading history of the Common
Stock, the general condition of the equity securities markets, and the demand
for similar securities of companies considered comparable to the Company.
The Underwriter has advised the Company that it proposes to offer the
shares to the public at the public offering price set forth on the cover page of
this Prospectus.
The Company has agreed to indemnify the Underwriter against certain
liabilities in connection with the Registration Statement, including liabilities
under the Securities Act.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 1.5% of the gross proceeds of the Offering.
The Company also has agreed to sell to the Underwriter or its designees,
options to purchase a number of shares of Common Stock equal to 10% of the
number of shares of Common Stock sold in the Offering at a price of $.001 per
option. The Underwriter's Purchase Options will be exercisable for a period of
four years, commencing one year after the date hereof, at an initial exercise
price per share equal to 120% of the public offering price per share. The
Underwriter's Purchase Options cannot be sold, transferred, assigned, or
hypothecated for one year from the date of their issuance, except that they may
be assigned, in whole or in part, to any successor, officer or partner of the
Underwriter.
The exercise price of, and the number of shares of Common Stock underlying,
the Underwriter's Purchase Options are subject to adjustment in the event of
stock splits, stock dividends, or other similar events. In the event of any
reclassification or other similar change of outstanding Common Stock, any
consolidation or merger involving the Company (other than a consolidation or
merger which does not result in any reclassification or other similar change in
the outstanding Common Stock), or a sale, lease, or conveyance to another
corporation of the property of the Company as, or substantially as, an entirety,
the Underwriter's Purchase Options will thereupon become exercisable only for
the kind and number of shares of stock or other
52
<PAGE> 55
securities, assets, or cash to which a holder of the number of shares of Common
Stock issuable (at the time of such reclassification, consolidation, merger, or
sale) upon exercise of the Underwriter's Purchase Options would have been
entitled upon such reclassification, consolidation, merger, or sale.
The holder of the Underwriter's Purchase Options has the right, in lieu of
payment in cash of the exercise price, to surrender all or part of the
Underwriter's Purchase Options in exchange for a number of shares of Common
Stock equal to the value of the Underwriter's Purchase Options being surrendered
(determined by subtracting the aggregate exercise price of the Underwriter's
Purchase Options being surrendered from the Current Market Value (as defined) of
the shares of Common Stock issuable upon exercise of the Underwriter's Purchase
Options being surrendered) divided by the Current Market Price of one share of
Common Stock.
The Company has agreed that it will, on any two occasions during the
five-year period commencing on the date hereof, register the sale of the shares
of Common Stock underlying the Underwriter's Purchase Options at the request of
the holders of a majority of the shares of Common Stock issued or issuable upon
exercise of the Underwriter's Purchase Options. The Company also has agreed,
during the seven-year period commencing from the date hereof, to register on a
"piggyback" basis, on an unlimited number of occasions, such securities whenever
the Company files a registration statement. The Company will bear the expenses
of such registrations, except for any underwriting discounts and commissions and
fees and disbursements of counsel to the holders, and except that the holders
will bear the expenses of the second demand registration.
For the life of the Underwriter's Purchase Options, the holders are given,
at nominal cost, the opportunity to profit if the price of the Common Stock in
the public market exceeds the exercise price of the Underwriter's Purchase
Options, without assuming the risks or benefits of ownership, with a resulting
dilution in the interest of other security holders. If the public price of the
Common Stock does not rise above the exercise price of the Underwriter's
Purchase Options during the exercise period, then such Options will expire
worthless. As long as the Underwriter's Purchase Options remain unexercised, the
terms under which the Company could obtain additional capital may be adversely
affected. Moreover, the holders of the Underwriter's Purchase Options might be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain capital by a new offering of its securities on terms more
favorable than those provided by the Underwriter's Purchase Options.
The Underwriter was registered as a broker-dealer and became a member of
the NASD in 1992 and has limited experience in public offerings as an
underwriter, though it has acted as syndicate member, sole placement agent,
co-placement agent, selected dealer, or sole participating broker in more than a
dozen public or private offerings.
On May 10, 1995, the Underwriter was retained by the Company to introduce
the Company to a specified pharmaceutical company. The engagement expired
without any compensation being payable to the Underwriter.
In August and September 1995, the Company completed the August/September
Offering, in which 12,000,000 shares of Common Stock were sold for an aggregate
of $14,400,000 (or $1.20 per share) in a best efforts public offering
underwritten by the Underwriter. In addition to the cash compensation payable to
the Underwriter for its services as underwriter of the August/September
Offering, the Underwriter and its designees also received underwriter's purchase
options exercisable for 1,123,333 shares of Common Stock at a price of $1.86 per
share.
In connection with the August/September Offering, the Company, for a period
of 12 months; the Company's directors and senior officers (who own in the
aggregate 16,600 shares of Common Stock and options and warrants to purchase
1,804,000 shares of common Stock), for a period of 12 months; the Company's
other officers (who own in the aggregate 1,500 shares of Common Stock and
options and warrants to purchase 377,000 shares of Common Stock), for a period
of six months; and the Company's principal stockholders (who own in the
aggregate 13,513,816 shares of Common Stock and no options and warrants to
purchase shares of Common Stock), for a period of 24 months (except that each
such principal stockholder will be permitted to sell not more than 12.9% of its
shares of Common Stock during the second 12 month period), have agreed (subject
to certain exceptions) not to sell, directly or indirectly, any of their shares
of
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<PAGE> 56
Common Stock or other equity securities of the Company, without the consent of
Sunrise and the Company. All such periods commenced on August 14, 1995, and the
agreements not to sell of the Company's other officers lapsed on February 14,
1996. In addition, certain of such principal stockholders have pledged an
aggregate of 9,502,148 shares of Common Stock beneficially owned by them to
their respective banks as collateral to secure indebtedness owed to such banks.
Any shares acquired by lenders pursuant to such pledge arrangements would not be
subject to any agreements not to sell. Moreover, the Company and Sunrise may, in
their sole discretion and any time without notice, release all or any portion of
the securities subject to agreements not to sell.
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<PAGE> 57
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 55,000,000 shares of Common Stock. As of
April 1, 1996, 34,448,768 shares of Common Stock were outstanding. In addition,
5,391,594 shares of Common Stock were reserved for issuance upon exercise of
outstanding warrants and options. If the maximum number of shares of Common
Stock are sold in the Offering, 41,448,768 shares of Common Stock will be
outstanding and 6,091,594 shares of Common Stock (plus such number of shares as
may become issuable as a result of antidilution adjustments) will be reserved
for issuance upon exercise of outstanding warrants and options.
COMMON STOCK
Each outstanding share of Common Stock entitles the holder to one vote on
all matters requiring a vote of stockholders. Since the Common Stock does not
have cumulative voting rights, the holders of shares having more than 50% of the
voting power, if they choose to do so, may elect all the directors of the
Company and the holders of the remaining shares would not be able to elect any
directors. See "Principal Stockholders."
Subject to the rights of holders of any series of preferred stock that may
be issued in the future, the holders of the Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. See "Price Range of Common Stock and Dividend
Policy." In the event of a voluntary or involuntary liquidation of the Company,
all shareholders are entitled to a pro rata distribution of the assets of the
Company remaining after payment of claims of creditors and liquidation
preferences of any preferred stock. Holders of Common Stock have no conversion
or preemptive rights. All outstanding shares of Common Stock are, and the shares
of Common Stock offered hereby by the Company when issued and paid for will be,
fully paid and nonassessable.
The transfer agent for the Common Stock is Harris Trust Company of New
York, 77 Water Street, New York, New York 10005.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock,
none of which is outstanding, the terms of which may be fixed by the Board of
Directors. It is not possible to state the actual effect of any issuance of one
or more series of preferred stock upon the rights of holders of Common Stock
until the Board of Directors of the Company determines the respective rights of
the holders of one or more series of the preferred stock. Such effects might,
however, include: (a) reduction of the amount of funds otherwise available for
payment of cash dividends on Common Stock; (b) restrictions on the payment of
cash dividends on Common Stock; (c) dilution of the voting power of the Common
Stock, to the extent that any series of issued preferred stock has voting rights
or is convertible into Common Stock; and (d) the holders of Common Stock not
being entitled to share in the assets of the Company upon liquidation until
satisfaction of liquidation preferences, if any, in respect of any outstanding
series of preferred stock. Additionally, preferred stock may be issued through a
depositary mechanism thereby increasing the amount of preferred stock that could
be issued.
LEGAL MATTERS
The legality of the securities offered hereby will be passed on for the
Company by Andrea D. Kantor, Associate General Counsel of the Company. Ms.
Kantor does not own any shares of Common Stock but has options to purchase
36,750 shares of Common Stock, 33,750 of which are currently exercisable.
Certain other legal matters will be passed on for the Company by Duane, Morris &
Heckscher, New York, New York. Certain legal matters relating to FDA regulations
will be passed on for the Company by Kleinfeld, Kaplan & Becker, Washington,
D.C. Certain legal matters in connection with the Offering will be passed upon
for the Underwriter by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York,
New York.
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EXPERTS
The audited consolidated financial statements of the Company and its
subsidiary at December 31, 1995 and 1994, and for each of the years in the three
year period ended December 31, 1995 included herein have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, included herein, and upon the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-2 under the Securities Act with respect to the shares of Common Stock being
offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the Offering, reference is made to the Registration Statement,
including the exhibits thereto, which may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the Registration Statement may be obtained from the Commission at its
principal office upon payment of prescribed fees. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance where such contract or other document
is an exhibit to the Registration Statement, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by such reference.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Financial Statements:
Consolidated Balance Sheets -- December 31, 1995 and 1994........................... F-3
Consolidated Statements of Operations -- Years ended December 31, 1995, 1994 and
1993............................................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity -- Years ended December
31, 1995, 1994 and 1993.......................................................... F-5
Consolidated Statements of Cash Flows -- Years ended December 31, 1995, 1994 and
1993............................................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Interferon Sciences, Inc.:
We have audited the consolidated financial statements of Interferon
Sciences, Inc. and subsidiary as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Interferon
Sciences, Inc. and subsidiary at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
New York, New York
February 16, 1996
F-2
<PAGE> 61
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................................... $ 7,221,108 $ 330,617
Accounts and other receivables................................ 47,351 35,546
Inventories................................................... 815,978 1,029,158
Consignment inventory......................................... 220,410
Receivables from NPDC and affiliated companies................ 27,211 20,001
Prepaid expenses and other current assets..................... 76,000 55,221
------------ ------------
TOTAL CURRENT ASSETS............................................ 8,187,648 1,690,953
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land.......................................................... 140,650 140,650
Buildings and improvements.................................... 7,384,102 7,384,102
Equipment..................................................... 4,369,424 4,301,317
------------ ------------
11,894,176 11,826,069
Less accumulated depreciation and amortization................ (6,760,181) (6,013,839)
------------ ------------
5,133,995 5,812,230
------------ ------------
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $1,049,923
AND $1,018,989
Patent costs.................................................. 341,596 355,019
OTHER ASSETS.................................................... 289,343 323,900
------------ ------------
$ 13,952,582 $ 8,182,102
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt.......................... $ $ 409,275
Accounts payable.............................................. 872,552 882,090
Accrued expenses.............................................. 253,254 746,935
Amount due NPDC............................................... 134,347
Amount due Purdue for repurchase of common stock.............. 300,000
------------ ------------
TOTAL CURRENT LIABILITIES....................................... 1,125,806 2,472,647
------------ ------------
COMMON STOCK SUBJECT TO REPURCHASE COMMITMENT (0 AND 682,494
SHARES)....................................................... 2,729,976
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share;
authorized -- 5,000,000 shares; none issued and
outstanding................................................
Common stock, par value $.01 per share;
authorized -- 55,000,000 and 30,000,000 shares; issued and
outstanding -- 34,448,768 and 19,509,291 shares............ 344,488 195,093
Capital in excess of par value.................................. 82,641,859 65,572,243
Accumulated deficit............................................. (70,159,571) (62,787,857)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY...................................... 12,826,776 2,979,479
------------ ------------
$ 13,952,582 $ 8,182,102
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 62
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
REVENUES
Sales
Alferon N Injection.................................. $ 1,260,933 $ 979,425 $
Research products and other revenues................. 34,729 186,506 51,323
----------- ------------ -----------
Total revenues............................... 1,295,662 1,165,931 51,323
COSTS AND EXPENSES
Cost of goods sold and excess/idle production
costs............................................. 3,076,249 2,778,109 1,880,563
Research and development (net of $181,992, $150,000
and $138,996 of rental income received from
NPDC)............................................. 3,726,230 5,195,699 4,151,158
General and administrative (includes $1,241,145,
$1,314,380 and $1,015,700 of charges from NPDC for
management fees and reimbursements of expenses)... 1,939,864 4,974,224 2,366,897
----------- ------------ -----------
Total costs and expenses..................... 8,742,343 12,948,032 8,398,618
----------- ------------ -----------
LOSS FROM OPERATIONS................................... (7,446,681) (11,782,101) (8,347,295)
Interest and other income............................ 155,478 157,929 255,344
Net (loss) gain on sales of marketable securities.... (300,430) 3,297
Interest expense (includes $34,889 in 1995 to
NPDC)............................................. (80,511) (152,935) (371,208)
----------- ------------ -----------
NET LOSS............................................... $(7,371,714) $(12,077,537) $(8,459,862)
========== =========== ==========
NET LOSS PER SHARE..................................... $ (.28) $ (.62) $ (.55)
========== =========== ==========
Weighted average number of shares outstanding.......... 26,646,654 19,594,285 15,432,287
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 63
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TOTAL
--------------------- EXCESS OF ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAR VALUE DEFICIT EQUITY
---------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992..... 14,411,118 $144,111 $58,263,555 $(42,250,458) $16,157,208
Net proceeds from issuance of
common stock and warrants to D.
Blech and his designees........ 5,000,000 50,000 9,200,501 9,250,501
Issuance of common stock as
required by various
agreements..................... 40,967 410 142,975 143,385
Proceeds from exercise of common
stock options.................. 12,200 122 39,203 39,325
Net loss......................... (8,459,862) (8,459,862)
---------- -------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1993..... 19,464,285 194,643 67,646,234 (50,710,320) 17,130,557
Net proceeds from sale of common
stock and warrants............. 610,000 6,100 1,470,335 1,476,435
Commitment to purchase common
stock from Purdue Frederick,
Runham and Banela.............. (994,994) (9,950) (3,970,026) (3,979,976)
Net proceeds from the sale of
common stock to Sentinel
Charitable Remainder Trust..... 430,000 4,300 425,700 430,000
Net loss......................... (12,077,537) (12,077,537)
---------- -------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1994..... 19,509,291 195,093 65,572,243 (62,787,857) 2,979,479
Net proceeds from public sale of
common stock................... 12,000,000 120,000 12,374,035 12,494,035
Termination of commitment to
repurchase common stock from
Purdue Frederick............... 619,994 6,200 2,473,776 2,479,976
Net proceeds from sale of common
stock to Fujimoto Diagnostics,
Inc............................ 1,034,483 10,345 1,472,155 1,482,500
Net proceeds from sale of common
stock to Amarillo Cell Culture
Company, Inc. and its
licensee....................... 375,000 3,750 738,750 742,500
Issuance of common stock in
exchange for warrants to
purchase common stock.......... 900,000 9,000 (9,000)
Proceeds from exercise of common
stock options.................. 10,000 100 19,900 20,000
Net loss......................... (7,371,714) (7,371,714)
---------- -------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1995..... 34,448,768 $344,488 $82,641,859 $(70,159,571) $12,826,776
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 64
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS USED FOR OPERATIONS:
Net loss.................................................. $ (7,371,714) $(12,077,537) $(8,459,862)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization........................... 777,276 2,926,439 1,017,949
Reduction of other assets............................... 150,000 50,000
Net loss (gain) on sales of marketable securities......... 300,430 (3,297)
Change in operating assets and liabilities:
Receivables from NPDC and affiliated companies.......... (7,210) (1,500) 1,500
Inventories............................................. 213,180 1,129,847 (49,752)
Consignment inventory................................... 220,410 (220,410)
Accounts and other receivables.......................... (561,805) (647,897) 12,023
Prepaid expenses and other current assets............... (20,779) 154,958 (162,338)
Accounts payable and accrued expenses................... (503,219) 604,359 (148,859)
------------ ------------ -----------
Net cash used for operations....................... (7,103,861) (7,781,311) (7,792,636)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of marketable securities............................ 6,490,406 4,153,719
Purchases of marketable securities........................ (2,496,445) (3,891,422)
Additions to property, plant and equipment................ (68,107) (82,498) (87,412)
Additions to intangible and other assets.................. (132,954) (101,345) (84,537)
------------ ------------ -----------
Net cash (used for) provided by investing
activities....................................... (201,061) 3,810,118 90,348
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from purchase agreement with D. Blech........ 430,000 9,355,500
Net proceeds from sale of common stock and warrants....... 14,719,035 1,476,435
(Decrease) increase in advances from NPDC................. (134,347) 126,297 (38,627)
Reduction of long-term debt............................... (409,275) (1,727,989) (1,542,481)
Purchase of common stock from Runham and Banela........... (250,000)
Loans from principal stockholders......................... 1,870,000
Repayment of loans from principal stockholders............ (1,870,000)
Proceeds from exercise of common stock options............ 20,000 39,325
------------ ------------ -----------
Net cash provided by financing activities.......... 14,195,413 54,743 7,813,717
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents........ 6,890,491 (3,916,450) 111,429
------------ ------------ -----------
Cash and cash equivalents at beginning of year.............. 330,617 4,247,067 4,135,638
------------ ------------ -----------
Cash and cash equivalents at end of year.................... $ 7,221,108 $ 330,617 $ 4,247,067
============= ============= ============
Cash paid for interest expense.............................. $ 79,166 $ 205,190 $ 329,643
============= ============= ============
NON CASH INVESTING AND FINANCING ACTIVITIES:
Issuances of common stock in payment of liabilities....... $ $ $ 143,385
============= ============= ============
Commitment to purchase common stock....................... $ $ 3,729,976 $
============= ============= ============
Offset of receivables in settlement of obligation to
repurchase common stock................................. $ 550,000 $ 700,000 $
============= ============= ============
Termination of commitment to repurchase common stock...... $ 2,479,976 $ $
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 65
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION, BUSINESS, TRANSACTIONS WITH NATIONAL PATENT
Since January 1981, Interferon Sciences, Inc. (the "Company") has been
primarily engaged in the research and development of pharmaceutical products
containing alpha interferon for the treatment of viral diseases, cancers and
diseases of the immune system. ALFERON N Injection is a preparation for the
treatment of genital warts by local injection. In October 1989, the Company
received from the Food and Drug Administration ("FDA") approval to market
ALFERON N Injection for the intralesional treatment of refractory or recurring
external genital warts in patients 18 years of age or older. Nationwide
distribution of ALFERON N Injection commenced during July 1991 (See Note 5).
Additional products under development by the Company include ALFERON LDO and
ALFERON N Gel. ALFERON LDO is a low dose oral liquid alpha interferon
preparation which the Company believes has potential for treating HIV-infected
individuals and possibly other viral diseases. ALFERON N Gel is a topical
interferon preparation which the Company believes has potential in the treatment
of cervical dysplasia, recurrent genital herpes, other viral diseases and
cancers (See Note 6).
All commercial sales by the Company of ALFERON N Injection have been to two
distributors, Purdue Pharma L.P. ("Purdue Pharma," and collectively with its
affiliates, "Purdue") in the United States and Industria Farmaceutica Andromaco,
S.A. De C.V. in Mexico.
The Company is a party to a management agreement with National Patent
Development Corporation ("NPDC") pursuant to which certain legal, financial and
administrative services have been provided by employees of NPDC. The fee for
such services in 1995, 1994 and 1993 was $120,000 annually. In addition, during
such years NPDC provided to the Company, at its estimated cost, certain
personnel and services which the Company used in its operations. For the years
ended December 31, 1995, 1994 and 1993, such charges amounted to $1,121,145,
$1,194,380 and $895,700, respectively. Commencing January 1, 1996, the NPDC
personnel who had been providing such services to the Company became employees
of the Company, and will provide certain services to NPDC at the Company's
estimated cost. The Company was also covered under NPDC's insurance policies
except for certain policies which the Company has in its own name beginning in
1994. The Company's allocated portion of insurance costs was $15,000, $114,000
and $291,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
The Company owns the buildings which contain its offices and laboratories
and presently leases out a portion of the buildings to NPDC. Total occupancy
costs for the years ended December 31, 1995, 1994 and 1993 were approximately
$729,000, $760,000 and $686,000, respectively. NPDC paid to the Company as rent
NPDC's proportionate share of such occupancy costs (based on both square feet
occupied and number of personnel), which amounted to $181,992, $150,000 and
$138,996, respectively.
See Note 16 for information with respect to royalty obligations to NPDC.
TRANSACTIONS WITH DAVID BLECH
On May 28, 1993, David Blech, the Chief Executive Officer, sole shareholder
and a director of D. Blech & Company, Incorporated ("DBC"), and the Company
entered into a Purchase Agreement (the "Purchase Agreement"), pursuant to which
David Blech or his designees purchased for $4.00 per unit, an aggregate of
2,500,000 units ("Units"), each Unit consisting of two shares of Common Stock,
one Class A Warrant (the "Class A Warrants") to purchase one share of Common
Stock at an exercise price of $3.25 per share and one Class B Warrant (the
"Class B Warrants") to purchase one share of Common Stock at an exercise price
of $5.00 per share. The Class A Warrants and the Class B Warrants expire on
August 31, 2000. The purchasers have certain registration rights as to the
securities acquired by them under the Purchase Agreement. The Company paid DBC a
$500,000 fee for its services in connection with the Purchase Agreement, and
incurred $100,000 in legal and other fees. In addition, fees totalling
approximately $105,000 relating to this transaction were paid by issuance of
Common Stock to another party.
F-7
<PAGE> 66
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concurrently with the execution of the Purchase Agreement, the Company
entered into a consulting agreement with DBC under which the Company agreed to
pay $100,000 per year, payable monthly, to DBC for advisory services with
respect to the Company's field of interest and business, strategic and
commercial matters related to the biotechnology industry. The term of the
consulting agreement was one year and commenced on June 1, 1993.
On May 13, 1994, the Company filed a registration statement with the
Securities and Exchange Commission, which statement was amended on July 1, 1994
and was subsequently amended again on August 10, 1994, covering a proposed
public offering of 2,000,000 shares of Common Stock through DBC as underwriter.
On September 22, 1994, DBC could not meet certain minimum capital requirements
and was forced to discontinue its operations. Consequently, the Company had to
cancel the proposed public offering of Common Stock.
On December 6, 1994, the Company entered into a Purchase and Exchange
Agreement with David Blech and certain other parties pursuant to which Sentinel
Charitable Remainder Trust purchased 430,000 shares of the Common Stock for
$430,000. In addition, pursuant to such agreement David Blech and another
individual agreed to exchange an aggregate of 462,500 Class A Warrants and
1,200,000 Class B Warrants for an aggregate of 332,500 shares of Common Stock.
The issuance and exchange of the shares of Common Stock by David Blech and the
other individual pursuant to the Purchase and Exchange Agreement were completed
during the first quarter of 1995.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation -- The financial statements include the
operations of the Company and Interferon Sciences Development Corporation
("ISD"), its wholly owned subsidiary.
Statements of cash flows -- For purposes of the statements of cash flows,
the Company considers all highly liquid instruments with maturities of three
months or less from purchase date to be cash equivalents.
Property, plant and equipment -- Property, plant and equipment are carried
at cost. Major additions and betterments are capitalized while maintenance and
repairs which do not extend the lives of the assets are expensed currently.
Depreciation -- The Company provides for depreciation and amortization of
plant and equipment following the straight-line method over the estimated useful
lives of such assets as follows:
<TABLE>
<CAPTION>
ESTIMATED
CLASS OF ASSETS USEFUL LIVES
-------------------------------------------------------------- --------------
<S> <C>
Buildings and Improvements.................................... 15 to 30 years
Equipment..................................................... 5 to 10 years
</TABLE>
Intangible assets -- The Company capitalizes costs to obtain and maintain
patents and licenses. Patent costs are amortized over 17 years and license costs
are amortized over 5 years, each on a straight-line basis. To the extent a
patent is determined to be worthless, the related capitalized cost is
immediately expensed.
Revenue recognition -- Sales are recorded generally upon shipment of
product. However, when a sale is made subject to a right of return, revenues are
not recognized until notification by the customer that the product has been
resold, and the related product is recorded as consignment inventory until such
notification.
Collaborative agreement research and development revenues and costs -- The
costs of performing research and development are reported when incurred and are
included in research and development expenses and the purchase of equipment in
accordance with the nature of the costs incurred. Generally, the Company matches
its collaborative research and development revenues in the same accounting
periods in which the
F-8
<PAGE> 67
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related research costs are incurred. However, when the revenues are exhausted,
the Company has the option to continue the research activities at its own
expense.
Inventories -- Inventories, consisting of raw materials, work in process
and finished goods, are stated at the lower of cost or market on a FIFO basis.
Inventories, if any, which are expected to become obsolete before sale or use in
research are written off.
Pension plan -- The Company's employees are included in NPDC's pension
plan. The Company provides for its allocable share of such costs as they accrue.
Effective December 31, 1991, the plan benefits were frozen (See Note 13).
Net loss per share -- Net loss per share is based on the weighted average
number of shares of Common Stock outstanding during the period.
NOTE 3. LIQUIDITY
The Company has experienced significant operating losses since its
inception in 1980. As of December 31, 1995, the Company had an accumulated
deficit of approximately $70.2 million. For the years ended December 31, 1995,
1994 and 1993, the Company had losses from operations of approximately $7.4
million, $11.8 million and $8.3 million, respectively. Although the Company
received FDA approval to market ALFERON N Injection in October 1989, it has had
only limited revenue from the sale of ALFERON N Injection. In order for the
Company to operate profitably, the Company must sell significantly more ALFERON
N Injection. Increased sales will depend primarily upon the expansion of
existing markets and/or successful attainment of FDA approval to market ALFERON
N Injection for additional uses, of which there can be no assurance. There can
be no assurance that sufficient quantities of ALFERON N Injection will be sold
to allow the Company to operate profitably.
In August and September 1995, the Company completed the sale of 12,000,000
shares of Common Stock for an aggregate of $14,400,000 with net proceeds to the
Company of $12,494,000 (the "August/September Offering"). However, the Company
has limited financial resources as of December 31, 1995 with which to support
future operating activities and to satisfy its financial obligations as they
become payable. Insufficient funds will require the Company further to delay,
scale back, or eliminate certain or all of its research and development programs
or license third parties to commercialize products or technologies that the
Company would otherwise seek to develop itself or to shut down or curtail its
manufacturing facility. Consequently, management is actively pursuing raising
required additional capital through private placements and public offerings of
the Company's securities and by licensing rights to its injectable, topical or
oral formulations of alpha interferon or entering into collaborative or other
arrangements with corporate partners.
NOTE 4. AGREEMENTS WITH HOFFMANN-LAROCHE
In June 1988, Hoffmann-LaRoche, Inc. ("Hoffmann") and the Company entered
into an agreement (the "1988 License Agreement") pursuant to which the Company
received a non-exclusive license from Hoffmann, under a U.S. Patent held by
Hoffmann, which enabled the Company to sell ALFERON N Injection in the United
States for the treatment of genital warts. As part of the 1988 License
Agreement, Hoffmann received 100,000 shares of Common Stock in June 1988, the
value of which was recorded as a license cost on the balance sheet in 1988. In
addition, when the Company granted marketing rights to Purdue for the
distribution of ALFERON N Injection (See Note 5), the Company became obligated
to pay Hoffmann $250,000. Such obligation was recorded by the Company as an
additional license cost in 1988. The 1988 License Agreement also required the
Company to pay Hoffmann a royalty of 8% of net sales of ALFERON N Injection up
to $20,000,000 and 9.5% of net sales in excess of $20,000,000 in any calendar
year. Net sales were defined as the invoiced amount of product sold by the
Company (other than to a marketing partner) or by a marketing partner, less
certain deductions. Finally, as a result of receiving FDA approval for
F-9
<PAGE> 68
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALFERON N Injection in 1989, the Company was obligated to issue 484,262 shares
of Common Stock to Hoffmann as a prepaid royalty against a portion of future net
sales by the Company. Such shares, valued at $2,100,000, were issued in February
1990. The value of the Common Stock previously issued for the license as well as
the additional license cost of $250,000 recorded in 1988 were also to be
credited against a portion of future royalties payable to Hoffmann.
In January 1991, the Company and Hoffmann signed an agreement (the
"Hoffmann Gel Agreement") pursuant to which the Company could obtain supplies of
Hoffmann's bulk purified recombinant interferon for use in the Company's topical
products, thereby eliminating the need for the Company to build a recombinant
interferon manufacturing facility. Alternatively, under the Hoffmann Gel
Agreement, the Company could use its own natural alpha interferon in ALFERON N
Gel under a license from Hoffmann.
In January 1991, the 1988 License Agreement was amended to allow the
Company to sell ALFERON N Injection for diseases which are refractory to
recombinant interferon therapy and to redefine net sales as the invoiced amount
of product sold by the Company in arms' length transactions, less certain
deductions.
In March 1992, the Company obtained a non-exclusive license from Hoffmann,
which allowed the Company to make, have made, use and sell in the United States,
without a potential patent infringement claim from Hoffmann, natural alpha
interferon for the oral treatment of human diseases.
F. Hoffmann-LaRoche Ltd. ("Roche"), the parent of Hoffmann, also has been
issued patents covering human alpha interferon in many countries throughout the
world. As of March 31, 1995, the Company obtained a non-exclusive license from
Hoffmann and Roche (the "1995 License Agreement") which grants the Company the
worldwide rights to make, use, and sell, without a potential patent infringement
claim from Hoffmann or Roche, any formulation of Natural Alpha Interferon. The
1995 License Agreement permits the Company to grant marketing rights with
respect to Natural Alpha Interferon products to third parties, except that the
Company cannot grant marketing rights with respect to injectable products in any
country in which Hoffmann or Roche has patent rights covered by the 1995 License
Agreement (the "Hoffmann Territory") to any third party not listed on a schedule
of approximately 50 potential marketing partners without the consent of Hoffmann
and Roche, which consent cannot be unreasonably withheld. The 1995 License
Agreement will enable the Company, if it is successful in obtaining necessary
regulatory approvals, to expand the formulations of Natural Alpha Interferon it
makes, uses, and sells in the United States and the rest of the world and to
market its products for the treatment of additional indications.
On May 6, 1994, the United States Patent and Trademark Office issued an
Office Action in Reexamination on the Hoffmann patent and rejected all of the 14
claims in the Hoffmann patent. Claims in a patent under reexamination are valid
and enforceable until such time as a final disposition on the claims is reached.
On July 11, 1994, Hoffmann filed a response objecting to the Patent Office's
rejection of such claims. On July 20, 1995, the Patent Office issued another
Office Action in Reexamination on the Hoffmann patent and rejected three of the
claims in the Hoffmann patent and concluded that the remaining 11 claims are
patentable. In November 1995, Hoffmann filed another response objecting to the
Patent Office's rejection of such three claims. The outcome of such
reexamination of the Hoffmann patent cannot be determined at this time.
Under the terms of the 1995 License Agreement, the Company is obligated to
pay Hoffmann and Roche an aggregate royalty on net sales (as defined) of Natural
Alpha Interferon products by the Company in an amount equal to (i) 8% of net
sales in the Hoffmann Territory, and 2% of net sales outside the Hoffmann
Territory of products manufactured in the Hoffmann Territory, up to $75,000,000
of net sales in any calendar year and (ii) 9.5% of net sales in the Hoffmann
Territory, and 2% of net sales outside the Hoffmann Territory of products
manufactured in the Hoffmann Territory, in excess of $75,000,000 of net sales in
any calendar year, provided that the total royalty payable in any calendar year
shall not exceed $8,000,000. Net sales are defined as the invoiced amount of
product sold by the Company, less certain deductions. The 1995 License
F-10
<PAGE> 69
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Agreement can be terminated by the Company on 30 days' notice with respect to
the United States patent, any individual foreign patent, or all patents owned by
Hoffmann or Roche. If the 1995 License Agreement is terminated with respect to
the patents owned by Hoffmann or Roche in a specified country, such country is
no longer included in the Hoffmann Territory. If Hoffmann's United States
patent, or the claims in such patent which the marketing of Natural Alpha
Interferon products by the Company might infringe, were found to be invalid, the
Company intends to terminate the 1995 License Agreement with respect to
Hoffmann's United States patent, which would eliminate the royalty payable to
Hoffmann and Roche on net sales in the United States of products manufactured in
the United States. Under the terms of the 1995 License Agreement, the unused
credits against future royalties from the 1988 License Agreement are available
as offsets against 50% of the Company's future royalty obligations to Hoffmann
until the Company obtains an FDA approval to market ALFERON N Injection for an
indication other than genital warts. The value of the Company's Common Stock
which may be credited against royalties payable is the lesser of its value on
the date of issuance and on the date the Company exercises its right to credit
such stock against its royalty obligations. As of December 31, 1995, based upon
the market value of the Common Stock, the Company had approximately $719,437 of
credits available to offset 50% of its future royalty obligations to Hoffmann.
During the second quarter of 1994, the Company adopted a policy of
amortizing prepaid royalties at the greater of the straight line rate over a
five-year period or the amount of royalties incurred based upon sales. During
the third quarter of 1994, the Company, in its quarterly evaluation of whether
the unamortized balance of prepaid royalties is realizable, determined that it
was prudent to write off such prepaid royalties. The Company based this decision
on the reduced market price during the third quarter of the Company's Common
Stock, the uncertainty created by the decision of the United States Patent and
Trademark Office in May 1994 to reexamine the claims of the Hoffmann patent and
upon sales of ALFERON N Injection. During 1994, the amortization and writeoff of
prepaid royalties totalling $2,100,000 were included as general and
administrative expense in the statements of operations and reflected as
depreciation and amortization in the statements of cash flows.
Through December 31, 1995, the Company had incurred $715,669 of royalties
due Hoffmann resulting from sales of ALFERON N Injection. However, the Company
applied $626,054 of the prepayments previously made to Hoffmann against the
amount due.
NOTE 5. AGREEMENTS WITH PURDUE
In 1988, the Company entered into exclusive marketing and distribution
agreements with Mundipharma Pharmaceutical Company ("Mundipharma"), a related
entity of Purdue, with respect to ALFERON N Injection, which agreements have
been amended from time to time (as amended, the "Purdue Marketing Agreements").
In 1991, Mundipharma assigned the right to market and distribute ALFERON N
Injection in the United States to its affiliate, Purdue Pharma, and retained the
right to market and distribute ALFERON N Injection in Canada, Western Europe,
Israel, India, Japan, and Australia. In 1993, the Company reacquired the right
to market and distribute ALFERON N Injection in Japan.
In 1994, an amendment to these agreements was entered into (the "1994
Purdue Amendment") pursuant to which the Company reacquired the right to market
ALFERON N Injection in Western Europe and other countries and took over from
Purdue the conduct and funding of clinical trials. Specifically, the 1994 Purdue
Amendment provided, among other things, that (i) the Company reacquired the
right to market ALFERON N Injection in Western Europe, Israel, India, and
Australia (the "Returned Territories"), subject to the payment to Mundipharma of
a royalty equal to 3% of net sales (as defined) in the Returned Territories
until Mundipharma has received royalty payments equal to $3 million ($5 million
under certain circumstances) and 1% of net sales thereafter; (ii) the Company
assumed responsibility for the conduct and funding of clinical trials to develop
new indications for ALFERON N Injection; Purdue was granted the right to obtain
marketing and distribution rights for each additional indication of ALFERON N
Injection at such time
F-11
<PAGE> 70
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as the Company files a product license application or receives FDA approval for
any such additional indication, by reimbursing the Company for some or all of
its clinical costs plus an additional lump-sum payment; and the Company was
given the right to reacquire the rights to market and distribute ALFERON N
Injection in the United States and Canada after each of the first three
additional indications if Purdue does not exercise its right to obtain marketing
and distribution rights for such indication, at a price based on a percentage of
total sales or gross profit during a specified period of all products subject to
the agreement; (iii) the Company agreed to purchase for $4.00 per share 994,994
shares of Common Stock held by Purdue and certain related parties over a period
of 18 months; (iv) Purdue Pharma and Mundipharma retained the right to market
and distribute ALFERON N Injection in the United States and Canada,
respectively, subject to the Company's option (the "First Option") to reacquire
such rights at a price of $12 million until July 25, 1995 ($10 million if the
First Option had been exercised before January 1995); provided that the First
Option could not have been exercised unless the Company simultaneously paid the
unpaid balance of the purchase price for the 994,994 shares referred to above,
which payment would have reduced the First Option exercise price; and (v) Purdue
ordered 45,000 vials of ALFERON N Injection at an agreed upon price. Unless
certain minimum purchase levels are reached during certain annual periods, or
minimum payments are made to the Company in lieu of such minimum purchases, the
Company can terminate Purdue Pharma and Mundipharma's exclusive marketing and
distribution rights. All marketing and distribution costs are borne by Purdue
Pharma and Mundipharma in their respective territories.
In March 1995, the Company entered into an amendment to the 1994 Purdue
Amendment (the "March 1995 Purdue Amendment") pursuant to which the Company
obtained an option, exercisable until June 30, 1995 (the "Second Option"), to
reacquire the remaining marketing and distribution rights from Purdue Pharma and
Mundipharma. The exercise price of the Second Option was 2.5 million shares of
Common Stock; provided that the Option could not have been exercised unless the
Company simultaneously paid the unpaid balance of the purchase price for the
994,994 shares referred to above. If, 18 months from the date of exercise of the
Second Option by the Company (the "Valuation Date"), the 2.5 million shares of
Common Stock did not have a value of at least $9,037,807 (which value was
calculated using the average of the closing bid and asked prices of the Common
Stock as quoted by the NASDAQ National Market System for the ten trading days
ending on the day prior to the Valuation Date), the Company was required to
issue a note for the shortfall. Such note was required to bear interest at the
prime rate and became due and payable 24 months from the Valuation Date. The
Company agreed that it would utilize its best efforts to ensure that the 2.5
million shares of Common Stock would be registered and freely tradeable 18
months from the date of exercise of the Second Option. If the Second Option were
exercised, the First Option, the royalty obligations, and Purdue's right to
obtain marketing and distribution rights for new indications contained in the
1994 Purdue Amendment would have terminated.
In July 1995, the Company entered into an amendment, which became effective
upon the sale on August 22, 1995 of more than the minimum number of shares of
Common Stock in the August/September Offering, to the 1994 Purdue Amendment and
the March 1995 Purdue Amendment (the "July 1995 Purdue Amendment"), pursuant to
which the balance owed to Purdue for the 62,500 shares of Common Stock required
to be repurchased in April 1995 was forgiven and the Company obtained an option,
exercisable until December 31, 1996 (the "Third Option"), to reacquire the
remaining marketing and distribution rights from Purdue Pharma and Mundipharma.
The exercise price of the Third Option is $5,029,133, subject to reduction as
set forth below, plus 750,000 shares of Common Stock (350,000 shares of Common
Stock if the Third Option had been exercised on or before December 31, 1995).
The Company has agreed that it will utilize its best efforts to ensure that such
shares will be registered and freely tradeable upon issuance. The Third Option
may not be exercised unless the Company simultaneously pays the unpaid balance
of the purchase price for any of the 994,994 shares referred to above then held
by Purdue. As of March 1, 1996, Purdue held 619,994 of such shares and such
unpaid balance was $2,479,976. The cash exercise price of the Third Option will
be reduced by the aggregate of (i) the amount paid by the Company to Purdue to
repurchase any of such 619,994
F-12
<PAGE> 71
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares then held by Purdue, (ii) if Purdue sells any or all of such 619,994
shares, which may only be done until December 31, 1996 with the consent of the
Company, the amount received by Purdue from such sale, and (iii) the amount by
which the transfer price for vials sold by the Company to Purdue Pharma or
Mundipharma exceeds $25 per vial. If the Third Option is exercised, the royalty
obligations and Purdue's right to obtain marketing and distribution rights for
new indications contained in the 1994 Purdue Amendment will terminate. If the
Third Option is not exercised, the Company will no longer have the obligation to
repurchase the 619,994 shares. In July 1995, the Company and Purdue also agreed
to extend the date on which the Company was obligated to repurchase the final
619,994 shares of Common Stock if the July 1995 Purdue Amendment did not become
effective from July 25, 1995 to August 31, 1995 (or such earlier date on which
the August/September Offering shall have terminated prior to the sale of the
minimum number of shares of Common Stock).
The Company entered into the 1994 Purdue Amendment, the March 1995 Purdue
Amendment, and the July 1995 Purdue Amendment to provide it with greater
financial flexibility and control over the worldwide marketing and distribution
of ALFERON N Injection. The July 1995 Purdue Amendment provides the Company with
the flexibility to enter into a strategic alliance with a multinational
marketing partner if it elects to exercise the Third Option.
Under the terms of the Purdue Marketing Agreements, the Company receives a
transfer price for the sale of vials of ALFERON N Injection to Purdue Pharma or
Mundipharma. Such transfer price is calculated based on either a manufacturing
cost formula or a fixed price formula (subject to consumer price index
adjustments); provided, however, that if the Company chooses the fixed price
formula, the Company may be entitled to additional payments if the net sales
price received by Purdue Pharma or Mundipharma for ALFERON N Injection exceeds
certain levels. Pursuant to the July 1995 Purdue Amendment, the transfer price
for each vial will be payable $25 in cash and the balance as an offset to the
cash exercise price of the Third Option. If the Third Option is not exercised,
such offsets will have no value. The Company may choose the applicable formula
every six months. Except as described below and in Note 9, Purdue Pharma and
Mundipharma had no recourse against the Company in the event that they were
unable to resell ALFERON N Injection to third parties. Purdue Pharma and
Mundipharma presently have no such recourse.
In January 1994, pursuant to the 1994 Purdue Amendment, Purdue ordered
45,000 vials of ALFERON N Injection at an agreed upon price. In addition, the
Company agreed, under certain circumstances, to replace up to 15,000 vials of
ALFERON N Injection from Purdue's existing inventory at an agreed upon
discounted price. The Company also granted Purdue an option, exercisable (in
whole only) until July 25, 1995, to purchase an additional 100,000 vials of
ALFERON N Injection at an agreed upon discounted price. The option was not
exercised.
NOTE 6. RESEARCH AND DEVELOPMENT AGREEMENT WITH INTERFERON SCIENCES RESEARCH
PARTNERS, LTD.
During January 1984, the Company organized ISD to act as the sole general
partner of Interferon Sciences Research Partners, Ltd., a New Jersey limited
partnership (the "Partnership"). The Company and the Partnership entered into a
development contract whereby the Company received substantially all of the net
proceeds ($4,414,475) of the Partnership's public offering of limited
partnership interests. The Company used the proceeds to perform research,
development and clinical testing on behalf of the Partnership for the
development of ALFERON Gel containing recombinant interferon.
In connection with the formation of the Partnership, ISD agreed to make
additional cash contributions for purposes of continuing development of ALFERON
Gel if the Partnership exhausted its funds prior to development of such product.
ISD is wholly dependent upon the Company for capital to fund such commitment.
The Partnership exhausted its funds during 1986, and the Company contributed a
total of $1,997,000 during the period from 1986 to 1990, for the continued
development of ALFERON Gel. During May 1987, the Company filed a Product License
Application with the FDA for approval to market
F-13
<PAGE> 72
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALFERON Gel. At a meeting with the FDA in February, 1990, the FDA indicated that
additional process development and clinical trials would be necessary prior to
approval of ALFERON Gel. The Company believed, at that time, that the costs to
complete the required process development and clinical trials would be
substantial, and there could be no assurance that the clinical trials would be
successful.
As a result of the above events, in March 1992, the Company withdrew its
FDA Product License Application for ALFERON Gel containing recombinant
interferon. In place of single species recombinant interferon, previously
ALFERON Gel's active ingredient, the Company commenced, in 1992, further
development of ALFERON Gel using the Company's natural source multi-species
alpha interferon ("ALFERON N Gel"). Assuming successful development and
commercial exploitation of ALFERON N Gel, the Company may be obligated to pay
the Partnership royalties equal to 4% of the Company's net sales of ALFERON N
Gel and 15% of revenues received from sublicensing ALFERON N Gel.
NOTE 7. AGREEMENT WITH FUJIMOTO DIAGNOSTICS, INC.
In the first quarter of 1995, the Company concluded an agreement with
Fujimoto Diagnostics, Inc. ("Fujimoto"), a pharmaceutical company located in
Osaka, Japan, for the commercialization of the Company's ALFERON N Injection and
ALFERON N Gel in Japan. In connection with the agreement, Fujimoto purchased
$1,500,000 of Common Stock at $1.45 per share (the then market price), all of
which cash was received during the first quarter of 1995, and agreed to purchase
an additional $500,000 of Common Stock on February 6, 1996 at the then market
price. Such additional $500,000 of Common Stock has to date not been purchased.
To date, Fujimoto has incurred higher than anticipated development expenses, and
Fujimoto has determined that there may be greater difficulties in obtaining
Japanese regulatory approval than originally anticipated. Fujimoto has therefore
requested that the Company renegotiate such investment agreement and the related
commercialization agreement. The Company intends to meet with Fujimoto to
consider its request.
NOTE 8. MARKETABLE SECURITIES
As of January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). There was no material effect on the
consolidated financial statements as a result of the adoption of this principle.
The Company's marketable securities consisted of United States Government
obligations. Under SFAS No. 115, the Company classifies these debt securities as
available-for-sale and records the securities at their fair value. Unrealized
holding gains and losses on available-for-sale securities are excluded from
earnings and are reported as a separate component of stockholders' equity until
realized. The effect of the change in accounting was not material to the Company
and all of the Company's marketable equity securities were sold by December 31,
1994.
A decline in the market value of any available-for-sale security below cost
that is deemed other than temporary is charged to earnings resulting in the
establishment of a new cost basis for the security.
Realized gains and losses for securities classified as available-for-sale
are included in earnings and are derived using the specific identification
method for determining the cost of securities sold.
Proceeds from the sale of marketable securities were $6,490,406 for the
year ended December 31, 1994. Net realized losses on such sales for the year
ended December 31, 1994 were $300,430.
F-14
<PAGE> 73
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. INVENTORIES
Inventories, consisting of material, labor and overhead, are classified as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
-------- ----------
<S> <C> <C>
Finished goods....................................................... $344,550 $ 342,330
Work in process...................................................... 162,567 303,111
Raw materials........................................................ 308,861 383,717
-------- ----------
$815,978 $1,029,158
======== =========
</TABLE>
Inventories at December 31, 1995 and 1994 are stated at their estimated net
realizable value.
Finished goods inventory at December 31, 1995 consisted of vials of ALFERON
N Injection.
Consignment inventory at December 31, 1994 consisted of ALFERON N Injection
shipped to Purdue during 1994; however such shipment was subject to a right of
return until notification by Purdue that the product had been resold. Such
inventory was resold by Purdue in 1995.
Cost of goods sold and excess/idle production costs for 1995, 1994 and 1993
includes the write-down of 1995, 1994 and 1993 inventories to their estimated
net realizable value.
NOTE 10. LONG TERM DEBT
On March 13, 1990, the Company borrowed $4.2 million from United States
Capital Corporation, an indirect subsidiary of The Hong Kong and Shanghai Bank,
at an effective interest rate of approximately 12.4%. The proceeds of the loan
were used to finance (i) the expansion of the Company's manufacturing facility
and (ii) the purchase of additional equipment for the facility.
During December 1994, the Company renegotiated the terms of the loan such
that the $409,275 balance on the loan was extended, with interest, until April
1995 when the obligation was paid in full.
The Company currently has no long-term debt.
NOTE 11. INCOME TAXES
On May 30, 1991, NPDC exchanged the Company's Class B Common Stock for an
equal number of shares of the Company's Common Stock. As a result, on that date
the Company ceased to be included in NPDC's consolidated Federal income tax
return. For periods subsequent to May 30, 1991, the Company files its own
consolidated Federal income tax return, including its wholly-owned subsidiary.
As a result of the loss allocation rules contained in the Federal income
tax consolidated return regulations, approximately $6,008,000 of net operating
loss carryforwards, which expire in 2001-2006, are available to the Company upon
ceasing to be a member of NPDC's consolidated return group. In addition, the
Company has net operating loss carryforwards from tax years prior to joining the
NPDC consolidated return group of approximately $2,147,000, which expire in
1996-1998. Further, the Company has net operating loss carryforwards for periods
subsequent to May 31, 1991, and through December 31, 1994 of approximately
$29,263,000, which expire in 2006-2009. For the year ended December 31, 1995,
the Company had a tax net operating loss of $7,047,000, which expires in 2010.
At present, the Company believes that the events culminating with the first
closing of the August/ September Offering on August 22, 1995 resulted in an
"ownership change" under Internal Revenue Code Section 382 with respect to its
stock (See Note 3). The Company believes that as a result of the ownership
change, the future utility of its pre-change net operating losses are limited to
an annual amount of
F-15
<PAGE> 74
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $3,230,000. In addition, the Company has approximately $116,000 of
investment tax credit carryforwards and $973,000 of research and development
credit carryforwards that are, in accordance with Internal Revenue Code Section
383, subject to the annual limitation under Internal Revenue Code Section 382.
The following table summarizes the tax net operating losses as of December 31,
1995:
<TABLE>
<CAPTION>
YEARS
DESCRIPTION AMOUNT EXPIRE
- ----------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Subject to Section 382........................................... $42,116,000 1996 - 2010
Not Subject to Section 382....................................... 2,349,000 2010
-----------
$44,465,000
===========
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
determined, based on the Company's recent history of annual net losses, that a
full valuation allowance is appropriate.
The Company has, as of December 31, 1995, deferred tax assets of
approximately $16,207,000, deferred tax liabilities of approximately $222,000
and a valuation allowance of approximately $15,985,000. At January 1, 1995, the
valuation allowance was $13,303,000. The increase to the valuation allowance of
$2,682,000 is due primarily to net operating losses.
The tax effects that give rise to these deferred tax assets and liabilities
consist of the following as of December 31, 1995:
<TABLE>
<S> <C>
DEFERRED TAX ASSETS
Net operating loss carryforwards....................................... $ 15,118,000
Tax credit carryforwards............................................... 1,089,000
------------
16,207,000
DEFERRED TAX LIABILITIES
Property and equipment, principally due to differences in
depreciation......................................................... (222,000)
------------
Net deferred tax asset................................................. 15,985,000
Valuation allowance.................................................... (15,985,000)
------------
Net deferred tax asset after valuation allowance....................... $ --
============
</TABLE>
NOTE 12. STOCK OPTIONS, WARRANTS AND OTHER SHARES RESERVED
In 1981, the Company adopted the 1981 Stock Option Plan (the "Plan"),
authorizing a committee of the Board of Directors to grant options, over a
10-year period, to purchase not more than 500,000 shares of Common Stock to
officers, directors, employees and consultants of the Company. Since 1981, the
Plan has been amended several times to increase the number of shares issuable
under the Plan to 3,500,000 and to extend the Plan until 2001. Pursuant to the
terms of the Plan, no option may be exercised after 10 years from the date of
grant. The exercise price for any option issued may not be less than 85 percent
of the market price of the common stock on the date of issuance.
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 1994 and 1993, include 20,000 shares under a warrant
agreement with U.S. Capital Corporation. Such warrants expired unexercised in
1995.
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 1993, include 375,000 shares under warrant agreements
with Purdue. Such warrants were terminated in 1994 as a result of the amended
marketing and distribution agreements with Purdue (See Note 5).
F-16
<PAGE> 75
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options and warrants outstanding and exercisable, and shares reserved for
issuance, at December 31, 1995, include 331,483 shares, and at December 31, 1994
and 1993, include 200,000 shares, under warrant agreements with the underwriter
of the October 1991 public offering of Common Stock.
Options and warrants outstanding and shares reserved for issuance at
December 31, 1995, 1994 and 1993, and options and warrants exercisable at
December 31, 1995 and 1994, include 125,000 shares under a warrant agreement
with Strategic Growth International, the Company's outside public relations
advisor.
Options and warrants outstanding and exercisable, and shares reserved for
issuance, at December 31, 1995, include 595,458 shares, and at December 31, 1994
and 1993, include 5,000,000 shares, under a warrant agreement with David Blech.
During 1995, David Blech and certain other parties exchanged 2,250,000 Class A
Warrants and 2,250,000 Class B Warrants for 900,000 shares of Common Stock (See
Note 1).
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 1995 and 1994 include 61,000 shares under a warrant
agreement issued as a commission in connection with the sale of shares of Common
Stock to an institutional investor.
Options and warrants outstanding and shares reserved for issuance at
December 31, 1995 include 1,123,333 shares under warrant agreements with the
underwriter of the August/September 1995 Offering.
Changes in options and warrants outstanding during the years ended December
31, 1995, 1994 and 1993, options and warrants exercisable and shares reserved
for issuance at December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
PRICE RANGE NUMBER OF
PER SHARE SHARES
------------ ----------
<S> <C> <C>
Options and Warrants
Outstanding at December 31, 1992................................ $2.25 -- $10.00 3,502,550
Granted......................................................... 2.13 -- 5.00 5,138,250
Exercised....................................................... 2.25 -- 4.25 (12,200)
Terminated...................................................... 3.50 -- 9.00 (28,750)
------------ ----------
Outstanding at December 31, 1993................................ 2.13 -- 10.00 8,599,850
Granted......................................................... 2.00 -- 2.70 2,318,700
Exercised....................................................... --
Terminated...................................................... 3.13 -- 10.00 (2,638,200)
------------ ----------
Outstanding at December 31, 1994................................ 2.00 -- 6.50 8,280,350
Granted......................................................... 1.56 -- 4.20 1,920,274
Exercised....................................................... 2.00 -- (10,000)
Terminated...................................................... 2.00 -- 6.50 (4,909,000)
------------ ----------
Outstanding at December 31, 1995................................ 1.56 -- 4.20 5,281,624
=========
Exercisable
December 31, 1993............................................... 2.13 -- 10.00 7,738,950
=========
December 31, 1994............................................... 2.00 -- 6.50 7,841,200
=========
December 31, 1995............................................... 1.56 -- 4.20 3,575,891
=========
Shares reserved for issuance
December 31, 1993............................................... 8,885,320
=========
December 31, 1994............................................... 8,571,320
=========
December 31, 1995............................................... 5,391,594
=========
</TABLE>
F-17
<PAGE> 76
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. PENSION AND INVESTMENT PLANS
NPDC had a Defined Benefit Pension Plan (the "Plan") for employees of
certain divisions and subsidiaries including those of the Company. Benefits were
based primarily on years of service and a fixed rate of benefits per year of
service. Contributions were intended to provide not only for benefits attributed
to service to date but also for those expected to be earned in the future.
Effective December 31, 1991, the Plan benefits were frozen. In the future,
accrued vested benefits will be paid to terminated participants in the form of a
lump sum distribution in cases where the accrued vested benefit is less than
$3,500. Terminated participants can elect a lump sum distribution if the accrued
vested benefit is greater than $3,500 but less than $7,500.
In the event that the accrued vested benefit exceeds the $7,500 payable
limit as outlined in the Plan, payment will be deferred until a terminated
vested participant reaches age 65 or elects early retirement, at age 60 or
later. As of December 31, 1995, 1994 and 1993, the projected benefit obligation
of the NPDC Plan was $5,890,000, $4,469,000 and $4,917,000 and the fair value of
plan assets was $4,352,900, $3,405,000 and $3,528,000. The discount rate used in
determining the actuarial present value of the projected benefit obligation was
7.25%. The expected long-term rate of return on assets was 10 percent.
Effective March 1, 1992, NPDC adopted the 1992 401(k) Savings Plan (the
"Savings Plan"). Effective December 31, 1991, the Plan participants would no
longer accrue benefits under the Defined Benefit Pension Plan, but became
eligible to participate in NPDC's Savings Plan.
NPDC's Savings Plan is for employees who have completed one year of
service; however, past vesting service credit was recognized for employees who
participated in the Savings Plan at the date of initial enrollment, March 1,
1992.
The Savings Plan permits pre-tax contributions to the Savings Plan by
participants pursuant to Section 401(k) of the Internal Revenue Code of 2% to 6%
of base compensation. The Company matches 40% of the participants' eligible
contributions based on a formula set forth in the Savings Plan. For 1995, 1994
and 1993, the Company's contribution to the Savings Plan was $49,000, $53,000
and $49,000, respectively. Participants are fully vested in their contributions
and may withdraw such contributions at time of employment termination, or at age
59 1/2, or earlier in the event of financial hardship. Amounts otherwise are
paid at retirement or in the event of death or disability. Employer
contributions vest at a rate of 20% per year.
The Savings Plan is administered by a trustee appointed by the Board of
Directors of NPDC and all contributions are held by the trustee and invested at
the participants' direction in various mutual funds.
The Company does not provide any post-retirement benefits, other than
pensions, to its employees.
NOTE 14. PROFIT SHARING PLAN
Effective June 6, 1988, the Company adopted the 1988 Profit Sharing Plan
(the "Profit Sharing Plan") providing key employees and consultants with an
opportunity to share in the profits of the Company. The Profit Sharing Plan is
administered by the Company's Compensation Committee.
Pursuant to the terms of the Profit Sharing Plan, the Compensation
Committee, in its sole discretion, based upon the significance of the employee's
contributions to the operations of the Company, selects certain key employees
and consultants of the Company who are entitled to participate in the Profit
Sharing Plan and determines the extent of their participation. The amount of the
Company's profits available for distribution to the participants (the
"Distribution Pool") is the lesser of (a) 10% of the Company's income before
taxes and profit sharing expense and (b) an amount equal to 100% of the base
salary for such year of all the participants in the Profit Sharing Plan. A
number of key employees are eligible to participate in the Profit Sharing Plan.
F-18
<PAGE> 77
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Compensation Committee may require as a condition to participation that
a participant remain in the employ of the Company until the end of the fiscal
year for which payment is to be made. Payments required to be made under the
Profit Sharing Plan must be made within 10 days of the filing of the Company's
tax return. To date, there have been no contributions by the Company under the
Profit Sharing Plan.
NOTE 15. NON-CASH FINANCING AND INVESTING ACTIVITIES
During the years ended December 31, 1995, 1994 and 1993 the following
noncash financing and investing activities occurred:
1995:
Offset of receivables in settlement of obligation to repurchase Common
Stock for $550,000 and forgiveness of balance due.
By agreement, the Company terminated a commitment to repurchase 619,994
shares, valued at $2,479,976, of Common Stock from Purdue.
1994:
The Company committed to purchase 932,494 shares, valued at $3,729,976, of
its Common Stock from Purdue.
Offset of receivables of $700,000 in settlement of obligation to repurchase
Common Stock.
1993:
The Company issued 40,967 shares, valued at $143,385, of Common Stock as
required by various agreements.
NOTE 16. COMMITMENTS AND CONTINGENCIES
As consideration for the transfer to the Company of certain licenses,
rights and assets upon the formation of the Company by NPDC, the Company agreed
to pay NPDC royalties of $1,000,000, but such payments will be made only with
respect to those years in which the Company has income before income taxes, and
will be limited to 25% of such income.
See Notes 4 and 6 for information relating to royalties payable to Roche
and the Partnership, respectively.
In October 1989, the Company entered into a license agreement with a
non-affiliated party for co-exclusive rights to certain low dose oral
formulations of interferon. The Company will be required to pay a royalty of 10%
of net sales, as defined, of products produced and marketed by the Company that
may be developed under the license agreement.
NOTE 17. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-19
<PAGE> 78
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable, approximate fair market
values, because of short maturities or interest rates that approximate current
rates.
F-20
<PAGE> 79
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES AS OF WHICH
SUCH INFORMATION IS GIVEN.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
The Company......................... 9
Risk Factors........................ 9
Use of Proceeds..................... 18
Price Range of Common Stock and
Dividend Policy................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Financial Information...... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 22
Business............................ 27
Management.......................... 45
Principal Stockholders.............. 48
Certain Transactions................ 50
Underwriting........................ 52
Description of Securities........... 55
Legal Matters....................... 55
Experts............................. 56
Additional Information.............. 56
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
INTERFERON SCIENCES, INC.
7,000,000 SHARES
OF
COMMON STOCK
------------------
PROSPECTUS
------------------
SUNRISE SECURITIES
CORP.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized statement of all expenses in
connection with the issuance and distribution of the securities being registered
hereby. All are estimated except the SEC and NASD fees.
<TABLE>
<S> <C>
SEC registration fee...................................................... $ 5,733
NASD fee.................................................................. 1,963
NASDAQ listing fee........................................................ 7,500
Accounting fees and expenses.............................................. 25,000
Legal fees and expenses................................................... 40,000
Blue sky expenses and counsel fees........................................ 12,500
Cost of printing and engraving............................................ 40,000
Transfer agent's fees..................................................... 1,000
Miscellaneous............................................................. 16,304
--------
Total........................................................... $150,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 9 of the Company's Restated Certificate of Incorporation provides
that the Company shall, to the full extent then permitted by law, indemnify all
persons whom it may indemnify pursuant thereto. In addition, Article 10 of the
Company's Restated Certificate of Incorporation eliminates personal liability of
its directors to the full extent permitted by Section 102(b)(7) of the General
Corporation Law of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation to indemnify its directors and officers against expenses
(including attorney's fees), judgments, fines and amounts paid in settlements
actually and reasonably incurred by them in connection with any action, suit or
proceeding brought by third parties, if such directors or officers acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reason to believe their conduct was unlawful. In a derivative
action, i.e., one by or in the right of the corporation, indemnification may be
made only for expenses actually and reasonably incurred by directors and
officers in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interest of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant officers or directors are
reasonably entitled to indemnity for such expenses despite such adjudication of
liability.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a corporation may eliminate or limit the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. No such provision shall eliminate or limit
the liability of a director for any act or omission occurring prior to the date
when such provision becomes effective.
Section 8 of the Underwriting Agreement (filed as Exhibit 1.1) provides
that the Underwriter will indemnify and hold harmless the Company and each
director, officer, or controlling person of the Company from and against any
liability caused by any statement or omission in the Registration Statement or
Prospectus based upon information furnished in writing to the Company by the
Underwriter expressly for use therein.
The Company currently has a $1,000,000 directors' and officers' liability
insurance policy.
II-1
<PAGE> 81
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<C> <C> <S>
(a) -- Exhibits
1.1 -- Form of Underwriting Agreement between the Registrant and Sunrise Securities
Corp.**
1.2 -- Form of Subscription Agreement.**
1.3 -- Form of Escrow Agreement among the Registrant, Sunrise Securities Corp., and Bank
of Montreal Trust Company.**
3.1 -- Restated Certificate of Incorporation of the Registrant. Incorporated herein by
reference to Exhibit 3B of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988.
3.2 -- Certificate of Amendment of Restated Certificate of Incorporation of the
Registrant. Incorporated herein by reference to Exhibit 3.4 of Registration
Statement No. 33-40902.
3.3 -- Certificate of Amendment to the Restated Certificate of Incorporation of the
Registrant. Incorporated herein by reference to Exhibit 3.2 of Registration
Statement No. 33-78952.
3.4 -- Certificate of Amendment to the Restated Certificate of Incorporation of the
Registrant*
3.5 -- By-Laws of the Registrant, as amended. Incorporated herein by reference to Exhibit
3.2 of Registration Statement No. 2-7117.
4.1 -- Underwriter's Warrant dated October 29, 1991 between the Registrant and
Commonwealth Associates. Incorporated herein by reference to Exhibit 4.2 of
Registration Statement No. 33-40902.
4.2 -- Agam Warrant dated October 29, 1991 between the Registrant and Jacob Agam.
Incorporated herein by reference to Exhibit 4.3 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1991.
4.3 -- Form of Purchase Option issued to the Underwriter in connection with the
August/September Offering. Incorporated herein by reference to Exhibit 4.1 of
Registration Statement No. 33-59479.
4.4 -- Form of Underwriter's Purchase Options.**
5.1 -- Opinion of Andrea D. Kantor, Esq., Associate General Counsel of the Registrant, as
to the legality of the securities being registered.**
10.1 -- Transfer and License Agreement among National Patent, Hydron Laboratories, Inc. and
the Registrant dated as of January 1, 1981. Incorporated herein by reference to
Exhibit 10.8 of the Registrant's Registration Statement No. 2-71117.
10.2 -- Management Services Agreement dated January 1, 1981 between the Registrant and
National Patent. Incorporated herein by reference to Exhibit 10.9 of Registration
Statement No. 2-71117.
10.3 -- Registrant's 1981 Stock Option Plan, as amended. Incorporated herein by reference
to Exhibit 10.3 to Registration Statement No. 33-59479.
10.4 -- Cross License Agreement dated October 26, 1984 between Registrant and the
Partnership. Incorporated herein by reference to Exhibit 10V of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1984.
10.5 -- Deleted
10.6 -- Deleted
10.7 -- Deleted
10.8 -- Deleted
10.9 -- Supply Agreement dated September 25, 1992 between the Registrant and Celltech
Limited. Incorporated herein by reference to Exhibit 10.27 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992.
10.10 -- Deleted
10.11 -- Profit Sharing Plan of the Registrant. Incorporated herein by reference to Exhibit
10X of the Registrant's Annual Report on Form 10-K for the year ended December 31,
1988.
10.12 -- License Agreement dated October 20, 1989 between the Registrant and Amarillo Cell
Culture Company, Incorporated. Incorporated herein by reference to Exhibit 10Y of
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989.
10.13 -- Deleted
10.14 -- Deleted
</TABLE>
II-2
<PAGE> 82
<TABLE>
<C> <C> <S>
10.15 -- Distribution Agreement dated June 14, 1991 between Purdue Pharma L.P. and the
Registrant. Incorporated herein by reference to Exhibit 10.26 of Registration
Statement No. 33-40902.
10.16 -- Amended and Restated Distribution Agreement dated June 14, 1991 between Mundipharma
Pharmaceutical Corporation and the Registrant. Incorporated herein by reference to
Exhibit 10.27 of Registration Statement No. 33-40902.
10.17 -- Deleted
10.18 -- NPDC 401(k) Savings Plan dated January 9, 1992 effective March 1, 1992,
Incorporated herein by reference to Exhibit 10.12 to the Registrant's Annual Report
on Form 10-K for the Year ended December 31, 1992.
10.19 -- Amendment dated January 26, 1994 to the Distribution Agreement dated June 14, 1991
between the Registrant and Purdue Pharma L.P. Incorporated herein by to Exhibit
10.18 to the Registrant's Annual Report on Form 10-K for the Year ended December
31, 1993.
10.20 -- Amendment dated January 26, 1994 to the Amended and Restated Distribution Agreement
dated June 14, 1991 between the Registrant and Mundipharma Pharmaceutical Company.
Incorporated herein by reference to Exhibit 10.19 to the Registrant's Annual Report
on Form 10-K for the Year ended December 31, 1993.
10.21 -- Amended and Restated RS Agreement dated January 26, 1994 among the Registrant,
Mundipharma Pharmaceutical Company and Purdue Pharma L.P. Incorporated herein by
reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the
Year ended December 31, 1993.
10.22 -- Agreement dated January 26, 1994 between the Registrant and The Purdue Frederick
Company. Incorporated herein by reference to Exhibit 10.21 to the Registrant's
Annual Report on Form 10-K for the Year ended December 31, 1993.
10.23 -- Agreement dated January 26, 1994 among the Registrant, Banela Corporation and
Runham Corporation. Incorporated herein by reference to Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for the Year ended December 31, 1993.
10.24 -- Deleted
10.25 -- Purchase Agreement dated as of May 28, 1993 between the Registrant and David Blech.
Incorporated herein by reference to Exhibit 10.26 of Registration Statement No.
33-78952.
10.26 -- Form of Warrant to be issued pursuant to the Purchase Agreement. Incorporated
herein by reference to Exhibit 10.28 of Registration Statement No. 33-78952.
10.27 -- Distribution Agreement dated as of February 3, 1994 between Registrant and
Industria Farmaceutica Andromaco, S.A. Incorporated herein by reference to Exhibit
6(a) to the Registrant's Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1994.
10.28 -- Processing and Supply Agreement dated as of September 1, 1994 between Registrant
and Sanofi Winthrop L.P. Incorporated herein by reference to Exhibit 6(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
1994.
10.29 -- Amendment dated March 24, 1995 to Distribution Agreement dated as of February 3,
1994 between Registrant and Industria Farmaceutica Andromaco S.A. Incorporated
herein by reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994.
10.30 -- Purchase and Exchange Agreement dated as of December 6, 1994 between the
Registrant, David Blech and certain designated purchasers. Incorporated herein by
reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
10.31 -- Purchase and Exchange Agreement dated as of January 31, 1995 between the Registrant
and Neoprobe Corp. Incorporated herein by reference to Exhibit 10.32 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
10.32 -- Stock Purchase Agreement dated as of January 24, 1995 between the Registrant and
Fujimoto Diagnostics, Inc. Incorporated herein by reference to Exhibit 10.33 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
10.33 -- Agreement dated as of January 24, 1995 between the Registrant and Fujimoto
Diagnostics, Inc. Incorporated herein by reference to Exhibit 10.34 to the
Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994.
</TABLE>
II-3
<PAGE> 83
<TABLE>
<C> <C> <S>
10.34 -- Form of Stock Agreement dated as of August 31, 1994 between the Registrant and
Dimensional Funds Advisors, Inc. Incorporated herein by reference to Exhibit 10.35
to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
10.35 -- Form of Warrant Agreement dated as of August 31, 1994 between the Registrant and
Capello Capital Corp. Incorporated herein by reference to Exhibit 10.36 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
10.36 -- Amendment dated March 29, 1995 to Agreement dated January 26, 1994 between the
Registrant and Purdue Frederick Company. Incorporated herein by reference to
Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.37 -- Amendment dated March 29, 1995 to Agreement dated January 26, 1994 between the
Registrant, Banela Corporation and Runham Corporation. Incorporated herein by
reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
10.38 -- Amendment dated March 29, 1995 to Distribution Agreement dated June 14, 1991
between the Registrant and Purdue Pharma L.P. Incorporated herein by reference to
Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.39 -- Amendment dated March 29, 1995 to Amended and Restated Distribution Agreement dated
June 14, 1991 between the Registrant and Mundipharma Pharmaceutical Company.
Incorporated herein by reference to Exhibit 10.40 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1994.
10.40 -- Amendment dated March 29, 1995 to Amended and Restated RS Agreement dated January
26, 1994 among the Registrant, Mundipharma Pharmaceutical Company and Purdue Pharma
L.P. Incorporated herein by reference to Exhibit 10.41 to the Registrant's Annual
Report on
Form 10-K for the year ended December 31, 1994.
10.41 -- Letter dated March 29, 1995 between the Registrant and Purdue Pharma L.P.
Incorporated herein by reference to Exhibit 10.42 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1994.
10.42 -- License Agreement, dated as of March 29, 1995, among the Registrant, Hoffmann-La
Roche, Inc., and F. Hoffmann-La Roche Ltd. Incorporated herein by reference to
Exhibit 10.42 to Registration Statement No. 33-59479.
10.43 -- Amendment of ACC/ISI License Agreement, dated April 27, 1995, between Registrant
and Amarillo Cell Culture Company, Incorporated. Incorporated herein by reference
to Exhibit 10.43 to Registration Statement No. 33-59479.
10.44 -- Form of note issued by the Registrant to National Patent Development Corporation,
Biotechnology Investment Group, L.L.C., and Edward Blech Charitable Remainder
Trust. Incorporated herein by reference to Exhibit 10.44 to Registration Statement
No. 33-59479.
10.45 -- Form of note issued by the Registrant to National Patent Development Corporation
and Biotechnology Investment Group, L.L.C. Incorporated herein by reference to
Exhibit 10.45 to Registration Statement No. 33-59479.
10.46 -- Amendment, dated July 31, 1995, to the Distribution Agreement, dated June 14, 1991,
between the Registrant and Purdue Pharma L.P. Incorporated herein by reference to
Exhibit 10.46 to Registration Statement No. 33-59479.
10.47 -- Amendment, dated July 31, 1995, to the Amended and Restated Distribution Agreement,
dated June 14, 1991, between the Registrant and Mundipharma Pharmaceutical Company.
Incorporated herein by reference to Exhibit 10.47 to Registration Statement No.
33-59479.
10.48 -- Letter dated July 31, 1995, between The Purdue Frederick Company and the Registrant
Incorporated herein by reference to Exhibit 10.48 to the Registration Statement No.
33-59479.
10.49 -- Letter dated July 31, 1995, by and among the Registrant, Banela Corporation, and
Runham Corporation. Incorporated herein by reference to Exhibit 10.49 to
Registration Statement
No. 33-59479.
10.50 -- Amended and Restated R S Agreement, dated July 31, 1995, by and among the
Registrant, Mundipharma Pharmaceutical Company, and Purdue Pharma L.P. Incorporated
herein by reference to Exhibit 10.50 to Registration Statement No. 33-59479.
</TABLE>
II-4
<PAGE> 84
<TABLE>
<C> <C> <S>
10.51 -- Settlement Agreement, dated April 27, 1995, among the Registrant, Amarillo Cell
Culture Company, Incorporated, Pharma Pacific Management Pty. Ltd., Pharma Pacific
Pty. Ltd., Pharma Pacific Ltd., and Fernz Corporation Limited. Incorporated herein
by reference to Exhibit 10.51 to Registration Statement No. 33-59479.
10.52 -- PPM/ACC Sub License Agreement, dated April 27, 1995, between Pharma Pacific
Management Pty. Ltd and Amarillo Cell Culture Company, Incorporated. Incorporated
herein by reference to Exhibit 10.52 to Registration Statement No. 33-59479.
10.53 -- Letter Agreement, dated April 29, 1992, between the Registrant and Strategic Growth
International, Inc. Incorporated herein by reference to Exhibit 10.53 to
Registration Statement No. 33-59479.
10.54 -- Agreement, dated May 27, 1993, between the Registrant and Strategic Growth
International, Inc. Incorporated herein by reference to Exhibit 10.54 to
Registration Statement No. 33-59479.
10.55 -- Lease Agreement, dated August 1, 1995, between the Registrant and National Patent
Development Corporation. Incorporated herein by reference to Exhibit 10.55 to
Registration Statement No. 33-59479.
10.56 -- Amendment dated January 1, 1996 to Management Services Agreement dated January 1,
1981 between the Registrant and National Patent Development Corporation.
Incorporated herein by reference to Exhibit 10.47 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995.
23.1 -- Consent of Independent Auditors.**
23.2 -- Consent of Andrea D. Kantor (included in Exhibit 5.1).**
</TABLE>
(b) Financial Statement Schedules:
None
- ---------------
* Previously filed.
** Filed herewith.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act, as amended (the "Securities Act") 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 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, 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
Securities Act and will be governed by the final adjudication of such issue.
A. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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.
II-5
<PAGE> 85
B. 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;
(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 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; and
(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;
(2) That, for the purpose of determining any liability under the
Securities Act, 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 remains unsold at the
termination of the offering.
II-6
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and the State of New York, on this 3rd
day of April, 1996.
INTERFERON SCIENCES, INC.
By: /s/ LAWRENCE M. GORDON
------------------------------------
Lawrence M. Gordon
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in
their capacities on April 3, 1996.
<TABLE>
<C> <S>
/s/ MARTIN M. POLLAK Chairman of the Board
- ---------------------------------------------
Martin M. Pollak
/s/ JEROME I. FELDMAN Chairman of the Board's Executive Committee,
- --------------------------------------------- Treasurer and Director
Jerome I. Feldman
/s/ SAMUEL H. RONEL, PH.D. Vice Chairman of the Board
- ---------------------------------------------
Samuel H. Ronel, Ph.D.
/s/ LAWRENCE M. GORDON Chief Executive Officer and Director
- --------------------------------------------- (Principal Executive Officer)
Lawrence M. Gordon
/s/ STANLEY G. SCHUTZBANK, PH.D. President and Director
- ---------------------------------------------
Stanley G. Schutzbank, Ph.D.
Director
- ---------------------------------------------
Leon Botstein, Ph.D.
Director
- ---------------------------------------------
Sheldon L. Glashow, Ph.D
/s/ SCOTT N. GREENBERG Director
- ---------------------------------------------
Scott N. Greenberg
Director
- ---------------------------------------------
Roald Hoffmann, Ph.D
/s/ OGDEN R. REID Director
- ---------------------------------------------
Ogden R. Reid
/s/ DONALD W. ANDERSON Controller (Principal Accounting and Financial
- --------------------------------------------- Officer)
Donald W. Anderson
</TABLE>
The foregoing constitute a majority of the members of the Board of
Directors.
II-7
<PAGE> 87
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement between the Registrant and Sunrise
Securities Corp.**
1.2 -- Form of Subscription Agreement.**
1.3 -- Form of Escrow Agreement among the Registrant, Sunrise Securities Corp.,
and Bank of Montreal Trust Company.**
3.1 -- Restated Certificate of Incorporation of the Registrant. Incorporated
herein by reference to Exhibit 3B of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988.
3.2 -- Certificate of Amendment of Restated Certificate of Incorporation of the
Registrant. Incorporated herein by reference to Exhibit 3.4 of
Registration Statement No. 33-40902.
3.3 -- Certificate of Amendment to the Restated Certificate of Incorporation of
the Registrant. Incorporated herein by reference to Exhibit 3.2 of
Registration Statement No. 33-78952.
3.4 -- Certificate of Amendment to the Restated Certificate of Incorporation of
the Registrant*
3.5 -- By-Laws of the Registrant, as amended. Incorporated herein by reference
to Exhibit 3.2 of Registration Statement No. 2-7117.
4.1 -- Underwriter's Warrant dated October 29, 1991 between the Registrant and
Commonwealth Associates. Incorporated herein by reference to Exhibit 4.2
of Registration Statement No. 33-40902.
4.2 -- Agam Warrant dated October 29, 1991 between the Registrant and Jacob
Agam. Incorporated herein by reference to Exhibit 4.3 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1991.
4.3 -- Form of Purchase Option issued to the Underwriter in connection with the
August/September Offering. Incorporated herein by reference to Exhibit
4.1 of Registration Statement No. 33-59479.
4.4 -- Form of Underwriter's Purchase Options.**
5.1 -- Opinion of Andrea D. Kantor, Esq., Associate General Counsel of the
Registrant, as to the legality of the securities being registered.**
10.1 -- Transfer and License Agreement among National Patent, Hydron
Laboratories, Inc. and the Registrant dated as of January 1, 1981.
Incorporated herein by reference to Exhibit 10.8 of the Registrant's
Registration Statement No. 2-71117.
10.2 -- Management Services Agreement dated January 1, 1981 between the
Registrant and National Patent. Incorporated herein by reference to
Exhibit 10.9 of Registration Statement No. 2-71117.
10.3 -- Registrant's 1981 Stock Option Plan, as amended. Incorporated herein by
reference to Exhibit 10.3 to Registration Statement No. 33-59479.
10.4 -- Cross License Agreement dated October 26, 1984 between Registrant and
the Partnership. Incorporated herein by reference to Exhibit 10V of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1984.
10.5 -- Deleted
10.6 -- Deleted
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
<C> <C> <S> <C>
10.7 -- Deleted
10.8 -- Deleted
10.9 -- Supply Agreement dated September 25, 1992 between the Registrant and
Celltech Limited. Incorporated herein by reference to Exhibit 10.27 of
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1992.
10.10 -- Deleted
10.11 -- Profit Sharing Plan of the Registrant. Incorporated herein by reference
to Exhibit 10X of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1988.
10.12 -- License Agreement dated October 20, 1989 between the Registrant and
Amarillo Cell Culture Company, Incorporated. Incorporated herein by
reference to Exhibit 10Y of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1989.
10.13 -- Deleted
10.14 -- Deleted
10.15 -- Distribution Agreement dated June 14, 1991 between Purdue Pharma L.P.
and the Registrant. Incorporated herein by reference to Exhibit 10.26 of
Registration Statement No. 33-40902.
10.16 -- Amended and Restated Distribution Agreement dated June 14, 1991 between
Mundipharma Pharmaceutical Corporation and the Registrant. Incorporated
herein by reference to Exhibit 10.27 of Registration Statement No.
33-40902.
10.17 -- Deleted
10.18 -- NPDC 401(k) Savings Plan dated January 9, 1992 effective March 1, 1992,
Incorporated herein by reference to Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the Year ended December 31, 1992.
10.19 -- Amendment dated January 26, 1994 to the Distribution Agreement dated
June 14, 1991 between the Registrant and Purdue Pharma L.P. Incorporated
herein by to Exhibit 10.18 to the Registrant's Annual Report on Form
10-K for the Year ended December 31, 1993.
10.20 -- Amendment dated January 26, 1994 to the Amended and Restated
Distribution Agreement dated June 14, 1991 between the Registrant and
Mundipharma Pharmaceutical Company. Incorporated herein by reference to
Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the
Year ended December 31, 1993.
10.21 -- Amended and Restated RS Agreement dated January 26, 1994 among the
Registrant, Mundipharma Pharmaceutical Company and Purdue Pharma L.P.
Incorporated herein by reference to Exhibit 10.20 to the Registrant's
Annual Report on Form 10-K for the Year ended December 31, 1993.
10.22 -- Agreement dated January 26, 1994 between the Registrant and The Purdue
Frederick Company. Incorporated herein by reference to Exhibit 10.21 to
the Registrant's Annual Report on Form 10-K for the Year ended December
31, 1993.
10.23 -- Agreement dated January 26, 1994 among the Registrant, Banela
Corporation and Runham Corporation. Incorporated herein by reference to
Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the
Year ended December 31, 1993.
10.24 -- Deleted
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
<C> <C> <S> <C>
10.25 -- Purchase Agreement dated as of May 28, 1993 between the Registrant and
David Blech. Incorporated herein by reference to Exhibit 10.26 of
Registration Statement No. 33-78952.
10.26 -- Form of Warrant to be issued pursuant to the Purchase Agreement.
Incorporated herein by reference to Exhibit 10.28 of Registration
Statement No. 33-78952.
10.27 -- Distribution Agreement dated as of February 3, 1994 between Registrant
and Industria Farmaceutica Andromaco, S.A. Incorporated herein by
reference to Exhibit 6(a) to the Registrant's Quarterly Report on Form
10-Q/A for the quarter ended September 30, 1994.
10.28 -- Processing and Supply Agreement dated as of September 1, 1994 between
Registrant and Sanofi Winthrop L.P. Incorporated herein by reference to
Exhibit 6(a) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994.
10.29 -- Amendment dated March 24, 1995 to Distribution Agreement dated as of
February 3, 1994 between Registrant and Industria Farmaceutica Andromaco
S.A. Incorporated herein by reference to Exhibit 10.30 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
10.30 -- Purchase and Exchange Agreement dated as of December 6, 1994 between the
Registrant, David Blech and certain designated purchasers. Incorporated
herein by reference to Exhibit 10.31 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1994.
10.31 -- Purchase and Exchange Agreement dated as of January 31, 1995 between the
Registrant and Neoprobe Corp. Incorporated herein by reference to
Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
10.32 -- Stock Purchase Agreement dated as of January 24, 1995 between the
Registrant and Fujimoto Diagnostics, Inc. Incorporated herein by
reference to Exhibit 10.33 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
10.33 -- Agreement dated as of January 24, 1995 between the Registrant and
Fujimoto Diagnostics, Inc. Incorporated herein by reference to Exhibit
10.34 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994.
10.34 -- Form of Stock Agreement dated as of August 31, 1994 between the
Registrant and Dimensional Funds Advisors, Inc. Incorporated herein by
reference to Exhibit 10.35 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
10.35 -- Form of Warrant Agreement dated as of August 31, 1994 between the
Registrant and Capello Capital Corp. Incorporated herein by reference to
Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
10.36 -- Amendment dated March 29, 1995 to Agreement dated January 26, 1994
between the Registrant and Purdue Frederick Company. Incorporated herein
by reference to Exhibit 10.37 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
</TABLE>
<PAGE> 90
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10.37 -- Amendment dated March 29, 1995 to Agreement dated January 26, 1994
between the Registrant, Banela Corporation and Runham Corporation.
Incorporated herein by reference to Exhibit 10.38 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994.
10.38 -- Amendment dated March 29, 1995 to Distribution Agreement dated June 14,
1991 between the Registrant and Purdue Pharma L.P. Incorporated herein
by reference to Exhibit 10.39 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
10.39 -- Amendment dated March 29, 1995 to Amended and Restated Distribution
Agreement dated June 14, 1991 between the Registrant and Mundipharma
Pharmaceutical Company. Incorporated herein by reference to Exhibit
10.40 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.40 -- Amendment dated March 29, 1995 to Amended and Restated RS Agreement
dated January 26, 1994 among the Registrant, Mundipharma Pharmaceutical
Company and Purdue Pharma L.P. Incorporated herein by reference to
Exhibit 10.41 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994.
10.41 -- Letter dated March 29, 1995 between the Registrant and Purdue Pharma
L.P. Incorporated herein by reference to Exhibit 10.42 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
10.42 -- License Agreement, dated as of March 29, 1995, among the Registrant,
Hoffmann-La Roche, Inc., and F. Hoffmann-La Roche Ltd. Incorporated
herein by reference to Exhibit 10.42 to Registration Statement No.
33-59479.
10.43 -- Amendment of ACC/ISI License Agreement, dated April 27, 1995, between
Registrant and Amarillo Cell Culture Company, Incorporated. Incorporated
herein by reference to Exhibit 10.43 to Registration Statement No.
33-59479.
10.44 -- Form of note issued by the Registrant to National Patent Development
Corporation, Biotechnology Investment Group, L.L.C., and Edward Blech
Charitable Remainder Trust. Incorporated herein by reference to Exhibit
10.44 to Registration Statement No. 33-59479.
10.45 -- Form of note issued by the Registrant to National Patent Development
Corporation and Biotechnology Investment Group, L.L.C. Incorporated
herein by reference to Exhibit 10.45 to Registration Statement No.
33-59479.
10.46 -- Amendment, dated July 31, 1995, to the Distribution Agreement, dated
June 14, 1991, between the Registrant and Purdue Pharma L.P.
Incorporated herein by reference to Exhibit 10.46 to Registration
Statement No. 33-59479.
10.47 -- Amendment, dated July 31, 1995, to the Amended and Restated Distribution
Agreement, dated June 14, 1991, between the Registrant and Mundipharma
Pharmaceutical Company. Incorporated herein by reference to Exhibit
10.47 to Registration Statement No. 33-59479.
10.48 -- Letter dated July 31, 1995, between The Purdue Frederick Company and the
Registrant Incorporated herein by reference to Exhibit 10.48 to the
Registration Statement No. 33-59479.
10.49 -- Letter dated July 31, 1995, by and among the Registrant, Banela
Corporation, and Runham Corporation. Incorporated herein by reference to
Exhibit 10.49 to Registration Statement
No. 33-59479.
</TABLE>
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10.50 -- Amended and Restated R S Agreement, dated July 31, 1995, by and among
the Registrant, Mundipharma Pharmaceutical Company, and Purdue Pharma
L.P. Incorporated herein by reference to Exhibit 10.50 to Registration
Statement No. 33-59479.
10.51 -- Settlement Agreement, dated April 27, 1995, among the Registrant,
Amarillo Cell Culture Company, Incorporated, Pharma Pacific Management
Pty. Ltd., Pharma Pacific Pty. Ltd., Pharma Pacific Ltd., and Fernz
Corporation Limited. Incorporated herein by reference to Exhibit 10.51
to Registration Statement No. 33-59479.
10.52 -- PPM/ACC Sub License Agreement, dated April 27, 1995, between Pharma
Pacific Management Pty. Ltd and Amarillo Cell Culture Company,
Incorporated. Incorporated herein by reference to Exhibit 10.52 to
Registration Statement No. 33-59479.
10.53 -- Letter Agreement, dated April 29, 1992, between the Registrant and
Strategic Growth International, Inc. Incorporated herein by reference to
Exhibit 10.53 to Registration Statement No. 33-59479.
10.54 -- Agreement, dated May 27, 1993, between the Registrant and Strategic
Growth International, Inc. Incorporated herein by reference to Exhibit
10.54 to Registration Statement No. 33-59479.
10.55 -- Lease Agreement, dated August 1, 1995, between the Registrant and
National Patent Development Corporation. Incorporated herein by
reference to Exhibit 10.55 to Registration Statement No. 33-59479.
10.56 -- Amendment dated January 1, 1996 to Management Services Agreement dated
January 1, 1981 between the Registrant and National Patent Development
Corporation. Incorporated herein by reference to Exhibit 10.47 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995.
23.1 -- Consent of Independent Auditors.**
23.2 -- Consent of Andrea D. Kantor (included in Exhibit 5.1).**
</TABLE>
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* Previously filed.
** Filed herewith.
<PAGE> 1
INTERFERON SCIENCES, INC.
UNDERWRITING AGREEMENT
_________, 1996
Sunrise Securities Corp.
919 Third Avenue
New York, New York 10022
Attention: Nathan Low, President
Gentlemen:
The undersigned, Interferon Sciences, Inc., a Delaware corporation (the
"Company"), hereby confirms its agreement with you (the "Underwriter") as
follows:
1. INTRODUCTION.
(a) The Company proposes to issue and sell a minimum of
5,000,000 and a maximum of 7,000,000 shares (the "Shares") of common stock, par
value $.01 per share, of the Company (the "Common Stock") at a price equal to
$2.00 per Share.
(b) The Company is retaining the Underwriter as its exclusive
agent in the offering contemplated hereby (the "Offering"), and understands that
the Underwriter is acting on a "best efforts" basis in connection with the
Offering.
(c) The Company hereby agrees to pay to the Underwriter a
commission equal to 7.0% of the gross proceeds of the sale of the Shares in the
Offering.
(d) The Company hereby agrees to issue and sell to the
Underwriter options (the "Underwriter's Options") to purchase a number of shares
of Common
<PAGE> 2
Stock equal to 10% of the number of Shares sold to purchasers in the Offering
(the "Option Stock") for a purchase price of $.001 per option. The Underwriter's
Options will be exercisable for the Option Stock for a period of four years,
commencing one year after the effective date of the Registration Statement (as
hereinafter defined) at an initial exercise price per share equal to 120% of the
initial public offering price per Share in the Offering. The Option Stock shall
be identical to the Shares. The Underwriter's Options shall be substantially in
the form filed as an exhibit to the Registration Statement. The Underwriter's
Options and the Option Stock are hereinafter referred to collectively as the
"Underwriter's Securities." The Shares and the Underwriter's Securities are
hereinafter referred to collectively as the "Securities."
2. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to,
and agrees with, the Underwriter that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have filed
one or more amendments thereto, on Form S-2 (Registration No. 33- 00845),
including in such registration statement and each such amendment a related
preliminary prospectus, for the registration of the Securities under the
Securities Act of 1933, as amended (the "Act"). As used in this Agreement,
the term "Registration Statement" shall refer to such registration
statement, as amended, on file with the Commission at the time such
registration statement becomes effective under the Act (including the
prospectus, financial statements, exhibits, and all other documents filed
as a part thereof, or incorporated by reference directly or indirectly
therein (such incorporated documents being herein referred to as the
"Incorporated Documents")); provided, however, that such
- 2 -
<PAGE> 3
Registration Statement, at the time it becomes effective, may omit such
information as is permitted to be omitted from such Registration Statement
when it becomes effective under the Act pursuant to Rule 430A of the
General Rules and Regulations of the Commission under the Act (the
"Regulations"), which information (the "Rule 430A Information") shall be
deemed to be included in such Registration Statement when a final
prospectus is filed with the Commission in accordance with Rules 430A and
424(b)(1) or (4) of the Regulations); the term "Preliminary Prospectus"
shall refer to each prospectus included in the Registration Statement, or
any amendments thereto, before the Registration Statement becomes
effective under the Act, the form of prospectus omitting Rule 430A
Information included in the Registration Statement when the Registration
Statement becomes effective under the Act, if applicable (the "Rule 430A
Prospectus"), and any prospectus filed by the Company with your consent
pursuant to Rule 424(a) of the Regulations; and the term "Prospectus"
shall refer to the final prospectus in the form first filed pursuant to
Rule 424(b)(1) or (4) of the Regulations or, if no such filing is
required, the form of final prospectus included in the Registration
Statement.
(b) When the Registration Statement becomes effective under
the Act, and at all times subsequent thereto up to and including the First
Closing Date (as defined in Section 3) and each Additional Closing Date
(as defined in Section 3), and during such longer period as the Prospectus
may be required to be delivered in connection with sales by you, and
during such longer period until any post-effective amendment thereto shall
become effective under the Act, the Registration Statement (and any
post-effective amendment thereto) and the Prospectus (as amended
- 3 -
<PAGE> 4
or as supplemented if the Company shall have filed with the Commission any
amendment or supplement to the Registration Statement or the Prospectus)
will contain all statements which are required to be stated therein in
accordance with the Act and the Regulations, will comply with the Act and
the Regulations, and will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and no event will
have occurred which should have been set forth in an amendment or
supplement to the Registration Statement or the Prospectus which has not
then been set forth in such an amendment or supplement; if a Rule 430A
Prospectus is included in the Registration Statement at the time it
becomes effective under the Act, the Prospectus filed pursuant to Rules
430A and 424(b)(1) or (4) of the Regulations will contain all Rule 430A
Information and all statements which are required to be stated therein in
accordance with the Act or the Regulations, will comply with the Act and
the Regulations, and will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; and each
Preliminary Prospectus, as of the date filed with the Commission, did not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; except that no representation or
warranty is made in this Section 2(b) with respect to statements or
omissions made in reliance upon and in conformity with written information
furnished to the Company as stated in Section 8(b) with respect to the
Underwriter by or on behalf of the Underwriter expressly for inclusion in
the Registration Statement, any Preliminary Prospectus,
- 4 -
<PAGE> 5
or the Prospectus, or any amendment or supplement thereto. Each of the
Incorporated Documents complies in all material respects with the
requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the rules and regulations thereunder.
(c) Neither the Commission nor the "blue sky" or securities
authority of any jurisdiction has issued an order (a "Stop Order")
suspending the effectiveness of the Registration Statement, preventing or
suspending the use of the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto,
refusing to permit the effectiveness of the Registration Statement, or
suspending the registration or qualification of the Securities, nor has
any of such authorities instituted or, to the knowledge of the Company,
threatened to institute any proceedings with respect to a Stop Order.
(d) Any contract, agreement, instrument, lease, or license
required to be described in the Registration Statement or the Prospectus
has been properly and accurately described therein. Any contract,
agreement, instrument, lease, or license required to be filed as an
exhibit to the Registration Statement has been filed with the Commission
as an exhibit to, or has been incorporated as an exhibit by reference
into, the Registration Statement.
(e) The only subsidiary (as defined in the Regulations) of the
Company is Interferon Sciences Development Corporation (the "Subsidiary").
Each of the Company and the Subsidiary is a corporation duly organized,
validly existing, and in good standing under the laws of the jurisdiction
of its incorporation, with full power and authority, and all necessary
consents, authorizations, approvals, orders, licenses, certificates, and
permits of and from, and declarations and filings with,
- 5 -
<PAGE> 6
all federal, state, local, and other governmental authorities and all
courts and other tribunals, to own, lease, license, and use its properties
and assets and to conduct its business in the manner described in the
Prospectus. Each of the Company and the Subsidiary is duly qualified to do
business as a foreign corporation and is in good standing as such in every
jurisdiction in which its ownership, leasing, licensing, or use of
property and assets or the conduct of its business makes such
qualification necessary, except where the failure to be so qualified does
not now have and will not in the future have a material adverse effect on
the operations, business, properties, or assets of the Company and the
Subsidiary taken as a whole.
(f) The authorized capital stock of the Company consists of
55,000,000 shares of Common Stock, of which 22,511,268 shares are
outstanding, and 5,000,000 shares of Preferred Stock (the "Preferred
Stock"), of which no shares are outstanding. Except as disclosed in the
Prospectus, each outstanding share of Common Stock, and each outstanding
share of capital stock of the Subsidiary, is validly authorized and
issued, fully paid, and nonassessable, without any personal liability
attaching to the ownership thereof, has not been issued and is not owned
or held in violation of any preemptive rights of stockholders, and, in the
case of the Subsidiary, is owned of record and beneficially by the
Company, free and clear of all liens, security interests, pledges,
charges, encumbrances, stockholders' agreements, and voting trusts, except
as may be properly described or reflected in the Prospectus. There is no
commitment, plan, or arrangement to issue, and no outstanding option,
warrant, or other right calling for the issuance of, any share of capital
stock of the Company or of the Subsidiary or any security or
- 6 -
<PAGE> 7
other instrument which by its terms is convertible into, or exercisable or
exchangeable for, capital stock of the Company or of the Subsidiary,
except as may be properly described or reflected in the Prospectus. There
is outstanding no security or other instrument which by its terms is
convertible into, or exercisable or exchangeable for, capital stock of the
Company or of the Subsidiary, except as may be properly described or
reflected in the Prospectus. The certificates evidencing the Common Stock
and the Preferred Stock are in proper form.
(g) The consolidated financial statements of the Company and
the Subsidiary included in the Registration Statement and the Prospectus
fairly present, with respect to the Company and the Subsidiary, the
consolidated financial position, the consolidated results of operations,
the consolidated changes in stockholders' equity, the consolidated cash
flows, and the other information purported to be shown therein at the
respective dates and for the respective periods to which they apply. Such
financial statements have been prepared in accordance with generally
accepted accounting principles (except to the extent that certain footnote
disclosures regarding any stub period may have been omitted in accordance
with the applicable rules of the Commission under the Exchange Act)
consistently applied throughout the periods involved, are correct and
complete in all material respects, and are in accordance with the books
and records of the Company and the Subsidiary. KPMG Peat Marwick, the
accountants whose report on the audited financial statements is filed with
the Commission as a part of the Registration Statement, are, and during
the periods covered by their report(s) included in the Registration
Statement and the Prospectus were, independent certified public
accountants with respect to the Company and the Subsidiary within
- 7 -
<PAGE> 8
the meaning of the Act and the Regulations. No other financial statements
are required by Form S-2 or otherwise to be included in the Registration
Statement or the Prospectus. There has at no time been a material adverse
change in the financial condition, results of operations, business,
properties, assets, or liabilities of the Company or the Subsidiary from
the latest information set forth in the Registration Statement or the
Prospectus, except as may be properly described in the Prospectus.
(h) There is no litigation, arbitration, claim, governmental
or other proceeding (formal or informal), or investigation pending,
threatened, or, to the best knowledge of the Company, in prospect (or any
basis therefor known to the Company or the Subsidiary) with respect to the
Company, the Subsidiary, or any of their respective operations,
businesses, properties, or assets, except as may be properly described in
the Prospectus or such as individually or in the aggregate do not now
have, and will not in the future have, a material adverse effect upon the
operations, business, properties, or assets of the Company and the
Subsidiary taken as a whole. Neither the Company nor the Subsidiary is in
violation of, or in default with respect to, any law, rule, regulation,
order, judgment, or decree, except as may be properly described in the
Prospectus or such as in the aggregate do not now have, and will not in
the future have, a material adverse effect upon the operations, business,
properties, assets, or net worth of the Company and the Subsidiary taken
as a whole; nor is the Company or the Subsidiary currently required to
take any action in order to avoid any such violation or default.
- 8 -
<PAGE> 9
(i) Each of the Company and the Subsidiary has good and
marketable title in fee simple absolute to all real properties and good
title to all other properties and assets which the Prospectus indicates
are owned by it, free and clear of all liens, security interests, pledges,
charges, encumbrances, and mortgages (except as may be properly described
in the Prospectus or such as in the aggregate do not now have and will not
in the future have a material adverse effect upon the operations,
business, properties, or assets of the Company and the Subsidiary taken as
a whole). No real property owned, leased, licensed, or used by the Company
or by the Subsidiary lies in an area which is, or to the knowledge of the
Company or the Subsidiary will be, subject to zoning, use, or building
code restrictions which would prohibit, and no state of facts relating to
the actions or inactions of another person or entity or his or its
ownership, leasing, licensing, or use of any real or personal property
exists or will exist which would prevent, the continued effective
ownership, leasing, licensing, or use of such real property in the
business of the Company or the Subsidiary as presently conducted or as the
Prospectus indicates it contemplates conducting (except as may be properly
described in the Prospectus or such as in the aggregate do not now have
and will not in the future have a material adverse effect upon the
operations, business, properties, or assets of the Company and the
Subsidiary taken as a whole).
(j) Except as may be properly described in the Prospectus,
neither the Company, the Subsidiary, nor, to the knowledge of the Company
or the Subsidiary, any other party, is now, or is expected by the Company
or the Subsidiary to be, in violation or breach of, or in default with
respect to, any material provision of any contract, agreement,
- 9 -
<PAGE> 10
instrument, lease, license, arrangement, or understanding which is
material to the Company and the Subsidiary taken as a whole, and each such
contract, agreement, instrument, lease, license, arrangement, and
understanding is in full force and effect and is the legal, valid, and
binding obligation of the parties thereto and is enforceable as to them in
accordance with its terms. Each of the Company and the Subsidiary enjoys
peaceful and undisturbed possession under all material leases and licenses
under which it is operating. Except as described in the Prospectus,
neither the Company nor the Subsidiary is a party to, or bound by, any
contract, agreement, instrument, lease, license, arrangement, or
understanding, or subject to any charter or other restriction, which has
had, or is reasonably likely in the future to have, a material adverse
effect on the financial condition, results of operations, business,
properties, assets, or liabilities of the Company and the Subsidiary taken
as a whole. Neither the Company nor the Subsidiary is in violation or
breach of, or in default with respect to, any term of its certificate of
incorporation (or other charter document) or by-laws.
(k) (i) Except as described in the Prospectus, all material
United States and foreign patents, patent applications, trademarks,
trademark applications, trade names, service marks, copyrights,
franchises, and other intangible properties and assets (all of the
foregoing being herein called "Intangibles") that the Company or the
Subsidiary owns or has pending, or under which it is licensed, are
in good standing and uncontested. ALFERON(R) and ALFERON LDO(R) are
trademarks used by the Company to identify its products, and such
trademarks are protected by registration in the name of the
- 10 -
<PAGE> 11
Company on the principal register in the United States Patent Office.
There is no right under any Intangible necessary to the business of the
Company or of the Subsidiary as presently conducted or as the Prospectus
indicates it contemplates conducting (except as may be so designated in
the Prospectus). Neither the Company nor the Subsidiary has infringed, is
infringing, or has received notice of (or knows of any basis for) a third
party claim of infringement with respect to asserted Intangibles of
others. To the knowledge of the Company or the Subsidiary, there is no
infringement by others of Intangibles of the Company or of the Subsidiary.
To the knowledge of the Company or the Subsidiary, except as set forth in
the Prospectus, there is no Intangible of others which has had, or is
reasonably likely in the future to have, a material adverse effect on the
financial condition, results of operations, business, properties, assets,
or liabilities of the Company and the Subsidiary taken as a whole.
(ii) On the date hereof, (A) the Company's United States Food
and Drug Administration ("FDA") approval with respect to the manufacture
and sale of ALFERON N Injection in the United States for the intralesional
treatment of adults with refractory or recurring external genital warts is
in full force and effect and (B) regulatory approval to sell ALFERON N
Injection for the treatment of genital warts in Mexico is in full force
and effect. All clinical studies conducted or being conducted by or on
behalf of the Company have been and are being conducted in accordance with
accepted standards of good clinical practice. All manufacturing operations
of the Company have been and are being conducted in
- 11 -
<PAGE> 12
substantial compliance with good manufacturing practice regulations. The
Company is in substantial compliance with all FDA requirements and the
Company has not received any notice, report, other document, or
correspondence from the FDA to indicate or suggest any lack of compliance
with any applicable regulatory requirement which has or is reasonably
likely to have a material adverse effect on the financial condition,
results of operations, business, properties, assets or liabilities of the
Company and the Subsidiary taken as a whole, or any withdrawal of the
approval referred to in (A) above.
(l) Neither the Company nor the Subsidiary, nor any director, officer,
agent, employee, or other person associated with, or acting on behalf of, the
Company or the Subsidiary has, directly or indirectly: used any corporate funds
for unlawful contributions, gifts, entertainment, or other unlawful expenses
relating to political activity; made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic political
parties or campaigns from corporate funds; violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate,
payoff, influence payment, kickback, or other unlawful payment. The Company's
internal accounting controls and procedures are sufficient to cause the Company
to comply in all material respects with the Foreign Corrupt Practices Act of
1977, as amended.
(m) The Company has all requisite power and authority to execute,
deliver, and perform this Agreement, the Escrow Agreement (as hereinafter
defined), the Subscription Agreements (as hereinafter defined), and the
Underwriter's Options. All necessary corporate proceedings of the
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<PAGE> 13
Company have been duly taken to authorize the execution, delivery, and
performance by the Company of this Agreement, the Escrow Agreement, the
Subscription Agreements, and the Underwriter's Options. This Agreement has
been duly authorized, executed, and delivered by the Company, is the
legal, valid and binding obligation of the Company, and is enforceable
against the Company in accordance with its terms. The Underwriter's
Options, the Escrow Agreement, and the Subscription Agreements have been
duly authorized by the Company and, when executed and delivered by the
Company, will be the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms. No
consent, authorization, approval, order, license, certificate, or permit
of or from, or declaration or filing with, any federal, state, local, or
other governmental authority or any court or other tribunal is required by
the Company or the Subsidiary for the execution, delivery, or performance
by the Company of this Agreement, the Escrow Agreement, the Subscription
Agreements, or the Underwriter's Options (except filings and orders under
the Act which have been or will be made or obtained before the First
Closing Date or Additional Closing Date, as the case may be, and consents,
authorizations, approvals, orders, licenses, certificates, permits,
declarations, or filings required under "blue sky" or securities laws
which have been obtained at or prior to the date of this Agreement).
Except as may be properly described in the Prospectus, no consent of any
party to any contract, agreement, instrument, lease, license, arrangement,
or understanding to which the Company or the Subsidiary is a party, or to
which any of their respective properties or assets are subject, is
required for the execution, delivery, or performance of this Agreement,
the Escrow Agreement, the Subscription Agreements, and the
- 13 -
<PAGE> 14
Underwriter's Options. Except as may be properly described in the
Prospectus, the execution, delivery, and performance of this Agreement,
the Escrow Agreement, the Subscription Agreements, and the Underwriter's
Options will not violate, result in a breach of, conflict with, result in
the creation or imposition of any lien, charge, or encumbrance upon any
properties or assets of the Company or the Subsidiary pursuant to the
terms of, or (with or without the giving of notice or the passage of time
or both) entitle any party to terminate or call a default under, any such
contract, agreement, instrument, lease, license, arrangement, or
understanding, or violate, result in a breach of, or conflict with any
term of the certificate of incorporation (or other charter document) or
by-laws of the Company or the Subsidiary, or violate, result in a breach
of, or conflict with any law, rule, regulation, order, judgment, or decree
binding on the Company or the Subsidiary or to which any of their
respective operations, businesses, properties, or assets are subject.
(n) Each Share to be delivered on the First Closing Date or
any Additional Closing Date is validly authorized and, when issued and
delivered in accordance with this Agreement, will be validly issued, fully
paid, and nonassessable, without any personal liability attaching to the
ownership thereof, and will not be issued in violation of any preemptive
or similar rights of stockholders, and each purchaser will receive good
title to the Shares purchased by it from the Company, free and clear of
all liens, security interests, pledges, charges, encumbrances,
stockholders' agreements, and voting trusts other than those arising from
the acts of the purchaser. The Option Stock is validly authorized and
reserved for issuance and, when issued and delivered upon the exercise of
the Underwriter's Options and payment
- 14 -
<PAGE> 15
therefor in accordance with the respective terms thereof, will be validly
issued, fully-paid, and nonassessable, without any personal liability
attaching to the ownership thereof, and will not be issued in violation of
any preemptive or similar rights of stockholders. When issued, the
Underwriter's Options will constitute legal, valid, and binding
obligations of the Company to issue and sell, upon exercise thereof and
payment therefor in accordance with the respective terms thereof, the
number and type of securities of the Company called for thereby and the
Underwriter's Options will be enforceable against the Company in
accordance with their respective terms. The Underwriter will receive good
title to the Underwriter's Options purchased by it, free and clear of all
liens, security interests, pledges, charges, encumbrances, restrictions,
stockholders' agreements, and voting trusts other than those arising from
the acts of the Underwriter.
(o) The Securities conform in all material respects to the
descriptions thereof contained in the Registration Statement and the
Prospectus.
(p) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except as
may otherwise be properly described in or contemplated by the Prospectus,
neither the Company nor the Subsidiary has (i) issued any securities or
incurred any liability or obligation, primary or contingent, for borrowed
money, (ii) entered into any transaction not in the ordinary course of
business, or (iii) declared or paid any dividend on its capital stock
other than by the Subsidiary.
(q) Neither the Company nor any of its officers, directors, or
affiliates (as defined in the Regulations), has taken or will take,
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<PAGE> 16
directly or indirectly, to facilitate the sale or resale of any of the
Shares, any action designed to stabilize or manipulate the price of any
security of the Company, or which has caused or resulted in, or which
might in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any security of the Company.
(r) In connection with the public offering consummated in
August and September 1995, the Company obtained from each of the
stockholders listed in the Principal Stockholders table in the Prospectus
(the "Principal Stockholders") and each officer or director of the
Company, his or its enforceable written agreement, in form and substance
satisfactory to counsel for the Underwriter, that for a period of (i) 24
months from the date on which the Registration Statement shall become
effective under the Act, with respect to the Principal Stockholders; and
(ii) 12 months from the date on which the Registration Statement shall
become effective under the Act, with respect to all directors and
officers, except vice presidents or officers junior to vice presidents, he
or it will not, without the prior written consent of the Underwriter and
the Company, offer, pledge, sell, contract to sell, grant any option for
the sale of, or otherwise dispose of, directly or indirectly
(collectively, "Dispose of"), any shares of Common Stock or any security
or other instrument which by its terms is convertible into, exercisable
for, or exchangeable for shares of Common Stock, including, without
limitation, any shares of Common Stock issuable under any employee stock
options. Each such agreement is a legal, valid, and binding obligation of
the director, officer, or securityholder executing the same, and is
enforceable as to such director, officer, or securityholder in accordance
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<PAGE> 17
with the terms thereof, except that (iii) each Principal Stockholder
shall be permitted to Dispose of during the 12-month period commencing 12
months from the date on which the Registration Statement shall become
effective under the Act not more than 12.9% of the shares of Common Stock
subject to the foregoing restriction, (iv) if any Principal Stockholder
shall have pledged any shares of Common Stock before the date on which
the Registration Statement shall become effective under the Act, the
pledgee of such shares shall be permitted to levy on and Dispose of any
such shares acquired by such pledgee pursuant to such pledge arrangement,
(v) National Patent Development Corporation shall be permitted to grant
options to purchase shares of Common Stock owned by it to its and its
subsidiaries' employees, officers, and directors and to issue such shares
of Common Stock on exercise of such options, (vi) the foregoing
restriction shall not apply to any securities Disposed of at death, and
(vii) the foregoing restriction shall not apply to any securities
Disposed of by gift if the donee agrees to be bound by the same
restriction.
(s) The Company is not, and does not intend to conduct its
business in a manner in which it would become, an "investment company" as
defined in Section 3(a) of the Investment Company Act of 1940, as amended
(the "Investment Company Act").
(t) No person or entity has the right to require registration
of shares of Common Stock or other securities of the Company because of
the filing or effectiveness of the Registration Statement, except those
persons or entities who have waived such rights in writing or who have
been notified as provided in the agreements granting such rights and have
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<PAGE> 18
not elected to have the Company register the securities subject to such
rights and except as may be properly described in the Prospectus.
(u) Except as may be set forth in the Prospectus, the Company
has not incurred any liability for a fee, commission, or other
compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement.
(v) Neither the Company nor any of its affiliates is presently
doing business with the government of Cuba or with any person or affiliate
located in Cuba. If, at any time after the date on which the Registration
Statement is declared effective under the Act or with the Florida
Department of Banking and Finance (the "Florida Department"), whichever is
later, and prior to the end of the period referred to in the first clause
of Section 2(b), the Company commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba, the
Company will so inform the Florida Department within 90 days after such
commencement of business in Cuba, and, during the period referred to in
Section 2(b), will inform the Florida Department within 90 days after any
change occurs with respect to previously reported information.
(w) Except as disclosed in the Prospectus, to the knowledge of
the Company, no stockholder beneficially owning 5% or more of any class of
outstanding securities of the Company and no officer or director of the
Company has any affiliation or association with the National Association
of Securities Dealers, Inc. (the "NASD") or any member thereof other than
David Blech and related entities.
(x) Except as disclosed in the Prospectus, the Company has no
liabilities for any taxes, including any federal, state, local, and
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<PAGE> 19
foreign income and franchise taxes, other than taxes not yet due and
payable or being contested in good faith.
(y) The Common Stock has been registered under Section 12(g)
of the Exchange Act since 1981. Since such date, the Company has filed all
reports and other filings required under the Exchange Act and all
information contained in such reports and other filings, incorporated by
reference in the Registration Statement, and not modified or superseded by
information in the Registration Statement is accurate and complete.
(z) The Common Stock is currently listed on the NASDAQ
SmallCap Market (the "NASDAQ/SCM") and all appropriate actions have been
taken to include the Shares and the Option Stock on the NASDAQ/SCM.
3. PURCHASE, SALE, AND DELIVERY OF THE SHARES.
(a) On the basis of representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the
Company hereby appoints you its sales agent and grants you the exclusive
right to offer and sell the Shares during the Offering Period (as
hereinafter defined) for the account and risk of the Company. You accept
such appointment and agree to use your best efforts as sales agent,
following written or telegraphic receipt of notice of the effective date
of the Registration Statement, to offer and sell such number of Shares as
contemplated by this Agreement at the price stated in the Prospectus.
(b) Each prospective purchaser of Shares will be required to
complete, execute, and deliver to the Company a subscription agreement in
the form filed as an exhibit to the Registration Statement (the
"Subscription Agreement"). Prior to or concurrently with the delivery to
the Company of any Subscription Agreement by any purchaser, funds
sufficient to purchase the Shares subscribed for shall be wired to an
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<PAGE> 20
escrow account to be maintained pursuant to an escrow agreement among the
Escrow Agent (as hereinafter defined), the Company, and the Underwriter in
the form filed as an exhibit to the Registration Statement (the "Escrow
Agreement"). Except as provided in the first sentence of subparagraph (c)
below, the Company shall not be entitled to reject, without the
Underwriter's consent, any Subscription Agreement tendered to it prior to
the Termination Date (as hereinafter defined) unless (i) the Subscription
Agreement is not properly completed after the Underwriter and the Company
have given the subscriber an opportunity to cure the defect or payment in
full for the Shares subscribed for is not made in accordance with such
Subscription Agreement or (ii) the subscriber submitting such Subscription
Agreement is a resident of a jurisdiction in which the offering is not
registered, qualified, or exempt from such registration or qualification.
The Company will forward to you copies of each Subscription Agreement
received by it (other than from you) within three business days of receipt
by the Company of such Subscription Agreement.
(c) All subscriptions for Shares will be conditioned upon the
acceptance by the Company of Subscription Agreements for at least
5,000,000 Shares (the "Minimum Subscriptions") by ____________, 1996,
which is the last date on which the offering of Shares may be made, except
that such last offering date may be extended by the Underwriter, in its
sole discretion, to a date not later than __________, 1996 (the last date
on which the offering of Shares may be made is herein referred to as the
"Termination Date" and the period during which the offering of Shares may
be made is herein referred to as the "Offering Period"). If Minimum
Subscriptions are not tendered to and accepted by the Company by
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<PAGE> 21
the Termination Date, this Agreement shall, subject to the provisions of
Section 10 hereof, terminate. If at least the Minimum Subscriptions are
tendered to and accepted by the Company on or before the Termination Date,
a closing will be held at the offices of the Underwriter at a mutually
agreed date (not later than five business days after the Termination Date)
and time as soon as practicable after the delivery of the last of such
subscriptions (the "First Closing Date") and shall be subject to each of
the conditions precedent to closing provided for in this Agreement. The
parties hereto may mutually agree to continue the Offering after the First
Closing Date and prior to the Termination Date until up 7,000,000 Shares
are subscribed for. If additional subscriptions are tendered and accepted
after the First Closing Date and prior to the Termination Date, one or
more additional closings with respect to such subscriptions shall be held
in accordance with the terms of the Prospectus (each an "Additional
Closing Date"). Each such additional closing will be held at the offices
of the Underwriter at a mutually agreed date (not later than five business
days after the Termination Date) and time and shall be subject to each of
the conditions precedent to closing provided for in this Agreement. Each
closing date provided for under this Agreement (including the First
Closing Date) shall constitute a "Closing Date."
(d) Prior to the applicable Closing Date, all cash payments of
purchasers received (unless and until returned to the purchasers pursuant
hereto) will be placed in a segregated escrow account with Bank of
Montreal Trust Company (the "Escrow Agent") for the purchasers' benefit.
(e) The purchase price paid by any prospective purchaser whose
subscription is rejected, or is returned because the conditions to
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<PAGE> 22
closing were not satisfied, shall be returned to such prospective
purchaser.
(f) If, prior to the Termination Date, subscriptions for more
than 7,000,000 Shares are received, the Underwriter, in its sole and
absolute discretion, may allocate the Shares among the subscribers as to
whom a closing has not already been held in such manner as it shall see
fit.
(g) As soon as practicable after each Closing Date, the
Company shall deliver or cause to be delivered by mail to each purchaser
of Shares on such Closing Date (i) a copy of an executed Subscription
Agreement which indicates thereon the number of Shares such purchaser has
purchased and (ii) a stock certificate representing such Shares,
registered in such purchaser's name.
4. OFFERING OF THE SHARES ON BEHALF OF THE COMPANY. In offering the Shares
for sale, you shall offer Shares as agent for the Company, and the Offering
shall be made upon the terms and subject to the conditions set forth in the
Registration Statement and Prospectus. The Underwriter shall commence offering
the Shares for sale as agent for the Company as soon after the Effective Date as
the Underwriter may deem advisable.
5. COVENANTS. The Company covenants that it will:
(a) Use its best efforts to cause the Registration Statement
to become effective under the Act as promptly as possible and notify you
immediately, and confirm such notice in writing, (i) when the Registration
Statement and any post-effective amendment thereto become effective under
the Act, (ii) of the receipt of any comments from the Commission or the
"blue sky" or securities authority of any jurisdiction regarding the
Registration Statement, any post-effective amendment
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<PAGE> 23
thereto, the Prospectus, or any amendment or supplement thereto, (iii) of
the filing with the Commission of any supplement to the Prospectus, and
(iv) of the receipt of any notification with respect to a Stop Order or
the initiation or threatening of any proceeding with respect to a Stop
Order. The Company will use its best efforts to prevent the issuance of
any Stop Order and, if any Stop Order is issued, to obtain the lifting
thereof as promptly as possible. If the Registration Statement has become
or becomes effective under the Act with a form of prospectus omitting Rule
430A Information, or filing of the Prospectus with the Commission is
otherwise required under Rule 424(b), the Company will file with the
Commission the Prospectus, properly completed, pursuant to Rule 424(b)
within the time period prescribed and will provide evidence satisfactory
to you of such timely filing.
(b) During the Offering Period and any subsequent time when a
prospectus relating to the Shares is required to be delivered hereunder or
under the Act or the Regulations, comply with all requirements imposed
upon it by the Act, as now existing and as hereafter amended, and by the
Regulations, as from time to time in force, so far as necessary to permit
the continuance of sales of, or dealings in, the Shares and in accordance
with the provisions hereof and of the Prospectus. If, at any time during
the Offering Period or any time thereafter when a prospectus relating to
the Shares is required to be delivered hereunder or under the Act or the
Regulations, any event shall have occurred as a result of which, in the
reasonable opinion of counsel for the Company or counsel for the
Underwriter, the Registration Statement or the Prospectus as then amended
or supplemented contains any untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary to
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<PAGE> 24
make the statements therein not misleading, or if, in the opinion of
either of such counsel, it is necessary at any time to amend or
supplement the Registration Statement or the Prospectus to comply with
the Act or the Regulations, the Company will immediately notify you and
promptly prepare and file with the Commission an appropriate amendment
or supplement (in form and substance satisfactory to you) which will
correct such statement or omission or which will effect such compliance
and will use its best efforts to have any such amendment declared
effective under the Act as soon as possible.
(c) Deliver without charge to you such number of copies of
each Preliminary Prospectus as you may reasonably request and, as soon
as the Registration Statement, or any amendment thereto, becomes
effective under the Act or a supplement is filed with the Commission,
deliver without charge to you two signed copies of the Registration
Statement, including exhibits and Incorporated Documents, or such
amendment thereto, as the case may be, and two copies of any supplement
thereto, and deliver without charge to you such number of copies of the
Prospectus, the Registration Statement, and amendments and supplements
thereto, if any, without exhibits or Incorporated Documents, as you may
request for the purposes contemplated by the Act.
(d) Endeavor in good faith, in cooperation with you and your
counsel, at or prior to the time the Registration Statement becomes
effective under the Act, to qualify the Shares for offering and sale
under the "blue sky" or securities laws of such jurisdictions as you
may designate; provided, however, that no such qualification shall be
required in any jurisdiction where, as a result thereof, the Company
would be subject to service of general process or to taxation as a
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<PAGE> 25
foreign corporation doing business in such jurisdiction to which it is
not then subject. In each jurisdiction where such qualification shall
be effected, the Company will, unless you agree in writing that such
action is not at the time necessary or advisable, file and make such
statements or reports at such times as are or may be required by the
laws of such jurisdiction.
(e) Make generally available (within the meaning of Section
11(a) of the Act and the Regulations) to its security holders as soon
as practicable, but not later than 90 days after the end of the
12-month period beginning at the end of the current fiscal quarter of
the Company, an earnings statement (which need not be certified by
independent certified public accountants unless required by the Act or
the Regulations, but which shall satisfy the provisions of Section
11(a) of the Act and the Regulations) covering a period of at least 12
months beginning after the effective date of the Registration
Statement.
(f) Until August 14, 1996, not, without the prior written
consent of the Underwriter, issue or otherwise dispose of any shares of
Common Stock or other equity securities of the Company, or any security
or other instrument which by its terms is convertible into, or
exercisable or exchangeable for, shares of Common Stock or other equity
securities of the Company, except for (i) the Securities; (ii) stock
options granted to employees, officers and directors of the Company;
(iii) shares issuable upon the exercise of stock options outstanding on
the date hereof or granted pursuant to clause (ii) above; (iv) shares
issuable pursuant to other options, warrants, or convertible or
exchangeable debt instruments which are properly described in the
Prospectus; and (v) shares issuable in connection with strategic
alliances, marketing or distribution
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<PAGE> 26
arrangements, or similar transactions, including shares issuable to
Purdue (as defined in the Prospectus) in connection with the Company's
repurchase of marketing rights.
(g) During the Offering Period, the Company shall not, without
the prior written consent of the Underwriter, consummate any stock
dividend, stock split, recapitalization, reorganization,
reclassification, combination or any other similar event affecting the
capital stock of the Company.
(h) For a period of five years after the effective date of the
Registration Statement, furnish you without charge the following:
(i) within 90 days after the end of each fiscal year,
three copies of financial statements certified by independent
certified public accountants, including a balance sheet,
statement of income, and statement of cash flows of the
Company and its then existing subsidiary or subsidiaries, with
supporting schedules, prepared in accordance with generally
accepted accounting principles, as at the end of such fiscal
year and for the 12 months then ended, which may be on a
consolidated basis;
(ii) as soon as practicable after they have been sent
to stockholders of the Company or filed with, or furnished to,
the Commission or the NASD, three copies of each annual and
interim financial and other report or communication sent by
the Company to its stockholders or filed with, or furnished
to, the Commission or the NASD;
(iii) as soon as practicable, two copies of every
press release and every material news item and article in
respect of the Company or its affairs which was released by
the Company; and
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<PAGE> 27
(iv) such additional documents and information with
respect to the affairs of the Company and its then existing
subsidiary or subsidiaries as you may from time to time
reasonably request; provided, however, that such additional
documents and information shall be received by you on a
confidential basis, unless otherwise disclosed to the public,
and shall not be used in violation of the Federal securities
laws and the regulations promulgated thereunder.
(i) Apply the net proceeds received by the Company from the
Offering contemplated by this Agreement in the manner set forth under
the heading "Use of Proceeds" in the Prospectus.
(j) Furnish to you as early as practicable prior to the First
Closing Date and any Additional Closing Date, as the case may be, but
no less than two full business days prior thereto, a copy of the latest
available unaudited interim consolidated financial statements of the
Company and the Subsidiary which have been read by the Company's
independent certified public accountants, as stated in their letters to
be furnished pursuant to Section 7(h).
(k) File no amendment or supplement to the Registration
Statement or Prospectus at any time, whether before or after the date
on which the Registration Statement becomes effective under the Act,
unless such filing shall comply with the Act and the Regulations and
unless you shall previously have been advised of such filing and
furnished with a copy thereof, and you and counsel for the Underwriter
shall have approved such filing.
(l) File timely with the Commission and the NASD a report on
Form 10-C in accordance with the rules and regulations of the
Commission under the Exchange Act.
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<PAGE> 28
(m) Comply with all provisions of all undertakings contained
in the Registration Statement.
(n) Prior to the First Closing Date or any Additional Closing
Date, as the case may be, issue no press release or other
communication, directly or indirectly, and hold no press conference
with respect to the Company or the Subsidiary or the financial
condition, results of operations, business, properties, assets,
liabilities of either of them, or the Offering, without the prior
written consent of the Underwriter, which consent will not be
unreasonably withheld.
(o) For at least five years from the date of this Agreement,
so long as the Common Stock is included on the NASDAQ Stock
Market/National Market (the "NASDAQ/NM"), make all filings required to
maintain the inclusion of the Common Stock on the NASDAQ/NM for at
least five years from the date of this Agreement.
(p) On each Closing Date, sell to the Underwriter (or its
designee), the Underwriter's Options for an aggregate purchase price of
$.001 per option, entitling the holder thereof to purchase a number of
shares of Common Stock equal to 10% of the number of Shares sold on
such Closing Date for an exercise price equal to 120% of initial public
offering price per share.
(q) Until expiration of the Underwriter's Options, keep
reserved sufficient shares of Common Stock for issuance upon exercise
of the Underwriter's Options.
(r) Deliver to the Underwriter, without charge, within a
reasonable period after the last Closing Date, three sets of bound
volumes of the Registration Statement and all related materials to the
individuals designated by you or counsel for the Underwriter.
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<PAGE> 29
(s) For a period of one year after the effective date of the
Registration Statement, provide, at its sole expense, to the
Underwriter copies of the Company's daily transfer sheets, if so
requested.
(t) For a period of five years after the First Closing Date,
supply to the appropriate parties such information as may be necessary
or desirable, and otherwise use its best efforts, so that during such
five-year period the Company will be listed in one or more of the
securities manuals published by Standard & Poor's Corporation and
Moody's Investors Service, Inc. and that, at all times during such
period, such listing will, at a minimum, contain the names of the
Company's officers and directors, a balance sheet as of a date not more
than 18 months prior to such time and a statement of operations for
either the fiscal year preceding such date or the most recent fiscal
year of operations; provided that the provisions of this Section 5(t)
shall not apply during any period that the Common Stock is included on
the NASDAQ/NM.
(u) Comply with all registration, filing and reporting
requirements of the Exchange Act, which may from time to time be
applicable to the Company.
6. PAYMENT OF EXPENSES.
(a) The Company hereby agrees to pay, whether or not the Offering
is consummated, all expenses (other than fees of counsel to the Underwriter,
except as provided in Sections 6(a)(iii) and 6(b)) in connection with (i) the
preparation, printing, filing, distribution, and mailing of the Registration
Statement and the Prospectus and the printing, filing, distribution, and
mailing of this Agreement and related documents, including the cost of all
copies thereof and of the Preliminary Prospectuses and of the Prospectus and
any amendments or supplements thereto supplied to the Underwriter in quantities
as
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<PAGE> 30
hereinabove stated, (ii) the issuance, sale, transfer, and delivery of the
Securities, including any transfer or other taxes payable thereon, (iii) the
qualification of the Securities under state or foreign "blue sky" or securities
laws, including the costs of printing and mailing the preliminary and final
"Blue Sky Survey" and the fees of counsel for the Underwriter and the
disbursements in connection therewith, (iv) the filing fees payable to the
Commission, the NASD, and the jurisdictions in which such qualification is
sought, (v) any fees relating to the listing of the Common Stock and the Option
Stock on the NASDAQ/SCM, (vi) the cost of printing certificates representing the
Shares, and (vii) the fees of the transfer agent for the Shares.
(b) In addition, if the Offering is consummated, the Company
hereby agrees to pay to the Underwriter on each Closing Date (i) a
non-accountable expense allowance equal to 1.5% of the gross proceeds from the
sale of the Shares on such Closing Date (other than the gross proceeds from the
sale of the Principal Stockholder Shares); and (ii) a commission equal to 7.0%
of the gross proceeds from the sale of Shares (other than the gross proceeds
from the sale of the Principal Stockholder Shares) on such Closing Date.
(c) In the event that (i) this Agreement is terminated by the
Underwriter pursuant to Section 10 hereof, or (ii) Minimum Subscriptions are not
received prior to the Termination Date, the Company hereby confirms that it will
pay within 10 days following the date of termination of this Agreement (in the
case of clause (i) above) and within 10 days following the Termination Date (in
the case of clause (ii) above), all of your actual accountable out-of-pocket
expenses, including, without limitation, the reasonable legal fees, marketing
and due diligence expenses, and travel expenses incurred by you, less any
amounts previously paid to you with respect to such expenses; and the Company
will be responsible for the payment of all other expenses relating to this
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<PAGE> 31
Agreement and the Offering, whether or not set forth in clauses (i) through
(vii) of Section 6(a) hereof.
7. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. Your obligations hereunder,
and the right of the Company to obtain on any Closing Date the purchase price
for Shares to be purchased on such Closing Date, shall be subject to the
continued accuracy in all material respects, on the date hereof and on such
Closing Date, of the representations, warranties and agreements of the Company
and to the performance by the Company of its obligations hereunder in all
material respects and to the following terms and conditions:
(a) The Registration Statement shall have become effective
under the Act not later than 6:00 p.m., New York City time, on the date of this
Agreement or such later date and time as shall be consented to in writing by
you; on or prior to the First Closing Date, or any Additional Closing Date, as
the case may be, no Stop Order shall have been issued and no proceeding shall
have been initiated or threatened with respect to a Stop Order; and any request
by the Commission for additional information shall have been complied with by
the Company to the reasonable satisfaction of your counsel. If required, the
Prospectus shall have been filed with the Commission in the manner and within
the time period required by Rule 424(b) under the Act.
(b) On the First Closing Date and any Additional Closing Date,
as the case may be, the Underwriter shall have received the favorable opinion of
Messrs. Duane, Morris & Heckscher, counsel for the Company, dated the date of
delivery, addressed to the Underwriter, and substantially in the form attached
as Exhibit B hereto.
(c) On the First Closing Date and any Additional Closing Date,
as the case may be, the Underwriter shall have received the favorable opinion of
Lawrence M. Gordon, Esq., General Counsel of the Company, dated the date of
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<PAGE> 32
delivery, addressed to the Underwriter, and in form and scope satisfactory to
counsel for the Underwriter.
(d) At the First Closing Date and any Additional Closing Date,
as the case may be, the Underwriter shall have received the favorable opinion of
Kleinfeld, Kaplan & Becker, FDA counsel for the Company, dated the date of
delivery, addressed to the Underwriter, and in form and scope satisfactory to
counsel for the Underwriter.
(e) On or prior to the First Closing Date and any Additional
Closing Date, as the case may be, the Underwriter shall have been furnished such
information, documents, certificates, and opinions as they may reasonably
require in order to evidence the accuracy, completeness, or satisfaction of any
of the representations, warranties, covenants, agreements, or conditions herein
contained, or as the Underwriter may reasonably request.
(f) At the First Closing Date and any Additional Closing Date,
as the case may be, you shall have received a certificate of the chief executive
officer and the chief financial officer of the Company, dated the First Closing
Date or such Additional Closing Date, as the case may be, to the effect that,
(i) the conditions set forth in Section 7(a) have been satisfied, (ii) as of the
date of this Agreement and as of the Closing Date or such Additional Closing
Date, as the case may be, the representations and warranties of the Company
contained herein were and are accurate and correct in all material respects, and
(iii) as of the First Closing Date or such Additional Closing Date, as the case
may be, the obligations to be performed by the Company hereunder on or prior
thereto have been fully performed in all material respects.
(g) At the First Closing Date and any Additional Closing Date,
as the case may be, you shall have received a letter, dated the date of
delivery,
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<PAGE> 33
addressed to the Underwriter, from KPMG Peat Marwick, independent certified
public accountants for the Company:
(i) confirming that they are, and during the period
covered by their report included in the Registration Statement and the
Prospectus were, independent certified public accountants with respect to the
Company within the meaning of the Securities Act and the published Regulations;
(ii) stating that, in their opinion, the financial
statements of the Company included in the Registration Statement examined by
them comply in form in all material respects with the applicable accounting
requirements of the Securities Act and the related published rules and
regulations;
(iii) stating that, on the basis of procedures (but
not an examination made in accordance with generally accepted auditing
standards) consisting of a reading of the latest available unaudited interim
financial statements of the Company (with an indication of the date of the
latest available unaudited interim financial statements), a reading of the
latest available minutes of the stockholders and Board of Directors of the
Company and committees of such Board of Directors, inquiries to certain officers
and other employees of the Company responsible for financial and accounting
matters, and other specified procedures and inquiries, nothing has come to their
attention that caused them to believe that: (A) the unaudited financial
statements of the Company included in the Registration Statement and Prospectus
do not comply in form in all material respects with the applicable accounting
requirements of the Securities Act and the Exchange Act and the related
published rules and regulations under the Securities Act or the Exchange Act or
are not fairly presented in conformity with generally accepted accounting
principles (except to the extent that certain footnote disclosures regarding any
stub period may have been omitted in accordance with the applicable rules of the
Commission
- 33 -
<PAGE> 34
under the Exchange Act) applied on a basis consistent with that of the audited
financial statements appearing therein; (B) there was any change in the capital
stock or long-term debt of the Company or any decrease in the net current assets
or stockholders' equity of the Company as of the date of the latest available
monthly financial statements of the Company as of a specified date not more than
five business days prior to the date of such letter, each as compared with the
amounts shown in the latest balance sheet included in the Registration Statement
and Prospectus, other than as properly described in the Registration Statement
and Prospectus; or (C) there was any decrease in net sales, or increase in loss
during the period from the date of such balance sheet to the date of the latest
available monthly financial statements of the Company or to a specified date not
more than five business days prior to the date of such letter, each as compared
with the corresponding period in 1995, other than as properly described in the
Registration Statement and Prospectus; and
(iv) stating that they have compared specific
numerical data and financial information pertaining to the Company set forth in
the Registration Statement, which have been specified by you, to the extent that
such data and information may be derived from the general accounting records of
the Company, with the results obtained from the application of specified
readings, inquiries, and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter, and found them to be in agreement.
(h) All proceedings taken in connection with the issuance,
sale, transfer, and delivery of the Shares shall be satisfactory in form and
substance to you and to your counsel.
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<PAGE> 35
(i) The NASD, upon review of the terms of the public offering
of the Shares, shall not have objected to the Underwriter's participation in
such offering.
(j) Prior to or on each Closing Date, the Company shall have
issued, in accordance with this Agreement, the Underwriter's Options to the
Underwriter in the name or names and in such authorized denominations as the
Underwriter may request.
(k) Prior to or on the First Closing Date, the Company shall
have provided to the Underwriter copies of the agreements referred to in Section
2(r).
(l) At least the Minimum Subscriptions shall have been tendered
to the Company in accordance with the terms hereof.
Any certificate or other document signed by any officer of the Company
and delivered to the Underwriter or to counsel for the Underwriter shall be
deemed a representation and warranty by the Company hereunder to the Underwriter
as to the statements made therein. If any condition to the Underwriter's
obligations hereunder to be fulfilled prior to or at the First Closing Date or
any Additional Closing Date, as the case may be, is not so fulfilled, the
Underwriter may terminate this Agreement or, if the Underwriter so elects, in
writing waive any such conditions which have not been fulfilled or extend the
time for their fulfillment.
If any of the conditions specified in this Section 7 shall not have
been fulfilled or waived, this Agreement and all your obligations hereunder may
be cancelled, prospectively, by you at, or at any time prior to, any Closing
Date. Any such cancellation shall be without liability to you, and the
obligations of the Company pursuant to Sections 6 and 8 hereof shall
nevertheless survive and continue thereafter. Notice of such cancellation shall
be given to the Company
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<PAGE> 36
at the addresses specified in Section 11 hereof, in writing, or by telegraph or
telephone confirmed in writing.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless the Underwriter, its officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of
the Exchange Act, against any and all loss, liability, claim, damage, and
expense whatsoever (which shall include, for all purposes of this Section 8, but
not be limited to, reasonable attorneys' fees and any and all expense whatsoever
incurred in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever and any and all amounts paid in
settlement of any claim or litigation) as and when incurred arising out of,
based upon, or in connection with, (i) any untrue statement or alleged untrue
statement of a material fact contained in (A) the Registration Statement, any
Preliminary Prospectus, or the Prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto or (B) any application or
other document or communication (for purposes of this Section 8, collectively
referred to as an "application") executed by, or on behalf of, the Company or
based upon written information furnished by, or on behalf of, the Company filed
in any jurisdiction in order to qualify the Securities under the "blue sky" or
securities laws thereof or filed with the Commission or any securities exchange;
or any omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
unless such statement or omission was made in reliance upon, and in conformity
with, written information furnished to the Company as stated in Section 8(b)
with respect to the Underwriter, expressly for inclusion in the Registration
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<PAGE> 37
Statement, any Preliminary Prospectus, or the Prospectus, or any amendment or
supplement thereto, or in any application, as the case may be, or (ii) any
breach of any representation, warranty, covenant, or agreement of the Company
contained in this Agreement. The foregoing agreement to indemnify shall be in
addition to any liability the Company may otherwise have, including liabilities
arising under this Agreement.
If any action is brought against the Underwriter or any of its
officers, directors, partners, employees, agents, or counsel, or any person who
controls the Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act (an "indemnified party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability it may have other than pursuant to this Section 8(a)
except to the extent it is prejudiced in any material respect by such failure)
and the Company shall promptly assume the defense of such action, including the
employment of counsel (reasonably satisfactory to such indemnified party or
parties) and payment of expenses. Such indemnified party or parties shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such action or the
Company shall not have promptly employed counsel reasonably satisfactory to such
indemnified party or parties to have charge of the defense of such action or
such indemnified party or parties shall have reasonably concluded that there may
be one or more legal defenses available to it or them or to other indemnified
parties which are different from or additional to those available to the
Company, in any of which
- 37 -
<PAGE> 38
events such fees and expenses shall be borne by the Company, and the Company
shall not have the right to direct the defense of such action on behalf of the
indemnified party or parties. Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any settlement of any such
claim or action effected without its written consent, which shall not be
unreasonably withheld. The Company shall not, without the prior written consent
(which shall not be unreasonably withheld) of each indemnified party that is not
released as described in this sentence, settle or compromise any action, or
permit a default or consent to the entry of judgment in or otherwise seek to
terminate any pending or threatened action, in respect of which indemnity may be
sought hereunder (whether or not any indemnified party is a party thereto),
unless such settlement, compromise, consent, or termination includes an
unconditional release of each indemnified party from all liability in respect of
such action. The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against the Company or any of its
officers or directors in connection with the sale of the Shares, the
Registration Statement, any Preliminary Prospectus, any Rule 430A Prospectus, or
the Prospectus, or any amendment or supplement thereto, or any application. With
respect to any untrue statement or alleged untrue statement made in, or omission
or alleged omission from, any Preliminary Prospectus or the Prospectus, the
indemnity agreement contained in this Section 8(a) with respect to such
Preliminary Prospectus or Prospectus, to the extent it is based on the claim of
a person who purchased Shares in the Offering, shall not inure to the benefit of
such Underwriter (or to the benefit of any of its officers, directors, partners,
employees, agents, counsel, or any person controlling such Underwriter) if the
Prospectus (or the Prospectus as amended or supplemented if the Company shall
have filed with the Commission any amendment or supplement
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<PAGE> 39
thereto) which shall have been furnished to such Underwriter prior to the time
it sent written confirmation of such sale to such person does not contain such
statement, alleged statement, omission, or alleged omission and a copy of the
Prospectus (or the Prospectus as amended or supplemented if the Company shall
have filed with the Commission any amendment or supplement thereto) shall not
have been sent or given to such person and such person shall not otherwise have
received a copy thereof at or prior to the written confirmation of such sale to
such person.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each director of the Company, each officer of the Company who shall
have signed the Registration Statement, each other person, if any, who controls
the Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, and its or their respective counsel, to the same extent as the
foregoing indemnity from the Company to the Underwriter in Section 8(a), but
only with respect to statements or omissions, if any, made in the Registration
Statement, any Preliminary Prospectus, or the Prospectus (as from time to time
amended and supplemented), or any amendment or supplement thereto, or in any
application in reliance upon, and in conformity with, written information
furnished to the Company as stated in this Section 8(b) with respect to the
Underwriter by or on behalf of the Underwriter expressly for inclusion in the
Registration Statement, any Preliminary Prospectus, or the Prospectus, or any
amendment or supplement thereto, or in any application, as the case may be;
provided, however, that the obligation of the Underwriter to provide indemnity
under the provisions of this Section 8(b) shall be limited to the gross proceeds
of the Offering. For all purposes of this Agreement, the information relating to
when the Underwriter registered and became a member of the NASD and the
Underwriter's participation in prior offerings constitute the only information
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<PAGE> 40
furnished in writing by the Underwriter expressly for inclusion in the
Registration Statement, any Preliminary Prospectus, or the Prospectus (as from
time to time amended or supplemented), or any amendment or supplement thereto,
or in any application, as the case may be. If any action shall be brought
against the Company, or any other person so indemnified based on the
Registration Statement, any Preliminary Prospectus, or the Prospectus, or any
amendment or supplement thereto, or on any application, and in respect of which
indemnity may be sought against the Underwriter pursuant to this Section 8(b),
the Underwriter shall have the rights and duties given to the Company, and the
Company and each other person so indemnified shall have the rights and duties
given to the indemnified parties, by the provisions of Section 8(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Sections 8(a) or
8(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case or (ii) any indemnified or indemnifying party seeks
contribution under the Act, the Exchange Act, or otherwise, then the Company
(including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed the Registration
Statement, and any controlling person of the Company), as one entity and the
Underwriter (including for this purpose any contribution by or on behalf of an
indemnified party) as a second entity, shall contribute to the losses,
liabilities, claims, damages, and expenses whatsoever to which any of them may
be subject, in such proportions as are appropriate to reflect the relative
benefits received by the Company and the Underwriter; provided, however, that
- 40 -
<PAGE> 41
if applicable law does not permit such allocation, then other relevant equitable
considerations such as the relative fault of the Company and the Underwriter in
connection with the facts which resulted in such losses, liabilities, claims,
damages, and expenses shall also be considered. The relative benefits received
by the Company and the Underwriter shall be deemed to be in the same proportion
as (x) the total proceeds from the Offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and (y) the
underwriting discounts and commissions received by the Underwriter, in each case
as set forth in the table on the cover page of the Prospectus and in the
footnotes thereto. The relative fault, in the case of an untrue statement,
alleged untrue statement, omission, or alleged omission, shall be determined by,
among other things, whether such statement, alleged statement, omission, or
alleged omission relates to information supplied by the Company or by the
Underwriter, and the parties' relative intent, knowledge, access to information,
and opportunity to correct or prevent such statement, alleged statement,
omission, or alleged omission. The Company and the Underwriter agree that it
would be unjust and inequitable if the respective obligations of the Company and
the Underwriter for contribution were determined by pro rata or per capita
allocation of the aggregate losses, liabilities, claims, damages, and expenses
(even if the Underwriter and the other indemnified parties were treated as one
entity for such purpose) or by any other method of allocation that does not
reflect the equitable considerations referred to in this Section 8(c). No person
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who is not guilty of
such fraudulent misrepresentation. For purposes of this Section 8(c), each
person, if any, who controls the Underwriter within the meaning of Section
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<PAGE> 42
15 of the Act or Section 20(a) of the Exchange Act and each officer, director,
partner, employee, agent, and counsel of the Underwriter shall have the same
rights to contribution as the Underwriter and each person, if any, who controls
the Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, each officer of the Company who shall have signed the Registration
Statement, and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to the provisions of this
Section 8(c). Anything in this Section 8(c) to the contrary notwithstanding, no
party shall be liable for contribution with respect to the settlement of any
claim or action effected without its written consent. This Section 8(c) is
intended to supersede any right to contribution under the Act, the Exchange Act,
or otherwise.
9. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, covenants, and agreements contained in this
Agreement shall be deemed to be representations, warranties, covenants, and
agreements at the First Closing Date and any Additional Closing Date, and such
representations, warranties, covenants, and agreements of the Company, and the
Underwriter, including the indemnity and contribution agreements contained in
Section 8, shall remain operative and in full force and effect regardless of any
investigation made by, or on behalf of, the Underwriter or any indemnified
person, or by, or on behalf of, the Company, or any person or entity which is
entitled to be indemnified under Section 8(b), and shall survive termination of
this Agreement or the delivery of the Shares to the purchasers and the
Underwriter's Option to the Underwriter. In addition, the provisions of Sections
5(a), 6, 8, 9, 10 and 12 shall survive termination of this Agreement,
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<PAGE> 43
whether such termination occurs before or after the First Closing Date or any
Additional Closing Date.
10. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
(a) This Agreement shall become effective upon its execution
except that you, at your option, may delay the effectiveness of this Agreement
until the earlier of (i) 11:00 A.M. New York time on the first full business day
following the day on which the Registration Statement becomes effective under
the Act and (ii) the initial public offering by you of the Stock. In addition to
the right to terminate this Agreement pursuant to Section 7 hereof, you shall
have the right to terminate this Agreement at any time prior to the First
Closing Date or any Additional Closing Date, as the case may be, by giving
notice to the Company, (i) if any domestic or international event, act, or
occurrence has materially disrupted, or, in your opinion, will in the immediate
future materially disrupt, the securities markets; or (ii) if there shall have
been a general suspension of, or a general limitation on prices for, trading in
securities on the New York Stock Exchange, the American Stock Exchange or in the
over-the-counter market; or (iii) if there shall have been an outbreak or
material increase in the level of major hostilities or other national or
international calamity; or (iv) if a banking moratorium has been declared by a
state or federal authority; or (v) if a moratorium in foreign exchange trading
by major international banks or persons has been declared; or (vi) if there
shall have been a material interruption in the mail service or other means of
communication within the United States; or (vii) if the Company or the
Subsidiary shall have sustained a material or substantial loss by fire, flood,
accident, hurricane, earthquake, theft, sabotage, or other calamity or malicious
act, whether or not such loss shall have been insured, or from any labor dispute
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<PAGE> 44
or court or government action, order, or decree, which will, in your opinion,
make it inadvisable to proceed with the offering, sale, or delivery of the
Shares; or (viii) if any material governmental restrictions shall have been
imposed on trading in securities in general, which restrictions are not in
effect on the date hereof; or (ix) if there shall be passed by the Congress of
the United States or any state legislature any act or measure, or adopted by any
governmental body, authoritative accounting institute or board, or governmental
executive any orders, rules, or regulations, which you believe likely to have a
material adverse effect on the business, financial condition, or financial
statements of the Company and the Subsidiary or the market for any of the
Company's securities; or (x) if there shall have been a material adverse change
in the market for the Company's securities or securities in general or in
political, financial, or economic conditions as in your judgment makes it
inadvisable to proceed with the offering, sale, and delivery of the Shares on
the terms contemplated by the Prospectus.
(b) If you elect to terminate this Agreement, you shall notify
the Company promptly by telephone, telex, or telegram, confirmed by letter.
(c) Anything in this Agreement to the contrary notwithstanding
other than Section 10(d), if this Agreement shall terminate or shall otherwise
not be carried out within the time specified herein for any reason, the Company
shall have no liability to the Underwriter other than pursuant to Section 6.
(d) Notwithstanding any termination of this Agreement, and
whether or not this Agreement is otherwise carried out, the provisions of
Sections 5(a), 6, 8, 9, 10 and 12 shall not be in any way affected by such
termination or failure to carry out the terms of this Agreement or any part
hereof.
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<PAGE> 45
11. NOTICES. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and shall be delivered
personally, transmitted by facsimile transmission confirmed in writing within
three business days thereafter, or sent by prepaid overnight air courier or
registered or certified mail, postage prepaid, return receipt requested, if sent
to you at 919 Third Avenue, New York, New York 10022, Attention: Mr. Preston
Tsao, Facsimile: (212) 421-5944, with a copy to Squadron, Ellenoff, Plesent &
Sheinfeld, LLP, 551 Fifth Avenue, New York, New York 10176, Attention: Kenneth
R. Koch, Esq., Facsimile: (212) 697-6686; or if sent to the Company, at 9 West
57th Street, New York, New York 10019, Attention: Lawrence M. Gordon, Esq.,
General Counsel, Facsimile: (212) 230-9545, with a copy to Duane, Morris &
Heckscher, Suite 2125, 122 East 42nd Street, New York, New York 10168,
Attention: Robert J. Hasday, Esq., Facsimile: (212) 499-0420. All notices
hereunder shall be deemed to have been given (a) when delivered, if delivered
personally, or sent by facsimile transmission and, in the case of facsimile
transmission, confirmed in writing within three business days thereafter, or
sent by prepaid overnight air courier or (b) three business days following the
mailing thereof, if mailed by registered or certified mail, postage prepaid,
return receipt requested, in any such case at the address set forth in this
Section 11, or such other address or addresses as a party may have advised the
other party in the manner provided in this Section 11.
12. PARTIES. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Underwriter, the Company, and the persons and
entities referred to in Section 8 who are entitled to indemnification or
contribution, and their respective successors, legal representatives, and
assigns (which shall not include any buyer, as such, of the Shares), and no
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<PAGE> 46
other person shall have or be construed to have any legal or equitable right,
remedy, or claim under or in respect of or by virtue of this Agreement or any
provision herein contained.
13. CONSTRUCTION. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ITS PRINCIPLES OF
CONFLICTS OF LAWS. TIME IS OF THE ESSENCE IN THIS AGREEMENT.
14. CONSENT TO JURISDICTION. THE COMPANY IRREVOCABLY CONSENTS TO THE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF ANY FEDERAL COURT
LOCATED IN SUCH STATE IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT
OF, OR RELATING TO, THIS AGREEMENT, ANY DOCUMENT OR INSTRUMENT DELIVERED
PURSUANT TO, IN CONNECTION WITH, OR SIMULTANEOUSLY WITH THIS AGREEMENT, OR A
BREACH OF THIS AGREEMENT OR ANY SUCH DOCUMENT OR INSTRUMENT. IN ANY SUCH ACTION
OR PROCEEDING, THE COMPANY WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT, OR
OTHER PROCESS AND AGREES THAT SERVICE THEREOF MAY BE MADE IN ACCORDANCE WITH
SECTION 11. WITHIN 30 DAYS AFTER SUCH SERVICE, OR SUCH OTHER TIME AS MAY BE
MUTUALLY AGREED UPON IN WRITING BY THE ATTORNEYS FOR THE PARTIES TO SUCH ACTION
OR PROCEEDING, THE COMPANY SHALL APPEAR OR ANSWER SUCH SUMMONS, COMPLAINT, OR
OTHER PROCESS. SHOULD THE COMPANY FAIL TO APPEAR OR ANSWER WITHIN SUCH 30-DAY
PERIOD OR SUCH EXTENDED PERIOD, AS THE CASE MAY BE, THE COMPANY SHALL BE DEEMED
IN DEFAULT AND JUDGMENT MAY BE ENTERED AGAINST THE COMPANY FOR THE AMOUNT AS
DEMANDED IN ANY SUMMONS, COMPLAINT, OR OTHER PROCESS SO SERVED.
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<PAGE> 47
If the foregoing correctly sets forth the understanding between you and
the Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement between us.
Very truly yours,
INTERFERON SCIENCES, INC.
BY:
-------------------------------
NAME:
TITLE:
ACCEPTED AS OF THE DATE FIRST ABOVE
WRITTEN IN NEW YORK, NEW YORK
SUNRISE SECURITIES CORP.
BY:
--------------------------------
NAME:
TITLE:
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<PAGE> 1
SUBSCRIPTION AGREEMENT
Interferon Sciences, Inc.
783 Jersey Avenue
New Brunswick, New Jersey 08901
Fax Number (908) 249-6895
ATTN: Stanley G. Schutzbank
Gentlemen:
The undersigned (the "Subscriber") hereby subscribes for and agrees to
purchase shares of Common Stock, par value $.01 per share (the "Securities"), of
Interferon Sciences, Inc., a Delaware corporation (the "Company"), at a per
share purchase price of $___, in the amounts set forth on the Signature Page to
this Subscription Agreement (the "Signature Page") and on the terms set forth in
the Prospectus dated ___________, 1996 (the "Prospectus"), which is part of
Securities and Exchange Commission Registration Statement No. 33-00845 (the
"Registration Statement"), and in this Subscription Agreement.
The Subscriber represents and warrants to the Company and covenants and
agrees with it as follows:
1. Payment; Escrow. The Company and Sunrise Securities Corp. (the
"Underwriter") have entered into an Escrow Agreement (the "Escrow Agreement")
with Bank of Montreal Trust Company (the "Bank"), and the Bank has established
an escrow account (the "Escrow Account"). The Subscriber shall forthwith cause
the full amount of the subscription price to be paid by wire transfer to the
Escrow Account as follows:
Chemical Bank - New York City
ABA: 021000128
FBO: Bank of Montreal Trust Company
Account No. 400-046075
Attn: Amy Roberts
Ref: Interferon
Subscriber Name: ____________________
The Subscriber shall (i) include the Subscriber's name in the wire transfer
instructions; and (ii) request, from the bank or other financial institution
that is originating the transfer, the federal wire number with respect to
payment of the subscription price and retain that number for future reference.
Upon payment of the subscription price, the Subscriber shall cause the Signature
Page, appropriately executed and completed, to be sent via facsimile to Sunrise
Securities Corp., Attention: Mr. Preston Tsao, Facsimile No. 212-421-5924. In
addition, the entire executed and completed Subscription Agreement should be
mailed or otherwise delivered to Sunrise Securities Corp., 919 Third Avenue,
19th Floor, New York, New York 10022, Attention: Mr. Preston Tsao. The
subscription price may not be paid by check. If the proceeds of the sale of at
least 5,000,000 shares of Common Stock have been deposited in the Escrow Account
and the Escrow Agent has been notified by the Company and the Underwriter that
the Company has accepted subscription agreements for at least 5,000,000 shares
<PAGE> 2
of Common Stock and that the other conditions for a closing of all or a portion
of the shares subject to the Offering have been met, and from time to time
thereafter after the Escrow Agent has been notified by the Company and the
Underwriter that the Company has accepted additional subscription agreements for
shares of Common Stock and that the other conditions for a closing of a portion
of the shares subject to the Offering have been met, the Escrow Agent will
release the subscription price of the Securities to the Company and the Company
will promptly mail a certificate therefor to the Subscriber at the address
specified on the Signature Page or, if instructed to do so on the Signature
Page, deliver such Securities by DTC delivery or pursuant to alternate delivery
instructions. Notwithstanding the foregoing, if by ___________, 1996, or such
later date, not later than _____________, 1996, to which the offering
contemplated by the Prospectus (the "Offering") may be extended by the
Underwriter, in its sole discretion, the proceeds of the 5,000,000 shares of
Common Stock have not been deposited in the Escrow Account and the Escrow Agent
has been notified by the Company and the Underwriter that the Company has not
accepted subscription agreements for 5,000,000 shares of Common Stock, the
Escrow Agent will not release the subscription price of the Securities to the
Company. If the subscription price is not released to the Company, the Escrow
Agent will return such funds to the Subscriber, without interest, by mailing a
check or by making a wire transfer. Except as otherwise agreed between the
Subscriber and the Company, certificates representing the Securities shall not
bear any legends restricting transfer.
2. Irrevocable; Rejection or Acceptance of the Subscription by the Company.
This Subscription Agreement is irrevocable by the Subscriber. The Company may,
in its sole discretion, accept or reject this Subscription Agreement in whole or
in part at any time. If the Company rejects the Subscription Agreement in whole,
the Company will promptly cause the Escrow Agent to return the entire amount
paid by the Subscriber in connection with this Subscription Agreement, without
interest, by mailing a check or by making a wire transfer. If the Company
rejects the Subscription Agreement in part, the Company will promptly cause the
Escrow Agent to return the amount paid by the Subscriber in connection with the
portion of this Subscription Agreement that is rejected, without interest, by
mailing a check or by making a wire transfer. Unless and until the Company
accepts this Subscription Agreement and the Company receives payment in full for
the Securities upon release of the funds therefor from the Escrow Agent, the
Subscriber will not become a holder of the Securities subscribed for hereunder
and such Securities will not be considered issued or outstanding.
3. Prospectus. The Subscriber has received and reviewed the Prospectus.
4. Capacity; Enforceability. The Subscriber (and with respect to clause (a)
below, each signatory executing this Subscription Agreement in a representative
or fiduciary capacity on behalf of any Subscriber) represents and warrants that:
(a) if such signatory is executing this Subscription Agreement in a
representative or fiduciary capacity, such signatory has full power and
authority to execute and deliver this Subscription Agreement in such capacity
and on behalf of his principal; and (b) this Subscription Agreement constitutes
a legal, valid and binding obligation of the Subscriber (or the person for whom
- 2 -
<PAGE> 3
he is executing this Subscription Agreement) enforceable against the Subscriber
(or such person) in accordance with its terms.
5. Miscellaneous. This Subscription Agreement sets forth the entire
agreement of the parties with respect to the subject matter hereof and it
supersedes and discharges all prior agreements (written or oral) and
negotiations and all contemporaneous oral agreements concerning such subject
matter. This Subscription Agreement may not be amended or terminated except by a
writing signed by the party against whom any such amendment or terminations is
sought. If the Subscriber is more than one person, the obligation of the
Subscriber shall be joint and several. THIS SUBSCRIPTION AGREEMENT IS GOVERNED
BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ITS PRINCIPLES OF
CONFLICTS OF LAWS.
- 3 -
<PAGE> 4
UPON PAYMENT OF THE SUBSCRIPTION PRICE, THIS PAGE SHOULD BE SENT VIA FACSIMILE
TO SUNRISE SECURITIES CORP., ATTENTION: MR. PRESTON TSAO, FACSIMILE NO. 212-421-
5924. PLEASE FOLLOW CAREFULLY ALL OF THE OTHER SUBSCRIPTION INSTRUCTIONS
CONTAINED IN PARAGRAPH 1 OF THIS SUBSCRIPTION AGREEMENT.
Number of shares subscribed for: Total Amount of Payment: $
------------- --------
SIGN AND DATE HERE:
ADDRESS OF SUBSCRIBER:
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(Print Name of Subscriber)
By:
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(Street) (Signature)
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(City) (Print Name of Signatory)
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(State) (Zip Code) (Print Title of Signatory)
, 1995
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(Taxpayer Identification Number) (Date)
DTC DELIVERY INSTRUCTIONS: ALTERNATIVE DELIVERY INSTRUCTIONS:
- -------------------------------------
(Subscriber Account Title)
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(Subscriber Account Number)
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(Broker)
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(Contact Person at Broker)
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(Broker Telephone Number)
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(Broker DTC Number)
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<PAGE> 5
ACCEPTED: Date: , 1995
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INTERFERON SCIENCES, INC.
By:
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Authorized Officer
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<PAGE> 1
Exhibit 1.3
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Agreement") is made as of the __ day of
______, 1996, among Interferon Sciences, Inc. a Delaware corporation (the
"Company"), Sunrise Securities Corp. (the "Underwriter"), and Bank of Montreal
Trust Company (the "Escrow Agent").
WITNESSETH:
WHEREAS, the Company proposes to offer and sell a minimum of 5,000,000
and a maximum of 7,000,000 shares (the "Shares") of common stock, par value $.01
per share, of the Company in an offering (the "Offering") registered pursuant to
a Registration Statement (as amended, the "Registration Statement") filed by the
Company with the Securities and Exchange Commission (the "SEC"); and
WHEREAS, the Underwriter has agreed to offer the Shares as the agent of
the Company on a "best efforts" basis; and
WHEREAS, the Company needs to provide for the safekeeping and
investment of the proceeds of the sale of the Shares until such time as the
Company accepts subscriptions for at least 5,000,000 Shares and the proceeds of
the sale of such Shares are deposited with the Escrow Agent (the "Minimum
Subscription") or until such time as the Offering terminates and the Escrow
Agent is required to return such proceeds to the subscribers as provided for
herein; and
WHEREAS, the form of subscription agreement (the "Subscription
Agreement") for the Offering provides that the purchase price of the Shares will
be directly wired to the Escrow Agent; and
WHEREAS, the Escrow Agent is a bank, as defined in Section 3(a)(6) of
the Securities Exchange Act of 1934 (a "Bank"), and has consented to act as
escrow depository and to receive and hold the Subscription Agreements and the
funds deposited pursuant thereto in escrow for the Company and the various
subscribers;
NOW, THEREFORE, in consideration of the mutual promises of the parties,
it is hereby agreed as follows:
SECTION 1. Delivery of Registration Statement. The Company shall
deliver to the Escrow Agent a conformed copy of the Registration Statement, and
any amendments thereto.
SECTION 2. Escrow Deposit. The Company shall forward the Subscription
Agreements to the Escrow Agent. The Escrow Agent shall receive and hold funds in
payment for the Shares, together with any interest earned on such funds, in an
escrow account designated as
<PAGE> 2
"Interferon Sciences Escrow Account" (the "Escrow Account") upon the terms and
conditions stated herein.
SECTION 3. Investment of Escrow Funds. All funds deposited pursuant to
this Agreement shall be deposited by the Escrow Agent, at reasonable and
convenient times after receipt, in a money market account which invests all of
its assets in short-term obligations backed by the full faith and credit of the
United States of America. All funds will be invested only in investments
permissible under SEC Rule 15c2-4, it being understood that investment in the
above-described escrow account is permissible under such rule.
SECTION 4. Termination of Escrow.
(a) At such time as the Company and Underwriter jointly notify
the Escrow Agent in writing that the Company has accepted Subscription
Agreements for at least the Minimum Subscription and that the other conditions
for a closing of all or a portion of the Shares have been met and the Escrow
Agent has received available good funds for at least the Minimum Subscription,
the Escrow Agent shall promptly release to the Company all cleared funds then
deposited pursuant to this Agreement, together with any interest earned thereon
and copies of the related Subscription Agreements.
(b) If the Escrow Agent has previously released to the Company
pursuant to Section 4(a) all funds then deposited pursuant to this Agreement,
the Escrow Agent shall promptly release to the Company all additional funds
deposited pursuant to this Agreement, together with any interest earned thereon
and copies of the related Subscription Agreements, upon joint written notice
from the Company and the Underwriter that the Company has accepted additional
Subscription Agreements and that the conditions for an additional closing of a
portion of the Shares have been met.
(c) As soon as practicable after the earlier of (i) the
receipt of joint written instructions from the Company and the Underwriter to
comply with the provisions of this Section 4(c) and (ii) 60 days after the date
that the Registration Statement is declared effective by the SEC, this Agreement
shall terminate and the Escrow Agent shall return all funds then held, without
interest, to the subscribers depositing such funds, together with a copy of
their Subscription Agreements marked "cancelled," and the Escrow Agent shall pay
all interest to the Company.
SECTION 5. Books and Records. During the term of this Escrow Agreement,
the Escrow Agent shall keep accurate books and records of all transaction
hereunder. The Company and Underwriter shall have access to such books and
records at all reasonable times.
SECTION 6. Compensation. The Escrow Agent shall receive as compensation
for services hereunder the sum of $2,500 plus transaction fees equal to $5.00
per check issued, and $15.00 per wire transfer, by the Escrow Agent. Any
additional services requested beyond the
2
<PAGE> 3
scope and time frame of this Agreement shall be assessed in a reasonable amount
commensurate with the services rendered.
SECTION 7. Indemnification. The Company hereby agrees to indemnify and
hold harmless the Escrow Agent against any and all losses, claims, damages,
liabilities, and reasonable expenses, including reasonable administrative and
counsel fees, which may be imposed upon the Escrow Agent or incurred by the
Escrow Agent in connection with the performance of its duties hereunder or by
reason of any litigation arising from this Escrow Agreement or involving the
subject matter hereof or the funds deposited hereunder; provided, however, that
such indemnity shall not extend to any such losses, claims, damages,
liabilities, or expenses which are so imposed upon or incurred by the Escrow
Agent by reason of its failure to perform or observe any of its obligations
hereunder.
SECTION 8. Transfer. Any party may terminate this Agreement on 30 days'
prior written notice to the others provided that, prior to the effective date of
termination hereof, a Bank acceptable to the Company and Underwriter has agreed
to act as escrow agent under terms substantially identical hereto and the Escrow
Agent has transferred to such Bank all funds, interest, Subscription Agreements,
records, and other materials held by it as Escrow Agent.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers or representatives as of the day and
year first above written.
INTERFERON SCIENCES, INC.
By: _______________________
Name: _____________________
Title: ____________________
SUNRISE SECURITIES CORP.
By: _______________________
Name: _____________________
Title: ____________________
BANK OF MONTREAL TRUST
COMPANY
By: _______________________
Name: _____________________
Title: ____________________
3
<PAGE> 1
COMMON STOCK PURCHASE OPTION AGREEMENT
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE
COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. HOWEVER, NEITHER THE
SECURITIES, SUCH COMMON STOCK, NOR ANY INTEREST THEREIN MAY
BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) A POST-EFFECTIVE
AMENDMENT TO SUCH REGISTRATION STATEMENT, (ii) A SEPARATE
REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT.
THE TRANSFER OF THIS OPTION IS
RESTRICTED AS DESCRIBED HEREIN.
VOID AFTER 5:00 P.M., NEW YORK TIME, _________, 2001
INTERFERON SCIENCES, INC.
Option for the Purchase
of
______ Shares of Common Stock
No.
THIS CERTIFIES that, subject to the terms hereof, including without
limitation Section 4 hereof, for receipt in hand of $_____ and other value
received, ____________ (the "Holder"), is entitled to subscribe for and purchase
from Interferon Sciences, Inc., a Delaware corporation (the "Company"), upon the
terms and conditions set forth herein, at any time or from time to time after
_________, 1997, and before 5:00 P.M. on _________, 2001, New York time (the
"Exercise Period"), ____________________________________________ (______) shares
of the Company's Common Stock, par value $.01 per share, subject to adjustment
as provided herein (the "Option Shares"), at a price of $____ per share, subject
to adjustment as provided herein (the "Exercise Price"). This Purchase Option
shall not be redeemable by the Holder. This Purchase Option is the Purchase
Option or one of the Purchase Options (collectively, including any Purchase
Option issued upon the exercise or transfer of any such Purchase Options, in
whole or in part, the "Options") issued pursuant to the Underwriting Agreement,
dated _________, 1996, between the Company and Sunrise Securities Corp. (the
"Underwriting Agreement"). As used herein, the term "this Option" shall mean and
include this Option and any Option or Options hereafter issued as a consequence
of the exercise or transfer of this Option in whole or in part. This Option may
not be sold, transferred, assigned or hypothecated until ______ __, 1997, except
that it may be transferred, in whole or in part, to (i) one or more officers or
partners of the Holder (or the officers or partners of any such partner); (ii) a
successor to the Holder, or the officers or partners of such successor; (iii) a
purchaser of substantially all of the assets of the Holder; or (iv) by operation
of law; and the term the "Holder" as used herein shall include any transferee to
whom this Option has been transferred in accordance
<PAGE> 2
with the above. No such sale, transfer, assignment or hypothecation of this
Option, or of the Option Shares, will be permitted unless (a) a registration
statement under the Securities Act of 1933, as amended (the "Act"), with respect
thereto has become effective and appropriate qualification or other action has
been taken under state securities laws or (b) there is presented to the Company
notice of the proposed transfer and a legal opinion reasonably satisfactory to
the Company that such registration and qualification or other action is not
required.
1. This Option may be exercised during the Exercise Period, as to the
whole or any lesser number of whole Option Shares, by the surrender of this
Option (with the election at the end hereof duly executed) to the Company at its
office at 783 Jersey Avenue, New Brunswick, New Jersey 08901, or at such other
place as may be designated in writing by the Company, together with a certified
or bank cashier's check payable to the order of the Company in an amount equal
to the Exercise Price multiplied by the number of Option Shares for which this
Option is being exercised. In lieu of the payment of the Exercise Price, the
Holder shall have the right (but not the obligation), during the Exercise
Period, to require the Company to convert this Option, in whole or in part, into
the Option Shares (the "Conversion Right") as provided for in this Section. Upon
exercise of the Conversion Right, the Company shall deliver to the Holder
(without payment by the Holder of the Exercise Price) that number of shares of
Common Stock equal to (i) the percentage portion of the Option being converted
multiplied by (ii) the quotient obtained by dividing (x) the value of the Option
at the time the Conversion Right is exercised (determined by subtracting the
Exercise Price in effect immediately prior to the exercise of the Conversion
Right from the Current Market Price (as determined pursuant to Section 5(f)
below), for the shares of Common Stock issuable upon exercise of the Option
immediately prior to the exercise of the Conversion Right) by (y) the Current
Market Price of one share of Common Stock immediately prior to the exercise of
the Conversion Right. The Conversion Rights provided under this Section may be
exercised in whole or in part and at any time and from time to time while any
Options remain outstanding. In order to exercise the Conversion Right, the
Holder shall surrender to the Company, at its offices, this Option accompanied
by the form of Subscription Agreement duly filled in and signed and a duly
completed Conversion Notice in the form attached hereto. The presentation and
surrender shall be deemed a waiver of the Holder's obligation to pay all or any
portion of the aggregate purchase price payable for the Option Shares being
issued upon such exercise of this Option. This Option (or so much thereof as
shall have been surrendered for conversion) shall be deemed to have been
converted immediately prior to the close of business on the day of surrender of
this Option for conversion in accordance with the foregoing provisions. As
promptly as practicable on or after the conversion date, the Company shall issue
and shall deliver to the Holder (i) a certificate or certificates representing
the largest number of whole Option Shares which the Holder shall be entitled as
a result of the conversion, and (ii) if such Option is being converted in part
only, a new Option exercisable for the number of Option Shares equal to the
unconverted portion of the Option. Upon any exercise (which term, as used
herein, shall include any exercise of the Conversion Right) of this Option, in
lieu of any fractional Option Shares to which the Holder shall be entitled, the
Company shall pay to the Holder cash in accordance with the provisions of
Section 5(c) hereof.
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<PAGE> 3
2. Upon each exercise of the Holder's rights to purchase Option Shares,
the Holder shall be deemed to be the holder of record of the Option Shares
issuable upon such exercise, notwithstanding that the transfer books of the
Company shall then be closed or certificates representing such Option Shares
shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise of this Option, the Company shall issue and
deliver to the Holder a certificate or certificates for the Option Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Option should be exercised in part only, the Company shall,
upon surrender of this Option for cancellation, execute and deliver a new Option
evidencing the right of the Holder to purchase the balance of the Option Shares
(or portions thereof) subject to purchase hereunder.
3. Any Options issued upon the transfer or exercise in part of this Option
shall be numbered and shall be registered in an option register (the "Option
Register") as they are issued. The Company shall be entitled to treat the
registered holder of any Option on the Option Register as the owner in fact
thereof for all purposes and shall not be bound to recognize any equitable or
other claim to or interest in such Option on the part of any other person, and
shall not be liable for any registration or transfer of Options which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration or transfer, or
with the knowledge of such facts that its participation therein amounts to bad
faith. This Option shall be transferable only on the books of the Company upon
delivery thereof duly endorsed by the Holder or by his or its duly authorized
attorney or representative, or accompanied by proper evidence of succession,
assignment, or authority to transfer. In all cases of transfer by an attorney,
executor, administrator, guardian or other legal representative, duly
authenticated evidence of his or its authority shall be produced. Upon any
registration of transfer, the Company shall deliver a new Option or Options to
the person entitled thereto. This Option may be exchanged, at the option of the
Holder thereof, for another Option, or other Options of different denominations,
of like tenor and representing in the aggregate the right to purchase a like
number of Option Shares (or portions thereof), upon surrender to the Company or
its duly authorized agent. Notwithstanding the foregoing, the Company shall have
no obligation to cause this Option to be transferred on its books to any person
if, in the opinion of counsel to the Company, such transfer does not comply with
the provisions of the Act and the rules and regulations thereunder.
4. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the Options, such number of shares of Common Stock as shall,
from time to time, be sufficient therefor. The Company covenants that all shares
of Common Stock issuable upon exercise of this Option, upon receipt by the
Company of the full payment therefor, shall be validly issued, fully paid,
nonassessable, and free of preemptive rights.
5. Subject to the provisions of this Section 5, the Exercise Price in
effect from time to time shall be subject to adjustment, as follows:
(a) In case the Company shall at any time after the date the Options
were first issued (i) declare a dividend on the outstanding Common Stock
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<PAGE> 4
payable in shares of its capital stock, (ii) subdivide the outstanding Common
Stock, (iii) combine the outstanding Common Stock into a smaller number of
shares, or (iv) issue any shares of its capital stock by reclassification of the
Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation),
then, in each case, the Exercise Price in effect, and the number of shares of
Common Stock issuable upon exercise of the Options outstanding, at the time of
the record date for such dividend or of the effective date of such subdivision,
combination, or reclassification, shall be proportionately adjusted so that the
holders of the Options after such time shall be entitled to receive the
aggregate number and kind of shares which, if such Options had been exercised
immediately prior to such time, such holders would have owned upon such exercise
and been entitled to receive by virtue of such dividend, subdivision,
combination, or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b) In case the Company shall distribute to all holders of Common Stock
(including any such distribution made to the stockholders of the Company in
connection with a consolidation or merger in which the Company is the continuing
corporation) evidences of its indebtedness, cash (other than any cash dividend
which, together with any cash dividends paid within the 12 months prior to the
record date for such distribution, does not exceed 5% of the Current Market
Price at the record date for such distribution), or assets (other than
distributions and dividends payable in shares of Common Stock), or rights,
options, or warrants to subscribe for or purchase Common Stock, or securities
convertible into or exchangeable for shares of Common Stock, then, in each case,
the Exercise Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to the record date for the determination of stockholders
entitled to receive such distribution by a fraction, the numerator of which
shall be the Current Market Price (as determined pursuant to Section 5(f)
hereof) per share of Common Stock on such record date, less the fair market
value (as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error) of the portion of
the evidences of indebtedness or assets so to be distributed, or of such rights,
options, or warrants or convertible or exchangeable securities, or the amount of
such cash, applicable to one share, and the denominator of which shall be such
Current Market Price per share of Common Stock. Such adjustment shall become
effective at the close of business on such record date.
(c) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-thousandth of a share, as the case may be; provided,
however that, no adjustment in the Exercise Price shall be required if such
adjustment is less than $.05; and provided, further, that any adjustments which
by reason of this Section 5 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. The Company shall not be
required to issue fractions of shares of Common Stock or other capital stock of
the Company upon the exercise of this Option. If any fraction of a share would
be issuable on the exercise of this Option (or specified portions thereof), the
Company shall purchase such fraction for an amount in cash equal to the same
fraction of the Current Market Price (as hereinafter defined) of such share of
Common Stock on the date of exercise of this Option.
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<PAGE> 5
(d) In any case in which this Section 5 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event (an "Event"), the Company may elect to defer, until the
occurrence of such Event, issuing to the Holder, if the Holder exercised this
Option after such record date, the shares of Common Stock, if any, issuable upon
such exercise over and above the number of Option Shares, if any, issuable upon
such exercise on the basis of the Exercise Price in effect prior to such
adjustment; provided, however, that the Company shall deliver to the Holder a
due bill or other appropriate instrument evidencing the Holder's right to
receive such additional shares upon the occurrence of the Event requiring such
adjustment.
(e) Whenever there shall be an adjustment as provided in this Section
5, the Company shall within 15 days thereafter cause written notice thereof to
be sent by registered mail, postage prepaid, to the Holder, at its address as it
shall appear in the Option Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Option Shares issuable
hereunder and the Exercise Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment and the computation thereof,
which officer's certificate shall be conclusive evidence of the correctness of
any such adjustment absent manifest error.
(f) The Current Market Price per share of Common Stock on any date
shall be deemed to be the average of the daily closing prices for the 30
consecutive trading days immediately preceding the date in question. The closing
price for each day shall be the last reported sales price regular way or, in
case no such reported sale takes place on such day, the closing bid price
regular way, in either case on the principal national securities exchange
(including, for purposes hereof, the Nasdaq National Market (the "NASDAQ/NM"))
on which the Common Stock is listed or admitted to trading or, if the Common
Stock is not listed or admitted to trading on any national securities exchange,
the highest reported bid price for the Common Stock as furnished by the National
Association of Securities Dealers, Inc. through NASDAQ or a similar organization
if NASDAQ is no longer reporting such information. If on any such date the
Common Stock is not listed or admitted to trading on any United States national
securities exchange and is not quoted by NASDAQ or any similar organization, the
fair value of a share of Common Stock on such date, as determined in good faith
by the board of directors of the Company, whose determination shall be
conclusive absent manifest error, shall be used.
(g) Upon each adjustment of the Exercise Price as a result of the
calculations made in Section 5(b) hereof, the Options shall thereafter evidence
the right to purchase, at the adjusted Exercise Price, that number of shares
(calculated to the nearest thousandth obtained by dividing (A) the product
obtained by multiplying the number of shares purchasable upon exercise of the
Options prior to adjustment of the number of shares by the Exercise Price in
effect prior to adjustment of the Exercise Price by (B) the Exercise Price in
effect after such adjustment of the Exercise Price.
6. (a) In case of any consolidation with or merger of the Company with or
into another corporation (other than a merger or consolidation in which the
Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of the property and assets of any
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<PAGE> 6
nature of the Company as an entirety or substantially as an entirety (such
actions being hereinafter collectively referred to as "Reorganizations"), there
shall thereafter be deliverable upon exercise of this Option (in lieu of the
number of shares of Common Stock theretofore deliverable) the kind and amount of
shares of stock or other securities or property receivable upon such
Reorganization by a holder of the number of shares of Common Stock, for which
this Option might have been exercised immediately prior to such Reorganization.
In case of any Reorganization, appropriate adjustment, as determined in good
faith by the Board of Directors of the Company, shall be made in the application
of the provisions herein set forth with respect to the rights and interests of
the Holder so that the provisions set forth herein shall thereafter be
applicable, as nearly as possible, in relation to any shares or other property
thereafter deliverable upon exercise of this Option. Any such adjustment shall
be made by and set forth in a supplemental agreement between the Company, or any
successor thereto, and the Holder and shall for all purposes hereof conclusively
be deemed to be an appropriate adjustment. The Company shall not effect any such
Reorganization unless upon or prior to the consummation thereof the successor
corporation, or if the Company shall be the surviving corporation in any such
Reorganization and is not the issuer of the shares of stock or other securities
or property to be delivered to holders of shares of the Common Stock outstanding
at the effective time thereof, then such issuer, shall assume by written
instrument the obligation to deliver to the Holder such shares of stock,
securities, cash or other property as the Holder shall be entitled to purchase
in accordance with the foregoing provisions.
(b) In case of any reclassification or change of the shares of Common
Stock issuable upon exercise of this Option (other than a change in par value or
from no par value to a specified par value, or as a result of a subdivision or
combination of the outstanding shares of Common Stock, but including any change
of the shares of Common Stock into two or more classes or series of shares), or
in case of any consolidation or merger of another corporation into the Company
in which the Company is the continuing corporation and in which there is a
reclassification or change (including a change to the right to receive cash or
other property) of the shares of Common Stock (other than a change in par value,
or from no par value to a specified par value, or as a result of a subdivision
or combination of the outstanding shares of Common Stock, but including any
change of the shares into two or more classes or series of shares), the Holder
shall have the right thereafter to receive upon exercise of this Option solely
the kind and amount of shares of stock and other securities, property, cash, or
any combination thereof receivable upon such reclassification, change,
consolidation, or merger by a holder of the number of shares of Common Stock for
which this Option might have been exercised immediately prior to such
reclassification, change, consolidation, or merger. Thereafter, appropriate
provision shall be made for adjustments which shall be as nearly equivalent as
practicable to the adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
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<PAGE> 7
7. In case at any time the Company shall propose:
(a) to pay any dividend or make any distribution on shares of Common
Stock in shares of Common Stock or make any other distribution (other than
regularly scheduled cash dividends which are not in a greater amount per share
than the most recent such cash dividend) to all holders of Common Stock; or
(b) to issue any rights, warrants or other securities to all holders of
Common Stock entitling them to purchase any additional shares of Common Stock or
any other rights, warrants or other securities; or
(c) to effect any reclassification or change of outstanding shares of
Common Stock, or any consolidation, merger, sale, lease, or conveyance of
property, described in Section 6; or
(d) to effect any liquidation, dissolution or winding-up of the
Company;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Option Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined or (ii) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up.
8. The issuance of any shares or other securities upon the exercise of
this Option and the delivery of certificates or other instruments representing
such shares or other securities shall be made without charge to the Holder for
any tax or other charge in respect of such issuance. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name other
than that of the Holder and the Company shall not be required to issue or
deliver any such certificate unless and until the person or persons requesting
the issue thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
9. (a) If, at any time during the seven-year period commencing on
__________, 1996 the Company shall file a registration statement (other than on
Form S-4, Form S-8, or any successor form) with the Securities and Exchange
Commission (the "Commission") while any Options are outstanding, the Company
shall give all the then holders of any Options (the "Eligible Holders") at least
20 days prior written notice of the filing of such registration statement. If
requested by any Eligible Holder in writing within 10 days after receipt of any
such notice, the Company shall, at the Company's sole expense (other than the
fees and disbursements of counsel for the Eligible Holders and the underwriting
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<PAGE> 8
discounts, if any, payable in respect of the Option Shares sold by any Eligible
Holder), register or qualify all or, at each Eligible Holder's option, any
portion of the Option Shares of any Eligible Holders who shall have made such
request, concurrently with the registration of such other securities, all to the
extent requisite to permit the public offering and sale of the Option Shares
through the facilities of all appropriate securities exchanges and the
over-the-counter market, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable. Notwithstanding the foregoing, if the
managing underwriter of any such offering shall advise the Company in writing
that, in its opinion, the distribution of all or a portion of the Option Shares
requested to be included in the registration concurrently with the securities
being registered by the Company would materially adversely affect the
distribution of such securities by the Company for its own account, then the
Company shall not have an obligation to include such Option Shares in such
registration statement; provided that if any securities of the Company are
included in such registration statement for the account of any person other than
the Company, a pro rata portion of the Option Shares which were requested to be
included shall also be included in such registration statement.
(b) If, on any two occasions during the five-year period commencing on
__________, 1996, the Company shall receive a written request from Eligible
Holders who in the aggregate own (or upon exercise of all Options then
outstanding would own) a majority of the total number of shares of Common Stock
then included (or upon such exercises would be included) in the Option Shares
(the "Majority Holders"), to register the sale of all or part of such Option
Shares, the Company shall, as promptly as practicable, prepare and file with the
Commission a registration statement sufficient to permit the public offering and
sale of the Option Shares through the facilities of all appropriate securities
exchanges and the over-the-counter market, and will use its best efforts through
its officers, directors, auditors, and counsel to cause such registration
statement to become effective as promptly as practicable; provided, that the
Company shall only be obligated to file one such registration statement for
which all expenses incurred in connection with such registration (other than the
fees and disbursements of counsel for the Eligible Holders and underwriting
discounts, if any, payable in respect of the Option Shares sold by the Eligible
Holders) shall be borne by the Company. Within three business days after
receiving any request contemplated by this Section 9(b), the Company shall give
written notice to all the other Eligible Holders, advising each of them that the
Company is proceeding with such registration and offering to include therein all
or any portion of any such other Eligible Holder's Option Shares, provided that
the Company receives a written request to do so from such Eligible Holder within
30 days after receipt by him or it of the Company's notice.
(c) In the event of a registration pursuant to the provisions of this
Section 9, the Company shall use its best efforts to cause the Option Shares so
registered to be registered or qualified for sale under the securities or blue
sky laws of such jurisdictions as the Holder or such holders may reasonably
request; provided, however, that the Company shall not be required to qualify to
do business in any state by reason of this Section 9(c) in which it is not
otherwise required to qualify to do business or otherwise subject itself to
general service of process in any such State.
- 8 -
<PAGE> 9
(d) The Company shall keep effective any registration or qualification
contemplated by this Section 9 and shall from time to time amend or supplement
each applicable registration statement, preliminary prospectus, final
prospectus, application, document and communication for such period of time as
shall be required to permit the Eligible Holders to complete the offer and sale
of the Option Shares covered thereby. The Company shall in no event be required
to keep any such registration or qualification in effect for a period in excess
of nine months from the date on which the Eligible Holders are first free to
sell such Option Shares; provided, however, that, if the Company is required to
keep any such registration or qualification in effect with respect to securities
other than the Option Shares beyond such period, the Company shall keep such
registration or qualification in effect as it relates to the Option Shares for
so long as such registration or qualification remains or is required to remain
in effect in respect of such other securities.
(e) In the event of a registration pursuant to the provisions of this
Section 9, the Company shall furnish to each Eligible Holder such number of
copies of the registration statement and of each amendment and supplement
thereto (in each case, including all exhibits), such reasonable number of copies
of each prospectus contained in such registration statement and each supplement
or amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of the Act and the rules and regulations thereunder,
and such other documents, as any Eligible Holder may reasonably request to
facilitate the disposition of the Option Shares included in such registration.
(f) In the event of a registration pursuant to the provisions of this
Section 9, the Company shall furnish each Eligible Holder of any Option Shares
so registered with an opinion of its counsel (reasonably acceptable to the
Eligible Holders) to the effect that (i) the registration statement has become
effective under the Act and no order suspending the effectiveness of the
registration statement, preventing or suspending the use of the registration
statement, any preliminary prospectus, any final prospectus or any amendment or
supplement thereto has been issued, nor has the Commission or any securities or
blue sky authority of any jurisdiction instituted or threatened to institute any
proceedings with respect to such an order, (ii) the registration statement and
each prospectus forming a part thereof (including each preliminary prospectus),
and any amendment or supplement thereto, complies as to form with the Act and
the rules and regulations thereunder, and (iii) such counsel has no knowledge of
any material misstatement or omission in such registration statement or any
prospectus, as amended or supplemented.
(g) In the event of a registration pursuant to the provision of this
Section 9, the Company shall enter into a cross-indemnity agreement and a
contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses and customary closing
conditions, including, without limitation, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Option Shares.
(h) The Company agrees that until all the Option Shares have been sold
under a registration statement or pursuant to Rule 144 under the Act, it shall,
so long as it is so required by applicable law, keep current in filing all
reports, statements and other materials required to be filed with the
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<PAGE> 10
Commission to permit holders of the Option Shares to sell such securities under
Rule 144.
(i) The Company will not, without the written consent of the Majority
Holders, grant to any persons the right to request the Company to register any
securities of the Company, provided that the Company may grant such registration
rights to other persons so long as such rights do not conflict with the rights
of the Eligible Holders.
10. (a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless each Eligible Holder, its officers, directors,
partners, employees, agents and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all loss, liability, charge, claim, damage and expense
whatsoever (which shall include, for all purposes of this Section 10, without
limitation, reasonable attorneys' fees and any and all expense whatsoever
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation), as and when incurred, arising out of,
based upon, or in connection with (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any registration statement,
preliminary prospectus or final prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, relating to the sale of
any of the Option Shares, or (B) in any application or other document or
communication (in this Section 10 collectively called an "application") executed
by or on behalf of the Company or based upon written information furnished by or
on behalf of the Company filed in any jurisdiction in order to register or
qualify any of the Option Shares under the securities or blue sky laws thereof
or filed with the Commission or any securities exchange; or any omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, unless such statement
or omission was made in reliance upon and in conformity with written information
furnished to the Company with respect to such Eligible Holder by or on behalf of
such person expressly for inclusion in any registration statement, preliminary
prospectus, or final prospectus, or any amendment or supplement thereto, or in
any application, as the case may be, or (ii) any breach of any representation,
warranty, covenant or agreement of the Company contained in this Option. The
foregoing agreement to indemnify shall be in addition to any liability the
Company may otherwise have, including liabilities arising under this Option.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents or counsel, or any controlling
persons of such person (an "indemnified party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability other than pursuant to this Section 10(a) except to
the extent it may have been prejudiced in any material respect by such failure)
and the Company shall promptly assume the defense of such action, including the
employment of counsel (reasonably satisfactory to such indemnified party or
parties) and payment of expenses. Such indemnified party or parties shall have
- 10 -
<PAGE> 11
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such action or the
Company shall not have promptly employed counsel reasonably satisfactory to such
indemnified party or parties to have charge of the defense of such action or
such indemnified party or parties shall have reasonably concluded that there may
be one or more legal defenses available to it or them or to other indemnified
parties which are different from or additional to those available to the
Company, in any of which events such fees and expenses shall be borne by the
Company, and the Company shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties. Anything in this Section
10 to the contrary notwithstanding, the Company shall not be liable for any
settlement of any such claim or action effected without its written consent,
which shall not be unreasonably withheld. The Company shall not, without the
prior written consent (which shall not be unreasonably withheld) of each
indemnified party that is not released as described in this sentence, settle or
compromise any action, or permit a default or consent to the entry of judgment
in or otherwise seek to terminate any pending or threatened action, in respect
of which indemnity may be sought hereunder (whether or not any indemnified party
is a party thereto), unless such settlement, compromise, consent or termination
includes an unconditional release of each indemnified party from all liability
in respect of such action. The Company agrees promptly to notify the Eligible
Holders of the commencement of any litigation or proceedings against the Company
or any of its officers or directors in connection with the sale of any Option
Shares or any preliminary prospectus, prospectus, registration statement or
amendment or supplement thereto, or any application relating to any sale of any
Option Shares. With respect to any untrue statement or alleged untrue statement
made in, or omission or alleged omission from, any preliminary prospectus or
prospectus, the indemnity agreement contained in this Section 10(a) with respect
to such preliminary prospectus or prospectus, to the extent it is based on the
claim of a person who purchased any Option Shares directly from an Eligible
Holder, shall not inure to the benefit of such Eligible Holder (or to the
benefit of any of its officers, directors, partners, employees, agents, counsel,
or any person controlling such Eligible Holder) if the prospectus (or the
prospectus as amended or supplemented if the Company shall have filed with the
Commission any amendment or supplement thereto) which shall have been furnished
to such Eligible Holder prior to the time it sent written confirmation of such
sale to such person does not contain such statement, alleged statement,
omission, or alleged omission and a copy of the prospectus (or the prospectus as
amended or supplemented if the Company shall have filed with the Commission any
amendment or supplement thereto) shall not have been sent or given to such
person and such person shall not otherwise have received a copy thereof at or
prior to the written confirmation of such sale to such person.
(b) Each of the Holder and any Eligible Holder agrees to indemnify and
hold harmless the Company, each director of the Company, each officer of the
Company who shall have signed any registration statement covering Option Shares
held by the Holder and any Eligible Holder, each other person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, and its or their respective counsel, to the same
extent as the foregoing indemnity from the Company to the Holder in Section
10(a), but only with respect to statements or omissions, if any, made in any
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<PAGE> 12
registration statement, preliminary prospectus, or final prospectus (as from
time to time amended and supplemented), or any amendment or supplement thereto,
or in any application, in reliance upon and in conformity with written
information furnished to the Company with respect to the Holder by or on behalf
of the Holder or with respect to any Eligible Holder or by or on behalf of such
Eligible Holder expressly for inclusion in any such registration statement,
preliminary prospectus, or final prospectus, or any amendment or supplement
thereto, or in any application, as the case may be; provided, however, that the
Holder and each Eligible Holder shall be liable only for written information
furnished to the Company by it or on its own behalf for inclusion in a
registration statement. If any action shall be brought against the Company or
any other person so indemnified based on any such registration statement,
preliminary prospectus, or final prospectus, or any amendment or supplement
thereto, or in any application, and in respect of which indemnity may be sought
against the Holder pursuant to this Section 10(b), the Holder and each Eligible
Holder, as the case may be, shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the indemnified parties, by the provisions of Section
10(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 10(a) or
10(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Eligible Holders of the Option
Shares included in such registration in the aggregate (including for this
purpose any contribution by or on behalf of an indemnified party), as a second
entity, shall contribute to the losses, liabilities, claims, damages and
expenses whatsoever to which any of them may be subject, on the basis of
relevant equitable considerations such as the relative fault of the Company and
such Eligible Holders in connection with the facts which resulted in such
losses, liabilities, claims, damages and expenses. The relative fault, in the
case of an untrue statement, alleged untrue statement, omission or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement, omission or alleged omission relates to information supplied
by the Company or by such Eligible Holders, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement, alleged statement, omission or alleged omission. The Company and the
Holder agree that it would be unjust and inequitable if the respective
obligations of the Company and the Eligible Holders for contribution were
determined by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages and expenses (even if the Holder and the other
indemnified parties were treated as one entity for such purpose) or by any other
method of allocation that does not reflect the equitable considerations referred
to in this Section 10(c). In no case shall any Eligible Holder be responsible
for a portion of the contribution obligation imposed on all Eligible Holders in
excess of its pro rata share based on the number of shares of Common Stock owned
- 12 -
<PAGE> 13
(or which would be owned upon exercise of all Option Shares) by it and included
in such registration as compared to the number of shares of Common Stock owned
(or which would be owned upon exercise of all Option Shares) by all Eligible
Holders and included in such registration. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 10(c), each person, if any, who
controls any Eligible Holder within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee,
agent and counsel of each such Eligible Holder or control person shall have the
same rights to contribution as such Eligible Holder or control person and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, each officer of the Company who shall
have signed any such registration statement, each director of the Company and
its or their respective counsel shall have the same rights to contribution as
the Company, subject in each case to the provisions of this Section 10(c).
Anything in this Section 10(c) to the contrary notwithstanding, no party shall
be liable for contribution with respect to the settlement of any claim or action
effected without its written consent. This Section 10(c) is intended to
supersede any right to contribution under the Act, the Exchange Act or
otherwise.
11. Unless registered pursuant to the provisions of Section 9 hereof, the
Option Shares issued upon exercise of the Option shall be subject to a stop
transfer order and the certificate or certificates evidencing such Option
Shares, shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. HOWEVER, SUCH SHARES MAY
NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) A
POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION STATEMENT,
(ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR
(iii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT."
12. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of any Option (and upon surrender of any Option
if mutilated), and upon reimbursement of the Company's reasonable incidental
expenses, the Company shall execute and deliver to the Holder thereof a new
Option of like date, tenor and denomination.
13. The Holder of any Option shall not have, solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Option.
14. This Option shall be construed in accordance with the laws of the
State of New York applicable to contracts made and performed within such State,
without regard to principles of conflicts of law.
15. The Company irrevocably consents to the jurisdiction of the courts of
the State of New York and of any federal court located in such State in
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<PAGE> 14
connection with any action or proceeding arising out of or relating to this
Option, any document or instrument delivered pursuant to, in connection with or
simultaneously with this Option, or a breach of this Option or any such document
or instrument. In any such action or proceeding, the Company waives personal
service of any summons, complaint or other process and agrees that service
thereof may be made in accordance with Section 11 of the Underwriting Agreement.
Dated: , 1996 INTERFERON SCIENCES, INC.
BY: /S/ LAWRENCE M. GORDON
----------------------
LAWRENCE M. GORDON
VICE PRESIDENT
/s/ Andrea Kantor
- -----------------
Assistant Secretary
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<PAGE> 15
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Option.)
FOR VALUE RECEIVED, ______________________ hereby sells, assigns, and
transfers unto ______________ an Option to purchase ______________ shares of
Common Stock, $.01 par value per share, of Interferon Sciences, Inc. (the
"Company"), together with all right, title, and interest therein, and does
hereby irrevocably constitute and appoint ________ attorney to transfer such
Option on the books of the Company, with full power of substitution.
Dated: ______________________
Signature ____________________
NOTICE
The signature on the foregoing Assignment must correspond to the name
as written upon the face of this Option in every particular, without alteration
or enlargement or any change whatsoever.
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<PAGE> 16
ELECTION TO EXERCISE
To: Interferon Sciences, Inc.
783 Jersey Avenue
New Brunswick, New Jersey 08901
The undersigned hereby exercises his or its rights to purchase _______
Option Shares covered by the within Option and tenders payment herewith in the
amount of $_________ in accordance with the terms thereof, and requests that
certificates for such securities be issued in the name of, and delivered to:
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Option Shares shall not be all the Option Shares covered
by the within Option, that a new Option for the balance of the Option Shares
covered by the within Option be registered in the name of, and delivered to, the
undersigned at the address stated below.
Dated: Name
------------------ -------------------------
(Print)
Address:
(Signature)
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<PAGE> 17
CONVERSION RIGHT EXERCISE FORM
(To be executed upon exercise of Option pursuant to Section 1)
The undersigned hereby irrevocably elects to surrender percent of
its Option for such Option Shares pursuant to the Conversion Right provisions of
the within Option, as provided for in Section 1 of such Option.
Please issue a certificate or certificates for such Option Shares in
the name of the undersigned, pay cash for any fractional share pursuant to
Section 5(c) of the Option (if applicable) and issue a new Option for the
unexercised portion thereof (if applicable).
Name
----------------------------------
(Please Print Name, Address and
Social Security No.)
Address
--------------------------------
---------------------------------------
---------------------------------------
Social
Security No.---------------------------
Signature
NOTE ------------------------------
The above signature should
correspond exactly with the
name on the first page of this
Option or with the name of the
assignee appearing in the
assignment form below
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<PAGE> 1
EXHIBIT 5.1
INTERFERON SCIENCES, INC. [LOGO] [LETTERHEAD]
April 3, 1996
Interferon Sciences, Inc.
783 Jersey Avenue
New Brunswick, New Jersey 08901
Gentlemen:
Reference is made to the Registration Statement on Form S-2 (Registration
No. 333-00845) of Interferon Sciences, Inc. (the "Company") relating to the
registration of shares of the Company's common stock, par value $.01 per share
(the "Common Stock").
I am Associate General Counsel of the Company, and have examined such
corporate records and other documents as I have deemed relevant. Based upon the
above, I am of the opinion that the Common Stock to be sold pursuant to the
Registration Statement is validly authorized and issued, fully paid, and
non-assessable.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the use of my name in the Prospectus.
Very truly yours,
Andrea D. Kantor
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Interferon Sciences, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
New York, New York
April 3, 1996
