As filed with the Securities and Exchange Commission on November 6, 2000
Registration No. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
ON FORM S-1
TO FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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INTERFERON SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 325414 22-2313648
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Identification incorporation or organization) Classification Number) Number)
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783 JERSEY AVENUE
NEW BRUNSWICK, NJ 08901
(732) 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
Interferon Sciences, Inc.
783 Jersey Avenue
New Brunswick, New Jersey 08901
(732) 249-3250
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
ROBERT J. HASDAY, ESQ.
Duane, Morris & Heckscher LLP
380 Lexington Avenue
New York, New York 10168
(212) 692-1010
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
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 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 this Form is a post-effective amendment filed pursuant to Rule
462(d) 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. [ ]
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CALCULATION OF REGISTRATION FEE
Proposed
Title of Each Class of Proposed Maximum Maximum
Securities Amount to Offering Price Aggregate Amount of
to be Registered Be Registered Per Share Offering Price Registration Fee
<S> <C> <C> <C> <C>
Common Stock, par value $.01 23,312,302(1) $1.56 $36,367,191 $9,600.94(2)
per share
Common Stock, par value $.01 4,587,518(1) $1.03 $ 4,725,144 $1,247.44(3)
per share
(1) The securities being registered hereby consist of shares of common stock offered from time to time for resale by certain
selling security holders, including shares issuable upon exercise of warrants. Also registered hereunder is such indeterminate
number of additional shares of common stock that may become issuable pursuant to the anti-dilution provisions of such warrants.
(2) Previously paid on August 4, 2000.
(3) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the amount of the registration fee and based upon
the closing price per share of the common stock, on October 26, 2000, as reported on the OTC Bulletin Board, of $1.03.
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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Information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the SEC is
effective. This is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
PROSPECTUS SUBJECT TO COMPLETION
November _____, 2000
INTERFERON SCIENCES, INC.
27,899,820 SHARES OF COMMON STOCK
We have prepared this prospectus to allow the selling stockholders we
identify herein to sell up to 27,899,820 shares of our common stock (which
includes 15,069,569 shares of common stock issuable upon exercise of warrants).
We will not receive any of the proceeds from the sale of common stock by the
selling stockholders. However, we could receive up to $21,122,024 upon exercise
of the warrants. Any proceeds we receive from the exercise of the warrants will
be used for general corporate purposes.
We expect that sales made pursuant to this prospectus will be made
- in broker's transactions,
- in transactions directly with market makers, or
- in negotiated sales or otherwise
The shares may be sold at current market prices or at negotiated prices
at the time of the sale. We will pay the expenses incurred to register the
shares for resale, but the selling stockholders will pay any underwriting
discounts, concessions, and brokerage commissions associated with the sale of
their shares.
The selling stockholders and the brokers and dealers that they utilize
may be deemed to be "underwriters" within the meaning of the securities laws,
and any commissions received and any profits realized by them on the sale of
shares may be considered to be underwriting compensation.
Our common stock is traded on the OTC Bulletin Board under the symbol
"IFSC." On October 26, 2000, the last reported sale price of our common stock on
the OTC Bulletin Board was $1.03 per share.
Investing in our common stock involves a high degree of risk. See "Risk Factors"
beginning on page 4.
Neither the SEC nor any state securities commission has approved the common
stock nor have these organizations determined that this prospectus is accurate
or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is November __, 2000.
This prospectus contains forward-looking statements relating to future
events or our future financial performance. These statements are only
predictions and actual events or results may be materially different from our
predictions. In evaluating these statements, you should consider the various
factors identified in this prospectus, including but not limited to the matters
set forth under the heading "Risk Factors," which could cause actual results to
differ materially from those indicated by such forward-looking statements.
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. Neither we nor the
selling stockholders have authorized anyone else to provide you with different
information. Neither we nor the selling stockholders are making an offer of
these securities in any state where the offer is not permitted. You should not
assume that the information in this prospectus is accurate as of any date other
than the date on the front of the prospectus.
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SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read this entire prospectus carefully before deciding to
acquire shares of our common stock. This prospectus contains forward-looking
statements, which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this prospectus. All references to "we," "our," "us," "our
company," "the Company," or "ISI" in this prospectus refer to Interferon
Sciences, Inc. and its subsidiary.
The Company
Interferon Sciences, Inc. is a biopharmaceutical company which studies,
manufactures, and sells pharmaceutical products based on its highly purified,
multispecies, natural source alpha interferon ("Natural Alpha Interferon"). Our
ALFERON N Injection(R) (Interferon Alfa-n3) product has been approved by the
United States Food and Drug Administration ("FDA") for the treatment of certain
types of genital warts and we have studied its potential use in the treatment of
human immunodeficiency virus ("HIV"), hepatitis C virus ("HCV"), and other
indications. We have also studied ALFERON N Gel(R) and ALFERON LDO(R), our
topical and oral formulations of Natural Alpha Interferon, for the potential
treatment of viral and immune system diseases. In addition, we are seeking to
enter into collaborations with companies in the areas of cancer, infectious
diseases, and immunology. Our strategy is to utilize our expertise in regulatory
affairs, clinical trials, manufacturing, and research and development to acquire
equity participations in early stage companies. Our principal executive offices
are located at 783 Jersey Avenue, New Brunswick, New Jersey 08901, and our
telephone number is (732) 249-3250.
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The Offereing
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Shares Offered......................27,899,820 shares of common stock to be offered by the selling stockholders named in this
prospectus. The shares include 15,069,569 shares that we will issue to the selling stockholders
on exercise of warrants held by them.
Offering Price......................Determined at the time of sale by the selling stockholders.
Shares Outstanding..................17,949,897 at October 31, 2000
Use of Proceeds.....................We will not receive any of the proceeds of the shares offered by the selling stockholders
Any proceeds we received from the sale of shares on exercise of warrants by the selling
stockholders will be used for general corporate purposes. See "Use of Proceeds."
OTC Bulletin Board Symbol...........IFSC
Risk Factors........................Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on
page 4.
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RISK FACTORS
You should carefully consider the following factors, as well as the
other information in this prospectus, before purchasing our common stock.
You should be cautioned that the following important factors have
affected, and in the future could affect, our actual results. There may be
additional factors not discussed in this prospectus that could also affect
future results. These factors could cause our future financial results to differ
materially from those expressed in any forward-looking statements made by us.
Forward-looking statements may relate to such matters as:
- our ability to generate future revenues;
- the potential commercialization of our products; and
- our ability to enter into future business collaborations and marketing
partnerships.
Forward-looking statements may include words such as "will," "should,"
"could," "anticipate," "believe," "plan," "estimate," "expect," "intend," and
other similar expressions. This list does not constitute all factors that you
should consider prior to making an investment decision in our securities. You
should also not assume that the information contained herein is complete or
accurate in all respects after the date of this filing. We disclaim any duty to
update the statements contained herein.
History Of Operating Losses; Uncertainty Of Future Financial Results
We have experienced significant operating losses since our inception in
1980. For the years ended December 31, 1999, 1998, and 1997, we had losses from
operations of $5.4 million, $20.8 million, and $22.4 million, respectively. We
expect such losses to continue until significant sales of ALFERON N Injection
occur, or we enter into successful collaborations with other companies. Although
we received approval to market ALFERON N Injection for the treatment of genital
warts from the FDA in October 1989 and from certain foreign countries many years
ago, we have had only limited revenues from the sale of ALFERON N Injection.
There can be no assurance that sales of ALFERON N Injection will ever reach a
level that will enable us to operate profitably. Future financial results will
be affected by, among other things, the following factors:
- our ability to increase the market for ALFERON N Injection;
- the willingness of potential strategic partners to market ALFERON N
Injection;
- our ability to enter into collaborations with promising companies;
- the costs related to any new collaborations with other companies;
- the progress of our research and development programs;
- the progress of our preclinical and human clinical studies;
- the time, costs, and ability of obtaining regulatory approvals for
those products subject to such approvals;
- our ability to protect our proprietary rights;
- the costs of protecting our patent claims;
- competing technological and market developments;
- manufacturing costs associated with our various products and potential
products; and
- the costs of commercializing and marketing our products.
Need For Additional Capital
Additional funds will be required to:
- enable us to continue our research and development activities;
- conduct preclinical and clinical studies;
- fund our obligations in any new collaborations with other companies;
and
- manufacture and market our products.
Management is likely to pursue various financing alternatives to obtain
these funds, including:
- equity issuances;
- lease financing;
- collaborative arrangements with partners; and/or
- asset-based financing.
The level of expenditures required for these activities will depend in
part on the extent to which we develop, manufacture, and market ALFERON N
Injection independently or with other companies through collaborative
arrangements. Our future capital requirements will also depend, among other
things, on one or more of the following factors:
- our obligations in any new collaborations;
- the extent and progress of our research and development programs;
- the progress of preclinical and clinical studies;
- the time and costs of obtaining regulatory clearances for those
products subject to such clearances;
- the costs involved in filing, protecting, and enforcing patent claims;
- competing technological and market developments;
- the cost of capital expenditures at our manufacturing facilities;
- the costs of marketing and commercializing our products; and
- our ability to attract partners to help market and/or manufacture our
products.
There is no assurance that funding to carry on these activities will be
available at all or on favorable terms to permit successful commercialization of
ALFERON N Injection or of any products which we collaborate on with other
companies
If adequate funds are not available, we may be required to:
- curtail one or more of our research and development programs;
- curtail manufacturing and commercialization programs; and/or
- obtain funds through arrangements with collaborative partners or
others, if possible.
These arrangements may require us to relinquish certain technology or
product rights, including patent and other intellectual property rights.
Equity Participations
Our strategy of seeking to acquire equity participations in early stage
companies subjects us to all of the risks inherent in such companies, including:
- the uncertainty of whether such companies can obtain require
funding on acceptable terms or at all;
- the uncertainty as to whether such companies can complete the
research and development of a commercially viable product;
- the risk that such companies may not be able to adequately protect
their intellectual property, or that their technology will infringe
the intellectual property of third parties; and
- the risk that superior technologies will be developed.
There are also other risks involved in investing in such companies,
including:
- the limited basis on which we can evaluate the business and prospects of such
companies;
- we will have to compete with others seeking to acquire interests in such
companies, and we may not be able to acquire such interests on terms acceptable
to us or at all;
- since we contemplate generally not acquiring a controlling interest in such
companies, any success we have will be largely dependent upon the efforts of the
management of such companies, over which we may have limited control; and
- the uncertainty of whether we will have an acceptable exit strategy. No
Guaranteed Source Of Required Materials
We use a number of essential materials in the production of ALFERON N
Injection, including human white blood cells, and we have a limited number of
sources from which to obtain such materials. We do not have long-term agreements
for the supply of any of such materials. There can be no assurance we can enter
into long-term supply agreements covering essential materials on commercially
reasonable terms, if at all. If we are unable to obtain the required raw
materials, we may be required to scale back our operations or stop manufacturing
ALFERON N Injection. The costs and availability of products and materials we
need for the commercial production of ALFERON N Injection and other products
which we may commercially produce are subject to fluctuation depending on a
variety of factors beyond our control, including competitive factors, changes in
technology, and FDA and other governmental regulation and there can be no
assurance that we will be able to obtain such products and materials on terms
acceptable to us or at all.
Limited Marketing Program
In June 1998, we entered into an agreement with Integrated
Commercialization Solutions, Inc. ("ICS"), a subsidiary of Bergen Brunswig
Corporation, pursuant to which ICS became the sole United States distributor of
ALFERON N Injection. ICS also provides clinical and product information,
reimbursement information and services, and management of patient assistant
services. Although we currently have marketing arrangements for the distribution
of ALFERON N Injection in Mexico and Germany, substantially all of the revenues
derived from the sales of ALFERON N Injection are in the United States. Unless
we successfully develop our own sales force or enter into additional marketing
arrangements with other companies, we will be dependent on the ability of our
current distributors to sell sufficient quantities of ALFERON N Injection to
allow us to operate profitably. There can be no assurance that we will be able
to develop our own sales force or enter into additional marketing agreements on
acceptable terms, if at all, or that we will be able to successfully market and
sell ALFERON N Injection or any other product.
Products Under Development
We are currently evaluating the development of ALFERON N Injection for
the treatment of multiple sclerosis and certain types of cancer. We are also
planning additional clinical trials in order to expand the potential uses of
Alferon N Injection for the treatment of human papilloma virus ("HPV") and other
related areas. However, there can be no assurance that these products will be
cost-effective, safe, or effective treatments for these diseases, and there is
no assurance of receiving regulatory approvals to market these products. We
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. Our ability
to become profitable depends on the successful commercial development of these
products or our entering into successful collaborations with other companies.
Potential Side Effects
We manufacture and sell only one FDA approved product, ALFERON N
Injection for the intralesional 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 did not experience serious side
effects; however, there can be no assurance that unexpected or unacceptable side
effects will not be found in the future for this use or other potential uses of
ALFERON N Injection or for any other product which we may develop which could
threaten or limit such product's usefulness.
Risk Of Product Liability
Our 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. We may sell products that
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 our
products, and there can be no assurance that we 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 that might be imposed as a
result of any claims or the cost of defending such claims. We have product
liability insurance in the amount of $10,000,000. Although we believe this
amount is sufficient, there is no assurance that we will be able to maintain
such coverage, and even if we do maintain it, in the event that we become
subject to liability claims in excess of any insurance coverage we may have in
effect, we may not have sufficient assets or liquidity to satisfy such claims
which could result in the inability to continue our operations. Furthermore, any
published reports or rumors suggesting a link between any of our products and
injury to a person could be expected to materially impair our ability to market
such product.
Substantial Competition
Many of our 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 we or our marketing partners have.
We currently compete with Schering-Plough Corp.'s ("Schering")
injectable recombinant interferon product for the treatment of genital warts.
Minnesota Mining & Manufacturing Co. also received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of genital warts. ALFERON N Injection also competes with surgical,
chemical, and other methods of treating genital warts. We cannot assess the
impact products developed by our competitors or advances in other methods of the
treatment of genital warts will have on the commercial viability of ALFERON N
Injection.
If and when we obtain additional approvals of uses of our products, we
expect to compete primarily on the basis of product performance. Our potential
competitors have developed or may develop products (containing either alpha
interferon or other therapeutic compounds) or other treatment modalities for
those uses. In the United States, two recombinant forms of beta interferon have
been approved for the treatment of relapsing-remitting multiple sclerosis. There
can be no assurance that, if we are able to obtain regulatory approval of
ALFERON N Injection for the treatment of new indications, we 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.
Currently, our 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 we do,
obtaining approvals for such products from the FDA more rapidly than we do, or
developing products that are more effective than those we may develop. While we
will attempt to expand our 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 our technology or products obsolete or
non-competitive or result in treatments or cures superior to any therapy we
develop.
Potential Patent Infringement Claims
On March 5, 1985, the United States Patent and Trademark Office issued
a patent to Hoffmann-La Roche, Inc. ("H-LR") claiming purified human alpha
(leukocyte) interferon (regardless of how it is produced). F. Hoffmann-LaRoche
Ltd. ("Roche"), the parent of H-LR, also has been issued patents covering human
alpha interferon in many countries throughout the world. As of March 31, 1995,
we obtained a non-exclusive perpetual license from H-LR and Roche (collectively,
"Hoffmann") that grants us the worldwide rights to make, use, and sell, without
a potential patent infringement claim from Hoffmann, any formulation of Natural
Alpha Interferon. The license permits us to grant marketing rights with respect
to Natural Alpha Interferon products to third parties, except that we cannot
grant marketing rights with respect to injectable formulations of Natural Alpha
Interferon in any country in which Hoffmann 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, which consent
cannot be unreasonably withheld. There can be no assurance that we will not want
to grant such marketing rights to a third party not listed on such schedule, or
that Hoffmann will not withhold the required consent. In addition, if such
license were terminated, we may be subject to a patent infringement lawsuit by
Hoffmann if we continue to market Natural Alpha Interferon products. If such a
suit were brought, we would have to either counterclaim to attempt to invalidate
the Hoffmann patents or prove that we do not infringe such patents.
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 our
potential competitors, with respect to the technologies and/or products that we
may require to produce our current and proposed products. If any of such patents
issue in the United States or in foreign countries in a form that covers our
products or processes, we 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 we could obtain licenses under any
of such patents if so issued, particularly if they were issued to companies
directly in competition with us, or that, even if we could obtain licenses, we
could do so on commercially reasonable terms.
If the sale or use of any of our products were to become the basis of a
patent infringement lawsuit, assuming we could not obtain a license on
satisfactory terms, we 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 our financial condition even if we were
successful in the litigation. If we were not successful in such litigation, we
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 we could obtain a license under such patents on commercially reasonable
terms or at all, or that we could successfully redevelop the products to fall
outside the scope of the claim.
Our policy is to seek licenses if we believe 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, our ability to protect rights in any of our
products or technology we may develop depends upon our ability to obtain
suitable patent or similar protection. Our ability to obtain patents, and the
nature, extent, and enforceability of the intellectual property rights that are
obtained as a result of our research, involve complex legal and factual issues.
New technology and products that we develop may not qualify for patent
protection or, if they do qualify, may be subject to challenge or to protracted
judicial proceedings. In addition, we may determine not to seek additional
patent or other protection for our technology or products. It is not certain
that other patents will be issued or, if issued, that they will afford us
protection from competitive products. Although our practice is to require our
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 our proprietary information. In addition, we have a non-exclusive
license agreement with Hoffmann that enables us to sell ALFERON N Injection.
There can be no assurance that Hoffmann has not granted or will not grant a
similar license to another company with considerably greater financial,
technical, and marketing resources than we have or that Hoffmann will not enter
the market itself with a competitive product.
While we have been issued a United States patent for Natural Alpha
Interferon produced from human peripheral blood leukocytes and our production
process and have several patent applications pending, it is possible that others
have or may develop equivalent or superior products or technologies which would
not fall within the scope of our patent claims or which might involve inventions
similar in scope to those of ours for which patent or similar rights are
obtained by others prior to the time that we are able to do so.
Regulatory Approvals
The production and marketing of our products in the United States, as
well as our 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 our
products in the United States. In order to obtain such FDA approval, we 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 us 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 that 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 we do not handle a specific portion of the manufacturing
process for a product, we must similarly receive FDA approval for the
participation by such third party in the manufacturing process. For example, we
have an agreement with Abbott Laboratories, Inc. ("Abbott") pursuant to which
Abbott formulates and packages ALFERON N Injection. We presently have a biologic
establishment license for the facilities in which we produce ALFERON N
Injection, which includes the facilities in which Abbott formulates and packages
ALFERON N Injection. If our or Abbott's present manufacturing facilities were
damaged or destroyed or our agreement with Abbott 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 our
ability to develop, produce, and sell our products. In addition, if we fail to
comply in any respect with FDA requirements with respect to the production and
marketing of biological drug products, we could be subject to potential civil
and criminal penalties. In addition, our products could be subject 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.
Foreign Regulatory Approvals
To market our products outside of the United States, we are 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 our products will
receive such approvals. In addition, under certain circumstances, we may be
required to obtain FDA authorization to export products for sale in foreign
countries. For instance, in most cases, we may not export products that have not
been approved by the FDA unless we first obtain an export permit from the FDA.
However, these FDA export restrictions generally do not apply if our products
are exported in conformance with their United States approvals or are
manufactured outside the United States. At the present time, we do not have any
foreign manufacturing facilities.
Royalty Obligations
We have entered into certain license agreements pursuant to which we
are obligated to pay royalties based upon the commercial exploitation of our
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 our net sales of such products. Such royalty
obligations, together with any additional royalties that we may become obligated
to pay in the future, may limit our marketing strategies and prevent us from
obtaining adequate profit margins and could have a material adverse effect on
the commercial exploitation of our products.
In connection with the acquisition of certain intellectual property and
technology rights from GP Strategies Corporation ("GP Strategies"), we agreed to
pay GP Strategies a royalty of $1 million. Such amount is payable if and when we
generate income before income taxes, limited to 25% of such income before income
taxes per year until such amount is paid in full. Since we have not had income
before taxes, we have not made any payments to GP Strategies.
Retention Of Key Personnel
Because of the specialized scientific nature of our 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 we will continue to attract and retain personnel of high
scientific caliber. Other than Mr. Gordon, our Chief Executive Officer, Dr.
Schutzbank, our President, and Dr. Ronel, our Chairman of the Board, none of our
other key employees have employment agreements. We do not maintain key man life
insurance for any of our key employees and do not intend to obtain such
insurance. If we lose the services of certain of our employees, it could have a
material adverse effect on our operations.
Preferred Stock
Our charter allows us to issue up to 5,000,000 shares of preferred
stock, the rights, preferences, qualifications, limitations, and restrictions
that 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 the change of control of ISI.
Options And Warrants
As of October 31, 2000, we had outstanding options and warrants to
purchase 17,098,326 shares of common stock. For the life of the outstanding
options and warrants, 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 or warrants, 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 or warrants during the exercise period, then such
securities will expire worthless. As long as the outstanding options and
warrants remain unexercised, the terms under which we could obtain additional
capital may be adversely affected. Moreover, the holders of these securities may
be expected to exercise them at a time when we would, in all likelihood, be able
to obtain any needed capital by a new offering of our securities on terms more
favorable than those provided by these securities.
Possible Volatility Of Stock Price; Limited Liquidity; Absence Of Dividends
The market price of our common stock may experience a high level of
volatility, as frequently occurs with publicly traded emerging growth companies
and biosciences companies. The market price of our stock may be significantly
impacted, among other things, by:
- announcements of technological innovations or new commercial products by us or
our competitors;
- developments or disputes concerning patent or proprietary rights;
- publicity regarding actual or potential medical results relating to products
under development by us or our competitors;
- general regulatory developments affecting our products in both the United
States and foreign countries;
- market conditions for emerging growth companies and biosciences companies and
economic and other internal and external factors;
- period-to-period fluctuations in financial results; and
- our ability to enter into collaborations with third parties to market our
products.
We have never declared or paid any cash dividends on our common stock
and do not intend to do so for the foreseeable future.
Shares Eligible For Future Sale; Registration Rights
As of October 31, 2000, we had 17,949,897 outstanding shares of common
stock, approximately 5.1 million of which are available for sale in the public
marketplace and the remaining approximately 12.8 million of which will become
available for sale on the date of this Prospectus. There were also outstanding
stock options to purchase an aggregate of 1,937,380 shares of common stock at
prices ranging from $.25 to $1.50 per share and warrants to purchase 15,160,946
shares of common stock at prices ranging from $.66 to $48 per share. Shares of
common stock that may be issued under outstanding options and warrants will be
available for sale in the public markets. In addition, certain holders of the
common stock have certain demand and piggyback registration rights pursuant to a
registration rights agreement between us and these holders. No prediction can be
made as to the effect, if any, that sales of shares of common stock or the
availability of such shares for sale will have on the market prices of the
common stock prevailing from time to time. The possibility that substantial
amounts of common stock may be sold in the public market may adversely affect
prevailing market prices for the common stock. This could impair our ability to
raise capital through the sale of equity securities. Further, if we were
required to include shares, through exercise of the outstanding piggyback
registration rights, in a company-initiated registration, the sale of such
shares could have a material adverse effect on our ability to raise additional
capital.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Our Common Stock is traded on the OTC Bulletin Board and is quoted
under the symbol IFSC. On April 13, 1999, the Common Stock was delisted from the
NASDAQ National Market System for failure to maintain certain listing
requirements. 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 April 13, 1999 and on the OTC Bulletin Board commencing
April 14, 1999.
<TABLE>
<CAPTION>
All prices have been adjusted for a one-for-five reverse stock split
effective as of January 6, 1999.
2000 1999 1998
---- ---- ----
Quarter High Low High Low High Low
------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C>
First $5 5/8 $ 5/16 $2 1/2 $ 3/4 $46 7/8 $18 29/32
Second 3 1 1/8 1 3/16 35 15/16 4 17/32
Third 2 9/16 1 5/16 1/2 7/32 6 1/4 2 1/2
Fourth (through
October 31, 2000) 1 1/4 1 1/32 15/32 1/8 8 3/4 1 13/32
As of October 15, 2000, the Company had 1,300 stockholders of record.
</TABLE>
We have not paid any dividends on our Common Stock since our inception
and do not contemplate paying dividends on our Common Stock in the foreseeable
future.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of common
stock by the selling stockholders. If all the warrants are exercised in full, we
will receive up to approximately $21.1 million, which will be used for general
corporate purposes. There can be no assurance, however, that the selling
stockholders will exercise the warrants in full or at all.
<PAGE>
SELECTED FINANCIAL DATA
.........The selected financial data presented below under the captions
"Selected Income Statement Data" and "Selected Balance Sheet Data" for, and as
of the end of, each of the years in the five-year period ended December 31,
1999, are derived from the consolidated financial statements of the Company
which financial statements have been audited by KPMG LLP, independent certified
public accountants. The consolidated financial statements as of December 31,
1999 and 1998 and for each of the years in the three-year period ended December
31, 1999, and the report thereon, are included elsewhere in this Prospectus. The
selected unaudited financial data as of June 30, 2000 and for the six months
ended June 30, 2000 and 1999, are derived from the unaudited consolidated
financial statements of the Company which are included elsewhere in this
Prospectus and include all adjustments consisting only of normal recurring
adjustments necessary for a fair presentation of the operating results and
financial position as of and for the unaudited periods. The selected financial
data should be read in conjunction with the consolidated financial statements as
of December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998
and 1997, the related notes and the audit report, appearing elsewhere in this
Prospectus, which contains an explanatory paragraph that states the Company has
suffered recurring losses from operations and has an accumulated deficit that
raise substantial doubt about its ability to continue as a going concern. The
consolidated financial statements and selected financial data do not include any
adjustments that might result from that uncertainty. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Consolidated Financial Statements."
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
June 30,
------------------ ---------------------------------------------
(Thousands of dollars except per share data)
2000 1999 1999 1998 1997 1996 1995
(restated)
---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Income (unaudited)
Statement Data:
Revenues $ 321 $ 986 $2,329 $ 2,007 $ 2,956 $ 2,092 $ 1,296
Cost of goods sold and
excess/idle production
costs 655 2,224 3,552 6,533 1,858 1,400 3,076
Research and development
costs, net 458 1,943 3,060 8,655 11,864 6,400 3,726
General and administrative
expense 966 1,285 2,315 4,570 4,389 3,405 1,940
Loss from operations(2)(3) (1,623) (3,883) (5,420) (20,841) (22,410) (12,426) (7,447)
Interest (expense and
financing costs) income, net (10) (245) (530) 253 670 441 75
Gain on sale of state net
operating loss carryovers 2,349
Net loss(2)(3) (1,633) (4,128) (3,602) (21,325) (21,740) (11,986) (7,372)
Basic and diluted loss per
share of common stock(2)(3)(4) (.22) (.84) (.71) (6.67) (8.15) (5.98) (5.55)
Dividends NONE NONE NONE NONE NONE NONE NONE
</TABLE>
<TABLE>
December 31,
June 30, ________________________________________
2000 1999 1998 1997 1996 1995
(unaudited) ____ ____ ____ ____ ____
---------
<S> <C> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Total assets $7,181 $6,256 $6,599 $24,153 $27,743 $13,953
Working capital (deficiency) 879 (2,097) (1,889) 14,529 19,929 7,062
Stockholders' equity 3,777 557 2,103 20,214 25,374 12,827
(1) The June 30, 1999 information has been restated to correct certain accounts (see Note 6 to the consolidated financial
statements as of and for the six-month period ended June 30, 2000).
(2) The loss from operations and the net loss and loss per share data include
a (reversal)/provision for excess inventory of $(1,177,531), $3,089,841
and $7,254,710 in 1999, 1998 and 1997, respectively.
(3) The loss from operations and the net loss and loss per share data for 1997 include a $3,313,705
charge for reacquisition of marketing rights.
(4) Prior periods have been restated to reflect the effect of the one-for-four
reverse stock split effective as of March 21, 1997 and for the
one-for-five reverse stock split effective as of January 6, 1999.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since 1981, the Company has been primarily engaged in the research and
development of pharmaceutical products containing Natural Alpha Interferon. The
Company has experienced significant operating losses since its inception. The
Company received FDA approval in 1989 to market ALFERON N Injection in the
United States for the treatment of certain genital warts. ALFERON N Injection is
currently marketed and sold in the United States by the Company and in Mexico
and Germany by licensees. However, the Company has had limited revenues from the
sale of ALFERON N Injection to date. 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. Management is continuing to pursue raising
additional capital by either (i) issuing securities in a private equity
offering, or (ii) licensing the rights to its injectable, topical or oral
formulations of alpha interferon. The Company has primarily financed its
operations to date through private placements and public offerings of the
Company's securities. This may be more difficult in the future in light of the
FDA's requirement for the Company to conduct additional Phase 3 studies of
ALFERON N Injection in the treatment of patients infected with the human
immunodeficiency virus ("HIV") and hepatitis C virus ("HCV").
Liquidity and Capital Resources
The Company recently completed a private offering in which it raised
gross proceeds of $7,679,380 from the sale of 11,635,451 shares of common stock
at a price of $0.66 per share and warrants, exercisable until April 2005 to
purchase 11,635,451 shares of common stock at a price of $1.50 per share. The
proceeds from this private placement will be used to fund new initiatives, in
addition to funding certain projects within the Company's existing
interferon-related operations. The Company is seeking to enter into
collaborations with companies in the areas of cancer, infectious diseases, and
immunology. The strategy is to utilize our expertise in regulatory affairs,
clinical trials, manufacturing, and research and development to acquire equity
participations in early stage companies. As of October 31, 2000, the Company had
an aggregate of approximately $4,400,000 in cash and cash equivalents. Until
utilized, such cash and cash equivalents are being invested principally in
short-term interest-bearing investments.
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 pre-clinical testing and clinical
trials; the time and costs involved in obtaining regulatory approvals; the costs
involved in filing, prosecuting, and enforcing patent claims; competing
technologies and market developments; changes in its existing research
relationships; and the ability of the Company to establish collaborative
arrangements and effective commercialization activities and arrangements.
Based on the Company's estimates of revenues, expenses, the timing of
repayment of creditors, and levels of production, management believes that the
cash presently available will be sufficient to enable the Company to continue
operations until at least September 30, 2001. However, actual results,
especially with respect to revenues, may differ materially from such estimate,
and no assurance can be given that additional funding will not be required
sooner than anticipated or that such additional funding, whether from financial
markets or collaborative or other arrangements with corporate partners or from
other sources, will be available when needed or on terms acceptable to the
Company. Insufficient funds will require the Company to further 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. The independent auditors' report, dated
April 10, 2000, on the Company's consolidated financial statements as of and for
the year ended December 31, 1999 included an explanatory paragraph that states
that the Company has suffered recurring losses from operations and has an
accumulated deficit that raise substantial doubt about its ability to continue
as a going concern.
The Company participates in the State of New Jersey's corporation
business tax benefit certificate transfer program (the "Program"), which allows
certain high technology and biotechnology companies to transfer unused New
Jersey net operating loss carryovers to other New Jersey corporation business
taxpayers. During 1999, the Company submitted an application to the New Jersey
Economic Development Authority (the "EDA") to participate in the Program and the
application was approved. The EDA then issued a certificate certifying the
Company's eligibility to participate in the Program and the amount of New Jersey
net operating loss carryovers the Company has available to transfer. Since New
Jersey law provides that net operating losses can be carried over for up to
seven years, the Company may be able to transfer its New Jersey net operating
losses from the last seven years. The Company estimated that, as of January 1,
1999, it had approximately $85 million of unused New Jersey net operating loss
carryovers available for transfer under the Program. The Program requires that a
purchaser pay at least 75% of the amount of the surrendered tax benefit.
During December 1999, the Company completed the sale of approximately
$32 million of its New Jersey tax loss carryovers and received $2.35 million. In
June 2000, the Company submitted an application to sell an additional $4.8
million of tax benefits (calculated by multiplying the Company's unused New
Jersey net operating loss carryovers of approximately $53 million by 9%). The
actual amount of such tax benefits the Company may sell will depend upon the
allocation among qualifying companies of an annual pool established by the State
of New Jersey. The allocated pool for fiscal year 2000 and future years is $40
million per year.
The Company obtained human white blood cells used in the manufacture of
ALFERON N Injection from several sources, including the Red Cross pursuant to a
supply agreement dated April 1, 1997 (the "Supply Agreement"). The Company will
not need to purchase more human white blood cells until such time as production
of crude alpha interferon is resumed, and has not purchased any since April 1,
1998. Under the terms of the Supply Agreement, the Company was obligated to
purchase a minimum amount of human white blood cells each month through March
1999 (the "Minimum Purchase Commitment"), with an aggregate Minimum Purchase
Commitment during the period from April 1998 through March 1999 in excess of
$3,000,000. As of November 23, 1998, the Company owed the Red Cross
approximately $1.46 million plus interest at the rate of 6% annum accruing from
April 1, 1998 (the "Red Cross Liability") for white blood cells purchased
pursuant to the Supply Agreement.
In an agreement dated November 23, 1998, the Company agreed to grant
the Red Cross a security interest in certain assets to secure the Red Cross
Liability and to issue to the Red Cross 300,000 shares of Common Stock (with a
market value of $1,171,875 at December 4, 1998) and additional shares at some
future date as requested by the Red Cross. The Red Cross agreed that any net
proceeds received by it upon sale of such shares would be applied against the
Red Cross Liability and that at such time as the Red Cross Liability was paid in
full, the Minimum Purchase Commitment would be deleted effective April 1, 1998
and any then existing breaches of the Minimum Purchase Commitment would be
waived. In January 1999 the Company granted the Red Cross a security interest
(the "Security Interest") in, among other things, the Company's real estate,
equipment inventory, receivables, and New Jersey net operating loss carryovers
to secure repayment of the Red Cross Liability, and the Red Cross agreed to
forbear from exercising its rights under the Supply Agreement, including with
respect to collecting the Red Cross Liability, until June 30, 1999 (which was
subsequently extended until December 31, 1999). On December 29, 1999, the
Company, the Red Cross and GP Strategies entered in an agreement pursuant to
which the Red Cross agreed that until September 30, 2000 it would forbear from
exercising its rights under (i) the Supply Agreement, including with respect to
collecting the Red Cross Liability, and (ii) the Security Interest. As of the
date hereof, the Red Cross has not given the Company notice of its intent to
exercise its rights to collect the Red Cross Liability. Under the terms of such
agreement, the Company is allowing the Red Cross to sell the Company's real
estate. In the event the Red Cross is successful in selling the Company's real
estate, the Company would hope to be able to enter into a lease with the new
owner, although there can be no assurance.
As the liability to the Red Cross remains unsettled until such time as
the Red Cross sells the shares it has already received and could receive in the
future, the Company recorded any shares issued to the Red Cross as "Settlement
Shares" within stockholders' equity. Any decreases in the market value of the
Company's common stock below $1.2 million, until such time as the Red Cross were
to sell its shares, would impact the value of the shares held by the Red Cross
and accordingly require an adjustment to "Settlement Shares". Due to the decline
in the Company's stock price during 1999, an adjustment for $550,000 was
recorded with a corresponding charge to cost of goods sold. Due to the increase
in the Company's stock price during the three months ended March 31, 2000 up to
the date of sale by the Red Cross of all remaining Settlement Shares, an
adjustment for $287,341 was recorded with a corresponding credit to cost of
goods sold. During 1999, the Red Cross sold 27,000 of the Settlement Shares and
sold the balance of such shares (273,000 shares) during the first quarter of
2000. As a result, the net proceeds from the sales of the Settlement Shares,
$33,000 in 1999 and $368,000 in 2000, were applied against the liability to the
Red Cross. The remaining liability to the Red Cross at September 30, 2000 and
December 31, 1999 was approximately $1,260,000 and $1,579,000, respectively. On
October 30, 2000, the Company issued an additional 800,000 shares to the Red
Cross which are part of this offering. The net proceeds from the sale of such
shares by the Red Cross will be applied against the remaining liability owed to
the Red Cross. However, there can be no assurance that the net proceeds from the
sale of such shares will be sufficient to extinguish the remaining liability
owed the Red Cross.
In an agreement dated March 25, 1999, GP Strategies agreed to lend the
Company $500,000 (the "GP Strategies Debt"). In return, the Company agreed to
grant GP Strategies (i) a first mortgage on the Company's real estate, (ii) a
two-year option to purchase the Company's real estate, provided that the Company
has terminated its operations and the Red Cross Liability has been repaid, and
(iii) a two-year right of first refusal in the event the Company desires to sell
its real estate. In addition, the Company agreed to issue GP Strategies 500,000
shares of Common Stock (the "GP Shares") and a five-year warrant (the "GP
Warrant") to purchase 500,000 shares of Common Stock at a price of $1 per share.
The Company also agreed not to increase its payroll during the term of the GP
Strategies debt without the prior consent of GP Strategies. Pursuant to the
agreement, the Company has issued a note to GP Strategies representing the GP
Strategies Debt, which note was due on September 30, 1999 and bears interest,
payable at maturity, at the rate of 6% per annum. In addition, at that time the
Company negotiated a subordination agreement with the Red Cross pursuant to
which the Red Cross agreed that its lien on the Company's real estate is
subordinate to GP Strategies' lien. On March 27, 2000, the Company and GP
Strategies entered into an agreement pursuant to which (i) the GP Strategies
Debt was extended until June 30, 2001, and (ii) the Management Agreement between
the Company and GP Strategies was terminated and all intercompany accounts
between the Company and GP Strategies (other than the GP Strategies Debt) in the
amount of approximately $130,000 were discharged. The agreement also provides
that (i) commencing on May 1, 2001 and ending on June 30, 2001, on any day ISI
may require GP Strategies to exercise the GP Warrant and sell the underlying
shares, if the market price of ISI Common Stock exceeds $1.00 per share on each
of the 10 trading days prior to any such day, and (ii) any proceeds from the
sale of the shares issuable upon exercise of the GP Warrant in excess of the
aggregate amount paid by GP Strategies to purchase such shares, would be deemed
to reduce the then outstanding amount of principal and interest of the GP
Strategies Debt until such amount is reduced to zero.
The Company's Common Stock now trades on the OTC Bulletin Board, which
may have a material adverse effect on the ability of the Company to finance its
operations and on the liquidity of the Common Stock.
Results of Operations
Six Months Ended June 30, 2000 versus Six Months Ended June 30, 1999
For the six months ended June 30, 2000 and 1999, the Company had
revenues from the sale of ALFERON N Injection of $321,072 and $985,910,
respectively. In the third and fourth quarters of 1999, the Company offered
price concessions to its largest customers in an attempt to raise cash from the
sale of ALFERON N Injection, which resulted in substantially higher than normal
sales in the second half of 1999 and in lower than normal sales in the six
months ended June 30, 2000. This was due to the fact that such customers were
selling out of their inventory of Alferon N Injection (rather than purchasing
Alferon N Injection from the Company).
In the six months ended June 30, 2000, the Company sold, through its
distributor, to wholesalers and other customers in the United States 2,636 vials
of ALFERON N Injection, compared to 7,897 vials sold by the Company during the
six months ended June 30, 1999. In addition, foreign sales of ALFERON N
Injection were 354 vials for the six months ended June 30, 1999. There were no
foreign sales in the six months ended June 30, 2000.
Cost of goods sold and idle production costs totaled $655,330 and
$2,223,840 for six months ended June 30, 2000 and 1999, respectively. Idle
production costs in the six months ended June 30, 2000 and 1999 represented
fixed production costs, which were incurred after production of ALFERON N
Injection was discontinued in April 1998. Such costs were greater in the 1999
period due to higher levels of payroll costs. In addition, lower unit sales in
the six months ended June 30, 2000 as compared to the six months ended June 30,
1999 contributed to lower cost of goods sold. In addition, based on changes in
the value of the Settlement Shares, for the six months ended June 30, 2000, cost
of goods sold was credited for $287,341 as compared to a charge of $587,261 to
cost of goods sold for the six months ended June 30, 1999.
During the six months ended June 30, 2000 and 1999, a portion of the
reserve for excess inventory was reversed in the amount of $135,271 and
$582,650, respectively, in order to reflect the inventory at its estimated net
realizable value.
Research and development expenses during the six months ended June 30,
2000 of $457,819 decreased by $1,485,170 from $1,942,989 for the same period in
1999, principally because the Company has had a reduction in research personnel
which has reduced its payroll and research costs. In addition, during the second
quarter of 2000, the Company settled amounts owed on various research-related
liabilities at a savings to the Company of approximately $457,000. Such amount
was credited against research and development expenses.
General and administrative expenses for the six months ended June 30,
2000 were $966,177 as compared to $1,285,023 for the same period in 1999. The
decrease of $318,846 was principally due to decreases in payroll and other
operating expenses.
Interest expense, net, for the six months ended June 30, 2000 was
$10,399 of expense and primarily represented interest accrued on the Red Cross
Liability and GP Strategies Debt partially offset by interest income. Interest
expense, net, for the six months ended June 30, 1999 was $244,623 of expense and
primarily represented financing costs partially offset by interest income.
As a result of the foregoing, the Company incurred net losses of
$1,633,382 and $4,127,638 for the six months ended June 30, 2000 and 1999,
respectively.
Year Ended December 31, 1999 versus Year Ended December 31, 1998
For the year ended December 31, 1999 (the "1999 Period"), the Company's
revenues of $2,329,222 included $2,328,945 from the sale of ALFERON N Injection
and the balance from sales of research products. Revenues of $2,007,007 for the
year ended December 31, 1998 (the "1998 Period") included $1,930,657 from the
sale of ALFERON N Injection and the balance from sales of research products and
other revenues. Cost of goods sold and idle production costs totaled $3,552,026
and $6,533,462 for the 1999 Period and 1998 Period, respectively. Idle
production costs in the 1999 and 1998 Periods, represented fixed production
costs, which were incurred after production of ALFERON N Injection was
discontinued in April 1998.
In May 1997, the Company appointed Alternate Site Distributors, Inc.
("ASD"), a wholly owned subsidiary of Bergen Brunswig Corporation, the sole
United States distributor of ALFERON N Injection. Under the agreement with ASD,
the Company sold vials to ASD, which then resold them to the marketplace. As a
result, the Company recognized revenues when it sold vials to ASD, rather than
when ASD resold them to the marketplace. In June 1998, the Company replaced ASD
with ICS, another subsidiary of Bergen Brunswig Corporation better able to
handle the Company's specialty distribution requirements. Under the new
agreement, vials are not sold to ICS, but instead are sold by the Company
directly to the marketplace, at which time the Company recognizes revenues. In
the 1999 Period, the Company sold to wholesalers and other customers in the
United States 19,463 vials of ALFERON N Injection, compared to 13,284 vials sold
by the Company during the 1998 Period. In addition, foreign sales of ALFERON N
Injection were 1,374 vials and 3,300 vials for the 1999 and 1998 periods,
respectively.
During the 1999 Period, a portion of the reserve for excess inventory
was reversed in the amount of $1,177,531 as compared to a provision for excess
inventory of $3,089,841 during the 1998 Period in order to reflect the inventory
at its estimated net realizable value.
Research and development expenses during the 1999 Period of $3,060,019
decreased by $5,594,869 from $8,654,888 for the 1998 Period, principally because
the Company has concluded its Phase 3 clinical studies of ALFERON N Injection in
HIV- and HCV-infected patients. The Company received $29,375 in 1998, as rental
income from GP Strategies for the use of a portion of the Company's facilities,
which offset research and development expenses.
General and administrative expenses for the 1999 Period were $2,315,010
as compared to $4,569,608 for the 1998 Period. The decrease in the 1999 Period
was principally due to decreases in payroll and other operating expenses.
On February 5, 1998, the Company completed the sale of 7,500 shares of
Series A Convertible Preferred Stock to an institutional investor for an
aggregate amount of $7,500,000. The $7,179,000 of net proceeds were expected to
augment the Company's working capital while awaiting the results of the two
Phase 3 clinical trials of ALFERON N Injection for the treatment of HIV-infected
and hepatitis C patients. After considering the reaction of the Company's
stockholders to the issuance and the negative impact the issuance apparently had
on the Company's market capitalization, the Board of Directors determined on
February 13, 1998 to exercise an option to repurchase the shares of Convertible
Preferred Stock for $7,894,737 (plus accrued dividends). The net loss to the
Company on the repurchase of the Preferred Stock amounted to $737,037.
Interest income for the 1999 Period was $6,104 as compared to $252,528
for the 1998 Period. The decrease of $246,424 was due to less funds available
for investment in the 1999 Period.
Interest expense and financing costs for the 1999 Period was $536,394,
primarily due to interest and other costs related to the GP Strategies Debt in
1999, as compared to zero for the 1998 Period.
During December 1999, the Company completed the sale of a portion of
its New Jersey tax loss carryforwards and recorded a gain on such sale amounting
to $2,348,509, which is recorded as an income tax benefit.
As a result of the foregoing, the Company incurred net losses of
$3,602,083 and $21,325,301 for the 1999 Period and 1998 Period, respectively.
Year Ended December 31, 1998 Versus Year Ended December 31, 1997
For the year ended December 31, 1998, the Company's revenues of
$2,007,007 included $1,930,657 from the sale of ALFERON N Injection and the
balance from sales of research products and other revenues. Revenues of
$2,955,802 for the year ended December 31, 1997 (the "1997 Period") included
$2,927,585 from the sale of ALFERON N Injection and the balance from sales of
research products. Cost of goods sold and idle production costs totaled
$6,533,462 and $1,857,959 for the 1998 Period and 1997 Period, respectively.
Idle production costs in the 1998 Period primarily represented fixed production
costs, which were incurred after production of ALFERON N Injection was
discontinued in April 1998. There were no idle production costs in the 1997
Period.
In May 1997, the Company appointed ASD, a wholly owned subsidiary of
Bergen Brunswig Corporation, the sole United States distributor of ALFERON N
Injection. Under the agreement with ASD, the Company sold vials to ASD, which
then resold them to the marketplace. As a result, the Company recognized
revenues when it sold vials to ASD, rather than when ASD resold them to the
marketplace. In June 1998, the Company replaced ASD with ICS, another subsidiary
of Bergen Brunswig Corporation better able to handle the Company's specialty
distribution requirements. Under the new agreement, vials are not sold to ICS,
but are instead sold by the Company directly to the marketplace, under the
administration of ICS, at which time revenues are recognized by the Company. In
the 1998 Period, the Company sold to wholesalers and other customers in the
United States 13,284 vials of ALFERON N Injection, compared to 21,584 vials sold
by the Company during the 1997 Period. In addition, foreign sales of ALFERON N
Injection were 3,300 vials and 4,587 vials for the 1998 and 1997 Periods,
respectively.
In light of the results to date of the Company's Phase 3 studies of
ALFERON N Injection in HIV- and HCV-infected patients, the Company has
written-down the carrying value of its inventory of ALFERON N Injection to its
estimated net realizable value. The write-downs were the result of the Company's
reassessment of anticipated near-term needs for product to be sold or utilized
in clinical trials (within approximately a two-year period beginning January 1,
1998 and based on historical sales levels). As a result, during the three months
ended March 31, 1998, the Company recorded an inventory write-off of $3,089,841
in addition to the $7,254,710 inventory write-down, which was recorded at
December 31, 1997. As of December 31, 1998, the Company estimated that the
remaining inventory value represented product to be sold within a one-year
period.
Research and development expenses during the 1998 Period of $8,654,888
decreased by $3,209,099 from $11,863,987 for the 1997 Period, principally
because the Company has nearly concluded its Phase 3 clinical studies of ALFERON
N Injection in HIV- and HCV-infected patients. The Company received $29,375 and
$234,996, respectively, as rental income from GP Strategies for the use of a
portion of the Company's facilities, which offset research and development
expenses.
General and administrative expenses for the 1998 Period were $4,569,608
as compared to $4,389,025 for the 1997 Period. The increase of $180,583 was
principally due to increases in payroll and other operating expenses. GP
Strategies provides certain administrative services for which the Company paid
GP Strategies $120,000 for both the 1998 and 1997 Period. In addition, for the
1997 Period, payments to GP Strategies for services provided to the Company by
GP Strategies personnel amounted to $135,000. For the 1998 Period, receipts from
GP Strategies for services provided to GP Strategies by Company personnel
amounted to $25,000.
On February 5, 1998, the Company completed the sale of 7,500 shares of
Series A Convertible Preferred Stock to an institutional investor for an
aggregate amount of $7,500,000. The $7,179,000 of net proceeds were expected to
augment the Company's working capital while awaiting the results of the two
Phase 3 clinical trials of ALFERON N Injection for the treatment of HIV-infected
and hepatitis C patients. After considering the reaction of the Company's
stockholders to the issuance and the negative impact the issuance apparently had
on the Company's market capitalization, the Board of Directors determined on
February 13, 1998 to exercise an option to repurchase the shares of Convertible
Preferred Stock for $7,894,737 (plus accrued dividends). The net loss to the
Company on the repurchase of the Preferred Stock amounted to $737,037.
Interest income for the 1998 Period was $252,528 as compared to
$670,199 for the 1997 Period. The decrease of $417,671 was due to less funds
available for investment in the current period.
As a result of the foregoing, the Company incurred net losses of
$21,325,301 and $21,739,680 for the 1998 Period and 1997 Period, respectively.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities". This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement as amended by SFAS 137 and SFAS 138 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company does not believe that implementation of SFAS 133, as amended, will have
a material effect on its results of operations or financial position.
On December 3, 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 - "Revenue Recognition in Financial
Statements" ("SAB No. 101"). SAB No. 101 provides the SEC staff's views on the
recognition of revenue including nonrefundable technology access fees received
by biotechnology companies in connection with research collaborations with third
parties. SAB No. 101 states that in certain circumstances the SEC staff believes
that up-front fees, even if nonrefundable, should be deferred and recognized
systematically over the term of the research arrangement. On June 26, 2000, the
SEC issued SAB No. 101B which postponed the implementation of SAB No. 101 until
the quarter beginning October 1, 2000. The Company is currently assessing the
financial impact of complying with SAB No. 101 and has not yet determined
whether applying the accounting guidance of SAB No. 101 will have a material
effect on its financial position or results of operations.
FASB Interpretation No. 44 provides guidance for applying APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("FIN 44"). It applies
prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards, and changes in grantee status on or after
July 1, 2000, except for provisions related to repricings and the definition of
an employee which apply to awards issued after December 15, 1998. The Company
has evaluated the financial impact of FIN 44 and has determined that the
repricing of employee stock options on October 27, 1999 falls within the
guidance of FIN 44. On October 27, 1999, the Company repriced 429,475 stock
options to $.25 per share. On July 1, 2000, the implementation date of FIN 44,
352,823 shares of the 429,475 shares were fully vested (exercisable) and the
closing price of the Company's common stock on such date was $1.63 per share.
Beginning on and after July 1, 2000, the Company is required to record
compensation expense on the repriced vested stock options only when the market
price exceeds $1.63 per share and only on the amount in excess of $1.63 per
share. For the repriced unvested stock options, the intrinsic value measured at
the July 1, 2000 effective date that is attributable to the remaining vesting
period will be recognized over that future period. The unvested stock options at
July 1, 2000 (76,652) will fully vest on January 1, 2001. On September 30, 2000,
the closing price of the Company's common stock was $1.16 per share and
accordingly, under FIN 44, no additional compensation expense was recorded
through that date on the repriced fully vested stock options. However, under FIN
44, for the repriced unvested stock options, the Company will record
compensation expenses of $7,431. The Company believes that this will be the only
impact of FIN 44 on the Company's financial position and operating results.
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, the risk that the
Company will run out of cash; 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; substantial royalty obligations payable by 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.
<PAGE>
BUSINESS
General
The Company is a biopharmaceutical company engaged in the study,
manufacture, and sale of pharmaceutical products based on its highly purified,
multispecies, natural source alpha interferon ("Natural Alpha Interferon"). The
Company's ALFERON N Injection (Interferon Alfa-n3) product has been approved by
the United States Food and Drug Administration ("FDA") for the treatment of
certain types of genital warts and the Company has studied its potential use in
the treatment of HIV, hepatitis C, and other indications. The Company has also
studied ALFERON N Gel(R) and ALFERON LDO(R), the Company's topical and oral
formulations of Natural Alpha Interferon, for the potential treatment of viral
and immune system diseases.
The Company operates in a single segment. For the years ended December
31, 1999, 1998 and 1997, domestic sales totaled $2,204,437, $1,716,157 and
$2,613,430, respectively, and foreign sales (primarily Germany) totaled
$124,508, $214,500 and $314,155, respectively. All identifiable assets are
located in the United States.
Scientific Background
Interferons are a group of proteins produced and secreted by cells to
combat diseases. Researchers have identified five major classes of human
interferon: alpha, beta, gamma, omega, and tau. 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 major medical uses worldwide.
Alpha interferons are manufactured commercially in three ways: by
genetic engineering, by cell culture, and from human white blood cells. In the
United States, all three of these types of alpha interferon are approved for
commercial sale.
The Company believes that the potential advantages of Natural Alpha
Interferon over recombinant interferons may be based upon their respective
molecular compositions. Natural Alpha Interferon is composed of a family of
proteins containing many different molecular species of alpha interferon. In
contrast, recombinant alpha interferons each contain only a single species.
Researchers have reported that the various species of interferon may have
differing antiviral activity depending upon the type of virus. Natural Alpha
Interferon presents a broad complement of species that the Company believes may
account for its higher efficacy in laboratory studies with the HIV compared with
that of recombinant alpha interferon 2a and 2b (ROFERON(R) A and INTRON(R) A,
respectively). Natural Alpha Interferon is also glycosylated (partially covered
with sugar molecules). Such glycosylation is not present on the currently
marketed recombinant alpha interferons. The Company believes that the absence of
glycosylation may be, in part, responsible for the production of
interferon-neutralizing antibodies seen in patients treated with recombinant
alpha interferon. Although cell cultured-derived interferon is also composed of
multiple glycosylated alpha interferon species, the types and relative quantity
of these species are different from the Company's Natural Alpha Interferon.
The production of Natural Alpha Interferon is dependent upon a supply
of human white blood cells and other essential materials. The Company obtains
white blood cells from FDA- licensed blood donor centers.
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 ("HPV"). 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. A topical formulation of an
interferon-inducer was approved by the FDA in 1997 for the treatment of genital
warts. To date, the Company does not believe that such approval has had a
material adverse effect on the sales of Alferon N Injection.
Clinical Trials for New Indications. 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 conducted, and is currently planning, various
clinical trials for new indications.
HIV-infected patients. The Human Immunodeficiency Virus ("HIV")
infection is at epidemic levels in the world. The World Health Organization
estimates that 50 million people - 1% of the world's population - have become
infected with HIV. HIV infection usually signals the start of a progressive
disease that compromises the immune systems, ultimately resulting in Acquired
Immune Deficiency Syndrome ("AIDS"). The United States Centers for Disease
Control estimates that as of the end of 1999, there were approximately 412,000
people living with HIV infection and with AIDS in the United States.
An article published in AIDS Research and Human Retroviruses in 1993 by
investigators at Walter Reed Army Institute of Research ("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 alpha interferon 2a and 2b, respectively, in blocking the
replication of HIV-1, the AIDS virus, in infected human cells (monocytes) in
vitro.
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 products.
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 ALFERON N Injection, 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 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 ALFERON N Injection 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 follow-up analysis of patients' blood testing data, it was found
after an average of 16 months after treatment, CD4 white blood cell counts
remained essentially unchanged or were higher than at the onset of the trial in
11 of 20 patients. In addition, while on treatment, the amount of HIV detectable
in the patients' blood, as measured by polymerize chain reaction ("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 was published in the May
1996 Issue of 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, based on the safety and preliminary
efficacy data obtained from this trial and after meeting with the FDA, the
Company conducted a multi-center Phase 3 clinical trial of ALFERON N Injection
in HIV-infected patients, which was completed in December 1997. This randomized,
double-blind, placebo-controlled trial was designed to evaluate the safety and
efficacy of ALFERON N Injection in the treatment of HIV-positive patients, some
of whom may have been taking other FDA-approved antiviral agents. Enrolled
patients were required to have CD4 white blood cell counts of at least 250 cells
per microliter and a viral burden (as determined by PCR testing) of at least
2,000 RNA copies per milliliter. The Company completed the analysis of the data
collected from the 16 investigator sites and attended a pre-filing meeting with
the FDA in mid-March 1998. Shortly after that meeting, the FDA advised the
Company that, although ALFERON N Injection demonstrated biological activity in
this Phase 3 clinical trial, the results were insufficient for filing for
approval for this additional indication for ALFERON N Injection. While the
results over the course of treatment demonstrated benefits that were
statistically significant for the group of patients receiving ALFERON N
Injection and highly statistically significant for the subgroup of such patients
with high CD4 counts, the study's primary efficacy variable (reduction in viral
load) was not met at the time point specified in the protocol (end of
treatment). The FDA therefore indicated that an additional trial would be
necessary to evaluate further the efficacy of ALFERON N Injection for this
indication. The Company does not currently intend to pursue this program until
it obtains substantial additional funding or enters into collaboration with
another company for such purpose.
There can be no assurance that ALFERON N Injection for the treatment of
patients with HIV 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.
Hepatitis C. Chronic viral hepatitis is a liver infection caused by
various hepatitis viruses. The United States Centers for Disease Control
estimates that nearly four million people in the United States are presently
infected with the hepatitis C virus ("HCV"), a majority of who become chronic
carriers and will suffer gradual deterioration of their liver and possibly
cancer of the liver. Several brands of recombinant interferon and a
cell-cultured interferon have been approved for the treatment of hepatitis C in
the United States and by various regulatory agencies worldwide. See "Business -
ALFERON N Injection - Competition." However, reports have indicated that many
patients either do not respond to treatment with the recombinant products or
relapse after treatment. The Company has conducted three multi-center,
randomized, open-label, dose ranging Phase 2 clinical trials utilizing ALFERON N
Injection with patients chronically infected with HCV. The objective of the
Company's HCV clinical studies was 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.
The results in naive patients indicated a significant dose-dependent
response at the end of treatment favoring the highest dose group. In addition,
treatment of naive patients with ALFERON N Injection did not produce any
interferon-neutralizing antibodies. An oral presentation of the results in naive
patients was given at the American Association for the Study of Liver Diseases
("AASLD") meeting that took place in November 1995. The results of this study
were published in the February 1997 issue of Hepatology.
The results in refractory patients indicated a significant
dose-dependent response at the end of treatment favoring the highest dose group.
A poster presentation of the results in refractory patients was given at the
AASLD meeting that took place in November 1995.
As a result of the promising results obtained in the study on naive
patients, the study on relapsing patients, which was accruing patients slowly,
was terminated early so that the Company could concentrate its limited resources
on pursuing the Phase 3 trials in naive patients, discussed below.
After meeting with the FDA, the Company commenced in 1996 a Phase 3
multi-center, open label, randomized, controlled clinical trial designed to
evaluate the safety and efficacy of ALFERON N Injection in naive chronic
hepatitis C patients. The trial was conducted at 26 sites located in the United
States and Canada and a total of 321 people were treated. The trial consisted of
a 24-week treatment phase and 24-week follow-up and also included an interim
analysis after approximately one-half of the enrolled patients completed the
treatment and follow-up phases.
On April 2, 1998, the Company announced it had completed the interim
analysis of the results for approximately half of the enrolled patients. If the
results of the interim analysis had demonstrated at a very high level of
statistical significance that ALFERON N Injection is effective, the Company
intended to seek FDA approval while continuing to follow the other enrolled
patients. However, while the efficacy analysis indicated that ALFERON N
Injection and the control treatment (an approved therapy) appeared to yield
similar results, the study protocol required a showing of superiority in order
to meet the criteria for statistical significance in the interim analysis.
Therefore the Company did not seek FDA approval based on the interim analysis.
The Phase 3 study was completed in 1998. The Company completed the final
analysis of the data in March 1999, and met with the FDA to determine the
acceptability of the results for filing purposes. At that meeting, the FDA
advised the Company that the results of the trial were insufficient to file for
approval because the designed endpoint of the trial (which required a showing of
superiority in sustained normalization of liver enzymes at the end of treatment
and after six months of follow up) was not met. Therefore, the FDA informed the
Company that an additional trial would be required to further evaluate the
efficacy of Alferon N Injection for this indication. At the present time, the
Company does not have the resources necessary to conduct an additional study and
does not plan to initiate such a study unless it can find a sponsor to continue
this program.
HIV and Hepatitis C Co-Infected Patients. In December 1997, patient
enrollment commenced in a Phase 2 multi-center, open label clinical trial
designed to evaluate the safety and efficacy of ALFERON N Injection in patients
co-infected with HIV and HCV. This study has been concluded and an abstract was
accepted for publication in Gastroenterology for the Annual Meeting of American
Gastroenterology Association, Digestive Disease Week, in May, 2000. The Company
does not intend to continue this program unless it obtains substantial
additional funding or a sponsor.
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, two recombinant forms of beta interferon have
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 treatments may limit their usefulness for
a subset of patients. In addition, Copaxone(R), a non-interferon product, was
approved by the FDA to treat relapsing-remitting multiple sclerosis. Based in
part on encouraging anecdotal reports on the use of ALFERON N Injection in MS
patients, as well as a recent poster presentation entitled "Management of
Interferon-(beta)1b (Betaseron) Failures in MS With Interferon-(alpha)n3
(Alferon N)", given at the Charcot Foundation Meeting in Switzerland in March
2000, the Company would like to conduct a clinical trial in order to investigate
the potential use of ALFERON N Injection for the treatment of MS. However, the
timing of this trial will be dependent upon the Company's ability to obtain
substantial additional funding or a sponsor.
Other HPV Indications or Routes of Administration. The Company is also
evaluating whether to investigate the potential use of ALFERON N Injection by
subcutaneous systemic administration for the treatment of genital warts.
Currently, the approved route of administration is intralesional and requires up
to 16 office visits to the medical practitioner. If subcutaneous systemic
treatment were found to be efficacious, patients could potentially
self-administer the product as they have done in many of the clinical trials
conducted by the Company. This would make treatment considerably more convenient
for patients.
In addition, in the following two publications: "Adjuvant Interferon
for Anal Condyloma, A Prospective Randomized Trial", Diseases of the Colon and
Rectum 1994, and "Interferon as an Adjuvant Treatment for Genital Condyloma
Acuminatum", International Journal of Gynecology & Obstetrics 1995, in which
ALFERON N Injection was studied in conjunction with other treatments for genital
warts, the authors reported that the addition of ALFERON N Injection to the
other ablative therapies significantly reduced the recurrence rates. The Company
is evaluating whether to conduct clinical trials to further investigate the
potential use of ALFERON N Injection as an adjuvant to other genital wart
treatments.
Marketing and Distribution. The Company does not have its own sales
force. In June 1998, the Company entered into an agreement appointing ICS, a
subsidiary of Bergen Brunswig Corporation, as the sole United States distributor
of ALFERON N Injection. ICS distributes ALFERON N Injection to wholesalers
throughout the United States. The Company does not believe that the loss of any
one wholesaler would have a material adverse effect on the Company's sales or
financial position. Pursuant to such agreement, ICS also provides clinical and
product information, reimbursement information and services, and management of
patient assistance services. Most of the Company's sales have been in the United
States.
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
Abbott pursuant to a processing and supply agreement entered into in September
1994. Under the terms of the agreement with Abbott, the Company pays Abbott an
agreed price to formulate and package ALFERON N Injection in accordance with
specifications provided by the Company. At the present time, the Company has
discontinued production of crude interferon. The Company is converting
intermediates to finished product as needed. The Company believes it has
produced sufficient inventory of these intermediates to satisfy its clinical and
commercial needs for the foreseeable future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business - ALFERON
N Injection - Clinical Trials for New Indications," "Business - Governmental
Regulation," and "Properties."
Competition. Presently, INTRON A, manufactured by Schering, is the one
other injectable interferon product approved by the FDA for the treatment of
genital warts. INTRON A is made from recombinant alpha interferon. Since the
production of INTRON A is not dependent on a source of human blood cells, it 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 INTRON A. In 1997, 3M
Pharmaceuticals received FDA approval for its immune-response modifier,
Aldara(R), a self-administered topical cream, for the treatment of external
genital and perianal warts. ALFERON N Injection also competes with surgical,
chemical, and other methods of treating genital warts. The Company cannot assess
the impact from products developed by the Company's competitors or advances in
other methods of the treatment of genital warts on the commercial viability of
its product.
If and when the Company obtains approvals for additional indications of
ALFERON N Injection, it expects to compete primarily on the basis of product
performance and price with a number of pharmaceutical companies, both in the
United States and abroad.
A number of synthetic antiviral compounds have been approved in the
United States and certain foreign countries for the treatment, primarily in
combination therapy, of HIV infection and AIDS. Shown in Table 1 below are the
drugs, which are currently approved in the United States for the treatment of
patients infected with HIV.
<TABLE>
<CAPTION>
Table 1: HIV Antiretroviral Drugs Approved in the United States
Class of Drug Brand Name Generic Name Manufacturer
<S> <C> <C> <C> <C>
Nucleoside Reverse Combivir(R) Zidovudine + Lamivudine Glaxo Wellcome
Transcriptase Inhibitors Epivir(R) Lamivudine Glaxo Wellcome
Hivid(R) Zalcitabine Hoffmann-La Roche
Retrovir(R) Zidovudine Glaxo Wellcome
Videx(R) Didanosine Bristol-Myers Squibb
Zerit(R) Stavudine Bristol-Myers Squibb
Ziagen(R) Abacavir Glaxo Wellcome
Non-Nucleoside Reverse Rescriptor(R) Delavirdine Pharmacia & Upjohn
Transcriptase Inhibitors Viramune(R) Nevirapine Boehringer Ingelheim
Sustiva(R) Efavirenz DuPont-Merck
Protease Inhibitors Crixivan(R) Indinavir Merck & Co.
Invirase(R) Saquinavir Hoffmann-La Roche
Fortovase(R) Saquinavir Hoffmann-La Roche
Norvir(R) Ritonavir Abbott Laboratories
Viracept(R) Nelfinavir Agouron Pharmaceuticals
Agenerase(R) Amprenavir Glaxo Wellcome
</TABLE>
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. Roche Pharmaceuticals's recombinant
interferon product has been approved for the treatment of hepatitis C in the
United States and for other medical uses in the United States and in foreign
countries. In addition, Amgen Inc.'s recombinant interferon, Infergen(R), also
known as consensus interferon product, as well as Glaxo Wellcome's cell culture
derived interferon, Wellferon(R), are approved for the treatment of hepatitis C
in the United States.
In the United States, two recombinant forms of beta interferon, Biogen,
Inc.'s Avonex(R) and Berlex Laboratories' Betaseron(R) as well as Teva Marion
Partners' Copaxone(R), a non-interferon product, have been approved for the
treatment of relapsing-remitting MS.
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. Therefore, there can be no assurance that, if the
Company is able to obtain regulatory approval of ALFERON N Injection for the
treatment of any additional diseases, it will be able to achieve any significant
penetration into those markets.
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, intravaginal warts, and mucocutaneous and genital herpes.
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 HPV, the
same family of viruses that causes genital warts. The Company has completed a
small 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. Pap smears, identification tests for the presence and type
of virus, and cervical biopsies indicated that ALFERON N Gel appears to have the
potential for improving the course of cervical dysplasia as indicated in the
majority of patients who completed the treatment course. The Company presently
does not plan to start additional clinical trials for this indication unless it
can find a sponsor.
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 or a sponsor is secured.
ALFERON N Gel may also be beneficial to immunocompromised patients with
mucocutaneous herpes. Patients with this form of herpes suffer from persistent
skin lesions, which have become resistant to existing therapies. The Company
will not start clinical trials for this indication unless additional funding or
a sponsor is secured.
ALFERON N Gel may also be of benefit to patients who have intravaginal
warts. However, the Company will not start clinical trials for this indication
unless additional funding or a sponsor is secured.
Marketing and Distribution. The Company does not have any marketing
agreement with respect to ALFERON N Gel and, if FDA approval is obtained, no
assurance can be given that the Company will be able to enter into a marketing
agreement on terms satisfactory to the Company. The Company may also choose to
market ALFERON N Gel itself if FDA approval is obtained.
Competition. The Company believes that three antiviral products are
presently sold in the United States for the treatment of recurrent genital
herpes: Zovirax(R) (manufactured by Glaxo Wellcome, Inc.) which contains
acyclovir and is administered orally, topically, or intravenously, Famvir(R)
(manufactured by SmithKline Beecham Pharmaceuticals) which contains famcyclovir
and is administered orally, and Valtrex(R) (manufactured by Glaxo Wellcome,
Inc.) which contains valacyclovir and is also administered orally. The only
current treatment for cervical dysplasia in the United States is surgery, while
intravaginal warts are treated with ablative therapy.
ALFERON LDO
ALFERON LDO is a low dose oral liquid Natural Alpha Interferon
preparation that the Company has developed and believes has potential in the
treatment of several quality-of-life parameters of importance to patients
infected with HIV.
Clinical Trials for ALFERON LDO. As described below, the Company has
completed two Phase 2 clinical trials for its ALFERON LDO formulation for the
treatment of HIV-infected patients. In addition, a National Institute of Allergy
and Infectious Diseases ("NIAID") sponsored Phase 3 trial in HIV-infected
patients has been concluded in which ALFERON LDO was included as one of the
treatments.
HIV-infected patients. The Company has completed two double-blind
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. The results from the dose ranging study indicate that one of the doses
may promote weight gain and an increase in energy and overall well-being. At the
insistence of AIDS groups and community-based physicians who had been using
low-dose oral formulations of interferon in their practice, the NIAID launched
in 1996 a Phase 3 trial of three preparations of low-dose oral interferon,
including ALFERON LDO and matching placebos. An advisory committee comprised of
representatives from the Company and other interferon manufacturers, AIDS
Support groups, the FDA, and the National Institutes of Health was organized to
design this multicenter study, which examined the effectiveness of low dose oral
alpha interferon therapy on several quality-of-life parameters of importance to
patients infected with HIV. Patients enrolled in the study were randomly
assigned to one of four treatment groups, with all participants receiving three
preparations. In three of the groups, patients received one active compound and
two placebos. Patients in the fourth group received only placebos. This was a
double-blind study and had a six-month treatment phase and six-month follow-up
period. While in the study, patients were permitted to take antiretroviral drugs
and therapies against opportunistic infections. The Company provided clinical
quantities of ALFERON LDO for use in the study.
In June 1997, NIAID terminated enrollment in this study with 247 out of
the required 560 patients enrolled. Even though the trial did not enroll the
number of patients the advisory committee had deemed necessary to determine if
the drugs were effective, the results were published in the Journal of Acquired
Immune Deficiency Syndromes in December of 1999. In that article the authors
concluded: "Although the trial was designed to enroll 560 study subjects and was
prematurely terminated because of slow accrual and discontinuation of
participants, the small differences among the arms in the primary and secondary
endpoints do not support claims of efficacy for the measures studied." The
Company does not presently anticipate the further development of ALFERON LDO for
this use or any other use unless a sponsor is secured.
Marketing and Distribution. The Company does not have a marketing
agreement with respect to ALFERON LDO and, if FDA approval of 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.
The Company may also choose to market ALFERON LDO itself if FDA approval is
obtained.
Competition. Under the terms of a licensing agreement (as amended, the
"Amarillo Agreement") with Amarillo Bioscience, Inc. (formerly Amarillo Cell
Culture Company, Incorporated) ("Amarillo") (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) Amarillo and Pharma
Pacific Management Pty. Ltd. ("PPM"), a company which has also obtained a
license from Amarillo, 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. See "Business -- Licenses and Royalty
Obligations." Therefore, with respect to low dose oral interferon products, the
Company will potentially compete with Amarillo and PPM in the United States and
in the rest of the world except Japan and with Hayashibara Biochemical
Laboratory in Japan. In addition, the Company will potentially compete with the
manufacturers of the synthetic antiviral compounds that have been approved in
the United States and certain foreign countries for the treatment of HIV and
AIDS. See "Business -- ALFERON N Injection -- Competition".
Patents
In 1996, the Company was issued a United States patent, comprised of 15
claims, for Natural Alpha Interferon. The two major claims are for (i) a highly
purified Natural Alpha Interferon composition produced from human peripheral
blood leukocytes and (ii) an improved method to produce this composition. The
issuance of this patent gives the Company protection for the manufacture, use,
and sale of its Natural Alpha Interferon product in the United States and
prevents a competitor from producing or using equivalent products derived from
human peripheral blood leukocytes. Patents have also been issued in selected
foreign countries. In 1997, the Company was issued a second United States patent
which broadens the scope of the first one to cover certain individual, or
mixtures of, alpha interferon species present in Natural Alpha Interferon.
Also in 1996, the Company was issued a United States patent, comprised
of four claims that will expand the Company's portfolio on overall technologies
in the interferon field. The biological activities of interferon take place when
the interferon binds to Type 1-interferon receptor proteins, which are present
in various human cells. The major claim is the composition claim for an
interferon receptor protein specifically binding alpha and beta, but not gamma,
interferons. The receptor, which is isolated from a cancerous cell line, binds
both natural and recombinant alpha interferons and is a variant form of the
human interferon receptor (Type 1) that has been found in some cases of acute
leukemia. The claimed receptor protein could be used to produce anti-receptor
antibodies that may have potential use in diagnostic testing for tumors or
cancers that have an abnormal number of receptors. The claimed receptor protein
may also have potential use as a therapeutic agent for those diseases, which
have aberrant production of interferon, by binding to and neutralizing the
excess interferon.
The United States Patent and Trademark Office has also issued two
patents to the Company, that 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 that responds therapeutically to
interferon, and a system for delivering interferon topically that prevents
oxidation of the protein. The inventions specifically encompass the topical
treatment for treating viral diseases, such as herpes genitalis, with alpha
interferon.
In 1999, the Company was issued a United States patent, comprised of 16
claims, that describes an innovative method for recovery of white blood cells
from recycled filters. Major blood centers in the United States and foreign
countries have been adopting a process to use filters to deplete white blood
cells (leukoreduction) from plasma, red blood cells, platelets, and other blood
preparations. Typically, these filters that contain a large amount of white
blood cells are discarded. The new invention provides an efficient back-flushing
method to recover functional white blood cells from these filters. The white
blood cells recovered can be used for production of interferons and other
cytokines for use as therapeutic products. They can also be used for further
isolation of subsets of white blood cells for development of new immunological
products. This invention protects the Company's ability to utilize white blood
cells collected in the filters for interferon production when the leukoreduction
process is uniformly implemented in blood centers. An international patent
application was filed in December 1998.
Licenses and Royalty Obligations
Hoffmann has been issued patents covering human alpha interferon in
many countries throughout the world. In 1995, the Company obtained a
non-exclusive perpetual license from Hoffmann (the "Hoffmann Agreement") that
grants the Company the worldwide rights to make, use, and sell, without a
potential patent infringement claim from Hoffmann, 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 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, which consent cannot be unreasonably withheld.
Under the terms of the Hoffmann Agreement, the Company is obligated to
pay Hoffmann 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 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. If the Hoffmann Agreement is terminated with
respect to the patents owned by Hoffmann in a specified country, such country is
no longer included in the Hoffmann Territory. Accordingly, the Company would not
be permitted to market any formulation of alpha interferon in such country.
In 1989, the Company entered into the Amarillo Agreement. Amarillo,
which is located in Amarillo, Texas, is in the business of the research and
development of animal health products and became a public company in 1996. Under
the terms of the Amarillo Agreement, the Company has a non-exclusive license
under all of Amarillo'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. In addition, Amarillo 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.
The Company will be obligated to pay Amarillo royalties of 10% on the
sales of Natural Alpha Interferon products using Amarillo's patented technology
as determined under the Amarillo Agreement. In addition, 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.
On September 15, 2000, Amarillo gave notice to the Company of its
intention to terminate the Amarillo License Agreement. The Company does not
believe it has breached the terms of the Amarillo License Agreement. However,
even if the Amarillo License Agreement were terminated, the Company does not
believe it would have a material adverse effect on the Company's business or
prospects.
In addition, the Company agreed to pay GP Strategies a royalty of $1
million in connection with the acquisition of certain intellectual property and
technology rights from GP Strategies. 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. To date, the Company has
not generated income before taxes and therefore has not paid royalties to GP
Strategies.
Recent Developments
On July 28, 2000, the Company acquired for $100,000 an option to
purchase certain securities of Metacine on the terms set forth below. Metacine
will use such funds to retain a third party to conduct a review and analysis of
Metacine's intellectual property. The option may be exercised by the Company
during the 60-day period following the Company's receipt of such review and
analysis, which is required to be delivered to the Company by December 15, 2000.
If the option is exercised, Metacine is required to issue to the
Company 700,000 shares of Metacine common stock and a warrant to purchase, at a
price of $12.48 per share, 178,056 shares of Metacine common stock in exchange
for $150,000 in cash, $250,000 of services to be rendered by the Company to
Metacine, and shares of the Company's common stock having a market value of
$2,000,000. The Company is also required to pay Metacine the amount, if any, by
which the net proceeds from the sale by Metacine of the shares of the Company's
common stock is less than $2,000,000.
Metacine presently has outstanding 150,000 shares of common stock and
has issued warrants to purchase, at a price of $.01 per share, 752,500 shares of
Metacine common stock.
The Company and the other stockholders of Metacine have entered into a
stockholders' agreement providing for rights of first refusal, tag-along rights,
and preemptive rights. The agreement also provides that the Company will have
one representative on Metacine's board and will vote its shares in the same
proportion as Metacine's other stockholders, and that certain corporate actions
will not be taken without the Company's consent.
The essential feature of Metacine's therapeutic strategy is the
modification and targeted activation of dendritic cells ("DC"), the body's
primary antigen presenting cell, for the treatment of first cancer, and then
viral disease, autoimmune disease and organ transplant rejection. The deployment
of DCs results in a cellular immune response culminating in the production of
two types of target-specific T cells (cytolytic and helper) that team together
to find and destroy tumors and virally infected cells. For effective treatment
of cancer (and chronic viral infections), a patient requires a large number of
cytolytic and helper T cells. In the case of transplant rejection (and
auto-immune disease), too many existing T cells attack donor (or normal) tissue,
ultimately killing the donated organ. Production of these T cells needs to be
curtailed to improve the chances of a successful outcome.
Metacine, whose founding scientists have received more than $25 million
in Federal grants for DC research, is pursuing four different approaches to the
therapeutic use of DCs for the treatment of cancer: (1) ex vivo cell processing
using DCs pulsed with known antigens to create allogenic vaccines, (2) ex vivo
cell processing using patient DCs cultured with patient tumor cells to create
multi-epitope, patient specific, autologous vaccines, (3) in vivo activation of
DCs to stimulate the patient's immune system to attack the primary tumor as well
as metastatic sites, and (4) use of DCs as "intelligent" gene therapy vectors
that carry therapeutic genes to the primary tumor, then stimulate the patient's
immune system to attack the tumor and any metastatic sites.
Metacine's program for prevention of organ transplant rejection
represents another important area of application for DCs. Ex vivo culturing and
re-introduction of tolerogenic DCs down-regulates the patient's immune system by
flooding the system with DCs that do not present the transplanted organ's
antigens. Mouse models in which tolerogenic DCs are introduced to prevent
rejection of transplanted tissue have shown highly positive results as evidenced
by reduction of detrimental host vs. graft immune response, and significant
extension of life following organ transplant.
A general lack of side effects has been observed by Metacine, and by
others investigating DC-based therapy, in human clinical trials, which is
probably due to the fact that the technology utilizes the body's own cells, and
antigens that are already present in the body.
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 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 a Notice of Claimed Investigational Exemption for a New Drug 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 to FDA a New Drug Application ("NDA"), or for previously approved
biological products such as Natural Alpha Interferon, a Product and
Establishment License Application ("PLA/ELA") or for newly submitted biological
products a single Biological License Application ("BLA") which summarizes the
results and observations of the product 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 that 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 Abbott, pursuant to which Abbott formulates and packages
ALFERON N Injection. The Company presently has a license for the facilities in
which it produces ALFERON N Injection, which includes the facilities in which
Abbott 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 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.
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. In addition to
its United States approval, ALFERON N Injection has received regulatory approval
in Mexico, Germany, Hong Kong, and Singapore, and registration filings have been
submitted in certain other countries.
Under certain circumstances, the Company may be required to obtain FDA
authorization to export products for sale in foreign countries. For instance, in
most cases, the Company may not export products that have not been approved by
the FDA unless it first obtains an export permit from the FDA. However, these
FDA export restrictions generally do not apply if the Company's products are
exported in conformance with their United States approvals or are manufactured
outside the United States. At the present time, the Company does not have any
foreign manufacturing facilities.
Research Staff and Employees
As of October 31, 2000, the Company had 38 employees, 5 of whom work
less than full time. Of the 38 employees, 7 hold Ph.D. degrees, 1 holds an M.D.
degree and 15 hold other degrees in scientific or technical fields. Of such
employees, approximately 7 were engaged in research and product development, 10
were engaged in quality control, regulatory and quality assurance and product
and process improvement for manufacturing, 7 were engaged in engineering and
maintenance, 4 were engaged in medical affairs and 10 were general and
administrative personnel.
Research and Development
During the years ended December 31, 1999, 1998, and 1997, the Company
expended approximately $3.1 million, $8.7 million, and $11.9 million,
respectively for research and development. Substantially all of these
expenditures were for Company-sponsored research and development programs.
Foreign and Domestic Operations and Export Sales
All of the Company's material operations and sales are conducted in the
United States.
Properties
The Company owns two freestanding buildings comprising approximately
44,000 square feet which are located in New Brunswick, New Jersey. The Company
uses the facilities for staff offices, for the conversion of interferon
intermediates to finished product, for quality control and research activities,
and for the storage of raw, in process and finished materials.
The Company believes that its current facilities and equipment are
suitable and adequate for research and development and the conversion of
interferon intermediates to finished product, and in good condition.
Legal Proceedings
The Company is not a party to any legal proceedings.
<PAGE>
MANAGEMENT
Executive Officers
The following table sets forth the names of the directors and principal
executive officers of the Company as of September 30, 2000, their positions with
the Company, and their principal business experience for the last five years.
<TABLE>
Name Age Position
<S> <C> <C>
Samuel H. Ronel, Ph.D 64 Chairman of the Board
Lawrence M. Gordon 47 Chief Executive Officer and a
Director
Stanley G. Schutzbank, Ph.D., R.A.C. 55 President and a Director
Donald W. Anderson 51 Controller (Principal
Accounting and Financial
Officer) and Secretary
Mei-June Liao, Ph.D. 49 Vice President, Research and
Development
James R. Knill, M.D. 67 Vice President, Medical Affairs
Robert P. Hansen 56 Vice President, Manufacturing
Sheldon L. Glashow 67 Director
</TABLE>
Samuel H. Ronel, Ph.D. has been Chairman of the Board since February
1997 and was Vice Chairman of the Board from January 1996 to February 1997 and
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 GP Strategies in 1970 and
served as the Vice President of Research and Development of GP Strategies and as
the President of Hydro Med Sciences, a division of GP Strategies, from 1976 to
September 1996. 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 from 1993 to 1995 and to
the Governing Body of the Emerging Companies Section from 1993 to 1997. Since
1999 he has been a member of the Technology Advisory Board of the New Jersey
Economic Development Authority.
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.
Stanley G. Schutzbank, Ph.D. has been President of the Company since
January 1996, Executive Vice President of the Company from 1981 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 GP Strategies in 1972 and served as the Corporate Director
of Regulatory and Clinical Affairs of GP Strategies from 1976 to September 1996
and as Executive Vice President of Hydro Med Sciences from 1982 to September
1996. Dr. Schutzbank is a member of the Regulatory Affairs Professionals Society
("RAPS") 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. In August 2000, Dr. Schutzbank was notified that he has
been selected to receive "The Leonard J. Stauffer" Award from RAPS. This award
is presented to an individual holding the RAC certification who has demonstrated
exceptional service to the certification program and/or mentoring in the
profession.
Donald W. Anderson has been the Controller of the Company since 1981
and Corporate Secretary of the Company since 1988. He was an officer of various
subsidiaries of GP Strategies from 1976 to September 1996.
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 postdoctoral 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.
James R. Knill, M.D. has been Vice President, Medical Affairs of the
Company since September 1996 and a consultant to the Company from November 1995
to September 1996. Dr. Knill was employed as Vice President of Medical Affairs
for Cytogen Corporation from 1994 to 1995 and as consultant for Cytogen
Corporation from 1995 to July 1996. He was previously employed for more than 20
years as Vice President of Medical Affairs for Bristol-Myers Squibb Company.
Robert P. Hansen has been Vice President, Manufacturing of the Company
since February 1997. He served as a Director of Manufacturing since 1995, and
held senior positions in the Company's Manufacturing Department since 1987.
Sheldon L. Glashow, Ph.D. has been a director of the Company
since 1991. He has been a director of GP Strategies since 1987, a
director of GSE Systems, Inc. since 1995, and a director of CalCol,
Inc. since 1994. Dr. Glashow is the Higgins Professor of Physics and
the Mellon Professor of the Sciences at Harvard University. He was a
Distinguished Professor and visiting Professor of Physics at Boston
University. In 1971, he received the Nobel Prize in Physics.
<PAGE>
Executive Compensation
The following table presents the compensation paid by the Company to
its Chief Executive Officer and the Company's four most highly compensated
executive officers for 1999, 1998, and 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation Compensation Awards
------------------- -----------------------------
Stock All Other
Year Salary Bonus Options Compensation
Name and Principal Position ($) ($) (#) ($) (3)
--------------------------- ---- ------ ------ -------- ------------
<S> <C> <C> <C> <C> <C>
Lawrence M. Gordon 1999 135,800(1) - 0 - 400,000 9,059
Chief Executive Officer 1998 270,000 103,000 60,000 10,000
1997 135,000(2) - 0 - 42,525 4,718
Samuel H. Ronel, Ph.D. 1999 103,000(1) - 0 - 250,000
8,916
Chairman of the Board 1998 213,000 27,000 40,000 10,000
1997 205,154 - 0 - 51,200 5,083
Stanley G. Schutzbank, Ph.D. 1999 123,400(1) - 0 - 400,000 8,261
President 1998 251,000 77,000 60,000 10,000
1997 231,302 - 0 - 51,750 4,860
James Knill, M.D. 1999 120,800(1) - 0 - 50,375 12,692
Vice President 1998 170,000 16,800 10,000 10,000
Medical Affairs 1997 130,646 - 0 - 15,400 3,582
Mei-June Liao, Ph.D. 1999 113,200(1) - 0 - 81,075 6,952
Vice President, Research 1998 133,000 16,500 15,000 7,500
and Development 1997 122,380 - 0 - 7,325 3,744
------------
(1) In 1999, due to the financial condition of the Company, Messrs. Gordon, Ronel, Schutzbank, Knill and Ms. Liao reduced the
number of hours per week they worked for the Company.
(2) In 1997, Mr. Gordon spent 60% of his time working on the Company's business.
(3) Matching contribution by the Company to the 401(k) Savings Plan and payments by the Company for Group Term Life.
</TABLE>
<PAGE>
The following table sets forth information for the named executive
officers regarding the unexercised options held at the end of 1999. No options
were exercised by the named executive officers in 1999.
<TABLE>
<CAPTION>
Aggregated December 31, 1999 Option Values
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1999(#) December 31, 1999($)(1)
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
<S> <C> <C> <C> <C>
Lawrence M. Gordon 165,653 343,352 $8,282 $17,167
Samuel H. Ronel, Ph.D. 103,469 208,796 5,173 10,439
Stanley G. Schutzbank, Ph.D. 153,535 331,340 7,676 16,567
James Knill, M.D. 19,634 44,141 981 2,207
Mei-June Liao, Ph.D. 30,363 68,752 1,518 3,437
-------------------
(1) Calculated based on the closing price of the Common Stock as reported on the OTC Bulletin Board on December 31, 1999.
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Agreements with GP Strategies
Transfer Agreement. As of January 1, 1981, GP Strategies entered into
an agreement (the "Transfer Agreement") with the Company pursuant to which GP
Strategies (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 GP Strategies a royalty of $1,000,000. Such amount is payable if and when
the Company generates net income before income taxes, and is limited to 25% of
such net income before taxes per year until the amount is paid in full. To date,
the Company has not generated income before taxes and therefore has not paid
royalties to GP Strategies.
Other Transactions. In an agreement dated March 25, 1999, GP Strategies
agreed to lend the Company $500,000 at the rate of $250,000 a month (the "GP
Strategies Debt"). In return, the Company agreed to grant GP Strategies (i) a
first mortgage on the Company's real estate, (ii) a two-year option to purchase
the Company's real estate, provided that the Company has terminated its
operations and the Red Cross Debt has been repaid, and (iii) a two-year right of
first refusal in the event the Company desires to sell its real estate. In
addition, the Company agreed to issue GP Strategies 500,000 shares of Common
Stock and five-year options to purchase 500,000 shares of Common Stock at a
price of $1 per share. Pursuant to the agreement, the Company issued a note to
GP Strategies representing the GP Strategies Debt, which note was due on
September 30, 1999 (but extended to June 30, 2001) and bears interest, payable
at maturity, at the rate of 6% per annum. In addition, the Company has
negotiated a subordination agreement with the Red Cross pursuant to which the
Red Cross has agreed that its lien on the Company's real estate is subordinate
to GP Strategies' lien. On March 27, 2000, the Company and GP Strategies entered
into an agreement pursuant to which (i) the GP Strategies Debt was extended
until June 30, 2001, and (ii) the Management Agreement between the Company and
GP Strategies was terminated and all intercompany accounts between the Company
and GP Strategies (other than the GP Strategies Debt) in the amount of $130,000
were discharged and eliminated. The agreement also provides that (i) commencing
on May 1, 2001 and ending on June 30, 2001, on any day ISI may require GP
Strategies to exercise the GP Warrant and sell the underlying shares, if the
market price of ISI Common Stock exceeds $1.00 per share on each of the 10
trading days prior to any such day, and (ii) any proceeds from the sale of the
shares issuable upon exercise of the GP Warrant in excess of the aggregate
amount paid by GP Strategies to purchase such shares, would be deemed to reduce
the then outstanding amount of principal and interest of the GP Strategies Debt
until such amount is reduced to zero.
Employment Agreements
As of October 1, 1997, Lawrence M. Gordon entered into an employment
agreement with the Company pursuant to which Mr. Gordon is employed as the Chief
Executive Officer of the Company until December 31, 2001. On December 31, 1999,
and on each December 31 of each year thereafter, the employment period is
automatically extended for one additional year unless, not later than June 30
immediately preceding any such December 31, either party delivers to the other
written notice that the employment period is not further extended.
Commencing January 1, 1997, Mr. Gordon's base annual salary is
$250,000, subject to annual increases of 6%. The Company's Board of Directors
may determine Mr. Gordon's bonus for each year, and whether to grant Mr. Gordon
additional options, based upon the Company's revenues, profits or losses,
financing activities, progress in clinical trials, and such other factors deemed
relevant by the Board.
As of July 1, 2000, Stanley G. Schutzbank and Samuel H. Ronel entered
into employment agreements with the Company pursuant to which Dr. Schutzbank is
employed as President of the Company and Dr. Ronel is employed as Chairman of
the Board of the Company until December 31, 2003. On December 31, 2001 for Dr.
Schutzbank and December 31, 2002 for Dr. Ronel, and on each December 31 of each
year thereafter, the employment period is automatically extended for one
additional year unless, not later than June 30 immediately preceding any such
December 31, either party delivers to the other written notice that the
employment period is not further extended.
Dr. Schutzbank's base annual salary is $250,000, subject to annual
increases of 6%, and Dr. Ronel's base annual salary is $175,000, subject to such
increases as may be granted by the Board. The Board may determine Dr.
Schutzbank's and Dr. Ronel's bonus for each year, and whether to grant them
stock options, based upon the Company's revenues, profits or losses, financing
activities, progress in clinical trials, and such other factors deemed relevant
by the Board.
The Company may terminate each of the employment agreements for Cause,
which is defined as (i) the willful and continued failure by the employee to
substantially perform his duties or obligations or (ii) the willful engaging by
the employee in misconduct which is materially monetarily injurious to the
Company. If an employment agreement is terminated for Cause, the Company is
required to pay the employee his full salary through the termination date.
Each of the employees can terminate his employment agreement for Good
Reason, which is defined as (i) a change in control of the Company or (ii) a
failure by the Company to comply with any material provision of the employment
agreement which has not been cured within ten days after notice. A "change in
control" of the Company is defined as (i) a change in control of a nature that
would be required to be reported in response to Item 1(a) of Current Report on
Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
(the "Exchange Act"), (ii) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing 20% or more of the combined voting power of the
Company's then outstanding securities, or (iii) at any time individuals who were
either nominated for election or elected by the Board of Directors of the
Company cease for any reason to constitute at least a majority of the Board.
If the Company wrongfully terminates an employment agreement or the
employee terminates his employment agreement for Good Reason, then (i) the
Company is required to pay the employee his full salary through the termination
date; (ii) the Company is required to pay as severance pay to the employee an
amount equal to (a) his average annual cash compensation received from the
Company during the three full calendar years immediately preceding the
termination date (or, if the termination date is prior to December 31, 2002,
during the full calendar years commencing with calendar year 2000 preceding the
termination date), multiplied by (b) the greater of (I) the number of years
(including partial years) that would have been remaining in the employment
period if the employment agreement had not so terminated and (II) three (one and
one-half in the case of Dr. Ronel), such payment to be made (c) if termination
is based on a change of control of the Company, in a lump sum on or before the
fifth day following the termination date or (d) if termination results from any
other cause, in substantially equal semimonthly installments payable over the
number of years (including partial years) that would have been remaining in the
employment period if the employment agreement had not so terminated; (iii) all
options to purchase the Company's common stock granted to the employee under the
Company's option plan or otherwise immediately become fully vested and terminate
on such date as they would have terminated if the employee's employment by the
Company had not terminated and, if the employee's termination is based on a
change of control of the Company and the employee elects to surrender any or all
of such options to the Company, the Company is required to pay the employee a
lump sum cash payment equal to the excess of (a) the fair market value on the
termination date of the securities issuable upon exercise of the options
surrendered over (b) the aggregate exercise price of the options surrendered;
and (iv) if termination of the employment agreement arises out of a breach by
the Company, the Company is required to pay all other damages to which the
employee may be entitled as a result of such breach. If the employment agreement
is terminated for any reason other than Cause, the Company is required to
maintain in full force and effect, for a number of years equal to the greater of
(i) the number of years (including partial years) that would have been remaining
in the employment period if the employment agreement had not so terminated and
(ii) three (one and one-half in the case of Dr. Ronel), all employee benefit
plans and programs in which the employee was entitled to participate immediately
prior to the termination date.
PRINCIPAL STOCKHOLDERS
The following table sets forth the number of shares of Common Stock
beneficially owned as of October 31, 2000, by each person who is known to us to
own beneficially more than 5% of our outstanding Common Stock.
Name and Address Number of Shares Percent of
of Beneficial Owner Beneficially Owned Class
------------------- ------------------ -----------
Harbor Trust 2,727,274(1)(2) 4.8%(1)(2)
418 Avenue I
Brooklyn, NY 11230
(1) Includes 1,363,637 shares that may be acquired upon the exercise of
warrants, exercisable until April 2005, at a price of $1.50 per share.
(2) Does not include an option to purchase 246,212 Units (each Unit consisting
of a share of Common Stock and a warrant to purchase a share of Common
Stock for $1.50) exercisable commencing on April 17, 2001 at a price of
$.66 per unit.
The following table sets forth, as of October 31, 2000, beneficial
ownership of shares of Common Stock of the Company by each director, each of the
named executive officers and all directors and executive officers as a group.
<TABLE>
<CAPTION>
Of Total Number
of Shares
Beneficially
Total Number Percent of Owned
of Shares Common Shares which
Beneficially Stock May be Acquired
Name Owned Owned(1) Within 60 Days
---- ---------- ---------- -----------------
<S> <C> <C> <C>
Samuel H. Ronel, Ph.D. 313,765 2% 176,617
Lawrence M. Gordon 509,905 3% 287,329
Stanley G. Schutzbank, Ph.D. 484,875 3% 269,205
Sheldon L. Glashow 22,250 * 19,350
Directors and Executive Officers 1,608,003 9% 896,540
as a Group (8 persons)
-------------
* The number of shares owned is less than one percent of the outstanding shares
of Common Stock.
(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.
</TABLE>
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 55,000,000 shares of Common Stock.
As of October 31, 2000, 17,949,897 shares of Common Stock were outstanding. In
addition, 17,098,326 shares of Common Stock were 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
Dividends." In the event of a voluntary or involuntary liquidation of the
Company, all stockholders 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 Computershare Investor
Services, L.L.C., 2 North LaSalle Street, Chicago, Illinois 60602.
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
Preferred Stock.
SELLING STOCKHOLDERS
This prospectus relates to the offering by the selling stockholders
named in this prospectus of up to 27,899,820 shares of common stock. All of the
selling stockholders have acquired the shares of common stock in private
placements and may acquire additional shares of common stock upon the exercise
of warrants issued in the private placements.
The following table sets forth important information with respect to the selling
stockholders as of October 31, 2000, as follows:
- the name and position or other material relationship (if any) within
the past three years of the selling stockholders with us;
- the number of shares of common stock beneficially owned by the
selling stockholders (including shares issuable upon exercise of
warrants exercisable within 60 days of October 31, 2000) prior
to this offering;
- the number of shares of common stock being offered through this
prospectus; and
- the number and percentage of shares of common stock to be
beneficially owned by the selling stockholders after the sale of
the shares of common stock being offered through this
prospectus.
The selling stockholders do not have to sell all of the shares of common stock
that they own.
<TABLE>
<CAPTION>
Number of Shares Number of Shares Shares Beneficially
Beneficially Issuable Upon Owned After the Offering
Owned Prior to Exercise of Number of Shares ------------------------
Selling Stockholder the Offering Warrants Offered Hereby Number Percentage
------------------- ------------ --------- -------------- ------ ----------
<S> <C> <C> <C> <C> <C>
Anfel Trading Ltd. 757,576 378,788(1) 757,576(3) 0 0
Marc L. Bailin 75,758 37,879(1) 75,758(3) 0 0
Balmore S.A. 1,515,152 757,576(1) 1,515,152(3) 0 0
Arnaldo Barros 454,546 227,273(1) 454,546(3) 0 0
B&B Trading Retirement Plan 75,758 37,879(1) 75,758(3) 0 0
Ismelia Costa Belmont 120,000 60,000(1) 120,000(3) 0 0
Ethan Benovitz 75,758 37,879(1) 75,758(3) 0 0
Daniel Berger 151,516 75,758(1) 151,516(3) 0 0
John W. Blaha 37,880 18,940(1) 37,880(3) 0 0
Martin Blech 90,910 45,455(1) 90,910(3) 0 0
Bruce Bridges 30,000 15,000(1) 30,000(3) 0 0
Celeste Trust Reg. 1,515,152 757,576(1) 1,515,152(3) 0 0
Central Yeshiva Beth Joseph 237,123 146,971(1) 237,123(3) 0 0
Clarex Limited 300,000 150,000(1) 300,000(3) 0 0
Congregation Ohel Torah 75,758 37,879(1) 75,758(3) 0 0
Robert Degirmenci 75,758 37,879(1) 75,758(3) 0 0
Robert H. Donehew 30,304 15,152(1) 30,304(3) 0 0
Donehew Fund Limited
Partnership 272,728 136,364(1) 272,728(3) 0 0
Stella Eros Trust 400,000 200,000(1) 400,000(3) 0 0
Richard and Kenneth Etra 37,880 18,940(1) 37,880(3) 0 0
Steven Etra 189,394 94,697(1) 189,394(3) 0 0
Steven Gluckstein, IRA 50,000 25,000(1) 50,000(3) 0 0
Ari S. Goldman 96,000 48,000(1) 96,000(3) 0 0
Martin Goldman 80,000 40,000(1) 80,000(3) 0 0
GP Strategies Corporation 794,800 500,000(2) 794,800(3) 0 0
Frank V. Grace 75,758 37,879(1) 75,758(3) 0 0
HAA, Inc. 454,546 227,273(1) 454,546(3) 0 0
Mark and Amy Halper 200,000 100,000(1) 200,000(3) 0 0
Harbor Trust 2,727,274 1,363,637(1) 2,727,274(3)(5) 0 0
Harbor Trust 0 0 492,424(5) 0 0
Harnof Investments Limited 303,032 151,516(1) 303,032(3) 0 0
John Heilshorn 113,638 56,819(1) 113,638(3) 0 0
Charlotte Horowitz 121,214 60,607(1) 121,214(3) 0 0
Benjamin J. Jesselson 8/21/74
Trust 757,576 378,788(1) 757,576(3) 0 0
Michael G. Jesselson 12/18/80
Trust 1,515,152 757,576(1) 1,515,152(3) 0 0
Richard Kandel 151,516 75,758(1) 151,516(3) 0 0
Scott J. Koppelman 200,000 100,000(1) 200,000(3) 0 0
KSH Strategic Investment Fund
I, LP 757,576 378,788(1) 757,576(3) 0 0
Alan and Penny Layton 37,880 18,940(1) 37,880(3) 0 0
George Lichtenstein 170,455 85,227(1) 170,455(3) 0 0
Lightning Ltd. 151,516 75,758(1) 151,516(3) 0 0
Keith Lippert 75,758 37,879(1) 75,758(3) 0 0
Low Family Trust 151,516 75,758(1) 151,516(3) 0 0
Robert A. Mackie 340,000 170,000(1) 340,000(3) 0 0
Magic Consulting Corp. 200,000 100,000(1) 200,000(3) 0 0
Markham Holdings Limited 303,032 151,516(1) 303,032(3) 0 0
Martin Marlow 75,758 37,879(1) 75,758(3) 0 0
Abraham Masliansky 400,000 200,000(1) 400,000(3) 0 0
Maria Molinsky 200,000 100,000(1) 200,000(3) 0 0
Sean Molloy 30,000 15,000(1) 30,000(3) 0 0
New Millennium Biotech 0 0 492,424(5) 0 0
New Millennium Biotech 303,032 151,516(1) 303,032(3) 0 0
Avroham Moshel 200,000 100,000(1) 200,000(3) 0 0
Jules Nordlicht 303,032 151,516(1) 303,032(3) 0 0
Mark Nordlicht 1,212,122 606,061(1) 1,212,122(3) 0 0
Steven Oliveira 200,000 100,000(1) 200,000(3) 0 0
One Route 340 Corp. 75,758 37,879(1) 75,758(3) 0 0
Ruthy Parnes 151,516 75,758(1) 151,516(3) 0 0
Lawrence L. Pickens 37,880 18,940(1) 37,880(3) 0 0
Mary Ann Pickens 75,758 37,879(1) 75,758(3) 0 0
Richard S. Post 37,880 18,940(1) 37,880(3) 0 0
Earl H. Powers 75,758 37,879(1) 75,758(3) 0 0
Dov Rauchwerger 181,820 90,910(1) 181,820(3) 0 0
RBB Bank Aktiengesellschaft 1,760,000 880,000(1) 1,760,000(3) 0 0
Thomas Redington 136,364 68,182(1) 136,364(3) 0 0
David Rosenberg 400,000 200,000(1) 400,000(3) 0 0
Daniel Saks 75,758 37,879(1) 75,758(3) 0 0
Marvin Schick 151,516 75,758(1) 151,516(3) 0 0
Frank J. Schultheis 151,516 75,758(1) 151,516(3) 0 0
Elliot S. Schwartz and Michael
Ettinger - Tenants in Common 75,758 37,879(1) 75,758(3) 0 0
Seaview Global Fund, LP 80,000 40,000(1) 80,000(3) 0 0
Abraham Shapiro 75,758 37,879(1) 75,758(3) 0 0
Charles Silberstein 30,304 15,152(1) 30,304(3) 0 0
Gary Stein 60,608 30,304(1) 60,608(3) 0 0
Richard S. Thompson 75,758 37,879(1) 75,758(3) 0 0
Michele Faskowitz Treister 30,304 15,152(1) 30,304(3) 0 0
Nelson M. Tuchman 75,758 37,879(1) 75,758(3) 0 0
Israel Wallach 30,304 15,152(1) 30,304(3) 0 0
Teddy Wallach 60,608 30,304(1) 60,608(3) 0 0
Zvi Weinreb 151,516 75,758(1) 151,516(3) 0 0
Stephen Weiss 30,304 15,152(1) 30,304(3) 0 0
Yeshiva Gimel Daled Inc. 303,032 151,516(1) 303,032(3) 0 0
Yeshiva Madreigas HaAdam 100,000 50,000(1) 100,000(3) 0 0
Jay Zises, IRA 303,032 151,516(1) 303,032(3) 0 0
GKN Securities 0 0 88,380(4) 0 0
Jay Goldman 0 0 60,700(4) 0 0
Stuart Horowitz 0 0 20,234(4) 0 0
Diane Pilatsky 0 0 1,650(4) 0 0
Robert Gladstone 0 0 5,398(4) 0 0
David Nussbaum 0 0 5,398(4) 0 0
Roger Gladstone 0 0 5,398(4) 0 0
Graubard, Mollen & Miller 0 0 20,796(4) 0 0
Catalyst Venture Capital LLC 0 0 280,000(4) 0 0
Albert Poliak 0 0 24,250(4) 0 0
Robert Setteducati 0 0 24,250(4) 0 0
YMT, Inc. 0 0 113,638(4) 0 0
Libra Finance S.A. 0 0 454,546(4) 0 0
Central Yeshiva Beth Joseph 0 0 360,228(4) 0 0
Daniel J. Moran 0 0 56,820(4) 0 0
KSH Investment Group, Inc. 0 0 113,638(4) 0 0
Steven Oliveira 0 0 150,000(4) 0 0
Fred Sager 0 0 51,764(4) 0 0
Stephen J. Perrone 0 0 22,182(4) 0 0
Gabriel M. Cerrone 0 0 90,000(4) 0 0
American Red Cross 800,000(6) 0 800,000(6) 0 0
Terry Plasse, MD 30,000(7) 0 30,000(7) 0 0
Sera-Tec Biologicals Limited
Partnership 70,000(8) 0 70,000(8) 0 0
(1) The warrants are exercisable at a price of $1.50 per share of common stock until April, 2005.
(2) The warrants are exercisable at a price of $1.00 per share of common stock until March, 2004.
(3) Consists of shares of common stock currently owned by the selling
stockholders and offered hereby, as well as shares of common stock issuable
to such selling stockholders upon exercise of warrants currently held and
offered hereby by such selling stockholders.
(4) Represents options to purchase Units, each Unit consisting of a share of
Common Stock and a warrant to purchase an additional share of Common Stock
at a price of $1.50, exercisable at a price of $.66 per Unit, commencing on
April 17, 2001. The Units were issued as compensation for services rendered
to the Company in the private placement.
(5) Does not include options to purchase an additional 246,212 Units, each Unit
consisting of a share of Common Stock and a warrant to purchase an
additional share of Common Stock at a price of $1.50, exercisable at a
price of $.66 per Unit, commencing on April 17, 2001. The warrants were
issued to the selling stockholder for acting as a lead investor.
(6) Represents shares issued as payment for indebtedness owed to the selling stockholder.
(7) Represents shares issued as payment for indebtedness owed to the selling stockholder. Dr. Plasse rendered consulting
services to the Company during 1998 and 1999.
(8) Represents shares issued as payment for indebtedness owed to the selling stockholder.
</TABLE>
PLAN OF DISTRIBUTION
The common stock being offered by the selling stockholders will be sold
in one or more transactions (which may involve block transactions) on the OTC
Bulletin Board or on another market on which the common stock may from time to
time be trading, in privately-negotiated transactions, through the writing of
options on the common stock, short sales, or any combination thereof. The sale
price to the public may be the market price prevailing at the time of sale, a
price related to the prevailing market price, or any other price as the selling
stockholders determine from time to time. The selling stockholders shall have
the sole and absolute discretion not to accept any purchase offer or make any
sale of common stock if they deem the purchase price to be unsatisfactory at any
particular time.
The selling stockholders may also sell the common stock directly to
market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Brokers acting as agents for the selling
stockholders will receive usual and customary commissions for brokerage
transactions, and market makers and block purchasers purchasing the common stock
will do so for their own account and at their own risk. It is possible that the
selling stockholders will attempt to sell shares of common stock in block
transactions to market makers or other purchasers at a price per share which may
be below the then market price. In addition, the selling stockholders (or their
successors in interest) may enter into hedging transactions with broker-dealers
who may engage in short sales of common stock in the course of hedging the
positions they assume with a selling stockholder. There can be no assurance that
all or any of the common stock offered hereby will be issued to, or sold by, the
selling stockholders.
The selling stockholders and any other persons participating in the
sale or distribution of the common stock will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder. These
rules may limit the timing of purchases and sales of any of the common stock by
the selling stockholders or any other person participating in the distribution.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and other market
activities with respect to the common stock for a specified period of time
before the distribution begins. These restrictions may reduce the marketability
of the common stock.
We have agreed to indemnify the selling stockholders against
potentially significant liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
Certain legal matters with respect to the shares of common stock and
the shares issuable upon exercise of the warrants offered hereby have been
passed upon for the Company by Duane, Morris & Heckscher LLP, New York, New
York.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1999 and 1998, and for each of the years in the three-year period ended December
31, 1999 have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The report of KPMG LLP covering the December 31, 1999 financial
statements contains an explanatory paragraph that states that our recurring
losses from operations and accumulated deficit raise substantial doubt about our
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of that
uncertainty.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at
1-800-732-0330 for further information on the public reference rooms.
We have filed a registration statement on Form S-1 with the SEC
relating to the common stock offered by this prospectus. This prospectus does
not contain all of the information set forth in the registration statement and
the exhibits for the registration statement. Statements contained in this
prospectus as to the content of any contract or other document referred to are
not necessarily complete and in each instance we refer you to the contract or
other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference.
For further information with respect to ISI and the common stock
offered by this prospectus, we refer you to the registration statement,
exhibits, and schedules, which may be inspected by anyone without charge at the
public reference facilities maintain by the SEC at the above locations. Copies
of all or any part of the registration statement may be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of the prescribed fees. The registration statement is also
available through the SEC's Web site at the following address:
http://www.sec.gov. Our common stock is quoted on the OTC Bulletin Board under
the symbol "IFSC."
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Financial Statements Page
<S> <C>
Consolidated Condensed Balance Sheets - June 30, 2000 (Unaudited) and
December 31, 1999...................................................................................F-2
Consolidated Condensed Statements of Operations - Three Months and Six Months
Ended June 30, 2000 and 1999 (Unaudited)............................................................F-3
Consolidated Condensed Statements of Changes in Stockholders' Equity - Six Months
Ended June 30, 2000 (Unaudited).....................................................................F-5
Consolidated Condensed Statements of Cash Flows - Six Months Ended June 30, 2000
and 1999 (Unaudited)................................................................................F-6
Notes to Consolidated Condensed Financial Statements (Unaudited)................................................F-7
Audited Consolidated Financial Statements
Independent Auditors' Report...................................................................................F-12
Consolidated Balance Sheets - December 31, 1999 and 1998.......................................................F-13
Consolidated Statements of Operations - Years Ended December 31, 1999, 1998 and 1997...........................F-14
Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31,
1999, 1998, and 1997..................................................................................F-14
Consolidated Statements of Cash Flows - Years Ended December 31, 1999, 1998 and 1997...........................F-16
Notes to Consolidated Financial Statements.....................................................................F-17
</TABLE>
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2000 1999
(Unaudited)
ASSETS -------------------------------
Current assets
Cash and cash equivalents $ 3,391,236 $ 2,273,242
Accounts and other receivables 128,097 35,561
Inventories, net of reserves
of $5,945,842 and $6,225,185,
respectively 735,203 766,000
Prepaid expenses and other
current assets 28,582 27,018
------------- -------------
Total current assets 4,283,118 3,101,821
------------- -------------
Property, plant and equipment,
at cost 12,759,273 12,759,273
Less accumulated depreciation (10,076,311) (9,834,558)
------------- -------------
2,682,962 2,924,715
------------- -------------
Patent costs, net of accumulated
amortization 204,788 219,822
Other assets 10,100 10,100
------------- -------------
Total assets $ 7,180,968 $ 6,256,458
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,867,722 $ 4,915,466
Note payable and amount due
GP Strategies 536,250 283,637
------------- -------------
Total current liabilities 3,403,972 5,199,103
------------- -------------
Note payable to GP Strategies 500,000
------------- -------------
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 shares; issued
and outstanding-12,482,393 and
5,327,473 shares, respectively 124,824 53,275
Capital in excess of par value 134,097,733 129,397,259
Accumulated deficit (130,445,561) (128,812,179)
Settlement shares (81,000)
------------- ------------
Total stockholders' equity 3,776,996 557,355
------------- ------------
Total liabilities and stockholders'
equity $ 7,180,968 $ 6,256,458
============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
-----------------------------
2000 1999
(as restated)
------------- ------------
Revenues
Alferon N Injection $ 157,922 $ 526,389
------------- -------------
Total revenues 157,922 526,389
------------- -------------
Costs and expenses
Cost of goods sold and idle
production costs 425,177 765,408
Reversal of reserve for excess inventory (273,789)
Research and development (net of $456,998
for settlements on various liabilities
during the three months ended June 30, 2000) 34,000 696,497
General and administrative 518,103 504,792
------------- -------------
Total costs and expenses 977,280 1,692,908
------------- -------------
Loss from operations (819,358) (1,166,519)
Interest expense and financing costs 779 249,360
------------- -------------
Net loss $ (820,137) $(1,415,879)
============= =============
Basic and diluted loss per share $ (.09) $ (.27)
============= =============
Weighted average number of
shares outstanding 9,227,925 5,179,034
============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
June 30,
-----------------------------
2000 1999
(as restated)
------------- -------------
Revenues
Alferon N Injection $ 321,072 $ 985,910
Research products 277
------------- -------------
Total revenues 321,072 986,187
------------- -------------
Costs and expenses
Cost of goods sold and idle
production costs 655,330 2,223,840
Reversal of reserve for excess inventory (135,271) (582,650)
Research and development (net of $456,998
for settlements on various liabilities
during the six months ended June 30, 2000) 457,819 1,942,989
General and administrative 966,177 1,285,023
------------- -------------
Total costs and expenses 1,944,055 4,869,202
------------- -------------
Loss from operations (1,622,983) (3,883,015)
Interest expense and financing costs 10,399 244,623
------------- -------------
Net loss $ (1,633,382) $(4,127,638)
============= =============
Basic and diluted loss per share $ (.22) $ (.84)
============= =============
Weighted average number of
shares outstanding 7,566,877 4,922,447
============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED June 30, 2000
(Unaudited)
Capital Total
Common Stock in excess Accummulated Settlement stockholders'
Shares Amount of par value deficit shares equity
------------------ ------------ -------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
Dec. 31,
1999 5,327,473 $ 53,275 $129,397,259 $(128,812,179) $ (81,000) $ 557,355
Net proceeds
from sale of
common stock 7,088,648 70,886 4,507,614 4,578,500
Common stock
issued as
compensation 20,000 200 23,550 23,750
Common stock
issued under
Company 401(k)
Plan 46,272 463 39,424 39,887
Forgiveness of
amount due GP
Strategies 129,886 129,886
Settlement shares
sold 368,341 368,341
Market value
adjustment (287,341) (287,341)
Net loss (1,633,382) (1,633,382)
--------------------------------------------------------------------------------------
Balance at
June 30,
2000 12,482,393 $124,824 $134,097,733 $(130,445,561) $ --- $3,776,996
The accompanying notes are an integral part of these consolidated condensed
financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------------
2000 1999
(as restated)
------------ ------------
<S> <C> <C>
Cash flows from operations:
Net loss $(1,633,382) $(4,127,638)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 256,787 373,654
Amortization of deferred financing costs 250,000
Gain on settlements of research-related liabilities (456,998)
Compensation and
benefits paid with common stock 63,637 68,979
Reversal of reserve for
excess inventory (135,271) (582,650)
Market value adjustment (287,341) 587,261
Loss on sale of other assets 51,392
Change in operating assets and liabilities:
Inventories 166,068 520,434
Amount due to GP Strategies (117,501) 74,264
Accounts and other receivables (92,536) 480,810
Prepaid expenses and other current
assets (1,564) (78,319)
Accounts payable and accrued expenses (1,222,405) 878,161
------------ ------------
Net cash used for operations (3,460,506) (1,503,652)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of other assets 38,658
------------ ------------
Net cash provided by 38,658
investing activities ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 4,578,500
Proceeds from note payable to
GP Strategies 500,000
------------ ------------
Net cash provided by financing activities 4,578,500 500,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,117,994 (964,994)
Cash and cash equivalents at beginning
of period 2,273,242 1,170,861
------------ ------------
Cash and cash equivalents at end of period $ 3,391,236 $ 205,867
============ ============
Noncash items:
Forgiveness of amount due GP Strategies $ 129,886 $
=========== ============
The accompanying notes are an integral part of these consolidated condensed financial statements
</TABLE>
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The financial information included herein is unaudited. Such
information, however, reflects all adjustments (consisting solely of normal
recurring adjustments) that are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
interim periods. The operating results for interim periods are not necessarily
indicative of operating results to be expected for the year.
Note 2. Inventories
Inventories are classified as follows:
June 30, December 31,
2000 1999
-------------- --------------
Finished goods $ 570,070 $ 361,809
Work in process 4,778,415 5,296,816
Raw materials 1,332,560 1,332,560
Less reserve for
excess inventory (5,945,842) (6,225,185)
--------------- --------------
$ 735,203 $ 766,000
=============== ==============
Finished goods inventory consists of vials of ALFERON N Injection,
available for commercial and clinical use either immediately or upon final
release by quality assurance.
During the three months ended June 30, 2000, the Company converted a
portion of its interferon intermediates (work in process inventory) into
finished goods inventory.
In light of the results to date of the Company's phase 3 studies of
ALFERON N Injection in HIV and HCV-infected patients, the Company has recorded a
reserve against its inventory of ALFERON N Injection to reflect its estimated
net realizable value. The reserve was a result of the Company's assessment of
anticipated near-term projections of product to be sold or utilized in clinical
trials, giving consideration to historical sales levels. As a result,
inventories at June 30, 2000 and December 31, 1999, reflect a reserve for excess
inventory of $5,945,842 and $6,225,185, respectively.
During the six months ended June 30, 2000 and 1999, a portion of the
reserve for excess inventory was reversed in the amount of $135,271 and
$582,650, respectively, to reflect inventory at its estimated net realizable
value. In addition, during the six months ended June 30, 2000, a portion of the
reserve for excess inventory was used in the amount of $144,072.
Note 3. Agreement with GP Strategies Corporation
In an agreement dated March 25, 1999, GP Strategies Corporation ("GP
Strategies") agreed to lend the Company $500,000 (the "GP Strategies Debt"). In
return, the Company agreed to grant GP Strategies (i) a first mortgage on the
Company's real estate, (ii) a two-year option to purchase the Company's real
estate, provided that the Company has terminated its operations and a certain
liability to the American Red Cross (the "Red Cross") has been repaid, and (iii)
a two-year right of first refusal in the event the Company desires to sell its
real estate. In addition, the Company agreed to allow a designee of GP
Strategies to attend any meeting with the FDA with respect to approval of
ALFERON N Injection for the treatment of hepatitis C and to issue GP Strategies
500,000 shares (the "GP Shares") of common stock and five-year warrant (the "GP
Warrant") to purchase 500,000 shares of common stock at a price of $1 per share.
The GP Shares and GP Warrant were valued at $500,000 and recorded as a financing
cost and amortized over the original period of the GP Strategies Debt in 1999.
The Company also agreed not to increase its payroll during the term of the GP
Strategies Debt without the prior consent of GP Strategies. Pursuant to the
agreement, the Company has issued a note to GP Strategies representing the GP
Strategies Debt, which note was due on September 30, 1999 and bears interest,
payable at maturity, at the rate of 6% per annum. In addition, at that time, the
Company negotiated a subordination agreement with the Red Cross pursuant to
which the Red Cross agreed that its lien on the Company's real estate is
subordinate to GP Strategies' lien.
On March 27, 2000, the Company and GP Strategies entered into an
agreement pursuant to which (i) the GP Strategies Debt was extended until June
30, 2001 (and accordingly is classified as a current liability and a long-term
liability on the accompanying consolidated condensed balance sheets at June 30,
2000 and December 31, 1999, respectively), (ii) the Company agreed to file a
registration statement prior to July 31, 2000 (which the Company is currently in
the process of filing) covering the shares issuable upon exercise of the GP
Warrant and any of the GP Shares for which Rule 144 under the Securities Act of
1933 was not available, and (iii) the Management Agreement between the Company
and GP Strategies (whereby certain legal, financial and administrative services
were provided by GP Strategies to the Company) was terminated and all
intercompany accounts between the Company and GP Strategies (other than the GP
Strategies Debt) were discharged. The amount of intercompany accounts that were
discharged was approximately $130,000, which was recorded in the quarter ended
March 31, 2000 as a contribution to capital. The agreement also provides that
(i) commencing on May 1, 2001 and ending on June 30, 2001, on any day ISI may
require GP Strategies to exercise the GP Warrant and sell the underlying shares,
if the market price of ISI common stock exceeds $1.00 per share on each of the
10 trading days prior to any such day, and (ii) any proceeds from the sale of
the shares issuable upon exercise of the GP Warrant in excess of the aggregate
amount paid by GP Strategies to purchase such shares, would be deemed to reduce
the then outstanding amount of principal and interest of the GP Strategies Debt
until such amount is reduced to zero.
Note 4. Agreement with the Red Cross
In an agreement dated November 23, 1998, the Company agreed to grant
the Red Cross a security interest in certain assets to secure the Red Cross
Liability and to issue to the Red Cross 300,000 shares of Common Stock (with a
market value of $1,171,875 at December 4, 1998) and additional shares at some
future date as requested by the Red Cross. The Red Cross agreed that any net
proceeds received by it upon sale of such shares would be applied against the
Red Cross Liability.
As the liability to the Red Cross remained unsettled until such time as
the Red Cross sells the shares they have already received and could receive in
the future, the Company recorded any shares issued to the Red Cross as
"Settlement Shares" within stockholders' equity. Any decreases in the market
value of the Company's common stock below $1.2 million, until such time as the
Red Cross were to sell its shares, would impact the value of the shares held by
the Red Cross and accordingly require an adjustment to "Settlement Shares". Due
to the decline in the Company's stock price during the six months ended June 30,
1999, an adjustment for $587,261 was recorded with a corresponding charge to
cost of goods sold. Due to the increase in the Company's stock price during the
three months ended March 31, 2000 up to the date of sale by the Red Cross of all
remaining Settlement Shares, an adjustment for $287,341 was recorded with a
corresponding credit to cost of goods sold. During 1999, the Red Cross sold
27,000 of the Settlement Shares and sold the balance of such shares (273,000
shares) during the first quarter of 2000. As a result, the net proceeds from the
sales of the Settlement Shares, $33,000 in 1999 and $368,000 in 2000, were
applied against the liability to the Red Cross. The remaining liability to the
Red Cross at June 30, 2000 and December 31, 1999 was approximately $1,244,000
and $1,579,000, respectively.
On October 30, 2000, the Company issued an accumulated 800,000 shares to
the Red Cross . The net proceeds from the sale of such shares by the Red Cross
will be applied against the remaining liability owed to the Red Cross. However,
there can be no assurance that the net proceeds from the sale of such shares
will be sufficient to extinguish the remaining liability owed the Red Cross.
Note 5. Operations and Liquidity
The Company has experienced significant operating losses since its
inception in 1980. As of June 30, 2000, the Company had an accumulated deficit
of approximately $130.4 million. For the six months ended June 30, 2000 and the
years ended December 31, 1999, 1998 and 1997, the Company had losses from
operations of approximately $1.6 million, $5.4 million, $20.8 million and $22.4
million, respectively. Although the Company received FDA approval in 1989 to
market ALFERON N Injection in the United States for the treatment of certain
genital warts and ALFERON N Injection currently is marketed and sold in the
United States by the Company, in Mexico by Industria Farmaceutica Andromaco,
S.A. De C.V. and in Germany by Cell Pharm GmbH ("Cell Pharm"), the Company has
had limited revenues from the sale of ALFERON N Injection to date. 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, 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.
During the second quarter of 2000 and through August 3, 2000, the
Company raised gross proceeds of $7,679,380 from the sale in a private placement
of 11,635,451 shares of common stock at a price of $0.66 per share and warrants,
exercisable until April 2005 to purchase 11,635,451 shares of common stock at a
price of $1.50 per share. The proceeds from this private placement will be used
to fund new initiatives, in addition to funding certain projects within the
Company's existing interferon-related operations. At August 10, 2000, the
Company has $5,700,000 of cash and cash equivalents, with which to support
future operating activities and to satisfy its financial obligations as they
become payable. Management is continuing to actively pursue raising additional
capital by either (i) issuing securities in a private equity offering, (ii)
licensing the rights to its injectable, topical or oral formulations of alpha
interferon, or (iii) selling the Company. Insufficient funds will require the
Company to further delay, scale back, or eliminate certain or all of its
activities or to license third parties to commercialize products or technologies
that the Company would otherwise seek to develop itself.
During the second quarter of 2000, the Company was able to settle
certain amounts owed on various research-related liabilities at a savings to the
Company of approximately $457,000. Such amount was credited against research and
development expenses.
Based on the Company's estimates of revenues, expenses, the timing of
repayment of creditors, and levels of production, management believes that the
cash presently available will be sufficient to enable the Company to continue
operations for at least the next twelve months. However, actual results,
especially with respect to revenues, may differ materially from such estimate,
and no assurance can be given that additional funding will not be required
sooner than anticipated or that such additional funding, whether from financial
markets or collaborative or other arrangements with corporate partners or from
other sources, will be available when needed or on terms acceptable to the
Company.
Note 6. Restatement of the June 30, 1999 Financial Statements (unaudited)
The Company has restated its consolidated condensed financial
statements for the three months ended March 31, 1999, June 30, 1999 and
September 30, 1999 because of errors discovered subsequent to the issuance of
such consolidated condensed financial statements. The consolidated condensed
financial statements required restatement to correct the reporting for
inventories, Settlement Shares, deferred compensation, cost of sales, financing
costs and certain other expenses.
The impact of the restatement on the Company's consolidated condensed
statements of operations for the three months and six months ended June 30, 1999
and cash flows for the six months ended June 30, 1999 is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1999
Operations: As Reported Restated
---------- ----------- --------
<S> <C> <C>
Revenues
Alferon N Injection $ 526,389 $ 526,389
------------- -------------
Total revenues 526,389 526,389
------------- -------------
Costs and expenses
Cost of goods sold and idle production costs 603,360 765,408
Reversal of reserve for excess inventory (273,789)
Research and development 696,497 696,497
General and administrative 458,381 504,792
------------- -------------
Total costs and expenses 1,758,238 1,692,908
------------- -------------
Loss from operations (1,231,849) (1,166,519)
Interest income (expense and
financing costs) 640 (249,360)
------------- -------------
Net loss $ (1,231,209) $ (1,415,879)
============= =============
Basic and diluted loss per share $ (.26) $ (.27)
============= =============
Weighted average number of
shares outstanding 4,697,034 5,179,034
============= =============
Six Months Ended
June 30, 1999
Operations: As Reported Restated
---------- ----------- --------
Revenues
Alferon N Injection $ 985,910 $ 985,910
Research products 277 277
------------- -------------
Total revenues 986,187 986,187
------------- -------------
Costs and expenses
Cost of goods sold and idle production costs 1,636,579 2,223,840
Reversal of reserve for excess inventory (582,650)
Research and development 1,942,989 1,942,989
General and administrative 1,261,076 1,285,023
------------- ------------
Total costs and expenses 4,840,644 4,869,202
------------- -------------
Loss from operations (3,854,457) (3,883,015)
Interest income (expense and
financing costs) 5,377 (244,623)
------------- -------------
Net loss $ (3,849,080) $ (4,127,638)
============= =============
Basic and diluted loss per share $ (.83) $ (.84)
============= =============
Weighted average number of
shares outstanding 4,636,733 4,922,447
============= =============
Six Months Ended
June 30, 1999
Cash flows: As Reported Restated
---------- ----------- --------
Cash flows from operations:
Net loss $ (3,849,080) $ (4,127,638)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 373,654 373,654
Amortization of deferred financing costs 250,000
Accounts payable and benefits paid with
common stock 603,354 68,979
Reversal of reserve for excess inventory (582,650)
Market value adjustment 587,261
Loss on sale of other assets 51,392
Change in operating assets and liabilities:
Inventories 520,434 520,434
Amount due to GP Strategies 574,264 74,264
Accounts and other receivables 480,810 480,810
Prepaid expenses and other current assets (78,319) (78,319)
Accounts payable and accrued expenses 319,839 878,161
------------ ------------
Net cash used for operations (1,055,044) (1,503,652)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of other assets 90,050 38,658
------------ ------------
Net cash provided by investing activities 90,050 38,658
------------ ------------
Cash flows from financing activities:
Proceeds from note payable to GP Strategies 500,000
------------ ------------
Net cash provided by financing activities 500,000
------------ ------------
Net decrease in cash and cash equivalents (964,994) (964,994)
Cash and cash equivalents at beginning of
period 1,170,861 1,170,861
------------ ------------
Cash and cash equivalents at end of period $ 205,867 $ 205,867
============ ============
</TABLE>
<PAGE>
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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
3 to the consolidated financial statements, the Company has suffered recurring
losses from operations and has an accumulated deficit that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
New York, New York
April 10, 2000
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
------------
1999 1998
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 2,273,242 $ 1,170,861
Accounts and other receivables 35,561 689,511
Inventories, net of reserves of
$6,225,185 and $10,344,551 766,000 709,784
Prepaid expenses and other current assets 27,018 36,511
------------- ------------
Total current assets 3,101,821 2,606,667
------------- ------------
Property, plant and equipment, at cost
Land 140,650 140,650
Buildings and improvements 7,702,825 7,702,825
Equipment 4,915,798 4,928,298
-------------- ------------
12,759,273 12,771,773
Less accumulated depreciation (9,834,558) (9,130,248)
------------ ------------
2,924,715 3,641,525
------------ ------------
Patent costs, net of accumulated amortization
of $301,339 and $270,856 219,822 250,305
Other assets 10,100 100,150
------------ ------------
$ 6,256,458 $ 6,598,647
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,396,181 $ 4,149,666
Accrued expenses 519,285 236,641
Amount due GP Strategies 283,637 108,943
------------- -------------
Total current liabilities 5,199,103 4,495,250
------------- -------------
Note payable to GP Strategies 500,000
------------- -------------
Commitments
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 shares; issued and outstanding
- 5,327,473 and 4,360,808 shares 53,275 43,608
Capital in excess of par value 129,397,259 127,933,885
Accumulated deficit (128,812,179) (125,210,096)
Settlement shares (81,000) (664,000)
-------------- -------------
Total stockholders' equity 557,355 2,103,397
-------------- -------------
$ 6,256,458 $ 6,598,647
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Revenues
ALFERON N Injection $ 2,328,945 $ 1,930,657 $ 2,927,585
Research products and other
revenues 277 76,350 28,217
------------ ------------ ------------
Total revenues 2,329,222 2,007,007 2,955,802
------------ ------------ ------------
Costs and expenses
Cost of goods sold and excess/idle
production costs 3,552,026 6,533,462 1,857,959
(Reversal) Provision for excess inventory (1,177,531) 3,089,841 7,254,710
Research and development 3,060,019 8,654,888 11,863,987
General and administrative 2,315,010 4,569,608 4,389,025
------------ ------------- ------------
Total costs and expenses 7,749,524 22,847,799 25,365,681
------------ ------------- ------------
Loss from operations (5,420,302) (20,840,792) (22,409,879)
Interest income 6,104 252,528 670,199
Interest expense and financing costs (536,394)
Loss on repurchase of preferred stock (737,037)
----------- ------------- ------------
Loss before income tax benefit (5,950,592) (21,325,301) (21,739,680)
----------- ------------- ------------
Income tax benefit:
Gain on sale of state net operating loss
carryovers 2,348,509
------------- ------------- ------------
Net loss $ (3,602,083) $(21,325,301) $(21,739,680)
============= ============= ============
Basic and diluted
loss per share $ (.71) $ (6.67) $ (8.15)
============= ============= ============
Weighted average number of
shares outstanding 5,088,620 3,199,396 2,668,352
============= ============= ============
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Total
Capital in stock-
Preferred stock Common stock excess of Accumulated Settlement holders
Shares Amount Shares Amount par value deficit shares equity
------- ------ ----- ------ --------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 2,455,239 $24,552 $107,494,394 $(82,145,115) $ $25,373,831
Net proceeds from sale of common stock 582,418 5,824 16,429,896 16,435,720
Purchase of fractional shares of common stock
resulting from reverse stock split (21) - (633) (633)
Common stock issued under Company 401(k) plan 483 5 22,962 22,967
Proceeds from exercise
of common stock options 3,962 40 121,395 121,435
Net loss (21,739,680) (21,739,680)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 3,042,081 30,421 124,068,014 (103,884,795) 20,213,640
Net proceeds from the sale of common
and preferred stock 7,500 75 960,000 9,600 9,123,762 9,133,437
Repurchase of preferred Stock (7,500) (75) (7,178,925) (7,179,000)
Common stock issued as payment against
negotiated settlement
and accounts payable 330,000 3,300 1,246,794 (1,189,000) 61,094
Common stock issued as compensation 3,238 32 116,865 116,897
Common stock issued
under Company 401(k) plan 25,489 255 170,978 171,233
Compensation paid in cash in exchange
of obligation to issue common stock 386,397 386,397
Market value adjustment 525,000 525,000
Net loss (21,325,301) (21,325,301)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 4,360,808 43,608 127,933,885 (125,210,096) (664,000) 2,103,397
Common stock issued as financing cost 500,000 5,000 495,000 500,000
Common stock issued as payment against
accounts payable 285,000 2,850 531,525 534,375
Common stock issued
under Company 401(k) plan 181,665 1,817 98,159 99,976
Compensation paid in cash in exchange
of obligation to issue common stock 338,690 338,690
Settlement shares sold 33,000 33,000
Market value adjustment 550,000 550,000
Net loss (3,602,083) (3,602,083)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 5,327,473 $53,275 $129,397,259 $(128,812,179) $(81,000) $557,355
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operations:
Net loss $ (3,602,083) $(21,325,301) $(21,739,680)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization 747,293 894,013 782,802
Amortization of deferred financing costs 500,000
Compensation and benefits
paid with common stock 99,976 288,130 22,967
(Reversal) provision for excess inventory (1,177,531) 3,089,841 7,254,710
Non-cash deferred compensation 338,690 386,397
Loss on repurchase of preferred stock 737,037
Market value adjustment 550,000 515,625
Provision for impairment of equipment 803,217
Loss on sale of other assets 51,392
Change in operating assets
and liabilities:
Inventories 1,121,315 (466,972) (6,258,765)
Accounts and other receivables 653,950 299,947 (756,421)
Prepaid expenses and other current assets 9,493 28,842 96,666
Amount due to GP Strategies 174,694 130,847 60,998
Accounts payable and accrued expenses 1,096,534 517,040 1,570,704
--------------- ------------ -------------
Net cash provided by (used for) operations 563,723 (14,101,337) (18,966,019)
--------------- ------------ -------------
Cash flows from investing activities:
Additions to property, plant and equipment (78,235) (1,023,175)
Proceeds from sale of other assets 38,658 73,750
--------------- ------------ ------------
Net cash provided by (used for)
investing activities 38,658 (4,485) (1,023,175)
--------------- ------------ -------------
Cash flows from financing activities:
Proceeds from GP Strategies 500,000
Net proceeds from sale of common stock 1,954,437 16,435,720
Net proceeds from preferred stock offering 7,179,000
Repurchase of preferred stock (7,916,037)
Proceeds from exercise of common stock options 121,435
Purchase of fractional shares of common stock (633)
--------------- ------------ -------------
Net cash provided by financing activities 500,000 1,217,400 16,556,522
--------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents 1,102,381 (12,888,422) (3,432,672)
Cash and cash equivalents at beginning of year 1,170,861 14,059,283 17,491,955
-------------- ------------ -------------
Cash and cash equivalents at end of year $ 2,273,242 $ 1,170,861 $14,059,283
============== ============ =============
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Business
Interferon Sciences, Inc. (the "Company") is a biopharmaceutical
company that operates in a single segment and is engaged in the study,
manufacture, and sale of pharmaceutical products based on its highly purified,
multispecies, natural source alpha interferon ("Natural Alpha Interferon"). The
Company's ALFERON(R) N Injection (Interferon Alfa-n3) product has been approved
by the United States Food and Drug Administration ("FDA") for the treatment of
certain types of genital warts and is being studied for potential use in the
treatment of HIV, hepatitis C, and other indications. Alferon N Injection is
sold principally in the United States, however, a portion is sold in foreign
countries. For the years ended December 31, 1999, 1998 and 1997, domestic sales
totaled $2,204,437, $1,716,157 and $2,613,430, respectively, and foreign sales
(primarily Germany) totaled $124,508, $214,500 and $314,155, respectively. All
identifiable assets are located in the United States. The Company also is
studying ALFERON N Gel and ALFERON LDO(R), the Company's topical and oral
formulations of Natural Alpha Interferon, for the potential treatment of viral
and immune system diseases. (See Note 5).
Integrated Commercialization Solutions, Inc. ("ICS"), a subsidiary of
Bergen Brunswig Corporation, is the sole United States distributor of ALFERON N
Injection. ICS distributes ALFERON N Injection to wholesalers throughout the
United States. The Company does not believe that the loss of any one wholesaler
would have a material adverse effect on the Company's sales or financial
position.
Note 2. Summary of Significant Accounting Policies
Principles of consolidation -- The consolidated financial statements
include the operations of the Company and Interferon Sciences Development
Corporation ("ISD"), its wholly owned subsidiary. All significant intercompany
transactions and balances have been eliminated.
Cash and cash equivalents -- 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.
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:
Class of Assets Estimated Useful Lives
Buildings and Improvements 15 to 30 years
Equipment 5 to 10 years
Patent costs -- The Company capitalizes costs to obtain and maintain
patents and licenses. Patent costs are amortized over 17 years on a
straight-line basis. To the extent a patent is determined to be worthless, the
related net capitalized cost is immediately expensed.
Revenue recognition -- Sales are recorded upon shipment of product.
Collaborative agreement research and development revenues and costs -
The costs of performing research and development are expensed when incurred.
Generally, the Company matches its collaborative research and development
revenues in the same accounting periods in which the 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. Inventory in excess of the Company's estimated usage requirements is
written down to its estimated net realizable value. Inherent in the estimates of
net realizable value are management estimates related to the Company's future
manufacturing schedules, customer demand, possible alternative uses and ultimate
realization of potentially excess inventory.
Long-Lived Assets -- The Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the estimated fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or estimated
fair value less costs to sell. Due to the circumstances described in Note 7,
during 1998, the Company ceased production of finished goods inventory and
continues to hold its long-lived assets for use. In addition, as the Company's
financial and operating situation had continued to worsen (as further described
in Note 3), and after consideration of projected revenues for 1999, the Company
determined that the carrying value of their equipment was impaired. Accordingly,
the Company recorded a charge for impairment of its equipment of $803,217 in
December 1998 to write down this equipment to its estimated fair value.
Management has determined, based on their best estimates and available
information, the estimated fair value of this equipment to be that amount which
could be recovered through the sale of the equipment. No further impairment was
deemed to exist at December 31, 1999. Quoted market prices are not available.
Stock option plan - The Company applies the provision of SFAS No. 123,
Accounting for Stock-Based Compensation, which requires entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. As permitted under SFAS No. 123, the Company elects to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
(loss) and pro forma earnings (loss) per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied and, accordingly, no compensation cost
has been recognized for its stock options in the consolidated financial
statements.
Reverse stock split -- As a result of a one-for-four reverse stock
split effective as of March 21, 1997, and a one-for-five reverse stock split
effective as of January 6, 1999, all shares and per share information have been
restated.
Loss per share -- Basic earnings (loss) per share (EPS) are based upon
the weighted average number of common shares outstanding during the period.
Diluted EPS are based upon the weighted average number of common shares
outstanding during the period assuming the issuance of common shares for all
dilutive potential common shares outstanding. At December 31, 1999, 1998 and
1997, the Company's options and warrants are anti-dilutive and therefore basic
and diluted EPS are the same.
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.
Income taxes - Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Reclassifications - Certain balances in prior years have been
reclassified to conform to the presentation adopted in the current year.
Note 3. Operations and Liquidity
The Company has experienced significant operating losses since its
inception in 1980. As of December 31, 1999, the Company had an accumulated
deficit of approximately $128.8 million. For the years ended December 31, 1999,
1998 and 1997, the Company had losses from operations of approximately $5.4
million, $20.8 million and $22.4 million, respectively. Although the Company
received FDA approval in 1989 to market ALFERON N Injection in the United States
for the treatment of certain genital warts and ALFERON N Injection currently is
marketed and sold in the United States by the Company, in Mexico by Industria
Farmaceutica Andromaco, S.A. De C.V. and in Germany by Cell Pharm GmbH ("Cell
Pharm"), the Company has had limited revenues from the sale of ALFERON N
Injection to date. 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, 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.
The Company has limited financial resources as of December 31, 1999
with which to support future operating activities and to satisfy its financial
obligations as they become payable. Consequently, management is continuing to
actively pursue raising additional capital by either (i) issuing securities in a
private equity offering, (ii) licensing the rights to its injectable, topical or
oral formulations of alpha interferon, or (iii) selling the Company.
Insufficient funds will require the Company to further delay, scale back, or
eliminate certain or all of its activities or to license third parties to
commercialize products or technologies that the Company would otherwise seek to
develop itself.
Based on the Company's estimates of revenues, expenses and levels of
production, management believes that the cash presently available will be
sufficient to enable the Company to continue operations through approximately
June 30, 2000. However, actual results, especially with respect to revenues, may
differ materially from such estimates, and no assurance can be given that
additional funding will not be required sooner than anticipated or that such
additional funding, whether from financial markets or collaborative or other
arrangements with corporate partners or from other sources, will be available
when needed or on terms acceptable to the Company.
Note 4. Agreements with Hoffmann-LaRoche
F. Hoffmann-La Roche Ltd. and Hoffmann-LaRoche, Inc. (collectively,
"Hoffmann") have been issued patents covering human alpha interferon in many
countries throughout the world. In 1995, the Company obtained a non-exclusive
perpetual license from Hoffmann (the "Hoffmann Agreement") which grants the
Company the worldwide rights to make, use, and sell, without a potential patent
infringement claim from Hoffmann, 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 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,
which consent cannot be unreasonably withheld.
Under the terms of the Hoffmann Agreement, the Company is obligated to
pay Hoffmann 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. For the years ended December 31, 1999, 1998 and 1997, the Company
recorded approximately $94,000, $77,000 and $117,000 in royalty expenses to
Hoffmann, respectively. The Hoffmann 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. If the Hoffmann Agreement is
terminated with respect to the patents owned by Hoffmann in a specified country,
such country is no longer included in the Hoffmann Territory. Accordingly, the
Company would not be permitted to market any formulation of alpha interferon in
such country.
Note 5. Research and Development Agreement with Interferon Sciences Research
Partners, Ltd.
In 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. In 1987, the Company filed a Product License
Application with the FDA for approval to market ALFERON Gel. 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 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, which to date has not occurred, 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 6. Agreement with Cell Pharm GmbH
In 1996, the Company entered into a supply and distribution agreement
(the "Cell Pharm Agreement") with Cell Pharm. Cell Pharm, headquartered in
Hanover, Germany, is a privately owned pharmaceutical company primarily involved
in the distribution and manufacture of products for cancer treatment and other
uses. The Cell Pharm Agreement, which terminates on June 30, 2001, unless
renewed, grants Cell Pharm rights to distribute, promote, and sell ALFERON N
Injection in Germany. The Cell Pharm Agreement provides that the Company will
supply Cell Pharm with ALFERON N Injection at specified prices, and obligates
Cell Pharm to purchase specified minimum amounts in each annual period. In
addition, Cell Pharm is required to pay the Company 50% of the incremental
revenue Cell Pharm receives as a result of selling ALFERON N Injection at a
price higher than a specified price. To date, no incremental revenue has been
generated. Cell Pharm has informed the Company that it is marketing ALFERON N
Injection under the trade name Cytoferon(R), pursuant to Cell Pharm's existing
regulatory approval to market Cellferon in Germany for the treatment of hairy
cell leukemia and for the treatment of patients who develop antibodies against
recombinant alpha interferons.
Note 7. Inventories
Inventories, consisting of material, labor and overhead, are classified
as follows:
December 31,
1999 1998
--------------------
Finished goods ................ $ 361,809 $ 3,443,786
Work in process............... 5,296,816 6,466,914
Raw materials.................. 1,332,560 1,143,635
Less reserve for excess inventory (6,225,185) (10,344,551)
------------ ------------
$ 766,000 $ 709,784
============ ============
Finished goods inventory consists of vials of ALFERON N Injection,
available for commercial and clinical use either immediately or upon final
release by quality assurance.
In light of the results to date of the Company's Phase 3 studies of
ALFERON N Injection in HIV- and HCV-infected patients, the Company has
written-down the carrying value of its inventory of ALFERON N Injection to its
estimated net realizable value. The write-down is a result of the Company's
assessment of anticipated near-term projections of product to be sold or
utilized in clinical trials, giving consideration to historical sales levels. As
a result, inventories at December 31, 1999 and 1998, reflect a reserve for
excess inventory of $6,225,185 and $10,344,551, respectively.
During 1999, the reserve for excess inventory was reversed in the
amount of $1,177,531.
In addition, during 1999, approximately $2,900,000 of inventory was
written off against the reserve for excess inventory since the inventory had
expired and could no longer be sold or used for clinical trials.
Note 8. Preferred Stock
On February 5, 1998, the Company completed the sale of 7,500 shares of
Series A Convertible Preferred Stock to an institutional investor for an
aggregate amount of $7,500,000. The $7,179,000 of net proceeds were expected to
augment the Company's working capital while awaiting the results of the two
Phase 3 clinical trials of ALFERON N Injection for the treatment of HIV-infected
and hepatitis C patients. After considering the reaction of the Company's
stockholders to the issuance and the negative impact the issuance apparently had
on the Company's market capitalization, the Board of Directors determined on
February 13, 1998 to exercise an option to repurchase the shares of Convertible
Preferred Stock for $7,894,737 (plus accrued dividends). The net loss to the
Company on the repurchase of the Preferred Stock amounted to $737,037.
Note 9. Income Taxes
As a result of the loss allocation rules contained in the Federal
income tax consolidated return regulations, approximately $6,009,000 of net
federal operating loss carry-forwards, which expire from 2001 to 2006, are
available to the Company upon ceasing to be a member of GP Strategies's
consolidated return group in 1991. In addition, the Company has net federal
operating loss carry-forwards for periods subsequent to May 31, 1991, and
through December 31, 1999 of approximately $93,565,000 which expire from 2006 to
2014. For the year ended December 31, 1999, the Company had a tax net operating
loss of $9,318,000, which expires in 2014.
The Company believes that the events culminating with the closing of
its Common Stock Offering on August 22, 1995 resulted in an "ownership change"
under Internal Revenue Code, Section 382, with respect to its stock. 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 approximately
$3,230,000. In addition, the Company has approximately $33,000 of investment tax
credit carry-forwards, which expire in 2000 and $488,000 of research and
development credit carry-forwards, which expire from 2000 to 2002 that are, in
accordance with Internal Revenue Code, Section 383, subject to the annual
limitation under Internal Revenue Code Section 382.
The tax effects that give rise to deferred tax assets and liabilities consist of
the following as of December 31, 1999 and 1998:
Deferred tax assets 1999 1998
------------------- ---------------------
Net operating loss carry-forwards $31,601,000 $ 28,644,000
Tax credit carry-forwards 521,000 676,000
Inventory 2,117,000 3,517,000
Property and equipment,
principally due to differences
in basis and depreciation 387,000 246,000
------------ -----------
Net deferred tax asset 34,626,000 33,083,000
Valuation allowance (34,626,000) (33,083,000)
------------ ------------
Net deferred tax asset after
valuation allowance $ --- $ ---
============ ============
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will be realized. The Company has
determined, based on the Company's history of annual net losses, that a full
valuation allowance is appropriate.
The Company participates in the State of New Jersey's corporation
business tax benefit certificate transfer program (the "Program"), which allows
certain high technology and biotechnology companies to transfer unused New
Jersey net operating loss carryovers to other New Jersey corporation business
taxpayers. During 1999, the Company submitted an application to the New Jersey
Economic Development Authority (the "EDA") to participate in the Program and the
application was approved. The EDA then issued a certificate certifying the
Company's eligibility to participate in the Program and the amount of New Jersey
net operating loss carryovers the Company has available to transfer. Since New
Jersey law provides that net operating losses can be carried over for up to
seven years, the Company may be able to transfer its New Jersey net operating
losses from the last seven years. The Company estimated that, as of January 1,
1999, it had approximately $85 million of unused New Jersey net operating loss
carryovers available for transfer under the Program. The Program requires that a
purchaser pay at least 75% of the amount of the surrendered tax benefit.
During December 1999, the Company completed the sale of approximately
$32 million of its New Jersey tax loss carryforwards and received $2.35 million,
which was recorded as a gain on sale of state net operating loss carryovers on
its Consolidated Statement of Operations. In June 2000, the Company will submit
an application to sell an additional $4.8 million of tax benefits (calculated by
multiplying the Company's unused New Jersey net operating loss carryovers of
approximately $53 million by 9%). The actual amount of tax benefits the Company
may sell will depend upon the allocation among qualifying companies of an annual
pool established by the State of New Jersey. The allocated pool for future years
is $40 million per year.
Note 10. Common Stock, Stock Options, Warrants and Other Shares Reserved
On January 6, 1999, the Company's stockholders approved a proposal to
amend the Company's Restated Certificate of Incorporation to affect a
one-for-five reverse stock split of the Company's Common Stock. The reverse
stock split was effective as of January 6, 1999. As of January 6, 1999, there
were 21,804,138 shares of Common Stock outstanding and after the stock split
there were 4,360,808 shares of Common Stock outstanding.
The par value of the Common Stock did not change as a result of the
reverse stock split. Cash was paid in lieu of fractional shares based on the
last reported sale price of the Common Stock on the first trading date after the
stock split.
The Company has a stock option plan (the "Plan"), which authorizes a
committee of the Board of Directors to grant options, to purchase shares of
Common Stock, to officers, directors, employees and consultants of the Company.
Pursuant to the terms of the Plan, no option may be exercised after 10 years
from the date of grant. The Plan permits options to be granted at a price not
less than 85% of the fair market value, however, the options granted to date
have been at fair market value of the common stock at the date of the grant.
At December 31, 1999, the per share weighted-average fair value of
stock options granted during 1999, 1998 and 1997 was $.21, $2.20 and $22.05 on
the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1999 - expected dividend yield of 0.0%,
risk-free interest rate of 6.1%, expected volatility of 116.4% and an expected
life of 4.0 years; 1998 - expected dividend yield of 0.0%, risk-free interest
rate of 4.3%, expected volatility of 113.9% and an expected life of 5.0 years;
1997 - expected dividend yield of 0.0%, risk-free interest rate of 6.3%,
expected volatility of 85.5% and an expected life of 4.4 years.
The Company applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss would have been increased to the pro forma
amounts indicated below:
1999 1998 1997
---- ---- ----
Net loss as reported $(3,602,083) $(21,325,301) $(21,739,680)
pro forma (4,231,122) (21,868,534) (24,255,223)
Basic and diluted
loss per share as reported $ (.71) $ (6.67) $ (8.15)
pro forma (.83) (6.84) (9.10)
Pro forma net loss reflects options granted between 1995 and 1999. In
addition, compensation cost is reflected over the options' vesting period.
Employee stock option activity for options under the Plan during the
periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
--------- -----------
Balance at December 31, 1996 160,013 $35.95
Granted 117,733 33.25
Exercised (2,909) 29.40
Forfeited (4,942) 30.60
Expired (57,528) 41.35
----------
Balance at December 31, 1997 212,367 33.20
Granted 336,234 2.65
Forfeited (9,787) 32.25
Expired (725) 46.05
----------
Balance at December 31, 1998 538,089 1.40
Granted 1,487,792 .25
Forfeited (138,621) 1.40
----------
Balance at December 31, 1999 1,887,260 .25
On October 27, 1999, the Company repriced all existing employee stock
options to have an exercise price of $.25 (the closing market price on that
date) and an expiration date of December 31, 2003. Accordingly, the weighted
average price of options outstanding at December 31, 1999 has been re-stated to
$.25. All other terms and conditions remain the same with the exception of
repricing the exercise price and the new expiration date.
On October 15, 1998, the Company repriced all existing employee stock
options to have an exercise price of $1.40 (the closing market price on that
date).
At December 31, 1999, the exercise price and weighted-average remaining
contractual life of outstanding options was $.25 and 4 years, respectively.
At December 31, 1999, 1998 and 1997, the number of options exercisable
was 641,755, 249,434 and 153,758, respectively, and the weighted-average
exercise price of those options was $.25, $1.40 and $35.20, respectively.
Information regarding all Options and Warrants
Changes in options and warrants outstanding during the years ended
December 31, 1999, 1998 and 1997, and options and warrants exercisable and
shares reserved for issuance at December 31, 1999, 1998 and 1997 are as follows:
The following table includes all options and warrants including
employee options (which are discussed above).
Price Range Number of
Per Share Shares
----------- ---------
Outstanding at December 31, 1996 $21.80 - $84.00 295,252
Granted 25.00 - 77.90 172,619
Exercised 21.80 - 40.00 ( 3,962)
Terminated 25.00 - 84.00 (68,720)
--------------------- -----------
Outstanding at December 31, 1997 21.80 - 77.90 395,189
Granted 2.65 - 41.90 336,234
Terminated 25.00 - 55.00 (10,512)
--------------------- -----------
Outstanding at December 31, 1998 1.40 - 77.90 720,911
Granted .25 - 1.00 1,987,792
Terminated 1.40 - 54.00 (141,671)
-------------------- ----------
Outstanding at December 31, 1999 .25 - 77.90 2,567,032
==========
Exercisable:
December 31, 1997 21.80 - 77.90 309,616
==========
December 31, 1998 1.40 - 77.90 432,256
==========
December 31, 1999 .25 - 77.90 1,321,527
==========
Shares reserved for issuance:
December 31, 1997 425,879
==========
December 31, 1998 739,364
==========
December 31, 1999 2,573,479
==========
Options and warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1999, 1998 and 1997, include 33,282 shares under a
warrant agreement with a certain individual. The warrants are priced at $51.35
and $77.90 per share and expire on August 31, 2000.
Options and warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1999, 1998 and 1997, include 55,113 shares under
warrant agreements with the underwriter of a 1995 Stock Offering. The warrants
are priced at $37.20 per share and expire on August 14, 2000.
Options and warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1999, 1998 and 1997, include 64,413 shares under
warrant agreements with the underwriter of a 1996 Stock Offering. The warrants
are priced at $48.00 per share and expire on April 23, 2001.
Options and warrants outstanding and shares reserved for issuance at
December 31, 1999 1998 and 1997, and exercisable at December 31, 1999 and 1998,
include 26,964 shares under warrant agreements with the underwriters of a 1997
Stock Offering. The warrants are priced at $36.00 per share and expire on August
18, 2002.
Options and warrants outstanding and exercisable, and shares reserved
for issuance at December 31, 1999, include 500,000 shares under a warrant
agreement with GP Strategies. The warrants are priced at $1.00 per share and
expire on March 25, 2004.
Shares reserved for issuance at December 31, 1999, 1998 and 1997
include 6,447, 18,451 and 30,690 shares under the common stock compensation
plan. (See Note 12).
Note 11. Savings Plan
The ISI Savings Plan (the "Savings Plan") permits pre-tax contributions
to the Savings Plan by participants pursuant to Section 401(k) of the Internal
Revenue Code of up to 15% of base compensation. The Company will match up to the
6% level of the participants eligible contributions. The Savings Plan matches
40% in cash and 60% in the Company's common stock up to the 6% level. For 1999,
the Company's contribution to the Savings Plan was $137,000, consisting of
$37,024 in cash and $99,976 in stock. For 1998, the Company's contribution to
the Savings Plan was $288,000, consisting of $116,767 in cash and $171,233 in
stock. For 1997, the Company's contribution to the Savings Plan was $126,000,
consisting of $103,033 in cash and $22,967 in stock.
Note 12. Common Stock Compensation and Profit Sharing Plan
Common Stock Compensation Plan
Effective October 1, 1997, the Company adopted the Common Stock
Compensation Plan (the "Stock Compensation Plan"), providing key employees with
the opportunity of receiving the Company's common stock as additional
compensation.
Pursuant to the terms of the Stock Compensation Plan, key employees
will receive, as additional compensation, a pre-determined amount of the
Company's common stock in three equal installments on October 1, 1998, 1999, and
2000, provided that the key employees remain in the employ of the Company at
each such installment date. As of October 1, 1999 and 1998, a deferred
compensation liability of $340,821 and $412,344, respectively, was accrued for
these employees based on the common stock market price of October 1, 1997. On
October 1, 1999 and 1998, the Company agreed to pay the additional compensation
in cash in place of the issuance of the Company's common stock. Accordingly,
cash of $2,131 and $25,947, respectively, was paid in satisfaction of the
accrued liability of $340,821 and $412,344, respectively. The difference of
$338,690 and $386,397 was credited to additional paid in capital in 1999 and
1998, respectively. At December 31, 1999, the total number of shares reserved
for issuance under the Stock Compensation Plan for the remaining installment is
6,447 and the amount of $72,480 is recorded in accrued expenses.
Profit Sharing Plan
The Company has a 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.
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 13. Related Party Transactions
GP Strategies owns approximately 6% of the Company's common stock as of
December 31, 1999. The Company was a party to a management agreement with GP
Strategies, pursuant to which certain legal, financial and administrative
services had been provided by employees of GP Strategies. The fee for such
services in 1999, 1998 and 1997 was $120,000 annually. The management agreement
was terminated on March 27, 2000 (See Note 15). In addition, during 1997 GP
Strategies provided to the Company, at its estimated cost, certain personnel and
services which the Company used in its operations. For the year ended December
31, 1997, such charges amounted to $135,000. During the year ended December 31,
1998, the Company provided certain services to GP Strategies at the Company's
estimated cost of $25,000. Such costs were included in general and
administrative expense.
The Company owns the buildings which contain its offices and
laboratories and until March 1998 leased a portion of the buildings to GP
Strategies. Total occupancy costs for the years ended December 31, 1998 and 1997
were approximately $1,084,000 and $1,039,000, respectively. GP Strategies paid
to the Company as rent GP Strategies' proportionate share of such occupancy
costs (based on both square feet occupied and number of personnel), which
amounted to $29,375 and $234,996, respectively. Such income was included as a
reduction to research and development expense.
See Note 15 for information with respect to royalty obligations to GP
Strategies.
Note 14. Supplemental Statement of Cash Flow Information
The Company paid no income taxes or interest during the three-year
period ended December 31, 1999.
During the years ended December 31, 1999, 1998 and 1997 the following
non-cash financing and investing activities occurred:
1999:
The Company issued 285,000 shares, valued at $534,375, of Common Stock
as payment against accounts payable and the purchase of inventory.
As consideration for a loan from GP Strategies, the Company issued
500,000 shares and warrants to purchase an additional 500,000 shares, valued at
$500,000.
1998:
The Company issued 330,000 shares valued at $1,250,094 of common stock
as payment against a negotiated settlement (see Note 15) and accounts payable.
The Company issued 3,238 shares valued at $116,897 of common stock as
compensation.
1997:
None
Note 15. Commitments
The Company has obtained human white blood cells used in the
manufacture of ALFERON N Injection from several sources, including the American
Red Cross (the "Red Cross") pursuant to a supply agreement dated April 1, 1997
(the "Supply Agreement"). The Company will not need more human white blood cells
until such time as production of ALFERON N Injection is resumed, and has not
purchased any since April 1, 1998. Under the terms of the Supply Agreement, the
Company was obligated to purchase a minimum amount of human white blood cells
each month through March 1999 (the "Minimum Purchase Commitment"), with an
aggregate Minimum Purchase Commitment during the period from April 1998 through
March 1999 of in excess of $3,000,000. As of November 23, 1998, the Company owed
the Red Cross approximately $1.46 million plus interest at the rate of 6% per
annum accruing from April 1, 1998 (the "Red Cross Liability") for white blood
cells purchased pursuant to the Supply Agreement.
In an agreement dated November 23, 1998, the Company agreed to grant
the Red Cross a security interest in certain assets to secure the Red Cross
Liability and to issue to the Red Cross 300,000 shares of Common Stock (with a
market value of $1,171,875 at December 4, 1998) and additional shares at some
future date as requested by the Red Cross. The Red Cross agreed that any net
proceeds received by it upon sale of such shares would be applied against the
Red Cross Liability and that at such time as the Red Cross Liability was paid in
full, the Minimum Purchase Commitment would be deleted effective April 1, 1998,
and any then existing breaches of the Minimum Purchase Commitment would be
waived. In January 1999, the Company granted the Red Cross a security interest
in, among other things, the Company's real estate, equipment, inventory,
receivables, and New Jersey net operating loss carryovers to secure repayment of
the Red Cross Liability, and the Red Cross agreed to forbear from exercising its
rights under the Supply Agreement, including with respect to collecting the Red
Cross Liability, until June 30, 1999 (which was subsequently extended until
December 31, 1999). On December 29, 1999, the Company, the Red Cross and GP
Strategies entered into an agreement pursuant to which the Red Cross agreed that
until September 30, 2000 it would forbear from exercising its rights under (i)
the Supply Agreement, including with respect to collecting the Red Cross
Liability, and (ii) the Security Interest. Under the terms of such agreement,
the Company is allowing the Red Cross to sell the Company's real estate. In the
event the Red Cross is successful in selling the Company's real estate, the
Company would hope to be able to enter into a lease with the new owner, although
there can be no assurance.
As the liability to the Red Cross remains unsettled until such time as
the Red Cross sells the shares they have already received and could receive in
the future, the Company has recorded any shares issued to the Red Cross as
"Settlement Shares" within stockholders' equity. Any decreases in the market
value of the Company's common stock below $1.2 million, until such time as the
Red Cross were to sell its shares, would impact the value of the shares held by
the Red Cross and accordingly require an adjustment to "Settlement Shares". Due
to the decline in the Company's stock price during 1999 and from November 23,
1998 to December 31, 1998, an adjustment for $550,000 and $525,000 has been
recorded with a corresponding charge to operations during 1999 and 1998,
respectively. During 1999, the Red Cross sold 27,000 of the Settlement Shares
and sold the balance of 273,000 shares during the first quarter of 2000. As a
result, the net proceeds from the sales of the Settlement Shares, $33,000 in
1999 and $368,000, were applied against the liability to Red Cross. The
remaining liability to the Red Cross at December 31, 1999 and at April 1, 2000
was approximately $1,579,000 and $1,228,000, respectively.
In an agreement dated March 25, 1999, GP Strategies agreed to lend the
Company $500,000 at the rate of $250,000 a month (the "GP Strategies Debt"). In
return, the Company agreed to grant GP Strategies (i) a first mortgage on the
Company's real estate, (ii) a two-year option to purchase the Company's real
estate, provided that the Company has terminated its operations and the Red
Cross Liability has been repaid, and (iii) a two-year right of first refusal in
the event the Company desires to sell its real estate. In addition, the Company
agreed to allow a designee of GP Strategies to attend any meeting with the FDA
with respect to approval of ALFERON N Injection for the treatment of hepatitis C
and to issue GP Strategies 500,000 shares (the "GP Shares") of Common Stock and
five-year warrant (the "GP Warrant") to purchase 500,000 shares of Common Stock
at a price of $1 per share. The GP Shares and GP Warrant were valued at $500,000
and recorded as a financing cost on the Consolidated Statement of Operations and
amortized over the original period of the GP Strategies Debt. The Company also
agreed not to increase its payroll during the term of the GP Strategies Debt
without the prior consent of GP Strategies. Pursuant to the agreement, the
Company has issued a note to GP Strategies representing the GP Strategies Debt,
which note matured on September 30, 1999 and bears interest, payable at
maturity, at the rate of 6% per annum. In addition, at that time, the Company
negotiated a subordination agreement with the Red Cross pursuant to which the
Red Cross agreed that its lien on the Company's real estate is subordinate to GP
Strategies' lien. On March 27, 2000, the Company and GP Strategies entered into
an agreement pursuant to which (i) the GP Strategies Debt was extended until
June 30, 2001 (and reclassified as long-term on the accompanying Consolidated
Balance Sheet at December 31, 1999), (ii) the Company agreed to file a
registration statement prior to July 31, 2000 covering the shares issuable upon
exercise of the GP Warrant and any of the GP Shares for which Rule 144 under the
Securities Act of 1933 was not available, and (iii) the Management Agreement
between the Company and GP Strategies was terminated (see Note 13 to the
Consolidated Financial Statements) and all intercompany accounts between the
Company and GP Strategies (other than the GP Strategies Debt) were discharged
and eliminated. The amount of intercompany accounts that were discharged and
eliminated was approximately $130,000, which were recorded in the first quarter
of 2000. The agreement also provides that (i) commencing on May 1, 2001 and
ending on June 30, 2001, on any day ISI may require GP Strategies to exercise
the GP Warrant and sell the underlying shares, if the market price of ISI Common
Stock exceeds $1.00 per share on each of the 10 trading days prior to any such
day, and (ii) any proceeds from the sale of the shares issuable upon exercise of
the GP Warrant in excess of the aggregate amount paid by GP Strategies to
purchase such shares, would be deemed to reduce the then outstanding amount of
principal and interest of the GP Strategies Debt until such amount is reduced to
zero.
As consideration for the transfer to the Company of certain licenses,
rights and assets upon the formation of the Company by GP Strategies, the
Company agreed to pay GP Strategies 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. To date, the
Company has not generated income before taxes and therefore has not paid
royalties to GP Strategies.
See Notes 4 and 5 for information relating to royalties payable to
Hoffmann and the Partnership, respectively.
In 1989, the Company entered into a license agreement with Amarillo 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. To date, no sales of these products have occurred, therefore,
no royalty payments have been made.
Note 16. 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.
Note 17. Restatement of 1999 Quarterly Financial Statements (unaudited)
The Company has restated its consolidated financial statements as of
and for the three months ended March 31, June 30, and September 30, 1999 because
of errors discovered for those periods subsequent to the issuance of such
consolidated financial statements. The consolidated financial statements for
each three-month and year to date periods ended in 1999 required restatement to
correct the reporting for inventories, Settlement Shares, deferred compensation,
cost of sales, financing costs and certain other expenses.
The impact of the restatement on the Company's consolidated balance
sheets and statements of operations is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Three Months Ended
March 31, 1999 June 30, 1999 September 30, 1999
As Reported Restated As Reported Restated As Reported Restated
<S> <C> <C> <C> <C> <C> <C>
Operations:
----------
Total costs
and expenses $3,082,406 $3,176,294 $1,758,238 $1,692,908 $1,447,232 $1,396,584
Loss from operations (2,622,608) (2,716,496) (1,231,849) (1,166,519) (448,957) (398,309)
Net loss (2,617,871) (2,711,759) (1,231,209) (1,415,879) (448,957) (648,309)
Basic and diluted loss
per share (.57) (.58) (.26) (.27) (.09) (.12)
Six Months Ended Nine Months Ended
June 30, 1999 September 30, 1999
As Reported Restated As Reported Restated
Total costs
and expenses $4,840,644 $4,869,202 $6,287,876 $6,265,786
Loss from operations (3,854,457) (3,883,015) (4,303,414) (4,281,324)
Net loss (3,849,080) (4,127,638) (4,298,037) (4,775,947)
Basic and diluted loss
per share (.83) (.84) (.92) (.95)
March 31, 1999 June 30, 1999 September 30, 1999
As Reported Restated As Reported Restated As Reported Restated
Balance Sheet:
-------------
Total current assets $1,048,991 $1,857,852 $ 718,748 $1,551,398 $ 603,338 $1,311,338
Total assets 4,764,092 5,572,953 4,247,024 5,079,674 3,944,781 4,652,781
Total current
liabilities 4,705,057 4,682,593 5,389,353 5,413,300 5,521,618 5,620,267
Total stockholders'
equity (deficit) 59,035 890,360 (1,142,329) (333,626) (1,576,837) (967,486)
Total liabilities and
stockholders' equity 4,764,092 5,572,953 4,247,024 5,079,674 3,944,781 4,652,781
</TABLE>
<PAGE>
No person has been authorized in connection with the offering made
hereby to give any information or to make any representation not contained in
this prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the company or the selling
stockholders. This prospectus does not constitute an offer to sell or a
solicitation of any offer to buy any of the securities offered hereby to any
person or by anyone in any jurisdiction in which it is unlawful to make such
offer or solicitation. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof.
TABLE OF CONTENTS PAGE
Summary...............................................................3
Risk Factors .........................................................4
Price Range of Common Stock and Dividends............................13
Use of Proceeds......................................................14
Selected Financial Data..............................................15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................................................16
Business.............................................................25
Management...........................................................40
Certain Relationships and Related
Transactions.....................................................43
Principal Stockholders...............................................45
Description of Capital Stock.........................................46
Selling Stockholders ................................................47
Plan of Distribution ................................................53
Legal Matters .......................................................54
Experts .............................................................54
Where You Can Find More Information .................................54
Index to Consolidated Financial Statements..........................F-1
INTERFERON SCIENCES, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
November __, 2000
<PAGE>
10
II-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses to be paid by the
Company in connection with the issuance and distribution of the securities being
registered hereby. All the amounts are estimates, except the commission
registration fee. The selling stockholders will bear the cost of all selling
commissions and underwriting discounts with respect to the sale of any
securities by them.
Securities and Exchange Commission registration fee .. $ 1,247.44
Legal fees and expenses .............................. 5,000.00
Accounting and Miscellaneous expenses ................ 35,000.00
-----------
Total.......................................................... $41,247.44
===========
ITEM 14. 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.
.........The Company currently has a $5,000,000 directors' and officers'
liability insurance policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Except as described in the prospectus, there were no recent sales of
unregistered securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit
Number............Exhibit Description
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 of Restated Certificate of Incorporation of the
Registrant. Incorporated herein by reference to Exhibit 3.2 of Registration
Statement No. 33-40902.
3.4 - Certificate of Amendment to the Restated Certificate of Incorporation of
the Registrant. Incorporated herein by reference to Exhibit 3.4 of Registration
Statement No. 33-00845.
3.5 - Certificate of Amendment to the Restated Certificate of Incorporation of
the Registrant. Incorporated by reference to Exhibit 3.5 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.
3.6 - By-Laws of the Registrant, as amended. Incorporated herein by reference to
Exhibit 3.2 of Registration Statement No. 2-7117.
4.1 - Form of Underwriter's Purchase Option issued in connection with the
August/September 1995 Offering. Incorporated herein by reference to Exhibit 4.1
of Registration Statement No. 33-59479.
4.2 - Form of Underwriter's Purchase Option issued in connection with the May
1996 Offering. Incorporated herein by reference to Exhibit 4.4 of Registration
Statement No. 333-00845.
4.3 - Form of Purchase Option issued in connection with the December 1996
Private Placement. Incorporated by reference to Exhibit 4.3 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.
5 - Opinion of Duane, Morris & Heckscher LLP (to be filed by amendment).
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 - Registrant's 1981 Stock Option Plan, as amended. Incorporated herein by
reference to Exhibit 10.3 to Registration Statement No. 33-59479.
10.3 - 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.
10.4 - 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.
10.5 - GP Strategies 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.
10.6 - 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.
10.7 - 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.
10.8 - 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.
10.9 - 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.
10.10 - Amendment of ACC/ISI License Agreement, dated 27, 1995, between
Registrant and Amarillo Cell Culture Company, Incorporated. Incorporated herein
by reference to Exhibit 10.43 to Registration Statement No. 33-59479.
10.11 - 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.
10.12 - Supply and Distribution Agreement, dated as of April 3, 1996, between
the Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit
10.56 to Registration Statement No. 333-00845.
10.13 - Quality Assurance Agreement, dated as of April 3, 1996, between the
Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit
10.57 to Registration Statement No. 333-00845.
10.14 - Agreement, dated as of April 1, 1997, between the Registrant and the
American National Red Cross. Incorporated by reference to Exhibit 10.54 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.15 - Agreement dated May 27, 1997, between the Registrant and Alternate Site
Distributors, Inc. Incorporated by reference to Exhibit 10.55 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.16 - Stock Bonus Plan. Incorporated by reference to Exhibit 10.57 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997.
10.17 - Form of employment agreement for participants in Stock Bonus Plan.
Incorporated by reference to Exhibit 10.58 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
10.18 - Employment Agreement, dated as of October 1, 1997, between the
Registrant and Lawrence M. Gordon. Incorporated by reference to Exhibit 10.59 of
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
21.0 - Subsidiaries of the Registrant. **
23.1 - Consent of independent auditors.
23.2 - Consent of Duane, Morris & Heckscher LLP (to be included in their opinion
to be filed as Exhibit 5).
24* - Powers of Attorney (included in the Signature Page to this Registration
Statement).
*Filed herewith.
** Previously filed.
(b) Financial Statement Schedules
Schedules have been omitted because they are not required or are
not applicable or the required information has been included in
the financial statements or the notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the registration statement is on Form S-3 or Form
S-8, and the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section
13 or section 15(d) of the Securities and Exchange Act of 1934
that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the County of
Middlesex, State of New Jersey on November 6, 2000.
INTERFERON SCIENCES, INC.
By /s/ Lawrence M. Gordon
-----------------------
Lawrence M. Gordon
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Lawrence M. Gordon, Stanley G. Schutzbank, Ph.D., and Samuel H. Ronel, Ph.D.,
and each of them, with full power of substitution and resubstitution and each
with full power to act without the other, his true and lawful attorney-in-fact
and agent, for him and in his name, place and stead, in any and all capacities,
to sign any and all amendments (including post-effective amendments) to this
Registration Statement, and to file the same, with all exhibits thereto, and all
other documents in connection therewith, with the Securities and Exchange
Commission or any state, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their,
his substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Date: November 6, 2000 /s/ Lawrence M. Gordon
----------------------------------------
Lawrence M. Gordon
Chief Executive Officer and Director
(Principal Executive Officer)
Date: November 6, 2000 /s/ Donald W. Anderson
----------------------------------------
Donald W. Anderson
Controller
(Principal Accounting and Financial Officer)
Date: November 6, 2000 /s/ Stanley G. Schutzbank
----------------------------------------
Stanley G. Schutzbank, Ph.D.
President and Director
Date: November 6, 2000 /s/ Samuel H. Ronel
----------------------------------------
Samuel H. Ronel, Ph.D.
Chairman of the Board
Date: November __, 2000
----------------------------------------
Sheldon Glashow, Ph.D.
Director
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
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 of Restated Certificate of Incorporation of the
Registrant. Incorporated herein by reference to Exhibit 3.2 of Registration
Statement No. 33-40902.
3.4 - Certificate of Amendment to the Restated Certificate of Incorporation of
the Registrant. Incorporated herein by reference to Exhibit 3.4 of Registration
Statement No. 33-00845.
3.5 - Certificate of Amendment to the Restated Certificate of Incorporation of
the Registrant. Incorporated by reference to Exhibit 3.5 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.
3.6 - By-Laws of the Registrant, as amended. Incorporated herein by reference to
Exhibit 3.2 of Registration Statement No. 2-7117.
4.1 - Form of Underwriter's Purchase Option issued in connection with the
August/September 1995 Offering. Incorporated herein by reference to Exhibit 4.1
of Registration Statement No. 33-59479.
4.2 - Form of Underwriter's Purchase Option issued in connection with the May
1996 Offering. Incorporated herein by reference to Exhibit 4.4 of Registration
Statement No. 333-00845.
4.3 - Form of Purchase Option issued in connection with the December 1996
Private Placement. Incorporated by reference to Exhibit 4.3 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.
5* - Opinion of Duane, Morris & Heckscher LLP (to be filed by amendment).
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 - Registrant's 1981 Stock Option Plan, as amended. Incorporated herein by
reference to Exhibit 10.3 to Registration Statement No. 33-59479.
10.3 - 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.
10.4 - 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.
10.5 - GP Strategies 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.
10.6 - 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.
10.7 - 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.
10.8 - 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.
10.9 - 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.
10.10 - Amendment of ACC/ISI License Agreement, dated 27, 1995, between
Registrant and Amarillo Cell Culture Company, Incorporated. Incorporated herein
by reference to Exhibit 10.43 to Registration Statement No. 33-59479.
10.11 - 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.
10.12 - Supply and Distribution Agreement, dated as of April 3, 1996, between
the Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit
10.56 to Registration Statement No. 333-00845.
10.13 - Quality Assurance Agreement, dated as of April 3, 1996, between the
Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit
10.57 to Registration Statement No. 333-00845.
10.14 - Agreement, dated as of April 1, 1997, between the Registrant and the
American National Red Cross. Incorporated by reference to Exhibit 10.54 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.15 - Agreement dated May 27, 1997, between the Registrant and Alternate Site
Distributors, Inc. Incorporated by reference to Exhibit 10.55 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.16 - Stock Bonus Plan. Incorporated by reference to Exhibit 10.57 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997.
10.17 - Form of employment agreement for participants in Stock Bonus Plan.
Incorporated by reference to Exhibit 10.58 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
10.18 - Employment Agreement, dated as of October 1, 1997, between the
Registrant and Lawrence M. Gordon. Incorporated by reference to Exhibit 10.59 of
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
21.0 - Subsidiaries of the Registrant.*
23.1 - Consent of independent auditors.
23.2 - Consent of Duane, Morris & Heckscher LLP (included in their opinion to be
filed as Exhibit 5).
24* - Powers of Attorney (included in the Signature Page to this Registration
Statement).
*Filed herewith.
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Name Jurisdiction
Interferon Sciences Development Corporation Delaware
<PAGE>
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 headings "Selected Financial Data" and "Experts"
in the prospectus.
Our report dated April 10, 2000 contains an explanatory paragraph that
states the Company has suffered recurring losses from operations and has an
accumulated deficit which raise substantial doubt about its ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
/s/ KPMG LLP
New York, New York
November 6, 2000
