UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _________________
Commission File Number 2-89332
INTERFERON SCIENCES RESEARCH PARTNERS, LTD.
(Exact name of registrant as specified in its charter)
New Jersey 22-2502556
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
783 Jersey Avenue, New Brunswick, New Jersey 08901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732)249-3250
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
<PAGE>
TABLE OF CONTENTS
Page
----
Item 1. Business ........................................................ 1
Item 2. Properties ...................................................... 4
Item 3. Legal Proceedings .............................................. 4
Item 4. Submission of Matters to a Vote
of Security Holders ............................................ 4
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters ................................ 5
Item 6. Selected Financial Data ........................................ 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 7
Item 8. Financial Statements and Supplementary Data .................... 8
Item 9. Disagreements on Accounting and Financial Disclosure ........... 16
Item 10. Directors and Executive Officers of the Registrant ............. 17
Item 11. Executive Compensation ......................................... 17
Item 12. Security Ownership of Certain Beneficial
Owners and Management .......................................... 18
Item 13. Certain Relationships and Related Transactions ................. 18
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K ........................................ 19
<PAGE>
PART 1
Item 1. Business
Interferon Sciences Research Partners, Ltd., a limited partnership (the
"Partnership"), was formed on February 2, 1984, under the laws of the State of
New Jersey, and commenced operations on October 26, 1984. The Agreement of
Limited Partnership is among the Partnership, Interferon Sciences Development
Corporation (the "General Partner"), a wholly owned subsidiary of Interferon
Sciences, Inc. ("ISI"), and those parties admitted to the Partnership as Limited
Partners.
The business of the Partnership is (i) to develop externally applied
(topical) formulations of alpha interferon produced by recombinant DNA
techniques to be used in the treatment of herpes genitalis (the "Product"), (ii)
to develop large-scale processes for the formulation of the Product, (iii) to
establish the safety and efficacy of the Product through clinical testing, (iv)
to obtain the regulatory approvals necessary for the manufacture and sale of the
Product, and (v) to earn income from the worldwide sale of the Product.
In order to conduct these activities, the Partnership entered into
certain agreements with ISI during 1984, the contents of which are summarized
below.
The Cross License Agreement
ISI granted the Partnership a worldwide, nonexclusive license, with the
right to grant sublicenses, to use all of ISI's know-how, patent rights and
biological materials, (the "ISI Technology") solely for the development,
manufacture, and sale of the Product. The Partnership granted ISI a worldwide,
exclusive license, with the right to grant sublicenses, to use all of the
Partnership's know-how, patent rights, and biological materials developed during
the development period (the "Partnership Technology") for all purposes other
than the development, manufacture, or sale of the Product. ISI agreed to pay
royalties to the Partnership based on sales of, and revenues received from
sublicensing to other companies the right to manufacture and sell, the Product.
ISI agreed to pay royalties to the Partnership in respect of products
which compete with the Partnership's Product (the "Competitive Products") and
products which utilize Partnership Technology (the "Other Products").
Under the Cross License Agreement and the Interim License Agreement
(see below), the Partnership will be entitled to receive a royalty equal to 4%
of the sales by ISI of the Product and Competitive Products and 15% of the
revenues received by ISI from sublicensing the Product and Competitive Products.
The Development Contract
ISI and the Partnership entered into a Development Contract to develop
the Product. As of December 31, 1986, $4,555,000 was paid to ISI for the work it
performed as contractor under the Development Contract.
Under the Development Contract, ISI agreed to use its best efforts to
perform all research and development necessary to complete development, to
conduct clinical tests, and to obtain regulatory approval of the Product. In May
1987, ISI filed a Product License Application with the Food and Drug
Administration for approval to market the Product.
Under the terms of the Development Contract, if the Partnership did not
have sufficient funds to complete the development of the Product, ISI was
required, subject to certain conditions, to make sufficient funds available to
the General Partner to allow it to make an additional contribution (the "Overrun
Contribution") to the Partnership of $433,138. As of September 30, 1986, the
Partnership expended all of its funds and since such time all of the activities
of the Partnership have been funded by the General Partner. Through December 31,
1997, the General Partner had made an Overrun Contribution of $1,997,000. Under
the terms of the Partnership Agreement, the General Partner's Overrun
Contribution changes the way in which distributions are made by the Partnership.
For a description of the extent of changes in distributions by the Partnership
to the Limited Partners due to the General Partner making the Overrun
Contribution, see Item 5 "Market for the Registrant's Common Equity and Related
Stockholder Matters."
The Partnership has not made any payments to ISI for research and
development pursuant to the Development Contract since 1986.
1
<PAGE>
Interim License Option
ISI has an option (the "Interim License Option") to acquire a
worldwide, exclusive license (the "Interim License") to use the Partnership
Technology for the development, manufacture, and sale of the Product. The
Interim License Option will be exercisable for a period of 90 days, commencing
on the date (the "Interim License Option Date") which is the earlier of the date
on which the Product is (i) approved for sale in the United States by the FDA or
(ii) for sale in any of the Major Market Countries by a similar regulatory
authority.
If the Interim License Option is exercised, the Partnership will
continue to be entitled to receive royalties with respect to the Product,
Competitive Products, and Other Products.
Purchase Option
ISI has an option (the "Purchase Option") to acquire from each Limited
Partner all of such Limited Partner's interest in the Partnership. The Purchase
Option is exercisable for a period (the "Purchase Option Period") of 90 days
(subject to a 90-day extension under certain circumstances) commencing on the
date (the "Purchase Option Date") which is the earlier of (i) the date on which
the Partnership has received from ISI under the Interim License an aggregate of
$3,000,000 in payments with respect to the Product (provided that the Purchase
Option may not be exercised earlier than 14 months after the Interim License
Option Date) or (ii) the fourth anniversary of the date the Interim License
Option is exercised. If ISI exercises the Purchase Option, it will be obligated
to make a one-time payment of $557 per Unit to the Limited Partners in exchange
for their Units on the date it exercises the Purchase Option (the "Purchase
Option Exercise Date") and to pay royalties for a period of 15 years thereafter.
In the event the Purchase Option is exercised, the royalty rates (i) will
increase to 5% of sales and 20% of sublicensing revenues and (ii) no royalties
will be payable in respect of Other Products.
Recent Developments
ISI does not presently intend to exploit the Product. In the past, ISI
conducted clinical trials utilizing its ALFERON Gel proprietary formulation
containing its recombinant alpha interferon for the treatment of the symptoms of
recurrent genital herpes. However, ISI is currently focusing its clinical
efforts on ALFERON N Gel, a formulation containing ISI's natural source alpha
interferon (interferon alfa-n3) which was developed for the topical treatment of
viral diseases and cancers affecting the skin and mucosal tissues. In November
1992, ISI submitted an investigational new drug application for a clinical trial
utilizing its reformulated ALFERON N Gel containing natural alpha interferon for
the treatment of cervical dysplasia, a disease that affects approximately
500,000 to one million women each year in the United States alone. ISI has
completed this Phase 2 dose ranging study using ALFERON N Gel at the Columbia
Presbyterian Medical Center in New York for the treatment of mild cervical
dysplasia. Based upon Pap smears, identification tests for the presence of virus
and cervical biopsies, ALFERON N Gel appears to have the potential for improving
the course of cervical dysplasia in the majority of patients who completed the
treatment course. Based upon these results, a physician-sponsored study in
HIV-infected women with cervical dysplasia commenced in August 1995. However,
the study was discontinued at the request of the physician-sponsor due to the
loss of the physician's study coordinator and a change in the physician's
priorities. In January 1998, ISI announced the start of an investigator-
sponsored, Phase 2 clinical trial in women with intravaginal warts, a condition
caused by the human papillomavirus (HPV). This trial is a randomized,
placebo-controlled, double-blind, parallel group study using the topical gel
formulation of ISI's natural-source alpha interferon, ALFERON N Gel, for the
treatment of female patients with intravaginal warts. The study will evaluate
the effectiveness of ALFERON N Gel in treating the warts and eliminating HPV in
these patients.
Under the terms of the Partnership Agreement, a royalty may be payable
to the Partnership by reason of the commercial exploitation of ALFERON N Gel
which may be considered an Other Product under the terms of the Partnership
Agreement to the extent that it utilizes any of the Partnership Technology. This
royalty will be adjusted based upon the proportional funding contributions to
the development of such Other Product by the Partnership and ISI. However, ISI
will not start clinical trials for genital herpes unless it obtains additional
funding or a sponsor. ISI may exploit ALFERON N Gel for herpes which under the
terms of the Partnership Agreement may be considered a Competitive Product which
may entitle the Partnership to a royalty in respect of products which compete
with the Product. This royalty will be adjusted based upon the funding
contribution to the development of such Competitive Product by ISI. See Item 5
"Market for the Registrant's Common Equity and Related Stockholder Matters."
2
<PAGE>
THE PRODUCT
Herpes Virus Infections
Human herpes viruses either cause or are associated with a whole
spectrum of diseases. A distinctive feature of the herpes virus is its ability
to establish a latent infection following a primary infection. Reactivation of
the latent infection causes recurrent acute symptoms. Herpes genitalis is one of
the most common of the sexually transmitted diseases. In the acute primary phase
it causes painful genital lesions which may persist for several weeks. These may
recur several times a year and persist for approximately seven days during each
recurrence. The goal of the research and development program of the Partnership
will be to develop a treatment for herpes genitalis which will, in general,
accelerate symptom relief and shorten healing time.
Natural Human Alpha Interferon
Interferons are a group of proteins produced and secreted by cells to
combat diseases. Researchers have identified four major classes of human
interferon: alpha, beta, gamma and omega.
Alpha interferons are manufactured commercially in three ways: by
genetic engineering, by cell culture, and from human white blood cells. In the
United States, only two types of alpha interferon are approved for commercial
sale: recombinant (genetically engineered) alpha interferon and Natural Alpha
Interferon, which is manufactured from human white blood cells. Outside of the
United States, sales of alpha interferon produced by cell culture account for a
significant portion of the market.
An analysis of Natural Alpha Interferon shows that it is composed of a
family of proteins containing many different molecular species of interferon. In
contrast, recombinant alpha interferons each contain only a single species.
Researchers have reported that the various species of interferon may have
differing anti-viral activity depending upon the strain of virus. Natural Alpha
Interferon presents a broad complement of species. Natural Alpha Interferon is
also glycosylated, or partially covered with sugar molecules, which does not
occur with recombinant alpha interferon.
Published studies suggest that natural human alpha interferon, if
applied topically to the area of herpes virus infections, can accelerate symptom
relief and shorten healing time. This is important epidemiologically because it
reduces the potential of transmitting these diseases through personal contact.
In addition, controlled human clinical testing conducted by ISI with topical
formulations of natural alpha interferon have shown some evidence of efficacy in
the treatment of herpes genitalis.
Competition
The General Partner believes that two products are presently sold in
the United States for the treatment of recurrent genital herpes. Zovirax
(manufactured by Glaxo Wellcome Inc.) which contains acyclovir and is
administered orally, topically, or intravenously and Famvir (manufactured by
SmithKline Beecham) which contains famcyclovir and is administered orally. The
only current treatment for cervical dysplasia in the United States is surgery.
Patents
Unpredictability of Patent Protection
The United States Patent and Trademark Office has granted two patents
to ISI which disclose and claim topical interferon preparations. The patents
encompass interferon preparations for the topical delivery of one or more
interferons to the site of a disease which respond therapeutically to
interferon, and a system for delivering interferon topically which prevents
oxidation of the protein. The inventions specifically encompass the topical
treatment for treating viral diseases, such as herpes genitalis, with alpha
interferon. It is not certain that other patents will be issued, or, if issued,
that they will afford ISI protection from competitive products.
Notwithstanding any patent obtained with respect to ALFERON N Gel, it
is possible that others have or may develop equivalent or superior products or
technologies.
Potential Patent Infringement Claims Against ISI
F. Hoffmann-La Roche ("Roche"), the parent of Hoffmann-La Roche
("Hoffmann"), has also been issued patents covering human alpha interferon in
many countries throughout the world. If ISI desires to exploit ALFERON N Gel for
any indication in any country in which Roche has such a patent and it did not or
was not able to obtain a license from Roche, it may be subject to a patent
infringement lawsuit by Roche. If such a suit were brought, ISI would have to
either counterclaim to attempt to invalidate such patent or prove ALFERON N Gel
(using natural interferon) does not infringe such patent.
3
<PAGE>
Royalty Obligations
ISI is a party to certain license agreements pursuant to which it is
obligated to pay royalties based upon commercial exploitation of ALFERON N Gel.
Under the terms of such license agreements, ISI would pay royalties up to 13.5%
of the net sales of ALFERON N Gel.
Personnel
The Partnership and its General Partner, Interferon Sciences
Development Corporation, a wholly owned subsidiary of ISI, do not have any
full-time employees. As of February 13, 1998, ISI employed 123 full-time
persons, who, on an as needed basis, could dedicate a portion of their time to
Partnership activities.
Item 2. Properties
The Partnership itself does not own or lease any properties. The
Partnership's business is conducted at the facilities of the General Partner,
Interferon Sciences Development Corporation, located in New Brunswick, New
Jersey. Under the Development Agreement, ISI utilizes a portion of its
facilities to conduct the research and development activities of the
Partnership.
ISI owns two free-standing buildings comprising approximately 44,000
square feet and leases another 10,000 square feet all of which is located in New
Brunswick, New Jersey. ISI occupies approximately 35,000 square feet, for staff
offices, for the production and purification of interferon, for quality control
and research activities, and for the storage of raw, in process and finished
materials. ISI also shares approximately 9,000 square feet with G.P. Strategies
Corporation ("G.P. Strategies"), formerly National Patent Development
Corporation, an approximately 12% Stockholder of ISI and leases approximately
10,000 square feet to G.P. Strategies at such location. Beginning in March 1998,
G.P. Strategies terminated the leasing of such space with ISI.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
4
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
No public or other market exists for interests in the Partnership.
Partnership interests are transferable subject to the satisfaction of certain
conditions contained in Article 6 (as amended) of the Agreement of Limited
Partnership incorporated herein by reference.
The following information as of December 31, 1997 relates to the
ownership of Partnership interests:
Title of Class Number of Record Holders
General Partner Interest One
Limited Partnership Interests 827
There have been no cash distributions to the partners to date. Future
distributions, if any, will be made by the General Partner to the partners as
soon as practicable after the end of any fiscal quarter, in proportion to the
partners' respective capital accounts as of the end of such quarter.
Distributable cash, which must be distributed to the partners, is generally
defined as the excess of cash revenues over certain expenditures and other
amounts determined by the General Partner to be necessary for the proper
operation of the Partnership's business. The capital account of each partner
will be credited with such partner's cash contributions to the Partnership,
debited by the amount of any such distribution from the Partnership to such
partner, and credited or debited with such partner's allocation of the net gain
or loss of the Partnership for Federal income tax purposes ("Profits" and
"Losses", respectively).
Profits and losses of the Partnership and each item of Partnership
income, gain, credit, loss, and deduction shall be allocable as of the end of
each Partnership fiscal year 99% to the Limited Partners and 1% to the General
Partner, provided, however, if the General Partner contributes additional funds
to continue the development of a Product prior to FDA approval, each item of
deduction arising from the expenditure of such funds will be allocable 100% to
the General Partner, and each item of income, gain, or credit will be allocated
(i) 99% to the Limited Partners and 1% to the General Partner until such time as
the Limited Partners have received distributions from the Partnership equal to
50% of their aggregate capital contributions, (ii) thereafter, 50% to the
General Partner and 50% to the Limited Partners until the General Partner has
received distributions equal to 120% of such contributed funds, and (iii)
thereafter, 99% to the Limited Partners and 1% to the General Partner.
Similarly, if the General Partner has contributed funds to the
development of any Product prior to FDA approval, and, as of the Purchase Option
Exercise Date, has not yet received distributions equal to 120% of such
contributed funds as required by the Partnership Agreement (see "Summary of the
Partnership Agreement"), then 50% of the royalties otherwise payable to the
Final Limited Partners shall be paid to the General Partner until the amounts so
paid to the General Partner, together with all distributions received after the
date of such contribution by the General Partner, equal 120% of such
contribution. If, after the Purchase Option Exercise Date, ISI contributes funds
to the development of any Products prior to FDA approval, then 50% of the
royalties otherwise payable to the Final Limited Partners shall be retained by
ISI until ISI has retained 120% of the funds so contributed by ISI. However, in
no event will the royalties payable to the Final Limited Partners be so reduced
until the Limited Partners and the Final Limited Partners have received
aggregate distributions and royalty payments equal to 50% of their aggregate
capital contributions.
Because of the foregoing allocation and royalty adjustments, the
contribution of funds by the General Partner (or ISI) will have a material
effect on the potential distributions (or royalties) to be received by the
Limited Partners (or the Final Limited Partners).
5
<PAGE>
<TABLE>
Item 6. Selected Financial Data
Year Ended December 31,
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net loss None None None None None
Net loss per limited
partnership unit None None None None None
Net loss-General None None None None None
Partner
Distributions None None None None None
to partners
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total assets None None None None None
Long-term debt None None None None None
Working capital None None None None None
Partners' capital None None None None None
</TABLE>
6
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition and Liquidity
During 1984, the Partnership sold 1038.7 units of limited partnership
interests and received net proceeds of approximately $4,415,000 from such sale.
The primary use of the proceeds was to fund research and development and
clinical trials necessary for obtaining regulatory approval of a topical
formulation containing recombinant alpha interferon for the treatment of herpes
genitalis (ALFERON Gel). The Partnership entered into a Development Contract
with Interferon Sciences, Inc. (ISI) to conduct such research. The Partnership
paid ISI $4,555,000 under such agreement through 1986. By September 30, 1986,
the Partnership had exhausted all of its available funds for the funding of
research and development of ALFERON Gel. The General Partner agreed to
contribute up to an additional $433,000, under certain conditions, to continue
the research. Such amount was based on the number of units sold in the offering.
Notwithstanding that commitment, from September 1986 to October 1990, the
General Partner contributed $1,997,000 towards the cost of such research. During
May 1987, ISI filed a Product License Application with the Food and Drug
Administration (FDA) for approval to market ALFERON Gel. This filing was
supplemented in 1989 with an updated clinical summary and a comprehensive
statistical analysis of the completed trials. At a meeting with the FDA in
February, 1990, the FDA indicated that additional process development and
clinical trials would be necessary prior to approval of ALFERON Gel. ISI
believed, at that time, that the costs to complete the required process
development and clinical trials would be substantial, and there could be no
assurance that the clinical trials would be successful. As a result of the above
events, in March 1992, ISI withdrew its FDA Product License Application for
ALFERON Gel containing recombinant interferon.
The General Partner does not anticipate that the Partnership will
receive any revenues in 1998. In addition, the Partnership is not in a position
to incur additional expenses since it has exhausted all its available funds, and
ISI is currently developing ALFERON Gel using ISI's natural source,
multi-species alpha interferon (ALFERON N Gel) in place of recombinant
interferon.
ISI does not presently intend to exploit ALFERON Gel (the Partnership
Product). ISI is currently focusing its clinical efforts on ALFERON N Gel, a
formulation containing ISI's natural alpha interferon (interferon alfa-n3) which
was developed for the topical treatment of viral diseases and cancers affecting
the skin and mucosal tissues. Now that ISI has expanded capacity to manufacture
sufficient quantities of its natural-source alpha interferon due to the
expansion of its manufacturing facilities in 1991, ISI resumed clinical trials
of this topical preparation utilizing its natural-source alpha interferon as the
active ingredient. A Phase 2 pilot clinical trial utilizing its reformulated
ALFERON N Gel has been completed for the treatment of cervical dysplasia and a
phase 2 clinical trial commenced in January 1998 for the treatment of
intravaginal warts (see "Recent Developments", page 3). Under the terms of the
Partnership Agreement, a royalty may be payable to the Partnership by reason of
the commercial exploitation of ALFERON N Gel to the extent that it utilizes any
of the Partnership Technology, which royalty will be adjusted based upon the
proportional funding contributions to the development of ALFERON N Gel by the
Partnership and ISI. If ISI obtains additional financing in the future, ISI may
exploit ALFERON N Gel for herpes genitalis which may entitle the Partnership to
a royalty in respect to a product which competes with the Partnership Product;
however, this royalty will be adjusted based upon the proportional funding
contributions to the development of ALFERON N Gel by the Partnership and ISI.
Results of Operations
Since ISI did not make any contributions to the Partnership in 1997,
1996 and 1995, the Partnership did not record any expense or loss.
7
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report ....................................... 9
Financial Statements:
Balance Sheet -
December 31, 1997 and 1996 ....................................... 10
Statement of Operations -
Years ended December 31, 1997, 1996 and 1995 ..................... 11
Statement of Cash Flows -
Years ended December 31, 1997, 1996 and 1995 ..................... 12
Statement of Changes in Partners' Capital -
Years ended December 31, 1997, 1996 and 1995 ..................... 13
Notes to Financial Statements .................................... 14
8
<PAGE>
Independent Auditors' Report
The Partners
Interferon Sciences Research Partners, Ltd.
We have audited the financial statements of Interferon Sciences
Research Partners, Ltd. as listed in the accompanying index. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present
fairly, in all material respects, the financial position of Interferon Sciences
Research Partners, Ltd. at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
Interferon Sciences Research Partners, Ltd. will continue as a going concern.
The Partnership is ultimately reliant upon Interferon Sciences, Inc. for
funding. As indicated in Note 6 to the financial statements, Interferon
Sciences, Inc. has suffered recurring losses from operations and has an
accumulated deficit. These circumstances raise substantial doubt about the
Partnership's ability to continue as a going concern.
KPMG Peat Marwick LLP
New York, New York
April 2, 1998
9
<PAGE>
<TABLE>
INTERFERON SCIENCES RESEARCH PARTNERS, LTD.
BALANCE SHEET
December 31,
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Total assets $ --- $ ---
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Partners' capital
Limited partners $ --- $ ---
General Partner --- ---
------- -------
Total partners' capital --- ---
------- -------
Total liabilities and partners' capital $ --- $ ---
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
<TABLE>
INTERFERON SCIENCES RESEARCH PARTNERS, LTD.
STATEMENT OF OPERATIONS
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ --- $ --- $ ---
======= ======= =======
Net income (loss)-Limited Partners $ --- $ --- $ ---
Net income (loss)-General Partner --- --- ---
------- ------- -------
Net income (loss) $ --- $ --- $ ---
======= ======= =======
Net loss Net loss Net loss
per unit per unit per unit
-------- -------- --------
Net income (loss) - Limited Partners
(1038.7 units outstanding) $ --- $ --- $ ---
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
<TABLE>
INTERFERON SCIENCES RESEARCH PARTNERS, LTD.
STATEMENT OF CASH FLOWS
Year Ended December 31,
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net change in cash $ --- $ --- $ ---
-------- -------- --------
Cash at beginning of year --- --- ---
-------- -------- --------
Cash at end of year $ --- $ --- $ ---
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
<TABLE>
INTERFERON SCIENCES RESEARCH PARTNERS, LTD.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
Total
General Partners'
Limited Partners Partner Capital
---------------- ------- ---------
Units Amount Amount Amount
<S> <C> <C> <C> <C>
Balance at December 31, 1994 1038.7 $ --- $ --- $ ---
Capital contribution --- --- --- ---
Net loss --- --- --- ---
--------- --------- --------- ---------
Balance at December 31, 1995 1038.7 --- --- ---
Capital contribution --- --- --- ---
Net loss --- --- --- ---
--------- --------- ---------- ---------
Balance at December 31, 1996 1038.7 --- --- ---
Capital contribution --- --- --- ---
Net loss --- --- --- ---
--------- --------- ---------- ---------
Balance at December 31, 1997 1038.7 $ --- $ --- $ ---
========= ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
INTERFERON SCIENCES RESEARCH PARTNERS, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Interferon Sciences Research Partners, Ltd., a New Jersey Limited
Partnership (the Partnership), was established in February 1984 and commenced
operations in October 1984. The General Partner is Interferon Sciences
Development Corporation (ISD), a wholly owned subsidiary of Interferon Sciences,
Inc. (ISI).
In February 1984, the Partnership filed a registration statement, which
became effective in May 1984, with the Securities and Exchange Commission,
covering a public offering of Limited Partnership interests (Units). During
1984, the Partnership sold 1,038.7 Units for gross proceeds of $5,193,500
resulting in net proceeds of $4,414,475 to the Partnership. The offering expired
April 1, 1985 with no additional Units being sold.
The business of the Partnership is to fund research and development and
clinical trials necessary for obtaining regulatory approval of a topical
formulation ("the Product") containing recombinant alpha interferon for the
treatment of herpes genitalis (ALFERON Gel). In order for the Partnership to
commence its business activities, the Partnership entered into a Cross License
Agreement, a Development Contract, an Interim License Option and a Purchase
Option with ISI (see Note 5).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Research and development costs - Payments to ISI for research and
development, pursuant to the Development Contract, were expensed in the period
the payments were made.
Income taxes - The Partnership's financial statements do not include
provisions for income taxes. Taxes, if any, are the liability of the individual
partners. The Partnership reports its operations on the cash method of
accounting for Federal income tax purposes.
Net loss per limited partnership unit - Aggregate losses allocated to
the limited partners were limited to the extent of their capital accounts.
NOTE 3. PARTNERSHIP ALLOCATION OF PROFIT AND LOSS
Profits and losses of the Partnership are allocated 99% to the Limited
Partners and 1% to the General Partner, subject to adjustment when the General
Partner contributes additional funds to the Partnership. Since 1986, all losses
have been funded by the General Partner, and consequently all losses since that
time have been allocated to the General Partner.
NOTE 4. FUNDING
The Partnership exhausted its available funds in 1986. The General
Partner had originally agreed to contribute up to an additional $433,000 to
continue research, under certain circumstances. During the period beginning
September 30, 1986, the date on which the Partnership had exhausted its
available funds, through October 31, 1990, the General Partner contributed
$1,997,000 towards the cost of such research. Beginning November 1990, the
General Partner discontinued funding the development of ALFERON Gel containing
recombinant interferon. Beginning in 1992, ISI commenced further development of
ALFERON Gel using ISI's natural source multi-species alpha interferon (ALFERON N
Gel) in place of recombinant interferon. If the General Partner does not resume
funding or other sources of cash do not become available, the Partnership will
not be able to fund the Partnership Product. The Partnership is dependent on the
General Partner for on-going financial support to cover incidental costs of
retaining the Partnership. See Note 6.
NOTE 5. RELATED PARTY TRANSACTIONS
During 1984, the Partnership and ISI entered into several agreements
including a Development Contract whereby substantially all of the net proceeds
of the offering were paid to ISI in periodic payments over the term of the
Partnership's development program. Such payments were used to fund research and
development and clinical trials necessary for obtaining regulatory approval with
respect to ALFERON Gel. In 1986, 1985 and 1984, the Partnership paid ISI
$690,000, $2,289,000 and $1,576,000, respectively, under this agreement.
Additionally, in 1990, 1989, 1988, 1987 and 1986, ISD contributed $56,000,
$144,000, $520,000, $1,177,000 and $100,000, respectively, to the Partnership,
which used such funds to pay for additional research and development for the
benefit of the Partnership. Beginning in 1992, ISI commenced further development
of ALFERON Gel using ISI's natural source multi-species alpha interferon in
place of recombinant interferon.
14
<PAGE>
The Partnership and ISI have also entered into a Cross License
Agreement pursuant to which the Partnership has obtained from ISI a worldwide,
nonexclusive license to use the ISI Technology (as defined) and ISI has obtained
from the Partnership a worldwide, exclusive license to use the Partnership
Technology (as defined) for all purposes other than the development,
manufacture, or sale of ALFERON Gel. The agreement also provides for the payment
by ISI to the Partnership of royalties based on specified levels of sales during
the development phase at the rates specified below.
For a period of 90 days commencing on the earlier of the dates on which
ALFERON Gel is approved for sale in the United States by the Food and Drug
Administration or approved for sale in any of the Major Market Countries (as
defined) by a similar regulatory authority, ISI will have an option to acquire a
worldwide, exclusive license to use the Partnership Technology for the
development, manufacture and sale of ALFERON Gel. If ISI exercises the option,
it will be obligated to pay the Partnership royalties at the rates of 4% of
sales and 15% of sublicense revenues.
ISI will also have an option to acquire from each Limited Partner all
of such Limited Partner's interest in the Partnership. If ISI exercises this
option, it will be obligated to make a one time payment of approximately
$580,000, plus royalties of 5% and 20% of specified sales and sublicense
revenues, respectively, for a period of 15 years. All of the payments made by
ISI will be divided among the Limited Partners in proportion to their respective
partnership unit percentages. ISI may terminate its obligation to pay future
royalties to the Partnership by making a one time payment in cash or common
stock of ISI having a fair market value equal to $20,774,000 on or before the
second anniversary of the purchase option exercise date and increasing to
$31,161,000 after the third anniversary of such date, all reduced by royalty
payments actually made under the terms of the purchase option, provided,
however, that such payment may not be less than $12,118,000.
NOTE 6. INTERFERON SCIENCES DEVELOPMENT CORPORATION AND INTERFERON
SCIENCES, INC.
ISD, the General Partner, is a wholly owned subsidiary of ISI. From
September 1986 through October 1990, ISD's total capitalization was used to fund
Partnership expenses. ISD was totally dependent upon ISI for capital to be able
to fund the Partnership during this period and is totally dependent on ISI for
future capital. Beginning in 1992, ISI commenced development of ALFERON N Gel
using its own funds. ISI has had continuing losses from operations and has an
accumulated deficit which raise substantial doubt about its ability to continue
as a going concern.
Summarized consolidated financial information of ISI is as follows:
<TABLE>
December 31,
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 14,059,283 $ 17,491,955
Receivables from affiliated companies 21,904 82,902
Accounts and other receivables 989,458 233,037
Inventories 3,332,653 4,328,598
Other current assets 65,353 162,019
Property, plant and equipment, net 5,229,863 4,958,833
Intangible and other assets, net 454,862 485,519
------------- ------------
$ 24,153,376 $ 27,742,863
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities 3,939,736 2,369,032
Stockholders' equity 20,213,640 25,373,831
------------- ------------
$ 24,153,376 $ 27,742,863
============= ============
</TABLE>
15
<PAGE>
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
16
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Exclusive management and control of the business of the Partnership is
vested in the General Partner, Interferon Sciences Development Corporation.
Accordingly, the following information pertains to the Directors and Officers of
Interferon Sciences Development Corporation:
Positions Held with General Partner
and Principal Occupations for the
Name Age Past Five Years
- ---- ----- -----------------------------------
Samuel H. Ronel 61 President and a Director of the
General Partner; Chairman of the
Board of ISI.
Stanley G. Schutzbank 52 Executive Vice President and a
Director of the General Partner;
President and a Director of ISI.
Donald W. Anderson 48 Chief Financial Officer of the General
Partner; Controller and Secretary
of ISI.
Martin M. Pollak 70 Director of the General Partner;
Founder, Executive Vice President,
Treasurer, and a Director of G.P.
Strategies; Director of ISI.
Jerome I. Feldman 69 Director of the General Partner;
Founder, President, Chief Executive
Officer, and a Director of G.P.
Strategies; Director of ISI.
Directors of Interferon Sciences Development Corporation are elected annually by
ISI, the sole shareholder, and officers are elected annually by the Board of
Directors. There are no family relationships between any of the directors or
officers.
Item 11. Executive Compensation
The Directors and Officers of the General Partner, Interferon Sciences
Development Corporation, do not receive any direct remuneration from the
Partnership.
17
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of all persons known to the
Partnership to be the beneficial owners of more than 5% of any class of the
Partnership's securities as of December 31, 1997 is as follows:
Name and Address Amount and Nature
Title of of Beneficial of Beneficial Percent
Ownership Ownership Ownership of Class
- --------- ---------------- ----------------- ---------
General Interferon Sciences One General Partner 100%
Partner Interest Development Corporation Interest
783 Jersey Avenue
New Brunswick, NJ 08901
As of December 31, 1997, no Limited Partner owns more than five percent
of the Limited Partnership Units outstanding.
Exclusive management and control of the Partnership's business is
vested in Interferon Sciences Development Corporation, the General Partner of
the Partnership. Information regarding ownership of limited partnership
interests of the directors, and all directors and officers as a group, of the
General Partner as of December 31, 1997 is as follows:
Amount and Nature
of Beneficial Percent
Name of Beneficial Owner Ownership of Class
- ------------------------ ----------------- --------
Samuel Ronel One Interest ---
Stanley Schutzbank One Interest ---
(Directors and Officers
as a Group) Two Interests ---
Item 13. Certain Relationships and Related Transactions
All of the officers and directors of the General Partner are officers
and/or directors of ISI. During 1984, the Partnership entered into certain
agreements with ISI, the summarized contents of which are set forth in Item 1.
18
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page
(a) (1) The following financial statements are
included in Part II, Item 8:
Independent Auditors' Report ........................... 9
Financial Statements:
Balance Sheet - December 31, 1997 and 1996 ............. 10
Statement of Operations - Years Ended December 31,
1997, 1996 and 1995. ................................... 11
Statement of Cash Flows - Years Ended December 31,
1997, 1996 and 1995 .................................... 12
Statement of Changes in Partners' Capital - Years
Ended December 31, 1997, 1996 and 1995 ................. 13
Notes to Financial Statements .......................... 14
(a) (2) All schedules are omitted because they are not
applicable, or not required, or because the required information is included in
the financial statements or notes thereto.
(a) (3) See accompanying Index to Exhibits
19
<PAGE>
SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Interferon Sciences Research Partners, Ltd.
A Limited Partnership
(Registrant)
By: Interferon Sciences
Development Corporation
General Partner
/s/ Samuel H. Ronel, Ph.D.
----------------------
Samuel H. Ronel, Ph.D.
President
Dated: April 14, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title
- --------- -----
/s/ Samuel H. Ronel, Ph.D. President and Director
- --------------------------
Samuel H. Ronel, Ph.D.
/s/ Stanley G. Schutzbank, Ph.D. Executive Vice President
- ------------------------------- and Director
Stanley G. Schutzbank, Ph.D.
/s/ Donald W. Anderson Controller (Principal
- ---------------------- Accounting and Financial
Donald W. Anderson Officer)
/s/ Martin M. Pollak Director
- --------------------
Martin M. Pollak
/s/ Jerome I. Feldman Director
- ---------------------
Jerome I. Feldman
Dated: April 14, 1998
20
<PAGE>
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<NAME> INTERFERON SCIENCES RESEARCH PARTNERS LTD
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
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0
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