-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ek0MBzEWiRm/yisSOvkF/QHZMSCmykbFl1IlrKuQA6tEaL32bYcg4xgetmmn3NIN IewDTpNGPz6N19TdGItpyA== 0000351532-00-000004.txt : 20000417 0000351532-00-000004.hdr.sgml : 20000417 ACCESSION NUMBER: 0000351532-00-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERFERON SCIENCES INC CENTRAL INDEX KEY: 0000351532 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 222313648 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10379 FILM NUMBER: 601670 BUSINESS ADDRESS: STREET 1: 783 JERSEY AVE CITY: NEW BRUNSWICK STATE: NJ ZIP: 08901 BUSINESS PHONE: 9082493250 MAIL ADDRESS: STREET 1: 783 JERSEY AVENUE STREET 2: 783 JERSEY AVENUE CITY: NEW BRUNSWICK STATE: NJ ZIP: 08901 10-K 1 INTERTFERON SCIENCES, INC. 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, 1999 / / 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 0-10379 INTERFERON SCIENCES, INC. (Exact name of registrant as specified in its charter) Delaware 22-2313648 (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(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.01 Per Share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter Period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of April 1, 2000, the aggregate market value of the outstanding shares of the registrant's Common Stock, par value $.01 per share, held by non-affiliates (assuming for this calculation only that all officers and directors are affiliates) was approximately $14,500,000 based on the last reported sale price of such stock on the OTC Bulletin Board on March 31, 2000. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at April 1, 2000 ----------------------------------- Common Stock, par value $.01 per share 5,387,473 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. TABLE OF CONTENTS Page Item 1. Business 1 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 13 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 19 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 36 Item 10. Directors and Executive Officers of the Registrant 37 Item 11. Executive Compensation 37 Item 12. Security Ownership of Certain Beneficial Owners and Management 37 Item 13. Certain Relationships and Related Transactions 37 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 38 PART I Item 1. Business (a) General Development of Business Interferon Sciences, Inc. (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(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 the Company has been studying its potential use in the treatment of HIV, hepatitis C, and other indications. The Company has also been studying 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. (b) Financial Information about Business Segments The Company operates as a single line of business. 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. (c) Narrative Description of Business Scientific Background Interferons are a group of proteins produced and secreted by cells to combat diseases. Researchers have identified four major classes of human interferon: alpha, beta, gamma, and omega. The Company's three ALFERON products contain a form of alpha interferon. The worldwide market for injectable alpha interferon-based products has experienced rapid growth and various alpha interferon injectable products are approved for 17 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 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 which the Company believes may account for its higher efficacy in laboratory studies with the HIV virus 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. 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 projects that this virus will affect 30 to 40 million people by the year 2000. HIV infection usually signals the start of a progressive disease that compromises the immune systems, ultimately resulting in Acquired Immune Deficiency Syndrome ("AIDS"). The United States Centers for Disease Control estimates that as of the middle of 1999, there were approximately 285,000 people living 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 micrometer 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 whom 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 the data is presently being analyzed. 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 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", Dis Colon Rectum 1994, and "Interferon as an Adjuvant Treatment for Genital Condyloma Acuminatum", Intl J Gynecol Obstet 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 in the event it obtains additional funding. Marketing and Distribution. The Company has focused its efforts in the United States on making additional sales to existing customers. The Company does not have its own sales force. In June 1998, the Company entered into an agreement appointing Integrated Commercialization Solutions, Inc. ("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 Laboratories Inc. ("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 intends to convert 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 "Business - ALFERON N Injection - Clinical Trials for New Indications," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business - Governmental Regulation," and "Properties." Competition. Presently, INTRON A, manufactured by Schering Plough Corp. ("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 1: HIV Antiretroviral Drugs Approved in the United States Class of Drug Brand Name Generic Name Manufacturer - ---------------------------------------------------------------------------------------------- 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
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 the human papillomavirus ("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 which 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 recently 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) which 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 which 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, which disclose and claim topical interferon preparations. The patents encompass interferon preparations for the topical delivery of one or more interferons to the site of a disease which responds therapeutically to interferon, and a system for delivering interferon topically which prevents oxidation of the protein. The inventions specifically encompass the topical treatment for treating viral diseases, such as herpes genitalis, with alpha interferon. 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 which 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 F. Hoffmann-LaRoche Ltd. and Hoffmann-La Roche, 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. 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. In addition, the Company agreed to pay GP Strategies Corporation ("GP Strategies"), formerly named National Patent Development Corporation, 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. 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 a New Drug Application ("NDA"), or for biological products such as Natural Alpha Interferon, a Product and Establishment License Applications ("PLA/ELA") to the FDA summarizing the results and observations of the drugs during the clinical trials. Each facility, in which products are produced and packaged, whether operated by the Company or a third party, must meet the FDA's standards for current good manufacturing practices and must also be approved prior to marketing any product produced or packaged in such facility. Any significant change in the production process which may be commercially required, including changes in sources of certain raw materials, or any change in the location of the production facilities will also require FDA approval. To the extent a portion of the manufacturing process for a product is handled by an entity other than the Company, the Company must similarly receive FDA approval for the other entity's participation in the manufacturing process. The Company has entered into an agreement with Abbott, pursuant to which Abbott formulates and packages ALFERON N Injection. The Company presently has a biologic establishment license for the facilities in which it produces ALFERON N Injection, which includes the facilities in which 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 March 15, 2000, the Company had 35 employees, 15 of whom work less than full time. Of the 35 employees, 6 hold Ph.D. degrees, 1 holds an M.D. degree and 13 hold other degrees in scientific or technical fields. Of such employees, approximately 6 were engaged in research and product development, 9 were engaged in quality control, regulatory and quality assurance and product and process improvement for manufacturing, 8 were engaged in engineering and maintenance, 3 were engaged in medical affairs and 9 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. Executive Officers of the Registrant The following table sets forth the names of the principal executive officers of the Company as of March 15, 2000 and their positions with the Company. The principal business experience of the executive officers for the last five years is also described below.
Name Age Position Samuel H. Ronel, Ph.D 63 Chairman of the Board Lawrence M. Gordon 46 Chief Executive Officer and a Director Stanley G. Schutzbank, Ph.D., R.A.C. 54 President and a Director Donald W. Anderson 50 Controller (Principal Accounting and Financial Officer) and Secretary Mei-June Liao, Ph.D. 48 Vice President, Research and Development James R. Knill, M.D. 67 Vice President, Medical Affairs Robert P. Hansen 56 Vice President, Manufacturing
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 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. 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 & Deve- lopment since 1987, and held senior positions in the Company's Research & Development Department since 1983. Dr. Liao received her Ph.D. from Yale Univ- ersity 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. (d) Financial Information About Foreign and Domestic Operations and Export Sales All of the Company's material operations and sales are conducted in the United States. Item 2. Properties The Company's executive offices and its research and production facilities are located at 783 Jersey Avenue, New Brunswick, New Jersey 08901, and its telephone number is (732) 249-3250. 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. Item 3. Legal Proceedings The Company is not a party to any legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters The 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. All prices have been adjusted for a one-for-five reverse stock split effective as of January 6, 1999.
1 9 9 9 1 9 9 8 ------------ ----------- Quarter High Low High Low - ------- ---- --- ---- --- First....... $ 2 1/2 $ 3/4 $ 46 7/8 $ 18 29/32 Second.... 1 3/16 35 15/16 4 17/32 Third...... 1/2 7/32 6 1/4 2 1/2 Fourth..... 15/32 1/8 8 3/4 1 13/32
As of April 1, 2000, the Company had 720 stockholders of record. The Company has not paid any dividends on the Common Stock since its inception and does not contemplate paying dividends on the Common Stock in the foreseeable future.
Item 6. Selected Financial Data - -------------------------------- (Thousands of dollars except per share data) Year Ended December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Revenues $2,329 $ 2,007 $ 2,956 $ 2,092 $ 1,296 Cost of goods sold and excess/ idle production costs 3,552 6,533 1,858 1,400 3,076 Research and development costs, net 3,060 8,655 11,864 6,400 3,726 General and administrative expense 2,315 4,570 4,389 3,405 1,940 Loss from operations* (5,420) (20,841) (22,410) (12,426) (7,447) Interest (expense and financing costs) income, net (530) 253 670 441 75 Gain on sale of state net operating loss carryovers 2,349 Net loss* (3,602) (21,325) (21,740) (11,986) (7,372) Basic and diluted loss per share of common stock** (.71) (6.67) (8.15) (5.98) (5.55) Dividends NONE NONE NONE NONE NONE - ----------------------------------
*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 (see Note 3 to the Consolidated Financial Statements). **All 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 (see Note 10 to the Consolidated Financial Statements).
December 31, 1999 1998 1997 1996 1995 ------------------------------------------------- Total assets $6,256 $6,599 $24,153 $27,743 $13,953 Working capital (deficiency) (2,097) (1,889) 14,529 19,929 7,062 Stockholders' equity 557 2,103 20,214 25,374 12,827
Item 7. 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. The Company has limited financial resources 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. 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 results to date of the Company's Phase 3 studies of ALFERON N Injection in HIV- and HCV-infected patients. See "Business - ALFERON N Injection - Clinical Trials for New Indications." Liquidity and Capital Resources As of April 10, 2000, the Company had an aggregate of $650,000 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, 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. 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 notes 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 carryforwards and received $2.35 million. 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. On May 25, 1999, the Company announced that based upon a meeting with the Food and Drug Administration regarding its Phase 3 clinical trial comparing ALFERON N Injection against Schering Plough's Intron(R) A for the treatment of previously untreated patients infected with hepatitis C virus, it would be required to conduct an additional clinical study prior to filing for approval with the FDA. The FDA advised the Company that the results of this 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. 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. 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 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. 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 such shares (273,000) 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 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 Corporation ("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 issue GP Strategies 500,000 shares of Common Stock (the "GP Stock") 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, (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) 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. 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 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 totalled $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 Integrated Commercialization Solutions ("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, 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 1999, 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 1998 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 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 Integrated Commercialization Solutions ("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 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 derivatives as either assets or liabilities in the 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 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company is still evaluating its position with respect to the use of derivative instruments. 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. SAB No. 101, amended by SAB 101A, issued on March 24, 2000, requires registrants to adopt the accounting guidance contained therein by no later than the second fiscal quarter of the fiscal year beginning after December 15, 1999. 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". 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 provisions related to modifications to fixed stock option awards to add a reload feature are effective for awards modified after January 12, 2000. The Company is evaluating the impact on its financial position and results of operations. Year 2000 The Company did not experience any business or operational disruptions, resulting from the Company's or its suppliers, as a result of the arrival of the year 2000. Forward-Looking Statements This report 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; uncertainty of pharmaceutical pricing; substantial royalty obligations payable by the Company; limited production experience of the Company; risk of product liability; and risk of loss of key management personnel, all of which are difficult to predict and many of which are beyond the control of the Company. Item 7A. Quantitative and Qualitative Disclosure About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report 20 Financial Statements: Consolidated Balance Sheets - December 31, 1999 and 1998 21 Consolidated Statements of Operations - Years ended December 31, 1999, 1998 and 1997 22 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 1999, 1998 and 1997 23 Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997 24 Notes to Consolidated Financial Statements 25 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
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.
INTERFERON SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1999 1998 1997 -------- -------- ------- 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
INTERFERON SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 Capital in Total Preferred stock Common stock excess of Accumulated Settlement stockholders' Shares Amount Shares Amount par value deficit shares equity --------------- ------------------ ------------ -------------- ---------- ------------- 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
INTERFERON SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1999 1998 1997 -------- -------- -------- 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
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 distributer of ALFERON N Injection to wholesalers throughout the United States. The Company does not believe that the loss of any one wholesaler would have 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 effect 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's 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:
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 ----------- -------- ----------- -------- ----------- -------- 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
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to the directors of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this report. Item 11. Executive Compensation Information with respect to compensation of executives of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to Security Ownership of Certain Beneficial Owners and Management is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which statement will be filed not later than 120 days after the end of the fiscal year covered by this Report. Item 13. Certain Relationships and Related Transactions Information with respect to Certain Relationships and Related Transactions is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which statement will be filed not later than 120 days after the end of the fiscal year covered by this Report. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) The following financial statements are included in Part II, Item 8:
Page Independent Auditors' Report 20 Financial Statements: Consolidated Balance Sheets - December 31, 1999 and 1998 21 Consolidated Statements of Operations - Years ended December 31, 1999, 1998, and 1997 22 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 1999, 1998 and 1997 23 Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998, and 1997 24 Notes to Consolidated Financial Statements 25
(a)(2) 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. (a)(3) See accompanying Index to Exhibits (b) There were no reports on Form 8-K filed by the Registrant during the last quarter of the Period covered by this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERFERON SCIENCES, INC. By: /s/ Lawrence M. Gordon ---------------------- Lawrence M. Gordon Chief Executive Officer Dated: April 13, 2000 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 Date /s/ Samuel H. Ronel Chairman of the Board April 13, 2000 - ------------------- Samuel H. Ronel, Ph.D. /s/ Lawrence M. Gordon Chief Executive Officer and Director - ---------------------- (Principal Executive Officer) April 13, 2000 Lawrence M. Gordon /s/ Stanley G. Schutzbank President and Director April 13, 2000 - ------------------------- Stanley G Schutzbank, Ph.D. ___________________ Director April __, 2000 Sheldon L. Glashow /s/ Donald W. Anderson Controller (Principal April 13, 2000 - ---------------------- Accounting and Financial Donald W. Anderson Officer) The foregoing constitute a majority of the members of the Board of Directors. INDEX TO EXHIBITS Exhibit Number 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. 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. 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. 10.17 - Form of employment agreement for participants in Stock Bonus Plan. 10.18 - Employment Agreement, dated as of October 1, 1997, between the Registrant and Lawrence M. Gordon. 21.0 - Subsidiaries of the Registrant. * 23.1 - Consent of Independent Auditors. * - ----------------- *Filed herewith Exhibit 21 Subsidiaries of the Registrant Name Jurisdiction Interferon Sciences Development Corporation Delaware Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS INTERFERON SCIENCES, INC. We consent to incorporation by reference in (i) the Registration Statement (No. 33-64921) on Form S-3, ii) the Registration Statement (No. 333-04381) on Form S-3, (iii) the Registration Statement (No. 333-19451) on Form S-3, (iv) the Registration Statement (No. 33-30209) on Form S-8, and (v) the Registration Statement (No. 333-34203) on Form S-3 of Interferon Sciences, Inc. of our report dated April 10, 2000 relating to the consolidated balance sheets of Interferon Sciences, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of Interferon Sciences, Inc. Our report on Interferon Sciences, Inc. and subsidiary dated April 10, 2000, 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 do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP New York, New York April 10, 2000 EX-27 2
5 0000351532 INTERFERON SCIENCES, INC. 1 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 2,273,242 0 35,561 0 766,000 3,101,821 12,759,273 9,834,558 6,256,458 5,199,103 0 0 0 53,275 504,080 6,256,458 2,329,222 2,329,222 3,552,026 3,552,026 4,197,498 0 0 (5,950,592) (3,602,083) (3,602,083) 0 0 0 (3,602,083) (.71) (.71)
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