10-K 1 isi10kee1.txt 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, 2000 / / 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 March 13, 2001, 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 $7,186,000 based on the last reported sale price of such stock on the OTC Bulletin Board on March 13, 2001. 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 March 13, 2001 ----------------------------------- Common Stock, par value $.01 per share 17,965,628 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for its 2001 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
TABLE OF CONTENTS Page Item 1. Business 1 Item 2. Properties 10 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 12 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 17 Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 35 Item 10. Directors and Executive Officers of the Registrant 36 Item 11. Executive Compensation 36 Item 12. Security Ownership of Certain Beneficial Owners and Management 36 Item 13. Certain Relationships and Related Transactions 36 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 37
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. In addition, the Company is seeking to enter into collaborations with companies in the areas of cancer, infectious diseases, and immunology. The Company's strategy is to utilize its expertise in regulatory affairs, clinical trials, manufacturing, and research and development to acquire equity participations in early stage companies. For a description of the Company's first investment, see "Business - Investments - Metacine". (b) Financial Information about Business Segments The Company operates as a single line of business. For the years ended December 31, 2000, 1999 and 1998, domestic sales totaled $1,046,470, $2,204,437 and $1,716,157, 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's Natural Alpha Interferon is produced from human white blood cells. 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. Certain types of human papilloma viruses cause genital warts, a sexually transmitted disease. 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 outcome is often difficult to achieve. The FDA approved a topical formulation of an interferon inducer 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, 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. It currently affects approximately 30 million people. HIV infection usually signals the start of a progressive disease that compromises the immune systems, ultimately resulting in Acquired Immune Deficiency Syndrome ("AIDS"). 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 IX th 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). Because the agreed upon primary endpoint was not met and in light of the changes in HIV treatment regimen to simultaneous multiple drug therapy since this trial was designed, the FDA indicated that an additional trial, in which ALFERON N Injection was studied in conjunction with multiple drug therapy would be necessary to evaluate further the efficacy of ALFERON N Injection for this indication. Because of the costly nature and the length of such a trial, 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. The Company is presently preparing a manuscript for submission for publication. In February 2001, some of the researchers at the 8th Conference on Retroviruses and Opportunistic Infections held in Chicago called for a delay in starting patients on the powerful multiple drug therapies. Previously, the old treatment guidelines started patients on therapy when their T-cells (CD4+) fell below 500 cells or the amount of HIV in the blood goes above 20,000 copies per milliliter as measured by PCR testing. The new guidelines call for initiating treatment when T-cells fall below 350, or when the virus rose above 55,000 copies, which can take several years. In the Company's HIV trials with ALFERON N Injection, the subgroup of patients with T-cell counts above 400 and not on any other therapy seemed to show the most benefit. Therefore, if these new guidelines are adopted, the type of additional trials the FDA might require could be substantially different and the role that ALFERON N Injection could play in the treatment of HIV infected patients could potentially be important. 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. Hepatitic C. Chronic viral hepatitis is a liver infection caused by various hepatitis viruses. The United States Centers for Disease Control estimates that nearly four million people in the United States are presently infected with the hepatitis C virus ("HCV"), a majority of who become chronic carriers and will suffer gradual deterioration of their liver and possibly cancer of the liver. Several brands of recombinant interferon and a cell-cultured interferon have been approved for the treatment of hepatitis C in the United States and by various regulatory agencies worldwide. See "Business - ALFERON N Injection - Competition." However, reports have indicated that many patients either do not respond to treatment with the recombinant products or relapse after treatment. The Company has conducted three multi-center, randomized, open-label, dose ranging Phase 2 clinical trials utilizing ALFERON N Injection with patients chronically infected with HCV. The objective of the Company's HCV clinical studies was to compare the safety and efficacy of different doses of Natural Alpha Interferon injected subcutaneously in naive (previously untreated), refractory (unsuccessfully treated with recombinant interferon), and relapsing (initially responded to recombinant interferon but later relapsed) patients. The results in naive patients indicated a significant dose-dependent response at the end of treatment favoring the highest dose group. In addition, treatment of naive patients with ALFERON N Injection did not produce any interferon-neutralizing antibodies. An oral presentation of the results in naive patients was given at the American Association for the Study of Liver Diseases ("AASLD") meeting that took place in November 1995. The results of this study were published in the February 1997 issue of Hepatology. The results in refractory patients indicated a significant dose-dependent response at the end of treatment favoring the highest dose group. A poster presentation of the results in refractory patients was given at the AASLD meeting that took place in November 1995. As a result of the promising results obtained in the study on naive patients, the study on relapsing patients, which was accruing patients slowly, was terminated early so that the Company could concentrate its limited resources on pursuing the Phase 3 trials in naive patients, discussed below. After meeting with the FDA, the Company commenced in 1996 a Phase 3 multi-center, open label, randomized, controlled clinical trial designed to evaluate the safety and efficacy of ALFERON N Injection in naive chronic hepatitis C patients. The trial was conducted at 26 sites located in the United States and Canada and a total of 321 people were treated. The trial consisted of a 24-week treatment phase and 24-week follow-up and also included an interim analysis after approximately one-half of the enrolled patients completed the treatment and follow-up phases. On April 2, 1998, the Company announced it had completed the interim analysis of the results for approximately half of the enrolled patients. If the results of the interim analysis had demonstrated at a very high level of statistical significance that ALFERON N Injection is effective, the Company intended to seek FDA approval while continuing to follow the other enrolled patients. However, while the efficacy analysis indicated that ALFERON N Injection and the control treatment (an approved therapy) appeared to yield similar results, the study protocol required a showing of superiority in order to meet the criteria for statistical significance in the interim analysis. Therefore the Company did not seek FDA approval based on the interim analysis. The Phase 3 study was completed in 1998. The Company completed the final analysis of the data in March 1999, and met with the FDA to determine the acceptability of the results for filing purposes. At that meeting, the FDA advised the Company that the results of the trial were insufficient to file for approval because the designed endpoint of the trial (which required a showing of superiority in sustained normalization of liver enzymes at the end of treatment and after six months of follow up) was not met. Therefore, the FDA informed the Company that an additional trial would be required to further evaluate the efficacy of Alferon N Injection for this indication. At the present time, the Company does not have the resources necessary to conduct an additional study and does not plan to initiate such a study unless it can find a sponsor to continue this program. HIV and Hepatitic 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. In May, 2000 an abstract entitled "Treatment of HCV/HIV Coinfection with Leukocyte Derived Interferon Alfa-n3", was accepted for publication in Gastroenterology. 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 is sponsoring at the University of Miami School of Medicine, a retrospective comparison of the responses to treatment with ALFERON N Injection, Betaseron and no therapy, to assess the therapeutic benefit of ALFERON for treatment of patients with MS. This comparison is based on a double blind evaluation of MRI studies of the CNS taken before and after treatment of each patient in each of the study groups. The experience with ALFERON N Injection for the treatment of MS has involved in excess of 100 patients, a number of whom have continued ALFERON N Injection for periods in excess of five years. Timing of future clinical trials will be dependent upon the results of this retrospective study and 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 surgical treatment. 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"). 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 Kaletra(R) Lopinavir + Ritonavir
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. Recently Schering's PEG-Intron(TM) was approved for the treatment of patients with chronic hepatitis not previously treated with interferon. 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 SmithKilne'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. 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 addition, the Company agreed to pay GP Strategies Corporation ("GP Strategies") a royalty of $1 million in connection with the acquisition of certain intellectual property and technology rights from GP Strategies. Such amount is payable if and when the Company generates income before taxes, limited to 25% of such income before income taxes per year until the amount is paid in full. To date, the Company has not generated income before taxes and therefore has not paid royalties to GP Strategies. 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 Biological License Application ("BLA") 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 that may be commercially required, including changes in sources of certain raw materials, or any change in the location of the production facilities will also require FDA approval. To the extent a portion of the manufacturing process for a product is handled by an entity other than the Company, the Company must similarly receive FDA approval for the other entity's participation in the manufacturing process. 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. 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. Investments Metacine On July 28, 2000, the Company acquired for $100,000 an option to purchase certain securities of Metacine, Inc. a privately held company engaged primarily in cancer research on the terms set forth below. Metacine used a portion of such funds to retain a third party to conduct a review and analysis of Metacine's intellectual property. The option may be exercised by the Company during the 60-day period following the Company's receipt of such review and analysis, which will end on April 15, 2001. If the option is exercised, Metacine is required to issue to the Company 700,000 shares of Metacine common stock and a warrant to purchase, at a price of $12.48 per share, 178,056 shares of Metacine common stock in exchange for an aggregate of $2,400,000 in a combination of cash, services to be rendered by the Company to Metacine, and shares of the Company's common stock. Upon exercise of the option, the Company would have a significant equity investment in Metacine. The Company and the other stockholders of Metacine have entered into a stockholders' agreement providing for rights of first refusal, tag-along rights, and preemptive rights. The agreement also provides that the Company will have one representative on Metacine's board and will vote its shares in the same manner as votes of Metacine's other stockholders, and that certain corporate actions will not be taken without the Company's consent. The essential feature of Metacine's therapeutic strategy is the modification and targeted activation of dendritic cells ("DC"), the body's primary antigen presenting cell, for the treatment of first cancer, and then viral disease, autoimmune disease and organ transplant rejection. The deployment of DCs results in a cellular immune response culminating in the production of two types of target-specific T cells (cytolytic and helper) that team together to find and destroy tumors and virally infected cells. For effective treatment of cancer (and chronic viral infections), a patient requires a large number of cytolytic and helper T cells. In the case of transplant rejection (and auto-immune disease), too many existing T cells attack donor (or normal) tissue, ultimately killing the donated organ. Production of these T cells needs to be curtailed to improve the chances of a successful outcome. Metacine, whose founding scientists have received more than $25 million in Federal grants for DC research, is pursuing four different approaches to the therapeutic use of DCs for the treatment of cancer: (1) ex vivo cell processing using DCs pulsed with known antigens to create allogenic vaccines, (2) ex vivo cell processing using patient DCs cultured with patient tumor cells to create multi-epitope, patient specific, autologous vaccines, (3) in vivo activation of DCs to stimulate the patient's immune system to attack the primary tumor as well as metastatic sites, and (4) use of DCs as "intelligent" gene therapy vectors that carry therapeutic genes to the primary tumor, then stimulate the patient's immune system to attack the tumor and any metastatic sites. Metacine's program for prevention of organ transplant rejection represents another important area of application for DCs. Ex vivo culturing and re-introduction of tolerogenic DCs down-regulates the patient's immune system by flooding the system with DCs that do not present the transplanted organ's antigens. Mouse models in which tolerogenic DCs are introduced to prevent rejection of transplanted tissue have shown highly positive results as evidenced by reduction of detrimental host vs. graft immune response, and significant extension of life following organ transplant. A general lack of side effects has been observed by Metacine, and by others investigating DC-based therapy, in human clinical trials, which is probably due to the fact that the technology utilizes the body's own cells, and antigens that are already present in the body. Research Staff and Employees As of January 31, 2001, the Company had 40 employees, 5 of whom work less than full time. Of the 40 employees, 7 hold Ph.D. degrees, 1 holds an M.D. degree and 16 hold other degrees in scientific or technical fields. Of such employees, approximately 7 were engaged in research and product development, 12 were engaged in quality control, regulatory and quality assurance and product and process improvement for manufacturing, 7 were engaged in engineering and maintenance, 4 were engaged in medical affairs and 10 were general and administrative personnel. Research and Development During the years ended December 31, 2000, 1999, and 1998, the Company expended approximately $1.5 million, $3.1 million, and $8.7 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 13, 2001 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 64 Chairman of the Board Lawrence M. Gordon 47 Chief Executive Officer and a Director Stanley G. Schutzbank, Ph.D., R.A.C. 55 President and a Director Donald W. Anderson 51 Controller (Principal Accounting and Financial Officer) and Secretary Mei-June Liao, Ph.D. 49 Vice President, Research and Development James R. Knill, M.D. 68 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 (RAPS) and has served as Chairman of the Regulatory Affairs Certification Board from its inception until 1994. Dr. Schutzbank received the 1991 Richard E. Greco Regulatory Affairs Professional of the Year Award for his leadership in developing the United States Regulatory Affairs Certification Program. In September 1995, Dr. Schutzbank was elected to serve as President-elect in 1996, President in 1997, and Chairman of the Board in 1998 of RAPS. In October 2000, Dr. Schutzbank received the Leonard J. Stauffer Award from RAPS. RAPS gives this award once each year to a Regulatory Affairsw Certified (RAC) individual who exemplifies outstanding service to the RAC Program and/or mentoring in the regulatory affairs profession. Donald W. Anderson has been the Controller of the Company since 1981 and Corporate Secretary of the Company since 1988. He was an officer of various subsidiaries of GP Strategies from 1976 to September 1996. Mei-June Liao, Ph.D. has been Vice President, Research and Development of the Company since March 1995. She has served as a Director, Research & Development since 1987, and held senior positions in the Company's Research & Development Department since 1983. Dr. Liao received her Ph.D. from Yale University and completed a three-year postdoctoral appointment at the Massachusetts Institute of Technology under the direction of Nobel Laureate in Medicine, Professor H. Gobind Khorana. Dr. Liao has authored many scientific publications and invention disclosures. James R. Knill, M.D. has been Vice President, Medical Affairs of the Company since September 1996 and a consultant to the Company from November 1995 to September 1996. Dr. Knill was employed as Vice President of Medical Affairs for Cytogen Corporation from 1994 to 1995 and as consultant for Cytogen Corporation from 1995 to July 1996. He was previously employed for more than 20 years as Vice President of Medical Affairs for Bristol-Myers Squibb Company. Robert P. Hansen has been Vice President, Manufacturing of the Company since February 1997. He served as a Director of Manufacturing since 1995, and held senior positions in the Company's Manufacturing Department since 1987. (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 that 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.
2 0 0 0 1 9 9 9 ------------ ----------- Quarter High Low High Low ------- ---- --- ---- --- First....... $ 5 5/8 $ 5/16 $ 2 1/2 $ 3/4 Second.... 3 1 1/8 1 3/16 Third...... 2 9/16 1 1/32 1/2 7/32 Fourth..... 1 9/32 3/8 15/32 1/8
As of March 22, 2001, the Company had 663 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, 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Revenues $ 1,069 $ 2,329 $ 2,007 $ 2,956 $ 2,092 Cost of goods sold and excess/ idle production costs 2,332 3,552 6,533 1,858 1,400 Research and development costs, net 1,533 3,060 8,655 11,864 6,400 General and administrative expense 2,306 2,315 4,570 4,389 3,405 Loss from operations* (4,539) (5,420) (20,841) (22,410) (12,426) Interest income (expense and Financing costs) , net 74 (530) 253 670 441 Gain on sale of state net operating loss carryovers 1,484 2,349 Net loss* (2,982) (3,602) (21,325) (21,740) (11,986) Basic and diluted loss per share (.25) (.71) (6.67) (8.15) (5.98) Dividends NONE NONE NONE NONE NONE ---------------------------------- *The Company has suffered recurring losses from operations and has an accumulated deficit that raises substantial doubt about its ability to continue as a going concern (see Note 3 to the Consolidated Financial Statements). December 31, 2000 1999 1998 1997 1996 ------------------------------------------------ Total assets $8,998 $6,256 $6,599 $24,153 $27,743 Working capital (deficiency) 3,043 (2,097) (1,889) 14,529 19,929 Long-term debt 500 Stockholders' equity 5,852 557 2,103 20,214 25,374
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 primarily financed its operations to date through private placements and public offerings of the Company's securities. Management is continuing to pursue raising additional capital by either (i) issuing securities in a private or public equity offering or (ii) licensing the rights to its injectable, topical or oral formulations of natural alpha interferon. This may be more difficult in the future in light of the FDA's requirement for the Company to conduct additional Phase 3 studies of ALFERON N Injection in the treatment of patients infected with the human immunodeficiency virus and hepatitis C virus. See "Business - ALFERON N Injection - Clinical Trials for New Indications." Management also is seeking to enter into mergers, joint ventures or other collaborations that could provide the additional resources necessary to advance the Company's most valuable programs. The Company's strategy is to utilize its expertise in regulatory affairs, clinical trials, manufacturing, and research and development to acquire equity participations in early stage companies. For a description of the Company's first investment, see "Business - Investments - Metacine". There can be no assurances, however, that the Company will be successful in obtaining an adequate level of financing, on terms that are acceptable to the Company, needed to continue operations. Liquidity and Capital Resources During 2000, the Company completed a private offering in which it raised gross proceeds of $7,679,380 from the sale of 11,635,451 shares of common stock at a price of $.66 per share and warrants, exercisable until April 2005 to purchase 11,635,451 shares of common stock at a price of $1.50 per share. The proceeds from this private placement will be used to fund new initiatives, in addition to funding certain projects within the Company's existing interferon-related operations. The Company is seeking to enter into collaborations with companies in the areas of cancer, infectious diseases, and immunology. The strategy is to utilize our expertise in regulatory affairs, clinical trials, manufacturing, and research and development to acquire equity participations in early stage companies. As of March 22, 2001, the Company had an aggregate of approximately $3.8 million in cash and cash equivalents. Until utilized, such cash and cash equivalents are being invested principally in short-term interest-bearing investments. The Company's future capital requirements will depend on many factors, including: continued scientific progress in its drug development programs; the magnitude of these programs; progress with pre-clinical testing and clinical trials; the time and costs involved in obtaining regulatory approvals; the costs involved in filing, prosecuting, and enforcing patent claims; competing technologies and market developments; changes in its existing research relationships; and the ability of the Company to establish collaborative arrangements and effective commercialization activities and arrangements. Based on the Company's estimates of revenues, expenses, the timing of repayment of creditors, and levels of production, management believes that the cash presently available will be sufficient to enable the Company to continue operations until November, 2001. However, actual results, especially with respect to revenues, may differ materially from such estimate, and no assurance can be given that additional funding will not be required sooner than anticipated or that such additional funding, whether from financial markets or collaborative or other arrangements with corporate partners or from other sources, will be available when needed or on terms acceptable to the Company. Insufficient funds will require the Company to further delay, scale back, or eliminate certain or all of its research and development programs or to license third parties to commercialize products or technologies that the Company would otherwise seek to develop itself. The independent auditors' report, dated March 9, 2001, on the Company's consolidated financial statements as of and for the year ended December 31, 2000 includes an explanatory paragraph that states that the Company has suffered recurring losses from operations, has an accumulated deficit and has limited liquid resources 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 2000 and December 1999, the Company completed the sale of approximately $19 million and $32 million of its New Jersey tax loss carryovers and received $1.48 million (in January 2001) and $2.35 million (in December 1999), which was recorded as a gain on sale of state net operating loss carryovers on its Consolidated Statement of Operations in 2000 and 1999, respectively. In June 2001, the Company will submit an application to sell an additional $3.6 million of tax benefits (calculated by multiplying the Company's unused New Jersey net operating loss carryovers through December 31, 2000 of approximately $40 million by 9%). The actual amount of such tax benefits the Company may sell will depend upon the allocation among qualifying companies of an annual pool established by the State of New Jersey. The allocated pool for fiscal year 2001 and future years is $40 million per year. The Company obtained human white blood cells used in the manufacture of ALFERON N Injection from several sources, including the Red Cross pursuant to a supply agreement dated April 1, 1997 (the "Supply Agreement"). The Company will not need to purchase more human white blood cells until such time as production of crude alpha interferon is resumed, and has not purchased any since April 1, 1998. Under the terms of the Supply Agreement, the Company was obligated to purchase a minimum amount of human white blood cells each month through March 1999 (the "Minimum Purchase Commitment"), with an aggregate Minimum Purchase Commitment during the period from April 1998 through March 1999 in excess of $3,000,000. As of November 23, 1998, the Company owed the Red Cross approximately $1.46 million plus interest at the rate of 6% annum accruing from April 1, 1998 (the "Red Cross Liability") for white blood cells purchased pursuant to the Supply Agreement. In an agreement dated November 23, 1998, the Company agreed to grant the Red Cross a security interest in certain assets to secure the Red Cross Liability and to issue to the Red Cross 300,000 shares of Common Stock (with a market value of $1,171,875 at December 4, 1998) and additional shares at some future date as requested by the Red Cross to satisfy any remaining amount of the Red Cross Liability. The Red Cross agreed that any net proceeds received by it upon sale of such shares would be applied against the Red Cross Liability and that at such time as the Red Cross Liability was paid in full, the Minimum Purchase Commitment would be deleted effective April 1, 1998 and any then existing breaches of the Minimum Purchase Commitment would be waived. In January 1999 the Company granted the Red Cross a security interest (the "Security Interest") in, among other things, the Company's real estate, equipment inventory, receivables, and New Jersey net operating loss carryovers to secure repayment of the Red Cross Liability, and the Red Cross agreed to forbear from exercising its rights under the Supply Agreement, including with respect to collecting the Red Cross Liability, until June 30, 1999 (which was subsequently extended until December 31, 1999). On December 29, 1999, the Company, the Red Cross and GP Strategies entered in an agreement pursuant to which the Red Cross agreed that until September 30, 2000 it would forbear from exercising its rights under (i) the Supply Agreement, including with respect to collecting the Red Cross Liability, and (ii) the Security Interest. As of the date hereof, the Red Cross has not given the Company notice of its intent to exercise its rights to collect the Red Cross Liability. Under the terms of such agreement, the Red Cross has the right 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 that this would occur. As the liability to the Red Cross remains unsettled until such time as the Red Cross sells the shares it has already received and could receive in the future, the Company recorded any shares issued to the Red Cross as "Settlement Shares" within stockholders' equity. Any decreases, or increases up to the amount of any previous decreases, in the market value at issuance of the Company's common stock issued to the Red Cross, until such time as the Red Cross sells 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 was recorded with a corresponding charge to cost of goods sold during 1999 and 1998, respectively. Due to the increase in the Company's stock price during the three months ended March 31, 2000 up to the date of sale by the Red Cross of all remaining Settlement Shares, an adjustment for $287,000 was recorded with a corresponding credit to cost of goods sold. During 1999, the Red Cross sold 27,000 of the Settlement Shares and sold the balance of such shares (273,000 shares) during the first quarter of 2000. As a result, the net proceeds from the sales of the Settlement Shares, $33,000 in 1999 and $368,000 in 2000, were applied against the liability to the Red Cross. The remaining liability to the Red Cross at December 31, 2000 and 1999 was approximately $1,276,000 and $1,579,000, respectively. On October 30, 2000, the Company issued an additional 800,000 shares to the Red Cross (with a market value of $824,000 on such date). Due to the decline in the Company's stock price from October 30, 2000 to December 31, 2000, an adjustment for $524,000 has been recorded with a corresponding charge to cost of goods sold in 2000. The net proceeds from the sale of such shares by the Red Cross will be applied against the remaining liability of $1,276,000 owed to the Red Cross. However, there can be no assurance that the net proceeds from the sale of such shares will be sufficient to extinguish the remaining liability owed the Red Cross. Pursuant to an agreement dated March 25, 1999, GP Strategies loaned the Company $500,000 (the "GP Strategies Debt"). In return, the Company agreed to grant GP Strategies (i) a first mortgage on the Company's real estate, (ii) a two-year option to purchase the Company's real estate, provided that the Company has terminated its operations and the Red Cross Liability has been repaid, and (iii) a two-year right of first refusal in the event the Company desires to sell its real estate. In addition, the Company agreed to issue GP Strategies 500,000 shares of Common Stock (the "GP Shares") and a five-year warrant (the "GP Warrant") to purchase 500,000 shares of Common Stock at a price of $1 per share. The common stock and warrants issued to GP Strategies were valued at $500,000 and recorded as a financing cost and amortized over the original period of the GP Strategies Debt in 1999. The Company also agreed not to increase its payroll during the term of the GP Strategies debt without the prior consent of GP Strategies. Pursuant to the agreement, the Company has issued a note to GP Strategies representing the GP Strategies Debt, which note was due on September 30, 1999 and bears interest, payable at maturity, at the rate of 6% per annum. In addition, at that time the Company negotiated a subordination agreement with the Red Cross pursuant to which the Red Cross agreed that its lien on the Company's real estate is subordinate to GP Strategies' lien. On March 27, 2000, the Company and GP Strategies entered into an agreement pursuant to which (i) the GP Strategies Debt was extended until June 30, 2001, and (ii) the Management Agreement between the Company and GP Strategies was terminated and all intercompany accounts between the Company and GP Strategies (other than the GP Strategies Debt) in the amount of approximately $130,000 were discharged which was recorded as a credit to capital in excess of par value. 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, 2000 Versus Year Ended December 31, 1999 For the year ended December 31, 2000 (the "2000 Period") and 1999 (the "1999 Period"), the Company had revenues from the sale of ALFERON N Injection of $1,067,471 and $2,328,945, respectively. In the third and fourth quarters of 1999, the Company offered price concessions to its largest customers in an attempt to raise cash from the sale of ALFERON N Injection, which resulted in substantially higher than normal sales in the 1999 Period and in lower than normal sales in the 2000 Period. This was due to the fact that such customers were selling out of their inventory of ALFERON N Injection (rather than purchasing ALFERON N Injection from the Company). In the 2000 Period, the Company sold, through its distributor, to wholesalers and other customers in the United States 7,946 vials of ALFERON N Injection, compared to 19,463 vials sold by the Company during the 1999 Period. In addition, foreign sales of ALFERON N Injection were 132 vials and 1,374 vials for the 2000 and 1999 Periods, respectively. Cost of goods sold and idle production costs totaled $2,332,153 and $3,552,026 for the 2000 and 1999 Periods, respectively. Idle production costs in the 2000 and 1999 Periods represented fixed production costs, which were incurred after production of ALFERON N Injection was discontinued in April 1998. Such costs were greater in the 1999 Period due to higher levels of payroll costs, supplies and depreciation expense. In addition, lower unit sales in the 2000 Period as compared to the 1999 Period contributed to lower cost of goods sold. In addition, based on changes in the value of the Settlement Shares for the 2000 Period, cost of goods sold was charged for $278,835 in 2000 as compared to a charge of $550,000 to cost of goods sold for the 1999 Period. During the 2000 and 1999 Periods, a portion of the reserve for excess inventory was reversed in the amount of $563,215 and $1,177,531 respectively, in order to reflect the inventory at its estimated net realizable value. Research and development expenses during the 2000 Period of $1,533,324 decreased by $1,526,695 from $3,060,019 for the 1999 Period, principally because the Company has had a reduction in research personnel which has reduced its payroll and research costs. In addition, during 2000, the Company settled amounts owed on various research related liabilities at a savings to the Company of approximately $457,000. Such amount was credited against research and development expenses. General and administrative expenses for the 2000 Period were $2,306,146 as compared to $2,315,010 for the 1999 Period. The decrease of $8,864 was principally due to decreases in administrative fees and other operating expenses partially offset by increases in payroll and certain other operating costs. Interest income for the 2000 Period was $161,835 as compared to $6,104 for the 1999 Period. The increase of $155,731 was due to more funds available for investment in the 2000 Period. Interest expense and financing costs for the 2000 Period was $87,873 as compared to $536,394 for the 1999 Period. The decrease of $448,521 was primarily due to financing costs related to the GP Strategies Debt in the 1999 Period. During December 2000 and 1999, the Company completed the sale of a portion of its New Jersey tax net operating loss carryforwards and recorded a gain on such sale amounting to $1,483,861 and $2,348,509, which is recorded as an income tax benefit in the 2000 and 1999 Periods, respectively. As a result of the foregoing, the Company incurred net losses of $2,981,672 and $3,602,083 for the 2000 and 1999 Periods, respectively. Year Ended December 31, 1999 versus Year Ended December 31, 1998 For the year ended December 31, 1999, 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. In the 1999 Period, the Company sold, through its distributor, 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. Cost of goods sold and idle production costs totaled $3,552,026 and $6,533,462 for the 1999 Period and 1998 Period, respectively. Idle production costs in the 1999 and 1998 Periods, represented fixed production costs, which were incurred after production of ALFERON N Injection was discontinued in April 1998. Such costs were greater in the 1998 Period due to higher levels of payroll costs, supplies and other operating expenses. 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 net operating 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. Recent Accounting Developments In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities". This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This Statement, as amended by SFAS 137 and 138, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The implementation of SFAS 133, as amended, did not have a material effect on the Company's results of operations or financial position. 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 19 Financial Statements: Consolidated Balance Sheets - December 31, 2000 and 1999 20 Consolidated Statements of Operations - Years ended December 31, 2000, 1999 and 1998 21 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2000, 1999 and 1998 22 Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998 23 Notes to Consolidated Financial Statements 24 Schedule II - Valuation and Qualifying Accounts 39
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. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements and financial statement schedule 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, has an accumulated deficit and has limited liquid resources 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 and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Princeton, New Jersey March 9, 2001
INTERFERON SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, ------------ 2000 1999 ---- ---- ASSETS Current assets Cash and cash equivalents $ 3,658,805 $ 2,273,242 Receivable from sale of state net operating loss carryovers 1,483,861 Accounts and other receivables 190,937 35,561 Inventories, net of reserves of $5,286,011 and $6,225,185, respectively 837,300 766,000 Prepaid expenses and other current assets 17,488 27,018 ------------- ------------ Total current assets 6,188,391 3,101,821 ------------- ------------ Property, plant and equipment, at cost Land 140,650 140,650 Buildings and improvements 7,750,672 7,702,825 Equipment 4,916,518 4,915,798 -------------- ------------ 12,807,840 12,759,273 Less accumulated depreciation (10,298,260) (9,834,558) ------------ ------------ 2,509,580 2,924,715 ------------ ------------ Patent costs, net of accumulated amortization of $331,394 and $301,339 189,767 219,822 Other assets 110,100 10,100 ------------ ------------ $ 8,997,838 $ 6,256,458 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 2,300,719 $ 4,396,181 Accrued expenses 278,108 519,285 Note payable and amount due GP Strategies 566,639 283,637 ------------- ------------- Total current liabilities 3,145,466 5,199,103 ------------- ------------- 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- 17,931,838 and 5,327,473 shares, respectively 179,318 53,275 Capital in excess of par value 137,782,655 129,397,259 Accumulated deficit (131,793,851) (128,812,179) Settlement shares (315,750) (81,000) -------------- ------------- Total stockholders' equity 5,852,372 557,355 -------------- ------------- $ 8,997,838 $ 6,256,458 ============= =============
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, 2000, 1999 AND 1998 2000 1999 1998 -------- -------- ------- Revenues ALFERON N Injection $ 1,067,471 $ 2,328,945 $ 1,930,657 Research products and other revenues 1,442 277 76,350 ------------ ------------ ------------ Total revenues 1,068,913 2,329,222 2,007,007 ------------ ------------ ------------ Costs and expenses Cost of goods sold and excess/idle production costs 2,332,153 3,552,026 6,533,462 (Reversal) Provision for excess inventory (563,215) (1,177,531) 3,089,841 Research and development 1,533,324 3,060,019 8,654,888 General and administrative 2,306,146 2,315,010 4,569,608 ------------ ------------- ------------ Total costs and expenses 5,608,408 7,749,524 22,847,799 ------------ ------------- ------------ Loss from operations (4,539,495) (5,420,302) (20,840,792) Interest income 161,835 6,104 252,528 Interest expense and financing costs (87,873) (536,394) Loss on repurchase of preferred stock (737,037) ----------- ------------- ------------ Loss before income tax benefit (4,465,533) (5,950,592) (21,325,301) ----------- ------------- ------------ Income tax benefit: Gain on sale of state net operating loss carryovers 1,483,861 2,348,509 ------------- ------------- ------------ Net loss $ (2,981,672) $ (3,602,083) $(21,325,301) ============= ============= ============ Basic and diluted loss per share $ (.25) $ (.71) $ (6.67) ============= ============= ============ Weighted average number of shares outstanding 12,097,252 5,088,620 3,199,396 ============= ============= ============
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, 2000, 1999 AND 1998 Total Capital in stock- Preferred stock Common stock excess of Accumulated Settlement holders' Shares Amount Shares Amount par value deficit shares equity --------------- ------------------ ------------ -------------- ---------- -------- 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 settlement 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 settlement 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 Net proceeds from sale of common stock 11,635,451 116,354 6,980,595 7,096,949 Common stock issued as compensation 20,000 200 23,550 23,750 Common stock issued under Company 401(k) Plan 78,914 789 79,409 80,198 Common stock issued as payment against accounts payable 870,000 8,700 887,400 (896,100) Employee stock option compensation 2,050 2,050 Compensation paid in cash in settlement of obligation to issue common stock 282,506 282,506 Forgiveness of amount due GP Strategies 129,886 129,886 Settlement shares sold 382,515 382,515 Market value adjustment 278,835 278,835 Net loss (2,981,672) (2,981,672) -------------------------------------------------------------------------------------- Balance at December 31, 2000 $ 17,931,838 $179,318 $137,782,655 $(131,793,851) $(315,750) $5,852,372 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, 2000, 1999 AND 1998 2000 1999 1998 -------- -------- -------- Cash flows from operations: Net loss $ (2,981,672) $ (3,602,083) $(21,325,301) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 502,157 747,293 894,013 Amortization of deferred financing costs 500,000 Gain on settlements of research-related liabilities (456,998) Compensation and benefits paid with common stock 103,948 99,976 288,130 (Reversal) provision for excess inventory (563,215) (1,177,531) 3,089,841 Provision for notes receivable 70,000 Non-cash compensation expense 284,556 338,690 386,397 Loss on repurchase of preferred stock 737,037 Market value adjustment 278,835 550,000 515,625 Provision for impairment of equipment 803,217 Loss on sale of other assets 51,392 Change in operating assets and liabilities: Inventories 491,915 1,121,315 (466,972) Accounts and other receivables (1,639,237) 653,950 299,947 Prepaid expenses and other current assets 9,530 9,493 28,842 Amount due to GP Strategies (87,112) 174,694 130,847 Accounts payable and accrued expenses (1,497,126) 1,096,534 517,040 --------------- ------------ ------------- Net cash (used for) provided by operations (5,484,419) 563,723 (14,101,337) --------------- ------------ ------------- Cash flows from investing activities: Additions to property, plant and equipment (56,967) (78,235) Investments in other assets (170,000) Proceeds from sale of other assets 38,658 73,750 --------------- ------------ ------------ Net cash (used for) provided by investing activities (226,967) 38,658 (4,485) --------------- ------------ ------------- Cash flows from financing activities: Net proceeds from sale of common stock 7,096,949 1,954,437 Proceeds from note payable to GP Strategies 500,000 Net proceeds from preferred stock offering 7,179,000 Repurchase of preferred stock (7,916,037) --------------- ------------ ------------- Net cash provided by financing activities 7,096,949 500,000 1,217,400 --------------- ------------ ------------- Net increase (decrease) in cash and cash equivalents 1,385,563 1,102,381 (12,888,422) Cash and cash equivalents at beginning of year 2,273,242 1,170,861 14,059,283 -------------- ------------ ------------- Cash and cash equivalents at end of year $ 3,658,805 $ 2,273,242 $ 1,170,861 ============== ============ =============
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 the Company has studied its 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, 2000, 1999 and 1998, domestic sales totaled $1,046,470, $2,204,437 and $1,716,157, respectively, and foreign sales totaled $21,003, $124,508 and $214,500, respectively. All identifiable assets are located in the United States. The Company has also studied ALFERON N Gel and ALFERON LDO(R), the Company's topical and oral formulations of Natural Alpha Interferon, for the potential treatment of viral and immune system diseases (See Note 5). Integrated Commercialization Solutions, Inc. ("ICS"), a subsidiary of Bergen Brunswig Corporation, is the sole United States distributor of ALFERON N Injection. ICS distributes ALFERON N Injection to a limited number of wholesalers throughout the United States. The Company does not believe that the loss of any one wholesaler would have a material adverse effect on the Company's sales or financial position. Note 2. Summary of Significant Accounting Policies Principles of consolidation -- The consolidated financial statements include the operations of the Company and Interferon Sciences Development Corporation ("ISD"), its wholly owned subsidiary. All significant intercompany transactions and balances have been eliminated. Cash and cash equivalents -- The Company considers all highly liquid instruments with maturities of three months or less from purchase date to be cash equivalents. Property, plant and equipment -- Property, plant and equipment are carried at cost. Major additions and betterments are capitalized while maintenance and repairs, which do not extend the lives of the assets, are expensed. Depreciation -- The Company provides for depreciation and amortization of plant and equipment following the straight-line method over the estimated useful lives of such assets as follows: Class of Assets Estimated Useful Lives Buildings and Improvements 15 to 30 years Equipment 5 to 10 years Patent costs -- The Company capitalizes costs to obtain 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 records its collaborative research and development revenues as the related research costs are incurred. 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 is 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. Quoted market prices are not available. No further impairment was deemed to exist at December 31, 1999. In addition, at December 31, 2000 the equipment considered impaired was fully depreciated. Stock option plan - The Company accounts for its stock-based compensation to employees and members of the Board of Directors in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation is recorded on the date of issuance or grant as the excess of the current market value of the underlying stock over the purchase or exercise price. Any deferred compensation is amortized over the respective vesting periods of the equity instruments, if any. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," which permits entities to provide pro forma net loss and net loss per share disclosures for stock-based compensation as if the fair value method defined in SFAS No. 123 had been applied. As required by SFAS No. 123, transactions with non-employees, in which goods or services are the consideration received for the issuance of equity instruments, are accounted for under the fair value basis in accordance with SFAS 123. 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 retroactively. 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, 2000, 1999 and 1998, the Company's options and warrants outstanding 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 accounting principles generally accepted in the United States of America 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 the results of operations in the period that includes the enactment date. Reclassifications - Certain balances in prior years have been reclassified to conform to the presentation 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, 2000, the Company had an accumulated deficit of approximately $131.8 million. For the years ended December 31, 2000, 1999 and 1998, the Company had losses from operations of approximately $4.5 million, $5.4 million and $20.8 million, respectively. Also, the Company has limited liquid resources. These factors raise substantial doubt about the Company's 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. Although the Company received FDA approval in 1989 to market ALFERON N Injection in the United States for the treatment of certain genital warts and ALFERON N Injection currently is marketed and sold in the United States by the Company, in Mexico by Industria Farmaceutica Andromaco, S.A. De C.V. and in Germany by Cell Pharm GmbH ("Cell Pharm"), the Company has had limited revenues from the sale of ALFERON N Injection to date. For the Company to operate profitably, the Company must sell significantly more ALFERON N Injection. Increased sales will depend primarily upon the expansion of existing markets and/or successful attainment of FDA approval to market ALFERON N Injection for additional indications, of which there can be no assurance. There can be no assurance that sufficient quantities of ALFERON N Injection will be sold to allow the Company to operate profitably. During 2000, the Company received net proceeds of $7,096,949 from the sale in a private placement of 11,635,451 shares of common stock at a price of $.66 per share and warrants, exercisable until April 2005 to purchase 11,635,451 shares of common stock at a price of $1.50 per share. In addition, the Company issued to finders and placement agents in connection with the private placement, warrants to purchase 1,467,059 units, exercisable at a price of $.66 per unit. Each unit is comprised of a share of common stock and a warrant to purchase an additional share of common stock, exercisable until April 2005, at a price of $1.50 per share. The proceeds from this private placement will be used to fund new initiatives, in addition to funding certain projects within the Company's existing interferon-related operations. During 2000, the Company was able to settle certain amounts owed on various research-related liabilities at a savings to the Company of approximately $457,000. Such amount was credited against research and development expenses. During December 2000, the Company completed the sale of approximately $19 million of its New Jersey tax loss carryovers and received $1.48 million in January 2001 (see Note 10). At December 31, 2000, the Company had approximately $3.7 million of cash and cash equivalents, with which to support future operating activities and to satisfy its financial obligations as they become payable. Based on the Company's estimates of revenues, expenses, the timing of repayment of creditors, and levels of production, management believes that the Company has sufficient resources to enable the Company to continue operations until November, 2001. However, actual results, especially with respect to revenues, may differ materially from such estimate, and no assurance can be given that additional funding will not be required sooner than anticipated or that such additional funding, whether from financial markets or collaborative or other arrangements with corporate partners or from other sources, will be available when needed or on terms acceptable to the Company. Management plans to pursue raising additional capital by either (i) issuing securities in a private or public equity offering or (ii) licensing the rights to its injectable, topical or oral formulations of natural alpha interferon. Management is seeking to enter into mergers, joint ventures or other collaborations that could provide the additional resources necessary to advance the Company's most valuable programs. There can be no assurances, however, that the Company will be successful in obtaining an adequate level of financing, on terms that are acceptable to the Company, needed to continue operations. 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. 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") that grants the Company the worldwide rights to make, use, and sell, without a potential patent infringement claim from Hoffmann, any formulation of Natural Alpha Interferon. The Hoffmann Agreement permits the Company to grant marketing rights with respect to Natural Alpha Interferon products to third parties, except that the Company cannot grant marketing rights with respect to injectable products in any country in which Hoffmann has patent rights covered by the Hoffmann Agreement (the "Hoffmann Territory") to any third party not listed on a schedule of approximately 50 potential marketing partners without the consent of Hoffmann, which consent cannot be unreasonably withheld. Under the terms of the Hoffmann Agreement, the Company is obligated to pay Hoffmann an aggregate royalty on net sales (as defined) of Natural Alpha Interferon products by the Company in an amount equal to (i) 8% of net sales in the Hoffmann Territory, and 2% of net sales outside the Hoffmann Territory of products manufactured in the Hoffmann Territory, up to $75,000,000 of net sales in any calendar year and (ii) 9.5% of net sales in the Hoffmann Territory, and 2% of net sales outside the Hoffmann Territory of products manufactured in the Hoffmann Territory, in excess of $75,000,000 of net sales in any calendar year, provided that the total royalty payable in any calendar year shall not exceed $8,000,000. For the years ended December 31, 2000, 1999 and 1998, the Company recorded approximately $42,000, $94,000 and $77,000 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"). However, at the present time, the Company is not actively pursuing development of ALFERON N Gel and the Company does not have an obligation to provide additional funding to the Partnership. 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. Agreement with Metacine, Inc. On July 28, 2000, the Company acquired for $100,000 an option to purchase certain securities of Metacine, Inc. ("Metacine"), a company engaged in research using dendritic cell technology, on the terms set forth below. Metacine used a portion of such funds to retain a third party to conduct a review and analysis of Metacine's intellectual property. The option may be exercised by the Company during the 60-day period following the Company's receipt of such review and analysis, which will end on April 15, 2001. The $100,000 paid for the option has been recorded as other assets on the December 31, 2000 consolidated balance sheet. If the option is exercised, Metacine is required to issue to the Company 700,000 shares of Metacine common stock and a warrant to purchase, at a price of $12.48 per share, 178,056 shares of Metacine common stock in exchange for an aggregate of $2,400,000 in a combination of cash, services to be rendered by the Company to Metacine, and shares of the Company's common stock. Upon exercise of the option, the Company would have a significant equity investment in Metacine. The Company and the other stockholders of Metacine have entered into a stockholders' agreement providing for rights of first refusal, tag-along rights, and preemptive rights. The agreement also provides that the Company will have one representative on Metacine's board and will vote its shares in the same manner as votes of Metacine's other stockholders, and that certain corporate actions will not be taken without the Company's consent. Note 8. Inventories Inventories, consisting of material, labor and overhead, are classified as follows: December 31, 2000 1999 ------------------------- Finished goods $1,073,195 $ 361,809 Work in process 3,717,556 5,296,816 Raw materials 1,332,560 1,332,560 Less reserve for excess inventory (5,286,011) (6,225,185) ------------ ------------ $ 837,300 $ 766,000 ============ =========== Finished goods inventory consists of vials of ALFERON N Injection, available for commercial and clinical use either immediately or upon final release by quality assurance. During 2000, the Company converted a portion of its interferon intermediates (work in process inventory) into finished goods inventory. In light of the results to date of the Company's Phase 3 studies of ALFERON N Injection in HIV- and HCV-infected patients, the Company has recorded a reserve against its inventory of ALFERON N Injection to reflect its estimated net realizable value. The reserve was a result of the Company's assessment of anticipated near-term projections of product to be sold or utilized in clinical trials, giving consideration to historical sales levels. As a result, inventories at December 31, 2000 and 1999, reflect a reserve for excess inventory of $5,286,011 and $6,225,185, respectively. During 2000 and 1999, a portion of the reserve for excess inventory was reversed in the amount of $563,215 and $1,177,531, respectively, to reflect inventory at its estimated net realizable value. During 1998, the Company increased the reserve for excess inventory by $3,089,841 to reflect inventory at its estimated net realizable value. In addition, during 2000, approximately $375,959 of inventory was written off against the reserve for excess inventory due to losses in the conversion of work in process inventory into finished goods. Also, 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 9. 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 10. 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 carryforwards, 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 carryforwards for periods subsequent to May 31, 1991, and through December 31, 2000 of approximately $97,340,000 that expire from 2006 to 2020. In addition, the Company had state net operating loss carryforwards of approximately $40,000,000 which expire from 2004 to 2007. The Company believes that the events culminating with the closing of its Common Stock Private Offering on November 6, 2000 may result 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 may be significantly limited. In addition, the Company has approximately $209,000 of research and development credit carryforwards, which expire from 2001 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 of temporary differences that give rise to deferred tax assets and liabilities consist of the following as of December 31, 2000 and 1999: Deferred tax assets 2000 1999 ------------------- --------------------- Net operating loss carryforwards $35,496,000 $31,601,000 Tax credit carry-forwards 209,000 521,000 Inventory reserve 2,114,000 2,117,000 Property and equipment, principally due to differences in basis and depreciation 510,000 387,000 ----------- ----------- Gross deferred tax asset 38,329,000 34,626,000 Valuation allowance (38,329,000) (34,626,000) ----------- ----------- Net deferred taxes $ --- $ --- =========== =========== 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 change in the valuation allowance for 2000 and 1999 was $3,703,000 and $1,543,000, respectively. 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 Program requires that a purchaser pay at least 75% of the amount of the surrendered tax benefit. During December 2000 and December 1999, the Company completed the sale of approximately $19 million and $32 million of its New Jersey tax loss carryforwards and received $1.48 million (in January 2001) and $2.35 million (in December 1999), which were recorded as a tax benefit from gains on sale of state net operating loss carryovers on its Consolidated Statement of Operations in 2000 and 1999, respectively. Note 11. Common Stock, Stock Options, Warrants and Other Shares Reserved 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, 2000, the per share weighted-average fair value of stock options granted during 2000, 1999 and 1998 was $.88, $.21 and $2.20 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 2000 - expected dividend yield of 0.0%, risk-free interest rate of 6.1%, expected volatility of 142.4% and an expected life of 3.0 years; 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. 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 and loss per share would have been increased to the pro forma amounts indicated below: 2000 1999 1998 ---- ---- ---- Net loss as reported $(2,981,672) $(3,602,083) $(21,325,301) pro forma (3,462,823) (4,231,122) (21,868,534) Basic and diluted loss per share as reported $ (.25) $ (.71) $ (6.67) pro forma (.29) (.83) (6.84) Pro forma net loss and loss per share reflects options granted between 1995 and 2000. Related pro forma compensation cost is amortized 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, 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 Granted 61,710 1.10 Forfeited (2,580) .25 ---------- Balance at December 31, 2000 1,946,390 .28 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), which vest over a three-year period, and have an expiration date of December 31, 2003. Accordingly, the weighted average price of options outstanding at December 31, 1999 has been restated to $.25. All other terms and conditions of the repriced options 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, 2000, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $.25-$1.25, and 3 years, respectively. At December 31, 2000, the number of options exercisable was 1,102,458, and the weighted-average exercise price of those options was $.27. FASB Interpretation No. 44 provides guidance for applying APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("FIN 44"). It applies prospectively to new awards, exchanges of awards in a business combination, modifications to outstanding awards, and changes in grantee status on or after July 1, 2000, except for provisions related to repricings and the definition of an employee that apply to awards issued after December 15, 1998. The Company has evaluated the financial impact of FIN 44 and has determined that the repricing of employee stock options on October 27, 1999 falls within the guidance of FIN 44. On October 27, 1999, the Company repriced 429,475 stock options to $.25 per share. On July 1, 2000, the implementation date of FIN 44, 352,823 shares of the 429,475 shares were fully vested (exercisable) and the closing price of the Company's common stock on such date was $1.63 per share. Beginning on and after July 1, 2000, the Company is required to record compensation expense on the repriced vested options only when the market price exceeds $1.63 per share and only on the amount in excess of $1.63 per share. For the repriced unvested stock options, the intrinsic value measured at the July 1, 2000 effective date that is attributable to the remaining vesting period will be recognized over that future period. The unvested stock options at July 1, 2000 (76,652) will fully vest on January 1, 2001. On December 31, 2000, the closing price of the Company's common stock was $.375 per share and accordingly, under FIN 44, no compensation expense was recorded on the repriced fully vested stock options. However, under FIN 44, for the repriced unvested stock options, the Company calculated and recorded compensation expense of $2,050, subject to adjustment for changes in the stock price. Information regarding all Options and Warrants Changes in options and warrants outstanding during the years ended December 31, 2000, 1999 and 1998, and options and warrants exercisable and shares reserved for issuance at December 31, 2000 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, 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 Granted .56 - 1.50 14,631,279 Terminated .25 - 77.90 (90,975) -------------------- ---------- Outstanding at December 31, 2000 .25 - 48.00 17,107,336 ========== Exercisable: December 31, 2000 .25 - 48.00 13,329,286 ========== Shares reserved for issuance: December 31, 2000 17,107,336 ========== Options and warrants outstanding and exercisable, and shares reserved for issuance at December 31, 2000, 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 exercisable, and shares reserved for issuance at December 31, 2000, 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, 2000, 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. Options and warrants outstanding and exercisable, and shares reserved for issuance at December 31, 2000, include 11,635,451 shares under warrant agreements with the purchasers of a 2000 private offering. The warrants are priced at $1.50 per share and expire on April 17, 2005. Options and warrants outstanding and shares reserved for issuance at December 31, 2000, include 2,934,118 shares under a warrant agreement to purchase 1,467,059 units. Each unit consists of a share of common stock and a warrant to purchase an additional share of common stock at a price of $1.50 per share, exercisable at a price of $.66 per unit beginning on April 17, 2001. The units were issued as compensation for services rendered to the Company in the 2000 private offering and expire on April 17, 2005. Note 12. 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 2000, the Company's contribution to the Savings Plan was $124,000, consisting of $43,802 in cash and $80,198 in stock. 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. Note 13. 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 were to 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, 2000, 1999 and 1998, a deferred compensation liability of $289,920, $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, 2000, 1999 and 1998, the Company paid the compensation in cash in settlement of the Company's obligation to issue shares of common stock. Accordingly, cash of $7,414, $2,131, and $25,947, respectively, was paid in satisfaction of the accrued liability of $289,920, $340,821 and $412,344, respectively. The difference of $282,506, $338,690, and $386,397 was credited to additional paid in capital in 2000, 1999 and 1998, respectively. 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 14. Related Party Transactions GP Strategies owns approximately 4% of the Company's common stock as of December 31, 2000. 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 both 1999 and 1998 was $120,000. Such costs were included in general and administrative expenses. The management agreement was terminated on March 27, 2000 (See Note 16). In addition, 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 services were included as a reduction to general and administrative expenses. 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 year ended December 31, 1998 were approximately $1,084,000. 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. Such income was included as a reduction to research and development expense. See Note 16 for information with respect to royalty obligations to GP Strategies. Note 15. Supplemental Statement of Cash Flow Information The Company paid no income taxes or interest during the three-year period ended December 31, 2000. During the years ended December 31, 2000, 1999 and 1998 the following non-cash financing and investing activities occurred: 2000: The Company issued 870,000 shares, valued at $896,100, of common stock as settlement shares related to accounts payable (see Note 16). The Company credited capital in excess of par value for forgiveness of $129,886 of debt due GP Strategies. The Company reduced the settlement share contra-equity account and the corresponding liability by $382,515 for settlement shares sold. 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. The Company reduced the settlement share contra-equity account and the corresponding liability by $33,000 for settlement shares sold. 1998: The Company issued 330,000 shares valued at $1,250,094 of common stock as payment against a negotiated settlement (see Note 16) and accounts payable. Note 16. Commitments The Company obtained human white blood cells used in the manufacture of ALFERON N Injection from several sources, including the Red Cross pursuant to a supply agreement dated April 1, 1997 (the "Supply Agreement"). The Company will not need to purchase more human white blood cells until such time as production of crude alpha interferon is resumed, and has not purchased any since April 1, 1998. Under the terms of the Supply Agreement, the Company was obligated to purchase a minimum amount of human white blood cells each month through March 1999 (the "Minimum Purchase Commitment"), with an aggregate Minimum Purchase Commitment during the period from April 1998 through March 1999 in excess of $3,000,000. As of November 23, 1998, the Company owed the Red Cross approximately $1.46 million plus interest at the rate of 6% annum accruing from April 1, 1998 (the "Red Cross Liability") for white blood cells purchased pursuant to the Supply Agreement. Pursuant to an agreement dated November 23, 1998, the Company granted the Red Cross a security interest in certain assets to secure the Red Cross Liability, issued to the Red Cross 300,000 shares of common stock and agreed to issue additional shares at some future date as requested by the Red Cross to satisfy any remaining amount of the Red Cross Liability. The Red Cross agreed that any net proceeds received by it upon sale of such shares would be applied against the Red Cross Liability and that at such time as the Red Cross Liability was paid in full, the Minimum Purchase Commitment would be deleted effective April 1,1998 and any then existing breaches of the Minimum Purchase Commitment would be waived. In January 1999 the Company granted the Red Cross a security interest (the "Security Interest") in, among other things, the Company's real estate, equipment inventory, receivables, and New Jersey net operating loss carryovers to secure repayment of the Red Cross Liability, and the Red Cross agreed to forbear from exercising its rights under the Supply Agreement, including with respect to collecting the Red Cross Liability until June 30, 1999 (which was subsequently extended until December 31, 1999). On December 29, 1999, the Company, the Red Cross and GP Strategies entered in an agreement pursuant to which the Red Cross agreed that until September 30, 2000 it would forbear from exercising its rights under (i) the Supply Agreement, including with respect to collecting the Red Cross Liability, and (ii) the Security Interest. As of the date hereof, the Red Cross has not given the Company notice of its intent to exercise its rights to collect the Red Cross Liability. Under the terms of such agreement, the Red Cross has the right 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 that this would occur. 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 recorded any shares issued to the Red Cross as "Settlement Shares" within stockholders' equity. Any decreases, or increases up to the amount of any previous decreases, in the market value at issuance of the Company's common stock issued to the Red Cross, until such time as the Red Cross sells 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 cost of goods sold during 1999 and 1998, respectively. Due to the increase in the Company's stock price during the three months ended March 31, 2000 up to the date of sale by the Red Cross of all remaining Settlement Shares, an adjustment for $287,341 was recorded with a corresponding credit to cost of goods sold. During 1999, the Red Cross sold 27,000 of the Settlement Shares and sold the balance of such shares (273,000 shares) during the first quarter of 2000. As a result, the net proceeds from the sales of the Settlement Shares, $33,000 in 1999 and $368,000 in 2000, were applied against the liability to the Red Cross. The remaining liability to the Red Cross included in accounts payable on the consolidated balance sheet at December 31, 2000 and 1999 was approximately $1,276,000 and $1,579,000, respectively. On October 30, 2000, the Company issued an additional 800,000 shares to the Red Cross (with a market value of $824,000 on such date). Due to the decline in the Company's stock price from October 30, 2000 to December 31, 2000, an adjustment for $524,000 has been recorded with a corresponding charge to cost of goods sold in 2000. The net proceeds from the sale of such shares by the Red Cross will be applied against the remaining liability of $1,276,000 owed to the Red Cross. However, there can be no assurance that the net proceeds from the sale of such shares will be sufficient to extinguish the remaining liability owed the Red Cross. Pursuant to an agreement dated March 25, 1999, GP Strategies loaned the Company $500,000. In return, the Company granted 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 issued GP Strategies 500,000 shares of Common Stock and a five-year warrant to purchase 500,000 shares of Common Stock at a price of $1 per share. The common stock and warrants issued to GP Strategies were valued at $500,000 and recorded as a financing cost and amortized over the original period of the GP Strategies Debt in 1999. Pursuant to the agreement, the Company has issued a note to GP Strategies representing the GP Strategies Debt, which note was originally due on September 30, 1999 (but extended to June 30, 2001) and bears interest, payable at maturity, at the rate of 6% per annum. In addition, at that time the Company negotiated a subordination agreement with the Red Cross pursuant to which the Red Cross agreed that its lien on the Company's real estate is subordinate to GP Strategies' lien. On March 27, 2000, the Company and GP Strategies entered into an agreement pursuant to which (i) the GP Strategies Debt was extended until June 30, 2001 and (ii) the Management Agreement between the Company and GP Strategies was terminated and all intercompany accounts between the Company and GP Strategies (other than the GP Strategies Debt) in the amount of approximately $130,000 were discharged which was recorded as a credit to capital in excess of par value. 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 accrued or 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 17. Quarterly Financial Data (unaudited) The following summarizes the Company's unaudited quarterly results for 2000 and 1999.
2000 Quarters First Second Third Fourth ------ ------ ----- ------ Thousands of dollars except per share data Revenues $ 163 $ 158 $ 324 $ 424 Gross profit (loss)(1) 68 (267) (231) (270) Net loss (813) (820) (1,272) (77) Basic and diluted loss per share (.15) (.09) (.08) -- 1999 Quarters First Second Third Fourth ------ ------ ----- ------ Thousands of dollars except per share data Revenues $ 460 $ 526 $ 998 $ 345 Gross profit (loss)(1) (690) 35 605 5 Net income (loss) (2,712) (1,416) (648) 1,174 Basic and diluted income(loss)per share (.58) (.27) (.12) .22 (1) Gross profit (loss) is calculated as revenue less cost of goods sold and excess/idle production costs and reversal/(provision) for excess inventory.
Note 18. Fair Value of Financial Instruments The carrying values of financial instruments, assuming the Company continues as a going concern, including cash and cash equivalents, accounts receivable, accounts payable and long-term debt, approximate fair values, because of the short term nature or interest rates that approximate current rates. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 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 19 Financial Statements: Consolidated Balance Sheets - December 31, 2000 and 1999 20 Consolidated Statements of Operations - Years ended December 31, 2000, 1999, and 1998 21 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2000, 1999 and 1998 22 Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999, and 1998 23 Notes to Consolidated Financial Statements 24 (a)(2) The following is a list of all financial schedules for 2000, filed as part of this report: Schedule II - Valuation and Qualifying Accounts 39 Schedules other than that listed above 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 3, 2001 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 3, 2001 ------------------- Samuel H. Ronel, Ph.D. /s/ Lawrence M. Gordon Chief Executive Officer and Director ---------------------- (Principal Executive Officer) April 3, 2001 Lawrence M. Gordon /s/ Stanley G. Schutzbank President and Director April 3, 2001 ------------------------- Stanley G Schutzbank, Ph.D. ___________________ Director April __, 2001 Sheldon L. Glashow /s/ Donald W. Anderson Controller (Principal April 3, 2001 ---------------------- Accounting and Financial Donald W. Anderson Officer) The foregoing constitutes a majority of the members of the Board of Directors.
INTERFERON SCIENCES, INC. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Additions Balance at Charged to Balance at Beginning Costs, Provisions End of Description of Period and Expenses Deductions Period ----------- --------- ------------ ---------- ------- Year ended December 31, 2000 Valuation and qualifying accounts deducted from assets to which they apply: Reserve for excess inventory $ 6,225,185 $ (a)$ 939,174 $ 5,286,011 Year ended December 31, 1999 Valuation and qualifying accounts deducted from assets to which they apply: Reserve for excess inventory $10,344,551 $ (b)$4,119,366 $ 6,225,185 Year ended December 31, 1998 Valuation and qualifying accounts deduced from assets to which they apply: Reserve for excess inventory $ 7,254,710 $3,089,841 $ $10,344,551 Notes: (a) Deductions include $563,215 for the reversal of a portion of the reserve for excess inventory and $375,959 for the usage of the reserve to write-off inventory. (b) Deductions include $1,177,531 for the reversal of a portion of the reserve for excess inventory, $139,132 for the usage of a portion of the reserve to write-off excess inventory and $2,802,703 to write-off expired inventory.
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 toExhibit 3.4 of Registration Statement No. 33-40902. 3.3 - Certificate of Amendment of Restated Certificate of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.2 of Registration Statement No. 33-40902. 3.4 - Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.4 of Registration Statement No. 33-00845. 3.5 - Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant. Incorporated by reference to Exhibit 3.5 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. 3.6 - By-Laws of the Registrant, as amended. Incorporated herein by reference to Exhibit 3.2 of Registration Statement No. 2-7117. 4.1 - Form of Underwriter's Purchase Option issued in connection with the August/September 1995 Offering. Incorporated herein by reference to Exhibit 4.1 of Registration Statement No. 33-59479. 4.2 - Form of Underwriter's Purchase Option issued in connection with the May 1996 Offering. Incorporated herein by reference to Exhibit 4.4 of Registration Statement No. 333-00845. 4.3 - Form of Purchase Option issued in connection with the December 1996 Private Placement. Incorporated by reference to Exhibit 4.3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. 10.1 - Transfer and License Agreement among National Patent, Hydron Laboratories, Inc. and the Registrant dated as of January 1, 1981. Incorporated herein by reference to Exhibit 10.8 of the Registrant's Registration Statement No. 2-71117. 10.2 - Registrant's 1981 Stock Option Plan, as amended. Incorporated herein by reference to Exhibit 10.3 to Registration Statement No. 33-59479. 10.3 - Profit Sharing Plan of the Registrant. Incorporated herein by reference to Exhibit 10X of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988. 10.4 - License Agreement dated October 20, 1989 between the Registrant and Amarillo Cell Culture Company, Incorporated. Incorporated herein by reference to Exhibit 10Y of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10.5 - GP Strategies 401(k) Savings Plan dated January 9, 1992, effective March 1, 1992. Incorporated herein by reference to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the Year ended December 31, 1992. 10.6 - Distribution Agreement dated as of February 3, 1994 between Registrant and Industria Farmaceutica Andromaco, S.A. Incorporated herein by reference to Exhibit 6(a) to the Registrant's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1994. 10.7 - Processing and Supply Agreement dated as of September 1, 1994 between Registrant and Sanofi Winthrop L.P. Incorporated herein by reference to Exhibit 6(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. 10.8 - Amendment dated March 24, 1995 to Distribution Agreement dated as of February 3, 1994 between Registrant and Industria Farmaceutica Andromaco S.A. Incorporated herein by reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.9 - License Agreement, dated as of March 29, 1995, among the Registrant, Hoffmann-La Roche, Inc. and F. Hoffmann La-Roche, Ltd. Incorporated herein by reference to Exhibit 10.42 to Registration Statement No. 33-59479. 10.10 - Amendment of ACC/ISI License Agreement, dated 27, 1995, between Registrant and Amarillo Cell Culture Company, Incorporated. Incorporated herein by reference to Exhibit 10.43 to Registration Statement No. 33-59479. 10.11 - PPM/ACC Sub License Agreement, dated April 27, 1995, between Pharma Pacific Management Pty. Ltd., and Amarillo Cell Culture Company, Incorporated. Incorporated herein by reference to Exhibit 10.52 to Registration Statement No. 33-59479. 10.12 - Supply and Distribution Agreement, dated as of April 3, 1996, between the Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit 10.56 to Registration Statement No. 333-00845. 10.13 - Quality Assurance Agreement, dated as of April 3, 1996, between the Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit 10.57 to Registration Statement No. 333-00845. 10.14 - Agreement, dated as of April 1, 1997, between the Registrant and the American National Red Cross. Incorporated by reference to Exhibit 10.54 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.15 - Agreement dated May 27, 1997, between the Registrant and Alternate Site Distributors, Inc. Incorporated by reference to Exhibit 10.55 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.16 - Stock Bonus Plan. Incorporated by reference to Exhibit 10.57 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. 10.17 - Form of employment agreement for participants in Stock Bonus Plan. Incorporated by reference to Exhibit 10.58 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. 10.18 - Employment Agreement, dated as of October 1, 1997, between the Registrant and Lawrence M. Gordon. Incorporated by reference to Exhibit 10.59 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. 21.0 - Subsidiaries of the Registrant. * 23.1 - Consent of KPMG LLP. * ----------------- *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, (v) the Registration Statement (No. 333-34203) on Form S-3, and (vi) the Registration Statement (No. 333-43078) on Form S-1 of Interferon Sciences, Inc. of our report dated March 9, 2001 relating to the consolidated balance sheets of Interferon Sciences, Inc. and subsidiary as of December 31, 2000 and 1999, 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, 2000, and the related schedule, which report appears in the December 31, 2000 Annual Report on Form 10-K of Interferon Sciences, Inc. Our report dated March 9, 2001, contains an explanatory paragraph that states the Company has suffered recurring losses from operations, has an accumulated deficit and has limited liquid resources 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 that uncertainty. /s/ KPMG LLP Princeton, New Jersey April 3, 2001