-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AJhirMtkKCJqvzjzsiUnc9wQp6l7s3kfCMMEa6csHIzssMtmiH5dcuMyNwtesdL6 0N5GHHUko8dwAsf0CXdkeg== 0000351532-98-000018.txt : 19980416 0000351532-98-000018.hdr.sgml : 19980416 ACCESSION NUMBER: 0000351532-98-000018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980415 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERFERON SCIENCES INC CENTRAL INDEX KEY: 0000351532 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 222313648 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10379 FILM NUMBER: 98594254 BUSINESS ADDRESS: STREET 1: 783 JERSEY AVE CITY: NEW BRUNSWICK STATE: NJ ZIP: 08901 BUSINESS PHONE: 9082493250 MAIL ADDRESS: STREET 1: 783 JERSEY AVENUE STREET 2: 783 JERSEY AVENUE CITY: NEW BRUNSWICK STATE: NJ ZIP: 08901 10-K 1 INTERFERON SCIENCES, INC.TD UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1997 / / Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934 For the transition Period from ________to________ Commission File Number 0-10379 INTERFERON SCIENCES, INC. (Exact name of registrant as specified in its charter) Delaware 22-2313648 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 783 Jersey Avenue, New Brunswick, New Jersey 08901 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (732) 249-3250 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.01 Per Share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter Period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of April 9, 1998, 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 $26,500,000 based on the last reported sale price of such stock on the NASDAQ National Market System on April 9, 1998. 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 12 , 1998 ----- ------------------------------ Common Stock, par value $.01 per share 15,234,774 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. TABLE OF CONTENTS Page Item 1. Business ........................................................ 1 Item 2. Properties ...................................................... 12 Item 3. Legal Proceedings ............................................... 12 Item 4. Submission of Matters to a Vote of Security Holders ............. 12 Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ............................................. 13 Item 6. Selected Financial Data ......................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................. 15 Item 7A. Quantitative and Qualitative Disclosure About Market Risk ..................................................... 19 Item 8. Financial Statements and Supplementary Data ..................... 20 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure ............................. 36 Item 10. Directors and Executive Officers of the Registrant .............. 37 Item 11. Executive Compensation .......................................... 37 Item 12. Security Ownership of Certain Beneficial Owners and Management .................................................. 37 Item 13. Certain Relationships and Related Transactions .................. 37 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......................................... 38 PART I Item 1. Business (a) General Development of Business Interferon Sciences, Inc. (the "Company") is a biopharmaceutical company engaged in the study, manufacture, and sale of pharmaceutical products based on its highly purified, multispecies, natural source alpha interferon ("Natural Alpha Interferon"). The Company's ALFERON N Injection(R)(Interferon Alfa-n3) product has been approved by the United States Food and Drug Administration ("FDA")for the treatment of certain types of genital warts and is being studied for potential use in the treatment of HIV, hepatitis C, and other indications. The Company also is studying ALFERON N Gel(R) and ALFERON LDO(R), the Company's topical and oral formulations of Natural Alpha interferon, for the potential treatment of viral and immune system diseases. (b) Financial Information about Business Segments. This Item is not applicable because the Company has only a single line of business. (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, only two types of alpha interferon are approved for commercial sale: recombinant (genetically engineered) alpha interferon and Natural Alpha Interferon, which is manufactured from human white blood cells. Outside of the United States, sales of alpha interferon produced by cell culture account for a significant portion of the market. The Company believes that the potential advantages of Natural Alpha Interferon over recombinant interferon may be based upon their respective molecular compositions. 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 responsible for the production of interferon-neutralizing antibodies seen in patients treated with recombinant alpha interferon. The production of Natural Alpha Interferon is dependent upon a supply of human white blood cells and other essential materials. The Company currently obtains white blood cells from FDA-licensed blood donor centers. ALFERON N Injection Approved Indication. On October 10, 1989, the FDA approved ALFERON N Injection for the intralesional treatment of refractory (resistant to other treatment) or recurring external genital warts in patients 18 years of age or older. Substantially all of the Company's revenues, to date, have been generated from the sale of ALFERON N Injection for such treatment. Genital warts, a sexually transmitted disease, are caused by certain types of human papillomaviruses. A published report estimates that approximately eight million new and recurrent cases of genital warts occur annually in the United States alone. Genital warts are usually treated using caustic chemicals or through physical removal methods. These procedures can be quite painful and effective treatment is often difficult to achieve. 1 Clinical Trials for New Indications. In an effort to obtain approval to market ALFERON N Injection for additional indications in the United States and around the world, the Company is focusing its research program on conducting and planning various clinical trials for new indications. HIV-infected patients. The Human Immunodeficiency Virus ("HIV") infection is at epidemic levels in the world. The World Health Organization projects that this virus will affect 30 to 40 million people by the year 2000. HIV infection usually signals the start of a progressive disease that compromises the immune systems, ultimately resulting in Acquired Immune Deficiency Syndrome ("AIDS"). The United States Centers for Disease Control estimates that as of the middle of 1997, there were approximately 259,000 cases of AIDS in the United States. A recent study in the Journal of the American Medical Association estimated that 650,000 to 900,000 U.S. residents were living with HIV infection. 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 in blocking the replication of HIV-1, the AIDS virus, in infected human cells 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. This information provided additional support for a long-held belief of the Company that its Natural Alpha Interferon has unique anti-viral properties distinguishing it from recombinant interferon products. In addition, published reports of trials using recombinant alpha interferon in asymptomatic HIV-infected patients indicated that while high doses blocked virus production in many cases, such doses resulted in high levels of adverse reactions, thereby limiting the usefulness of the recombinant product. These facts led the Walter Reed researchers to conduct a Phase 1 clinical trial with the Company's product in asymptomatic HIV-infected patients. In March 1992, Walter Reed launched a Phase 1 clinical trial with asymptomatic HIV-infected patients to investigate the safety and tolerance, at several dose regimens, of ALFERON N Injection, self-injected subcutaneously for periods of up to 24 weeks. The investigators concluded that the treatment was "surprisingly" well tolerated by patients, at all dose regimens. Preliminary findings were reported by Walter Reed at the IXth International Conference on AIDS in Berlin in 1993. The investigators also reported that the expected interferon side effects, such as flu-like symptoms, were rare or absent in the majority of patients treated with the Company's product. Although this Phase 1 clinical trial was designed primarily to provide safety information on various doses of ALFERON N Injection used for extended periods of time, there were encouraging indications that certain disease parameters had stabilized or even improved in certain patients by the end of the experimental treatment. In a follow-up analysis of patients' blood testing data, it was found after an average of 16 months after treatment, CD4 white blood cell counts remained essentially unchanged or were higher than at the onset of the trial in 11 of 20 patients. In addition, while on treatment, the amount of HIV detectable in the patients' blood, as measured by polymerase 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 2 efficacy data obtained from this trial and after meeting with the FDA, the Company conducted a multi-center Phase 3 clinical trial of ALFERON N Injection in HIV-infected patients, which was completed in December 1997. This randomized, double-blind, placebo-controlled trial was designed to evaluate the safety and efficacy of ALFERON N Injection in the treatment of HIV-positive patients, some of whom may have been taking other FDA-approved antiviral agents. Enrolled patients were required to have CD4 white blood cell counts of at least 250 cells per microliter and a viral burden (as determined by PCR testing) of at least 2,000 RNA copies per milliliter. The Company completed the preliminary analysis of the data collected from the 16 investigator sites and scheduled a pre-filing meeting with the FDA in mid-March 1998. Shortly after that meeting, the FDA advised the Company that, although ALFERON N Injection demonstrated biological activity in this Phase 3 clinical trial, the results were insufficient for filing for approval for this additional indication for ALFERON N Injection. While the results over the course of treatment demonstrated benefits that were statistically significant for the group of patients receiving ALFERON N Injection and highly statistically significant for the subgroup of such patients with high CD4 counts, the study's primary efficacy variable (reduction in viral load) was not met at the time point specified in the protocol (end of treatment). The FDA therefore indicated that an additional trial will be necessary to evaluate further the efficacy of ALFERON N Injection for this indication. The Company is currently evaluating its options with respect to the HIV program. After satisfactorily completing the 24-week treatment in this Phase 3 trial, patients were eligible to enroll in a separate open-label continuation study to evaluate the safety and efficacy of different maintenance treatment regimens. Approximately 93% of such eligible patients have chosen to enroll in the continuation study. There can be no assurance that ALFERON N Injection for the treatment of patients with HIV will be cost-effective, safe, and effective or that the Company will be able to obtain FDA approval for such use. Furthermore, even if such approval is obtained, there can be no assurance that such product will be commercially successful or will produce significant revenues or profits for the Company. Hepatitis C. Chronic viral hepatitis is a liver infection caused by various hepatitis viruses. The United States Centers for Disease Control estimates that nearly four million people in the United States are presently infected with the hepatitis C virus ("HCV"), a majority of whom become chronic carriers and will suffer gradual deterioration of their liver and possibly cancer of the liver. Several brands of recombinant and cell-cultured interferon have been approved by various regulatory agencies worldwide for the treatment of hepatitis C, including three recombinant products in the United States. See "Business -- ALFERON N Injection -Competition." However, reports have indicated that many patients either do not respond to treatment with the recombinant 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. 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 response at the end of treatment in 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 the second quarter of 1996 a Phase 3 multi-center, randomized, controlled clinical trial designed to evaluate the safety and efficacy of ALFERON N Injection in naive chronic hepatitis C patients. The trial consists of a 24-week treatment phase and 24-week follow-up and also includes an interim analysis after approximately one-half of the enrolled patients complete the treatment and follow-up phases. 3 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) appear to be equivalent, the study protocol requires a showing of superiority in order to meet the criteria for statistical significance in the interim analysis, and the Company will therefore not seek FDA approval based on the interim analysis. The Company expects that all patients will complete the study by mid- year, followed by a final analysis in the third quarter of 1998. If the results at the end of the trial are favorable (which to be statistically significant must demonstrate superiority over the control treatment for all enrolled patients as a group), the Company intends to seek FDA approval approval in the fourth quarter of 1998. However, there can be no assurance that such efficacy results will be demonstrated at the time of the final analysis or that the use of ALFERON N Injection for the treatment of patients with hepatitis C will be cost-effective, safe, and effective or that the Company will be able to obtain FDA approval for such use. Furthermore, even if such approval is obtained, there can be no assurance that such product will be commercially successful or will produce significant revenues or profits for the Company. HIV and hepatitis C co-infected patients. In December 1997, patient enrollment commenced in a Phase 2 multi-center, open label clinical trial designed to evaluate the safety and efficacy of ALFERON N Injection in patients co-infected with HIV and HCV. The trial consists of a 24-week treatment phase and 24-week follow-up. Two groups of patients with chronic hepatitis C will be studied - one with significant HIV viral levels and the other with low or undetectable levels. The patients' HIV and HCV viral levels will be evaluated throughout the treatment and follow-up phases. It is estimated that approximately 10% of HIV-infected patients are co-infected with HCV. 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. In addition, Copaxone(R), a non-interferon product was recently 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, the Company would like to conduct a clinical trial in order to investigate the potential use of ALFERON N Injection for the treatment of MS. However, the timing of this trial will be dependent upon the Company's ability to obtain additional funding or a sponsor. Marketing and Distribution. The Company completed the reacquisition of marketing and distribution rights for ALFERON N Injection from The Purdue Frederick Company ("Purdue") in May 1996. The Company believes that the reacquisition of marketing provides it with greater financial flexibility and control over the distribution of ALFERON N Injection. Since the reacquisition, the Company has focused its efforts in the United States on making additional sales to existing customers. In May 1997, the Company entered into an agreement appointing Alternate Site Distributors, Inc. ("ASD"), a subsidiary of Bergen Brunswig Corporation, the sole United States distributor of ALFERON N Injection. Pursuant to such agreement, ASD will also provide clinical and product information, reimbursement information and services, and management of patient assistance services. In 1996, the Company entered into a supply and distribution agreement (the "Cell Pharm Agreement") with Cell Pharm GmbH ("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 4 Injection at a price higher than a specified price. Cell Pharm is required to maintain an active and efficient sales and customer service organization with adequately trained personnel for marketing and selling ALFERON N Injection. Cell Pharm represents to the Company that it has obtained, and Cell Pharm agrees to maintain in effect, all registrations, approvals, and consents from governments in Germany as are necessary to permit or facilitate the lawful handling, promotion, and resale of ALFERON N Injection in Germany. Cell Pharm has informed the Company that it intends to market ALFERON N Injection under the trade name Cytoferon(TM), pursuant to Cell Pharm's existing regulatory approval to market Cytoferon in Germany for the treatment of hairy cell leukemia and for the treatment of patients who develop antibodies against recombinant alpha interferons. In February 1994, the Company entered into an exclusive distribution agreement for ALFERON N Injection in Mexico with Industria Farmaceutica Andromaco, S.A. de C.V. ("Andromaco"), a privately-held pharmaceutical company headquartered in Mexico City which specializes in oncology and immunology products. Pursuant to the agreement, Andromaco obtained approval from the Mexican regulatory authorities to sell ALFERON N Injection for the treatment of genital warts, which is marketed under the trade name ALTEMOL(R). The agreement establishes performance milestones for the maintenance of distribution rights by Andromaco in Mexico. In addition, the Company has a buy-out option to reacquire the marketing and distribution rights in Mexico under certain terms and conditions. Manufacturing. The purified drug concentrate utilized in the formulation of ALFERON N Injection is manufactured in the Company's facility located in New Brunswick, New Jersey, and ALFERON N Injection is formulated and packaged at a production facility located in McPherson, Kansas and operated by Abbott Laboratories Inc. ("Abbott") pursuant to a processing and supply agreement entered into in September 1994. Under the terms of the agreement with Abbott, the Company pays Abbott an agreed price to formulate and package ALFERON N Injection in accordance with specifications provided by the Company. The Company's facilities received FDA approval in October 1989. Subsequently, the Company developed process improvements and completed an expansion of its manufacturing facility, both of which were approved by the FDA in June 1991. The process improvements and expanded facility enabled the Company to reduce the manufacturing costs of ALFERON N Injection and gave the Company increased production capacity for ALFERON N Injection. Since the beginning of 1996, the Company increased its physical manufacturing capacity by 50%. In anticipation of increased demand, production of interferon was continued at a level in excess of current market demand. In light of the results to date of the Company's Phase 3 studies of ALFERON N Injection in HIV- and HCV-infected patients, the Company has written-down the carrying value of its inventory of ALFERON N Injection to its estimated net realizable value. The write-down is the result of the Company's reassessment of anticipated near-term needs for product to be sold or utilized in clinical trials (within approximately a two-year period at historical sales levels). As a result, inventories at December 31, 1997 reflect a reserve for excess inventory of $7,254,710. Also, during the quarter ending March 31, 1998, the Company will record an additional write-off of approximately $3,000,000 of inventories that were produced during the three months ended March 31, 1998. At the present time, the Company has produced sufficient inventory to satisfy its clinical and commercial needs for the foreseeable future and has therefore discontinued production of ALFERON N Injection. 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 March 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 products developed by the Company's competitors or advances in other methods of the treatment of genital warts will have on the commercial viability of its product. If and when the Company obtains approvals for additional indications of ALFERON N Injection and its proposed products (such as the approval obtained by Cell Pharm in Germany), 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, including reverse transcriptase inhibitors (nucleoside analogues) such as Epivir(R) and Retrovir(R) (manufactured by Glaxo Wellcome Inc.), Hivid(R) (manufactured by Roche Laboratories, Inc.), and Zerit(R) and Videx(R) (manufactured by Bristol-Myers 5 Squibb Company) and protease inhibitors such as Crixivan(R) (manufactured by Merck & Co., Inc.), Fortovase(R) and Invirase(R)(manufactured by Roche Laboratories, Inc.), Norvir(R) (manufactured by Abbott Laboratories) and Viracept(R) manufactured by Agouron Pharmaceutical, Inc. Also, Viramune(R), a non-nucleoside reverse transcriptase inhibitor (manufactured by Boehringer Ingelheim Corporation), and Rescriptor(R) manufactured by Pharmacia and Upjohn Company, have been approved by the FDA for use in combination with nucleoside analogues for the treatment of HIV-infected adults. Schering's recombinant interferon product is already approved for the treatment of hepatitis C and hepatitis B in the United States and other markets, as well as for many other medical uses. Roche Pharmaceuticals's recombinant interferon product has been approved for the treatment of hepatitis C in the United States and for other medical uses in the United States and in foreign countries. In addition, Amgen Inc.'s recombinant interferon, Infergen(R), also known as consensus interferon product, was recently approved for the treatment of hepatitis C in the United States. In the United States, two recombinant forms of beta interferon, Biogen, Inc.'s Avonex(R) and Berlex Laboratories' Betaseron(R) as well as Teva Marion Partners' Copaxone(R), a non-interferon product, have been approved for the treatment of relapsing-remitting MS. Many of the Company's potential competitors are among the largest pharmaceutical companies in the world, are well known to the public and the medical community, and have substantially greater financial resources and product development, manufacturing, and marketing capabilities than the Company or its marketing partners. Therefore, there can be no assurance that, if the Company is able to obtain regulatory approval of ALFERON N Injection for the treatment of any additional diseases, it will be able to achieve any significant penetration into those markets. ALFERON N Gel ALFERON N Gel is a topical, Natural Alpha Interferon preparation which the Company has developed and believes has potential in the treatment of cervical dysplasia, intravaginal warts, and mucocutaneous and genital herpes. Clinical Trials. The Company has completed one clinical trial, has commenced one clinical trial, and may conduct other clinical trials for its ALFERON N Gel formulation to develop applications and obtain initial approvals for such products. Cervical Dysplasia and Intravaginal Warts. Affecting approximately 500,000 to one million women each year in the United States alone, cervical dysplasia, or abnormal cervical cells, has been identified as a potential precursor to cervical cancer. Cervical cancer strikes approximately 13,000 women in the United States each year, causing 5,000 deaths, and is responsible for more than half a million deaths worldwide. Cervical dysplasia is caused by certain strains of the human papillomavirus ("HPV"), the same family of viruses that causes genital warts. The Company has completed a small Phase 2 dose-ranging study using ALFERON N Gel at the Columbia-Presbyterian Medical Center in New York for the treatment of mild cervical dysplasia. Pap smears, identification tests for the presence of virus, and cervical biopsies indicated that ALFERON N Gel appears to have the potential for improving the course of cervical dysplasia in the majority of patients who completed the treatment course. In addition, an investigator-sponsored, Phase 2 randomized, placebo-controlled, double-blind, parallel group clinical study to investigate the potential use of ALFERON N Gel for the treatment of intravaginal warts (which are also caused by the HPV) commenced in January 1998. Other Widespread Dermatological Lesions Potentially Treatable with ALFERON N Gel Therapy. Nearly 30 million people in the U.S. are infected with the herpes simplex type II virus, which is the infectious virus that causes genital herpes. Up to 500,000 new cases are reported each year, according to the Alan Guttmacher Institute. To date, there is no cure for genital herpes. Preliminary findings with a previous formulation of recombinant interferon in the Company's proprietary gel showed significant shortening of the contagious period and relief of symptoms, but the Company will not start clinical trials unless additional funding or a sponsor is secured. ALFERON N Gel may also be of benefit to immunocompromised patients with mucocutaneous herpes. Patients with this form of herpes suffer from persistent skin lesions which have become resistant to existing therapies. The Company will not start clinical trials for this indication unless additional funding or a sponsor is secured. Marketing and Distribution. The Company does not have any marketing agreement with respect to ALFERON N Gel and, if FDA approval is obtained, no assurance can be given that the Company will be able to enter into a marketing agreement on terms satisfactory to the Company. The Company may also choose to market ALFERON N Gel itself if FDA approval is obtained. 6 Competition. The Company believes that three antiviral products are presently sold in the United States for the treatment of recurrent genital herpes: Zovirax(R) (manufactured by Glaxo Wellcome Inc.) which contains acyclovir and is administered orally, topically, or intravenously, Famvir(R) (manufactured by SmithKline Beecham Pharmaceuticals) which contains famcyclovir and is administered orally, and Valtrex(R) (manufactured by Glaxo Wellcome, Inc.) which contains valacyclovir and is also administered orally. The only current treatment for cervical dysplasia in the United States is surgery, while intravaginal warts are treated with ablative therapy. ALFERON LDO ALFERON LDO is a low dose oral liquid Natural Alpha Interferon preparation which the Company has developed and believes has potential in the treatment of several quality-of-life parameters of importance to patients infected with HIV. Clinical Trials for ALFERON LDO. As described below, the Company has completed two Phase 2 clinical trials for its ALFERON LDO formulation for the treatment of HIV-infected patients. In addition, a National Institute of Allergy and Infectious Diseases ("NIAID") sponsored Phase 3 trial in HIV-infected patients has been concluded in which ALFERON LDO was included as one of the treatments. HIV-infected patients. The Company has completed two double-blind studies at Mount Sinai Medical Center in New York involving ALFERON LDO. One was a placebo-controlled study in AIDS-related complex ("ARC") patients, and the other was a dose ranging study in AIDS or ARC patients. The results from the placebo-controlled study did not demonstrate a significant improvement or alteration in the expected progression of the disease, although patients receiving ALFERON LDO reported greater energy and appetite than those given the placebo. The results from the dose ranging study indicate that one of the doses may promote weight gain and an increase in energy and overall well-being. At the insistence of AIDS groups and community-based physicians who had been using low-dose oral formulations of interferon in their practice, the NIAID launched in the second quarter of 1996 a Phase 3 trial of three preparations of low-dose oral interferon, including ALFERON LDO. An advisory committee comprised of representatives from the Company and other interferon manufacturers, AIDS support groups, the FDA, and the National Institutes of Health was organized to design this multicenter study, which is examining the effectiveness of low dose oral alpha interferon therapy on several quality-of-life parameters of importance to patients infected with HIV. Patients enrolled in the study were randomly assigned to one of four treatment groups, with all participants receiving three compounds. In three of the groups, patients received one active compound and two placebos. Patients in the fourth group received only placebos. Neither the physician nor the patient will know which group the patient was assigned to until after the study, which had a six-month treatment phase and six-month follow-up period, has ended and the analysis is completed. While in the study, patients were permitted to take antiretroviral drugs and therapies against opportunistic infections. In June 1997, NIAID terminated enrollment in this study because of the slow rate of patient accrual. NIAID will analyze and publish the results of the completed patients when available. The Company has provided clinical quantities of ALFERON LDO for use in the study. Marketing and Distribution. The Company does not have a marketing agreement with respect to ALFERON LDO and, if FDA approval of ALFERON LDO is obtained, no assurance can be given that the Company will be able to enter into a marketing agreement for such products on terms satisfactory to the Company. The Company may also choose to market ALFERON LDO itself if FDA approval is obtained. Competition. Under the terms of a licensing agreement (as amended, the "Amarillo Agreement") with Amarillo Bioscience, Inc. (formerly Amarillo Cell Culture Company, Incorporated) ("Amarillo") (i) the Company has the exclusive right to sell ALFERON LDO, containing Natural Alpha Interferon, in the United States and all foreign countries other than Japan, (ii) Amarillo and Pharma Pacific Management Pty. Ltd. ("PPM"), a company which has also obtained a license from Amarillo, each has the right to sell any interferon other than Natural Alpha Interferon in the United States and all foreign countries other than Japan, and (iii) Hayashibara Biochemical Laboratory has the right to sell its low dose alpha interferon in Japan. See "Business -- Licenses and Royalty Obligations." Therefore, with respect to low dose oral interferon products, the Company will potentially compete with Amarillo and PPM in the United States and in the rest of the world except Japan and with Hayashibara Biochemical Laboratory in Japan. In addition, the Company will potentially compete with the manufacturers of the synthetic antiviral compounds that have been approved in the United States and certain foreign countries for the treatment of HIV and AIDS. (See "Business -- ALFERON N Injection -- Competition"). 7 Patents In 1996, the Company was issued a United States patent, comprised of 15 claims, for Natural Alpha Interferon. The two major claims are for (i) a highly purified Natural Alpha Interferon composition produced from human peripheral blood leukocytes and (ii) an improved method to produce this composition. The issuance of this patent gives the Company protection for the manufacture, use, and sale of its Natural Alpha Interferon product in the United States and prevents a competitor from producing or using equivalent products derived from human peripheral blood leukocytes. Patent applications have also been filed in selected foreign countries. In the fourth quarter of 1997, the Company was issued a second United States patent which broadens the scope of the first one to cover certain individual or mixtures of alpha interferon species present in Natural Alpha Interferon. Also in 1996, the Company was issued a United States patent, comprised of four claims, that will expand the Company's portfolio on overall technologies in the interferon field. The biological activities of interferon take place when the interferon binds to Type 1 interferon receptor proteins, which are present in various human cells. The major claim is the composition claim for an interferon receptor protein specifically binding alpha and beta, but not gamma, interferon. The receptor, which is isolated from a cancerous cell line, binds both natural and recombinant alpha interferons and is a variant form of the human interferon receptor (Type 1) which has been found in some cases of acute leukemia. The claimed receptor protein could be used to produce anti-receptor antibodies that may have potential use in diagnostic testing for tumors or cancers which have an abnormal number of receptors. The claimed receptor protein may also have potential use as a therapeutic agent for those diseases which have aberrant production of interferon, by binding to and neutralizing the excess interferon. The United States Patent and Trademark Office has also issued two patents to the Company which disclose and claim topical interferon preparations. The patents encompass interferon preparations for the topical delivery of one or more interferons to the site of a disease which responds therapeutically to interferon, and a system for delivering interferon topically which prevents oxidation of the protein. The inventions specifically encompass the topical treatment for treating viral diseases, such as herpes genitalis, with alpha interferon. The Company has various other issued patents and patent applications pending in the field of biotechnology, purification processes, and therapeutics. Licenses and Royalty Obligations F. Hoffmann-LaRoche Ltd. and Hoffmann-LaRoche, Inc. (collectively, "Hoffmann") have been issued patents covering human alpha interferon in many countries throughout the world. As of March 31, 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 replaced a 1988 non-exclusive license which, as amended, granted the Company the right to make, use, and sell in the United States, without a potential patent infringement claim from Hoffmann, injectable formulations of Natural Alpha Interferon for the treatment of genital warts or patients with diseases refractory to recombinant interferon therapy. The 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. When the Company received FDA approval for ALFERON N Injection for the treatment of genital warts in 1989, the Company became obligated to issue shares of its Common Stock to Hoffmann as a prepaid royalty against future net sales by the Company. Under the terms of the 8 Hoffmann Agreement, certain payments previously made to Hoffmann (including a portion of the value of the Common Stock previously issued to Hoffmann) are available as offsets against 50% of the Company's future royalty obligations to Hoffmann until the Company obtains an FDA approval to market ALFERON N Injection for an additional indication. For the years ended December 31, 1997, 1996 and 1995, the Company applied $117,102, $77,584 and $50,437 respectively, of the prepayments previously made to Hoffmann against the amounts due. As of December 31, 1997, based upon the market value of the Company's common stock, the Company had approximately $698,200 of credits available to offset its future royalty obligations to Hoffmann. In October 1989, the Company entered into the Amarillo Agreement. Amarillo, which is located in Amarillo, Texas, is in the business of the research and development of animal health products and became a public company in 1996. Under the terms of the Amarillo Agreement, the Company has a non-exclusive license under all of Amarillo's issued patents, patent applications, and "know-how" relating to the treatment of humans by the oral administration of Natural Alpha Interferon in low doses. In addition, Amarillo has the right to purchase the Company's Natural Alpha Interferon for use in the animal health market and is obligated to pay royalties to the Company based upon sales using the Company's Natural Alpha Interferon. The Company will be obligated to pay Amarillo royalties of 10% on the sales of Natural Alpha Interferon products using Amarillo's patented technology as determined under the Amarillo Agreement. In addition, the Company is a party to certain license agreements, including the Hoffmann Agreement, pursuant to which it is obligated to pay royalties based upon commercial exploitation of ALFERON N Gel and ALFERON LDO. Under the terms of such license agreements, the Company would pay royalties of up to 13.5% and 19.5% of net sales of ALFERON N Gel and ALFERON LDO, respectively. In addition, the Company agreed to pay G.P. Strategies Corporation ("G.P. Strategies"), formerly named National Patent Development Corporation, a royalty of $1 million in connection with the acquisition of certain intellectual property and technology rights from G.P. 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. 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. 9 The FDA closely monitors the progress of each of the phases of clinical testing and may, at its discretion, re-evaluate, alter, suspend, or terminate the testing based on the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the patient. Estimates of the total time required for completing clinical testing vary between four and ten years. Upon successful completion of clinical testing of a new drug, a company typically submits a New Drug Application ("NDA"), or for biological products such as Natural Alpha Interferon, a Product and Establishment License Applications ("PLA/ELA") to the FDA summarizing the results and observations of the drugs during the clinical trials. Each facility in which products are produced and packaged, whether operated by the Company or a third party, must meet the FDA's standards for current good manufacturing practices and must also be approved prior to marketing any product produced or packaged in such facility. Any significant change in the production process which may be commercially required, including changes in sources of certain raw materials, or any change in the location of the production facilities will also require FDA approval. To the extent a portion of the manufacturing process for a product is handled by an entity other than the Company, the Company must similarly receive FDA approval for the other entity's participation in the manufacturing process. The Company has entered into an agreement with Abbott, pursuant to which Abbott formulates and packages ALFERON N Injection. The Company presently has a biologic establishment license for the facilities in which it produces ALFERON N Injection, which includes the facilities in which Abbott formulates and packages ALFERON N Injection. In addition, FDA approval would have to be obtained if the Company should choose to use an outside formulator and/or packager for ALFERON N Gel or ALFERON LDO. Once the manufacture and sale of a product is approved, various FDA regulations govern the production processes and marketing activities of such product. A post-marketing testing, surveillance, and reporting program may be required to monitor the product's usage and effects. Product approvals may be withdrawn, or other actions may be ordered, if compliance with regulatory standards is not maintained. Each individual lot of Natural Alpha Interferon produced must be tested for compliance with specifications and released for sale by the FDA prior to distribution in the marketplace. Even after initial FDA marketing approval for a product has been granted, further studies may be required to provide additional data on safety or efficacy; to obtain approval for marketing a product as a treatment for specific diseases other than those for which the product was originally approved; to change the dosage levels of a product; to support new safety or efficacy claims for the product; or to support changes in manufacturing methods, facilities, sources of raw materials, or packaging. In many markets, effective commercialization also requires inclusion of the product in national, state, provincial, or institutional formularies or cost reimbursement systems. The impact of new or changed laws or regulations cannot be predicted with any accuracy. The Company uses its own staff of regulatory affairs professionals and outside consultants to enable it to monitor compliance, not only with FDA laws and regulations, but also with state and foreign government laws and regulations. Promotional and educational communications by the Company and its distributors also are regulated by the FDA and are governed by statutory and regulatory restrictions and FDA policies regarding the type and extent of data necessary to support claims that may be made. The Company currently does not have data adequate to satisfy FDA requirements with respect to potential comparative claims between Natural Alpha Interferon and competing recombinant interferon products. For marketing outside the United States, the Company will also be subject to foreign regulatory requirements governing human clinical trials, manufacturing, and marketing approval for drugs and other medical products. The requirements governing the conduct of clinical trials, product licensing, pricing, and reimbursement vary widely from country to country. In addition to its United States approval, ALFERON N Injection has received regulatory approval in Mexico, Germany, Hong Kong, and Singapore, and registration filings have been submitted in certain other countries. Under certain circumstances, the Company may be required to obtain FDA authorization to export products for sale in foreign countries. For instance, in most cases, the Company may not export products that have not been approved by the FDA unless it first obtains an export permit from the FDA. However, these FDA export restrictions generally do not apply if the Company's products are exported in conformance with their United States approvals or are manufactured outside the United States. At the present time, the Company does not have any foreign manufacturing facilities. 10 Research Staff and Employees As of April 8, 1998, the Company had approximately 100 full-time employees, of whom 14 hold Ph.D. degrees, 1 holds an M.D. degree and 52 hold other degrees in scientific or technical fields. Of such employees, approximately 21 were engaged in research and product development, 40 were engaged in quality control and product and process improvement for manufacturing, 9 were engaged in engineering, maintenance and regulatory and quality assurance, 6 were engaged in medical affairs and the remainder were general and administrative personnel. Research and Development During the fiscal years ended December 31, 1997, 1996, and 1995, the Company expended approximately $11.9 million, $6.4 million, and $3.7 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 15, 1998 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 61 Chairman of the Board Lawrence M. Gordon 44 Chief Executive Officer and a Director Stanley G. Schutzbank, Ph.D. 52 President and a Director Donald W. Anderson 48 Controller (Principal Accounting and Financial Officer) and Secretary Drew Stoudt 50 Vice President, Regulatory Affairs and Quality Mei-June Liao, Ph.D. 46 Vice President, Research and Development James R. Knill, M.D. 65 Vice President, Medical Affairs Robert P. Hansen 54 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 G.P. Strategies in 1970 and served as the Vice President of Research and Development of G.P. Strategies and as the President of Hydro Med Sciences, a division of G.P. 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. Lawrence M. Gordon has been Chief Executive Officer and a director of the Company since January 1996, Vice President of the Company from June 1991 to January 1996, General Counsel of the Company from 1984 to January 1996, General Counsel of G.P. Strategies since November 1986, and Vice President of G.P. Strategies from June 1991 to September 1996. He was Associate General Counsel of G.P. Strategies from 1983 through November 1986. 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 G.P. Strategies in 1972 and served as the Corporate Director of Regulatory and Clinical Affairs of G.P. 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 11 Professionals Society and has served as Chairman of the Regulatory Affairs Certification Board from its inception until 1994. Dr. Schutzbank received the 1991 Richard E. Greco Regulatory Affairs Professional of the Year Award for his leadership in developing the United States Regulatory Affairs Certification Program. In September 1995, Dr. Schutzbank was elected to serve as President-elect in 1996, President in 1997, and Chairman of the Board in 1998 of the Regulatory Affairs Professionals Society. Donald W. Anderson has been the Controller of the Company since 1981 and Corporate Secretary of the Company since 1988. He was an officer of various subsidiaries of G.P. Strategies from 1976 to September 1996. Drew Stoudt has been Vice President, Regulatory Affairs and Quality of the Company since March 1991. He was Vice President, Quality Assurance and Quality Control from February 1990 to March 1991. Mr. Stoudt has served as Director of Quality Assurance for the Company and other divisions of G.P. Strategies from 1985 to 1990. Mr. Stoudt is a member of the Regulatory Affairs Professionals Society and received the 1988 Richard e. Greco Regulatory Affairs Professional of the Year Award. In addition, in 1997, Mr. Stoudt was elected to a three-year term as Treasurer of this Society. Mei-June Liao, Ph.D. has been Vice President, Research and Development of the Company since March 1995. She has served as a Director, Research & Development since 1987, and held senior positions in the Company's Research & Development Department since 1983. Dr. Liao received her Ph.D. from Yale University and completed a three-year post doctoral appointment at the Massachusetts Institute of Technology under the direction of Nobel Laureate in Medicine, Professor H. Gobind Khorana. Dr. Liao has authored many scientific publications and invention disclosures. 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 also maintains offices at 9 West 57th Street, New York, New York 10019, the cost of which is included in the Management Agreement. See Note 1 of Notes to Consolidated Financial Statements. The Company owns two free standing buildings comprising approximately 44,000 square feet and leases another 10,000 square feet all of which is located in New Brunswick, New Jersey. The Company uses the facilities for staff offices, for the production and purification of interferon, for quality control and research activities, and for the storage of raw, in process and finished materials. The Company believes that its current facilities and equipment are suitable and adequate for research and development and commercial production of purified interferon, well maintained, 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. 12 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters The Common Stock is traded in the over-the counter market and is quoted on the NASDAQ National Market System under the symbol IFSC. Effective June 17, 1997, the trading market for the Common Stock was changed from the NASDAQ Small Cap Market to the NASDAQ National Market System. The following table sets forth for each period indicated, the high and low sales prices for the Common Stock as reported on the NASDAQ Small Cap Market through June 16, 1997 and on the NASDAQ National Market System commencing June 17, 1997. All prices have been adjusted for a one-for-four reverse stock split that became effective as of 5:00 p.m. New York City time on March 21, 1997.
1997 1996 ------------ ----------- Quarter High Low High Low - ------- ---- --- ---- --- First....... $11 $ 5 3/8 $ 10 1/4 $ 6 Second.... 9 5/8 4 1/2 12 7 1/4 Third...... 9 1/2 6 8 1/4 4 1/2 Fourth..... 11 3/16 7 1/2 7 7/8 3 1/2
As of March 12, 1998, the Company had 350 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. On August 18, 1997, the Company completed the private placement primarily to institutional investors of 1,936,667 shares of Common Stock. The Company received aggregate cash consideration of $11,620,002. Sunrise Securities Corp. ("Sunrise") acted as placement agent and in connection therewith received a commission of 116,200 shares of Common Stock and options to purchase 96,833 shares of Common Stock at a purchase price of $7.20 per share. The options are exercisable for a period of four years, commencing on August 18, 1998, and cannot be sold, transferred, assigned, or hypothecated until such date, except that they may be assigned, in whole or in part, to any successor, officer, or partner of Sunrise. Sunrise also received an unaccountable expense allowance of 38,733 shares of Common Stock. The private placement and the issuance of shares and options to designees of Sunrise were made in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933 (the "Securities Act") for a transaction by an issuer not involving any public offering and/or Rule 506 of Regulation D promulgated under the Securities Act. 13 Item 6. Selected Financial Data (Thousands of dollars except per share data)
Year Ended December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Revenues $ 2,956 $ 2,092 $ 1,296 $ 1,166 $ 51 Research and development costs, net 11,864 6,400 3,726 5,196 4,151 General and administrative expense 4,389 3,405 1,940 4,974 2,367 Loss from operations* (22,410) (12,426) (7,447) (11,782) (8,347) Interest income (expense), net 670 441 75 (295) (113) Net loss* (21,740) (11,986) (7,372) (12,078) (8,460) Basic and diluted loss per share of common stock** (1.63) (1.20) (1.11) (2.47) (2.19) Dividends NONE NONE NONE NONE NONE
- ---------------------------------- [FN] *Includes a provision for excess inventory of $7.3 million in 1997. **All Periods have been restated to reflect the effect of the one-for-four reverse stock split that became effective as of 5:00 p.m. New York City time on March 21, 1997 (see Note 11 to the Consolidated Financial Statements).
December 31, ------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Total assets $ 24,153 $ 27,743 $ 13,953 $ 8,182 $ 20,301 Current maturities of long-term debt -- -- -- 409 1,999 Long-term debt, net of current maturities -- -- -- -- 138 Common Stock subject to repurchase commitment -- -- -- 2,730 -- Working capital (deficiency) 14,529 19,929 7,062 (782) 7,985 Stockholders' equity 20,214 25,374 12,827 2,979 17,131
14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Since January 1981, the Company has been primarily engaged in the research and development of pharmaceutical products containing Natural Alpha Interferon. The Company has experienced significant operating losses since its inception. Although the Company received FDA approval in October 1989 to market ALFERON N Injection in the United States for the treatment of certain genital warts and ALFERON N Injection currently is marketed and sold in the United States by the Company, in Mexico by Andromaco, and in Germany by 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. The future revenues and profitability of, and availability of capital for, biotechnology companies may be affected by the continuing efforts of governmental and third-party payors to contain or reduce the costs of health care through various means. The Company has limited financial resources with which to support future operating activities and to satisfy its financial obligations as they become payable. Consequently, management is continuing to actively pursue raising additional capital by either (i) issuing securities in a public or private equity offering, (ii) licensing the rights to its injectable, topical or oral formulations of alpha interferon, or (iii) entering into collaborative or other arrangements with corporate partners. The Company has primarily financed its operations to date through private placements and public offerings of the Company's securities. This may be more difficult in the future in light of the results to date of the Company's Phase 3 studies of ALFERON N Injection in HIV- and HCV-infected patients. See "Business - ALFERON N Injection - Clinical Trials for New Indications." All per share amounts have been adjusted for a one-for-four reverse stock split that became effective as of 5:00 p.m. New York City time on March 21, 1997. Liquidity and Capital Resources As of April 10, 1998, the Company had an aggregate of $7.2 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 requires substantial funds to conduct research and development and pre-clinical and clinical testing and to market its products. For the year ended December 31, 1997, the cash utilized by the Company's operations was approximately 19.0 million of which increases in inventories and accounts and other receivables accounted for approximately $6.3 and $0.8 million, respectively. The Company had continued to increase its investment in inventories of ALFERON N Injection to meet anticipated increases in market demand, for use in the Company-sponsored Phase 3 and Phase 2 clinical trials, and so that inventory would be available in the event ALFERON N Injection was subsequently approved for the treatment of HIV or hepatitis C or both by the U.S. Food and Drug Administration. 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 determined that it has enough inventory on hand to satisfy its clinical and commercial needs for the foreseeable future and therefore discontinued production of ALFERON N Injection in April 1998. The Company currently obtains human white blood cells used in the manufacture of ALFERON N Injection from several sources, including the American Red Cross pursuant to a supply agreement dated April 1, 1997. The Company will not need more human white blood cells until such time as production of ALFERON N Injection is resumed. Under the terms of the agreement with the American Red Cross, the Company is obligated to purchase a minimum of 18,000 buffy coats of human white blood cells each month through March 1999, at a price per buffy coat of $14.50. The Company hopes to renegotiate the minimum purchase commitment, but if it is unable to do so such obligation may have a material adverse effect on the financial condition of the Company. For the years ended December 31, 1996 and 1995, the cash utilized by the Company's operations was approximately $13.3 million and $7.1 million, respectively. 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. The Company anticipates that the cash that will be utilized by the Company's operations in 1998 will be significantly less than in 1997 as a result of the discontinuance in April 1998 of manufacturing, the conclusion in 1998 of the Company's Phase 3 studies of ALFERON N Injection in HIV- and HCV-infected patients, and certain other cost reductions instituted in 1998 by the Company, offset in part by the expenses associated with the HIV and hepatitis C co-infection study that commenced in December 1997. Based on the Company's estimates of revenues, expenses, and levels of production, management believes that the cash presently available will be sufficient to enable the 15 Company to continue operations through approximately September 1998. However, actual results, especially with respect to revenues, may differ materially from such estimates, and no assurance can be given that additional funding will not be required sooner than anticipated or that such additional funding, whether from financial markets or collaborative or other arrangements with corporate partners or from other sources, will be available when needed or on terms acceptable to the Company. Insufficient funds will require the Company to further delay, scale back, or eliminate certain or all of its research and development programs or to license third parties to commercialize products or technologies that the Company would otherwise seek to develop itself. The Independent Auditors' Report dated April 2, 1998 on the Company's consolidated financial statements notes that the Company has suffered recurring losses from operations and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. During the second half of 1997, the Company received net proceeds of approximately $16.4 million from public and private stock offerings, primarily to institutional investors, of the Company's common stock. On December 24, 1996, the Company sold in a private placement (the "December 1996 Private Placement") 1,403,750 shares of Common Stock at a price of $6.50 per share. The $9,124,375 of proceeds from such sale (less expenses of $61,300 excluding the impact of shares of common stock and warrants issued to the placement agent as additional compensation) were used (i) to increase the Company's inventory of ALFERON N Injection, (ii) to fund the Company's clinical programs, and (iii) to increase the Company's marketing and sales capabilities. On May 2, 1996, the Company completed the sale of 2,000,000 shares of Common Stock for an aggregate of $16,000,000 (the "May 1996 Offering"). Of the net proceeds of $14,453,000 from the May 1996 Offering, the Company used an aggregate of $3,760,012 to pay Purdue, approximately $6,000,000 for research, product development and clinical trials of the Company's products and the balance for working capital and general corporate purposes. In August and September 1995, the Company completed the sale of 3,000,000 shares of Common Stock for an aggregate of $14,400,000 (the "August/September 1995 Offering"). Of the $12,494,000 of net proceeds from the August/September 1995 Offering, the Company used $1,870,000 to repay indebtedness to certain principal stockholders, approximately $7,000,000 for research, product development, and clinical trials of the Company's products and the balance for working capital and general corporate purposes. Between May and August 1995, three principal stockholders of the Company loaned the Company an aggregate of $1,870,000. Such loans bore interest at prime plus 2% and were repaid with a portion of the proceeds of the August/September 1995 Offering. In 1995, Amarillo and Pharma Pacific Management Pty. Ltd. agreed to purchase an aggregate of $750,000 of Common Stock at $8.00 per share, all of which cash was received during the second quarter of 1995. In connection with the Fujimoto Agreement, in the first quarter of 1995 Fujimoto purchased $1,500,000 of Common Stock at $5.80 per share (the then market price) and agreed to purchase an additional $500,000 of Common Stock on February 6, 1996 at the then market price. During January 1996, Fujimoto advised the Company that, to date, it had incurred higher than anticipated development expenses, and that it had determined that there may be greater difficulties in obtaining Japanese regulatory approval than originally anticipated. Fujimoto therefore requested that the Company renegotiate such investment agreement, and the Company met with Fujimoto to consider its request. As a result of such meeting, during the third quarter of 1996 Fujimoto purchased the additional $500,000 of Common Stock originally scheduled for purchase on February 6, 1996 and reimbursed the Company $133,000 for the cancellation of a prior commitment to purchase ALFERON N Injection. The $133,000 was recorded as other revenues in the third quarter of 1996. In March, 1997, Fujimoto and the Company terminated the Fujimoto Agreement. In 1988, the Company entered into exclusive marketing and distribution agreements with Purdue with respect to ALFERON N Injection. The Company reacquired from Purdue in 1993 and 1994 all except United States and Canadian marketing rights. In January 1994, the Company assumed sole responsibility to conduct and fund clinical trials required to obtain FDA approval for additional indications for ALFERON N Injection. Prior to these amendments, Purdue was responsible for the payment of the costs of such clinical trials. In May 1996, the Company reacquired the United States and Canadian marketing rights from Purdue for $3,313,705, which was charged to expense in the second quarter of 1996. In connection with the reacquisition of United States and Canadian marketing rights (i) Purdue agreed to provide during the first year after the reacquisition certain distribution services to the Company with respect to 16 24,000 vials of ALFERON N Injection at an aggregate cost of $240,000, (ii) Purdue agreed to provide during the second year after the reacquisition, if requested by the Company, certain distribution services to the Company with respect to up to 30,000 vials of ALFERON N Injection at a cost of $15 per vial, and (iii) the Company purchased from Purdue all vials of ALFERON N Injection and all other assets of Purdue used exclusively in its ALFERON N Injection business at an aggregate cost of $206,307. The Company believes that while the reacquisition of marketing rights from Purdue will increase the Company's future capital requirements, such reacquisition provides it with greater financial flexibility and control over the distribution of ALFERON N Injection. See "Business -- ALFERON N Injection -- Marketing and Distribution." Results of Operations Year Ended December 31, 1997 versus Year Ended December 31, 1996 For the year ended December 31, 1997 (the "1997 Period"), the Company's revenues of $2,955,802 included $2,927,585 from the sale of ALFERON N Injection and the balance from sales of research products and other revenues. Revenues of $2,091,907 for the year ended December 31, 1996 (the "1996 Period") included $1,939,595 from the sale of ALFERON N Injection and the balance from sales of research products and revenues resulting from the cancellation of a prior commitment to purchase ALFERON N Injection. There were no sales to Purdue during the 1996 Period because the Company was negotiating the reacquisition of United States and Canadian marketing rights from Purdue and Purdue had adequate inventory from which to make sales pending the consummation of such reacquisition, which took place during May 1996. Cost of goods sold and excess/idle production costs totalled $1,857,959 and $1,399,610 for the 1997 Period and 1996 Period, respectively. In light of the results to date of the Company's Phase 3 studies of ALFERON N Injection in HIV- and HCV-infected patients, the Company has written-down the carrying value of its inventory of ALFERON N Injection to its estimated net realizable value. The write-down is a result of the Company's reassessment of anticipated near-term needs for product to be sold or utilized in clinical trials (within approximately a two-year period based on historical sales levels). As a result, a provision for excess inventory was established in 1997 for $7,254,710. Substantially all of the of the inventory which was sold during the 1996 Period had previously been written-down to its then net realizable value. Excess/idle production costs in the 1996 Period represented current production costs in excess of the estimated net realizable value of the inventory produced. Research and development expenses during the 1997 Period of $11,863,987 increased by $5,463,674 from $6,400,313 for the 1996 Period, principally because the Company continued to intensify its level of clinical research on ALFERON N Injection. The Company received $234,996 and $258,984 during the 1997 Period and 1996 Period, respectively, as rental income from G.P. Strategies for the use of a portion of the Company's facilities, which offset research and development expenses. General and administrative expenses for the 1997 Period were $4,389,025 as compared to $3,404,578 (which includes non-recurring compensation expenses of approximately $768,000) for the 1996 Period. The increase in the 1997 Period was principally due to increases in marketing expenses of approximately $900,000 and, to a lesser extent, increases in payroll and other operating expenses. G.P. Strategies provides certain administrative services for which the Company paid G.P. Strategies $120,000 for each of the 1997 Period and 1996 Period. In addition, for the 1997 Period and 1996 Period, the Company reimbursed G.P. Strategies zero and $195,000, respectively, for expenses paid by G.P. Strategies on behalf of the Company. For the 1997 Period and 1996 Period, payments to G.P. Strategies for the services provided to the Company by G.P. Strategies personnel amounted to $135,000 and $154,758, respectively. For the 1997 Period and 1996 Period, receipts from G.P. Strategies for the services provided to G.P. Strategies by Company personnel amounted to zero and $351,759, respectively. The $3,313,705 cost of reacquisition of marketing rights from Purdue was charged to expense in the second quarter of 1996. Interest income for the 1997 Period was $670,199 as compared to $440,755 for the 1996 Period. The increase of $229,444 was due to more funds available for investment in the current Period. As a result of the foregoing, the Company incurred net losses of $21,739,680 and $11,985,544 for the 1997 Period and 1996 Period, respectively. Year Ended December 31, 1996 versus Year Ended December 31, 1995 For the 1996 Period, the Company's revenues of $2,091,907 included $1,939,595 from the sale of ALFERON N Injection and the balance from sales of research products and revenues resulting from the cancellation of a prior commitment to purchase ALFERON N Injection. Revenues of $1,295,662 for the year ended December 31,1995 (the "1995 Period") included $1,260,933 from the sale of ALFERON N Injection and the balance from sales of research products. Sales of ALFERON N Injection to Purdue declined from approximately $918,000 in the 1995 Period to none in the 1996 Period, offset by direct sales of ALFERON N Injection of approximately $1,810,000 by the Company in the 1996 Period after it 17 reacquired the United States and Canadian marketing rights for ALFERON N Injection from Purdue in May 1996. There were no sales to Purdue during the 1996 Period because the Company was negotiating the reacquisition of United States and Canadian marketing rights from Purdue during such Period and Purdue had adequate inventory from which to make sales pending the consummation of such reacquisition. Cost of goods sold and excess/idle production costs totaled $1,399,610 and $3,076,249 for the 1996 Period and 1995 Period, respectively. Substantially all of the inventory which was sold during the 1996 Period and the 1995 Period had previously been written down to its then net realizable value. Since the facility was operating during the 1996 Period and 1995 Period, excess/idle production costs primarily represented current production costs in excess of the estimated net realizable value of the inventory produced. The positive gross margin achieved during the 1996 Period reflects the higher selling prices of ALFERON N Injection realized as a result of the reacquisition of United States marketing rights, as well as the low carrying values of inventories written down in prior periods due to the sales prices specified in the Purdue distribution agreements. Research and development expenses during the 1996 Period of $6,400,313 increased by $2,674,083 from $3,726,230 for the 1995 Period, principally because the Company has increased its level of clinical research on ALFERON N Injection. The Company received $258,984 and $181,992 during the 1996 Period and 1995 Period, respectively, as rental income from G.P. Strategies for the use of a portion of the Company's facilities, which offset research and development expenses. General and administrative expenses for the 1996 Period were $3,404,578 as compared to $1,939,864 for the 1995 Period. The increase of $1,464,714 was principally due to non-recurring compensation expenses of approximately $768,000 ($517,000 of which was paid in shares of Common Stock) and the balance to increases in payroll and other operating expenses, including distribution expenses of $160,000 for ALFERON N Injection incurred pursuant to the distribution agreement with Purdue which was entered into in connection with the Company's reacquisition of marketing rights. G.P. Strategies provides certain administrative services for which the Company paid G.P. Strategies $120,000 for each of the 1996 Period and 1995 Period. In addition, for the 1996 Period and 1995 Period, the Company reimbursed G.P. Strategies $195,000 and $249,996, respectively, for expenses paid by G.P. Strategies on behalf of the Company. During the 1995 Period, G.P. Strategies provided to the Company, at its estimated cost, certain personnel which the Company used in its operations. For the 1995 Period, payments to G.P. Strategies for the services provided to the Company by G.P. Strategies personnel amounted to $871,149. Commencing January 1, 1996, most of the G.P. Strategies personnel who had been providing a portion of their time to the Company became employees of the Company and are now providing a portion of their time to G.P. Strategies at the Company's estimated cost. For the 1996 Period, receipts from G.P. Strategies for the services provided to G.P. Strategies by Company personnel amounted to $351,759 and payments to G.P. Strategies for the services provided to the Company by G.P. Strategies personnel amounted to $154,758. The $3,313,705 cost of reacquisition of marketing rights from Purdue was charged to expense in the second quarter of 1996. Interest income for the 1996 Period was $440,755 as compared to $155,478 for the 1995 Period. The increase of $285,277 was due to more funds available for investment in the current Period. Interest expense for the 1996 Period and 1995 Period was zero and $80,511, respectively. The decrease was due to the absence of interest bearing debt during the 1996 Period. As a result of the foregoing, the Company incurred net losses of $11,985,544 and $7,371,714 for the 1996 Period and 1995 Period, respectively. Recent Tax and Accounting Developments In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" which established standards for computing and presenting earnings per share (EPS). The Statement simplifies the standards for computing EPS, replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS on the face of the income statement. This Statement was effective for financial statements issued for periods after December 15, 1997 and required restatement of all prior-period EPS data presented. The adoption of SFAS No. 128 did not have a material impact on previously reported EPS data. The Financial Accounting Standards Board issued Accounting Standards (SFAS 130), "Reporting Comprehensive Income", in June 1997 which requires a statement of comprehensive income to be included in the financial statements for fiscal years beginning after December 15, 1997. The Company does not believe that this Statement will have an impact on the 1998 financial statements. 18 In addition, in June of 1997, the FASB issued SFAS 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS 131 requires disclosure of certain information about operating segments and about products and services, geographic areas in which a company operates, and their major customers. The Company is presently in the process of evaluating the effect that this new standard will have on disclosures in the Company's financial statements. The Company is aware of the issues associated with the programming code in existing computer systems as the millennium (year 2000) approaches. The "year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. While the Company is not heavily reliant upon computer processing of its data, the Company is utilizing internal resources to identify, correct or reprogram and test its systems for year 2000 compliance. It is anticipated that the project will be completed by the middle of 1999. Management has not yet assessed the year 2000 compliance expense and related potential effect on the Company's earnings, but the Company believes these expenses will not be material. However, there can be no assurance that the systems of other companies on which the Company's systems rely also will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems. 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, 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. 19 Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Independent Auditors' Report. . . . . . . . . . . . . . . . . . .. . . . . 21 Financial Statements: Consolidated Balance Sheets - December 31, 1997 and 1996.. . . . . . . . . 22 Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . 23 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995. . . . . . . . 24 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . 25 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 26 20 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Interferon Sciences, Inc.: We have audited the consolidated financial statements of Interferon Sciences, Inc. and subsidiary as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Interferon Sciences, Inc. and subsidiary at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG Peat Marwick LLP New York, New York April 2, 1998 21 INTERFERON SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, ------------ 1997 1996 ------ ------ ASSETS Current assets Cash and cash equivalents $ 14,059,283 $ 17,491,955 Accounts and other receivables 989,458 233,037 Inventories, net of reserve in 1997 of $7,254,710 3,332,653 4,328,598 Receivables from G.P. Strategies and affiliated companies 21,904 82,902 Prepaid expenses and other current assets 65,353 162,019 ------------- ----------- Total current assets 18,468,651 22,298,511 ------------- ----------- Property, plant and equipment, at cost Land 140,650 140,650 Buildings and improvements 7,684,269 7,611,994 Equipment 5,671,836 4,720,936 -------------- ------------ 13,496,755 12,473,580 Less accumulated depreciation (8,266,892) (7,514,747) -------------- ------------ 5,229,863 4,958,833 -------------- ------------ Patent costs, net of accumulated amortization of $240,199 and $209,542 280,962 311,619 Other assets 173,900 173,900 ------------- ------------ $ 24,153,376 $ 27,742,863 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 3,552,182 $ 1,908,381 Accrued expenses 387,554 460,651 ------------- ------------ Total current liabilities 3,939,736 2,369,032 ------------- ------------ Commitments and contingencies Stockholders' equity* Preferred stock, par value $.01 per share; authorized - 5,000,000 shares; none issued and outstanding Common stock, par value $.01 per share; authorized - 55,000,000 shares; issued and outstanding - 15,210,405 and 12,276,195 shares 152,104 122,762 Capital in excess of par value 123,946,331 107,396,184 Accumulated deficit (103,884,795) (82,145,115) ------------- ------------ Total stockholders' equity 20,213,640 25,373,831 ------------- ------------ $ 24,153,376 $ 27,742,863 ============= ============
*Stockholders' equity has been restated to reflect the effect of the one-for-four reverse stock split (see Note 11 to the Consolidated Financial Statements). The accompanying notes are an integral part of these consolidated financial statements. 22 INTERFERON SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 -------- -------- ------- Revenues ALFERON N Injection $ 2,927,585 $ 1,939,595 $ 1,260,933 Research products and other revenues 28,217 152,312 34,729 ------------ ------------ ------------ Total revenues 2,955,802 2,091,907 1,295,662 ------------ ------------ ------------ Costs and expenses Cost of goods sold and excess/idle production costs 1,857,959 1,399,610 3,076,249 Provision for excess inventory 7,254,710 Research and development (net of $234,996, $258,984 and $181,992 of rental income received from G.P. Strategies) 11,863,987 6,400,313 3,726,230 General and administrative (includes $255,000, $469,758 and $1,241,145 of payments to G.P. Strategies for management fees and reimbursements of certain salaries and operating expenses; net of $351,759 received from G.P. Strategies in 1996 for reimbursements of certain salaries) 4,389,025 3,404,578 1,939,864 Cost of reacquisition of marketing rights 3,313,705 ------------ ------------- ------------ Total costs and expenses 25,365,681 14,518,206 8,742,343 ------------ ------------- ------------ Loss from operations (22,409,879) (12,426,299) (7,446,681) Interest income 670,199 440,755 155,478 Interest expense (includes $34,889 in 1995 to G.P. Strategies) (80,511) ------------- ------------- ------------ Net loss $(21,739,680) $(11,985,544) $ (7,371,714) ============= ============= ============ Basic and diluted loss per share* $ (1.63) $ (1.20) $ (1.11) ============= ============= ============ Weighted average number of shares outstanding* 13,341,758 10,015,616 6,661,664 ============= ============= ============
*All Periods have been restated to reflect the effect of the one-for-four reverse stock split (see Note 11 to the Consolidated Financial Statements). The accompanying notes are an integral part of these consolidated financial statements. 23 INTERFERON SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Capital in Total Common Stock excess of Accumulated Stockholders' Shares Amount par value deficit equity ------------------ ---------- ------------ ------------- Balance at December 31, 1994 4,877,323* $ 48,773* $ 65,718,563* $(62,787,857) $ 2,979,479 Net proceeds from public sale of common stock 3,000,000 30,000 12,464,035 12,494,035 Termination of commitment to repurchase common stock from Purdue Frederick 154,998 1,550 2,478,426 2,479,976 Net proceeds from sale of common stock to Fujimoto Diagnostics, Inc. 258,621 2,586 1,479,914 1,482,500 Net proceeds from sale of common stock to Amarillo Bioscience, Inc. and its licensee 93,750 938 741,562 742,500 Issuance of common stock in exchange for warrants to purchase common stock 225,000 2,250 (2,250) Proceeds from exercise of common stock options 2,500 25 19,975 20,000 Net loss ( 7,371,714) (7,371,714) -------------------------------------------------------------------------- Balance at December 31, 1995 8,612,192 86,122 82,900,225 (70,159,571) 12,826,776 Net proceeds from public and private sale of common stock 3,525,816 35,258 23,480,817 23,516,075 Net proceeds from sale of common stock to Fujimoto Diagnostics, Inc. 71,806 718 499,282 500,000 Common stock issued as compensation 66,381 664 515,860 516,524 Net loss (11,985,544) (11,985,544) -------------------------------------------------------------------------- Balance at December 31, 1996 12,276,195 122,762 107,396,184 (82,145,115) 25,373,831 Net proceeds from sale of common stock 2,912,092 29,121 16,406,599 16,435,720 Purchase of fractional shares of common stock resulting from reverse stock split (106) (1) (632) (633) Common stock issued under Company 401(k) plan 2,415 24 22,943 22,967 Proceeds from exercise of common stock options 19,809 198 121,237 121,435 Net loss (21,739,680) (21,739,680) -------------------------------------------------------------------------- Balance at December 31, 1997 15,210,405 $ 152,104 $ 123,946,331 $(103,884,795) $ 20,213,640 - --------------- *All Periods have been restated to reflect the effect of the one-for-four reverse stock split (see Note 11 to the Consolidated Financial Statements). The accompanying notes are an integral part of these consolidated financial statements
24 INTERFERON SCIENCES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 -------- -------- -------- Cash flows from operations: Net loss $(21,739,680) $(11,985,544) $(7,371,714) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 782,802 785,185 777,276 Compensation and benefits paid with common stock 22,967 516,524 Provision for excess inventory 7,254,710 Reduction of other assets 150,000 Change in operating assets and liabilities: Receivables from G.P. Strategies and affiliated companies 60,998 (55,691) (7,210) Inventories (6,258,765) (3,512,620) 213,180 Consignment inventory 220,410 Accounts and other receivables (756,421) (185,686) (561,805) Prepaid expenses and other current assets 96,666 (86,019) (20,779) Accounts payable and accrued expenses 1,570,704 1,243,226 (503,219) --------------- ------------ ------------- Net cash used for operations (18,966,019) (13,280,625) (7,103,861) --------------- ------------ ------------- Cash flows from investing activities: Additions to property, plant and equipment ( 1,023,175) (579,404) (68,107) Reductions (additions) to intangible and other assets 114,801 (132,954) --------------- ------------ ------------- Net cash used for investing activities (1,023,175) (464,603) (201,061) --------------- ------------ ------------- Cash flows from financing activities: Net proceeds from sale of common stock 16,435,720 24,016,075 14,719,035 Decrease in advances from G.P. Strategies (134,347) Reduction of long-term debt (409,275) Loans from principal stockholders 1,870,000 Repayment of loans from principal stockholders (1,870,000) Proceeds from exercise of common stock options 121,435 20,000 Purchase of fractional shares of common stock (633) --------------- ------------ ------------- Net cash provided by financing activities 16,556,522 24,016,075 14,195,413 --------------- ------------ ------------- Net (decrease) increase in cash and cash equivalents (3,432,672) 10,270,847 6,890,491 Cash and cash equivalents at beginning of year 17,491,955 7,221,108 330,617 -------------- ------------ ------------- Cash and cash equivalents at end of year $ 14,059,283 $17,491,955 $ 7,221,108 ============== ============ ============= Cash paid for interest expense $ $ $ 79,166 ============== ============ =============
The accompanying notes are an integral part of these consolidated financial statements 25 INTERFERON SCIENCES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Organization, Business and Transactions with G.P. Strategies Corporation 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(R) N Injection (Interferon Alfa-n3) product has been approved by the United States Food and Drug Administration ("FDA") for the treatment of certain types of genital warts and is being studied for potential use in the treatment of HIV, hepatitis C, and other indications. The Company also is studying ALFERON N Gel and ALFERON LDO(R), the Company's topical and oral formulations of Natural Alpha interferon, for the potential treatment of viral and immune system diseases. (See Note 6). The Company is a party to a management agreement with G.P. Strategies Corporation("G.P. Strategies"), formerly National Patent Development Corporation, pursuant to which certain legal, financial and administrative services have been provided by employees of G.P. Strategies. The fee for such services in 1997, 1996 and 1995 was $120,000 annually. In addition, during such years G.P. Strategies provided to the Company, at its estimated cost, certain personnel and services which the Company used in its operations. For the years ended December 31, 1997, 1996 and 1995, such charges amounted to $135,000, $349,758, and $1,121,145, respectively. During the year ended December 31, 1996, the Company provided certain services to G.P. Strategies at the Company's estimated cost of $351,759. The Company owns the buildings which contain its offices and laboratories and until March 1998 leased out a portion of the buildings to G.P. Strategies. Total occupancy costs for the years ended December 31, 1997, 1996 and 1995 were approximately $1,039,000, $991,000 and $729,000, respectively. G.P. Strategies paid to the Company as rent G.P. Strategies's proportionate share of such occupancy costs (based on both square feet occupied and number of personnel), which amounted to $234,996, $258,984 and $181,992, respectively. See Note 15 for information with respect to royalty obligations to G.P. Strategies. Note 2. Summary of Significant Accounting Policies Principles of consolidation -- The financial statements include the operations of the Company and Interferon Sciences Development Corporation ("ISD"), its wholly owned subsidiary. Statements of cash flows -- For purposes of the statements of cash flows, the Company considers all highly liquid instruments with maturities of three months or less from purchase date to be cash equivalents. Property, plant and equipment -- Property, plant and equipment are carried at cost. Major additions and betterments are capitalized while maintenance and repairs which do not extend the lives of the assets are expensed currently. Depreciation -- The Company provides for depreciation and amortization of plant and equipment following the straight-line method over the estimated useful lives of such assets as follows: Estimated Class of Assets Useful Lives --------------- ------------
Buildings and Improvements 15 to 30 years Equipment 5 to 10 years
Intangible assets -- The Company capitalizes costs to obtain and maintain patents and licenses. Patent costs are amortized over 17 years and license costs are amortized over 5 years, each on a straight-line basis. To the extent a patent is determined to be worthless, the related capitalized cost is immediately expensed. Revenue recognition -- Sales are recorded upon shipment of product. 26 Collaborative agreement research and development revenues and costs -- The costs of performing research and development are reported when incurred. Generally, the Company matches its collaborative research and development revenues in the same accounting periods in which the related research costs are incurred. However, when the revenues are exhausted, the Company has the option to continue the research activities at its own expense. Inventories -- Inventories, consisting of raw materials, work in process and finished goods, are stated at the lower of cost or market on a FIFO basis. Inventories, if any, which are expected to become obsolete before sale or use in research are written off. 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 exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Stock option plan -- Prior to January 1, 1996, the Company accounted for its stock option plan 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 expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Reverse stock split -- As a result of a one-for-four reverse stock split effective as of 5:00 PM, New York City time on March 21, 1997, all shares and per share information have been restated. Loss per share - The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", which established standards for computing and presenting earnings per share (EPS). The statement simplifies the standards for computing EPS, replaces the presentation of primary EPS with a presentation of basic EPS and requires a dual presentation of basic and diluted EPS on the face of the income statement. Basic 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, 1997, 1996 and 1995, the Company's options and warrants are anti-dilutive and therefore basic and diluted EPS are the same. Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 3. Operations and Liquidity The Company has experienced significant operating losses since its inception in 1980. As of December 31, 1997, the Company had an accumulated deficit of approximately $103.9 million. For the years ended December 31, 1997, 1996 and 1995, the Company had losses from operations of approximately $22.4 million (including a provision for excess inventory of $7.3 million), $12.4 million and $7.4 million, respectively. Although the Company received FDA approval in October 1989 to market ALFERON N Injection in the United States for the treatment of certain genital warts 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. 27 The Company has limited financial resources as of December 31, 1997 with which to support future operating activities and to satisfy its financial obligations as they become payable. Consequently, management is continuing to actively pursue raising additional capital by either (i) issuing securities in a public or private equity offering, (ii) licensing the rights to its injectable, topical or oral formulations of alpha interferon, or (iii) entering into collaborative or other arrangements with corporate partners. 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. In addition, the Company hopes to renegotiate the minimum purchase commitment disclosed in Note 15, but if it is unable to do so such obligation may have a material adverse effect on the financial condition of the Company. Based on the Company's estimates of revenues, expenses and levels of production, management believes that the cash available will be sufficient to enable the Company to continue operations through approximately September 1998. However, actual results, especially with respect to revenues, may differ materially from such estimates, and no assurance can be given that additional funding will not be required sooner than anticipated or that such additional funding, whether from financial markets or collaborative or other arrangements with corporate partners or from other sources, will be available when needed or on terms acceptable to the Company. Note 4. Agreements with Hoffmann-LaRoche F. Hoffmann-LaRoche Ltd. and Hoffmann-LaRoche, Inc. (collectively, "Hoffmann") have been issued patents covering human alpha interferon in many countries throughout the world. As of March 31, 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 replaced a 1988 non-exclusive license which, as amended, granted the Company the right to make, use, and sell in the United States, without a potential patent infringement claim from Hoffmann, injectable formulations of Natural Alpha Interferon for the treatment of genital warts or patients with diseases refractory to recombinant interferon therapy. The 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. When the Company received FDA approval for ALFERON N Injection for the treatment of genital warts in 1989, the Company became obligated to issue shares of its Common Stock to Hoffmann as a prepaid royalty against future net sales by the Company. Under the terms of the Hoffmann Agreement, certain payments previously made to Hoffmann (including a portion of the value of the Common Stock previously issued to Hoffmann) are available as offsets against 50% of the Company's future royalty obligations to Hoffmann until the Company obtains an FDA approval to market ALFERON N Injection for an additional indication. As of December 31, 1997, based upon the market value of the Company's common stock, the Company had approximately $698,200 of credits available to offset its future royalty obligations to Hoffmann, which for financial statement purposes, were expensed in previous periods. For the years ended December 31, 1997, 1996 and 1995, the Company applied $117,102, $77,584 and $50,437 respectively, of the prepayments previously made to Hoffmann against the amounts due. Note 5. Agreements with Purdue In 1988, the Company entered into exclusive marketing and distribution agreements with affiliates of The Purdue Frederick Company (collectively, "Purdue") with respect to ALFERON N Injection. The Company reacquired from Purdue in 1993 and 1994 all marketing rights except in the United States and Canada. In May 1996, the Company reacquired the United States and Canadian marketing rights from Purdue for $3,313,705, which was charged to expense in the second quarter of 1996. 28 In connection with the reacquisition of United States and Canadian marketing rights (i) Purdue agreed to provide during the first year after the reacquisition certain distribution services to the Company with respect to 24,000 vials of ALFERON N Injection at an aggregate cost of $240,000, (ii) Purdue agreed to provide during the second year after the reacquisition, if requested by the Company, certain distribution services to the Company with respect to up to 30,000 vials of ALFERON N Injection at a cost of $15 per vial, and (iii) the Company purchased from Purdue all vials of ALFERON N Injection and all other assets of Purdue used exclusively in its ALFERON N Injection business at an aggregate cost of $206,307. Note 6. Research and Development Agreement with Interferon Sciences Research Partners, Ltd. During January 1984, the Company organized ISD to act as the sole general partner of Interferon Sciences Research Partners, Ltd., a New Jersey limited partnership (the "Partnership"). The Company and the Partnership entered into a development contract whereby the Company received substantially all of the net proceeds ($4,414,475)of the Partnership's public offering of limited partnership interests. The Company used the proceeds to perform research, development and clinical testing on behalf of the Partnership for the development of ALFERON Gel containing recombinant interferon. In connection with the formation of the Partnership, ISD agreed to make additional cash contributions for purposes of continuing development of ALFERON Gel if the Partnership exhausted its funds prior to development of such product. ISD is wholly dependent upon the Company for capital to fund such commitment. The Partnership exhausted its funds during 1986, and the Company contributed a total of $1,997,000 during the period from 1986 to 1990, for the continued development of ALFERON Gel. During May 1987, the Company filed a Product License Application with the FDA for approval to market ALFERON Gel. At a meeting with the FDA in February, 1990, the FDA indicated that additional process development and clinical trials would be necessary prior to approval of ALFERON Gel. The Company believed, at that time, that the costs to complete the required process development and clinical trials would be substantial, and there could be no assurance that the clinical trials would be successful. As a result of the above events, in March 1992, the Company withdrew its FDA Product License Application for ALFERON Gel containing recombinant interferon. In place of single species recombinant interferon, previously ALFERON Gel's active ingredient, the Company commenced, in 1992, further development of ALFERON Gel using the Company's natural source multi-species alpha interferon ("ALFERON N Gel"). Assuming successful development and commercial exploitation of ALFERON N Gel, the Company may be obligated to pay the Partnership royalties equal to 4% of the Company's net sales of ALFERON N Gel and 15% of revenues received from sublicensing ALFERON N Gel. Note 7. Agreement with Fujimoto Diagnostics, Inc. In the first quarter of 1995, the Company entered into an agreement with Fujimoto Diagnostics, Inc. ("Fujimoto"), a pharmaceutical company located in Osaka, Japan, for the commercialization of the Company's ALFERON N Injection and ALFERON N Gel in Japan. In connection with the agreement, Fujimoto purchased $1,500,000 of Common Stock at $5.80 per share (the then market price), all of which cash was received during the first quarter of 1995, and agreed to purchase an additional $500,000 of Common Stock on February 6, 1996 at the then market price. During January 1996, Fujimoto advised the Company that, to date, it had incurred higher than anticipated development expenses, and that it had determined that there may be greater difficulties in obtaining Japanese regulatory approval than originally anticipated. Fujimoto therefore requested that the Company renegotiate such investment agreement, and the Company met with Fujimoto to consider its request. As a result of such meeting, during the third quarter of 1996 Fujimoto purchased the additional $500,000 of Common Stock originally scheduled for purchase on February 6, 1996 and reimbursed the Company $133,000 for the cancellation of a prior commitment to purchase ALFERON N Injection. The $133,000 was recorded as other revenues in the third quarter of 1996. In March, 1997, Fujimoto and the Company terminated the Fujimoto Agreement. Note 8. 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 29 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. Cell Pharm is required to maintain an active and efficient sales and customer service organization with adequately trained personnel for marketing and selling ALFERON N Injection. Cell Pharm represents to the Company that it has obtained, and Cell Pharm agrees to maintain in effect, all registrations, approvals, and consents from governments in Germany as are necessary to permit or facilitate the lawful handling, promotion, and resale of ALFERON N Injection in Germany. Cell Pharm has informed the Company that it intends to market 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 9. Inventories Inventories, consisting of material, labor and overhead, are classified as follows:
December 31, 1997 1996 Finished goods................... $ 3,720,000 $ 2,563,755 Work in process................. 5,621,714 1,106,214 Raw materials....................... 1,245,649 658,629 Less reserve for excess inventory (7,254,710) ------------ --------------- $ 3,332,653 $ 4,328,598 ============ ===============
Finished goods inventory consists of vials of ALFERON N Injection, available for commercial and clinical use either immediately or upon final release by Quality Assurance. In light of the results to date of the Company's Phase 3 studies of ALFERON N Injection in HIV- and HCV-infected patients, the Company has written- down the carrying value of its inventory of ALFERON N Injection to its estimated net realizable value. The write-down is a result of the Company's reassessment of anticipated near-term needs for product to be sold or utilized in clinical trials (within approximately a two-year period based on historical sales levels). As a result, inventories at December 31, 1997 reflect a reserve for excess inventory of $7,254,710. Also, during the quarter ending March 31, 1998, the Company will record an additional write-off of approximately $3,000,000 of inventories that were produced during the three months ended March 31, 1998. Write-downs of inventories at December 31, 1995 to their estimated net realizable values are included in cost of goods sold and excess/idle production costs for 1995. Note 10. Income Taxes On May 30, 1991, G.P. Strategies exchanged the Company's Class B Common Stock for an equal number of shares of the Company's Common Stock. As a result, on that date the Company ceased to be included in G.P. Strategies's consolidated Federal income tax return. For Periods subsequent to May 30, 1991, the Company files its own consolidated Federal income tax return, including its wholly-owned subsidiary. As a result of the loss allocation rules contained in the Federal income tax consolidated return regulations, approximately $6,009,000 of net operating loss carry-forwards, which expire in 2001-2006, are available to the Company upon ceasing to be a member of G.P. Strategies's consolidated return group. In addition, the Company has net operating loss carry-forwards from tax years prior to joining the G.P. Strategies consolidated return group of $742,000, which expire December 31, 1998. Further, the Company has net operating loss carry-forwards for periods subsequent to May 31, 1991, and through December 31, 1996 of approximately $47,984,000, which expire in 2006-2011. For the year ended December 31, 1997, the Company had a tax net operating loss of $14,317,000, which expires in 2012. At December 31, 1997, the Company has total net operating loss carry-forwards of approximately $69,052,000. The loss carry-forwards expire at various dates from 1998 through 2012, as reflected above. 30 The Company believes that the events culminating with the closing of its Common Stock Offering on August 22, 1995 resulted in an "ownership change" under Internal Revenue Code, Section 382, with respect to its stock. The Company believes that as a result of the ownership change, the future utility of its pre-change net operating losses are limited to an annual amount of approximately $3,230,000. In addition, the Company has approximately $90,000 of investment tax credit carry-forwards, which expire in 1998-2000 and $692,000 of research and development credit carry-forwards, which expire in 1998-2002 that are, in accordance with Internal Revenue Code, Section 383, subject to the annual limitation under Internal Revenue Code Section 382. The Company further believes that the events culminating with the closing of its private placement of common stock on August 18, 1997, may give rise to an "ownership change" under Internal Revenue Code, Section 382, with respect to its stock. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The Company has determined, based on the Company's history of annual net losses, that a full valuation allowance is appropriate. The Company has, as of December 31, 1997, deferred tax assets of approximately $26,723,000, deferred tax liabilities of approximately $68,000 and a valuation allowance of approximately $26,655,000. At January 1, 1997, the valuation allowance was $20,051,000. The increase to the valuation allowance of $6,604,000 is due primarily to net operating losses. The tax effects that give rise to these deferred tax assets and liabilities consist of the following as of December 31, 1997 and 1996:
Deferred tax assets 1997 1996 - ------------------- ---- ---- Net operating loss carry-forwards $ 23,474,000 $ 19,084,000 Tax credit carry-forwards 782,000 1,089,000 Inventory 2,467,000 ----------- ----------- 26,723,000 20,173,000 Deferred tax liabilities Property and equipment, principally due to differences in depreciation (68,000) (122,000) ------------ ------------ Net deferred tax asset 26,655,000 20,051,000 Valuation allowance (26,655,000) (20,051,000) ------------ ------------ Net deferred tax asset after valuation allowance $ --- $ --- ============ ============
Note 11. Common Stock, Stock Options, Warrants and Other Shares Reserved On March 21, 1997, the Company's stockholders approved a proposal to amend the Company's Restated Certificate of Incorporation to effect a one-for-four reverse stock split of the Company's Common Stock. The reverse stock split became effective as of 5:00 PM, New York City time, on March 21, 1997 (the "Effective Time"). As of March 21, 1997, there were 49,104,779 shares of Common Stock outstanding and after the Effective Time there were 12,276,089 shares of new Common Stock outstanding. The par value of the Common Stock did not change as a result of the reverse stock split. Cash was paid in lieu of fractional shares based on the last reported sale price of the new Common Stock on the first trading date after the Effective Time. The balance sheet at December 31, 1996 as well as the loss per share and average outstanding shares for the years ended December 31, 1996 and 1995, have been restated to reflect the reverse split as if it had occurred on January 1, 1995. In 1981, the Company adopted the 1981 Stock Option Plan (the "Plan"), authorizing a committee of the Board of Directors to grant options, over a 10-year Period, to purchase not more than 125,000 shares of Common Stock to officers, directors, employees and consultants of the Company. Since 1981, the Plan has been amended several times to increase the number of shares issuable under the Plan and to extend the Plan until 2001. Pursuant to the terms of the Plan, no option may be exercised after 10 years from the date of grant. The exercise price for any option issued may not be less than 85 percent of the market price of the common stock on the date of issuance. 31 At December 31, 1997, the per share weighted-average fair value of stock options granted during 1997, 1996 and 1995 was $ 4.41, $3.44 and $5.16 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1997 - expected dividend yield of 0.0%, risk-free interest rate of 6.3%, expected volatility of 85.5% and an expected life of 4.4 years; 1996 - expected dividend yield of 0.0%, risk-free interest rate of 5.8%, expected volatility of 77.2% and an expected life of 3.3 years; 1995 - expected dividend yield of 0.0%, risk-free interest rate of 5.9%, expected volatility of 77.2% and an expected life of 5 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 financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below:
1997 1996 1995 ---- ---- ---- Net loss as reported $(21,739,680) $(11,985,544) $ (7,371,714) pro forma (24,255,223) (13,251,799) (7,519,328) Basic and diluted loss per share as reported $ (1.63) $ (1.20) $ (1.11) pro forma (1.82) (1.32) (1.13)
Pro forma net loss reflects only options granted in 1997, 1996 and 1995. In addition, compensation cost is reflected over the options vesting Period. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above. 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, 1994 718,588 $8.23 Granted 142,500 7.76 Exercised (2,500) 8.00 Forfeited (54,500) 8.08 Expired (42,750) 9.00 -------- Balance at December 31, 1995 761,338 8.11 Granted 364,325 6.08 Exercised --- --- Forfeited (1,275) 7.90 Expired (324,325) 8.10 -------- Balance at December 31, 1996 800,063 7.19 Granted 588,666 6.65 Exercised (14,543) 5.88 Forfeited (24,708) 6.12 Expired (287,641) 8.27 ---------- Balance as December 31, 1997 1,061,837 $6.64 ----------
At December 31, 1997, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $4.36 - $11.00 and 3.02 years, respectively. At December 31, 1997, 1996 and 1995, the number of options exercisable was 768,791, 677,113 and 615,738, respectively, and the weighted-average exercise price of those options was $7.04, $7.12 and $8.17, respectively. 32 Information regarding all Options and Warrants Changes in options and warrants outstanding during the years ended December 31, 1997, 1996 and 1995, options and warrants exercisable and shares reserved for issuance at December 31, 1997, 1996 and 1995 are as follows:
Price Range Number of Per Share Shares ----------- --------- Outstanding at December 31, 1994 $ 8.00 - $ 26.00 2,070,088 Granted 6.24 - 16.80 480,068 Exercised 8.00 - (2,500) Terminated 8.00 - 26.00 (1,227,250) --------------------- ----------- Outstanding at December 31, 1995 6.24 - 16.80 1,320,406 Granted 4.36 - 9.60 564,325 Exercised -- Terminated 7.24 - 9.00 (408,471) --------------------- ----------- Outstanding at December 31, 1996 4.36 - 16.80 1,476,260 Granted 5.00 - 9.18 863,095 Exercised 4.36 - 8.00 (19,809) Terminated 5.00 - 9.40 (343,599) --------------------- ----------- Outstanding at December 31, 1997 4.36 - 15.58 1,975,947 Exercisable December 31, 1995 6.24 - 16.80 893,973 ========= December 31, 1996 4.36 - 16.80 1,153,310 ========= December 31, 1997 4.36 - 15.58 1,548,082 ========= Shares reserved for issuance December 31, 1995 1,347,899 ========= December 31, 1996 1,465,028 ========= December 31, 1997 2,129,396 =========
Options and warrants outstanding and exercisable, and shares reserved for issuance at December 31, 1994, include 5,000 shares under a warrant agreement with U.S. Capital Corporation. Such warrants expired unexercised in 1995. Options and warrants outstanding and exercisable, and shares reserved for issuance at December 31, 1995, include 82,871 shares, under warrant agreements with the underwriter of the October 1991 public offering of Common Stock. Such warrants expired unexercised in 1996. Options and warrants outstanding and exercisable, and shares reserved for issuance at December 31, 1996 and 1995, include 31,250 shares under a warrant agreement with Strategic Growth International, the Company's former outside public relations advisor. Such warrants expired unexercised in 1997. Options and warrants outstanding and exercisable, and shares reserved for issuance at December 31, 1997, include 166,409 shares and at December 31, 1996 and 1995, include 148,865 shares and at December 31, 1994, include 1,250,000 shares under a warrant agreement with certain parties. During 1995, these parties agreed to exchange 562,500 Class A Warrants and 562,500 Class B Warrants for 225,000 shares of Common Stock. Options and Warrants outstanding and exercisable, and shares reserved for issuance at December 31, 1997, 1996 and 1995, include 15,250 shares under a warrant agreement issued as a commission in connection with the sale of shares of Common Stock to an institutional investor. Options and warrants outstanding and exercisable, and shares reserved for issuance at December 31, 1997, include 275,567 shares and at December 31, 1996 and 1995, include 280,833 shares under warrant agreements with the underwriter of the August/September 1995 Offering. 33 Options and warrants outstanding and shares reserved for issuance at December 31, 1997, and options and warrants exercisable at December 31, 1997 and 1996, include 322,065 shares and 200,000 shares, respectively, under warrant agreements with the underwriter of the May and December 1996 Offerings. Options and warrants outstanding and shares reserved for issuance at December 31, 1997, include 134,820 shares under warrant agreements with the underwriters of the 1997 Offerings. Shares reserved for issuance at December 31, 1997 include 153,449 shares under the common stock compensation plan. (See Note 13). Note 12. Pension and Investment Plans Effective March 1, 1992, G.P. Strategies adopted the 1992 401(k) Savings Plan (the "Savings Plan"). Effective December 31, 1991, the Plan participants became eligible to participate in G.P. Strategies's Savings Plan. G.P. Strategies's Savings Plan is for employees who have completed one year of service. The Savings Plan permits pre-tax contributions to the Savings Plan by participants pursuant to Section 401(k) of the Internal Revenue Code of 2% to 6% of base compensation. The Company matches 40% of the participants' eligible contributions based on a formula set forth in the Savings Plan. On October 1, 1997, the Savings Plan was transferred into a new Savings Plan (the "New Savings Plan"). Under the New Savings Plan, participants may contribute up to 15% of base compensation and the Company will match up to the 6% level of the participants eligible contributions. The New Savings Plan increased the Company match to 100% of the participant's eligible contributions by matching 40% in cash and 60% in the Company's common stock. For 1997, 1996 and 1995, the Company's contribution to the Savings Plan was $126,000, $79,000 and $49,000, respectively. Participants are fully vested in their contributions and may withdraw such contributions at time of employment termination, or at age 59 1/2, or earlier in the event of financial hardship. Amounts otherwise are paid at retirement or in the event of death or disability. Employer contributions vest at a rate of 20% per year. The New Savings Plan is administered by a trustee appointed by the Board of Directors of the Company and all contributions are held by the trustee and invested at the participants' direction in various mutual funds. The Company does not provide any post-retirement benefits, other than pensions, to its employees. Note 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 will receive, as additional compensation, a pre-determined amount of the Company's common stock in three equal installments on October 1, 1998, 1999, and 2000, provided that the key employee remain in the employ of the Company at each such installment date. The total number of shares reserved for issuance under the Stock Compensation Plan is 153,449 and the total number of key employees participating in this plan is 21. Profit Sharing Plan Effective June 6, 1988, the Company adopted the 1988 Profit Sharing Plan (the "Profit Sharing Plan") providing key employees and consultants with an opportunity to share in the profits of the Company. The Profit Sharing Plan is administered by the Company's Compensation Committee. Pursuant to the terms of the Profit Sharing Plan, the Compensation Committee, in its sole discretion, based upon the significance of the employee's contributions to the operations of the Company, selects certain key employees and consultants of the Company who are entitled to participate in the Profit Sharing Plan and determines the extent of their participation. The amount of the Company's profits available for distribution to the participants (the "Distribution Pool") is the lesser of (a) 10% of the Company's income before taxes and profit sharing expense and (b) an amount equal to 100% of the base salary for such year of all the participants in the Profit Sharing Plan. A number of key employees are eligible to participate in the Profit Sharing Plan. 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. 34 Note 14. Non-cash Financing and Investing Activities During the years ended December 31, 1997, 1996 and 1995 the following non-cash financing and investing activities occurred: 1997: The Company issued 2,415 shares valued at $22,967 of Common Stock as part of the Company 401(K) Plan. The Company issued 215,710 shares of Common Stock for services provided by the underwriter of the 1997 stock offerings. 1996: The Company issued 66,381 shares, valued at $516,524, of Common Stock as compensation. The Company issued 122,066 shares of Common Stock for services provided by the underwriter of the December 24, 1996 private placement. 1995: Offset of receivables in settlement of obligation to repurchase Common Stock for $550,000 and forgiveness of balance due. By agreement, the Company terminated a commitment to repurchase 154,998 shares, valued at $2,479,976, of Common Stock from Purdue. Note 15. Commitments and Contingencies The Company currently obtains human white blood cells used in the manufacture of ALFERON N Injection from several sources, including the American Red Cross pursuant to a supply agreement dated April 1, 1997. The Company will not need more human white blood cells until such time as production of ALFERON N INJECTION is resumed. Under the terms of the agreement with the American Red Cross, the Company is obligated to purchase a minimum of 18,000 buffy coats of human white blood cells each month through March 1999, at a price per buffy coat of $14.50. The Company hopes to renegotiate the minimum purchase commitment, but if it is unable to do so such obligation may have a material adverse effect on the financial condition of the Company. As consideration for the transfer to the Company of certain licenses, rights and assets upon the formation of the Company by G.P. Strategies, the Company agreed to pay G.P. 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. See Notes 4 and 6 for information relating to royalties payable to Hoffmann and the Partnership, respectively. In October 1989, the Company entered into a license agreement with a non-affiliated party for co-exclusive rights to certain low dose oral formulations of interferon. The Company will be required to pay a royalty of 10% of net sales, as defined, of products produced and marketed by the Company that may be developed under the license agreement. Note 16. Fair Value of Financial Instruments The carrying values of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair market values, because of short maturities or interest rates that approximate current rates. Note 17. Subsequent Events 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). 35 In April 1998, the FDA advised the Company that, although ALFERON N Injection demonstrated biological activity in the Phase 3 clinical trial in HIV- infected patients, the results were insufficient for filing for approval for this additional indication for ALFERON N Injection. In light of the results to date of the Company's Phase 3 studies of ALFERON N Injection in HIV- and HCV- infected patients, the Company has written-down the carrying value of its inventory of ALFERON N Injection to its estimated net realizable value. The write-down is a result of the Company's reassessment of anticipated near-term needs for product to be sold or utilized in clinical trials(within approximately a two-year period based on historical sales levels). As a result, inventories at December 31, 1997 reflect a reserve for excess inventory of $7,254,710. Also, during the quarter ending March 31, 1998, the Company will record an additional write-off of approximately $3,000,000 of inventories that were produced during the three months ended March 31, 1998. Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure None 36 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. 37 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 Auditor's Report ..................................... 22 Financial Statements: Consolidated Balance Sheets - December 31, 1997 and 1996 ...... 23 Consolidated Statements of Operations - Years ended December 31, 1997, 1996, and 1995 ............................. 24 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995 ......... 25 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996, and 1995 ............................. 26 Notes to Consolidated Financial Statements .................... 27 (a)(2) Schedules have been omitted because they are not required or are not applicable, or the required information has been included in the financial statements or the notes thereto. (a)(3) See accompanying Index to Exhibits (b) There were no reports on Form 8-K filed by the Registrant during the last quarter of the Period covered by this report. 38 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 15, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Samuel H. Ronel Chairman of the Board April 15, 1998 - ------------------- Samuel H. Ronel, Ph.D. /s/ Lawrence M. Gordon Chief Executive Officer and Director - ---------------------- (Principal Executive Officer) April 15, 1998 Lawrence M. Gordon /s/ Stanley G. Schutzbank President and Director April 15, 1998 - ------------------------- Stanley G Schutzbank, Ph.D. ___________________ Director April 15, 1998 Leon Botstein, Ph.D. /s/ Jerome I. Feldman Director April 15, 1998 - --------------------- Jerome I. Feldman _____________________ Director April 15, 1998 Sheldon L. Glashow /s/ Scott N. Greenberg Director April 15, 1998 - ---------------------- Scott N. Greenberg ____________________ Director April 15, 1998 Roald Hoffmann, Ph.D. /s/ Martin M. Pollak Director April 15, 1998 - -------------------- Martin M. Pollak /s/ Donald W. Anderson Controller (Principal April 15, 1998 - ---------------------- Accounting and Financial Donald W. Anderson Officer) The foregoing constitute a majority of the members of the Board of Directors. 39 INDEX TO EXHIBITS Exhibit Number 3.1 - Restated Certificate of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3B of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988. 3.2 - Certificate of Amendment of Restated Certificate of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.4 of Registration Statement No. 33-40902. 3.3 - Certificate of Amendment of Restated Certificate of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.2 of Registration Statement No. 33-40902. 3.4 - Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.4 of Registration Statement No. 33-00845. 3.5 - Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant. 3.6 - By-Laws of the Registrant, as amended. Incorporated herein by reference to Exhibit 3.2 of Registration Statement No. 2-7117. 4.1 - Form of Underwriter's Purchase Option issued in connection with the August/September 1995 Offering. Incorporated herein by reference to Exhibit 4.1 of Registration Statement No. 33-59479. 4.2 - Form of Underwriter's Purchase Option issued in connection with the May 1996 Offering. Incorporated herein by reference to Exhibit 4.4 of Registration Statement No. 333-00845. 4.3 - Form of Purchase Option issued in connection with the December 1996 Private Placement. 10.1 - Transfer and License Agreement among National Patent, Hydron Laboratories, Inc. and the Registrant dated as of January 1, 1981. Incorporated herein by reference to Exhibit 10.8 of the Registrant's Registration Statement No. 2-71117. 10.2 - Management Services Agreement dated January 1, 1981 between the Registrant and National Patent. Incorporated herein by reference to Exhibit 10.9 of the Registration Statement No. 2-71117. 10.3 - Registrant's 1981 Stock Option Plan, as amended. Incorporated herein by reference to Exhibit 10.3 to Registration Statement No. 33-59479. 10.4 - Cross License Agreement dated October 26, 1984 between the Registrant and the Partnership. Incorporated herein by reference to Exhibit 10V of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1984. 10.5 - Supply Agreement dated September 25, 1992 between the Registrant and Celltech Limited. Incorporated herein by reference to Exhibit 10.27 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. 10.6 - 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. 10.7 - 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. 10.8 - Distribution Agreement dated June 14, 1991 between Purdue Pharma L.P. and the Registrant. Incorporated herein by reference to Exhibit 10.26 of Registration Statement No. 33-40902. 10.9 - Amended and Restated Distribution Agreement dated June 14, 1991 between Mundipharma Pharmaceutical Corporation and the Registrant. Incorporated herein by reference to Exhibit 10.27 of Registration Statement No. 33-40902. 10.10 - G.P. 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. 10.11 - Amendment dated January 26, 1994 to the Distribution Agreement dated June 14, 1991 between the Registrant and Purdue Pharma L.P. Incorporated herein by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the Year ended December 31, 1993. 40 10.12 - Amendment dated January 26, 1994 to the Amended and Restated Distribution Agreement dated June 14, 1991 between the Registrant and Mundipharma Pharmaceutical Company. Incorporated herein by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the Year ended December 31, 1993. 10.13 - Amended and Restated RS Agreement dated January 26, 1994 among the Registrant, Mundipharma Pharmaceutical Company and Purdue Pharma L.P. Incorporated herein by reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the Year ended December 31, 1993. 10.14 - Agreement dated January 26, 1994 between the Registrant and The Purdue Frederick Company. Incorporated herein by reference to exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the Year ended December 31, 1993. 10.15 - Agreement dated January 26, 1994 among the Registrant, Banela Corporation and Runham Corporation. Incorporated herein by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the Year ended December 31, 1993. 10.16 - Purchase Agreement dated as of May 28, 1993 between the Registrant and David Blech. Incorporated herein by reference to Exhibit 10.26 to Registration Statement No. 33-78952. 10.17 - Form of Warrant to be issued pursuant to the Purchase Agreement. Incorporated herein by reference to Exhibit 10.28 to Registration Statement No. 33-78952. 10.18 - 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. 10.19 - 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. 10.20 - 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. 10.21- Purchase and Exchange Agreement dated as of December 6, 1994 between the Registrant, David Blech and certain designated purchasers. Incorporated herein by reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.22 - Purchase and Exchange Agreement dated as of January 31, 1995 between the Registrant and Neoprobe Corp. Incorporated herein by reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.23 - Stock Purchase Agreement dated as of January 24, 1995 between the Registrant and Fujimoto Diagnostics Inc. Incorporated herein by reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.24 - Agreement dated as of January 24, 1995, between the Registrant and Fujimoto Diagnostics, Inc. Incorporated herein by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.25 - Form of Stock Purchase Agreement dated as of August 31, 1994 between the Registrant and Dimensional Funds Advisors, Inc. Incorporated herein by reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.26 - Form of Warrant Agreement dated as of August 31, 1994 between the Registrant and Capello Capital Corp. Incorporated herein by reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.27 - Amendment dated March 29, 1995 to Agreement dated January 26, 1994 between the Registrant and The Purdue Frederick Company. Incorporated herein by reference to Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.28 - Amendment dated March 29, 1995 to Agreement dated January 26, 1994 between the Registrant, Banela Corporation and Runham Corporation. Incorporated herein by reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 41 10.29 - Amendment dated March 29, 1995 to Distribution Agreement dated June 14, 1991 between the Registrant and Purdue Pharma L.P. Incorporated herein by reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.30 - Amendment dated March 29, 1995 to Amended and Restated Distribution Agreement dated June 14, 1991 between the Registrant and Mundipharma Pharmaceutical Company. Incorporated herein by reference to Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.31 - Amendment dated March 29, 1995 to Amended and Restated RS Agreement dated January 26, 1994 among the Registrant, Mundipharma Pharmaceutical Company and Purdue Pharma L.P. Incorporated herein by reference to Exhibit 10.41 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.32 - Letter dated March 29, 1995 between the Registrant and Purdue Pharma L.P. Incorporated herein by reference to Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.33 - 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. 10.34 - 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. 10.35 - Form of note issued by the Registrant to National Patent Development Corporation, Biotechnology Investment Group, L.L.C., and Edward Blech Charitable Remainder Trust. Incorporated herein by reference to Exhibit 10.44 to Registration Statement No. 33-59479. 10.36 - Form of note issued by the Registrant to National Patent Development Corporation and Biotechnology Investment Group, L.L.C. Incorporated herein by reference to Exhibit 10.45 to Registration Statement No. 33-59479. 10.37 - Amendment, dated July 31, 1995, to the Distribution Agreement, dated June 14, 1991, between the Registrant and Purdue Pharma L.P. Incorporated herein by reference to Exhibit 10.46 to Registration Statement No. 33-59479. 10.38 - Amendment, dated July 31, 1995, to the Amended and Restated Distribution Agreement, dated June 14, 1991, between the Registrant and Mundipharma Pharmaceutical Company. Incorporated herein by reference to Exhibit 10.47 to Registration Statement No. 33-59479. 10.39 - Letter dated July 31, 1995, between The Purdue Frederick Company and the Registrant. Incorporated herein by reference to Exhibit 10.48 to Registration Statement No. 33-59479. 10.40 - Letter dated July 31, 1995, by and among the Registrant, Banela Corporation, and Runham Corporation. Incorporated herein by reference to Exhibit 10.49 to Registration Statement No. 33-59479. 10.41 - Amended and Restated R S Agreement, dated July 31, 1995, by and among the Registrant, Mundipharma Pharmaceutical Company, and Purdue Pharma L.P. Incorporated herein by reference to Exhibit 10.50 to Registration Statement No. 33-59479. 10.42 - Settlement Agreement, dated 27, 1995, among the Registrant, Amarillo Cell Culture Company, Incorporated, Pharma Pacific Management Pty. Ltd., Pharma Pacific Pty. Ltd., Pharma Pacific Ltd., and Fernz Corporation Limited. Incorporated herein by reference to Exhibit 10.51 to Registration Statement No. 33-59479. 10.43 - PPM/ACC Sub License Agreement, dated 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. 10.44 - Letter Agreement, dated 29, 1992, between the Registrant and Strategic Growth International, Inc. Incorporated herein by reference to Exhibit 10.53 to Registration Statement No. 33-59479. 10.45 - Agreement, dated May 27, 1993, between the Registrant and Strategic Growth International, Inc. Incorporated herein by reference to Exhibit 10.54 to Registration Statement No. 33-59479. 10.46 - Lease Agreement, dated August 1, 1995, between the Registrant and National Patent Development Corporation. Incorporated herein by reference to Exhibit 10.55 to Registration Statement No. 33-59479. 42 10.47 - Amendment dated January 1, 1996 to Management Services Agreement dated January 1, 1981 between the Registrant and National Patent Development Corporation. Incorporated herein by reference to Exhibit 10.47 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. 10.48 - Supply and Distribution Agreement, dated as of 3, 1996, between the Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit 10.56 to Registration Statement No. 333-00845. 10.49 - Quality Assurance Agreement, dated as of 3, 1996, between the Registrant and Cell Pharm GmbH. Incorporated herein by reference to Exhibit 10.57 to Registration Statement No. 333-00845. 10.50 - RS Agreement, dated 23, 1996, by and among the Registrant, Mundipharma Pharmaceutical Company, and Purdue Pharma L.P. Incorporated herein by reference to Exhibit 10.58 to Registration Statement No. 333-00845. 10.51 - Agreement, dated 23, 1996, between the Registrant and Purdue Pharma L.P. Incorporated herein by reference to Exhibit 10.59 to Registration Statement No. 333-00845. 10.52 - Agreement, dated 23, 1996, between the Registrant and Mundipharma Pharmaceutical Company. Incorporated herein by reference to Exhibit 10.60 to Registration Statement No. 333-00845. 10.53 - Form of Subscription Agreement used in connection with the December 1996 Private Placement. 10.54 - 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. 10.55 - 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. 10.56 - Form of Subscription Agreement used in connection with the 1997 private placement.* 10.57 - Stock Bonus Plan.* 10.58 - Form of employment agreement for participants in Stock Bonus Plan.* 10.59 - Employment Agreement, dated as of October 1, 1997, between the Registrant and Lawrence M. Gordon.* 21.0 - Subsidiaries of the Registrant.* 23.1 - Consent of Independent Auditors. * - ----------------- [FN] *Filed herewith 43 EX-27 2
5 0000351532 INTERFERON SCIENCES, INC. 1 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 14,059,283 0 989,458 0 3,332,653 18,468,651 13,496,755 (8,266,892) 24,153,376 3,939,736 0 0 0 152,104 20,061,536 24,153,376 2,955,802 2,955,802 1,857,959 1,857,959 23,507,722 0 0 (21,739,680) 0 (21,739,680) 0 0 0 (21,739,680) (1.63) (1.63)
EX-10 3 Exhibit 10.56 SUBSCRIPTION AGREEMENT Interferon Sciences, Inc. 783 Jersey Avenue New Brunswick, New Jersey 08901 Attn.: Chief Executive Officer Gentlemen: 1. Subscription. The undersigned is hereby purchasing from Interferon Sciences, Inc., a Delaware corporation (the "Company"), the number of shares (the "Shares") of common stock, par value $.01 per share (the "Common Stock"), of the Company set forth on the signature page hereto, for a purchase price (the "Purchase Price") of $6.00 per Share. 2. Closing. Payment of the Purchase Price is being made by electronic wire transfer in accordance with the following instructions: Account Name: Interferon Sciences, Inc. Bank Name: Summit Bank Bank Address: 223 Moore Street, Hackensack, New Jersey ABA#: 0212-0216-2 Account #: 1910855005 or by delivery of a bank check or certified check made payable to "Interferon Sciences, Inc." against delivery to the undersigned of a certificate representing the Shares. 3. Transfer Restrictions. (a) The undersigned realizes that the Shares are not registered under the Securities Act of 1933, as amended (the "Act"), or any foreign or state securities laws. The undersigned agrees that the Shares will not be sold, offered for sale, transferred, pledged, hypothecated, or otherwise disposed of (collectively, "Disposed Of") except in compliance with the Act, if applicable, and applicable foreign and state securities laws. Purchasers of Shares can only Dispose Of the Shares pursuant to registration under the Act or pursuant to an exemption therefrom. The undersigned understands that to Dispose Of the Shares may require in some jurisdictions specific approval by the appropriate governmental agency or commission in such jurisdiction. The undersigned has been advised that, except as set forth in Section 5, the Company has no obligation, and does not intend, to cause the Shares to be registered under the Act or the securities law of any other jurisdiction or to comply with the requirements for any exemption under the Act, including but not limited to those provided by Rule 144 and Rule 144A promulgated under the Act, or under the securities law of any other jurisdiction. (b) To enable the Company to enforce the transfer restrictions contained in Section 3(a), the undersigned hereby consents to the placing of legends upon, and stop-transfer orders with the transfer agent of the Common Stock with respect to, the Shares. 4. Representations and Warranties. To induce the Company to accept the undersigned's subscription, the undersigned hereby represents and warrants to the Company that: (a) the undersigned, if an individual, has reached the age of majority in the jurisdiction in which he resides; is a bona fide resident of the jurisdiction contained in the address set forth on the signature page of this Subscription Agreement; is legally competent to execute this Subscription Agreement; and does not intend to change residence to another jurisdiction; (b) the undersigned, if an entity, is duly authorized to execute this Subscription Agreement and this Subscription Agreement, when executed and delivered by the undersigned, will constitute a legal, valid, and binding obligation enforceable against the undersigned in accordance with its terms; and the execution, delivery, and performance of this Subscription Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate or other necessary action on the part of the undersigned; (c) the Shares subscribed for hereby are being acquired by the undersigned for investment purposes only, for the account of the undersigned and not with the view to any resale or distribution thereof, and the undersigned is not participating, directly or indirectly, in a distribution of such Shares and will not take, or cause to be taken, any action that would cause the undersigned to be deemed an "underwriter" of such Shares as defined in Section 2(11) of the Act; 1 (d) the undersigned has had access to all materials, books, records, documents, and information relating to the Company, including (i) the Prospectus dated February 11, 1997 (the "February Prospectus"), (ii) the Annual Report on Form 10-K for the year ended December 31, 1996, (iii) the Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, and (iv) the Proxy Statement dated April 30, 1997, and has been able to verify the accuracy of the information contained therein; (e) the undersigned acknowledges and understands that the Company may sell as many as 2.5 million shares of Common Stock on the same terms and conditions as set forth herein, although there can be no assurance that the Company will sell any such additional shares; (f) the undersigned acknowledges and understands that investment in the Shares involves a high degree of risk, including the risks set forth in the February Prospectus under the caption "Risk Factors"; (g) the undersigned acknowledges that the undersigned has been offered an opportunity to ask questions of, and receive answers from, officers of the Company concerning all material aspects of the Company and its business, and that any request for such information has been fully complied with to the extent the Company possesses such information or can acquire it without unreasonable effort or expense; (h) the undersigned has such knowledge and experience in financial and business matters that the undersigned is capable of evaluating the merits and risks of an investment in the Company and can afford a complete loss of his investment in the Company; (i) the undersigned has never been notified by the Internal Revenue Service that the undersigned is subject to backup withholding; (j) the undersigned recognizes that no governmental agency has passed upon the issuance of the Shares or made any finding or determination as to the fairness of this investment; (k) if the undersigned is purchasing the Shares subscribed for hereby in a representative or fiduciary capacity, the representations and warranties contained herein shall be deemed to have been made on behalf of the person or persons for whom such Shares are being purchased; (l) the undersigned has not entered into any agreement to pay commissions to any persons with respect to the purchase or sale of the Shares, except commissions for which the undersigned will be responsible; (m) the undersigned acknowledges that (i) the Company will issue to Sunrise Securities Corp. ("Sunrise"), as a commission with respect to the sale of the Shares by the Company to the undersigned, (A) a number shares of Common Stock equal to 6% of the number of Shares being purchased by the undersigned hereunder and (B) five-year warrants to purchase, at a purchase price of $7.20 per share, a number shares of Common Stock equal to 5% of the number of Shares being purchased by the undersigned hereunder, and (ii) the Company will issue to Sunrise, as an unaccountable expense allowance, a number shares of Common Stock equal to 2% of the number of Shares being purchased by the undersigned hereunder or, at the option of Sunrise, cash in an amount equal to the product of such number of Shares and the Purchase Price. (n) the undersigned is an "Accredited Investor" as that term is defined in Section 501(a) of Regulation D promulgated under the Act. Specifically the undersigned is (check appropriate items(s)): [ ] (i) a bank as defined in section 3(a)(2) of the Act, or a savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; a broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; an insurance company as defined in section 2(13) of the Act; an investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; a Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; an employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; 2 [ ] (ii) a private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940; [ ] (iii) an organization described in section 501(c)(3) of the Internal Revenue Code of 1986, as amended, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring Shares, with total assets in excess of $5,000,000; [ ] (iv) a director or executive officer of the Company; [ ] (v) a natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his or her purchase exceeds $1,000,000; [ ] (vi) a natural person who had an individual income (not including his or her spouse's income) in excess of $200,000 in 1994 and 1995 or joint income with his or her spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching such income level in 1996; [ ] (vii) a trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring Shares, whose purchase is directed by a person having such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks entailed in the purchase of Shares; or [ ] (viii) an entity in which all of the equity owners are Accredited Investors. (If this alternative is checked, the undersigned must identify each equity owner and provide statements signed by each demonstrating how each is qualified as an accredited investor.) 5. Registration of Shares under the Act. (a) The Company shall, at its expense, (i) not later than ten business days after the date hereof, file a registration statement (the "Registration Statement") to register under the Act the resale by the undersigned of the Shares, (ii) take all commercially reasonable actions to cause the Registration Statement to become effective under the Act, and (iii) after the Registration Statement is declared effective under the Act, furnish the undersigned with such number of copies of the prospectus (the "Prospectus") included in the Registration Statement as the undersigned may reasonably request to facilitate the resale of the Shares. (b) If at any time during the period that the undersigned owns any Shares an event (an "Event") shall have occurred that has caused the Prospectus to contain an untrue statement of a material fact or to omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, the Company shall (i) give the undersigned a notice (the "No-Sell Notice") that an Event has occurred, (ii) promptly (or, if in the reasonable judgment of the Company disclosure of the Event would be detrimental to the Company, promptly after disclosure of the Event would not be detrimental to the Company) take all commercially reasonable efforts to cause the Registration Statement not to contain an untrue statement of a material fact or to omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, and (iii) give the undersigned a notice (the "Sell Notice") when the Registration Statement does not contain an untrue statement of a material fact or to omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made. The undersigned shall not sell any Shares pursuant to the Registration Statement after it has received a No-Sell Notice until it has received a subsequent Sell Notice. (c) In connection with the Registration Statement, the undersigned shall furnish to the Company such information as the Company shall reasonably request. 6. Indemnification. The undersigned understands the meaning and legal consequences of the representations and warranties made by the undersigned in this Agreement, and agrees to indemnify and hold harmless the Company and each of the Company's directors, officers, stockholders, employees, counsel, agents, successors, and assigns, if any, from and against any and all loss, damage, liability, or expense (including, without limitation, attorneys' fees), as and when incurred, due to or arising out of (in each case in whole or in part) any breach of any representation or warranty made by the undersigned set forth herein or in any other agreement or other document furnished by the undersigned to any of the foregoing in connection with this transaction, any failure by the undersigned to fulfill any of its covenants or agreements set forth herein or therein, or arising out of the resale or distribution by the undersigned of the Shares or any portion thereof in violation of the Act or any applicable foreign or state securities or "blue sky" law. 7. Further Documents. The undersigned agrees that he will execute such other documents as may be necessary or desirable in connection with the transactions contemplated hereby. 3 8. Modification. Neither this Subscription Agreement nor any provisions hereof shall be waived, modified, discharged, or terminated except by an instrument in writing signed by the party against whom any such waiver, modification, discharge, or termination is sought. 9. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or by Federal Express, Express Mail or similar overnight delivery or courier service or delivered (in person or by telecopy, telex or similar telecommunications equipment) against receipt to the party to whom it is to be given, (i) if to the Company, at its address set forth on the first page hereof, (ii) if to the undersigned, at his address set forth on the signature page hereto, or (iii) in either case, to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 9. Notice to the estate of any party shall be sufficient if addressed to the party as provided in this Section 9. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. Any notice given by other means permitted by this Section 9 shall be deemed given at the time of receipt thereof. 10. Counterparts. This Subscription Agreement may be executed through the use of separate signature pages or in any number of counterparts, and each such counterpart shall, for all purposes, constitute one agreement binding on all parties, notwithstanding that all parties are not signatories to the same counterpart. 11. Entire Agreement. This Subscription Agreement contains the entire agreement of the parties with respect to the subject matter hereof and there are no representations, covenants, or other agreements except as stated or referred to herein. 12. Severability. Each provision of this Subscription Agreement is intended to be severable from every other provision, and the invalidity or illegality of any portion hereof shall not affect the validity or legality of the remainder hereof. 13. Assignability. This Subscription Agreement is not transferable or assignable by the undersigned. 14. Applicable Law. This Subscription Agreement has been negotiated and consummated in the State of New York and shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to conflict of laws. 15. Choice of Jurisdiction. Any action or proceeding arising, directly, indirectly, or otherwise, in connection with, out of or from this Subscription Agreement, any breach hereof or any transaction covered hereby shall be resolved within the City of New York, State of New York, United States of America. Accordingly, the parties consent and submit to the jurisdiction of the United States federal and state courts located within the City of New York, State of New York, United States of America. 16. Taxpayer Identification Number. The undersigned verifies under penalties of perjury that any Taxpayer Identification Number or Social Security Number shown on the signature page hereto is true, correct, and complete. 17. Pronouns. Any personal pronoun shall be considered to mean the corresponding masculine, feminine, or neuter personal pronoun, as the context requires. IN WITNESS WHEREOF, the undersigned has executed this Subscription Agreement, this ____ day of ______, 1997. Number of Shares Subscribed for: _________ Shares 4 INDIVIDUAL SUBSCRIBER: ENTITY SUBSCRIBER: ---------- - ------------------------------ ------------------------- (Signature of Subscriber) (Print Name of Subscriber By: ------ - ----------------------------- ------------------------- (Typed or Printed Name) Name: Title: - ------------------------------ (Residence Address) ------------------------- Address - ------------------------------ (City, State and Zip Code) ------------------------- (City, State and Zip code) - ------------------------------ (Telephone Number) ------------------------- (Telephone Number) - ------------------------------ (Telecopier Number) ------------------------- (Telephone Number) - ------------------------------ (Tax I.D. or Social Security Number) ---------------------------------- (Tax I.D. or Social Security Number ACCEPTED: Interferon Sciences, Inc. By:_____________________________ Name: Title: Date: __________, 1997 5 EX-10 4 Exhibit 10.57 INTERFERON SCIENCES, INC. STOCK BONUS PLAN 1. Purpose. The purpose of this Stock Bonus Plan (the "Plan") is to provide additional incentive and reward to key management employees who contribute materially to the success and growth of Interferon Sciences, Inc. (the "Company") by their creativity, ability, industry, loyalty, or exceptional service, by affording them a means of participating in that success and growth. 2. Administration. This Plan shall be administered by the Company's Board of Directors (the "Board") which shall make such determinations and take such action in connection with the Plan as it deems necessary. Such determinations and actions shall be binding and conclusive for all purposes and upon all persons. 3. Key Executives. The Board shall possess the exclusive right to name those key management employees who will participate in this Plan, each of whom shall be designated as a "Key Executive" for purposes of this Plan. No Key Executive or any person claiming under or through him shall have any right or interest, whether vested or otherwise, in this Plan or any bonus hereunder, unless and until there has been compliance with all of the terms and conditions of this Plan that affect the Key Executive. 4. Bonus Shares. Bonus awards shall be made in the form of shares ("Bonus Shares") of common stock, par value $.01 per share (the "Common Stock"), of the Company. The Board shall have the sole discretion to determine the number of Bonus Shares to be awarded under this Plan to any Key Executive. Recommendations for bonus awards shall be made to the Board by the Company's Chief Executive Officer, under such procedures as may from time to time be prescribed by the Board. Bonus Shares may be issued on the date of grant of the bonus award, or may be issuable on one or more dates subsequent to the date of grant of the bonus award upon the satisfaction of such conditions as may be imposed by the Board at the time of grant. 5. Bonus Share Agreement. If all of the Bonus Shares covered by a bonus award are not issued on the date of grant of the bonus award, it shall be a condition precedent to the award and transfer of any Bonus Shares to a Key Executive under this Plan that the Key Executive enter into a Bonus Share Agreement with the Company, in the form attached hereto as Exhibit A or such other form as the Board may require. 6. Common Stock Available for Bonuses. The Bonus Shares awarded under this Plan may be unissued shares or treasury shares. Bonus Shares awarded pursuant to this Plan shall be validly issued, fully paid, and nonassessable. The aggregate number of Bonus Shares shall not exceed 250,000 shares of Common Stock (subject to adjustment for stock splits, stock dividends, and similar events). 7. Nontransferability. The right and interest of any Key Executive to any bonus award made under this Plan shall not be transferred, assigned, pledged, or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment, or similar process. 8. Withholding. The Key Executive shall provide for the satisfaction of all federal, state, and local tax withholding requirements as a condition to the payment of any Bonus Shares under this Plan. 9. Fringe Benefits. By acceptance of any Bonus Shares under this Plan, each Key Executive agrees that such Bonus Shares represent special incentive compensation and that such Bonus Shares shall not be treated as salary or other compensation for the purpose of the calculation of retirement benefits, life insurance, or other fringe benefits provided by the Company. 10. Expenses. All expenses and costs in connection with the administration of this Plan shall be borne by the Company and no part shall be charged to the Key Executives. 11. Amendment, Suspension, Termination. The Board may discontinue or terminate this Plan in whole or in part at any time or may from time to time change or amend the Plan in such respects as the Board may deem advisable, in its sole discretion; provided that no such action shall affect Bonus Shares previously awarded under this Plan. 12. Plan and Award Not to Affect Employment. Neither this Plan nor any Bonus Shares awarded hereunder shall confer upon any Key Executive any right to continue in the employ of the Company and the right and power of the Company to dismiss or discharge any Key Executive is specifically reserved. 1 13. Notices. Any notice required or permitted hereunder shall be sufficiently given only if sent by registered or certified mail, postage prepaid, addressed to the Company at its principal corporate offices or to the Key Executive at the home address of record on file with the Company on the date any Bonus Stock award is made hereunder, or to such other address as either party may hereafter designate in writing by notice similarly given by one party to the other. 14. Successors. The Plan shall be binding upon and inure to the benefit of any successors or assigns of the Company. 15. Severability. If any part of this Plan shall be determined to be invalid or void in any respect, such determination shall not affect, impair, invalidate, or nullify the remaining provisions of this Plan which shall continue in full force and effect, as if the invalid or void provision had not been included in this Plan. 16. Additional Terms. The Board may impose such additional terms and conditions, including, without limitation, vesting restrictions, upon the award of Bonus Shares under this Plan as the Board may determine, in its sole discretion, at the time it authorizes such awards. 17. Governing Law. This Plan shall be governed by the laws of the State of New Jersey, without giving effect to conflicts of laws. 18. Effective Date. This Plan shall be effective as of October 1, 1997. 2 Exhibit A INTERFERON SCIENCES, INC. BONUS SHARE AGREEMENT Agreement, dated as of _______, ___, between Interferon Sciences, Inc., a Delaware corporation (the "Company"), and __________ (the "Employee"). W I T N E S S E T H: WHEREAS, the Company maintains the Interferon Sciences, Inc. Stock Bonus Plan (the "Plan") under which the Board of Directors of the Company (the "Board") may award shares ("Bonus Shares") of common stock, par value $.01 per share (the "Common Stock"), of the Company to such key management executives as the Board may determine, subject to the such terms, conditions, or restrictions as the Board may deem appropriate, in its sole discretion, thereby allowing the Employee to acquire a proprietary interest in the Company in order that the Employee will have a further incentive for remaining with and increasing his efforts on behalf of the Company; and WHEREAS, pursuant to the Plan and conditioned upon the execution by the Company and the Employee of this Agreement, the Board has authorized the granting to the Employee of a Bonus Share award (the "Award"); NOW THEREFORE, in consideration of the foregoing and of the mutual covenants hereinafter set forth and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. The Company hereby awards to the Employee, as a separate incentive in connection with his employment and in consideration of the covenants of the Employee contained in the Employment Agreement between the Company and the Employee of even date herewith and not in lieu of any salary or other compensation for his services, an Award covering the number of Bonus Shares set forth on Appendix A hereto, subject to the terms and conditions set forth in this Agreement. 2. The Bonus Shares covered by the Award shall be issuable in the installments and on the dates set forth on Appendix A hereto, provided that the Employee is employed by the Company on such dates. If the Employee's employment with the Company terminates for any reason, any Bonus Shares that were issuable on a date on or after the date of such termination shall not be issued. 3. (a) In case the Company shall at any time after the date of this Agreement (i) declare a dividend on the outstanding Common Stock payable in shares of its capital stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then, in each case, the number of Bonus Shares issuable on any date after the record date for such dividend or the effective date of such subdivision or combination shall be proportionately adjusted so that the Employee shall receive the aggregate number and kind of shares which, if such Bonus Shares had been issued immediately prior to such time, he would have owned and been entitled to receive by virtue of such dividend, subdivision or combination. Such adjustment shall be made successively whenever any event listed above shall occur. (b) The Company shall not be required to issue fractions of shares of Common Stock or other capital stock of the Company. If any fraction of a share would be issuable pursuant to this Agreement, the Company shall purchase such fraction for an amount in cash equal to the same fraction of the Current Market Price (as hereinafter defined) of such share of Common Stock or other capital stock of the Company on the date of issuance of the such shares. (c) The "Current Market Price" per share of stock on any date shall be the average of the daily closing prices for the 20 consecutive trading days immediately preceding the date in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the closing bid price regular way, in either case on the principal national securities exchange (including, for purposes hereof, the Nasdaq National Market or Small Cap System if such system is then generally reporting last sale prices) on which such stock is listed or admitted to trading or, if such stock is not listed or admitted to trading on any national securities exchange, the highest reported bid price for such stock as furnished by the National Association of Securities Dealers, Inc. through Nasdaq or a similar organization if Nasdaq is no longer reporting such information. If on any such date such stock is not listed or admitted to trading on any national securities exchange and is not quoted by Nasdaq or any similar organization, the fair value of a share of stock on such date, as determined in good faith by the Board, whose determination shall be conclusive absent manifest error, shall be used. 3 4. (a) In case of any consolidation with or merger of the Company with or into another corporation (other than a merger or consolidation in which the Company is the surviving or continuing corporation), or in case of any sale, lease, or conveyance to another corporation of the property and assets of the Company as an entirety or substantially as an entirety, such successor, leasing, or purchasing corporation, as the case may be, shall execute with the Employee an agreement providing that the Employer shall have the right thereafter to receive, in lieu of the number of Bonus Shares which he was entitled to receive on any date subsequent to such consolidation, merger, sale, lease, or conveyance, and subject to equivalent terms and conditions as those set forth in this Agreement (including without limitation that the Employee is employed by such successor, leasing, or purchasing corporation on such date), solely the kind and amount of shares of stock and other securities, property, cash, or any combination thereof receivable upon such consolidation, merger, sale, lease, or conveyance by a holder of such number of Bonus Shares immediately prior to such consolidation, merger, sale, lease, or conveyance. Such agreement shall provide for adjustments which shall be as nearly equivalent as practicable to the adjustments in Section 3. (b) In case of any reclassification or change of the shares of Common Stock issuable under this Agreement (other than a change in par value or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), or in case of any consolidation or merger of another corporation into the Company in which the Company is the continuing corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), the Employee shall have the right thereafter to receive, in lieu of the number of Bonus Shares which he was entitled to receive on any date subsequent to such reclassification, change, consolidation, or merger, and subject to the terms and conditions set forth in this Agreement, solely the kind and amount of shares of stock and other securities, property, cash, or any combination thereof receivable upon such reclassification, change, consolidation, or merger by a holder of such number of Bonus Shares immediately prior to such reclassification, change, consolidation, or merger. Thereafter, appropriate provision shall be made for adjustments which shall be as nearly equivalent as practicable to the adjustments in Section 3. (c) The above provisions of this Section 4 shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales, leases, or conveyances. 5. In its discretion, the Company may require the Employee receiving Bonus Shares to reimburse the Company for any taxes required to be withheld by the Company and may withhold any issuance of Bonus Shares in whole or in part until the Company is so reimbursed. In lieu thereof, the Company shall have the right to withhold from any other cash amount due or to become due from the Company to the Employee an amount equal to such taxes as required to be withheld by the Company to reimburse the Company for any such taxes or to reduce the number of Bonus Shares issued to the Employee in order to reimburse the Company for any such taxes. 6. Any notice required or permitted hereunder shall be sufficiently given only if sent by registered or certified mail, postage prepaid, addressed to the Company at its principal corporate offices or to the Employee at the home address of record on file with the Company on the date hereof, or to such other address as either party may hereafter designate in writing by notice similarly given by one party to the other. 7. Nothing herein contained shall affect the Employee's right to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, or other employee welfare plan or program of the Company or any affiliate. 8. Except as otherwise herein provided, the Award herein granted and the rights and privileges conferred hereby shall not be transferred, assigned, pledged, or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment, or similar process. 9. Subject to the limitation on the transferability contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors, and assigns of the parties hereto. 10. The Board shall have the power to interpret this Agreement and to adopt such rules for the administration, interpretation, and application of this Agreement as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Board shall be final and binding upon Employee, the Company, and all other interested persons. No member of the Board shall be personally liable for any action, determination, or interpretation made with respect to this Agreement. 4 11. This Agreement shall be subject to the terms of the Plan, as it may be amended from time to time, which Plan is incorporated herein by this reference, except that the Bonus Shares covered by the Award subject to this Agreement may not in any way be restricted or limited by any Plan amendment or termination adopted or authorized after the date of such Award hereunder without the Employee's written consent. 12. If any provision of this Agreement shall be determined to be invalid or void in any respect, such determination shall not affect, impair, invalidate, or nullify the remaining provisions of this Agreement which shall continue in full force and effect, as if the invalid or void provision had not been included in this Agreement. 13. This Agreement shall be governed by the laws of the State of New Jersey, without giving effect to conflicts of laws. 14. This Agreement may be executed in counterparts, each of which shall be deemed an original, but both of which together shall constitute but one and the same instrument. 15. This Agreement contains the entire understanding of the parties and may be amended or modified only by a written instrument executed by both the Company and the Employee. IN WITNESS WHEREOF, the parties have executed this Agreement, in duplicate, the day and year first above written. INTERFERON SCIENCES, INC. By:______________________________ Title:_____________________________ --------------------------------- Employee's Signature Print Name:_______________________ Social Security Number:_____________ 5 Appendix A Issue Date Number of Bonus Shares -------- 6 EX-10 5 Exhibt 10.58 EMPLOYMENT AGREEMENT AGREEMENT, dated as of _________, 1997, between Interferon Sciences, Inc., a Delaware corporation with principal executive offices at 783 Jersey Avenue, New Brunswick, New Jersey 08901 (the "Company"), and ____________, residing at _________________ ______________ ("Employee"). W I T N E S S E T H WHEREAS, the Company desires to employ Employee upon the terms and subject to the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises, the mutual promises, covenants, and conditions herein contained and for other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties hereto intending to be legally bound hereby agree as follows: Section 1. Employment. The Company hereby agrees to continue to employ Employee, and Employee hereby agrees to continue to serve the Company, all upon the terms and subject to the conditions set forth in this Agreement. Section 2. Capacity and Duties. Employee shall be employed by the Company in the capacity of _________________and shall have the duties, responsibilities, and authorities normally performed by a person with such position and such other duties, responsibilities, and authorities as are assigned to him by the Board of Directors or the Chief Executive Officer of the Company. Employee shall devote substantially all of his business time and attention to promote and advance the business of the Company. Section 3. Compensation. During the period that Employee is employed by the Company hereunder, subject to all the terms and conditions of this Agreement and as compensation for all services to be rendered and covenants to be performed by Employee under this Agreement, the Company shall pay to or provide Employee with such salary, bonus, and other benefits as the Company may determine, including an award on the date hereof by the Company to Employee under the Interferon Sciences, Inc. Stock Bonus Plan. Section 4. Non-Competition. Employee agrees that he will not during the period he is employed by the Company under this Agreement or otherwise and for a period of one year thereafter, directly or indirectly compete with or be engaged in the same business as the Company, or be employed by, or act as consultant or lender to, or be a director, officer, employee, owner, or partner of, any business or organization which, during the period Employee is employed by the Company under this Agreement or otherwise, directly or indirectly competes with or is engaged in the same business as the Company, except that in each case the provisions of this Section 4 will not be deemed breached merely because Employee owns not more than 1% of the outstanding common stock of a corporation, if, at the time of its acquisition by Employee, such stock is listed on a national securities exchange, is reported on NASDAQ, or is regularly traded in the over-the-counter market by a member of a national securities exchange. Section 5. Patents. Any interest in patents, patent applications, inventions, copyrights, developments, and processes (the "Inventions") which Employee now or hereafter during the period he is employed by the Company under this Agreement or otherwise may own or develop relating to the fields in which the Company may then be engaged shall belong to the Company; and forthwith upon request of the Company Employee shall execute all such assignments and other documents and take all such other action as the Company may reasonably request in order to vest in the Company all his right, title, and interest in and to the Inventions free and clear of all liens, charges, and encumbrances. Section 6. Confidential Information. All confidential information which Employee may now possess, may obtain during or after the period he is employed by the Company under this Agreement or otherwise, or may create prior to the end of the period he is employed by the Company under this Agreement or otherwise relating to the business of the Company or of any its customers or suppliers shall not be published, disclosed, or made accessible by him to any other person, firm, or corporation either during or after the termination of his employment or used by him except during the period he is employed by the Company under this Agreement or otherwise in the business and for the benefit of the Company, in each case without prior written permission of the Company. Employee shall return all tangible evidence of such confidential information to the Company prior to or at the termination of his employment. 1 Section 7. Termination. Employee's employment hereunder may be terminated, without any breach of this Agreement, by the Company or Employee at any time for any cause or without cause. Section 8. Compensation Upon Termination. If Employee's employment with the Company shall terminate, the Company shall pay Employee his then salary through the date of termination and the Company shall have no further obligations to Employee under this Agreement. Section 9. Successors; Binding Agreement. Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance, or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees, and shall be binding upon and inure to the benefit of the Company and its successors. Section 10. No Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement (except as provided in Section 9). Section 11. Representations and Warranties of Employee. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder and (b) Employee is under no physical or mental disability that would hinder his performance of duties under this Agreement. Section 12. Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. Section 13. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 13). Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 13. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. Section 14. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing. 2 Section 15. Headings. The headings in this Agreement are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. Section 16. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to conflict of laws. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. Interferon Sciences, Inc. By: ------------------------- ----------------------------- 3 EX-10 6 Exhibit 10.59 EMPLOYMENT AGREEMENT AGREEMENT, dated as of October 1, 1997, between Interferon Sciences, Inc., a Delaware corporation with principal executive offices at 783 Jersey Avenue, New Brunswick, New Jersey 08901 (the "Company"), and Lawrence M. Gordon, residing at 30 Talbot Court, Short Hills, New Jersey 07078 ("Employee"). W I T N E S S E T H WHEREAS, the Company desires to employ Employee upon the terms and subject to the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises, the mutual promises, covenants, and conditions herein contained and for other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties hereto intending to be legally bound hereby agree as follows: Section 1. Employment. The Company hereby agrees to continue to employ Employee, and Employee hereby agrees to continue to serve the Company, all upon the terms and subject to the conditions set forth in this Agreement. Section 2. Capacity and Duties. Employee is and shall be employed in the capacity of Chief Executive Officer of the Company and shall have the duties, responsibilities, and authorities normally performed by the chief executive officer of a company and such other duties, responsibilities, and authorities as are assigned to him by the Board of Directors of the Company (the "Board") so long as such additional duties, responsibilities, and authorities are consistent with Employee's position and level of authority as Chief Executive Officer of the Company. Employee shall devote substantially all of his business time and attention to promote and advance the business of the Company; provided, however, that Employee shall be permitted to invest his personal assets in a business which does not compete with the Company if such investment will not require services of any significance on the part of Employee in the operation of the affairs of the business in which such investment is made. Section 3. Term of Employment. The term of employment of Employee by the Company pursuant to this Agreement shall be for the period (the "Employment Period") commencing on the date hereof and ending on December 31, 2001, unless further extended or sooner terminated in accordance with the provisions of this Agreement. On December 31, 1999, and on each December 31 of each year thereafter, the Employment Period shall be automatically extended for one additional year unless, not later than June 30 immediately preceding any such December 31, the Company shall have delivered to Employee or Employee shall have delivered to the Company written notice that the Employment Period shall not be further extended. Section 4. Place of Employment. Employee's principal place of work shall be located at the principal offices of the Company, currently located in New Brunswick, New Jersey. The Company's principal offices shall not be relocated outside of the New York/New Jersey Metropolitan Area without Employee's consent. Section 5. Compensation. During the Employment Period, subject to all the terms and conditions of this Agreement and as compensation for all services to be rendered by Employee under this Agreement, the Company shall pay to or provide Employee with the following: (a) Base Salary. Commencing January 1, 1997, the Company shall pay to Employee a base annual salary at the rate of $250,000. Each January 1 during the Employment Period, commencing January 1, 1998, the base annual salary shall be increased by 6%. The base salary will be payable at such intervals (at least monthly) as salaries are paid generally to other executive officers of the Company. 1 (b) Bonus. Each December during the Employment Period, the Board may determine Employee's bonus for the year then ending, based upon the Company's revenues, profits or losses, financing activities, progress in clinical trials, and such other factors deemed relevant by the Board. Any bonus shall be payable to Employee on or after January 2 of the following year. (c) Options. On the date hereof, the Company shall grant to Employee under the Company's option plan options to purchase 150,000 shares of the Company's common stock at an exercise price of $8.50. Such options shall vest 20% on the date hereof and 20% on each January 1 commencing January 1, 1998 and shall terminate on December 31, 2001. Each December during the Employment Period, the Board may determine whether to grant Employee additional options, based upon the Company's revenues, profits or losses, financing activities, progress in clinical trials, and such other factors deemed relevant by the Board. (d) Vacation. Employee shall be entitled to vacation in accordance with the Company's policy for its senior executives. Vacation may be carried into the subsequent year if not used in the year earned. (e) Automobile. The Company shall provide Employee with an automobile of his choice (comparable to the automobile currently provided by the Company to Employee) at the Company's expense and shall pay the maintenance, gas, and insurance expenses in connection with such automobile. Such automobile shall be equipped with a car phone. (f) Club Dues. The Company shall pay up to $15,000 per year for initiation and monthly dues of one country club as shall be specified by Employee. (g) Life and Disability Insurance. The Company shall pay up to $5,000 per year for such term life and disability insurance policies covering Employee as shall be specified by Employee. Such policies shall be owned by Employee and Employee shall have the sole right to exercise all rights under such policies. (h) Employee Benefit Plans. Employee shall be entitled to participate in all employee benefit plans maintained by the Company for its senior executives or employees, including without limitation the Company's medical and life insurance plans, profit-sharing plan, and 401(k) plan. Section 6. Expenses. The Company shall reimburse Employee for all reasonable expenses (including, but not limited to, business travel and customer entertainment expenses) incurred by him in connection with his employment hereunder in accordance with the written policy and guidelines established by the Company for executive officers. In addition, Employee shall be entitled to receive an unaccountable expense allowance of $500 per month. Section 7. Non-Competition. Employee agrees that he will not during the period he is employed by the Company under this Agreement or otherwise and for a period of one year thereafter, directly or indirectly compete with or be engaged in the same business as the Company, or be employed by, or act as consultant or lender to, or be a director, officer, employee, owner, or partner of, any business or organization which, during the period Employee is employed by the Company under this Agreement or otherwise, directly or indirectly competes with or is engaged in the same business as the Company, except that in each case the provisions of this Section 7 will not be deemed breached merely because Employee owns not more than 1% of the outstanding common stock of a corporation, if, at the time of its acquisition by Employee, such stock is listed on a national securities exchange, is reported on NASDAQ, or is regularly traded in the over-the-counter market by a member of a national securities exchange; provided, however, that this Section 7 shall not apply if (a) in breach of this Agreement, the Company shall terminate Employee's employment other than pursuant to Section 10(b) or 10(c) (it being understood that a purported termination pursuant to Section 10(b) or 10(c) which is disputed and finally determined not to have been proper shall be a termination by the Company in breach of this Agreement) or (b) Employee shall terminate his employment for Good Reason (as hereinafter defined). 2 Section 8. Patents. Any interest in patents, patent applications, inventions, copyrights, developments, and processes ("Such Inventions") which Employee now or hereafter during the period he is employed by the Company under this Agreement or otherwise may own or develop relating to the fields in which the Company may then be engaged shall belong to the Company; and forthwith upon request of the Company Employee shall execute all such assignments and other documents and take all such other action as the Company may reasonably request in order to vest in the Company all his right, title, and interest in and to Such Inventions free and clear of all liens, charges, and encumbrances. Section 9. Confidential Information. All confidential information which Employee may now possess, may obtain during or after the Employment Period, or may create prior to the end of the period he is employed by the Company under this Agreement or otherwise relating to the business of the Company or of any its customers or suppliers shall not be published, disclosed, or made accessible by him to any other person, firm, or corporation either during or after the termination of his employment or used by him except during the Employment Period in the business and for the benefit of the Company, in each case without prior written permission of the Company. Employee shall return all tangible evidence of such confidential information to the Company prior to or at the termination of his employment. Section 10. Termination. Employee's employment hereunder may be terminated without any breach of this Agreement only under the following circumstances: (a) Death. Employee's employment hereunder shall terminate upon his death. (b) Disability. If, as a result of Employee's incapacity due to physical or mental illness, Employee shall have been absent from his duties hereunder on a full-time basis for the entire period of six consecutive months, and within 30 days after a Notice of Termination (as defined in Section 10(e)) is given shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate Employee's employment hereunder. (c) Cause. The Company may terminate Employee's employment hereunder for Cause. For purposes of this Agreement, the Company shall have "Cause" to terminate Employee's employment hereunder upon (i) the willful and continued failure by Employee to substantially perform his duties or obligations hereunder (other than any such failure resulting from Employee's incapacity due to physical or mental illness), after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes Employee has not substantially performed his duties or obligations, or (ii) the willful engaging by Employee in misconduct which is materially monetarily injurious to the Company. For purposes of this paragraph, no act, or failure to act, on Employee's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Employee shall not be deemed to have been terminated for Cause without (i) reasonable notice to Employee setting forth the reasons for the Company's intention to terminate for Cause, (ii) an opportunity for Employee, together with his counsel, to be heard before the Board, and (iii) delivery to Employee of a Notice of Termination from the Board finding that in the good faith opinion of the Board Employee was guilty of conduct set forth above in clause (i) or (ii) of the preceding sentence, and specifying the particulars thereof in detail. (d) Termination by Employee. Employee may terminate his employment hereunder (i) for Good Reason or (ii) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health or his life, provided that Employee shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, Employee shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of Employee's doctor. For purposes of this Agreement, "Good Reason" shall mean (i) a change in control of the Company (as defined below), (ii) a failure by the Company to comply with any material provision of this Agreement which has not been cured within ten days after notice of such noncompliance has been given by Employee to the Company, or (iii) any purported termination of Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 10(e) (and for purposes of this Agreement no such purported termination shall be effective). For purposes of this Agreement, a "change in 3 control" of the Company shall mean (i) a change in control of a nature that would be required to be reported in response to Item 1(a) of Current Report on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), (ii) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities, or (iii) at any time individuals who were either nominated for election by the Board or were elected by the Board cease for any reason to constitute at least a majority of the Board. (e) Notice of Termination. Any termination of Employee's employment by the Company or by Employee (other than termination pursuant to Section 10(a)) shall be communicated by a Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment under the provision so indicated. (f) Date of Termination. "Date of Termination" shall mean (i) if Employee's employment is terminated by his death, the date of his death, (ii) if Employee's employment is terminated pursuant to Section 10(b), 30 days after Notice of Termination is given (provided that Employee shall not have returned to the performance of his duties on a full-time basis during such 30 day period), and (iii) if Employee's employment is terminated for any other reason, the date specified in the Notice of Termination, which shall not be earlier than the date on which the Notice of Termination is given; provided that if within 30 days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is resolved, either by mutual written agreement of the parties or by a judgment, order, or decree of a court of competent jurisdiction. Section 11. Compensation Upon Termination or During Disability. (a) During any period that Employee fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("disability period"), Employee shall continue to receive his full salary at the rate then in effect for such period until his employment is terminated pursuant to Section 10(b), provided that payments so made to Employee during the disability period shall be reduced by the sum of the amounts, if any, payable to Employee at or prior to the time of any such payment under disability benefit plans of the Company and which were not previously applied to reduce any such payment. (b) If Employee's employment is terminated by his death, the Company shall pay to Employee's spouse, or if he leaves no spouse, to his estate, an amount equal to his full salary at the rate then in effect for a period of three months after the date of death. (c) If Employee's employment shall be terminated for Cause, the Company shall pay Employee his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given. (d) If (i) in breach of this Agreement, the Company shall terminate Employee's employment other than pursuant to Section 10(b) or 10(c) (it being understood that a purported termination pursuant to Section 10(b) or 10(c) which is disputed and finally determined not to have been proper shall be a termination by the Company in breach of this Agreement) or (ii) Employee shall terminate his employment for Good Reason, then (A) the Company shall pay Employee his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given; (B) in lieu of any further salary or bonus payments to Employee for periods subsequent to the Date of Termination, the Company shall pay as severance pay to Employee an amount equal to (1) Employee's average annual cash compensation received from the Company or National Patent Development Corporation during the three full calendar years immediately preceding the 4 Date of Termination, multiplied by (2) the greater of (w)the number of years (including partial years) that would have been remaining in the Employment Period if Employee's employment by the Company had not so terminated and (x) three, such payment to be made (y) if Employee's termination is based on a change of control of the Company, in a lump sum on or before the fifth day following the Date of Termination, or (z) if Employee's termination results from any other cause, in substantially equal semimonthly installments on the fifteenth and last days of each month commencing with the month in which the Date of Termination occurs and continuing for the number of consecutive semimonthly payment dates (including the first such date as aforesaid) equal to the product obtained by multiplying the number of years (including partial years) applicable under clause (w) above by 24; (C) all options to purchase the Company's common stock granted to Employee under the Company's option plan or otherwise shall immediately become fully vested and shall terminate on such date as they would have terminated if Employee's employment by the Company had not terminated and, if Employee's termination is based on a change of control of the Company and Employee elects, not more than 30 days after the Date of Termination, to surrender any or all of such options to the Company, the Company shall pay Employee on or before the fifth day following such surrender a lump sum cash payment equal to the excess of (1) the fair market value on the Date of Termination of the securities issuable upon exercise of the options surrendered over (2) the aggregate exercise price of the options surrendered; and (D) if termination of Employee's employment arises out of a breach by the Company of this Agreement, the Company shall pay all other damages to which Employee may be entitled as a result of such breach, including damages for any and all loss of benefits to Employee under the Company's employee benefit plans which Employee would have received if the Company had not breached this Agreement and had Employee's employment continued for the then remaining term of the Employment Period, and including all reasonable legal fees and expenses incurred by him as a result of such termination. (e) If Employee shall terminate his employment under Section 10(d)(ii), the Company shall pay Employee his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given. (f) Unless Employee is terminated for Cause, the Company shall maintain in full force and effect, for the continued benefit of Employee, for a number of years equal to the greater of (i) the number of years (including partial years) that would have been remaining in the Employment Period if Employee's employment by the Company had not so terminated and (ii) three, all employee benefit plans and programs in which Employee was entitled to participate immediately prior to the Date of Termination provided that Employee's continued participation is possible under the general terms and provisions of such plans and programs. In the event that Employee's participation in any such plan or program is barred, the Company shall arrange to provide Employee with benefits substantially similar to those which Employee would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred. (g) Employee shall not be required to mitigate the amount of any payment provided for in this Section 11 by seeking other employment or otherwise. (h) Notwithstanding anything in the foregoing to the contrary, the Company shall not be obligated to pay any portion of any amount otherwise payable to Employee pursuant to this Section 11 if the Company could not reasonably deduct such portion solely by operation of Section 280G of the Internal Revenue Code of 1986, as amended. 5 Section 12. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and reasonably substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 12(a) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance, or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees, and shall be binding upon and inure to the benefit of the Company and its successors under Section 12(a). If Employee should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. Section 13. No Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement (except as provided in Section 12). Section 14. Fees and Expenses. The Company shall pay all reasonable legal fees and related expenses (including the costs of experts, evidence, and counsel) incurred by Employee as a result of a contest or dispute over Employee's termination of employment if such contest or dispute is resolved in whole or in part in Employee's favor. Section 15. Representations and Warranties of Employee. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder and (b) Employee is under no physical or mental disability that would hinder his performance of duties under this Agreement. Section 16. Life Insurance. If requested by the Company, Employee shall submit to such physical examinations and otherwise take such actions and execute and deliver such documents as may be reasonably necessary to enable the Company, at its expense and for its own benefit, to obtain life insurance on the life of Employee. Employee has no reason to believe that his life is not insurable with a reputable insurance company at rates now prevailing in the City of New York for healthy men of his age. Section 17. Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. Section 18. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 18). Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 18. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 6 Section 19. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing. Section 20. Headings. The headings in this Agreement are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. Section 21. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to conflict of laws. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. Interferon Sciences, Inc. By: ------------------------------ ------------------------------ Lawrence M. Gordon 7 EX-21 7 Exhibit 21 Subsidiaries of the Registrant Name Jurisdiction Interferon Sciences Development Corporation Delaware EX-23 8 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS INTERFERON SCIENCES, INC. We consent to incorporation by reference in (i) the Registration Statement (No. 33-64921) on Form S-3, ii) the Registration Statement (No. 333-04381) on Form S-3, (iii) the Registration Statement (No. 333-19451) on Form S-3, (iv) the Registration Statement (No. 33-30209) on Form S-8, and (v) the Registration Statement (No. 333-34203) on Form S-3 of Interferon Sciences, Inc. of our report dated April 2, 1998 relating to the consolidated balance sheets of Interferon Sciences, Inc. as of December 31, 1997 and 1996, 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, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Interferon Sciences, Inc. KPMG Peat Marwick LLP New York, New York April 15, 1998 -----END PRIVACY-ENHANCED MESSAGE-----