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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Fiscal Year Ended December 31, 2000
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition Period from ________to________
Commission File Number 0-10379
INTERFERON SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2313648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
783 Jersey Avenue, New Brunswick, New Jersey 08901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 249-3250
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter Period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No --
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 13, 2001, the aggregate market value of the outstanding shares
of the registrant's Common Stock, par value $.01 per share, held by
non-affiliates (assuming for this calculation only that all officers and
directors are affiliates) was approximately $7,186,000 based on the last
reported sale price of such stock on the OTC Bulletin Board on March 13, 2001.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 13, 2001
-----------------------------------
Common Stock, par value $.01 per share 17,965,628 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2001 Annual Meeting
of Stockholders are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Page
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 35
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners
and Management 36
Item 13. Certain Relationships and Related Transactions 36
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 37
PART I
Item 1. Business
(a) General Development of Business
Interferon Sciences, Inc. (the "Company") is a biopharmaceutical company
engaged in the study, manufacture, and sale of pharmaceutical products based on
its highly purified, multispecies, natural source alpha interferon ("Natural
Alpha Interferon"). The Company's ALFERON N Injection(R) (Interferon Alfa-n3)
product has been approved by the United States Food and Drug Administration
("FDA") for the treatment of certain types of genital warts and the Company has
been studying its potential use in the treatment of HIV, hepatitis C, and other
indications. In addition, the Company is seeking to enter into collaborations
with companies in the areas of cancer, infectious diseases, and immunology. The
Company's strategy is to utilize its expertise in regulatory affairs, clinical
trials, manufacturing, and research and development to acquire equity
participations in early stage companies. For a description of the Company's
first investment, see "Business - Investments - Metacine".
(b) Financial Information about Business Segments
The Company operates as a single line of business. For the years ended
December 31, 2000, 1999 and 1998, domestic sales totaled $1,046,470, $2,204,437
and $1,716,157, respectively. All identifiable assets are located in the United
States.
(c) Narrative Description of Business
Scientific Background
Interferons are a group of proteins produced and secreted by cells to
combat diseases. Researchers have identified four major classes of human
interferon: alpha, beta, gamma, and omega. The Company's three ALFERON products
contain a form of alpha interferon. The worldwide market for injectable alpha
interferon-based products has experienced rapid growth and various alpha
interferon injectable products are approved for 17 major medical uses worldwide.
Alpha interferons are manufactured commercially in three ways: by genetic
engineering, by cell culture, and from human white blood cells. In the United
States, all three of these types of alpha interferon are approved for commercial
sale. The Company's Natural Alpha Interferon is produced from human white blood
cells.
The Company believes that the potential advantages of Natural Alpha
Interferon over recombinant interferons may be based upon their respective
molecular compositions. Natural Alpha Interferon is composed of a family of
proteins containing many different molecular species of interferon. In contrast,
recombinant alpha interferons each contain only a single species. Researchers
have reported that the various species of interferon may have differing
antiviral activity depending upon the type of virus. Natural Alpha Interferon
presents a broad complement of species which the Company believes may account
for its higher efficacy in laboratory studies with the HIV virus compared with
that of recombinant alpha interferon 2a and 2b (ROFERON(R) A and INTRON(R) A,
respectively). Natural Alpha Interferon is also glycosylated (partially covered
with sugar molecules). Such glycosylation is not present on the currently
marketed recombinant alpha interferons. The Company believes that the absence of
glycosylation may be, in part, responsible for the production of
interferon-neutralizing antibodies seen in patients treated with recombinant
alpha interferon. Although cell cultured-derived interferon is also composed of
multiple glycosylated alpha interferon species, the types and relative quantity
of these species are different from the Company's Natural Alpha Interferon.
The production of Natural Alpha Interferon is dependent upon a supply of
human white blood cells and other essential materials. The Company obtains white
blood cells from FDA- licensed blood donor centers.
ALFERON N Injection
Approved Indication. On October 10, 1989, the FDA approved ALFERON N
Injection for the intralesional treatment of refractory (resistant to other
treatment) or recurring external genital warts in patients 18 years of age or
older. Substantially all of the Company's revenues, to date, have been generated
from the sale of ALFERON N Injection for such treatment. Certain types of human
papilloma viruses cause genital warts, a sexually transmitted disease. A
published report estimates that approximately eight million new and recurrent
cases of genital warts occur annually in the United States alone.
Genital warts are usually treated using caustic chemicals or through
physical removal methods. These procedures can be quite painful and effective
treatment outcome is often difficult to achieve. The FDA approved a topical
formulation of an interferon inducer in 1997 for the treatment of genital warts.
To date, the Company does not believe that such approval has had a material
adverse effect on the sales of Alferon N Injection.
Clinical Trials for New Indications. In an effort to obtain approval to
market ALFERON N Injection for additional indications, the Company has
conducted, and is currently planning, various clinical trials for new
indications.
HIV-infected Patients. The Human Immunodeficiency Virus ("HIV") infection
is at epidemic levels in the world. It currently affects approximately 30
million people. HIV infection usually signals the start of a progressive disease
that compromises the immune systems, ultimately resulting in Acquired Immune
Deficiency Syndrome ("AIDS").
An article published in AIDS Research and Human Retroviruses in 1993 by
investigators at Walter Reed Army Institute of Research ("Walter Reed") in
collaboration with the Company's scientists indicated that the various
interferon species display vast differences in their ability to affect virus
replication. Walter Reed researchers found that the Company's Natural Alpha
Interferon was 10 to 100 times more effective than equal concentrations of
recombinant alpha interferon 2a and 2b, respectively, in blocking the
replication of HIV-1, the AIDS virus, in infected human cells (monocytes) in
vitro.
Moreover, the Company's scientists were able to separate members of the
interferon family in single protein fractions or clusters of proteins using
advanced fractionation techniques. The individual fractions were tested for
their ability to block HIV replication in the laboratory by researchers at
Walter Reed. They found that the unusual anti-HIV activity was attributable to
very specific fractions in the Company's product. The most active fractions are
not present in marketed recombinant interferon products.
This information provided additional support for a long-held belief of the
Company that its Natural Alpha Interferon has unique anti-viral properties
distinguishing it from recombinant interferon products. In addition, published
reports of trials using recombinant alpha interferon in asymptomatic
HIV-infected patients indicated that while high doses blocked virus production
in many cases, such doses resulted in high levels of adverse reactions, thereby
limiting the usefulness of the recombinant product. These facts led the Walter
Reed researchers to conduct a Phase 1 clinical trial with the Company's product
in asymptomatic HIV-infected patients.
In March 1992, Walter Reed launched a Phase 1 clinical trial with
asymptomatic HIV-infected patients to investigate the safety and tolerance, at
several dose regimens, of ALFERON N Injection, self-injected subcutaneously for
periods of up to 24 weeks. The investigators concluded that the treatment was
"surprisingly" well tolerated by patients, at all dose regimens. Preliminary
findings were reported by Walter Reed at the IX th International Conference on
AIDS in Berlin in 1993. The investigators also reported that the expected
interferon side effects, such as flu-like symptoms, were rare or absent in the
majority of patients treated with the Company's product.
Although this Phase 1 clinical trial was designed primarily to provide
safety information on various doses of ALFERON N Injection used for extended
periods of time, there were encouraging indications that certain disease
parameters had stabilized or even improved in certain patients by the end of the
experimental treatment.
In a follow-up analysis of patients' blood testing data, it was found after
an average of 16 months after treatment, CD4 white blood cell counts remained
essentially unchanged or were higher than at the onset of the trial in 11 of 20
patients. In addition, while on treatment, the amount of HIV detectable in the
patients' blood, as measured by polymerize chain reaction ("PCR") testing,
declined in a dose dependent manner (the greatest declines were observed in the
highest dose group). Also, none of the patients were found to have developed
neutralizing antibodies to Natural Alpha Interferon, even after being treated
three times weekly for many months. These results were reported at the Third
International Congress on Biological Response Modifiers held in Cancun, Mexico
in January 1995 and were selected for a poster presentation at the 35th
Interscience Conference on Antimicrobial Agents and Chemotherapy held in San
Francisco in September 1995. An extensive report was published in the May 1996
Issue of the Journal of Infectious Diseases.
It is important to note that, because of the small number of study
participants and the absence of a control group, no firm conclusions can be
drawn from these observations. However, based on the safety and preliminary
efficacy data obtained from this trial and after meeting with the FDA, the
Company conducted a multi-center Phase 3 clinical trial of ALFERON N Injection
in HIV-infected patients, which was completed in December 1997. This randomized,
double blind, placebo-controlled trial was designed to evaluate the safety and
efficacy of ALFERON N Injection in the treatment of HIV-positive patients, some
of whom may have been taking other FDA-approved antiviral agents. Enrolled
patients were required to have CD4 white blood cell counts of at least 250 cells
per micrometer and a viral burden (as determined by PCR testing) of at least
2,000 RNA copies per milliliter. The Company completed the analysis of the data
collected from the 16 investigator sites and attended a pre-filing meeting with
the FDA in mid-March 1998. Shortly after that meeting, the FDA advised the
Company that, although ALFERON N Injection demonstrated biological activity in
this Phase 3 clinical trial, the results were insufficient for filing for
approval for this additional indication for ALFERON N Injection. While the
results over the course of treatment demonstrated benefits that were
statistically significant for the group of patients receiving ALFERON N
Injection and highly statistically significant for the subgroup of such patients
with high CD4 counts, the study's primary efficacy variable (reduction in viral
load) was not met at the time point specified in the protocol (end of
treatment). Because the agreed upon primary endpoint was not met and in light of
the changes in HIV treatment regimen to simultaneous multiple drug therapy since
this trial was designed, the FDA indicated that an additional trial, in which
ALFERON N Injection was studied in conjunction with multiple drug therapy would
be necessary to evaluate further the efficacy of ALFERON N Injection for this
indication. Because of the costly nature and the length of such a trial, the
Company does not currently intend to pursue this program until it obtains
substantial additional funding or enters into collaboration with another company
for such purpose. The Company is presently preparing a manuscript for submission
for publication.
In February 2001, some of the researchers at the 8th Conference on
Retroviruses and Opportunistic Infections held in Chicago called for a delay in
starting patients on the powerful multiple drug therapies. Previously, the old
treatment guidelines started patients on therapy when their T-cells (CD4+) fell
below 500 cells or the amount of HIV in the blood goes above 20,000 copies per
milliliter as measured by PCR testing. The new guidelines call for initiating
treatment when T-cells fall below 350, or when the virus rose above 55,000
copies, which can take several years. In the Company's HIV trials with ALFERON N
Injection, the subgroup of patients with T-cell counts above 400 and not on any
other therapy seemed to show the most benefit. Therefore, if these new
guidelines are adopted, the type of additional trials the FDA might require
could be substantially different and the role that ALFERON N Injection could
play in the treatment of HIV infected patients could potentially be important.
There can be no assurance that ALFERON N Injection for the treatment of
patients with HIV will be cost-effective, safe, and effective or that the
Company will be able to obtain FDA approval for such use. Furthermore, even if
such approval is obtained, there can be no assurance that such product will be
commercially successful or will produce significant revenues or profits for the
Company.
Hepatitic C. Chronic viral hepatitis is a liver infection caused by various
hepatitis viruses. The United States Centers for Disease Control estimates that
nearly four million people in the United States are presently infected with the
hepatitis C virus ("HCV"), a majority of who become chronic carriers and will
suffer gradual deterioration of their liver and possibly cancer of the liver.
Several brands of recombinant interferon and a cell-cultured interferon have
been approved for the treatment of hepatitis C in the United States and by
various regulatory agencies worldwide. See "Business - ALFERON N Injection -
Competition." However, reports have indicated that many patients either do not
respond to treatment with the recombinant products or relapse after treatment.
The Company has conducted three multi-center, randomized, open-label, dose
ranging Phase 2 clinical trials utilizing ALFERON N Injection with patients
chronically infected with HCV. The objective of the Company's HCV clinical
studies was to compare the safety and efficacy of different doses of Natural
Alpha Interferon injected subcutaneously in naive (previously untreated),
refractory (unsuccessfully treated with recombinant interferon), and relapsing
(initially responded to recombinant interferon but later relapsed) patients.
The results in naive patients indicated a significant dose-dependent
response at the end of treatment favoring the highest dose group. In addition,
treatment of naive patients with ALFERON N Injection did not produce any
interferon-neutralizing antibodies. An oral presentation of the results in naive
patients was given at the American Association for the Study of Liver Diseases
("AASLD") meeting that took place in November 1995. The results of this study
were published in the February 1997 issue of Hepatology.
The results in refractory patients indicated a significant dose-dependent
response at the end of treatment favoring the highest dose group. A poster
presentation of the results in refractory patients was given at the AASLD
meeting that took place in November 1995.
As a result of the promising results obtained in the study on naive
patients, the study on relapsing patients, which was accruing patients slowly,
was terminated early so that the Company could concentrate its limited resources
on pursuing the Phase 3 trials in naive patients, discussed below.
After meeting with the FDA, the Company commenced in 1996 a Phase 3
multi-center, open label, randomized, controlled clinical trial designed to
evaluate the safety and efficacy of ALFERON N Injection in naive chronic
hepatitis C patients. The trial was conducted at 26 sites located in the United
States and Canada and a total of 321 people were treated. The trial consisted of
a 24-week treatment phase and 24-week follow-up and also included an interim
analysis after approximately one-half of the enrolled patients completed the
treatment and follow-up phases.
On April 2, 1998, the Company announced it had completed the interim
analysis of the results for approximately half of the enrolled patients. If the
results of the interim analysis had demonstrated at a very high level of
statistical significance that ALFERON N Injection is effective, the Company
intended to seek FDA approval while continuing to follow the other enrolled
patients. However, while the efficacy analysis indicated that ALFERON N
Injection and the control treatment (an approved therapy) appeared to yield
similar results, the study protocol required a showing of superiority in order
to meet the criteria for statistical significance in the interim analysis.
Therefore the Company did not seek FDA approval based on the interim analysis.
The Phase 3 study was completed in 1998. The Company completed the final
analysis of the data in March 1999, and met with the FDA to determine the
acceptability of the results for filing purposes. At that meeting, the FDA
advised the Company that the results of the trial were insufficient to file for
approval because the designed endpoint of the trial (which required a showing of
superiority in sustained normalization of liver enzymes at the end of treatment
and after six months of follow up) was not met. Therefore, the FDA informed the
Company that an additional trial would be required to further evaluate the
efficacy of Alferon N Injection for this indication. At the present time, the
Company does not have the resources necessary to conduct an additional study and
does not plan to initiate such a study unless it can find a sponsor to continue
this program.
HIV and Hepatitic C Co-Infected Patients. In December 1997, patient
enrollment commenced in a Phase 2 multi-center, open label clinical trial
designed to evaluate the safety and efficacy of ALFERON N Injection in patients
co-infected with HIV and HCV. In May, 2000 an abstract entitled "Treatment of
HCV/HIV Coinfection with Leukocyte Derived Interferon Alfa-n3", was accepted for
publication in Gastroenterology.
Multiple Sclerosis. Multiple sclerosis ("MS") is a chronic, sometimes
progressive, immune-mediated disease of the central nervous system that is
believed to occur in genetically predisposed individuals following exposure to
an environmental factor, such as virus infection. The disease affects an
estimated 250,000 to 350,000 people in the United States, primarily young
adults. Symptoms of MS, including vision problems, muscle weakness, slurred
speech, and poor coordination, are believed to occur when the patient's own
cells attack and ultimately destroy the insulating myelin sheath surrounding the
brain and spinal cord nerve fibers, resulting in improper transmission of
signals throughout the nervous system.
In the United States, two recombinant forms of beta interferon have been
approved for the treatment of relapsing-remitting MS. However, reports in the
scientific literature and elsewhere have indicated that the significant adverse
reactions associated with the treatments may limit their usefulness for a subset
of patients. In addition, Copaxone(R), a non-interferon product, was approved by
the FDA to treat relapsing-remitting multiple sclerosis. Based in part on
encouraging anecdotal reports on the use of ALFERON N Injection in MS patients,
as well as a recent poster presentation entitled "Management of
Interferon-(beta)1b (Betaseron) Failures in MS with Interferon-(alpha)n3
(ALFERON N)", given at the Charcot Foundation Meeting in Switzerland in March
2000, the Company is sponsoring at the University of Miami School of Medicine, a
retrospective comparison of the responses to treatment with ALFERON N Injection,
Betaseron and no therapy, to assess the therapeutic benefit of ALFERON for
treatment of patients with MS. This comparison is based on a double blind
evaluation of MRI studies of the CNS taken before and after treatment of each
patient in each of the study groups. The experience with ALFERON N Injection for
the treatment of MS has involved in excess of 100 patients, a number of whom
have continued ALFERON N Injection for periods in excess of five years. Timing
of future clinical trials will be dependent upon the results of this
retrospective study and the Company's ability to obtain additional funding or a
sponsor.
Other HPV Indications or Routes of Administration. The Company is also
evaluating whether to investigate the potential use of ALFERON N Injection by
subcutaneous systemic administration for the treatment of genital warts.
Currently, the approved route of administration is intralesional and requires up
to 16 office visits to the medical practitioner. If subcutaneous systemic
treatment were found to be efficacious, patients could potentially
self-administer the product as they have done in many of the clinical trials
conducted by the Company. This would make treatment considerably more convenient
for patients.
In addition, in the following two publications: "Adjuvant Interferon for
Anal Condyloma, A Prospective Randomized Trial", Dis Colon Rectum 1994, and
"Interferon as an Adjuvant Treatment for Genital Condyloma Acuminatum", Intl J
Gynecol Obstet 1995, in which ALFERON N Injection was studied in conjunction
with other treatments for genital warts, the authors reported that the addition
of ALFERON N Injection to the other ablative therapies significantly reduced the
recurrence rates. The Company is evaluating whether to conduct clinical trials
to further investigate the potential use of ALFERON N Injection as an adjuvant
to surgical treatment.
Marketing and Distribution. The Company has focused its efforts in the
United States on making additional sales to existing customers. The Company does
not have its own sales force. In June 1998, the Company entered into an
agreement appointing Integrated Commercialization Solutions, Inc. ("ICS"), a
subsidiary of Bergen Brunswig Corporation, as the sole United States distributor
of ALFERON N Injection. ICS distributes ALFERON N Injection to wholesalers
throughout the United States. The Company does not believe that the loss of any
one wholesaler would have a material adverse effect on the Company's sales or
financial position. Pursuant to such agreement, ICS also provides clinical and
product information, reimbursement information and services, and management of
patient assistance services. Most of the Company's sales have been in the United
States.
Manufacturing. The purified drug concentrate utilized in the formulation of
ALFERON N Injection is manufactured in the Company's facility located in New
Brunswick, New Jersey, and ALFERON N Injection is formulated and packaged at a
production facility located in McPherson, Kansas and operated by Abbott
Laboratories Inc. ("Abbott"). At the present time, the Company has discontinued
production of crude interferon. The Company intends to convert intermediates to
finished product as needed. The Company believes it has produced sufficient
inventory of these intermediates to satisfy its clinical and commercial needs
for the foreseeable future. See "Business - ALFERON N Injection - Clinical
Trials for New Indications," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business - Governmental Regulation," and
"Properties."
Competition. Presently, INTRON A, manufactured by Schering Plough Corp.
("Schering"), is the one other injectable interferon product approved by the FDA
for the treatment of genital warts. INTRON A is made from recombinant alpha
interferon. Since the production of INTRON A is not dependent on a source of
human blood cells, it may be able to be produced in greater volume and at a
lower cost than ALFERON N Injection. Currently, the Company's wholesale price on
a per unit basis of ALFERON N Injection is substantially higher than that of
INTRON A. In 1997, 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of external genital and perianal warts. ALFERON N Injection also
competes with surgical, chemical, and other methods of treating genital warts.
The Company cannot assess the impact from products developed by the Company's
competitors or advances in other methods of the treatment of genital warts on
the commercial viability of its product.
If and when the Company obtains approvals for additional indications of
ALFERON N Injection, it expects to compete primarily on the basis of product
performance and price with a number of pharmaceutical companies, both in the
United States and abroad.
A number of synthetic antiviral compounds have been approved in the United
States and certain foreign countries for the treatment, primarily in combination
therapy, of HIV infection and AIDS. Shown in Table 1 below are the drugs, which
are currently approved in the United States for the treatment of patients
infected with HIV.
Table 1: HIV Antiretroviral Drugs Approved in the United States
Class of Drug Brand Name Generic Name Manufacturer
- --------------------------------------------------------------------------------------
Nucleoside Reverse Combivir(R) Zidovudine + Lamivudine Glaxo Wellcome
Transcriptase Inhibitors Epivir(R) Lamivudine Glaxo Wellcome
Hivid(R) Zalcitabine Hoffmann-La Roche
Retrovir(R) Zidovudine Glaxo Wellcome
Videx(R) Didanosine Bristol-Myers Squibb
Zerit(R) Stavudine Bristol-Myers Squibb
Ziagen(R) Abacavir Glaxo Wellcome
Non-Nucleoside Reverse Rescriptor(R) Delavirdine Pharmacia & Upjohn
Transcriptase Inhibitors Viramune(R) Nevirapine Boehringer Ingelheim
Sustiva(R) Efavirenz DuPont-Merck
Protease Inhibitors Crixivan(R) Indinavir Merck & Co.
Invirase(R) Saquinavir Hoffmann-La Roche
Fortovase(R) Saquinavir Hoffmann-La Roche
Norvir(R) Ritonavir Abbott Laboratories
Viracept(R) Nelfinavir Agouron Pharmaceuticals
Agenerase(R) Amprenavir Glaxo Wellcome
Kaletra(R) Lopinavir + Ritonavir
Schering's recombinant interferon product is already approved for the
treatment of hepatitis C and hepatitis B in the United States and other markets,
as well as for many other medical uses. Recently Schering's PEG-Intron(TM) was
approved for the treatment of patients with chronic hepatitis not previously
treated with interferon. Roche Pharmaceuticals's recombinant interferon product
has been approved for the treatment of hepatitis C in the United States and for
other medical uses in the United States and in foreign countries. In addition,
Amgen Inc.'s recombinant interferon, Infergen(R), also known as consensus
interferon product, as well as Glaxo SmithKilne's cell culture derived
interferon, Wellferon(R), are approved for the treatment of hepatitis C in the
United States.
In the United States, two recombinant forms of beta interferon, Biogen,
Inc.'s Avonex(R) and Berlex Laboratories' Betaseron(R) as well as Teva Marion
Partners' Copaxone(R), a non-interferon product, have been approved for the
treatment of relapsing-remitting MS.
Many of the Company's potential competitors are among the largest
pharmaceutical companies in the world, are well known to the public and the
medical community, and have substantially greater financial resources and
product development, manufacturing, and marketing capabilities than the Company
or its marketing partners. Therefore, there can be no assurance that, if the
Company is able to obtain regulatory approval of ALFERON N Injection for the
treatment of any additional diseases, it will be able to achieve any significant
penetration into those markets.
Licenses and Royalty Obligations
F. Hoffmann-LaRoche Ltd. and Hoffmann-La Roche, Inc. (collectively,
"Hoffmann") have been issued patents covering human alpha interferon in many
countries throughout the world. In 1995, the Company obtained a non-exclusive
perpetual license from Hoffmann (the "Hoffmann Agreement"), which grants the
Company the worldwide rights to make, use, and sell, without a potential patent
infringement claim from Hoffmann, any formulation of Natural Alpha Interferon.
The Hoffmann Agreement permits the Company to grant marketing rights with
respect to Natural Alpha Interferon products to third parties, except that the
Company cannot grant marketing rights with respect to injectable products in any
country in which Hoffmann has patent rights covered by the Hoffmann Agreement
(the "Hoffmann Territory") to any third party not listed on a schedule of
approximately 50 potential marketing partners without the consent of Hoffmann,
which consent cannot be unreasonably withheld.
Under the terms of the Hoffmann Agreement, the Company is obligated to pay
Hoffmann an aggregate royalty on net sales (as defined) of Natural Alpha
Interferon products by the Company in an amount equal to (i) 8% of net sales in
the Hoffmann Territory, and 2% of net sales outside the Hoffmann Territory of
products manufactured in the Hoffmann Territory, up to $75,000,000 of net sales
in any calendar year and (ii) 9.5% of net sales in the Hoffmann Territory, and
2% of net sales outside the Hoffmann Territory of products manufactured in the
Hoffmann Territory, in excess of $75,000,000 of net sales in any calendar year,
provided that the total royalty payable in any calendar year shall not exceed
$8,000,000. The Hoffmann Agreement can be terminated by the Company on 30 days'
notice with respect to the United States patent, any individual foreign patent,
or all patents owned by Hoffmann. If the Hoffmann Agreement is terminated with
respect to the patents owned by Hoffmann in a specified country, such country is
no longer included in the Hoffmann Territory. Accordingly, the Company would not
be permitted to market any formulation of alpha interferon in such country.
In addition, the Company agreed to pay GP Strategies Corporation ("GP
Strategies") a royalty of $1 million in connection with the acquisition of
certain intellectual property and technology rights from GP Strategies. Such
amount is payable if and when the Company generates income before taxes, limited
to 25% of such income before income taxes per year until the amount is paid in
full. To date, the Company has not generated income before taxes and therefore
has not paid royalties to GP Strategies.
Governmental Regulation
Regulations imposed by U.S. federal, state, and local authorities, as well
as their counterparts in other countries, are a significant factor in the
conduct of the research, development, manufacturing, and marketing activities
for present and proposed products developed by the Company.
The Company's or its licensees' potential products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human medical products are subject to rigorous pre-clinical and clinical testing
and other approval procedures by the FDA in the United States and similar health
authorities in foreign countries. Various federal and, in some cases, state
statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, record keeping, and marketing of such products, including the
use, manufacture, storage, handling, and disposal of hazardous materials and
certain waste products. The process of obtaining these approvals and the
subsequent compliance with applicable federal and foreign statutes and
regulations involves a time-consuming process and requires the expenditure of
substantial resources.
The effect of government regulation may be to delay for a considerable
period of time or prevent the marketing of any product that the Company may
develop and/or impose costly procedures on the Company's activities, the result
of which may be to furnish an advantage to the Company's competitors. Any delay
in obtaining or failure to obtain such approvals would adversely affect the
marketing of the Company's products and the ability to earn product revenue.
Before testing of any agents with potential therapeutic value in healthy
human test subjects or patients may begin, stringent government requirements for
pre-clinical data must be satisfied. These data, obtained from studies in
several animal species, as well as from laboratory studies, are submitted in a
Notice of Claimed Investigational Exemption for a New Drug or its equivalent in
countries outside the U.S. where clinical studies are to be conducted. If the
necessary authorizations are received, the Company then conducts clinical tests
of its products on human beings at various unaffiliated medical centers and
institutions. Initial trials (Phase 1) are conducted on a small number of
volunteers to determine whether the drug is safe for human beings. If the
initial trials demonstrate the safety of the product, trials (Phase 2) are then
conducted on patients affected with the disease or condition under investigation
to establish the proper dose and dosing interval. The findings of these trials
are then used to design and implement large-scale controlled trials (Phase 3) to
provide statistical proof of effectiveness and adequate evidence of safety to
meet FDA and/or foreign approval requirements.
The FDA closely monitors the progress of each of the phases of clinical
testing and may, at its discretion, re-evaluate, alter, suspend, or terminate
the testing based on the data which have been accumulated to that point and its
assessment of the risk/benefit ratio to the patient. Estimates of the total time
required for completing clinical testing vary between four and ten years. Upon
successful completion of clinical testing of a new drug, a company typically
submits a New Drug Application ("NDA"), or for biological products such as
Natural Alpha Interferon, a Biological License Application ("BLA") to the FDA
summarizing the results and observations of the drugs during the clinical
trials.
Each facility, in which products are produced and packaged, whether
operated by the Company or a third party, must meet the FDA's standards for
current good manufacturing practices and must also be approved prior to
marketing any product produced or packaged in such facility. Any significant
change in the production process that may be commercially required, including
changes in sources of certain raw materials, or any change in the location of
the production facilities will also require FDA approval. To the extent a
portion of the manufacturing process for a product is handled by an entity other
than the Company, the Company must similarly receive FDA approval for the other
entity's participation in the manufacturing process. Abbott formulates and
packages ALFERON N Injection. The Company presently has a biologic establishment
license for the facilities in which it produces ALFERON N Injection, which
includes the facilities in which Abbott formulates and packages ALFERON N
Injection.
Once the manufacture and sale of a product is approved, various FDA
regulations govern the production processes and marketing activities of such
product. A post-marketing testing, surveillance, and reporting program may be
required to monitor the product's usage and effects. Product approvals may be
withdrawn, or other actions may be ordered, if compliance with regulatory
standards is not maintained.
Each individual lot of Natural Alpha Interferon produced must be tested for
compliance with specifications and released for sale by the FDA prior to
distribution in the marketplace. Even after initial FDA marketing approval for a
product has been granted, further studies may be required to provide additional
data on safety or efficacy; to obtain approval for marketing a product as a
treatment for specific diseases other than those for which the product was
originally approved; to change the dosage levels of a product; to support new
safety or efficacy claims for the product; or to support changes in
manufacturing methods, facilities, sources of raw materials, or packaging.
In many markets, effective commercialization also requires inclusion of the
product in national, state, provincial, or institutional formularies or cost
reimbursement systems. The impact of new or changed laws or regulations cannot
be predicted with any accuracy. The Company uses its own staff of regulatory
affairs professionals and outside consultants to enable it to monitor
compliance, not only with FDA laws and regulations, but also with state and
foreign government laws and regulations.
Promotional and educational communications by the Company and its
distributors also are regulated by the FDA and are governed by statutory and
regulatory restrictions and FDA policies regarding the type and extent of data
necessary to support claims that may be made. The Company currently does not
have data adequate to satisfy FDA requirements with respect to potential
comparative claims between Natural Alpha Interferon and competing recombinant
interferon products.
For marketing outside the United States, the Company will also be subject
to foreign regulatory requirements governing human clinical trials,
manufacturing, and marketing approval for drugs and other medical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing, and reimbursement vary widely from country to country. In addition to
its United States approval, ALFERON N Injection has received regulatory approval
in Mexico, Germany, Hong Kong, and Singapore, and registration filings have been
submitted in certain other countries.
Under certain circumstances, the Company may be required to obtain FDA
authorization to export products for sale in foreign countries. For instance, in
most cases, the Company may not export products that have not been approved by
the FDA unless it first obtains an export permit from the FDA. However, these
FDA export restrictions generally do not apply if the Company's products are
exported in conformance with their United States approvals or are manufactured
outside the United States. At the present time, the Company does not have any
foreign manufacturing facilities.
Investments
Metacine
On July 28, 2000, the Company acquired for $100,000 an option to purchase
certain securities of Metacine, Inc. a privately held company engaged primarily
in cancer research on the terms set forth below. Metacine used a portion of such
funds to retain a third party to conduct a review and analysis of Metacine's
intellectual property. The option may be exercised by the Company during the
60-day period following the Company's receipt of such review and analysis, which
will end on April 15, 2001.
If the option is exercised, Metacine is required to issue to the Company
700,000 shares of Metacine common stock and a warrant to purchase, at a price of
$12.48 per share, 178,056 shares of Metacine common stock in exchange for an
aggregate of $2,400,000 in a combination of cash, services to be rendered by the
Company to Metacine, and shares of the Company's common stock. Upon exercise of
the option, the Company would have a significant equity investment in Metacine.
The Company and the other stockholders of Metacine have entered into a
stockholders' agreement providing for rights of first refusal, tag-along rights,
and preemptive rights. The agreement also provides that the Company will have
one representative on Metacine's board and will vote its shares in the same
manner as votes of Metacine's other stockholders, and that certain corporate
actions will not be taken without the Company's consent.
The essential feature of Metacine's therapeutic strategy is the
modification and targeted activation of dendritic cells ("DC"), the body's
primary antigen presenting cell, for the treatment of first cancer, and then
viral disease, autoimmune disease and organ transplant rejection. The deployment
of DCs results in a cellular immune response culminating in the production of
two types of target-specific T cells (cytolytic and helper) that team together
to find and destroy tumors and virally infected cells. For effective treatment
of cancer (and chronic viral infections), a patient requires a large number of
cytolytic and helper T cells. In the case of transplant rejection (and
auto-immune disease), too many existing T cells attack donor (or normal) tissue,
ultimately killing the donated organ. Production of these T cells needs to be
curtailed to improve the chances of a successful outcome.
Metacine, whose founding scientists have received more than $25 million in
Federal grants for DC research, is pursuing four different approaches to the
therapeutic use of DCs for the treatment of cancer: (1) ex vivo cell processing
using DCs pulsed with known antigens to create allogenic vaccines, (2) ex vivo
cell processing using patient DCs cultured with patient tumor cells to create
multi-epitope, patient specific, autologous vaccines, (3) in vivo activation of
DCs to stimulate the patient's immune system to attack the primary tumor as well
as metastatic sites, and (4) use of DCs as "intelligent" gene therapy vectors
that carry therapeutic genes to the primary tumor, then stimulate the patient's
immune system to attack the tumor and any metastatic sites.
Metacine's program for prevention of organ transplant rejection represents
another important area of application for DCs. Ex vivo culturing and
re-introduction of tolerogenic DCs down-regulates the patient's immune system by
flooding the system with DCs that do not present the transplanted organ's
antigens. Mouse models in which tolerogenic DCs are introduced to prevent
rejection of transplanted tissue have shown highly positive results as evidenced
by reduction of detrimental host vs. graft immune response, and significant
extension of life following organ transplant.
A general lack of side effects has been observed by Metacine, and by others
investigating DC-based therapy, in human clinical trials, which is probably due
to the fact that the technology utilizes the body's own cells, and antigens that
are already present in the body.
Research Staff and Employees
As of January 31, 2001, the Company had 40 employees, 5 of whom work
less than full time. Of the 40 employees, 7 hold Ph.D. degrees, 1 holds an M.D.
degree and 16 hold other degrees in scientific or technical fields. Of such
employees, approximately 7 were engaged in research and product development, 12
were engaged in quality control, regulatory and quality assurance and product
and process improvement for manufacturing, 7 were engaged in engineering and
maintenance, 4 were engaged in medical affairs and 10 were general and
administrative personnel.
Research and Development
During the years ended December 31, 2000, 1999, and 1998, the Company
expended approximately $1.5 million, $3.1 million, and $8.7 million,
respectively, for research and development. Substantially all of these
expenditures were for Company-sponsored research and development programs.
Executive Officers of the Registrant
The following table sets forth the names of the principal executive
officers of the Company as of March 13, 2001 and their positions with the
Company. The principal business experience of the executive officers for the
last five years is also described below.
Name Age Position
Samuel H. Ronel, Ph.D 64 Chairman of the Board
Lawrence M. Gordon 47 Chief Executive Officer and a Director
Stanley G. Schutzbank, Ph.D., R.A.C. 55 President and a Director
Donald W. Anderson 51 Controller (Principal Accounting and
Financial Officer) and Secretary
Mei-June Liao, Ph.D. 49 Vice President, Research and Development
James R. Knill, M.D. 68 Vice President, Medical Affairs
Robert P. Hansen 56 Vice President, Manufacturing
Samuel H. Ronel, Ph.D. has been Chairman of the Board since February 1997
and was Vice Chairman of the Board from January 1996 to February 1997 and
President, Chief Executive Officer, and a director of the Company from 1981 to
January 1996. He was responsible for the interferon research and development
program since its inception in 1979. Dr. Ronel joined GP Strategies in 1970 and
served as the Vice President of Research and Development of GP Strategies and as
the President of Hydro Med Sciences, a division of GP Strategies, from 1976 to
September 1996. Dr. Ronel served as President of the Association of
Biotechnology Companies, an international organization representing United
States and foreign biotechnology firms, from 1986-88 and has served as a member
of its Board of Directors until 1993. Dr. Ronel was elected to the Board of
Directors of the Biotechnology Industry Organization from 1993 to 1995 and to
the Governing Body of the Emerging Companies Section from 1993 to 1997. Since
1999 he has been a member of the Technology Advisory Board of the New Jersey
Economic Development Authority.
Lawrence M. Gordon has been Chief Executive Officer and a director of the
Company since January 1996, Vice President of the Company from June 1991 to
January 1996, General Counsel of the Company from 1984 to January 1996.
Stanley G. Schutzbank, Ph.D. has been President of the Company since
January 1996, Executive Vice President of the Company from 1981 to January 1996,
and a director of the Company since 1981 and has been associated with the
interferon research and development program since its inception in 1979. He is
involved with all facets of administration and planning of the Company and has
coordinated compliance with FDA regulations governing manufacturing and clinical
testing of interferon, leading to the approval of ALFERON N Injection in 1989.
Dr. Schutzbank joined GP Strategies in 1972 and served as the Corporate Director
of Regulatory and Clinical Affairs of GP Strategies from 1976 to September 1996
and as Executive Vice President of Hydro Med Sciences from 1982 to September
1996. Dr. Schutzbank is a member of the Regulatory Affairs Professionals Society
(RAPS) and has served as Chairman of the Regulatory Affairs Certification Board
from its inception until 1994. Dr. Schutzbank received the 1991 Richard E. Greco
Regulatory Affairs Professional of the Year Award for his leadership in
developing the United States Regulatory Affairs Certification Program. In
September 1995, Dr. Schutzbank was elected to serve as President-elect in 1996,
President in 1997, and Chairman of the Board in 1998 of RAPS. In October 2000,
Dr. Schutzbank received the Leonard J. Stauffer Award from RAPS. RAPS gives this
award once each year to a Regulatory Affairsw Certified (RAC) individual who
exemplifies outstanding service to the RAC Program and/or mentoring in the
regulatory affairs profession.
Donald W. Anderson has been the Controller of the Company since 1981 and
Corporate Secretary of the Company since 1988. He was an officer of various
subsidiaries of GP Strategies from 1976 to September 1996.
Mei-June Liao, Ph.D. has been Vice President, Research and Development of
the Company since March 1995. She has served as a Director, Research &
Development since 1987, and held senior positions in the Company's Research &
Development Department since 1983. Dr. Liao received her Ph.D. from Yale
University and completed a three-year postdoctoral appointment at the
Massachusetts Institute of Technology under the direction of Nobel Laureate in
Medicine, Professor H. Gobind Khorana. Dr. Liao has authored many scientific
publications and invention disclosures.
James R. Knill, M.D. has been Vice President, Medical Affairs of the
Company since September 1996 and a consultant to the Company from November 1995
to September 1996. Dr. Knill was employed as Vice President of Medical Affairs
for Cytogen Corporation from 1994 to 1995 and as consultant for Cytogen
Corporation from 1995 to July 1996. He was previously employed for more than 20
years as Vice President of Medical Affairs for Bristol-Myers Squibb Company.
Robert P. Hansen has been Vice President, Manufacturing of the Company
since February 1997. He served as a Director of Manufacturing since 1995, and
held senior positions in the Company's Manufacturing Department since 1987.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
All of the Company's material operations and sales are conducted in the
United States.
Item 2. Properties
The Company's executive offices and its research and production facilities
are located at 783 Jersey Avenue, New Brunswick, New Jersey 08901, and its
telephone number is (732) 249-3250.
The Company owns two freestanding buildings comprising approximately 44,000
square feet that are located in New Brunswick, New Jersey. The Company uses the
facilities for staff offices, for the conversion of interferon intermediates to
finished product, for quality control and research activities, and for the
storage of raw, in process and finished materials.
The Company believes that its current facilities and equipment are suitable
and adequate for research and development and the conversion of interferon
intermediates to finished product, and in good condition.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Common Stock is traded on the OTC Bulletin Board and is quoted under
the symbol IFSC. On April 13, 1999, the Common Stock was delisted from the
NASDAQ National Market System for failure to maintain certain listing
requirements. The following table sets forth for each period indicated, the high
and low sales prices for the Common Stock as reported on the NASDAQ National
Market System through April 13, 1999 and on the OTC Bulletin Board commencing
April 14, 1999.
All prices have been adjusted for a one-for-five reverse stock split
effective as of January 6, 1999.
2 0 0 0 1 9 9 9
------------ -----------
Quarter High Low High Low
- ------- ---- --- ---- ---
First....... $ 5 5/8 $ 5/16 $ 2 1/2 $ 3/4
Second.... 3 1 1/8 1 3/16
Third...... 2 9/16 1 1/32 1/2 7/32
Fourth..... 1 9/32 3/8 15/32 1/8
As of March 22, 2001, the Company had 663 stockholders of record.
The Company has not paid any dividends on the Common Stock since its
inception and does not contemplate paying dividends on the Common Stock in the
foreseeable future.
Item 6. Selected Financial Data
- --------------------------------
(Thousands of dollars except per share data)
Year Ended December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenues $ 1,069 $ 2,329 $ 2,007 $ 2,956 $ 2,092
Cost of goods sold and excess/
idle production costs 2,332 3,552 6,533 1,858 1,400
Research and development costs, net 1,533 3,060 8,655 11,864 6,400
General and administrative expense 2,306 2,315 4,570 4,389 3,405
Loss from operations* (4,539) (5,420) (20,841) (22,410) (12,426)
Interest income (expense and
Financing costs) , net 74 (530) 253 670 441
Gain on sale of state net
operating loss carryovers 1,484 2,349
Net loss* (2,982) (3,602) (21,325) (21,740) (11,986)
Basic and diluted loss per share (.25) (.71) (6.67) (8.15) (5.98)
Dividends NONE NONE NONE NONE NONE
- ----------------------------------
*The Company has suffered recurring losses from operations and has an
accumulated deficit that raises substantial doubt about its ability to continue
as a going concern (see Note 3 to the Consolidated Financial Statements).
December 31,
2000 1999 1998 1997 1996
------------------------------------------------
Total assets $8,998 $6,256 $6,599 $24,153 $27,743
Working capital (deficiency) 3,043 (2,097) (1,889) 14,529 19,929
Long-term debt 500
Stockholders' equity 5,852 557 2,103 20,214 25,374
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Since 1981, the Company has been primarily engaged in the research and
development of pharmaceutical products containing Natural Alpha Interferon. The
Company has experienced significant operating losses since its inception. The
Company received FDA approval in 1989 to market ALFERON N Injection in the
United States for the treatment of certain genital warts. ALFERON N Injection is
currently marketed and sold in the United States by the Company and in Mexico
and Germany by licensees. However, the Company has had limited revenues from the
sale of ALFERON N Injection to date. For the Company to operate profitably, the
Company must sell significantly more ALFERON N Injection. Increased sales will
depend primarily upon the expansion of existing markets and/or successful
attainment of FDA approval to market ALFERON N Injection for additional
indications. The future revenues and profitability of, and availability of
capital for, biotechnology companies may be affected by the continuing efforts
of governmental and third-party payors to contain or reduce the costs of health
care through various means. The Company has primarily financed its operations to
date through private placements and public offerings of the Company's
securities.
Management is continuing to pursue raising additional capital by either (i)
issuing securities in a private or public equity offering or (ii) licensing the
rights to its injectable, topical or oral formulations of natural alpha
interferon. This may be more difficult in the future in light of the FDA's
requirement for the Company to conduct additional Phase 3 studies of ALFERON N
Injection in the treatment of patients infected with the human immunodeficiency
virus and hepatitis C virus. See "Business - ALFERON N Injection - Clinical
Trials for New Indications." Management also is seeking to enter into mergers,
joint ventures or other collaborations that could provide the additional
resources necessary to advance the Company's most valuable programs. The
Company's strategy is to utilize its expertise in regulatory affairs, clinical
trials, manufacturing, and research and development to acquire equity
participations in early stage companies. For a description of the Company's
first investment, see "Business - Investments - Metacine". There can be no
assurances, however, that the Company will be successful in obtaining an
adequate level of financing, on terms that are acceptable to the Company, needed
to continue operations.
Liquidity and Capital Resources
During 2000, the Company completed a private offering in which it raised
gross proceeds of $7,679,380 from the sale of 11,635,451 shares of common stock
at a price of $.66 per share and warrants, exercisable until April 2005 to
purchase 11,635,451 shares of common stock at a price of $1.50 per share. The
proceeds from this private placement will be used to fund new initiatives, in
addition to funding certain projects within the Company's existing
interferon-related operations. The Company is seeking to enter into
collaborations with companies in the areas of cancer, infectious diseases, and
immunology. The strategy is to utilize our expertise in regulatory affairs,
clinical trials, manufacturing, and research and development to acquire equity
participations in early stage companies. As of March 22, 2001, the Company had
an aggregate of approximately $3.8 million in cash and cash equivalents. Until
utilized, such cash and cash equivalents are being invested principally in
short-term interest-bearing investments.
The Company's future capital requirements will depend on many factors,
including: continued scientific progress in its drug development programs; the
magnitude of these programs; progress with pre-clinical testing and clinical
trials; the time and costs involved in obtaining regulatory approvals; the costs
involved in filing, prosecuting, and enforcing patent claims; competing
technologies and market developments; changes in its existing research
relationships; and the ability of the Company to establish collaborative
arrangements and effective commercialization activities and arrangements.
Based on the Company's estimates of revenues, expenses, the timing of
repayment of creditors, and levels of production, management believes that the
cash presently available will be sufficient to enable the Company to continue
operations until November, 2001. However, actual results, especially with
respect to revenues, may differ materially from such estimate, and no assurance
can be given that additional funding will not be required sooner than
anticipated or that such additional funding, whether from financial markets or
collaborative or other arrangements with corporate partners or from other
sources, will be available when needed or on terms acceptable to the Company.
Insufficient funds will require the Company to further delay, scale back, or
eliminate certain or all of its research and development programs or to license
third parties to commercialize products or technologies that the Company would
otherwise seek to develop itself. The independent auditors' report, dated March
9, 2001, on the Company's consolidated financial statements as of and for the
year ended December 31, 2000 includes an explanatory paragraph that states that
the Company has suffered recurring losses from operations, has an accumulated
deficit and has limited liquid resources that raise substantial doubt about its
ability to continue as a going concern.
The Company participates in the State of New Jersey's corporation business
tax benefit certificate transfer program (the "Program"), which allows certain
high technology and biotechnology companies to transfer unused New Jersey net
operating loss carryovers to other New Jersey corporation business taxpayers.
During 1999, the Company submitted an application to the New Jersey Economic
Development Authority (the "EDA") to participate in the Program and the
application was approved. The EDA then issued a certificate certifying the
Company's eligibility to participate in the Program and the amount of New Jersey
net operating loss carryovers the Company has available to transfer. Since New
Jersey law provides that net operating losses can be carried over for up to
seven years, the Company may be able to transfer its New Jersey net operating
losses from the last seven years. The Company estimated that, as of January 1,
1999, it had approximately $85 million of unused New Jersey net operating loss
carryovers available for transfer under the Program. The Program requires that a
purchaser pay at least 75% of the amount of the surrendered tax benefit.
During December 2000 and December 1999, the Company completed the sale of
approximately $19 million and $32 million of its New Jersey tax loss carryovers
and received $1.48 million (in January 2001) and $2.35 million (in December
1999), which was recorded as a gain on sale of state net operating loss
carryovers on its Consolidated Statement of Operations in 2000 and 1999,
respectively. In June 2001, the Company will submit an application to sell an
additional $3.6 million of tax benefits (calculated by multiplying the Company's
unused New Jersey net operating loss carryovers through December 31, 2000 of
approximately $40 million by 9%). The actual amount of such tax benefits the
Company may sell will depend upon the allocation among qualifying companies of
an annual pool established by the State of New Jersey. The allocated pool for
fiscal year 2001 and future years is $40 million per year.
The Company obtained human white blood cells used in the manufacture of
ALFERON N Injection from several sources, including the Red Cross pursuant to a
supply agreement dated April 1, 1997 (the "Supply Agreement"). The Company will
not need to purchase more human white blood cells until such time as production
of crude alpha interferon is resumed, and has not purchased any since April 1,
1998. Under the terms of the Supply Agreement, the Company was obligated to
purchase a minimum amount of human white blood cells each month through March
1999 (the "Minimum Purchase Commitment"), with an aggregate Minimum Purchase
Commitment during the period from April 1998 through March 1999 in excess of
$3,000,000. As of November 23, 1998, the Company owed the Red Cross
approximately $1.46 million plus interest at the rate of 6% annum accruing from
April 1, 1998 (the "Red Cross Liability") for white blood cells purchased
pursuant to the Supply Agreement.
In an agreement dated November 23, 1998, the Company agreed to grant the
Red Cross a security interest in certain assets to secure the Red Cross
Liability and to issue to the Red Cross 300,000 shares of Common Stock (with a
market value of $1,171,875 at December 4, 1998) and additional shares at some
future date as requested by the Red Cross to satisfy any remaining amount of the
Red Cross Liability. The Red Cross agreed that any net proceeds received by it
upon sale of such shares would be applied against the Red Cross Liability and
that at such time as the Red Cross Liability was paid in full, the Minimum
Purchase Commitment would be deleted effective April 1, 1998 and any then
existing breaches of the Minimum Purchase Commitment would be waived. In January
1999 the Company granted the Red Cross a security interest (the "Security
Interest") in, among other things, the Company's real estate, equipment
inventory, receivables, and New Jersey net operating loss carryovers to secure
repayment of the Red Cross Liability, and the Red Cross agreed to forbear from
exercising its rights under the Supply Agreement, including with respect to
collecting the Red Cross Liability, until June 30, 1999 (which was subsequently
extended until December 31, 1999). On December 29, 1999, the Company, the Red
Cross and GP Strategies entered in an agreement pursuant to which the Red Cross
agreed that until September 30, 2000 it would forbear from exercising its rights
under (i) the Supply Agreement, including with respect to collecting the Red
Cross Liability, and (ii) the Security Interest. As of the date hereof, the Red
Cross has not given the Company notice of its intent to exercise its rights to
collect the Red Cross Liability. Under the terms of such agreement, the Red
Cross has the right to sell the Company's real estate. In the event the Red
Cross is successful in selling the Company's real estate, the Company would hope
to be able to enter into a lease with the new owner, although there can be no
assurance that this would occur.
As the liability to the Red Cross remains unsettled until such time as the
Red Cross sells the shares it has already received and could receive in the
future, the Company recorded any shares issued to the Red Cross as "Settlement
Shares" within stockholders' equity. Any decreases, or increases up to the
amount of any previous decreases, in the market value at issuance of the
Company's common stock issued to the Red Cross, until such time as the Red Cross
sells its shares, would impact the value of the shares held by the Red Cross and
accordingly require an adjustment to "Settlement Shares". Due to the decline in
the Company's stock price during 1999 and from November 23, 1998 to December 31,
1998, an adjustment for $550,000 and $525,000 was recorded with a corresponding
charge to cost of goods sold during 1999 and 1998, respectively. Due to the
increase in the Company's stock price during the three months ended March 31,
2000 up to the date of sale by the Red Cross of all remaining Settlement Shares,
an adjustment for $287,000 was recorded with a corresponding credit to cost of
goods sold. During 1999, the Red Cross sold 27,000 of the Settlement Shares and
sold the balance of such shares (273,000 shares) during the first quarter of
2000. As a result, the net proceeds from the sales of the Settlement Shares,
$33,000 in 1999 and $368,000 in 2000, were applied against the liability to the
Red Cross. The remaining liability to the Red Cross at December 31, 2000 and
1999 was approximately $1,276,000 and $1,579,000, respectively. On October 30,
2000, the Company issued an additional 800,000 shares to the Red Cross (with a
market value of $824,000 on such date). Due to the decline in the Company's
stock price from October 30, 2000 to December 31, 2000, an adjustment for
$524,000 has been recorded with a corresponding charge to cost of goods sold in
2000. The net proceeds from the sale of such shares by the Red Cross will be
applied against the remaining liability of $1,276,000 owed to the Red Cross.
However, there can be no assurance that the net proceeds from the sale of such
shares will be sufficient to extinguish the remaining liability owed the Red
Cross.
Pursuant to an agreement dated March 25, 1999, GP Strategies loaned the
Company $500,000 (the "GP Strategies Debt"). In return, the Company agreed to
grant GP Strategies (i) a first mortgage on the Company's real estate, (ii) a
two-year option to purchase the Company's real estate, provided that the Company
has terminated its operations and the Red Cross Liability has been repaid, and
(iii) a two-year right of first refusal in the event the Company desires to sell
its real estate. In addition, the Company agreed to issue GP Strategies 500,000
shares of Common Stock (the "GP Shares") and a five-year warrant (the "GP
Warrant") to purchase 500,000 shares of Common Stock at a price of $1 per share.
The common stock and warrants issued to GP Strategies were valued at $500,000
and recorded as a financing cost and amortized over the original period of the
GP Strategies Debt in 1999. The Company also agreed not to increase its payroll
during the term of the GP Strategies debt without the prior consent of GP
Strategies. Pursuant to the agreement, the Company has issued a note to GP
Strategies representing the GP Strategies Debt, which note was due on September
30, 1999 and bears interest, payable at maturity, at the rate of 6% per annum.
In addition, at that time the Company negotiated a subordination agreement with
the Red Cross pursuant to which the Red Cross agreed that its lien on the
Company's real estate is subordinate to GP Strategies' lien. On March 27, 2000,
the Company and GP Strategies entered into an agreement pursuant to which (i)
the GP Strategies Debt was extended until June 30, 2001, and (ii) the Management
Agreement between the Company and GP Strategies was terminated and all
intercompany accounts between the Company and GP Strategies (other than the GP
Strategies Debt) in the amount of approximately $130,000 were discharged which
was recorded as a credit to capital in excess of par value. The agreement also
provides that (i) commencing on May 1, 2001 and ending on June 30, 2001, on any
day ISI may require GP Strategies to exercise the GP Warrant and sell the
underlying shares, if the market price of ISI Common Stock exceeds $1.00 per
share on each of the 10 trading days prior to any such day, and (ii) any
proceeds from the sale of the shares issuable upon exercise of the GP Warrant in
excess of the aggregate amount paid by GP Strategies to purchase such shares,
would be deemed to reduce the then outstanding amount of principal and interest
of the GP Strategies Debt until such amount is reduced to zero.
The Company's Common Stock now trades on the OTC Bulletin Board, which may
have a material adverse effect on the ability of the Company to finance its
operations and on the liquidity of the Common Stock.
Results of Operations
Year Ended December 31, 2000 Versus Year Ended December 31, 1999
For the year ended December 31, 2000 (the "2000 Period") and 1999 (the
"1999 Period"), the Company had revenues from the sale of ALFERON N Injection of
$1,067,471 and $2,328,945, respectively. In the third and fourth quarters of
1999, the Company offered price concessions to its largest customers in an
attempt to raise cash from the sale of ALFERON N Injection, which resulted in
substantially higher than normal sales in the 1999 Period and in lower than
normal sales in the 2000 Period. This was due to the fact that such customers
were selling out of their inventory of ALFERON N Injection (rather than
purchasing ALFERON N Injection from the Company).
In the 2000 Period, the Company sold, through its distributor, to
wholesalers and other customers in the United States 7,946 vials of ALFERON N
Injection, compared to 19,463 vials sold by the Company during the 1999 Period.
In addition, foreign sales of ALFERON N Injection were 132 vials and 1,374 vials
for the 2000 and 1999 Periods, respectively.
Cost of goods sold and idle production costs totaled $2,332,153 and
$3,552,026 for the 2000 and 1999 Periods, respectively. Idle production costs in
the 2000 and 1999 Periods represented fixed production costs, which were
incurred after production of ALFERON N Injection was discontinued in April 1998.
Such costs were greater in the 1999 Period due to higher levels of payroll
costs, supplies and depreciation expense. In addition, lower unit sales in the
2000 Period as compared to the 1999 Period contributed to lower cost of goods
sold. In addition, based on changes in the value of the Settlement Shares for
the 2000 Period, cost of goods sold was charged for $278,835 in 2000 as compared
to a charge of $550,000 to cost of goods sold for the 1999 Period.
During the 2000 and 1999 Periods, a portion of the reserve for excess
inventory was reversed in the amount of $563,215 and $1,177,531 respectively, in
order to reflect the inventory at its estimated net realizable value.
Research and development expenses during the 2000 Period of $1,533,324
decreased by $1,526,695 from $3,060,019 for the 1999 Period, principally because
the Company has had a reduction in research personnel which has reduced its
payroll and research costs. In addition, during 2000, the Company settled
amounts owed on various research related liabilities at a savings to the Company
of approximately $457,000. Such amount was credited against research and
development expenses.
General and administrative expenses for the 2000 Period were $2,306,146 as
compared to $2,315,010 for the 1999 Period. The decrease of $8,864 was
principally due to decreases in administrative fees and other operating expenses
partially offset by increases in payroll and certain other operating costs.
Interest income for the 2000 Period was $161,835 as compared to $6,104 for
the 1999 Period. The increase of $155,731 was due to more funds available for
investment in the 2000 Period.
Interest expense and financing costs for the 2000 Period was $87,873 as
compared to $536,394 for the 1999 Period. The decrease of $448,521 was primarily
due to financing costs related to the GP Strategies Debt in the 1999 Period.
During December 2000 and 1999, the Company completed the sale of a portion
of its New Jersey tax net operating loss carryforwards and recorded a gain on
such sale amounting to $1,483,861 and $2,348,509, which is recorded as an income
tax benefit in the 2000 and 1999 Periods, respectively.
As a result of the foregoing, the Company incurred net losses of $2,981,672
and $3,602,083 for the 2000 and 1999 Periods, respectively.
Year Ended December 31, 1999 versus Year Ended December 31, 1998
For the year ended December 31, 1999, the Company's revenues of $2,329,222
included $2,328,945 from the sale of ALFERON N Injection and the balance from
sales of research products. Revenues of $2,007,007 for the year ended December
31, 1998 (the "1998 Period") included $1,930,657 from the sale of ALFERON N
Injection and the balance from sales of research products and other revenues.
In the 1999 Period, the Company sold, through its distributor, to
wholesalers and other customers in the United States 19,463 vials of ALFERON N
Injection, compared to 13,284 vials sold by the Company during the 1998 Period.
In addition, foreign sales of ALFERON N Injection were 1,374 vials and 3,300
vials for the 1999 and 1998 periods, respectively.
Cost of goods sold and idle production costs totaled $3,552,026 and
$6,533,462 for the 1999 Period and 1998 Period, respectively. Idle production
costs in the 1999 and 1998 Periods, represented fixed production costs, which
were incurred after production of ALFERON N Injection was discontinued in April
1998. Such costs were greater in the 1998 Period due to higher levels of payroll
costs, supplies and other operating expenses.
During 1999, a portion of the reserve for excess inventory was reversed in
the amount of $1,177,531 as compared to a provision for excess inventory of
$3,089,841 during 1998 in order to reflect the inventory at its estimated net
realizable value.
Research and development expenses during the 1999 Period of $3,060,019
decreased by $5,594,869 from $8,654,888 for the 1998 Period, principally because
the Company has concluded its Phase 3 clinical studies of ALFERON N Injection in
HIV- and HCV-infected patients. The Company received $29,375 in 1998, as rental
income from GP Strategies for the use of a portion of the Company's facilities,
which offset research and development expenses.
General and administrative expenses for the 1999 Period were $2,315,010 as
compared to $4,569,608 for the 1998 Period. The decrease in the 1999 Period was
principally due to decreases in payroll and other operating expenses.
On February 5, 1998, the Company completed the sale of 7,500 shares of
Series A Convertible Preferred Stock to an institutional investor for an
aggregate amount of $7,500,000. The $7,179,000 of net proceeds were expected to
augment the Company's working capital while awaiting the results of the two
Phase 3 clinical trials of ALFERON N Injection for the treatment of HIV-infected
and hepatitis C patients. After considering the reaction of the Company's
stockholders to the issuance and the negative impact the issuance apparently had
on the Company's market capitalization, the Board of Directors determined on
February 13, 1998 to exercise an option to repurchase the shares of Convertible
Preferred Stock for $7,894,737 (plus accrued dividends). The net loss to the
Company on the repurchase of the Preferred Stock amounted to $737,037.
Interest income for the 1999 Period was $6,104 as compared to $252,528 for
the 1998 Period. The decrease of $246,424 was due to less funds available for
investment in the 1999 Period.
Interest expense and financing costs for the 1999 Period was $536,394,
primarily due to interest and other costs related to the GP Strategies Debt in
1999, as compared to zero for the 1998 Period.
During December 1999, the Company completed the sale of a portion of its
New Jersey tax net operating loss carryforwards and recorded a gain on such sale
amounting to $2,348,509, which is recorded as an income tax benefit.
As a result of the foregoing, the Company incurred net losses of $3,602,083
and $21,325,301 for the 1999 Period and 1998 Period, respectively.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities". This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement, as amended by SFAS 137 and 138, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The
implementation of SFAS 133, as amended, did not have a material effect on the
Company's results of operations or financial position.
Forward-Looking Statements
This report contains certain forward-looking statements reflecting
management's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements, including, but not limited to, the risk that the
Company will run out of cash; uncertainty of obtaining additional funding for
the Company; uncertainty of obtaining United States regulatory approvals for the
Company's products under development and foreign regulatory approvals for the
Company's FDA-approved product and products under development and, if such
approvals are obtained, uncertainty of the successful commercial development of
such products; substantial competition from companies with substantially greater
resources than the Company in the Company's present and potential businesses; no
guaranteed source of required materials for the Company's products; dependence
on certain distributors to market the Company's products; potential adverse side
effects from the use of the Company's products; potential patent infringement
claims against the Company; possible inability of the Company to protect its
technology; uncertainty of pharmaceutical pricing; substantial royalty
obligations payable by the Company; limited production experience of the
Company; risk of product liability; and risk of loss of key management
personnel, all of which are difficult to predict and many of which are beyond
the control of the Company.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 19
Financial Statements:
Consolidated Balance Sheets - December 31, 2000 and 1999 20
Consolidated Statements of Operations - Years ended
December 31, 2000, 1999 and 1998 21
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31, 2000, 1999 and 1998 22
Consolidated Statements of Cash Flows - Years ended
December 31, 2000, 1999 and 1998 23
Notes to Consolidated Financial Statements 24
Schedule II - Valuation and Qualifying Accounts 39
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Interferon Sciences, Inc.:
We have audited the consolidated financial statements of Interferon
Sciences, Inc. and subsidiary as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Interferon
Sciences, Inc. and subsidiary as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 3 to the consolidated financial statements, the
Company has suffered recurring losses from operations, has an accumulated
deficit and has limited liquid resources that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The consolidated financial statements and
financial statement schedule do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ KPMG LLP
Princeton, New Jersey
March 9, 2001
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
------------
2000 1999
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 3,658,805 $ 2,273,242
Receivable from sale of state
net operating loss carryovers 1,483,861
Accounts and other receivables 190,937 35,561
Inventories, net of reserves of
$5,286,011 and $6,225,185, respectively 837,300 766,000
Prepaid expenses and other current assets 17,488 27,018
------------- ------------
Total current assets 6,188,391 3,101,821
------------- ------------
Property, plant and equipment, at cost
Land 140,650 140,650
Buildings and improvements 7,750,672 7,702,825
Equipment 4,916,518 4,915,798
-------------- ------------
12,807,840 12,759,273
Less accumulated depreciation (10,298,260) (9,834,558)
------------ ------------
2,509,580 2,924,715
------------ ------------
Patent costs, net of accumulated amortization
of $331,394 and $301,339 189,767 219,822
Other assets 110,100 10,100
------------ ------------
$ 8,997,838 $ 6,256,458
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,300,719 $ 4,396,181
Accrued expenses 278,108 519,285
Note payable and amount due GP Strategies 566,639 283,637
------------- -------------
Total current liabilities 3,145,466 5,199,103
------------- -------------
Note payable to GP Strategies 500,000
------------- -------------
Commitments
Stockholders' equity
Preferred stock, par value $.01 per share;
authorized - 5,000,000 shares; none
issued and outstanding
Common stock, par value $.01 per share;
authorized - 55,000,000 shares; issued
and outstanding- 17,931,838 and 5,327,473
shares, respectively 179,318 53,275
Capital in excess of par value 137,782,655 129,397,259
Accumulated deficit (131,793,851) (128,812,179)
Settlement shares (315,750) (81,000)
-------------- -------------
Total stockholders' equity 5,852,372 557,355
-------------- -------------
$ 8,997,838 $ 6,256,458
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-------- -------- -------
Revenues
ALFERON N Injection $ 1,067,471 $ 2,328,945 $ 1,930,657
Research products and other revenues 1,442 277 76,350
------------ ------------ ------------
Total revenues 1,068,913 2,329,222 2,007,007
------------ ------------ ------------
Costs and expenses
Cost of goods sold and excess/idle
production costs 2,332,153 3,552,026 6,533,462
(Reversal) Provision for excess inventory (563,215) (1,177,531) 3,089,841
Research and development 1,533,324 3,060,019 8,654,888
General and administrative 2,306,146 2,315,010 4,569,608
------------ ------------- ------------
Total costs and expenses 5,608,408 7,749,524 22,847,799
------------ ------------- ------------
Loss from operations (4,539,495) (5,420,302) (20,840,792)
Interest income 161,835 6,104 252,528
Interest expense and financing costs (87,873) (536,394)
Loss on repurchase of preferred stock (737,037)
----------- ------------- ------------
Loss before income tax benefit (4,465,533) (5,950,592) (21,325,301)
----------- ------------- ------------
Income tax benefit:
Gain on sale of state net operating loss
carryovers 1,483,861 2,348,509
------------- ------------- ------------
Net loss $ (2,981,672) $ (3,602,083) $(21,325,301)
============= ============= ============
Basic and diluted loss per share $ (.25) $ (.71) $ (6.67)
============= ============= ============
Weighted average number of
shares outstanding 12,097,252 5,088,620 3,199,396
============= ============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Total
Capital in stock-
Preferred stock Common stock excess of Accumulated Settlement holders'
Shares Amount Shares Amount par value deficit shares equity
--------------- ------------------ ------------ -------------- ---------- --------
Balance at December 31, 1997 $ 3,042,081 $ 30,421 $124,068,014 $(103,884,795) $ $20,213,640
Net proceeds from the sale of common
and preferred stock 7,500 75 960,000 9,600 9,123,762 9,133,437
Repurchase of preferred Stock (7,500) (75) (7,178,925) (7,179,000)
Common stock issued as payment against
negotiated settlement and accounts payable 330,000 3,300 1,246,794 (1,189,000) 61,094
Common stock issued as compensation 3,238 32 116,865 116,897
Common stock issued under Company 401(k)plan 25,489 255 170,978 171,233
Compensation paid in cash in settlement
of obligation to issue
common stock 386,397 386,397
Market value adjustment 525,000 525,000
Net loss (21,325,301) (21,325,301)
--------------------------------------------------------------------------------------
Balance at December 31, 1998 4,360,808 43,608 127,933,885 (125,210,096) (664,000) 2,103,397
Common stock issued as financing cost 500,000 5,000 495,000 500,000
Common stock issued as payment against
accounts payable 285,000 2,850 531,525 534,375
Common stock issued under Company 401(k) plan 181,665 1,817 98,159 99,976
Compensation paid in cash in settlement
of obligation to issue common stock 338,690 338,690
Settlement shares sold 33,000 33,000
Market value adjustment 550,000 550,000
Net loss (3,602,083) (3,602,083)
--------------------------------------------------------------------------------------
Balance at December 31, 1999 5,327,473 53,275 129,397,259 (128,812,179) (81,000) 557,355
Net proceeds from sale of common stock 11,635,451 116,354 6,980,595 7,096,949
Common stock issued as compensation 20,000 200 23,550 23,750
Common stock issued under Company 401(k) Plan 78,914 789 79,409 80,198
Common stock issued as payment against accounts payable 870,000 8,700 887,400 (896,100)
Employee stock option compensation 2,050 2,050
Compensation paid in cash in settlement of obligation
to issue common stock 282,506 282,506
Forgiveness of amount due GP Strategies 129,886 129,886
Settlement shares sold 382,515 382,515
Market value adjustment 278,835 278,835
Net loss (2,981,672) (2,981,672)
--------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 17,931,838 $179,318 $137,782,655 $(131,793,851) $(315,750) $5,852,372
The accompanying notes are an integral part of these consolidated financial statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-------- -------- --------
Cash flows from operations:
Net loss $ (2,981,672) $ (3,602,083) $(21,325,301)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization 502,157 747,293 894,013
Amortization of deferred financing costs 500,000
Gain on settlements of research-related
liabilities (456,998)
Compensation and benefits
paid with common stock 103,948 99,976 288,130
(Reversal) provision for excess inventory (563,215) (1,177,531) 3,089,841
Provision for notes receivable 70,000
Non-cash compensation expense 284,556 338,690 386,397
Loss on repurchase of preferred stock 737,037
Market value adjustment 278,835 550,000 515,625
Provision for impairment of equipment 803,217
Loss on sale of other assets 51,392
Change in operating assets
and liabilities:
Inventories 491,915 1,121,315 (466,972)
Accounts and other receivables (1,639,237) 653,950 299,947
Prepaid expenses and other current assets 9,530 9,493 28,842
Amount due to GP Strategies (87,112) 174,694 130,847
Accounts payable and accrued expenses (1,497,126) 1,096,534 517,040
--------------- ------------ -------------
Net cash (used for) provided by operations (5,484,419) 563,723 (14,101,337)
--------------- ------------ -------------
Cash flows from investing activities:
Additions to property, plant and equipment (56,967) (78,235)
Investments in other assets (170,000)
Proceeds from sale of other assets 38,658 73,750
--------------- ------------ ------------
Net cash (used for) provided by
investing activities (226,967) 38,658 (4,485)
--------------- ------------ -------------
Cash flows from financing activities:
Net proceeds from sale of common stock 7,096,949 1,954,437
Proceeds from note payable to GP Strategies 500,000
Net proceeds from preferred stock offering 7,179,000
Repurchase of preferred stock (7,916,037)
--------------- ------------ -------------
Net cash provided by financing activities 7,096,949 500,000 1,217,400
--------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents 1,385,563 1,102,381 (12,888,422)
Cash and cash equivalents at beginning of year 2,273,242 1,170,861 14,059,283
-------------- ------------ -------------
Cash and cash equivalents at end of year $ 3,658,805 $ 2,273,242 $ 1,170,861
============== ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Business
Interferon Sciences, Inc. (the "Company") is a biopharmaceutical company
that operates in a single segment and is engaged in the study, manufacture, and
sale of pharmaceutical products based on its highly purified, multispecies,
natural source alpha interferon ("Natural Alpha Interferon"). The Company's
ALFERON(R) N Injection (Interferon Alfa-n3) product has been approved by the
United States Food and Drug Administration ("FDA") for the treatment of certain
types of genital warts and the Company has studied its potential use in the
treatment of HIV, hepatitis C, and other indications. Alferon N Injection is
sold principally in the United States, however, a portion is sold in foreign
countries. For the years ended December 31, 2000, 1999 and 1998, domestic sales
totaled $1,046,470, $2,204,437 and $1,716,157, respectively, and foreign sales
totaled $21,003, $124,508 and $214,500, respectively. All identifiable assets
are located in the United States. The Company has also studied ALFERON N Gel and
ALFERON LDO(R), the Company's topical and oral formulations of Natural Alpha
Interferon, for the potential treatment of viral and immune system diseases (See
Note 5).
Integrated Commercialization Solutions, Inc. ("ICS"), a subsidiary of
Bergen Brunswig Corporation, is the sole United States distributor of ALFERON N
Injection. ICS distributes ALFERON N Injection to a limited number of
wholesalers throughout the United States. The Company does not believe that the
loss of any one wholesaler would have a material adverse effect on the Company's
sales or financial position.
Note 2. Summary of Significant Accounting Policies
Principles of consolidation -- The consolidated financial statements
include the operations of the Company and Interferon Sciences Development
Corporation ("ISD"), its wholly owned subsidiary. All significant intercompany
transactions and balances have been eliminated.
Cash and cash equivalents -- The Company considers all highly liquid
instruments with maturities of three months or less from purchase date to be
cash equivalents.
Property, plant and equipment -- Property, plant and equipment are carried
at cost. Major additions and betterments are capitalized while maintenance and
repairs, which do not extend the lives of the assets, are expensed.
Depreciation -- The Company provides for depreciation and amortization of
plant and equipment following the straight-line method over the estimated useful
lives of such assets as follows:
Class of Assets Estimated Useful Lives
Buildings and Improvements 15 to 30 years
Equipment 5 to 10 years
Patent costs -- The Company capitalizes costs to obtain patents and
licenses. Patent costs are amortized over 17 years on a straight-line basis. To
the extent a patent is determined to be worthless, the related net capitalized
cost is immediately expensed.
Revenue recognition -- Sales are recorded upon shipment of product.
Collaborative agreement research and development revenues and costs - The
costs of performing research and development are expensed when incurred.
Generally, the Company records its collaborative research and development
revenues as the related research costs are incurred.
Inventories -- Inventories, consisting of raw materials, work in process
and finished goods, are stated at the lower of cost or market on a FIFO basis.
Inventory in excess of the Company's estimated usage requirements is written
down to its estimated net realizable value. Inherent in the estimates of net
realizable value is management estimates related to the Company's future
manufacturing schedules, customer demand, possible alternative uses and ultimate
realization of potentially excess inventory.
Long-Lived Assets -- The Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the estimated fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or estimated
fair value less costs to sell. Due to the circumstances described in Note 7,
during 1998, the Company ceased production of finished goods inventory and
continues to hold its long-lived assets for use. In addition, as the Company's
financial and operating situation had continued to worsen (as further described
in Note 3), and after consideration of projected revenues for 1999, the Company
determined that the carrying value of their equipment was impaired. Accordingly,
the Company recorded a charge for impairment of its equipment of $803,217 in
December 1998 to write down this equipment to its estimated fair value.
Management has determined, based on their best estimates and available
information, the estimated fair value of this equipment to be that amount which
could be recovered through the sale of the equipment. Quoted market prices are
not available. No further impairment was deemed to exist at December 31, 1999.
In addition, at December 31, 2000 the equipment considered impaired was fully
depreciated.
Stock option plan - The Company accounts for its stock-based compensation
to employees and members of the Board of Directors in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation is recorded on the date of issuance or grant as the excess of the
current market value of the underlying stock over the purchase or exercise
price. Any deferred compensation is amortized over the respective vesting
periods of the equity instruments, if any. The Company has adopted the
disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," which permits
entities to provide pro forma net loss and net loss per share disclosures for
stock-based compensation as if the fair value method defined in SFAS No. 123 had
been applied. As required by SFAS No. 123, transactions with non-employees, in
which goods or services are the consideration received for the issuance of
equity instruments, are accounted for under the fair value basis in accordance
with SFAS 123.
Reverse stock split -- As a result of a one-for-four reverse stock split
effective as of March 21, 1997, and a one-for-five reverse stock split effective
as of January 6, 1999, all shares and per share information have been restated
retroactively.
Loss per share -- Basic earnings (loss) per share (EPS) are based upon the
weighted average number of common shares outstanding during the period. Diluted
EPS are based upon the weighted average number of common shares outstanding
during the period assuming the issuance of common shares for all dilutive
potential common shares outstanding. At December 31, 2000, 1999 and 1998, the
Company's options and warrants outstanding are anti-dilutive and therefore basic
and diluted EPS are the same.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Income taxes - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations in the period
that includes the enactment date.
Reclassifications - Certain balances in prior years have been reclassified
to conform to the presentation in the current year.
Note 3. Operations and Liquidity
The Company has experienced significant operating losses since its
inception in 1980. As of December 31, 2000, the Company had an accumulated
deficit of approximately $131.8 million. For the years ended December 31, 2000,
1999 and 1998, the Company had losses from operations of approximately $4.5
million, $5.4 million and $20.8 million, respectively. Also, the Company has
limited liquid resources. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Although the Company received FDA approval in 1989 to market
ALFERON N Injection in the United States for the treatment of certain genital
warts and ALFERON N Injection currently is marketed and sold in the United
States by the Company, in Mexico by Industria Farmaceutica Andromaco, S.A. De
C.V. and in Germany by Cell Pharm GmbH ("Cell Pharm"), the Company has had
limited revenues from the sale of ALFERON N Injection to date. For the Company
to operate profitably, the Company must sell significantly more ALFERON N
Injection. Increased sales will depend primarily upon the expansion of existing
markets and/or successful attainment of FDA approval to market ALFERON N
Injection for additional indications, of which there can be no assurance. There
can be no assurance that sufficient quantities of ALFERON N Injection will be
sold to allow the Company to operate profitably.
During 2000, the Company received net proceeds of $7,096,949 from the sale
in a private placement of 11,635,451 shares of common stock at a price of $.66
per share and warrants, exercisable until April 2005 to purchase 11,635,451
shares of common stock at a price of $1.50 per share. In addition, the Company
issued to finders and placement agents in connection with the private placement,
warrants to purchase 1,467,059 units, exercisable at a price of $.66 per unit.
Each unit is comprised of a share of common stock and a warrant to purchase an
additional share of common stock, exercisable until April 2005, at a price of
$1.50 per share. The proceeds from this private placement will be used to fund
new initiatives, in addition to funding certain projects within the Company's
existing interferon-related operations.
During 2000, the Company was able to settle certain amounts owed on various
research-related liabilities at a savings to the Company of approximately
$457,000. Such amount was credited against research and development expenses.
During December 2000, the Company completed the sale of approximately $19
million of its New Jersey tax loss carryovers and received $1.48 million in
January 2001 (see Note 10). At December 31, 2000, the Company had approximately
$3.7 million of cash and cash equivalents, with which to support future
operating activities and to satisfy its financial obligations as they become
payable.
Based on the Company's estimates of revenues, expenses, the timing of
repayment of creditors, and levels of production, management believes that the
Company has sufficient resources to enable the Company to continue operations
until November, 2001. However, actual results, especially with respect to
revenues, may differ materially from such estimate, and no assurance can be
given that additional funding will not be required sooner than anticipated or
that such additional funding, whether from financial markets or collaborative or
other arrangements with corporate partners or from other sources, will be
available when needed or on terms acceptable to the Company.
Management plans to pursue raising additional capital by either (i) issuing
securities in a private or public equity offering or (ii) licensing the rights
to its injectable, topical or oral formulations of natural alpha interferon.
Management is seeking to enter into mergers, joint ventures or other
collaborations that could provide the additional resources necessary to advance
the Company's most valuable programs. There can be no assurances, however, that
the Company will be successful in obtaining an adequate level of financing, on
terms that are acceptable to the Company, needed to continue operations.
Insufficient funds will require the Company to further delay, scale back,
or eliminate certain or all of its activities or to license third parties to
commercialize products or technologies that the Company would otherwise seek to
develop itself.
Note 4. Agreements with Hoffmann-LaRoche
F. Hoffmann-La Roche Ltd. and Hoffmann-LaRoche, Inc. (collectively,
"Hoffmann") have been issued patents covering human alpha interferon in many
countries throughout the world. In 1995, the Company obtained a non-exclusive
perpetual license from Hoffmann (the "Hoffmann Agreement") that grants the
Company the worldwide rights to make, use, and sell, without a potential patent
infringement claim from Hoffmann, any formulation of Natural Alpha Interferon.
The Hoffmann Agreement permits the Company to grant marketing rights with
respect to Natural Alpha Interferon products to third parties, except that the
Company cannot grant marketing rights with respect to injectable products in any
country in which Hoffmann has patent rights covered by the Hoffmann Agreement
(the "Hoffmann Territory") to any third party not listed on a schedule of
approximately 50 potential marketing partners without the consent of Hoffmann,
which consent cannot be unreasonably withheld.
Under the terms of the Hoffmann Agreement, the Company is obligated to pay
Hoffmann an aggregate royalty on net sales (as defined) of Natural Alpha
Interferon products by the Company in an amount equal to (i) 8% of net sales in
the Hoffmann Territory, and 2% of net sales outside the Hoffmann Territory of
products manufactured in the Hoffmann Territory, up to $75,000,000 of net sales
in any calendar year and (ii) 9.5% of net sales in the Hoffmann Territory, and
2% of net sales outside the Hoffmann Territory of products manufactured in the
Hoffmann Territory, in excess of $75,000,000 of net sales in any calendar year,
provided that the total royalty payable in any calendar year shall not exceed
$8,000,000. For the years ended December 31, 2000, 1999 and 1998, the Company
recorded approximately $42,000, $94,000 and $77,000 in royalty expenses to
Hoffmann, respectively. The Hoffmann Agreement can be terminated by the Company
on 30 days notice with respect to the United States patent, any individual
foreign patent, or all patents owned by Hoffmann. If the Hoffmann Agreement is
terminated with respect to the patents owned by Hoffmann in a specified country,
such country is no longer included in the Hoffmann Territory. Accordingly, the
Company would not be permitted to market any formulation of alpha interferon in
such country.
Note 5. Research and Development Agreement with Interferon Sciences Research
Partners, Ltd.
In 1984, the Company organized ISD to act as the sole general partner of
Interferon Sciences Research Partners, Ltd., a New Jersey limited partnership
(the "Partnership"). The Company and the Partnership entered into a development
contract whereby the Company received substantially all of the net proceeds
($4,414,475) of the Partnership's public offering of limited partnership
interests. The Company used the proceeds to perform research, development and
clinical testing on behalf of the Partnership for the development of ALFERON Gel
containing recombinant interferon.
In connection with the formation of the Partnership, ISD agreed to make
additional cash contributions for purposes of continuing development of ALFERON
Gel if the Partnership exhausted its funds prior to development of such product.
ISD is wholly dependent upon the Company for capital to fund such commitment.
The Partnership exhausted its funds during 1986, and the Company contributed a
total of $1,997,000 during the period from 1986 to 1990, for the continued
development of ALFERON Gel. In 1987, the Company filed a Product License
Application with the FDA for approval to market ALFERON Gel. In February 1990,
the FDA indicated that additional process development and clinical trials would
be necessary prior to approval of ALFERON Gel. The Company believed, at that
time, that the costs to complete the required process development and clinical
trials would be substantial, and there could be no assurance that the clinical
trials would be successful.
As a result of the above events, in 1992, the Company withdrew its FDA
Product License Application for ALFERON Gel containing recombinant interferon.
In place of single species recombinant interferon, previously ALFERON Gel's
active ingredient, the Company commenced, in 1992, further development of
ALFERON Gel using the Company's natural source multi-species alpha interferon
("ALFERON N Gel"). However, at the present time, the Company is not actively
pursuing development of ALFERON N Gel and the Company does not have an
obligation to provide additional funding to the Partnership. Assuming successful
development and commercial exploitation of ALFERON N Gel, which to date has not
occurred, the Company may be obligated to pay the Partnership royalties equal to
4% of the Company's net sales of ALFERON N Gel and 15% of revenues received from
sublicensing ALFERON N Gel.
Note 6. Agreement with Cell Pharm GmbH
In 1996, the Company entered into a supply and distribution agreement (the
"Cell Pharm Agreement") with Cell Pharm. Cell Pharm, headquartered in Hanover,
Germany, is a privately owned pharmaceutical company primarily involved in the
distribution and manufacture of products for cancer treatment and other uses.
The Cell Pharm Agreement, which terminates on June 30, 2001, unless renewed,
grants Cell Pharm rights to distribute, promote, and sell ALFERON N Injection in
Germany. The Cell Pharm Agreement provides that the Company will supply Cell
Pharm with ALFERON N Injection at specified prices, and obligates Cell Pharm to
purchase specified minimum amounts in each annual period. In addition, Cell
Pharm is required to pay the Company 50% of the incremental revenue Cell Pharm
receives as a result of selling ALFERON N Injection at a price higher than a
specified price. To date, no incremental revenue has been generated. Cell Pharm
has informed the Company that it is marketing ALFERON N Injection under the
trade name Cytoferon(R), pursuant to Cell Pharm's existing regulatory approval
to market Cellferon in Germany for the treatment of hairy cell leukemia and for
the treatment of patients who develop antibodies against recombinant alpha
interferons.
Note 7. Agreement with Metacine, Inc.
On July 28, 2000, the Company acquired for $100,000 an option to purchase
certain securities of Metacine, Inc. ("Metacine"), a company engaged in research
using dendritic cell technology, on the terms set forth below. Metacine used a
portion of such funds to retain a third party to conduct a review and analysis
of Metacine's intellectual property. The option may be exercised by the Company
during the 60-day period following the Company's receipt of such review and
analysis, which will end on April 15, 2001. The $100,000 paid for the option has
been recorded as other assets on the December 31, 2000 consolidated balance
sheet.
If the option is exercised, Metacine is required to issue to the Company
700,000 shares of Metacine common stock and a warrant to purchase, at a price of
$12.48 per share, 178,056 shares of Metacine common stock in exchange for an
aggregate of $2,400,000 in a combination of cash, services to be rendered by the
Company to Metacine, and shares of the Company's common stock. Upon exercise of
the option, the Company would have a significant equity investment in Metacine.
The Company and the other stockholders of Metacine have entered into a
stockholders' agreement providing for rights of first refusal, tag-along rights,
and preemptive rights. The agreement also provides that the Company will have
one representative on Metacine's board and will vote its shares in the same
manner as votes of Metacine's other stockholders, and that certain corporate
actions will not be taken without the Company's consent.
Note 8. Inventories
Inventories, consisting of material, labor and overhead, are classified
as follows:
December 31,
2000 1999
-------------------------
Finished goods $1,073,195 $ 361,809
Work in process 3,717,556 5,296,816
Raw materials 1,332,560 1,332,560
Less reserve for excess inventory (5,286,011) (6,225,185)
------------ ------------
$ 837,300 $ 766,000
============ ===========
Finished goods inventory consists of vials of ALFERON N Injection,
available for commercial and clinical use either immediately or upon final
release by quality assurance.
During 2000, the Company converted a portion of its interferon
intermediates (work in process inventory) into finished goods inventory.
In light of the results to date of the Company's Phase 3 studies of ALFERON
N Injection in HIV- and HCV-infected patients, the Company has recorded a
reserve against its inventory of ALFERON N Injection to reflect its estimated
net realizable value. The reserve was a result of the Company's assessment of
anticipated near-term projections of product to be sold or utilized in clinical
trials, giving consideration to historical sales levels. As a result,
inventories at December 31, 2000 and 1999, reflect a reserve for excess
inventory of $5,286,011 and $6,225,185, respectively.
During 2000 and 1999, a portion of the reserve for excess inventory was
reversed in the amount of $563,215 and $1,177,531, respectively, to reflect
inventory at its estimated net realizable value. During 1998, the Company
increased the reserve for excess inventory by $3,089,841 to reflect inventory at
its estimated net realizable value.
In addition, during 2000, approximately $375,959 of inventory was written
off against the reserve for excess inventory due to losses in the conversion of
work in process inventory into finished goods. Also, during 1999, approximately
$2,900,000 of inventory was written off against the reserve for excess inventory
since the inventory had expired and could no longer be sold or used for clinical
trials.
Note 9. Preferred Stock
On February 5, 1998, the Company completed the sale of 7,500 shares of
Series A Convertible Preferred Stock to an institutional investor for an
aggregate amount of $7,500,000. The $7,179,000 of net proceeds were expected to
augment the Company's working capital while awaiting the results of the two
Phase 3 clinical trials of ALFERON N Injection for the treatment of HIV-infected
and hepatitis C patients. After considering the reaction of the Company's
stockholders to the issuance and the negative impact the issuance apparently had
on the Company's market capitalization, the Board of Directors determined on
February 13, 1998 to exercise an option to repurchase the shares of Convertible
Preferred Stock for $7,894,737 (plus accrued dividends). The net loss to the
Company on the repurchase of the Preferred Stock amounted to $737,037.
Note 10. Income Taxes
As a result of the loss allocation rules contained in the Federal income
tax consolidated return regulations, approximately $6,009,000 of net federal
operating loss carryforwards, which expire from 2001 to 2006, are available to
the Company upon ceasing to be a member of GP Strategies's consolidated return
group in 1991. In addition, the Company has net federal operating loss
carryforwards for periods subsequent to May 31, 1991, and through December 31,
2000 of approximately $97,340,000 that expire from 2006 to 2020. In addition,
the Company had state net operating loss carryforwards of approximately
$40,000,000 which expire from 2004 to 2007.
The Company believes that the events culminating with the closing of its
Common Stock Private Offering on November 6, 2000 may result in an "ownership
change" under Internal Revenue Code, Section 382, with respect to its stock. The
Company believes that as a result of the ownership change, the future utility of
its pre-change net operating losses may be significantly limited. In addition,
the Company has approximately $209,000 of research and development credit
carryforwards, which expire from 2001 to 2002 that are, in accordance with
Internal Revenue Code, Section 383, subject to the annual limitation under
Internal Revenue Code Section 382.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities consist of the following as of December 31, 2000 and
1999:
Deferred tax assets 2000 1999
- ------------------- ---------------------
Net operating loss carryforwards $35,496,000 $31,601,000
Tax credit carry-forwards 209,000 521,000
Inventory reserve 2,114,000 2,117,000
Property and equipment,
principally due to differences
in basis and depreciation 510,000 387,000
----------- -----------
Gross deferred tax asset 38,329,000 34,626,000
Valuation allowance (38,329,000) (34,626,000)
----------- -----------
Net deferred taxes $ --- $ ---
=========== ===========
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will be realized. The Company has determined,
based on the Company's history of annual net losses, that a full valuation
allowance is appropriate. The change in the valuation allowance for 2000 and
1999 was $3,703,000 and $1,543,000, respectively.
The Company participates in the State of New Jersey's corporation business
tax benefit certificate transfer program (the "Program"), which allows certain
high technology and biotechnology companies to transfer unused New Jersey net
operating loss carryovers to other New Jersey corporation business taxpayers.
During 1999, the Company submitted an application to the New Jersey Economic
Development Authority (the "EDA") to participate in the Program and the
application was approved. The EDA then issued a certificate certifying the
Company's eligibility to participate in the Program and the amount of New Jersey
net operating loss carryovers the Company has available to transfer. Since New
Jersey law provides that net operating losses can be carried over for up to
seven years, the Company may be able to transfer its New Jersey net operating
losses from the last seven years. The Program requires that a purchaser pay at
least 75% of the amount of the surrendered tax benefit.
During December 2000 and December 1999, the Company completed the sale of
approximately $19 million and $32 million of its New Jersey tax loss
carryforwards and received $1.48 million (in January 2001) and $2.35 million (in
December 1999), which were recorded as a tax benefit from gains on sale of state
net operating loss carryovers on its Consolidated Statement of Operations in
2000 and 1999, respectively.
Note 11. Common Stock, Stock Options, Warrants and Other Shares Reserved
The Company has a stock option plan (the "Plan"), which authorizes a
committee of the Board of Directors to grant options, to purchase shares of
Common Stock, to officers, directors, employees and consultants of the Company.
Pursuant to the terms of the Plan, no option may be exercised after 10 years
from the date of grant. The Plan permits options to be granted at a price not
less than 85% of the fair market value, however, the options granted to date
have been at fair market value of the common stock at the date of the grant.
At December 31, 2000, the per share weighted-average fair value of stock
options granted during 2000, 1999 and 1998 was $.88, $.21 and $2.20 on the date
of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 2000 - expected dividend yield of 0.0%, risk-free
interest rate of 6.1%, expected volatility of 142.4% and an expected life of 3.0
years; 1999 - expected dividend yield of 0.0%, risk-free interest rate of 6.1%,
expected volatility of 116.4% and an expected life of 4.0 years; 1998 - expected
dividend yield of 0.0%, risk-free interest rate of 4.3%, expected volatility of
113.9% and an expected life of 5.0 years.
The Company applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss and loss per share would have been increased to
the pro forma amounts indicated below:
2000 1999 1998
---- ---- ----
Net loss as reported $(2,981,672) $(3,602,083) $(21,325,301)
pro forma (3,462,823) (4,231,122) (21,868,534)
Basic and diluted
loss per share as reported $ (.25) $ (.71) $ (6.67)
pro forma (.29) (.83) (6.84)
Pro forma net loss and loss per share reflects options granted between 1995
and 2000. Related pro forma compensation cost is amortized over the options'
vesting period.
Employee stock option activity for options under the Plan during the
periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
---------- ----------------
Balance at December 31, 1997 212,367 $33.20
Granted 336,234 2.65
Forfeited (9,787) 32.25
Expired (725) 46.05
----------
Balance at December 31, 1998 538,089 1.40
Granted 1,487,792 .25
Forfeited (138,621) 1.40
----------
Balance at December 31, 1999 1,887,260 .25
Granted 61,710 1.10
Forfeited (2,580) .25
----------
Balance at December 31, 2000 1,946,390 .28
On October 27, 1999, the Company repriced all existing employee stock
options to have an exercise price of $.25 (the closing market price on that
date), which vest over a three-year period, and have an expiration date of
December 31, 2003. Accordingly, the weighted average price of options
outstanding at December 31, 1999 has been restated to $.25. All other terms and
conditions of the repriced options remain the same with the exception of
repricing the exercise price and the new expiration date.
On October 15, 1998, the Company repriced all existing employee stock
options to have an exercise price of $1.40 (the closing market price on that
date).
At December 31, 2000, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $.25-$1.25, and 3 years,
respectively.
At December 31, 2000, the number of options exercisable was 1,102,458, and
the weighted-average exercise price of those options was $.27.
FASB Interpretation No. 44 provides guidance for applying APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("FIN 44"). It applies
prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards, and changes in grantee status on or after
July 1, 2000, except for provisions related to repricings and the definition of
an employee that apply to awards issued after December 15, 1998. The Company has
evaluated the financial impact of FIN 44 and has determined that the repricing
of employee stock options on October 27, 1999 falls within the guidance of FIN
44. On October 27, 1999, the Company repriced 429,475 stock options to $.25 per
share. On July 1, 2000, the implementation date of FIN 44, 352,823 shares of the
429,475 shares were fully vested (exercisable) and the closing price of the
Company's common stock on such date was $1.63 per share. Beginning on and after
July 1, 2000, the Company is required to record compensation expense on the
repriced vested options only when the market price exceeds $1.63 per share and
only on the amount in excess of $1.63 per share. For the repriced unvested stock
options, the intrinsic value measured at the July 1, 2000 effective date that is
attributable to the remaining vesting period will be recognized over that future
period. The unvested stock options at July 1, 2000 (76,652) will fully vest on
January 1, 2001. On December 31, 2000, the closing price of the Company's common
stock was $.375 per share and accordingly, under FIN 44, no compensation expense
was recorded on the repriced fully vested stock options. However, under FIN 44,
for the repriced unvested stock options, the Company calculated and recorded
compensation expense of $2,050, subject to adjustment for changes in the stock
price.
Information regarding all Options and Warrants
Changes in options and warrants outstanding during the years ended December
31, 2000, 1999 and 1998, and options and warrants exercisable and shares
reserved for issuance at December 31, 2000 are as follows:
The following table includes all options and warrants including
employee options (which are discussed above).
Price Range Number of
Per Share Shares
----------- ---------
Outstanding at December 31, 1997 $21.80 - $77.90 395,189
Granted 2.65 - 41.90 336,234
Terminated 25.00 - 55.00 (10,512)
--------------------- ----------
Outstanding at December 31, 1998 1.40 - 77.90 720,911
Granted .25 - 1.00 1,987,792
Terminated 1.40 - 54.00 (141,671)
-------------------- ----------
Outstanding at December 31, 1999 .25 - 77.90 2,567,032
Granted .56 - 1.50 14,631,279
Terminated .25 - 77.90 (90,975)
-------------------- ----------
Outstanding at December 31, 2000 .25 - 48.00 17,107,336
==========
Exercisable:
December 31, 2000 .25 - 48.00 13,329,286
==========
Shares reserved for issuance:
December 31, 2000 17,107,336
==========
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2000, include 64,413 shares under warrant agreements
with the underwriter of a 1996 Stock Offering. The warrants are priced at $48.00
per share and expire on April 23, 2001.
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2000, include 26,964 shares under warrant agreements
with the underwriters of a 1997 Stock Offering. The warrants are priced at
$36.00 per share and expire on August 18, 2002.
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2000, include 500,000 shares under a warrant agreement
with GP Strategies. The warrants are priced at $1.00 per share and expire on
March 25, 2004.
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2000, include 11,635,451 shares under warrant
agreements with the purchasers of a 2000 private offering. The warrants are
priced at $1.50 per share and expire on April 17, 2005.
Options and warrants outstanding and shares reserved for issuance at
December 31, 2000, include 2,934,118 shares under a warrant agreement to
purchase 1,467,059 units. Each unit consists of a share of common stock and a
warrant to purchase an additional share of common stock at a price of $1.50 per
share, exercisable at a price of $.66 per unit beginning on April 17, 2001. The
units were issued as compensation for services rendered to the Company in the
2000 private offering and expire on April 17, 2005.
Note 12. Savings Plan
The ISI Savings Plan (the "Savings Plan") permits pre-tax contributions to
the Savings Plan by participants pursuant to Section 401(k) of the Internal
Revenue Code of up to 15% of base compensation. The Company will match up to the
6% level of the participants' eligible contributions. The Savings Plan matches
40% in cash and 60% in the Company's common stock up to the 6% level. For 2000,
the Company's contribution to the Savings Plan was $124,000, consisting of
$43,802 in cash and $80,198 in stock. For 1999, the Company's contribution to
the Savings Plan was $137,000, consisting of $37,024 in cash and $99,976 in
stock. For 1998, the Company's contribution to the Savings Plan was $288,000,
consisting of $116,767 in cash and $171,233 in stock.
Note 13. Common Stock Compensation and Profit Sharing Plan
Common Stock Compensation Plan
Effective October 1, 1997, the Company adopted the Common Stock
Compensation Plan (the "Stock Compensation Plan"), providing key employees with
the opportunity of receiving the Company's common stock as additional
compensation.
Pursuant to the terms of the Stock Compensation Plan, key employees were to
receive, as additional compensation, a pre-determined amount of the Company's
common stock in three equal installments on October 1, 1998, 1999 and 2000,
provided that the key employees remain in the employ of the Company at each such
installment date. As of October 1, 2000, 1999 and 1998, a deferred compensation
liability of $289,920, $340,821 and $412,344, respectively, was accrued for
these employees based on the common stock market price of October 1, 1997. On
October 1, 2000, 1999 and 1998, the Company paid the compensation in cash in
settlement of the Company's obligation to issue shares of common stock.
Accordingly, cash of $7,414, $2,131, and $25,947, respectively, was paid in
satisfaction of the accrued liability of $289,920, $340,821 and $412,344,
respectively. The difference of $282,506, $338,690, and $386,397 was credited to
additional paid in capital in 2000, 1999 and 1998, respectively.
Profit Sharing Plan
The Company has a Profit Sharing Plan (the "Profit Sharing Plan") providing
key employees and consultants with an opportunity to share in the profits of the
Company. The Profit Sharing Plan is administered by the Company's Compensation
Committee.
Pursuant to the terms of the Profit Sharing Plan, the Compensation
Committee, in its sole discretion, based upon the significance of the employee's
contributions to the operations of the Company, selects certain key employees
and consultants of the Company who are entitled to participate in the Profit
Sharing Plan and determines the extent of their participation. The amount of the
Company's profits available for distribution to the participants (the
"Distribution Pool") is the lesser of (a) 10% of the Company's income before
taxes and profit sharing expense and (b) an amount equal to 100% of the base
salary for such year of all the participants in the Profit Sharing Plan.
The Compensation Committee may require as a condition to participation that
a participant remain in the employ of the Company until the end of the fiscal
year for which payment is to be made. Payments required to be made under the
Profit Sharing Plan must be made within 10 days of the filing of the Company's
tax return. To date, there have been no contributions by the Company under the
Profit Sharing Plan.
Note 14. Related Party Transactions
GP Strategies owns approximately 4% of the Company's common stock as of
December 31, 2000. The Company was a party to a management agreement with GP
Strategies, pursuant to which certain legal, financial and administrative
services had been provided by employees of GP Strategies. The fee for such
services in both 1999 and 1998 was $120,000. Such costs were included in general
and administrative expenses. The management agreement was terminated on March
27, 2000 (See Note 16). In addition, during the year ended December 31, 1998,
the Company provided certain services to GP Strategies at the Company's
estimated cost of $25,000. Such services were included as a reduction to general
and administrative expenses.
The Company owns the buildings which contain its offices and laboratories
and until March 1998 leased a portion of the buildings to GP Strategies. Total
occupancy costs for the year ended December 31, 1998 were approximately
$1,084,000. GP Strategies paid to the Company as rent GP Strategies's
proportionate share of such occupancy costs (based on both square feet occupied
and number of personnel), which amounted to $29,375. Such income was included as
a reduction to research and development expense.
See Note 16 for information with respect to royalty obligations to GP
Strategies.
Note 15. Supplemental Statement of Cash Flow Information
The Company paid no income taxes or interest during the three-year period
ended December 31, 2000.
During the years ended December 31, 2000, 1999 and 1998 the following
non-cash financing and investing activities occurred:
2000:
The Company issued 870,000 shares, valued at $896,100, of common stock as
settlement shares related to accounts payable (see Note 16).
The Company credited capital in excess of par value for forgiveness of
$129,886 of debt due GP Strategies.
The Company reduced the settlement share contra-equity account and the
corresponding liability by $382,515 for settlement shares sold.
1999:
The Company issued 285,000 shares, valued at $534,375, of common stock
as payment against accounts payable and the purchase of inventory.
As consideration for a loan from GP Strategies, the Company issued
500,000 shares and warrants to purchase an additional 500,000 shares, valued at
$500,000.
The Company reduced the settlement share contra-equity account and the
corresponding liability by $33,000 for settlement shares sold.
1998:
The Company issued 330,000 shares valued at $1,250,094 of common stock
as payment against a negotiated settlement (see Note 16) and accounts payable.
Note 16. Commitments
The Company obtained human white blood cells used in the manufacture of
ALFERON N Injection from several sources, including the Red Cross pursuant to a
supply agreement dated April 1, 1997 (the "Supply Agreement"). The Company will
not need to purchase more human white blood cells until such time as production
of crude alpha interferon is resumed, and has not purchased any since April 1,
1998. Under the terms of the Supply Agreement, the Company was obligated to
purchase a minimum amount of human white blood cells each month through March
1999 (the "Minimum Purchase Commitment"), with an aggregate Minimum Purchase
Commitment during the period from April 1998 through March 1999 in excess of
$3,000,000. As of November 23, 1998, the Company owed the Red Cross
approximately $1.46 million plus interest at the rate of 6% annum accruing from
April 1, 1998 (the "Red Cross Liability") for white blood cells purchased
pursuant to the Supply Agreement.
Pursuant to an agreement dated November 23, 1998, the Company granted the
Red Cross a security interest in certain assets to secure the Red Cross
Liability, issued to the Red Cross 300,000 shares of common stock and agreed to
issue additional shares at some future date as requested by the Red Cross to
satisfy any remaining amount of the Red Cross Liability. The Red Cross agreed
that any net proceeds received by it upon sale of such shares would be applied
against the Red Cross Liability and that at such time as the Red Cross Liability
was paid in full, the Minimum Purchase Commitment would be deleted effective
April 1,1998 and any then existing breaches of the Minimum Purchase Commitment
would be waived. In January 1999 the Company granted the Red Cross a security
interest (the "Security Interest") in, among other things, the Company's real
estate, equipment inventory, receivables, and New Jersey net operating loss
carryovers to secure repayment of the Red Cross Liability, and the Red Cross
agreed to forbear from exercising its rights under the Supply Agreement,
including with respect to collecting the Red Cross Liability until June 30, 1999
(which was subsequently extended until December 31, 1999). On December 29, 1999,
the Company, the Red Cross and GP Strategies entered in an agreement pursuant to
which the Red Cross agreed that until September 30, 2000 it would forbear from
exercising its rights under (i) the Supply Agreement, including with respect to
collecting the Red Cross Liability, and (ii) the Security Interest. As of the
date hereof, the Red Cross has not given the Company notice of its intent to
exercise its rights to collect the Red Cross Liability. Under the terms of such
agreement, the Red Cross has the right to sell the Company's real estate. In the
event the Red Cross is successful in selling the Company's real estate, the
Company would hope to be able to enter into a lease with the new owner, although
there can be no assurance that this would occur.
As the liability to the Red Cross remains unsettled until such time as the
Red Cross sells the shares they have already received and could receive in the
future, the Company recorded any shares issued to the Red Cross as "Settlement
Shares" within stockholders' equity. Any decreases, or increases up to the
amount of any previous decreases, in the market value at issuance of the
Company's common stock issued to the Red Cross, until such time as the Red Cross
sells its shares, would impact the value of the shares held by the Red Cross and
accordingly require an adjustment to "Settlement Shares". Due to the decline in
the Company's stock price during 1999 and from November 23, 1998 to December 31,
1998, an adjustment for $550,000 and $525,000 has been recorded with a
corresponding charge to cost of goods sold during 1999 and 1998, respectively.
Due to the increase in the Company's stock price during the three months ended
March 31, 2000 up to the date of sale by the Red Cross of all remaining
Settlement Shares, an adjustment for $287,341 was recorded with a corresponding
credit to cost of goods sold. During 1999, the Red Cross sold 27,000 of the
Settlement Shares and sold the balance of such shares (273,000 shares) during
the first quarter of 2000. As a result, the net proceeds from the sales of the
Settlement Shares, $33,000 in 1999 and $368,000 in 2000, were applied against
the liability to the Red Cross. The remaining liability to the Red Cross
included in accounts payable on the consolidated balance sheet at December 31,
2000 and 1999 was approximately $1,276,000 and $1,579,000, respectively. On
October 30, 2000, the Company issued an additional 800,000 shares to the Red
Cross (with a market value of $824,000 on such date). Due to the decline in the
Company's stock price from October 30, 2000 to December 31, 2000, an adjustment
for $524,000 has been recorded with a corresponding charge to cost of goods sold
in 2000. The net proceeds from the sale of such shares by the Red Cross will be
applied against the remaining liability of $1,276,000 owed to the Red Cross.
However, there can be no assurance that the net proceeds from the sale of such
shares will be sufficient to extinguish the remaining liability owed the Red
Cross.
Pursuant to an agreement dated March 25, 1999, GP Strategies loaned the
Company $500,000. In return, the Company granted GP Strategies (i) a first
mortgage on the Company's real estate, (ii) a two-year option to purchase the
Company's real estate, provided that the Company has terminated its operations
and the Red Cross Liability has been repaid, and (iii) a two-year right of first
refusal in the event the Company desires to sell its real estate. In addition,
the Company issued GP Strategies 500,000 shares of Common Stock and a five-year
warrant to purchase 500,000 shares of Common Stock at a price of $1 per share.
The common stock and warrants issued to GP Strategies were valued at $500,000
and recorded as a financing cost and amortized over the original period of the
GP Strategies Debt in 1999. Pursuant to the agreement, the Company has issued a
note to GP Strategies representing the GP Strategies Debt, which note was
originally due on September 30, 1999 (but extended to June 30, 2001) and bears
interest, payable at maturity, at the rate of 6% per annum. In addition, at that
time the Company negotiated a subordination agreement with the Red Cross
pursuant to which the Red Cross agreed that its lien on the Company's real
estate is subordinate to GP Strategies' lien. On March 27, 2000, the Company and
GP Strategies entered into an agreement pursuant to which (i) the GP Strategies
Debt was extended until June 30, 2001 and (ii) the Management Agreement between
the Company and GP Strategies was terminated and all intercompany accounts
between the Company and GP Strategies (other than the GP Strategies Debt) in the
amount of approximately $130,000 were discharged which was recorded as a credit
to capital in excess of par value. The agreement also provides that (i)
commencing on May 1, 2001 and ending on June 30, 2001, on any day ISI may
require GP Strategies to exercise the GP Warrant and sell the underlying shares,
if the market price of ISI Common Stock exceeds $1.00 per share on each of the
10 trading days prior to any such day, and (ii) any proceeds from the sale of
the shares issuable upon exercise of the GP Warrant in excess of the aggregate
amount paid by GP Strategies to purchase such shares, would be deemed to reduce
the then outstanding amount of principal and interest of the GP Strategies Debt
until such amount is reduced to zero.
As consideration for the transfer to the Company of certain licenses,
rights and assets upon the formation of the Company by GP Strategies, the
Company agreed to pay GP Strategies royalties of $1,000,000, but such payments
will be made only with respect to those years in which the Company has income
before income taxes, and will be limited to 25% of such income. To date, the
Company has not generated income before taxes and therefore has not accrued or
paid royalties to GP Strategies.
See Notes 4 and 5 for information relating to royalties payable to Hoffmann
and the Partnership, respectively.
In 1989, the Company entered into a license agreement with Amarillo for
co-exclusive rights to certain low dose oral formulations of interferon. The
Company will be required to pay a royalty of 10% of net sales, as defined, of
products produced and marketed by the Company that may be developed under the
license agreement. To date, no sales of these products have occurred, therefore,
no royalty payments have been made.
Note 17. Quarterly Financial Data (unaudited)
The following summarizes the Company's unaudited quarterly results for 2000 and
1999.
2000 Quarters First Second Third Fourth
------ ------ ----- ------
Thousands of dollars except per share data
Revenues $ 163 $ 158 $ 324 $ 424
Gross profit (loss)(1) 68 (267) (231) (270)
Net loss (813) (820) (1,272) (77)
Basic and diluted loss per share (.15) (.09) (.08) --
1999 Quarters First Second Third Fourth
------ ------ ----- ------
Thousands of dollars except per share data
Revenues $ 460 $ 526 $ 998 $ 345
Gross profit (loss)(1) (690) 35 605 5
Net income (loss) (2,712) (1,416) (648) 1,174
Basic and diluted income(loss)per share (.58) (.27) (.12) .22
(1) Gross profit (loss) is calculated as revenue less cost of goods sold and
excess/idle production costs and reversal/(provision) for excess inventory.
Note 18. Fair Value of Financial Instruments
The carrying values of financial instruments, assuming the Company
continues as a going concern, including cash and cash equivalents, accounts
receivable, accounts payable and long-term debt, approximate fair values,
because of the short term nature or interest rates that approximate current
rates.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors of the Company is incorporated
herein by reference to the Company's definitive proxy statement pursuant to
Regulation 14A, which proxy statement will be filed not later than 120 days
after the end of the fiscal year covered by this report.
Item 11. Executive Compensation
Information with respect to compensation of executives of the Company is
incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, which proxy statement will be filed not later than
120 days after the end of the fiscal year covered by this Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to Security Ownership of Certain Beneficial Owners
and Management is incorporated herein by reference to the Company's definitive
proxy statement pursuant to Regulation 14A, which statement will be filed not
later than 120 days after the end of the fiscal year covered by this Report.
Item 13. Certain Relationships and Related Transactions
Information with respect to Certain Relationships and Related Transactions
is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, which statement will be filed not later than 120
days after the end of the fiscal year covered by this Report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements are included in Part II, Item 8:
Page
Independent Auditors' Report 19
Financial Statements:
Consolidated Balance Sheets - December 31, 2000 and 1999 20
Consolidated Statements of Operations - Years ended
December 31, 2000, 1999, and 1998 21
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 2000, 1999 and 1998 22
Consolidated Statements of Cash Flows - Years ended
December 31, 2000, 1999, and 1998 23
Notes to Consolidated Financial Statements 24
(a)(2) The following is a list of all financial schedules for 2000,
filed as part of this report:
Schedule II - Valuation and Qualifying Accounts 39
Schedules other than that listed above have been omitted because
they are not required or are not applicable or the required
information has been included in the financial statements or the
notes thereto.
(a)(3) See accompanying Index to Exhibits
(b) There were no reports on Form 8-K filed by the Registrant during
the last quarter of the Period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERFERON SCIENCES, INC.
By: /s/ Lawrence M. Gordon
-----------------------
Lawrence M. Gordon
Chief Executive Officer
Dated: April 3, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Samuel H. Ronel Chairman of the Board April 3, 2001
- -------------------
Samuel H. Ronel, Ph.D.
/s/ Lawrence M. Gordon Chief Executive Officer and Director
- ---------------------- (Principal Executive Officer) April 3, 2001
Lawrence M. Gordon
/s/ Stanley G. Schutzbank President and Director April 3, 2001
- -------------------------
Stanley G Schutzbank, Ph.D.
___________________ Director April __, 2001
Sheldon L. Glashow
/s/ Donald W. Anderson Controller (Principal April 3, 2001
- ---------------------- Accounting and Financial
Donald W. Anderson Officer)
The foregoing constitutes a majority of the members of the Board of
Directors.
INTERFERON SCIENCES, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance at
Beginning Costs, Provisions End of
Description of Period and Expenses Deductions Period
- ----------- --------- ------------ ---------- -------
Year ended December 31, 2000
Valuation and qualifying
accounts deducted from assets
to which they apply:
Reserve for excess inventory $ 6,225,185 $ (a)$ 939,174 $ 5,286,011
Year ended December 31, 1999
Valuation and qualifying
accounts deducted from assets
to which they apply:
Reserve for excess inventory $10,344,551 $ (b)$4,119,366 $ 6,225,185
Year ended December 31, 1998
Valuation and qualifying
accounts deduced from assets
to which they apply:
Reserve for excess inventory $ 7,254,710 $3,089,841 $ $10,344,551
Notes:
(a) Deductions include $563,215 for the reversal of a portion of the reserve
for excess inventory and $375,959 for the usage of the reserve to write-off
inventory.
(b) Deductions include $1,177,531 for the reversal of a portion of the reserve
for excess inventory, $139,132 for the usage of a portion of the reserve to
write-off excess inventory and $2,802,703 to write-off expired inventory.
INDEX TO EXHIBITS
Exhibit Number
3.1 - Restated Certificate of Incorporation of the Registrant.
Incorporated herein by reference to Exhibit 3B of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988.
3.2 - Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant. Incorporated herein by reference
toExhibit 3.4 of Registration Statement No. 33-40902.
3.3 - Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant. Incorporated herein by reference to
Exhibit 3.2 of Registration Statement No. 33-40902.
3.4 - Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant. Incorporated herein by reference to
Exhibit 3.4 of Registration Statement No. 33-00845.
3.5 - Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant. Incorporated by reference to Exhibit
3.5 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
3.6 - By-Laws of the Registrant, as amended. Incorporated herein by
reference to Exhibit 3.2 of Registration Statement No. 2-7117.
4.1 - Form of Underwriter's Purchase Option issued in connection with
the August/September 1995 Offering. Incorporated herein by reference
to Exhibit 4.1 of Registration Statement No. 33-59479.
4.2 - Form of Underwriter's Purchase Option issued in connection with
the May 1996 Offering. Incorporated herein by reference to Exhibit 4.4
of Registration Statement No. 333-00845.
4.3 - Form of Purchase Option issued in connection with the December
1996 Private Placement. Incorporated by reference to Exhibit 4.3 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
10.1 - Transfer and License Agreement among National Patent, Hydron
Laboratories, Inc. and the Registrant dated as of January 1, 1981.
Incorporated herein by reference to Exhibit 10.8 of the Registrant's
Registration Statement No. 2-71117.
10.2 - Registrant's 1981 Stock Option Plan, as amended. Incorporated
herein by reference to Exhibit 10.3 to Registration Statement No.
33-59479.
10.3 - Profit Sharing Plan of the Registrant. Incorporated herein by
reference to Exhibit 10X of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1988.
10.4 - License Agreement dated October 20, 1989 between the Registrant
and Amarillo Cell Culture Company, Incorporated. Incorporated herein
by reference to Exhibit 10Y of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1989.
10.5 - GP Strategies 401(k) Savings Plan dated January 9, 1992,
effective March 1, 1992. Incorporated herein by reference to Exhibit
10.12 to the Registrant's Annual Report on Form 10-K for the Year
ended December 31, 1992.
10.6 - Distribution Agreement dated as of February 3, 1994 between
Registrant and Industria Farmaceutica Andromaco, S.A. Incorporated
herein by reference to Exhibit 6(a) to the Registrant's Quarterly
Report on Form 10-Q/A for the quarter ended September 30, 1994.
10.7 - Processing and Supply Agreement dated as of September 1, 1994
between Registrant and Sanofi Winthrop L.P. Incorporated herein by
reference to Exhibit 6(a) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994.
10.8 - Amendment dated March 24, 1995 to Distribution Agreement dated
as of February 3, 1994 between Registrant and Industria Farmaceutica
Andromaco S.A. Incorporated herein by reference to Exhibit 10.30 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.9 - License Agreement, dated as of March 29, 1995, among the
Registrant, Hoffmann-La Roche, Inc. and F. Hoffmann La-Roche, Ltd.
Incorporated herein by reference to Exhibit 10.42 to Registration
Statement No. 33-59479.
10.10 - Amendment of ACC/ISI License Agreement, dated 27, 1995,
between Registrant and Amarillo Cell Culture Company, Incorporated.
Incorporated herein by reference to Exhibit 10.43 to Registration
Statement No. 33-59479.
10.11 - PPM/ACC Sub License Agreement, dated April 27, 1995, between
Pharma Pacific Management Pty. Ltd., and Amarillo Cell Culture
Company, Incorporated. Incorporated herein by reference to Exhibit
10.52 to Registration Statement No. 33-59479.
10.12 - Supply and Distribution Agreement, dated as of April 3, 1996,
between the Registrant and Cell Pharm GmbH. Incorporated herein by
reference to Exhibit 10.56 to Registration Statement No. 333-00845.
10.13 - Quality Assurance Agreement, dated as of April 3, 1996,
between the Registrant and Cell Pharm GmbH. Incorporated herein by
reference to Exhibit 10.57 to Registration Statement No. 333-00845.
10.14 - Agreement, dated as of April 1, 1997, between the Registrant
and the American National Red Cross. Incorporated by reference to
Exhibit 10.54 of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.
10.15 - Agreement dated May 27, 1997, between the Registrant and
Alternate Site Distributors, Inc. Incorporated by reference to Exhibit
10.55 of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
10.16 - Stock Bonus Plan. Incorporated by reference to Exhibit 10.57
of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.17 - Form of employment agreement for participants in Stock Bonus
Plan. Incorporated by reference to Exhibit 10.58 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
10.18 - Employment Agreement, dated as of October 1, 1997, between the
Registrant and Lawrence M. Gordon. Incorporated by reference to
Exhibit 10.59 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
21.0 - Subsidiaries of the Registrant. *
23.1 - Consent of KPMG LLP. *
- -----------------
*Filed herewith
Exhibit 21
Subsidiaries of the Registrant
Name Jurisdiction
Interferon Sciences Development Corporation Delaware
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
INTERFERON SCIENCES, INC.
We consent to incorporation by reference in (i) the Registration Statement
(No. 33-64921) on Form S-3, (ii) the Registration Statement (No. 333-04381) on
Form S-3, (iii) the Registration Statement (No. 333-19451) on Form S-3, (iv) the
Registration Statement (No. 33-30209) on Form S-8, (v) the Registration
Statement (No. 333-34203) on Form S-3, and (vi) the Registration Statement (No.
333-43078) on Form S-1 of Interferon Sciences, Inc. of our report dated March 9,
2001 relating to the consolidated balance sheets of Interferon Sciences, Inc.
and subsidiary as of December 31, 2000 and 1999, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2000, and the
related schedule, which report appears in the December 31, 2000 Annual Report on
Form 10-K of Interferon Sciences, Inc.
Our report dated March 9, 2001, contains an explanatory paragraph that
states the Company has suffered recurring losses from operations, has an
accumulated deficit and has limited liquid resources that raise substantial
doubt about its ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
/s/ KPMG LLP
Princeton, New Jersey
April 3, 2001