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, 1996
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 2-89332
INTERFERON SCIENCES RESEARCH PARTNERS, LTD.
(Exact name of registrant as specified in its charter)
New Jersey 22-2502556
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
783 Jersey Avenue, New Brunswick, New Jersey 08901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 249-3250
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
TABLE OF CONTENTS
Page
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of
Security Holders 6
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 7
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 8. Financial Statements and Supplementary Data 12
Item 9. Disagreements on Accounting and
Financial Disclosure 21
Item 10. Directors and Executive Officers of
the Registrant 21
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial
Owners and Management 22
Item 13. Certain Relationships and Related
Transactions 23
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 23
PART 1
Item 1. Business
Interferon Sciences Research Partners, Ltd., a limited
partnership (the "Partnership"), was formed on February 2, 1984,
under the laws of the State of New Jersey, and commenced
operations on October 26, 1984. The Agreement of Limited
Partnership is among the Partnership, Interferon Sciences
Development Corporation (the "General Partner"), a wholly owned
subsidiary of Interferon Sciences, Inc. ("ISI"), and those parties
admitted to the Partnership as Limited Partners.
The business of the Partnership is (i) to develop externally
applied (topical) formulations of alpha interferon produced by
recombinant DNA techniques to be used in the treatment of herpes
genitalis (the "Product"), (ii) to develop large-scale processes
for the formulation of the Product, (iii) to establish the safety
and efficacy of the Product through clinical testing, (iv) to
obtain the regulatory approvals necessary for the manufacture and
sale of the Product, and (v) to earn income from the worldwide
sale of the Product.
In order to conduct these activities, the Partnership entered
into certain agreements with ISI during 1984, the contents of
which are summarized below.
The Cross License Agreement
ISI granted the Partnership a worldwide, nonexclusive
license, with the right to grant sublicenses, to use all of ISI's
know-how, patent rights and biological materials, (the "ISI
Technology") solely for the development, manufacture, and sale of
the Product. The Partnership granted ISI a worldwide, exclusive
license, with the right to grant sublicenses, to use all of the
Partnership's know-how, patent rights, and biological materials
developed during the development period (the "Partnership
Technology") for all purposes other than the development,
manufacture, or sale of the Product. ISI agreed to pay royalties
to the Partnership based on sales of, and revenues received from
sublicensing to other companies the right to manufacture and sell,
the Product.
ISI agreed to pay royalties to the Partnership in respect of
products which compete with the Partnership's Product (the
"Competitive Products") and products which utilize Partnership
Technology (the "Other Products").
Under the Cross License Agreement and the Interim License
Agreement (see below), the Partnership will be entitled to receive
a royalty equal to 4% of the sales by ISI of the Product and
Competitive Products and 15% of the revenues received by ISI from
sublicensing the Product and Competitive Products.
The Development Contract
ISI and the Partnership entered into a Development Contract
to develop the Product. As of December 31, 1986, $4,555,000 was
paid to ISI for the work it performed as contractor under the
Development Contract.
Under the Development Contract, ISI agreed to use its best
efforts to perform all research and development necessary to
complete development, to conduct clinical tests, and to obtain
regulatory approval of the Product. In May 1987, ISI filed a
Product License Application with the Food and Drug Administration
for approval to market the Product.
Under the terms of the Development Contract, if the
Partnership did not have sufficient funds to complete the
development of the Product, ISI was required, subject to certain
conditions, to make sufficient funds available to the General
Partner to allow it to make an additional contribution (the
"Overrun Contribution") to the Partnership of $433,138. As of
September 30, 1986, the Partnership expended all of its funds and
since such time all of the activities of the Partnership have been
funded by the General Partner. Through December 31, 1996, the
General Partner had made an Overrun Contribution of $1,997,000.
Under the terms of the Partnership Agreement, the General
Partner's Overrun Contribution changes the way in which
distributions are made by the Partnership. For a description of
the extent of changes in distributions by the Partnership to the
Limited Partners due to the General Partner making the Overrun
Contribution, see Item 5 "Market for the Registrant's Common
Equity and Related Stockholder Matters."
The Partnership has not made any payments to ISI for research
and development pursuant to the Development Contract since 1986.
Interim License Option
ISI has an option (the "Interim License Option") to acquire a
worldwide, exclusive license (the "Interim License") to use the
Partnership Technology for the development, manufacture, and sale
of the Product. The Interim License Option will be exercisable
for a period of 90 days, commencing on the date (the "Interim
License Option Date") which is the earlier of the date on which
the Product is (i) approved for sale in the United States by the
FDA or (ii) for sale in any of the Major Market Countries by a
similar regulatory authority.
If the Interim License Option is exercised, the Partnership
will continue to be entitled to receive royalties with respect to
the Product, Competitive Products, and Other Products.
Purchase Option
ISI has an option (the "Purchase Option") to acquire from
each Limited Partner all of such Limited Partner's interest in the
Partnership. The Purchase Option is exercisable for a period (the
"Purchase Option Period") of 90 days (subject to a 90-day
extension under certain circumstances) commencing on the date (the
"Purchase Option Date") which is the earlier of (i) the date on
which the Partnership has received from ISI under the Interim
License an aggregate of $3,000,000 in payments with respect to the
Product (provided that the Purchase Option may not be exercised
earlier than 14 months after the Interim License Option Date) or
(ii) the fourth anniversary of the date the Interim License Option
is exercised. If ISI exercises the Purchase Option, it will be
obligated to make a one-time payment of $557 per Unit to the
Limited Partners in exchange for their Units on the date it
exercises the Purchase Option (the "Purchase Option Exercise
Date") and to pay royalties for a period of 15 years thereafter.
In the event the Purchase Option is exercised, the royalty rates
(i) will increase to 5% of sales and 20% of sublicensing revenues
and (ii) no royalties will be payable in respect of Other
Products.
Recent Developments
ISI does not presently intend to exploit the Product. In the
past, ISI conducted clinical trials utilizing its ALFERON Gel
proprietary formulation containing its recombinant alpha
interferon for the treatment of the symptoms of recurrent genital
herpes. However, ISI is currently focusing its clinical efforts
on ALFERON N Gel, a formulation containing ISI's natural source
alpha interferon (interferon alfa-n3) which was developed for the
topical treatment of viral diseases and cancers affecting the skin
and mucosal tissues. In November 1992, ISI submitted an
investigational new drug application for a clinical trial
utilizing its reformulated ALFERON N Gel containing natural alpha
interferon for the treatment of cervical dysplasia, a disease that
affects approximately 500,000 to one million women each year in
the United States alone. ISI has completed this Phase 2 dose
ranging study using ALFERON N Gel at the Columbia Presbyterian
Medical Center in New York for the treatment of mild cervical
dysplasia. Based upon Pap smears, identification tests for the
presence of virus and cervical biopsies, ALFERON N Gel appears to
have the potential for improving the course of cervical dysplasia
in the majority of patients who completed the treatment course.
Based upon these results, a physician-sponsored study in HIV-
infected women with cervical dysplasia commenced in August 1995.
However, the study was discontinued at the request of the
physician-sponsor due to the loss of the physician's study
coordinator and a change in the physician's priorities.
Under the terms of the Partnership Agreement, a royalty may
be payable to the Partnership by reason of the commercial
exploitation of ALFERON N Gel which may be considered an Other
Product under the terms of the Partnership Agreement to the extent
that it utilizes any of the Partnership Technology. This royalty
will be adjusted based upon the proportional funding contributions
to the development of such Other Product by the Partnership and
ISI. However, ISI will not start clinical trials for genital
herpes unless it obtains additional funding or a sponsor. ISI may
exploit ALFERON N Gel for herpes which under the terms of the
Partnership Agreement may be considered a Competitive Product
which may entitle the Partnership to a royalty in respect of
products which compete with the Product. This royalty will be
adjusted based upon the funding contribution to the development of
such Competitive Product by ISI. See Item 5 "Market for the
Registrant's Common Equity and Related Stockholder Matters."
THE PRODUCT
Herpes Virus Infections
Human herpes viruses either cause or are associated with a
whole spectrum of diseases. A distinctive feature of the herpes
virus is its ability to establish a latent infection following a
primary infection. Reactivation of the latent infection causes
recurrent acute symptoms. Herpes genitalis is one of the most
common of the sexually transmitted diseases. In the acute primary
phase it causes painful genital lesions which may persist for
several weeks. These may recur several times a year and persist
for approximately seven days during each recurrence. The goal of
the research and development program of the Partnership will be to
develop a treatment for herpes genitalis which will, in general,
accelerate symptom relief and shorten healing time.
Natural Human Alpha Interferon
Interferons are a group of proteins produced and secreted by
cells to combat diseases. Researchers have identified four major
classes of human interferon: alpha, beta, gamma and omega.
Alpha interferons are manufactured commercially in three
ways: by genetic engineering, by cell culture, and from human
white blood cells. In the United States, only two types of alpha
interferon are approved for commercial sale: recombinant
(genetically engineered) alpha interferon and Natural Alpha
Interferon, which is manufactured from human white blood cells.
Outside of the United States, sales of alpha interferon produced
by cell culture account for a significant portion of the market.
An analysis of Natural Alpha Interferon shows that it is
composed of a family of proteins containing many different
molecular species of interferon. In contrast, recombinant alpha
interferons each contain only a single species. Researchers have
reported that the various species of interferon may have differing
anti-viral activity depending upon the strain of virus. Natural
Alpha Interferon presents a broad complement of species. Natural
Alpha Interferon is also glycosylated, or partially covered with
sugar molecules, which does not occur with recombinant alpha
interferon.
Published studies suggest that natural human alpha
interferon, if applied topically to the area of herpes virus
infections, can accelerate symptom relief and shorten healing
time. This is important epidemiologically because it reduces the
potential of transmitting these diseases through personal contact.
In addition, controlled human clinical testing conducted by ISI
with topical formulations of natural alpha interferon have shown
some evidence of efficacy in the treatment of herpes genitalis.
Competition
The General Partner believes that two products are presently
sold in the United States for the treatment of recurrent genital
herpes. Zovirax (manufactured by Glaxo Wellcome Inc.) which
contains acyclovir and is administered orally, topically, or
intravenously and Famvir (manufactured by SmithKline Beecham)
which contains farncyclovir and is administered orally. The only
current treatment for cervical dysplasia in the United States is
surgery.
Patents
Unpredictability of Patent Protection
The United States Patent and Trademark Office has granted two
patents to ISI which disclose and claim topical interferon
preparations. The patents encompass interferon preparations for
the topical delivery of one or more interferons to the site of a
disease which respond therapeutically to interferon, and a system
for delivering interferon topically which prevents oxidation of
the protein. The inventions specifically encompass the topical
treatment for treating viral diseases, such as herpes genitalis,
with alpha interferon. It is not certain that other patents will
be issued, or, if issued, that they will afford ISI protection
from competitive products.
Notwithstanding any patent obtained with respect to ALFERON N
Gel, it is possible that others have or may develop equivalent or
superior products or technologies.
Potential Patent Infringement Claims Against ISI
F. Hoffmann-La Roche ("Roche"), the parent of Hoffmann-La
Roche ("Hoffmann"), has also been issued patents covering human
alpha interferon in many countries throughout the world. If ISI
desires to exploit ALFERON N Gel for any indication in any country
in which Roche has such a patent and it did not or was not able to
obtain a license from Roche, it may be subject to a patent
infringement lawsuit by Roche. If such a suit were brought, ISI
would have to either counterclaim to attempt to invalidate such
patent or prove ALFERON N Gel (using natural interferon) does not
infringe such patent.
Royalty Obligations
ISI is a party to certain license agreements pursuant to
which it is obligated to pay royalties based upon commercial
exploitation of ALFERON N Gel. Under the terms of such license
agreements, ISI would pay royalties up to 13.5% of the net sales
of ALFERON N Gel.
Personnel
The Partnership and its General Partner, Interferon Sciences
Development Corporation, a wholly owned subsidiary of ISI, do not
have any full-time employees. As of March 15, 1997, ISI employed
77 full-time persons, who, on an as needed basis, could dedicate a
portion of their time to Partnership activities.
Item 2. Properties
The Partnership itself does not own or lease any properties.
The Partnership's business is conducted at the facilities of the
General Partner, Interferon Sciences Development Corporation,
located in New Brunswick, New Jersey. Under the Development
Agreement, ISI utilizes a portion of its facilities to conduct the
research and development activities of the Partnership.
ISI owns two free-standing buildings comprising approximately
44,000 square feet located in New Brunswick, New Jersey. ISI
occupies approximately 25,000 square feet, for staff offices, for
the production and purification of interferon, for quality control
and research activities, and for the storage of raw, in process
and finished materials. ISI also shares approximately 9,000
square feet with National Patent Development Corporation
("National Patent"), an approximately 15% Stockholder of ISI and
leases approximately 10,000 square feet to National Patent at such
location.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
No public or other market exists for interests in the
Partnership. Partnership interests are transferable subject to
the satisfaction of certain conditions contained in Article 6 (as
amended) of the Agreement of Limited Partnership incorporated
herein by reference.
The following information as of December 31, 1996 relates to
the ownership of Partnership interests:
Title of Class Number of Record Holders
General Partner Interest One
Limited Partnership Interests 827
There have been no cash distributions to the partners to
date. Future distributions, if any, will be made by the General
Partner to the partners as soon as practicable after the end of
any fiscal quarter, in proportion to the partners' respective
capital accounts as of the end of such quarter. Distributable
cash, which must be distributed to the partners, is generally
defined as the excess of cash revenues over certain expenditures
and other amounts determined by the General Partner to be
necessary for the proper operation of the Partnership's business.
The capital account of each partner will be credited with such
partner's cash contributions to the Partnership, debited by the
amount of any such distribution from the Partnership to such
partner, and credited or debited with such partner's allocation of
the net gain or loss of the Partnership for Federal income tax
purposes ("Profits" and "Losses", respectively).
Profits and losses of the Partnership and each item of
Partnership income, gain, credit, loss, and deduction shall be
allocable as of the end of each Partnership fiscal year 99% to the
Limited Partners and 1% to the General Partner, provided, however,
if the General Partner contributes additional funds to continue
the development of a Product prior to FDA approval, each item of
deduction arising from the expenditure of such funds will be
allocable 100% to the General Partner, and each item of income,
gain, or credit will be allocated (i) 99% to the Limited Partners
and 1% to the General Partner until such time as the Limited
Partners have received distributions from the Partnership equal to
50% of their aggregate capital contributions, (ii) thereafter, 50%
to the General Partner and 50% to the Limited Partners until the
General Partner has received distributions equal to 120% of such
contributed funds, and (iii) thereafter, 99% to the Limited
Partners and 1% to the General Partner.
Similarly, if the General Partner has contributed funds to
the development of any Product prior to FDA approval, and, as of
the Purchase Option Exercise Date, has not yet received
distributions equal to 120% of such contributed funds as required
by the Partnership Agreement (see "Summary of the Partnership
Agreement"), then 50% of the royalties otherwise payable to the
Final Limited Partners shall be paid to the General Partner until
the amounts so paid to the General Partner, together with all
distributions received after the date of such contribution by the
General Partner, equal 120% of such contribution. If, after the
Purchase Option Exercise Date, ISI contributes funds to the
development of any Products prior to FDA approval, then 50% of the
royalties otherwise payable to the Final Limited Partners shall be
retained by ISI until ISI has retained 120% of the funds so
contributed by ISI. However, in no event will the royalties
payable to the Final Limited Partners be so reduced until the
Limited Partners and the Final Limited Partners have received
aggregate distributions and royalty payments equal to 50% of their
aggregate capital contributions.
Because of the foregoing allocation and royalty adjustments,
the contribution of funds by the General Partner (or ISI) will
have a material effect on the potential distributions (or
royalties) to be received by the Limited Partners (or the Final
Limited Partners).
Item 6. Selected Financial Data
Year Ended
December 31,
1996 1995 1994 1993 1992
Net loss NONE NONE NONE NONE NONE
Net loss per limited
partnership unit NONE NONE NONE NONE NONE
Net loss-General
Partner NONE NONE NONE NONE NONE
Distributions
to partners NONE NONE NONE NONE NONE
December 31,
1996 1995 1994 1993 1992
Total assets NONE NONE NONE NONE NONE
Long-term debt NONE NONE NONE NONE NONE
Working capital NONE NONE NONE NONE NONE
Partners' capital NONE NONE NONE NONE NONE
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition and Liquidity
During 1984, the Partnership sold 1038.7 units of limited
partnership interests and received net proceeds of approximately
$4,415,000 from such sale. The primary use of the proceeds was to
fund research and development and clinical trials necessary for
obtaining regulatory approval of a topical formulation containing
recombinant alpha interferon for the treatment of herpes genitalis
(ALFERON Gel). The Partnership entered into a Development
Contract with Interferon Sciences, Inc. (ISI) to conduct such
research. The Partnership paid ISI $4,555,000 under such
agreement through 1986. By September 30, 1986, the Partnership
had exhausted all of its available funds for the funding of
research and development of ALFERON Gel. The General Partner
agreed to contribute up to an additional $433,000, under certain
conditions, to continue the research. Such amount was based on
the number of units sold in the offering. Notwithstanding that
commitment, from September 1986 to October 1990, the General
Partner contributed $1,997,000 towards the cost of such research.
During May 1987, ISI filed a Product License Application with the
Food and Drug Administration (FDA) for approval to market ALFERON
Gel. This filing was supplemented in 1989 with an updated
clinical summary and a comprehensive statistical analysis of the
completed trials. At a meeting with the FDA in February, 1990,
the FDA indicated that additional process development and clinical
trials would be necessary prior to approval of ALFERON Gel. ISI
believed, at that time, that the costs to complete the required
process development and clinical trials would be substantial, and
there could be no assurance that the clinical trials would be
successful. As a result of the above events, in March 1992, ISI
withdrew its FDA Product License Application for ALFERON Gel
containing recombinant interferon.
The General Partner does not anticipate that the Partnership
will receive any revenues in 1997. In addition, the Partnership
is not in a position to incur additional expenses since it has
exhausted all its available funds, and ISI is currently developing
ALFERON Gel using ISI's natural source, multi-species alpha
interferon (ALFERON N Gel) in place of recombinant interferon.
ISI does not presently intend to exploit ALFERON Gel (the
Partnership Product). ISI is currently focusing its clinical
efforts on ALFERON N Gel, a formulation containing ISI's natural
alpha interferon (interferon alfa-n3) which was developed for the
topical treatment of viral diseases and cancers affecting the skin
and mucosal tissues. Now that ISI has expanded capacity to
manufacture sufficient quantities of its natural-source alpha
interferon due to the expansion of its manufacturing facilities in
1991, ISI resumed clinical trials of this topical preparation
utilizing its natural-source alpha interferon as the active
ingredient. A Phase 2 pilot clinical trial utilizing its
reformulated ALFERON N Gel has been completed for the treatment of
cervical dysplasia (see "Recent Developments", page 3). Under the
terms of the Partnership Agreement, a royalty may be payable to
the Partnership by reason of the commercial exploitation of
ALFERON N Gel to the extent that it utilizes any of the
Partnership Technology, which royalty will be adjusted based upon
the proportional funding contributions to the development of
ALFERON N Gel by the Partnership and ISI. If ISI obtains
additional financing in the future, ISI may exploit ALFERON N Gel
for herpes genitalis which may entitle the Partnership to a
royalty in respect to a product which competes with the
Partnership Product; however, this royalty will be adjusted based
upon the proportional funding contributions to the development of
ALFERON N Gel by the Partnership and ISI.
Results of Operations
Since ISI did not make any contributions to the Partnership
in 1996, 1995 and 1994, the Partnership did not record any expense
or loss.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report 13
Financial Statements:
Balance Sheet -
December 31, 1996 and 1995 14
Statement of Operations -
Years ended December 31, 1996, 1995 and 1994 15
Statement of Cash Flows -
Years ended December 31, 1996, 1995 and 1994 16
Statement of Changes in Partners' Capital -
Years ended December 31, 1996, 1995 and 1994 17
Notes to Financial Statements 18
Independent Auditors' Report
The Partners
Interferon Sciences Research Partners, Ltd.
We have audited the financial statements of Interferon
Sciences Research Partners, Ltd. as listed in the accompanying
index. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Interferon Sciences Research Partners, Ltd. at December 31,
1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 21, 1997
INTERFERON SCIENCES RESEARCH PARTNERS, LTD.
BALANCE SHEET
December 31,
1996 1995
ASSETS
Total assets $ --- $ ---
LIABILITIES AND PARTNERS' CAPITAL
Partners' capital
Limited partners $ --- $ ---
General Partner --- ---
Total partners' capital --- ---
Total liabilities and partners' capital $ --- ---
The accompanying notes are an integral part of these financial
statements.
INTERFERON SCIENCES RESEARCH PARTNERS, LTD.
STATEMENT OF OPERATIONS
Year Ended December 31,
1996 1995 1994
Net income (loss) $ -- $ -- $ --
Net income (loss) - Limited Partners $ -- $ -- $ --
Net income (loss) - General Partner -- -- --
Net income (loss) $ -- $ -- $ --
Net loss Net loss Net loss
per unit per unit per unit
Net income (loss) - Limited Partners
(1038.7 units outstanding) $ -- $ -- $ --
The accompanying notes are an integral part of these financial
statements.
INTERFERON SCIENCES RESEARCH PARTNERS, LTD.
STATEMENT OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
Net change in cash $ -- $ -- $ --
Cash at beginning of year -- -- --
Cash at end of year $ -- $ -- $ --
The accompanying notes are an integral part of these financial
statements.
INTERFERON SCIENCES RESEARCH PARTNERS, LTD.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Years ended December 31, 1996, 1995 and 1994
Total
General Partners'
Limited Partners Partner Capital
Units Amount Amount Amount
Balance at December 31,
1993 1038.7 $ -- $ -- $ --
Capital contribution -- -- -- --
Net loss -- -- -- --
Balance at December 31,
1994 1038.7 -- -- --
Capital contribution -- -- -- --
Net loss -- -- -- --
Balance at December 31,
1995 1038.7 -- -- --
Capital contribution -- -- -- --
Net loss -- -- -- --
Balance at December 31,
1996 1038.7 $ -- $ -- $ --
The accompanying notes are an integral part of these financial
statements.
INTERFERON SCIENCES RESEARCH PARTNERS, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Interferon Sciences Research Partners, Ltd., a New Jersey
Limited Partnership (the Partnership), was established in February
1984 and commenced operations in October 1984. The General
Partner is Interferon Sciences Development Corporation (ISD), a
wholly owned subsidiary of Interferon Sciences, Inc. (ISI).
In February 1984, the Partnership filed a registration
statement, which became effective in May 1984, with the Securities
and Exchange Commission, covering a public offering of Limited
Partnership interests (Units). During 1984, the Partnership sold
1,038.7 Units for gross proceeds of $5,193,500 resulting in net
proceeds of $4,414,475 to the Partnership. The offering expired
April 1, 1985 with no additional Units being sold.
The business of the Partnership is to fund research and
development and clinical trials necessary for obtaining regulatory
approval of a topical formulation ("the Product") containing
recombinant alpha interferon for the treatment of herpes genitalis
(ALFERON Gel). In order for the Partnership to commence its
business activities, the Partnership entered into a Cross License
Agreement, a Development Contract, an Interim License Option and a
Purchase Option with ISI (see Note 5).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Research and development costs - Payments to ISI for research
and development, pursuant to the Development Contract, were
expensed in the period the payments were made.
Income taxes - The Partnership's financial statements do not
include provisions for income taxes. Taxes, if any, are the
liability of the individual partners. The Partnership reports its
operations on the cash method of accounting for Federal income tax
purposes.
Net loss per limited partnership unit - Aggregate losses
allocated to the limited partners were limited to the extent of
their capital accounts.
NOTE 3. PARTNERSHIP ALLOCATION OF PROFIT AND LOSS
Profits and losses of the Partnership are allocated 99% to
the Limited Partners and 1% to the General Partner, subject to
adjustment when the General Partner contributes additional funds
to the Partnership. Since 1986, all losses have been funded by
the General Partner, and consequently all losses since that time
have been allocated to the General Partner.
NOTE 4. FUNDING
The Partnership exhausted its available funds in 1986. The
General Partner had originally agreed to contribute up to an
additional $433,000 to continue research, under certain
circumstances. During the period beginning September 30, 1986, the
date on which the Partnership had exhausted its available funds,
through October 31, 1990, the General Partner contributed
$1,997,000 towards the cost of such research. Beginning November
1990, the General Partner discontinued funding the development of
ALFERON Gel containing recombinant interferon. Beginning in 1992,
ISI commenced further development of ALFERON Gel using ISI's
natural source multi-species alpha interferon (ALFERON N Gel) in
place of recombinant interferon. If the General Partner does not
resume funding or other sources of cash do not become available,
the Partnership will not be able to fund the Partnership Product.
NOTE 5. RELATED PARTY TRANSACTIONS
During 1984, the Partnership and ISI entered into several
agreements including a Development Contract whereby substantially
all of the net proceeds of the offering were paid to ISI in
periodic payments over the term of the Partnership's development
program. Such payments were used to fund research and development
and clinical trials necessary for obtaining regulatory approval
with respect to ALFERON Gel. In 1986, 1985 and 1984, the
Partnership paid ISI $690,000, $2,289,000 and $1,576,000,
respectively, under this agreement. Additionally, in 1990, 1989,
1988, 1987 and 1986, ISD contributed $56,000, $144,000, $520,000,
$1,177,000 and $100,000, respectively, to the Partnership, which
used such funds to pay for additional research and development for
the benefit of the Partnership. Beginning in 1992, ISI commenced
further development of ALFERON Gel using ISI's natural source
multi-species alpha interferon in place of recombinant interferon.
The Partnership and ISI have also entered into a Cross
License Agreement pursuant to which the Partnership has obtained
from ISI a worldwide, nonexclusive license to use the ISI
Technology (as defined) and ISI has obtained from the Partnership
a worldwide, exclusive license to use the Partnership Technology
(as defined) for all purposes other than the development,
manufacture, or sale of ALFERON Gel. The agreement also provides
for the payment by ISI to the Partnership of royalties based on
specified levels of sales during the development phase at the
rates specified below.
For a period of 90 days commencing on the earlier of the
dates on which ALFERON Gel is approved for sale in the United
States by the Food and Drug Administration or approved for sale in
any of the Major Market Countries (as defined) by a similar
regulatory authority, ISI will have an option to acquire a
worldwide, exclusive license to use the Partnership Technology for
the development, manufacture and sale of ALFERON Gel. If ISI
exercises the option, it will be obligated to pay the Partnership
royalties at the rates of 4% of sales and 15% of sublicense
revenues.
ISI will also have an option to acquire from each Limited
Partner all of such Limited Partner's interest in the Partnership.
If ISI exercises this option, it will be obligated to make a one
time payment of approximately $580,000, plus royalties of 5% and
20% of specified sales and sublicense revenues, respectively, for
a period of 15 years. All of the payments made by ISI will be
divided among the Limited Partners in proportion to their
respective partnership unit percentages. ISI may terminate its
obligation to pay future royalties to the Partnership by making a
one time payment in cash or common stock of ISI having a fair
market value equal to $20,774,000 on or before the second
anniversary of the purchase option exercise date and increasing to
$31,161,000 after the third anniversary of such date, all reduced
by royalty payments actually made under the terms of the purchase
option, provided, however, that such payment may not be less than
$12,118,000.
NOTE 6. INTERFERON SCIENCES DEVELOPMENT CORPORATION AND
INTERFERON SCIENCES, INC.
ISD, the General Partner, is a wholly owned subsidiary of
ISI. From September 1986 through October 1990, ISD's total
capitalization was used to fund Partnership expenses. ISD was
totally dependent upon ISI for capital to be able to fund the
Partnership during this period. Beginning in 1992, ISI commenced
development of ALFERON N Gel using its own funds.
Summarized consolidated financial information of ISI is as
follows:
December 31,
Assets 1996 1995
Cash and cash equivalents $17,491,955 $7,221,108
Receivables from affiliated companies 82,902 27,211
Accounts and other receivables 233,037 47,351
Inventories 4,328,598 815,978
Other current assets 162,019 76,000
Property, plant and equipment, net 4,958,833 5,133,995
Intangible and other assets, net 485,519 630,939
$27,742,863 $13,952,582
Liabilities and Stockholders' Equity
Current liabilities 2,369,032 1,125,806
Stockholders' equity 25,373,831 12,826,776
$27,742,863 $13,952,582
Item 9. Disagreements on Accounting and Financial Disclosure
There has been no Form 8-K filed within 24 months prior to
the date of the most recent financial statements reporting a
change of accounting and/or reporting disagreement on any matter
of accounting principle or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Exclusive management and control of the business of the
Partnership is vested in the General Partner, Interferon Sciences
Development Corporation. Accordingly, the following information
pertains to the Directors and Officers of Interferon Sciences
Development Corporation:
Positions Held with General
Partner and Principal Occupations
Name Age for the Past Five Years
Samuel H. Ronel 60 President and a Director of the
General Partner; Chairman of the
Board of ISI.
Stanley G. Schutzbank 51 Executive Vice President and a
Director of the General Partner;
President and a Director of ISI.
Donald W. Anderson 47 Chief Financial Officer of the
General Partner; Controller and
Secretary of ISI.
Martin M. Pollak 69 Director of the General Partner;
Founder, Executive Vice
President, Treasurer, and a
Director of National Patent;
Director of ISI.
Jerome I. Feldman 68 Director of the General Partner;
Founder, President, Chief
Executive Officer, and a Director
of National Patent; Director of
ISI.
Directors of Interferon Sciences Development Corporation are
elected annually by ISI, the sole shareholder, and officers are
elected annually by the Board of Directors. There are no family
relationships between any of the directors or officers.
Item 11. Executive Compensation
The Directors and Officers of the General Partner, Interferon
Sciences Development Corporation, do not receive any direct
remuneration from the Partnership.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information regarding security ownership of all persons known
to the Partnership to be the beneficial owners of more than 5% of
any class of the Partnership's securities as of December 31, 1996
is as follows:
Title Name and Address Amount and Nature
of of Beneficial of Beneficial Percent
Ownership Ownership Ownership of Class
General Interferon Sciences One General 100%
Partner Development Corporation Partner
Interest 783 Jersey Avenue Interest
New Brunswick, NJ
As of December 31, 1996, no Limited Partner owns more than
five percent of the Limited Partnership Units outstanding.
Exclusive management and control of the Partnership's
business is vested in Interferon Sciences Development Corporation,
the General Partner of the Partnership. Information regarding
ownership of limited partnership interests of the directors, and
all directors and officers as a group, of the General Partner as
of December 31, 1996 is as follows:
Amount and Nature
of Beneficial Percent
Name of Beneficial Owner Ownership of Class
Samuel Ronel One Interest ---
Stanley Schutzbank One Interest ---
(Directors and Officers
as a Group) Two Interests ---
Item 13. Certain Relationships and Related Transactions
All of the officers and directors of the General Partner are
officers and/or directors of ISI. During 1984, the Partnership
entered into certain agreements with ISI, the summarized contents
of which are set forth in Item 1.
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
Page
(a) (1) The following financial statements
are included in Part II, Item 8:
Independent Auditors' Report 13
Financial Statements:
Balance Sheet - December 31, 1996 and 1995 14
Statement of Operations - Years Ended December 31,
1996, 1995 and 1994 15
Statement of Cash Flows - Years Ended December 31,
1996, 1995 and 1994 16
Statement of Changes in Partners' Capital - Years
Ended December 31, 1996, 1995 and 1994 17
Notes to Financial Statements 18
(a) (2) All schedules are omitted because they are not
applicable, or not required, or because the required
information is included in the financial statements or notes
thereto.
(a) (3) See accompanying Index to Exhibits
SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Interferon Sciences Research Partners, Ltd.
A Limited Partnership
(Registrant)
By: Interferon Sciences
Development Corporation
General Partner
Samuel H. Ronel, Ph.D.
President
Dated: March __, 1997
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
Samuel H. Ronel, Ph.D. President and Director
Stanley G. Schutzbank, Ph.D. Executive Vice President
and Director
Donald W. Anderson Controller (Principal
Accounting and Financial
Officer)
Martin M. Pollak Director
Jerome I. Feldman Director
Dated: March __, 1997