FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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Commission file number 0-16005
Unigene Laboratories, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2328609
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Little Falls Road, Fairfield, New Jersey 07004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 882-0860
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(Former name, former address and former fiscal year, if changed since last
report.)
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 [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 Par Value--46,436,940 shares as of May 15, 2001
INDEX
UNIGENE LABORATORIES, INC.
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements (Unaudited)
Condensed balance sheets-
March 31, 2001 and December 31, 2000 3
Condensed statements of operations-
Three months ended March 31, 2001 and 2000 4
Condensed statements of cash flows-
Three months ended March 31, 2001 and 2000 5
Notes to condensed financial statements-
March 31, 2001 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNIGENE LABORATORIES, INC.
CONDENSED BALANCE SHEETS
March 31, 2001 December 31, 2000
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(Unaudited)
ASSETS
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Current assets:
Cash and cash equivalents $ 10,596 $ 17,108
Receivables 111,803 165,671
Prepaid expenses 106,826 129,493
Inventory 374,223 415,420
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Total current assets 603,448 727,692
Property, plant and equipment - net 5,295,635 5,684,127
Investment in joint venture 900,000 900,000
Patents and other intangibles, net 1,278,216 1,288,686
Other assets 432,891 446,894
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$ 8,510,190 $ 9,047,399
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 3,115,456 $ 2,834,556
Accrued expenses 4,575,934 3,761,277
Notes payable - stockholders 4,483,323 2,873,323
Current portion - long-term notes payable -
stockholders 1,870,000 1,870,000
5% convertible debentures 2,400,000 2,400,000
Current portion - capital lease obligations 55,398 55,398
Deferred revenue -- 200,000
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Total current liabilities 16,500,111 13,994,554
Joint venture obligation, excluding current portion 495,000 495,000
Capital lease obligations, excluding current portion 45,937 50,572
Commitments and contingencies
Stockholders' deficit:
Common Stock - par value $.01 per share,
authorized 60,000,000 shares,
issued 46,444,230 shares in 2001 and
44,441,855 shares in 2000 464,442 444,419
Additional paid-in capital 71,425,182 70,053,710
Deferred stock option compensation (199,463) (284,948)
Deferred stock offering costs (1,717,000) (327,000)
Accumulated deficit (78,502,988) (75,377,877)
Less: Treasury stock, at cost, 7,290 shares (1,031) (1,031)
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Total stockholders' deficit (8,530,858) (5,492,727)
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$ 8,510,190 $ 9,047,399
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See notes to condensed financial statements
3
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31
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2001 2000*
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Licensing and other revenue $ 273,775 $ 1,201,250
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Operating expenses:
Research and development 2,300,470 1,998,668
General and administrative 609,515 599,413
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2,909,985 2,598,081
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Operating loss (2,636,210) (1,396,831)
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Other income (expense):
Interest income 3,336 12,075
Interest expense (492,237) (254,532)
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(488,901) (242,457)
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Loss before cumulative effect of accounting change (3,125,111) (1,639,288)
Cumulative effect of revenue recognition
accounting change -- (1,000,000)
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Net loss $ (3,125,111) $ (2,639,288)
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Loss per share-- basic and diluted:
Loss before cumulative effect of accounting change $ (0.07) $ (0.04)
Cumulative effect of accounting change -- (0.02)
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Net loss per share $ (0.07) $ (0.06)
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Weighted average number of shares outstanding -
basic and diluted 44,480,791 43,342,280
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* Restated--see Note A
See notes to condensed financial statements.
4
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
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2001 2000
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Net cash provided by (used for) operating activities $(1,659,118) $(1,143,926)
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Investing activities:
Purchase of equipment and furniture (7,639) (29,599)
Increase in patents and other intangibles -- (42,509)
Decrease in other assets 55,554 55,669
Construction of leasehold improvements (2,169) (3,680)
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45,746 (20,119)
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Financing activities:
Issuance of stockholder notes 1,610,000 300,000
Exercise of stock options and warrants 1,495 1,224,999
Repayment of capital lease obligations (4,635) (24,485)
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1,606,860 1,500,514
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Net increase (decrease) in cash and cash equivalents (6,512) 336,469
Cash and cash equivalents at beginning of year 17,108 682,629
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Cash and cash equivalents at end of period $ 10,596 $ 1,019,098
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SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Issuance of common stock and warrants for deferred
offering cost $ 1,390,000 --
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Cash paid for interest $ 17,600 $ 6,449
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See notes to condensed financial statements
5
UNIGENE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. For further information, please refer to the Company's financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 2000.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements
and specifically addresses revenue recognition in the biotechnology industry for
non-refundable technology access fees and other non-refundable fees. The Company
adopted SAB 101, effective January 1, 2000 changing its revenue recognition
policy for up-front licensing fees that require services to be performed in the
future from immediate revenue recognition to deferral of revenue with the
up-front fee recognized over the life of the agreement.
In 1997, we recognized $3,000,000 in revenue from an up-front licensing fee from
Pfizer. With the adoption of SAB 101, we are now recognizing this revenue over a
45-month period, equivalent to the term of our oral Calcitonin agreement with
Pfizer which was terminated in March 2001. We therefore recognized a non-cash
cumulative effect adjustment of $1,000,000 as of January 1, 2000 representing a
revenue deferral over the remaining 15 months of the agreement. We restated the
accompanying financial statements for the cumulative effect adjustment and to
recognize $200,000 of revenue in the quarter ended March 31, 2000 as a result of
this deferral.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 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. SFAS No. 133, as amended, is effective for our fiscal year
beginning January 1, 2001. The adoption of SFAS No. 133 had no effect on our
financial position or results of operations, as we do not engage in derivative
or hedging activities.
NOTE B - LIQUIDITY
The Company has incurred annual operating losses since its inception and, as a
result, at March 31, 2001 has an accumulated deficit of approximately
$78,500,000 and has a working capital deficiency of approximately $15,900,000.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. However, the financial statements have been prepared on a going
concern basis and as such do not include any adjustments that might result from
the outcome of this uncertainty. The Company's cash requirements are
approximately $10 to 11 million per year to operate its research and peptide
manufacturing facilities and develop its three Calcitonin products. In addition,
the Company has principal, interest and default interest obligations under its
outstanding notes payable to stockholders and its obligations relating to its
6
current and former joint ventures in China. The Company's cash requirements
related to the 5% Debentures include the principal, redemption premium,
delisting penalties and the increased interest rate described in Note D.
Management is actively seeking licensing and/or supply agreements with
pharmaceutical companies for oral, nasal and injectable forms of Calcitonin as
well as for other oral peptides. With the recent termination of our Pfizer
collaboration, we currently have no licenses for any of our products in the U.S.
We do not have sufficient financial resources to continue to fund our operations
at the current level. The agreement that we have entered into with Fusion
Capital Fund II, LLC could provide Unigene with funding beginning in the second
quarter of 2001. See Note F.
Under the agreement with Fusion, Fusion is required to purchase, at the then
current market price, on each trading day during the term of the agreement
$43,750 of our common stock up to an aggregate of $21,000,000 over a period of
24 months, provided that Unigene continues to satisfy the requirements that are
a condition to Fusion's obligation. The Board of Directors has authorized the
sale to Fusion of up to 6,000,000 shares of Unigene common stock. We anticipate
that, in order to sell significantly in excess of 6,000,000 shares to Fusion, it
may be necessary to obtain stockholder approval of an amendment to our
Certificate of Incorporation to increase the number of shares of Unigene common
stock that we are authorized to issue. However, we cannot predict if the
stockholders will approve an amendment to our Certificate of Incorporation or if
we will be able to meet the continuing requirements of the Fusion agreement.
The extent to which we rely on Fusion as a source of financing will depend on a
number of factors, including the prevailing market price of our common stock and
the extent to which we are able to secure working capital from other sources,
such as licensing agreements or the sale of calcitonin, both of which we are
actively exploring. If obtaining sufficient funding from Fusion were to prove
prohibitively expensive and if we are unable to enter into a significant revenue
generating license or other arrangement in the near term, we will need to secure
another source of funding in order to satisfy our working capital needs or
significantly curtail our operations. We also could consider a sale or merger of
the company. Should the funding we require to sustain our working capital needs
be unavailable or prohibitively expensive when we require it, the consequences
would be a material adverse effect on our business, operating results, financial
condition and prospects.
We believe that satisfying our capital requirements over the long term will
require the successful commercialization of our Calcitonin product or another
peptide product in the United States and abroad. However, it is uncertain
whether or not any of our products will be approved or will be commercially
successful. The commercialization of one or more peptide products may require us
to incur additional capital expenditures to expand or upgrade our manufacturing
operations to satisfy future supply obligations. However, we cannot determine
either the cost or the timing of such capital expenditures at this time.
NOTE C - NOTES PAYABLE - STOCKHOLDERS
During the first quarter of 2001 Jay Levy, the Chairman of the Board and an
officer of the Company, loaned to the Company $1,600,000 evidenced by demand
notes bearing interest at the Merrill Lynch Margin loan rate plus .25% (8.625%
as of March 31, 2001). Due to the fact that the Company did not make principal
and interest payments when due, the interest rate on $1,100,000 of these 2001
loans as well as on $2,365,000 of prior demand loans by Jay Levy has increased
an additional 5% per year to the Merrill Lynch Margin loan rate plus 5.25%
(13.625% as of March 31, 2001) and the interest rate on $1,870,000 of term notes
by Jay Levy has increased an additional 5% per year from 6% to 11%. The
increased rate is calculated on both past due principal and interest.
During the first quarter of 2001 Warren Levy, an officer and director of the
Company, loaned to the Company $5,000 evidenced by a demand note bearing
7
interest at the Merrill Lynch Margin loan rate plus .25% (8.625% as of March 31,
2001). Due to the fact that the Company did not make principal and interest
payments when due, the interest rate on $260,000 of prior demand loans by Warren
Levy has increased an additional 5% per year to the Merrill Lynch Margin loan
rate plus 5.25% (13.625% as of March 31, 2001). The increased rate is calculated
on both past due principal and interest.
During the first quarter of 2001 Ronald Levy, an officer and director of the
Company, loaned to the Company $5,000 evidenced by a demand note bearing
interest at the Merrill Lynch Margin loan rate plus .25% (8.625% as of March 31,
2001). Due to the fact that the Company did not make principal and interest
payments when due, the interest rate on $248,323 of prior demand loans by Ronald
Levy has increased an additional 5% per year to the Merrill Lynch Margin loan
rate plus 5.25% (13.625% as of March 31, 2001). The increased rate is calculated
on both past due principal and interest.
NOTE D - CONVERTIBLE DEBENTURES
In June 1998, the Company completed a private placement of $4,000,000 in
principal amount of 5% convertible debentures from which the Company realized
net proceeds of approximately $3,750,000. The 5% debentures were convertible
into shares of Unigene common stock. The interest on the debentures, at the
Company's option, was payable in shares of Unigene common stock. Upon
conversion, the holder of the 5% debenture was entitled to receive warrants to
purchase a number of shares of Unigene common stock equal to 4% of the number of
shares issued as a result of the conversion. However, the number of shares of
Unigene common stock that the Company is obligated to issue, in the aggregate,
upon conversion, when combined with the shares issued in payment of interest and
upon the exercise of the warrants, is limited to 3,852,500 shares. After this
share limit is reached, the Company is obligated to redeem all 5% debentures
tendered for conversion at a redemption price equal to 120% of the principal
amount, plus accrued interest. In December 1999, the Company was unable to
convert $200,000 in principal of the 5% debentures tendered for conversion
because the conversion would have exceeded the share limit. As a result, the
Company accrued, as of December 31, 1999, an amount equal to $400,000
representing the 20% premium on the outstanding $2,000,000 in principal amount
of 5% debentures that had not been converted. During 1999, all of the $2,000,000
in principal amount of 5% debentures were tendered for conversion and therefore
are classified as a current liability in the amount of $2,400,000.
Through March 31, 2001, we issued a total of 3,703,362 shares of Unigene common
stock upon conversion of $2,000,000 in principal amount of the 5% debentures and
in payment of interest on the 5% debentures. Also, we issued an additional
103,032 shares of Unigene common stock upon the cashless exercise of all of the
141,123 warrants issued upon conversion of the 5% debentures.
On January 5, 2000, the Company failed to make the required semi-annual interest
payment on the outstanding 5% debentures. As a result, the interest rate on the
outstanding 5% debentures has increased to 20% per year. The semi-annual
interest payments due July 5, 2000 and January 5, 2001 also have not been made.
As of March 31, 2001, the accrued and unpaid interest on the 5% debentures
totaled approximately $566,000. In addition, due to the delisting of the Unigene
common stock from the Nasdaq National Market in October 1999, the Company became
obligated under a separate agreement to pay the holder of the 5% debentures an
amount equal to 2% of the outstanding principal amount of the debentures per
month. The Company has not made any of these payments to date, but has accrued
the amounts as an expense. As of March 31, 2001, the accrued and unpaid amount
of this penalty totaled approximately $737,000.
8
The holder of the 5% debentures has commenced an arbitration proceeding in which
the holder claims that it is entitled, as of June 30, 2000, to payments in
respect of the 5% debentures in the amount of approximately $3,400,000,
consisting of principal, interest and penalties, resulting from the Company 's
default under various provisions of the debentures and related agreements. These
alleged defaults included the Company 's failure to redeem the debentures after
becoming obligated to do so, the failure to pay interest when due, and the
failure to pay liquidated damages arising from the delisting of the Unigene
common stock from the Nasdaq National Market. In July 2000, the Company
submitted to the American Arbitration Association a statement in which it denies
the amount of the holder's claim and makes certain counterclaims. A hearing on
the matter before an arbitrator appointed by the American Arbitration
Association is expected to occur in June 2001. The outcome of the proceeding is
uncertain. An extremely unfavorable ruling could have a material adverse effect
on the Company.
NOTE E - INVENTORY
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist of the following:
March 31, 2001 December 31, 2000
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Finished goods......... $ 99,879 $ 89,104
Raw materials.......... 274,344 326,316
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Total......... $374,223 $415,420
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NOTE F - FUSION CAPITAL FINANCING
On May 9, 2001, the Company entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC, under which Fusion has agreed to purchase on each
trading day during the term of the agreement $43,750 of our common stock up to
an aggregate of $21,000,000. This agreement replaced a similar agreement
originally entered into on December 18, 2000 and amended on March 30, 2001.
Fusion is committed to purchase the shares over a twenty-four month period. We
may decrease this amount or terminate the agreement at any time. If our stock
price equals or exceeds $4 per share, for five (5) consecutive trading days, we
have the right to increase the daily purchase amount above $43,750, providing
that the closing sale price of our stock remains at least $4.00. The Company
must continue to satisfy its requirements that are a condition to Fusion's
obligation including: the continued effectiveness of the related registration
statement, no default or acceleration prior to maturity of any payment
obligations in excess of $1,000,000, no insolvency or bankruptcy of the Company,
continued listing of Unigene common stock on the OTC Bulletin Board, and we must
avoid the failure to meet the maintenance requirements for listing on the Nasdaq
SmallCap Market for a period of 10 consecutive trading days or for more than an
aggregate of 30 trading days in any 365-day period. The selling price per share
to Fusion is equal to the lesser of: the lowest sale price of our common stock
on the day of purchase by Fusion, or the average of the lowest five closing sale
prices of our common stock, during the 15 trading days prior to the date of
purchase by Fusion. We issued to Fusion 2,000,000 shares of common stock and a
five-year warrant to purchase 1,000,000 shares of common stock at an exercise
price of $.50 per share as of March 30, 2001 as compensation for its commitment.
Fusion has agreed not to sell the shares issued as a commitment fee or the
shares issuable upon the exercise of the warrant until the earlier of 480
trading days from the date of the agreement, or the termination or a default
under the common stock purchase agreement. The Board of Directors has authorized
the issuance and sale to Fusion of up to 6,000,000 shares of the Company common
stock in connection with the financing transaction. We may be required to obtain
the approval of the Company's stockholders to an amendment to Unigene's
certificate of incorporation increasing the number of shares of the Company
9
common stock that the Company is authorized to issue in order to issue and sell
additional shares to Fusion.
In December 2000, the Company issued a five-year warrant to purchase 373,002
shares of Unigene common stock to its investment banker as a fee for the Fusion
financing agreement. The warrant has an exercise price of $1.126 and a fair
value of $327,000 using the Black-Scholes pricing model. The 2,000,000 shares
issued to Fusion had a fair market value of $1,000,000 and the warrant for
1,000,000 shares issued to Fusion had a fair value of $390,000 using the
Black-Scholes pricing model. The fair value of these warrants and shares has
been deferred pending the closing of the Fusion stock offering. The registration
statement for the stock offering was declared effective in May 2001 and these
deferred offering costs will be charged to additional paid-in capital in the
second quarter of 2001.
NOTE G - CHINA JOINT VENTURE
In June 2000, the Company entered into a joint venture with Shijiazhuang
Pharmaceutical Group ("SPG"), a pharmaceutical company in the People's Republic
of China. The joint venture will manufacture and distribute injectable and nasal
Calcitonin products in China (and possibly other selected Asian markets) for the
treatment of osteoporosis. The Company owns 45% of the joint venture and will
have a 45% interest in the joint venture profits and losses. In the first phase
of the collaboration, SPG will contribute its existing injectable Calcitonin
license to the joint venture, which will allow the joint venture to sell our
product in China. The joint venture will need to file a New Drug Application in
China for its injectable and nasal products. In addition, the joint venture may
be required to conduct brief local human trials. If the product is successful,
the joint venture may establish a facility in China to fill injectable and nasal
Calcitonin products using bulk Calcitonin produced at the Company's Boonton, New
Jersey plant. Eventually the joint venture may manufacture the bulk Calcitonin
in China at a new facility that would be constructed by the joint venture. This
would require local financing by the joint venture. The joint venture has not
yet begun formal operations as of March 31, 2001.
Under the terms of the joint venture with SPG, the Company is obligated to
contribute up to $405,000 in cash during 2001 and up to an additional $495,000
in cash within two years thereafter. However, these amounts may be reduced or
offset by our share of joint venture profits. As of March 31, 2001, we have not
made any investments in the joint venture. In addition, the Company is obligated
to pay to the Qingdao General Pharmaceutical Company an aggregate of $350,000 in
14 monthly installment payments of $25,000 in order to terminate its former
joint venture in China, of which $75,000 had been paid as of March 31, 2001. The
Company recognized the entire $350,000 obligation as an expense in 2000.
NOTE H - STOCK OPTION PLAN
In November 1999, the Board of Directors approved, subject to stockholder
approval, the adoption of a new Stock Option Plan (the "New Plan") to replace
the 1994 Employee Stock Option Plan (the "1994 Plan"). All employees (including
directors who are employees), as well as certain consultants, are eligible to
receive option grants under the New Plan. Options granted under the New Plan
have a ten-year term and an exercise price equal to the market price of the
Common Stock on the date of the grant. A total of 4,000,000 shares of Common
Stock are covered under the New Plan.
In November 1999, the Board granted under the New Plan, to employees of the
Company, stock options to purchase an aggregate of 482,000 shares (of which
14,650 shares were subsequently cancelled) of Common Stock at an exercise price
of $0.63 per share, the market price on the date of grant. Each of the grants
was made subject to stockholder approval of the New Plan. At the Company's June
10
6, 2000 Annual Meeting, the stockholders approved the New Plan. In accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", the measurement date for valuing the stock options for the purpose
of determining compensation expense was June 6, 2000, the date of stockholder
approval. The market price of the Common Stock on this date was $2.093 per
share. Therefore, an aggregate of $683,733 will be charged to compensation
expense over the vesting periods of the options, which vest in approximately 50%
increments on November 5, 2000 and November 5, 2001. The Company recognized
$398,785 as compensation expense in 2000, and compensation expense of $85,485 in
the first quarter of 2001, leaving a balance of $199,463 as deferred stock
option compensation.
NOTE I - LEGAL MATTERS
In addition to the arbitration proceedings discussed in Note D, Reseau de Voyage
Sterling, Inc. (Reseau) filed suit against the Company in July 2000. Reseau,
which purchased from a third party a warrant to purchase one million shares of
Unigene common stock, alleges that the Company breached a verbal agreement to
extend the term of the warrant beyond its expiration date. Reseau is seeking
damages of $2 million. We believe that the suit is completely without merit and
we intend to continue to vigorously contest the claim.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Revenue for the first quarter of 2001 decreased 77% to $274,000 from $1,201,000
in the first quarter of 2000. Revenue for both periods consists primarily of
revenue from Pfizer, including $200,000 from the amortization of deferred
revenue in each period and $1,000,000 resulting from the achievement of a
milestone in the development of an oral Calcitonin product in the first quarter
of 2000. In March 2001, Pfizer terminated its license agreement with the
Company.
Research and development, the Company's largest expense, increased 15% to
$2,300,000 from $1,999,000 for the three months ended March 31, 2001, as
compared to the same period in 2000. The increase was primarily attributable to
$250,000 of additional Calcitonin production costs charged to expenses rather
than capitalized. These were partially offset by decreased development expenses
related to the Company's nasal calcitonin product.
General and administrative expenses increased 2% to $610,000 from $599,000 for
the three months ended March 31, 2001, as compared to the same period in 2000.
The increase was primarily due to increased investment banking and professional
fees, partially offset by reduced public relations costs.
Interest income decreased $9,000 or 72% for the three months ended March 31,
2001, as compared to the same period in 2000, due to reduced funds available for
investments in 2001.
Interest expense increased $238,000 or 93% in the first quarter of 2001 to
$492,000 from $255,000 in the first quarter of 2000. Interest expense increased
in 2001 due to increased officers' loans and higher interest rates on these
loans. Officers' loans to the Company increased $1,610,000 during the first
quarter of 2001. In addition, due to the fact that the Company did not make
principal and interest payments on these officers' loans when due, the interest
rate on $1,100,000 of these new loans and on $2,873,323 of prior loans increased
an additional 5% per year and applied to both past due principal and interest.
This additional interest was approximately $134,000 for the first quarter of
2001. Interest expense for both periods also was affected by higher interest
rates on the 5% convertible debentures. The annual interest rate on the
$2,000,000 in outstanding principal amount of the 5% Debentures increased in
2000 to 20% resulting from the failure of the Company to make a semi-annual
interest payment that was due in January 2000. In addition, since October 1999,
the Company has been accruing additional interest expense monthly in an amount
equal to 2% of the outstanding principal amount of the 5% Debentures as a
penalty for the removal of the Company's Common Stock from trading on the Nasdaq
Stock Market.
Effective January 1, 2000, we adopted Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101) as described in Note A
to our March 31, 2001 unaudited condensed financial statements. As a result of
the adoption of SAB 101, we recognized a non-cash cumulative effect adjustment
of $1,000,000 in the first quarter of 2000.
Due to the decrease in revenue from Pfizer in the first quarter of 2001,
accompanied by an increase in operating and interest expenses, partially offset
by the cumulative effect adjustment applicable only to 2000 net loss increased
$486,000 or 18% from the corresponding period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains its peptide production facility on leased premises in
Boonton, New Jersey. The Company began production under current Good
Manufacturing Practice guidelines at this facility in 1996. The current lease
expires in 2004. The Company has two consecutive ten-year renewal options under
the lease, as well as an option to purchase the facility. During 2001, the
Company invested approximately $10,000 in fixed assets and leasehold
improvements. Currently, the Company has no material commitments outstanding for
capital expenditures relating to either the Boonton facility or the office and
laboratory facility in Fairfield, New Jersey.
At March 31, 2001, the Company had cash and cash equivalents of $11,000, a
decrease of $7,000 from December 31, 2000.
We do not have sufficient financial resources to continue to fund our operations
at the current level. The Company has incurred annual operating losses since its
inception and, as a result, at March 31, 2001, had an accumulated deficit of
approximately $78,500,000 and a working capital deficiency of approximately
$15,900,000. The independent auditors' report covering the Company's 2000
financial statements includes an explanatory paragraph stating that these
factors raise substantial doubt about our ability to continue as a going
concern. However, the financial statements have been prepared on a going concern
basis and as such do not include any adjustments that might result from the
outcome of this uncertainty. In October 1999, the Nasdaq Stock Market delisted
the Company's common stock. The delisting of the common stock may have an
adverse effect on our ability to raise capital.
The Company's future ability to generate cash from operations will depend
primarily upon signing research or licensing agreements, achieving defined
benchmarks in such agreements that entitle Unigene to receive milestone payments
and receiving royalties from the sale of its licensed products.
In July 1997, the Company entered into an agreement under which it granted to
Warner-Lambert Company a worldwide license to use its oral Calcitonin
technology. In June 2000, Pfizer Inc. acquired Warner-Lambert. Through March 31,
2001, the Company had received $3 million for an equity investment, $3 million
for a licensing fee and recognized an aggregate of $16.5 million in milestone
revenue under the agreement. Pfizer conducted a Phase I/II human study which was
completed in December 2000. Pfizer analyzed the results of the study and
informed the Company in March 2001 that the study did not achieve Pfizer's
desired results. Pfizer terminated the license agreement citing this
conclusion. We believe that this study, in which an FDA approved product also
did not work and which produced results contrary to many published studies, was
not capable of determining the performance of our oral Calcitonin product. The
Company believes that if subjects in the study had also received calcium
supplementation, in
12
addition to the Calcitonin, the results would have been more favorable.
Therefore, the Company intends to continue the development of its oral
Calcitonin product as a treatment of osteoporosis, and has begun discussions
with potential licensees in the U.S. and other countries. In addition, due to
the termination of the Pfizer agreement, we no longer have restrictions on
selling bulk Calcitonin. The Company also has the right to license the use of
its technologies for injectable and nasal formulations of Calcitonin on a
worldwide basis. The Company has licensed distributors in the United Kingdom,
Ireland and in Israel for its injectable product. However, these distribution
agreements have not produced significant revenues. In June 2000, the Company
entered into a joint venture agreement in China with Shijiazhuang Pharmaceutical
Group ("SPG") to manufacture and market our injectable and nasal products. The
Company is actively seeking other licensing and/or supply agreements with
pharmaceutical companies for its injectable and nasal Calcitonin products and
for other pharmaceutical products that can be manufactured and/or delivered
using its patented technologies, and is also exploring other opportunities
including business combinations. However, we may not be successful in our
efforts to enter into any additional revenue-generating agreements.
Under the terms of the joint venture with SPG, the Company is obligated to
contribute up to $405,000 in cash during 2001 and up to an additional $495,000
in cash within two years thereafter. However, these amounts may be reduced or
offset by the Company's share of joint venture profits. As of March 31, 2001,
the Company had not made any contributions to the joint venture. In addition,
the Company is obligated to pay to the Qingdao General Pharmaceutical Company an
aggregate of $350,000 in 14 monthly installment payments of $25,000 in order to
terminate its former joint venture in China, of which $75,000 had been paid as
of March 31, 2001. The Company recognized the entire $350,000 obligation as an
expense in 2000.
In June 1998, the Company completed a private placement of $4,000,000 in
principal amount of 5% convertible debentures from which the Company realized
net proceeds of approximately $3,750,000. The 5% debentures were convertible
into shares of the Company's common stock. The interest on the debentures, at
the Company's option, was payable in shares of common stock. Upon conversion,
the holder of a 5% debenture was entitled to receive warrants to purchase a
number of shares of common stock equal to 4% of the number of shares issued as a
result of the conversion. However, the number of shares of common stock that the
Company is obligated to issue, in the aggregate, upon conversion, when combined
with the shares issued in payment of interest and upon the exercise of the
warrants, is limited to 3,852,500 shares. After this share limit is reached, the
Company is obligated to redeem all 5% debentures tendered for conversion at a
redemption price equal to 120% of the principal amount, plus accrued interest.
In December 1999, the Company was unable to convert $200,000 in principal of the
5% debentures tendered for conversion because the conversion would have exceeded
the share limit. As a result, the Company accrued, as of December 31, 1999, an
amount equal to $400,000 representing the 20% premium on the outstanding
$2,000,000 in principal amount of 5% debentures that had not been converted. As
of March 31, 2001, all of the $2,000,000 in principal amount of 5% debentures
were tendered for conversion and therefore are classified as a current liability
in the amount of $2,400,000.
Through March 31, 2001, the Company issued a total of 3,703,362 shares of common
stock upon conversion of $2,000,000 in principal amount of the 5% debentures and
in payment of interest on the 5% debentures. Also, the Company issued an
additional 103,032 shares of common stock upon the cashless exercise of all of
the 141,123 warrants issued upon conversion of the 5% debentures.
On January 5, 2000, the Company failed to make the required semi-annual interest
payment on the outstanding 5% debentures. As a result, the interest rate on the
outstanding 5% debentures has increased to 20% per year. The semi-annual
interest payments due July 5, 2000 and January 5, 2001, also have not been made.
As of May 15, 2001, the accrued and unpaid interest on the 5% debentures totaled
13
approximately $616,000. In addition, due to the delisting of the Company's
common stock from the Nasdaq National Market in October 1999, the Company became
obligated under a separate agreement to pay the holder of the 5% debentures an
amount equal to 2% of the outstanding principal amount of the debentures per
month. The Company has not made any of these payments to date, but has accrued
the amounts as additional interest expense. As of May 15, 2001, the accrued and
unpaid amount of this penalty totaled approximately $797,000.
The holder of the 5% debentures has commenced an arbitration proceeding in which
the holder claims that it is entitled, as of June 30, 2000, to payments in
respect of the 5% debentures in the amount of approximately $3,400,000. See Part
II, Item 1 - Legal Proceedings.
To satisfy the Company 's short-term liquidity needs, Jay Levy, the Chairman of
the Board and an officer of Unigene, and Warren Levy and Ronald Levy, directors
and officers of the Company, and another Levy family member from time to time
have made loans to the Company. During the first quarter of 2001, Jay Levy
loaned the Company $1,600,000 and Warren Levy and Ronald Levy each loaned the
Company $5,000 in demand loans. From April 1, 2001 through May 15, 2001, Jay
Levy loaned the Company an additional $1,100,000 in demand loans. Due to the
fact that Unigene did not make principal and interest payments on certain loans
when due, interest on certain of these loans increased an additional 5% per year
and was calculated on both past due principal and interest. This additional
interest was approximately $134,000, and total interest expense on these loans
was approximately $244,000, for the first quarter of 2001. As of May 15, 2001,
total accrued interest on these loans was approximately $1,292,000 and the
outstanding loans by these individuals to the Company, classified as short-term
debt, totaled $7,453,323 and consists of:
o Loans from Jay Levy in the aggregate principal amount of $3,465,000,
which are evidenced by demand notes bearing a floating interest rate
equal to the Merrill Lynch Margin Loan Rate plus 5.25% (13.625% at March
31, 2001) that are classified as short-term debt. These loans were
originally at the Merrill Lynch Margin Loan Rate plus .25%. These loans
are secured by a security interest in the Company 's equipment and real
property. Accrued interest on these loans at May 15, 2001 was
approximately $737,000.
o Loans from Jay Levy in the aggregate principal amount of $1,870,000
evidenced by term notes maturing January 2002, and bearing interest at
the fixed rate of 11% per year. These loans were originally at 6%. These
loans are secured by a security interest in all of Unigene's equipment
and a mortgage on Unigene's real property. The terms of the notes
require Unigene to make installment payments of principal and interest
beginning in October 1999 and ending in January 2002 in an aggregate
amount of $72,426 per month. No installment payments have been made to
date. Accrued interest on these loans at May 15, 2001 was approximately
$247,000.
o Loans from Jay Levy in the aggregate principal amount of $1,600,000
which are evidenced by demand notes bearing a floating interest rate
equal to the Merrill Lynch Margin Loan Rate plus .25%, (8.625% at March
31, 2001) and are classified as short-term debt and which are secured by
a security interest in certain of our patents. Accrued interest on these
loans at May 15, 2001 was approximately $13,000.
o Loans from Warren Levy in the aggregate principal amount of $260,000
which are evidenced by demand notes bearing a floating interest rate
equal to the Merrill Lynch Margin Loan Rate plus 5.25% (13.625% at March
31, 2001) that are classified as short-term debt. These loans were
originally at the Merrill Lynch Margin Loan Rate plus .25%. An
additional loan in the amount of $5,000 bears interest at the Merrill
Lynch Loan Rate plus .25% (8.625% at March 31, 2001) and are classified
as short-term debt. These loans are secured by a secondary security
14
interest in the Company's equipment and real property. Accrued interest
on these loans at May 15, 2001 was approximately $148,000.
o Loans from Ronald Levy in the aggregate principal amount of $248,323
which are evidenced by demand notes bearing a floating interest rate
equal to the Merrill Lynch Margin Loan Rate plus 5.25% (13.625% at March
31, 2001) that are classified as short-term debt. These loans were
originally at the Merrill Lynch Margin Loan Rate plus .25%. An
additional loan in the amount of $5,000 bears interest at the Merrill
Lynch Margin Loan Rate plus .25% (8.625% at March 31, 2001) and are
classified as short-term debt. These loans are secured by a secondary
security interest in the Company's equipment and real property. Accrued
interest on these loans at May 15, 2001 was approximately $147,000.
The Company's cash requirements to operate its research and peptide
manufacturing facilities and develop its products are approximately $10 to 11
million per year. In addition to its obligations with respect to the 5%
Debentures, Unigene has principal and interest obligations over the next several
years under its outstanding notes payable to stockholders, specifically the
Levys, as well as obligations relating to its current and former joint ventures
in China.
The Company is actively seeking licensing and/or supply agreements with
pharmaceutical companies for oral, nasal and injectable forms of Calcitonin as
well as for other oral peptides. However, we may not be successful in licensing
any of our products.
Under the agreement with Fusion Capital, after a registration statement is
declared effective by the SEC for the resale of the shares of the Company's
common stock to be sold to Fusion, Fusion will be required to purchase, at the
then current market price, on each trading day during the term of the agreement
$43,750 of our common stock up to an aggregate of $21,000,000, provided that the
Company continues to satisfy the requirements that are a condition to Fusion's
obligation. See Notes B and F to our March 31, 2001 unaudited condensed
financial statements. The Board of Directors has authorized the sale to Fusion
of up to 6,000,000 shares of Unigene common stock. Assuming that all sales were
to occur at the closing price on May 15, 2001, of $.57, the Company would be
able to raise approximately $3,400,000 through the sale of the 6,000,000 shares
to Fusion. The Company anticipates that, in order to sell significantly in
excess of 6,000,000 shares to Fusion, it may be necessary to obtain stockholder
approval of an amendment to the Company's Certificate of Incorporation to
increase the number of shares of the Company's common stock that it is
authorized to issue. Assuming the Company has an adequate number of shares of
common stock to sell, it stays in compliance with the agreement, and depending
on the price at which shares are sold, Fusion could provide the Company with
sufficient funding to sustain its operations for up to two years, beginning in
the second quarter of 2001. However, the Company cannot predict if the
stockholders will approve the amendment to its certificate of incorporation or
if the Company will be able to meet the continuing requirements of the Fusion
agreement.
The extent to which we rely on Fusion as a source of financing will depend on a
number of factors, including the prevailing market price of our common stock and
the extent to which we are able to secure working capital from other sources,
such as through the entry into licensing agreements or the sale of calcitonin,
both of which we are actively exploring. If obtaining sufficient funding from
Fusion were to prove prohibitively expensive and if we are unable to enter into
a significant revenue generating license or other arrangement in the near term,
we will need to secure another source of funding in order to satisfy our working
capital needs or significantly curtail our operations. We also could consider a
sale or merger of the company. Should the funding we require to sustain our
working capital needs be unavailable or prohibitively expensive when we require
it, the consequences would be a material adverse effect on our business,
operating results, financial condition and prospects. The Company believes that
satisfying its capital requirements over the long term will require the
15
successful commercialization of its Calcitonin product or another peptide
product in the United States and abroad. However, it is uncertain whether or not
any of its products will be approved or will be commercially successful. In
addition, the commercialization of its oral Calcitonin product may require it to
incur additional capital expenditures to expand or upgrade its manufacturing
operations. However, the Company cannot determine either the cost or the timing
of such capital expenditures at this time.
As of December 31, 2000, the Company had available for federal income tax
reporting purposes net operating loss carryforwards in the approximate amount of
$68,000,000, expiring from 2001 through 2020, which are available to reduce
future earnings which would otherwise be subject to federal income taxes. For
the three months ending March 31, 2001, the Company accumulated additional
losses of approximately $3,125,000. In addition, as of December 31, 2000, the
Company has research and development credits in the approximate amount of
$2,500,000, which are available to reduce the amount of future federal income
taxes. These credits expire from 2001 through 2020. The Company has New Jersey
operating loss carryforwards in the approximate amount of $23,300,000, expiring
from 2003 through 2007, which are available to reduce future earnings, which
would otherwise be subject to state income tax. As of December 31, 2000,
approximately $11,400,000 of these New Jersey loss carryforwards has been
approved for future sale under a program of the New Jersey Economic Development
Authority (the "NJEDA"). In order to realize these benefits, the Company must
apply to the NJEDA each year and must meet various requirements for continuing
eligibility. In addition, the program must continue to be funded by the State of
New Jersey, and there are limitations based on the level of participation by
other companies. As a result, future tax benefits will be recognized in the
financial statements as specific sales are approved.
The Company follows Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Given the Company's past history of incurring
operating losses, any deferred tax assets that are recognizable under SFAS No.
109 were fully reserved. As of December 31, 2000 and 1999, under SFAS No. 109,
the Company had deferred tax assets of approximately $29,000,000 and
$26,000,000, respectively, subject to valuation allowances of $29,000,000 and
$26,000,000, respectively. The deferred tax assets are primarily a result of the
Company's net operating losses and tax credits. For the three-month period ended
March 31, 2001, the Company's deferred tax assets and valuation allowances each
increased by approximately $1,000,000.
OTHER
The Company's Common Stock was delisted from the Nasdaq National Market System
effective October 5, 1999 and is now trading on the OTC Bulletin Board. In order
to be relisted on the Nasdaq National Market or the Nasdaq SmallCap Market, we
must meet the initial listing requirements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the Company is exposed to fluctuations in
interest rates due to the use of debt as a component of the funding of its
operations. The Company does not employ specific strategies, such as the use of
derivative instruments or hedging, to manage its interest rate exposure. The
Company's interest rate exposure on the 5% convertible debentures has been
affected by the Company's delisting from the Nasdaq National Market and failure
to make the semi-annual interest payment in January 2000. Beginning in the first
quarter of 2001, the Company's interest rate exposure on its notes
payable-stockholders has been affected by its failure to make principal and
interest payments when due. The Company's exposure to interest rate fluctuations
over the near-term will continue to be affected by these events.
16
The information below summarizes the Company's market risks associated with debt
obligations as of March 31, 2001. The table below presents principal cash flows
and related interest rates by year of maturity based on the terms of the debt.
Under the terms of the 5% convertible debentures, no additional shares may be
issued to convert the remaining principal balance. Therefore, the information
presented as to the debentures is without consideration as to conversion
features. Variable interest rates disclosed represent the rates at March 31,
2001. Given the Company's financial condition described in "Liquidity and
Capital Resources" it is not practicable to estimate the fair value of the
Company's debt instruments at March 31, 2001.
17
Year of Maturity
----------------------------------------------------------
Carrying
Amount 2001 2002 2003 2004 2005
-------- ---------- -------- -------- -------- --------
Notes payable - stockholders $3,973,323 3,973,323 -- -- -- --
Variable interest rate (1) . 13.625% -- -- -- --
Notes payable - stockholders $ 510,000 510,000 -- -- -- --
Variable interest rate 8.625% -- -- -- --
Notes payable - stockholders $1,870,000 1,870,000 -- -- -- --
Fixed interest rate (2) 11% -- -- -- --
5% convertible debentures .. $2,400,000 2,400,000 -- -- -- --
Fixed interest rate (3) 20%
(1) Due to the fact that the Company did not make principal and interest
payments on its notes payable to stockholders when due, the variable
interest rate on these notes has increased from the Merrill Lynch Margin
Loan Rate plus .25% to the Merrill Lynch Margin Loan Rate plus 5.25%.
(2) Due to the fact that the Company did not make principal and interest
payments on its notes payable to stockholders when due, the fixed interest
rate on these notes has increased from 6% to 11%.
(3) As a result of the Company's failure to make the semi-annual interest
payment that was due January 5, 2000, the interest rate on the 5%
convertible debentures has increased from 7% at December 31, 1999, to 20%
beginning January 5, 2000. In addition, due to the delisting of the
Company's common stock from Nasdaq in 1999, the Company became obligated to
pay the holder of the 5% debentures an amount equal to 2% of the outstanding
principal amount of the debentures per month.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or activities of the Company, or industry results, to be materially different
from any future results, performance or activities expressed or implied by such
forward-looking statements. Such factors include: general economic and business
conditions, the financial condition of the Company, including the Company's need
for and success in securing additional financing, competition, the Company's
dependence on other companies to commercialize, manufacture and sell products
using the Company's technologies, the uncertainty of results of animal and human
testing, the risk of product liability and liability for human clinical trials,
the Company's dependence on patents and other proprietary rights, dependence on
key management officials, the availability and cost of capital, the availability
of qualified personnel, changes in, or the failure to comply with, governmental
regulations, the failure to obtain regulatory approvals of the Company's
products, litigation and other factors discussed in the Company's various
filings with the Securities and Exchange Commission, including the Company's
Annual Report or Form 10-K for the year ended December 31, 2000.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In July 2000, the Tail Wind Fund, Ltd., the holder of $2,000,000 in principal
amount of 5% convertible debentures issued by Unigene to Tail Wind in a private
placement completed in June 1998, filed with the American Arbitration
Association a demand for arbitration against Unigene. In its demand, Tail Wind
claimed that it was owed, as of June 30, 2000, approximately $3,400,000,
consisting of principal, interest and penalties, resulting from Unigene's
default under various provisions of the debentures and related agreements. These
alleged defaults included Unigene's failure to redeem the debentures after
becoming obligated to do so, the failure to pay interest when due, and the
failure to pay liquidated damages arising from the delisting of the Unigene
common stock from the Nasdaq National Market. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." In July 2000, Unigene submitted to the American Arbitration
Association a statement in which it denies the amount of Tail Wind's claim and
makes certain counterclaims. A hearing on the matter before an arbitrator
appointed by the American Arbitration Association is expected to occur in June
2001. The outcome of the proceeding is uncertain. An extremely unfavorable
ruling could have a material adverse effect on Unigene.
In July 2000, Reseau de Voyage Sterling, Inc. filed suit against Unigene in the
Supreme Court of the State of New York. Unigene removed the case to the United
States District Court for the Southern District of New York. The plaintiff,
which purchased from a third party a warrant to purchase one million shares of
Unigene common stock, alleges that Unigene breached a verbal agreement with the
plaintiff to extend the term of the warrant beyond its expiration date. The
plaintiff is seeking damages of $2 million. Following the deposition of the
plaintiff, counsel for the plaintiff withdrew and the court has stayed the case
until May 2001, to give the plaintiff an opportunity to seek new counsel. We
believe that this suit is completely without merit, and we will continue to
vigorously contest the claim.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Recent Sales of Unregistered Securities.
In the first quarter of 2001, the Company issued 2,000,000 shares of Common
Stock to Fusion Capital Fund II, LLC as compensation for its $21,000,000 common
stock purchase commitment. All of such shares were issued by the Company without
registration in reliance on an exemption under Section 4 (2) of the Securities
Act.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities
See description of 5% convertible debenture and notes payable to stockholders in
Part I, Item 2: "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources".
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months ended
March 31, 2001.
20
SIGNATURES
Pursuant to the requirements 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.
UNIGENE LABORATORIES, INC.
-----------------------
(Registrant)
/s/ Warren P. Levy
May 21, 2001 -----------------------
Warren P. Levy, President
(Chief Executive Officer)
/s/ Jay Levy
May 21, 2001 -----------------------
Jay Levy, Treasurer
(Chief Financial Officer and
Chief Accounting Officer)
21