As filed with the Securities and Exchange Commission on January 10, 2002
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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UNIGENE LABORATORIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2833 22-2328609
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Incorporation Industrial Classification Identification Number)
or Organization) Code Number)
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110 Little Falls Road
Fairfield, New Jersey 07004
(973) 882-0860
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principal Executive Offices)
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WARREN P. LEVY
President With copies to:
Unigene Laboratories, Inc. D. Michael Lefever, Esq.
110 Little Falls Road Covington & Burling
Fairfield, New Jersey 07004 1201 Pennsylvania Avenue, NW
(973) 882-0860 Washington, D.C. 20004-2401
(Name, Address, including Zip Code, (202) 662-5276
and Telephone Number, including Area
Code, of Agent For Service)
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Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [x]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================================
Title of Securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered (1) Offering Price Aggregate Registration
Per Share Offering Price Fee
- ------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share 1,025,000 $ .75 (2) $768,750 (2) $184.00(2)
================================================================================================
(1) This Registration Statement registers the offer and sale of 1,025,000
shares of common stock, par value $.01 per share of the registrant (the
"Common Stock"). Pursuant to Rule 416 under the Securities Act of 1933, as
amended, the number of shares registered hereby also includes such
additional number of shares of Common Stock as are required to prevent
dilution resulting from stock splits, stock dividends or similar
transactions.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based
on the average of the bid and asked prices of the Common Stock on the OTC
Bulletin Board on January 7, 2002.
Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
prospectus included herein constitutes a combined prospectus that also relates
to the registrant's Registration Statement on Form S-3 (File No. 333-04557), as
amended by Post-Effective Amendment No. 2 thereto on Form S-1.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant has filed a
further amendment that specifically states that the registration statement shall
thereafter become effective in accordance with section 8(a) of the securities
act of 1933.
********************************************************************************
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
********************************************************************************
Prospectus Subject To Completion
Dated January 10, 2002
Unigene Laboratories, Inc.
1,134,350 Shares
of
Common Stock
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This prospectus relates to the offer and sale of up to 1,134,350 shares of
common stock of Unigene Laboratories, Inc., a Delaware corporation, consisting
of 234,350 outstanding shares and 900,000 shares that may be issued to the
selling stockholders upon the exercise of warrants that they currently hold.
Our common stock is listed on the OTC Bulletin Board under the symbol
"UGNE."
Investing in the common stock involves risks. See "Risk Factors" beginning
on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is January __, 2002.
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TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY........................................ 3
RISK FACTORS.............................................. 4
FORWARD-LOOKING STATEMENTS................................ 10
THE FUSION TRANSACTION.................................... 10
USE OF PROCEEDS........................................... 10
PRICE RANGE OF COMMON STOCK............................... 10
DIVIDEND POLICY........................................... 11
SELECTED FINANCIAL DATA................................... 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 15
BUSINESS.................................................. 22
MANAGEMENT................................................ 28
PRINCIPAL STOCKHOLDERS.................................... 32
SELLING STOCKHOLDERS....................................... 37
PLAN OF DISTRIBUTION...................................... 37
LEGAL MATTERS............................................. 39
EXPERTS................................................... 39
ADDITIONAL INFORMATION.................................... 39
INDEX TO FINANCIAL STATEMENTS............................. F-1
2
Prospectus Summary
The following summary highlights information contained elsewhere in this
prospectus. It may not contain all of the information that is important to you.
You should read the entire prospectus carefully, especially the discussion
regarding the risks of investing in Unigene common stock under the heading "Risk
Factors," before investing in Unigene common stock. "Unigene," "Forcaltonin,"
and "Fortical" are registered trademarks of Unigene Laboratories, Inc.
Business
Unigene is a biopharmaceutical company engaged in the research, production
and delivery of small proteins, referred to as peptides, that have demonstrated
or may have potential medical use. We have a patented manufacturing technology
for producing many peptides cost-effectively. We also have patented technology
that has been shown to deliver orally medically useful amounts of various
peptides into the bloodstream. Our primary focus has been on the development of
Calcitonin and other peptide products for the treatment of osteoporosis and
other indications.
o Injectable Calcitonin. Our injectable Calcitonin product, which has
the trade name FORCALTONIN TM, has been approved for the treatment of
Paget's disease, a genetic bone disorder, and hypercalcemia, a
disorder associated with high calcium blood levels, in the 15 member
states of the European Union. This product was approved in 2001 in
Switzerland for the treatment of osteoporosis and other indications.
Sales to date of this product have been minimal.
o Nasal Calcitonin. In 2000 and 2001, we successfully completed human
studies demonstrating similar blood levels between our formulation and
that of an existing nasal Calcitonin product and also showed
significant bone marker activity. We expect to file a New Drug
Application with the U.S. Food and Drug Administration (FDA) in early
2002. We are seeking to license our nasal Calcitonin product in the
U.S. and other countries for the treatment of osteoporosis.
o Oral Calcitonin. In 1997, we entered into an agreement under which we
granted to the Parke-Davis division of Warner-Lambert Company (which
merged with Pfizer in June 2000), a worldwide license to make, use and
sell our oral Calcitonin technology. In December 1999, Warner Lambert
filed an Investigational New Drug application with the FDA for the
conduct of human trials in the United States of our oral Calcitonin
product as a treatment for osteoporosis. Pfizer began a Phase I/II
human study in April 2000 and patient dosing for this study was
completed in December 2000. Pfizer analyzed the results of the study
and informed us 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. We believe that if patients in the study
had also received calcium supplements, in addition to the Calcitonin,
the results would have been more favorable. Therefore, we intend to
continue the development of our oral Calcitonin product as a treatment
of osteoporosis, and have 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.
Our business strategy is to develop proprietary products and processes with
applications in human health care to generate revenues from license fees,
royalties on third-party sales and direct sales of bulk or finished products.
Generally, we fund our internal research activities and intend to rely on
licensees, which are likely to be established pharmaceutical companies, to
provide development funding. We also generally expect to rely on these licensees
to take responsibility for obtaining appropriate regulatory approvals, human
testing, and marketing of products derived from our research activities.
However, we may, in some cases, retain the responsibility for human testing and
for obtaining the required regulatory approvals for a particular product.
3
Corporate Information
Unigene is incorporated under the laws of the State of Delaware. Our
executive offices are located at 110 Little Falls, Fairfield, New Jersey 07004,
and our telephone number at this location is (973) 882-0860. The address of our
web site is www.unigene.com. Information on our web site is not part of this
prospectus.
Unigene Common Stock
Unigene common stock trades on the OTC Bulletin Board under the symbol
"UGNE."
The Offering
The stockholders identified in this prospectus are offering for sale up to
1,134,350 shares of Unigene common stock. The shares being offered consist of
234,350 outstanding shares and 900,000 shares that may be issued to the selling
stockholders upon the exercise of warrants that they currently hold. As of
November 30, 2001, there were 50,316,544 shares of Unigene common stock
outstanding.
Risk Factors
An investment in Unigene common stock involves a high degree of risk. You
should carefully consider the following factors and other information in this
prospectus before deciding to invest in shares of Unigene common stock. If any
of the following risks actually occur, our business, financial condition,
results of operations and prospects for growth would likely suffer. As a result,
the trading price of Unigene common stock could decline, and you could lose all
or part of your investment.
Prospective investors should consider carefully these factors concerning
our business before purchasing the securities offered by this prospectus. We
make various statements in this section which constitute "forward-looking
statements" under Section 27A of the Securities Act of 1933. See
"Forward-Looking Statements."
We have significant historical losses and expect to continue to incur losses in
the future.
We have incurred annual operating losses since our inception. As a result,
at September 30, 2001 we had an accumulated deficit of approximately
$85,000,000. Our gross revenues for the nine months ended September 30, 2001 and
the years ended December 31, 2000, 1999 and 1998 were $629,000, $3,287,000,
$9,589,000 and $5,050,000, respectively. However, our revenues have not been
sufficient to sustain our operations. These revenues consisted principally of
milestone payments and other fees received in connection with our terminated
license agreement with Pfizer. As of September 30, 2001, we have no significant
revenue generating license agreements. As a result, during the same periods, we
have incurred losses from operations of $8,146,000, $11,385,000, $1,997,000 and
$6,060,000, respectively. Our net losses for the nine months ended September 30,
2001 and the years ended December 31, 2000, 1999 and 1998 were $9,666,000,
$12,469,000, $1,577,000 and $6,881,000, respectively. Our injectable Calcitonin
product has been approved for commercial sale in a number of European countries,
but we do not anticipate that these sales
4
will produce significant revenues. We believe that the profitability of Unigene
will require the successful commercialization of our nasal or oral Calcitonin
products or another oral peptide product in the United States and abroad.
Unigene might never be profitable.
We will require additional financing to sustain our operations.
At September 30, 2001 we had a working capital deficiency of approximately
$20,800,000. The independent auditors' report for the year ended December 31,
2000, includes an explanatory paragraph stating that our recurring losses from
operations and working capital deficiency discussed above raise substantial
doubt about our ability to continue as a going concern. We had an operating cash
flow deficit of $4,864,000 in 1998, an operating cash flow deficit of $1,400,000
in 1999 and for the year ended December 31, 2000, an operating cash flow deficit
of $3,382,000. For the nine months ended September 30, 2001 we had an operating
cash flow deficit of $5,563,000. We do not have sufficient financial resources
to fund our operations at the current level. Therefore, we need additional funds
to continue our operations. Our agreement with Fusion Capital Fund II, LLC
("Fusion") has provided us with some cash to fund our operations, but it alone
has not been sufficient to satisfy all of our working capital needs. From May
18, 2001 through November 30, 2001 we have raised a total of $1,380,800 through
the sale of 3,879,604 shares of our common stock to Fusion, before cash expenses
of approximately $257,000. The extent to which we intend to rely on Fusion as a
source of financing will depend on a number of factors, including the prevailing
market price and trading volume 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 we are unable to enter into a significant revenue
generating license or financing arrangement in the near term, we will need to
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 the consequences would be a material
adverse effect on our business, operating results, financial condition and
prospects.
Even if we are able to access $21,000,000 under the common stock purchase
agreement with Fusion, we may still need additional capital to fully implement
our business, operating and development plans. In addition, our issuance of
shares of common stock to Fusion under the common stock purchase agreement will
result in dilution to existing stockholders. We only have the right to receive
$43,750 per trading day under the common stock purchase agreement unless our
stock price equals or exceeds $4.00 per share, in which event the daily purchase
amount may be increased. However, our sales of common stock to Fusion have been
below that level due to the share price and trading volume of our common stock.
Fusion is not obligated to purchase any shares of common stock on any trading
day that the market price is less than $.25. In addition, the agreement may be
terminated by Fusion at any time due to events of default under the agreement.
See "The Fusion Transaction". We believe that satisfying our long-term capital
requirements will require the successful commercialization of one of our peptide
products. At this time, we cannot predict with certainty that any of our
products will be commercially successful.
We may not be successful in our efforts to develop a Calcitonin or other peptide
product that will produce revenues that are sufficient to sustain our
operations.
We have obtained regulatory approval in the European Union and in
Switzerland for the sale of our injectable Calcitonin product, but there is a
limited market for the indications for which it has been approved. None of our
products have been approved for sale in the U.S. The U.S. Food and Drug
Administration must approve the commercial manufacture and sale of
pharmaceutical products in the U.S. Similar regulatory approvals are required
for the sale of pharmaceutical products outside of the United States. We must
conduct further human testing on our products before they can be approved for
commercial sale. We must show in these human trials that our products are safe
and effective. All clinical trials for our nasal Calcitonin product have been
completed. If any of our products are approved for commercial sale, we will need
to manufacture the product in commercial quantities at a reasonable cost in
order for it to be a successful product that will generate profits. Because of
our limited clinical, manufacturing and regulatory experience and the lack of a
marketing organization, we are likely to rely on licensees or other parties to
perform one or more tasks for the commercialization of pharmaceutical products.
5
We believe that expanded consumer acceptance of Calcitonin pharmaceutical
products depends on the development of more desirable formulations. We have
successfully completed human trials to evaluate a nasal Calcitonin product. An
NDA for our nasal Calcitonin product is expected to be filed in early 2002.
Pfizer completed a human trial for our oral Calcitonin product, but after
analyzing the results it terminated our license agreement citing scientific and
technical reasons. We disagree with Pfizer's conclusions and are seeking other
licensees to continue the development of our oral Calcitonin product. We may not
be successful in licensing our Calcitonin products or any of our other peptide
products. In addition, we may not be able to demonstrate the safety or
effectiveness of our products in human trials and, accordingly, they may not
receive the U.S. Food and Drug Administration and foreign governmental approvals
that are necessary to market these products. Other companies may develop other
products to compete with or surpass any nasal or oral product that we develop.
We have made a substantial investment in our production facility which we will
need to upgrade or expand in order to manufacture our products in commercial
quantities.
We have constructed and are operating a facility intended to produce
Calcitonin and other peptides. This facility has been approved by European
regulatory authorities for the manufacture of Calcitonin for human use, but has
not yet been inspected or approved by the U.S. Food and Drug Administration. The
risks associated with this facility include the failure to achieve targeted
production and profitability goals, the development by others of superior
processes and products, and the absence of a market for products produced by the
facility. In addition, the successful commercialization of an oral Calcitonin
product may require us to make additional expenditures to expand or upgrade our
manufacturing operations. Currently, we cannot determine the cost or timing of
these capital expenditures.
We are dependent on partners for the commercial development of our products.
We do not currently have, nor do we expect to have in the near future,
sufficient financial resources and personnel to develop and market our products
on our own. Accordingly, we expect to continue to depend on large pharmaceutical
companies for revenues from sales of products, research sponsorship and
distribution of our products. With the recent termination of our Pfizer
collaboration, we currently have no licenses for any of our products in the U.S.
In June 2000, we entered into a joint venture with a pharmaceutical company
in the People's Republic of China for the manufacture and distribution of
injectable and nasal Calcitonin products in China and possibly other Asian
markets, for the treatment of osteoporosis. This joint venture has not yet
commenced operations and it is uncertain whether it will generate meaningful
revenues or profits for Unigene. We also have entered into distribution
agreements for our injectable formulation of Calcitonin in the United Kingdom,
Ireland and Israel. To date, we have not received material revenues from these
distribution agreements.
We intend to pursue additional opportunities to license, or enter into
distribution arrangements for, our oral, nasal and injectable Calcitonin
products as well as other possible peptide products. Due to the termination of
the Pfizer agreement, we no longer have restrictions on selling bulk Calcitonin.
However, we may not be successful in any of these efforts.
Because we are a biopharmaceutical company, our operations are subject to
extensive government regulations.
Our laboratory research, development and production activities, as well as
those of our collaborators and licensees, are subject to significant regulation
by federal, state, local and foreign governmental authorities. In addition to
obtaining U.S. Food and Drug Administration approval and other regulatory
approvals of our products, we must obtain approvals for our manufacturing
facility to produce Calcitonin and other peptides for human use. The regulatory
approval process for a pharmaceutical product requires substantial resources and
may take many years. Our inability to obtain approvals or delays in obtaining
6
approvals would adversely affect our ability to continue our development
program, to manufacture and sell our products, and to receive revenue from
milestone payments, product sales or royalties.
The FDA or other regulatory agencies may audit our production facility at
any time to ensure compliance with current Good Manufacturing Practice
guidelines, referred to as cGMP. These guidelines require that we conduct our
production operation in strict compliance with our established rules for
manufacturing and quality controls. Any of these agencies can suspend production
operations and product sales if they find significant or repeated changes from
these guidelines. A suspension by any of these agencies could have a material
adverse effect on our operations.
Our competitors include large pharmaceutical companies with superior resources.
Unigene is engaged in a rapidly changing and highly competitive field. To
date, Unigene has concentrated its efforts primarily on one product --
Calcitonin -- for treating osteoporosis and other indications. During 2001, we
began developing other peptide products, including parathyroid hormone for
osteoporosis. Like the market for any pharmaceutical product, the market for
treating osteoporosis and these other indications has the potential for rapid,
unpredictable and significant technological change. Competition is intense from
specialized biotechnology companies, major pharmaceutical and chemical companies
and universities and research institutions. Most of our competitors have
substantially greater financial resources, research and development staffs and
facilities, and regulatory experience than we do. Major competitors in the field
of osteoporosis treatment include Novartis, American Home Products, Merck, Eli
Lilly, and Procter and Gamble. Our main competitor in the field of oral delivery
of peptides is Emisphere Technologies, Inc. Any one of these entities could, at
any time, develop products or a manufacturing process that could render our
technology or products noncompetitive or obsolete.
Our success depends upon our ability to protect our intellectual property
rights.
We filed applications for U.S. patents relating to proprietary peptide
manufacturing technology and oral formulations that we have invented in the
course of our research. To date, six U.S. patents have issued and other
applications are pending. We have also made patent application filings in
selected foreign countries and numerous foreign patents have issued. We face the
risk that any of our pending applications will not issue as patents. Our
business also is subject to the risk that our issued patents will not provide us
with significant competitive advantages if, for example, a competitor were to
independently develop or obtain similar or superior technologies. Although we
believe our patents and patent applications are valid, the invalidation of our
key patents or the failure of our pending applications to issue as patents could
have a material adverse effect upon our business.
We also rely on trade secrets to protect our inventions. Our policy is to
include confidentiality obligations in all research contracts, joint development
agreements and consulting relationships that provide access to our trade secrets
and other know-how. However, other parties with confidentiality obligations
could breach their agreements causing us harm. If a secrecy obligation were to
be breached, we may not have the financial resources necessary for a legal
challenge. If licensees, consultants or other third parties use technological
information independently developed by them or by others in the development of
our products, disputes may arise from the use of this information and as to the
ownership rights to products developed using this information. These disputes
may not be resolved in our favor.
Our technology or products could give rise to product liability claims.
Our business exposes us to the risk of product liability claims that are a
part of human testing, manufacturing and sale of pharmaceutical products. We may
not have sufficient resources to defend against or satisfy these claims.
Although we maintain product liability insurance coverage, product liability or
other judgments against us, as well as the cost of defending such claims in
excess of insurance limits, could have a material adverse effect upon our
business and financial condition.
The loss of our key executives could have a negative effect on our business.
7
Dr. Warren Levy and Dr. Ronald Levy have been the principal executive
officers since our inception. We rely on them for their leadership and business
direction. Each of them has entered into an agreement with us providing that he
shall not engage in any other employment or business for the period of his
employment with us. The loss of the services of either of these individuals
could have a material adverse effect on our business.
The outcome of our arbitration proceeding with The Tail Wind Fund is uncertain.
In July 2000, the Tail Wind Fund, Ltd., the holder of $2,000,000 in
principal amount of our 5% convertible debentures filed with the American
Arbitration Association a demand for arbitration of its claim that it was owed,
as of June 30, 2000, approximately $3,400,000, consisting of principal, interest
and penalties, resulting from our default under various provisions of the
debentures and related agreements. See "Business -- Litigation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity." We have denied the amount of
Tail Wind's claim and have made certain counterclaims. In June 2001, the
arbitration was postponed to allow Tail Wind and Unigene to engage in settlement
discussions. The outcome of these negotiations is uncertain. An extremely
unfavorable settlement or ruling could have a material adverse effect on
Unigene.
The market price of our common stock may be highly unstable.
The market price of our common stock has been and we expect it to continue
to be highly unstable. Factors, including our announcement of technological
improvements or announcements by other companies, regulatory matters, research
and development activities, new or existing products or procedures, signing or
termination of licensing agreements, concerns about our financial condition,
operating results, litigation, resolution of the arbitration with Tail Wind
involving our outstanding debentures, government regulation, developments or
disputes relating to agreements, patents or proprietary rights, and public
concern over the safety of activities or products may have a significant impact
on the market price of our stock. In addition, potential dilutive effects of
future sales of shares of Unigene common stock by Unigene and its stockholders,
including sales by Fusion and sales under this prospectus and by the exercise
and subsequent sale of Unigene common stock by the holders of other outstanding
and future warrants and options could have an adverse effect on the price of our
stock.
We do not anticipate paying cash dividends on our common stock.
We have never paid any cash dividends on our common stock and we do
not anticipate paying cash dividends in the foreseeable future. Rather, we
intend to retain any cash flow we generate for investment in our business.
Accordingly, Unigene common stock may not be suitable for investors who are
seeking current income from dividends.
Our common stock is classified as a "penny stock" under SEC rules which may make
it more difficult for our stockholders to resell our common stock.
Our common stock is traded on the OTC Bulletin Board. As a result, the
holders of our common stock may find it more difficult to obtain accurate
quotations concerning the market value of the stock. Stockholders also may
experience greater difficulties in attempting to sell the stock than if it was
listed on a stock exchange or quoted on the Nasdaq National Market or the Nasdaq
Small-Cap Market. Because Unigene common stock is not traded on a stock exchange
or on the Nasdaq National Market or the Nasdaq Small-Cap Market, and the market
price of the common stock is less than $5.00 per share, the common stock is
classified as a "penny stock." SEC Rule 15g-9 under the Exchange Act imposes
additional sales practice requirements on broker-dealers that recommend the
purchase or sale of penny stocks to persons other than those who qualify as an
"established customer" or an "accredited investor." This includes the
requirement that a broker-dealer must make a determination that investments in
penny stocks are suitable for the customer and must make special disclosures to
the customer concerning the risks of penny stocks. Application of the penny
stock rules to the Unigene common stock could adversely
8
affect the market liquidity of the shares, which in turn may affect the ability
of holders of the Unigene common stock to resell the stock.
The sale of our common stock to Fusion could cause substantial dilution and
the sale of the shares acquired by Fusion could cause the price of our
common stock to decline.
The price at which Fusion is obligated to purchase shares of our common
stock under the common stock purchase agreement will fluctuate based on the
market price of our common stock. See "The Fusion Transaction" for a detailed
description of the purchase price.
All of the shares offered for sale by Fusion are freely tradeable. However,
Fusion has agreed that it will not sell or otherwise transfer the 2,000,000
shares of common stock or the 1,000,000 shares of common stock issuable upon the
exercise of the warrant that we issued to Fusion as part of its commitment fee
until the earlier of the termination of the common stock purchase agreement, the
occurrence of an event of default by us under that agreement or May 2003. Fusion
may sell none, some or all of the shares of common stock purchased from Unigene
at any time. We have been advised by Fusion that the shares will be sold over a
period of up to 24 months from May 2001. Depending upon market liquidity at the
time, the resale by Fusion of shares at any given time could cause the trading
price of our common stock to decline. The sale by Fusion of a substantial number
of shares purchased from us, or the anticipation of such sales, could make it
more difficult for us to sell equity or equity related securities in the future
at a time and at a price that we might otherwise wish to effect sales.
If Fusion purchased the remaining balance of $19,475,800 purchasable under
the common stock purchase agreement on the date of this prospectus, at a price
equal to $.55, the closing sale price of our common stock on December 7, 2001,
Fusion would be able to purchase an additional 35,410,545 shares of our common
stock. These shares, along with the 2,000,000 shares and the 1,000,000 shares of
common stock issuable upon the exercise of the warrant which was issued to
Fusion as a commitment fee, would represent 44% of our outstanding common stock
as of the date of this prospectus, assuming that Fusion did not resell any
shares. The issuance of these shares would result in significant dilution to the
ownership interests of other holders of our common stock. The amount of dilution
would be higher if the market price of our common stock is lower than the
current market price at the time Fusion purchases shares under the common stock
purchase agreement, as a lower market price would cause more shares of our
common stock to be issuable to Fusion.
The existence of the agreement with Fusion to purchase shares of our common
stock could cause downward pressure on the market price of our common stock.
Both the actual dilution and the potential for dilution resulting from
sales of our common stock to Fusion could cause holders to elect to sell their
shares of our common stock, which could cause the trading price of our our
common stock to decrease. In addition, prospective investors anticipating the
downward pressure on the price of our common stock due to the shares available
for sale by Fusion could refrain from purchases or cause sales or short sales in
anticipation of a decline of the market price.
9
Forward-Looking Statements
Various statements that we make in this prospectus under the captions
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere in this
prospectus are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or activities of our business, or industry results, to be
materially different from any future results, performance or activities
expressed or implied by the forward-looking statements. These factors include:
general economic and business conditions, our financial condition, competition,
our dependence on other companies to commercialize, manufacture and sell
products using our technologies, the uncertainty of results of animal and human
testing, the risk of product liability and liability for human trials, our
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 for our products and other factors
discussed in this prospectus.
The Fusion Transaction
On May 9, 2001, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC under which Fusion 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 million. The $21 million is to be purchased over a 24 month
period, commencing May 18, 2001, subject to a six month extension or earlier
termination at our discretion. Through November 30, 2001 we have raised a total
of $1,380,800 through the sale of 3,879,604 shares of our common stock to
Fusion, before cash expenses of approximately $257,000.
The daily purchase amount may be decreased by us at any time. We also have
the right to increase the daily purchase amount at any time, provided, however,
that we may not increase the daily purchase amount above $43,750 unless the
closing sale price of our stock is above $4.00 for five (5) consecutive trading
days. Fusion has no obligation to purchase shares if the purchase price would be
less than $.25. The purchase price per share is equal to the lesser of:
o the lowest sale price of our common stock on the purchase date; or
o the average of the five (5) lowest closing sale prices of our common
stock during the fifteen (15) consecutive trading days ending on the
trading day immediately preceding such purchase date, to be
appropriately adjusted for any reorganization, recapitalization,
non-cash dividend, stock split or other similar transaction occurring
during the fifteen (15) consecutive trading days.
Fusion may not purchase shares of our common stock under the common stock
purchase agreement if Fusion and its affiliates would beneficially own more than
9.9% of our then aggregate outstanding common stock immediately after the
proposed purchase. If the 9.9% limitation is ever reached, this limitation will
not limit Fusion's obligation to fund the daily purchase amount.
Fusion has agreed that neither it nor any of its affiliates will engage in
any direct or indirect short-selling or hedging of our common stock during any
time prior to the termination of the common stock purchase agreement.
Fusion may terminate the common stock purchase agreement without any
liability or payment to Unigene, and would not be required to purchase any
additional shares of common stock, upon the occurrence of any of the following
events of default:
o if for any reason the shares cannot be sold for a period of 10
consecutive trading days or for more than an aggregate of 30 trading
days in any 365-day period;
o the suspension from trading or failure of our common stock to be
listed on the OTC Bulletin Board for a period of 10 consecutive
trading days or for more than an aggregate of 30 trading days in any
365-day period;
o the failure of Unigene or the Unigene common stock to meet the
requirements for continued listing on the OTC Bulletin Board for a
period of 10 consecutive trading days or for more than an aggregate of
30 trading days in any 365-day period;
o the failure of the transfer agent to issue shares of our common stock
in connection with a purchase;
o any breach of the representations or warranties or covenants contained
in the common stock purchase agreement or any related agreements which
has or which reasonably could be expected to have a material adverse
affect on Unigene;
o a default of any payment obligation of Unigene or any acceleration
prior to maturity in excess of $1.0 million; or
o commencement of insolvency or bankruptcy proceedings by or against
Unigene.
Fusion has received, as consideration for its commitment to purchase our
common stock, 2,000,000 shares of our common stock and a five-year warrant to
purchase 1,000,000 shares of our common stock, exercisable at $.50 per share.
Unless an event of default occurs, these shares and warrant shares must be held
by Fusion until the earlier of May 2003, or the termination or a default under,
the agreement.
Use of Proceeds
We will not receive any of the proceeds from the sale of the shares of our
common stock offered for sale under this prospectus.
Price Range of Common Stock
The Unigene common stock has been quoted on the OTC Bulletin Board under
the symbol UGNE since October 1999, when it was delisted from the Nasdaq
National Market. The following table presents, for the periods indicated, the
high and low sales prices per share of the Unigene common stock as reported on
the Nasdaq National Market from January 1, 1999 to October 4, 1999, and on the
OTC Bulletin Board from October 5, 1999 through the date of this prospectus.
Fiscal Year Ended December 31, 1999 High Low
---- ---
First Quarter $1.47 $0.94
Second Quarter $1.13 $0.63
Third Quarter $1.06 $0.63
Fourth Quarter $0.84 $0.23
Fiscal Year Ended December 31, 2000 High Low
---- ---
First Quarter $5.38 $0.54
Second Quarter $3.66 $1.44
Third Quarter $3.03 $2.00
Fourth Quarter $3.00 $0.97
Fiscal Year Ended December 31, 2001 High Low
---- ---
First Quarter $1.875 $0.375
Second Quarter $0.65 $0.33
Third Quarter $0.44 $0.19
Fourth Quarter (through December 7) $0.66 $0.33
10
On December 7, 2001, the last reported sale price of the Unigene common stock
on the OTC Bulletin Board was $.55. As of December 7, 2001, there were 488
holders of record of the Unigene common stock.
Dividend Policy
We have never paid a cash dividend on our common stock, and we do not
anticipate paying cash dividends in the foreseeable future. Instead, we
currently plan to retain all earnings, if any, for use in the operation of our
business and to fund future growth.
Selected Financial Data
The selected financial data as of December 31, 2000 and 1999, and for the
years ended December 31, 2000, 1999 and 1998, that is set forth below have been
derived from Unigene's financial statements included in this prospectus, which
have been audited by KPMG LLP, independent accountants. The audit report of KPMG
LLP covering the December 31, 2000 financial statements contains an explanatory
paragraph that states that the Company's recurring losses from operations and
working capital deficiency raise substantial doubt about the entity's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of that uncertainty. The selected
financial data below as of December 31, 1998, 1997 and 1996, and for the years
ended December 31, 1997 and 1996 have been derived from our audited financial
statements that are not included in this prospectus. The selected financial data
below as of and for the nine months ended September 30, 2001 and 2000, have been
derived from our unaudited financial statements, included in this prospectus
which, in our opinion, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of our financial position and
results of operations.
Historical results are not necessarily indicative of results to be expected
for any future period. You should read the data below together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes included in this
prospectus.
STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)
Nine Months Ended
September 30, Year Ended December 31,
---------------------- -------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- -------- -------- -------- -------- --------
Revenue: (Unaudited) (Unaudited)
Licensing & other revenue $ 629 $ 2,961 $ 3,287 $ 9,589 $ 5,050 $ 3,003 $ 308
Costs and expenses:
Research & development expenses 6,857 7,836 11,484 9,375 9,042 9,416 8,298
General and administrative 1,919 2,418 3,187 2,212 2,068 2,016 2,115
Loss before extraordinary item
and cumulative effect of
accounting change (9,666) (8,111) (11,469) (1,577) (6,737) (10,128) (10,597)
Extraordinary item -- -- -- -- (144) -- --
Cumulative effect of accounting change -- (1,000) (1,000) -- -- -- --
Net loss (9,666) (9,111) (12,469) (1,577) (6,881) (10,128) (10,597)
Basic and diluted loss per share:
Loss before
extraordinary item and cumulative
effect of accounting change (.21) (.19) (.26) (.04) (.17) (.27) (.38)
Extraordinary item -- -- -- -- (.01) -- --
Cumulative effect of accounting change -- (.02) (.02) -- -- -- --
Net loss (.21) (.21) (.28) (.04) (.18) (.27) (.38)
Weighted average number of shares
outstanding 46,542 43,869 44,008 40,719 38,701 37,397 27,943
11
BALANCE SHEET DATA
(In thousands) September 30, December 31,
------------------------ ------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
--------- --------- --------- ---------- ---------- --------- ---------
(Unaudited) (Unaudited)
Cash and cash equivalents $ 76 $ 49 $ 17 $ 683 $ 403 $ 2,126 $ 4,491
Working capital (deficiency) (20,816) (9,670) (13,267) (2,759) (1,805) 310 2,954
Total assets 7,599 11,452 9,047 13,778 11,564 13,692 17,169
Long-term debt 523 823 546 1,003 3,931 1,608 2,788
Total liabilities 21,793 13,339 14,540 9,049 7,344 4,258 5,309
Total stockholders' equity (deficit) (14,195) (1,887) (5,493) 4,729 4,220 9,433 11,860
12
SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
2000 2001
---- ----
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter
----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenue $1,201,250 $200,776 $1,559,164 $325,771 $ 273,775 $ 88,042 $ 267,654
Operating loss ($1,396,831) ($3,748,686) ($2,146,838) ($4,092,528) $(2,636,210) $(2,806,962) $(2,702,972)
Loss before cumulative
effect of accounting
change ($1,639,288) ($4,016,917) ($2,454,532) ($3,358,668) $(3,125,111) $(3,308,729) $(3,231,666)
Net loss ($2,639,288) ($4,016,917) ($2,454,532) ($3,358,668) $(3,125,111) $(3,308,729) $(3,231,666)
Loss per share, before
cumulative effect
of accounting change ($0.04) ($0.09) ($0.06) ($0.07) ($0.07) ($0.07) ($0.07)
Net loss per share,
basic and diluted ($0.06) ($0.09) ($0.06) ($0.07) ($0.07) ($0.07) ($0.07)
1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---- ----------- ----------- ----------- -----------
Revenue $2,500,172 $ 26,670 $ 7,000,733 $ 61,838
Operating income (loss) $ (349,707) $(2,825,543) $ 3,787,338 $(2,608,981)
Net income (loss) $ (563,755) $(2,977,610) $ 3,692,594 $(1,728,569)
Net income (loss)
per share, basic
and diluted $ (.01) $ (.07) $ .09 $ (.05)
The quarterly financial data for the first three quarters of 2000 reported above
differ from the data for those periods previously reported by us on Form 10-Q as
described below:
First Quarter Second Quarter Third Quarter
------------- -------------- -------------
Previously As Previously As Previously As
Reported Adjusted Reported Adjusted Reported Adjusted
---------- -------- ---------- -------- ---------- --------
Revenue $ 1,001,250 $ 1,201,250 $ 776 $ 200,776 $ 1,359,164 $ 1,559,164
Operating loss $(1,596,831) $(1,396,831) $(3,948,686) $(3,748,686) $(2,346,838) $(2,146,838)
Net loss $(1,839,288) $(2,639,288) $(4,216,917) $(4,016,917) $(2,654,532) $(2,454,532)
Net loss per share,
basic and diluted $ (.04) $ (.06) $ (.10) $ (.09) $ (.06) $ (.06)
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). Prior to the implementation of SAB 101, non-refundable license fees
received upon execution of license agreements were recognized as revenue
immediately. 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
13
recognition in the biotechnology industry for non-refundable technology access
fees and other non-refundable fees. We were required to adopt SAB 101, as
amended, in the fourth quarter of 2000 with an effective date of January 1,
2000, and the recognition of a cumulative effect adjustment calculated as of
January 1, 2000.
We adopted SAB 101 in 2000, changing our 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 have recognized 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 2000
financial statements for the cumulative effect adjustment and recognized
$200,000 of revenue in each of the quarters through March 31, 2001 as a result
of this deferral.
14
Management's Discussion and Analysis of
Financial Condition and Results of Operations
You should read the following discussion together with our financial
statements and the notes appearing elsewhere in this prospectus. The following
discussion contains forward-looking statements. Our actual results may differ
materially from those projected in the forward-looking statements. Factors that
might cause future results to differ materially from those projected in the
forward-looking statements include those discussed in "Risk Factors" and
elsewhere in this prospectus.
Nine months ended September 30, 2001 and 2000
Revenue for the third quarter of 2001 decreased 83% to $268,000 from
$1,559,000 in the third quarter of 2000. Revenue for the third quarter of 2001
consisted primarily of calcitonin sales. Revenue for the third quarter of 2000
consisted primarily of a $1,000,000 milestone from Pfizer, analytical testing
services provided to Pfizer, as well as the amortization of deferred revenue in
the amount of $200,000. Revenue for the first nine months of 2001 decreased 79%
to $629,000 from $2,961,000 in the first nine months of 2000. Revenue for the
first nine months of 2001 consisted primarily of $339,000 in calcitonin sales,
$200,000 from the amortization of deferred revenue from Pfizer and analytical
testing services provided to Pfizer. Revenue for the first nine months of 2000
consisted primarily of revenue from Pfizer, including $600,000 from the
amortization of deferred revenue and $2,000,000 resulting from the achievement
of milestones in the development of an oral Calcitonin product as well as from
analytical testing services provided to Pfizer. In March 2001, Pfizer terminated
its license agreement with Unigene.
Research and development, Unigene's largest expense, decreased 21% to
$2,289,000 from $2,905,000 for the three months ended September 30, 2001, as
compared to the same period in 2000. The decrease was primarily attributable to
decreased development expenses related to Unigene's nasal calcitonin product, as
well as decreased production expenditures. Research and development costs
decreased 12% to $6,857,000 from $7,836,000 for the nine months ended September
30, 2001, as compared to the same period in 2000. The decrease was primarily
attributable to reduced expenditures for the development of Unigene's nasal
calcitonin product, consulting fees and European regulatory filing fees.
General and administrative expenses decreased 15% to $682,000 from $801,000
for the three months ended September 30, 2001, and decreased 21% to $1,919,000
from $2,418,000 for the nine months ended September 30, 2001, as compared to the
same periods in 2000. The decreases for the three month and nine month periods
ended September 30, 2001 were primarily attributable to the recognition of a
non-cash expense in 2000 of $220,000 due to the issuance of a warrant to a
consultant, partially offset by increased legal fees in 2001. The decrease for
the nine month period ended September 30, 2001 was also affected by the
recognition of a $350,000 expense in June 2000 to terminate Unigene's former
joint venture in China.
Interest income decreased $3,000 or 71% for the three months ended
September 30, 2001, and decreased $34,000 or 83% for the nine months ended
September 30, 2001, as compared to the same periods in 2000, due to reduced
funds available for investment in 2001.
Interest expense increased $218,000 or 70% for the three months ended
September 30, 2001 to $530,000 from $312,000 and increased $666,000 or 78% for
the nine months ended September 30, 2001 to $1,526,000 from $860,000 from the
corresponding periods in 2000. Interest expense increased in 2001 due to
increased officers' loans and higher interest rates on a portion of these loans.
Officers' loans to Unigene increased $5,035,000 during the first nine months of
2001. In addition, due to the fact that Unigene did not make principal and
interest payments on 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 $382,000 for the first nine months 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 Unigene to make a semi-annual interest payment
that was due in January 2000. In addition, since October 1999, Unigene has been
accruing
15
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 Unigene's
common stock from trading on the Nasdaq Stock Market.
Effective January 1, 2000, Unigene adopted Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" (SAB 101) as described in
Note A to our September 30, 2001 unaudited condensed financial statements. As a
result of the adoption of SAB 101, Unigene recognized a non-cash cumulative
effect adjustment of $1,000,000 in the first quarter of 2000.
Due to the elimination of revenue from Pfizer, as well as an increase in
interest expense, partially offset by decreased operating expenses, net loss
increased $777,000 or 32% to $3,232,000 from $2,455,000 for the three months
ended September 30, 2001 from the corresponding period in 2000.
Due to the reduction in revenue from Pfizer, as well as an increase in
interest expense, partially offset by the cumulative effect adjustment
applicable to 2000, as well as a decrease in operating expenses, net loss
increased $555,000 or 6% to $9,666,000 from $9,111,000 for the nine months ended
September 30, 2001 from the corresponding period in 2000.
Years ended December 31, 2000, 1999 and 1998
Revenue. Revenue decreased 66% to $3,287,000 for the year ended December
31, 2000 as compared to $9,589,000 for the year ended December 31, 1999. Revenue
increased 90% to $9,589,000 for the year ended December 31, 1999 as compared to
$5,050,000 for the year ended December 31, 1998. In all three years, revenue
consists primarily of milestone revenue from Pfizer resulting from the
achievement of milestones in the development of an oral Calcitonin product for
treating osteoporosis. Yearly revenue was affected by the timing of the
completion of the various milestones. In addition, revenue for the year ended
December 31, 2000 included $800,000 from the amortization of deferred revenue
related to the initial licensing fee paid by Pfizer in 1997 and $345,000 for
analytical testing services provided to Pfizer. In March 2001, Pfizer terminated
its license agreement with the Company.
Research and Development Expenses. Research and development, the Company's
largest expense, increased 22% in 2000 to $11,484,000 from $9,375,000 in 1999
and increased 4% in 1999 from $9,042,000 in 1998. The 2000 increase was
primarily attributable to the Company's clinical trials for its nasal Calcitonin
product and an increase in expenditures related to an increase in Calcitonin
production and the write-off of inventory in the fourth quarter as a result of
Pfizer's termination of our agreement, partially offset by a reduction in
consulting fees related to the Pfizer collaboration. The 1999 increase was
primarily attributable to development expenses related to the Company's nasal
Calcitonin product, consulting and analytical testing expenses related to the
Company's Type II variation for its injectable Calcitonin product, and
consulting fees related to the Company's collaboration with Pfizer partially
offset by a reduction in production supplies. Expenditures for the sponsorship
of collaborative research programs were $411,000, $250,000 and $280,000 in 2000,
1999 and 1998, respectively, which are included as research and development
expenses. A portion of these expenditures was reimbursed by Pfizer in 1999 and
1998.
General and Administrative Expenses. General and administrative expenses
increased 44% in 2000 to $3,187,000 from $2,212,000 in 1999 and increased 7% in
1999 from $2,068,000 in 1998. The 2000 increase was primarily due to the
recognition of non-cash expenses of $220,000 due to the issuance of warrants to
a consultant and stock option compensation of $399,000, in addition to the
recognition of a $350,000 expense to terminate the Company's former joint
venture in China. The 1999 increase was primarily due to increased personnel
costs and professional fees partially offset by reductions in public relations
and travel expenses.
Interest Income. Interest income increased $12,000 or 31% in 2000 from
1999, after decreasing $70,000 or 65% in 1999 from 1998. The 2000 increase was
due to higher interest rates on investments. The 1999 decrease was due to lower
interest income resulting from reduced funds available for investment.
Interest Expense. Interest expense increased $27,000 or 2% in 2000 to
$1,199,000 from $1,171,000 in 1999 after increasing $386,000 or 49% in 1999 from
$785,000 in 1998. Interest expense increased in 2000 due to increased notes
payable to stockholders and to higher interest rates in 2000 on the 5%
convertible debentures, offset by a reduction in the amortization of the
beneficial conversion feature and
16
related warrants on the 5% convertible debentures as compared to 1999. 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 result of the removal of the Company's Common Stock from trading
on the Nasdaq Stock Market in October 1999. The expenses incurred in connection
with the 5% Debentures in 2000 were partially offset by a 50% decrease in the
principal balance outstanding as a result of conversions to Common Stock during
1999. Included in 1999 interest expense is $197,000 of the amortization of the
value of the beneficial conversion feature and related warrants of the Company's
5% convertible debentures. Excluding the change in the amortization charged to
interest, interest expense increased in 1999 as compared to 1998 as a result of
an increase in notes payable to stockholders, redemption premium resulting from
the Company exceeding the Share Limit on the 5% Debentures, and the 2% delisting
penalty on the 5% Debentures, partially offset by a decrease in the balance
outstanding under the Company's 5% Debentures as a result of partial conversions
to Common Stock.
Income Tax Benefit. Income tax benefit in 2000 of $1,065,000 and in 1999 of
$1,553,000 consisted of proceeds received for the sale of a portion of the
Company's state tax net operating loss carryforwards under a New Jersey Economic
Development Authority ("NJEDA") program, which allows certain New Jersey
taxpayers to sell their state tax benefits to third parties. The purpose of the
New Jersey program is to provide financial assistance to high-tech and
biotechnology companies in order to facilitate future growth and job creation.
Extraordinary Item. Extraordinary item, loss on early extinguishment of
debt, was $144,000 for 1998. The loss was due to redemption at a premium of a
portion of our 10% convertible debentures in September 1998.
Cumulative Effect of Accounting Change. In December 1999, the Securities
and Exchange Commission staff issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). Prior to the implementation of
SAB 101, non-refundable license fees received upon execution of license
agreements were recognized as revenue immediately. 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 was required to adopt SAB 101,
as amended, in the fourth quarter of 2000 with an effective date of January 1,
2000, and the recognition of a cumulative effect adjustment calculated as of
January 1, 2000. The Company adopted SAB 101 in 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, the Company recognized $3,000,000 in revenue from an up-front licensing
fee from Pfizer. With the adoption of SAB 101, the Company is now recognizing
this revenue over a 45 month period, equivalent to the term of its oral
Calcitonin agreement with Pfizer which was terminated in March 2001. The Company
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. The Company recognized $800,000 in revenue in 2000 and will
recognize $200,000 of revenue in 2001 as a result of this deferral.
Net Loss. During 2000, revenue decreased approximately $6,300,000
principally due to the timing of the achievement of various milestones in the
Pfizer agreement. In addition, operating expenses were higher as the Company
increased its product commercialization efforts including its nasal Calcitonin
clinical trials. Also, the Company recognized a cumulative charge from an
accounting change offset by a realized income tax benefit. Therefore, net loss
increased $10,892,000 for the year ended December 31, 2000 from the prior year.
During 1999, revenue increased $4,540,000 from 1998 due to the achievement of
various milestones in the Pfizer agreement. In addition, the Company received
$1,553,000 in 1999 from the partial sale of its state tax benefits. These were
partially offset by an increase in operating and
17
interest expenses. As a result, the Company's net loss decreased $5,304,000 or
77% for the year ended December 31, 1999, from the prior year.
Liquidity and Capital Resources
Unigene maintains its peptide production facility on leased premises in
Boonton, New Jersey. We began production under current Good Manufacturing
Practice guidelines at this facility in 1996. The current lease expires in 2004.
Unigene has two consecutive ten-year renewal options under the lease, as well as
an option to purchase the facility. During the first nine months of 2001,
Unigene invested approximately $15,000 in fixed assets and leasehold
improvements. Currently, Unigene 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 September 30, 2001, Unigene had cash and cash equivalents of $76,000, an
increase of $59,000 from December 31, 2000.
We do not have sufficient financial resources to continue to fund our
operations at the current level. Unigene has incurred annual operating losses
since its inception and, as a result, at September 30, 2001, had an accumulated
deficit of approximately $85,000,000 and a working capital deficiency of
approximately $20,800,000. The independent auditors' report covering Unigene'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
Unigene's common stock. The delisting of our common stock may have an adverse
effect on our ability to raise capital.
Our 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, Unigene 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 September
30, 2001, we had received a total of $22.9 million from Pfizer consisting of $3
million for an equity investment, $3 million for a licensing fee, $400,000 for
analytical testing services and recognized an aggregate of $16.5 million in
milestone revenue. Pfizer conducted a Phase I/II human study which was completed
in December 2000. Pfizer analyzed the results of the study and informed Unigene
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. Unigene also believes that if
subjects in the study had also received calcium supplementation, in addition to
the Calcitonin, the results would have been more favorable. Therefore, Unigene
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. During the
first nine months of 2001, we sold a total of $339,000 of bulk calcitonin.
Unigene also has the right to license the use of its technologies for injectable
and nasal formulations of Calcitonin on a worldwide basis. Unigene has licensed
distributors in the United Kingdom, Ireland and Israel for its injectable
product. However, these distribution agreements have not produced significant
revenues. In June 2000, we entered into a joint venture agreement in China with
Shijiazhuang Pharmaceutical Group ("SPG") to manufacture and market our
injectable and nasal products. Unigene 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
18
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, Unigene is obligated to
contribute up to $405,000 in cash during 2002 and up to an additional $495,000
in cash within two years thereafter. However, these amounts may be reduced or
offset by Unigene's share of joint venture profits. As of September 30, 2001,
Unigene had not made any contributions to the joint venture. We expect the joint
venture to begin operations in the first quarter of 2002. In addition, Unigene
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 $80,000 had been paid as of
September 30, 2001. We recognized the entire $350,000 obligation as an expense
in 2000.
In June 1998, Unigene completed a private placement of $4,000,000 in
principal amount of 5% convertible debentures from which Unigene realized net
proceeds of approximately $3,750,000. The 5% debentures were convertible into
shares of Unigene's common stock. The interest on the debentures, at our 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 Unigene was
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, was
limited to 3,852,500 shares. After this share limit was reached, we became
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, Unigene 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, Unigene 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 September 30, 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 September 30, 2001, Unigene 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, Unigene
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, Unigene 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, January 5, 2001 and July 5, 2001
also have not been made. As of November 30, 2001, the accrued and unpaid
interest on the 5% debentures totaled approximately $833,000. In addition, due
to the delisting of Unigene's common stock from the Nasdaq National Market in
October 1999, we 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. Unigene has not made any of these payments to date,
but has accrued the amounts as additional interest expense. As of November 30,
2001, the accrued and unpaid amount of this penalty totaled approximately
$1,057,000.
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.
19
To satisfy Unigene'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 Unigene, and another Levy family member from time to time have
made loans to Unigene. During the first quarter of 2001, Jay Levy loaned Unigene
$1,600,000 and Warren Levy and Ronald Levy each made demand loans to Unigene of
$5,000. During the second quarter of 2001, Jay Levy made demand loans to Unigene
of $1,950,000. During the third quarter of 2001, Jay Levy made demand loans to
Unigene of $1,475,000. From October 1, 2001 through November 30, 2001, Jay Levy
made demand loans to Unigene of an additional $725,000. Due to the fact that
Unigene did not make principal and interest payments on certain loans when due,
interest on loans through March 4, 2001 increased an additional 5% per year and
is calculated on both past due principal and interest. This additional interest
was approximately $382,000, and total interest expense on all Levy loans was
approximately $793,000 for the first nine months of 2001. The Levys have waived
all default provisions including additional interest penalties due under these
loans through December 31, 2000. As of November 30, 2001, total accrued interest
on all Levy loans was approximately $1,909,000 and the outstanding loans by
these individuals to Unigene, classified as short-term debt, totaled $10,503,323
and consist 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% (11.25% at November 30, 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 Unigene's equipment and real property. Accrued
interest on these loans at November 30, 2001 was approximately $1,041,000.
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 November 30, 2001 was approximately $377,000.
o Loans from Jay Levy in the aggregate principal amount of $4,650,000 which
are evidenced by demand notes bearing a floating interest rate equal to the
Merrill Lynch Margin Loan Rate plus .25%, (6.25% at November 30, 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
November 30, 2001 was approximately $137,000.
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% (11.25% at November 30, 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% (6.25% at
November 30, 2001) and is classified as short-term debt. These loans are
secured by a secondary security interest in Unigene's equipment and real
property. Accrued interest on these loans at November 30, 2001 was
approximately $178,000.
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% (11.25% at November 30, 2001)
that are classified as short-term debt. These loans were
20
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% (6.25% at November 30, 2001) and is classified as
short-term debt. These loans are secured by a secondary security interest
in Unigene's equipment and real property. Accrued interest on these loans
at November 30, 2001 was approximately $176,000.
Unigene'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 the Levys, as well as obligations
relating to its current and former joint ventures in China.
We are 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, Unigene has the contractual right
to sell to Fusion, subject to certain conditions, at the then current market
price, on each trading day during the term of the agreement $43,750 of its
common stock up to an aggregate of $21,000,000. See Notes B and F to our
September 30, 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. From May 18, 2001, through November 30, 2001, Unigene has received
approximately $1,381,000 through the sale of 3,879,604 shares to Fusion, before
cash expenses of approximately $257,000. Our sales of common stock to Fusion
have been below the maximum level due to the share price and trading volume of
our common stock. As a result, we are still borrowing from the Levys to
supplement the funding of our operations. Depending on the price at which shares
are sold, Fusion could provide Unigene with sufficient funding to sustain its
operations for up to two years, beginning in the second quarter of 2001. The
ability of Unigene to realize these funds will depend on its continuing
compliance with the Fusion Agreement.
The extent to which we intend to utilize 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 we are unable to
enter into a significant revenue generating license or other arrangement in the
near term, we would need either 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 consequence would be a material adverse effect
on our business, operating results, financial condition and prospects. Unigene
believes that satisfying its capital requirements over the long term will
require the successful commercialization of its oral or nasal Calcitonin
products 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 Unigene to incur additional capital expenditures
to expand or upgrade its manufacturing operations. Unigene cannot determine
either the cost or the timing of such capital expenditures at this time.
21
As of December 31, 2000, Unigene 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 nine months ended September 30, 2001, we accumulated additional losses of
approximately $9,666,000. In addition, as of December 31, 2000, Unigene has
research and development credits in the approximate amount of $2,750,000, which
are available to reduce the amount of future federal income taxes. These credits
expire from 2001 through 2020. Unigene has New Jersey operating loss
carryforwards in the approximate amount of $23,300,000, expiring from 2004
through 2007, which are available to reduce future earnings, which would
otherwise be subject to state income tax. As of September 30, 2001 these New
Jersey loss carryforwards have been approved for future sale under a program of
the New Jersey Economic Development Authority (the "NJEDA"). In order to realize
these benefits, Unigene 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. In
November 2001, the NJEDA approved a portion of our New Jersey tax benefits for
current sale. We have agreements in place to sell these tax benefits and expect
to realize approximately $800,000 in December 2001 and January 2002.
Unigene follows Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Given our 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, Unigene
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 nine-month period ended September
30, 2001, Unigene's deferred tax assets and valuation allowances each increased
by approximately $3,000,000.
22
Other
Our common stock was delisted from the Nasdaq National Market 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.
Market Risk
In the normal course of business, Unigene is exposed to fluctuations in
interest rates due to the use of debt as a component of the funding of its
operations. Unigene does not employ specific strategies, such as the use of
derivative instruments or hedging, to manage its interest rate exposure.
Unigene's interest rate exposure on the 5% debentures has been affected by our
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,
Unigene's interest rate exposure on its notes payable-stockholders has been
affected by its failure to make principal and interest payments when due.
Unigene's exposure to interest rate fluctuations over the near-term will
continue to be affected by these events.
The information below summarizes Unigene's market risks associated with
debt obligations as of September 30, 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% 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 September 30, 2001. Given
Unigene's financial condition described in "Liquidity and Capital Resources" it
is not practicable to estimate the fair value of our debt instruments at
September 30, 2001.
23
Year of Maturity
Carrying -------------------------------------
Amount 2001 2002 2003 2004 2005
------ ------ ------ ------ ------ ------
Notes payable - stockholders $3,973,323 3,973,323 -- -- -- --
Variable interest rate (1) 11.875% -- -- -- --
Notes payable - stockholders $3,935,000 3,935,000 -- -- -- --
Variable interest rate 6.875% -- -- -- --
Notes payable - stockholders $1,870,000 1,870,000 -- -- -- --
Fixed interest rate (2) 11% -- -- -- --
5% debentures $2,400,000 2,400,000 -- -- -- --
Fixed interest rate (3) 20%
(1) Due to the fact that Unigene 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 Unigene 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 Unigene's failure to make the semi-annual interest payment
that was due January 5, 2000, the interest rate on the 5% debentures has
increased from 7% at December 31, 1999, to 20% beginning January 5, 2000.
In addition, due to the delisting of our common stock from the Nasdaq
National Market in 1999, we 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.
24
Business
Overview
Unigene is a biopharmaceutical company engaged in the research, production
and delivery of small proteins, referred to as peptides, that have demonstrated
or may have potential medical use. We have a patented manufacturing technology
for producing many peptides cost-effectively. We also have patented technology
that has been shown to deliver orally medically useful amounts of various
peptides, into the bloodstream. Our primary focus has been on the development of
Calcitonin and other peptide products for the treatment of osteoporosis and
other indications. We have the facilities and the technology for manufacturing
Calcitonin in accordance with cGMP and have an injectable Calcitonin product
that is approved for sale in Switzerland for the treatment of osteoporosis and
in the European Union for two minor indications. We are also engaged in the
development of oral and nasal Calcitonin products. During 2001, we began
developing other peptide products, including parathyroid hormone for
osteoporosis.
Our Accomplishments
Among our major accomplishments are:
o Development of a Proprietary Peptide Production Process. One of our
principal scientific accomplishments is our success in developing a highly
efficient biotechnology-based peptide production process. Several patents
relating to this process have issued. We believe that these proprietary
processes are key steps in the more efficient and economical commercial
production of peptides with various medical applications. Many of these peptides
cannot be produced at a reasonable cost in sufficient quantities for human
testing or commercial use by currently available production processes. Using our
proprietary process, we have produced laboratory-scale quantities of various
peptides. We have constructed and are operating a manufacturing facility
employing this process to produce Calcitonin.
o Development of Proprietary Technology for Oral Delivery. We have also
developed and patented a formulation that has successfully delivered orally
Calcitonin into the bloodstream of human subjects. We and our collaborators have
shown in repeated human studies that this formulation regularly delivers
measurable quantities of the peptide into the human bloodstream. We believe that
this formulation may accelerate the regulatory approval process for an oral
Calcitonin product because it should be easier to establish its performance as
compared to a formulation that does not produce measurable Calcitonin blood
levels. We believe that the components of our patented oral product also can
enable the delivery of other peptides and we have initiated studies to
investigate this possibility internally and in collaboration with others. During
2001, we reported successful oral delivery in animal studies of various peptides
including parathyroid hormone for osteoporosis and insulin for diabetes.
Strategy
Our business strategy is to develop proprietary products and processes with
applications in human health care to generate revenues from license fees,
royalties on third-party sales and direct sales of bulk or finished products.
Generally, we fund our internal research activities and rely on licensees, which
are likely to be established pharmaceutical companies, to provide development
funding. We also generally expect to rely on these licensees to take
responsibility for obtaining appropriate regulatory approvals, human testing,
and marketing of products derived from our research activities. However, we may,
in some cases, retain the responsibility for human testing and for obtaining the
required regulatory approvals for a particular product.
o Pfizer License Agreement. In July 1997, we entered into an agreement
under which we granted to the Parke-Davis division of Warner-Lambert Company
(which merged with Pfizer in June 2000), a worldwide license to use our oral
Calcitonin technology. Upon signing the agreement, we received $6.0 million in
payments from Warner-Lambert, consisting of a $3.0 million licensing fee and a
$3.0 million equity investment by Warner-Lambert. Through December 31, 2000, we
recognized an aggregate of $16.5 million in revenue due to the achievement of
specified milestones, including $2.0 million in 2000. Pfizer began a Phase I/II
human study in April 2000 and patient dosing was completed in December 2000.
25
Pfizer analyzed the results of the study and informed us 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. We believe that if patients in the study had also received
calcium supplements, in addition to the Calcitonin, the results would have been
more favorable. Therefore, we intend to continue the development of our oral
Calcitonin product as a treatment of osteoporosis, and have 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.
o China Joint Venture. In June 2000, we 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. We own 45% of the joint
venture and will receive 45% of the joint venture profits. 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. A New Drug Application for its injectable and nasal Calcitonin
products has been filed in China. 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 our 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 operations as of September 30, 2001. We expect operations to commence in
the first quarter of 2002.
o Other License or Distribution Arrangements. In addition to the joint
venture with SPG, we have entered into distribution agreements for our
injectable Calcitonin product in the United Kingdom, Ireland and Israel. We
continue to seek other licensing or distribution agreements with pharmaceutical
companies for both the injectable and nasal Calcitonin products. However, we may
not be successful in our efforts to sign any additional revenue generating
agreements.
Competition
Our primary business activity has been biotechnology research and
development. Biotechnology research is highly competitive, particularly in the
field of human health care. We compete with specialized biotechnology companies,
major pharmaceutical and chemical companies, universities and other non-profit
research organizations, many of which can devote considerably greater financial
resources to research activities.
In 1999, we began manufacturing cGMP Calcitonin for use in pharmaceutical
products. In the development, manufacture and sale of peptide products, we
compete with contract laboratories and major pharmaceutical companies. Many of
our competitors can devote considerably greater financial resources to these
activities. Major competitors in the field of osteoporosis include Novartis,
American Home Products, Merck, Eli Lilly, and Procter and Gamble. Our main
competitor in the field of oral delivery of peptides is Emisphere Technologies,
Inc.
We believe that the unique safety and effectiveness of Calcitonin, combined
with our patented peptide manufacturing process and our patented oral
formulation, will enable us to compete with products marketed by these and other
companies.
We believe that success in competing with others in the biotechnology
industry will be based primarily upon scientific expertise and technological
superiority. We also believe that success will be based on the ability to
identify and to pursue scientifically feasible and commercially viable
opportunities and to obtain proprietary protection for research achievements.
Our success will further depend on our ability to obtain adequate funding and on
developing, testing, protecting, producing and marketing products and obtaining
their timely regulatory approval. We are always at risk that others may develop
superior processes or products that would render our processes or products
noncompetitive or obsolete.
26
Product Manufacture
We have been producing salmon Calcitonin since 1992. We constructed a cGMP
facility for the production of Calcitonin at leased premises located in Boonton,
New Jersey. The facility began producing salmon Calcitonin under cGMP guidelines
in 1996. The facility also produces our proprietary amidating enzyme for use in
producing Calcitonin. The current production level of the facility is between
one and two kilograms of bulk Calcitonin per year.
The facility can be modified to increase Calcitonin production capacity.
However, if we are successful in our efforts to commercialize an oral Calcitonin
product, we expect that we may incur additional expenditures to expand or
upgrade our manufacturing operations. Although the facility initially is devoted
exclusively to Calcitonin production, it also is suitable for producing other
peptide products.
We are following conventional procedures to secure the approval of the
facility by regulatory agencies to allow us to manufacture Calcitonin for human
use. European health authorities inspected the facility in connection with the
filing of our injectable Calcitonin dossier and found it to be in compliance
with cGMP guidelines. However, there is the risk that our operations might not
remain in compliance or that approval by other agencies will not be obtained.
The FDA must approve the facility in order to manufacture Calcitonin or other
peptides for sale in the United States.
Government Regulation
Our laboratory research, development and production activities and those of
our collaborators are subject to significant regulation by numerous federal,
state, local and foreign governmental authorities. FDA approval, following the
successful completion of various animal and human studies, is required for the
sale of a pharmaceutical product in the United States. Foreign sales require
similar studies and approval by regulatory agencies.
The regulatory approval process for a pharmaceutical product requires
substantial resources and can take many years. There is a risk that any
additional regulatory approvals required for our production facility or for any
of our products will not be obtained in a timely manner. Our inability to
obtain, or delays in obtaining, these approvals would adversely affect our
ability to continue to fund our programs, to produce marketable products, or to
receive revenue from milestone payments, product sales or royalties. We also
cannot predict the extent of any adverse governmental regulation that may arise
from future legislative and administrative action.
The FDA or other regulatory agencies may audit our production facility to
ensure that it is operating in compliance with current Good Manufacturing
Practice guidelines, referred to as cGMP. These guidelines require that
production operations be conducted in strict compliance with our established
rules for manufacturing and quality controls. These agencies are empowered to
suspend production operations and/or product sales if, in their opinion,
significant or repeated changes from these guidelines have occurred. A
suspension by any of these agencies could have a material adverse impact on our
operations.
Regulatory Approval of Our Injectable Calcitonin Product
In January 1999, we received approval from the European Committee for
Proprietary Medicinal Products, referred to as the CPMP, to market our
injectable Calcitonin product in all 15 member states of the European Union as a
treatment for Paget's disease and for hypercalcemia. We began to market this
product in Europe for these indications in 1999. We have filed a supplementary
submission with the CPMP, called a Type II Variation, to expand the approved
indications to include the treatment of osteoporosis. However, it is uncertain
whether or when the Type II Variation will be approved by the CPMP. In 2001, we
received an approval in Switzerland for our injectable Calcitonin product that
includes an osteoporosis indication.
27
Regulatory authorities in many non-European Union countries can cite the
approved European dossier, which we believe could significantly reduce the
registration requirements for injectable Calcitonin in those non-European Union
countries, and thereby could speed up product launch. In addition, we believe
that the human trials conducted to support the European filing of the injectable
Calcitonin product can be used to support the filing of a New Drug Application
with the FDA for use of our injectable Calcitonin product to treat osteoporosis
and other indications. We believe that our abbreviated clinical program, which
has been accepted by the FDA, will be sufficient to satisfy approval
requirements in the United States and other countries. Accordingly, we expect
that the review process for our injectable Calcitonin product in the United
States and other countries may be shorter than that typically associated with a
new drug submission for numerous reasons:
o The active ingredient is structurally identical to and
indistinguishable from the active ingredient in products already
approved by many regulatory agencies.
o The formulation is essentially similar to the formulations used in
already approved products.
o The human trial program that was accepted by the FDA is relatively
brief and involved small numbers of subjects. As a result, the amount
of information that must be reviewed is far less than would have been
compiled for the lengthier trials required for a typical new drug
submission.
Development of our Oral Calcitonin Product
In December 1995 and January 1996, we successfully tested a proprietary
Calcitonin oral formulation in two separate human studies in the United Kingdom.
These studies indicated that the majority of those who received oral Calcitonin
showed levels of the peptide in blood samples taken during the trial that were
greater than the minimum levels generally regarded as being required for maximum
medical benefit. We believe that these were the first studies to demonstrate
that significant blood levels of Calcitonin could be observed in humans
following oral administration of the peptide. In April 1996, we successfully
conducted a third pilot human study in the United Kingdom which used lower
Calcitonin dosages than in the prior two human trials. The results of this trial
indicated that every test subject showed levels of the peptide in their blood
samples that exceeded the minimum levels generally regarded as required for
maximum medical benefit. During 1999, with Warner-Lambert (now Pfizer), we
successfully concluded two pilot human studies using an oral Calcitonin
formulation manufactured by Warner-Lambert. Both studies showed significant
measurable blood levels of Calcitonin. In December 1999, Warner-Lambert filed an
Investigational New Drug application with the FDA, a Phase I/II study began in
April 2000 and patient dosing for this study was completed in December 2000.
Pfizer analyzed the results of the study and informed us 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. We believe that if patients in the study had also received
calcium supplements, in addition to the Calcitonin, the results would have been
more favorable. Therefore, we intend to continue the development of our oral
Calcitonin product as a treatment of osteoporosis, and have 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.
We have filed patent applications for our oral formulation in the United
States and in numerous foreign countries. In 1999, we received a U.S. patent for
our basic technology covering the oral delivery of Calcitonin for the treatment
of osteoporosis. In 2000, we received a U.S. patent extending this protection to
the oral delivery of other peptides.
There are risks that we will not be successful in licensing this product,
that a safe and effective oral product will not be developed, that we will not
be successful in obtaining regulatory approval of an oral
28
Calcitonin product, and that we will not succeed in developing, producing or
marketing an oral Calcitonin product.
Development of a Nasal Calcitonin Product
A major pharmaceutical company received FDA approval in 1995 for the
marketing of a nasal spray Calcitonin product, which has substantially enlarged
the U.S. market for Calcitonin. During 1999, we completed preliminary human
studies for our proprietary nasal Calcitonin product. A patent application for
the product was filed in February 2000. In January 2000 we filed an
Investigational New Drug Application with the FDA to begin human testing of our
nasal product as a treatment for osteoporosis. In February 2000, we began U.S.
human studies. In December 2000, we successfully completed a human study
demonstrating similar blood levels between our product and that of an existing
nasal Calcitonin product. We have successfully completed a second human study
which showed a rapid and persistent reduction in bone loss as measured by
several accepted blood markers. A substance in the bloodstream which measures
the rate of bone loss in the tested subjects decreased by an average of over 40%
in the first month of the study, and that reduction was maintained throughout
the three-month dosing period during which the measurements were taken. We are
seeking to license our nasal Calcitonin product in the U.S. and other countries
for the treatment of osteoporosis. However, we may not be successful in our
efforts to conclude a license agreement, to obtain governmental approval of our
nasal Calcitonin product, or to manufacture and sell the product.
Collaborative Research Programs
We are currently engaged in two collaborative research programs:
o Rutgers University College of Pharmacy continues to study oral
delivery of Calcitonin and other peptides.
o We are in collaboration with Yale University, to investigate new
applications for various peptides, including Calcitonin gene-related
peptide. In 1996, we reported that this peptide accelerated bone
growth and prevented bone loss in an animal model system. However,
this peptide may not have the same effect in humans. We may not be
successful in developing, manufacturing or marketing any resulting
product.
Patents and Proprietary Technology
We have filed a number of applications for U.S. patents relating to our
proprietary peptide manufacturing process and our technology for oral delivery.
To date, the following six U.S. patents have issued:
o Immunization By Immunogenic Implant, a method for producing antibodies
for developing diagnostic medical tests
o two patents related to the Alpha-Amidation Enzyme and its use in
manufacturing peptides
o a patent covering an improvement in our manufacturing technology
o two patents covering oral delivery of peptides
Other applications are pending. We also have made filings in selected
foreign countries, and numerous foreign patents have issued. However, our
pending applications may not issue as patents and our issued patents may not
provide us with significant competitive advantages. Furthermore, our competitors
may independently develop or obtain similar or superior technologies.
Although we believe our patents and patent applications are valid, the
repeal of one or more of our key patents could have a significant adverse effect
upon our business. Detecting and proving infringement generally is more
difficult with process patents than with product patents. In addition, a process
patent's value is diminished if others have patented the product that can be
produced using the process. Under
29
these circumstances, we would require the cooperation of, and likely be required
to share royalties with, the patent holder or its sublicensees in order to make
and sell the product.
In some cases, we rely on trade secrets to protect our inventions. Our
policy is to include confidentiality provisions in all research contracts, joint
development agreements and consulting relationships that provide access to our
trade secrets and other know-how. However, there is a risk that these secrecy
obligations could be breached causing us harm. To the extent licensees,
consultants or other third parties apply technological information independently
developed by them or by others to our projects, disputes may arise as to the
ownership rights to information, which may not be resolved in our favor.
Employees
As of November 30, 2001 we had 63 full-time employees. Twenty-one were
engaged in research, development and regulatory activities, 30 were engaged in
production activities and 12 were engaged in general and administrative
functions. Eight of our employees hold Ph.D. degrees. Our employees are experts
in molecular biology, including DNA cloning, synthesis, sequencing and
expression; protein chemistry, including purification, amino acid analysis,
synthesis and sequencing of proteins; immunology, including tissue culture,
monoclonal and polyclonal antibody production and immunoassay development;
chemical engineering; pharmaceutical production; quality assurance; and quality
control. None of our employees is covered by a collective bargaining agreement.
Warren P. Levy, President and Ronald S. Levy, Executive Vice President, both
executive officers and directors, have signed employment agreements with us.
Research and Development
We have established a multi-disciplinary research team to adapt proprietary
amidation, biological production and oral delivery technologies to the
development of proprietary products and processes. Approximately 82% of our
employees are directly engaged in activities relating to production of,
regulatory compliance for, and the research and development of pharmaceutical
products. We spent $11.5 million on research activities in 2000, $9.4 million in
1999, and $9.0 million in 1998.
Properties
We own a one-story office and laboratory facility consisting of
approximately 12,500 square feet. The facility is located on a 2.2 acre site in
Fairfield, New Jersey.
Our 32,000 square foot cGMP production facility, of which 18,000 square
feet are currently being used for the production of Calcitonin and can be used
for the production of other peptides, was constructed in a building located in
Boonton, New Jersey. We lease the facility under a ten-year agreement, which
began in February 1994. We have two 10-year renewal options and an option to
purchase the facility.
Litigation
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 -- Capital Resources
and Liquidity." 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
30
counterclaims. A hearing on the matter before an arbitrator appointed by the
American Arbitration Association was scheduled for June 2001. In June 2001, the
arbitration was postponed to allow Tail Wind and Unigene to engage in settlement
discussions. The outcome of these negotiations is uncertain. An extremely
unfavorable settlement or arbitration 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 this 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. We believe that this suit is
completely without merit, and we will continue to vigorously contest the claim.
Management
Executive Officers and Directors
The following table sets forth information regarding Unigene's executive
officers and directors:
Name Age Position
- ---------------------- --- -------------------------------------------------
Warren P. Levy (1) 49 President, Chief Executive Officer, and Director
Ronald S. Levy (1) 53 Executive Vice President, Secretary, and Director
Jay Levy (1) 78 Chairman of the Board and Treasurer
James P. Gilligan 49 Vice President of Product Development
J. Thomas August 74 Director
Bruce S. Morra 47 Director
Allen Bloom 58 Director
- -------------
(1) Dr. Warren P. Levy and Dr. Ronald S. Levy are brothers and are the sons
of Mr. Jay Levy.
Each executive officer's term of office continues until the first meeting
of the Board of Directors following the annual meeting of stockholders and until
the election and qualification of his successor. All officers serve at the
discretion of the Board of Directors.
Warren P. Levy. Dr. Warren P. Levy, a founder of Unigene, has served as
President and Chief Executive Officer, and as a director, since our formation in
November 1980. Dr. Levy holds a Ph.D. in biochemistry and molecular biology from
Northwestern University and a bachelor's degree in chemistry from the
Massachusetts Institute of Technology.
Ronald S. Levy. Dr. Ronald S. Levy, a founder of Unigene, has served as a
director since our formation in November 1980, as Executive Vice President since
April 1999, and as Secretary since May 1986. Dr. Levy served as Vice President
from November 1980 through March 1999. Dr. Levy holds a Ph.D. in bioinorganic
chemistry from Pennsylvania State University and a bachelor's degree in
chemistry from Rutgers University.
Jay Levy. Mr. Jay Levy, a founder of Unigene, has served as the Chairman of
the Board of Directors and as Treasurer since our formation in November 1980. He
served as Secretary from 1980 to May 1986. Mr. Levy is a part-time employee of
Unigene and devotes approximately 15% of his time to Unigene. From 1985 through
February 1991, he served as the principal financial advisor to the Estate of
Nathan Cummings and its principal beneficiary, The Nathan Cummings Foundation,
Inc., a large charitable foundation. From 1968 through 1985, he performed
similar services for the late Nathan Cummings, a noted industrialist and
philanthropist.
31
James P. Gilligan. Dr. James P. Gilligan has been employed by Unigene since
1981 and has served as Vice President of Product Development since April 1999.
From February 1995 to March 1999, he served as Director of Product Development.
Dr. Gilligan holds a Ph.D. in pharmacology from the University of Connecticut
and a Masters of International Business from Seton Hall University.
Dr. Allen Bloom. Dr. Allen Bloom, a patent attorney, has been a partner in
Dechert Price & Rhoads, a law firm, for the past six years where he established
and heads the patent practice group, which focuses on biotechnology,
pharmaceuticals and medical devices. Prior to that time, he was Vice President,
General Counsel and Secretary of The Liposome Company, Inc., a biotechnology
company, for nine years. His responsibilities there included patent, regulatory
and licensing activities. Dr. Bloom holds a Ph.D. in organic chemistry from Iowa
State University.
Dr. J. Thomas August is a Distinguished Service Professor of the
Departments of Oncology, Pharmacology and Molecular Sciences at the Johns
Hopkins University School of Medicine, where he has been employed since 1976. He
is also Director, Johns Hopkins Singapore Biomedical Centre. Dr. August has
served as Unigene's Director of Research since 1990. He serves on the Board of
Directors of Bioqual, Inc., Aarmedis, Inc. and the Foundation for Comparative
and Conservation Biology, and is also a consultant for various biotechnology and
medical companies. Dr. August received his medical degree from Stanford
University School of Medicine.
Dr. Bruce Morra has been the President, COO and CFO of Biopore Corporation
and Polygenetics, Inc., two related companies developing technology for drug
delivery and medical devices for biomedical and industrial applications since
2000. From 1993 through 2000, he served as President and COO of Flamel
Technologies, Inc., a company developing, manufacturing and licensing drug and
agrochemical delivery technologies and products. He has also served as President
of ISP Filters and currently serves as a director for Medisys Technologies. Dr.
Morra holds a Ph.D. in polymer science and engineering and an M.B.A. from the
University of Massachusetts, Amherst and a B.S.E. in chemical engineering from
Princeton University.
Committees of the Board of Directors
The Board of Directors performs several important functions through
committees. These committees are made up of members of the Board of Directors.
Unigene's by-laws authorize the formation of these committees and grant the
Board the authority to prescribe the functions of each committee and the
standards for membership of each committee. The Board has the following four
standing committees. The Board does not have a standing nominating committee.
Audit Committee. The responsibilities of the Audit Committee include
annually recommending a firm of independent public accountants to the Board to
act as our auditors, reviewing the scope of the annual audit with the auditors
in advance, and reviewing the results of the audit and the adequacy of our
accounting, financial and operating controls. The Audit Committee also reviews
our accounting and reporting principles, policies and practices; and approves
fees paid to the auditors for audit and non-audit services. The current members
of the Audit Committee are Messrs. Allen Bloom, J. Thomas August and Bruce
Morra.
Compensation Committee. The responsibilities of the Compensation Committee
include reviewing and approving the compensation, including salaries and
bonuses, of our officers. The Compensation Committee also oversees the
administration of our 401(k) plan and reviews and approves general benefits and
compensation strategies. The current members of the Compensation Committee are
Messrs. Jay Levy, Allen Bloom, J. Thomas August and Bruce Morra.
Stock Option Committee (2000 Stock Option Plan). The Stock Option Committee
for the 2000 Stock Option Plan, subject to the limitations of the plan, selects
the employees to be granted options, fixes the number of shares to be covered by
each option grant, and determines the exercise price and other terms and
conditions of each option. The current members of this Stock Option Committee
are Messrs. Allen Bloom, J. Thomas August and Bruce Morra.
Stock Option Committee (Directors Stock Option Plan). The Stock Option
Committee for the Directors Stock Option Plan, subject to the limitations of the
plan, interprets the plan and makes all determinations necessary for the plan's
administration. The current members of this Stock Option Committee are Messrs.
Jay Levy, Warren Levy and Ronald Levy.
32
Director Compensation
Directors who are not employees receive an annual retainer of $8,000 as
well as a fee of $1,000 for each Board meeting attended. Mr. Robert F.
Hendrickson (who did not stand for re-election in 2001) and Dr. Allen Bloom were
the only directors who received such fees in 2000. Board members do not earn
additional compensation for service on a committee.
Under the Director Stock Option Plan, each person elected to the Board who
is not an employee receives, on the date of his initial election, an initial
option to purchase 21,000 shares of Unigene common stock. On May 1st of each
year, each non-employee director receives an additional option to purchase
10,000 shares of Unigene common stock if he has served as a non-employee
director for at least six months prior to the grant date. Each option has a
ten-year term and the exercise price is equal to the market price of Unigene
common stock on the date of the grant. Each initial option vests in equal
installments of 1/3 over a period of three years, commencing on the date of the
grant, and each additional option vests in its entirety on the first anniversary
of the grant. If the director's service as a non-employee director terminates
prior to the expiration of the option term, the options will remain exercisable
for a 90-day period following termination of service, except if a non-employee
director resigns due to disability, the options will remain exercisable for 180
days following termination, and if a non-employee director dies while serving as
a director, or within 90 days following termination of service (180 days in the
case of disability), the options will remain exercisable for 180 days following
the person's death. After such period, the options will terminate and cease to
be exercisable.
Employment Agreements
Unigene entered into an employment agreement, effective January 1, 2000,
with Dr. Warren P. Levy for an initial term of two years. Under the agreement,
Dr. Levy serves as President and Chief Executive Officer at an annual salary of
$160,000 for the first year of the agreement. The Compensation Committee has
discretion to approve salary increases beyond this first year.
Unigene entered into an employment agreement, effective January 1, 2000,
with Dr. Ronald S. Levy for an initial term of two years. Under the agreement,
Dr. Levy serves as Executive Vice President at an annual salary of $155,000 for
the first year of the agreement. Salary increases beyond this first year are at
the discretion of the Compensation Committee.
Each agreement provides that, after the first two-year term, the agreement
will be renewed on a year-to-year basis unless either party notifies the other
of the desire not to renew the agreement. Either party must give this notice no
later than three months prior to the scheduled termination date. Each agreement
also provides that, if Unigene terminates the employment of the executive
without cause or the executive resigns for good reason, which the executive has
a right to do upon a change of control of Unigene or a significant reduction of
the executive's responsibilities without his consent, Unigene will make a
lump-sum severance payment to the executive equal to the salary that he would
have earned for the remaining term of this agreement, if the remaining term
(either the initial term or as extended) is more than one year; or if the
remaining term of the agreement (either the initial term or as extended) is one
year or less, a lump-sum payment equal to the executive's then-current annual
salary.
33
Compensation Committee Interlocks and Insider Participation
The Board of Directors determined executive compensation for 2000. Three of
the five Board members, Warren P. Levy, Ronald S. Levy and Jay Levy, are
executive officers. Jay Levy is the father of Warren and Ronald Levy.
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 made
demand loans to the Company of $5,000. During the second quarter of 2001, Jay
Levy made demand loans to the Company of $1,950,000. During the third quarter of
2001, Jay Levy made demand loans to the Company of an additional $1,475,000. Due
to the fact that Unigene did not make principal and interest payments on certain
loans when due, interest on loans through March 4, 2001 increased an additional
5% per year and is calculated on both past due principal and interest. This
additional interest was approximately $382,000, and total interest expense on
all Levy loans was approximately $793,000 for the first nine months of 2001. The
Levys have waived all default provisions including additional interest penalties
due under these loans through December 31, 2000. As of November 30, 2001, total
accrued interest on these loans was approximately $1,909,000 and the outstanding
loans by these individuals to the Company, classified as short-term debt,
totaled $10,503,323 and consist 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% (11.25% at November 30, 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 November 30, 2001 was approximately $1,041,000.
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
November 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 November 30, 2001 was approximately $377,000.
o Loans from Jay Levy in the aggregate principal amount of $4,650,000 which
are evidenced by demand notes bearing a floating interest rate equal to the
Merrill Lynch Margin Loan Rate plus .25%, (6.25% at November 30, 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
November 30, 2001 was approximately $137,000.
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% (11.25% at November 30, 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% (6.25% at
November 30, 2001) and is 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 November 30, 2001 was
approximately $178,000.
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% (11.25% at November 30, 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%
(6.25% at November 30, 2001) and is 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 November
30, 2001 was approximately $176,000.
34
Executive Compensation
The following table shows, for the years 1998, 1999 and 2000, the
compensation paid to the Chief Executive Officer and to each other executive
officer whose salary and bonus, for their services in all capacities in 2000
exceeded $100,000:
Summary Compensation Table
Long-Term
Compensation
------------
Annual Compensation Awards
------------------- ------ Payouts
Other Restricted -------
Annual Stock Options/ LTIP All Other
Name and Position Year Salary($) Bonus($) Compensation($)(2) Awards($) SARs(#) Payouts($) Compensation($)(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Warren P. Levy 2000 $160,175 $ 0 $ 0 $ 0 0 $ 0 $ 13,902
President, Chief 1999 146,211 0 0 0 0 0 13,866
Executive Officer 1998 146,231 0 0 0 0 0 13,830
Dr. Ronald S. Levy 2000 155,260 0 0 0 0 0 16,864
Executive Vice 1999 141,563 0 0 0 0 0 16,862
President 1998 141,618 0 0 0 0 0 16,792
Dr. James P. Gilligan 2000 148,034 0 7,615 0 0 0 0
Vice President 1999 139,216 0 7,235 0 135,000 0 0
1 Represents premium we paid on executive split-dollar life insurance.
2 Represents reimbursement for unused vacation days.
35
Aggregated Option Exercises and Year-End Option Values
The following table shows information about any option exercises during the
year ended December 31, 2000, and the number and value of unexercised options
held as of December 31, 2000, by each of the executive officers named in the
Summary Compensation Table:
Shares Underlying Value of Unexercised
Exercises during Unexercised Options In-the-Money Options(1)
the Fiscal Year ------------------- -----------------------
---------------
Number of
Name Shares Acquired Value Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- --------------- -------------- ----------- ------------- ----------- -------------
Dr. Warren P. Levy 0 0 0 0 0 0
Dr. Ronald S. Levy 0 0 0 0 0 0
Dr. James P. Gilligan 0 0 346,000 44,000 $77,595 $37,755
1 Based upon a closing price of $1.53 on December 31, 2000.
Principal Stockholders
The following table shows information as of November 30, 2001, concerning
the beneficial ownership of Unigene common stock by each of Unigene's directors,
each executive officer of Unigene listed in the Summary Compensation Table, and
all directors and executive officers of Unigene as a group and each other person
known by Unigene to be the beneficial owner of more than 5% of Unigene's common
stock.
The ownership percentages listed on the table are based on 50,316,544
shares of Unigene common stock outstanding as of November 30, 2001. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. A person generally is deemed to be the beneficial owner of
shares over which he has either voting or investment power. Shares underlying
options that are currently exercisable, or that will become exercisable within
60 days, are deemed to be beneficially owned by the person holding the options,
and are deemed to be outstanding for the purpose of computing the beneficial
ownership percentage of that person, but are not considered to be outstanding
for the purpose of computing the ownership percentage of any other person.
Except as otherwise noted, the persons and the group identified in the
table have sole voting and sole investment power with respect to all the shares
of Unigene common stock shown as beneficially owned by them. Except as otherwise
indicated, the address of each beneficial owner listed below is c/o Unigene
Laboratories, Inc., 110 Little Falls Road, Fairfield, New Jersey 07004.
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------------ -------------------- ----------------
Fusion Capital Fund II, LLC 3,365,853 (1) 6.6%
222 Merchandise Mart Plaza
Chicago, IL 60654
Warren P. Levy 1,980,545 (2) 3.9%
Ronald S. Levy 1,995,545 (2) 4.0%
Jay Levy 593,095 (3) 1.2%
James P. Gilligan 421,660 (4) *
Allen Bloom 51,000 (5) *
J. Thomas August 12,552 *
Bruce S. Morra -- *
Officers and Directors
as a Group (7 persons) 4,854,397 (2,6) 9.6%
* Less than one percent.
1 Includes 1,000,000 shares that Fusion has the right to acquire upon
the exercise of a warrant.
2 Includes 200,000 shares of Unigene common stock held in a family trust
over which Warren P. Levy and Ronald S. Levy, in their capacity as
trustees, share voting and dispositive power.
36
3 Includes 70,000 shares of Unigene common stock that Mr. Levy has the
right to acquire upon the exercise of stock options that are
exercisable either immediately or within 60 days.
4 Includes 402,000 shares of Unigene common stock that Dr. Gilligan has
the right to acquire upon the exercise of stock options that are
exercisable either immediately or within 60 days.
5 Includes 50,000 shares of Unigene common stock that Dr. Bloom has the
right to acquire upon the exercise of stock options that are
exercisable either immediately or within 60 days.
6 Includes an aggregate of 522,000 shares of Unigene common stock that
such persons have the right to acquire upon the exercise of stock
options that are exercisable either immediately or within 60 days.
Selling Stockholders
A total of 1,134,350 shares of our common stock may be offered for sale
from time to time under this prospectus.
37
o Up to 600,000 shares of our common stock are issuable to Annette North
pursuant to an agreement under which we are obligated to issue shares of
our common stock to Ms. North as compensation for the decrease in the
market price of 62,000 shares of our common stock that she acquired upon
the exercise of a warrant prior to the time that the warrant shares are
registered for resale and within 10 trading days after the warrant shares
are delivered to Ms. North. Pursuant to the agreement we will pay to Ms.
North, in shares of our common stock, an amount equal to the product of
62,000 and the amount by which $2.75 exceeds the closing sale price of our
common stock on the date that this registration statement to which this
prospectus relates becomes effective. Under the agreement, for warrant
shares sold within 10 days after delivery to Ms. North, we are obligated to
pay the amount, if any, that the closing price of the common stock on the
effective date exceeds the sale prices of the shares sold. In addition,
with respect to any warrant shares not sold within 10 days after delivery
to Ms. North, we also are obligated to pay the amount, if any, that the
closing price of the common stock on the effective date exceeds the closing
price of the shares on the date delivered.
o 300,000 shares of our common stock that we have issued to Patrick Tedesco
pursuant to an agreement under which we have agreed to issue additional
shares of our common stock to Mr. Tedesco as compensation for the decrease
in the market price of shares of our common stock that he acquired upon the
exercise of a warrant prior to the time that the warrant shares are
registered for resale.
o 125,000 shares of our common stock that we have issued to Synexus Limited
in payment for services provided to us in connection with clinical trials
conducted in the U.K. Since January 1998, we have incurred approximately
$250,000 in fees with this company.
o 109,350 shares of our common stock were acquired by Jay Levy, a founder and
the Chairman of the Board of Directors and the Treasurer of Unigene, upon
the exercise of a stock option that was granted to him in consideration for
a loan that he made to us in 1984.
With the exception of Synexus Limited and Mr. Jay Levy, none of the selling
stockholders has had any position, office or other material relationship with us
or our affiliates within the past three years. The following table states as of
November 30, 2001, with respect to each selling stockholder, the number of
shares of our common stock beneficially owned, the number of shares of our
common stock that may be offered for sale by the prospectus, and the number of
shares of our common stock that would be beneficially owned following the
offering (assuming the sale of all of the shares covered by this prospectus). We
may amend or supplement this prospectus from time to time to disclose the names
and relationships to us of additional selling stockholders (including persons or
entities who may acquire the shares of our common stock covered by this
prospectus from a selling stockholder named below as a donation or a pledge).
38
Beneficial Ownership of Shares of Common Beneficial Ownership of
Common Stock Prior to Stock Being Common Stock after
Offering Offered Offering
-------------------------- ---------------- -----------------------
Name Number Percent Number Number Percent
- ---------------------- --------- ------- --------- ------ -------
Annette North 600,000 1.2 600,000 0 0
Patrick Tedesco 300,000 * 300,000 0 0
Synexus Ltd. 125,000 * 125,000 0 0
Jay Levy(1) 578,095 1.1 109,350 468,745 *
- --------------------------------------------------------------------------------------------------------------
(1) Does not include 200,000 shares of Unigene common stock held by a trust in
which Mr. Levy has a pecuniary interest.
* Less than one percent.
39
Plan of Distribution
We are registering the shares of our common stock covered by this
prospectus on behalf of the selling stockholders. The purpose of this prospectus
is to permit the selling stockholders, if they desired, to dispose of some or
all of the shares at the times and at the prices as they determine are
appropriate. Whether sales will be made, and the timing and amount of any sale
made, is within the sole discretion of the selling stockholders. All references
in the section to selling stockholders include donees and pledgees that receive
any of the shares covered by this prospectus from the named selling stockholders
by donation or pledge.
Our common stock covered by this prospectus may be offered for sale from
time to time by the selling stockholders to or through underwriters or directly
to other purchasers or through agents in one or more market transactions, in one
or more private transactions or in a combination of those methods of sale, at
prices then prevailing, at prices related to prevailing prices or at negotiated
prices. Methods of distribution may include, without limitation: (a) a block
trade in which a broker-dealer will attempt to sell our common stock as agent,
but may position and resell a portion of the block as a principal to facilitate
the transaction; (b) purchases by a broker-dealer as a principal and resale by
the broker-dealer for its own account under this prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (d) face-to-face transactions between sellers and purchasers without a
broker or dealer. This prospectus may be amended or supplemented to describe a
specific plan of distribution.
As part of a distribution of our common stock or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions. As part of the transactions, those broker-dealers or
other financial institutions may engage in short sales of our common stock in
the course of hedging the positions they assume with the selling stockholders.
The selling stockholders may also sell our common stock short and redeliver the
shares to close out the short positions. The selling stockholders may also enter
into options or other transactions with broker-dealers or other financial
institutions that require the delivery to the broker-dealer or financial
institution of our common stock covered by this prospectus, which shares the
broker-dealer or other financial institutions may resell under this prospectus
(as appropriately amended or supplemented to reflect these transactions). The
selling stockholders also may pledge the shares registered here to a
broker-dealer or other financial institution and, upon a default, the
broker-dealer or other financial institution may effect sales of our pledged
common stock under this prospectus (as appropriately supplemented or amended to
reflect these transactions). In addition, any of our common stock covered by
this prospectus that qualifies for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than under this prospectus.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from the selling stockholders in amounts
to be negotiated in connection with sales. The selling stockholders and any
broker or dealer that acts in connection with the sale of the shares may be
deemed to be "underwriters" within the meaning of the Securities Act, and any
commission received by a broker or dealer and any profit realized by a broker or
dealer on the resale of any shares as principal may be deemed underwriting
discounts or commissions under the Securities Act.
All costs, expenses and fees incurred upon the registration of our common
stock will be borne by us. Commissions, discounts and transfer taxes, if any,
attributable to the sales of our common stock will be borne by the selling
stockholders.
We have agreed to supply the selling stockholders with the number of copies
of this prospectus as they may reasonably request. Each selling stockholders is
responsible for complying with the prospectus delivery requirements in
connection with any offer and sale by the stockholder of the shares of our
common stock covered by this prospectus.
40
Legal Matters
The validity of the shares of Unigene common stock offered by this
prospectus has been passed upon for Unigene either by Covington & Burling,
Washington, D.C. or by Becker Ross Stone DeStefano & Klein, New York, New York.
The wife of James J. Ross, an attorney who is of counsel to Becker Ross Stone
DeStefano & Klein, holds a one-third interest in a family partnership that is
the beneficial owner of 18,225 shares of Unigene common stock.
Experts
Unigene's audited financial statements as of December 31, 2000 and 1999,
and for each of the years in the three-year period ended December 31, 2000, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent accountants, appearing elsewhere herein, and
upon the authority of KPMG LLP as experts in accounting and auditing. The audit
report of KPMG LLP covering the December 31, 2000 financial statements contains
an explanatory paragraph that states that the Company's recurring losses from
operations and working capital deficiency raise substantial doubt about the
entity's ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of that uncertainty.
Also, the report of KPMG LLP covering the December 31, 2000 financial statements
refers to a change in the method of revenue recognition for up-front
non-refundable license fees in 2000.
Additional Information
Unigene has filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission. This prospectus, which forms a part of the Registration
Statement, does not contain all of the information included in the Registration
Statement. Some information is omitted from this prospectus in accordance with
the rules of the Securities and Exchange Commission and you should refer to the
Registration Statement and its exhibits for additional information. Unigene also
files annual and quarterly reports, proxy statements and other information with
the SEC. You may review a copy of the Registration Statement and any other
documents filed with the Securities and Exchange Commission at its public
reference room located at 450 Fifth Street, Washington, D.C. 20549, and at the
SEC's regional offices in Chicago, Illinois and New York, New York. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the operation of the public reference rooms. Unigene's SEC filings and the
Registration Statement can also be reviewed by accessing the SEC's Internet site
at http://www.sec.gov.
You should rely only on the information contained in this prospectus.
Unigene has not authorized anyone to provide you with any information that is
different from that contained in this prospectus. The information contained in
this prospectus is accurate as of the date of this prospectus. You should not
assume that there has been no changes in the affairs of Unigene since the date
of this prospectus or that the information in this prospectus is correct as of
any time after the date of this prospectus, regardless of the time that this
prospectus is delivered or any sale of the common stock offered by this
prospectus is made. This prospectus is not an offer to sell or a solicitation of
an offer to buy the shares covered by this prospectus in any jurisdiction where
the offer or solicitation is unlawful. In this prospectus, "Unigene," "we," "us"
and "our" refer to Unigene Laboratories, Inc.
41
Unigene Laboratories, Inc.
INDEX TO FINANCIAL STATEMENTS
Page
----
Fiscal Years Ended December 31, 2000, 1999 and 1998
Independent Auditors' Report.......................................................................... F-2
Balance Sheets--December 31, 2000 and December 31, 1999............................................... F-3
Statements of Operations--Years Ended December 31, 2000, 1999 and 1998................................ F-4
Statements of Stockholders' Equity (Deficit)--Years Ended December 31, 2000, 1999 and 1998............ F-5
Statements of Cash Flows--Years Ended December 31, 2000, 1999 and 1998................................ F-7
Notes to Financial Statements--Years Ended December 31, 2000, 1999 and 1998........................... F-8
Three Months and Nine Months Ended September 30, 2001 and 2000
Condensed Balance Sheets -- September 30, 2001 (Unaudited) and December 31, 2000...................... F-19
Condensed Statements of Operations (Unaudited) -- Three Months and Nine Months Ended September 30,
2001 and 2000......................................................................................... F-20
Condensed Statements of Cash Flows (Unaudited) -- Nine Months Ended September 30, 2001
and 2000.............................................................................................. F-21
Notes to Condensed Financial Statements............................................................... F-22
F-1
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Unigene Laboratories, Inc.:
We have audited the financial statements of Unigene Laboratories, Inc. as listed
in the accompanying index. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Unigene Laboratories, Inc. as
of December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 17 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency which raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 17. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for revenue recognition for up-front non-refundable license
fees in 2000.
/S/ KPMG LLP
Short Hills, New Jersey
March 30, 2001
F-2
UNIGENE LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 2000 and 1999
ASSETS 2000 1999
------ ---- ----
Current assets:
Cash and cash equivalents $ 17,108 $ 682,629
Contract receivables 165,671 3,526,229
Prepaid expenses 129,493 210,195
Inventory (Note 8) 415,420 867,566
------------ ------------
Total current assets 727,692 5,286,619
Property, plant and equipment - net (Note 4) 5,684,127 6,740,354
Patents and other intangibles, net 1,288,686 1,264,268
Investment in joint venture (Note 5) 900,000 --
Other assets 446,894 486,612
------------ ------------
$ 9,047,399 $ 13,777,853
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
Current liabilities:
Accounts payable $ 2,834,556 $ 1,258,334
Accrued expenses (Note 9) 3,761,277 2,217,413
Notes payable - stockholders (Note 3) 2,873,323 1,140,000
Current portion - long-term notes payable -
stockholders 1,870,000 960,606
5% convertible debentures (Note 6) 2,400,000 2,400,000
Current portion - capital lease obligations (Note 10) 55,398 69,708
Deferred revenue 200,000 --
------------ ------------
Total current liabilities 13,994,554 8,046,061
Notes payable - stockholders, excluding
current portion (Note 3) -- 909,394
Joint venture obligation, excluding current portion 495,000 --
Capital lease obligations, excluding
current portion (Note 10) 50,572 93,415
Commitments and contingencies (Notes 5,6,7,11 and 18)
Stockholders' equity (deficit) (Notes 7,12 and 13):
Common Stock - par value $.01 per share,
authorized 60,000,000 shares, issued
44,441,855 shares in 2000 and
43,088,184 shares in 1999 444,419 430,882
Additional paid-in capital 70,053,710 67,207,604
Deferred stock option compensation (284,948) --
Deferred stock offering costs (327,000) --
Accumulated deficit (75,377,877) (62,908,472)
Less: Treasury stock, at cost,
7,290 shares (1,031) (1,031)
------------ ------------
Total stockholders' equity (deficit) (5,492,727) 4,728,983
------------ ------------
$ 9,047,399 $ 13,777,853
============ ============
See accompanying notes to financial statements.
F-3
UNIGENE LABORATORIES, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Licensing and other revenue $ 3,286,961 $ 9,589,413 $ 5,049,844
------------ ------------ ------------
Operating expenses:
Research and development 11,484,379 9,374,528 9,041,618
General and administrative 3,187,465 2,211,778 2,067,958
------------ ------------ ------------
14,671,844 11,586,306 11,109,576
------------ ------------ ------------
Operating loss (11,384,883) (1,996,893) (6,059,732)
Other income (expense):
Interest income 49,130 37,545 107,502
Interest expense (1,198,508) (1,171,260) (784,972)
------------ ------------ ------------
Loss before income taxes,
extraordinary item and cumulative
effect of accounting change (12,534,261) (3,130,608) (6,737,202)
Income tax benefit (Note 14) 1,064,856 1,553,268 --
------------ ------------ ------------
Loss before extraordinary item and cumulative
effect of accounting change (11,469,405) (1,577,340) (6,737,202)
Extraordinary item-loss
on early extinguishment of debt (Note 6) -- -- (143,810)
Cumulative effect of revenue recognition
accounting change (Note 2) (1,000,000) -- --
------------ ------------ ------------
Net loss $(12,469,405) $ (1,577,340) $ (6,881,012)
============ ============ ============
Loss per share - basic and diluted:
Loss before extraordinary item
and cumulative effect of accounting change $ (.26) $ (.04) $ (.17)
Extraordinary item -- -- (.01)
Cumulative effect of accounting change (.02) -- --
------------ ------------ ------------
Net loss per share $ (.28) $ (.04) $ (.18)
============ ============ ============
Weighted average number of shares
outstanding - basic and diluted 44,008,154 40,718,519 38,701,253
============ ============ ============
Pro forma amounts assuming the new revenue recognition principle is applied
retroactively, exclusive of cumulative effect adjustment:
Loss before extraordinary item $ (11,469,405) $ (777,340) $ (5,937,202)
============= ============= =============
Net loss $ (11,469,405) $ (777,340) $ (6,081,012)
============= ============= =============
Earnings per share -- basic and diluted:
Loss before extraordinary item $ (.26) $ (.02) $ (.15)
============= ============= =============
Net loss $ (.26) $ (.02) $ (.16)
============= ============= =============
See accompanying notes to financial statements.
F-4
UNIGENE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 2000, 1999 and 1998
Common Stock Deferred Deferred
------------ Additional Stock Stock
Number of Par Paid-in Option Offering Accumulated Treasury
Shares Value Capital Compensation Costs Deficit Stock Total
--------- ----- ---------- ------------ -------- ----------- --------- -----
Balance,
January 1, 1998 38,517,722 $385,177 $63,499,439 $ -- $ -- $(54,450,120) $(1,031) $ 9,433,465
Conversion of 9.5%
Debentures 448,834 4,489 495,705 -- -- -- -- 500,194
Conversion of
notes payable -
stockholders 163,635 1,636 220,091 -- -- -- -- 221,727
Conversion of
10% Debentures and
accrued interest 214,131 2,141 202,234 -- -- -- -- 204,375
Value of 5% Debentures
allocated to beneficial
conversion feature and
related warrants -- -- 686,796 -- -- -- -- 686,796
Exercise of
stock options 40,500 405 47,564 -- -- -- -- 47,969
Issuance of warrants
as compensation -- -- 6,574 -- -- -- -- 6,574
Net loss -- -- -- -- -- (6,881,012) -- (6,881,012)
------------ -------- ----------- ------ ------- ------------ ------- -----------
Balance,
December 31, 1998 39,384,822 393,848 65,158,403 -- -- (61,331,132) (1,031) 4,220,088
Conversion of 5%
Debentures into
Common Stock
and Warrants 3,528,125 35,281 1,859,994 -- -- -- -- 1,895,275
Issuance of Common
Stock as payment of
interest on 5%
Debentures 175,237 1,753 189,207 -- -- -- -- 190,960
Net loss -- -- -- -- -- (1,577,340) -- (1,577,340)
------------ -------- ----------- ------ ------- ------------ ------- -----------
(Continued)
F-5
UNIGENE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Years Ended December 31, 2000, 1999 and 1998
Common Stock Deferred Deferred
------------ Additional Stock Stock
Number of Par Paid-in Option Offering Accumulated Treasury
Shares Value Capital Compensation Costs Deficit Stock Total
--------- ----- ---------- ------------ -------- ----------- --------- -----
Balance,
December 31, 1999 43,088,184 $ 430,882 $ 67,207,604 -- -- $(62,908,472) $ (1,031) $ 4,728,983
Exercise of
warrants 1,118,071 11,181 1,317,087 -- -- -- -- 1,328,268
Exercise of
stock options 235,600 2,356 298,177 -- -- -- -- 300,533
Deferred stock
option compensation -- -- 683,733 (284,948) -- -- -- 398,785
Deferred stock offering
costs -- -- 327,000 -- (327,000) -- -- --
Issuance of warrants
as compensation -- -- 220,109 -- -- -- -- 220,109
Net loss -- -- -- -- -- (12,469,405) -- (12,469,405)
---------- --------- ----------- --------- --------- ------------ -------- ------------
Balance,
December 31, 2000 44,441,855 $ 444,419 $ 70,053,710 $(284,948) $(327,000) $(75,377,877) $ (1,031) $ (5,492,727)
========== ========= ============ ========= ========= ============ ======== ============
See accompanying notes to financial statements.
F-6
UNIGENE LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,469,405) $ (1,577,340) $ (6,881,012)
Adjustments to reconcile net loss to net
cash used by operating activities:
Non-cash cumulative effect adjustment 1,000,000 -- --
Amortization of deferred revenue (800,000) -- --
Non-cash compensation 618,894 -- 6,574
Depreciation and amortization 1,617,957 1,558,663 1,552,734
Amortization of beneficial conversion feature on 5%
Debentures -- 197,193 489,603
20% premium on 5% Debentures -- 400,000 --
Payment of interest through the issuance of Common Stock -- 190,960 44,060
Decrease in other assets 42,312 64,528 48,500
(Increase) decrease in contract receivables 3,360,558 (3,210,171) (316,058)
(Increase) decrease in prepaid expenses and
inventory 532,848 (188,092) (55,424)
Increase in accounts payable and accrued
expenses 2,715,086 1,163,795 247,237
------------ ------------ ------------
Net cash used for operating activities (3,381,750) (1,400,464) (4,863,786)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction of leasehold and building improvements (235,764) (4,010) (8,384)
Purchase of furniture and equipment (283,589) (134,127) (76,486)
Increase in patents and other assets (69,389) (88,695) (264,959)
------------ ------------ ------------
Net cash used in investing activities (588,742) (226,832) (349,829)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- 1,870,000 4,000,000
Proceeds from issuance of short-term debt, net 1,733,323 100,000 --
Repayment of long-term debt and capital lease
obligations (57,153) (62,739) (304,138)
Exercise of stock options and warrants 1,628,801 -- 47,969
Debt issuance and other costs -- -- (253,879)
------------ ------------ ------------
Net cash provided by financing activities 3,304,971 1,907,261 3,489,952
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (665,521) 279,965 (1,723,663)
Cash and cash equivalents at
beginning of period 682,629 402,664 2,126,327
------------ ------------ ------------
Cash and cash equivalents at end of period $ 17,108 $ 682,629 $ 402,664
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Investment in joint venture and related obligations $ 900,000 -- --
Acquisition of equipment through capital leases -- $ 36,617 $ 221,900
Conversion of convertible debentures and accrued
interest into Common Stock -- $ 2,190,960 $ 707,069
Conversion of notes payable - stockholders
into Common Stock -- -- $ 225,000
Value of beneficial conversion feature and related
warrants on issuance of 5% Debentures -- -- $ 686,796
============ ============ ============
Cash paid for interest $ 39,800 $ 24,700 $ 119,000
============ ============ ============
See accompanying notes to financial statements.
F-7
UNIGENE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. Description of Business
Unigene Laboratories, Inc. (the "Company"), a biopharmaceutical company, was
incorporated in the State of Delaware in 1980. The Company's single business
segment focuses on research, production and delivery of peptides for medical
use. The Company has concentrated most of its efforts to date on one product -
Calcitonin, for the treatment of osteoporosis and other indications. The
Company's initial products will be injectable, nasal and oral formulations of
Calcitonin. The Company's Calcitonin products require clinical trials and
approvals from regulatory agencies as well as acceptance in the marketplace. The
Company's injectable Calcitonin product has been approved for marketing in all
15-member states of the European Union for the treatment of Paget's disease and
hypercalcemia associated with malignancy. Through December 31, 2000, sales of
injectable Calcitonin have not been significant. Although the Company believes
its patents and patent applications are valid, the invalidation of its patents
or the failure of certain of its pending patent applications to issue as patents
could have a material adverse effect upon its business. The Company competes
with specialized biotechnology companies, major pharmaceutical and chemical
companies and universities and research institutions. Many of these competitors
have substantially greater resources than does the Company. During 2000, 1999
and 1998, almost all of the Company's revenue was generated from one customer,
Pfizer (see Note 16). The Pfizer agreement was terminated in March 2001.
2. Summary of Significant Accounting Policies & Practices
Segment Information -The Company is managed and operated as one business. The
entire business is managed by a single management team that reports to the chief
executive officer. The Company does not operate separate lines of business or
separate business entities with respect to any of its product candidates.
Accordingly, the Company does not prepare discrete financial information with
respect to separate product areas or by location and does not have separately
reportable segments as defined by Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
Property, Plant and Equipment - Property, plant and equipment are carried at
cost. Equipment under capital leases are stated at the present value of the
minimum lease payments. Depreciation is computed using the straight-line method.
Amortization of equipment under capital leases and leasehold improvements is
computed over the shorter of the lease term or estimated useful life of the
asset. Additions and improvements are capitalized, while repairs and maintenance
are charged to expense as incurred.
Research and Development - Research and development expenses include the costs
associated with internal research and development by the Company and research
and development conducted for the Company by outside advisors, sponsored
university-based research partners, and clinical study partners. All research
and development costs discussed above are expensed as incurred. Expenses
reimbursed under research and development contracts, which are not refundable,
are recorded as a reduction to research and development expense in the statement
of operations.
Revenue Recognition - Research and development contract revenues are recognized
based upon the successful completion of various benchmarks as set forth in the
individual agreements. Commencing in 2000, non-refundable license fees received
upon execution of license agreements where the Company has continuing
involvement are deferred and recognized as revenue over the life of the
agreement. Prior to the implementation of SAB 101, non-refundable license fees
received upon execution of license agreements were recognized as revenue
immediately. Revenue from the sale of product is recognized upon shipment to the
customer.
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
was required to adopt SAB 101, as amended, in the fourth quarter of 2000 with an
effective date of January 1, 2000, and the recognition of a cumulative effect
adjustment calculated as of January 1, 2000. The Company adopted SAB 101 in
2000,
F-8
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, the Company recognized $3,000,000 in revenue from an
up-front licensing fee from Pfizer. With the adoption of SAB 101, the Company is
now recognizing this revenue over a 45 month period, equivalent to the term of
its oral Calcitonin agreement with Pfizer which was terminated in March 2001.
The Company 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. The Company recognized $800,000 of revenue
in 2000 and $200,000 in revenue will be recognized in 2001 as a result of this
deferral. The pro forma effects of retroactive application of this new revenue
recognition principle on net loss and related per share amounts, for the years
ended December 31, 2000, 1999 and 1998 are presented in the accompanying
statements of operations.
Patents and Other Intangibles - Patent costs are deferred pending the outcome of
patent applications. Successful patent costs are amortized using the
straight-line method over the lives of the patents. Unsuccessful patent costs
are expensed when determined worthless. As of December 31, 2000, six of the
Company's patents had issued in the U.S. and numerous have issued in various
foreign countries. Various other applications are still pending. Other
intangibles are recorded at cost and are amortized over their estimated useful
lives. Accumulated amortization on patents and other intangibles is $186,000 and
$143,600 at December 31, 2000 and 1999, respectively.
Stock Option Plan - The Company accounts for stock options issued to employees
and directors in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense is recorded on fixed stock option
grants only if the current market price of the underlying stock exceeded the
exercise price; compensation expense on variable stock option grants is
estimated until the measurement date. As permitted by SFAS No. 123, "Accounting
for Stock-Based Compensation", the Company provides pro forma net income and pro
forma earnings per share disclosures for employee and director stock option
grants as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company accounts for stock options and warrants issued to
consultants on a fair value basis in accordance with SFAS No. 123 and Emerging
Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services."
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of - The
Company accounts for the impairment of long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Net Loss per Share - The Company computes and presents both basic and diluted
earnings per share ("EPS") on the face of the statement of operations. Basic EPS
is computed using the weighted average number of common shares outstanding
during the period being reported on. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue Common Stock were
exercised or converted into Common Stock at the beginning of the period being
reported on and the effect was dilutive. The Company's net loss and weighted
average shares outstanding used for computing diluted loss per share were the
same as that used for computing basic loss per share for each of the years ended
December 31, 2000, 1999 and 1998 because the Company's convertible debentures,
stock options and warrants were not included in the calculation since the
inclusion of such potential shares (approximately 3,200,000 potential shares of
Common Stock at December 31, 2000) would be antidilutive.
Cash Equivalents - The Company considers all highly liquid securities purchased
with an original maturity of three months or less to be cash equivalents.
Inventory - Inventories are stated at the lower of cost (using the first-in,
first-out method) or market.
Fair Value of Financial Instruments - The fair value of a financial instrument
represents the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation.
Significant differences can arise between the fair value and carrying amounts of
financial instruments that are recognized at historical
F-9
cost amounts. Given our financial condition described in Note 17, it is not
practicable to estimate the fair value of our financial instruments at December
31, 2000.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
3. Related Party Transactions
Notes payable - stockholders. Since 1995, Warren P. Levy, Ronald S. Levy and Jay
Levy each an officer and director of the Company, and another member of their
family (collectively, the "Levys"), have extended loans to the Company for
working capital needs. Each of the loans is evidenced by a promissory note that
sets the terms of the loan. The variable interest rate on these notes is
equivalent to the Merrill Lynch Margin Loan Rate plus .25%. The principal amount
is collateralized by security interests in the Company's Fairfield, New Jersey
plant and equipment and Boonton, New Jersey equipment.
During 1999, Jay Levy loaned the Company $1,500,000 evidenced by demand notes
bearing interest at 6% per year. During the third quarter of 1999, Jay Levy
loaned the Company an additional $370,000 evidenced by term notes maturing
January 2002 and bearing interest at 6% per year, and the $1,500,000 of demand
notes were converted into 6% term notes maturing January 2002. The Company has
granted Jay Levy a security interest in all of its equipment and a mortgage on
its real property to secure payment of the term notes, which are senior to all
notes payable to Warren Levy and Ronald Levy. The Company is required to make
installment payments on the term notes commencing in October 1999 and ending in
January 2002 in an aggregate amount of $72,426 per month. No installment
payments were made during 1999 or 2000. During 2000, the Levys loaned to the
Company an additional $1,733,323 in short-term notes. As of December 31, 2000,
the outstanding loans by the Levys to Unigene, all classified as short-term
debt, consisted of: joint loans in the aggregate principal amount of $2,873,323,
which are evidenced by demand notes bearing a floating interest rate equal to
the Merrill Lynch Margin Loan Rate plus.25% (9.875% at December 31, 2000) and
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 6%
per year. During 2000, $4,600 in interest was paid on these loans. As of
December 31, 2000, accrued interest on all Levy loans totalled approximately
$922,000.
Interest and principal payments required under these loans have not been made by
Unigene, but the Levys have waived all default provisions including additional
interest penalties due under these loans through December 31, 2000.
From January 1, 2001 through March 30, 2001 the Levys loaned to the Company an
additional $1,610,000 of demand notes at the Merrill Lynch Margin Loan Rate plus
.25%, of which $500,000 is secured by a security interest in certain of our
patents.
F-10
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31, 2000
and 1999:
Estimated
Depreciable
2000 1999 Lives
---------- ----------- -----------
Building and
improvements $1,397,210 $1,377,075 25 years
Leasehold improvements 8,695,851 8,480,222 Lease Term
Manufacturing equipment 4,000,940 3,842,038 10 years
Laboratory equipment 2,815,870 2,704,820 5 years
Other equipment 466,523 466,523 10 years
Office equipment and
furniture 340,843 327,206 5 years
Equipment under capital
leases 258,517 258,517 Lease Term
---------- ----------
17,975,754 17,456,401
Less accumulated
depreciation and
amortization 12,412,794 10,837,214
---------- ----------
5,562,960 6,619,187
Land 121,167 121,167
---------- ----------
$5,684,127 $6,740,354
========== ==========
Depreciation and amortization expense on property, plant and equipment was
$1,576,000, $1,520,000, and $1,520,000 in 2000, 1999 and 1998, respectively.
5. China Joint Venture
In June 2000, we 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. We own 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 our 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 operations as of December 31, 2000.
Under the terms of the joint venture with SPG, Unigene 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 December 31, 2000, we have
not made any investments in the joint venture. In addition, Unigene 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 December 31, 2000.
We recognized the entire $350,000 obligation as an expense in 2000.
F-11
6. Convertible Debentures
In March 1996, the Company issued $3,300,000 of 9.5% Senior Secured Convertible
Debentures in exchange for a secured loan of an equal amount. All of these
debentures had been converted into approximately 2,924,000 shares of Common
Stock as of November 15, 1998, the due date of the debentures.
In March 1996, the Company completed a private placement of $9,080,000 aggregate
principal amount of 10% Convertible Debentures. The Company received net
proceeds of approximately $8.1 million as a result of this placement. These
debentures were to mature March 4, 1999, but as of December 31, 1998, all
outstanding 10% Debentures have been converted or redeemed in full. Through
December 31, 1998, $8,808,515 of principal amount of these debentures, plus
approximately $355,000 of accrued interest, had been converted into
approximately 4,838,000 shares of Common Stock. Due to restrictions on the total
number of shares which could be issued upon conversion of the 10% Debentures, in
October 1998 the Company redeemed in cash an additional $271,485 of principal,
and in connection therewith paid to the holder $68,899 of accrued interest and
$143,810 in redemption premiums, for an aggregate payment of $484,194. The cost
of the redemption premium of $143,810 was recorded as an extraordinary loss in
1998.
In June 1998, Unigene completed a private placement of $4,000,000 in principal
amount of 5% convertible debentures from which we 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 Unigene's option, was
payable in shares of Unigene common stock. Upon conversion, the holder of a 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 we
are 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, Unigene 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, Unigene 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, we 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 as
of December 31, 2000.
Through December 31, 2000, 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, Unigene 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 December 31, 2000, the accrued and unpaid interest on the 5% debentures
totaled approximately $467,000. In addition, due to the delisting of the Unigene
common stock from the Nasdaq National Market in October 1999, Unigene 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. Unigene has not made any of these payments to date, but has accrued the
amounts as an expense. As of December 31, 2000, the accrued and unpaid amount of
this penalty totaled approximately $617,000.
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,
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. 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.
The Company in 1998 estimated the value of the beneficial conversion feature and
related warrants at the issuance of the 5% Debentures to be approximately
$687,000. Such amount was credited to additional paid-in capital and was
amortized to
F-12
interest expense over the earliest conversion periods using the effective
interest method (approximately $197,000 and $490,000 for the years ended
December 31, 1999 and 1998, respectively).
7. Fusion Capital Financing
On December 18, 2000, and as amended March 30, 2001, Unigene entered into a
common stock purchase agreement with Fusion Capital Fund II, LLC, under which
Fusion has agreed to purchase up to $21,000,000 in shares of Unigene common
stock at the rate of $875,000 per month. Fusion is committed to purchase the
shares over a twenty-four month period, subject to a six-month extension or
earlier termination at our discretion. We may decrease this amount at any time
that the price of our common stock is less than $15 per share. If our stock
price equals or exceeds $4 per share, we have the right to require Fusion to
purchase, over a period of 60 days, up to the full remaining portion of the $21
million commitment. However, Fusion's commitment does not begin until a
registration statement covering the resale of the shares purchased by Fusion is
declared effective by the Securities and Exchange Commission. We cannot predict
when or if the SEC will declare our registration statement effective. In
addition, Unigene 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 of any obligations in excess
of $1,000,000, no insolvency or bankruptcy proceedings, 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 is equal to the
lesser of: the lowest sale price of our common stock on the day of submission of
a purchase notice by Fusion; the average of any five closing sale prices of our
common stock, selected by Fusion, during the 15 trading days prior to the date
of submission of a purchase notice by Fusion; or $15. In addition to the
2,000,000 shares and five-year warrants to purchase 1,000,000 shares of common
stock at an exercise price of $.50 per share that we issued to Fusion as of
March 30, 2001 as compensation for its commitment, the Board of Directors has
authorized the issuance and sale to Fusion of up to 6,000,000 shares of Unigene
common stock in connection with the financing transaction. We may be required to
obtain the approval of Unigene stockholders to an amendment to Unigene's
certificate of incorporation increasing the number of shares of Unigene 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 fair value of the
warrant has been deferred pending the closing of the Fusion financing. When the
registration statement for the financing is declared effective, these deferred
offering costs will be charged to additional paid-in capital. If the
registration statement is not declared effective, or the offering is terminated,
these deferred offering costs will be charged to operations.
8. Inventory - Inventory consists of the following:
Dec. 31, 2000 Dec. 31, 1999
------------- -------------
Finished goods $ 89,104 $ 596,359
Raw material 326,316 271,207
---------- -----------
Total $ 415,420 $ 867,566
========== ===========
The Company wrote-off $515,000 of finished goods inventory in the fourth quarter
of 2000 as a result of Pfizer's termination of its license agreement with the
Company.
9. Accrued expenses - Accrued expenses consist of the following:
Dec. 31, 2000 Dec. 31, 1999
------------- -------------
Interest - notes payable to stockholders $ 921,722 $ 645,290
Interest - 5% convertible debentures 1,083,194 243,196
China joint ventures 680,000 --
Clinical trials/contract research 665,568 763,352
Vacation pay 204,948 187,710
Consultants 47,000 164,500
Other 158,845 213,365
---------- -----------
Total $3,761,277 $2,217,413
========== ==========
F-13
10. Obligations Under Capital Leases
The Company entered into various lease arrangements during 1999 and 1998 which
qualify as capital leases.
The future years' minimum lease payments under the capital leases, together with
the present value of the net minimum lease payments, as of December 31, 2000 are
as follows:
2001 $ 71,860
2002 48,347
2003 10,656
----------
Total minimum lease payments 130,863
Less amount representing interest 24,893
----------
Present value of net minimum
lease payments 105,970
Less current portion 55,398
----------
Obligations under capital leases,
excluding current portion $ 50,572
==========
The discount rates on these leases vary from 12% to 18%.
11. Obligations Under Operating Leases
The Company is obligated under a 10-year net-lease, which began in February
1994, for its manufacturing facility located in Boonton, New Jersey. The Company
has two 10-year renewal options as well as an option to purchase the facility.
In addition, the Company leases laboratory and office equipment under various
operating leases expiring in 2001 through 2003. Total future minimum rentals
under these noncancelable operating leases as of December 31, 2000 are as
follows:
2001 $222,584
2002 207,936
2003 189,764
2004 15,444
---------
$635,728
Total rent expense was approximately $259,000, $243,000 and $209,000 for 2000,
1999 and 1998, respectively.
12. Stockholders' Equity
In 1996, the placement agent, in connection with the issuance of the 10%
Debentures, received a five-year warrant to purchase 454,000 shares of Common
Stock at an exercise price of $2.10 per share as partial compensation for
services rendered. Through December 31, 2000, an aggregate of 322,000 of these
warrants have been exercised and 132,000 remain unexercised.
In October 1996, the Company completed a private placement of 4,218,804 Units at
a price of $1.75 per Unit. Each Unit consisted of (i) one share of Common Stock,
(ii) one quarter of a Class C Warrant, (each whole Class C Warrant was
exercisable to purchase one share of Common Stock) and (iii) one quarter of a
Class D Warrant (each whole Class D Warrant was exercisable to purchase one
share of Common Stock). The Class C Warrants and the Class D Warrants each had
an exercise price of $3.00 and expired unexercised on October 11, 1999. The fee
paid to the placement agent in the transaction consisted of an additional
296,935 Units in lieu of cash compensation. The net proceeds to the Company were
approximately $7 million.
In October 1994, the Company entered into an agreement with a consultant whose
compensation for its services included the issuance of warrants, exercisable at
$3.00 per share, for the purchase of 1,000,000 shares of Common Stock. These
warrants expired unexercised in October 1998. During 1996, another consultant's
compensation included warrants to purchase a total of 400,000 shares of Common
Stock at exercise prices ranging from $1.63 to $3.50 per share. These warrants
expire in April 2001.
F-14
In connection with the services rendered by various consultants during 1997, the
Company issued an aggregate of 75,000 stock purchase warrants, expiring from
1999 to 2002, exercisable at prices ranging from $2.25 to $3.41 per share, and
10,000 shares of Common Stock. Compensation expense recognized in 1997 as a
result of these transactions was approximately $131,000. During 1998, the
Company issued warrants to purchase 5,000 shares of Common Stock, expiring in
2003, to a consultant. These warrants are exercisable at $2.38, resulting in
1998 compensation expense of approximately $7,000. During 2000, the Company
issued warrants to purchase 150,000 shares of Common Stock, expiring in 2005, to
its investment banker. These warrants are exercisable at $2.66 and resulted in
2000 compensation expense of $220,000. The Company's investment bankers received
an additional warrant to purchase 373,002 shares of Common Stock at an exercise
price of $1.126 per share, expiring in 2005, for arranging the Fusion financing.
During 2000, the Company issued to various consultants 850,536 shares of Common
Stock upon the exercise of warrants at exercise prices ranging from $1.38 to
$2.43 per share. In addition, the Company issued to various consultants 263,360
shares of Common Stock upon the cashless exercise of an aggregate of 475,623
warrants at exercise prices ranging from $.46 to $2 per share.
During 1998, an aggregate of $681,000 in principal amount of convertible
debentures, plus $44,000 of accrued interest, was converted into approximately
663,000 shares of Common Stock. During 1999, an aggregate of $2,000,000 in
principal amount of convertible debentures, plus $191,000 of accrued interest,
was converted into approximately 3,703,000 shares of Common Stock. See Note 6.
In August 1998, an aggregate of $225,000 in principal amount of notes payable
from stockholders was converted into 163,635 shares of Common Stock at a
conversion price of $1.375 per share; such conversion was at a price slightly
higher than the then market price of the Common Stock.
As of December 31, 2000, there are warrants outstanding, all of which are
currently exercisable, to purchase an aggregate of 989,000 shares of Common
Stock at exercise prices ranging from $1.13 to $3.50 per share, with a weighted
average exercise price of $2.11.
13. Stock Option Plans
During 1994, the Company's stockholders approved the adoption of the 1994
Employee Stock Option Plan (the "1994 Plan"). All employees of the Company were
eligible to participate in the 1994 Plan, including executive officers and
directors who are employees of the Company. The 1994 Plan terminated on June 6,
2000; however, 1,729,965 options previously granted continue to be outstanding
and exercisable under that plan as of December 31, 2000.
At the Company's 1999 Annual Meeting, the stockholders approved the adoption of
a 1999 Directors Stock Option Plan (the "1999 Plan") under which each person
elected to the Board after June 23, 1999 who is not an employee will receive, on
the date of his initial election, an option to purchase 21,000 shares of Common
Stock. In addition, on May 1st of each year, commencing May 1, 1999, each
non-employee director will receive an option to purchase 10,000 shares of Common
Stock if he or she has served as a non-employee director for at least six months
prior to the May 1st grant. Each option granted under the 1999 Plan will have a
ten-year term and the exercise price of each option will be equal to the market
price of the Company's Common Stock on the date of the grant. A total of 350,000
shares of Common Stock are reserved for issuance under the 1999 Plan.
In November 1999, the Board of Directors approved, subject to stockholder
approval, the adoption of a new Stock Option Plan (the "2000 Plan") to replace
the 1994 Plan. All employees (including directors who are employees), as well as
certain consultants, are eligible to receive option grants under the 2000 Plan.
Options granted under the 2000 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 reserved for issuance under the 2000
Plan.
In November 1999, the Board granted under the 2000 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 2000 Plan. At the Company's June
6, 2000 Annual Meeting, the stockholders approved the 2000 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%
F-15
increments on November 5, 2000 and November 5, 2001. The Company recognized
$398,785 as compensation expense in 2000, leaving a balance of $284,948 as
deferred stock option compensation at December 31, 2000.
The following summarizes activity for options granted to directors and employees
under the 1994, 1999 and 2000 Plans:
Options Weighted Weighted
Exercisable Average Average
At End of Grant-date Exercise
Options Year Fair Value Price
--------- ----------- -------------- ----------
Outstanding January 1, 1998 1,316,465 1,023,090
=========
Granted 610,750 $ 1.50 $ 1.99
Cancelled (91,600) -- 2.85
Exercised (40,500) -- 1.18
---------
Outstanding December 31,1998 1,795,115 1,382,615
=========
Granted 438,000 $ 0.55 $ 0.70
Cancelled (187,250) -- 2.17
Exercised -- -- --
---------
Outstanding December 31, 1999 2,045,865 1,639,615
=========
Granted 571,500 $ 1.96 $ 0.87
Cancelled (64,650) -- 1.78
Exercised (245,600) -- 1.28
--------- ======= ======
Outstanding December 31, 2000 2,307,115 1,968,540
========= =========
A summary of options outstanding and exercisable as of December 31, 2000,
follows:
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------------
Weighted Ave.
Range of Number Remaining Weighted Ave. Number Weighted Ave.
Exercise Price Outstanding Life (years) Exercise Price Exercisable Exercise Price
- -------------- ----------- ------------- -------------- ------------ --------------
$ .50-.98 773,250 9.0 $ .65 514,925 $ .65
1.00-1.97 858,365 6.6 1.81 812,115 1.83
2.16-4.69 675,500 5.8 2.81 641,500 2.80
--------- ---------
2,307,115 1.71 1,968,540 1.84
========= ==== ========= ====
As of December 31, 2000, options to purchase 310,000 shares and 3,463,850 shares
of Common Stock were available for grant under the 1999 and 2000 Plans.
The Company accounts for options granted to employees and directors under APB
Opinion No. 25. Had compensation cost for options granted to employees and
directors been determined consistent with SFAS No. 123, the Company's pro forma
net loss and pro forma net loss per share would have been as follows as of
December 31:
2000 1999 1998
------------- ------------- ------------
Net loss:
As reported $(12,469,405) (1,577,340) (6,881,012)
Pro forma (12,644,405) (2,182,340) (7,796,012)
============= ============= ============
Basic and diluted net loss per share:
As reported $ (0.28) (0.04) (0.18)
Pro forma (0.29) (0.05) (0.20)
============= ============= ============
F-16
The fair value of the stock options granted in 2000, 1999 and 1998 is estimated
at grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions: dividend yields of 0%; expected volatility of 103%
in 2000, 74% in 1999 and 63% in 1998; a risk-free interest rate of 4.7% in 2000,
6.4% in 1999 and 4.8% in 1998; and expected lives of 5 years in 2000 and 6 years
in 1999 and 1998.
During 1995, the Company granted to a consultant options to purchase 10,000
shares of the Company's Common Stock, expiring in 2000, immediately exercisable
at $1.44 per share. These options were exercised in a cashless exercise during
2000, resulting in the issuance of 4,175 shares of Common Stock.
14. Income Taxes
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. In
addition, 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 have 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. In the fourth quarters of
2000 and 1999, the Company realized $1,065,000 and $1,553,000, respectively, of
tax benefits arising from the sale of a portion of the Company's New Jersey net
operating loss carryforwards that had previously been subject to a full
valuation allowance.
Given the Company's past history of incurring operating losses, any gross
deferred tax assets that are recognizable under SFAS No. 109 have been fully
reserved. As of December 31, 2000 and 1999, the Company had gross 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 gross
deferred tax assets were generated primarily as a result of the Company's net
operating losses and tax credits. The Company's ability to use such net
operating losses may be limited by change in control provisions under Internal
Revenue Code Section 382.
15. Employee Benefit Plan
The Company maintains a deferred compensation plan covering all full-time
employees. The plan allows participants to defer a portion of their compensation
on a pre-tax basis pursuant to Section 401(k) of the Internal Revenue Code of
1986, as amended, up to an annual maximum for each employee set by the Internal
Revenue Service. The Company's discretionary matching contribution expense for
2000, 1999 and 1998 was approximately $48,000, $44,000 and $43,000,
respectively.
16. Research and Licensing Revenue
In July 1997, the Company entered into an agreement under which it granted to
the Parke-Davis division of Warner-Lambert Company a worldwide license to use
the Company's oral Calcitonin technology. In June 2000, Pfizer Inc. acquired
Warner-Lambert. During 1997, the Company received $3 million for an equity
investment and $3 million for a licensing fee (see Note 2). Several milestones
were achieved during 1998, resulting in milestone revenue of $5 million. In
1999, two pilot human studies for the Company's oral calcitonin formulation were
successfully concluded, resulting in milestone revenue totaling $5 million. Also
in 1999, the Company and Pfizer identified an oral calcitonin formulation to be
used in the Phase I/II clinical study entitling the Company to milestone revenue
of an additional $4.5 million. During 2000, two milestones were achieved
resulting in milestone revenue of $2 million. Patient dosing for this study was
completed in December 2000. Pfizer analyzed the results of this study and
terminated the agreement in March 2001 citing scientific and technical reasons.
17. Liquidity
The Company has incurred annual operating losses since its inception and, as a
result, at December 31, 2000 has an accumulated deficit of approximately
$75,378,000 and has a working capital deficiency of approximately $13,267,000.
F-17
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 and interest obligations under its outstanding notes
payable to stockholders and 5% Convertible Debentures and its obligations
relating to its current and former joint ventures in China. The Company's cash
requirements related to the 5% Debentures include the redemption premium,
delisting penalties and the increased interest rate described in Note 6.
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. We had an operating cash flow deficit of $4,864,000 in
1998, an operating cash flow deficit of $1,400,000 in 1999 and for the year
ended December 31, 2000, an operating cash flow deficit of $3,382,000. The
agreement that we have entered into with Fusion could provide Unigene with
funding beginning in the first half of 2001. See Note 7.
Under the agreement with Fusion, after a registration statement is declared
effective by the SEC for the resale of the shares of Unigene common stock to be
sold to Fusion, Fusion will be required to purchase, at the then current market
price, shares of Unigene common stock at the rate of $875,000 per month 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 when or
if the SEC will declare the registration statement effective, 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.
If we do not receive any financing from Fusion, we will need to secure another
source of financing in order to satisfy our working capital needs, which may be
unavailable or the cost of which may be prohibitively expensive. Should such
financing be unavailable or prohibitively expensive, it will be necessary for
Unigene to curtail significantly its operations or consider alternative uses of
its technology and manufacturing capability including the supply of Calcitonin
to other companies. Assuming we are able to raise additional capital through our
agreement with Fusion, we still anticipate that we may need additional capital
to implement fully our business plans. 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 our oral
Calcitonin product 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.
18. Legal Matters
In addition to the arbitration proceedings discussed in Note 6, 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 vigorously contest the claim.
F-18
UNIGENE LABORATORIES, INC.
CONDENSED BALANCE SHEETS
September 30, 2001 December 31, 2000
------------------ -----------------
ASSETS (Unaudited)
- ------
Current assets:
Cash and cash equivalents $ 76,385 $ 17,108
Receivables 35,475 165,671
Prepaid expenses 51,989 129,493
Inventory 289,807 415,420
------------ ------------
Total current assets 453,656 727,692
Property, plant and equipment, net 4,503,368 5,684,127
Investment in joint venture 900,000 900,000
Patents and other intangibles, net 1,382,223 1,288,686
Other assets 359,264 446,894
------------ ------------
$ 7,598,511 $ 9,047,399
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 3,495,980 $ 2,834,556
Accrued expenses 5,553,624 3,761,277
Notes payable - stockholders 7,908,323 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 42,158 55,398
Deferred revenue -- 200,000
------------ ------------
Total current liabilities 21,270,085 13,994,554
Joint venture obligation, excluding current portion 495,000 495,000
Capital lease obligations, excluding current portion 28,129 50,572
Commitments and contingencies
Stockholders' deficit:
Common Stock - par value $.01 per share, authorized 100,000,000 shares,
issued 48,923,222 shares in 2001 and
44,441,855 shares in 2000 489,232 444,419
Additional paid-in capital 70,388,971 70,053,710
Deferred stock option compensation (28,493) (284,948)
Deferred stock offering costs -- (327,000)
Accumulated deficit (85,043,382) (75,377,877)
Less: Treasury stock, at cost, 7,290 shares (1,031) (1,031)
------------ ------------
Total stockholders' deficit (14,194,703) (5,492,727)
------------ ------------
$ 7,598,511 $ 9,047,399
============ ============
See notes to condensed financial statements.
F-19
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000* 2001 2000*
---- ----- ---- -----
Licensing and other revenue $ 267,654 $ 1,559,164 $ 629,471 $ 2,961,190
------------ ------------ ------------ ------------
Operating expenses:
Research and development 2,288,764 2,905,285 6,856,780 7,835,759
General and administrative 681,862 800,717 1,918,835 2,417,786
------------ ------------ ------------ ------------
2,970,626 3,706,002 8,775,615 10,253,545
------------ ------------ ------------ ------------
Operating loss (2,702,972) (2,146,838) (8,146,144) (7,292,355)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 1,369 4,650 6,862 41,165
Interest expense (530,063) (312,344) (1,526,224) (859,547)
------------ ------------ ------------ ------------
(528,694) (307,694) (1,519,362) (818,382)
------------ ------------ ------------ ------------
Loss before cumulative effect of
accounting change (3,231,666) (2,454,532) (9,665,506) (8,110,737)
Cumulative effect of revenue recognition
accounting change -- -- -- (1,000,000)
------------ ------------ ------------ ------------
Net loss $ (3,231,666) $ (2,454,532) $ (9,665,506) $ (9,110,737)
============ ============ ============ ============
Loss per share basic and diluted:
Loss before cumulative effect of
accounting change $ (.07) $ (.06) $ (.21) $ (.19)
Cumulative effect of
accounting change -- -- -- (.02)
------------ ------------ ------------ ------------
Net loss per share $ (.07) $ (.06) $ (.21) $ (.21)
============ ============ ============ ============
Weighted average number of
shares outstanding -
basic and diluted 48,335,004 44,279,250 46,541,768 43,868,779
============ ============ ============ ============
* Restated - see Note A.
See notes to condensed financial statements.
F-20
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
-------------------------------------
2001 2000
---- ----
Net cash used for operating activities $(5,563,221) $(3,085,949)
----------- -----------
Investing activities:
Purchase of equipment and furniture (12,673) (245,259)
Increase in patents and other intangibles (124,947) (62,932)
Decrease in other assets 55,896 40,364
Construction of leasehold improvements (2,169) (187,704)
----------- -----------
(83,893) (455,531)
----------- -----------
Financing activities:
Proceeds from sale of stock, net 705,579 --
Issuance of stockholder notes 5,035,000 1,358,323
Exercise of stock options and warrants 1,495 1,601,411
Repayment of capital lease obligations (35,683) (51,955)
----------- -----------
5,706,391 2,907,779
----------- -----------
Net increase (decrease) in cash and cash equivalents 59,277 (633,701)
Cash and cash equivalents at beginning of year 17,108 682,629
----------- -----------
Cash and cash equivalents at end of period $ 76,385 $ 48,928
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Investment in joint venture and related obligations $ -- $ 900,000
=========== ===========
Cash paid for interest $ 41,000 $ 22,000
=========== ===========
See notes to condensed financial statements.
F-21
UNIGENE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 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 nine-month period ended September 30, 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 our financial statements and
footnotes thereto included in Unigene'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. Unigene
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 have recognized 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 2000 financial statements for the cumulative effect adjustment and
recognized $200,000 of revenue in each of the quarters through March 31, 2001 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
Unigene has incurred annual operating losses since its inception and, as a
result, at September 30, 2001 has an accumulated deficit of approximately
$85,000,000 and has a working capital deficiency of approximately $20,800,000.
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. Unigene's cash requirements are approximately $10
to 11 million per year to operate its research and peptide manufacturing
facilities and develop its Calcitonin and other peptide products. In
F-22
addition, Unigene has principal, interest and default interest obligations under
its outstanding notes payable to stockholders and its 5% debentures, in addition
to its obligations relating to its current and former joint ventures in China.
Unigene's cash requirements related to the 5% debentures include the principal,
redemption premium, delisting penalties and the increased interest rate
described in Note D. Unigene 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 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. Under the agreement with Fusion, Unigene has
the contractual right to sell to Fusion, subject to certain conditions, at the
then current market price, on each trading day $43,750 of our common stock up to
an aggregate of $21,000,000 over a period of 24 months. The Board of Directors
has authorized the sale to Fusion of up to 6,000,000 shares of Unigene common
stock. See Note F. During the third quarter of 2001, Unigene received gross
proceeds of $476,000 from the sale of 1,437,000 shares of common stock to
Fusion. From May 18, 2001, through September 30, 2001, Unigene has received
approximately $931,000 through the sale of 2,478,992 shares of common stock to
Fusion, before cash expenses of approximately $226,000. Our sales of common
stock to Fusion have been below the maximum level permitted due to the share
price and trading volume of our common stock. As a result, in the third quarter
of 2001, we borrowed an additional $1,475,000 from Jay Levy, the Chairman of the
Board, to fund our operations.
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 and trading volume 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 we are unable to enter into a significant
revenue generating license or other arrangement in the near term, we would need
either to secure additional sources 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 consequence 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 oral or nasal 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. 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 Unigene, loaned to Unigene $1,600,000 evidenced by demand notes
bearing interest at the Merrill Lynch Margin Loan Rate plus .25%. Due to the
fact that we 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 made to Unigene by Jay Levy, has increased an additional 5% per year to
the Merrill Lynch Margin Loan Rate plus 5.25% (11.875% as of September 30, 2001)
and the interest rate on $1,870,000 of term notes evidencing loans made by Jay
Levy to Unigene 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
second quarter of 2001, Jay Levy loaned to Unigene an additional $1,950,000
evidenced by demand notes bearing interest at the Merrill Lynch Margin Loan Rate
plus .25%.
F-23
During the third quarter of 2001, Jay Levy loaned to Unigene an additional
$1,475,000 evidenced by demand notes bearing interest at the Merrill Lynch
Margin Loan Rate plus .25% (6.875% as of September 30, 2001).
During the first quarter of 2001 Warren Levy, an officer and director of
Unigene, loaned to Unigene $5,000 evidenced by a demand note bearing interest at
the Merrill Lynch Margin Loan Rate plus .25% (6.875% as of September 30, 2001).
Due to the fact that we did not made principal and interest payments when due,
the interest rate on $260,000 of prior demand loans made to Unigene by Warren
Levy has increased an additional 5% per year to the Merrill Lynch Margin Loan
Rate plus 5.25% (11.875% as of September 30, 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
Unigene, loaned to Unigene $5,000 evidenced by a demand note bearing interest at
the Merrill Lynch Margin Loan Rate plus .25% (6.875% as of September 30, 2001).
Due to the fact that we did not make principal and interest payments when due,
the interest rate on $248,323 of prior demand loans made to Unigene by Ronald
Levy has increased an additional 5% per year to the Merrill Lynch Margin Loan
Rate plus 5.25% (11.875% as of September 30, 2001). The increased rate is
calculated on both past due principal and interest.
NOTE D - CONVERTIBLE DEBENTURES
In June 1998, Unigene completed a private placement of $4,000,000 in principal
amount of 5% convertible debentures from which we 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 our 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 we
were 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,
was limited to 3,852,500 shares. After this share limit was reached, Unigene
became 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, Unigene 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, Unigene 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 September 30, 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, Unigene 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, January 5, 2001 and July 5, 2001 also have
not been made. As of September 30, 2001, the accrued and unpaid interest on the
5% debentures totaled approximately $766,000. In addition, due to the delisting
of the Unigene common stock from the Nasdaq National Market in October 1999, we
became obligated
F-24
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.
Unigene has not made any of these payments to date, but has accrued the amounts
as an expense. As of September 30, 2001, the accrued and unpaid amount of this
penalty totaled approximately $977,000.
The holder of the 5% debentures commenced an arbitration proceeding in which the
holder claimed 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 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. In July 2000, we submitted to the American
Arbitration Association a statement in which we denied the amount of the
holder's claim and made certain counterclaims. A hearing on the matter before an
arbitrator appointed by the American Arbitration Association was scheduled for
June 2001. In June 2001, the arbitration was postponed to allow Tail Wind and
Unigene to engage in settlement discussions. The outcome of these negotiations
is uncertain. An extremely unfavorable settlement or arbitration ruling could
have a material adverse effect on Unigene.
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:
September 30, 2001 December 31, 2000
------------------ -----------------
Finished goods........... $100,000 $ 89,104
Raw materials............ 189,807 326,316
-------- ---------
Total.................... $289,807 $ 415,420
======== =========
NOTE F - FUSION CAPITAL FINANCING
On May 9, 2001, Unigene entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC, under which Unigene has the right to sell to
Fusion, subject to certain conditions, on each trading day during the term of
the agreement $43,750 of our common stock up to an aggregate of $21,000,000.
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 $4.00 per share, for five (5) consecutive trading days,
we have the right to increase the daily purchase amount above $43,750, provided
that the closing sale price of our stock remains at least $4.00. Under the
agreement with Fusion, Unigene must satisfy the requirements that are a
condition to Fusion's obligation including: the continued effectiveness of the
registration statement for the resale of the shares by Fusion, no default on, or
acceleration prior to maturity of, any payment obligations of Unigene 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 Unigene must avoid the
failure to meet the maintenance requirements for continued listing on the Nasdaq
Small Cap Market for a period of 10 consecutive trading days or for more than an
aggregate of 30 trading days in any 365-day period. Unigene did not meet all of
the requirements for continued listing on the Nasdaq Small Cap Market. As a
result, Fusion and Unigene amended their agreement to change the continuing
listing requirements to those of the OTC Bulletin Board. Unigene is in
compliance with the amended agreement. The selling price per share to Fusion is
equal to the lesser of: the lowest sale
F-25
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 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 May
2003, or the termination or a default under the common stock purchase agreement.
In addition to the compensation shares, the Board of Directors has authorized
the issuance and sale to Fusion of up to 6,000,000 shares of Unigene common
stock.
In December 2000, we issued a five-year warrant to purchase 373,002 shares of
Unigene common stock to our investment banker as a fee in connection with 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 value of these warrants and shares had 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 were charged to additional paid-in capital in the second
quarter of 2001.
From May 18, 2001 through September 30, 2001, Unigene has received approximately
$931,000 through the sale of 2,478,992 shares of common stock to Fusion, before
cash expenses of approximately $226,000.
NOTE G - CHINA JOINT VENTURE
In June 2000, Unigene 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 and other indications. Unigene 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. A New Drug Application for its injectable
and nasal products has been filed in China. 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 Unigene'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 September 30, 2001. We expect operations to
commence in the first quarter of 2002.
Under the terms of the joint venture with SPG, the Company is obligated to
contribute up to $405,000 in cash during 2002 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 September 30, 2001, we have
not made any investments in the joint venture. In addition, Unigene 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 $80,000 had been paid as of September 30, 2001.
Unigene recognized the entire $350,000 obligation as an expense in 2000.
F-26
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 Unigene,
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 Unigene's June 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. Unigene recognized $398,785
as compensation expense in 2000, and compensation expense of $256,455 in the
first nine months of 2001, leaving a balance of $28,493 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 Unigene in July 2000. Reseau, which
purchased from a third party a warrant to purchase one million shares of Unigene
common stock, alleges that Unigene 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 this claim.
NOTE J - NEW ACCOUNTING PRONOUNCEMENT
In July 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible
Assets. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. Unigene is required to adopt the provisions of
Statement 142 effective January 1, 2002.
Upon adoption of Statement 142, Unigene will be required to reassess the useful
lives and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, Unigene will
be required to test the intangible asset for impairment in accordance with the
provisions of Statement 142 within the first interim period. Any impairment loss
will be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period. Unigene
does not expect the adoption of the pronouncement to have a material effect on
its financial statements.
F-27
In June 2001, the FASB issued Statement No. 143, Accounting For Asset Retirement
Obligations. Statement 143 applies to legal obligations associated with the
retirement of tangible long-lived assets that result from the acquisition,
construction, or development and/or the normal operation of a long-lived asset
for certain obligations of lessees. This Statement requires entities to record
the fair value of a liability for an asset retirement obligation in the period
incurred. The fair value of the liability is added to the carrying amount of the
associated asset and this additional carrying amount is depreciated over the
life of the asset. The liability is accreted at the end of each period through
charges to operating expense. If the obligation is settled for other than the
carrying amount of the liability, the company will recognize a gain or loss on
settlement. We are required to adopt the provisions of Statement No. 143
beginning January 1, 2003. We have not determined the impact, if any, the
adoption of this statement will have on our financial position or results of
operations.
In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement
establishes an accounting model for impairment or disposal of long-lived assets
by sale. Statement 144 is required to be adopted beginning January 1, 2002. We
have not determined the impact, if any, the adoption of Statement No. 144 will
have on our financial position or results of operation.
F-28
Part II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
The expenses payable by the Registrant in connection with the issuance and
distribution of the securities being registered (other than underwriting
discounts and commissions, if any) are set forth below. Each item listed is
estimated, except for the Securities and Exchange Commission registration fee.
Securities and Exchange Commission registration fee.............. $ 184
Nasdaq Listing Fee .............................................. 0
Blue Sky fees and expenses....................................... 0
Accounting fees and expenses..................................... 3,000
Legal fees and expenses.......................................... 5,000
Registrar and transfer agent's fees and expenses................. 0
Printing and engraving expenses.................................. 0
Miscellaneous.................................................... 0
--------
Total expenses................................................... $ 8,184
========
Item 14. Indemnification of Directors and Officers
Article VI of the Registrant's By-laws requires the Registrant to indemnify
each of its directors and officers to the extent permitted by the Delaware
General Corporation Law ("DGCL"). Section 145 of the DGCL provides that a
corporation may indemnify any person, including any officer or director, who was
or is a party, or who is threatened to be made a party, to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation), by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement,
actually and reasonably incurred by such person, if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the corporation and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful. Section 145 also
provides that a corporation may indemnify any person, including any officer or
director, who was or is a party, or who is threatened to be made a party, to any
threatened, pending or completed action by or in the right of the corporation,
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of the action, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made with respect to any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that a court of
competent jurisdiction shall determine that such indemnity is proper. To the
extent that a director or officer is successful on the merits or otherwise in
the defense of any action referred to above, the corporation is required under
Delaware law to indemnify that person against expenses (including attorneys'
fees) actually and reasonably incurred in connection therewith.
The Registrant's Certificate of Incorporation provides that no director
shall be liable to the Registrant or its stockholders for monetary damages for
breach of his fiduciary duty as a director. However, a director will be liable
for any breach of his duty of loyalty to the Registrant or its stockholders, for
acts or omissions not in good faith or involving intentional misconduct or
knowing violation of law, any transaction from which the director derived an
improper personal benefit, or payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law.
II-1
Item 15. Recent Sales of Unregistered Securities
Since September 30, 1998, Unigene has made the following sales of
securities that were not registered under the Securities Act of 1933, as amended
(the "Securities Act"):
(1) In the quarter ended December 31, 1998, Unigene issued 448,834 shares
of Unigene common stock upon the conversion of $502,694 in principal amount of
Unigene's 9.5% Convertible Debentures. All of such shares were issued by Unigene
without registration in reliance on an exemption under Section 3(a) (9) of the
Securities Act.
(2) In January 1999, Unigene issued 79,384 shares of Unigene common stock
as payment of approximately $101,000 in accrued interest on its 5% convertible
debentures due December 31, 2001, (the "5% Debentures"). All of such shares were
issued by Unigene without registration in reliance on an exemption under Section
4 (2) of the Securities Act.
(3) In January 1999, Unigene issued 164,102 shares of Unigene common stock
upon the conversion of $200,000 in principal amount of the 5% Debentures. All of
the shares were issued by Unigene without registration in reliance on an
exemption under Section 3(a)(9) of the Securities Act.
(4) During the quarter ended June 30, 1999, $1,000,000 in principal amount
of the 5% Debentures were converted into (a) 1,457,458 shares of Unigene common
stock and (b) warrants, expiring April through June 2004, to purchase an
aggregate of 58,298 shares of Unigene common stock at exercise prices ranging
from $.78 to $1.15 per share. All of such shares and warrants were issued by
Unigene without registration in reliance on an exemption under Section 3(a)(9)
of the Securities Act.
(5) In July 1999, Unigene issued 95,853 shares of Unigene common stock as
payment of approximately $90,000 in accrued interest on the 5% Debentures. All
of such shares were issued by Unigene without registration in reliance on an
exemption under Section 4 (2) of the Securities Act.
(6) During the quarter ended December 31, 1999, $800,000 of principal
amount of the 5% Debentures were converted into (a) 1,906,565 shares of Unigene
common stock and (b) warrants, expiring in 2004, to purchase an
II-2
aggregate of 76,261 shares of Unigene common stock at exercise prices ranging
from $.46 to $.60 per share. All of such shares and warrants were issued by
Unigene without registration in reliance on an exemption under Section 3(a) (9)
of the Securities Act.
(7) In the quarter ended March 31, 2000, Unigene issued for cash 626,036
shares of Unigene common stock upon the exercise of an equal number of warrants
exercisable to purchase one share of Unigene common stock at exercise prices
ranging from $1.38 to $2.43 per share. An additional 103,032 shares of Unigene
common stock were issued upon the cashless exercise of a total of 141,123
warrants at exercise prices ranging from $.46 to $1.52 per share. All of such
shares were issued by Unigene without registration in reliance on an exemption
under Section 4 (2) of the Securities Act.
(8) In the quarter ended June 30, 2000, Unigene issued 56,007 shares of
Unigene common stock upon the cashless exercise of a total of 116,666 warrants
at exercise prices ranging from $1.38 to $1.44 per share. All of such shares
were issued by Unigene without registration in reliance on an exemption under
Section 4 (2) of the Securities Act.
(9) In the quarter ended September 30, 2000, Unigene issued 95,685 shares
of Unigene common stock upon the cashless exercise of a total of 195,834
warrants and options at exercise prices ranging from $1.38 to $1.44 per share.
In addition, Unigene issued for cash 224,500 shares of Unigene common stock upon
the exercise of warrants at exercise prices ranging from $1.38 to $1.50 per
share. All of the shares were issued by Unigene without registration in reliance
on an exemption under Section 4 (2) of the Securities Act.
(10) In the quarter ended December 31, 2000, Unigene issued 8,636 shares of
Unigene common stock upon the cashless exercise of a total of 22,000 warrants at
an exercise price of $2.00 per share. All of the shares were issued by Unigene
without registration in reliance on an exemption under Section 4 (2) of the
Securities Act.
(11) In the quarter ended March 31, 2001, Unigene issued to Fusion
2,000,000 shares of Unigene common stock and a warrant to purchase 1,000,000
shares of Unigene common stock. These securities were issued by Unigene without
registration in reliance on an exemption under Section 4 (2) of the Securities
Act.
(12) In the quarter ended June 30, 2001, Unigene sold 1,041,500 shares of
common stock to Fusion Capital Fund II, LLC for gross proceeds of $455,290. All
of such shares were issued by the Company without registration in reliance on an
exemption under Section 4(2) of the Securities Act of 1933, as amended.
(13) In the quarter ended September 30, 2001, Unigene sold 1,437,492 share
of common stock to Fusion Capital Fund II, LLC for gross proceeds of $476,076.
All of such shares were issued by the Company without registration in reliance
on an exemption under Section 4(2) of the Securities Act of 1933, as amended.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
Exhibit
Number Description
3.1 Certificate of Incorporation of the Registrant and Amendments thereto
to July 1, 1986 (incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement No. 33-6877 on Form S-1, filed July
1, 1986).
3.1.1 Amendments to Certificate of Incorporation filed July 29, 1986 and May
22, 1987 (incorporated by reference to Exhibit 3.1.1 to the
Registrant's Registration Statement No. 33-6877 on Form S-1, filed July
1, 1986).
3.1.2 Amendment to Certificate of Incorporation filed August 22, 1997
(incorporated by reference to Exhibit 3.1.2 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997).
3.1.3 Amendment to Certificate of Incorporation filed July 18, 2001
(incorporated by reference to Exhibit 3.1.3 to the Registrant's
Registration Statement No. 333-04557 on Form S-1, filed December 12,
2001.)
3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1993).
4.2 Specimen Certificate for Common Stock, par value $.01 per share
(incorporated by reference to Exhibit 3.1.1 to the Registrant's
Registration Statement No. 33-6877 on Form S-1, filed July 1, 1986).
5.1 Opinion of Covington & Burling, dated January , 2002 as to the
legality of certain shares of Unigene common stock being registered.*
II-3
10.1 Lease agreement between the Registrant and Fulton Street Associates,
dated May 20, 1993 (incorporated by reference to Exhibit 10.1 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 0-16005)).
10.2 1994 Employee Stock Option Plan (incorporated by reference to the
Registrant's Definitive Proxy Statement dated April 28, 1994, which is
set forth as Appendix A to Exhibit 28 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993(File No. 0-16005)).
10.3 Directors Stock Option Plan (incorporated by reference to Exhibit 10.4
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999 (File No. 0-16005)).
10.4 Mortgage and Security Agreement between the Registrant and Jean Levy
dated February 10, 1995 (incorporated by reference to Exhibit 10.4 of
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1994).
10.5 Loan and Security Agreement between the Registrant and Jay Levy, Warren
P. Levy and Ronald S. Levy dated March 2, 1995 (incorporated by
reference to Exhibit 10.5 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994).
10.6 Employment Agreement between the Registrant and Warren P. Levy, dated
January 1, 2000 (incorporated by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1999).
10.7 Employment Agreement between the Registrant and Ronald S. Levy, dated
January 1, 2000 (incorporated by reference to Exhibit 10.7 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1999).
10.8 Employment Agreement between the Registrant and Jay Levy, dated January
1, 2000 (incorporated by reference to Exhibit 10.8 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999).
10.9 Split Dollar Agreement dated September 30, 1992 between the Registrant
and Warren P. Levy (incorporated by reference to Exhibit 10.9 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992).
10.10 Split Dollar Agreement dated September 30, 1992 between the Registrant
and Ronald S. Levy (incorporated by reference to Exhibit 10.10 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992).
10.12 Amendment to Loan Agreement and Security Agreement between the
Registrant and Jay Levy, Warren P. Levy and Ronald S. Levy dated March
20, 1995 (incorporated by reference to Exhibit 10.12 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994).
10.14 Amendment to Loan and Security Agreement between the Registrant and Jay
Levy, Warren P. Levy and Ronald S. Levy dated June 29, 1995
(incorporated by reference to Exhibit 10.14 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995).
10.15 Promissory Note between the Registrant and Jay Levy, Warren P. Levy and
Ronald S. Levy dated June 29, 1995 (incorporated by reference to
Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995).
II-4
10.17 License Agreement, dated as of July 15, 1997, between the Registrant
and Warner-Lambert Company (incorporated by reference to Exhibit 10.1
to the Registrant's Current Report on Form 8-K, dated July 15, 1997).
10.19 Purchase Agreement, dated June 29, 1998, between the Registrant and The
Tail Wind Fund, Ltd. (incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998).
10.20 Registration Rights Agreement, dated June 29, 1998, between the
Registrant and The Tail Wind Fund, Ltd. (incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
10.21 Form of Promissory Note between the Registrant and Jay Levy
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
10.22 Form of Promissory Note between the Registrant and Warren Levy and
Ronald Levy (incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999).
10.23 Amendment to Loan Agreement and Security Agreement between the
Registrant and Jay Levy, Warren Levy and Ronald Levy dated June 25,
1999 (incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
10.24 Amended and Restated Secured Note between the Registrant and Jay Levy
dated July 13, 1999 (incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
10.25 Amended and Restated Security Agreement between the Registrant and Jay
Levy, Warren P. Levy and Ronald S. Levy dated July 13, 1999
(incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
10.26 Subordination Agreement between the Registrant and Jay Levy, Warren P.
Levy and Ronald S. Levy dated July 13, 1999 (incorporated by reference
to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999).
10.27 Mortgage and Security Agreement dated July 13, 1999, between the
Registrant and Jay Levy (incorporated by reference to Exhibit 10.4 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
10.28 $70,000 Secured Note between the Registrant and Jay Levy dated July 30,
1999 (incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
10.29 $200,000 Secured Note between the Registrant and Jay Levy dated August
5, 1999 (incorporated by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
10.30 Modification of Mortgage and Security Agreement between the Registrant
and Jay Levy dated August 5, 1999 (incorporated by reference to Exhibit
10.7 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999).
10.31 Amendment to Security Agreement and Subordination Agreement between the
Registrant and Jay Levy, Warren Levy and Ronald Levy dated August 5,
1999 (incorporated by reference to Exhibit 10.8 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
10.32 Joint Venture Contract between Shijiazhuang Pharmaceutical Group
Company, Ltd., and Unigene Laboratories, Inc., dated June 15, 2000
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on
II-5
Form 10-Q for the quarter ended June 30, 2000, with certain
confidential information omitted and filed separately with the
Secretary of the Commission).
10.33 Articles of Association of Shijiazhuang-Unigene Pharmaceutical
Corporation Limited, dated June 15, 2000 (incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, with certain confidential information
omitted and filed separately with the Secretary of the Commission).
10.34 2000 Stock Option Plan (incorporated by reference to Attachment A to
the Registrant's Schedule 14A, dated April 28, 2000, containing the
Registrant's Definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders (File No. 0-16005)).
10.35 Common Stock Purchase Agreement, dated May 9, 2001, between the
Registrant and Fusion Capital Fund II, LLC. (incorporated by reference
to Exhibit 10.35 to the Registrant's Registration Statement No.
333-60642 on Form S-1, filed May 10, 2001.)
10.36 Registration Rights Agreement, dated April 23, 2001, between the
Registrant and Fusion Capital Fund II, LLC. (incorporated by reference
to Exhibit 10.36 to the Registrant's Registration Statement No.
333-60642 on Form S-1, filed May 10, 2001.)
10.37 Warrant, dated March 30, 2001, between the Registrant and Fusion
Capital Fund II, LLC. (incorporated by reference to Exhibit 10.37 to
the Registrant's Registration Statement No. 333-60642 on Form S-1,
filed May 10, 2001.)
10.38 Patent Security Agreement dated March 13, 2001 between the Registrant
and Jay Levy. (incorporated by reference to Exhibit 10.38 to the
Registrant's Registration Statement No. 333-04557 on Form S-1, filed
December 12, 2001.)
10.39 First Amendment to Patent Security Agreement dated May 29, 2001 between
the Registrant and Jay Levy (incorporated by reference to Exhibit 10.39
to the Registrant's Registration Statement No. 333-04557 on Form S-1,
filed December 12, 2001.)
10.40 Letter Agreement between Fusion Capital Fund II, LLC and Unigene
Laboratories, Inc. dated November 1, 2001 (incorporated by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001).
10.41 Letter Agreement between Fusion Capital Fund II, LLC and Unigene
Laboratories, Inc. dated November 26, 2001 (incorporated by reference
to Exhibit 10.41 to the Registrant's Registration Statement No.
333-04557 on Form S-1, filed December 12, 2001.)
23.1 Consent of KPMG LLP.*
23.2 Consent of Covington & Burling (included in opinion filed as Exhibit
5.1).*
24.1 Powers of Attorney of Directors of Unigene Laboratories, Inc. (included
on signature page)
- --------
* Filed herewith
(b) Financial Statement Schedules
No financial statement schedules are required.
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
II-6
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b),
if, in the aggregate, the changes in volume and price represent
no more than 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement."
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-7
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Fairfield, New Jersey,
on this 10th day of January 2002.
UNIGENE LABORATORIES, INC.
By: /s/ Warren P. Levy
-------------------------
Warren P. Levy
President
Each person whose signature appears below hereby constitutes and appoints
Warren P. Levy and Ronald S. Levy, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any or all amendments
(including, without limitation, post-effective amendments) to this Registration
Statement and any subsequent registration statement filed by the Registrant
pursuant to Rule 462(b) of the Securities Act of 1933, which relates to this
Registration Statement, and to file the same, with all exhibits thereto, and all
documents in connection herewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his or their substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed on this 10th day of January 2002 by
the persons and in the capacities indicated below.
Signature Title
- ----------------------------- ------------------------------------------
/s/ Warren P. Levy President and Chief Executive
- ----------------------------- Officer (principal executive
Warren P. Levy officer) and Director
/s/ Jay Levy Treasurer (principal financial
- ----------------------------- Officer (principal executive
Jay Levy
/s/ Ronald S. Levy Director
- -----------------------------
Ronald S. Levy
* Director
- -----------------------------
Allen Bloom
* Director
- -----------------------------
J. Thomas August
* Director
- -----------------------------
Bruce S. Morra
* By Power of Attorney
/s/ Warren P. Levy
- -----------------------------
Warren P. Levy
II-8
EXHIBIT INDEX
Exhibit
Number Description
- ------ ---------------------------------------------------------------------
5.1 Opinion of Covington & Burling.
23.1 Consent of KPMG LLP.
23.2 Consent of Covington & Burling (included in opinion filed as Exhibit
5.1).
II-9