As filed with the Securities and Exchange Commission on February 11, 2002.
Registration No. 333-75960
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________
Amendment No. 2 to
------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________________
UNIGENE LABORATORIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 2833 22-2328609
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
__________________
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)
__________________
Warren P. Levy
President
Unigene Laboratories, Inc.
110 Little Falls Road
Fairfield, New Jersey 07004
(973) 882-0860
(Name, address including zip code, and telephone number, including area code,
of agent for service)
__________________
With a copy to:
Christopher G. Karras, Esq.
Dechert
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
(215) 994-4000
__________________
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 Fee
Per Share Offering Price
- --------------------------------------------------------------------------------------------------
Common Stock, par
value $.01 per share 15,000,000 $.62(2) $9,300,000(2) $855.60(2)(3)
==================================================================================================
(1) This Registration Statement registers the offer and sale of 15,000,000
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 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) based on the average of the high and low prices of
the Common Stock reported on the OTC Bulletin Board on February 7, 2002.
(3) The registrant paid $1,225 in connection with its original filing.
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.
_______________
Pursuant to Rule 429 under the Securities Act, the Prospectus included
in this Registration Statement is a combined Prospectus which relates to the
Registration Statement on Form S-1 (Registration No. 333-60642) previously filed
by the Registrant and declared effective on May 14, 2001 (the "Prior
Registration Statement"). This Registration Statement also constitutes
Post-Effective Amendment No. 2 to the Prior Registration Statement under which
3,767,800 shares of Common Stock of the Registrant remain to be issued. A filing
fee of $461.56 was previously paid with the Prior Registration Statement.
================================================================================
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ 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 we are no +
+ soliciting offers to buy these securities in any state where the offer +
+ or sale is not permitted. +
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 11, 2002
PROSPECTUS
UNIGENE LABORATORIES, INC.
18,767,800 SHARES OF COMMON STOCK
This prospectus relates to the sale of up to 18,767,800 shares of our
common stock by Fusion Capital Fund II, LLC. Fusion is sometimes referred to in
this prospectus as the selling stockholder. The prices at which Fusion may sell
the shares will be determined by the prevailing market price for the shares or
in negotiated transactions. We will not receive proceeds from the sale of our
shares by Fusion.
Our common stock is quoted on the Over-the-Counter Bulletin Board under
the symbol "UGNE." On February 8, 2002, the last reported sale price for our
common stock as reported on the Over-The-Counter Bulletin Board was $.59 per
share.
___________
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 3 FOR A DISCUSSION OF THESE RISKS.
___________
The selling stockholder is an "underwriter" within the meaning of the
Securities Act of 1933, as amended.
___________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
___________
The date of this Prospectus is , 2002.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY.......................................................................................... 1
RISK FACTORS................................................................................................ 3
FORWARD-LOOKING STATEMENTS.................................................................................. 10
USE OF PROCEEDS............................................................................................. 10
PRICE RANGE OF COMMON STOCK................................................................................. 11
DIVIDEND POLICY............................................................................................. 11
SELECTED FINANCIAL DATA..................................................................................... 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 16
BUSINESS.................................................................................................... 24
MANAGEMENT.................................................................................................. 31
PRINCIPAL STOCKHOLDERS...................................................................................... 36
DESCRIPTION OF CAPITAL STOCK................................................................................ 38
THE FUSION TRANSACTION...................................................................................... 38
SELLING STOCKHOLDER......................................................................................... 41
PLAN OF DISTRIBUTION........................................................................................ 42
LEGAL MATTERS............................................................................................... 43
EXPERTS..................................................................................................... 43
ADDITIONAL INFORMATION...................................................................................... 43
INDEX TO FINANCIAL STATEMENTS............................................................................... F-1
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(R),"
"Forcaltonin(R)," and "Fortical(R)" 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.
. Injectable Calcitonin. Our injectable Calcitonin product, which has the
trade name FORCALTONIN(R), 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.
. 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) by the middle of 2002. We are seeking to
license our nasal Calcitonin product in the U.S. and other countries for
the treatment of osteoporosis.
. 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 are seeking 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 due to our limited
financial resources 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.
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
On May 9, 2001, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC under which Fusion has committed to purchase on each
trading day during the term of the agreement $43,750 of our common stock up to
an aggregate of $21,000,000. Fusion, the selling stockholder, is offering for
sale up to 15,767,800 shares of Unigene common stock that Fusion has agreed to
purchase from Unigene 2,000,000 shares that Unigene issued to Fusion as
compensation for its purchase commitment and 1,000,000 shares that are issuable
upon the exercise of a warrant that Unigene issued to Fusion as compensation for
its purchase commitment. As of January 16, 2002, there were 51,914,425 shares of
Unigene common stock outstanding, including the 2,000,000 shares that Unigene
has issued to Fusion as compensation for its purchase commitment, but not
including the 1,000,000 shares that are issuable upon the exercise of the
warrant. The number of shares offered by this prospectus represent 23% of the
total number of shares of common stock outstanding as of January 16, 2002,
assuming the issuance of 15,522,515 shares that Fusion may acquire under the
common stock purchase agreement.
The number of shares ultimately offered for sale by Fusion is dependent
upon the number of shares purchased by Fusion. This number may be affected by
other factors more fully described under the heading "The Fusion
Transaction."
2
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 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, AND OUR ABILITY
TO SECURE ADDITIONAL FINANCING IS UNCERTAIN.
We may be unable to raise on acceptable terms, if at all, the substantial
capital resources necessary to conduct our operations. If we are unable to raise
the required capital, we may be forced to limit some or all of our research and
development programs and related operations, curtail commercialization of our
product candidates and, ultimately, cease operations. Our future capital
requirements will depend on many factors, including:
. continued scientific progress in our discovery and research programs;
. progress with preclinical studies and clinical trials;
. the magnitude and scope of our discovery, research and development
programs;
. our ability to maintain existing, and establish additional, corporate
partnerships and licensing arrangements;
. the time and costs involved in obtaining regulatory approvals;
. the time and costs involved in expanding and maintaining our
production facility;
. the costs involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims;
. the potential need to develop, acquire or license new technologies
and products; and
. other factors beyond our control.
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 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
3
through January 16, 2002 we have raised a total of $2,108,110 through the sale
of 5,477,485 shares of our common stock to Fusion, before cash expenses of
approximately $308,000. 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 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.
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. 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.
In addition, the agreement may be terminated by Fusion at any time due to events
of default under the agreement. See "The Fusion Transaction-Events of Default."
Our agreement with Fusion may prohibit us from raising funds through other
equity financings. The agreement expressly prohibits us from selling equity
securities in other variable priced financings without Fusion's consent. In
addition, the sale of our common stock to Fusion could cause the price of our
common stock to decline. If our stock price declines, we may be unable to raise
additional funds through the sale of our common stock to others. If we are able
to sell shares of our common stock, the sales could result in significant
dilution to our stockholders.
We believe that satisfying our long-term capital requirements will require
the successful commercialization of one of our peptide products. However, our
products may never become commercially successful.
SOME OF OUR EXECUTIVES HAVE MADE LOANS TO THE COMPANY AND ARE ENTITLED TO
REMEDIES AVAILABLE TO A SECURED CREDITOR, WHICH GIVES THEM A PRIORITY OVER THE
HOLDERS OF OUR COMMON STOCK.
Some of our executives have made loans to us under promissory notes. Our
obligations under these promissory notes are secured by, among other things,
mortgages upon all of the real property owned by us and pledges of substantially
all of our assets. If we become insolvent or are liquidated, or if payment under
the promissory notes are accelerated, the holders of the promissory notes will
be entitled to exercise the remedies available to a secured lender under
applicable law which would entitle them to full repayment before any funds could
be paid to our shareholders.
A PAYMENT DEFAULT HAS OCCURRED AND IS CONTINUING UNDER OUR 5% CONVERTIBLE
DEBENTURES WHICH ENTITLES THE DEBENTURE OWNER TO PURSUE REMEDIES AGAINST US.
In June 1998, we issued 5% convertible debentures with a principal amount
of $4,000,000 to The Tail Wind Fund. Pursuant to the terms of the debentures,
they were convertible into shares of our common stock, the interest on the
debentures, at our option, was payable in shares of common stock, and, upon
conversion, the owners of the debentures were 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 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, we became obligated to redeem in cash all debentures tendered for
conversion at a redemption price equal to 120% of the principal amount, plus
accrued interest.
Through September 30, 2001, we issued a total of 3,703,362 shares of
common stock upon conversion of $2,000,000 principal amount of the debentures
and in payment of interest on them. Also, we 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 debentures.
As of September 30, 2001, the owner of the debenture had tendered the
remaining $2,000,000 principal amount of the debentures for conversion, but the
conversion into shares of common stock would have exceeded the aggregate share
limit. As a result, the owner of the debenture became entitled to redeem the
$2,000,000 principal
4
amount of the debenture for $2,400,000 in cash. We failed to make the redemption
payment to the owner of the debenture. We have also failed to make the required
semi-annual interest payment on the outstanding debentures since January 1,
2000. As a result, the interest rate on the outstanding debentures has increased
to 20% per year. As of December 31, 2001, the accrued and unpaid interest on the
debentures was approximately $866,000.
In addition, the delisting of our common stock from the Nasdaq National
Market in October 1999 obligated us under a separate agreement to pay the owner
of the debentures an amount in cash equal to 2% of the outstanding principal
amount of the debentures per month. We have not made any of these payments. As
of December 31, 2001, the accrued and unpaid amount of this penalty totaled
approximately $1,097,000.
Because of our failure to make cash payments to the owner of the
debenture, an event of default has occurred and is continuing under our
debentures. The owner of the debenture is entitled to exercise the remedies
available under applicable law. The owner of the debentures has commenced an
arbitration proceeding in which the owner claims that it is entitled, as of June
30, 2000, to payments in respect of the debentures in the amount of
approximately $3,400,000. As a creditor, the owner of the debenture has priority
over the owners of our common stock in the event the our company is liquidated.
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. In the event that we are unable to reach a favorable
settlement, we may be required to pay Tail Wind substantial damages. We may be
required to issue additional shares of common stock which, in turn, could cause
the price of our common stock to decline and could dilute our common stock.
WE MAY NOT BE SUCCESSFUL IN OUR EFFORTS TO DEVELOP A CALCITONIN OR OTHER PEPTIDE
PRODUCT THAT WILL PRODUCE REVENUES SUFFICIENT TO SUSTAIN OUR OPERATIONS.
Our success depends on our ability to commercialize a Calcitonin or other
peptide product that will produce revenues sufficient to sustain our operations.
We may never develop a Calcitonin or other peptide product that makes us
profitable. Our ability to achieve profitability is dependent on a number of
factors, including our ability to complete development efforts, obtain
regulatory approval for our product candidates, and commercialize successfully
those product candidates or our technologies.
We believe that the development of more desirable formulations is
essential to expand consumer acceptance of Calcitonin pharmaceutical products.
However, we may not be successful in our development efforts, or other companies
may develop these products before we do.
Even if we are successful in our development efforts, we may not be able
to obtain the necessary regulatory approval for our products. The U.S. Food and
Drug Administration must approve the commercial manufacture and sale of
pharmaceutical products in the United States. Similar regulatory approvals are
required for the sale of pharmaceutical products outside of the United States.
Although we have received regulatory approval in the European Union and
Switzerland for the sale of our injectable Calcitonin product, none of our
products have been approved for sale in the United States, and our products may
never receive the approvals necessary for commercialization. We must conduct
further human testing on our products before they can be approved for commercial
sale. Any delay in receiving, or failure to receive, these approvals would
adversely affect our ability to generate product revenues.
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.
We may incur additional costs and delays while working with these parties, and
these parties may ultimately be unsuccessful.
5
WE HAVE MADE A SUBSTANTIAL INVESTMENT IN OUR PRODUCTION FACILITY WHICH WE WILL
NEED TO UPGRADE OR EXPAND IN ORDER TO MANUFACTURE SOME OF OUR PRODUCTS IN
COMMERCIAL QUANTITIES REQUIRED BY OUR CORPORATE PARTNERS.
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. We may be unable to make these capital expenditures
when required.
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.
The process of establishing partnerships is difficult and time-consuming.
Our discussions with potential partners may not lead to the establishment of new
partnerships on favorable terms, if at all. If we successfully establish new
partnerships, the partnerships may never result in the successful development of
our product candidates or the generation of significant revenue. Management of
our relationships with these partners would require:
. significant time and effort from our management team;
. coordination of our research with the research priorities of our
corporate partners;
. effective allocation of our resources to multiple projects; and
. an ability to attract and retain key management, scientific and other
personnel.
We may not be able to manage these relationships successfully.
With the recent termination of our Pfizer collaboration, we currently have
no licenses for any of our products in the U.S. We are pursuing opportunities to
license, or enter into distribution arrangements for, our oral, nasal and
injectable Calcitonin products, as well as other possible peptide products.
However, we may not be successful in any of these efforts.
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.
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
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.
6
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 would likely cause us to incur additional costs
or delays in product development.
IF OUR PRODUCTS GET REGULATORY APPROVAL, OUR COMPETITORS MAY EVENTUALLY
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. We believe that one of our
main competitors in the field of oral delivery of peptides is Emisphere
Technologies. We currently have no products approved for sale in the U.S. If we
are successful in obtaining approval for one of our products, our future
competitors will have substantially greater financial resources, research and
development staffs and facilities, and regulatory experience than we do. Major
companies in the field of osteoporosis treatment include Novartis, American Home
Products, Merck, Eli Lilly, and Procter and Gamble. We would be able to compete
with these companies only if we have partnered with a major pharmaceutical or
biotechnology company. 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. To the extent
we are unable to protect our patents and patent applications, our investment in
those technologies may not yield the benefits that we expect.
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. The
administration of drugs to humans, whether in clinical trials or commercially,
can result in product liability claims even if our products are not actually at
fault for causing an injury. Furthermore, our products may cause, or may appear
to cause, adverse side effects or potentially dangerous drug interactions that
we may not learn about or understand fully until the drug is actually
manufactured and sold. Product liability claims can be expensive to defend and
may result in large judgments against us. Even if a product liability claim is
not successful, the adverse publicity, time, and expense involved in defending
such a claim may interfere with our business. We may not have sufficient
resources to defend against or satisfy these claims. Although we maintain
$2,000,000 in product liability insurance coverage, this amount may not be
sufficient to protect us against losses or may be unavailable in the future on
acceptable terms, if at all.
7
WE MAY BE UNABLE TO RETAIN KEY EMPLOYEES OR RECRUIT ADDITIONAL QUALIFIED
PERSONNEL.
Because of the specialized scientific nature of our business we are highly
dependent upon qualified scientific, technical, and managerial personnel. There
is intense competition for qualified personnel in our business. Therefore,
we may not be able to attract and retain the qualified personnel necessary for
the development of our business. The loss of the services of existing personnel,
as well as the failure to recruit additional key scientific, technical, and
managerial personnel in a timely manner would harm our research and development
programs and our business.
Dr. Warren Levy and Dr. Ronald Levy have been our 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. However, each of them is only bound by his respective
employment agreement to provide services for a one-year term. The loss of the
services of either of these individuals could significantly delay or prevent the
achievement of our scientific and business objectives.
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 under this prospectus and by the exercise and
subsequent sale of Unigene common stock by the holders of outstanding and future
warrants and options could have an adverse effect on the price of our stock.
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 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
our common stock could adversely affect the market liquidity of the shares,
which in turn may affect the ability of holders of our common stock to resell
the stock.
THE SALE OF OUR COMMON STOCK TO FUSION COULD CAUSE THE PRICE OF OUR COMMON STOCK
TO DECLINE.
All of the shares offered for sale by Fusion under this prospectus are
freely tradeable. However, Fusion has agreed that it will not sell or otherwise
transfer the 2,000,000 commitment shares 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 the
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 registered in this offering 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 registered in this offering 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.
8
THE SALE OF COMMON STOCK TO FUSION COULD CAUSE SUBSTANTIAL DILUTION OF OUR
COMMON STOCK AND SIGNIFICANTLY IMPACT OUR CAPITAL STRUCTURE.
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-Purchase Of Shares
Under The Common Stock Purchase Agreement" for a detailed description of the
purchase price.
If Fusion purchased the remaining balance of $18,891,890 purchasable under
the common stock purchase agreement on the date of this prospectus, at a price
equal to $.61, the closing sale price of our common stock on January 16, 2002,
Fusion would be able to purchase an additional 30,970,311 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 37% of our outstanding common stock
as of the date of this prospectus.
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. See "The Fusion Transaction-Purchase Of
Shares Under The Common Stock Purchase Agreement" for a table that shows the
number of shares issuable and potential dilution based on varying market prices.
Subsequent sales of these shares in the open market by Fusion may also have the
effect of lowering our stock price, thereby increasing the number of shares
issuable under the common stock purchase agreement and consequently further
diluting our outstanding shares. Although we have the right to suspend Fusion
purchases at any time, the financial condition of Unigene at the time may
require Unigene to waive its right to suspend purchases even if there is a
decline in the market price. If the closing sale price of our common stock is at
least $4.00 for five (5) consecutive trading days, we have the right to increase
the daily purchase amount above $43,750, provided the closing sale price of our
common stock remains at least $4.00.
THE EXISTENCE OF THE AGREEMENT WITH FUSION TO PURCHASE SHARES OF UNIGENE COMMON
STOCK COULD CAUSE DOWNWARD PRESSURE ON THE MARKET PRICE OF THE UNIGENE COMMON
STOCK.
Both the actual dilution and the potential for dilution resulting from
sales of Unigene common stock to Fusion could cause holders to elect to sell
their shares of Unigene common stock, which could cause the trading price of the
Unigene common stock to decrease. In addition, prospective investors
anticipating the downward pressure on the price of the Unigene 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, which may
itself cause the price of our stock to decline.
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.
USE OF PROCEEDS
Unigene will not receive any of the proceeds from the sale of the shares
of Unigene common stock offered for sale by Fusion under this prospectus.
However, we may receive up to $21,000,000 from the sale of our common stock to
Fusion under the agreement with Fusion, subject to the conditions of the
agreement. We expect to use these proceeds for ongoing research and development
activities and for general corporate purposes.
10
PRICE RANGE OF COMMON STOCK
The Unigene common stock is quoted on the OTC Bulletin Board under the
symbol UGNE. 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
OTC Bulletin Board.
Fiscal Year Ended December 31, High Low
---- ---
2000
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 $0.66 $0.33
Fiscal Year Ended December 31, 2002 High Low
---- ---
First Quarter (through February 8) $.0875 $0.53
On February 8, 2002, the last reported sale price of the Unigene common
stock on the OTC Bulletin Board was $.59. As of January 16, 2002, there were 494
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.
11
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.
12
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
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
Revenue:
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
BALANCE SHEET
(IN THOUSANDS)
NINE MONTHS
ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31,
--------------------- --------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- -------- -------- -------- -------- --------
(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
13
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
Operation 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) $ 0.9 $ (0.5)
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 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 are now recognizing this revenue over a 45 month
14
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.
15
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 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.
16
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 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
17
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 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.
18
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. As a result of the
termination, Pfizer was no longer obligated to make additional milestone
payments or royalty payments to us (previously achieved milestones had been paid
in full prior to December 31, 2000). At the time the agreement was terminated,
there were remaining milestone payments in the aggregate amount of $32 million.
Of this total, $16 million was related to commencement of clinical trials or
regulatory submissions and $16 million was related to regulatory approvals in
the U.S. and overseas. 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 is seeking
potential licensees in the U.S. and other countries. Until we are able to enter
into a new licensing agreement, the termination of the Pfizer agreement leaves
us without a source of significant revenue and makes us dependent upon
alternative methods of financing our current and future operations such as
related-party loans and the equity financing discussed below. However, 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 opportunities including
business combinations. However, we may not be successful in our efforts to enter
into any additional revenue generating agreements.
We are engaged in the research, production and delivery of peptide-related
products. Our primary focus has been on the development of various forms of
calcitonin and other peptide products for the treatment of osteoporosis,
including nasal and oral calcitonin, and, beginning in 2001, parathyroid
hormone. In each case, we seek to develop the basic product and then license the
product to an established pharmaceutical company to complete the development,
clinical trials and regulatory process. As a result, we will not control the
nature, timing or cost of bringing our products to market. We do not track costs
on a per project basis, and therefore are unable to allocate our total research
and development costs incurred to date to our various products. Each of these
products is in various stages of completion. For nasal calcitonin, we filed an
Investigational New Drug Application with the FDA in February 2000 and
successfully completed human studies using our product. The remaining steps to
commercialize
19
this product would include the signing of a license or distribution agreement
and the filing of a New Drug Application (NDA) with the FDA around mid-year-
2002. The remaining costs for preparing and filing the NDA is approximately
$250,000. The Company is seeking a liscensing partner or contract sales
organization which could proceed to market nasal calcitonin after FDA approval.
We believe that this product could be on the market as soon as 2003. For oral
calcitonin, Pfizer terminated its license agreement with Unigene in March 2001
and as a result we will require a new licensee to redo the Phase I/II clinical
trials of Pfizer and also to conduct a Phase III clinical trial. We expect that
the costs of these trials would be borne by our future licensee due to our
limited financial resources. Parathyroid hormone is in very early stages of
development. Because multiple clinical trials are still necessary for our oral
calcitonin product, the product launch would take at least several years. It is
too early to speculate on a marketable product using our parathyroid hormone. In
addition, we would expect cash inflows prior to commercialization from any
license agreement we sign in the form of up-front payments and milestone
payments. Due to our limited financial resources, the delay in signing license
or distribution agreements for our products, or the delay in obtaining
regulatory approvals for our products would have an adverse effect on our
operations and our cash flow.
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, July 5, 2001 and
January 5, 2002 also have not been made. As of December 31, 2001, the accrued
and unpaid interest on the 5% debentures totaled approximately $866,000. 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 December 31, 2001, the accrued and unpaid amount of this penalty totaled
approximately $1,097,000.
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
Business - Litigation.
20
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 2001, Jay Levy made demand loans to Unigene of
$6,100,000 and Warren Levy and Ronald Levy each made demand loans to Unigene of
$5,000. 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 $512,000, and total
interest expense on all Levy loans was approximately $1,087,000 for 2001. The
Levys have waived all default provisions including additional interest penalties
due under these loans through December 31, 2000. As of December 31, 2001, total
accrued interest on all Levy loans was approximately $2,008,000 and the
outstanding loans by these individuals to Unigene, classified as short-term
debt, totaled $10,853,323 and consist of:
. 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% (11.00% at
December 31, 2001) that are classified as short-term debt. These loans
were originally at the Merrill Lynch Margin Loan Rate plus .25%. These
loans are secured by a security interest in Unigene's equipment and
real property. Accrued interest on these loans at December 31, 2001 was
approximately $1,085,000.
. 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 December 31, 2001
was approximately $399,000.
. Loans from Jay Levy in the aggregate principal amount of $5,000,000
which are evidenced by demand notes bearing a floating interest rate
equal to the Merrill Lynch Margin Loan Rate plus .25%, (6.00% at
December 31, 2001) and are classified as short-term debt and which are
secured by a security interest in certain of our patents. Accrued
interest on these loans at December 31, 2001 was approximately
$162,000.
. 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% (11.00% at
December 31, 2001) that are classified as short-term debt. These loans
were originally at the Merrill Lynch Margin Loan Rate plus .25%. An
additional loan in the amount of $5,000 bears interest at the Merrill
Lynch Loan Rate plus .25% (6.00% at December 31, 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 December 31, 2001 was approximately
$182,000.
. 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% at (11.00% at
December 31, 2001) that are classified as short-term debt. These loans
were originally at the Merrill Lynch Margin Loan Rate plus .25%. An
additional loan in the amount of $5,000 bears interest at the Merrill
Lynch Margin Loan Rate plus .25% (6.00% at December 31, 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 December 31, 2001 was approximately
$180,000.
--------
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.
21
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 December 31, 2001, Unigene has received
$1,880,800 through the sale of 5,012,485 shares to Fusion, before cash expenses
of approximately $292,000. 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.
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 sold tax benefits and realized a total of $832,000 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 System
effective October 5, 1999, and is now trading on the OTC Bulletin Board. In
order to be relisted on the Nasdaq National Market or the Nasdaq SmallCap
Market, we must meet the initial listing requirements.
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.
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.
23
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:
. 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.
. 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.
These two patented technologies are the basis for our business strategy.
The potential pharmaceutical products that we are developing use one, or in most
cases, both of these technologies. For example, our nasal calcitonin product
would use calcitonin manufactured by our peptide production process.
All of our clinical trials for nasal calcitonin were completed by 2001.
The new drug application (NDA) is in the final stages of preparation, and the
filing of the NDA is expected around mid-year 2002. FDA approval typically takes
approximately 12 months from the filing of the NDA. We are seeking a licensing
partner or contract sales organization which could proceed to market the product
after FDA approval, although we may not be successful in our attempts to find a
licensing partner or contract sales organization to market the product on
favorable terms, if at all. There is an existing nasal calcitonin product on the
market. Since our end product would be similar to the currently existing
product, we believe that it would not require extensive sales promotions by our
potential partners. Therefore, we believe this product could be on the market as
soon as 2003. Our oral calcitonin and oral parathyroid hormone products would
utilize our peptide production process as well as our oral delivery system for
peptides. These products would be on the market after our nasal Calcitonin
product.
24
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 due to our limited
financial resources 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.
. 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. 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 we are seeking 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.
. 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. 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 September 30, 2001. We expect operations to
commence in the first quarter of 2002.
. 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. We believe that one of our main competitors in
the field of oral delivery of peptides is Emisphere Technologies. We currently
have no products approved for sale in the U.S.
25
In 1999, we began manufacturing cGMP Calcitonin for use in pharmaceutical
products. If we are successful in obtaining approval for one of our products, we
would compete in the future with major pharmaceutical companies. These
competitors can devote considerably greater financial resources to these
activities. Major companies with products in the field of osteoporosis include
Novartis, American Home Products, Merck, Eli Lilly, and Procter and Gamble. We
would be able to compete with these companies only if we have partnered with a
major pharmaceutical or biotechnology company. We believe that the unique safety
and effectiveness of Calcitonin, combined with our patented peptide
manufacturing process and our patented oral formulation, will enable it 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.
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
26
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.
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:
. The active ingredient is structurally identical to and indistinguishable
from the active ingredient in products already approved by many regulatory
agencies.
. The formulation is essentially similar to the formulations used in
already approved products.
. 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.
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 make, use and sell oral Calcitonin. Under
this agreement, Pfizer had the ability to terminate the license if (1) a product
was disapproved in the U.S. or Europe; (2) peak blood levels were too low; (3)
the product was infeasible for scientific or technical reasons; (4) Unigene was
declared bankrupt or insolvent; (5) there was an uncured material breach; or (6)
Pfizer could not meet at least 25% of its sales projections.
During 1999, we and Pfizer 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
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.
27
Pfizer analyzed the results of the study and informed us in March 2001 that the
study did not achieve Pfizer's desired results related to measurement of bone
marker activity. Pfizer terminated the license agreement for scientific reasons
citing this conclusion. We believe that this study, in which an FDA approved
product, nasal Calcitonin, 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 for osteoporosis, and we are seeking
licensees for this product 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.
In February 2000, we received a payment of $1 million from Pfizer by
achieving a milestone after we completed testing of clinical supplies for
clinical study. In October 2000, we received a payment of $1 million from Pfizer
by achieving a milestone in connection with a Phase I/II clinical trial. Through
September 30, 2001, we 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 an aggregate of $16.5 million in milestone
revenue.
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 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:
. Rutgers University College of Pharmacy continues to study oral
delivery of Calcitonin and other peptides.
. 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:
28
. Immunization By Immunogenic Implant, a method for producing
antibodies for developing diagnostic medical tests
. two patents related to the Alpha-Amidation Enzyme and its use in
manufacturing peptides
. a patent covering an improvement in our manufacturing technology
. two patents covering oral delivery of peptides
We believe that our manufacturing patents give us a competitive advantage
in producing peptides cost-effectively and in large quantities, because they
cover a highly efficient bacterial fermentation process for producing
calcitonin. Currently, other companies use a chemical synthesis process to
manufacture peptide products. This process is very labor intensive and involves
many steps in which product is lost because no step is 100% efficient. Our
patents cover a process that we expect will reduce the cost and time required
for commercial production by up to 95%.
We also believe that our oral delivery patents give us a competitive advantage
in enabling us to develop peptide products in oral forms, because they cover a
process allowing delivery of measurable quantities of the peptide calcitonin
into the bloodstream. Peptides are small proteins that get broken down in the
digestive system. They are currently available only as injectable or nasal spray
products.
We believe that the true competitive advantage of our manufacturing and
oral delivery patent estates is the combination of both patented technologies.
To successfully commercialize an oral peptide product, an efficient
manufacturing process is necessary, because oral delivery systems are typically
less efficient than injectable or nasal spray products. Reduced efficiency
requires an increase in the active pharmaceutical ingredient in each dose.
Therefore, an efficient manufacturing process is needed to manufacture the
increased quantities that are necessary and to make a product that is
commercially viable from a cost perspective.
We believe that our manufacturing and oral delivery patent estates provide
both a current and anticipated advantage. Currently, the patent estates protect
our intellectual property rights in the manufacturing and oral delivery
processes. In the future, we expect that the patent estates will allow us to
commercialize our products.
Other applications are pending. We also have made filings in selected
foreign countries, and eighteen 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 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 December 31, 2001 we had 61 full-time employees. Twenty were engaged
in research, development and regulatory activities, 30 were engaged in
production activities and 11 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,
29
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 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.
30
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.
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.
J. THOMAS AUGUST. 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.
BRUCE S. MORRA. Dr. Bruce S. 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
31
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.
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.
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. Bloom, August and 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. Bloom, August and 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. Bloom, August and 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.
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 Hendrickson
(who did not stand for re-election in 2001) and Dr. 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
32
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 will serve 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 will serve 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.
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 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 2001, Jay Levy made demand loans to Unigene of
$6,100,000 and Warren Levy and Ronald Levy each made demand loans to Unigene of
$5,000. 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 $512,000, and total
interest expense on all Levy loans was approximately $1,087,000 for 2001. The
Levys have waived all default provisions including additional interest penalties
due under these loans through December 31, 2000. As of December 31, 2001, total
accrued interest on all Levy loans was approximately $2,008,000 and the
outstanding loans by these individuals to Unigene, classified as short-term
debt, totaled $10,853,323 and consist of:
. 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% (11.00% at
December 31, 2001) that are classified as short-term debt. These loans
were originally at the Merrill Lynch Margin Loan Rate plus .25%. These
loans are secured by a security interest in Unigene's equipment and
real property. Accrued interest on these loans at December 31, 2001 was
approximately $1,085,000.
. 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
33
installment payments have been made to date. Accrued interest on these
loans at December 31, 2001 was approximately $399,000.
. Loans from Jay Levy in the aggregate principal amount of $5,000,000
which are evidenced by demand notes bearing a floating interest rate
equal to the Merrill Lynch Margin Loan Rate plus .25%, (6.00% at
December 31, 2001) and are classified as short-term debt and which are
secured by a security interest in certain of our patents. Accrued
interest on these loans at December 31, 2001 was approximately
$162,000.
. 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% (11.00% at
December 31, 2001) that are classified as short-term debt. These loans
were originally at the Merrill Lynch Margin Loan Rate plus .25%. An
additional loan in the amount of $5,000 bears interest at the Merrill
Lynch Loan Rate plus .25% (6.00% at December 31, 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 December 31, 2001 was approximately
$182,000.
. 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%
(11.00% at December 31, 2001 that are classified as short-term debt.
These loans were originally at the Merrill Lynch Margin Loan Rate plus
.25%. An additional loan in the amount of $5,000 bears interest at the
Merrill Lynch Margin Loan Rate plus .25% (6.00% at December 31, 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 December 31, 2001 was approximately
$180,000.
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.
34
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:
EXERCISE DURING SHARES UNDERLYING VALUE OF UNEXERCISED
THE FISCAL YEAR UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(1)
-------------------------------- ---------------------------- ----------------------------
NUMBER OF VALUE
NAME SHARES ACQUIRED 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.
35
PRINCIPAL STOCKHOLDERS
The following table shows information as of January 16, 2002, 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 51,914,425
shares of Unigene common stock outstanding as of January 16, 2002. 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
222 Merchandise Mart Plaza
Chicago, IL 60654 3,245,285 (1) 6.1%
1,990,545
Warren P. Levy (3) 3.8%
2,005,545
Ronald S. Levy (4) 3.9%
Jay Levy 623,095 (5) 1.2%
James P. Gilligan 457,660 (6) *
J. Thomas August 24,552 (7) *
Bruce S. Morra 12,000 (8) *
Allen Bloom 66,000 (9) *
Officers and Directors
as a Group (7 persons) 4,979,397 (2) (10) 9.5%
_____________________________
* 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.
(3) Includes 10,000 shares of Unigene common stock that Dr. Warren Levy has the
right to acquire upon the exercise of stock options that are exercisable
either immediately or within 60 days.
(4) Includes 10,000 shares of Unigene common stock that Dr. Ronald Levy has the
right to acquire upon the exercise of stock options that are exercisable
either immediately or within 60 days.
(5) Includes 100,000 shares of Unigene common stock that Jay Levy has the right
to acquire upon the exercise of stock options that are exercisable either
immediately or within 60 days.
(6) Includes 438,000 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.
(7) Includes 12,000 shares of Unigene common stock that Dr. August has the
right to acquire upon the exercise of stock options that are exercisable
either immediately or within 60 days.
36
(8) Includes 12,000 shares of Unigene common stock that Dr. Morra has the right
to acquire upon the exercise of stock options that are exercisable either
immediately or within 60 days.
(9) Includes 65,000 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.
(10) Includes an aggregate of 647,000 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.
37
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common
stock, par value $0.01 per share. As of January 16, 2001, there were 51,914,425
shares of common stock outstanding and held of record by approximately 494
stockholders.
Each holder of common stock is entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. There is no
cumulative voting for the election of directors and, as a consequence, minority
stockholders will not be able to elect directors on the basis of their votes
alone. Holders of common stock are entitled to receive ratably dividends as may
be declared by the board of directors out of funds legally available therefor.
We have never paid and we do not anticipate declaring or paying any cash
dividends on shares of our common stock in the foreseeable future. Upon our
liquidation, dissolution or winding up, the holders of common stock then
outstanding are entitled to share ratably in our assets remaining after the
payment of liabilities. All shares of common stock outstanding and to be
outstanding upon completion of this offering are and will be fully paid and
nonassessable.
THE FUSION TRANSACTION
GENERAL
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 or an
aggregate of $21 million. The $21 million of common stock 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. The purchase price of the
shares of common stock will be equal to a price based upon the future market
price of the common stock without any fixed discount to the market price.
PURCHASE OF SHARES UNDER THE COMMON STOCK PURCHASE AGREEMENT
Under the common stock purchase agreement, on each trading day Fusion is
obligated to purchase a specified dollar amount of our common stock. Subject to
our right to suspend such purchases at any time, and our right to terminate the
agreement with Fusion at any time, each as described below, Fusion shall
purchase on each trading day during the term of the agreement $43,750 of our
common stock. This 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, we may not increase the daily purchase amount above $43,750 unless our
stock price is above $4.00 per share for five consecutive trading days. The
purchase price per share is equal to the lesser of:
. the lowest sale price of our common stock on the purchase date; or
. the average of the five (5) lowest closing sale prices of our common
stock during the fifteen (15) consecutive trading days prior to the
date of a purchase by Fusion.
The purchase price will be adjusted for any reorganization,
recapitalization, non-cash dividend, stock split, or other similar transaction
occurring during the trading days in which the closing sale price is used to
compute the purchase price. Fusion may not purchase shares of our common stock
under the common stock purchase agreement if Fusion, together with its
affiliates, would beneficially own more than 9.9% of our common stock
outstanding at the time of the purchase by Fusion. However, even though Fusion
may not receive additional shares of our common stock in the event that the 9.9%
limitation is ever reached, Fusion is still obligated to pay to us $43,750 on
each trading day, unless the common stock purchase agreement is suspended, an
event of default occurs or the agreement is terminated. Under these
circumstances, Fusion would have the right to acquire additional shares in the
future should its ownership subsequently become less than the 9.9%. Fusion has
the right at any time to sell any shares purchased under the common stock
purchase agreement which would allow it to avoid the 9.9% limitation. Therefore,
we do not believe that Fusion will ever reach the 9.9% limitation.
38
The following table sets forth the number of shares of our common stock
that would be sold to Fusion under the common stock purchase agreement at
varying purchase prices:
PROCEEDS FROM THE SALE OF
PERCENTAGE OUTSTANDING 15,522,515 SHARES TO FUSION
ASSUMED AVERAGE NUMBER OF SHARES TO BE AFTER GIVING EFFECT TO THE UNDER THE COMMON STOCK
PURCHASE PRICE ISSUED IF FULL PURCHASE(1) ISSUANCE TO FUSION(2) PURCHASE AGREEMENT
--------------- ----------------------- ------------------ -----------------------
$0.40 47.6% $ 6,209,006
47,229,725
$0.61 (3) 30,970,311 37.4% $ 9,468,734
$1.00 18,891,890 26.7% $15,522,515
$2.00 9,445,945 15.4% $18,891,890(1)
$3.00 6,297,297 10.8% $18,891,890(1)
$4.00 4,722,973 8.3% $18,891,890(1)
___________________________
(1) Based on a remaining available balance of $18,891,890 under the common
stock purchase agreement.
(2) Based on 51,914,425 shares outstanding as of January 16, 2002. Includes the
issuance of 2,000,000 shares of common stock issued to Fusion as a
commitment fee and the number of shares issuable at the corresponding
assumed purchase price set forth in the adjacent column. Excludes 1,000,000
shares of common stock underlying warrants issued to Fusion as a commitment
fee.
(3) Closing sale price of our common stock on January 16, 2002.
MINIMUM PURCHASE PRICE
Fusion shall not be obligated to purchase any shares of our common stock in
the event that the purchase price is less than $.25.
OUR RIGHT TO SUSPEND PURCHASES
We have the unconditional right to suspend purchases at any time for any
reason effective upon one trading day's notice. Any suspension would remain in
effect until our revocation of the suspension. To the extent we need to use the
cash proceeds of the sales of common stock under the common stock purchase
agreement for working capital or other business purposes, we do not intend to
restrict purchases under the common stock purchase agreement.
OUR RIGHT TO INCREASE AND DECREASE THE DAILY PURCHASE AMOUNT
We have the unconditional right to decrease the daily amount to be
purchased by Fusion at any time for any reason effective upon one trading day's
notice. We also have the right to increase the daily purchase amount at any time
for any reason; provided however, we may not increase the daily purchase amount
above $43,750 unless our stock price has been above $4.00 per share for five
consecutive trading days. For any trading day that the sale price of our common
stock is below $4.00, the daily purchase amount shall not be greater than
$43,750.
OUR TERMINATION RIGHTS
We have the unconditional right at any time for any reason to give notice
to Fusion terminating the common stock purchase agreement. Such notice shall be
effective one trading day after Fusion receives such notice.
EFFECT OF PERFORMANCE OF THE COMMON STOCK PURCHASE AGREEMENT ON OUR SHAREHOLDERS
All shares registered in this offering will be freely tradable. It is
anticipated that shares registered in this offering will be sold over a period
of up to approximately 16 months, from the date of this prospectus. The sale of
a significant amount of shares registered in this offering at any given time
could cause the trading price of our common stock to decline and to be highly
volatile. Fusion may ultimately purchase all of the shares of common stock
issuable under the common stock purchase agreement, and it may sell some, none
or all of the shares of common stock it acquires upon purchase. Therefore, the
purchases under the common stock purchase agreement may result in substantial
dilution to the interests of other holders of our common stock. However, we have
the right at any time for any reason to: (1) reduce the daily purchase amount,
(2) suspend purchases of the common stock by Fusion and (3) terminate the common
stock purchase agreement.
39
NO SHORT-SELLING OR HEDGING BY FUSION
Fusion has agreed that neither it nor any of its affiliates shall 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.
EVENTS OF DEFAULT
Generally, Fusion may terminate the common stock purchase agreement without
any liability or payment to the Company upon the occurrence of any of the
following events of default:
. if for any reason the shares offered by this prospectus cannot be sold
pursuant to this prospectus because the registration statement of
which this prospectus is a part lapses or becomes unavailable to
Fusion for a period of ten consecutive trading days or for more than
an aggregate of 30 trading days in any 365-day period;
. suspension by the OTC Bulletin Board of our common stock from trading
for a period of ten consecutive trading days or for more than an
aggregate of 30 trading days in any 365-day period;
. our failure to satisfy the requirements for continued listing on the
OTC Bulletin Board for a period of ten consecutive trading days or for
more than an aggregate of 30 trading days in any 365-day period;
. the transfer agent's failure for five trading days to issue to Fusion
shares of our common stock which Fusion is entitled to under the
common stock purchase agreement;
. any material breach of the representations or warranties or covenants
contained in the common stock purchase agreement or any related
agreements which has or which could have a material adverse affect on
us subject to a cure period of ten trading days;
. a default by us of any payment obligation in excess of $1.0 million;
or
. any participation or threatened participation in insolvency or
bankruptcy proceedings by or against us.
COMMITMENT SHARES ISSUED TO FUSION
Under the terms of the common stock purchase agreement Fusion has received
2,000,000 shares of our common stock as a commitment fee and warrants to
purchase 1,000,000 shares of our common stock, exercisable at $.50 per share.
Unless an event of default occurs, these shares must be held by Fusion until 24
months from the date of the common stock purchase agreement, which is
approximately May 2003, or the date the common stock purchase agreement is
terminated.
NO VARIABLE PRICED FINANCINGS
Until the termination of the common stock purchase agreement, we have
agreed not to issue, or enter into any agreement with respect to the issuance
of, any variable priced equity or variable priced equity-like securities unless
we have obtained Fusion's prior written consent.
40
SELLING STOCKHOLDER
The following table presents information regarding the selling
stockholder's beneficial ownership of our common stock as of January 16, 2002.
Neither the selling stockholder nor any of its affiliates has held a position or
office, or had any other material relationship, with us.
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
SHARES SHARES SHARES
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED BEFORE OWNED BEFORE SHARES TO BE SOLD OWNED AFTER
SELLING STOCKHOLDER OFFERING (1) OFFERING (2) IN THE OFFERING OFFERING (1) (2)
- ------------------------------ -------------- -------------- ------------------- ------------------
Fusion Capital Fund II, LLC
(1)(2)(3) 18,767,800 23% 18,767,800 0%
____________________
(1) As of January 16, 2002, Fusion (a) held 2,245,285 shares of our common
stock, consisting of 2,000,000 shares issued to Fusion as a commitment fee
and 245,285 shares purchased by Fusion under the common stock purchase
agreement; (b) had the right to acquire 1,000,000 shares of our common
stock upon exercise of a warrant issued as part of the commitment fee; and
(c) had the right to acquire up to an additional 15,522,515 shares of our
common stock under the common stock purchase agreement.
(2) Percentage of outstanding shares is based on 51,914,425 shares of common
stock outstanding as of January 16, 2002, together with such additional
15,522,515 shares of common stock that may be acquired by Fusion from us
under the common stock purchase agreement after the date hereof. Fusion may
not purchase shares of our common stock under the common stock purchase
agreement if Fusion, together with its affiliates, would beneficially own
more than 9.9% of our common stock outstanding at the time of the purchase
by Fusion. However, even though Fusion may not receive additional shares of
our common stock in the event that the 9.9% limitation is ever reached,
Fusion is still obligated to pay to us $43,750 on each trading day, unless
the common stock purchase agreement is suspended, an event of default
occurs or the agreement is terminated. Under these circumstances, Fusion
would have the right to acquire additional shares in the future should its
ownership subsequently become less than the 9.9%. Fusion has the right at
any time to sell any shares purchased under the common stock purchase
agreement which would allow it to avoid the 9.9% limitation. Therefore, we
do not believe that Fusion will ever reach the 9.9% limitation.
(3) Steven G. Martin and Joshua B. Scheinfeld, the principals of Fusion, are
deemed to be beneficial owners of all of the shares of common stock owned
by Fusion. Messrs. Martin and Scheinfeld have shared voting and dispositive
power over the shares being offered under this prospectus.
41
PLAN OF DISTRIBUTION
The common stock offered by this prospectus is being offered by Fusion
Capital Fund II, LLC, the selling stockholder. The common stock may be sold or
distributed from time to time by the selling stockholder directly to one or more
purchasers or through brokers, dealers, or underwriters who may act solely as
agents at market prices prevailing at the time of sale, at prices related to the
prevailing market prices, at negotiated prices, or at fixed prices, which may be
changed. The sale of the common stock offered by this Prospectus may be effected
in one or more of the following methods:
. ordinary brokers' transactions;
. transactions involving cross or block trades;
. through brokers, dealers, or underwriters who may act solely as agents
. "at the market" into an existing market for the common stock;
. in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected
through agents;
. in privately negotiated transactions; or
. any combination of the foregoing.
In order to comply with the securities laws of certain states, if
applicable, the shares may be sold only through registered or licensed brokers
or dealers. In addition, in certain states, the shares may not be sold unless
they have been registered or qualified for sale in the state or an exemption
from the registration or qualification requirement is available and complied
with.
Brokers, dealers, underwriters, or agents participating in the distribution
of the shares as agents may receive compensation in the form of commissions,
discounts, or concessions from the selling shareholder and/or purchasers of the
common stock for whom the broker-dealers may act as agent. The compensation paid
to a particular broker-dealer may be less than or in excess of customary
commissions.
Fusion is an "underwriter" within the meaning of the Securities Act.
Neither we nor Fusion can presently estimate the amount of compensation
that any agent will receive. We know of no existing arrangements between Fusion,
any other stockholder, broker, dealer, underwriter, or agent relating to the
sale or distribution of the shares offered by this Prospectus. At the time a
particular offer of shares is made, a prospectus supplement, if required, will
be distributed that will set forth the names of any agents, underwriters, or
dealers and any compensation from the selling stockholder and any other required
information.
We will pay all of the expenses incident to the registration, offering, and
sale of the shares to the public other than commissions or discounts of
underwriters, broker-dealers, or agents. We have also agreed to indemnify Fusion
and related persons against specified liabilities, including liabilities under
the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers, and controlling persons, we have
been advised that in the opinion of the SEC this indemnification is against
public policy as expressed in the Securities Act and is therefore,
unenforceable.
Fusion and its affiliates have agreed not to engage in any direct or
indirect short selling or hedging of our common stock during the term of the
common stock purchase agreement.
We have advised Fusion that while it is engaged in a distribution of the
shares included in this Prospectus it is required to comply with Regulation M
promulgated under the Securities Exchange Act of 1934, as amended. With certain
exceptions, Regulation M precludes the selling stockholder, any affiliated
purchasers, and any broker-dealer or other person who participates in the
distribution from bidding for or purchasing, or attempting to induce any person
to bid for or purchase any security which is the subject of the distribution
until the entire distribution is complete. Regulation M also prohibits any bids
or purchases made in order to stabilize the price of a security in connection
with the distribution of that security. All of the foregoing may affect the
marketability of the shares offered hereby this Prospectus.
42
This offering will terminate on the date that all shares offered by this
Prospectus have been sold by Fusion.
LEGAL MATTERS
The validity of the Unigene common stock offered by this prospectus will be
passed upon for Unigene by Dechert, Philadelphia, Pennsylvania.
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.
43
UNIGENE LABORATORIES, INC.
INDEX TO FINANCIAL STATEMENTS
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, $38,517,722 $ 385,177 $63,499,439 $ -- $ -- $(54,450,120 $ (1,031) $9,433,465
January 1, 1998
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 TEASURY
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 OPERATION 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 into 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 third parties. These costs
primarily consist of salaries, clinical trials, outside consultants, sponsorship
of universities' research projects, supplies, and indirect costs. Indirect costs
such as depreciation, rent, utilities, insurance, taxes, and maintenance are
allocated to research and development based on specific criteria such as square
footage utilized. 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
F-8
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 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.
F-9
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 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 totaled 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.
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31,
2000 and 1999:
F-10
2000 1999 ESTIMATED
---- ---- DEPRECIABLE
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.
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
F-11
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 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
F-12
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/contracts 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
============= =============
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:
F-13
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.
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
F-14
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%
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.
F-15
The following summarizes activity for options granted to directors and
employees under the 1994, 1999 and 2000 Plans:
OPTIONS WEIGHTED AVERAGE
EXERCISABLE AT GRANT-DATE WEIGHTED AVERAGE
OPTIONS END OF YEAR FAIR VALUE EXERCISE 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 LIFE WEIGHTED AVE. NUMBER WEIGHTED AVE.
EXERCISE PRICE OUTSTANDING (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)
===================== ===================== ======================
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.
F-16
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.
As a result of the termination, Pfizer was no longer obligated to make
additional milestone payments or royalty payments to us (previously achieved
milestones had been paid in full prior to December 31, 2000). At the time the
agreement was terminated, there were remaining milestone payments in the
aggregate amount of $32 million. Of this total, $16 million was related to
commencement of clinical trials or regulatory submissions and $16 million was
related to regulatory approvals in the U.S. and overseas. While the Company does
not track costs on a specific research and development basis, management
estimates that Unigene's direct and indirect costs were approximately $4 million
per year (of which indirect costs represented approximately 33% of the total)
related to the Warner-Lambert program, based upon an estimate of research
personnel time and a review of batch production records. These costs primarily
consist of personnel costs, supplies, outside consultants and indirect costs and
are included in Research and Development expenses.
F-17
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.
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
--------------------- ----------------------
(UNAUDITED)
ASSETS
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 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
F-22
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%. 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
F-23
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 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
F-24
$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 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.
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.
F-25
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.
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-26
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.............. $ 856
Blue Sky fees and expenses....................................... 0
Accounting fees and expenses..................................... 10,000
Legal fees and expenses.......................................... 25,000
Registrar and transfer agent's fees and expenses................. 1,000
Printing and engraving expenses.................................. 0
Miscellaneous.................................................... 1,000
---------
Total expenses................................................... $ 37,856
=========
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.
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 to members of the Citadel Investment Group, LLC without registration
in reliance on
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an exemption under Section 3(a)(9) of the Securities Act. No commission or other
remuneration was paid to solicit the conversion.
(2) In January 1999, Unigene issued 79,384 shares of Unigene common
stock as payment of approximately $101,000 in accrued interest on the 5%
Debentures. All of such shares were issued by Unigene to The Tail Wind Fund,
Ltd. without registration in reliance on an exemption under Section 4<(2)>(2) of
the Securities Act, because the offer and sale was made to a limited number of
investors in a private transaction.
(3) In January 1999, Unigene issued 164,102 shares of Unigene common
stock to The Tail Wind Fund, Ltd. 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. No commission or other remuneration was paid to solicit the conversion.
(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 to The Tail Wind Fund, Ltd. without registration in reliance on an
exemption under Section 3(a)(9) of the Securities Act. No commission or other
remuneration was paid to solicit the conversion.
(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 to The Tail Wind Fund, Ltd. without
registration in reliance on an exemption under Section 4(2) of the Securities
Act, because the offer and sale was made to a limited number of investors in a
private transaction.
(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 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 to The
Tail Wind Fund, Ltd. without registration in reliance on an exemption under
Section 3(a)(9) of the Securities Act. No commission or other remuneration was
paid to solicit the conversion.
(7) In the quarter ended March 31, 2000, Unigene issued for cash
626,036 shares of Unigene common stock to four accredited investors all of whom
were involved in fund raising activities for Unigene 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 to The Tail Wind Fund, Ltd.
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, because the offer and sale was made to a limited number of
investors in a private transaction.
(8) In the quarter ended June 30, 2000, Unigene issued 56,007 shares
of Unigene common stock to three accredited investors all of whom were involved
in fund raising activities for Unigene 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, because the offer and sale
was made to a limited number of investors in a private transaction.
(9) In the quarter ended September 30, 2000, Unigene issued 95,685
shares of Unigene common stock to three accredited investors all of whom were
involved in fund raising activities for Unigene 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 to four accredited investors all of whom were involved in fund
raising activities for Unigene 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, because the offer and sale was made to a limited number of
investors in a private transaction.
(10) In the quarter ended December 31, 2000, Unigene issued 8,636
shares of Unigene common stock to one accredited investor who was involved in
fund raising activities for Unigene upon the cashless exercise of a
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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, because the offer and sale was made to
a limited number of investors in a private transaction.
(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, because the offer and sale was made to a limited number of
investors in a private transaction.
(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, because the
offer and sale was made to a limited number of investors in a private
transaction.
(13) In the quarter ended September 30, 2001, Unigene sold 1,437,492
shares 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,
because the offer and sale was made to a limited number of investors in a
private transaction.
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 of Post-Effective
Amendment No. 2 to 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 Dechert as to the legality of 10,000,000 of the shares
of Unigene common stock being registered. **
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-
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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).
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).
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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 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
II-5
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 of Amendment No. 2 to 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 of Amendment No. 2 to 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 of Amendment No. 2 to 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 Dechert (included in opinion filed as Exhibit
5.1).**
24.1 Powers of Attorney of Directors of Unigene Laboratories, Inc.*
- -------------------------
* Previously filed
** 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:
(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
II-6
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 Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Fairfield, New Jersey, on this 11th day of February, 2002.
UNIGENE LABORATORIES, INC.
By: /s/ Warren P. Levy
----------------------
Warren P. Levy
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed on this 11th
day of February, 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 Treasure (principal financial
- --------------------------- and accounting officer) and
Jay Levy Director
/s/ Ronald S. Levy Director
- ---------------------------
Ronald S. Levy
* Director
- ---------------------------
Allen Bloom
* Director
- ---------------------------
Bruce S. Morra
* Director
- ---------------------------
J. Thomas August
/s/ Warren P. Levy
- ---------------------------
Warren P. Levy
* Attorney-in-Fact
II-8
EXHIBIT INDEX
Exhibit
Number Description
----------- -------------------------------------
5.1 Opinion of Dechert
23.1 Consent of KPMG LLP
23.2 Consent of Dechert (included in opinion filed as
Exhibit 5.1)
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