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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-3390
UNIMED PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
22-1685346
(I.R.S. Employer
Identification Number)
2150 E. LAKE COOK RD.,
BUFFALO GROVE, ILLINOIS
(Address of principal executive offices)
60089
(Zip Code)
Registrant's telephone number, including area code: (847) 541-2525
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS ON WHICH REGISTERED NAME OF EACH EXCHANGE
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None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.25 PAR VALUE
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, AS OF
FEBRUARY 28, 1997 -- 8,783,499.
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT, BASED UPON THE CLOSING PRICE ON FEBRUARY 28,
1997 WAS $42,774,745.
DOCUMENTS INCORPORATED BY REFERENCE
THE DEFINITIVE PROXY STATEMENT (TO BE FILED PURSUANT TO REGULATION 14A) FOR
THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 24, 1997 IS INCORPORATED BY
REFERENCE IN PART III.
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PART I
ITEM 1. BUSINESS.
Unimed Pharmaceuticals, Inc. and its consolidated subsidiary (the
"Company") develop and market prescription pharmaceutical products. Currently
the Company promotes two approved drugs and is developing others targeted for
the HIV/AIDS, infectious diseases, endocrinology, urology, oncology and
hematology markets. The Company developed and promotes Marinol(R), an appetite
stimulant and antiemetic drug, through a specialty sales force in the U.S.
primarily to AIDS-treating physicians. Marinol is distributed in international
markets through foreign licensees. In February 1997, the Company acquired from
G.D. Searle & Co., the long-term, exclusive U.S. marketing and distribution
rights for Maxaquin(R) (lomefloxacin), a fluoroquinolone antibiotic used in the
urology and infectious disease markets. The Company is a Delaware corporation
incorporated in 1948.
The Company's business strategy is to license and develop drugs that have
successfully completed milestones leading to human clinical testing. The Company
expects to build a diversified portfolio of products in several therapeutic
areas. During 1996, the Company completed Phase II clinical development on three
new drugs that were licensed in 1995. The Company has initiated Phase III
clinical trials on two of these compounds, and expects to begin a Phase III
trial on the third by mid-1997.
The Company is concentrating on "niche" markets in which relatively few
physicians treat affected patients. The Company believes a small specialized
sales force can reach targeted physicians. The Company has expanded and expects
to further expand the sales and marketing organization as new products are added
and new business opportunities arise. In addition, the Company intends to work
closely with managed care providers to ensure formulary listing of its approved
drugs.
The Company's products and clinical supplies are manufactured through
contractors, although certain specialized equipment is owned and maintained by
the Company. The Company believes that qualified contract manufacturers are
available to produce both currently marketed drugs and those now under
development, and expects to continue to utilize contract manufacturing in the
foreseeable future.
MARINOL (DRONABINOl)
Marinol was approved for marketing by the Food and Drug Administration
(FDA) in 1985 for treating nausea and vomiting associated with cancer
chemotherapy in patients failing to respond adequately to conventional
antiemetic drug therapy. In 1992, the FDA approved a second indication for
Marinol: treating anorexia associated with weight-loss in patients with AIDS.
Marinol is supplied as round soft gelatin capsules containing either 2.5mg,
5mg or 10mg dronabinol.
Use of Marinol in Cancer
Marinol is a safe and effective oral antiemetic (relieving drug-induced
nausea and vomiting) based on numerous clinical studies in cancer patients
undergoing chemotherapy. The drug is believed to exert its antiemetic effects
through binding with cannabinoid receptor sites in the brain. Marinol has been
shown effective when used as a single agent or in combination with other
antiemetic therapies for mild to moderate nausea associated with cancer
chemotherapy.
Use of Marinol in AIDS
Infection from the human immunodeficiency virus (HIV) has a largely
irreversible and progressive effect on the nutritional status of the patient.
Eventually the compromised status of the patient leads to profound weight-loss,
known as HIV wasting syndrome. Studies of individuals with AIDS have shown a
high correlation between weight-loss and death, hence treatment that can improve
caloric intake and/or stimulate appetite may be clinically beneficial in this
patient population.
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Weight-loss observed in AIDS is due to one or more of four primary
mechanisms: poor intestinal absorption, abnormal cellular utilization, increased
energy requirements due to HIV and opportunistic infections, and inadequate
caloric intake (leading to clinical malnutrition). In addition, recent studies
suggest a high correlation between endocrine dysfunction (low testosterone serum
levels) and weight-loss.
In 1987, the Company initiated clinical development of Marinol in treatment
of weight-loss in cancer patients. The emerging AIDS pandemic led the Company to
expand the clinical program and then to concentrate on an AIDS application. A
subsequent Phase III multi-center double-blind, placebo-controlled trial in AIDS
patients with anorexia and weight-loss demonstrated statistically significant
improvement in appetite by the fourth week of therapy. Patients in the study
were permitted to continue treatment in an open-label study, in which there was
sustained improvement in appetite. Treatment was well tolerated by most
patients. The incidence of side-effects was decreased by dose reduction. This
pivotal study also demonstrated clinical trends toward improvement in the
patients' weight, mood and reduced nausea. The Company completed the
multi-center Phase III clinical trial in early 1992, filed a New Drug
Application in August 1992, and received approval to market from the FDA in
December 1992.
In spite of a growing arsenal of pharmacological agents to treat HIV
infection (e.g., protease inhibitors; reverse transcription inhibitors), the
Company believes that the need for Marinol as an appetite stimulant will
continue to grow as AIDS becomes a chronic disease and individuals who are HIV
positive, but asymptomatic for AIDS, develop the disease. The Company believes
that Marinol can be safely and effectively used in combination with the wide
variety of drugs currently used to treat AIDS and related opportunistic
infections.
Potential Use of Marinol in Alzheimer's Disease
During 1996, the Company completed a pilot study exploring use of Marinol
in Alzheimer patients as an appetite stimulant. Alzheimer's disease is believed
to afflict an estimated 4 million Americans with a projected annual increase of
400,000 new cases per year. Although the six-week pilot study was primarily
undertaken to investigate the effect of Marinol on appetite, patients were found
to have a significant reduction in disturbed behavior compared to patients on
placebo.
A Phase II trial was initiated in December 1996 to further evaluate the
clinical effects of Marinol doses on the behavior of patients with Alzheimer's
disease. Pending positive results from this study, the Company intends to
conduct additional trials in Alzheimer patients.
MAXAQUIN (LOMEFLOXACIN HCl)
In February 1997, the Company entered into a long-term exclusive agreement
with G.D. Searle & Co. (Searle), a wholly-owned subsidiary of the Monsanto
Company, for U.S. marketing and distribution rights to Maxaquin, a
fluoroquinolone antibiotic. Fluoroquinolone sales in the U.S. are in excess of
$1 billion annually. The acquisition of this product is part of the Company's
strategy to establish a presence in the urology and infectious disease
therapeutic markets.
Maxaquin was originally approved by the FDA in February 1992. Currently it
is indicated for: (1) lower respiratory tract infections, (2) complicated and
uncomplicated urinary tract infections, (3) preoperatively for the prevention of
infection in transrectal prostate biopsy and, (4) preoperatively for the
prevention of infection in transurethral surgical procedures. A supplemental NDA
is pending at the FDA for the three-day use of Maxaquin to treat uncomplicated
urinary tract infections.
The Company intends to focus initial sales and marketing programs in
markets where historically Maxaquin sales have been strong. The Company intends
to expand its capacity to sell and promote Maxaquin to its target markets both
directly to physicians and to managed care providers. The Company expects
Maxaquin to be one of several Unimed products marketed to urologists (see
discussion on Androgel products under "Product Development").
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PRODUCT DEVELOPMENT
The Company has four drugs under development: Nitazoxanide (NTZ), a
therapeutic treatment for cryptosporidiosis; Androgel and Androgel-DHT, for
therapeutic replacement and supplementation of testosterone; and SERC, for
treatment of vestibular vertigo. The status of each drug is discussed below.
NITAZOXANIDE
In June 1995, the Company entered into an exclusive licensing agreement
with Romark Laboratories, L.C., Tampa, Florida ("Romark"), to develop and market
oral dosage formulations of the anti-parasitic drug, nitazoxanide ("NTZ"), for
human use in the U.S., Canada, Australia and New Zealand. The agreement provides
for rights to oral and intravenous administration for treatment of
cryptosporidiosis. In addition, the Company has marketing rights to oral uses of
NTZ for all indications and is investigating other therapeutic applications of
the drug.
Individuals with AIDS and others with compromised immune function are at
high risk of prolonged and potentially life-threatening infections from
Cryptosporidium parvum (C. parvum) -- a food and waterborne parasite for which
there is no effective treatment. C. parvum inhabits the respiratory and
gastrointestinal tracts of animals and, increasingly, humans. In 1982, according
to the Centers for Disease Control (CDC), the number of cases of C. parvum
significantly increased, which was later determined to be related to the AIDS
epidemic. The parasite is highly contagious through contact with infected
humans.
Symptoms of cryptosporidiosis include diarrhea, nausea, vomiting and
weight-loss. Severity of symptoms varies with the degree of immunosuppression.
In healthy people, the infection is self-limiting, lasting from a few days to
several weeks. Patients with AIDS are often carriers of C. parvum for months or
even years. There is no FDA approved drug to treat cryptosporidiosis.
A Phase II clinical trial was completed in 1996 in 28 patients with AIDS
and cryptosporidiosis at Cornell Medical Center, in New York City and at Kaiser
Permanente Research Center in San Francisco, CA. Patients received up to 2,000mg
(milligrams) per day of NTZ for eight weeks. A favorable clinical response was
observed in 58% of the patients. Complete or partial reduction in the frequency
of diarrhea was observed in 50% of the patients while 36% had complete or
partial reduction of C. parvum. One third of patients experienced a reduction in
both diarrhea and parasitic burden.
In early 1997, the AIDS Clinical Trials Group (ACTG), a clinical research
cooperative supported by the National Institute of Allergy and Infectious
Diseases, initiated a Phase II/III placebo controlled study of NTZ to treat AIDS
patients with cryptosporidiosis.
The ACTG trial is a nine-week double-blind, placebo-controlled trial
designed to determine the efficacy and safety of NTZ in AIDS patients with
cryptosporidiosis. After the nine weeks, all patients will be randomized to
active therapy at different doses for six months. The study is expected to
enroll 60 HIV positive patients with cryptosporidiosis at several study sites
across the U.S. The Company anticipates that data from this trial will be
sufficient to support the filing of an NDA.
The Company provides NTZ free of charge under an FDA-sponsored
compassionate use program for patients not meeting the clinical entry criteria
in company-sponsored studies or not in geographic proximity to the Company or
government-sponsored trials. Data gathered from these patients will be used to
support a Company NDA filing. Results obtained to date are consistent with the
Phase I/II findings and provide further evidence of NTZ's safety and
effectiveness in these patients.
The Company's agreement with Romark, among other things, obligates the
Company to use its best efforts, consistent with reasonable business judgment,
to prosecute FDA approval of an initial NTZ product. The Company is in ongoing
discussions with Romark addressing the performance of its obligations under the
agreement.
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ANDROGEL(TM) AND ANDROGEL(TM)-DHT
In 1995, the Company acquired exclusive rights from Laboratoires Besins
Iscovesco S.A. ("Besins") in the U.S., Canada and Mexico to topical gel
formulations of two male hormones -- testosterone and dihydrotestosterone (DHT).
The gels are applied to the arms or abdomen and gradually absorbed into the
blood stream. DHT has been marketed in France and Belgium as treatment for low
testosterone levels (hypogonadism) for over 10 years. Low testosterone is
associated with a variety of adverse effects, including: impotence; lack of sex
drive; diminished energy; muscle weakness; and low bone mineral density.
Hypogonadism has also been implicated as a potential factor in the etiology of
HIV wasting syndrome.
Hypogonadism can result from a number of causes, including congenital
abnormalities (e.g., Klinefelter's syndrome -- a condition in male newborns
having an extra X chromosome); disease or injuries affecting the pituitary
gland, hypothalamus or testes; chronic illnesses (e.g., diabetes, kidney
failure, AIDS); or declining testosterone production associated with aging
(geriatric hypogonadism). Testosterone levels in men may decline 30-40%
beginning in their late 40s to their early 70s. Because of this, androgen
supplementation in aging men may prove to be beneficial.
The Company initiated a Phase II clinical trial in 1996 evaluating the
safety and efficacy of Androgel(TM)-DHT (dihydrotestosterone gel) for treating
patients with HIV wasting syndrome. Shortly thereafter, a Phase II clinical
trial began in geriatric hypogonadism (deficient levels of testosterone due to
aging, also known as andropause). This trial was completed by year-end. In
mid-1996, the Company also initiated and later completed a Phase I/II
pharmacokinetics trial, testing Androgel(TM) (testosterone gel) in men with
classic hypogonadism. In March 1997 the Company began a pivital Phase III human
clinical trial with androgel for the treatment of testoterone difficiency in
men.
SERC(R)
SERC (betahistine HCl) was developed by the Company in the 1960s, and is
widely distributed by others around the world for treatment of vestibular
vertigo and Meniere's syndrome. SERC generates an estimated $80 million in sales
to foreign manufacturers, primarily Solvay-Duphar, a Netherlands-based
pharmaceutical company. Through 1995, the Company generated royalty income from
SERC through distributors in Canada, Australia and South Africa. SERC is not
approved for sale in the United States.
In December 1995, the Company licensed back from Solvay-Duphar rights to
proprietary know-how and manufacturing which may be used to develop SERC in the
U.S. Unimed sold its rights and trademarks in Canada, Australia and South Africa
to Solvay-Duphar. Solvay-Duphar made a $1.4 million payment to Unimed.
Solvay-Duphar will also supply SERC to Unimed. Unimed will pay a royalty to
Solvay-Duphar on sales of SERC in the U.S., should the drug be approved.
MARKETING AND DISTRIBUTION
The Company's sales force details Marinol primarily to AIDS-treating
physicians under a co-promotional agreement with Roxane Laboratories, Inc.
(Roxane), a member of the Boehringer Ingelheim group of companies. Sales
territories are located throughout the U.S. in cities with a high incidence of
AIDS. In March 1997, the Company began to distribute Maxaquin. Initially, the
Company will detail Maxaquin in the urology market and to high prescribing
infectious disease physicians. The Company expects to expand its sales force as
the marketing strategy is implemented.
The Company intends to develop a portfolio of proprietary drugs to
distribute in niche markets -- therapeutic areas such as HIV/AIDS, urology and
endocrinology where fewer than 10,000 physicians manage the majority of
patients. The Company believes it can obtain new FDA approvals from the current
clinical development program and that this will result in substantial revenue
growth. The Company intends to focus on U.S. markets and to pursue partnerships
and corporate alliances to market its products abroad.
In 1996, Marinol was approved for use as an antiemetic in South Africa and
is under regulatory review for use as an appetite stimulant. The product was
launched in 1996 and is being marketed and sold in South Africa by Pharmacare
Ltd.
In 1996, the Company sublicensed to BioChem Pharma International Inc. the
right to register, market and distribute in Canada NTZ, Adrogel and Adrogel-DHT.
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MANUFACTURING
Manufacture of the Company's products and drugs under development is
performed on a contract basis by third parties.
The NORAC Company, Inc. (NORAC) supplies THC (tetrahydrocannabinol), the
active ingredient in Marinol, to the Company on an exclusive basis, through
December 31, 1999, subject to an automatic annual renewal thereafter. The
Company owns the principal equipment used by NORAC to manufacture THC. THC is
synthesized and purified through a complex and time-consuming process. The loss
of NORAC as a supplier could have a material adverse effect on the Company.
Currently, the Company maintains a three-year supply of THC.
Under the terms of the Unimed/G.D. Searle & Co. Distribution Agreement,
Searle will continue to manufacture Maxaquin and supply it to Unimed.
The Company has supply agreements with Romark for NTZ, Besins for Androgel
and Androgel-DHT, and Solvay-Duphar for SERC. Under these agreements, the
Company purchases clinical supplies, and after approval by the FDA, will
purchase finished drug products in accordance with the Company's specifications.
COMPETITION
There are many companies, both public and private, including well-known
pharmaceutical companies, chemical companies and specialized genetic engineering
companies, engaged in developing pharmaceuticals and biotechnology compounds for
human therapeutic applications. Most of these companies have substantially
greater financial, research and development, manufacturing, marketing and human
resources than the Company, and represent significant competition. Such
companies may succeed in developing products that are more effective or less
costly than any developed by the Company and may also prove to be more
successful in manufacturing and marketing. The Company does not have a
significant position in the pharmaceutical market.
Recent passage of legislation in California and Arizona legalizing the use
of marijuana for medical purposes could result in competition for Marinol since
THC is a synthetic version of the active component of marijuana. However, the
Company does not expect that efforts to promote the use of marijuana as a
therapuetic will adversely impact Marinol sales for several reasons. These
reasons include the fact that there are no clinical trials establishing the
safety or efficacy of marijuana for any medical use, the potency and purity of
marijuana are not assured, the fact that the cost of Marinol is eligible for
Medicaid reimbursements, unlike marijuana, and the fact that the illegal status
of marijuana under federal law presents a barrier to many physicians prescribing
it to patients.
GOVERNMENT REGULATION
The FDA and comparable agencies in other countries impose substantial
requirements on the introduction of therapeutic pharmaceutical products through
lengthy and detailed laboratory and clinical testing procedures and other costly
and time-consuming procedures. Satisfaction of these requirements typically
takes a number of years and varies substantially based upon the type, complexity
and novelty of the product. In general, the FDA approval process for
pharmaceuticals involves the submission of an Investigational New Drug (IND)
application following preclinical studies, clinical trials in humans to
demonstrate the safety and efficacy of the product under the protocols set forth
in the IND, and submission of preclinical and clinical data as well as other
information to the FDA in an New Drug Application (NDA). The conduct of clinical
trials requires substantial time and expense, and there is no assurance that the
results of the trials will be sufficient to support the submission or the
approval of an NDA. The failure of Unimed to receive FDA approval for its
products under development would preclude the Company from marketing and selling
newly developed products in the United States.
Pharmaceutical manufacturers are subject to extensive regulation by federal
and state regulatory agencies. The Federal Food, Drug and Cosmetic Act, the
Controlled Substance Act, and other federal statutes and regulations govern or
influence the testing, manufacture, safety, labeling, storage, record-keeping,
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approval, advertising and promotion of pharmaceutical products. Noncompliance
with applicable requirements can result in fines, recall and seizure of
products, total or partial suspension of production, and governmental refusal to
approve new products or indications. The manufacture and sale of Marinol also is
regulated by the Drug Enforcement Agency (DEA) and by statutes and regulations
promulgated by a number of states and foreign countries.
PATENTS AND PROPRIETARY RIGHTS
In 1991, Marinol was designated as an Orphan Drug by the FDA for use as an
appetite stimulant in patients with AIDS. Under the Orphan Drug Act of 1983, the
Company was granted seven years of marketing exclusivity for this use in the
U.S. The seven-year period began with receipt of marketing approval from the FDA
in December 1992.
In February 1997, Unimed acquired from G.D. Searle & Co. long-term
exclusive U.S. marketing and distribution rights to Maxaquin, which is the
subject of a U.S. patent. Maxaquin was approved by the FDA in February 1992 for
the following indications: (1) lower respiratory tract infections, (2)
complicated and uncomplicated urinary tract infections, (3) preoperatively for
the prevention of infection in transrectal prostate biopsy, and (4)
preoperatively for the prevention of infection in transurethral surgical
procedures. The Maxaquin trademark registration is valid and subsisting in the
U.S., and as part of the marketing and distribution agreement the Company has
the exclusive right to use the trademark in the United States. Searle holds its
rights to maxaquin under a license agreement with a third party.
The Company requested and was notified by the FDA that Androgel-DHT
qualifies as an Orphan Drug for treating weight-loss in AIDS patients. In
addition, the Company may receive proprietary protection from a patent should it
be issued, relating to the use of Androgel-DHT in treating geriatric
hypogonadism, pursuant to its license agreement with Laboratoires Besins
Iscovesco S.A.
The Drug Price Competition and Patent Restoration Act of 1984 (commonly
known as the "Waxman-Hatch Act") provides market exclusivity for drug products
that have received FDA market approval based on an NDA that includes data from
pivotal clinical studies conducted by the applicant. In the case of the Company,
both Androgel and Androgel-DHT will be protected against competition (for a
period of three and five years, respectively) from any company that is able to
obtain approval of an abbreviated NDA (ANDA) for a generic copy of either
Company product.
Nitazoxanide, when combined with a wetting agent, and optionally, a starch
derivative, in an oral composition, is the subject of certain patents held by
its licensor, Romark Laboratoires, L.C. Unimed has the right to use and practice
those patents under its license agreement with Romark; however, Unimed does not
hold any NTZ-related patents directly. The Company has obtained an Orphan Drug
Designation for the use of NTZ in the treatment of cryptosporidiosis in patients
with AIDS.
The Company owns the Marinol, SERC, Androgel and Androgel-DHT trademarks in
the U.S.
EXECUTIVE OFFICERS
TERM OF
NAME AGE POSITION OFFICE BUSINESS EXPERIENCE
---- --- -------- ------- -------------------
Robert E. Dudley Ph.D.......... 42 Chief Executive Officer 1997 Chief Executive Officer of Unimed
Pharmaceuticals, Inc. since
January 1997 and Vice President
of Clinical and Regulatory
Affairs from December 1994
through December 1996; Vice
President of Clinical Development
of Bio-Technology General Corp.,
a biotechnology company, from
August 1993 through November
1994; Vice President of Research
and Development of Gynex
Pharmaceuticals, Inc., a pharma-
ceutical company, from May 1989
through August 1993.
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TERM OF
NAME AGE POSITION OFFICE BUSINESS EXPERIENCE
---- --- -------- ------- -------------------
David E. Riggs................. 45 Senior Vice President, 1997 Senior Vice President since
CFO, Secretary, October, 1994 and Vice President,
Treasurer CFO, Secretary and
Treasurer of Unimed
Pharmaceuticals, Inc. since May
1992; CFO of NeoPharm, Inc. since
October 1995; CFO and Secretary
of VideoCart, Inc., a micro-
marketing media company, from
1990 through 1991; Treasurer and
Director of Financial Planning
for Lyphomed, Inc., a
pharmaceutical company, from 1986
through 1990.
John E. Lee.................... 48 Vice President 1997 Vice President of Commercial
Commercial Development Development since July 1996;
principal of Alexander Group, a
consulting company from September
1992 through January 1996;
several positions at G.D. Searle
& Company, a pharmaceutical
company, from March 1975 through
September 1992, most recently
Senior Director U.S. Operations.
EMPLOYEES
The Company has 23 full-time employees and one part-time employee. Unimed
expects to add technical, sales and marketing and administration staff to
support development of the business. The Company believes employee relations are
satisfactory and that it will be able to attract additional personnel as needed.
ITEM 2. PROPERTIES.
The Company leases approximately 5,000 square feet of executive office
space in Buffalo Grove, Illinois, at an annualized cost of approximately
$165,000, under a lease that expires in 1998. See "Note 14 -- Subsequent Events"
in Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the over-the-counter market. Its
Common Stock is quoted on the NASDAQ National Market System (NMS) under the
symbol UMED. The following table lists the high and low closing prices of the
Common Stock for the two most recent fiscal years.
HIGH LOW
---- ---
1995 (January 1 -- December 31)
First Quarter............................................. 4 3/8 2 3/8
Second Quarter............................................ 6 3 1/2
Third Quarter............................................. 6 3/4 4 3/4
Fourth Quarter............................................ 7 5/8 5 1/8
1996 (January 1 -- December 31)
First Quarter............................................. 8 6 1/8
Second Quarter............................................ 9 1/2 6 3/8
Third Quarter............................................. 8 13/16 5 5/8
Fourth Quarter............................................ 8 3/8 6 1/4
The Company had approximately 1,128 holders of record of Common Stock on
February 28, 1997. Unimed's Board of Directors anticipates the retention of all
available earnings to support expected growth and does not anticipate payment of
dividends in the foreseeable future.
In February 1996, the Company issued 1.4 million and 800,000 shares of
Common Stock pursuant to a private placement and the exercise of the John N.
Kapoor Trust warrants, respectively. In addition, 50,771 shares of Common Stock
were issued to BioChem Pharma (International) Inc., in connection with a product
license agreement.
ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED
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12/31/96 12/31/95 12/31/94 12/31/93 9/30/92
-------- -------- -------- -------- -------
RESULTS OF OPERATIONS:
Net sales........................ $ 7,648,599 $ 7,320,052 $ 7,387,860 $ 6,875,678 $ 3,615,381
Income (Loss) from continuing
operations..................... 1,522,143 625,062 40,708 (852,294) (3,829,177)
(Loss) from discontinued
operations..................... -- -- -- -- (380,634)
Net income (loss)................ 1,522,143 625,062 40,708 (852,294) (4,209,811)
Total assets..................... 30,746,875 16,305,181 11,804,781 11,662,035 12,174,796
----------- ----------- ----------- ----------- -----------
PER SHARE COMMON STOCK DATA:
Income (Loss) from continuing
operations..................... $.17 $.09 $.01 $(0.14) $(0.72)
Net income (loss)................ $.17 $.09 $.01 $(0.14) $(0.79)
Dividends paid................... $ -- $ -- $ -- $ -- $ --
Selected financial data for all periods prior to December 31, 1995 have
been restated to conform to the 1996 presentation. These restatements had no
effect on net income (loss).
Results for the fiscal year ended September 30, 1992, include a $2.5
million restructuring charge.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The Company develops and markets proprietary pharmaceutical products in
niche medical markets, consisting of approximately 10,000 or fewer physicians.
During 1996, sales and cash flow from Marinol were used to fund product
development programs. The Company is actively pursuing acquisition of commercial
products and expects to purchase or acquire rights to additional pharmaceutical
products under late-stage development or already on the market. In 1996,
Unimed's net sales were $7.6 million, a 4% increase over 1995 net sales of $7.3
million. Marinol(R) net sales increased by 27% over 1995 due to growth in
domestic sales and the launch of Marinol in South Africa. Higher Marinol sales
offset the effect of products discontinued at the end of 1995.
The Company reported net income of $.17 per share in 1996 compared to net
income of $.09 per share in 1995 and $.01 per share in 1994.
The Company generated cash flow from operations of $3,045,000 compared to
$1,640,000 in 1995 due to significantly higher Marinol sales. The Company
reported year-end cash, cash equivalents and short-term investments of
$20,830,000 compared with $8,401,000 at year-end 1995. This increase was
generated from a private placement of common stock completed in the first
quarter of 1996, the exercise of stock warrants and options, and from
internally generated cash from operations.
REVENUE
Fiscal 1996 net sales of Marinol(R), marketed as a refractory antiemetic in
cancer chemotherapy and an appetite stimulant in anorexia associated with weight
loss in AIDS, increased 27% over 1995 levels, ending the year at $7,649,000.
This compares with a 5% increase in Marinol net sales growth for 1995 to
$6,031,000 and a 5% increase in net Marinol sales from 1994 ($5,755,000) to
1995. For the year ended December 31, 1995 and for all prior periods presented,
the Company reclassified, for financial reporting purposes, a normally recurring
provision for estimated Medicaid rebates on Marinol sales. This provision for
Medicaid rebates, previously reported as a cost of sales, has been reclassified
as a reduction to gross sales. This change had no effect on gross profit or net
income. Marinol is marketed by the Company's licensee, Roxane Laboratories, Inc.
(Roxane). The Company reports the royalty income it receives from Roxane as
revenues from Marinol sales. In 1996, Marinol was approved for use as an
antiemetic in South Africa and is currently under regulatory review for use as
an appetite stimulant. The antiemetic approval resulted in launching the product
in South Africa in July 1996. Marinol sales to countries outside the United
States totaled approximately $812,000 in 1996 and $134,000 in 1995.
SERC(R) is marketed by other pharmaceutical companies in Canada and several
international markets to treat recurrent vertigo. During 1995, SERC was marketed
by Sanofi Winthrop in Canada. In December 1995, Unimed entered into an agreement
with Solvay Duphar whereby Unimed licensed the rights to proprietary know-how
and manufacturing for the drug SERC in the U.S. As part of the agreement, the
Company received a $1.4 million payment for product development and for Unimed's
product and trademark rights to SERC in Canada, Australia and South Africa.
Royalties from SERC sales in Canada amounted to zero in 1996, $1,049,000 in 1995
and $1,060,000 in 1994.
During 1994, the Company terminated promotion of over-the-counter (OTC)
products which had been marketed directly to patients, specialty pharmacies and
physicians. The OTC products, consisting of ONDROX and the MouthKote product
line, generated net sales of $240,000 during 1995 and $573,000 during 1994.
Total revenue for 1996 was $8,213,000, representing 11% growth over
$7,412,000 in 1995. Higher Marinol sales, combined with research and development
revenues of $564,000 compared to research and development revenues of $92,000 in
1995, were able to offset the effect of the OTC products discontinued at the end
of 1995. The Company deferred the recognition of revenue on unconditional cash
payments made from corporate partners which will be applied to development of
the Company's product portfolio. The Company expects that this deferred revenue
will be utilized in 1997. Approximately $1,600,000 of R & D expenditures are
expected to be offset by deferred R & D revenues in 1997.
9
11
Other income (net of other expenses) increased to $1,550,000 in 1996
primarily due to the growth in interest income. Interest income increased to
$1,068,000 due to significantly higher cash balances from the private placement
of Common Stock and the exercise of outstanding stock warrants and options and
higher interest rates on short-term holdings. Other income includes
approximately $311,000 in 1996 from the gain on a product sublicense and
$200,000 from a gain on the sale of a trademark. Other income was 253,624 in
1994 and was comprised entirely of interest income.
COSTS AND EXPENSES
Cost of sales improved by 4% from $3,201,000 in 1995 to $3,087,000 in 1996.
The lower cost of sales in 1996 was due to lower Marinol raw material costs.
1995 cost of sales was slightly higher than 1994 cost of sales ($2,958,000) and
was related primarily to product sales growth.
Research and development expenses increased 139% from $710,000 in 1995 to
$1,699,000 in 1996 with completion of three human clinical studies and
initiation of several toxicology studies. In 1994, research and development
expenses totaled $362,000.
Sales and marketing expenses increased 20% as the Company added a
commercial development function to distribute new products. Sales and marketing
expenses decreased between 1995 and 1994, due to the termination of active
promotion of the OTC portfolio. Marinol promotional programs were unaffected by
these reductions.
Operating and administrative expenses were $2,183,000 in 1996, a slight
increase compared with $2,129,000 in 1995. Operating and administrative expenses
decreased 3% from 1994 to 1995. Operating and administrative expenses as a
percent of net sales were 29% in both 1996 and 1995. Operating and
administrative expenses were $2,780,000 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash and cash equivalents and
short-term investments of $20,830,000, compared with $8,401,000 at December 31,
1995. During 1996, Unimed generated cash from operations of $3,045,000. Working
capital increased from $8,423,000 to $18,901,000. The Company expects to
increase research and development expenditures in 1997 due to the development of
the Company's three drugs in Phase III clinical trials. The Company will require
a higher investment in working capital in order to fund accounts receivable and
inventories.
During 1996, the Company received approximately $711,000 from the exercise
of stock options. Net proceeds of $7,215,000 were obtained from a private
placement of common stock completed in February 1996. Also in February 1996,
stock warrants to purchase 800,000 shares of Common Stock were exercised,
generating $1.7 million.
Inventories increased $857,000 in 1996 over 1995 levels, as raw material
production of THC by NORAC was expanded. The Company's distributor, Roxane,
advances funds to Unimed to maintain Marinol inventories. The current
liability, due to Roxane, is relieved on a quarterly basis through the
reduction of royalties payable to the Company. The reduction in the quarter's
royalty payment primarily corresponds to the cost of Marinol inventory sold
during the quarter.
The Company maintains cash reserves and short-term investments to meet
anticipated working capital, capital expenditures, research and development and
other investment opportunities. The Company intends to acquire other product
licenses which may reduce cash balances.
ACCOUNTING PRONOUNCEMENTS
The FASB recently issued SFAS No. 128, "Earnings per Share," which
establishes standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or potential common stock.
This Statement simplifies the standards for computing earnings per share and
replaces the presentation of primary EPS with a presentation of basic EPS. The
Company will adopt this
10
12
Standard during the first quarter of 1997. The impact of the adoption has not
yet been determined by the Company's management.
BACKLOG, SEASONALITY AND IMPACT OF INFLATION
Sales orders are typically filled shortly after receipt. In general, the
Company's products experience minor seasonal fluctuations. While raw materials
included in certain products are subject to price escalation, due to a limited
number of suppliers, the complexity of manufacturing processes and regulatory
procedures, the Company does not attribute this to inflation and does not
anticipate inflation to have a significant impact on costs in the near future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data are listed
under Item 14 in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K under the captions "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as oral statements that may be made by the Company or
officers, directors or employees of the Company acting on the Company's behalf,
that are not historical fact constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause the actual results of the Company to be
materially different from the historical results or from any results expressed
or implied by such forward-looking statements. Such factors include, among
others, the following:
Uncertainty of Product Development. A substantial amount of the Company's
resources have been, and for the foreseeable future will continue to be,
dedicated to the Company's acquisition of rights to and the development of
potential products. There can be no assurance that the Company's activities will
lead to the development or commercialization of any product.
Regulatory and Technology Uncertainty. The Company is engaged in the
biopharmaceuticals field, which is characterized by extensive research and rapid
technological change. There can be no assurance that research and discoveries by
others will not render some or all of the Company's products non-competitive or
obsolete.
Dependence on Others. The Company's strategy for development and
commercialization of its products is to rely, in part, on various arrangements
with licensors, licensees, exclusive manufacturers and suppliers and others and,
therefore, is dependent upon the success of these outside parties in the
performance of their duties. There can be no assurance that the Company will be
able to negotiate acceptable arrangements or product distribution arrangements.
There can be no assurance that the Company, at all times, will be in compliance
with the material terms and conditions of all its licensing arrangements, which
could lead to periodic renegotiations of terms.
Substantial Competition and Technological Change. Many companies engage in
developing pharmaceutical products for human therapeutic applications. Most of
these companies have substantially greater capital, research and development and
human resources and experience than the Company and represent significant
long-term competition for the Company. In addition, many of these competitors
have a significantly greater experience that the Company in undertaking the
development of new pharmaceutical products and in obtaining regulatory approval.
Other companies may succeed in developing products that are more effective or
less costly than any that may be developed by the Company and may also prove to
be more successful than the Company in production and marketing.
11
13
Dependence on Qualified Personnel. The Company's success is highly
dependent upon its ability to attract and retain qualified administrative,
product developement and technical personnel. The loss of key personnel would
be detrimental to the Company and there can be no assurance that these
employees will remain with the Company.
Uncertain Availability of Health Care Reimbursement. The Company may be
materially adversely affected by the continuing efforts of government and third
party payers to contain or reduce the cost of health care through various means.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item as to the Directors of the Company is
hereby incorporated by reference from the information appearing under the
caption "Members of the Board of Directors" in the Company's definitive Proxy
Statement which is to be filed with the Securities and Exchange Commission (the
"Commission") within 120 days of the Company's fiscal year ended December 31,
1996.
The information required by this item as to the Executive Officers of the
Company appears in Part I, Item 2 under the caption "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item as to executive compensation is
hereby incorporated by reference from the information appearing under the
captions "Executive Compensation", "Compensation of Directors", in the Company's
definitive Proxy Statement which is to be filed with the Commission within
120 days of the Company's fiscal year ended December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item as to the ownership of management and
others of securities of the Company is hereby incorporated by reference from the
information appearing under the caption "Ownership of Shares" in the Company's
definitive Proxy Statement which is to be filed with the Commission within 120
days of the Company's fiscal year ended December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item as to certain business relationships
and transactions with management and other related parties of the Company is
hereby incorporated by reference from the information appearing under the
caption "Certain Transactions" in the Company's definitive Proxy Statement which
is to be filed with the Commission within 120 days of the Company's fiscal year
ended December 31, 1996.
12
14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
(a) and (d) Financial Statements
See Index to Consolidated Financial Statements and Schedules on page F-1.
(b) Reports on Form 8-K
None
(c) Exhibits
3-A -- Certificate of Incorporation of the Registrant, as amended
(filed by reference to Exhibits 3(a) through 3(c) to
Registration Statement No. 2-19352, Exhibit 3(c)(i) to
Registration Statement No. 2-21680, Exhibit 3(a) (i) to
Registration Statement No. 2-42398, Exhibit 3(a) to Current
Report on Form 8-K, dated January 27, 1981, Exhibit 3-A(ii)
to Annual Report on Form 10-K for the fiscal year ended
September 30, 1985 and Exhibit 3.1 to Registration Statement
No. 33-10975).
3-B(i) -- Amendment to Certificate of Incorporation, dated March 27,
1991 (filed by reference to Exhibit 3-B to Post-Effective
Amendment No. 3 to Registration Statement No. 33-10975).
3-B(ii) -- Amendment to Certificate of Incorporation, adopted by
stockholders on May 2, 1994 (filed by reference to Exhibit
3-B[ii] to Annual Report on Form 10-K for the fiscal year
ended December 31, 1994).
*3-B(iii) -- Amendment to Certificate of Incorporation adopted by
stockholders on May 2, 1996.
3-C -- By-laws of the Registrant, as amended (filed by reference to
Exhibit 3-B to Annual Report on Form 10-K for fiscal year
ended September 30, 1989).
3-D -- Amendment to the By-laws of the Company, dated May 5, 1991
(filed by reference to Exhibit 3-D to the Post-Effective
Amendment No. 3 to Registration Statement No. 33-10975).
4-A -- Specimen Common Stock Certificates (filed by reference to
Exhibit 4 to the Annual Report on Form 10-K for the fiscal
year ended September 30, 1991).
4-C -- Stock Registration Rights Agreement, dated March 27, 1991,
between the John N. Kapoor Trust and the Company (filed by
reference to Post-Effective Amendment No. 3 to Registration
Statement No. 33-10975).
4-D -- Stock and Warrant Agreement, dated as of August 11, 1995,
between the Company and Laboratoires Besins Iscovesco S.A.
4-E -- Warrant, dated August 11, 1995, for 72,550 shares of Common
Stock, issued to Laboratoires Besins Iscovesco S.A.
4-F -- Registration Rights Agreement, dated August 11, 1995,
between the Company and Laboratoires Besins Iscovesco S.A.
4-G -- Warrant, dated February 29, 1996, for 140,000 shares of
Common Stock, issued to Sunrise Securities Corp.
4-H -- Registration Rights Agreement, dated February 29, 1996,
between the Company and certain holders of Common Stock.
*4-I -- Stock Purchase Agreement dated May 9, 1996 between the
Company and BioChem Pharma (International) Inc.
*4-J -- Registration Rights Agreement dated May 9, 1996 by and
between the Company and BioChem Pharma (International) Inc.
10-B(i) -- Agreement between Roxane Laboratories, Inc. and the Company,
dated February 12, 1986 (filed as Exhibit 10 to the
Company's Current Report on Form 8-K dated February 12,
1986).
13
15
10-B(ii) -- Agreement between Roxane Laboratories, Inc. and the Company,
dated April 1, 1987 (filed as Exhibit 28.1 to the Company's
Current Report on Form 8-K dated April 28, 1987).
10-B(iii) -- Agreement between Roxane Laboratories, Inc. and the Company,
dated January 20, 1995, (filed by reference to Exhibit
10-B(iii) to Annual Report on Form 10-k for fiscal year
ended December 31, 1995).
10-D(i) -- Forms of Graduated Vesting Non-qualified Stock Option
Agreement (filed by reference to Exhibit 10-G[iv] to
Registration Statement No. 33-43838).
10-D(ii) -- Form of Immediate Vesting Non-qualified Stock Option
Agreement (filed by reference to Exhibit 10-G[v] to
Registration Statement No. 33-43838).
10-D(iii) -- Form of Incentive Stock Option Agreement (filed by reference
to Exhibit 10-G[vi] to Registration Statement No. 33-43838).
*10-K -- Unimed Pharmaceuticals, Inc. 1991 Stock Option Plan, as
amended through May 2, 1996.
*10-L -- Agreement for Manufacture and Sale of THC, dated as of
January 1, 1995, by and between The NORAC Company, Inc. and
the Company.
10-N -- Employment Agreement, dated as of November 3, 1994 between
the Company and Robert E. Dudley (filed by reference to
Exhibit 10-N to Annual Report on Form 10-k for fiscal year
ended December 31, 1995).
*10-R -- Distribution Agreement dated February 14, 1997 by and
between the Company and G.D. Searle & Co.
*10-S -- Consulting Agreement dated July 23, 1996 by and between the
Company and E.J. Financial Enterprises, Inc.
*11 -- Computation of Income per Share
*27 -- Financial Data Schedule
- -------------------------
* Filed herewith.
14
16
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
Report of Independent Accountants........................... F-2
Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and
December 31, 1995...................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994....................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................... F-6
Notes to Consolidated Financial Statements................ F-7
Report of Independent Accountants on Financial Statement
Schedule.................................................. S-1
Financial Statement Schedule:
Valuation and Qualifying Accounts (Schedule II)........... S-2
F-1
17
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Unimed Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Unimed
Pharmaceuticals, Inc. and Subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1996, 1995 and 1994. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Unimed
Pharmaceuticals, Inc. and Subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and cash flows for the years ended
December 31, 1996, 1995 and 1994, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 14, 1997
F-2
18
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND DECEMBER 31, 1995
1996 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................... $ 4,458,889 $ 7,011,843
Short-term investments...................................... 16,370,897 1,388,756
Receivables:
Trade, less allowances of $39,390 in 1996 and $43,000 in
1995...................................................... 1,876,807 1,548,148
Other....................................................... 78,109 535,104
----------- -----------
Total receivables.................................... 1,954,916 2,083,252
Inventories................................................. 4,184,855 3,327,939
Prepaid expenses............................................ 108,457 276,043
----------- -----------
Total current assets................................. 27,078,014 14,087,833
----------- -----------
Equipment and leasehold improvements, at cost............... 2,035,807 1,922,006
Less accumulated depreciation and amortization......... 1,227,790 1,050,866
----------- -----------
Net.................................................... 808,017 871,140
----------- -----------
Investment in and subordinated debenture from Romark
Laboratories, L.C......................................... 2,275,910 600,000
Other assets................................................ 584,934 746,208
----------- -----------
Total assets......................................... $30,746,875 $16,305,181
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 376,761 $ 416,705
Accrued liabilities......................................... 1,210,664 531,446
Due to Roxane Laboratories.................................. 4,945,801 3,716,633
Deferred research and development revenues.................. 1,643,887 1,000,000
----------- -----------
Total current liabilities.............................. 8,177,113 5,664,784
----------- -----------
Commitments and contingencies (Notes 11 and 12)
Stockholders' equity:
Common stock, $.25 par value; authorized 30,000,000 and
12,000,000 shares; issued and outstanding: 8,775,499 and
6,270,886................................................. 2,193,875 1,567,722
Additional paid-in capital.................................. 27,340,665 17,559,861
Accumulated deficit......................................... (7,005,726) (8,527,869)
Accumulated foreign currency translation adjustment......... 40,948 40,683
----------- -----------
Total stockholders' equity........................... 22,569,762 10,640,397
----------- -----------
Total liabilities and stockholders' equity........... $30,746,875 $16,305,181
=========== ===========
See accompanying notes to consolidated financial statements
F-3
19
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
Net sales................................................ $7,648,599 $7,320,052 $7,387,860
Research and development revenue......................... 564,327 92,334 33,889
---------- ---------- ----------
Total revenue............................................ 8,212,926 7,412,386 7,421,749
Cost of sales............................................ 3,086,713 3,201,014 2,957,602
---------- ---------- ----------
Gross profit............................................. 5,126,213 4,211,372 4,464,147
---------- ---------- ----------
Operating and administrative............................. 2,183,229 2,129,140 2,195,829
Sales and marketing...................................... 1,271,566 1,059,215 2,112,826
Research and development................................. 1,699,304 710,353 362,256
---------- ---------- ----------
Total expenses........................................... 5,154,099 3,898,708 4,670,911
---------- ---------- ----------
(Loss) Income from operations............................ (27,886) 312,664 (206,764)
Interest income.......................................... 1,067,975 430,098 253,624
Other, net............................................... 482,054 (106,000) --
---------- ---------- ----------
Income before income taxes............................... 1,522,143 636,762 46,860
Income tax provision..................................... -- 11,700 6,152
---------- ---------- ----------
Net income............................................... $1,522,143 $ 625,062 $ 40,708
========== ========== ==========
Net income per share:
Primary................................................ $ .17 $ .09 $ .01
========== ========== ==========
Fully diluted.......................................... $ .17 $ .09 $ --
========== ========== ==========
Weighted average number of common and common equivalent
shares outstanding:
Primary................................................ 8,896,876 7,030,553 6,401,066
========== ========== ==========
Fully diluted.......................................... 9,054,847 7,300,921 --
========== ========== ==========
See accompanying notes to consolidated financial statements
F-4
20
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ACCUMULATED
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
------------ PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
------ ------ ---------- ----------- ----------- -----
Balance at December
31, 1993.......... 6,127,161 $1,531,790 $17,052,661 $(9,193,639) $38,595 $ 9,429,407
Net income.......... -- -- -- 40,708 -- 40,708
Foreign currency
translation
gain.............. -- -- -- -- 446 446
--------- ---------- ----------- ----------- ------- -----------
Balance at December
31, 1994.......... 6,127,161 1,531,790 17,052,661 (9,152,931) 39,041 9,470,561
Net income.......... -- -- -- 625,062 -- 625,062
Exercise of common
stock options..... 71,125 17,782 232,681 -- -- 250,463
Issuance of common
stock for product
licenses.......... 72,600 18,150 274,519 -- -- 292,669
Foreign currency
translation
gain.............. -- -- -- -- 1,642 1,642
--------- ---------- ----------- ----------- ------- -----------
Balance at December
31, 1995.......... 6,270,886 1,567,722 17,559,861 (8,527,869) 40,683 10,640,397
--------- ---------- ----------- ----------- ------- -----------
Net income.......... -- -- -- 1,522,143 -- 1,522,143
Exercise of common
stock options..... 181,342 45,335 665,485 -- -- 710,820
Issuance of common
stock for product
licenses.......... 123,271 30,818 750,373 -- -- 781,191
Issuance of common
stock in private
placement, net.... 1,400,000 350,000 6,864,946 -- -- 7,214,946
Exercise of
warrants.......... 800,000 200,000 1,500,000 -- -- 1,700,000
Foreign currency
translation
gain.............. -- -- -- -- 265 265
--------- ---------- ----------- ----------- ------- -----------
Balance at December
31, 1996.......... 8,775,499 $2,193,875 $27,340,665 $(7,005,726) $40,948 $22,569,762
========= ========== =========== =========== ======= ===========
See accompanying notes to consolidated financial statements
F-5
21
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
Cash flows provided by operations:
Net income............................................ $ 1,522,143 $ 625,062 $ 40,708
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization....................... 176,924 108,012 105,537
Other............................................... 38,344 107,601 --
Decrease (Increase) in receivables.................. 128,336 (435,007) (85,392)
Decrease in notes receivable........................ -- -- 35,032
(Increase) Decrease in inventories.................. (856,916) (812,994) 220,769
Decrease in prepaid expenses and other assets....... 167,586 9,028 175,700
Increase in accounts payable and accrued
liabilities...................................... 639,274 203,582 126,779
Increase (Decrease) in due to Roxane................ 1,229,168 1,834,717 (25,187)
------------ ----------- ----------
Net cash flows provided by operating
activities................................ 3,044,859 1,640,001 593,946
Cash flows (used in) provided by investing activities:
Proceeds on disposition of equipment................ 6,124 63,063 --
Purchases of equipment.............................. (129,039) (25,969) (36,409)
Purchase of short-term investments.................. (48,736,422) (877,393) --
Sale of short-term investments...................... 33,754,281 -- 256,258
Investment in Medisperse............................ -- (39,456) (40,927)
Investment in and subordinated debenture from Romark
Laboratories, L.C................................ (1,675,910) (600,000) --
------------ ----------- ----------
Net cash (used in) provided by investing
activities................................ (16,780,966) (1,479,755) 178,922
Cash flows provided by financing activities:
Proceeds from exercise of stock options............. 710,820 250,463 --
Proceeds from exercise of warrants.................. 1,700,000 -- --
Proceeds from issuance of common stock for product
licenses......................................... 781,191 -- --
Proceeds from issuance of common stock in private
placement, net................................... 7,214,946 -- --
Collection of note receivable....................... 132,252 -- --
Deferred research and development, net.............. 643,888 500,000 --
------------ ----------- ----------
Net cash flows provided by financing
activities................................ 11,183,097 750,463 --
Effect of exchange rate changes on cash............. 56 41 80
------------ ----------- ----------
Net change in cash and cash equivalents............... (2,552,954) 910,750 772,948
Cash and cash equivalents at beginning of year........ 7,011,843 6,101,093 5,328,145
------------ ----------- ----------
Cash and cash equivalents at end of year.............. $ 4,458,889 $ 7,011,843 $6,101,093
============ =========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes........................................ $ 11,700 $ 1,663 $ 1,605
See accompanying notes to consolidated financial statements
F-6
22
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unimed Pharmaceuticals, Inc. (the Company) and its subsidiary develop and
market proprietary ethical pharmaceutical products in niche medical markets.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary after elimination of intercompany balances and transactions.
(B) TRANSLATION OF FOREIGN CURRENCY AND RELATED MATTERS
The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars. Assets and liabilities of the subsidiary have been
translated using exchange rates in effect at the balance sheet date. The
statements of operations have been translated using the average rates of
exchange for the year. Adjustments resulting from the translations are
accumulated in the stockholders' equity section of the consolidated balance
sheets. Exchange gains or losses arising from the settlement of foreign currency
transactions during the year are reflected in the consolidated statements of
operations.
(C) CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents and short-term investments include liquid
instruments purchased with an original maturity of 90 or fewer days.
The Company has investments in short-term debt securities that have been
classified under the provisions of SFAS No. 115 as held-to-maturity. The
carrying amount of the investments approximate fair market value. Accordingly,
these investments are measured at amortized cost and temporary unrealized gains
or losses are not recognized. The Company's short-term investments are intended
to be applied in part to the cost of product research and development.
(D) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
(E) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation is provided on a straight-line basis over the estimated useful
lives of the applicable assets. Amortization of leasehold improvements is
provided on a straight-line basis over the lesser of the estimated useful lives
of improvements or the terms of the related leases. Expenditures for repairs and
maintenance are charged to operations; replacements, renewals and betterments
are capitalized. The cost and accumulated depreciation of assets retired or
otherwise disposed of are eliminated from the accounts and any gains or losses
on such dispositions are reflected in operations.
(F) INCOME TAXES
The consolidated financial statements reflect the application of Statement
of Financial Accounting Standards ("SFAS") No. 109 "Accounting For Income
Taxes". The Company files a consolidated federal income tax return.
(G) REVENUE RECOGNITION
Revenue is recognized as earned in accordance with specific terms of each
distribution, royalty and licensing agreement.
F-7
23
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(H) INCOME PER SHARE
Primary net income per share is computed by dividing net income by the
weighted average number of common stock and common stock equivalents (when
dilutive). Common stock equivalents include unexercised stock options and
warrants. Fully diluted net income per share is computed based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period, as if the common stock equivalents were converted
into common stock at the beginning of the period.
(I) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
(J) STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). As provided by SFAS 123, the Company has elected to continue to account
for its stock-based compensation programs according to the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, compensation expense has been recognized to the extent
of employee or director services rendered based on the intrinsic value of
compensatory options or shares granted under the plans. The Company has adopted
the disclosure provisions required by SFAS 123 (see "Note 9 -- Stock Options" in
Notes to Consolidated Financial Statements).
(K) RECLASSIFICATIONS
Certain amounts for 1995 and 1994 were reclassified to conform to the
current year presentation.
(L) LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be fully recoverable. In the event that facts and circumstances indicate that
the cost of any long-lived assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is required. The adoption did not have a material
effect on the Company's financial position or results of operations.
(2) INVENTORIES
A summary of inventory components at December 31 follows:
1996 1995
---- ----
Finished products..................................... $ 367,124 $ 368,636
Raw materials......................................... 3,817,731 2,959,303
---------- ----------
$4,184,855 $3,327,939
========== ==========
F-8
24
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A summary of equipment and leasehold improvements at December 31 follows:
ESTIMATED
1996 1995 USEFUL LIFE
---- ---- -----------
Equipment, furniture and fixtures.......... $1,997,888 $1,884,087 5-10 years
Leasehold improvements..................... 37,919 37,919 10 years
---------- ----------
$2,035,807 $1,922,006
========== ==========
The Company has purchased and retains title to the majority of the
equipment used by The NORAC Company, Inc. (NORAC) to manufacture Marinol(R)
(dronabinol). As of December 31, 1996 and 1995, the equipment had a net book
value of $408,902 and $490,285, respectively.
(4) PRODUCT DEVELOPMENT, LICENSING AND OTHER AGREEMENTS
Solvay Duphar
The Company entered into an agreement in January 1996 with Solvay Duphar of
The Netherlands. Unimed licensed the rights to proprietary know-how and
manufacturing for the drug SERC (betahistine hydrochloride) in the United
States. As part of the agreement, the Company received a $1.4 million payment to
help fund product development and for Unimed's product and trademark rights to
SERC in Canada, Australia and South Africa. The Company will buy all
requirements of SERC from Solvay Duphar, and will pay a royalty on sales of SERC
in the United States, if the drug is approved for marketing.
BioChem Pharma (International) Inc.
In May 1996, the Company signed a Collaboration Agreement with BioChem
Pharma (International) Inc., under which the Company sublicensed product rights
in Canada to NTZ, Androgel and Androgel-DHT. Successful development of the
Androgel(TM) products may result in additional equity investment and milestone
payments from BioChem Pharma (International) Inc. The sublicense fee was
$311,000. Concurrently, BioChem Pharma purchased for $489,000, 50,771 shares of
the Company's Common Stock.
Romark Laboratories, L.C.
In July 1996, the Company acquired an interest-bearing
convertible-subordinated debenture from Romark Laboratories, L.C. for $1.5
million and has accounted for this investment utilizing the cost method. The
debenture has a five-year term with interest payable to Unimed annually at the
rate of 7.5% per annum. Unimed has obtained an exclusive license to develop and
market oral dosage formulations of NTZ for human use in the U.S., Canada,
Australia and New Zealand from Romark Laboratories, L.C., Tampa, Florida.
(5) SHORT-TERM INVESTMENTS
Short-term investments in debt securities were as follows:
SHORT-TERM INVESTMENTS
HELD-TO-MATURITY
------------------------
1996 1995
---- ----
Obligations of corporations.......................... $16,370,897 $1,138,756
Obligations of U.S. government agencies.............. -0- 250,000
----------- ----------
$16,370,897 $1,388,756
=========== ==========
F-9
25
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
The provision for income taxes is comprised of the following:
CURRENT 1996 1995 1994
------- ---- ---- ----
Federal................................................ $-- $ -- $ --
State.................................................. -- 11,700 6,152
Foreign................................................ -- -- --
-- ------- ------
Total........................................ $-- $11,700 $6,152
== ======= ======
Income tax provisions from continuing operations differed from the taxes
calculated at the statutory federal rate as follows:
1996 1995 1994
---- ---- ----
Taxes at the statutory rate................... $ 517,400 $ 216,500 $ 16,400
Utilization of tax loss carryforward.......... (518,000) (217,100) (17,000)
State income taxes............................ -- 11,700 6,152
Foreign loss.................................. 600 600 600
Valuation allowance........................... -- -- --
--------- --------- --------
Totals.............................. $ -- $ 11,700 $ 6,152
========= ========= ========
At December 31, 1996, the Company has a tax loss carryforward of
approximately $8,402,000 for federal income tax purposes, which expires in the
years 2001 through 2010. The Company has available a research and development
credit carryforward at December 31, 1996, of approximately $430,000, which
expires in the years 2003 through 2010. Management has recorded a 100% valuation
allowance against deferred tax assets since future taxable income is uncertain.
The components of deferred taxes are as follows:
1996 1995
---- ----
Deferred tax assets:
Net operating loss carryforward................... $ 3,361,000 $ 4,013,000
Research tax credit carryforward.................. 430,000 430,000
Sales returns and allowances...................... 15,000 16,000
Inventory......................................... 4,500 22,000
Accrued liabilities............................... 22,000 32,000
Other............................................. 1,000 1,000
Valuation allowance............................... (3,620,500) (4,342,000)
----------- -----------
Total..................................... $ 213,000 $ 172,000
----------- -----------
Deferred tax liabilities:
Depreciation...................................... 213,000 172,000
----------- -----------
Net....................................... $ 0 $ 0
=========== ===========
(7) DISTRIBUTION, RESEARCH, ROYALTY AND LICENSING AGREEMENTS
In February 1986, the Company entered into a distribution agreement with
Roxane Laboratories, ("Roxane"), making Roxane the Company's exclusive
distributor of Marinol in the United States. The Company and Roxane subsequently
agreed that Puerto Rico is not part of the United States territory. Roxane
distribution of Marinol began in July 1986 in the United States. From October
1991 through March 1993,
F-10
26
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Boehringer Ingelheim distributed Marinol in Canada. In March 1993, Sanofi
Winthrop started to distribute Marinol in Canada under a separate agreement. The
Roxane Marinol agreement sets forth a formula for the royalties paid on net
sales of Marinol on an equal basis. The Sanofi agreement pays a royalty-based
commission on net sales of 55% to Sanofi Winthrop and 45% to Unimed. Marinol net
sales were $7,648,599 (1996), $6,030,892 (1995) and $5,754,968 (1994). As of
December 31, 1996 and 1995, trade receivables included $1,557,403 and
$1,468,040, respectively, due from Roxane. Under a separate contract, Roxane has
agreed to reimburse the Company for half of the external research costs incurred
in further clinical development of Marinol. Roxane and Unimed have agreed to
fund additional Marinol clinical trials for which budgeted costs have been
mutually agreed upon. Such reimbursements shall not exceed $3 million without
prior written approval by the parties. Roxane paid $27,746 (1996), $92,334
(1995) and $33,889 (1994) of these costs, which is included in research and
development revenues.
In November 1990, the Company entered into an inventory agreement with
Roxane, under which Roxane will advance funds at no interest to the Company for
the purpose of producing and maintaining a three-year raw material inventory of
Marinol. Roxane advances funds to the Company for the Marinol encapsulation
process as capsules are produced. Advances are offset as inventory is sold by
Roxane.
The Company has various other licensing, marketing and distribution
agreements typical to its business. See "Note 14 -- Subsequent Events" in Notes
to Consolidated Financial Statements.
(8) WARRANTS
In March 1991, The John N. Kapoor Trust (the Trust) purchased for $1.5
million, 1.2 million shares of the Company's Common Stock and warrants to
purchase 800,000 shares of the Company's Common Stock at an exercise price of
$2.125 per share. These warrants, which would have expired March 31, 1996,
contained certain antidilution provisions for adjustment of the exercise price
and the number of warrants. In February 1996, the Trust exercised the
aforementioned warrants to purchase 800,000 shares of the Company's Common
Stock, yielding $1.7 million to the Company.
In April 1992, the Company granted to LifeScience Corporation warrants to
purchase 50,000 shares of Common Stock at an exercise price of $8.375 per share,
with an expiration date of April 1, 1997. As of December 31, 1996, the 50,000
share warrant had not been exercised.
In August 1995, the Company granted to Besins Iscovesco of Paris, France,
warrants to purchase 72,550 shares of Common Stock at an exercise price of $8.00
per share, with an expiration date of August 11, 2005. As of December 31, 1996,
the 72,550 share warrant had not been exercised.
In February 1996, the Company granted to Sunrise Securities Corp. warrants
to purchase 140,000 shares of Common Stock at an exercise price of $7.20 per
share, with an expiration date of February 28, 2001. As of December 31, 1996,
the 140,000 share warrant had not been exercised.
(9) STOCK OPTIONS
The Company has established certain stock-based compensation plans for the
benefit of its officers, directors, employees and consultants. The plans
generally include vesting requirements from 0 to 4 years and option lives to 10
years. Options are granted with an exercise price that approximates the market
price of the Common Stock at the date of grant. For the years ended December 31,
1996 and 1995, the 1991 Stock Option Plan was the only plan that granted
options.
(A) 1991 STOCK OPTION PLAN
The 1991 Stock Option Plan (the Plan) was amended by the Board of Directors
in March 1996 and approved by the stockholders in May 1996. This amendment
increased to 1,800,000 the number of shares of
F-11
27
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock reserved for issuance under the Plan, an increase of 800,000 shares
of Common Stock reserved for granting stock options to directors, officers, and
key employees and consultants of the Company and its subsidiary. The holder of
the option must remain in the continuous employ of the Company for at least one
year from the date the option is granted before exercising any part of the
option. Options expire 10 years from the date of grant or 90 days after
termination of employment.
Option activity for the 1991 Plan for the years ended December 31, 1994,
1995, 1996 was as follows:
WEIGHTED-AVERAGE OPTIONS
SHARES EXERCISE PRICE EXERCISABLE
------ ---------------- -----------
Balance at January 1, 1994................. 499,688 $6.16 22,500
Options granted............................ 440,500 3.45
Options exercised.......................... -- --
Options forfeited.......................... 420,438 3.51
------- ------ ------
Balance at December 31, 1994............... 519,750 6.01 22,500
------- ------ ------
Options granted............................ 854,754 3.31 --
Options exercised.......................... 12,125 2.64 --
Options forfeited.......................... 457,875 3.02 --
------- ------ ------
Balance at December 31, 1995............... 904,504 3.50 45,000
------- ------ ------
Options granted............................ 155,140 7.43 --
Options exercised.......................... 43,187 3.09 --
Options forfeited.......................... 31,000 8.24 --
------- ------ ------
Balance at December 31, 1996............... 985,457 $4.15 60,000
------- ------ ------
The following table summarizes the status of outstanding stock options as
of December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
NUMBER OF REMAINING WEIGHTED NUMBER OF WEIGHTED
RANGE OF OPTIONS CONTRACTUAL LIFE AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
2.75 - 4.88 622,079 7.8 2.93 47,000 3.59
5.25 - 6.75 185,828 7.8 5.51 15,000 6.75
7.13 - 8.25 177,550 8.4 7.54 22,500 7.75
----------- ------- --- ---- ------ ----
-- 985,457 7.9 4.24 84,500 5.24
----------- ------- --- ---- ------ ----
Had the Company elected to apply the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
123) regarding recognition of compensation expense to the extent of the
calculated fair value of stock options granted in 1995 and 1996, reported net
income and earnings per share would have been reduced as follows:
1996 1995
---- ----
Net income, as reported................................. $1,522,143 $625,062
Pro forma net income.................................... $1,169,032 $420,546
Earnings per share, as reported......................... $ .17 $ .09
Pro forma net income.................................... $ .13 $ .06
The effects of applying SFAS 123 in the above pro forma disclosure are not
likely to be representative of the effects disclosed in future years because the
proforma calculations exclude stock options granted before 1995.
F-12
28
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of the SFAS 123 pro forma net income and earnings per share
calculation, the fair value of each option grant is estimated as of the date of
grant using the Black-Scholes option-pricing model. The weighted-average
assumptions used in determining fair value as disclosed for SFAS 123 are shown
in the following table:
1996 1995
---- ----
Risk-free interest rate..................................... 6.16% 7.34%
Dividend yield.............................................. 0.00% 0.00%
Option life (years)......................................... 4.7 4.11
Stock price volatility...................................... 58.16% 57.12%
(B) OTHER STOCK OPTIONS
In November 1986, reflecting employment contracts with certain executives,
the Company granted to these executives nonqualified options to purchase 220,000
shares of Common Stock through March 1999 at $15.00 per share as adjusted and
amended. In January 1988, the exercise price of these options was changed to
$5.38. In March 1991, the exercise price of those options was changed to $4.36,
and the number of options was adjusted to 271,216 shares of Common Stock
pursuant to certain antidilution provisions discussed below. In addition during
March 1991, the Board of Directors extended the expiration date of the
outstanding options to March 1999. Through December 31, 1996, options to
purchase 143,280 shares of Common Stock had been exercised, none had been
canceled, and options to purchase 127,936 shares of Common Stock were
outstanding.
In March 1987, the Company granted to non-officer members of the Board of
Directors nonqualified options to purchase an aggregate of 50,000 shares of
Common Stock at $8.50 per share. In January 1988, the exercise price of these
options was changed to $5.38. During fiscal 1991 and fiscal 1990, the options to
purchase 10,000 and 20,000 of these shares, respectively, were canceled. In
March 1991, the exercise price of those options remaining was changed to $4.36
and the number of options was adjusted to 24,656 shares of Common Stock,
reflecting certain antidilution provisions discussed below. In addition, during
March 1991, the Board of Directors extended the expiration date of the
outstanding options to March 1999. There were no exercises or cancellations
during 1994, 1995 or 1996.
In November 1989, additional nonqualified options to purchase 20,000 shares
of Common Stock at $2.63 per share were granted to non-officer members of the
Board. During fiscal 1991, the option to purchase 10,000 of these shares was
canceled. In March 1991, the exercise price of the remaining options was changed
to $2.35 and the number of options remaining was adjusted to 11,170 shares of
Common Stock pursuant to certain antidilution provisions discussed below. In
addition, during March 1991, the Board extended the expiration date of the
outstanding options to March 1999. There were no exercises or cancellations
during 1994, 1995 or 1996.
In March 1991, the Company granted to employees nonqualified options to
purchase 120,000 shares of Common Stock at $3.00 per share. A majority of these
options vest over four years. The option price was below the market price at the
date of grant, and the Company has recognized the pro rata compensation expense
representing the difference between the option price and fair market value at
the date of grant of approximately $27,000 in 1993. As of December 31, 1996,
options to purchase 67,500 shares of Common Stock had been exercised, 51,500 had
been canceled and options to purchase 1,000 shares of Common Stock were
outstanding.
In March 1991, the Company granted to past and present members of the Board
nonqualified options to purchase 20,000 shares of Common Stock at $3.00 per
share for prior years of service. The grant price was below the market price.
The Company recognized a compensation expense at the date of grant of $35,000.
As
F-13
29
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of December 31, 1996, options to purchase 10,000 shares of Common Stock had been
exercised, none had been canceled and options to purchase 10,000 shares of
Common Stock were outstanding.
In March 1991, the Company granted to non-employee members of the Board
nonqualified options to purchase 20,000 shares of Common Stock at $4.75 per
share. As of December 31, 1996, options to purchase 5,000 shares of Common Stock
had been exercised, none had been canceled and options to purchase 15,000 shares
of Common Stock were outstanding.
In addition during April, May and October 1991, the Company granted to
employees nonqualified options to purchase 26,000 shares of Common Stock with
exercise prices ranging from $4.25 to $7.75. As of December 31, 1996, options to
purchase 8,750 shares of Common Stock had been exercised, 15,000 had been
canceled and options to purchase 2,250 shares of Common Stock were outstanding.
In August 1992, the Company granted to John Kapoor, Chairman of the Board,
nonqualified options to purchase 200,000 shares of Common Stock at $7.75 per
share. There were no exercises or cancellations during 1994, 1995 or 1996.
The exercise price and number of shares of Common Stock which can be
purchased upon the exercise of the nonqualified stock options are adjusted in
the event of stock dividends, split-ups, combinations or exchanges of shares by
recapitalization or reclassification. The exercise price and number of shares of
Common Stock purchasable upon the exercise of certain nonqualified stock options
also are adjusted in the case of the issuance of Common Stock by the Company
(other than pursuant to the grant of stock options and restricted stock grants)
below the then existing exercise price.
There are 392,012 shares of the Company's Common Stock reserved for these
arrangements as of December 31, 1996.
(C) INCENTIVE STOCK OPTION PLAN
The following summarizes transactions under the 1981 Incentive Stock Option
Plan for the periods ended December 31, 1994, 1995 and 1996:
NUMBER OF SHARES
----------------
Outstanding at December 31, 1993............................ 12,500
Canceled.................................................. (3,750)
-------
Outstanding at December 31, 1994............................ 8,750
Canceled.................................................. (8,750)
-------
Outstanding at December 31, 1995 and 1996................... --
=======
As of December 31, 1996, there were no stock options exercisable under the
Plan.
(10) RETIREMENT PLAN
The Company offers a discretionary 401(k)Plan (the Plan) to its employees.
Under the Plan, employees may defer income on a tax exempt basis, subject to IRS
limitation. All employees are eligible to participate in the Plan. Under the
Plan, the Company may make discretionary matching contributions. Company
contributions expensed in 1996 and 1995 totaled $55,278 and $42,901,
respectively. There were no Company contributions to the Plan in 1994.
(11) COMMITMENTS
The Company is obligated for rental payments under a noncancellable
operating lease relating to an office facility. Real estate taxes, insurance and
maintenance expenses generally are Company obligations. Rental
F-14
30
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expenses charged to operations were approximately $143,000 in 1996, $193,000 in
1995 and $225,000 in 1994. At December 31, 1996, approximate amounts committed
for future fiscal years are as follows:
1997........................................................ $145,000
1998........................................................ 61,000
Management expects that in the normal course of business, leases that
expire will be renewed or replaced by other leases. See "Note 14 - Subsequent
Events" in Notes to Consolidated Financial Statements.
The Company entered into a new agreement with NORAC for NORAC to supply and
the Company to purchase THC, the raw material in Marinol, through December 31,
1999. THC is synthesized and purified through a complex and time-consuming
process. NORAC is the Company's sole supplier of THC. Currently, the Company
maintains a three-year supply of THC.
(12) CONTINGENCIES
The pharmaceutical industry has traditionally experienced difficulty in
maintaining product liability insurance coverage at desired levels. To date, no
significant product liability suit has ever been filed against the Company.
However, if a suit were filed and a judgment entered against the Company that
significantly exceeded the policy limits, it could have a material adverse
effect upon the Company's operations and financial condition.
(13) RELATED PARTIES
EJ Financial Enterprises, Inc. (EJ) is a healthcare investment and
consulting company owned by the Company's chairman, an indirect majority
stockholder. In addition to the distribution, research, royalty and licensing
agreements which were terminated, the Company and EJ currently have a consulting
agreement, which provides for EJ's assistance in the Company's product
licensing, development and marketing efforts. The agreement can be canceled by
either party upon 30 days prior written notice. Expenditures under this
agreement totaled approximately $50,000 (1996 and 1995) and $106,250 (1994).
(14) SUBSEQUENT EVENTS
(A) MANAGEMENT CHANGE
In January 1997, Stephen M. Simes resigned as President/CEO and Director of
the Company to pursue other business interests. Dr. Robert E. Dudley, Vice
President of Clinical and Regulatory Affairs, was appointed CEO.
(B) MAXAQUIN(R) MARKETING AND DISTRIBUTION AGREEMENT
The Company entered into an agreement on February 14, 1997 with G.D. Searle
& Co. to acquire long-term exclusive U.S. marketing and distribution rights for
Maxaquin(R) (lomefloxacin), a fluoroquinolone anti-infective drug. As a result
of the Maxaquin agreement, the Company entered into an agreement with a third
party logistical company to provide warehousing, distribution and certain other
requirements for Maxaquin.
(C) NEW LEASE COMMITMENT
Effective February 1, 1997 the Company entered into a lease thereby
expanding their leased premises by 9,323 square feet to a total of 14,334 square
feet. Approximately one third of the leased premises will be
F-15
31
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subleased to an already identified sub-tenant. The new lease extends through
January 31, 2002 and post-sub lease results in an approximate annual rental
expense as follows:
1997...................................................... $163,000
1998...................................................... 168,000
1999...................................................... 171,000
2000...................................................... 175,000
2001...................................................... 178,000
2002...................................................... 22,000
F-16
32
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors
Unimed Pharmaceuticals, Inc.
Our report on the consolidated financial statements of Unimed
Pharmaceuticals, Inc. and Subsidiaries is included on page F-2 of this Form
10-K. In connection with our audits of such financial statements, we have also
audited the related financial statement schedule listed in the index on page F-1
of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 14, 1997
S-1
33
SCHEDULE II
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ----------
Allowance for doubtful accounts and returns:
1994.............................................. $298,000 $270,000 $ 28,000
======== ======== ========
1995.............................................. $ 28,000 $ 15,000 $ 43,000
======== ======== ========
1996.............................................. $ 43,000 $ 9,436 $ 13,046 $ 39,390
======== ======== ======== ========
Reserve for inventory obsolescence:
1994.............................................. $250,000 $250,000
======== ========
1995.............................................. $250,000 $195,298 $ 54,702
======== ======== ========
1996.............................................. $ 54,702 $241,107 $284,529 $ 11,280
======== ======== ======== ========
S-2
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the Undersigned, thereunder duly authorized.
UNIMED PHARMACEUTICALS, INC.
By: /s/ ROBERT E. DUDLEY
------------------------------------
Robert E. Dudley
Chief Executive Officer
March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME CAPACITY(IES) DATE
---- ------------- ----
/s/ DR. JOHN N. KAPOOR Chairman and Director March 28, 1997
- ------------------------------------------------
Dr. John N. Kapoor
/s/ ROBERT E. DUDLEY Chief Executive Officer March 28, 1997
- ------------------------------------------------
Robert E. Dudley
/s/ DAVID E. RIGGS Senior Vice President, Chief March 28, 1997
- ------------------------------------------------ Financial Officer, Secretary and
David E. Riggs Treasurer
/s/ FRED HOLUBOW Director March 28, 1997
- ------------------------------------------------
Fred Holubow
/s/ JAMES J. LEMPENAU Director March 28, 1997
- ------------------------------------------------
James J. Lempenau
/s/ ROLAND WEISER Director March 28, 1997
- ------------------------------------------------
Roland Weiser
S-3
35
EXHIBIT INDEX
EXHIBIT NUMBER
- --------------
11 Computation of Income (Loss) per Share
27 Financial Data Schedule