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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
COMMISSION FILE NUMBER: 0-3390
UNIMED PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-1685346
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2150 E. LAKE COOK RD.
BUFFALO GROVE, ILLINOIS 60089
(Address of principal executive offices) (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
March 13, 1998 -- 9,051,942.
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant, based upon the closing price on March 13, 1998
was $54,532,560.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement (to be filed pursuant to Regulation 14A) for
the Annual Meeting of Stockholders to be held May 28, 1998, is incorporated by
reference in Part III.
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PART I
ITEM 1. BUSINESS.
Unimed Pharmaceuticals, Inc. (the "Company" or "Unimed") develops and
markets prescription pharmaceutical products. Currently, the Company promotes
three approved drugs and is developing others targeted for the HIV/AIDS,
endocrinology, infectious diseases and urology markets. The Company developed
and co-promotes Marinol(R), an appetite stimulant and antiemetic drug, through
the Company's 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 anti-infective used in the urology and
infectious disease markets. The Company markets and distributes Maxaquin through
the efforts of the Company's specialty sales force in the U.S. primarily to
urologists and AIDS-treating physicians. In July 1997, the Company acquired from
Syntex (USA), Inc. and its Mexican affiliate ("Syntex") all rights to Anadrol(R)
(oxymetholone) for the U.S., Canada and Mexico. Anadrol is an orally active
anabolic androgenic steroid used to treat various anemias. The Company began
marketing and distributing Anadrol in the first quarter of 1998. The Company is
a Delaware corporation incorporated in 1948.
The Company's business strategy is to become a premier niche pharmaceutical
products development and marketing concern. With a business strategy that
focuses on licensing and developing drugs that have successfully completed human
clinical testing milestones, the Company expects to build a diversified
portfolio of products in several therapeutic areas including HIV and other
infectious diseases, endocrinology, hematology, oncology and urology. The
Company's specific goals center on effectively marketing the current product
line while rapidly developing the current product pipeline. During 1996, the
Company completed Phase II clinical development on three new drugs that were
in-licensed in 1995 described under "Product Development." In 1997, the Company
initiated Phase III clinical trials on all three of these compounds. The Company
expects completion of these clinical trials during 1998 or early 1999. The
Company filed a New Drug Application ("NDA") with the U.S. Food and Drug
Administration ("FDA") on one of these drugs in 1997.
The Company is concentrating on markets in which relatively few specialized
physicians treat affected patients. The Company believes a small and specialized
salesforce will 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(R) (DRONABINOL)
Marinol was approved for marketing by the 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 currently supplied as round soft gelatin capsules containing
2.5mg, 5mg or 10mg dronabinol. During 1997, the Company began studies on
alternative dosage forms of Marinol. These studies are aimed at identifying a
dosage form that will allow quicker absorption by the body, a feature that the
Company believes would be beneficial to, among others, cancer chemotherapy
patients who are prescribed Marinol to treat nausea and vomiting. The dosage
forms currently under review include an aerosol formulation, a sublingual
formulation and a nasal gel formulation. Of these dosage forms, the one that
proves to be the most effective will then be pursued through Phase I
bioavailability studies. Subject to the Company achieving positive
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results, the selected dosage form will then need to be studied as part of a
Phase II/III clinical trial, the length of which is not yet determinable.
Currently, Marinol is under clinical investigation to treat nausea and
vomiting caused by anti-HIV drug regimens. In addition, Marinol is being studied
in combination with testosterone to reverse weight loss and wasting in HIV
patients.
Use of Marinol(R) 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(R) 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. Treatment with Marinol can
improve caloric intake and/or stimulate appetite, resulting in clinical
improvements.
Potential Use of Marinol(R) in Alzheimer's Disease
Alzheimer's disease is believed to afflict an estimated four million
Americans with a projected annual increase of 400,000 new cases per year. During
1996, the Company completed a pilot study exploring use of Marinol in Alzheimer
patients as an appetite stimulant. Although the pilot study was primarily
undertaken to investigate the effect of Marinol on appetite, patients were
observed to have a significant reduction in disturbed behavior compared to
patients on placebo. The disturbed behavior most commonly associated with
Alzheimer patients is believed to be due to a degenerative process in which
brain cells are lost leading to brain atrophy. This atrophy usually leads to
memory loss in early stages of the disease and can later lead to disturbances of
arousal, attention, orientation, perception and intellectual function.
A series of Phase II trials were initiated in December 1996 to further
evaluate the clinical effects of Marinol doses on the behavior of patients with
Alzheimer's disease. The Company intends to pursue a Phase III program on
Alzheimer patients if the results are favorable from the Phase II studies.
MAXAQUIN(R) (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 anti-infective. 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 provide multiple product offerings to AIDS-treating physicians and
ultimately to establish a presence in the urology and infectious disease
therapeutic markets.
The FDA approved Maxaquin 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. In September of 1997, the FDA
approved a supplemental NDA for the three-day use of Maxaquin to treat
uncomplicated urinary tract infections. Prior to this, Maxaquin was approved for
a 10-day regimen.
Sales were initiated in the first quarter of 1997. Initial efforts focused
on markets where Maxaquin sales have been strong historically. Future
promotional efforts will center on marketing Maxaquin as one component
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of a portfolio of Unimed products offered to the Company's target physician
population including urologists (see discussion on Androgel(TM) and
Andractim(TM) under "Product Development").
ANADROL(R) (OXYMETHOLONE)
In July 1997, the Company acquired from Syntex (USA), Inc. all rights to
Anadrol (oxymetholone), an orally active anabolic androgenic steroid used to
treat various anemias, for the U.S., Canada and Mexico. The acquisition of this
product is part of the Company's strategy to provide a multiple of product
offerings to AIDS-treating physicians and ultimately to develop and market
products for pharmaceutical markets such as hematology.
Anadrol is an orally active anabolic androgenic steroid, a synthetic
derivative of testosterone. Anadrol is used to treat various anemias caused by
deficient red blood cell production. Anemias that typically display this
deficiency are associated with erythropoietin deficiency or bone marrow
dysfunction. Erythropoietin deficiency is commonly associated with chronic renal
failure and drug-induced renal dysfunction. In both cases, the kidneys produce
less erythropoietin causing reduced erythrocyte (red blood cell) production. In
addition, anemia is a common complication following treatment of cancer with
chemotherapy or radiation, which can be mylelotoxic (destructive to bone
marrow). Anadrol has been found to enhance the production of urinary excretion
of erythropoietin in patients with anemia due to bone marrow failure and often
stimulates erythropoiesis (production of red blood cells in the bone marrow) in
anemia due to deficient red cell production.
Patients with HIV commonly have hematologic abnormalities and almost all
have some bone marrow abnormality. Although 10-to-20% of HIV/AIDS patients are
believed to be anemic when first seen by a healthcare professional, 70-to-80%
eventually become anemic during the course of the disease. The factors that
contribute to the development of anemia in AIDS patients include the disease
itself, opportunistic infections and their treatment, treatment with
antiretroviral drugs and the effects of chronic disease. The major cause of
anemia in AIDS patients is impaired erythropoiesis.
The Company initiated sales of Anadrol in February of 1998. The Company
intends to increase visibility of Anadrol by using the Company's specialty sales
force to target physician specialists such as hematologists, oncologists and
infectious disease physicians.
The Company is researching the viability of further clinical studies that
may lead to additional uses for Anadrol. Among other topics, the Company is
researching Anadrol as a treatment for HIV wasting syndrome. It is generally
believed in the HIV community that anabolic steroids can help prevent and/or
reverse the wasting syndrome effect of HIV.
PRODUCT DEVELOPMENT
The Company has three drugs under development: Nitazoxanide (formerly
referred to as "NTZ"), an antiparasitic compound being developed for the
treatment of cryptosporidial diarrhea. Androgel(TM), a transdermal gel being
developed to treat 18-60 year-old men who do not produce sufficient levels of
testosterone; and Andractim(TM), another transdermal gel being developed to
treat men over the age of 60 for the supplementation and replacement of
testosterone.
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 nitazoxanide 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 nitazoxanide 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
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of animals and, increasingly, humans. In 1982, according to the Centers for
Disease Control (CDC), the number of cases of C. parvum increased significantly,
which was later determined to relate 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.
In a Phase II clinical trial in 28 patients with AIDS and cryptosporidiosis
at Cornell Medical Center, in New York City and at Kaiser Permanente Research
Center in San Francisco, patients received up to 2,000mg per day of nitazoxanide
for eight weeks. A favorable clinical response was observed in 58% of the
patients.
This trial together with patients enrolled in an unrestricted, open label
compassionate use trial, culminated in the submission of an NDA in December
1997.
During 1997, the AIDS Clinical Trials Group (ACTG), a clinical research
cooperative supported by the National Institute of Allergy and Infectious
Diseases, initiated a Phase III placebo controlled study of nitazoxanide to
treat AIDS patients with cryptosporidiosis. The Company participated in the
design of this study, is providing nitazoxanide to patients and is providing
certain other supportive services to ACTG.
This NDA marks the first submission of a new drug application to treat the
diarrhea associated with cryptosporidiosis in AIDS patients. The Company has
been granted priority review by the FDA of this NDA, thereby ensuring a complete
review and action within six months of filing.
In 1998, the Company intends initiate studies that may provide additional
indications for nitazoxanide. These studies could include researching
nitazoxanide as a possible treatment for Helicobacter pylori, a bacterium that
is the causative agent in most cases of nonerosive gastritis.
ANDROGEL(TM)
In 1995, the Company acquired exclusive rights from Laboratoires Besins
Iscovesco S.A. ("Besins") in the U.S., Canada and Mexico to Androgel, an
androgen replacement drug. Androgel consists of a proprietary topical gel
formulation of the male hormone, testosterone, and is applied to the arms and
abdomen. Androgel is a testosterone replacement drug used by men age 18 to 60
who do not produce sufficient levels of testosterone. This deficiency is
referred to as hypogonadism. 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 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, and chronic illnesses (e.g., diabetes, kidney
failure, AIDS). Hypogonadism has also been implicated as a potential factor in
the etiology of HIV wasting syndrome.
In March 1997, the Company began a pivotal Phase III human clinical trial
with Androgel for the treatment of testosterone deficiency in men. This study is
expected to be complete in late 1998 or early 1999. Pending positive results,
the Company intends to file an NDA with the FDA.
ANDRACTIM(TM)
In 1995, the Company also acquired exclusive rights from Besins in the
U.S., Canada and Mexico to Andractim, a novel, patented topical gel formulation
of the male hormone, dihydrotestosterone (DHT). Andractim has demonstrated many
of the benefits of other testosterone-replacement products but does not have the
specific type of androgen linked with prostate enlargement in men 60 and older.
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.
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The Company initiated a Phase II clinical trial in 1996 to evaluate the
safety and efficacy of Andractim for treating patients with HIV wasting
syndrome. This study is expected to be complete in the second quarter of 1998.
The Company has also initiated a Phase II/III study in geriatric hypogonadism
(deficient levels of testosterone due to aging, also known as andropause) during
1997. This study is expected to be complete in 1999.
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. The Company
details Maxaquin in the urology market and to high prescribing infectious
disease physicians. In February 1998, the Company began to distribute Anadrol.
The Company expanded its sales and marketing capabilities in 1997 and will only
further expand its sales force as market conditions warrant.
The Company intends to develop a portfolio of proprietary drugs to
distribute in niche markets -- therapeutic areas such as HIV/AIDS and other
infectious diseases, 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.
Marinol is approved for use as an antiemetic in South Africa and is under
regulatory review or use as an appetite stimulant. The product is being marketed
and sold in South Africa by Pharmacare Ltd.
The Company has sublicensed the right to register, market and distribute
nitazoxanide, Androgel and Andractim in Canada to BioChem Pharma Inc.
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.
Under the terms of the Unimed/G.D. Searle & Co. Distribution Agreement,
Searle manufactures and supplies Maxaquin to Unimed.
The terms of the agreement with Syntex provide for an initial supply of
finished Anadrol tablets to be provided to the Company. Further production will
be the responsibility of the Company, which is finalizing a contract
manufacturing agreement with Oread Pharmaceutical Manufacturing, to supply the
Company with Anadrol.
The Company has supply agreements with Romark for nitazoxanide, Besins for
Androgel and Andractim. 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, 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
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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.
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 efforts to promote therapeutic use of marijuana will
have a significant adverse impact on Marinol sales. There are no clinical trials
establishing the safety or efficacy of marijuana for any medical use and the
potency and purity of marijuana is not assured. Moreover, the cost of Marinol is
eligible for Medicaid reimbursements, unlike marijuana, and 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. 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,
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 and
Anadrol is also 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 Andractim qualifies
as an Orphan Drug for treating weight loss in AIDS patients. In addition, the
Company received proprietary protection from a U.S. patent that was issued
during the year. This patent relates to the use of Andractim in treating
geriatric hypogonadism.
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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 Andractim 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 Laboratories, L.C. Unimed has the right to use and practice
those patents under its license agreement with Romark; however, Unimed does not
hold any nitazoxanide-related patents directly.
The Company owns the Marinol, SERC, Anadrol, Androgel and Andractim
trademarks in the U.S.
EXECUTIVE OFFICERS
TERM OF
NAME AGE POSITION BUSINESS EXPERIENCE
---- --- -------- -------------------
Ronald L. Goode Ph.D. ...... 54 President, Chief President, Chief Executive Officer and
Executive Officer and Director of Unimed since November, 1997;
Director several positions at G.D. Searle & Company, a
pharmaceutical company, from 1986 through
1997, most recently Corporate Senior Vice
President and President Asia/Pacific World
Area; several positions at Pfizer
Pharmaceuticals, a pharmaceutical company,
from 1976 through 1986, most recently Vice
President Clinical Research and Scientific
Affairs.
Robert E. Dudley Ph.D. ..... 43... Senior Vice President Senior Vice President of Clinical and
Regulatory Affairs since November 1997, Chief
Executive Officer and Interim President of
Unimed from January 1997 through November 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 pharmaceutical
company, from May 1989 through August 1993.
David E. Riggs.............. 46 Senior Vice President Senior Vice President since October, 1994 and
Vice President, CFO, Secretary, and Treasurer
of Unimed since May 1992; CFO of NeoPharm,
Inc. from October 1995 through November 1997;
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.
EMPLOYEES
As of March 13, 1998, the Company has 45 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 14,000 square feet of executive office
space in Buffalo Grove, Illinois, at an annualized cost of approximately
$250,000, under a lease that expires in 2002.
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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 NASDAQ stock market -- 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
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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
1997 (January 1 -- December 31)
First Quarter............................................. 8 1/8 4 7/8
Second Quarter............................................ 5 3/4 4 1/2
Third Quarter............................................. 6 3/4 4 1/4
Fourth Quarter............................................ 8 3/4 5 3/8
The Company had approximately 1,049 holders of record of Common Stock on
March 13, 1998. 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 April 1997, the Company announced a stock repurchase program had been
approved by the Board of Directors allowing the Company to purchase up to
500,000 shares of common stock through open market purchases. As of December 31,
1997, the Company held 70,000 shares (108,500 total) in treasury as a result of
this program.
ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED
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12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
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RESULTS OF OPERATIONS:
Net sales..................... $ 8,918,424 $ 7,648,599 $ 7,320,052 $ 7,387,860 $ 6,875,678
Net (loss) income............. (8,209,488) 1,522,143 625,062 40,708 (852,294)
Total assets.................. 24,089,724 30,746,875 16,305,181 11,804,781 11,662,035
Long-term obligation.......... 1,213,000 -- -- -- --
PER SHARE COMMON STOCK DATA:
Basic net (loss) income....... $(.93) $.18 $.10 $.01 $(0.14)
Dividends paid................ $ -- $ -- $ -- $ -- $ --
Selected financial data for all periods prior to December 31, 1996, have
been restated to conform to the 1997 presentation. These restatements had no
effect on net income (loss).
Results for the fiscal year ended December 31, 1997, include a $4.1 million
write down of previously capitalized Maxaquin acquisition costs and a $2.5
million valuation adjustment related to the Company's investment in, and a
subordinated debenture from, Romark Laboratories, L.C.
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 1997, sales and cash flow from Marinol and Maxaquin, as well as cash from
cash reserves, were used to fund product development programs and expand
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the Company's sales and marketing infrastructure. The Company is actively
pursuing acquisition of commercial products and rights to additional
pharmaceutical products under late-stage development or already on the market.
In 1997, Unimed's net sales were $8.9 million, a 17% increase over 1996 net
sales of $7.6 million. Marinol net sales increased by 6% over 1996 due to growth
in domestic sales and a price increase in the second quarter of 1997. Maxaquin
was introduced in the second quarter of 1997 contributing $833,000 to net sales.
The Company reported a net loss of $.93 per share (basic) in 1997 compared
to net income of $.18 per share (basic) in 1996 and $.10 per share (basic) in
1995. The net loss in 1997 was caused primarily by the write down of certain
assets and investments totaling $6,580,000 or $.74 per share, a 166% increase in
sales and marketing expenses, and a 57% increase in research and development
spending.
In 1997, the Company used cash to support operations of $482,000 compared
to generating cash flow from operations of $3,045,000 in 1996. The Company
reported year-end cash, cash equivalents and short-term investments of
$14,787,000 compared with $20,830,000 at year-end 1996.
REVENUE
Fiscal 1997 net sales of Marinol, marketed as a refractory antiemetic in
cancer chemotherapy and an appetite stimulant in anorexia associated with weight
loss in AIDS, increased 6% over 1996 levels, ending the year at $8,085,000. This
compares with a 27% increase in Marinol net sales growth for 1996 to $7,649,000.
Both the 1997 and 1996 Marinol net sales increase were a result of increased
unit sales and a price increase. The Company's licensee, Roxane Laboratories,
Inc. (Roxane), markets Marinol. 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 $124,000 in 1997 and
$812,000 in 1996.
The Company began to market Maxaquin, a fluoroquinolone antibiotic, in the
second quarter of 1997. Net sales for the year totaled $833,000.
Other pharmaceutical companies in Canada and several other international
markets promote SERC for the treatment of recurrent vertigo. During 1995, Sanofi
Winthrop in Canada marketed SERC for the Company. 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 1997 and 1996 and $1,049,000 in 1995.
Total revenue for 1997 was $8,918,000, representing 17% growth over
$7,649,000 in 1996. Higher Marinol net sales, combined with Maxaquin net sales
were responsible for the increase. For the year ended December 31, 1996, and for
all prior periods presented, the Company reclassified, for financial reporting
purposes, all research and development revenues that were historically treated
as part of total revenue. These revenues are now offset against research and
development expenses in the operating expenses section of the income statement.
This change had no effect on net income. In 1996, the Company deferred the
recognition of revenue on unconditional cash payments made from corporate
partners that were to be applied to development of the Company's product
portfolio. The Company recognized the remaining portion of this deferred revenue
in 1997.
Other income (net of other expenses) decreased approximately $315,000 or
20% to $1,235,000 in 1997 primarily as a result of imputed interest expense of
approximately $113,000. The Maxaquin distribution agreement includes a long and
short-term debt obligation for which interest is imputed and recorded. Interest
income decreased to $1,049,000, a $19,000 decrease from 1996 due to lower
invested cash balances. Other income in 1997 includes $300,000 of clinical
development milestone payments from a product sub-license agreement. In 1996,
other income included approximately $311,000 from the gain on a product
sub-license
11
12
and $200,000 from a gain on the sale of a trademark. Other income in 1995
included a $106,000 write off of the Company's interest in a limited
partnership.
COSTS AND EXPENSES
Cost of sales improved by 3% from $3,087,000 in 1996 to $2,997,000 in 1997.
The lower cost of sales in 1997 was due to lower Marinol raw material costs and
Maxaquin product costs which are lower than those of Marinol. Cost of sales in
1996 was lower than the 1995 cost of sales of $3,201,000 due primarily to lower
Marinol raw material costs.
Net research and development expenses increased 136% from $1,135,000 in
1996 to $2,675,000 in 1997. As mentioned earlier, the Company started three
Phase III clinical trials during 1997 as well as several smaller studies such as
the Marinol alternate dosage form studies. The Company also prepared an NDA for
nitazoxanide and submitted it to the FDA in December. Net research and
development expenses increased 84% from $618,000 in 1995 to $1,135,000 in 1996
with the completion of three human clinical studies and initiation of several
toxicology studies. For the year ended December 31, 1996, and for all prior
periods presented, the Company reclassified, for financial reporting purposes,
all research and development revenues that were historically treated as part of
total revenue. These revenues are now offset against research and development
expenses in the operating expenses section of the income statement. This change
had no effect on net income. Approximately $1,600,000 of deferred research and
development expenditures were offset against research and development expenses
in 1997. These deferred expenses would have historically been recognized as
research and development revenue.
Sales and marketing expenses increased 166% from $1,272,000 in 1996 to
$3,384,000 in 1997. During 1997, the Company organized an integrated sales and
marketing infrastructure that can provide for the coordinated introduction of
new products to targeted markets. The increase can be attributed to increased
personnel and advertising expenses related to the promotion of Maxaquin. Sales
and marketing expenses increased 20% from 1995 to 1996 as the Company added a
commercial development function to distribute new products.
Operating and administrative expenses increased 25% from $2,183,000 in 1996
to $2,726,000 in 1997 primarily due to increased administrative support of the
expanded sales and marketing activities and accelerated development programs,
professional expenses related to the acquisition of product rights, higher
personnel-related expenses and executive recruitment. Operating and
administrative expenses increased 3% from 1995 to 1996. Operating and
administrative expenses as a percent of net sales were 31% in 1997 and 29% in
both 1996 and 1995. Operating and administrative expenses were $2,129,000 in
1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents and
short-term investments of $14,787,000, compared with $20,830,000 at December 31,
1996. During 1997, Unimed used cash in operations of $602,000. Working capital
decreased from $18,901,000 in 1996 to $13,210,000 in 1997, primarily due to the
purchase of Maxaquin and Anadrol product rights, the purchase of equipment and
leasehold improvements and the purchase of Company Common Stock. The Company
expects to continue to increase clinical development expenditures in 1998 as it
accelerates Phase III clinical trials. The Company will also continue to expand
its sales and marketing efforts as it adds to the portfolio of products
currently promoted. In addition, the Company will require a higher investment in
working capital in order to fund accounts receivable and inventories.
During 1997, the Company received approximately $847,000 from the exercise
of stock options. The Company purchased $561,000 of its own common stock,
maintaining 108,500 shares in treasury as of December 31, 1997.
Inventories increased approximately $200,000 in 1997 over 1996 levels. Due
to increasing Marinol sales and production levels of THC remaining constant, THC
inventory decreased during the year. This was offset by inventory purchases
related to Maxaquin and Anadrol. Also, the Company increased the reserve for
12
13
inventory obsolescence during 1997. The Company's Marinol 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 has recently issued two new accounting standards, Statement No.
130, "Reporting Comprehensive Income" and, Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", and if adopted will be
effective for fiscal year 1998. The Company is evaluating the effect, if any, of
these new statements.
YEAR 2000 PROGRAM
The Company will continue to conduct a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation plan to resolve the issue. The Company
presently believes that, with modifications to existing software and converting
to new software, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems as so modified and converted.
However, if such modifications and conversions are not completed in a timely
manner, the Year 2000 problem may have a material impact on the operations of
the Company.
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.
13
14
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,
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 than 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.
Dependence on Qualified Personnel. The Company's success is highly
dependent upon its ability to attract and retain qualified administrative,
product development 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.
14
15
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,
1997.
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, 1997.
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, 1997.
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, 1997.
15
16
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 (filed by reference to Exhibit
3-B(iii) to Annual Report on Form 10-K for fiscal year ended
December 31, 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.
(filed by reference to Exhibit 4 to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
4-E -- Warrant, dated August 11, 1995, for 72,550 shares of Common
Stock, issued to Laboratoires Besins Iscovesco S.A. (filed
by reference to Exhibit 4 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
4-F -- Registration Rights Agreement, dated August 11, 1995,
between the Company and Laboratoires Besins Iscovesco S.A.
(filed by reference to Exhibit 4 to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
4-G -- Warrant, dated February 29, 1996, for 140,000 shares of
Common Stock, issued to Sunrise Securities Corp. (filed by
reference to Exhibit 4 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
4-H -- Registration Rights Agreement, dated February 29, 1996,
between the Company and certain holders of Common Stock
(filed by reference to Exhibit 4 to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
16
17
4-I -- Stock Purchase Agreement dated May 9, 1996, between the
Company and BioChem Pharma (International) Inc. (filed by
reference to Exhibit 4-I to Annual Report on Form 10-K for
the fiscal year ended December 31, 1996).
4-J -- Registration Rights Agreement dated May 9, 1996, by and
between the Company and BioChem Pharma (International) Inc.
(filed by reference to Exhibit 4-J to Annual Report on Form
10-K for the fiscal year ended December 31, 1996).
4-K -- Rights Agreement dated as of June 16, 1997, between the
Company and Harris Trust and Savings Bank including Form of
Rights Certificate and Summary of Rights attached thereto as
Exhibits A and B (filed by reference to Exhibit 4.1 to
Current Report on Form 8-K dated June 20, 1997).
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).
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 (filed by reference to Exhibit
10-K to the Annual Report on Form 10-K filed in fiscal year
ended December 31, 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 (filed by reference to Exhibit 10-L to the
Annual Report on Form 10-K filed in fiscal year ended
December 31, 1996).
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. (filed by
reference to Exhibit 10-R to the Annual Report on Form 10-K
filed in fiscal year ended December 31, 1996).
10-S -- Consulting Agreement dated July 23, 1996, by and between the
Company and E.J. Financial Enterprises, Inc (filed by
reference to Exhibit 10-S to the Annual Report on Form 10-K
filed in fiscal year ended December 31, 1996).
*10-T -- Employment Agreement dated November 13, 1997, by and between
the Company and Ronald L. Goode.
*10-U -- Agreement between Syntex (USA) Inc. and its Mexican
affiliate and the Company dated July 1, 1997.
*27 -- Financial Data Schedule
- -------------------------
* Filed herewith.
17
18
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
(Item 14(a)1 and 14(a)2)
PAGE
----
Report of Independent Accountants........................... F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996...................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995....................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997,
1996 and 1995.......................................... F-6
Notes to Consolidated Financial Statements................ F-7
Report of Independent Accountants on Financial Statement
Schedule.................................................. F-17
Financial Statement Schedule:
Valuation and Qualifying Accounts (Schedule II)........... F-18
F-1
19
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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996, and the
consolidated results of operations and cash flows for the years ended December
31, 1997, 1996 and 1995, in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 6, 1998
F-2
20
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND DECEMBER 31, 1996
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,068,279 $ 4,458,889
Short-term investments.................................... 13,718,834 16,370,897
Receivables:
Trade, less allowances of $21,398 in 1997 and $39,390
in 1996............................................... 1,661,042 1,876,807
Other.................................................. 116,978 78,109
------------ -----------
Total receivables.................................... 1,778,020 1,954,916
Inventories, less reserves of $302,020 in 1997 and $11,280
in 1996................................................ 4,386,904 4,184,855
Prepaid expenses.......................................... 407,698 108,457
------------ -----------
Total current assets................................. 21,359,735 27,078,014
------------ -----------
Equipment and leasehold improvements, at cost............... 2,555,857 2,035,807
Less accumulated depreciation and amortization....... 1,452,217 1,227,790
------------ -----------
Net.................................................. 1,103,640 808,017
------------ -----------
Investment in, and subordinated debenture from, Romark
Laboratories, L.C......................................... 0 2,275,910
Product rights, net of amortization......................... 1,626,349 584,934
------------ -----------
Total assets......................................... $ 24,089,724 $30,746,875
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,812,030 $ 376,761
Accrued and other liabilities............................. 1,806,687 1,210,664
Due to Roxane Laboratories, Inc........................... 3,616,665 4,945,801
Deferred research and development revenues................ 0 1,643,887
Current portion of long-term obligation................... 914,836 0
------------ -----------
Total current liabilities............................ 8,150,218 8,177,113
------------ -----------
Long-term obligation........................................ 1,213,000 0
------------ -----------
Total liabilities.................................... 9,363,218 8,177,113
------------ -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.25 par value; authorized 30,000,000
shares; issued and outstanding: 9,040,942 and
8,775,499.............................................. 2,260,236 2,193,875
Additional paid-in capital................................ 28,201,420 27,340,665
Accumulated deficit....................................... (15,215,214) (7,005,726)
Accumulated foreign currency translation adjustment....... 41,522 40,948
------------ -----------
15,287,964 22,569,762
Less: treasury stock at cost (108,500 shares in 1997 and 0
shares in 1996)........................................... (561,458) 0
------------ -----------
Total stockholders' equity........................... 14,726,506 22,569,762
------------ -----------
Total liabilities and stockholders' equity........... $ 24,089,724 $30,746,875
============ ===========
See accompanying notes to consolidated financial statements
F-3
21
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
Net sales............................................. $ 8,918,424 $7,648,599 $7,320,052
Cost of sales......................................... 2,997,030 3,086,713 3,201,014
----------- ---------- ----------
Gross profit.......................................... 5,921,394 4,561,886 4,119,038
----------- ---------- ----------
Operating and administrative.......................... 2,726,452 2,183,229 2,129,140
Sales and marketing................................... 3,384,213 1,271,566 1,059,215
Research and development, net......................... 2,675,467 1,134,977 618,019
Product rights writedown.............................. 4,080,189 0 0
Investment revaluation................................ 2,500,000 0 0
----------- ---------- ----------
Total expenses........................................ 15,366,321 4,589,772 3,806,374
----------- ---------- ----------
(Loss) Income from operations......................... (9,444,927) (27,886) 312,664
Interest income....................................... 1,048,562 1,067,975 430,098
Interest expense...................................... (113,123) 0 0
Other, net............................................ 300,000 482,054 (106,000)
----------- ---------- ----------
(Loss) Income before income taxes..................... (8,209,488) 1,522,143 636,762
Income tax provision.................................. 0 0 11,700
----------- ---------- ----------
Net (loss) income..................................... $(8,209,488) $1,522,143 $ 625,062
=========== ========== ==========
Net (loss) income per share:
Basic............................................... $(.93) $.18 $.10
=========== ========== ==========
Diluted............................................. $(.93) $.17 $.09
=========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding:
Basic............................................... 8,862,000 8,365,785 6,178,453
=========== ========== ==========
Diluted............................................. 9,229,101 8,898,430 6,998,610
=========== ========== ==========
See accompanying notes to consolidated financial statements
F-4
22
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
ACCUMULATED
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
---------------------- PAID-IN ACCUMULATED TRANSLATION TREASURY
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT STOCK TOTAL
------ ------ ---------- ----------- ----------- -------- -----
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
--------- ---------- ----------- ------------ ------- --------- -----------
Net loss............... -- -- -- (8,209,488) -- -- (8,209,488)
Treasury stock
acquired............. -- -- -- -- -- $(561,458) (561,458)
Exercise of common
stock options........ 265,443 66,361 860,755 -- -- -- 927,116
Foreign currency
translation gain..... -- -- -- -- 574 -- 574
--------- ---------- ----------- ------------ ------- --------- -----------
Balance at December 31,
1997................. 9,040,942 $2,260,236 $28,201,420 $(15,215,214) $41,522 $(561,458) $14,726,506
========= ========== =========== ============ ======= ========= ===========
See accompanying notes to consolidated financial statements
F-5
23
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
Cash flows provided by operations:
Net (loss) income..................................... $ (8,209,488) $ 1,522,143 $ 625,062
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operations:
Depreciation and amortization....................... 450,251 176,924 108,012
Writedown of investment in, and debenture from,
Romark........................................... 2,500,000 -- --
Provision for Maxaquin product rights writedown..... 4,080,389 -- --
Conversion of Anadrol product rights to inventory... 318,750 -- --
Increase in royalty payment......................... (120,000) -- --
Decrease (Increase) in receivables.................. 176,896 128,336 (435,007)
Increase in inventories............................. (492,789) (813,494) (617,696)
Increase (Decrease) in inventory reserve............ 290,740 (43,422) (195,298)
(Increase) Decrease in prepaid expenses and other... (298,718) 205,930 116,629
Increase in accounts payable and accrued
liabilities...................................... 2,031,292 639,274 203,582
(Decrease) Increase in due to Roxane Laboratories,
Inc. ............................................ (1,329,136) 1,229,168 1,834,717
------------ ------------ -----------
Net cash flows (used in) provided by operating
activities.......................................... (601,813) 3,044,859 1,640,001
Cash flows (used in) investing activities:
Proceeds on disposition of equipment................ 1,880 6,124 63,063
Purchases of equipment.............................. (564,272) (129,039) (25,969)
Purchase of product rights.......................... (3,376,000) -- --
Purchase of short-term investments.................. (31,794,726) (48,736,422) (877,393)
Sale of short-term investments...................... 34,446,789 33,754,281 --
Investment in Medisperse............................ -- -- (39,456)
Investment in and subordinated debenture from Romark
Laboratories, L.C................................ (224,090) (1,675,910) (600,000)
------------ ------------ -----------
Net cash (used in) investing activities............... (1,510,419) (16,780,966) (1,479,755)
Cash flows (used in) provided by financing activities:
Purchase of treasury stock.......................... (561,458) -- --
Proceeds from exercise of stock options............. 927,116 710,820 250,463
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.............. (1,643,888) 643,888 500,000
------------ ------------ -----------
Net cash flows (used in) provided by financing
activities.......................................... (1,278,230) 11,183,097 750,463
Effect of exchange rate changes on cash............... (148) 56 41
------------ ------------ -----------
Net change in cash and cash equivalents............... (3,390,610) (2,552,954) 910,750
Cash and cash equivalents at beginning of year........ 4,458,889 7,011,843 6,101,093
------------ ------------ -----------
Cash and cash equivalents at end of year.............. $ 1,068,279 $ 4,458,889 $ 7,011,843
============ ============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes........ $ 11,805 $ 11,700 $ 1,663
Obligation incurred due to product rights
acquisitions (including imputed interest)........ $ 2,127,836 -- --
See accompanying notes to consolidated financial statements
F-6
24
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 approximates 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 apply 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
25
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(H) EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards 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.
Basic earnings (loss) per share was computed by dividing net income (loss)
by the weighted-average number of common shares outstanding during the year.
Diluted earnings per share was computed assuming the conversion of all
options and warrants (when dilutive) as of the beginning of the year. The number
of common shares issuable assuming conversion was then added to the
weighted-average number of common shares outstanding. No effect has been given
in 1997 to options outstanding under the Company's stock option plans and
warrants issued, as their effect is anti-dilutive.
(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 1996 and 1995 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 were required, the estimated
future undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a writedown to market value is
required. The adoption did not have a material effect on the Company's financial
position or results of operations.
F-8
26
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(M) INTANGIBLE ASSETS
Intangible assets consist of Maxaquin and Anadrol product rights. These
product rights are being amortized over 5 to 20 years. Amortization is provided
on a straight-line basis over the estimated useful lives of the product rights.
(2) INVENTORIES
A summary of inventory components at December 31 follows:
1997 1996
---- ----
Finished products................................... $ 847,709 $ 367,124
Work in process..................................... 986,406 0
Raw materials....................................... 2,854,809 3,829,011
Reserve for obsolescence............................ (302,020) (11,280)
---------- ----------
$4,386,904 $4,184,855
========== ==========
(3) EQUIPMENT, LEASEHOLD IMPROVEMENTS AND INTANGIBLE ASSETS
A summary of equipment and leasehold improvements at December 31 follows:
ESTIMATED
1997 1996 USEFUL LIFE
---- ---- -----------
Equipment, furniture and fixtures........ $2,347,782 $1,997,888 3-10 years
Leasehold improvements................... 208,075 37,919 10 years
---------- ----------
$2,555,857 $2,035,807
========== ==========
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, 1997 and 1996, the equipment had a net book
value of $327,519 and $408,902, respectively. Depreciation expense for 1997 and
1996 was $266,770 and $186,038, respectively.
At December 31, 1997, intangible assets consisted of product rights
($1,633,694) and the amortization related to those product rights ($7,345).
(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 Inc.
In May 1996, the Company signed a Collaboration Agreement with BioChem
Pharma (International) Inc. (which it subsequently assigned to BioChem Pharma
Inc.), under which the Company sublicensed product rights in Canada to
nitazoxanide, Androgel and Andractim. Successful development of the Androgel
products may result in additional equity investment and milestone payments from
BioChem Pharma Inc. The
F-9
27
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. ("Romark") for
$1.5 million. 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 nitazoxanide for human use in
the U.S., Canada, Australia and New Zealand from Romark Laboratories, L.C.,
Tampa, Florida. Unimed holds equity in Romark, which was previously valued at
$1,000,000 and a convertible subordinate debenture in the amounts of $1.5
million, which could be converted to Romark equity.
During the fourth quarter of 1997, the Company provided for an expense of
$2.5 million representing a revaluation of (1) a $1,000,000 equity investment in
Romark and (2) the $1.5 million convertible subordinated debenture.
G.D. Searle & Co.
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 (lomefloxacin),
a fluoroquinolone antibiotic. Under the terms of the agreement, the Company will
make sales-based distribution fee payments during the term of the agreement. The
Company also recorded long and short-term obligations along with imputed
interest at 8% on that obligation, to be satisfied January 2, 1998 and 1999,
respectively. During 1997, $3,058,148 in distribution fees were paid to Searle.
During the fourth quarter of 1997, the Company wrotedown the previously
capitalized acquisition costs of Maxaquin by $4.1 million.
Syntex (USA) Inc.
In July 1997, the Company acquired from Syntex (USA) Inc. and its Mexican
affiliate all rights to Anadrol(R) (oxymetholone) an orally active anabolic
androgenic steroid used to treat anemias, for the U.S., Canada and Mexico. The
Company will pay Syntex a licensing fee, in three installments, and a royalty on
net product sales. The Company paid the first installment, $376,000, in 1997.
(5) SHORT-TERM INVESTMENTS
Short-term investments held-to-maturity securities were $13,718,834 and
$16,370,897 in 1997 and 1996, respectively.
(6) INCOME TAXES
The provision for income taxes is comprised of the following:
CURRENT 1997 1996 1995
------- ---- ---- ----
Federal............................................. $-- $-- $ --
State............................................... -- -- 11,700
Foreign............................................. -- -- --
--- --- -------
Total............................................... $-- $-- $11,700
=== === =======
F-10
28
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax provisions from continuing operations differed from the taxes
calculated at the statutory federal rate as follows:
1997 1996 1995
---- ---- ----
Taxes (benefit) at the statutory
rate................................ $(2,791,000) $ 517,400 $ 216,500
Utilization of tax loss
carryforward........................ -- (518,000) (217,100)
State income taxes.................... -- -- 11,700
Foreign loss.......................... -- 600 600
Valuation allowance................... 2,791,000 -- --
----------- --------- ---------
Totals................................ $ -- $ -- $ 11,700
=========== ========= =========
At December 31, 1997, the Company has a tax loss carryforward of
approximately $9,112,000 for federal income tax purposes, which expires in the
years 2001 through 2011. The Company has available a research and development
credit carryforward at December 31, 1997, of approximately $172,000, which
expires in the years 2003 through 2011. 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:
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforward................. $ 3,667,000 $ 3,361,000
Research tax credit carryforward................ 172,000 430,000
Sales returns and allowances.................... 8,000 15,000
Inventory reserve............................... 121,000 4,500
Accrued liabilities............................. 41,000 22,000
Other........................................... 1,000 1,000
Depreciation.................................... 200,000 213,000
Valuation allowance............................. (4,210,000) (3,620,500)
----------- -----------
Total...................................... $ 0 $ 0
----------- -----------
Deferred tax liabilities:
None............................................ 0 0
----------- -----------
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. In March 1993,
Sanofi Winthrop started to distribute Marinol in Canada. 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
$8,085,000 (1997), $7,649,000 (1996) and $6,031,000 (1995). As of December 31,
1997 and 1996, trade receivables included $1,537,223 and $1,557,403,
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
F-11
29
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
paid $64,328 (1997), $27,746 (1996) and $92,334 (1995) of these costs, which is
netted against research and development expenses.
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 Roxane sells inventory.
The Company has various other licensing, marketing and distribution
agreements typical to its business. See Note 4 -- "Product Development,
Licensing and Other Agreements" 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. These warrants expired unexercised.
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, 1997,
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, 1997,
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,
1997 and 1996, 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 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. Generally, options expire 10
years from the date of grant or 90 days after termination of employment.
F-12
30
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity for the 1991 Plan for the years ended December 31, 1995,
1996 and 1997 was as follows:
WEIGHTED-AVERAGE OPTIONS
SHARES EXERCISE PRICE EXERCISABLE
------ ---------------- -----------
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
--------- ----- -------
Options granted........................... 1,112,500 6.38 --
Options exercised......................... (184,313) 2.76 --
Options forfeited......................... (425,375) 4.94 --
--------- ----- -------
Balance at December 31, 1997.............. 1,488,269 $5.83 425,117
========= ===== =======
The following table summarizes the status of outstanding stock options as
of December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ------------------------------------
RANGE OF REMAINING
EXERCISE NUMBER OF OPTIONS CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER OF OPTIONS WEIGHTED AVERAGE
PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------------- ---------------- ---------------- ----------------- ----------------
2.75 - 4.88 294,004 7.0 3.14 220,254 3.22
5.13 - 6.75 569,765 8.7 5.35 85,765 5.00
7.13 - 8.25 624,500 9.3 7.54 119,098 7.70
- ----------- --------- --- ---- ------- ----
-- 1,488,269 8.3 5.83 425,117 4.83
=========== ========= === ==== ======= ====
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 1996 and 1997, reported net
income and earnings per share would have been reduced as follows:
1997 1996
---- ----
Net (loss) income, as reported....................... $(8,209,488) $1,522,143
Pro forma net (loss) income.......................... $(8,562,962) $1,169,032
Basic (loss) earnings per share, as reported......... $(.93) $.18
Pro forma basic (loss) earnings per share, as
reported........................................... $(.99) $.13
Dilutive (loss) earnings per share, as reported...... $(.93) $.17
Pro forma dilutive (loss) earnings per share......... $(.99) $.13
The effects of applying SFAS 123 in the above pro forma disclosure are not
likely to represent the effects disclosed in future years because the proforma
calculations exclude stock options that were granted before 1995.
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
F-13
31
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
weighted-average assumptions used in determining fair value as disclosed for
SFAS 123 are shown in the following table:
1997 1996
---- ----
Risk-free interest rate..................................... 6.20% 6.16%
Dividend yield.............................................. 0.00% 0.00%
Option life (years)......................................... 4.2 4.7
Stock price volatility...................................... 55.82% 58.16%
(B) OTHER STOCK OPTIONS
In November 1986, reflecting employment contracts with certain executives,
the Company granted nonqualified options to purchase 220,000 shares of Common
Stock. In January 1988, the exercise price of these options was changed to $5.38
from $15.00. 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
giving effect 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, 1997, options to
purchase 214,110 shares of Common Stock had been exercised, none had been
canceled and options to purchase 57,106 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, giving
effect 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. There were no exercises or cancellations
during 1995, 1996 or 1997.
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 giving effect 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 1995, 1996 or 1997.
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 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, 1997,
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 of December 31, 1997, all 20,000 options had been exercised.
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, 1997, options to purchase
F-14
32
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997, 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 1995, 1996 or 1997.
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 311,182 shares of the Company's Common Stock reserved for these
arrangements as of December 31, 1997.
(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 1997 and 1996 totaled $78,668 and $55,278,
respectively.
(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 expenses charged
to operations were approximately $291,000 in 1997, $143,000 in 1996 and $193,000
in 1995. At December 31, 1997, approximate amounts committed for future fiscal
years are as follows:
1998................................................. $372,000
1999................................................. 379,000
2000................................................. 387,000
2001................................................. 395,000
2002................................................. 34,000
Management expects that in the normal course of business, leases that
expire will be renewed or replaced by other leases.
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.
(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
F-15
33
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Either party upon 30 days prior
written notice can cancel the agreement. Expenditures under this agreement
totaled approximately $50,000 in 1997, 1996 and 1995, respectively.
F-16
34
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 Subsidiary 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.
/s/ COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 6, 1998
F-17
35
SCHEDULE II
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTIONS END OF PERIOD
----------- ------------ ---------- ---------- -------------
Allowance for doubtful accounts and returns:
1995.......................................... $ 28,000 $ 15,000 $ 0 $ 43,000
======== ======== ======== ========
1996.......................................... $ 43,000 $ 9,436 $ 13,046 $ 39,390
======== ======== ======== ========
1997.......................................... $ 39,390 $ 0 $ 17,992 $ 21,398
======== ======== ======== ========
Reserve for inventory obsolescence:
1995.......................................... $250,000 $ 0 $195,298 $ 54,702
======== ======== ======== ========
1996.......................................... $ 54,702 $241,107 $284,529 $ 11,280
======== ======== ======== ========
1997.......................................... $ 11,280 $290,740 $ 0 $302,020
======== ======== ======== ========
F-18
36
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/ RONALD L. GOODE
------------------------------------
Ronald L. Goode
President and Chief
Executive Officer
March 30, 1998
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 30, 1998
---------------------------------------------
Dr. John N. Kapoor
/s/ RONALD L. GOODE President and Chief Executive March 30, 1998
--------------------------------------------- Officer
Ronald L. Goode
/s/ DAVID E. RIGGS Senior Vice President, Chief March 30, 1998
--------------------------------------------- Financial Officer, Secretary
David E. Riggs and Treasurer
/s/ FRED HOLUBOW Director March 30, 1998
---------------------------------------------
Fred Holubow
/s/ JAMES J. LEMPENAU Director March 30, 1998
---------------------------------------------
James J. Lempenau
/s/ ROLAND WEISER Director March 30, 1998
---------------------------------------------
Roland Weiser