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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the Fiscal Year Ended December 31, 2000
Commission file number 0-16005
Unigene Laboratories, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2328609
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
110 Little Falls Road, Fairfield, New Jersey 07004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 882-0860
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $.01 Par Value
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. [ X ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within 60 days prior
to the date of filing. Aggregate market value as of April 2, 2001: $23,156,152.
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's classes of
Common Stock, as of the latest practicable date. Common Stock, $.01 Par Value--
46,436,940 shares as of April 2, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) any annual report
to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.
None.
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the items captioned "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Form 10-K constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Art of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or activities of
the Company, or industry results, to be materially different from any future
results, performance or activities expressed or implied by such forward-looking
statements. Such factors include: general economic and business conditions, the
financial condition of the Company, competition, the Company's dependence on
other companies to commercialize, manufacture and sell products using the
Company's technologies, the uncertainty of results of animal and human testing,
the risk of product liability and liability for human clinical trials, the
Company's dependence on patents and other proprietary rights, dependence on key
management officials, the availability and cost of capital, the availability of
qualified personnel, changes in, or the failure to comply with, governmental
regulations, the failure to obtain regulatory approvals of the Company's
products, litigation, and other factors discussed in this Form 10-K.
Item 1. Business.
Background
Unigene Laboratories, Inc. ("Unigene" or "Company"), was incorporated under the
laws of the State of Delaware in 1980. Unigene is a biopharmaceutical company
engaged in the research, production and delivery of small proteins, referred to
as peptides, that have demonstrated or may have potential medical use. We have a
patented manufacturing technology for producing many peptides cost-effectively.
We also have patented technology that has been shown to deliver orally medically
useful amounts of various peptides into the bloodstream. Our primary focus has
been on the development of Calcitonin products for the treatment of osteoporosis
and other indications. We have the facilities and the technology for
manufacturing Calcitonin in accordance with cGMP and have an injectable
Calcitonin product that is approved for sale in the European Union for two minor
indications. We are also engaged in the development of oral and nasal Calcitonin
products.
Our Accomplishments
Among our major accomplishments are:
o Development of a Proprietary Peptide Production Process. One of our principal
scientific accomplishments is our success in developing a highly efficient
biotechnology-based peptide production process. Several patents relating to this
process have issued. We believe that these proprietary processes are key steps
in the more efficient and economical commercial production of peptides with
various medical applications. Many of these peptides cannot be produced at a
reasonable cost in sufficient quantities for human testing or commercial use by
currently available production processes. Using our proprietary process, we have
produced laboratory-scale quantities of various peptides. We have constructed
and are operating a manufacturing facility employing this process to produce
Calcitonin.
o Development of Proprietary Technology for Oral Delivery. We have also
developed and patented a formulation that has orally delivered Calcitonin into
the bloodstream of human subjects. We and our collaborators have shown in
repeated human studies that this formulation regularly delivers measurable
quantities of the peptide into the human bloodstream. We believe that this
formulation may accelerate the regulatory approval process for an oral
Calcitonin product because it should be easier to establish its performance as
compared to a formulation that does not produce measurable Calcitonin blood
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levels. We believe that the components of our patented oral product also can
enable the delivery of other peptides and we have initiated studies to
investigate this possibility internally and in collaboration with others.
Strategy
Our business strategy is to develop proprietary products and processes
with applications in human health care to generate revenues from license fees,
royalties on third-party sales and direct sales of bulk or finished products.
Generally, we fund our internal research activities and rely on licensees, which
are likely to be established pharmaceutical companies, to provide development
funding. We also generally expect to rely on these licensees to take
responsibility for obtaining appropriate regulatory approvals, human testing,
and marketing of products derived from our research activities. However, we may,
in some cases, retain the responsibility for human testing and for obtaining the
required regulatory approvals for a particular product.
o Pfizer License Agreement. In July 1997, we entered into an agreement
under which we granted to the Parke-Davis division of Warner-Lambert Company
(which merged with Pfizer in June 2000), a worldwide license to use our oral
Calcitonin technology. Upon signing the agreement, we received $6 million in
payments from Warner-Lambert, consisting of a $3 million licensing fee and a $3
million equity investment by Warner-Lambert. Through December 31, 2000, we
recognized an aggregate of $16.5 million in revenue due to the achievement of
specified milestones, including $2 million in 2000. Pfizer began a Phase I/II
human study in April 2000 and patient dosing was completed in December 2000.
Pfizer analyzed the results of the study and informed us in March 2001 that the
study did not achieve Pfizer's desired results. Pfizer terminated the license
agreement citing this conclusion. We believe that this study, in which an FDA
approved product also did not work and which produced results contrary to many
published studies, was not capable of determining the performance of our oral
Calcitonin product. We believe that if patients in the study had also received
calcium supplements, in addition to the Calcitonin, the results would have been
more favorable. Therefore, we intend to continue the development of our oral
Calcitonin product as a treatment of osteoporosis, and have begun discussions
with potential licensees in the U.S. and other countries. In addition, due to
the termination of the Pfizer agreement, we no longer have restrictions on
selling bulk Calcitonin.
o China Joint Venture. In June 2000, we entered into a joint venture with
Shijiazhuang Pharmaceutical Group ("SPG"), a pharmaceutical company in the
People's Republic of China. The joint venture will manufacture and distribute
injectable and nasal Calcitonin products in China (and possibly other selected
Asian markets) for the treatment of osteoporosis. We own 45% of the joint
venture and will have a 45% interest in the joint venture profits and losses. In
the first phase of the collaboration, SPG will contribute its existing
injectable Calcitonin license to the joint venture, which will allow the joint
venture to sell our product in China. The joint venture will need to file a New
Drug Application in China for its injectable and nasal products. In addition,
the joint venture may be required to conduct brief local human trials. If the
product is successful, the joint venture may establish a facility in China to
fill injectable and nasal Calcitonin products using bulk Calcitonin produced at
our Boonton, New Jersey plant. Eventually the joint venture may manufacture the
bulk Calcitonin in China at a new facility that would be constructed by the
joint venture. This would require local financing by the joint venture. The
joint venture has not yet begun operations as of December 31, 2000.
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o Other License or Distribution Arrangements. In addition to the joint venture
with SPG, we have entered into distribution agreements for our injectable
Calcitonin product in the United Kingdom, Ireland and Israel. We continue to
seek other licensing or distribution agreements with pharmaceutical companies
for both the injectable and nasal Calcitonin products, as well as various oral
peptide products. However, we may not be successful in our efforts to sign any
additional revenue generating agreements.
Competition
Our primary business activity has been biotechnology research and
development. Biotechnology research is highly competitive, particularly in the
field of human health care. We compete with specialized biotechnology companies,
major pharmaceutical and chemical companies, universities and other non-profit
research organizations, many of which can devote considerably greater financial
resources to research activities.
In 1996, we began manufacturing cGMP Calcitonin for use in
pharmaceutical products. In the development, manufacture and sale of peptide
products, we compete with contract laboratories and major pharmaceutical
companies. Many of our competitors can devote considerably greater financial
resources to these activities. Major competitors in the field of osteoporosis
include Novartis, American Home Products, Merck, Eli Lilly, and Procter and
Gamble. We believe that the unique safety and effectiveness of Calcitonin,
combined with our patented peptide manufacturing process and our patented oral
formulation, will enable us to compete with products marketed by these and other
companies.
We believe that success in competing with others in the biotechnology
industry will be based primarily upon scientific expertise and technological
superiority. We also believe that success will be based on the ability to
identify and to pursue scientifically feasible and commercially viable
opportunities and to obtain proprietary protection for research achievements.
Our success will further depend on our ability to obtain adequate funding and on
developing, testing, protecting, producing and marketing products and obtaining
their timely regulatory approval. We are always at risk that others may develop
superior processes or products that would render our processes or products
noncompetitive or obsolete.
Product Manufacture
We have been producing salmon Calcitonin since 1992. We constructed a
cGMP facility for the production of Calcitonin at leased premises located in
Boonton, New Jersey. The facility began producing salmon Calcitonin under cGMP
guidelines in 1996. The facility also produces our proprietary amidating enzyme
for use in producing Calcitonin. The current production level of the facility is
between one and two kilograms of bulk Calcitonin per year, and is expected to
increase significantly in 2001.
The facility can be modified to increase Calcitonin production capacity.
However, if we are successful in our efforts to commercialize an oral Calcitonin
product, we expect that we may incur additional expenditures to expand or
upgrade our manufacturing operations. Although the facility initially is devoted
exclusively to Calcitonin production, it also is suitable for producing other
peptide products.
We are following conventional procedures to secure the approval of the
facility by regulatory agencies to allow us to manufacture Calcitonin for human
use. European health authorities inspected the facility in connection with the
filing of our injectable Calcitonin dossier and found it to be in compliance
with cGMP guidelines. However, there is the risk that our operations might not
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remain in compliance or that approval by other agencies will not be obtained.
The FDA must approve the facility in order to manufacture Calcitonin or other
peptides for sale in the United States.
Government Regulation
Our laboratory research, development and production activities and those
of our collaborators are subject to significant regulation by numerous federal,
state, local and foreign governmental authorities. FDA approval, following the
successful completion of various animal and human studies, is required for the
sale of a pharmaceutical product in the United States. Foreign sales require
similar studies and approval by regulatory agencies.
The regulatory approval process for a pharmaceutical product requires
substantial resources and can take many years. There is a risk that any
additional regulatory approvals required for our production facility or for any
of our products will not be obtained in a timely manner. Our inability to
obtain, or delays in obtaining, these approvals would adversely affect our
ability to continue to fund our programs, to produce marketable products, or to
receive revenue from milestone payments, product sales or royalties. We also
cannot predict the extent of any adverse governmental regulation that may arise
from future legislative and administrative action.
The FDA or other regulatory agencies may audit our production facility
to ensure that it is operating in compliance with current Good Manufacturing
Practice guidelines, referred to as cGMP. These guidelines require that
production operations be conducted in strict compliance with our established
rules for manufacturing and quality controls. These agencies are empowered to
suspend production operations and/or product sales if, in their opinion,
significant or repeated changes from these guidelines have occurred. A
suspension by any of these agencies could have a material adverse impact on our
operations.
Regulatory Approval of Our Injectable Calcitonin Product
In January 1999, we received approval from the European Committee for
Proprietary Medicinal Products, referred to as the CPMP, to market our
injectable Calcitonin product in all 15 member states of the European Union as a
treatment for Paget's disease and for hypercalcemia. We began to market this
product in Europe for these indications in 1999. We have filed a supplementary
submission with the CPMP, called a Type II Variation, to expand the approved
indications to include the treatment of osteoporosis. However, it is uncertain
whether or when the Type II Variation will be approved by the CPMP.
Regulatory authorities in many non-European Union countries can cite the
approved European dossier, which we believe could significantly reduce the
registration requirements for injectable Calcitonin in those non-European Union
countries, and thereby could speed up product launch. We have been notified by
Switzerland that it intends to approve our injectable Calcitonin product for the
treatment of osteoporosis, Paget's disease and hypercalcemia; however, the
timing of that approval is uncertain. In addition, we believe that the human
trials conducted to support the European filing of the injectable Calcitonin
product can be used to support the filing of a New Drug Application with the FDA
for use of our injectable Calcitonin product to treat osteoporosis and other
indications. We believe that our abbreviated clinical program, which has been
accepted by the FDA, will be sufficient to satisfy approval requirements in the
United States and other countries. Accordingly, we expect that the review
process for our injectable Calcitonin product in the United States and other
countries may be shorter than that typically associated with a new drug
submission for numerous reasons:
o The active ingredient is structurally identical to and indistinguishable from
the active ingredient in products already approved by many regulatory agencies.
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o The formulation is essentially similar to the formulations used in already
approved products.
o The human trial program that was accepted by the FDA is relatively brief and
involved small numbers of subjects. As a result, the amount of information that
must be reviewed is far less than would have been compiled for the lengthier
trials required for a typical new drug submission.
Development of our Oral Calcitonin Product
In December 1995 and January 1996, we successfully tested a proprietary
Calcitonin oral formulation in two separate human studies in the United Kingdom.
These studies indicated that the majority of those who received oral Calcitonin
showed levels of the peptide in blood samples taken during the trial that were
greater than the minimum levels generally regarded as being required for maximum
medical benefit. We believe that these were the first studies to demonstrate
that significant blood levels of Calcitonin could be observed in humans
following oral administration of the peptide. In April 1996, we successfully
conducted a third pilot human study in the United Kingdom which used lower
Calcitonin dosages than in the prior two human trials. The results of this trial
indicated that every test subject showed levels of the peptide in their blood
samples that exceeded the minimum levels generally regarded as required for
maximum medical benefit. During 1999, with Warner-Lambert (now Pfizer), we
successfully concluded two pilot human studies using an oral Calcitonin
formulation manufactured by Warner-Lambert. Both studies showed significant
measurable blood levels of Calcitonin. In December 1999, Warner-Lambert filed an
Investigational New Drug application with the FDA. Pfizer initiated a Phase I/II
study in April 2000 and patient dosing for this study was completed in December
2000. Pfizer analyzed the results of the study and informed us in March 2001
that the study did not achieve Pfizer's desired results. Pfizer terminated the
license agreement citing this conclusion. We believe that this study, in which
an FDA approved product also did not work and which produced results contrary to
many published studies, was not capable of determining the performance of our
oral Calcitonin product. We believe that if patients in the study had also
received calcium supplements, in addition to the Calcitonin, the results would
have been more favorable. Therefore, we intend to continue the development of
our oral Calcitonin product as a treatment of osteoporosis, and have begun
discussions with potential licensees in the U.S. and other countries. In
addition, due to the termination of the Pfizer agreement, we no longer have
restrictions on selling bulk Calcitonin.
We have filed patent applications for our oral formulation in the United
States and in numerous foreign countries. In 1999, we received a U.S. patent for
our basic technology covering the oral delivery of Calcitonin for the treatment
of osteoporosis. In 2000, we received a U.S. patent extending this protection to
the oral delivery of other peptides.
There are risks that we will not be successful in licensing this product,
that a safe and effective oral product will not be developed, that we will not
be successful in obtaining regulatory approval of an oral Calcitonin product,
and that we will not succeed in developing, producing or marketing an oral
Calcitonin product.
Development of our Nasal Calcitonin Product
A major pharmaceutical company received FDA approval in 1995 for the
marketing of a nasal spray Calcitonin product, which has substantially enlarged
the U.S. market for Calcitonin. During 1999, we completed preliminary human
studies for our proprietary nasal Calcitonin product. A patent application for
the product was filed in February 2000. In January 2000 we filed an
Investigational New Drug Application with the FDA to begin human testing of our
nasal product as a treatment for osteoporosis. In February 2000, we began U.S.
human studies. In December 2000, we successfully completed a human study
demonstrating similar blood levels between our product and that of an existing
nasal Calcitonin product. We have initiated a second human study with final
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results expected in mid-2001. We are seeking to license our nasal Calcitonin
product in the U.S. and other countries for the treatment of osteoporosis.
However, we may not be successful in our efforts to conclude a license
agreement, to obtain governmental approval of our nasal Calcitonin product, or
to manufacture and sell the product.
Collaborative Research Programs
We are currently engaged in two collaborative research programs:
o Rutgers University College of Pharmacy continues to study oral delivery of
Calcitonin and other peptides.
o We are in collaboration with Yale University, to investigate new applications
for various peptides, including Calcitonin gene-related peptide. In 1996, we
reported that this peptide accelerated bone growth and prevented bone loss in an
animal model system. However, this peptide may not have the same effect in
humans. We may not be successful in developing, manufacturing or marketing any
resulting product.
Patents and Proprietary Technology
We have filed a number of applications for U.S. patents relating to our
proprietary peptide manufacturing process and our technology for oral delivery.
To date, the following six U.S. patents have issued:
o Immunization By Immunogenic Implant, a method for producing antibodies for
developing diagnostic medical tests
o two patents related to the Alpha-Amidation Enzyme and its use in manufacturing
peptides
o a patent covering an improvement in our manufacturing technology
o two patents covering oral delivery of peptides
Other applications are pending. We also have made filings in selected
foreign countries, and numerous foreign patents have issued. However, our
pending applications may not issue as patents and our issued patents may not
provide us with significant competitive advantages. Furthermore, our competitors
may independently develop or obtain similar or superior technologies.
Although we believe our patents and patent applications are valid, the
repeal of one or more of our key patents could have a significant adverse effect
upon our business. Detecting and proving infringement generally is more
difficult with process patents than with product patents. In addition, a process
patent's value is diminished if others have patented the product that can be
produced using the process. Under these circumstances, we would require the
cooperation of, and likely be required to share royalties with, the patent
holder or its sublicensees in order to make and sell the product.
In some cases, we rely on trade secrets to protect our inventions. Our
policy is to include confidentiality provisions in all research contracts, joint
development agreements and consulting relationships that provide access to our
trade secrets and other know-how. However, there is a risk that these secrecy
obligations could be breached causing us harm. To the extent licensees,
consultants or other third parties apply technological information independently
developed by them or by others to our projects, disputes may arise as to the
ownership rights to information, which may not be resolved in our favor.
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Fusion Financing
On December 18, 2000, Unigene entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC, which we amended as of March 30,
2001. Under the common stock purchase agreement, as amended, Fusion has agreed
to purchase up to $21,000,000 in shares of Unigene common stock at the rate of
$875,000 per month, provided we continue to satisfy the requirements that are a
condition to Fusion's purchase obligation. We may decrease this amount at any
time that the price of our common stock is less than $15 per share. If our stock
price equals or exceeds $4.00 per share, we have the right to require Fusion to
purchase, over a period of 60 days, up to the full remaining portion of the $21
million commitment. Fusion is committed to purchase the shares over a
twenty-four month period, subject to a six-month extension or earlier
termination at our discretion
In addition to the shares and the warrant that we have issued to Fusion
as compensation for its commitment, the Board of Directors has authorized the
issuance and sale to Fusion of up to 6,000,000 shares of Unigene common stock in
connection with the financing transaction. We may be required to obtain the
approval of Unigene stockholders to an amendment to Unigene's Certificate of
Incorporation increasing the number of shares of Unigene common stock that the
Company is authorized to issue in order to issue and sell additional shares to
Fusion. However, we cannot predict when or if the SEC will declare the
registration statement effective, if the stockholders will approve the amendment
to our certificate of incorporation or if we will be able to meet the continuing
requirements of the Fusion agreement.
The selling price per share is equal to the lesser of the lowest sale
price of our common stock on the day of submission of a purchase notice by
Fusion; or the average of any five closing sale prices of our common stock,
selected by Fusion, during the 15 trading days prior to the date of submission
of a purchase notice by Fusion; or $15.00.
Fusion has agreed that neither it nor any of its affiliates will engage
in any direct or indirect short-selling or hedging of our common stock during
any time prior to the termination of the common stock purchase agreement. Under
the terms of the common stock purchase agreement, as amended, Fusion has
received 2,000,000 shares of our common stock as a commitment fee. In addition,
Fusion also received five-year warrants for 1,000,000 shares of our common
stock, exercisable at $.50 per share as part of its commitment fee. Unless an
event of default occurs, these shares and warrant shares must be held by Fusion
until the earlier of the maturity of the common stock purchase agreement or the
date the common stock purchase agreement has been terminated.
Employees
As of April 2, 2001 we had 67 full-time employees. Twenty-one were engaged
in research, development and regulatory activities, 35 were engaged in
production activities and 11 were engaged in general and administrative
functions. Ten of our employees hold Ph.D. degrees. Our employees are experts in
molecular biology, including DNA cloning, synthesis, sequencing and expression;
protein chemistry, including purification, amino acid analysis, synthesis and
sequencing of proteins; immunology, including tissue culture, monoclonal and
polyclonal antibody production and immunoassay development; chemical
engineering; pharmaceutical production; quality assurance; and quality control.
None of our employees is covered by a collective bargaining agreement. Warren P.
Levy, President and Ronald S. Levy, Executive Vice President, both executive
officers and directors, have signed employment agreements with us.
Research and Development
We have established a multi-disciplinary research team to adapt
proprietary amidation, biological production and oral delivery technologies to
the development of proprietary products and processes. Approximately 83% of our
employees are directly engaged in activities relating to production of,
regulatory compliance for, and the research and development of pharmaceutical
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products. We spent $11.5 million on research activities in 2000, $9.4 million in
1999, and $9.0 million in 1998.
Product Liability
Our business exposes us to the risk of product liability claims that are
a part of human testing, manufacturing and sale of pharmaceutical products. We
may not have sufficient resources to defend against or satisfy these claims.
Although we maintain product liability insurance coverage, product liability or
other judgments against us, as well as the cost of defending such claims in
excess of insurance limits, could have a material adverse effect upon our
business and financial condition.
Risk Factors
Unigene's business is subject to the following risk factors:
We have significant historical losses and expect to continue to incur losses in
the future.
We have incurred annual operating losses since our inception. As a result,
at December 31, 2000, we had an accumulated deficit of $75,378,000. Our gross
revenues for the years ended December 31, 2000, 1999 and 1998 were $3,287,000,
$9,589,000 and $5,050,000, respectively. However, our revenues have not been
sufficient to sustain our operations. These revenues consisted principally of
milestone payments received in connection with our terminated license agreement
with Pfizer. As of March 31, 2001, we have no significant revenue generating
license agreements. As a result, during the same periods, we have incurred
losses from operations of $11,385,000 $1,997,000 and $6,060,000, respectively.
Our net losses for the years ended December 31, 2000, 1999 and 1998 were
$12,469,000 $1,577,000 and $6,881,000, respectively. While our injectable
Calcitonin product has been approved for commercial sale in a number of European
countries for the treatment of two minor indications, we do not anticipate that
sales for these indications will produce significant revenues. We believe that
the profitability of Unigene will require the successful commercialization of
our Calcitonin product or another peptide product in the United States and
abroad. Unigene might never be profitable.
We will require additional financing to sustain our operations.
At December 31, 2000, we had a working capital deficiency of
$13,267,000. The independent auditors' report for the year ended December 31,
2000, includes an explanatory paragraph stating that our recurring losses from
operations and working capital deficiency discussed above raise substantial
doubt about our ability to continue as a going concern. We had an operating cash
flow deficit of $4,864,000 in 1998, an operating cash flow deficit of $1,400,000
in 1999 and for the year ended December 31, 2000, an operating cash flow deficit
of $3,382,000. We do not have sufficient financial resources to fund our
operations at the current level. Therefore, excluding any funding that we might
receive from Fusion, we need additional funds to continue our operations. See
"Business - Fusion Financing." Our agreement with Fusion could provide us with
sufficient funding to sustain our operations for up to two years, beginning in
the second quarter of 2001. However, assuming we do not receive any funding from
Fusion, and we are unable to enter into a significant revenue generating license
or other arrangement in the near term we would require additional sources of
financing in order to satisfy our working capital needs, which may be
unavailable or prohibitively expensive. Should such financing be unavailable or
prohibitively expensive when we require it, we would not be able to sustain our
working capital needs, which would have a material adverse effect on our
business, operating results and financial condition.
Even if we are able to access $875,000 per month over the next 24
months, available under the common stock purchase agreement with Fusion, we may
still need additional capital to fully implement our business, operating and
development plans. In addition, our issuance of shares of common stock to Fusion
under the common stock purchase agreement will result in dilution to existing
stockholders. We only have the right to receive $875,000 per month under the
common stock purchase agreement unless our stock price equals or exceeds $4.00
per share, in which event greater amounts may be received. In addition, the
agreement may be terminated by Fusion in the event of a default under the
agreement. Since we have initially registered 6,000,000 shares in this offering,
the selling price of our stock to Fusion will have to average at least $3.50 per
share for us to receive the maximum proceeds of $21,000,000 without registering
or issuing any additional shares. We may need to seek shareholder approval to
increase the total number of authorized shares of our common stock. We cannot
sell shares of Unigene common stock to Fusion until the SEC declares effective
the registration statement registering the shares offered by this prospectus.
Unigene cannot predict with any certainty if or when this will occur. We believe
that satisfying our long-term capital requirements will require the successful
commercialization of one of our peptide products. At this time, we cannot
predict with certainty that any of our products will be commercially successful.
We may not be successful in our efforts to develop a Calcitonin or other peptide
product that will produce revenues that are sufficient to sustain our
operations.
We have obtained regulatory approval in Europe for the sale of our
injectable Calcitonin product, but there is a limited market for the indications
for which it has been approved. None of our products have been approved for sale
in the U.S. The U.S. Food and Drug Administration must approve the commercial
manufacture and sale of pharmaceutical products in the U.S. Similar regulatory
approvals are required for the sale of pharmaceutical products outside of the
United States. We must conduct further human testing on our products before they
can be approved for commercial sale. We must show in these human trials that our
products are safe and effective. If any of our products are approved for
commercial sale, we will need to manufacture the product in commercial
quantities at a reasonable cost in order for it to be a successful product that
will generate profits. Because of our limited clinical, manufacturing and
regulatory experience and the lack of a marketing organization, we are likely to
rely on licensees or other parties to perform one or more tasks for the
commercialization of pharmaceutical products.
We believe that expanded consumer acceptance of Calcitonin
pharmaceutical products depends on the development of more desirable
formulations. We have initiated human trials to evaluate a nasal Calcitonin
product with final results expected in mid-2001. Pfizer recently completed a
human trial for our oral Calcitonin product, but after analyzing the results it
terminated our license agreement due to scientific and technical reasons. We
disagree with Pfizer's conclusions and plan to seek other licensees to continue
the development of our oral Calcitonin product. We may not be successful in
licensing our Calcitonin products or any of our other peptide products. In
addition, we may not be able to demonstrate the safety or effectiveness of our
products in human trials and, accordingly, they may not receive the U.S. Food
and Drug Administration and foreign governmental approvals that are necessary to
market these products. Other companies may develop other products to compete
with or surpass any nasal or oral product that we develop.
We have made a substantial investment in our production facility which we will
need to upgrade or expand in order to manufacture our products in commercial
quantities.
We have constructed and are operating a facility intended to produce
Calcitonin and other peptides. This facility has been approved by European
regulatory authorities for the manufacture of Calcitonin for human use, but has
not yet been inspected or approved by the U.S. Food and Drug Administration. The
risks associated with this facility include the failure to achieve targeted
production and profitability goals, the development by others of superior
processes and products, and the absence of a market for products produced by the
facility. In addition, the successful commercialization of an oral Calcitonin
product may require us to make additional expenditures to expand or upgrade our
manufacturing operations. Currently, we cannot determine the cost or timing of
these capital expenditures.
We are dependent on partners for the commercial development of our products.
We do not currently have, nor do we expect to have in the near future,
sufficient financial resources and personnel to develop our products on our own.
Accordingly, we expect to continue to depend on large pharmaceutical companies
for revenues from sales of products, research sponsorship and distribution of
our products. With the recent termination of our Pfizer collaboration, we
currently have no licenses for any of our products in the U.S.
In June 2000, we entered into a joint venture with a pharmaceutical
company in the People's Republic of China for the manufacture and distribution
of injectable and nasal Calcitonin products in China and possibly other Asian
markets, for the treatment of osteoporosis. This joint venture has not yet
commenced operations and it is uncertain whether it will generate meaningful
revenues or profits for Unigene. We also have entered into distribution
agreements for our injectable formulation of Calcitonin in the United Kingdom,
Ireland and Israel. To date, we have not received material revenues from these
distribution agreements.
We intend to pursue additional opportunities to license, or enter
into distribution arrangements for, our oral, nasal and injectable Calcitonin
products as well as other possible peptide products. Due to the termination of
the Pfizer agreement, we no longer have restrictions on selling bulk Calcitonin.
However, we may not be successful in any of these efforts.
Because we are a biopharmaceutical company, our operations are subject to
extensive government regulations.
Our laboratory research, development and production activities, as well
as those of our collaborators and licensees, are subject to significant
regulation by federal, state, local and foreign governmental authorities. In
addition to obtaining U.S. Food and Drug Administration approval and other
regulatory approvals of our products, we must obtain approvals for our
manufacturing facility to produce Calcitonin and other peptides for human use.
The regulatory approval process for a pharmaceutical product requires
substantial resources and may take many years. Our inability to obtain approvals
or delays in obtaining approvals would adversely affect our ability to continue
our development program, to manufacture and sell our products, and to receive
revenue from milestone payments, product sales or royalties.
The FDA or other regulatory agencies may audit our production facility
at any time to ensure compliance with current Good Manufacturing Practice
guidelines, referred to as cGMP. These guidelines require that we conduct our
production operation in strict compliance with our established rules for
manufacturing and quality controls. Any of these agencies can suspend production
operations and product sales if they find significant or repeated changes from
these guidelines. A suspension by any of these agencies could have a material
adverse effect on our operations.
Our competitors include large pharmaceutical companies with superior resources.
Unigene is engaged in a rapidly changing and highly competitive field.
To date, Unigene has concentrated its efforts on one product -- Calcitonin --
for treating osteoporosis and other indications. Like the market for any
pharmaceutical product, the market for treating osteoporosis and these other
indications has the potential for rapid, unpredictable and significant
technological change. Competition is intense from specialized biotechnology
companies, major pharmaceutical and chemical companies and universities and
research institutions. Most of our competitors have substantially greater
financial resources, research and development staffs and facilities, and
regulatory experience than we do. Major competitors in the field of osteoporosis
treatment include Novartis, American Home Products, Merck, Eli Lilly, and
Procter and Gamble. Any one of these entities could, at any time, develop
products or a manufacturing process that could render our technology or products
noncompetitive or obsolete.
Our success depends upon our ability to protect our intellectual property
rights.
We filed applications for U.S. patents relating to proprietary peptide
manufacturing technology and oral formulations that we have invented in the
course of our research. To date, six U.S. patents have issued and other
applications are pending. We have also made patent application filings in
selected foreign countries and numerous foreign patents have issued. We face the
risk that any of our pending applications will not issue as patents. Our
business also is subject to the risk that our issued patents will not provide us
with significant competitive advantages if, for example, a competitor were to
independently develop or obtain similar or superior technologies. Although we
believe our patents and patent applications are valid, the invalidation of our
key patents or the failure of our pending applications to issue as patents could
have a material adverse effect upon our business.
We also rely on trade secrets to protect our inventions. Our policy is
to include confidentiality obligations in all research contracts, joint
development agreements and consulting relationships that provide access to our
trade secrets and other know-how. However, other parties with confidentiality
obligations could breach their agreements causing us harm. If a secrecy
obligation were to be breached, we may not have the financial resources
necessary for a legal challenge. If licensees, consultants or other third
parties use technological information independently developed by them or by
others in the development of our products, disputes may arise from the use of
this information and as to the ownership rights to products developed using this
information. These disputes may not be resolved in our favor.
Our technology or products could give rise to product liability claims.
Our business exposes us to the risk of product liability claims that are
a part of human testing, manufacturing and sale of pharmaceutical products. We
may not have sufficient resources to defend against or satisfy these claims.
Although we maintain product liability insurance coverage, product liability or
other judgments against us, as well as the cost of defending such claims in
excess of insurance limits, could have a material adverse effect upon our
business and financial condition.
The loss of our key executives could have a negative effect on our business.
Dr. Warren Levy and Dr. Ronald Levy have been the principal executive
officers since our inception. We rely on them for their leadership and business
direction. Each of them has entered into an agreement with us providing that he
shall not engage in any other employment or business for the period of his
employment with us. The loss of the services of either of these individuals
could have a material adverse effect on our business.
The outcome of our arbitration proceeding with The Tail Wind Fund is uncertain.
In July 2000, the Tail Wind Fund, Ltd., the holder of $2,000,000 in
principal amount of our 5% convertible debentures filed with the American
Arbitration Association a demand for arbitration of its claim that it was owed,
as of June 30, 2000, approximately $3,400,000, consisting of principal, interest
and penalties, resulting from our default under various provisions of the
debentures and related agreements. See "Legal Proceedings" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Capital Resources and Liquidity." We have denied the amount of Tail Wind's claim
and have made certain counterclaims. The outcome of the arbitration proceeding
is uncertain. An extremely unfavorable ruling could have a material adverse
effect on Unigene.
The market price of Unigene common stock may be highly unstable.
The market price of Unigene common stock has been and we expect it to
continue to be highly unstable. Factors, including our announcement of
technological improvements or announcements by other companies, regulatory
matters, research and development activities, new or existing products or
procedures, signing or termination of licensing agreements, concerns about our
financial position, operating results, litigation, resolution of the arbitration
involving our outstanding convertible debentures, government regulation,
developments or disputes relating to agreements, patents or proprietary rights,
and public concern over the safety of activities or products may have a
significant impact on the market price of our stock. In addition, potential
dilutive effects of future sales of shares of Unigene common stock by Unigene
and its stockholders, including sales by Fusion and by the exercise and
subsequent sale of Unigene common stock by the holders of outstanding and future
warrants and options could have an adverse effect on the price of our stock.
We do not anticipate paying cash dividends on the Unigene common stock.
We have never paid any cash dividends on the Unigene common stock and we
do not anticipate paying cash dividends in the foreseeable future. Rather, we
intend to retain any cash flow we generate for investment in our business.
Accordingly, Unigene common stock may not be suitable for investors who are
seeking current income from dividends.
The Unigene common stock is classified as a "penny stock" under SEC rules which
may make it more difficult for Unigene stockholders to resell their Unigene
common stock.
The Unigene common stock is traded on the OTC Bulletin Board. As a
result, the holders of Unigene common stock may find it more difficult to obtain
accurate quotations concerning the market value of the stock. Stockholders also
may experience greater difficulties in attempting to sell the stock than if it
was listed on a stock exchange or quoted on the Nasdaq National Market or the
Nasdaq Small-Cap Market. Because Unigene common stock is not traded on a stock
exchange or on the Nasdaq National Market or the Nasdaq Small-Cap Market, and
the market price of the common stock is less than $5.00 per share, the common
stock is classified as a "penny stock." SEC Rule 15g-9 under the Exchange Act
imposes additional sales practice requirements on broker-dealers that recommend
the purchase or sale of penny stocks to persons other than those who qualify as
an "established customer" or an "accredited investor." This includes the
requirement that a broker-dealer must make a determination that investments in
penny stocks are suitable for the customer and must make special disclosures to
the customer concerning the risks of penny stocks. Application of the penny
stock rules to the Unigene common stock could adversely affect the market
liquidity of the shares, which in turn may affect the ability of holders of the
Unigene common stock to resell the stock.
The sale of Unigene common stock to Fusion could cause substantial dilution and
the sale of the shares acquired by Fusion could cause the price of Unigene
common stock to decline.
The price at which Fusion is obligated to purchase shares of Unigene
common stock under the common stock purchase agreement will fluctuate based on
the market price of our common stock. See "Business - Fusion Financing" for a
description of the purchase price.
All of the shares offered for sale by Fusion are freely tradeable.
However, Fusion has agreed that it will not sell or otherwise transfer the
2,000,000 commitment shares or the 1,000,000 shares issuable upon the exercise
of its warrant which we issued as of March 30, 2001 to Fusion as part of its
commitment fee until the earlier of the termination of the common stock purchase
agreement, the occurrence of an event of default by us under this agreement or
the maturity date of the agreement which is in approximately two years. Fusion
may sell none, some or all of the shares of common stock purchased from Unigene
at any time. We have been advised by Fusion that the shares registered will be
sold over a period of up to 24 months. Depending upon market liquidity at the
time, the resale by Fusion of shares at any given time could cause the trading
price of the Unigene common stock to decline. The sale by Fusion of a
substantial number of shares purchased from Unigene, or the anticipation of such
sales, could make it more difficult for Unigene to sell equity or equity related
securities in the future at a time and at a price that it might otherwise wish
to effect sales.
If Fusion purchased the full amount of shares purchasable under the common
stock purchase agreement, at a price equal to $.55, the closing sale price of
the Unigene common stock on April 2, 2001, Fusion would have been able to
purchase a total of 38,181,818 shares of our common stock. These shares, along
with the 2,000,000 shares and warrants for 1,000,000 shares of common stock that
have been issued to Fusion as a commitment fee, would represent 48% of our
outstanding common stock as of that date. The issuance of these shares would
result in significant dilution to the ownership interests of other holders of
our common stock. The amount of dilution would be higher if the market price of
our common stock is lower than the current market price at the time Fusion
purchases shares under the common stock purchase agreement, as a lower market
price would cause more shares of our common stock to be issuable to Fusion.
Although we have the right to suspend Fusion purchases if the market price of
our common stock is below $15.00 for three consecutive trading days, the
financial condition of Unigene at the time may require Unigene to waive its
right to suspend purchases even if there is a decline in the market price. If
the closing sale price of our common stock prior to the first trading day of any
30-day period is at least $4.00, we have the right to require purchase by Fusion
of part or all of the remaining balance of the $21 million during the next two
30-day periods, provided the closing sale price of our common stock during such
30-day periods remains at least $4.00.
The existence of the agreement with Fusion to purchase shares of Unigene common
stock could cause downward pressure on the market price of the Unigene common
stock.
Both the actual dilution and the potential for dilution resulting from
sales of Unigene common stock to Fusion could cause holders to elect to sell
their shares of Unigene common stock, which could cause the trading price of the
Unigene common stock to decrease. In addition, prospective investors
anticipating the downward pressure on the price of the Unigene common stock due
to the shares available for sale by Fusion could refrain from purchases or cause
sales or short sales in anticipation of a decline of the market price.
Item 2. Properties
We own a one-story office and laboratory facility consisting of
approximately 12,500 square feet. The facility is located on a 2.2 acre site in
Fairfield, New Jersey.
Our 32,000 square foot cGMP production facility, of which 18,000 square
feet are currently being used for the production of Calcitonin and can be used
for the production of other peptides, was constructed in a building located in
Boonton, New Jersey. We lease the facility under a ten-year agreement, which
began in February 1994. We have two 10-year renewal options and an option to
purchase the facility.
We believe that these facilities are adequate for current purposes.
Item 3. Legal Proceedings
In July 2000, the Tail Wind Fund, Ltd., the holder of $2,000,000 in
principal amount of 5% convertible debentures issued by Unigene to Tail Wind in
a private placement completed in June 1998, filed with the American Arbitration
Association a demand for arbitration against Unigene. In its demand, Tail Wind
claimed that it was owed, as of June 30, 2000, approximately $3,400,000,
consisting of principal, interest and penalties, resulting from Unigene's
default under various provisions of the debentures and related agreements. These
alleged defaults included Unigene's failure to redeem the debentures after
becoming obligated to do so, the failure to pay interest when due, and the
failure to pay liquidated damages arising from the delisting of the Unigene
common stock from the Nasdaq National Market. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Capital Resources
and Liquidity." In July 2000, Unigene submitted to the American Arbitration
Association a statement in which it denies the amount of Tail Wind's claim and
makes certain counterclaims. A hearing on the matter before an arbitrator
appointed by the American Arbitration Association is expected to occur in June
2001. The outcome of the proceeding is uncertain. An extremely unfavorable
ruling could have a material adverse effect on Unigene.
In July 2000, Reseau de Voyage Sterling, Inc. filed suit against Unigene
in the Supreme Court of the State of New York. Unigene removed the case to the
United States District Court for the Southern District of New York. The
plaintiff, which purchased from a third party a warrant to purchase one million
shares of Unigene common stock, alleges that Unigene breached a verbal agreement
with the plaintiff to extend the term of the warrant beyond its expiration date.
The plaintiff is seeking damages of $2 million. Following the deposition of the
plaintiff, counsel for the plaintiff withdrew and the court has stayed the case
until May 2001, to give the plaintiff an opportunity to seek new counsel. We
believe that this suit is completely without merit, and we will continue to
vigorously contest the claim.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 2000.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company has not declared or paid any cash dividends since inception,
and does not anticipate paying any in the near future.
The Company became a public company in 1987. As of April 2, 2001, there
were 483 holders of record of the Common Stock. The Common Stock has traded on
the OTC Bulletin Board under the symbol UGNE since October 5, 1999. Prior to
October 5, 1999, the Common Stock traded on the Nasdaq Stock Market. The prices
below represent high and low sale prices.
2000 1999
---- ----
High-Low High-Low
1st Quarter: $5.38-0.54 $1.47-0.94
2nd Quarter: 3.66-1.44 1.13-0.63
3rd Quarter: 3.03-2.00 1.06-0.63
4th Quarter: 3.00-0.97 0.84-0.23
Recent Sales of Unregistered Securities
In the quarter ended December 31, 2000, Unigene issued 8,636 shares of Unigene
common stock upon the cashless exercise of a total of 22,000 warrants at an
exercise price of $2.00 per share. All of the shares were issued by Unigene
without registration in reliance on an exemption under Section 4 (2) of the
Securities Act.
10
Item 6. Selected Financial Data
STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)
Year Ended December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Revenue:
Licensing & other revenue $ 3,287 $ 9,589 $ 5,050 $ 3,003 $ 308
Costs and expenses:
Research & development expenses 11,484 9,375 9,042 9,416 8,298
General and administrative 3,187 2,212 2,068 2,016 2,115
Loss before extraordinary item
and cumulative effect of
accounting change (11,469) (1,577) (6,737) (10,128) (10,597)
Extraordinary item -- -- (144) -- --
Cumulative effect of accounting change ( 1,000) -- -- -- --
Net loss (12,469) (1,577) (6,881) (10,128) (10,597)
Basic and diluted loss per share:
Loss before
extraordinary item and cumulative
effect of accounting change (.26) (.04) (.17) (.27) (.38)
Extraordinary item -- -- (.01) -- --
Cumulative effect of accounting change (.02) -- -- -- --
Net loss (.28) (.04) (.18) (.27) (.38)
Weighted average number of shares
outstanding 44,008 40,719 38,701 37,397 27,943
BALANCE SHEET DATA
(In thousands) December 31,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Cash and cash equivalents $ 17 $ 683 $ 403 $ 2,126 $ 4,491
Working capital (deficiency) (13,267) (2,759) (1,805) 310 2,954
Total assets 9,047 13,778 11,564 13,692 17,169
Long-term debt and other
Long term obligations 546 1,003 3,931 1,608 2,788
Total liabilities 14,540 9,049 7,344 4,258 5,309
Total stockholders' equity
(deficit) (5,493) 4,729 4,220 9,433 11,860
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion together with our financial
statements and the notes appearing elsewhere in this Form 10-K. The following
discussion contains forward-looking statements. Our actual results may differ
materially from those projected in the forward-looking statements. Factors that
might cause future results to differ materially from those projected in the
forward-looking statements include those discussed in "Risk Factors" and
elsewhere in this Form 10-K.
RESULTS OF OPERATIONS
Years Ended December 31, 2000, 1999, and 1998
Revenue
Revenue decreased 66% to $3,287,000 for the year ended December 31,
2000 as compared to $9,589,000 for the year ended December 31, 1999. Revenue
increased 90% to $9,589,000 for the year ended December 31, 1999 as compared to
$5,050,000 for the year ended December 31, 1998. In all three years, revenue
consists primarily of milestone revenue from Pfizer resulting from the
achievement of milestones in the development of an oral Calcitonin product for
treating osteoporosis. Yearly revenue was affected by the timing of the
completion of the various milestones. In addition, revenue for the year ended
December 31, 2000 included $800,000 from the amortization of deferred revenue
related to the initial licensing fee paid by Pfizer in 1997 and $345,000 for
analytical testing services provided to Pfizer. In March 2001, Pfizer terminated
its license agreement with the Company.
Research and Development Expenses.
Research and development, the Company's largest expense, increased 22%
in 2000 to $11,484,000 from $9,375,000 in 1999 and increased 4% in 1999 from
$9,042,000 in 1998. The 2000 increase was primarily attributable to the
Company's clinical trials for its nasal Calcitonin product and an increase in
expenditures related to an increase in Calcitonin production and the write-off
of inventory in the fourth quarter as a result of Pfizer's termination of our
agreement, partially offset by a reduction in consulting fees related to the
Pfizer collaboration. The 1999 increase was primarily attributable to
development expenses related to the Company's nasal Calcitonin product,
consulting and analytical testing expenses related to the Company's Type II
variation for its injectable Calcitonin product, and consulting fees related to
the Company's collaboration with Pfizer partially offset by a reduction in
production supplies. Expenditures for the sponsorship of collaborative research
programs were $411,000, $250,000 and $280,000 in 2000, 1999 and 1998,
respectively, which are included as research and development expenses. A portion
of these expenditures was reimbursed by Pfizer in 1999 and 1998.
General and Administrative Expenses.
General and administrative expenses increased 44% in 2000 to $3,187,000
from $2,212,000 in 1999 and increased 7% in 1999 from $2,068,000 in 1998. The
2000 increase was primarily due to the recognition of non-cash expenses of
$220,000 due to the issuance of warrants to a consultant and stock option
compensation of $399,000, in addition to the recognition of a $350,000 expense
to terminate the Company's former joint venture in China. The 1999 increase was
primarily due to increased personnel costs and professional fees partially
offset by reductions in public relations and travel expenses.
Interest Income.
Interest income increased $12,000 or 31% in 2000 from 1999, after
decreasing $70,000 or 65% in 1999 from 1998. The 2000 increase was due to higher
interest rates on investments. The 1999 decrease was due to lower interest
income resulting from reduced funds available for investment.
Interest Expense.
Interest expense increased $27,000 or 2% in 2000 to $1,199,000 from
$1,171,000 in 1999 after increasing $386,000 or 49% in 1999 from $785,000 in
1998. Interest expense increased in 2000 due to increased notes payable to
12
stockholders and to higher interest rates in 2000 on the 5% convertible
debentures, offset by a reduction in the amortization of the beneficial
conversion feature and related warrants on the 5% convertible debentures as
compared to 1999. The annual interest rate on the $2,000,000 in outstanding
principal amount of the 5% Debentures increased in 2000 to 20% resulting from
the failure of the Company to make a semi-annual interest payment that was due
in January 2000. In addition, since October 1999, the Company has been accruing
additional interest expense monthly in an amount equal to 2% of the outstanding
principal amount of the 5% Debentures as a result of the removal of the
Company's Common Stock from trading on the Nasdaq Stock Market in October 1999.
The expenses incurred in connection with the 5% Debentures in 2000 were
partially offset by a 50% decrease in the principal balance outstanding as a
result of conversions to Common Stock during 1999. Included in 1999 interest
expense is $197,000 of the amortization of the value of the beneficial
conversion feature and related warrants of the Company's 5% convertible
debentures. Excluding the change in the amortization charged to interest,
interest expense increased in 1999 as compared to 1998 as a result of an
increase in notes payable to stockholders, redemption premium resulting from the
Company exceeding the Share Limit on the 5% Debentures, and the 2% delisting
penalty on the 5% Debentures, partially offset by a decrease in the balance
outstanding under the Company's 5% Debentures as a result of partial conversions
to Common Stock.
Income Tax Benefit.
Income tax benefit in 2000 of $1,065,000 and in 1999 of $1,553,000
consisted of proceeds received for the sale of a portion of the Company's state
tax net operating loss carryforwards under a New Jersey Economic Development
Authority ("NJEDA") program, which allows certain New Jersey taxpayers to sell
their state tax benefits to third parties. The purpose of the New Jersey program
is to provide financial assistance to high-tech and biotechnology companies in
order to facilitate future growth and job creation.
Extraordinary Item.
Extraordinary item, loss on early extinguishment of debt, was $144,000
for 1998. The loss was due to redemption at a premium of a portion of our 10%
convertible debentures in September 1998.
Cumulative Effect of Accounting Change.
In December 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). Prior to the implementation of SAB 101, non-refundable license fees
received upon execution of license agreements were recognized as revenue
immediately. SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements and specifically addresses revenue recognition in the biotechnology
industry for non-refundable technology access fees and other non-refundable
fees. The Company was required to adopt SAB 101, as amended, in the fourth
quarter of 2000 with an effective date of January 1, 2000, and the recognition
of a cumulative effect adjustment calculated as of January 1, 2000. The Company
adopted SAB 101 in 2000, changing its revenue recognition policy for up-front
licensing fees that require services to be performed in the future from
immediate revenue recognition to deferral of revenue with the up-front fee
recognized over the life of the agreement. In 1997, the Company recognized
$3,000,000 in revenue from an up-front licensing fee from Pfizer. With the
adoption of SAB 101, the Company is now recognizing this revenue over a 45 month
period, equivalent to the term of its oral Calcitonin agreement with Pfizer
which was terminated in March 2001. The Company therefore recognized a non-cash
cumulative effect adjustment of $1,000,000 as of January 1, 2000 representing a
revenue deferral over the remaining 15 months of the agreement. The Company
recognized $800,000 in revenue in 2000 and will recognize $200,000 of revenue in
2001 as a result of this deferral.
13
Net Loss.
During 2000, revenue decreased approximately $6,300,000 principally due
to the timing of the achievement of various milestones in the Pfizer agreement.
In addition, operating expenses were higher as the Company increased its product
commercialization efforts including its nasal Calcitonin clinical trials. Also,
the Company recognized a cumulative charge from an accounting change offset by a
realized income tax benefit. Therefore, net loss increased $10,892,000 for the
year ended December 31, 2000 from the prior year. During 1999, revenue increased
$4,540,000 from 1998 due to the achievement of various milestones in the Pfizer
agreement. In addition, the Company received $1,553,000 in 1999 from the partial
sale of its state tax benefits. These were partially offset by an increase in
operating and interest expenses. As a result, the Company's net loss decreased
$5,304,000 or 77% for the year ended December 31, 1999, from the prior year.
Liquidity and Capital Resources
Unigene maintains its peptide production facility on leased premises in
Boonton, New Jersey. We began production under current Good Manufacturing
Practice guidelines at this facility in 1996. The current lease expires in 2004.
Unigene has two consecutive ten-year renewal options under the lease, as well as
an option to purchase the facility. During 2000, Unigene invested approximately
$519,000 in fixed assets and leasehold improvements. The majority of these
expenditures were to increase Unigene's analytical testing capabilities.
Currently, we have no material commitments outstanding for capital expenditures
relating to either the Boonton facility or our office and laboratory facility in
Fairfield, New Jersey.
At December 31, 2000, Unigene had cash and cash equivalents of $17,000,
a decrease of $666,000 from December 31, 1999.
We do not have sufficient financial resources to continue to fund our
operations at the current level. Unigene has incurred annual operating losses
since its inception and, as a result, at December 31, 2000, had an accumulated
deficit of approximately $75,378,000 and a working capital deficiency of
approximately $13,267,000. The independent auditors' report covering Unigene's
2000 financial statements includes an explanatory paragraph stating that these
factors raise substantial doubt about our ability to continue as a going
concern. However, the financial statements have been prepared on a going concern
basis and as such do not include any adjustments that might result from the
outcome of this uncertainty. In October 1999, the Nasdaq Stock Market delisted
the Unigene common stock. The delisting of the common stock may have an adverse
effect on our ability to raise capital.
We had an operating cash flow deficit of $4,864,000 in 1998, an
operating cash flow deficit of $1,400,000 in 1999 and for the year ended
December 31, 2000, an operating cash flow deficit of $3,382,000. Unigene's
future ability to generate cash from operations will depend primarily upon
signing research or licensing agreements, achieving defined benchmarks in such
agreements that entitle Unigene to receive milestone payments, receiving
regulatory approval for its licensed products, and the sale of these products.
In July 1997, Unigene entered into an agreement under which it granted
to Warner-Lambert Company a worldwide license to use our oral Calcitonin
technology. In June 2000, Pfizer Inc acquired Warner-Lambert. Through December
31, 2000, Unigene had received $3 million for an equity investment, $3 million
for a licensing fee and recognized an aggregate of $16.5 million in milestone
revenue under the agreement. Pfizer conducted a Phase I/II human study which was
completed in December 2000. Pfizer analyzed the results the study and informed
us in March 2001 that the study did not achieve Pfizer's desired results. Pfizer
terminated the license agreement citing this conclusion. We believe that this
study, in which an FDA approved product also did not work and which produced
results contrary to many published studies, was not capable of determining the
performance of our oral Calcitonin product. We believe that if patients in the
14
study had also received calcium supplements, in addition to the Calcitonin, the
results would have been more favorable. Therefore, we intend to continue the
development of our oral Calcitonin product as a treatment of osteoporosis, and
have begun discussions with potential licensees in the U.S. and other countries.
In addition, due to the termination of the Pfizer agreement, we no longer have
restrictions on selling bulk Calcitonin. Unigene also has the right to license
the use of its technologies for injectable and nasal formulations of Calcitonin
on a worldwide basis. Unigene has licensed distributors in the United Kingdom,
Ireland and in Israel for its injectable product. However, these distribution
agreements have not produced significant revenues. In June 2000, Unigene entered
into a joint venture agreement in China with Shijiazhuang Pharmaceutical Group
("SPG") to manufacture and market our injectable and nasal products. See
"Business -- Strategy -- China Joint Venture." We are actively seeking other
licensing and/or supply agreements with pharmaceutical companies for our
injectable and nasal Calcitonin products and for other pharmaceutical products
that can be manufactured and/or delivered using our patented technologies.
However, we may not be successful in our efforts to enter into any additional
revenue-generating agreements.
Under the terms of the joint venture with SPG, Unigene is obligated to
contribute up to $405,000 in cash during 2001 and up to an additional $495,000
in cash within two years thereafter. However, these amounts may be reduced or
offset by our share of joint venture profits. However, as of December 31, 2000,
we had not made any contributions to the joint venture. In addition, Unigene is
obligated to pay to the Qingdao General Pharmaceutical Company an aggregate of
$350,000 in 14 monthly installment payments of $25,000 in order to terminate its
former joint venture in China, of which $75,000 had been paid as of December 31,
2000. We recognized the entire $350,000 obligation as an expense in 2000.
In June 1998, Unigene completed a private placement of $4,000,000 in
principal amount of 5% convertible debentures from which we realized net
proceeds of approximately $3,750,000. The 5% debentures were convertible into
shares of Unigene common stock. The interest on the debentures, at Unigene's
option, was payable in shares of Unigene common stock. Upon conversion, the
holder of a 5% debenture was entitled to receive warrants to purchase a number
of shares of Unigene common stock equal to 4% of the number of shares issued as
a result of the conversion. However, the number of shares of Unigene common
stock that we are obligated to issue, in the aggregate, upon conversion, when
combined with the shares issued in payment of interest and upon the exercise of
the warrants, is limited to 3,852,500 shares. After this share limit is reached,
Unigene is obligated to redeem all 5% debentures tendered for conversion at a
redemption price equal to 120% of the principal amount, plus accrued interest.
In December 1999, Unigene was unable to convert $200,000 in principal of the 5%
debentures tendered for conversion because the conversion would have exceeded
the share limit. As a result, we accrued, as of December 31, 1999, an amount
equal to $400,000 representing the 20% premium on the outstanding $2,000,000 in
principal amount of 5% debentures that had not been converted. As of December
31, 2000, all of the $2,000,000 in principal amount of 5% debentures were
tendered for conversion and therefore are classified as a current liability in
the amount of $2,400,000.
Through December 31, 2000, we issued a total of 3,703,362 shares of
Unigene common stock upon conversion of $2,000,000 in principal amount of the 5%
debentures and in payment of interest on the 5% debentures. Also, we issued an
additional 103,032 shares of Unigene common stock upon the cashless exercise of
all of the 141,123 warrants issued upon conversion of the 5% debentures.
On January 5, 2000, Unigene failed to make the required semi-annual
interest payment on the outstanding 5% debentures. As a result, the interest
rate on the outstanding 5% debentures has increased to 20% per year. The
semi-annual interest payments due July 5, 2000 and January 5, 2001, also have
not been made. As of December 31, 2000, the accrued and unpaid interest on the
5% debentures totaled approximately $467,000. In addition, due to the delisting
15
of the Unigene common stock from the Nasdaq National Market in October 1999,
Unigene became obligated under a separate agreement to pay the holder of the 5%
debentures an amount equal to 2% of the outstanding principal amount of the
debentures per month. Unigene has not made any of these payments to date, but
has accrued the amounts as additional interest expense. As of December 31, 2000,
the accrued and unpaid amount of this penalty totaled approximately $617,000.
The holder of the 5% debentures has commenced an arbitration proceeding
in which the holder claims that it is entitled, as of June 30, 2000, to payments
in respect of the 5% debentures in the amount of approximately $3,400,000. See
"Legal Proceedings."
To satisfy Unigene's short-term liquidity needs, Jay Levy, the Chairman
of the Board and an officer of Unigene, and Warren Levy and Ronald Levy,
directors and officers of Unigene, and another Levy family member from time to
time have made loans to Unigene. During February 2000, Jay Levy loaned us
$300,000. This loan was repaid in April 2000. During the third and fourth
quarters of 2000, Jay Levy and another family member loaned Unigene an aggregate
of $1,655,000 in demand loans and Warren Levy and Ronald Levy loaned Unigene an
aggregate of $78,323 in demand loans. As of December 31, 2000, total accrued
interest on these loans was $922,000 and the outstanding loans by these
individuals to Unigene, classified as short-term debt, totaled $4,743,323 and
consisted of:
o loans from the Levys in the aggregate principal amount of $2,873,323,
which are evidenced by demand notes bearing a floating interest rate
equal to the Merrill Lynch Margin Loan Rate plus .25% (9.875% at
December 31, 2000) that are classified as short-term debt. These loans
are secured by a security interest in Unigene's equipment and/or real
property.
o loans from Jay Levy in the aggregate principal amount of $1,870,000
evidenced by term notes maturing January 2002, and bearing interest at
the fixed rate of 6% per year. These loans are secured by a security
interest in all of Unigene's equipment and a mortgage on Unigene's real
property. The terms of the notes require Unigene to make installment
payments of principal and interest beginning in October 1999 and ending
in January 2002 in an aggregate amount of $72,426 per month. No
installment payments have been made to date.
Interest and principal payments required under these loans have not been
made by Unigene, but the Levys have waived all default provisions including
additional interest penalties due under these loans through December 31, 2000.
From January 1, 2001 through March 30, 2001, Jay Levy, Warren Levy and
Ronald Levy loaned to us an additional $1,610,000 at the Merrill Lynch Margin
Loan Rate plus .25%, of which $500,000 is secured by a security interest in
certain of our patents. No interest on these loans has been paid.
Unigene's cash requirements to operate its research and peptide
manufacturing facilities and develop its products are approximately $10 to 11
million per year. In addition to its obligations with respect to the 5%
Debentures, Unigene has principal and interest obligations over the next several
years under its outstanding notes payable to stockholders as well as obligations
relating to its current and former joint ventures in China.
We are actively seeking licensing and/or supply agreements with
pharmaceutical companies for oral, nasal and injectable forms of Calcitonin as
well as for other oral peptides. However, we may not be successful in licensing
any of our products.
Under the agreement with Fusion, after a registration statement is
declared effective by the SEC for the resale of the shares of Unigene common
stock to be sold to Fusion, Fusion will be required to purchase, at the then
16
current market price, shares of Unigene common stock at the rate of $875,000 per
month over a period of 24 months, provided that Unigene continues to satisfy the
requirements that are a condition to Fusion's obligation. The Board of Directors
has authorized the sale to Fusion of up to 6,000,000 shares of Unigene common
stock. Assuming that all sales were to occur at the closing price on April 2,
2001, of $.55, we would be able to raise approximately $3,300,000 through the
sale of the 6,000,000 shares to Fusion. We anticipate that, in order to sell
significantly in excess of 6,000,000 shares to Fusion, it may be necessary to
obtain stockholder approval of an amendment to our Certificate of Incorporation
to increase the number of shares of Unigene common stock that we are authorized
to issue. Assuming we have an adequate number of shares of common stock to sell,
we stay in compliance with the agreement, and depending on the price at which
shares are sold, Fusion could provide Unigene with sufficient funding to sustain
its operations for up to two years, beginning in the second quarter of 2001. See
"Business - Fusion Financing." However, we cannot predict when or if the SEC
will declare the registration statement effective, if the stockholders will
approve the amendment to our certificate of incorporation or if we will be able
to meet the continuing requirements of the Fusion agreement.
If we do not receive any financing from Fusion, we will need to secure
another source of financing in order to satisfy our working capital needs, which
may be unavailable or the cost of which may be prohibitively expensive. Should
such financing be unavailable or prohibitively expensive, it will be necessary
for Unigene to curtail significantly its operations or consider alternative uses
of its technology and manufacturing capability including the supply of
calcitonin to other companies. Assuming we are able to raise additional capital
through our agreement with Fusion, we still anticipate that we may need
additional capital to implement fully our business plans. We believe that
satisfying our capital requirements over the long term will require the
successful commercialization of our Calcitonin product or another peptide
product in the United States and abroad. However, it is uncertain whether or not
any of our products will be approved or will be commercially successful. In
addition, the commercialization of our oral Calcitonin product may require us to
incur additional capital expenditures to expand or upgrade our manufacturing
operations. However, we cannot determine either the cost or the timing of such
capital expenditures at this time.
As of December 31, 2000, the Company had available for federal income
tax reporting purposes net operating loss carryforwards in the approximate
amount of $68,000,000, expiring from 2001 through 2020, which are available to
reduce future earnings which would otherwise be subject to federal income taxes.
In addition, the Company has research and development credits in the approximate
amount of $2,500,000, which are available to reduce the amount of future federal
income taxes. These credits expire from 2001 through 2020. The Company has New
Jersey operating loss carryforwards in the approximate amount of $23,300,000,
expiring from 2003 through 2007, which are available to reduce future earnings,
which would otherwise be subject to state income tax. As of December 31, 2000,
approximately $11,400,000 of these New Jersey loss carryforwards have been
approved for future sale under a program of the New Jersey Economic Development
Authority (the "NJEDA"). In order to realize these benefits, the Company must
apply to the NJEDA each year and must meet various requirements for continuing
eligibility. In addition, the program must continue to be funded by the State of
New Jersey, and there are limitations based on the level of participation by
other companies. As a result, future tax benefits will be recognized in the
financial statements as specific sales are approved. In the fourth quarters of
2000 and 1999, the Company realized $1,065,000 and $1,553,000, respectively, of
tax benefits arising from the sale of a portion of the Company's New Jersey net
operating loss carryforwards that had previously been subject to a full
valuation allowance.
Unigene follows Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes." Given our past history of incurring
operating losses, any deferred tax assets that are recognizable under SFAS No.
109 were fully reserved. As of December 31, 2000 and 1999, under SFAS No. 109,
we had deferred tax assets of approximately $29,000,000 and $26,000,000,
respectively, subject to valuation allowances of $29,000,000 and $26,000,000,
17
respectively. The deferred tax assets are primarily a result of our net
operating losses and tax credits.
Other
The Unigene common stock has been delisted from the Nasdaq National
Market System effective October 5, 1999, and is now trading on the OTC Bulletin
Board. In order to be relisted on the Nasdaq National Market or the Nasdaq
SmallCap Market, we must meet the initial listing requirements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended, will be
effective for our fiscal year beginning January 1, 2001. We do not expect that
the adoption of SFAS No. 133 will have a material effect on our financial
position or results of operations.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, Unigene is exposed to fluctuations in
interest rates due to the use of debt as a component of the funding of its
operations. We do not employ specific strategies, such as the use of derivative
instruments or hedging, to manage our interest rate exposure. Unigene's interest
rate exposure on the 5% convertible debentures has been affected by Unigene's
delisting from the Nasdaq National Market and failure to make the semi-annual
interest payment in January 2000. Our exposure to interest rate fluctuations
over the near-term will continue to be affected by these events.
The information below summarizes Unigene's market risks associated with
debt obligations as of December 31, 2000. The table below presents principal
cash flows and related interest rates by year of maturity based on the terms of
the debt.
Under the terms of the 5% convertible debentures, no additional shares
may be issued to convert the remaining principal balance. Therefore, the
information presented as to the debentures is without consideration as to
conversion features. Variable interest rates disclosed represent the rates at
December 31, 2000. Given our financial condition described in "Liquidity and
Capital Resources" it is not practicable to estimate the fair value of our debt
instruments at December 31, 2000.
Year of Maturity
--------------------------------------------
Carrying
Amount 2001 2002 2003 2004 2005
-------- ---------- ------ ------ ------ ------
Notes payable - stockholders $2,873,323 2,873,323 -- -- -- --
Variable interest rate 9.875% -- -- -- --
- --
Notes payable - stockholders $1,870,000 1,870,000 -- -- -- --
- --
Fixed interest rate 6% -- -- -- --
- --
5% convertible debentures $2,400,000 2,400,000 -- -- -- --
Fixed interest rate (1) 20%
(1) As a result of Unigene's failure to make the semi-annual interest payment
that was due January 5, 2000, the interest rate on the 5% convertible debentures
has increased from 7% at December 31, 1999, to 20% beginning January 5, 2000. In
addition, due to the delisting of Unigene common stock from Nasdaq in 1999,
Unigene became obligated to pay the holder of the 5% debentures an amount equal
to 2% of the outstanding principal amount of the debentures per month.
18
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Fiscal Years Ended December 31, 2000, 1999 and 1998
Independent Auditors' Report...................................................................25
Balance Sheets--December 31, 2000 and December 31, 1999........................................26
Statements of Operations--Years Ended December 31, 2000, 1999 and 1998........................ 27
Statements of Stockholders' Equity (Deficit)--Years Ended December 31, 2000, 1999 and 1998.....28
Statements of Cash Flows--Years Ended December 31, 2000, 1999 and 1998.........................30
Notes to Financial Statements--Years Ended December 31, 2000, 1999 and 1998....................31
19
Independent Auditors' Report
The Stockholders and Board of Directors
Unigene Laboratories, Inc.:
We have audited the financial statements of Unigene Laboratories, Inc. as listed
in the accompanying index. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Unigene Laboratories, Inc. as
of December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 17 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency which raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 17. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for revenue recognition for up-front non-refundable license
fees in 2000.
/S/ KPMG LLP
Short Hills, New Jersey
March 30, 2001
20
UNIGENE LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 2000 and 1999
ASSETS
2000 1999
---- ----
Current assets:
Cash and cash equivalents $ 17,108 $ 682,629
Contract receivables 165,671 3,526,229
Prepaid expenses 129,493 210,195
Inventory (Note 8) 415,420 867,566
------------ ------------
Total current assets 727,692 5,286,619
Property, plant and equipment - net (Note 4) 5,684,127 6,740,354
Patents and other intangibles, net 1,288,686 1,264,268
Investment in joint venture (Note 5) 900,000 --
Other assets 446,894 486,612
------------ ------------
$ 9,047,399 $ 13,777,853
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,834,556 $ 1,258,334
Accrued expenses (Note 9) 3,761,277 2,217,413
Notes payable - stockholders (Note 3) 2,873,323 1,140,000
Current portion - long-term notes payable -
stockholders 1,870,000 960,606
5% convertible debentures (Note 6) 2,400,000 2,400,000
Current portion - capital lease obligations (Note 10) 55,398 69,708
Deferred revenue 200,000 --
------------ ------------
Total current liabilities 13,994,554 8,046,061
Notes payable - stockholders, excluding
current portion (Note 3) -- 909,394
Joint venture obligation, excluding current portion 495,000 --
Capital lease obligations, excluding
current portion (Note 10) 50,572 93,415
Commitments and contingencies (Notes 5,6,7,11 and 18)
Stockholders' equity
(deficit) (Notes 7,12 and 13):
Common Stock - par value $.01 per share, authorized 60,000,000 shares,
issued 44,441,855 shares in 2000 and
43,088,184 shares in 1999 444,419 430,882
Additional paid-in capital 70,053,710 67,207,604
Deferred stock option compensation (284,948) --
Deferred stock offering costs (327,000) --
Accumulated deficit (75,377,877) (62,908,472)
Less: Treasury stock, at cost,
7,290 shares (1,031) (1,031)
------------ ------------
Total stockholders' equity (deficit) (5,492,727) 4,728,983
------------ ------------
$ 9,047,399 $ 13,777,853
============ ============
See accompanying notes to financial statements.
21
UNIGENE LABORATORIES, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Licensing and other revenue $ 3,286,961 $ 9,589,413 $ 5,049,844
------------ ------------ ------------
Operating expenses:
Research and development 11,484,379 9,374,528 9,041,618
General and administrative 3,187,465 2,211,778 2,067,958
------------ ------------ ------------
14,671,844 11,586,306 11,109,576
------------ ------------ ------------
Operating loss (11,384,883) (1,996,893) (6,059,732)
Other income (expense):
Interest income 49,130 37,545 107,502
Interest expense (1,198,508) (1,171,260) (784,972)
------------ ------------ ------------
Loss before income taxes,
extraordinary item and cumulative
effect of accounting change (12,534,261) (3,130,608) (6,737,202)
Income tax benefit (Note 14) 1,064,856 1,553,268 --
------------ ------------ ------------
Loss before extraordinary item and cumulative
effect of accounting change (11,469,405) (1,577,340) (6,737,202)
Extraordinary item-loss
on early extinguishment of debt (Note 6) -- -- (143,810)
Cumulative effect of revenue recognition
accounting change (Note 2) (1,000,000) -- --
------------ ------------ ------------
Net loss $(12,469,405) $ (1,577,340) $ (6,881,012)
============ ============ ============
Loss per share - basic and diluted:
Loss before extraordinary item
and cumulative effect of accounting change $ (.26) $ (.04) $ (.17)
Extraordinary item -- -- (.01)
Cumulative effect of accounting change (.02) -- --
------------ ------------ ------------
Net loss per share $ (.28) $ (.04) $ (.18)
============ ============ ============
Weighted average number of shares
outstanding - basic and diluted 44,008,154 40,718,519 38,701,253
============ ============ ============
Pro forma amounts assuming the new revenue recognition principle is applied
retroactively, exclusive of cumulative effect adjustment :
Loss before extraordinary item $(11,469,405) $ (777,340) $ (5,937,202)
============ ============ ============
Net loss $(11,469,405) $ (777,340) $ (6,081,012)
============ ============ ============
Earnings per share -- basic and diluted:
Loss before extraordinary item $ (.26) $ (.02) $ (.15)
============ ============ ============
Net loss $ (.26) $ (.02) $ (.16)
============ ============ ============
See accompanying notes to financial statements.
22
UNIGENE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 2000, 1999 and 1998
Common Stock
------------------------
Deferred Deferred
Additional Stock Stock
Number of Par Paid-in Option Offering Accumulated
Shares Value Capital Compensation Costs Deficit
---------- --------- ------------- ------------- -------- ------------
Balance,
January 1, 1998 38,517,722 $ 385,177 $ 63,499,439 $ -- $ -- $(54,450,120)
Conversion of 9.5%
Debentures 448,834 4,489 495,705 -- -- --
Conversion of
notes payable -
stockholders 163,635 1,636 220,091 -- -- --
Conversion of
10% Debentures and
accrued interest 214,131 2,141 202,234 -- -- --
Value of 5% Debentures allocated
to beneficial conversion feature
and related warrants -- -- 686,796 -- -- --
Exercise of
stock options 40,500 405 47,564 -- -- --
Issuance of warrants
as compensation -- -- 6,574 -- -- --
Net loss -- -- -- -- -- (6,881,012)
------------ --------- ------------ --------- --------- ------------
Balance,
December 31,
1998 39,384,822 393,848 65,158,403 -- -- (61,331,132)
Conversion of 5%
Debentures into
Common Stock
and Warrants 3,528,125 35,281 1,859,994 -- -- --
Issuance of Common
Stock as payment of
interest on 5%
Debentures 175,237 1,753 189,207 -- -- --
Net loss -- -- -- -- -- (1,577,340)
------------ --------- ------------ --------- --------- ------------
Treasury
Stock Total
-------- -----
Balance,
January 1, 1998 $ (1,031) $ 9,433,465
Conversion of 9.5%
Debentures -- 500,194
Conversion of
notes payable -
stockholders -- 221,727
Conversion of
10% Debentures and
accrued interest -- 204,375
Value of 5% Debentures allocated
to beneficial conversion feature
and related warrants -- 686,796
Exercise of
stock options -- 47,969
Issuance of warrants
as compensation -- 6,574
Net loss -- (6,881,012)
------------ ---------
Balance,
December 31,
1998 (1,031) 4,220,088
Conversion of 5%
Debentures into
Common Stock
and Warrants -- 1,895,275
Issuance of Common
Stock as payment of
interest on 5%
Debentures -- 190,960
Net loss -- (1,577,340)
------------ ------------
(Continued)
23
UNIGENE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Years Ended December 31, 2000, 1999 and 1998
Common Stock
------------------------- Deferred Deferred
Additional Stock Stock
Number of Par Paid-in Option Offering Accumulated
Shares Value Capital Compensation Costs Deficit
------------- ------- --------------- ------------ ------------ ------------
Balance,
December 31,
1999 43,088,184 $ 430,882 $ 67,207,604 -- -- $(62,908,472)
Exercise of
warrants 1,118,071 11,181 1,317,087 -- -- --
Exercise of
stock options 235,600 2,356 298,177 -- -- --
Deferred stock
option compensation -- -- 683,733 (284,948) -- --
Deferred stock offering
costs -- -- 327,000 -- (327,000) --
Issuance of warrants
as compensation -- -- 220,109 -- -- --
Net loss -- -- -- -- -- (12,469,405)
--------- --------- ------------ ----------- ------------ -------------
Balance,
December 31,
2000 44,441,855 $ 444,419 $ 70,053,710 $ (284,948) $ (327,000) $(75,377,877)
=========== ========== ============ =========== ============ ===========
Treasury
Stock Total
---------- ---------
Balance,
December 31,
1999 $(1,031) $4,728,983
Exercise of
warrants -- 1,328,268
Exercise of
stock options -- 300,533
Deferred stock
option compensation -- 398,785
Deferred stock offering
costs -- --
Issuance of warrants
as compensation -- 220,109
Net loss -- (12,469,405)
- -------- -----------
Balance,
December 31,
2000 $(1,031) $(5,492,727)
======== ============
See accompanying notes to financial statements.
24
UNIGENE LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $(12,469,405) $ (1,577,340) $ (6,881,012)
Adjustments to reconcile net loss to net
cash used by operating activities:
Non-cash cumulative effect adjustment .................. 1,000,000 -- --
Amortization of deferred revenue ....................... (800,000) -- --
Non-cash compensation .................................. 618,894 -- 6,574
Depreciation and amortization .......................... 1,617,957 1,558,663 1,552,734
Amortization of beneficial conversion feature on 5%
Debentures .......................................... -- 197,193 489,603
20% premium on 5% Debentures ........................... -- 400,000 --
Payment of interest through the issuance of Common Stock -- 190,960 44,060
Decrease in other assets ............................ 42,312 64,528 48,500
(Increase) decrease in contract receivables ............ 3,360,558 (3,210,171) (316,058)
(Increase) decrease in prepaid expenses and inventory .. 532,848 (188,092) (55,424)
Increase in accounts payable and accrued expenses ...... 2,715,086 1,163,795 247,237
------------ ------------ ------------
Net cash used for operating activities ................. (3,381,750) (1,400,464) (4,863,786)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction of leasehold and building improvements ..... (235,764) (4,010) (8,384)
Purchase of furniture and equipment ..................... (283,589) (134,127) (76,486)
Increase in patents and other assets .................... (69,389) (88,695) (264,959)
------------ ------------ ------------
Net cash used in investing activities ................... (588,742) (226,832) (349,829)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ................ -- 1,870,000 4,000,000
Proceeds from issuance of short-term debt, net .......... 1,733,323 100,000 --
Repayment of long-term debt and capital lease
obligations ........................................... (57,153) (62,739) (304,138)
Exercise of stock options and warrants .................. 1,628,801 -- 47,969
Debt issuance and other costs ........................... -- -- (253,879)
------------ ------------ ------------
Net cash provided by financing activities ............... 3,304,971 1,907,261 3,489,952
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents ...................................... (665,521) 279,965 (1,723,663)
Cash and cash equivalents at
beginning of period ................................... 682,629 402,664 2,126,327
------------ ------------ ------------
Cash and cash equivalents at end of period .............. $ 17,108 $ 682,629 $ 402,664
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Investment in joint venture and related obligations ..... $ 900,000 -- --
Acquisition of equipment through capital leases ......... -- $ 36,617 $ 221,900
Conversion of convertible debentures and accrued
interest into Common Stock ........................... -- $ 2,190,960 $ 707,069
Conversion of notes payable - stockholders
into Common Stock ..................................... -- -- $ 225,000
Value of beneficial conversion feature and related
warrants on issuance of 5% Debentures ................ -- -- $ 686,796
============ ============ ============
Cash paid for interest .................................. $ 39,800 $ 24,700 $ 119,000
============ ============ ============
See accompanying notes to financial statements
25
UNIGENE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. Description of Business
Unigene Laboratories, Inc. (the "Company"), a biopharmaceutical company, was
incorporated in the State of Delaware in 1980. The Company's single business
segment focuses on research, production and delivery of peptides for medical
use. The Company has concentrated most of its efforts to date on one product -
Calcitonin, for the treatment of osteoporosis and other indications. The
Company's initial products will be injectable, nasal and oral formulations of
Calcitonin. The Company's Calcitonin products require clinical trials and
approvals from regulatory agencies as well as acceptance in the marketplace. The
Company's injectable Calcitonin product has been approved for marketing in all
15-member states of the European Union for the treatment of Paget's disease and
hypercalcemia associated with malignancy. Through December 31, 2000, sales of
injectable Calcitonin have not been significant. Although the Company believes
its patents and patent applications are valid, the invalidation of its patents
or the failure of certain of its pending patent applications to issue as patents
could have a material adverse effect upon its business. The Company competes
with specialized biotechnology companies, major pharmaceutical and chemical
companies and universities and research institutions. Many of these competitors
have substantially greater resources than does the Company. During 2000, 1999
and 1998, almost all of the Company's revenue was generated from one customer,
Pfizer (see Note 16). The Pfizer agreement was terminated in March 2001.
2. Summary of Significant Accounting Policies & Practices
Segment Information -The Company is managed and operated as one business. The
entire business is managed by a single management team that reports to the chief
executive officer. The Company does not operate separate lines of business or
separate business entities with respect to any of its product candidates.
Accordingly, the Company does not prepare discrete financial information with
respect to separate product areas or by location and does not have separately
reportable segments as defined by Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
Property, Plant and Equipment - Property, plant and equipment are carried at
cost. Equipment under capital leases are stated at the present value of the
minimum lease payments. Depreciation is computed using the straight-line method.
Amortization of equipment under capital leases and leasehold improvements is
computed over the shorter of the lease term or estimated useful life of the
asset. Additions and improvements are capitalized, while repairs and maintenance
are charged to expense as incurred.
Research and Development - Research and development expenses include the costs
associated with internal research and development by the Company and research
and development conducted for the Company by outside advisors, sponsored
university-based research partners, and clinical study partners. All research
and development costs discussed above are expensed as incurred. Expenses
reimbursed under research and development contracts, which are not refundable,
are recorded as a reduction to research and development expense in the statement
of operations.
26
Revenue Recognition - Research and development contract revenues are recognized
based upon the successful completion of various benchmarks as set forth in the
individual agreements. Commencing in 2000, non-refundable license fees received
upon execution of license agreements where the Company has continuing
involvement are deferred and recognized as revenue over the life of the
agreement. Prior to the implementation of SAB 101, non-refundable license fees
received upon execution of license agreements were recognized as revenue
immediately. Revenue from the sale of product is recognized upon shipment to the
customer.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements
and specifically addresses revenue recognition in the biotechnology industry for
non-refundable technology access fees and other non-refundable fees. The Company
was required to adopt SAB 101, as amended, in the fourth quarter of 2000 with an
effective date of January 1, 2000, and the recognition of a cumulative effect
adjustment calculated as of January 1, 2000. The Company adopted SAB 101 in
2000, changing its revenue recognition policy for up-front licensing fees that
require services to be performed in the future from immediate revenue
recognition to deferral of revenue with the up-front fee recognized over the
life of the agreement. In 1997, the Company recognized $3,000,000 in revenue
from an up-front licensing fee from Pfizer. With the adoption of SAB 101, the
Company is now recognizing this revenue over a 45 month period, equivalent to
the term of its oral Calcitonin agreement with Pfizer which was terminated in
March 2001. The Company therefore recognized a non-cash cumulative effect
adjustment of $1,000,000 as of January 1, 2000 representing a revenue deferral
over the remaining 15 months of the agreement. The Company recognized $800,000
of revenue in 2000 and $200,000 in revenue will be recognized in 2001 as a
result of this deferral. The pro forma effects of retroactive application of
this new revenue recognition principle on net loss and related per share
amounts, for the years ended December 31, 2000, 1999 and 1998 are presented in
the accompanying statements of operations.
Patents and Other Intangibles - Patent costs are deferred pending the outcome of
patent applications. Successful patent costs are amortized using the
straight-line method over the lives of the patents. Unsuccessful patent costs
are expensed when determined worthless. As of December 31, 2000, six of the
Company's patents had issued in the U.S. and numerous have issued in various
foreign countries. Various other applications are still pending. Other
intangibles are recorded at cost and are amortized over their estimated useful
lives. Accumulated amortization on patents and other intangibles is $186,000 and
$143,600 at December 31, 2000 and 1999, respectively.
Stock Option Plan - The Company accounts for stock options issued to employees
and directors in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense is recorded on fixed stock option
grants only if the current market price of the underlying stock exceeded the
exercise price; compensation expense on variable stock option grants is
estimated until the measurement date. As permitted by SFAS No. 123, "Accounting
for Stock-Based Compensation", the Company provides pro forma net income and pro
forma earnings per share disclosures for employee and director stock option
grants as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company accounts for stock options and warrants issued to
consultants on a fair value basis in accordance with SFAS No. 123 and Emerging
Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services."
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of - The
Company accounts for the impairment of long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." This Statement requires that
27
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Net Loss per Share - The Company computes and presents both basic and diluted
earnings per share ("EPS") on the face of the statement of operations. Basic EPS
is computed using the weighted average number of common shares outstanding
during the period being reported on. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue Common Stock were
exercised or converted into Common Stock at the beginning of the period being
reported on and the effect was dilutive. The Company's net loss and weighted
average shares outstanding used for computing diluted loss per share were the
same as that used for computing basic loss per share for each of the years ended
December 31, 2000, 1999 and 1998 because the Company's convertible debentures,
stock options and warrants were not included in the calculation since the
inclusion of such potential shares (approximately 3,200,000 potential shares of
Common Stock at December 31, 2000) would be antidilutive.
Cash Equivalents - The Company considers all highly liquid securities purchased
with an original maturity of three months or less to be cash equivalents.
Inventory - Inventories are stated at the lower of cost (using the first-in,
first-out method) or market.
Fair Value of Financial Instruments - The fair value of a financial instrument
represents the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation.
Significant differences can arise between the fair value and carrying amounts of
financial instruments that are recognized at historical cost amounts. Given our
financial condition described in Note 17, it is not practicable to estimate the
fair value of our financial instruments at December 31, 2000.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
3. Related Party Transactions
Notes payable - stockholders. Since 1995, Warren P. Levy, Ronald S. Levy and Jay
Levy each an officer and director of the Company, and another member of their
family (collectively, the "Levys"), have extended loans to the Company for
working capital needs. Each of the loans is evidenced by a promissory note that
sets the terms of the loan. The variable interest rate on these notes is
equivalent to the Merrill Lynch Margin Loan Rate plus .25%. The principal amount
is collateralized by security interests in the Company's Fairfield, New Jersey
plant and equipment and Boonton, New Jersey equipment.
During 1999, Jay Levy loaned the Company $1,500,000 evidenced by demand notes
bearing interest at 6% per year. During the third quarter of 1999, Jay Levy
loaned the Company an additional $370,000 evidenced by term notes maturing
January 2002 and bearing interest at 6% per year, and the $1,500,000 of demand
notes were converted into 6% term notes maturing January 2002. The Company has
28
granted Jay Levy a security interest in all of its equipment and a mortgage on
its real property to secure payment of the term notes, which are senior to all
notes payable to Warren Levy and Ronald Levy. The Company is required to make
installment payments on the term notes commencing in October 1999 and ending in
January 2002 in an aggregate amount of $72,426 per month. No installment
payments were made during 1999 or 2000. During 2000, the Levys loaned to the
Company an additional $1,733,323 in short-term notes. As of December 31, 2000,
the outstanding loans by the Levys to Unigene, all classified as short-term
debt, consisted of: joint loans in the aggregate principal amount of $2,873,323,
which are evidenced by demand notes bearing a floating interest rate equal to
the Merrill Lynch Margin Loan Rate plus.25% (9.875% at December 31, 2000) and
loans from Jay Levy in the aggregate principal amount of $1,870,000 evidenced by
term notes maturing January 2002, and bearing interest at the fixed rate of 6%
per year. During 2000, $4,600 in interest was paid on these loans. As of
December 31, 2000, accrued interest on all Levy loans totaled approximately
$922,000.
Interest and principal payments required under these loans have not been made by
Unigene, but the Levys have waived all default provisions including additional
interest penalties due under these loans through December 31, 2000.
From January 1, 2001 through March 30, 2001 the Levys loaned to the Company an
additional $1,610,000 of demand notes at the Merrill Lynch Margin Loan Rate plus
.25%, of which $500,000 is secured by a security interest in certain of our
patents.
29
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31, 2000
and 1999:
Estimated
Depreciable
2000 1999 Lives
----------- ----------- ------------
Building and
improvements $ 1,397,210 $ 1,377,075 25 years
Leasehold improvements 8,695,851 8,480,222 Lease Term
Manufacturing equipment 4,000,940 3,842,038 10 years
Laboratory equipment 2,815,870 2,704,820 5 years
Other equipment 466,523 466,523 10 years
Office equipment and
furniture 340,843 327,206 5 years
Equipment under capital
leases 258,517 258,517 Lease Term
----------- -----------
17,975,754 17,456,401
Less accumulated
depreciation and
amortization 12,412,794 10,837,214
----------- -----------
5,562,960 6,619,187
Land 121,167 121,167
----------- -----------
$ 5,684,127 $ 6,740,354
=========== ===========
Depreciation and amortization expense on property, plant and equipment was
$1,576,000, $1,520,000, and $1,520,000 in 2000, 1999 and 1998, respectively.
5. China Joint Venture
In June 2000, we entered into a joint venture with Shijiazhuang Pharmaceutical
Group ("SPG"), a pharmaceutical company in the People's Republic of China. The
joint venture will manufacture and distribute injectable and nasal Calcitonin
products in China (and possibly other selected Asian markets) for the treatment
of osteoporosis. We own 45% of the joint venture and will have a 45% interest in
the joint venture profits and losses. In the first phase of the collaboration,
SPG will contribute its existing injectable Calcitonin license to the joint
venture, which will allow the joint venture to sell our product in China. The
joint venture will need to file a New Drug Application in China for its
injectable and nasal products. In addition, the joint venture may be required to
conduct brief local human trials. If the product is successful, the joint
venture may establish a facility in China to fill injectable and nasal
Calcitonin products using bulk Calcitonin produced at our Boonton, New Jersey
plant. Eventually the joint venture may manufacture the bulk Calcitonin in China
at a new facility that would be constructed by the joint venture. This would
require local financing by the joint venture. The joint venture has not yet
begun operations as of December 31, 2000.
30
Under the terms of the joint venture with SPG, Unigene is obligated to
contribute up to $405,000 in cash during 2001 and up to an additional $495,000
in cash within two years thereafter. However, these amounts may be reduced or
offset by our share of joint venture profits. As of December 31, 2000, we have
not made any investments in the joint venture. In addition, Unigene is obligated
to pay to the Qingdao General Pharmaceutical Company an aggregate of $350,000 in
14 monthly installment payments of $25,000 in order to terminate its former
joint venture in China, of which $75,000 had been paid as of December 31, 2000.
We recognized the entire $350,000 obligation as an expense in 2000.
6. Convertible Debentures
In March 1996, the Company issued $3,300,000 of 9.5% Senior Secured Convertible
Debentures in exchange for a secured loan of an equal amount. All of these
debentures had been converted into approximately 2,924,000 shares of Common
Stock as of November 15, 1998, the due date of the debentures.
In March 1996, the Company completed a private placement of $9,080,000 aggregate
principal amount of 10% Convertible Debentures. The Company received net
proceeds of approximately $8.1 million as a result of this placement. These
debentures were to mature March 4, 1999, but as of December 31, 1998, all
outstanding 10% Debentures have been converted or redeemed in full. Through
December 31, 1998, $8,808,515 of principal amount of these debentures, plus
approximately $355,000 of accrued interest, had been converted into
approximately 4,838,000 shares of Common Stock. Due to restrictions on the total
number of shares which could be issued upon conversion of the 10% Debentures, in
October 1998 the Company redeemed in cash an additional $271,485 of principal,
and in connection therewith paid to the holder $68,899 of accrued interest and
$143,810 in redemption premiums, for an aggregate payment of $484,194. The cost
of the redemption premium of $143,810 was recorded as an extraordinary loss in
1998.
In June 1998, Unigene completed a private placement of $4,000,000 in principal
amount of 5% convertible debentures from which we realized net proceeds of
approximately $3,750,000. The 5% debentures were convertible into shares of
Unigene common stock. The interest on the debentures, at Unigene's option, was
payable in shares of Unigene common stock. Upon conversion, the holder of a 5%
debenture was entitled to receive warrants to purchase a number of shares of
Unigene common stock equal to 4% of the number of shares issued as a result of
the conversion. However, the number of shares of Unigene common stock that we
are obligated to issue, in the aggregate, upon conversion, when combined with
the shares issued in payment of interest and upon the exercise of the warrants,
is limited to 3,852,500 shares. After this share limit is reached, Unigene is
obligated to redeem all 5% debentures tendered for conversion at a redemption
price equal to 120% of the principal amount, plus accrued interest. In December
1999, Unigene was unable to convert $200,000 in principal of the 5% debentures
tendered for conversion because the conversion would have exceeded the share
limit. As a result, we accrued, as of December 31, 1999, an amount equal to
$400,000 representing the 20% premium on the outstanding $2,000,000 in principal
amount of 5% debentures that had not been converted. During 1999, all of the
$2,000,000 in principal amount of 5% debentures were tendered for conversion and
therefore are classified as a current liability in the amount of $2,400,000 as
of December 31, 2000.
Through December 31, 2000, we issued a total of 3,703,362 shares of Unigene
common stock upon conversion of $2,000,000 in principal amount of the 5%
debentures and in payment of interest on the 5% debentures. Also, we issued an
additional 103,032 shares of Unigene common stock upon the cashless exercise of
all of the 141,123 warrants issued upon conversion of the 5% debentures.
On January 5, 2000, Unigene failed to make the required semi-annual interest
payment on the outstanding 5% debentures. As a result, the interest rate on the
outstanding 5% debentures has increased to 20% per year. The semi-annual
interest payments due July 5, 2000 and January 5, 2001 also have not been made.
31
As of December 31, 2000, the accrued and unpaid interest on the 5% debentures
totaled approximately $467,000. In addition, due to the delisting of the Unigene
common stock from the Nasdaq National Market in October 1999, Unigene became
obligated under a separate agreement to pay the holder of the 5% debentures an
amount equal to 2% of the outstanding principal amount of the debentures per
month. Unigene has not made any of these payments to date, but has accrued the
amounts as an expense. As of December 31, 2000, the accrued and unpaid amount of
this penalty totaled approximately $617,000.
The holder of the 5% debentures has commenced an arbitration proceeding in which
the holder claims that it is entitled, as of June 30, 2000, to payments in
respect of the 5% debentures in the amount of approximately $3,400,000,
consisting of principal, interest and penalties, resulting from Unigene's
default under various provisions of the debentures and related agreements. These
alleged defaults included Unigene's failure to redeem the debentures after
becoming obligated to do so, the failure to pay interest when due, and the
failure to pay liquidated damages arising from the delisting of the Unigene
common stock from the Nasdaq National Market. In July 2000, Unigene submitted to
the American Arbitration Association a statement in which it denies the amount
of Tail Wind's claim and makes certain counterclaims. A hearing on the matter
before an arbitrator appointed by the American Arbitration Association is
expected to occur in June 2001. The outcome of the proceeding is uncertain. An
extremely unfavorable ruling could have a material adverse effect on Unigene.
The Company in 1998 estimated the value of the beneficial conversion feature and
related warrants at the issuance of the 5% Debentures to be approximately
$687,000. Such amount was credited to additional paid-in capital and was
amortized to interest expense over the earliest conversion periods using the
effective interest method (approximately $197,000 and $490,000 for the years
ended December 31, 1999 and 1998, respectively).
7. Fusion Capital Financing
On December 18, 2000, and as amended March 30, 2001, Unigene entered into a
common stock purchase agreement with Fusion Capital Fund II, LLC, under which
Fusion has agreed to purchase up to $21,000,000 in shares of Unigene common
stock at the rate of $875,000 per month. Fusion is committed to purchase the
shares over a twenty-four month period, subject to a six-month extension or
earlier termination at our discretion. We may decrease this amount at any time
that the price of our common stock is less than $15 per share. If our stock
price equals or exceeds $4 per share, we have the right to require Fusion to
purchase, over a period of 60 days, up to the full remaining portion of the $21
million commitment. However, Fusion's commitment does not begin until a
registration statement covering the resale of the shares purchased by Fusion is
declared effective by the Securities and Exchange Commission. We cannot predict
when or if the SEC will declare our registration statement effective. In
addition, Unigene must continue to satisfy its requirements that are a condition
to Fusion's obligation including: the continued effectiveness of the related
registration statement, no default or acceleration of any obligations in excess
of $1,000,000, no insolvency or bankruptcy proceedings, continued listing of
Unigene common stock on the OTC Bulletin Board, and we must avoid the failure to
meet the maintenance requirements for listing on the Nasdaq SmallCap Market for
a period of 10 consecutive trading days or for more than an aggregate of 30
trading days in any 365-day period. The selling price per share is equal to the
lesser of: the lowest sale price of our common stock on the day of submission of
a purchase notice by Fusion; the average of any five closing sale prices of our
common stock, selected by Fusion, during the 15 trading days prior to the date
of submission of a purchase notice by Fusion; or $15. In addition to the
2,000,000 shares and five-year warrants to purchase 1,000,000 shares of common
stock at an exercise price of $.50 per share that we issued to Fusion as of
March 30, 2001 as compensation for its commitment, the Board of Directors has
authorized the issuance and sale to Fusion of up to 6,000,000 shares of Unigene
common stock in connection with the financing transaction. We may be required to
obtain the approval of Unigene stockholders to an amendment to Unigene's
32
certificate of incorporation increasing the number of shares of Unigene common
stock that the Company is authorized to issue in order to issue and sell
additional shares to Fusion.
In December 2000, the Company issued a five-year warrant to purchase 373,002
shares of Unigene common stock to its investment banker as a fee for the Fusion
financing agreement. The warrant has an exercise price of $1.126 and a fair
value of $327,000 using the Black-Scholes pricing model. The fair value of the
warrant has been deferred pending the closing of the Fusion financing. When the
registration statement for the financing is declared effective, these deferred
offering costs will be charged to additional paid-in capital. If the
registration statement is not declared effective, or the offering is terminated,
these deferred offering costs will be charged to operations.
8. Inventory - Inventory consists of the following:
Dec. 31, 2000 Dec. 31, 1999
------------- -------------
Finished goods $ 89,104 $ 596,359
Raw material 326,316 271,207
------- -------
Total $ 415,420 $ 867,566
=========== ===========
The Company wrote-off $515,000 of finished goods inventory in the fourth quarter
of 2000 as a result of Pfizer's termination of its license agreement with the
Company.
9. Accrued expenses - Accrued expenses consist of the following:
Dec. 31, 2000 Dec. 31, 1999
------------- -------------
Interest - notes payable to stockholders $921,722 $ 645,290
Interest - 5% convertible debentures 1,083,194 243,196
China joint ventures 680,000 --
Clinical trials/contract research 665,568 763,352
Vacation pay 204,948 187,710
Consultants 47,000 164,500
Other 158,845 213,365
---------- -----------
Total $ 3,761,277 $2,217,413
=========== ==========
10. Obligations Under Capital Leases
The Company entered into various lease arrangements during 1999 and 1998 which
qualify as capital leases.
The future years' minimum lease payments under the capital leases, together with
the present value of the net minimum lease payments, as of December 31, 2000 are
as follows:
33
2001 $ 71,860
2002 48,347
2003 10,656
--------
Total minimum lease payments 130,863
Less amount representing interest 24,893
--------
Present value of net minimum
lease payments 105,970
Less current portion 55,398
--------
Obligations under capital leases,
excluding current portion $ 50,572
========
The discount rates on these leases vary from 12% to 18%.
11. Obligations Under Operating Leases
The Company is obligated under a 10-year net-lease, which began in February
1994, for its manufacturing facility located in Boonton, New Jersey. The Company
has two 10-year renewal options as well as an option to purchase the facility.
In addition, the Company leases laboratory and office equipment under various
operating leases expiring in 2001 through 2003. Total future minimum rentals
under these noncancelable operating leases as of December 31, 2000 are as
follows:
2001 $222,584
2002 207,936
2003 189,764
2004 15,444
---------
$635,728
Total rent expense was approximately $259,000, $243,000 and $209,000 for 2000,
1999 and 1998, respectively.
12. Stockholders' Equity
In 1996, the placement agent, in connection with the issuance of the 10%
Debentures, received a five-year warrant to purchase 454,000 shares of Common
Stock at an exercise price of $2.10 per share as partial compensation for
services rendered. Through December 31, 2000, an aggregate of 322,000 of these
warrants have been exercised and 132,000 remain unexercised.
In October 1996, the Company completed a private placement of 4,218,804 Units at
a price of $1.75 per Unit. Each Unit consisted of (i) one share of Common Stock,
(ii) one quarter of a Class C Warrant, (each whole Class C Warrant was
exercisable to purchase one share of Common Stock) and (iii) one quarter of a
Class D Warrant (each whole Class D Warrant was exercisable to purchase one
share of Common Stock). The Class C Warrants and the Class D Warrants each had
an exercise price of $3.00 and expired unexercised on October 11, 1999. The fee
paid to the placement agent in the transaction consisted of an additional
296,935 Units in lieu of cash compensation. The net proceeds to the Company were
approximately $7 million.
34
In October 1994, the Company entered into an agreement with a consultant whose
compensation for its services included the issuance of warrants, exercisable at
$3.00 per share, for the purchase of 1,000,000 shares of Common Stock. These
warrants expired unexercised in October 1998. During 1996, another consultant's
compensation included warrants to purchase a total of 400,000 shares of Common
Stock at exercise prices ranging from $1.63 to $3.50 per share. These warrants
expire in April 2001.
In connection with the services rendered by various consultants during 1997, the
Company issued an aggregate of 75,000 stock purchase warrants, expiring from
1999 to 2002, exercisable at prices ranging from $2.25 to $3.41 per share, and
10,000 shares of Common Stock. Compensation expense recognized in 1997 as a
result of these transactions was approximately $131,000. During 1998, the
Company issued warrants to purchase 5,000 shares of Common Stock, expiring in
2003, to a consultant. These warrants are exercisable at $2.38, resulting in
1998 compensation expense of approximately $7,000. During 2000, the Company
issued warrants to purchase 150,000 shares of Common Stock, expiring in 2005, to
its investment banker. These warrants are exercisable at $2.66 and resulted in
2000 compensation expense of $220,000. The Company's investment bankers received
an additional warrant to purchase 373,002 shares of Common Stock at an exercise
price of $1.126 per share, expiring in 2005, for arranging the Fusion financing.
During 2000, the Company issued to various consultants 850,536 shares of Common
Stock upon the exercise of warrants at exercise prices ranging from $1.38 to
$2.43 per share. In addition, the Company issued to various consultants 263,360
shares of Common Stock upon the cashless exercise of an aggregate of 475,623
warrants at exercise prices ranging from $.46 to $2 per share.
During 1998, an aggregate of $681,000 in principal amount of convertible
debentures, plus $44,000 of accrued interest, was converted into approximately
663,000 shares of Common Stock. During 1999, an aggregate of $2,000,000 in
principal amount of convertible debentures, plus $191,000 of accrued interest,
was converted into approximately 3,703,000 shares of Common Stock. See Note 6.
In August 1998, an aggregate of $225,000 in principal amount of notes payable
from stockholders was converted into 163,635 shares of Common Stock at a
conversion price of $1.375 per share; such conversion was at a price slightly
higher than the then market price of the Common Stock.
As of December 31, 2000, there are warrants outstanding, all of which are
currently exercisable, to purchase an aggregate of 989,000 shares of Common
Stock at exercise prices ranging from $1.13 to $3.50 per share, with a weighted
average exercise price of $2.11.
13. Stock Option Plans
During 1994, the Company's stockholders approved the adoption of the 1994
Employee Stock Option Plan (the "1994 Plan"). All employees of the Company were
eligible to participate in the 1994 Plan, including executive officers and
directors who are employees of the Company. The 1994 Plan terminated on June 6,
2000; however, 1,729,965 options previously granted continue to be outstanding
and exercisable under that plan as of December 31, 2000.
At the Company's 1999 Annual Meeting, the stockholders approved the adoption of
a 1999 Directors Stock Option Plan (the "1999 Plan") under which each person
elected to the Board after June 23, 1999 who is not an employee will receive, on
the date of his initial election, an option to purchase 21,000 shares of Common
Stock. In addition, on May 1st of each year, commencing May 1, 1999, each
non-employee director will receive an option to purchase 10,000 shares of Common
Stock if he or she has served as a non-employee director for at least six months
prior to the May 1st grant. Each option granted under the 1999 Plan will have a
ten-year term and the exercise price of each option will be equal to the market
price of the Company's Common Stock on the date of the grant. A total of 350,000
shares of Common Stock are reserved for issuance under the 1999 Plan.
35
In November 1999, the Board of Directors approved, subject to stockholder
approval, the adoption of a new Stock Option Plan (the "2000 Plan") to replace
the 1994 Plan. All employees (including directors who are employees), as well as
certain consultants, are eligible to receive option grants under the 2000 Plan.
Options granted under the 2000 Plan have a ten-year term and an exercise price
equal to the market price of the Common Stock on the date of the grant. A total
of 4,000,000 shares of Common Stock are reserved for issuance under the 2000
Plan.
In November 1999, the Board granted under the 2000 Plan, to employees of the
Company, stock options to purchase an aggregate of 482,000 shares (of which
14,650 shares were subsequently cancelled) of Common Stock at an exercise price
of $0.63 per share, the market price on the date of grant. Each of the grants
was made subject to stockholder approval of the 2000 Plan. At the Company's June
6, 2000 Annual Meeting, the stockholders approved the 2000 Plan. In accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", the measurement date for valuing the stock options for the purpose
of determining compensation expense was June 6, 2000, the date of stockholder
approval. The market price of the Common Stock on this date was $2.093 per
share. Therefore, an aggregate of $683,733 will be charged to compensation
expense over the vesting periods of the options, which vest in approximately 50%
increments on November 5, 2000 and November 5, 2001. The Company recognized
$398,785 as compensation expense in 2000, leaving a balance of $284,948 as
deferred stock option compensation at December 31, 2000.
The following summarizes activity for options granted to directors and employees
under the 1994, 1999 and 2000 Plans:
Options Weighted Weighted
Exercisable Average Average
At End of Grant-date Exercise
Options Year Fair Value Price
--------- --------- ----------- ---------
Outstanding January 1, 1998 1,316,465 1,023,090
=========
Granted 610,750 $ 1.50 $ 1.99
Cancelled (91,600) -- 2.85
Exercised (40,500) -- 1.18
---------
Outstanding December 31,1998 1,795,115 1,382,615
=========
Granted 438,000 $ 0.55 $ 0.70
Cancelled (187,250) -- 2.17
Exercised -- -- --
---------- -----
Outstanding December 31, 1999 2,045,865 1,639,615
=========
Granted 571,500 $ 1.96 $ 0.87
Cancelled (64,650) -- 1.78
Exercised (245,600) -- 1.28
---------- ========== ===== =====
Outstanding December 31, 2000 2,307,115 1,968,540
========== ==========
36
A summary of options outstanding and exercisable as of December 31, 2000,
follows:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted Ave.
Range of Number Remaining Weighted Ave. Number Weighted Ave.
Exercise Price Outstanding Life (years) Exercise Price Exercisable Exercise Price
- -------------- ----------- ------------- -------------- ------------ -------------
$ .50-.98 773,250 9.0 $ .65 514,925 $ .65
1.00-1.97 858,365 6.6 1.81 812,115 1.83
2.16-4.69 675,500 5.8 2.81 641,500 2.80
------- -------
2,307,115 1.71 1,968,540 1.84
========= ==== ========= ====
As of December 31, 2000, options to purchase 310,000 shares and 3,463,850 shares
of Common Stock were available for grant under the 1999 and 2000 Plans.
The Company accounts for options granted to employees and directors under APB
Opinion No. 25. Had compensation cost for options granted to employees and
directors been determined consistent with SFAS No. 123, the Company's pro forma
net loss and pro forma net loss per share would have been as follows as of
December 31:
2000 1999 1998
-------- -------- --------
Net loss:
As reported $ (12,469,405) (1,577,340) (6,881,012)
Pro forma (12,644,405) (2,182,340) (7,796,012)
============== ============ ============
Basic and diluted net loss per share:
As reported $ (0.28) (0.04) (0.18)
Pro forma (0.29) (0.05) (0.20)
============== ============ ============
The fair value of the stock options granted in 2000, 1999 and 1998 is estimated
at grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions: dividend yields of 0%; expected volatility of 103%
in 2000, 74% in 1999 and 63% in 1998; a risk-free interest rate of 4.7% in 2000,
6.4% in 1999 and 4.8% in 1998; and expected lives of 5 years in 2000 and 6 years
in 1999 and 1998.
During 1995, the Company granted to a consultant options to purchase 10,000
shares of the Company's Common Stock, expiring in 2000, immediately exercisable
at $1.44 per share. These options were exercised in a cashless exercise during
2000, resulting in the issuance of 4,175 shares of Common Stock.
14. Income Taxes
As of December 31, 2000, the Company had available for federal income tax
reporting purposes net operating loss carryforwards in the approximate amount of
$68,000,000, expiring from 2001 through 2020, which are available to reduce
future earnings which would otherwise be subject to federal income taxes. In
addition, the Company has research and development credits in the approximate
37
amount of $2,500,000, which are available to reduce the amount of future federal
income taxes. These credits expire from 2001 through 2020. The Company has New
Jersey operating loss carryforwards in the approximate amount of $23,300,000,
expiring from 2003 through 2007, which are available to reduce future earnings,
which would otherwise be subject to state income tax. As of December 31, 2000,
approximately $11,400,000 of these New Jersey loss carryforwards have been
approved for future sale under a program of the New Jersey Economic Development
Authority (the "NJEDA"). In order to realize these benefits, the Company must
apply to the NJEDA each year and must meet various requirements for continuing
eligibility. In addition, the program must continue to be funded by the State of
New Jersey, and there are limitations based on the level of participation by
other companies. As a result, future tax benefits will be recognized in the
financial statements as specific sales are approved. In the fourth quarters of
2000 and 1999, the Company realized $1,065,000 and $1,553,000, respectively, of
tax benefits arising from the sale of a portion of the Company's New Jersey net
operating loss carryforwards that had previously been subject to a full
valuation allowance.
Given the Company's past history of incurring operating losses, any gross
deferred tax assets that are recognizable under SFAS No. 109 have been fully
reserved. As of December 31, 2000 and 1999, the Company had gross deferred tax
assets of approximately $29,000,000 and $26,000,000, respectively, subject to
valuation allowances of $29,000,000 and $26,000,000, respectively. The gross
deferred tax assets were generated primarily as a result of the Company's net
operating losses and tax credits. The Company's ability to use such net
operating losses may be limited by change in control provisions under Internal
Revenue Code Section 382.
15. Employee Benefit Plan
The Company maintains a deferred compensation plan covering all full-time
employees. The plan allows participants to defer a portion of their compensation
on a pre-tax basis pursuant to Section 401(k) of the Internal Revenue Code of
1986, as amended, up to an annual maximum for each employee set by the Internal
Revenue Service. The Company's discretionary matching contribution expense for
2000, 1999 and 1998 was approximately $48,000, $44,000 and $43,000,
respectively.
16. Research and Licensing Revenue
In July 1997, the Company entered into an agreement under which it granted to
the Parke-Davis division of Warner-Lambert Company a worldwide license to use
the Company's oral Calcitonin technology. In June 2000, Pfizer Inc. acquired
Warner-Lambert. During 1997, the Company received $3 million for an equity
investment and $3 million for a licensing fee (see Note 2). Several milestones
were achieved during 1998, resulting in milestone revenue of $5 million. In
1999, two pilot human studies for the Company's oral calcitonin formulation were
successfully concluded, resulting in milestone revenue totaling $5 million. Also
in 1999, the Company and Pfizer identified an oral calcitonin formulation to be
used in the Phase I/II clinical study entitling the Company to milestone revenue
of an additional $4.5 million. During 2000, two milestones were achieved
resulting in milestone revenue of $2 million. Patient dosing for this study was
completed in December 2000. Pfizer analyzed the results of this study and
terminated the agreement in March 2001 citing scientific and technical reasons.
17. Liquidity
The Company has incurred annual operating losses since its inception and, as a
result, at December 31, 2000 has an accumulated deficit of approximately
$75,378,000 and has a working capital deficiency of approximately $13,267,000.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. However, the financial statements have been prepared on a going
concern basis and as such do not include any adjustments that might result from
the outcome of this uncertainty. The Company's cash requirements are
approximately $10 to 11 million per year to operate its research and peptide
manufacturing facilities and develop its three Calcitonin products. In addition,
the Company has principal and interest obligations under its outstanding notes
payable to stockholders and 5% Convertible Debentures and its obligations
relating to its current and former joint ventures in China. The Company's cash
requirements related to the 5% Debentures include the redemption premium,
delisting penalties and the increased interest rate described in Note 6.
Management is actively seeking licensing and/or supply agreements with
pharmaceutical companies for oral, nasal and injectable forms of Calcitonin as
well as for other oral peptides. With the recent termination of our Pfizer
38
collaboration, we currently have no licenses for any of our products in the U.S.
We do not have sufficient financial resources to continue to fund our operations
at the current level. We had an operating cash flow deficit of $4,864,000 in
1998, an operating cash flow deficit of $1,400,000 in 1999 and for the year
ended December 31, 2000, an operating cash flow deficit of $3,382,000. The
agreement that we have entered into with Fusion could provide Unigene with
funding beginning in the first half of 2001. See Note 7.
Under the agreement with Fusion, after a registration statement is declared
effective by the SEC for the resale of the shares of Unigene common stock to be
sold to Fusion, Fusion will be required to purchase, at the then current market
price, shares of Unigene common stock at the rate of $875,000 per month over a
period of 24 months, provided that Unigene continues to satisfy the requirements
that are a condition to Fusion's obligation. The Board of Directors has
authorized the sale to Fusion of up to 6,000,000 shares of Unigene common stock.
We anticipate that, in order to sell significantly in excess of 6,000,000 shares
to Fusion, it may be necessary to obtain stockholder approval of an amendment to
our Certificate of Incorporation to increase the number of shares of Unigene
common stock that we are authorized to issue. However, we cannot predict when or
if the SEC will declare the registration statement effective, if the
stockholders will approve an amendment to our Certificate of Incorporation or if
we will be able to meet the continuing requirements of the Fusion agreement.
If we do not receive any financing from Fusion, we will need to secure another
source of financing in order to satisfy our working capital needs, which may be
unavailable or the cost of which may be prohibitively expensive. Should such
financing be unavailable or prohibitively expensive, it will be necessary for
Unigene to curtail significantly its operations or consider alternative uses of
its technology and manufacturing capability including the supply of Calcitonin
to other companies. Assuming we are able to raise additional capital through our
agreement with Fusion, we still anticipate that we may need additional capital
to implement fully our business plans. We believe that satisfying our capital
requirements over the long term will require the successful commercialization of
our Calcitonin product or another peptide product in the United States and
abroad. However, it is uncertain whether or not any of our products will be
approved or will be commercially successful. The commercialization of our oral
Calcitonin product may require us to incur additional capital expenditures to
expand or upgrade our manufacturing operations to satisfy future supply
obligations. However, we cannot determine either the cost or the timing of such
capital expenditures at this time.
18. Legal Matters
In addition to the arbitration proceedings discussed in Note 6, Reseau de Voyage
Sterling, Inc. (Reseau) filed suit against the Company in July 2000. Reseau,
which purchased from a third party a warrant to purchase one million shares of
Unigene common stock, alleges that the Company breached a verbal agreement to
extend the term of the warrant beyond its expiration date. Reseau is seeking
damages of $2 million. We believe that the suit is completely without merit and
we intend to vigorously contest the claim.
In December 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). Prior to the implementation of SAB 101, non-refundable license fees
received upon execution of license agreements were recognized as revenue
immediately. SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements and specifically addresses revenue recognition in the biotechnology
industry for non-refundable technology access fees and other non-refundable
fees. We were required to adopt SAB 101, as amended, in the fourth quarter of
2000 with an effective date of January 1, 2000, and the recognition of a
cumulative effect adjustment calculated as of January 1, 2000.
We adopted SAB 101 in 2000, changing our revenue recognition policy
for up-front licensing fees that require services to be performed in the future
from immediate revenue recognition to deferral of revenue with the up-front fee
recognized over the life of the agreement. In 1997, we recognized $3,000,000 in
revenue from an up-front licensing fee from Pfizer. With the adoption of SAB
101, we are now recognizing this revenue over a 45 month period, equivalent to
the term of our oral Calcitonin agreement with Pfizer which was terminated in
March 2001. We therefore recognized a non-cash cumulative effect adjustment of
$1,000,000 as of January 1, 2000 representing a revenue deferral over the
remaining 15 months of the agreement. We recognized $800,000 in revenue in 2000
and will recognize $200,000 of revenue in 2001 as a result of this deferral.
The quarterly financial data above has been adjusted to reflect
retroactive application of SAB 101. Therefore, in each of the first three
quarters of 2000 we recognized $200,000 in additional revenue related to the
cumulative effect adjustment.
19. Selected Quarterly Financial Data (Unaudited)
2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---- ------------ ----------- ----------- -----------
Revenue $ 1,201,250 $ 200,776 $ 1,559,164 $ 325,771
Operating loss ($1,396,831) ($3,748,686) ($2,146,838) ($4,092,528)
Loss before cumulative
effect of accounting
change ($1,639,288) ($4,016,917) ($2,454,532) ($3,358,668)
Net loss ($2,639,288) ($4,016,917) ($2,454,532) ($3,358,668)
Loss per share, before cumulative effect
of accounting change ($ 0.04) ($ 0.09) ($ 0.06) ($ 0.07)
Net loss per share,
basic and diluted ($ 0.06) ($ 0.09) ($ 0.06) ($ 0.07)
1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---- ----------- ----------- ----------- -----------
Revenue $ 2,500,172 $ 26,670 $ 7,000,733 $ 61,838
Operating income (loss) $ (349,707) $(2,825,543) $ 3,787,338 $(2,608,981)
Net income (loss) $ (563,755) $(2,977,610) $ 3,692,594 $(1,728,569)
Net income (loss)
per share, basic
and diluted $ (.01) $ (.07) $ .09 $ (.05)
The quarterly financial data for the first three quarters of 2000 reported above
differ from the data for those periods previously reported by us on Form 10-Q as
described below:
First Quarter Second Quarter Third Quarter
------------- -------------- -------------
Previously As Previously As Previously As
Reported Adjusted Reported Adjusted Reported Adjusted
-------- -------- -------- -------- ----------- ---------
Revenue $ 1,001,250 $ 1,201,250 $ 776 $ 200,776 $ 1,359,164 $ 1,559,164
Operating loss $(1,596,831) $(1,396,831) $(3,948,686) $(3,748,686) $(2,346,838) $(2,146,838)
Net loss $(1,839,288) $(2,639,288) $(4,216,917) $(4,016,917) $(2,654,532) $(2,454,532)
Net loss per share,
basic and
diluted $ (.04) $ (.06) $ (.10) $ (.09) $ (.06) $ (.06)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
39
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth information regarding Unigene's
executive officers and directors:
Name Age Position
- ------------------------ --- ---------------------------------------------------
Warren P. Levy (1) 49 President, Chief Executive Officer, and Director
Ronald S. Levy (1) 52 Executive Vice President, Secretary, and Director
Jay Levy (1) 77 Chairman of the Board and Treasurer
James P. Gilligan 49 Vice President of Product Development
Robert F. Hendrickson 68 Director
Allen Bloom 57 Director
- --------------
(1) Dr. Warren P. Levy and Dr. Ronald S. Levy are brothers and are the
sons of Mr. Jay Levy.
Each executive officer's term of office continues until the first meeting of
the Board of Directors following the annual meeting of stockholders and until
the election and qualification of his successor. All officers serve at the
discretion of the Board of Directors.
Warren P. Levy. Dr. Warren P. Levy, a founder of Unigene, has served as
President and Chief Executive Officer, and as a director, since our formation in
November 1980. Dr. Levy holds a Ph.D. in biochemistry and molecular biology from
Northwestern University and a bachelor's degree in chemistry from the
Massachusetts Institute of Technology.
Ronald S. Levy. Dr. Ronald S. Levy, a founder of Unigene, has served as a
director since our formation in November 1980, as Executive Vice President since
April 1999, and as Secretary since May 1986. Dr. Levy served as Vice President
from November 1980 through March 1999. Dr. Levy holds a Ph.D. in bioinorganic
chemistry from Pennsylvania State University and a bachelor's degree in
chemistry from Rutgers University.
Jay Levy. Mr. Jay Levy, a founder of Unigene, has served as the Chairman of
the Board of Directors and as Treasurer since our formation in November 1980. He
served as Secretary from 1980 to May 1986. Mr. Levy is a part-time employee of
Unigene and devotes approximately 15% of his time to Unigene. From 1985 through
February 1991, he served as the principal financial advisor to the Estate of
Nathan Cummings and its principal beneficiary, The Nathan Cummings Foundation,
Inc., a large charitable foundation. From 1968 through 1985, he performed
similar services for the late Nathan Cummings, a noted industrialist and
philanthropist.
James P. Gilligan. Dr. James P. Gilligan has been employed by Unigene since
1981 and has served as Vice President of Product Development since April 1999.
From February 1995 to March 1999, he served as Director of Product Development.
Dr. Gilligan holds a Ph.D. in pharmacology from the University of Connecticut
and a Masters of International Business from Seton Hall University.
Robert F. Hendrickson. Mr. Robert F. Hendrickson was Senior Vice President,
Manufacturing and Technology, for Merck & Co., Inc., an international
pharmaceutical company, from 1985 to 1990. Since 1990, Mr. Hendrickson has been
a management consultant with a number of biotechnology and pharmaceutical
companies among his clients. He is currently a director of Envirogen, Inc. an
environmental biotechnology company, and of Cytogen, Inc. and The Liposome Co,
Inc., each of which is a biotechnology company.
40
Dr. Allen Bloom. Dr. Allen Bloom, a patent attorney, has been a partner in
Dechert Price & Rhoads, a law firm, for the past six years where he established
and heads the patent practice group, which focuses on biotechnology,
pharmaceuticals and medical devices. Prior to that time, he was Vice President,
General Counsel and Secretary of The Liposome Company, Inc., a biotechnology
company, for nine years. His responsibilities there included patent, regulatory
and licensing activities. Dr. Bloom holds a Ph.D. in organic chemistry from Iowa
State University.
Item 11. Executive Compensation.
Director Compensation
Directors who are not employees receive an annual retainer of $8,000 as
well as a fee of $1,000 for each Board meeting attended. Mr. Hendrickson and Dr.
Bloom were the only directors who received such fees in 2000. Board members do
not earn additional compensation for service on a committee.
Under the Director Stock Option Plan, each person elected to the Board who
is not an employee receives, on the date of his initial election, an initial
option to purchase 21,000 shares of Unigene common stock. On May 1st of each
year, each non-employee director receives an additional option to purchase
10,000 shares of Unigene common stock if he has served as a non-employee
director for at least six months prior to the grant date. Each option has a
ten-year term and the exercise price is equal to the market price of Unigene
common stock on the date of the grant. Each initial option vests in equal
installments of 1/3 over a period of three years, commencing on the date of the
grant, and each additional option vests in its entirety on the first anniversary
of the grant. If the director's service as a non-employee director terminates
prior to the expiration of the option term, the options will remain exercisable
for a 90-day period following termination of service, except if a non-employee
director resigns due to disability, the options will remain exercisable for 180
days following termination, and if a non-employee director dies while serving as
a director, or within 90 days following termination of service (180 days in the
case of disability), the options will remain exercisable for 180 days following
the person's death. After such period, the options will terminate and cease to
be exercisable.
Employment Agreements
Unigene entered into an employment agreement, effective January 1, 2000,
with Dr. Warren P. Levy for an initial term of two years. Under the agreement,
Dr. Levy will serve as President and Chief Executive Officer at an annual salary
of $160,000 for the first year of the agreement. The Compensation Committee has
discretion to approve salary increases beyond this first year.
Unigene entered into an employment agreement, effective January 1, 2000,
with Dr. Ronald S. Levy for an initial term of two years. Under the agreement,
Dr. Levy will serve as Executive Vice President at an annual salary of $155,000
for the first year of the agreement. Salary increases beyond this first year are
at the discretion of the Compensation Committee.
Each agreement provides that, after the first two-year term, the agreement
will be renewed on a year-to-year basis unless either party notifies the other
of the desire not to renew the agreement. Either party must give this notice no
later than three months prior to the scheduled termination date. Each agreement
also provides that, if Unigene terminates the employment of the executive
without cause or the executive resigns for good reason, which the executive has
a right to do upon a change of control of Unigene or a significant reduction of
the executive's responsibilities without his consent, Unigene will make a
lump-sum severance payment to the executive equal to the salary that he would
have earned for the remaining term of this agreement, if the remaining term
(either the initial term or as extended) is more than one year; or if the
41
remaining term of the agreement (either the initial term or as extended) is one
year or less, a lump-sum payment equal to the executive's then-current annual
salary.
Compensation Committee Interlocks and Insider Participation
The Board of Directors determined executive compensation for 2000. Three of
the five Board members, Warren P. Levy, Ronald S. Levy and Jay Levy, are
executive officers. Jay Levy is the father of Warren and Ronald Levy.
To satisfy Unigene's short-term liquidity needs, Jay Levy, the Chairman of
the Board and an officer of Unigene, and Warren Levy and Ronald Levy, directors
and officers of Unigene, and another Levy family member from time to time have
made loans to Unigene. During February 2000, Jay Levy loaned us $300,000. This
loan was repaid in April 2000. During the third and fourth quarters of 2000, Jay
Levy and another family member loaned Unigene an aggregate of $1,655,000 in
demand loans and Warren Levy and Ronald Levy loaned Unigene an aggregate of
$78,323 in demand loans. As of December 31, 2000, total accrued interest on
these loans was $922,000 and the outstanding loans by these individuals to
Unigene totaled $4,743,323 and consisted of:
o loans from the Levys in the aggregate principal amount of $2,873,323, which
are evidenced by demand notes bearing a floating interest rate equal to the
Merrill Lynch Margin Loan Rate plus .25% (9.875% at December 31, 2000) that are
classified as short-term debt. These loans are secured by a security interest in
Unigene's equipment and/or real property.
o
o loans from Jay Levy in the aggregate principal amount of $1,870,000 evidenced
by term notes maturing January 2002, and bearing interest at the fixed rate of
6% per year. These loans are secured by a security interest in all of Unigene's
equipment and a mortgage on Unigene's real property. The terms of the notes
require Unigene to make installment payments of principal and interest beginning
in October 1999 and ending in January 2002 in an aggregate amount of $72,426 per
month. No installment payments have been made to date.
Interest and principal payments required under these loans have not
been made by Unigene, but the Levys have waived all default provisions including
additional interest penalties due under these loans through December 31, 2000.
From January 1, 2001 through March 30, 2001, Jay Levy, Warren Levy
and Ronald Levy loaned to us an additional $1,610,000 at the Merrill Lynch
Margin Loan Rate plus .25%, of which $500,000 is secured by a security interest
in certain of our patents. No interest has been paid on these loans.
Executive Compensation
The following table shows, for the years 1998, 1999 and 2000, the
compensation paid to the Chief Executive Officer and to each other executive
officer whose salary and bonus, for their services in all capacities in 2000
exceeded $100,000:
42
Summary Compensation Table
Long-Term
Compensation
-----------------
Annual Compensation Awards Payouts
------------------- ------ -------
Other Restricted
Annual Stock Options/ LTIP All Other
Name and Position Year Salary($) Bonus($) Compensation($)(2) Awards($) SARs(#) Payouts($) Compensation($)(1)
- -----------------------------------------------------------------------------------------------------------------------------------
Warren P. Levy 2000 $160,175 $ 0 $ 0 $ 0 0 $ 0 $13,902
President, Chief 1999 146,211 0 0 0 0 0 13,866
Executive Officer 1998 146,231 0 0 0 0 0 13,830
Dr. Ronald S. Levy 2000 155,260 0 0 0 0 0 16,864
Executive Vice 1999 141,563 0 0 0 0 0 16,862
President 1998 141,618 0 0 0 0 0 16,792
Dr. James P. Gilligan 2000 148,034 0 7,615 0 0 0 0
Vice President 1999 139,216 0 7,235 0 135,000 0 0
1 Represents premium we paid on executive split-dollar life insurance.
2 Represents reimbursement for unused vacation days.
Aggregated Option Exercises and Year-End Option Values
The following table shows information about any option exercises during
the year ended December 31, 2000, and the number and value of unexercised
options held as of December 31, 2000, by each of the executive officers named in
the Summary Compensation Table:
Shares Underlying Value of Unexercised
Unexercised Options In-the-Money Options(1)
Exercises during ----------------------- -----------------------
the Fiscal Year
---------------
Number of
Name Shares Acquired Value Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- --------------- -------------- ----------- ------------- ----------- -------------
Dr. Warren P. Levy 0 0 0 0 0 0
Dr. Ronald S. Levy 0 0 0 0 0 0
Dr. James P. Gilligan 0 0 346,000 44,000 $77,595 $37,755
1 Based upon a closing price of $1.53 on December 31, 2000.
43
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table shows information as of March 31, 2001, concerning the
beneficial ownership of Unigene common stock by each of Unigene's directors,
each executive officer of Unigene listed in the Summary Compensation Table, and
all directors and executive officers of Unigene as a group.
The ownership percentages listed on the table are based on 46,436,940
shares of Unigene common stock outstanding as of March 31, 2001. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. A person generally is deemed to be the beneficial owner of
shares over which he has either voting or investment power. Shares underlying
options that are currently exercisable, or that will become exercisable within
60 days, are deemed to be beneficially owned by the person holding the options,
and are deemed to be outstanding for the purpose of computing the beneficial
ownership percentage of that person, but are not considered to be outstanding
for the purpose of computing the ownership percentage of any other person.
Except as otherwise noted, the persons and the group identified in the
table have sole voting and sole investment power with respect to all the shares
of Unigene common stock shown as beneficially owned by them. Except as otherwise
indicated, the address of each beneficial owner listed below is c/o Unigene
Laboratories, Inc., 110 Little Falls Road, Fairfield, New Jersey 07004.
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------------ -------------------- ----------------
Fusion Capital Fund II, LLC 3,000,000 (1) 6.3%
222 Merchandise Mart Plaza
Chicago, IL 60654
Warren P. Levy 1,980,545 (2) 4.3%
Ronald S. Levy 1,995,545 (2) 4.3%
Jay Levy 578,095 (3) 1.2%
James P. Gilligan 345,660 (4) 0.8%
Robert F. Hendrickson 55,000 (5) 0.1%
Allen Bloom 31,000 (6) 0.1%
Officers and Directors
as a Group (6 persons) 4,785,845 (2,7) 10.3%
1 Includes 1,000,000 shares that Fusion has the right to acquire upon
the exercise of a warrant.
2 Includes 200,000 shares of Unigene common stock held in a family trust
over which Warren P. Levy and Ronald S. Levy, in their capacity as
trustees, share voting and dispositive power.
3 Includes 55,000 shares of Unigene common stock that Mr. Levy has the
right to acquire upon the exercise of stock options that are
exercisable either immediately or within 60 days.
4 Includes 326,000 shares of Unigene common stock that Dr. Gilligan has
the right to acquire upon the exercise of stock options that are
exercisable either immediately or within 60 days.
5 Includes 40,000 shares of Unigene common stock that Mr. Hendrickson
has the right to acquire upon the exercise of stock options that are
exercisable either immediately or within 60 days.
6 Includes 30,000 shares of Unigene common stock that Dr. Bloom has the
right to acquire upon the exercise of stock options that are
exercisable either immediately or within 60 days.
7 Includes an aggregate of 451,000 shares of Unigene common stock that
such persons have the right to acquire upon the exercise of stock
options that are exercisable either immediately or within 60 days.
44
Item 13. Certain Relationships and Related Transactions.
The information required by this item is included in Item 10 of Part III
above, in the section entitled "Directors and Executive Officers of the
Registrant".
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
See Item 8.
(a) 2. Financial Statement Schedules.
None.
(a) 3. Exhibits.
See Index to Exhibits which appears on Pages 42-44.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter
ended December 31, 2000.
45
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, thereunto duly authorized.
UNIGENE LABORATORIES, INC.
April 16, 2001 /s/ Warren P. Levy
-------------------------------
Warren P. Levy, President
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.
April 16, 2001 /s/ Warren P. Levy
----------------------------------
Warren P. Levy, President,
Chief Executive Officer and
Director
April 16, 2001 /s/ Jay Levy
----------------------------------
Jay Levy, Treasurer,
Chief Financial Officer, Chief
Accounting Officer and Director
April 16, 2001 /s/ Ronald S. Levy
----------------------------------
Ronald S. Levy, Secretary,
Vice President and Director
April 16, 2001 /s/ Robert F. Hendrickson,
----------------------------------
Robert F. Hendrickson, Director
April 16, 2001 /s/ Allen Bloom
----------------------------------
Allen Bloom, Director
46
INDEX TO EXHIBITS
-----------------------------
3.1 Certificate of Incorporation and Amendments to July 1, 1986. (1)
3.1.1 Amendments to Certificate of Incorporation filed July 29, 1986 and May
22, 1987. (1)
3.1.2 Amendment to Certificate of Incorporation filed August 22, 1997
(Incorporated by reference to Exhibit 3.1.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997).
3.2 By-Laws. Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement No. 333-04557 on Form S-3 filed June 28, 1996.
4.2 Specimen Certificate for Common Stock, par value $.01 per share. (1)
10.1 Lease agreement between the Company and Fulton Street Associates, dated
May 20, 1993. (3)
10.2* 1994 Employee Stock Option Plan (incorporated by reference to the
Company's Definitive Proxy Statement dated April 28, 1994, which is set
forth as Appendix A to Exhibit 28 to the Company's Form 10-K for the year
ended December 31, 1993).
10.3* Directors Stock Option Plan (incorporated by reference to Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999).
10.4 Mortgage and Security Agreement between the Company and Jean Levy dated
February 10, 1995. (4)
10.5 Loan and Security Agreement between the Company and Jay Levy, Warren P.
Levy and Ronald S. Levy dated March 2, 1995. (4)
10.6* Employment Agreement with Warren P. Levy, dated January 1, 2000.
10.7* Employment Agreement with Ronald S. Levy, dated January 1, 2000.
10.8* Employment Agreement with Jay Levy, dated January 1, 2000.
10.9* Split Dollar Agreement dated September 30, 1992 between Unigene
Laboratories, Inc. and Warren P. Levy. (2)
10.10* Split Dollar Agreement dated September 30, 1992 between Unigene
Laboratories, Inc. and Ronald S. Levy. (2)
10.12 Amendment to Loan Agreement and Security Agreement between the Company
and Jay Levy, Warren P. Levy and Ronald S. Levy dated March 20, 1995. (4)
10.14 Amendment to Loan and Security Agreement between the Company and Jay
Levy, Warren P. Levy and Ronald S. Levy dated June 29, 1995. (5)
10.15 Promissory Note between the Company and Jay Levy, Warren P. Levy and
Ronald S. Levy dated June 29, 1995. (5)
47
10.17 License Agreement, dated as of July 15, 1997, between the Company and
Pfizer Company (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K, dated July 15, 1997).
10.19 Purchase Agreement, dated June 29, 1998, between the Company and The Tail
Wind Fund, Ltd. (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10Q for the quarter ended June 30,
1998).
10.20 Registration Rights Agreement, dated June 29, 1998, between the Company
and The Tail Wind Fund, Ltd. (incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10Q for the quarter ended June
30, 1998).
10.21 Form of Promissory Note between the Company and Jay Levy (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10Q
for the quarter ended June 30, 1999).
10.22 Form of Promissory Note between the Company and Warren Levy and Ronald
Levy (incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10Q for the quarter ended June 30, 1999).
10.23 Amendment to Loan Agreement and Security Agreement between the Company
and Jay Levy, Warren Levy and Ronald Levy dated June 25, 1999
(incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10Q for the quarter ended June 30, 1999).
10.24 Amended and Restated Secured Note dated July 13, 1999 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10Q
for the quarter ended September 30, 1999).
10.25 Amended and Restated Security Agreement dated July 13, 1999 (incorporated
by reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10Q for the quarter ended September 30, 1999).
10.26 Subordination Agreement dated July 13, 1999 (incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10Q for the
quarter ended September 30, 1999).
10.27 Mortgage and Security Agreement dated July 13, 1999 (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10Q
for the quarter ended September 30, 1999).
10.28 $70,000 Secured Note dated July 30, 1999 (incorporated by reference to
Exhibit 10.5 to the Company's Quarterly Report on Form 10Q for the
quarter ended September 30, 1999).
10.29 $200,000 Secured Note dated August 5, 1999 (incorporated by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form 10Q for the
quarter ended September 30, 1999).
10.30 Modification of Mortgage and Security Agreement dated August 5, 1999
(incorporated by reference to Exhibit 10.7 to the Company's Quarterly
Report on Form 10Q for the quarter ended September 30, 1999).
10.31 Amendment to Security Agreement and Subordination Agreement between the
Company and Jay Levy, Warren Levy and Ronald Levy dated August 5, 1999
(incorporated by reference to Exhibit 10.8 to the Company's Quarterly
Report on Form 10Q for the quarter ended September 30, 1999).
50
10.32 Joint Venture Contract between Shijiazhuang Pharmaceutical Group Company,
Ltd., and Unigene Laboratories, Inc., dated June 15, 2000 (incorporated
by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000, with certain confidential
information omitted and filed separately with the Secretary of the
Commission).
10.33 Articles of Association of Shijiazhuang-Unigene Pharmaceutical
Corporation Limited, dated June 15, 2000 (incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, with certain confidential information
omitted and filed separately with the Secretary of the Commission).
10.34 2000 Stock Option Plan (incorporated by reference to Attachment A to the
Registrant's Schedule 14A, dated April 28, 2000, containing the
Registrant's Definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders (File No. 0-16005)).
10.35 Common Stock Purchase Agreement, dated December 18, 2000, between the
Registrant and Fusion Capital Fund II, LLC. (6)
10.36 Registration Rights Agreement, dated December 18, 2000, between the
Registrant and Fusion Capital Fund II, LLC. (6)
10.37 First Amendment to Common Stock Purchase Agreement, dated March 30, 2001,
between the Registrant and Fusion Capital Fund II, LLC. (7)
10.38 Registration Rights Agreement, dated March 30, 2001, between the
Registrant and Fusion Capital Fund II, LLC. (7)
10.39 Warrant, dated March 30, 2001, between the Registrant and Fusion Capital
Fund II, LLC. (7)
23 Consent of KPMG LLP.
- ---------------------------
(1) Incorporated by reference to the exhibit of same number to the Company's
Registration Statement No. 33-6877 on Form S-1.
(2) Incorporated by reference to the exhibit of same number to the Company's
Form 10-K for the year ended December 31, 1992.
(3) Incorporated by reference to the exhibit of same number to the Company's
Form 10-K for the year ended December 31, 1993.
(4) Incorporated by reference to the exhibit of same number to the Company's
Form 10-K for the year ended December 31, 1994.
(5) Incorporated by reference to the exhibit of same number to the Company's
Form 10-K for the year ended December 31, 1995.
(6) Incorporated by reference to the exhibit of same number to the Company`s
Registration Statement No. 333-54048 on Form S-1.
(7) Incorporated by reference to the exhibit of same number to Amendment No.2
to the Company's Registration Statement No. 333-54048 on Form S-1.
51