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FORM 10K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-16005
Unigene Laboratories, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-2328609
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
110 Little Falls Road, Fairfield, New Jersey 07004
(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 stock 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 February 24, 1998: $96,679,356.
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--
38,517,722 shares as of February 24, 1998.
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 this Form 10-K constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act 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 preclinical and
clinical 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 and other factors discussed in this Form 10-K.
Item 1. Business.
Unigene Laboratories, Inc. ("Unigene" or "Company"), was incorporated under the
laws of the State of Delaware in 1980. The Company is a biopharmaceutical
company that is focusing on the development of Calcitonin products for the
treatment of osteoporosis. The Company is currently producing pharmaceutical
grade Calcitonin in accordance with current Good Manufacturing Practice
guidelines, developing production technology improvements, testing novel
Calcitonin formulations, registering its injectable Calcitonin product in Europe
and is seeking partnerships to market and distribute this product in selected
territories. Certain statements under this caption regarding the Company's
business constitute "forward-looking statements" under the Reform Act. See
"Special Note Regarding Forward-Looking Statements."
One of the principal scientific accomplishments of the Company was its success
in combining its proprietary amidation process with bacterial recombinant DNA
technology to develop a peptide hormone production process. The Company believes
that its proprietary amidation process will be a key step in the more efficient
and economical commercial production of certain peptide hormones with diverse
therapeutic applications. Many of these hormones cannot be produced at a
reasonable cost in sufficient quantities for clinical testing or commercial use
by currently available production processes. Using its proprietary process, the
Company has produced laboratory-scale quantities of seven such peptide hormones:
human Calcitonin, salmon Calcitonin, human Growth Hormone Releasing Factor,
human Calcitonin Gene-Related Peptide, human Corticotropin Releasing Factor,
human Amylin and a human Magainin. During 1991, a study commissioned by the
Company was prepared by a professor of chemical engineering at the Massachusetts
Institute of Technology. The study evaluated the economics for producing
Calcitonin and indicated that the Company's process for producing Calcitonin
should significantly reduce the cost and time required for commercial production
of multi-kilogram quantities.
The Company also has developed a proprietary oral delivery technology which has
successfully delivered Calcitonin into the blood stream of human subjects. The
formulation, which is the subject of international patent applications, has been
shown in repeated clinical studies to regularly deliver measurable quantities of
the hormone into the bloodstream. The Company believes that such a formulation
may expedite the regulatory approval process for an oral Calcitonin because it
should be easier to establish its performance efficacy as compared to a
formulation that does not produce measurable Calcitonin blood levels.
The Company's business strategy is to develop proprietary products and processes
with applications in human health-care, independently or in conjunction with
pharmaceutical and chemical companies, in order to generate revenues from
license fees, royalties on third party sales and/or direct sales of bulk or
finished products. Generally, the Company seeks sponsors and licensees to
provide research funding and assume responsibility for obtaining appropriate
regulatory approvals, clinical testing, and marketing of products derived from
the Company's research activities. However, in certain cases, the Company may
retain responsibility for clinical testing and for obtaining the required
regulatory approvals. To date, the Company has focused its efforts primarily on
the manufacture of, and the development of novel delivery systems for, salmon
Calcitonin.
The Company has licensed on an exclusive basis its oral Calcitonin technology to
the Parke-Davis division of Warner-Lambert Company. The Company believes that
the components of the proprietary oral formulation can enable the delivery of
other peptides in addition to Calcitonin and it has initiated studies to
investigate such possibilities.
The Company has been producing salmon Calcitonin since 1992. The Company has
constructed a cGMP facility for the production of pharmaceutical-grade
Calcitonin at leased premises located in Boonton, New Jersey. The facility began
producing salmon Calcitonin under cGMP regulations in 1996. The facility will
also produce Unigene's proprietary amidating enzyme for use in producing
Calcitonin. The production capacity of the facility is between 0.5-1.0 kilogram
of bulk Calcitonin per year.
The design of the facility is intended to allow for substantial increases in
Calcitonin production utilizing the existing equipment and, in March 1997, the
Company announced that an improvement to its proprietary production process had
been developed that can boost the Company's annual production of Calcitonin by
at least fourfold. However, if an oral Calcitonin product is successfully
commercialized the Company will be required to incur additional expenditures to
expand or upgrade its manufacturing operations to satisfy its supply obligations
under the Warner-Lambert license agreement. Although the facility will initially
be exclusively devoted to Calcitonin production, it would be suitable for
producing other peptide hormone products in the future.
The Company is following conventional procedures to secure the approval of the
facility by regulatory agencies that will allow the Company to manufacture its
Calcitonin for human use. Although the facility was inspected by an independent
consultant in early 1997 and found to be in compliance with cGMP guidelines,
there can be no assurance that approval by such agencies will be obtained. In
addition, there is no assurance that the facility production goals will be
achieved, that there will be a market for the Company's products, that such
production will be profitable to the Company, that others will not develop
processes and products superior to, or otherwise precluding the commercial
utilization of, the processes or products developed by the Company.
In addition to obtaining approval of the facility by regulatory agencies, it is
necessary to obtain regulatory approval in each country for human use of the
Calcitonin to be produced in the facility. This requires various human and
animal studies. The Company or its licensees then must prepare the required
documentation and must apply to the appropriate regulatory agencies for approval
of the Company's Calcitonin for human use.
The regulatory approval process for a pharmaceutical product takes a number of
years and requires substantial resources. During 1996, the Company received
authorization to proceed with pivotal clinical trials in the United States and
the United Kingdom for its injectable form of Calcitonin (having the tradename
FORTICAL(R)). These trials were completed in early 1997 and demonstrated that
the injectable product was bioequivalent to an injectable salmon Calcitonin
product currently on the market.
In August 1997, the Company's registration dossier for injectable FORTICAL(R)
was formally submitted to the European Union health authorities for approval.
This was the Company's first product registration filing. In September 1997, the
14,000 page document was officially accepted for review by the Committee for
Proprietary Medicinal Products. The European dossier was filed under the
recently-established Centralized procedure, by which the product's approval
would be obtained simultaneously in all of the 15 member nations of the European
Union. In addition, an approved European dossier can be readily cited by
regulatory authorities in many non-European nations, which could significantly
reduce the registration requirements for FORTICAL Injection in such countries,
thereby accelerating product launch. The Company has completed all clinical
trials necessary to file a New Drug Application ("NDA") for injectable FORTICAL
with the FDA and currently plans to file this application at a later date.
Because the injectable Calcitonin market in Europe is larger than that in the
U.S., the European dossier filing has been given a higher priority.
The Company believes that the abbreviated clinical program, authorized by both
the U.S. and European health authorities which consisted of bioequivalence and
safety studies will be sufficient to satisfy approval requirements in the United
States and the European Union. The Company believes that the review process for
the European dossier for its injectable Calcitonin product, and possibly for
similar filings in other countries, may be shorter than that typically
associated with a new drug submission because (i) the active ingredient is
structually identical to and biologically indistinguishable from the active
ingredient in products already approved by many regulatory agencies, (ii) the
formulation is essentially similar to the formulations used in already approved
products and (iii) the clinical trial program that was authorized was relatively
brief and involved small numbers of subjects, so 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. However, there can be no
assurance that the necessary governmental approvals will be obtained or that
they will be obtained on an expedited basis. See "Government Regulation".
Expanded consumer acceptance of Calcitonin pharmaceutical products will depend
on the development of a consumer-accepted delivery system. A major
pharmaceutical company received FDA approval in 1995 for the marketing of a
nasal spray delivery system for Calcitonin, which has enlarged the U.S. market
for Calcitonin. The Company, in collaboration with Warner-Lambert, as well as
other companies are conducting research on oral delivery systems for Calcitonin.
There can be no assurance that suitable delivery systems will be developed or
that governmental approval of such delivery systems will be obtained or that
others will not develop delivery technologies that have advantages over the
Company's technologies.
In December 1995 and January 1996, the Company successfully tested a proprietary
Calcitonin oral formulation in two separate Phase I clinical trials in the
United Kingdom. These studies indicated that the majority of those who received
the oral Calcitonin showed levels of the hormone in blood samples taken during
the trial which were greater than the minimum levels generally regarded as being
required for maximum therapeutic benefit. The Company believes that these were
the first studies to demonstrate that significant blood levels of Calcitonin
could be observed in humans following oral administration of the hormone. In
April 1996, the Company successfully conducted a third Phase I clinical trial in
the United Kingdom which utilized lower Calcitonin dosages than in the prior two
clinical trials. The results of this trial indicated that every test subject
showed levels of the hormone in their blood samples that exceeded the minimum
levels generally regarded as required for maximum therapeutic benefit. However,
there can be no assurance that these results will be replicated in further
studies. The Company has filed patent applications for its oral formulation in
the U.S. and in many foreign countries. Under the terms of the agreement with
Warner-Lambert Company, which has licensed the use of the Company's oral
Calcitonin technology, Warner-Lambert has assumed responsibility for conducting
the clinical trials and for obtaining regulatory approval of the product from
the FDA and other regulatory agencies. There can be no assurance that any of
these patent applications will be approved, that Warner-Lambert will be
successful in obtaining regulatory approval of an oral Calcitonin product or
that Warner-Lambert and the Company will be successful in developing, producing
or marketing an oral Calcitonin product.
The Company is dependent on large pharmaceutical companies, having much greater
resources than the Company, for revenues from royalties on sales of product,
research sponsorship, joint ventures and licensing arrangements. 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. Upon execution of the agreement, the Company received $6
million in payments from Warner-Lambert, consisting of a $3 million licensing
fee and a $3 million equity investment by Warner-Lambert (695,066 shares of the
Company's Common Stock were purchased at a price of approximately $4.32 per
share). In addition, the Company is eligible to receive up to an additional
$48.5 million in milestone payments during the course of the development program
if specified milestones are achieved, of which $15.5 million would be received
prior to the commencement of Phase I clinical studies in the U.S. If the product
is successfully commercialized, the Company also would receive revenue from the
sale of raw material to Warner-Lambert and royalties on product sales by
Warner-Lambert and its affiliates. The Company has retained the right to license
the use of its technologies for injectable and nasal formulations of Calcitonin
on a worldwide basis. The Company is actively seeking other licensing and/or
supply agreements with pharmaceutical companies for injectable and nasal forms
of Calcitonin. However, there is no assurance that any additional
revenue-generating agreements will be signed.
In June 1995, the Company entered into a joint venture agreement, effective as
of March 1996, with the Qingdao General Pharmaceutical Company and its Huanghai
factory for the production and marketing of injectable and nasal Calcitonin in
China. Under the agreement, the Chinese partners will finance the project,
including the construction and operation of a dedicated manufacturing facility
in China which will utilize the non-proprietary aspects of the Company's
production technology. The Company will provide the joint venture with
technology and training as well as the Company's proprietary enzyme at a
discounted price. The Company will receive a combination of fixed fees and
annual royalties based upon sales of the end product. This joint venture
contributed $300,000 to 1996 revenues. It is uncertain whether any additional
revenues will be recognized or received in connection with this joint venture.
The Company is currently engaged in two collaborative research programs. One,
with Rutgers University College of Pharmacy, continues to study oral drug
delivery technology for Calcitonin while exploring modifications which may have
applications for delivering other peptides. The second collaboration, performed
in conjunction with Yale University, is investigating novel applications for
certain amidated peptide hormones, including calcitonin gene-related peptide
("CGRP"). In 1996, the Company reported that CGRP accelerated bone growth and
prevented bone loss in an animal model system. However, there can be no
assurance that CGRP will have the same effect in humans.
Risks of International Operations
The Company's potential major customers, partners and licensees include foreign
companies or companies with significant international business. The business
operations of such companies and their ability to pay license fees, royalties
and other amounts due and otherwise perform their obligations to the Company
under agreements with the Company may be subject to regulation or approval by
foreign governments. There can be no assurance that required approvals will be
received. The failure to receive required approvals, governmental regulation and
other risks, including political and foreign currency risks, could affect the
ability of the Company to earn or receive payments pursuant to such agreements
and, in such event, may have a material adverse effect on the Company's future
operations.
Government Regulation
The laboratory research, development and production activities of the Company
and its sponsors, collaborators and licensees and the processes and products
which may be developed by them and the Company's production facility, are
subject to significant regulation by numerous federal, state, local and foreign
governmental authorities. In addition to obtaining the approval of the
production facility by the FDA and other regulatory agencies, it is necessary to
obtain the approval by such agencies of the Calcitonin produced in the facility
for human use. The regulatory approval process for a pharmaceutical product
requires substantial resources and may take a number of years. There can be no
assurance that regulatory approval will be obtained for the production facility
or for any of the Company's products or that such approvals will be obtained in
a timely manner. The inability to obtain, or delays in obtaining, such approvals
would adversely affect the Company's ability to continue to fund its programs,
produce marketable products, or receive revenue from milestone payments, product
sales or royalties. Furthermore, the extent of any adverse governmental
regulation that may arise from future legislative and administrative action
cannot be predicted.
The Company's production facility may, from time to time, be audited by the FDA
or other regulatory agencies to ensure that it is operating in compliance with
cGMP guidelines, which require that the production operation be conducted in
strict compliance with, among other things, the Company's written protocols for
reagent qualification, process execution, data recording, instrument calibration
and quality monitoring. Such agencies are empowered to suspend production
operations and/or product sales if, in their opinion, significant and/or
repeated deviations from these protocols have occurred. Such a suspension could
have a material adverse impact on the Company's future operations.
Competition
The Company's primary business activity to date has been biotechnology research
and development. In 1998, the Company expects to manufacture cGMP Calcitonin for
use in finished pharmaceutical products. Biotechnology research is highly
competitive, particularly in the field of human health-care. The Company
competes 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 the development, manufacture and sale of amidated peptide hormone products,
the Company and its licensees will be competing with contract laboratories and
major pharmaceutical companies, many of which can devote considerably greater
financial resources to these activities. Major competitors in the field of
osteoporosis include Novartis, American Home Products, Merck and Eli Lilly.
However, the Company believes that its patented hormone manufacturing process
will enable it to greatly reduce manufacturing time and costs in order to
successfully compete with these companies. The Company believes that success in
competing with others in the biotechnology industry will be based primarily upon
scientific expertise and technological superiority, the ability to identify and
pursue scientifically feasible and commercially viable opportunities and to
obtain proprietary protection for research achievements, the availability of
adequate funding and success in developing, testing, protecting, producing and
marketing products and obtaining timely regulatory approval. There can be no
assurance that others will not develop processes or products which are superior
to, or otherwise preclude the commercial utilization of, processes or products
developed by the Company.
Human Resources
On March 1, 1998, the Company had 69 full-time employees, of whom 26 were
engaged in research, development and regulatory activities, 32 were engaged in
production activities and 11 were engaged in general and administrative
functions. Ten of the Company's employees hold Ph.D. degrees. The Company's
employees have expertise 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 the Company's employees is covered by a collective
bargaining agreement.
Research and Development
The Company has 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 80% of the
Company's employees are directly engaged in activities relating to production
of, regulatory compliance for, and the research and development of
pharmaceutical products. During the years ended December 31, 1997, 1996 and
1995, approximately $9,416,000, $8,298,000 and $6,876,000, respectively, were
spent on these activities.
Patents and Proprietary Technology
The Company has filed applications for U.S. patents relating to proprietary
amidation, bacterial expression and immunization processes and to oral
formulations for Calcitonin and other peptide hormones invented in the course of
its research. To date, the following two patents have issued: Immunization By
Immunogenic Implant, a process patent, and Alpha-Amidation Enzyme, a process and
product patent. Other applications are pending. Filings relating to the
amidation process have also been made in selected foreign countries and numerous
such foreign patents have issued. There can be no assurance that any of the
Company's pending applications will issue as patents or that the Company's
issued patents will provide the Company with significant competitive advantages.
Furthermore, there can be no assurance that competitors will not independently
develop or obtain similar or superior technologies. Although the Company
believes its patents and patent applications are valid, the invalidation of its
Alpha-Amidation Enzyme patent or the failure of certain of its pending
applications to issue as patents could have a material adverse effect upon the
Company's business. Although one patent application currently is the subject of
an interference proceeding, the Company does not believe that an adverse ruling
would have a material adverse effect on the business of the Company or its
prospects. Difficulties in detecting and proving infringement are generally
greater with process patents than with product patents. In addition, the value
of a process patent may be reduced if the products that can be produced using
such process have been patented by others. Under such circumstances, the
cooperation of these patent holders or their sublicensees would be needed for
the commercialization of the aforementioned patented products in countries where
these companies hold valid patents.
In some cases, the Company relies on trade secrets to protect its inventions. It
is the policy of the Company to include in all research contracts, joint
development agreements and consulting relationships that provide access to the
Company's trade secrets and other know-how confidentiality obligations binding
on the parties involved. However, there can be no assurance that these secrecy
obligations will not be breached to the detriment of the Company. To the extent
sponsors, consultants or other third parties apply technological information
independently developed by them or by others to Company projects, disputes may
arise as to the proprietary rights to such information which may not be resolved
in favor of the Company.
Product Liability
Product liability claims relating to the Company's technology or products may be
asserted against the Company. There can be no assurance that the Company would
have sufficient resources to defend against or satisfy any such claims. Although
the Company has obtained product liability insurance coverage, product liability
or other judgments against the Company in excess of insurance limits could have
a material adverse effect upon the Company's business and financial condition.
Executive Officers of the Registrant
Served in Such
Position or Office
Name Age Continually Since Position(1)
- ---- --- ----------------- -----------
Dr. Warren P. Levy(2)(3) 46 1980 President (Chief
Executive Officer)
Dr. Ronald S. Levy(2)(4) 49 1980 Vice President
and Secretary
Jay Levy(2)(5) 74 1980 Treasurer
NOTES:
(1) Each executive officer's term of office is until the first meeting
of the Board of Directors of Unigene following the annual meeting of
stockholders and until the election and qualification of his successor. Officers
serve at the discretion of the Board of Directors.
(2) Dr. Warren P. Levy and Dr. Ronald S. Levy are brothers and are the
sons of Mr. Jay Levy.
(3) Dr. Warren P. Levy, a founder of the Company, has served as
President, Chief Executive Officer and Director of the Company since its
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.
(4) Dr. Ronald S. Levy, a founder of the Company, has served as Vice
President and Director of the Company since its formation in November 1980, and
as Secretary since May 1986. Dr. Levy holds a Ph.D. in bioinorganic chemistry
from Pennsylvania State University and a bachelor's degree in chemistry from
Rutgers University.
(5) Mr. Jay Levy, a founder of the Company, has served as Chairman of
the Board of Directors and Treasurer of the Company on a part-time basis since
its formation in November 1980. He also served as Secretary from 1980 to May
1986. Mr. Levy devotes approximately 15% of his time to the Company. From 1985
through February 1991, he served as the principal financial advisor to 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.
Item 2. Properties
The Company owns 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.
The Company's 32,000 square foot cGMP facility, of which 18,000 square feet are
currently being used for the production of pharmaceutical-grade Calcitonin and
can be used for the production of other peptide hormones, was constructed in a
building located in Boonton, New Jersey, that is being leased under a 10-year
agreement which began in February 1994. The Company has two 10-year renewal
options as well as an option to purchase the facility.
Item 3. Legal Proceedings
None.
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, 1997.
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 February 24, 1998, there were
533 Common Stockholders of record. The Company's Common Stock trades on the
Nasdaq Stock Market under the symbol UGNE. The prices below represent high and
low sale prices and are as reported to the Company by the Nasdaq Stock Market.
1997
--------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
High-Low High-Low High-Low High-Low
--------------------------------------------------------------------------
Common Stock 4 11/16-1 29/32 7 - 2 5/8 5 5/32-3 5/16 4 15/32-2 3/16
1996
--------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
High-Low High-Low High-Low High-Low
--------------------------------------------------------------------------
Common Stock 2 13/16-1 5/16 4 13/16-2 1/16 3 5/16-1 7/8 3 - 1 13/16
Class B Warrants 5/8-5/32 1 7/32-7/16 15/16 - 1/32(1) --
(1) Expired September 10, 1996
RECENT SALES OF UNREGISTERED SECURITIES
In the fourth quarter of 1997, the Company sold for cash 7,500 shares of Common
Stock to a financial consultant upon the exercise of an equal number of warrants
each exercisable to purchase one share of Common Stock at an exercise price of
$2.00 per share. The sale of such shares was effected in reliance on an
exemption from registration pursuant to Section 4 (2) of the Securities Act.
Item 6. Selected Financial Data
(In thousands, except per share data)
Years Ended December 31 1997 1996 1995 1994 1993
- ----------------------- ---- ---- ---- ---- ----
Licensing & other revenue .. $ 3,003 $ 308 $ 8 $ 258 $ 12
Research and development
expenses .................. $ 9,416 $ 8,298 $ 6,876 $ 5,137 $ 3,357
Net loss ................... $(10,128) $(10,597) $ (9,435) $ (6,319) $ (3,739)
Net loss per share ......... $ (.27) $ (.38) $ ( .44) $ ( .32) $ (.19)
At December 31
- --------------
Working capital (deficiency) $ 310 $ 2,954 $ (4,061) $ (1,907) $ 11,380
Total assets ............... $ 13,692 $ 17,169 $ 13,332 $ 14,211 $ 15,665
Long-term debt ............. $ 1,608 $ 2,788 $ 3,955 $ -- $ --
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Revenue for 1997 consisted primarily of a license fee of $3,000,000 from
Warner-Lambert Company for a worldwide licensing agreement for oral calcitonin.
Revenue for 1996 consisted primarily of a license fee of $300,000 from the
Company's joint venture in China. Other revenues for 1997 and 1996 and all
revenues for 1995 represent hormone and enzyme sales.
Research and development, the Company's largest expense, increased 13% in 1997
to $9,416,000 from $8,298,000, after increasing 21% in 1996 from $6,876,000 in
1995. The 1997 increase was primarily attributable to increased supplies and
personnel expenditures related to increased Calcitonin production and oral
calcitonin development; regulatory filing fees and payments to regulatory and
scientific consultants. The 1996 increase was primarily attributable to the
Company's oral and injectable Calcitonin clinical trials and regulatory
documentation preparation fees. Expenditures for the sponsorship of
collaborative research programs were $465,000, $411,000 and $483,000 in 1997,
1996 and 1995, respectively, which are included as research and development
expenses.
On February 7, 1997, the Company issued an aggregate of 490,000 shares of its
Common Stock to the holders of the Company's 9.5% Senior Secured Convertible
Debentures (the "Debentures") in consideration for the cancellation of an
obligation of the Company to pay to the holders a fee equal to 2% of the sum of
the market value as of December 31, 1998 of all of the Company's outstanding
shares of Common Stock plus the principal amount of all outstanding debt of the
Company, less its cash on deposit, up to a maximum fee of $3,000,000. The
expense associated with this transaction was valued at $1,669,063, based on a
closing price of the Common Stock of $3.40625 on February 7, 1997.
General and administrative expenses decreased 5% in 1997 to $2,016,000 from
$2,115,000 in 1996, after decreasing 2% from $2,158,000 in 1995. The 1997
decrease was primarily due to a reduction in public relations expenses,
consisting, in part, of the issuance of warrants as non-cash compensation in
1996. The 1996 decrease was primarily due to non-reoccurrence of legal and other
expenses incurred in 1995 associated with the Company's financing activities.
The 1996 decrease was partially offset by the issuance of the aforementioned
warrants.
Interest and other income decreased $26,000 or 11% in 1997 from 1996, after
increasing $162,000 or 237% in 1996 from 1995. The 1997 decrease was due to
gains on settlement of debt recognized in 1996, partially offset by higher
interest income in 1997. The 1996 increase was due to increased interest income
earned on the proceeds of financings which provided additional funds to be
invested, as well as gains on settlement of debt.
Interest expense decreased $487,000 or 68% in 1997 from 1996, after increasing
$245,000 or 51% in 1996 from 1995. The 1997 decrease was due to a reduction in
outstanding debt from the prior year as a result of the conversion of
convertible debentures and stockholders' notes into common stock. The 1996
increase was due to increased borrowings by the Company.
During 1997, revenue increased $2,700,000 due to the signing of a licensing
agreement with Warner-Lambert. This was mostly offset by an increase in
operating expenses. Research and development expenses increased due to the
Company's first product registration filing involving its FORTICAL TM Injection
product, its sponsorship of two collaborative research projects as well as its
continued development work on an oral Calcitonin formulation. In addition, the
Company incurred a non-cash expense of $1,669,000 in settlement of a contractual
right. As a result, net loss decreased $469,000 for the year ended December 31,
1997 from the prior year.
During 1996, the Company conducted clinical trials for its oral and injectable
forms of Calcitonin and continued its scale-up and production of cGMP Calcitonin
as well as its ongoing collaborative research projects, which together increased
research and development expenses. In addition, there were increased financings
causing an increase in interest expense. These increases were partially offset
by revenue from its joint venture in China as well as increased interest income
from the investment of the proceeds from the aforementioned financings. As a
result, the net loss increased $1,162,000 for the year ended December 31, 1996
from the prior year.
As of December 31, 1997, the Company had available for income tax reporting
purposes net operating loss carryforwards in the approximate amount of
$53,400,000, expiring from 1998 through 2012, which are available to reduce
future earnings which would otherwise be subject to federal income taxes. In
addition, the Company has investment tax credits and research and development
credits in the amounts of $50,000 and $1,984,000, respectively, which are
available to reduce the amount of future federal income taxes. These credits
expire from 1998 through 2012.
The Company follows Statement of Financial Accounting Standards No. 109 (FASB
109), "Accounting for Income Taxes". Given the Company's past history of
incurring operating losses, any deferred tax assets that are recognizable under
FASB 109 have been fully reserved. As of December 31, 1997 and 1996, under FASB
109, the Company had deferred tax assets of approximately $23,400,000 and
$19,200,000, respectively, subject to valuation allowances of $23,400,000 and
$19,200,000, respectively. The deferred tax assets were generated primarily as a
result of the Company's net operating losses and tax credits generated.
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share" on
December 31, 1997. SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS") and supersedes APB Opinion No. 15, "Earnings Per
Share". It also requires presentation of both basic and diluted EPS for net
income on the face of the income statement and a separate reconciliation of both
EPS amounts. 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. The adoption of SFAS 128 has had no effect on the
Company's reported per share results.
LIQUIDITY AND CAPITAL RESOURCES
During 1994, the Company completed construction of its peptide production
facility in Boonton, New Jersey. The facility was constructed in a shell
building that is being leased under a 10-year net lease which began in February
1994. The Company has two 10-year renewal options as well as an option to
purchase the facility. The total cost of leasehold improvements and process
equipment for this facility, including current validation costs, totaled
approximately $12 million. The improvements and equipment were primarily
financed from the remainder of the $17 million of proceeds received as a result
of the exercise by the warrant holders of the Company's Class A Warrants in 1991
and the proceeds of $2.2 million from the sale of stock in 1994. There are
currently no material commitments outstanding for capital expenditures relating
to either the Boonton facility or the Company's facility in Fairfield.
The Company, at December 31, 1997, had cash and cash equivalents of $2,126,000,
a decrease of $2,365,000 from December 31, 1996.
The Company's ability to generate cash from operations will depend primarily
upon signing research or licensing agreements, achieving defined benchmarks in
such agreements, receiving regulatory approval for its licensed products, and
the commercial sale of these products.
In 1996, the Company entered into a joint venture agreement with a
pharmaceutical company in China. This joint venture contributed $300,000 to 1996
revenues. It is uncertain whether any additional revenues will be recognized or
received in connection with this joint venture.
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. Upon execution of the agreement, the
Company received $6 million in payments from Warner-Lambert, consisting of a $3
million licensing fee and a $3 million equity investment by Warner-Lambert
(695,066 shares of Common Stock were purchased at a price of approximately $4.32
per share). In addition, the Company is eligible to receive up to an additional
$48.5 million in milestone payments during the course of the development program
if specified milestones are achieved, of which $15.5 million would be received
prior to the commencement of Phase I clinical studies in the U.S. The first of
these milestones was achieved in February 1998, resulting in a payment to the
Company of $2 million. If the product is successfully commercialized, the
Company also would receive revenue from royalties on product sales by
Warner-Lambert and its affiliates and from the sale of raw material to
Warner-Lambert. The Company has retained the right to license the use of its
technologies for injectable and nasal formulations of Calcitonin on a worldwide
basis.
The Company's cash requirements have increased to approximately $10 million per
year with the opening of its peptide manufacturing facility. In addition, the
Company faces principal and interest obligations over the next several years
under its outstanding convertible debentures and other indebtedness. However,
because of the current below-market conversion prices of each of the issues of
debentures, a substantial portion of such debentures has been, and a substantial
portion of the remainder is expected to be, converted into Common Stock, thereby
decreasing the amount of cash required for principal and interest payments. See
Note 5 of Notes to Financial Statements.
After receipt of an aggregate of $8 million from Warner-Lambert in July 1997 and
February 1998, management believes that the Company currently has sufficient
financial resources to sustain its operations at the current level through the
second quarter of 1998. The Company will require additional funds to ensure
continued operations beyond that time. Management currently believes that the
various milestones in the Warner-Lambert agreement can be achieved on a timely
basis thereby precluding the need for any outside financing of the Company's
operations in the near term. Early-stage milestones primarily relate to the
product's performance characteristics, while the latter-stage milestones are
primarily related to regulatory filings and approvals.
In addition to the Warner-Lambert agreement, management is actively seeking
other licensing and/or supply agreements with pharmaceutical companies for
injectable and nasal forms of Calcitonin. However, there is no assurance that
any additional revenue-generating agreements will be signed. In the absence of
or the delay in achieving the Warner-Lambert milestones or in signing other
agreements, obtaining adequate funds from other sources, which might include a
debt or equity financing, would be necessary to sustain the Company's
operations. However, there is no assurance as to the terms on which such
additional funds would be available or that in such circumstances sufficient
funds could be obtained.
While the Company believes that the implementation of the Warner-Lambert
licensing transaction will satisfy the Company's liquidity requirements over the
near-term, satisfying the Company's long-term liquidity requirements will
require the successful commercialization of the product licensed to
Warner-Lambert or one of its other Calcitonin products. In addition, the
commercialization of a Calcitonin product will require the Company to incur
additional capital expenditures, including expenditures to expand or upgrade the
Company's manufacturing operations to satisfy its supply obligations under the
Warner-Lambert license agreement. However, neither the cost or timing of such
capital expenditures are determinable at this time.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements and Related Information
(1) Financial Statements:
Independent Auditors' Report
Balance Sheets at December 31, 1997 and 1996
Statements of Operations for the three years
ended December 31, 1997
Statements of Stockholders' Equity for the
three years ended December 31, 1997
Statements of Cash Flows for the three
years ended December 31, 1997
Notes to Financial Statements
(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Unigene Laboratories, Inc. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company has suffered recurring losses from operations
which raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 13. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/KPMG PEAT MARWICK LLP
------------------------
KPMG PEAT MARWICK LLP
New York, New York
February 20, 1998
UNIGENE LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 1997 and 1996
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................. $ 2,126,327 $ 4,491,386
Prepaid expenses and other
current assets .......................... 834,245 983,089
------------ ------------
Total current assets ................. 2,960,572 5,474,475
Property, plant and equipment-net of
accumulated depreciation
and amortization (Note 4) ................. 9,298,445 10,356,070
Patents and other assets ..................... 1,432,883 1,338,691
------------ ------------
$ 13,691,900 $ 17,169,236
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................... $ 1,041,529 $ 1,025,136
Accrued expenses .......................... 999,212 685,568
Notes payable - stockholders (Note 3) ..... 610,000 810,000
------------ ------------
Total current liabilities ............ 2,650,741 2,520,704
Notes payable - stockholders (Note 3) ........ 655,000 655,000
9.5% convertible debentures (Note 5) ......... 502,694 1,283,400
10% convertible debentures (Note 5) .......... 450,000 850,000
Stockholders' equity (Note 7):
Common stock-par value $.01 per share,
authorized 60,000,000 shares, issued
38,517,722 shares in 1997
and 35,352,824 shares in 1996 ....... 385,177 353,528
Additional paid-in capital ................. 63,499,439 55,829,641
Accumulated deficit ........................ (54,450,120) (44,322,006)
Less: Treasury stock, at cost,
7,290 shares ........................... (1,031) (1,031)
------------ ------------
Total stockholders' equity ................... 9,433,465 11,860,132
------------ ------------
$ 13,691,900 $ 17,169,236
============ ============
See accompanying notes to financial statements.
UNIGENE LABORATORIES, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ ------------
Licensing and other revenue .. $ 3,003,299 $ 308,070 $ 7,531
------------ ------------ ------------
Operating expenses:
Research and
development ............ 9,416,315 8,298,056 6,876,253
Settlement of contractual
right (Note 12) ........ 1,669,063 -- --
General and
administrative ......... 2,015,730 2,115,081 2,157,777
------------ ------------ ------------
13,101,108 10,413,137 9,034,030
------------ ------------ ------------
Operating loss ............... (10,097,809) (10,105,067) (9,026,499)
------------ ------------ ------------
Other income (expense):
Interest/other income ..... 203,999 229,665 68,133
Interest expense .......... (234,304) (721,697) (476,505)
------------ ------------ ------------
(30,305) (492,032) (408,372)
------------ ------------ ------------
Net loss ..................... $(10,128,114) $(10,597,099) $ (9,434,871)
============ ============ ============
Net loss per share, basic..... $ (.27) $ (.38) $ (.44)
============ ============ ============
Net loss per share, diluted ... $ (.27) $ (.38) $ (.44)
============ ============ ============
Weighted average number
of shares outstanding ........ 37,397,150 27,942,903 21,657,549
============ ============ ============
See accompanying notes to financial statements.
UNIGENE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
Common Stock
--------------------------- Additional
Number of Par Paid-in Accumulated Treasury
Shares Value Capital Deficit Stock Total
------------ ------------ ------------ ------------ ------------ ------------
Balance
January 1,
1995............. 20,918,399 $ 209,184 $ 35,399,473 $(24,290,036) $ (1,031) $ 11,317,590
Sales of
stock ........ 2,802,022 28,020 2,561,044 -- -- 2,589,064
Exercise of
stock options . 92,750 928 149,995 -- -- 150,923
Net loss ...... -- -- -- (9,434,871) -- (9,434,871)
------------ ------------ ------------ ------------ ------------ ------------
Balance,
December 31,
1995............. 23,813,171 238,132 38,110,512 (33,724,907) (1,031) 4,622,706
Sales of Stock .. 4,887,029 48,870 7,338,621 -- -- 7,387,491
Conversion of 10%
Debentures ..... 4,403,838 44,038 7,578,173 -- -- 7,622,211
Conversion of 9.5%
Debentures ..... 1,778,401 17,784 1,988,316 -- -- 2,006,100
Exercise of
warrants ....... 330,000 3,300 460,250 -- -- 463,550
Exercise of
stock options .. 140,385 1,404 173,769 -- -- 175,173
Issuance of
warrants as
compensation .... -- -- 180,000 -- -- 180,000
Net Loss ........ -- -- -- (10,597,099) -- (10,597,099)
------------ ------------ ------------ ------------ ------------ ------------
UNIGENE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
Common Stock
----------------------------- Additional
Number of Par Paid-in Accumulated Treasury
Shares Value Capital Deficit Stock Total
------------ ------------ ------------ ------------ ------------ ------------
Balance,
December 31,
1996................ 35,352,824 353,528 55,829,641 (44,322,006) (1,031) 11,860,132
Sale of stock ...... 695,066 6,951 2,941,648 -- -- 2,948,599
Settlement of
contractual right . 490,000 4,900 1,664,163 -- -- 1,669,063
Exercise of
warrants .......... 712,759 7,127 1,133,020 -- -- 1,140,147
Conversion of
9.5% Debentures ... 697,058 6,971 769,235 -- -- 776,206
Exercise of
stock options ..... 282,350 2,823 433,229 -- -- 436,052
Conversion of
10% Debentures .... 220,465 2,205 398,225 -- -- 400,430
Conversion of
notes payable -
stockholders ...... 57,200 572 199,428 -- -- 200,000
Issuance of warrants
and stock as
compensation ...... 10,000 100 130,850 -- -- 130,950
Net Loss ........... -- -- -- (10,128,114) -- (10,128,114)
------------ ------------ ------------ ------------ ------------ ------------
Balance,
December 31,
1997................ 38,517,722 $ 385,177 $ 63,499,439 $(54,450,120) $ (1,031) $ 9,433,465
============ ============ ============ ============ ============ ============
See accompanying notes to financial statements.
UNIGENE LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31,
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $(10,128,114) $(10,597,099) $ (9,434,871)
------------ ------------ ------------
Adjustments to reconcile net loss to net
cash used for operating activities:
Non-cash settlement of contractual right .......... 1,669,063 -- --
Non-cash compensation ............................. 130,950 180,000 --
Depreciation and amortization ..................... 1,530,469 1,487,356 1,445,596
(Increase) decrease in prepaid
expenses and other current assets .............. 148,844 (548,930) (39,606)
Increase (decrease) in operating accounts
payable and accrued expenses ................... 370,967 (663,805) 1,457,187
------------ ------------ ------------
Total adjustments .................................. 3,850,293 454,621 2,863,177
------------ ------------ ------------
Net cash used for
operating activities ............................ (6,277,821) (10,142,478) (6,571,694)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction of leasehold improvements ............ (18,298) (614,479) (939,947)
Purchase of furniture and equipment ............... (430,068) (560,987) (635,198)
Increase in patents and other assets .............. (163,670) (134,034) (131,532)
------------ ------------ ------------
Net cash used in investing activities .............. (612,036) (1,309,500) (1,706,677)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of stock, net of related expenses ............ 2,948,599 7,387,491 2,589,064
Issuance of debt, net of related expenses ......... -- 8,098,523 8,205,000
Repayment of debt .................................. -- (440,000) (3,000,000)
Exercise of stock options and warrants ............. 1,576,199 638,723 150,923
------------ ------------ ------------
Net cash provided by
financing activities ............................. 4,524,798 15,684,737 7,944,987
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents ................................. (2,365,059) 4,232,759 (333,384)
Cash and cash equivalents at
beginning of period .............................. 4,491,386 258,627 592,011
------------ ------------ ------------
Cash and cash equivalents at
end of period .................................... $ 2,126,327 $ 4,491,386 $ 258,627
============ ============ ============
UNIGENE LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31,
1997 1996 1995
------------ ------------ ------------
Supplemental cash flow information:
Conversion of convertible debentures and accrued
interest, net of related offering expenses into
common stock ..................................... $ 1,176,636 $ 9,628,311 --
Conversion of notes payable - stockholders
into common stock ................................ $ 200,000 -- --
Interest paid ...................................... $ 74,000 $ 316,000 $ 240,000
Exchange of notes .................................. -- $ 3,300,000 --
See accompanying notes to financial statements.
UNIGENE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
1. Description of Business
Unigene Laboratories, Inc. (the "Company"), a biopharmaceutical company, was
incorporated in the State of Delaware in 1980. The Company's business focus is
in the research, production and delivery of peptide hormones. The Company has
concentrated most of its efforts to date on one product - calcitonin, for the
treatment of osteoporosis. The Company's calcitonin products require clinical
trials and approvals from regulatory agencies as well as acceptance in the
marketplace. 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.
2. Summary of Significant Accounting Policies & Practices
Property, Plant and Equipment- Property, plant and equipment are carried at
cost. Depreciation is computed using the straight-line method. Amortization of
leasehold improvements is computed over the remaining life of the lease using
the straight-line method.
Research and Development- Research and development contract revenues are accrued
based upon the successful completion of various benchmarks as set forth in the
individual agreements. Research and development expenditures are expensed as
incurred.
Patents- 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, 1997, two 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.
Stock Option Plan- Prior to January 1, 1996, the Company accounted for its stock
option plan 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 would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of- The
Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1,
1996. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the fair value of the asset or
future 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 adopted the provisions of SFAS No. 128,
"Earnings Per Share" on December 31, 1997. SFAS 128 establishes standards for
computing and presenting earnings per share ("EPS") and supersedes APB Opinion
No. 15, "Earnings Per Share". It also requires presentation of both basic and
diluted EPS for net income on the face of the income statement. 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. Per share amounts for 1996 and 1995 have been retroactively
restated to give effect to SFAS 128 and were not different from EPS measured
under APB No. 15. 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, 1997, 1996 and 1995.
Convertible debentures, stock options and warrants have not been included in the
calculation since the inclusion of such shares 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.
Use of Estimates- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent 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
In connection with loans made to the Company by certain stockholders in 1984 and
1985, which loans were repaid in 1989, the former lenders received options to
purchase 400,950 shares of the common stock of the Company, at prices ranging
from $1.37 to $1.65 per share. During 1994, options to purchase 145,800 shares
of common stock were exercised and options to purchase 72,900 shares of common
stock expired. During 1995, options to purchase 80,750 shares of common stock
were exercised and the remaining options to purchase 101,500 shares of common
stock expired.
During 1994, the Company's stockholders approved the adoption of a stock option
plan for outside directors. This plan replaced a plan previously adopted in
1991. As a result, the outside members of the Board of Directors at that time
were granted options, expiring in 2004, except if the individual is no longer a
director, to purchase shares of the Company's common stock at $3.00 per share.
These options terminate after the expiration of three months following the
termination of the optionee's services as an outside director. New outside
directors automatically receive stock options for 30,000 shares of common stock
upon their election to the Board of Directors having an exercise price equal to
the fair market value of the Common Stock on the date of grant and become
exercisable over a three-year period. At December 31, 1997, options representing
90,000 shares were outstanding under this plan, of which options representing
60,000 shares were exercisable. Options representing 10,000 shares become
exercisable on each of January 28, 1998, January 28, 1999 and January 28, 2000.
Options representing an aggregate of 60,000 shares of common stock were granted
at an exercise price of $3.00 per share. Options to purchase 30,000 shares of
common stock were granted at an exercise price of $2.81 per share.
Notes payable - stockholders. During 1995, members of the Levy family loaned to
the Company $1,905,000. The notes evidencing these loans were issued to Warren
P. Levy, Ronald S. Levy and Jay Levy, each an officer and director of the
Company, who in the aggregate own 11% of the Company's outstanding common stock,
and to another member of their family. These notes bear interest at the Merrill
Lynch Margin Loan Rate plus .25% (8.875% at December 31, 1997) and $1,850,000 of
the aggregate is collateralized by subordinated security interests in the
Company's Fairfield plant and equipment and the Boonton manufacturing equipment.
Notes for $1,255,000 were originally payable on demand, but in any event not
later than February 10, 1997. Another note for $650,000 was originally due on
February 10, 1997. Under an agreement entered into with the holders of the 9.5%
Senior Secured Convertible Debentures (see Note 5), while any amounts of the
9.5% Debentures are outstanding, an aggregate of only $1,250,000 of the
Stockholders' loans may be repaid by the Company over time based upon the
achievement of certain corporate benchmarks. The benchmarks and their associated
permitted repayments include $250,000 payable upon the occurrence of each of the
following: (1) achievement of GMP status for the peptide production facility,
(2) the filing of an injectable calcitonin IND and (3) the filing of an oral
calcitonin IND. In addition, there is a $500,000 permitted repayment associated
with the signing of a contract with a strategic marketing partner. The first two
benchmarks were achieved during 1996, and a total of $440,000 of these loans
were repaid. On May 2, 1997, an aggregate of $200,000 in principal amount of
these loans was converted into 57,200 shares of the common stock of the Company
at a conversion price of $3.4965 per share. The closing price of the common
stock on May 1, 1997, as reported in the Wall Street Journal, was $3.21875 per
share. In July 1997, the benchmark associated with a strategic marketing partner
was achieved. It is anticipated that the remaining benchmark for the oral
calcitonin IND will be achieved during 1998; as a result, $610,000 of these
loans has been classified as short-term as of December 31, 1997. The repayment
schedule for the remaining $655,000 in notes is subject to negotiation between
the Company and the holders of the 9.5% Senior Secured Convertible Debentures if
any amounts are outstanding under these debentures.
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31, 1997
and 1996:
Estimated
Depreciable
1997 1996 Lives
---------- ---------- -----------------------
Building and
improvements $1,373,975 $1,373,975 25 years
Leasehold improvements 8,470,928 8,452,630 Remaining Life of Lease
Manufacturing equipment 3,643,525 3,522,364 10 years
Laboratory equipment 2,694,871 2,466,591 5 years
Other equipment 466,523 466,523 10 years
Office equipment and
furniture 325,055 244,428 5 years
---------- -----------
16,974,877 16,526,511
Less accumulated
depreciation and
amortization 7,797,599 6,291,608
----------- -----------
9,177,278 10,234,903
Land 121,167 121,167
----------- -----------
$ 9,298,445 $10,356,070
=========== ===========
Depreciation and amortization expense on property, plant and equipment was
$1,506,000, $1,473,000 and $1,437,000 in 1997, 1996 and 1995, respectively.
5. Convertible Debentures
In March 1996, a secured $3,300,000 loan was exchanged for 9.5% Senior Secured
Convertible Debentures of an equal principal amount. These debentures mature
November 15, 1998 and are convertible into shares of Common Stock. The initial
conversion rate was $1.15 per share, subject to certain reset provisions. In
October 1996, the conversion rate was reset to $1.12 per share as a result of
the private placement completed in October 1996 (see Note 7). Through December
31, 1997, $2,797,306 of principal amount of these debentures had been converted
into approximately 2,475,000 shares of Common Stock.
In March 1996, the Company completed a private placement of $9.08 million
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 mature March 4, 1999. The 10% Debentures are convertible into shares
of Common Stock at a conversion rate determined by dividing the principal amount
to be converted, plus accrued interest, by the lower of $2.00 or 85% of the
average closing bid price as reported on Nasdaq for the ten trading days
immediately preceding the date of conversion. Through December 31, 1997,
$8,630,000 of principal amount of these debentures, plus approximately $311,000
of accrued interest, had been converted into approximately 4,624,000 shares of
Common Stock. The placement agent, in connection with the issuance of these
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.
6. Lease
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. Total
future minimum rentals under this noncancelable operating lease as of December
31, 1997 are as follows:
YEAR RENT
---- ----
1998 $ 185,323
1999 185,323
2000 185,323
2001 185,323
2002 185,323
Thereafter 200,763
----------
$1,127,378
==========
Total rent expense was $185,000 for each of 1997, 1996 and 1995.
7. Stockholders' Equity
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. During
1995, these warrants were sold by the consultant to an unrelated third party. No
proceeds were received by the Company in connection with this transaction. These
warrants were to expire in April 1997, but have been extended to 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. Compensation expense
recognized as a result of the above was $180,000. 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 as a result of these
transactions was approximately $131,000.
In October 1996, the Company completed a private placement of 4,218,804 Units at
a price of $1.75 per Unit. Each Unit consists of (i) one share of Common Stock,
(ii) one quarter of a Class C Warrant, (each whole Class C Warrant is
exercisable immediately to purchase one share of Common Stock) and (iii) one
quarter of a Class D Warrant (each whole Class D Warrant is exercisable
immediately to purchase one share of Common Stock). The Class C Warrants and the
Class D Warrants each have an initial exercise price of $3.00 and expire on
October 11, 1999, except that the expiration date of the Class C Warrants may be
accelerated under certain circumstances. In addition, the Warrants contain
certain adjustment and antidilution provisions which, upon the occurrence of
certain events, may require the Company to adjust the exercise price of the
Warrants and to issue additional shares of Common Stock upon the exercise
thereof. 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.
During 1997, an aggregate of $1,181,000 in convertible debentures, plus $41,000
of accrued interest, was converted into approximately 918,000 shares of Common
Stock. During 1996, an aggregate of $10,246,000 in convertible debentures, plus
$270,000 of accrued interest, was converted into approximately 6,181,000 shares
of Common Stock. See Note 5.
During 1997, an aggregate of 713,000 shares of Common Stock were issued due to
the exercise of warrants with net proceeds to the Company of approximately
$1,140,000. The exercise prices of these warrants ranged from $1.38 to $3.00 per
share. As of December 31, 1997, there are warrants outstanding to purchase an
aggregate of 4,918,000 shares of Common Stock at exercise prices ranging from
$1.38 to $3.50 per share.
8. Stock Option Plans
Under the Unigene Laboratories, Inc. 1984 Non-Qualified Stock Option Plan for
Selected Employees (the "1984 Plan"), each option granted expires no later than
the tenth anniversary of the date of its grant. The 1984 Plan terminated in
November 1994; however, 88,000 options previously granted continue to be
outstanding and exercisable under that plan.
During 1994, the Company's stockholders approved the adoption of the 1994
Employee Stock Option Plan (the "1994 Plan"). All employees of the Company are
eligible to participate in the 1994 Plan, including executive officers and
directors who are employees of the Company. The 1994 Plan is administered by the
Employee Stock Option Committee, which selects the employees to be granted
options, fixes the number of shares to be covered by the options granted and
determines the exercise price and other terms and conditions of each option.
Originally, a maximum of 1,500,000 shares of Common Stock was reserved for
issuance under the 1994 Plan. In June 1997, the stockholders of the Company
approved an amendment to the 1994 Plan increasing the total number of shares
authorized for issuance by 750,000 shares to 2,250,000 shares. Options granted
under the 1994 Plan have a maximum term of ten years. The purchase price of the
shares issuable upon the exercise of each option cannot be less than the fair
market value of the Common Stock on the date that the option is granted. The
1994 Plan will terminate on June 16, 2004, unless earlier terminated.
Transactions under the plans are as follows:
Option
Options Price
Outstanding Per Share
---------- -----------
January 1, 1995 .................... 899,400 $1.00-$5.00
---------- -----------
1995: Granted ...................... 582,750 $1.44-$2.69
Cancelled .................... (590,750)
Exercised .................... (12,000) $1.50
---------- -----------
December 31, 1995 .................. 879,400 $1.00-$3.00
---------- -----------
1996: Granted ...................... 818,500 $1.88-$3.13
Cancelled .................... (58,200)
Exercised .................... (140,385) $1.00-$1.63
---------- -----------
December 31, 1996 .................. 1,499,315 $1.00-$3.00
---------- -----------
1997: Granted ...................... 34,000 $2.03-$4.25
Cancelled .................... (39,500)
Exercised .................... (282,350) $1.06-$2.81
---------- -----------
December 31, 1997 .................. 1,211,465 $1.06-$4.25
---------- -----------
As of December 31, 1997, options to purchase 907,950 shares were available for
grant under the 1994 Plan and options for 948,090 shares were exercisable under
the 1994 and 1984 plans.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", and applies APB Opinion No. 25 in
accounting for its plans and, accordingly, has not recognized compensation cost
for stock options in its financial statements. Had the Company determined
compensation cost based on the fair value at the grant date consistent with the
provisions of SFAS 123, the Company's net income would have been changed to the
pro forma amounts indicated below:
1997 1996 1995
------------- ------------- -------------
Net loss - as reported $(10,128,114) $(10,597,099) $ (9,434,871)
Net loss - pro forma $(10,214,114) $(12,054,647) $(10,050,222)
Net loss per share - as reported $ (.27) $ (.38) $ (.44)
Net loss per share - pro forma $ (.27) $ (.43) $ (.46)
The fair value of the stock options granted in 1997, 1996 and 1995 is estimated
at grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions: dividend yield of 0% in 1997, 1996 and 1995;
expected volatility of 59% in 1997 and 62% in 1996 and 1995; a risk-free
interest rate of 5.25% in 1997 and 6.5% in 1996 and 1995; and expected lives of
6 years.
During 1993, a consultant received options to purchase 5,000 shares of the
Company's common stock at $4.56 per share. These options expired unexercised in
January 1998. During 1995, the Company granted to a consultant an option to
purchase 10,000 shares of the Company's Common Stock, expiring in October 2000,
exercisable at $1.44 per share, none of which have been exercised.
In addition, at December 31, 1997, there were 90,000 options outstanding and
shares reserved under agreements referred to in Note 3.
9. Income Taxes
As of December 31, 1997, the Company had available for income tax reporting
purposes net operating loss carryforwards in the amount of approximately
$53,400,000, expiring from 1998 through 2012, which are available to reduce
future earnings which would otherwise be subject to federal income taxes. In
addition, the Company has investment tax credits and research and development
credits in the amounts of $50,000 and $1,984,000, respectively, which are
available to reduce the amount of future federal income taxes. These credits
expire from 1998 through 2012.
The Company follows Statement of Financial Accounting Standards No. 109 (FASB
109), "Accounting for Income Taxes." Given the Company's past history of
incurring operating losses, any deferred tax assets that are recognizable under
FASB 109 have been fully reserved. As of December 31, 1997 and 1996, under FASB
109, the Company had deferred tax assets of approximately $23,400,000 and
$19,200,000, respectively, subject to valuation allowances of $23,400,000 and
$19,200,000, respectively. The deferred tax assets were generated primarily as a
result of the Company's net operating losses and tax credits generated.
10. Employee Benefit Plan
The Company, in 1989, implemented 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 a maximum for each employee of $9,500
for 1997 and 1996 and $9,240 for 1995. The Company's discretionary matching
contribution expense for 1997 was approximately $42,000. There were no matching
contributions for 1996 and 1995.
11. Research and Licensing Revenue
In June 1995, the Company entered into a joint venture agreement effective as of
March 1996, with the Qingdao General Pharmaceutical Company and its Huanghai
factory for the production and marketing of Calcitonin in China. Under the
agreement, the Chinese partners will finance the project, including the
construction and operation of a dedicated manufacturing facility in China which
will utilize the non-proprietary aspects of the Company's production technology.
Unigene will provide the joint venture with technology and training as well as
the Company's proprietary enzyme at a discounted price. Unigene will receive a
combination of fixed fees and annual royalties based upon sales of the end
product. This joint venture contributed $300,000 to 1996 revenues. It is
uncertain whether any additional revenues will be recognized or received in
connection with this joint venture.
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. Upon execution of the agreement, the
Company received $6 million in payments from Warner-Lambert, consisting of a $3
million licensing fee and a $3 million equity investment by Warner-Lambert
(695,066 shares of Common Stock were purchased at a price of approximately $4.32
per share). In addition, the Company is eligible to receive up to an additional
$48.5 million in milestone payments during the course of the development program
if specified milestones are achieved, of which $15.5 million would be received
prior to the commencement of Phase I clinical studies in the U.S. The first of
these milestones was achieved in February 1998, resulting in a payment to the
Company of $2 million. If the product is successfully commercialized, the
Company also would receive revenue from the sale of raw material to
Warner-Lambert and royalties on product sales by Warner-Lambert and its
affiliates. The Company has retained the right to license the use of its
technologies for injectable and nasal formulations of Calcitonin on a worldwide
basis.
12. Settlement of Contractual Right
On February 7, 1997, the Company issued an aggregate of 490,000 shares of common
stock to the holders of the Company's 9.5% Senior Secured Convertible Debentures
(the "Debentures") in exchange for the surrender of certain contractual rights.
The shares were issued in consideration for the cancellation of an obligation of
the Company to pay to the holders a fee equal to 2% of the sum of the market
value as of December 31, 1998 of the Company's common stock plus the principal
amount of all outstanding debt of the Company, less its cash on deposit, up to a
maximum fee of $3,000,000. The expense associated with this transaction was
valued at $1,669,063, based on a closing price of the common stock of $3.40625
on February 7, 1997.
13. Subsequent Events
The Company has incurred annual operating losses since its inception and, as a
result, at December 31, 1997 had an accumulated deficit of $54,450,000. The
Company's cash requirements have increased to approximately $10 million per year
with the opening of its peptide manufacturing facility.
After the receipt in February 1998 of the $2 million milestone payment from
Warner-Lambert, management believes that the Company currently has sufficient
financial resources to sustain its operations at the current level through the
second quarter of 1998. The Company will require additional funds to ensure
continued operations beyond that time. Management currently believes that the
various milestones in the Warner- Lambert agreement can be achieved on a timely
basis thereby precluding the need for any outside financing of the Company's
operations in the near term.
In addition to the Warner-Lambert agreement, management is actively seeking
other licensing and/or supply agreements with pharmaceutical companies for
injectable and nasal forms of Calcitonin. However, there is no assurance that
any additional revenue-generating agreements will be signed. In the absence of
or the delay in achieving the Warner-Lambert milestones or in signing other
agreements, obtaining adequate funds from other sources, which might include a
debt or equity financing, would be necessary to sustain the Company's
operations. However, there is no assurance as to the terms on which such
additional funds would be available or that in such circumstances sufficient
funds could be obtained.
While the Company believes that the implementation of the Warner-Lambert
licensing transaction will satisfy the Company's liquidity requirements over the
near-term, satisfying the Company's long-term liquidity requirements will
require the successful commercialization of the product licensed to
Warner-Lambert or one of its other Calcitonin products.
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth information with respect to the six directors of
the Company:
Served Continuously
Name Age as Director Since
- ---- --- -------------------
Warren P. Levy (1)(2) 46 1980
Ronald S. Levy (1)(3) 49 1980
Jay Levy (1)(4) 74 1980
Robert F. Hendrickson (5) 65 1997
Robert G. Ruark (6) 56 1993
George M. Weimer (7) 79 1984
(1) Dr. Warren P. Levy and Dr. Ronald S. Levy are brothers and are the sons of
Mr. Jay Levy. Drs. Levy and Mr. Levy are the Company's only executive officers.
(2) Dr. Warren P. Levy, a founder of the Company, has served as President, Chief
Executive Officer and Director of the Company since its 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.
(3) Dr. Ronald S. Levy, a founder of the Company, has served as Vice President
and Director of the Company since its formation in November 1980 and as
Secretary since May 1986. Dr. Levy holds a Ph.D. in bioinorganic chemistry from
Pennsylvania State University and a bachelor's degree in chemistry from Rutgers
University.
(4) Mr. Jay Levy, a founder of the Company, has served as Chairman of the Board
of Directors and Treasurer of the Company since its formation in November 1980.
Mr. Levy is a part time employee of the Company and devotes approximately 15% of
his time to the Company. 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. For the seventeen years prior thereto, he performed similar services
for the late Nathan Cummings, a noted industrialist and philanthropist.
(5) 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 Chairman of the Board of Envirogen, Inc. an environmental
biotechnology company, and a director of Cytogen, Inc. and The Liposome Co.,
Inc., both of which are biotechnology companies.
(6) Mr. Robert G. Ruark has been an independent consultant since June 1993.
Prior thereto, he had been employed by Merck and Co., Inc., an international
pharmaceutical company, for 25 years in legal and administrative capacities. Mr.
Ruark, an attorney, has extensive experience in international licensing and
business development. When he retired in 1993, Mr. Ruark was Vice President of
the Merck Human Health Division.
(7) Mr. George M. Weimer has been an independent general partner and director of
Westford Technology Ventures L.P., a venture capital investment company, since
May 1988. For more than 40 years prior thereto, Mr. Weimer worked in various
administrative capacities for divisions and subsidiaries of Merck & Co., Inc.
and E.R. Squibb & Sons, both of which are major international pharmaceutical
companies. When he retired in 1984, Mr. Weimer was Senior Vice
President-Administration for Merck Sharp & Dohme International Pharmaceuticals,
Inc., a position he had held since 1981. Since 1984, he has served as a
pharmaceutical consultant for the Company and, from time to time, for other
corporations.
Information concerning the Executive Officers of the Registrant is included in
Item I of Part I above, in the section entitled "Executive Officers of the
Registrant".
Item 11. Executive Compensation.
REPORT OF THE BOARD OF DIRECTORS ON 1997 EXECUTIVE COMPENSATION
The entire Board of Directors was responsible for determining the 1997
compensation of the three executive officers of the Company. This Report
describes the policies and other considerations used by the Board in
establishing such compensation.
The Board has familiarized itself with various forms and types of remuneration
from reports of other public corporations and their own business experience.
The Board has determined that, because the Company was still in a research and
preproduction phase in 1997, compensation for 1997 for executive officers could
not be related primarily to the performance of the Company's stock or to the
annual profit performance of the Company. A primary consideration for the
compensation of an executive officer of the Company is his leadership effort in
the development of proprietary products and processes, and in planning for
future growth and profitability. Other significant factors considered by the
Board of Directors in determining executive officers' compensation were salaries
paid by other public companies in the health-care related biotechnology field to
comparable officers, the duties and responsibilities of the executive officers
in the past and as projected, their past performance and commitment to the
Company, and incentives for future performance although no specific weighting
was allocated to any of these considerations. The executive officers were also
consulted with respect to their compensation and their plans for compensation
for other personnel in order to coordinate all compensation policies of the
Company.
The Board of Directors determined that no bonuses or salary increases should be
paid to executive officers in 1997, primarily on the basis of the Company's
losses and the projected expenses and cash flow required for the further
development for the Company's calcitonin pill as well as the regulatory expenses
and regulatory filing fees for the Company's injectable form of calcitonin.
The Board also determined that no stock options be awarded to executive officers
for 1997, at the request of such executive officers.
The compensation for the Chief Executive Officer for 1997 was based on the same
policies and considerations set forth above for executive officers generally.
Warren P. Levy
Ronald S. Levy
Jay Levy
Robert F. Hendrickson
Robert G. Ruark
George M. Weimer
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation for 1997 was determined by the Board of Directors of the
Company consisting of Messrs. Warren P. Levy, Ronald S. Levy, Jay Levy, Robert
F. Hendrickson, Robert G. Ruark, and George M. Weimer.
Three of the members of the six member Board of Directors, Warren P. Levy,
Ronald S. Levy and Jay Levy, are executive officers of the Company. Jay Levy is
the father of Warren and Ronald Levy.
During 1995, Warren P. Levy, Ronald S. Levy, Jay Levy, and another family member
loaned a total of $1,905,000 to the Company of which $1,850,000 was secured by
secondary liens on the Fairfield plant and equipment and the Boonton
manufacturing equipment. The notes bear interest at the Merrill Lynch Margin
Loan Rate plus .25% (8.875% at February 27, 1998). Under the terms of the
Company's 9.5% Senior Secured Convertible Debentures, for so long as the
Debentures are outstanding, repayment of the loans is contingent upon the
achievement of certain corporate benchmarks and is subject to a maximum
limitation of $1,250,000. A total of $440,000 in principal payments was made
during 1996. In 1997, an aggregate of $200,000 in principal amount of these
loans was converted into 57,200 shares of common stock leaving an outstanding
balance of $1,265,000 at December 31, 1997. No interest has been paid to date.
See Note 3 to the Financial Statements.
EXECUTIVE COMPENSATION
The following table sets forth for the years 1997, 1996 and 1995 compensation
paid to the Chief Executive Officer of the Company and to each other executive
officer whose compensation in 1997 exceeded $100,000 for services rendered by
such executive officers in all capacities in which they served:
SUMMARY COMPENSATION TABLE
All Other
Annual Compensation Long Term Compensation Compensation(1)
------------------- ---------------------- -------------
Awards Payouts
------ -------
Other Restricted
Name and Annual Stock Options/ LTIP
Principal Position Year Salary Bonus Compensation Award SARs Payouts
- ------------------ ---- ------ ----- ------------ ----- ---- -------
Warren P. Levy, 1997 $145,549 $ 0 $ 0 $ 0 $ 0 $ 0 $13,810
President, Chief 1996 145,454 -0- -0- -0- -0- -0- 13,806
Executive Officer 1995 145,394 -0- -0- -0- -0- -0- 13,811
and Director
Dr. Ronald S. Levy, 1997 140,895 -0- -0- -0- -0- -0- 16,756
Vice President and 1996 140,889 -0- -0- -0- -0- -0- 16,746
Director 1995 140,829 -0- -0- -0- -0- -0- 16,616
(1) Represents premium paid by the Company on executive split-dollar life
insurance.
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the yearly percentage change in the
cumulative total stockholder return on the Company's Common Stock against the
cumulative total return of the NASDAQ Market Index and of a peer group index
determined by Standard Industrial Classification (SIC) code.
[GRAPHIC -- GRAPH PLOTTED TO POINTS IN CHART BELOW]
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, INDUSTRY INDEX AND BROAD MARKET
- --------------------------FISCAL YEAR ENDING ----------------------------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
UNIGENE LABS INC 100 59.70 56.72 31.34 48.51 62.69
INDUSTRY INDEX 100 83.01 55.72 108.16 96.21 109.74
BROAD MARKET 100 119.95 125.94 163.35 202.99 248.30
Assumes $100 Invested on January 1, 1993
Assumes Dividends Reinvested
Fiscal Years Ending December 31.
The industry index chosen was:
SIC Code 8731 - Commercial Physical & Biological Research
The Broad Market index chosen was:
NASDAQ Market Index
The current composition of the industry index is as follows:
Abiomed Inc. Kendle Internat Inc.
AC Nielsen Corp. KFX Inc.
Affymetrix Inc. Kopin Corp.
Agritope Inc. Krug Internat Corp
Aura Systems Inc. Lifecell Corporation
Aurora Biosciences Corp. Liposome Co. Inc.
Bioreliance Corp. Megabios Corp.
Cadus Pharmaceutical CP Myriad Genetics Inc.
Catalytica Inc. Neopharm Inc.
Celgene Corp. Neose Technologies Inc.
Cocensys Inc. Neotherapeutics Inc.
Collaborative Clin Res Neurocrine Biosciences
Commonwealth Biotech Inc. Organogenesis Inc.
Conductus Inc. Pacific Biometrics Inc.
Covance Inc. Parexel Internat CP
Cree Research Inc. Pharmaceutical Prod Dev
CV Therapeutics Inc. Pharmacopeia Inc.
Cyclo 3 PSS Corp. Polymer Research of Amer
Depomed Inc. Primark Corp.
Ecogen Inc. Protein Polymer Tech
Ecoscience Corp Quest Diagnostics Inc.
Electronic Designs Inc. Quintiles Transnational
Electrosource Inc. Research Frontiers Inc.
Energy Biosystems Corp. Satcon Technology Corp.
Energy Conversn Devices SI Diamond Technol
Excel Technology Inc. Spire Corp.
Fiberchem Inc. Summit Technology Inc.
Gene Logic Inc. Superconductor Tech.
Genset ADR Synaptic Pharmaceutical
Illinois Superconductor Valence Technology Inc.
Incyte Pharmaceuticals Xenova GR PLC ADS
Innerdyne Inc. XXSYS Technologies Inc.
Integrated Process Equip.
Irvine Sensors Corp.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
PRINCIPAL STOCKHOLDERS
As of February 27, 1998 the following were the only beneficial owners known by
the Company to hold more than 5 percent of the outstanding shares of Common
Stock. The Company has no other class of voting securities outstanding.
Name and Address of Amount of Beneficial Percentage of
Beneficial Owner Ownership Outstanding Shares
- -------------------- --------------------- -------------------
Loews Corporation (1) 3,000,000 7.6%
CNA Plaza
Chicago, IL 60685
(1)Based on information furnished by Loews Corporation in a Schedule 13G, dated
March 4, 1997, filed with the Securities and Exchange Commission in which it
reports that the securities, which consist of 2,000,000 shares of Common Stock
and warrants to purchase 1,000,000 shares of Common Stock, are owned by
Continental Casualty Company, which is owned by CNA Financial Corp., a company
in which Loews Corporation has an 84% equity interest.
SECURITY OWNERSHIP OF MANAGEMENT
On February 27, 1998 the directors and executive officers listed below, and all
officers and directors as a group, beneficially owned the following number of
shares of Common Stock including shares of Common Stock issuable upon the
exercise of stock options. Unless otherwise indicated, each such beneficial
owner has reported sole voting power and sole dispositive power with respect to
the shares.
Common Stock of the Company
-----------------------------------
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership(1) Class
- ---------------- ----------------------- ----------
Warren P. Levy 1,726,000 (2) 4.5%
Ronald S. Levy 1,741,000 (2) 4.5%
Jay Levy 468,550 (2) 1.2%
Robert F. Hendrickson 25,000 (3) 0.1%
Robert G. Ruark 30,000 (4) 0.1%
George M. Weimer 30,000 (5) 0.1%
Officers and Directors
as a Group (6 persons) 4,020,550 (2)(6) 10.5%
(1) Unless otherwise noted, all officers, directors and principal stockholders
have sole voting and investment power with respect to shares indicated as
beneficially owned by them.
(2) An additional 200,000 shares of Common Stock, representing approximately .5%
of the total outstanding, is held by a trust. Jay Levy and members of his
immediate family, including his two sons, Warren P. Levy and Ronald S. Levy,
have pecuniary interests in the trust. As a result, each of such persons may be
deemed to be the beneficial owner of shares held by the trust. Warren P. Levy,
his wife and Ronald S. Levy are co-trustees of the trust.
(3) Includes 10,000 shares of Common Stock which Mr. Hendrickson has the right
to acquire pursuant to stock options which are exercisable immediately.
(4) Consists solely of shares of Common Stock which Mr. Ruark has the right to
acquire pursuant to stock options which are exercisable immediately.
(5) Consists solely of shares of Common Stock which Mr. Weimer has the right to
acquire pursuant to stock options which are exercisable immediately.
(6) Includes an aggregate of 70,000 shares of Common Stock which such persons
have the right to acquire pursuant to stock options which are exercisable
immediately.
Item 13. Certain Relationships and Related Transactions.
Information concerning the Executive Officers of the Registrant is included in
Item 11 of Part III above, under the section entitled "Compensation Committee
Interlocks and Insider Participation".
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.
(b) Exhibits.
See Index to Exhibits which appears on Pages 44 - 46.
(c) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the
quarter ended December 31, 1997.
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.
March 20, 1998 /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.
March 20, 1998 /s/ Warren P. Levy
-----------------------------
Warren P. Levy, President,
Chief Executive Officer and
Director
March 20, 1998 /s/ Jay Levy
-----------------------------
Jay Levy, Treasurer,
Chief Financial Officer, Chief
Accounting Officer and Director
March 20, 1998 /s/ Ronald S. Levy
-----------------------------
Ronald S. Levy, Secretary,
Vice President and Director
March 20, 1998 /s/ Robert F. Hendrickson
-----------------------------
Robert F. Hendrickson,
Director
March 20, 1998 /s/ Robert G. Ruark
-----------------------------
Robert G. Ruark, Director
/s/ George M. Weimer
March 20, 1998 -----------------------------
George M. Weimer, Director
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. 33-04557 on Form S-3.
4.1 Warrant Agreement, dated October 11, 1996, among the Company, BT
Securities Corporation and the purchasers named therein. (Incorporated
by reference to Exhibit 2 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 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 Agreement between the Company and George M. Weimer dated February 10,
1984. (1)
10.3* 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).
10.4* 1994 Outside Directors Stock Option Plan (incorporated by reference to
the Company's Definitive Proxy Statement dated April 28, 1994 which is
set forth as Appendix B to Exhibit 28 to the Company's Form 10-K for
the year ended December 31, 1993).
10.5 Mortgage and Security Agreement between the Company and Jean Levy dated
February 10, 1995. (4)
10.6 Loan and Security Agreement between the Company and Jay Levy, Warren P.
Levy and Ronald S. Levy dated March 2, 1995. (4)
10.7 Non-Competition Agreements with Warren P. Levy and Ronald S. Levy dated
May 29, 1987. (1)
10.8* Split Dollar Agreement dated September 30, 1992 between Unigene
Laboratories, Inc. and Warren P. Levy. (2)
10.9* Split Dollar Agreement dated September 30, 1992 between Unigene
Laboratories, Inc. and Ronald S. Levy. (2)
10.10 Loan and Security Agreement between the Company and Dejufra, Inc. dated
March 15, 1995. (4)
10.11 Consulting Agreement, dated October 25, 1994, between the Company and
Broad Capital Associates, Inc. (incorporated by reference as Exhibit 1
to the Company's Form 10-Q for the period ended September 30, 1994).
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)
10.13 Amended and Restated Securities Purchase Agreement dated March 6, 1996
by and among Olympus Securities, Ltd., Nelson Partners and Unigene
Laboratories, Inc. (5)
10.14 Regulation S Securities Subscription Agreement between the Company and
subscribers, dated February - March 1996. (5)
10.15 Registration Rights Agreement between the Company and Swartz
Investments, LLC dated March 12, 1996. (5)
10.16 Amendment to Loan and Security Agreement between the Company and Jay
Levy, Warren P. Levy and Ronald S. Levy dated June 29, 1995. (5)
10.17 Promissory Note between the Company and Jay Levy, Warren P. Levy and
Ronald S. Levy dated June 29, 1995. (5)
10.18 Registration Rights Agreement, dated October 11, 1996, among the
Company, BT Securities Corporation and the purchasers named therein
(incorporated by reference to Exhibit 1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996).
10.19 Letter Agreement dated as of February 7, 1997 among Unigene
Laboratories, Inc., Olympus Securities, Ltd. and Nelson Partners.
(incorporated by reference to exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997).
10.20 License Agreement, dated as of July 15, 1997, between the Company and
Warner-Lambert Company (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K,dated July 15, 1997).
10.21 Stock Purchase Agreement, dated as of July 15, 1997, between the
Company and Warner-Lambert Company (incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K, dated July
15, 1997).
27 Financial Data Schedule
(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.
* Management contracts or compensatory plan or arrangement.