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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the Fiscal Year Ended December 31, 2001
Commission file number 0-16005
UNIGENE LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2328609
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
110 Little Falls Road
Fairfield, New Jersey 07004
(973) 882-0860
(Address and telephone number of
principal executive offices)
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:
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Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No ___.
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within 60 days prior
to the date of filing. Aggregate market value as of March 1, 2002: $35,501,380.
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--
52,964,425 shares as of March 1, 2002.
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.
PART III: Definitive Proxy Statement of Unigene Laboratories, Inc., to
be filed in connection with the Annual Meeting of Stockholders to be
held on June 11, 2002.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Various statements in the items captioned "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Form 10-K constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or activities of
our business, or industry results, to be materially different from any future
results, performance or activities expressed or implied by the forward-looking
statements. These factors include: general economic and business conditions, our
financial condition, competition, our dependence on other companies to
commercialize, manufacture and sell products using our technologies, the
uncertainty of results of animal and human testing, the risk of product
liability and liability for human trials, our dependence on patents and other
proprietary rights, dependence on key management officials, the availability and
cost of capital, the availability of qualified personnel, changes in, or the
failure to comply with, governmental regulations, the failure to obtain
regulatory approvals for our products, litigation, and other factors discussed
in this Form 10-K.
Item 1. Business
Overview
Unigene is a biopharmaceutical company engaged in the research, production and
delivery of small proteins, referred to as peptides, that have demonstrated or
may have potential medical use. We have a patented manufacturing technology for
producing many peptides cost-effectively. We also have patented oral delivery
technology that has been shown to deliver medically useful amounts of various
peptides into the bloodstream. Our primary focus has been on the development of
calcitonin and other peptide products for the treatment of osteoporosis and
other indications. We have the facilities and the technology for manufacturing
calcitonin in accordance with current Good Manufacturing Practice guidelines,
referred to as cGMP, and we have an injectable calcitonin product that is
approved for sale in Switzerland for the treatment of osteoporosis and in the
European Union for two minor indications. We are seeking approval for an
osteoporosis indication in the European Union. We are also engaged in the
development of oral and nasal calcitonin products, as well as other peptide
products, including parathyroid hormone, which we refer to as PTH, for
osteoporosis.
Our Accomplishments
Among our major accomplishments are:
. Development of a Proprietary Peptide Production Process. One of our
principal scientific accomplishments is our success in developing a highly
efficient biotechnology-based peptide production process. Several patents
relating to this process have issued. We believe that these proprietary
processes are key steps in the more efficient and economical commercial
production of medically useful peptides. Many of these peptides cannot be
produced at a reasonable cost in sufficient quantities for human testing
or commercial use by currently available production processes. We have
constructed and are operating a manufacturing facility employing this
process to produce calcitonin, and we have also produced laboratory-scale
quantities of several other peptides.
. Development of Proprietary Technology for Oral Delivery. We have also
developed and patented an oral formulation that has successfully delivered
calcitonin into the bloodstream of human subjects. We and our
collaborators have shown in several human studies that this formulation
can deliver significant quantities of the peptide into the human
bloodstream. We believe that the components of our patented oral product
also can enable the delivery of other peptides and we have initiated
studies to investigate this possibility internally and in collaboration
with others. During 2001, we reported successful oral delivery in animal
studies of various peptides including parathyroid hormone for the
treatment of osteoporosis and insulin for the treatment of diabetes.
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These two patented technologies form the basis of our business strategy. The
potential pharmaceutical products that we are developing use one, or in most
cases, both of these technologies. For example, our nasal calcitonin product
would use calcitonin manufactured by our peptide production process.
All of our clinical trials for nasal calcitonin have been completed. A new drug
application, or NDA, is in the final stages of preparation, and the filing of
the NDA is expected around mid-year 2002. For this product, we believe that U.S.
Food and Drug Administration, or FDA, approval may take approximately 12 months
from the filing of the NDA. We are seeking a licensing partner or contract sales
organization which could proceed to market the product after FDA approval,
although we may not be successful in our attempts to find a licensing partner or
contract sales organization to market the product on favorable terms, if at all.
There is an existing nasal calcitonin product on the market. Since our end
product would be similar to the currently existing product, we believe that it
would not require extensive sales promotions by our potential partners.
Therefore, we believe that our product could be on the market as soon as 2003.
Our oral calcitonin and oral parathyroid hormone products would utilize our
peptide production process as well as our oral delivery system for peptides.
These products would be on the market after our nasal calcitonin product.
Strategy
Our business strategy is to develop proprietary products and processes with
applications in human health care to generate revenues from license fees,
royalties on third-party sales and direct sales of bulk or finished products.
Generally, we fund our internal research activities and, due to our limited
financial resources, intend to rely on licensees, which are likely to be
established pharmaceutical companies, to provide development funding. We also
generally expect to rely on these licensees to take responsibility for obtaining
appropriate regulatory approvals, human testing, and marketing of products
derived from our research activities. However, we may, in some cases, retain the
responsibility for human testing and for obtaining the required regulatory
approvals for a particular product.
. Pfizer License Agreement. In July 1997, we entered into an agreement under
which we granted to the Parke-Davis division of Warner-Lambert Company
(which merged with Pfizer in June 2000) a worldwide license to use our oral
calcitonin technology. Upon signing the agreement, we received $6.0 million
in payments from Warner-Lambert, consisting of a $3.0 million licensing fee
and a $3.0 million equity investment by Warner-Lambert. Through December
31, 2000, we recognized an aggregate of $16.5 million in revenue due to the
achievement of specified milestones, including $2.0 million in 2000. Pfizer
began a Phase I/II human study in April 2000 and patient dosing was
completed in December 2000. Pfizer analyzed the results of the study and
informed us in March 2001 that the study did not achieve Pfizer's desired
results. Pfizer terminated the license agreement citing this conclusion. We
believe that this study, in which an FDA approved product also did not work
and which produced results contrary to many published studies, was not
capable of determining the performance of our oral calcitonin product. We
also believe that the results would have been more favorable if patients in
the study had received calcium supplementation, in addition to the
calcitonin. Therefore, we intend to continue the development of our oral
calcitonin product as a treatment for osteoporosis, and we are seeking
potential licensees in the U.S. and other countries. In addition, due to
the termination of the Pfizer agreement, we no longer have restrictions on
selling bulk calcitonin and rights to all technologies and information
developed in the course of the collaboration have reverted to Unigene.
. China Joint Venture. In June 2000, we entered into a joint venture with
Shijiazhuang Pharmaceutical Group, or SPG, a pharmaceutical company in the
People's Republic of China. The joint venture will manufacture and
distribute injectable and nasal calcitonin products in China (and possibly
other selected Asian markets) for the treatment of osteoporosis. We own 45%
of the joint venture and will have a 45% interest in the joint venture
profits and losses. In the first phase of the collaboration, SPG will
contribute its existing injectable calcitonin license to the joint venture,
which will allow the joint venture to sell our product in China. The joint
venture is now preparing an NDA in China for its injectable and nasal
products, which is expected to be filed in late 2002. In addition, the
joint venture may be required to conduct brief local human trials. If the
product is successful, the joint venture may establish a facility in China
to fill injectable and nasal calcitonin products using bulk calcitonin
produced at our Boonton, New Jersey plant. Eventually the joint venture may
manufacture bulk calcitonin in China at a new facility that would be
constructed by it. This would require
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local financing by the joint venture. The joint venture began operations
in March 2002. We expect joint venture sales of the injectable calcitonin
product to begin in April 2002.
. Other License or Distribution Arrangements. In addition to the joint
venture with SPG, we have entered into distribution agreements for our
injectable calcitonin product in the United Kingdom, Ireland and Israel.
We continue to seek other licensing or distribution agreements with
pharmaceutical companies for both the injectable and nasal calcitonin
products. However, we may not be successful in our efforts to sign any
additional revenue generating agreements and any new or existing
agreements may not be successful in generating significant revenue.
Competition
Our primary business activity has been biotechnology research and
development. Biotechnology research is highly competitive, particularly in the
field of human health care. We compete with specialized biotechnology companies,
major pharmaceutical and chemical companies, universities and other non-profit
research organizations, many of which can devote considerably greater financial
resources to research activities. We believe that one of our main competitors in
the field of oral delivery of peptides is Emisphere Technologies, Inc. We
currently have no products approved for sale in the U.S.
Our calcitonin and PTH products have potential applications in the
treatment of osteoporosis. If we are successful in obtaining approval for one of
these products, we would compete with major pharmaceutical companies. These
competitors can devote considerably greater financial resources to these
activities. Major companies with products in the field of osteoporosis include
Novartis, Wyeth, Merck, Eli Lilly, and Procter and Gamble. We would be able to
compete with these companies only if we have partnered with a pharmaceutical or
biotechnology company. We believe that the unique safety and effectiveness of
calcitonin, combined with our patented peptide manufacturing process and our
patented oral formulation, will enable it to compete with products marketed by
these and other companies.
We believe that success in competing with others in the biotechnology
industry will be based primarily upon scientific expertise and technological
superiority. We also believe that success will be based on the ability to
identify and to pursue scientifically feasible and commercially viable
opportunities and to obtain proprietary protection for research achievements.
Our success will further depend on our ability to obtain adequate funding and on
developing, testing, protecting, producing and marketing products and obtaining
their timely regulatory approval. We are always at risk that others may develop
superior processes or products that would render our processes or products
noncompetitive or obsolete.
Product Manufacture
We have been producing salmon calcitonin since 1992. We constructed a cGMP
facility for the production of calcitonin at leased premises located in Boonton,
New Jersey. The facility began producing salmon calcitonin under cGMP guidelines
in 1996. The facility also produces our proprietary amidating enzyme for use in
producing calcitonin. The current production level of the facility is between
one and two kilograms of bulk calcitonin per year.
The facility can be modified to increase calcitonin production capacity.
However, if we are successful in our efforts to commercialize an oral calcitonin
product, we expect that we may incur additional expenditures to expand or
upgrade our manufacturing operations. Although the facility currently is devoted
primarily to calcitonin production, it also is suitable for producing other
peptide products.
We are following conventional procedures to secure the approval of the
facility by regulatory agencies to allow us to manufacture calcitonin for human
use. European health authorities inspected the facility in connection with the
filing of our injectable calcitonin dossier and found it to be in compliance
with cGMP guidelines. However, there is always the risk that our operations
might not remain in compliance or that approval by other agencies will not be
obtained. The FDA must approve the facility in order to manufacture calcitonin
or other peptides for sale in the United States.
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Government Regulation
Our laboratory research, development and production activities and those
of our collaborators are subject to significant regulation by numerous federal,
state, local and foreign governmental authorities. FDA approval, following the
successful completion of various animal and human studies, is required for the
sale of a pharmaceutical product in the United States. Foreign sales require
similar studies and approval by regulatory agencies.
The regulatory approval process for a pharmaceutical product requires
substantial resources and can take many years. There is always a risk that any
additional regulatory approvals required for our production facility or for any
of our products will not be obtained in a timely manner. Our inability to
obtain, or delays in obtaining, these approvals would adversely affect our
ability to continue to fund our programs, to produce marketable products, or to
receive revenue from milestone payments, product sales or royalties. We also
cannot predict the extent of any adverse governmental regulation that may arise
from future legislative and administrative action.
The FDA or other regulatory agencies may audit our production facility to
ensure that it is operating in compliance with cGMP. These guidelines require
that production operations be conducted in strict compliance with our
established rules for manufacturing and quality controls. These agencies are
empowered to suspend production operations and/or product sales if, in their
opinion, significant or repeated changes from these guidelines have occurred. A
suspension by any of these agencies could have a material adverse impact on our
operations.
Regulatory Approval of Our Injectable Calcitonin Product
In January 1999, we received approval from the European Committee for
Proprietary Medicinal Products, referred to as the CPMP, to market our
injectable calcitonin product in all 15 member states of the European Union as a
treatment for Paget's disease and for hypercalcemia. We began to market this
product in Europe for these indications in 1999. We have filed a supplementary
submission with the CPMP to expand the approved indications to include the
treatment of osteoporosis. However, it is uncertain whether or when the request
will be approved by the CPMP. In 2001, we received an approval in Switzerland
for our injectable calcitonin product that includes an osteoporosis indication.
Regulatory authorities in many non-European Union countries can cite the
approved European Union or Swiss dossiers in order to reduce the requirements
needed to obtain their national approvals for the products, which we believe
could significantly reduce the registration requirements for injectable
calcitonin in other countries, thereby speeding up product launch. We believe
that our abbreviated clinical program, which was accepted by the FDA, would be
sufficient to satisfy approval requirements in the United States and other
countries. Accordingly, we expect that the review process for our injectable
calcitonin product in such countries may be shorter than that typically
associated with a new drug submission for numerous reasons:
. The active ingredient is structurally identical to and indistinguishable
from the active ingredient in products already approved by many regulatory
agencies.
. The formulation is essentially similar to the formulations used in already
approved products.
. The human trial program that was accepted by the FDA is relatively brief
and involved small numbers of subjects. As a result, the amount of
information that must be reviewed is far less than would have been compiled
for the lengthier trials required for a typical new drug submission.
Development of our Oral Calcitonin Product
In December 1995 and January 1996, we successfully tested a proprietary
calcitonin oral formulation in two separate human studies in the United Kingdom.
These studies indicated that the majority of those who received oral calcitonin
showed levels of the peptide in blood samples taken during the trial that were
greater than the minimum levels generally regarded as being required for maximum
medical benefit. We believe that these were the first studies to demonstrate
that significant blood levels of calcitonin could be observed in humans
following oral administration of the peptide. In April 1996, we successfully
conducted a third pilot human study in the United Kingdom which used lower
calcitonin dosages than in the prior two human trials. The results of this trial
indicated
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that every test subject showed levels of the peptide in their blood samples that
exceeded the minimum levels generally regarded as required for maximum medical
benefit.
In July 1997, we entered into an agreement under which we granted to the
Parke-Davis division of Warner-Lambert Company (which merged with Pfizer in June
2000), a worldwide license to make, use and sell oral calcitonin. Under this
agreement, Pfizer had the ability to terminate the license if (1) a product was
disapproved in the U.S. or Europe; (2) peak blood levels were too low; (3) the
product was infeasible for scientific or technical reasons; (4) Unigene was
declared bankrupt or insolvent; (5) there was an uncured material breach; or (6)
Pfizer could not meet at least 25% of its sales projections.
During 1999, we and Pfizer successfully concluded two pilot human studies
using an oral calcitonin formulation manufactured by Warner-Lambert. Both
studies showed significant measurable blood levels of calcitonin. In December
1999, Warner Lambert filed an Investigational NDA with the FDA for the conduct
of human trials in the United States of our oral calcitonin product as a
treatment for osteoporosis. Pfizer began a Phase I/II human study in April 2000
and patient dosing for this study was completed in December 2000. Pfizer
analyzed the results of the study and informed us in March 2001 that the study
did not achieve Pfizer's desired results related to measurement of bone marker
activity. Pfizer terminated the license agreement for scientific reasons citing
this conclusion. We believe that this study, in which an FDA approved product,
nasal calcitonin, also did not work and which produced results contrary to many
published studies, was not capable of determining the performance of our oral
calcitonin product. We also believe that the results would have been more
favorable if patients in the study had received calcium supplementation, in
addition to the calcitonin. Therefore, we intend to continue the development of
our oral calcitonin product as a treatment for osteoporosis, and we are seeking
licensees for this product in the U.S. and other countries. In addition, due to
the termination of the Pfizer agreement, we no longer have restrictions on
selling bulk calcitonin and rights to all technologies and information developed
in the course of the collaboration have reverted to Unigene.
We have filed patent applications for our oral formulation in the United
States and in numerous foreign countries. In 1999, we received a U.S. patent for
our basic technology covering the oral delivery of calcitonin for the treatment
of osteoporosis. In 2000, we received a U.S. patent extending this protection to
the oral delivery of other peptides.
There are risks that we will not be successful in licensing this product,
that a safe and effective oral product will not be developed, that we will not
be successful in obtaining regulatory approval of an oral calcitonin product,
and that we will not succeed in developing, producing or marketing an oral
calcitonin product.
Development of a Nasal Calcitonin Product
A major pharmaceutical company received FDA approval in 1995 for the
marketing of a nasally administered calcitonin product, which has substantially
enlarged the U.S. market for calcitonin. During 1999, we completed preliminary
human studies for our proprietary nasal calcitonin product. A patent application
for the product was filed in February 2000. In January 2000, we filed an
Investigational New Drug Application with the FDA to begin human testing of our
nasal product as a treatment for osteoporosis. In February 2000, we began U.S.
human studies. In December 2000, we successfully completed a human study
demonstrating similar blood levels between our product and that of an existing
nasal calcitonin product. We have successfully completed a second human study
which showed a rapid and persistent reduction in bone loss as measured by
several accepted blood markers. A substance in the bloodstream that measures the
rate of bone loss in the tested subjects decreased by an average of over 40% in
the first month of the study, and that reduction was maintained throughout the
three-month dosing period during which the measurements were taken. We are
seeking to license our nasal calcitonin product in the U.S. and other countries
for the treatment of osteoporosis. However, we may not be successful in our
efforts to conclude a license agreement, to obtain governmental approval of our
nasal calcitonin product, or to manufacture and sell the product.
Patents and Proprietary Technology
We have filed a number of applications for U.S. patents relating to our
proprietary peptide manufacturing process and our technology for oral delivery.
To date, the following eight U.S. patents have issued:
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. a patent covering Immunization By Immunogenic Implant, a method for
producing antibodies for developing diagnostic medical tests
. three patents related to the Alpha-Amidation Enzyme and its use in
manufacturing peptides
. two patents covering an improvement in our manufacturing technology
. two patents covering oral delivery of peptides
We believe that our manufacturing patents give us a competitive advantage
in producing peptides cost-effectively and in large quantities, because they
cover a highly efficient bacterial fermentation process for producing
calcitonin. Currently, other companies use a chemical synthesis process to
manufacture peptide products. This process is very labor intensive and involves
many steps in which product is lost because no step is 100% efficient. Our
patents cover a process that we expect will reduce the cost and time required
for commercial production and enable the production of quantities of peptides
that exceed the capabilities of conventional technologies.
We also believe that our oral delivery patents give us a competitive
advantage in enabling us to develop peptide products in oral forms, because they
cover a process allowing delivery of significant quantities of peptides into the
bloodstream. Peptides are small proteins that get broken down in the digestive
system. They are currently available only as injectable or nasal spray products.
We believe that the greatest competitive advantage of our manufacturing
and oral delivery patent estates is realized through the combination of both
technologies. To successfully commercialize an oral peptide product, an
efficient manufacturing process is necessary, because oral delivery systems are
typically less efficient than injectable or nasal spray products. Reduced
efficiency requires an increase in the active pharmaceutical ingredient in each
dose. Therefore, an efficient manufacturing process is needed to
cost-effectively manufacture the increased quantities that are necessary and to
make a product that is commercially viable.
We believe that our manufacturing and oral delivery patent estates provide
both a current and anticipated advantage. Currently, the patent estates protect
our intellectual property rights in the development of our manufacturing and
oral delivery processes. In the future, we expect that the patent estates will
give us a competitive advantage in commercializing our products.
Other applications are pending. We also have made filings in selected
foreign countries, and eighteen foreign patents have issued. However, our
pending applications may not issue as patents and our issued patents may not
provide us with significant competitive advantages. Furthermore, our competitors
may independently develop or obtain similar or superior technologies.
Although we believe our patents and patent applications are valid, the
repeal of one or more of our key patents could have a significant adverse effect
upon our business. Detecting and proving infringement generally is more
difficult with process patents than with product patents. In addition, a process
patent's value is diminished if others have patented the product that can be
produced using the process. Under these circumstances, we would require the
cooperation of, and likely be required to share royalties with, the product
patent holder or its sublicensees in order to make and sell the product.
In some cases, we rely on trade secrets to protect our inventions. Our
policy is to include confidentiality provisions in all research contracts, joint
development agreements and consulting relationships that provide access to our
trade secrets and other know-how. However, there is a risk that these secrecy
obligations could be breached, causing us harm. To the extent licensees,
consultants or other third parties apply technological information independently
developed by them or by others to our projects, disputes may arise as to the
ownership rights to information, which may not be resolved in our favor.
Employees
As of March 1, 2002 we had 60 full-time employees. Twenty were engaged in
research, development and regulatory activities, 29 were engaged in production
activities and 11 were engaged in general and administrative
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functions. Eight of our employees hold Ph.D. degrees. Our employees are experts
in molecular biology, including DNA cloning, synthesis, sequencing and
expression; protein chemistry, including purification, amino acid analysis,
synthesis and sequencing of proteins; immunology, including tissue culture,
monoclonal and polyclonal antibody production and immunoassay development;
chemical engineering; pharmaceutical production; quality assurance; and quality
control. None of our employees are covered by a collective bargaining agreement.
Warren P. Levy, President and Ronald S. Levy, Executive Vice President, both
executive officers and directors, have signed employment agreements with us.
Research and Development
We have established a multi-disciplinary research team to adapt
proprietary amidation, biological production and oral delivery technologies to
the development of proprietary products and processes. Approximately 82% of our
employees are directly engaged in activities relating to production of,
regulatory compliance for, and the research and development of pharmaceutical
products. We spent $9.1 million on research activities in 2001, $11.5 million in
2000, and $9.4 million in 1999.
Properties
We own a one-story office and laboratory facility consisting of
approximately 12,500 square feet. The facility is located on a 2.2 acre site in
Fairfield, New Jersey.
Our 32,000 square foot cGMP production facility, of which 20,000 square
feet are currently being used for the production of calcitonin and can be used
for the production of other peptides, was constructed in a building located in
Boonton, New Jersey. We lease the facility under a ten-year agreement, which
began in February 1994. We have two 10-year renewal options and an option to
purchase the facility.
Litigation
In July 2000, the Tail Wind Fund, Ltd., the holder of $2,000,000 in
principal amount of 5% convertible debentures issued by Unigene to Tail Wind in
a private placement completed in June 1998, filed with the American Arbitration
Association a demand for arbitration against Unigene. In its demand, Tail Wind
claimed that it was owed, as of June 30, 2000, approximately $3,400,000,
consisting of principal, interest and penalties, resulting from Unigene's
default under various provisions of the debentures and related agreements. These
alleged defaults included Unigene's failure to redeem the debentures after
becoming obligated to do so, the failure to pay interest when due, and the
failure to pay liquidated damages arising from the delisting of the Unigene
common stock from the Nasdaq National Market. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." In July 2000, Unigene submitted to the American Arbitration
Association a statement in which it denied the amount of Tail Wind's claim and
made certain counterclaims. A hearing on the matter before an arbitrator
appointed by the American Arbitration Association was scheduled for June 2001.
In June 2001, the arbitration was postponed to allow Tail Wind and Unigene to
engage in settlement discussions. On April 9, 2002, Unigene and Tail Wind
entered into a settlement. Pursuant to the terms of the settlement agreement,
Tail Wind has agreed to surrender to Unigene the $2 million in principal amount
of convertible debentures that remain outstanding and to release all claims
against Unigene relating to Tail Wind's purchase of the convertible debentures,
including all issues raised in the arbitration, which are currently in excess of
$4 million. In exchange, Unigene has agreed to issue to Tail Wind a $1 million
secured promissory note and two million shares of Unigene common stock. The note
bears interest at a rate of 6% per annum and principal and interest are due in
February 2005. The shares are valued at $1.1 million in the aggregate, based on
Unigene's closing stock price on April 9, 2002. Unigene will therefore recognize
a gain for accounting purposes of approximately $2 million on the extinguishment
of debt and related interest. Unigene is required to deposit the two million
shares of common stock with an escrow agent and to file a registration statement
covering the resale of the shares with the Securities and Exchange Commission.
Once the registration statement is declared effective by the SEC, the escrow
agent will release the shares to Tail Wind at a rate of 50,000 shares per week
over a 40-week period, depending on trading volume. If the registration
statement is not declared effective on a timely basis as provided for in the
settlement agreement, Unigene may incur penalties of $1,000 per day.
In July 2000, Reseau de Voyage Sterling, Inc. filed suit against Unigene
in the Supreme Court of the State of New York. Unigene removed this case to the
United States District Court for the Southern District of New York. The
plaintiff, which purchased from a third party a warrant to purchase one million
shares of Unigene common stock, alleges that Unigene breached a verbal agreement
with the plaintiff to extend the term of the warrant beyond
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its expiration date. The plaintiff is seeking damages of $2 million. We believe
that this suit is completely without merit, and we will continue to vigorously
contest the claim.
Fusion Financing
On May 9, 2001, Unigene entered into a common stock purchase agreement
with Fusion Capital Fund II, LLC, under which Fusion has agreed to purchase on
each trading day during the term of the agreement $43,750 of our common stock up
to an aggregate of $21,000,000. Fusion is committed to purchase the shares over
a twenty-four month period. We may decrease this amount or terminate the
agreement at any time. If our stock price equals or exceeds $4.00 per share, for
five (5) consecutive trading days, we have the right to increase the daily
purchase amount above $43,750, providing that the closing sale price of our
stock remains at least $4.00. Fusion is not obligated to purchase any shares of
our common stock if the purchase price is less than $0.25 per share. Under the
agreement with Fusion, Unigene must satisfy the requirements that are a
condition to Fusion's obligation including: the continued effectiveness of the
registration statement for the resale of the shares by Fusion, no default on, or
acceleration prior to maturity of, any payment obligations of Unigene in excess
of $1,000,000, no insolvency or bankruptcy of Unigene, continued listing of
Unigene common stock on the OTC Bulletin Board, and Unigene must avoid the
failure to meet the maintenance requirements for listing on the OTC Bulletin
Board for a period of 10 consecutive trading days or for more than an aggregate
of 30 trading days in any 365-day period. The selling price per share to Fusion
is equal to the lesser of: the lowest sale price of our common stock on the day
of purchase by Fusion, or the average of the lowest five closing sale prices of
our common stock, during the 15 trading days prior to the date of purchase by
Fusion. We issued to Fusion 2,000,000 shares of common stock and a five-year
warrant to purchase 1,000,000 shares of common stock at an exercise price of
$.50 per share as of March 30, 2001 as compensation for its commitment. Fusion
has agreed not to sell the shares issued as a commitment fee or the shares
issuable upon the exercise of the warrant until the earlier of May 2003, or the
termination or a default under the common stock purchase agreement. In addition
to the compensation shares, the Board of Directors has authorized the issuance
and sale to Fusion of up to 21,000,000 shares of Unigene common stock. From May
18, 2001 through March 15, 2002, we have received $2,995,730 through the sale of
7,197,485 shares of common stock to Fusion, before cash expenses of
approximately $400,000.
In December 2000, we issued a five-year warrant to purchase 373,002 shares
of Unigene common stock at $1.126 per share to our investment banker as a fee in
connection with the Fusion financing agreement. We also issued to Fusion
2,000,000 shares of common stock and five-year warrant to purchase 1,000,000
shares of common stock at an exercise price of $.50 per share as of March 30,
2001 as compensation for its commitment which was charged to additional
paid-in-capital.
Fusion has agreed that neither it nor any of its affiliates will engage in
any direct or indirect short-selling or hedging of our common stock during any
time prior to the termination of the common stock purchase agreement.
-10-
Risk Factors
Unigene's business is subject to the following risk factors:
We have significant historical losses and expect to continue to incur losses in
the future.
We have incurred annual operating losses since our inception. As a result,
at December 31, 2001, we had an accumulated deficit of approximately
$87,850,000. Our gross revenues for the years ended December 31, 2001, December
31, 2000 and 1999 were $865,000, $3,287,000 and $9,589,000, respectively.
However, our revenues have not been sufficient to sustain our operations.
Revenues for 2000 and 1999 consisted principally of milestone payments and other
fees received in connection with our terminated license agreement with Pfizer.
As of March 15, 2002, we have no significant revenue generating license
agreements. Our injectable calcitonin product has been approved for commercial
sale in a number of European countries, but we do not anticipate that these
sales will produce significant revenues. During the same periods, we have
incurred losses from operations of $10,957,000, $11,385,000 and $1,997,000,
respectively. Our net losses for the years ended December 31, 2001, 2000 and
1999 were $12,472,000, $12,469,000 and $1,577,000, respectively. We believe that
the profitability of Unigene will require at least the successful
commercialization of our nasal or oral calcitonin products or another oral
peptide product in the United States and abroad. Unigene might never be
profitable.
We will require additional financing to sustain our operations, and our ability
to secure additional financing is uncertain.
We may be unable to raise on acceptable terms, if at all, the substantial
capital resources necessary to conduct our operations. If we are unable to raise
the required capital, we may be forced to limit some or all of our research and
development programs and related operations, curtail commercialization of our
product candidates and, ultimately, cease operations. Our future capital
requirements will depend on many factors, including:
. continued scientific progress in our discovery and research
programs;
. progress with preclinical studies and clinical trials;
. the magnitude and scope of our discovery, research and
development programs;
. our ability to maintain existing, and establish additional,
corporate partnerships and licensing arrangements;
. our ability to sell and market our products;
. the time and costs involved in obtaining regulatory approvals;
. the time and costs involved in expanding and maintaining our
production facility;
. the costs involved in preparing, filing, prosecuting,
maintaining, defending and enforcing patent claims;
. the potential need to develop, acquire or license new
technologies and products; and
. other factors beyond our control.
At December 31, 2001, we had a working capital deficiency of approximately
$22,100,000. The independent auditors' report for the year ended December 31,
2001 includes an explanatory paragraph stating that our recurring losses from
operations and working capital deficiency discussed above raise substantial
doubt about our ability to continue as a going concern. We had operating cash
flow deficits of $1,400,000, $3,382,000 and $7,122,000 for the years ended
December 31, 1999, 2000, and 2001, respectively. We do not have sufficient
financial resources to fund our operations at the current level. Therefore, we
need additional funds to continue our operations. Our agreement with Fusion has
provided us with some cash to fund our operations, but it alone has not been
sufficient to satisfy all of our working capital needs. From May 18, 2001
through March 15, 2002 we have raised a total of $2,995,730 through the sale of
7,197,485 shares of our common stock to Fusion, before cash expenses of
approximately $400,000. The extent to which we intend to rely on Fusion as a
source of financing will depend on a number of factors, including the prevailing
market price of our common stock and the extent to which we are able to secure
working capital from other sources, such as through the entry into licensing
agreements or the sale of calcitonin, both of which we are actively exploring.
If we are unable to enter into a significant revenue generating license or
-11-
financing arrangement in the near term, we will need to significantly curtail
our operations. We also could consider a sale or merger of Unigene.
Even if we are able to access the remaining $18,000,000 under the common
stock purchase agreement with Fusion at March 15, 2002, we may still need
additional capital to fully implement our business, operating and development
plans. We only have the right to receive $43,750 per trading day under the
common stock purchase agreement unless our stock price equals or exceeds $4.00
per share, in which event the daily purchase amount may be increased. However,
our sales of common stock to Fusion have been well below that level due to the
share price and trading volume of our common stock and due to our desire to keep
dilution to a minimum. In addition, the agreement may be terminated by Fusion at
any time due to events of default under the agreement. See "Business - Fusion
Financing."
Our agreement with Fusion may prohibit us from raising funds through other
equity financings. The agreement expressly prohibits us from selling equity
securities in other variable priced financings without Fusion's consent. In
addition, the sale of our common stock to Fusion could cause the price of our
common stock to decline. If our stock price declines, we may be unable to raise
additional funds through the sale of our common stock to others. If we are able
to sell shares of our common stock, the sales could result in significant
dilution to our stockholders.
We believe that satisfying our long-term capital requirements will require
at least the successful commercialization of one of our peptide products.
However, our products may never become commercially successful.
Some of our executives have made loans to Unigene and are entitled to remedies
available to a secured creditor, which gives them a priority over the holders of
our common stock. We expect to grant similar rights to The Tail Wind Fund, Ltd.
in the very near future.
Some of our executives have made loans to us under promissory notes. Our
obligations under these promissory notes are secured by, among other things,
mortgages upon all of the real property owned by us and pledges of substantially
all of our assets. If we become insolvent or are liquidated, or if payment under
the promissory notes are accelerated, the holders of the promissory notes will
be entitled to exercise the remedies available to a secured lender under
applicable law which would entitle them to full repayment before any funds could
be paid to our shareholders. Upon completion of the transactions contemplated by
the settlement agreement with The Tail Wind Fund, Ltd., we will issue to Tail
Wind a $1 million secured promissory note due in February 2005. Our obligation
to repay the note will be secured by, among other things, a mortgage on the real
property owned by us and pledges of our fixed assets in Fairfield, New Jersey.
If a default occurs under the note or the security documents, Tail Wind will
also be entitled to remedies generally available to a secured lender, which
would entitle Tail Wind to full payment before any funds could be paid to our
shareholders.
We may not be successful in our efforts to develop a calcitonin or other peptide
product that will produce revenues sufficient to sustain our operations.
Our success depends on our ability to commercialize a calcitonin or other
peptide product that will produce revenues sufficient to sustain our operations.
We may never develop a calcitonin or other peptide product that makes us
profitable. Our ability to achieve profitability is dependent on a number of
factors, including our ability to complete development efforts, obtain
regulatory approval for our product candidates, and commercialize successfully
those product candidates or our technologies.
We believe that the development of more desirable formulations is
essential to expand consumer acceptance of peptide pharmaceutical products.
However, we may not be successful in our development efforts, or other companies
may develop these products before we do.
Even if we are successful in our development efforts, we may not be able
to obtain the necessary regulatory approval for our products. The FDA must
approve the commercial manufacture and sale of pharmaceutical products in the
United States. Similar regulatory approvals are required for the sale of
pharmaceutical products outside of the United States. Although we have received
regulatory approval in the European Union and Switzerland for the sale of our
injectable calcitonin product, none of our products have been approved for sale
in the United States, and our products may never receive the approvals necessary
for commercialization. We must conduct further human testing on our products
before they can be approved for commercial sale. Any delay in receiving, or
failure to receive, these approvals would adversely affect our ability to
generate product revenues.
-12-
If any of our products are approved for commercial sale, we will need to
manufacture the product in commercial quantities at a reasonable cost in order
for it to be a successful product that will generate profits. Because of our
limited clinical, manufacturing and regulatory experience and the lack of a
marketing organization, we are likely to rely on licensees or other parties to
perform one or more tasks for the commercialization of pharmaceutical products.
We may incur additional costs and delays while working with these parties, and
these parties may ultimately be unsuccessful.
We have made a substantial investment in our production facility which we will
need to upgrade or expand in order to manufacture some of our products in
commercial quantities required by our corporate partners.
We have constructed and are operating a facility intended to produce
calcitonin and other peptides. This facility has been approved by European
regulatory authorities for the manufacture of calcitonin for human use, but has
not yet been inspected or approved by the FDA. The risks associated with this
facility include the failure to achieve targeted production and profitability
goals, the development by others of superior processes and products, and the
absence of a market for products produced by the facility. In addition, the
successful commercialization of any of our products may require us to make
additional expenditures to expand or upgrade our manufacturing operations. We
may be unable to make these capital expenditures when required.
We are dependent on partners for the commercial development of our products.
We do not currently have, nor do we expect to have in the near future,
sufficient financial resources and personnel to develop and market our products
on our own. Accordingly, we expect to continue to depend on large pharmaceutical
companies for revenues from sales of products, research sponsorship and
distribution of our products.
The process of establishing partnerships is difficult and time-consuming.
Our discussions with potential partners may not lead to the establishment of new
partnerships on favorable terms, if at all. If we successfully establish new
partnerships, the partnerships may never result in the successful development of
our product candidates or the generation of significant revenue. Management of
our relationships with these partners would require:
. significant time and effort from our management team;
. coordination of our research with the research priorities of our
corporate partners;
. effective allocation of our resources to multiple projects; and
. an ability to attract and retain key management, scientific and other
personnel.
We may not be able to manage these relationships successfully.
With the termination of our Pfizer collaboration, we currently have no
licenses for any of our products in the U.S. We are pursuing opportunities to
license, or enter into distribution arrangements for, our oral, nasal and
injectable calcitonin products, as well as other possible peptide products.
However, we may not be successful in any of these efforts.
In June 2000, we entered into a joint venture with a pharmaceutical company
in the People's Republic of China for the manufacture and distribution of
injectable and nasal calcitonin products in China and possibly other Asian
markets, for the treatment of osteoporosis. The joint venture began operations
in March 2002. We expect joint venture sales of the injectable calcitonin
product to begin in April 2002. However, it is uncertain whether it will
generate meaningful revenues or profits for Unigene. We also have entered into
distribution agreements for our injectable formulation of calcitonin in the
United Kingdom, Ireland and Israel. To date, we have not received material
revenues from these distribution agreements.
Because we are a biopharmaceutical company, our operations are subject to
extensive government regulations.
Our laboratory research, development and production activities, as well as
those of our collaborators and licensees, are subject to significant regulation
by federal, state, local and foreign governmental authorities. In addition to
obtaining FDA approval and other regulatory approvals for our products, we must
obtain approvals for
-13-
our manufacturing facility to produce calcitonin and other peptides for human
use. The regulatory approval process for a pharmaceutical product requires
substantial resources and may take many years. Our inability to obtain approvals
or delays in obtaining approvals would adversely affect our ability to continue
our development program, to manufacture and sell our products, and to receive
revenue from milestone payments, product sales or royalties.
The FDA or other regulatory agencies may audit our production facility at
any time to ensure compliance with cGMP. These guidelines require that we
conduct our production operation in strict compliance with our established rules
for manufacturing and quality controls. Any of these agencies can suspend
production operations and product sales if they find significant or repeated
changes from these guidelines. A suspension would likely cause us to incur
additional costs or delays in product development.
If our products receive regulatory approval, our competitors may eventually
include large pharmaceutical companies with superior resources.
Unigene is engaged in a rapidly changing and highly competitive field. To
date, Unigene has concentrated its efforts primarily on one product --
calcitonin -- for treating osteoporosis and other indications. During 2001, we
began developing other peptide products, including parathyroid hormone for
osteoporosis. Like the market for any pharmaceutical product, the market for
treating osteoporosis and these other indications has the potential for rapid,
unpredictable and significant technological change. Competition is intense from
specialized biotechnology companies, major pharmaceutical and chemical companies
and universities and research institutions. We currently have no products
approved for sale in the U.S. If we are successful in obtaining approval for one
of our products, our future competitors will have substantially greater
financial resources, research and development staffs and facilities, and
regulatory experience than we do. Major companies in the field of osteoporosis
treatment include Novartis, Wyeth, Merck, Eli Lilly, and Procter and Gamble. We
would be able to compete with these companies only if we have partnered with a
major pharmaceutical or biotechnology company. Any one of these entities could,
at any time, develop products or a manufacturing process that could render our
technology or products noncompetitive or obsolete.
Our success depends upon our ability to protect our intellectual property
rights.
We filed applications for U.S. patents relating to proprietary peptide
manufacturing technology and oral formulations that we have invented in the
course of our research. To date, eight U.S. patents have issued and other
applications are pending. We have also made patent application filings in
selected foreign countries and numerous foreign patents have issued. We face the
risk that any of our pending applications will not issue as patents. Our
business also is subject to the risk that our issued patents will not provide us
with significant competitive advantages if, for example, a competitor were to
independently develop or obtain similar or superior technologies. To the extent
we are unable to protect our patents and patent applications, our investment in
those technologies may not yield the benefits that we expect.
We also rely on trade secrets to protect our inventions. Our policy is to
include confidentiality obligations in all research contracts, joint development
agreements and consulting relationships that provide access to our trade secrets
and other know-how. However, parties with confidentiality obligations could
breach their agreements causing us harm. If a secrecy obligation were to be
breached, we may not have the financial resources necessary for a legal
challenge. If licensees, consultants or other third parties use technological
information independently developed by them or by others in the development of
our products, disputes may arise from the use of this information and as to the
ownership rights to products developed using this information. These disputes
may not be resolved in our favor.
Our technology or products could give rise to product liability claims.
Our business exposes us to the risk of product liability claims that are a
part of human testing, manufacturing and sale of pharmaceutical products. The
administration of drugs to humans, whether in clinical trials or commercially,
can result in product liability claims even if our products are not actually at
fault for causing an injury. Furthermore, our products may cause, or may appear
to cause, adverse side effects or potentially dangerous drug interactions that
we may not learn about or understand fully until the drug is actually
manufactured and sold. Product liability claims can be expensive to defend and
may result in large judgments against us. Even if a product liability claim is
not successful, the adverse publicity, time, and expense involved in defending
such a claim may
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interfere with our business. We may not have sufficient resources to defend
against or satisfy these claims. Although we maintain $2,000,000 in product
liability insurance coverage, this amount may not be sufficient to protect us
against losses or may be unavailable in the future on acceptable terms, if at
all.
We may be unable to retain key employees or recruit additional qualified
personnel.
Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical, and managerial personnel. There
is intense competition for qualified personnel in our business. Therefore, we
may not be able to attract and retain the qualified personnel necessary for the
development of our business. The loss of the services of existing personnel, as
well as the failure to recruit additional key scientific, technical, and
managerial personnel in a timely manner would harm our research and development
programs and our business.
Dr. Warren Levy and Dr. Ronald Levy have been our principal executive
officers since our inception. We rely on them for their leadership and business
direction. Each of them has entered into an agreement with us providing that he
shall not engage in any other employment or business for the period of his
employment with us. However, each of them is only bound by his respective
employment agreement to provide services for a one-year term. The loss of the
services of either of these individuals could significantly delay or prevent the
achievement of our scientific and business objectives.
The market price of our common stock is volatile.
The market price of our common stock has been, and we expect it to continue
to be, highly unstable. Factors, including our announcement of technological
improvements or announcements by other companies, regulatory matters, research
and development activities, new or existing products or procedures, signing or
termination of licensing agreements, concerns about our financial condition,
operating results, litigation, government regulation, developments or disputes
relating to agreements, patents or proprietary rights, and public concern over
the safety of activities or products have had a significant impact on the market
price of our stock. We expect such factors to continue to impact our market
price for the foreseeable future. In addition, potential dilutive effects of
future sales of shares of Unigene common stock by Unigene or its stockholders,
including sales by Fusion and by Tail Wind and by the exercise and subsequent
sale of Unigene common stock by the holders of outstanding and future warrants
and options could have an adverse effect on the price of our stock.
Our common stock is classified as a "penny stock" under SEC rules which may make
it more difficult for our stockholders to resell our common stock.
Our common stock is traded on the OTC Bulletin Board. As a result, the
holders of our common stock may find it more difficult to obtain accurate
quotations concerning the market value of the stock. Stockholders also may
experience greater difficulties in attempting to sell the stock than if it was
listed on a stock exchange or quoted on the Nasdaq National Market or the Nasdaq
Small-Cap Market. Because Unigene common stock is not traded on a stock exchange
or on the Nasdaq National Market or the Nasdaq Small-Cap Market, and the market
price of the common stock is less than $5.00 per share, the common stock is
classified as a "penny stock." Rule 15g-9 of the Securities Exchange Act of 1934
imposes additional sales practice requirements on broker-dealers that recommend
the purchase or sale of penny stocks to persons other than those who qualify as
an "established customer" or an "accredited investor." This includes the
requirement that a broker-dealer must make a determination that investments in
penny stocks are suitable for the customer and must make special disclosures to
the customer concerning the risks of penny stocks. Application of the penny
stock rules to our common stock could adversely affect the market liquidity of
the shares, which in turn may affect the ability of holders of our common stock
to resell the stock.
The sale of our common stock to Fusion could cause the price of our common stock
to decline.
All of the shares offered for sale by Fusion are freely tradeable. However,
Fusion has agreed that it will not sell or otherwise transfer the 2,000,000
commitment shares or the 1,000,000 shares of common stock issuable upon the
exercise of the warrant that we issued to Fusion as part of its commitment fee
until the earlier of the termination of the common stock purchase agreement, the
occurrence of an event of default by us under the agreement or May 2003. Fusion
may sell none, some or all of the shares of common stock purchased from Unigene
at any time. We have been advised by Fusion that the shares registered in this
offering will be sold over a period of up to 24 months from May 2001. Depending
upon market liquidity at the time, the resale by Fusion of shares at any given
time could
-15-
cause the trading price of our common stock to decline. The sale by Fusion of a
substantial number of shares purchased from us, or the anticipation of such
sales, could make it more difficult for us to sell equity or equity related
securities in the future at a time and at a price that we might otherwise wish
to effect sales.
The sale of common stock to Fusion could cause substantial dilution of our
common stock and significantly impact our capital structure.
The price at which Fusion is obligated to purchase shares of our common
stock under the common stock purchase agreement will fluctuate based on the
market price of our common stock. See "Business - Fusion Financing" for a
detailed description of the purchase price.
If Fusion purchased the remaining balance of $18,004,270 purchasable under
the common stock purchase agreement, at a price equal to $.69, the closing sale
price of our common stock on March 15, 2002, Fusion would be able to purchase an
additional 26,093,145 shares of our common stock. These shares, along with the
2,000,000 shares and the 1,000,000 shares of common stock issuable upon the
exercise of the warrant which was issued to Fusion as a commitment fee, would
represent 36% of our outstanding common stock as of March 15, 2002.
The issuance of these shares would result in significant dilution to the
ownership interests of other holders of our common stock. The amount of dilution
would be higher if the market price of our common stock is lower than the
current market price at the time Fusion purchases shares under the common stock
purchase agreement, as a lower market price would cause more shares of our
common stock to be issuable to Fusion. Subsequent sales of these shares in the
open market by Fusion may also have the effect of lowering our stock price,
thereby increasing the number of shares issuable under the common stock purchase
agreement and consequently further diluting our outstanding shares. Although we
have the right to reduce or suspend Fusion purchases at any time, the financial
condition of Unigene at the time may require Unigene to waive its right to
suspend purchases even if there is a decline in the market price. If the closing
sale price of our common stock is at least $4.00 for five (5) consecutive
trading days, we have the right to increase the daily purchase amount above
$43,750, provided the closing sale price of our common stock remains at least
$4.00.
The existence of the agreement with Fusion to purchase shares of Unigene common
stock could cause downward pressure on the market price of the Unigene common
stock.
Both the actual dilution and the potential for dilution resulting from
sales of Unigene common stock to Fusion could cause holders to elect to sell
their shares of Unigene common stock, which could cause the trading price of the
Unigene common stock to decrease. In addition, prospective investors
anticipating the downward pressure on the price of the Unigene common stock due
to the shares available for sale by Fusion could refrain from purchases or cause
sales or short sales in anticipation of a decline of the market price, which may
itself cause the price of our stock to decline.
The issuance of our common stock to Tail Wind could cause the price of our
common stock to decline. It could also cause dilution of our common stock.
On April 9, 2002, Unigene and Tail Wind entered into a settlement agreement
whereby Unigene has agreed to issue to Tail Wind a $1 million secured promissory
note and two million shares of common stock. See "Item 3-Legal Proceedings."
Generally, the two million shares will be issued to Tail Wind at a rate of
50,000 shares per week over a 40-week period, depending on trading volume. Tail
Wind may sell none, some or all of the shares of common stock issued to it at
any time. Depending upon market liquidity, the resale of the shares by Tail Wind
could cause the trading price of our common stock to decline. Moreover, the
issuance of the shares to Tail Wind could result in dilution to the ownership
interests of other holders of our common stock. Both the actual dilution and the
potential for dilution resulting from the issuance of our common stock to Tail
Wind could cause holders to elect to sell their shares of common stock, which
could cause the trading price of our common stock to decrease. In addition,
prospective investors anticipating the downward pressure on the price of our
common stock due to the shares available for sale by Tail Wind could refrain
from purchases or cause sales or short sales in anticipation of a decline of the
market price, which may itself cause the price of our stock to decline.
Item 2. Properties
We own a one-story office and laboratory facility consisting of
approximately 12,500 square feet. The facility is located on a 2.2 acre site in
Fairfield, New Jersey.
Our 32,000 square foot cGMP production facility, of which 20,000 square
feet are currently being used for the production of calcitonin and can be used
for the production of other peptides, was constructed in a building located in
Boonton, New Jersey. We lease the facility under a ten-year agreement, which
began in February 1994. We have two 10-year renewal options and an option to
purchase the facility.
We believe that these facilities are adequate for current purposes.
Item 3. Legal Proceedings
In July 2000, the Tail Wind Fund, Ltd., the holder of $2,000,000 in
principal amount of 5% convertible debentures issued by Unigene to Tail Wind in
a private placement completed in June 1998, filed with the American Arbitration
Association a demand for arbitration against Unigene. In its demand, Tail Wind
claimed that it was owed, as of June 30, 2000, approximately $3,400,000,
consisting of principal, interest and penalties, resulting from
-16-
Unigene's default under various provisions of the debentures and related
agreements. These alleged defaults included Unigene's failure to redeem the
debentures after becoming obligated to do so, the failure to pay interest when
due, and the failure to pay liquidated damages arising from the delisting of the
Unigene common stock from the Nasdaq National Market. In June 2001, the
arbitration was postponed to allow Tail Wind and Unigene to engage in settlement
discussions. On April 9, 2002, Unigene and Tail Wind entered into a settlement.
Pursuant to the terms of the settlement agreement, Tail Wind has agreed to
surrender to Unigene the $2 million in principal amount of convertible
debentures that remain outstanding and to release all claims against Unigene
relating to Tail Wind's purchase of the convertible debentures, including all
issues raised in the arbitration, which are currently in excess of $4 million.
In exchange, Unigene has agreed to issue to Tail Wind a $1 million secured
promissory note and two million shares of Unigene common stock. The note bears
interest at a rate of 6% per annum and principal and interest are due in
February 2005. The shares are valued at $1.1 million in the aggregate, based on
Unigene's closing stock price on April 9, 2002. Unigene will therefore recognize
a gain for accounting purposes of approximately $2 million on the extinguishment
of debt and related interest. Unigene is required to deposit the two million
shares of common stock with an escrow agent and to file a registration statement
covering the resale of the shares with the Securities and Exchange Commission.
Once the registration statement is declared effective by the SEC, the escrow
agent will release the shares to Tail Wind at a rate of 50,000 shares per week
over a 40-week period, depending on trading volume. If the registration
statement is not declared effective on a timely basis as provided for in the
settlement agreement, Unigene may incur penalties of $1,000 per day.
In July 2000, Reseau de Voyage Sterling, Inc. filed suit against Unigene in
the Supreme Court of the State of New York. Unigene removed this case to the
United States District Court for the Southern District of New York. The
plaintiff, which purchased from a third party a warrant to purchase one million
shares of Unigene common stock, alleges that Unigene breached a verbal agreement
with the plaintiff to extend the term of the warrant beyond its expiration date.
The plaintiff is seeking damages of $2 million. We believe that this suit is
completely without merit, and we will continue to vigorously contest the claim.
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, 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Unigene has not declared or paid any cash dividends since inception, and
does not anticipate paying any in the near future.
Unigene became a public company in 1987. As of March 1, 2002, there were
491 holders of record of our common stock. Our common stock is traded on the OTC
Bulletin Board under the symbol UGNE. The prices below represent high and low
sale prices.
2001 2000
---- ----
High-Low High-Low
-------- --------
1/st/ Quarter: $1.88-0.38 $5.38-0.54
2/nd/ Quarter: 0.65-0.33 3.66-1.44
3/rd/ Quarter: 0.44-0.19 3.03-2.00
4/th/ Quarter: 0.66-0.33 3.00-0.97
Recent Sales of Unregistered Securities
In the quarter ended December 31, 2001, Unigene sold 2,533,493 shares of
common stock to Fusion Capital Fund II, LLC for gross proceeds of $949,434. All
of such shares were issued by Unigene without registration in reliance on an
exemption under Section 4(2) of the Securities Act of 1933, because the offer
and sale was made to a limited number of investors in a private transaction.
-17-
Item 6. Selected Financial Data
STATEMENT OF OPERATIONS DATA
- ----------------------------
(In thousands, except per share data)
Year Ended December 31,
---------------------------------------------------------------- -------------
2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- -------------
Revenue:
Licensing & other revenue $ 865 3,287 $ 9,589 $ 5,050 $ 3,003
Costs and expenses:
Research & development expenses 9,122 11,484 9,375 9,042 9,416
General and administrative 2,700 3,187 2,212 2,068 2,016
Loss before extraordinary item and
cumulative effect of accounting
change (12,472) (11,469) (1,577) (6,737) (10,128)
Extraordinary item -- -- -- (144) --
Cumulative effect of accounting
change -- (1,000) -- -- --
Net loss (12,472) (12,469) (1,577) (6,881) (10,128)
Basic and diluted loss per share:
Loss before extraordinary item and
cumulative effect of accounting change (.26) (.26) (.04) (.17) (.27)
Extraordinary item -- -- -- (.01) --
Cumulative effect of accounting change -- (.02) -- -- --
-------- -------- -------- -------- --------
Net loss (.26) (.28) (.04) (.18) (.27)
======== ======== ======== ======== ========
Weighted average number of shares
outstanding 47,483 44,008 40,719 38,701 37,397
BALANCE SHEET DATA
- ------------------
(In thousands) December 31,
----------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents $ 405 $ 17 $ 683 $ 403 $ 2,126
Working capital (deficiency) (22,089) (13,267) (2,759) (1,805) 310
Total assets 7,519 9,047 13,778 11,564 13,692
Long-term debt and other long-term
obligations 509 546 1,003 3,931 1,608
Total liabilities 23,359 14,540 9,049 7,344 4,258
Total stockholders' equity (deficit) (15,840) (5,493) 4,729 4,220 9,433
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion together with our financial
statements and the notes appearing elsewhere in this Form 10-K. The following
discussion contains forward-looking statements. Our actual results may differ
materially from those projected in the forward-looking statements. Factors that
might cause future results to differ materially from those projected in the
forward-looking statements include those discussed in "Risk Factors" and
elsewhere in this Form 10-K.
RESULTS OF OPERATIONS
Years ended December 31, 2001, 2000 and 1999
Revenue.
- -------
Revenue decreased 74% to $865,000 for the year ended December 31, 2001 as
compared to $3,287,000 for the year ended December 31, 2000, due to Pfizer's
termination of its license agreement with Unigene in March 2001. Revenue
decreased 66% to $3,287,000 for the year ended December 31, 2000 as compared to
$9,589,000 for the
-18-
year ended December 31, 1999. Revenue for 2001 consisted primarily of $339,000
in bulk calcitonin sales as well as deferred revenue, final analytical
testing services provided to Pfizer and $94,000 received in a grant from the
National Institute of Health. In 2000 and 1999, revenue consisted primarily of
milestone revenue from Pfizer resulting from the achievement of milestones in
the development of an oral calcitonin product for treating osteoporosis. Revenue
in those years was affected by the timing of the completion of the various
milestones. In addition, revenue for the year ended December 31, 2000 included
$800,000 from the amortization of deferred revenue related to the initial
licensing fee paid by Pfizer in 1997 and $345,000 for analytical testing
services provided to Pfizer.
Research and Development Expenses.
- ---------------------------------
Research and development, Unigene's largest expense, decreased 21% in 2001
to $9,122,000 from $11,484,000 in 2000 and increased 22% in 2000 from $9,375,000
in 1999. The decrease in 2001 was primarily attributable to decreased expenses
related to Unigene's nasal calcitonin product, as well as decreased production
expenditures. The increased expenditures in 2000 were primarily attributable to
Unigene's clinical trials for its nasal calcitonin product and an increase in
expenditures related to an increase in calcitonin production and the write-off
of inventory in the fourth quarter as a result of Pfizer's termination of our
agreement, partially offset by a reduction in consulting fees related to the
Pfizer collaboration. Expenditures for the sponsorship of collaborative research
programs were $405,000, $411,000 and $250,000 in 2001, 2000 and 1999,
respectively, which are included as research and development expenses. A portion
of these expenditures was reimbursed by Pfizer in 1999.
General and Administrative Expenses.
- -----------------------------------
General and administrative expenses decreased 15% in 2001 to $2,700,000
from $3,187,000 in 2000 and increased 44% in 2000 from $2,212,000 in 1999. The
2001 decrease was primarily attributable to the recognition of a non-cash
expense in 2000 of $220,000 due to the issuance of a warrant to a consultant,
and to the recognition of a $350,000 expense in 2000 to terminate Unigene's
former joint venture in China. This was partially offset by the recognition of a
non-cash expense in 2001 of $225,000 due to additional shares of common stock to
be issued to two consultants as compensation for the lack of an effective
registration statement. The 2000 increase was primarily due to the recognition
of non-cash expenses of $220,000 due to the issuance of warrants to a consultant
and stock option compensation of $399,000, in addition to the recognition of a
$350,000 expense to terminate Unigene's former joint venture in China.
Interest Income.
- ---------------
Interest income decreased $41,000 or 84% in 2001 from 2000, after
increasing $12,000 or 31% in 2000 from 1999. The 2001 decrease in interest
income resulted from reduced funds available for investment. The 2000 increase
was due to higher interest rates on investments.
Interest Expense.
- ----------------
Interest expense increased $885,000 or 74% in 2001 to $2,084,000 from
$1,199,000 in 2000 after increasing $27,000 or 2% in 2000 from $1,171,000 in
1999. Interest expense increased in 2001 due to increased stockholders' loans
and higher interest rates on a portion of these loans. Stockholders' loans to
Unigene increased $6,110,000 during 2001. In addition, due to the fact that
Unigene did not make principal and interest payments on stockholders' loans when
due, the interest rate on $1,100,000 of these new loans and on $4,743,323 of
prior loans increased an additional 5% per year and applied to both past due
principal and interest. This additional interest was approximately $512,000 for
2001. Interest expense increased in 2000, as compared to 1999, due to increased
notes payable to stockholders and to higher interest rates in 2000 on the 5%
convertible debentures, offset by a reduction in the amortization of the
beneficial conversion feature and related warrants on the 5% convertible
debentures as compared to 1999. The annual interest rate on the $2,000,000 in
outstanding principal amount of the 5% Debentures increased in 2000 to 20%
resulting from the failure of Unigene to make a semi-annual interest payment
that was due in January 2000. In addition, since October 1999, Unigene has been
accruing additional interest expense monthly in an amount equal to 2% of the
outstanding principal amount of the 5% Debentures as a penalty for the removal
of Unigene's Common Stock from trading on the Nasdaq Stock Market in October
1999. The expenses incurred in connection with the 5% Debentures in 2000 were
partially offset by a 50% decrease in the principal balance outstanding as a
result of conversions to common stock during 1999.
Income Tax Benefit.
- ------------------
-19-
The income tax benefit in 2001 of $561,000, in 2000 of $1,065,000 and in
1999 of $1,553,000 consists of proceeds received for the sale of a portion of
Unigene's state tax net operating loss carryforwards and research credits under
a New Jersey Economic Development Authority program, which allows certain New
Jersey taxpayers to sell their state tax benefits to third parties. The purpose
of the New Jersey program is to provide financial assistance to high-technology
and biotechnology companies in order to facilitate future growth and job
creation.
Cumulative Effect of Accounting Change.
- --------------------------------------
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
which we refer to as SAB 101. Prior to the implementation of SAB 101,
non-refundable license fees received upon execution of license agreements were
recognized as revenue immediately. SAB 101 summarizes certain of the staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements and specifically addresses revenue
recognition in the biotechnology industry for non-refundable technology access
fees and other non-refundable fees. Unigene was required to adopt SAB 101, as
amended, in the fourth quarter of 2000 with an effective date of January 1,
2000, and the recognition of a cumulative effect adjustment calculated as of
January 1, 2000. Unigene adopted SAB 101 in 2000, changing its revenue
recognition policy for up-front licensing fees that require services to be
performed in the future from immediate revenue recognition to deferral of
revenue with the up-front fee recognized over the life of the agreement. In
1997, Unigene recognized $3,000,000 in revenue from an up-front licensing fee
from Pfizer. With the adoption of SAB 101, Unigene is now recognizing this
revenue over a 45 month period, equivalent to the term of its oral calcitonin
agreement with Pfizer which was terminated in March 2001. Unigene therefore
recognized a non-cash cumulative effect adjustment of $1,000,000 as of January
1, 2000 representing a revenue deferral over the remaining 15 months of the
agreement. Unigene recognized $800,000 in revenue in 2000 and $200,000 of
revenue in 2001 as a result of this deferral.
Net Loss.
- --------
During 2001, operating expenses decreased from the prior year. In addition,
a cumulative effect adjustment was recognized in 2000. This was offset by a
reduction in revenue from Pfizer, after Pfizer terminated its license agreement
with Unigene, and also by an increase in interest expense. As a result, net loss
increased $3,000 for the year ended December 31, 2001 from the prior year.
During 2000, revenue decreased approximately $6,300,000 principally due to the
timing of the achievement of various milestones in the Pfizer agreement. In
addition, operating expenses were higher as Unigene increased its product
commercialization efforts including its nasal calcitonin clinical trials. Also,
Unigene recognized a cumulative charge from an accounting change offset by a
realized income tax benefit. Therefore, net loss increased $10,892,000 for the
year ended December 31, 2000 from the prior year.
Summary of Critical Accounting Policies.
- ---------------------------------------
The Securities and Exchange Commission recently issued disclosure guidance
for "critical accounting policies". The SEC defines "critical accounting
policies" as those that are both important to the portrayal of a company's
financial condition and results, and require management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain.
The following discussion of critical accounting policies represents our
attempt to bring to the attention of the readers of this report those accounting
policies which we believe are critical to our financial statements and other
financial disclosure. It is not intended to be a comprehensive list of all of
our significant accounting policies which are more fully described in Note 3 of
the Notes to the Financial Statements included in this Annual Report. In many
cases, the accounting treatment of a particular transaction is specifically
dictated by generally accepted accounting principles, with no need for
management's judgment in their application. There are also areas in which the
selection of an available policy would not produce a materially different
result.
Revenue Recognition: Revenue from the sale of product is recognized upon
shipment to the customer. Revenue from grants is recognized when earned. Such
revenues generally do not involve difficult, subjective or complex judgments.
Non-refundable milestone payments that represent the completion of a separate
earnings process and a significant step in the research and development process
are recognized as revenue when earned. This sometimes requires management to
judge whether or not a milestone has been met, and when it should be
-20-
recognized in the financial statements. Non-refundable license fees received
upon execution of license agreements where Unigene has continuing involvement
are deferred and recognized as revenue over the life of the agreement. This
requires management to estimate the expected term of the agreement or, if
applicable, the estimated life of its licensed patents.
Inventory Valuation: Inventories are stated at the lower of cost (using the
first-in, first-out method) or market. This requires management to estimate the
marketability of its products. Currently, Unigene has no approved products for
sale in the United States. However, we do sell calcitonin overseas and in the
U.S. for research purposes. We therefore capitalize and recognize in finished
goods inventory the estimated value of saleable calcitonin.
Accounting for Stock Options: We account for stock options granted to
employees and directors in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. As such, compensation expense is
recorded on fixed stock option grants only if the current fair value of the
underlying stock exceeds the exercise price of the option at the date of grant
and it is recognized on a straight-line basis over the vesting period. We
account for stock options granted to non-employees on a fair value basis in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", and
Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." As a result, the non-cash charge to operations for
non-employee options with vesting or other performance criteria is affected each
reporting period by changes in the fair value of our common stock. Had
compensation cost for options granted to employees and directors been determined
consistent with SFAS No. 123, Unigene's net loss would have increased for the
years ended December 31, 2001, 2000 and 1999 by approximately $780,000, $175,000
and $605,000, respectively.
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Liquidity and Capital Resources.
- -------------------------------
At December 31, 2001, Unigene had cash and cash equivalents of $405,000, an
increase of $388,000 from December 31, 2000.
We do not have sufficient financial resources to continue to fund our
operations at the current level. Unigene has incurred annual operating losses
since its inception and, as a result, at December 31, 2001, had an accumulated
deficit of approximately $87,850,000 and a working capital deficiency of
approximately $22,100,000. The independent auditors' report covering Unigene's
2001 financial statements includes an explanatory paragraph stating that these
factors raise substantial doubt about our ability to continue as a going
concern. However, the financial statements have been prepared on a going concern
basis and as such do not include any adjustments that might result from the
outcome of this uncertainty.
Unigene's cash requirements to operate its research and peptide
manufacturing facilities and develop its products are approximately $10 to 11
million per year. In addition, Unigene has principal and interest obligations
under the Tail Wind note and its outstanding notes payable to the Levys, as well
as obligations relating to its current and former joint ventures in China.
Our future ability to generate cash from operations will depend primarily
upon signing research or licensing agreements, achieving defined benchmarks in
such agreements that entitle Unigene to receive milestone payments and receiving
royalties from the sale of its licensed products. We are actively seeking
licensing and/or supply agreements with pharmaceutical companies for oral, nasal
and injectable forms of calcitonin as well as for other oral peptides. However,
we may not be successful in licensing any of our products.
In July 1997, Unigene entered into an agreement under which it granted to
Warner-Lambert Company a worldwide license to use its oral calcitonin
technology. In June 2000, Pfizer Inc. acquired Warner-Lambert.
-21-
Through December 31, 2001, we had received a total of $22.9 million from Pfizer
consisting of $3 million for an equity investment, $3 million for a licensing
fee, $400,000 for analytical testing services and recognized an aggregate of
$16.5 million in milestone revenue. Pfizer conducted a Phase I/II human study
which was completed in December 2000. Pfizer analyzed the results of the study
and informed Unigene in March 2001 that the study did not achieve Pfizer's
desired results. Pfizer terminated the license agreement citing this conclusion.
As a result of the termination, Pfizer was no longer obligated to make
additional milestone payments or royalty payments to us (previously achieved
milestones had been paid in full prior to December 31, 2000). At the time the
agreement was terminated, there were remaining milestone payments in the
aggregate amount of $32 million. Of this total, $16 million was related to
commencement of clinical trials or regulatory submissions and $16 million was
related to regulatory approvals in the U.S. and overseas. We believe that this
study, in which an FDA approved product also did not work and which produced
results contrary to many published studies, was not capable of determining the
performance of our oral calcitonin product. Unigene also believes that the
results would have been more favorable if subjects in the study had received
calcium supplementation in addition to the calcitonin. Therefore, Unigene
intends to continue the development of its oral calcitonin product as a
treatment of osteoporosis, and is seeking potential licensees in the U.S. and
other countries. Until we are able to enter into a new licensing agreement, the
termination of the Pfizer agreement leaves us without a source of significant
revenue and makes us dependent upon alternative methods of financing our current
and future operations such as related-party loans and the equity financing
discussed below.
As a result of the termination of the Pfizer agreement, we no longer have
restrictions on selling bulk calcitonin. During 2001, we sold a total of
$339,000 of bulk calcitonin. Unigene also has the right to license the use of
its technologies for injectable and nasal formulations of calcitonin on a
worldwide basis. Unigene has licensed distributors in the United Kingdom,
Ireland and Israel for its injectable product. However, these distribution
agreements have not produced significant revenues. In June 2000, we entered into
a joint venture agreement in China with SPG to manufacture and market our
injectable and nasal products. Unigene is actively seeking other licensing
and/or supply agreements with pharmaceutical companies for its injectable and
nasal calcitonin products and for other pharmaceutical products that can be
manufactured and/or delivered using its patented technologies, and is also
exploring other opportunities including business combinations. However, we may
not be successful in our efforts to enter into any additional revenue generating
agreements.
We are engaged in the research, production and delivery of peptide-related
products. Our primary focus has been on the development of various forms of
calcitonin and other peptide products for the treatment of osteoporosis,
including nasal and oral calcitonin, and, beginning in 2001, parathyroid
hormone. In each case, we seek to develop the basic product and then license the
product to an established pharmaceutical company to complete the development,
clinical trials and regulatory process. As a result, we will not control the
nature, timing or cost of bringing our products to market. We do not track costs
on a per project basis, and therefore are unable to allocate our total research
and development costs incurred to date to our various products. Each of these
products is in various stages of completion. For nasal calcitonin, we filed an
Investigational New Drug Application with the FDA in February 2000 and
successfully completed human studies using our product. The remaining steps to
commercialize this product would include the signing of a license or
distribution agreement and the filing of an NDA with the FDA around mid-year
2002. The remaining cost for preparing and filing the NDA is approximately
$250,000. Unigene is seeking a licensing partner or contract sales organization
which could proceed to market nasal calcitonin after FDA approval. We believe
that this product could be on the market as soon as 2003. For oral calcitonin,
Pfizer terminated its license agreement with Unigene in March 2001 and as a
result we will require a new licensee to repeat a Phase I/II clinical trial and
also to conduct a Phase III clinical trial. We expect that the costs of these
trials would be borne by our future licensee due to our limited financial
resources. Because multiple clinical trials are still necessary for our oral
calcitonin product, the product launch would take at least several years.
Parathyroid hormone is in very early stages of development. It is too early to
speculate on a marketable product using our parathyroid hormone. However, we
would expect cash inflows prior to commercialization from any license agreement
we sign in the form of up-front payments and milestone payments. Due to our
limited financial resources, the delay in signing license or distribution
agreements for our products, or the delay in obtaining regulatory approvals for
our products would have an adverse effect on our operations and our cash flow.
We have a number of future payment obligations under various agreements. They
are summarized at December 31, 2001, except as to the Tail Wind note which is as
of April 9, 2002, as follows:
-22-
Contractual Obligations Total 2002 2003 2004 Thereafter
----------------------- ----- ---- ---- ---- ----------
Chinese joint ventures 1,165,000 670,000 -- 495,000 --
Tail Wind Note 1,000,000 -- -- -- 1,000,000
Short-term notes payable - stockholders 8,983,323 8,983,323 -- -- --
Long-term notes payable - stockholders 1,870,000 1,870,000 -- -- --
Capital leases 43,808 29,677 14,131 -- --
Operating leases 544,169 245,180 227,010 39,676 32,303
Executive compensation 335,000 335,000 -- -- --
--------------------------------------------------------------------------
Total Contractual Obligations 13,941,300 12,133,180 241,141 534,676 1,032,303
--------------------------------------------------------------------------
Unigene maintains its peptide production facility on leased premises in
Boonton, New Jersey. We began production under current Good Manufacturing
Practice guidelines at this facility in 1996. The current lease expires in 2004.
Unigene has two consecutive ten-year renewal options under the lease, as well as
an option to purchase the facility. During 2001, Unigene invested approximately
$20,000 in fixed assets and leasehold improvements. Currently, Unigene has no
material commitments outstanding for capital expenditures relating to either the
Boonton facility or the office and laboratory facility in Fairfield, New Jersey.
Under the terms of the joint venture with SPG, Unigene is obligated to
contribute up to $405,000 in cash during 2002 and up to an additional $495,000
in cash within two years thereafter. However, these amounts may be reduced or
offset by Unigene's share of joint venture profits. As of December 31, 2001,
Unigene had not made any contributions to the joint venture. The joint venture
began operations in March 2002. In addition, Unigene is obligated to pay to the
Qingdao General Pharmaceutical Company an aggregate of $350,000 in 14 monthly
installment payments of $25,000 in order to terminate its former joint venture
in China, of which $85,000 had been paid as of December 31, 2001. We recognized
the entire $350,000 obligation as an expense in 2000.
In June 1998, Unigene completed a private placement of $4,000,000 in
principal amount of 5% convertible debentures from which Unigene realized net
proceeds of approximately $3,750,000. The 5% debentures were convertible into
shares of Unigene's common stock. The interest on the debentures, at our option,
was payable in shares of common stock. Upon conversion, the holder of a 5%
debenture was entitled to receive warrants to purchase a number of shares of
common stock equal to 4% of the number of shares issued as a result of the
conversion. However, the number of shares of common stock that Unigene was
obligated to issue, in the aggregate, upon conversion, when combined with the
shares issued in payment of interest and upon the exercise of the warrants, was
limited to 3,852,500 shares. After this share limit was reached, we became
obligated to redeem all 5% debentures tendered for conversion at a redemption
price equal to 120% of the principal amount, plus accrued interest. In December
1999, Unigene was unable to convert $200,000 in principal of the 5% debentures
tendered for conversion because the conversion would have exceeded the share
limit. As a result, Unigene accrued, as of December 31, 1999, an amount equal to
$400,000 representing the 20% premium on the outstanding $2,000,000 in principal
amount of 5% debentures that had not been converted. As of December 31, 2001,
all of the $2,000,000 in principal amount of 5% debentures were tendered for
conversion and therefore are classified as a current liability in the amount of
$2,400,000. Through December 31, 2001, Unigene issued a total of 3,703,362
shares of common stock upon conversion of $2,000,000 in principal amount of the
5% debentures and in payment of interest on the 5% debentures. Also, Unigene
issued an additional 103,032 shares of common stock upon the cashless exercise
of all of the 141,123 warrants issued upon conversion of the 5% debentures.
On January 5, 2000, Unigene failed to make the required semi-annual
interest payment on the outstanding 5% debentures. As a result, the interest
rate on the outstanding 5% debentures has increased to 20% per year. The
semi-annual interest payments due July 5, 2000, January 5, 2001, July 5, 2001
and January 5, 2002 also have not been made. As of March 1, 2002, the accrued
and unpaid interest on the 5% debentures totaled approximately $933,000. In
addition, due to the delisting of Unigene's common stock from the Nasdaq
National Market in October 1999, we became obligated under a separate agreement
to pay the holder of the 5% debentures an amount equal to 2% of the outstanding
principal amount of the debentures per month. Unigene has not made any of these
payments to date, but has accrued the amounts as additional interest expense. As
of March 1, 2002, the accrued and unpaid amount of this penalty totaled
approximately $1,177,000.
-23-
Because of our failure to make cash payments to the holder of the
debentures, an event of default occurred. As a result, the holder filed a demand
for arbitration against Unigene in July 2000. In June 2001, the arbitration was
postponed to allow Tail Wind and Unigene to engage in settlement discussions. On
April 9, 2002, Unigene and Tail Wind entered into a settlement. Pursuant to the
terms of the settlement agreement, Tail Wind has agreed to surrender to Unigene
the $2 million in principal amount of convertible debentures that remain
outstanding and to release all claims against Unigene relating to Tail Wind's
purchase of the convertible debentures, including all issues raised in the
arbitration, which are currently in excess of $4 million. In exchange, Unigene
has agreed to issue to Tail Wind a $1 million secured promissory note and two
million shares of Unigene common stock. The note bears interest at a rate of 6%
per annum and principal and interest are due in February 2005. The shares are
valued at $1.1 million in the aggregate, based on Unigene's closing stock price
on April 9, 2002. Unigene will therefore recognize a gain for accounting
purposes of approximately $2 million on the extinguishment of debt and related
interest. Unigene is required to deposit the two million shares of common stock
with an escrow agent and to file a registration statement covering the resale of
the shares with the Securities and Exchange Commission. Once the registration
statement is declared effective by the SEC, the escrow agent will release the
shares to Tail Wind at a rate of 50,000 shares per week over a 40-week period,
depending on trading volume. If the registration statement is not declared
effective on a timely basis as provided for in the settlement agreement, Unigene
may incur penalties of $1,000 per day.
Unigene will therefore recognize a gain for accounting
purposes of approximately $2 million on the extinguishment of debt and related
interest in the second quarter of 2002. Generally, the two million shares will
be issued to Tail Wind at a rate of 50,000 shares per week over a 40-week
period, depending on trading volume. Unigene is required to file a registration
statement covering the resale of the shares with the Securities and Exchange
Commission.
To satisfy Unigene's short-term liquidity needs, Jay Levy, the Chairman of
the Board and an officer of Unigene, and Warren Levy and Ronald Levy, directors
and officers of Unigene, and another Levy family member from time to time have
made loans to Unigene. During 2001, Jay Levy made demand loans to Unigene of
$6,100,000 and Warren Levy and Ronald Levy each made demand loans to Unigene of
$5,000. Unigene has not made principal and interest payments on certain loans
when due. However, the Levys waived all default provisions including additional
interest penalties due under these loans through December 31, 2000. Beginning
January 1, 2001, interest on loans originated through March 4, 2001 increased an
additional 5% per year and is calculated on both past due principal and
interest. This additional interest was approximately $512,000, and total
interest expense on all Levy loans was approximately $1,087,000 for 2001. As of
March 1, 2002, total accrued interest on all Levy loans was approximately
$2,199,000 and the outstanding loans by these individuals to Unigene, classified
as short-term debt, totaled $11,203,323 and consist of:
. Loans from Jay Levy in the aggregate principal amount of $3,465,000, which
are evidenced by demand notes bearing a floating interest rate equal to the
Merrill Lynch Margin Loan Rate plus 5.25% (11.00% at March 1, 2002) that
are classified as short-term debt. These loans were originally at the
Merrill Lynch Margin Loan Rate plus .25%. These loans are secured by a
security interest in Unigene's equipment and real property. Accrued
interest on these loans at March 1, 2002 was approximately $1,171,000.
. Loans from Jay Levy in the aggregate principal amount of $1,870,000
evidenced by term notes maturing January 2002, and bearing interest at the
fixed rate of 11% per year. These loans were originally at 6%. These loans
are secured by a security interest in all of Unigene's equipment and a
mortgage on Unigene's real property. The terms of the notes require Unigene
to make installment payments of principal and interest beginning in October
1999 and ending in January 2002 in an aggregate amount of $72,426 per
month. No installment payments have been made to date. Accrued interest on
these loans at March 1, 2002 was approximately $439,000.
. Loans from Jay Levy in the aggregate principal amount of $5,350,000 which
are evidenced by demand notes bearing a floating interest rate equal to the
Merrill Lynch Margin Loan Rate plus .25%, (6.00% at March 1, 2002) and are
classified as short-term debt and which are secured by a security interest
in certain of our patents. Accrued interest on these loans at March 1, 2002
was approximately $211,000.
. Loans from Warren Levy in the aggregate principal amount of $260,000 which
are evidenced by demand notes bearing a floating interest rate equal to the
Merrill Lynch Margin Loan Rate plus 5.25% (11.00% at March 1, 2002) that
are classified as short-term debt. These loans were originally at the
Merrill Lynch Margin Loan Rate plus .25%. An additional loan in the amount
of $5,000 bears interest at the Merrill Lynch Loan Rate plus .25% (6.00% at
March 1, 2002) and is classified as short-term debt. These loans are
secured by a secondary security interest in Unigene's equipment and real
property. Accrued interest on these loans at March 1, 2002 was
approximately $190,000.
-24-
. Loans from Ronald Levy in the aggregate principal amount of $248,323 which
are evidenced by demand notes bearing a floating interest rate equal to
the Merrill Lynch Margin Loan Rate plus 5.25% (11.00% at March 1, 2002)
that are classified as short-term debt. These loans were originally at the
Merrill Lynch Margin Loan Rate plus .25%. An additional loan in the amount
of $5,000 bears interest at the Merrill Lynch Margin Loan Rate plus .25%
(6.00% at March 1, 2002) and is classified as short-term debt. These loans
are secured by a secondary security interest in Unigene's equipment and
real property. Accrued interest on these loans at March 1, 2002 was
approximately $188,000.
Under the agreement with Fusion Capital, Unigene has the contractual right
to sell to Fusion, subject to certain conditions, at the then current market
price, on each trading day during the term of the agreement $43,750 of its
common stock up to an aggregate of $21,000,000. See Note 8 to our financial
statements. The Board of Directors has authorized the sale to Fusion of up to
21,000,000 shares of Unigene common stock. From May 18, 2001 through March 15,
2002, Unigene has received $2,995,730 through the sale of 7,197,485 shares to
Fusion, before cash expenses of approximately $400,000. Our sales of common
stock to Fusion have been below the maximum level due to the share price and
trading volume of our common stock. As a result, we are still borrowing from the
Levys to supplement the funding of our operations. Depending on the future price
at which shares are sold, Fusion could provide Unigene with sufficient funding
to sustain its operations for up to two years. The ability of Unigene to realize
these funds will also depend on its continuing compliance with the Fusion
agreement.
The extent to which we intend to utilize Fusion as a source of financing
will depend on a number of factors, including the prevailing market price of our
common stock and the extent to which we are able to secure working capital from
other sources, such as through the entry into licensing agreements or the sale
of calcitonin, both of which we are actively exploring. If we are unable to
enter into a significant revenue generating license or other arrangement in the
near term, we would need either to secure another source of funding in order to
satisfy our working capital needs or significantly curtail our operations. We
also could consider a sale or merger of Unigene. Should the funding we require
to sustain our working capital needs be unavailable or prohibitively expensive
when we require it, the consequence would be a material adverse effect on our
business, operating results, financial condition and prospects. Unigene believes
that satisfying its capital requirements over the long term will require the
successful commercialization of its oral or nasal calcitonin products or another
peptide product in the United States and abroad. However, it is uncertain
whether or not any of its products will be approved or will be commercially
successful. In addition, the commercialization of its oral calcitonin product
may require Unigene to incur additional capital expenditures to expand or
upgrade its manufacturing operations. Unigene cannot determine either the cost
or the timing of such capital expenditures at this time.
As of December 31, 2001, Unigene had available for federal income tax
reporting purposes net operating loss carryforwards in the approximate amount of
$80,000,000, expiring from 2002 through 2021, which are available to reduce
future earnings which would otherwise be subject to federal income taxes. In
addition, as of December 31, 2001, Unigene has research and development credits
in the approximate amount of $3,000,000, which are available to reduce the
amount of future federal income taxes. These credits expire from 2002 through
2021. Unigene has New Jersey operating loss carryforwards in the approximate
amount of $26,700,000, expiring from 2005 through 2008, which are available to
reduce future earnings, which would otherwise be subject to state income tax. As
of December 31, 2001, approximately $14,700,000 of these New Jersey loss
carryforwards has been approved for future sale under a program of the New
Jersey Economic Development Authority, which we refer to as the NJEDA. In order
to realize these benefits, Unigene must apply to the NJEDA each year and must
meet various requirements for continuing eligibility. In addition, the program
must continue to be funded by the State of New Jersey, and there are limitations
based on the level of participation by other companies. As a result, future tax
benefits will be recognized in the financial statements as specific sales are
approved. In November 2001, the NJEDA approved a portion of our New Jersey tax
benefits for current sale. We have sold tax benefits and realized a total of
$832,000 in December 2001 and January 2002.
Unigene follows Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes." Given our past history of incurring
operating losses, any deferred tax assets that are recognizable under SFAS No.
109 were fully reserved. As of December 31, 2001 and 2000 under SFAS No. 109,
Unigene had deferred tax assets of approximately $34,000,000 and $29,000,000,
respectively, subject to valuation allowances of $34,000,000 and $29,000,000,
respectively. The deferred tax assets are primarily a result of Unigene's net
operating losses and tax credits.
-25-
Recently Issued Accounting Pronouncements.
- -----------------------------------------
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of Statement
142. Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Unigene is required to adopt the provisions of
Statement 142 effective January 1, 2002.
Upon adoption of Statement 142, Unigene will be required to reassess the
useful lives and residual values of all intangible assets acquired in purchase
business combinations, and make any necessary amortization period adjustments by
the end of the first interim period after adoption. In addition, to the extent
an intangible asset is identified as having an indefinite useful life, Unigene
will be required to test the intangible asset for impairment in accordance with
the provisions of Statement 142 within the first interim period. Unigene is
required to adopt the provisions of SFAS No. 142 effective January 1, 2002.
Unigene does not expect that the adoption of SFAS No. 142 will have an impact on
its financial statements because the Company has never entered into a purchase
business combination and has no goodwill or indefinite life intangible assets at
December 31, 2001.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement
establishes an accounting model for impairment or disposal of long-lived assets
by sale. The Company is required to adopt SFAS No. 144 on January 1, 2002. The
Company does not expect the adoption of SFAS No. 144 for long-lived assets to
have a material impact on its financial statements because the impairment
assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The
provisions of this statement for assets held for sale or other disposal
generally are required to be applied prospectively after the adoption date to
newly initiated disposal activities and, therefore, will depend on future
actions initiated by management. As a result, the Company cannot determine the
potential effects that adoption of SFAS No. 144 will have on its financial
statements with respect to future decisions, if any.
Related Parties
- ---------------
One of our directors is a partner in a law firm that we have engaged for
legal services. In 2001, we incurred an aggregate of $11,432 in legal fees with
this firm.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, Unigene is exposed to fluctuations in
interest rates due to the use of debt as a component of the funding of its
operations. Unigene does not employ specific strategies, such as the use of
derivative instruments or hedging, to manage its interest rate exposure.
Beginning in the first quarter of 2001, Unigene's interest rate exposure on its
notes payable-stockholders has been affected by its failure to make principal
and interest payments when due. Unigene's exposure to interest rate fluctuations
over the near-term will continue to be affected by these events.
The information below summarizes Unigene's market risks associated with
debt obligations as of December 31, 2001, except as to the Tail Wind note which
is as of April 9, 2002. The table below presents principal cash flows and
related interest rates by year of maturity based on the terms of the debt.
Variable interest rates disclosed represent the rates at December 31, 2001.
Given Unigene's financial condition described in "Liquidity and Capital
Resources" it is not practicable to estimate the fair value of our debt
instruments.
-26-
Year of Maturity
--------------------------------------------------------------------
Carrying
Amount 2001 2002 2003 2004 2005
-------------- -------------- ------------ ----------- ------------ -----------
Notes payable - stockholders $ 3,973,323 3,973,323 -- -- -- --
Variable interest rate (1) 11.0% -- -- -- --
Notes payable - stockholders $ 5,010,000 5,010,000 -- -- -- --
Variable interest rate 6.0% -- -- -- --
Notes payable - stockholders $ 1,870,000 1,870,000 -- -- -- --
Fixed interest rate (2) 11% -- -- -- --
Tail Wind note $ 1,000,000 -- -- -- -- $1,000,000
Fixed interest rate - 6%
(1) Due to the fact that Unigene did not make principal and interest payments
on its notes payable to stockholders when due, the variable interest rate
on these notes has increased from the Merrill Lynch Margin Loan Rate plus
.25% to the Merrill Lynch Margin Loan Rate plus 5.25%.
(2) Due to the fact that Unigene did not make principal and interest payments
on its notes payable to stockholders when due, the fixed interest rate on
these notes has increased from 6% to 11%.
-27-
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report ......................................................... 29
BALANCE SHEETS -- December 31, 2001 and 2000 ......................................... 30
STATEMENTS OF OPERATIONS -- Years Ended December 31, 2001, 2000 and 1999 ............. 31
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) --
Years Ended December 31, 2001, 2000 and 1999 ..................................... 32
STATEMENTS OF CASH FLOWS -- Years Ended December 31, 2001, 2000 and 1999 ............. 34
NOTES TO FINANCIAL STATEMENTS -- Years Ended December 31, 2001, 2000 and 1999 ........ 35
-28-
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
Unigene's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Unigene Laboratories, Inc. as
of December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that Unigene
will continue as a going concern. As discussed in Note 2 to the financial
statements, Unigene has suffered recurring losses from operations and has a
working capital deficiency which raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 3 to the financial statements, the Company changed its
method of accounting for revenue recognition for up-front, non-refundable
license fees in 2000.
/S/ KPMG LLP
Short Hills, New Jersey
March 29, 2002, except as to
the last paragraph of note 7,
which is as of April 9, 2002
-29-
UNIGENE LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 2001 and 2000
ASSETS
2001 2000
-------------------- --------------------
Current assets:
Cash and cash equivalents $ 405,040 $ 17,108
Contract receivables -- 165,671
Prepaid expenses 72,701 129,493
Inventory (Note 9) 283,328 415,420
-------------------- --------------------
Total current assets 761,069 727,692
Property, plant and equipment - net (Note 5) 4,109,312 5,684,127
Patents and other intangibles, net 1,375,062 1,288,686
Investment in joint venture (Note 6) 900,000 900,000
Other assets 373,811 446,894
-------------------- --------------------
$ 7,519,254 $ 9,047,399
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable (Note 10) $ 2,977,949 $ 2,834,556
Accrued expenses (Notes 4, 6 and 10) 6,589,251 3,761,277
Notes payable - stockholders (Note 4) 8,983,323 2,873,323
Current portion - long-term notes payable -
stockholders (Note 4) 1,870,000 1,870,000
5% convertible debentures (Note 7) 2,400,000 2,400,000
Current portion - capital lease obligations (Note
11) 29,677 55,398
Deferred revenue -- 200,000
-------------------- --------------------
Total current liabilities 22,850,200 13,994,554
Joint venture obligation, excluding current portion
(Note 6) 495,000 495,000
Capital lease obligations, excluding current portion
(Note 11) 14,131 50,572
Commitments and contingencies (Notes 6, 7, 8, 12
and 18)
Stockholders' equity (deficit) (Notes 8, 13 and 14):
Common Stock - par value $.01 per share, authorized
100,000,000 shares, issued 51,456,715 shares in
2001 and 44,441,855 shares in 2000 514,567 444,419
Additional paid-in capital 71,271,610 70,053,710
Common stock to be issued (Note 13) 225,000 --
Deferred stock option compensation -- (284,948)
Deferred stock offering costs -- (327,000)
Accumulated deficit (87,850,223) (75,377,877)
Less: Treasury stock, at cost, 7,290 shares (1,031) (1,031)
-------------------- --------------------
Total stockholders' equity (deficit) (15,840,077) (5,492,727)
-------------------- --------------------
$ 7,519,254 $ 9,047,399
==================== ====================
See accompanying notes to financial statements.
-30-
UNIGENE LABORATORIES, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------------- ----------------- ----------------
Licensing and other revenue $ 864,645 $ 3,286,961 $ 9,589,413
----------------- ----------------- ----------------
Operating expenses:
Research and development 9,121,999 11,484,379 9,374,528
General and administrative 2,699,572 3,187,465 2,211,778
----------------- ----------------- ----------------
11,821,571 14,671,844 11,586,306
----------------- ----------------- ----------------
Operating loss (10,956,926) (11,384,883) (1,996,893)
Other income (expense):
Interest income 7,989 49,130 37,545
Interest expense (Notes 4 and 7) (2,084,008) (1,198,508) (1,171,260)
----------------- ----------------- ----------------
Loss before income taxes, and cumulative
effect of accounting change (13,032,945) (12,534,261) (3,130,608)
Income tax benefit (Note 15) 560,599 1,064,856 1,553,268
----------------- ----------------- ----------------
Loss before cumulative effect of accounting
change (12,472,346) (11,469,405) (1,577,340)
Cumulative effect of revenue recognition
accounting change (Note 3) -- (1,000,000) --
----------------- ----------------- ----------------
Net loss $ (12,472,346) $ (12,469,405) $ (1,577,340)
================= ================= ================
Loss per share - basic and diluted:
Loss before cumulative effect of
accounting change $ (.26) $ (.26) $ (.04)
Cumulative effect of accounting change -- (.02) --
----------------- ----------------- ----------------
Net loss per share $ (.26) $ (.28) $ (.04)
================= ================= ================
Weighted average number of shares
outstanding - basic and diluted 47,482,705 44,008,154 40,718,519
================= ================= ================
Pro forma amounts assuming the revenue recognition principle adopted in 2000 is applied retroactively, exclusive of
cumulative effect adjustment (See Note 3):
Net loss $ (11,469,405) $ (777,340)
================= ================
Earnings per share -- basic and diluted:
Net loss $ (.26) $ (.02)
================= ================
See accompanying notes to financial statements.
-31-
UNIGENE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 2001, 2000 and 1999
Common Stock
-----------------------
Additional Deferred Deferred Stock
Number of Paid-in Common Stock Stock Option Offering
Shares Par Value Capital to be Issued Compensation Costs
----------- ----------- ------------- ------------ ------------ --------------
Balance, January 1,
1999 39,384,822 $ 393,848 $ 65,158,403 $ -- $ -- $ --
Conversion of 5%
Debentures into
Common Stock and
Warrants 3,528,125 35,281 1,859,994 -- -- --
Issuance of Common
Stock as payment
of interest on
5% Debentures 175,237 1,753 189,207 -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ------------- ------------ ------------ --------------
Balance, December
31, 1999 43,088,184 430,882 67,207,604 -- -- --
Exercise of warrants 1,118,071 11,181 1,317,087 -- -- --
Exercise of stock
options 235,600 2,356 298,177 -- -- --
Grant and
recognition of
stock option
compensation -- -- 683,733 -- (284,948) --
Deferred stock
offering costs -- -- 327,000 -- -- (327,000)
Issuance of
warrants as
compensation -- -- 220,109 -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ------------- ------------ ------------ --------------
Balance, December
31, 2000 44,441,855 444,419 70,053,710 -- (284,948) (327,000)
Sale of common
stock to Fusion
at $.23 to $.47
per share (net
of cash issuance
costs of
$292,000) 5,012,485 50,125 1,211,427 -- -- 327,000
Issuance of common
stock as a
commitment fee
to Fusion 2,000,000 20,000 (20,000) -- -- --
Grant and
recognition of
stock option
compensation -- -- 25,000 -- 284,948 --
Common stock to
be issued -- -- -- 225,000 -- --
Exercise of stock
options 2,375 23 1,473 -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ------------- ------------ ------------ --------------
51,456,715 $ 514,567 $ 71,271,610 $ 225,000 $ -- $ --
=========== =========== ============= ============ ============ ==============
Accumulated Treasury
Deficit Stock Total
----------- -------- ------------
Balance, January 1,
1999 $ (61,331,132) $ (1,031) $ 4,220,088
Conversion of 5%
Debentures into
Common Stock and
Warrants -- -- 1,895,275
Issuance of Common
Stock as payment
of interest on
5% Debentures -- -- 190,960
Net loss (1,577,340) -- (1,577,340)
-------------- ------- ------------
Balance, December
31, 1999 (62,908,472) (1,031) 4,728,983
Exercise of warrants -- -- 1,328,268
Exercise of stock
options -- -- 300,533
Grant and
recognition of
stock option
compensation -- -- 398,785
Deferred stock
offering costs -- -- --
Issuance of
warrants as
compensation -- -- 220,109
Net loss (12,469,405) -- (12,469,405)
-------------- ------- ------------
Balance, December
31, 2000 (75,377,877) (1,031) (5,492,727)
Sale of common
stock to Fusion
at $.23 to $.47
per share (net
of cash issuance
costs of
$292,000) -- -- 1,588,552
Issuance of common
stock as a
commitment fee
to Fusion -- -- --
Grant and
recognition of
stock option
compensation -- -- 309,948
Common stock to
be issued -- -- 225,000
Exercise of stock
options -- -- 1,496
Net loss (12,472,346) -- (12,472,346)
-------------- ------- ------------
$ (87,850,223) $(1,031) $(15,840,077)
============== ======= ============
See accompanying notes to financial statements.
-32-
UNIGENE LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------------ ------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $(12,472,346) $(12,469,405) $ (1,577,340)
Adjustments to reconcile net loss to net cash
used by operating activities:
Non-cash cumulative effect adjustment ...................... -- 1,000,000 --
Amortization of deferred revenue ........................... (200,000) (800,000) --
Non-cash compensation ...................................... 534,948 618,894 --
Depreciation and amortization .............................. 1,647,510 1,617,957 1,558,663
Amortization of beneficial conversion feature on 5%
Debentures .............................................. -- -- 197,193
20% premium on 5% Debentures ............................... -- -- 400,000
Payment of interest through the issuance of Common Stock ... -- -- 190,960
Decrease in other assets ................................... 42,313 42,312 64,528
(Increase) decrease in contract receivables ................ 165,671 3,360,558 (3,210,171)
(Increase) decrease in prepaid expenses and
inventory ............................................... 188,884 532,848 (188,092)
Increase in accounts payable and accrued expenses .......... 2,971,367 2,715,086 1,163,795
------------ ------------ ------------
Net cash used for operating activities ..................... (7,121,653) (3,381,750) (1,400,464)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction of leasehold and building improvements ........ (2,169) (235,764) (4,010)
Purchase of furniture and equipment ........................ (17,556) (283,589) (134,127)
Increase in patents and other assets ....................... (108,576) (69,389) (88,695)
------------ ------------ ------------
Net cash used in investing activities ...................... (128,301) (588,742) (226,832)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ................... -- -- 1,870,000
Proceeds from issuance of short-term debt, net ............. 6,110,000 1,733,323 100,000
Repayment of long-term debt and capital lease
obligations ............................................. (62,162) (57,153) (62,739)
Exercise of stock options and warrants ..................... 1,496 1,628,801 --
Proceeds from sale of stock, net ........................... 1,588,552 -- --
------------ ------------ ------------
Net cash provided by financing activities .................. 7,637,886 3,304,971 1,907,261
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ....... 387,932 (665,521) 279,965
Cash and cash equivalents at beginning of period ........... 17,108 682,629 402,664
------------ ------------ ------------
Cash and cash equivalents at end of period ................. $ 405,040 $ 17,108 $ 682,629
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Investment in joint venture and related obligations ........ -- $ 900,000 --
Acquisition of equipment through capital leases ............ -- -- $ 36,617
Conversion of convertible debentures and accrued
interest into Common Stock .............................. -- -- $ 2,190,960
============ ============ ============
Cash paid for interest ..................................... $ 58,500 $ 39,800 $ 24,700
============ ============ ============
See accompanying notes to financial statements.
-33-
UNIGENE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. Description of Business
Unigene Laboratories, Inc. ("Unigene"), a biopharmaceutical company, was
incorporated in the State of Delaware in 1980. Unigene's single business segment
focuses on research, production and delivery of peptides for medical use.
Unigene has concentrated most of its efforts to date on one product -
calcitonin, for the treatment of osteoporosis and other indications. Unigene's
initial products will be injectable, nasal and oral formulations of calcitonin.
Unigene's calcitonin products require clinical trials and approvals from
regulatory agencies as well as acceptance in the marketplace. Unigene's
injectable calcitonin product has been approved for marketing in all 15-member
states of the European Union for the treatment of Paget's disease and
hypercalcemia associated with malignancy. Through December 31, 2001, sales of
injectable calcitonin have not been significant. Although Unigene 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. Unigene competes with
specialized biotechnology companies, major pharmaceutical and chemical companies
and universities and research institutions. Most of these competitors have
substantially greater resources than does Unigene. During 2000 and 1999, almost
all of Unigene's revenue was generated from one customer, Pfizer (see Note 17).
The Pfizer agreement was terminated in March 2001.
2. Liquidity
Unigene has incurred annual operating losses since its inception and, as a
result, at December 31, 2001 has an accumulated deficit of approximately
$87,850,000 and has a working capital deficiency of approximately $22,100,000.
These factors raise substantial doubt about Unigene's ability to continue as a
going concern. However, the financial statements have been prepared on a going
concern basis and as such do not include any adjustments that might result from
the outcome of this uncertainty. Unigene's cash requirements are approximately
$10 to 11 million per year to operate its research and peptide manufacturing
facilities and develop its calcitonin and other products. In addition, Unigene
has principal and interest obligations under its outstanding notes payable to
stockholders and other debt, and its obligations relating to its current and
former joint ventures in China. As a result of the Company's failure to make
required principal and interest payments, Unigene's cash requirements increased
related to interest rates on certain stockholders notes as described in Note 4.
Management is actively seeking licensing and/or supply agreements with
pharmaceutical companies for oral, nasal and injectable forms of calcitonin as
well as for other oral peptides. With the termination of our Pfizer
collaboration in March 2001, we currently have no licenses for any of our
products in the U.S. We do not have sufficient financial resources to continue
to fund our operations at the current level. We had operating cash flow deficits
of $1,400,000 in 1999, $3,382,000 in 2000 and $7,122,000 in 2001. Therefore, we
need additional funds to continue our operations. Our agreement with Fusion has
provided us with some cash to fund our operations, but it alone has not been
sufficient to satisfy all of our working capital needs. The extent to which we
intend to rely on Fusion as a source of financing will depend on a number of
factors, including the prevailing market price of our common stock and the
extent to which we are able to secure working capital from other sources, such
as through the entry into licensing agreements which we are actively exploring
or the sale of bulk calcitonin, which totaled $339,000 in 2001. If we are unable
to enter into a significant revenue generating license or financing arrangement
in the near term, we will need to significantly curtail our operations. We also
could consider a sale or merger of the Company.
Even if we are able to access $21,000,000 under the common stock purchase
agreement with Fusion, we may still need additional capital to fully implement
our business, operating and development plans. We only have the right to receive
$43,750 per trading day under the common stock purchase agreement unless our
stock price equals or exceeds $4.00 per share, in which event the daily purchase
amount may be increased. However, our sales of common stock to Fusion have been
well below that level due to the share price and trading volume of our common
stock and due to our desire to keep dilution to a minimum. In addition, the
agreement may be terminated by Fusion at any time due to events of default under
the agreement. See Note 8.
We believe that satisfying our capital requirements over the long term will
require the successful commercialization of one of our calcitonin products or
another peptide product in the United States and abroad. However, it is
uncertain whether or not any of our products will be approved or will be
commercially successful. The
-34-
commercialization of one of our products may require us to incur additional
capital expenditures to expand or upgrade our manufacturing operations to
satisfy future supply obligations. However, we cannot determine either the cost
or the timing of such capital expenditures at this time.
3. Summary of Significant Accounting Policies & Practices
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Segment Information - Unigene is managed and operated as one business. The
entire business is managed by a single management team that reports to the chief
executive officer. Unigene does not operate separate lines of business or
separate business entities with respect to any of its product candidates.
Accordingly, Unigene does not prepare discrete financial information with
respect to separate product areas or by location and does not have separately
reportable segments as defined by Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
Cash Equivalents - Unigene considers all highly liquid securities purchased with
an original maturity of three months or less to be cash equivalents.
Inventory - Inventories are stated at the lower of cost (using the first-in,
first-out method) or market.
Property, Plant and Equipment - Property, plant and equipment are carried at
cost. Equipment under capital leases are stated at the present value of the
minimum lease payments. Depreciation is computed using the straight-line method.
Amortization of equipment under capital leases and leasehold improvements is
computed over the shorter of the lease term or estimated useful life of the
asset. Additions and improvements are capitalized, while repairs and maintenance
are charged to expense as incurred.
Patents and Other Intangibles - Patent costs are deferred pending the outcome of
patent applications. Successful patent costs are amortized using the
straight-line method over the lives of the patents. Unsuccessful patent costs
are expensed when determined worthless. As of December 31, 2001, eight of
Unigene's patents had issued in the U.S. and eighteen had issued in various
foreign countries. Various other applications are still pending. Other
intangibles are recorded at cost and are amortized over their estimated useful
lives. Accumulated amortization on patents and other intangibles is $239,000 and
$186,000 at December 31, 2001 and 2000, respectively.
Goodwill and Other Intangible Assets - In July 2001, the FASB issued SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 142 will require that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 will also require that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144. Unigene is required to adopt the
provisions of SFAS No. 142 effective January 1, 2002. Unigene does not expect
that the adoption of SFAS No. 142 will have an impact on its financial
statements because the Company has never entered into a purchase business
combination and has no goodwill or indefinite life intangible assets at December
31, 2001.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of - The
Company accounts for the impairment of long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds 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.
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In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
requires that long-lived assets, exclusive of goodwill and indefinite life
intangibles, be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future undiscounted net
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future undiscounted net cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. SFAS No. 144 requires companies to
separately report discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. The Company is required to adopt SFAS No. 144 on January 1, 2002.
The Company does not expect the adoption of SFAS No. 144 for long-lived assets
to have a material impact on its financial statements because the impairment
assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The
provisions of this statement for assets held for sale or other disposal
generally are required to be applied prospectively after the adoption date to
newly initiated disposal activities and, therefore, will depend on future
actions initiated by management. As a result, the Company cannot determine the
potential effects that adoption of SFAS No. 144 will have on its financial
statements with respect to future decisions, if any.
Fair Value of Financial Instruments - The fair value of a financial instrument
represents the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation.
Significant differences can arise between the fair value and carrying amounts of
financial instruments that are recognized at historical cost amounts. Given our
financial condition described in Note 2, it is not practicable to estimate the
fair value of our financial instruments at December 31, 2001.
Revenue Recognition - Commencing in 2000, non-refundable license fees received
upon execution of license agreements where Unigene has continuing involvement
are deferred and recognized as revenue over the life of the agreement. Prior to
the implementation of SAB 101, non-refundable license fees received upon
execution of license agreements were recognized as revenue immediately.
Non-refundable milestone payments that represent the completion of a separate
earnings process and a significant step in the research and development process
are recognized as revenue when earned. Revenue from the sale of product is
recognized upon shipment to the customer. Revenue from grants is recognized when
earned.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements
and specifically addresses revenue recognition in the biotechnology industry for
non-refundable technology access fees and other non-refundable fees. Unigene was
required to adopt SAB 101, as amended, in the fourth quarter of 2000 with an
effective date of January 1, 2000, and the recognition of a cumulative effect
adjustment calculated as of January 1, 2000. Unigene adopted SAB 101 in 2000,
changing its revenue recognition policy for up-front licensing fees that require
services to be performed in the future from immediate revenue recognition to
deferral of revenue with the up-front fee recognized over the life of the
agreement. In 1997, Unigene recognized $3,000,000 in revenue from an up-front
licensing fee from Pfizer. With the adoption of SAB 101, Unigene recognized this
revenue over a 45 month period, equivalent to the term of its oral calcitonin
agreement with Pfizer which was terminated in March 2001. Unigene therefore
recognized a non-cash cumulative effect adjustment of $1,000,000 as of January
1, 2000 representing a revenue deferral over the remaining 15 months of the
agreement. Unigene recognized $800,000 of revenue in 2000 and $200,000 in
revenue in 2001 as a result of this deferral. The pro forma effects of
retroactive application of this revenue recognition principle on net loss and
related per share amounts for the years ended December 31, 2000 and 1999 are
presented in the accompanying statements of operations.
Research and Development - Research and development expenses include the costs
associated with internal research and development by Unigene and research and
development conducted for Unigene by third parties. These costs primarily
consist of salaries, clinical trials, outside consultants, sponsorship of
universities' research projects, supplies, and indirect costs. Indirect costs
such as depreciation, rent, utilities, insurance, taxes, and maintenance are
allocated to research and development based on specific criteria such as square
footage utilized. All research and development costs discussed above are
expensed as incurred. Expenses reimbursed under research and development
-36-
contracts, which are not refundable, are recorded as a reduction to research and
development expense in the statement of operations.
Stock Options - Unigene accounts for stock options issued to employees and
directors in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense is recorded on fixed stock option
grants only if the current market price of the underlying stock exceeded the
exercise price of the option at the date of grant and it is recognized on a
straight-line basis over the vesting period; compensation expense on variable
stock option grants is estimated until the measurement date. As permitted by
SFAS No. 123, "Accounting for Stock-Based Compensation", Unigene provides pro
forma net loss and pro forma loss per share disclosures for employee and
director stock option grants as if the fair-value-based method defined in SFAS
No. 123 had been applied. Unigene accounts for stock options and warrants issued
to consultants on a fair value basis in accordance with SFAS No. 123 and
Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
Income Taxes - Income taxes are accounted for under the asset and liability
method with deferred tax assets and liabilities recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be reversed or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date. Deferred tax assets are recorded
when they more likely than not are able to be realized.
Net Loss per Share - Unigene computes and presents both basic and diluted
earnings per share ("EPS") on the face of the statement of operations. Basic EPS
is computed using the weighted average number of common shares outstanding
during the period being reported on. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue Common Stock were
exercised or converted into Common Stock at the beginning of the period being
reported on and the effect was dilutive. Unigene's net loss and weighted average
shares outstanding used for computing diluted loss per share were the same as
that used for computing basic loss per share for each of the years ended
December 31, 2001, 2000 and 1999 because Unigene's convertible debentures, stock
options and warrants were not included in the calculation since the inclusion of
such potential shares (approximately 4,500,000 potential shares of Common Stock
at December 31, 2001) would be antidilutive.
4. Related Party Transactions
To satisfy Unigene's short-term liquidity needs, Jay Levy, the Chairman of the
Board and an officer of Unigene, and Warren Levy and Ronald Levy, directors and
officers of Unigene, and another Levy family member from time to time have made
loans to Unigene. During 2001, Jay Levy made demand loans to Unigene of
$6,100,000 and Warren Levy and Ronald Levy each made demand loans to Unigene of
$5,000. During 2000, the Levys loaned the Company $1,733,323 in demand loans.
Due to the fact that Unigene did not make principal and interest payments on
certain stockholder loans when due, the Company is in default on outstanding
loans originated through March 4, 2001. As a result, interest on such loans
increased an additional 5% per year beginning January 2001 and is calculated on
both past due principal and interest. This additional interest was approximately
$512,000, and total interest expense on all Levy loans was approximately
$1,087,000 for 2001 ($281,000 for 2000 and $153,000 for 1999). The Levys had
waived all default provisions including additional interest penalties due under
these loans through December 31, 2000. As of December 31, 2001, total accrued
interest on all Levy loans was approximately $2,008,000 ($922,000 as of December
31, 2000).
Outstanding stockholder loans consist of the following at December 31, 2001 and
2000 (in thousands):
2001 2000
------- ------
Jay Levy term loans $ 1,870 $1,870
Jay Levy demand loans 8,465 2,365
Warren Levy demand loans 265 260
Ronald Levy demand loans 253 248
------- ------
$10,853 $4,743
======= ======
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. Loans from Jay Levy in the aggregate principal amount of $1,870,000
($1,870,000 at December 31, 2000) evidenced by term notes maturing
January 2002, and bearing interest at the fixed rate of 11% per year.
These loans were originally at 6%. These loans are secured by a
security interest in all of Unigene's equipment and a mortgage on
Unigene's real property. The terms of the notes require Unigene to make
installment payments of principal and interest beginning in October
1999 and ending in January 2002 in an aggregate amount of $72,426 per
month. No installment payments have been made to date. Accrued interest
on these loans at December 31, 2001 was approximately $399,000.
. Loans from Jay Levy in the aggregate principal amount of $3,465,000
($2,365,000 at December 31, 2000), which are evidenced by demand notes
bearing a floating interest rate equal to the Merrill Lynch Margin Loan
Rate plus 5.25% (11.00% at December 31, 2001) that are classified as
short-term debt. These loans were originally at the Merrill Lynch
Margin Loan Rate plus .25%. These loans are secured by a security
interest in Unigene's equipment and real property. Accrued interest on
these loans at December 31, 2001 was approximately $1,085,000.
. Loans from Jay Levy in the aggregate principal amount of $5,000,000 ($0
at December 31, 2000) which are evidenced by demand notes bearing a
floating interest rate equal to the Merrill Lynch Margin Loan Rate plus
.25%, (6.00% at December 31, 2001) and are classified as short-term
debt and which are secured by a security interest in certain of our
patents. Accrued interest on these loans at December 31, 2001 was
approximately $162,000.
. Loans from Warren Levy in the aggregate principal amount of $260,000
($260,000 at December 31, 2000) which are evidenced by demand notes
bearing a floating interest rate equal to the Merrill Lynch Margin Loan
Rate plus 5.25% (11.00% at December 31, 2001) that are classified as
short-term debt. These loans were originally at the Merrill Lynch
Margin Loan Rate plus .25%. An additional loan in the amount of $5,000
($0 at December 31, 2000) bears interest at the Merrill Lynch Loan Rate
plus .25% (6.00% at December 31, 2001) and is classified as short-term
debt. These loans are secured by a secondary security interest in
Unigene's equipment and real property. Accrued interest on these loans
at December 31, 2001 was approximately $182,000.
. Loans from Ronald Levy in the aggregate principal amount of $248,323
($248,323 at December 31, 2000) which are evidenced by demand notes
bearing a floating interest rate equal to the Merrill Lynch Margin Loan
Rate plus 5.25% (11.00% at December 31, 2001) that are classified as
short-term debt. These loans were originally at the Merrill Lynch
Margin Loan Rate plus .25%. An additional loan in the amount of $5,000
($0 at December 31, 2000) bears interest at the Merrill Lynch Margin
Loan Rate plus .25% (6.00% at December 31, 2001) and is classified as
short-term debt. These loans are secured by a secondary security
interest in Unigene's equipment and real property. Accrued interest on
these loans at December 31, 2001 was approximately $180,000.
One of our directors is a partner in a law firm that we have engaged for legal
services. In 2001, we incurred an aggregate of $11,432 in legal fees with this
firm.
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5. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31, 2001
and 2000:
Estimated
Depreciable
2001 2000 Lives
---------- ----------- ------------
Building and improvements $ 1,397,210 $ 1,397,210 25 years
Leasehold improvements 8,698,020 8,695,851 Lease Term
Manufacturing equipment 4,009,741 4,000,940 10 years
Laboratory equipment 2,819,801 2,815,870 5 years
Other equipment 466,523 466,523 10 years
Office equipment and furniture 345,667 340,843 5 years
Equipment under capital leases 258,517 258,517 Lease Term
----------- -----------
17,995,479 17,975,754
Less accumulated depreciation and
amortization 14,007,334 12,412,794
----------- -----------
3,988,145 5,562,960
Land 121,167 121,167
----------- -----------
$ 4,109,312 $ 5,684,127
=========== ===========
Depreciation and amortization expense on property, plant and equipment was
$1,595,000, $1,576,000 and $1,520,000 in 2001, 2000 and 1999, respectively.
6. China Joint Venture
In June 2000, we entered into a joint venture with Shijiazhuang Pharmaceutical
Group ("SPG"), a pharmaceutical company in the People's Republic of China. The
joint venture will manufacture and distribute injectable and nasal calcitonin
products in China (and possibly other selected Asian markets) for the treatment
of osteoporosis. We own 45% of the joint venture and will have a 45% interest in
the joint venture profits and losses. In the first phase of the collaboration,
SPG will contribute its existing injectable calcitonin license to the joint
venture, which will allow the joint venture to sell our product in China. The
joint venture is now preparing a new drug application in China for its
injectable and nasal products which is expected to be filed in late-2002. In
addition, the joint venture may be required to conduct brief local human trials.
If the product is successful, the joint venture may establish a facility in
China to fill injectable and nasal calcitonin products using bulk calcitonin
produced at our Boonton, New Jersey plant. Eventually the joint venture may
manufacture bulk calcitonin in China at a new facility that would be constructed
by it. This would require local financing by the joint venture. The joint
venture had not yet begun formal operations as of December 31, 2001, but did
commence operations in March 2002.
Under the terms of the joint venture with SPG, Unigene is obligated to
contribute up to $405,000 in cash during 2002 and up to an additional $495,000
in cash within two years thereafter. However, these amounts may be reduced or
offset by our share of joint venture profits. As of December 31, 2001, we have
not made any investments in the joint venture. In addition, Unigene is obligated
to pay to the Qingdao General Pharmaceutical Company an aggregate of $350,000 in
14 monthly installment payments of $25,000 in order to terminate its former
joint venture in China, of which $85,000 had been paid as of December 31, 2001
($75,000 was paid as of December 31, 2000). We recognized the entire $350,000
obligation as an expense in 2000.
7. Convertible Debentures
In June 1998, we issued 5% convertible debentures with a principal amount of
$4,000,000 to the Tail Wind Fund, Ltd. Pursuant to the terms of the debentures,
they were convertible into shares of our common stock, the interest on the
debentures, at our option, was payable in shares of common stock, and, upon
conversion, the owners of the
-39-
debentures were entitled to receive warrants to purchase a number of shares of
common stock equal to 4% of the number of shares issued as a result of the
conversion. However, the number of shares of common stock that we were obligated
to issue, in the aggregate, upon conversion, when combined with the shares
issued in payment of interest and upon the exercise of the warrants, was limited
to 3,852,500 shares. After this share limit was reached, we became obligated to
redeem in cash all debentures tendered for conversion at a redemption price
equal to 120% of the principal amount, plus accrued interest. Unigene in 1998
estimated the value of the beneficial conversion feature and related warrants at
the issuance of the 5% Debentures to be approximately $687,000. Such amount was
credited to additional paid-in capital and was amortized to interest expense
over the earliest conversion periods using the effective interest method
(approximately $197,000 for the year ended December 31, 1999).
Through December 31, 2001, we issued a total of 3,703,362 shares of common stock
upon conversion of $2,000,000 principal amount of the debentures and in payment
of interest on them. Also, we issued an additional 103,032 shares of common
stock upon the cashless exercise of all of the 141,123 warrants issued upon
conversion of the debentures.
During 1999 and 2000, the owner of the debenture tendered the remaining
$2,000,000 principal amount of the debentures for conversion, but the conversion
into shares of common stock would have exceeded the aggregate share limit. As a
result, the owner of the debenture became entitled to redeem the $2,000,000
principal amount of the debenture for $2,400,000 in cash. We failed to make the
redemption payment to the owner of the debenture. We have also failed to make
the required semi-annual interest payment on the outstanding debentures since
January 5, 2000. As a result, the interest rate on the outstanding debentures
has increased to 20% per year. As of December 31, 2001, the accrued and unpaid
interest on the debentures is approximately $866,000 ($467,000 as of December
31, 2000).
In addition, the delisting of our common stock from the Nasdaq National Market
in October 1999 obligated us under a separate agreement to pay the owner of the
debentures an amount in cash equal to 2% of the outstanding principal amount of
the debentures per month. We have not made any of these payments. As of December
31, 2001, the accrued and unpaid amount of this penalty totaled approximately
$1,097,000 ($617,000 as of December 31, 2000).
Because of our failure to make cash payments to the holder of the debentures, an
event of default occurred. As a result, the holder filed a demand for
arbitration against Unigene in July 2000. In June 2001, the arbitration was
postponed to allow Tail Wind and Unigene to engage in settlement discussions. On
April 9, 2002, Unigene and Tail Wind entered into a settlement. Pursuant to the
terms of the settlement agreement, Tail Wind has agreed to surrender to Unigene
the $2 million in principal amount of convertible debentures that remain
outstanding and to release all claims against Unigene relating to Tail Wind's
purchase of the convertible debentures, including all issues raised in the
arbitration, which are currently in excess of $4 million. In exchange, Unigene
has agreed to issue to Tail Wind a $1 million secured promissory note and two
million shares of Unigene common stock. The note bears interest at a rate of 6%
per annum and principal and interest are due in February 2005. The shares are
valued at $1.1 million in the aggregate, based on Unigene's closing stock price
on April 9, 2002. Unigene will therefore recognize a gain for accounting
purposes of approximately $2 million on the extinguishment of debt and related
interest. Unigene is required to deposit the two million shares of common stock
with an escrow agent and to file a registration statement covering the resale of
the shares with the Securities and Exchange Commission. Once the registration
statement is declared effective by the SEC, the escrow agent will release the
shares to Tail Wind at a rate of 50,000 shares per week over a 40-week period,
depending on trading volume. If the registration statement is not declared
effective on a timely basis as provided for in the settlement agreement, Unigene
may incur penalties of $1,000 per day.
Unigene will therefore recognize a gain for accounting
purposes of approximately $2 million on the extinguishment of debt and related
interest in the second quarter of 2002. Generally, the two million shares will
be issued to Tail Wind at a rate of 50,000 shares per week over a 40-week
period, depending on trading volume. Unigene is required to file a registration
statement covering the resale of the shares with the Securities and Exchange
Commission.
8. Fusion Capital Financing
On May 9, 2001, Unigene entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC, under which Fusion has agreed, subject to certain
conditions, to purchase on each trading day during the term of the agreement
$43,750 of our common stock up to an aggregate of $21,000,000. Fusion is
committed to purchase the shares over a twenty-four month period. We may
decrease this amount or terminate the agreement at any time. If our stock price
equals or exceeds $4.00 per share for five (5) consecutive trading days, we have
the right to increase the daily purchase amount above $43,750, providing that
the closing sale price of our stock remains at least $4.00. Fusion is not
obligated to purchase any shares of our common stock if the purchase price is
less than $0.25. Under the agreement with Fusion, Unigene must satisfy the
requirements that are a condition to Fusion's obligation including: the
continued effectiveness of the registration statement for the resale of the
shares by Fusion, no default on, or acceleration prior to maturity of, any
payment obligations of Unigene in excess of $1,000,000, no insolvency or
bankruptcy of Unigene, continued listing of Unigene common stock on the OTC
Bulletin Board, and Unigene
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must not fail to meet the maintenance requirements for listing on the OTC
Bulletin Board for a period of 10 consecutive trading days or for more than an
aggregate of 30 trading days in any 365-day period. The selling price per share
to Fusion is equal to the lesser of: the lowest sale price of our common stock
on the day of purchase by Fusion, or the average of the lowest five closing sale
prices of our common stock, during the 15 trading days prior to the date of
purchase by Fusion. Fusion has agreed that neither it nor any of its affiliates
will engage in any direct or indirect short-selling or hedging of our common
stock during any time prior to the termination of the common stock purchase
agreement. We issued to Fusion 2,000,000 shares of common stock and a five-year
warrant to purchase 1,000,000 shares of common stock at an exercise price of
$.50 per share as of March 30, 2001 as compensation for its commitment which was
charged to additional paid-in-capital. Fusion has agreed not to sell the shares
issued as a commitment fee or the shares issuable upon the exercise of the
warrant until the earlier of May 2003, or the termination or a default under the
common stock purchase agreement. In addition to the compensation shares, the
Board of Directors has authorized the issuance and sale to Fusion of up to
21,000,000 shares of Unigene common stock and initially reserved 6,000,000
shares for such purpose. From May 18, 2001 through December 31, 2001, we have
received approximately $1,881,000 through the sale of 5,012,485 shares of common
stock to Fusion, before cash expenses of approximately $292,000. In January
2002, Unigene increased the shares reserved for sale to Fusion by 15,000,000.
In December 2000, we issued a five-year warrant to purchase 373,002 shares of
Unigene common stock to our investment banker as a fee in connection with the
Fusion financing agreement. The warrant has an exercise price of $1.126 and a
fair value of $327,000 using the Black-Scholes pricing model. The value of these
warrants had been deferred at December 31, 2000 pending the closing of the
Fusion stock offering, which occurred in May 2001.
9. Inventory - Inventories consist of the following as of December 31, 2001
and 2000:
2001 2000
---------- ----------
Finished goods $ 100,000 $ 89,104
Raw material 183,328 326,316
---------- ----------
Total $ 283,328 $ 415,420
========== ==========
Unigene charged $515,000 of finished goods inventory to research and development
expense in the fourth quarter of 2000 as a result of Pfizer's termination of its
license agreement with Unigene.
10. Accrued expenses and accounts payable - Accrued expenses consist of the
following as of December 31, 2001 and 2000:
2001 2000
------------ -----------
Interest - notes payable to stockholders
(Note 4) $ 2,008,273 $ 921,722
Interest and penalties on 5% convertible
debentures (Note 7) 1,963,190 1,083,194
China joint ventures (Note 6) 670,000 680,000
Clinical trials and contract research 991,399 665,568
Vacation and other payroll-related expenses 480,134 204,948
Consultants 203,656 47,000
Other 272,599 158,845
------------ -----------
Total $ 6,589,251 $ 3,761,277
============ ===========
Included in accounts payable are two notes to a vendor aggregating $800,000. One
note for $300,000 is a demand note with a per annum interest rate of 6%. The
other is a note for $500,000 which was due December 31, 2001. The per annum
interest rate was originally 8%, but increased to 12% on January 1, 2002 when
the note was not paid on its due date. No principal or interest payments have
been made on these notes.
11. Obligations Under Capital Leases
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Unigene entered into various lease arrangements during 1999 and 1998 which
qualify as capital leases. The future years' minimum lease payments under the
capital leases, together with the present value of the net minimum lease
payments, as of December 31, 2001 are as follows:
2002 $ 41,565
2003 10,656
---------
Total minimum lease payments 52,221
Less amount representing interest 8,413
---------
Present value of net minimum lease payments 43,808
Less current portion 29,677
---------
Obligations under capital leases, excluding
current portion $ 14,131
=========
The discount rates on these leases vary from 12% to 18%.
12. Obligations Under Operating Leases
Unigene is obligated under a 10-year net-lease, which began in February 1994,
for its manufacturing facility located in Boonton, New Jersey. Unigene has two
10-year renewal options as well as an option to purchase the facility. In
addition, Unigene leases laboratory production, and office equipment under
various operating leases expiring in 2002 through 2006. Total future minimum
rentals under these noncancelable operating leases are as follows:
2002 $245,180
2003 227,010
2004 39,676
2005 21,472
2006 10,831
--------
$544,169
========
Total rent expense was approximately $236,000, $259,000 and $243,000 for 2001,
2000 and 1999, respectively.
13. Stockholders' Equity
During 1999, an aggregate of $2,000,000 in principal amount of convertible
debentures, plus $191,000 of accrued interest, was converted into approximately
3,703,000 shares of Common Stock (see Note 7).
As of December 31, 2001, there are warrants outstanding to various consultants
and an investment banker, all of which are currently exercisable, to purchase an
aggregate of 1,598,002 shares of Common Stock at exercise prices ranging from
$.50 to $3.41 per share (warrants to purchase 989,000 shares of Common Stock
were exercisable at December 31, 2000 at a weighted average exercise price of
$2.11 per share).
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The following summarizes warrant activity for the past three years:
Warrants
Exercisable At Weighted Average
Warrants End of Year Exercise Price
--------------------- --------------------- ----------------------
Outstanding January 1, 1999 3,923,906 3,923,906
=====================
Granted 141,123 $ 0.71
Cancelled (2,262,870) 3.00
Exercised -- --
---------------------
Outstanding December 31, 1999 1,802,159 1,802,159
=====================
Granted 523,002 $ 1.57
Cancelled (10,000) 1.38
Exercised (1,326,159) 1.44
---------------------
Outstanding December 31, 2000 989,002 989,002
=====================
Granted 1,000,000 $ 0.50
Cancelled (391,000) 2.63
Exercised -- --
---------------------
Outstanding December 31, 2001 1,598,002 1,598,002
====================== =====================
A summary of warrants outstanding and exercisable as of December 31, 2001
follows:
Warrants Outstanding and Exercisable
- -----------------------------------------------------------------------------------------
Weighted Ave.
Range of Number Remaining Life Weighted Ave.
Exercise Price Outstanding (years) Exercise Price
- -------------------- ----------------- ------------------- -----------------
$0.50-$0.99 1,000,000 4.3 $ 0.50
$1.00-$1.99 373,002 4.0 1.13
$2.00-$2.99 155,000 3.4 2.61
$3.00-$3.41 70,000 0.5 3.23
-----------------
1,598,002 0.97
================= =============
In 1995, two consultants received warrants from Unigene to purchase an aggregate
of 112,000 shares of common stock. These warrants were exercised, but Unigene
was unable to issue unlegended stock due to the lack of an effective
registration statement. As compensation for the delay, Unigene has agreed to
issue additional shares to the holders which Unigene has recorded as a non-cash
expense of $225,000 in 2001.
14. Stock Option Plans
During 1994, Unigene's stockholders approved the adoption of the 1994 Employee
Stock Option Plan (the "1994 Plan"). All employees of Unigene were eligible to
participate in the 1994 Plan, including executive officers and directors who are
employees of Unigene. The 1994 Plan terminated on June 6, 2000; however,
1,283,865 options previously granted continue to be outstanding and exercisable
under that plan as of December 31, 2001.
At Unigene's 1999 Annual Meeting, the stockholders approved the adoption of a
1999 Directors Stock Option Plan (the "1999 Plan") under which each person
elected to the Board after June 23, 1999 who is not an employee will receive, on
the date of his initial election, an option to purchase 21,000 shares of Common
Stock. In addition, on May 1st of each year, commencing May 1, 1999, each
non-employee director will receive an option to purchase 10,000 shares of Common
Stock if he or she has served as a non-employee director for at least six months
prior to the May 1st grant. Each option granted under the 1999 Plan will have a
ten-year term and the exercise price of each option will be equal to the market
price of Unigene's Common Stock on the date of the grant. A total of 350,000
shares of Common Stock are reserved for issuance under the 1999 Plan.
-43-
In November 1999, the Board of Directors approved, subject to stockholder
approval, the adoption of a new Stock Option Plan (the "2000 Plan") to replace
the 1994 Plan. All employees (including directors who are employees), as well as
certain consultants, are eligible to receive option grants under the 2000 Plan.
Options granted under the 2000 Plan have a ten-year term and an exercise price
equal to the market price of the Common Stock on the date of the grant. A total
of 4,000,000 shares of Common Stock are reserved for issuance under the 2000
Plan.
In November 1999, the Board granted under the 2000 Plan, to employees of
Unigene, stock options to purchase an aggregate of 482,000 shares (of which
14,650 shares were subsequently cancelled) of Common Stock at an exercise price
of $0.63 per share, the market price on the date of grant. Each of the grants
was made subject to stockholder approval of the 2000 Plan. At Unigene's June 6,
2000 Annual Meeting, the stockholders approved the 2000 Plan. In accordance with
APB Opinion No. 25, the measurement date for valuing the stock options for the
purpose of determining compensation expense was June 6, 2000, the date of
stockholder approval. The market price of the Common Stock on this date was
$2.093 per share. Therefore, an aggregate of $683,733 was charged to
compensation expense over the vesting periods of the options, which vest in
approximately 50% increments on November 5, 2000 and November 5, 2001. Unigene
recognized $398,785 as compensation expense in 2000 and $284,948 as compensation
expense in 2001.
-44-
The following summarizes activity for options granted to directors and
employees:
Weighted
Options Average Weighted
Exercisable At Grant-date Average
Options End of Year Fair Value Exercise Price
------------- ----------------- ----------------- ---------------
Outstanding January 1, 1999 1,795,115 1,382,615
=============
Granted 438,000 $ 0.55 $ 0.70
Cancelled (187,250) -- 2.17
Exercised -- -- --
-------------
Outstanding December 31, 1999 2,045,865 1,639,615
=============
Granted 571,500 $ 1.96 $ 0.87
Cancelled (64,650) -- 1.78
Exercised (245,600) -- 1.28
-------------
Outstanding December 31, 2000 2,307,115 1,968,540
=============
Granted 1,955,000 $0.41 $ 0.44
Cancelled (348,000) -- 1.82
Exercised (2,375) -- 0.63
=============
Outstanding December 31, 2001 3,911,740 2,118,990
============= =============
A summary of options outstanding and exercisable as of December 31, 2001,
follows:
Options Outstanding Options Exercisable
-------------------------------------------------------- ------------------------------------
Weighted Ave.
Range of Number Remaining Weighted Ave. Number Weighted Ave.
Exercise Price Outstanding Life (years) Exercise Price Exerciseable Exercise Price
- ------------------- ------------ ------------- -------------- ------------- --------------
$.38- .94 2,625,875 9.3 $ .49 874,875 $ .60
1.00-1.97 723,365 5.5 1.81 698,115 1.83
2.16-4.69 562,500 4.7 2.81 546,000 2.80
------------ -------------
3,911,740 1.07 2,118,990 1.57
============ ============ ============= ======
As of December 31, 2001, options to purchase 278,000 shares and 2,012,600 shares
of Common Stock were available for grant under the 1999 and 2000 Plans.
Unigene accounts for options granted to employees and directors under APB
Opinion No. 25. Had compensation cost for options granted to employees and
directors been determined consistent with the fair value method under SFAS No.
123, Unigene's pro forma net loss and pro forma net loss per share would have
been as follows for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
-------------- -------------- -----------
Net loss:
As reported $ (12,472,346) (12,469,405) (1,577,340)
Pro forma (13,252,346) (12,644,405) (2,182,340)
============== ============== ============
Basic and diluted net loss per share:
As reported $ (0.26) (0.28) (0.04)
Pro forma (0.28) (0.29) (0.05)
============== ============== ============
-45-
The fair value of the stock options granted in 2001, 2000 and 1999 is estimated
at grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions: dividend yields of 0%; expected volatility of 113%
in 2001, 103% in 2000 and 74% in 1999; a risk-free interest rate of 4.4% in
2001, 4.7% in 2000 and 6.4% in 1999; and expected lives of 5 years in 2001 and
2000 and 6 years in 1999.
During 1995, Unigene granted to a consultant options to purchase 10,000 shares
of Unigene's Common Stock, expiring in 2000, immediately exercisable at $1.44
per share. These options were exercised in a cashless exercise during 2000,
resulting in the issuance of 4,175 shares of Common Stock.
15. Income Taxes
As of December 31, 2001, Unigene had available for federal income tax reporting
purposes net operating loss carryforwards in the approximate amount of
$80,000,000, expiring from 2002 through 2021, which are available to reduce
future earnings which would otherwise be subject to federal income taxes. In
addition, Unigene has research and development credits in the approximate amount
of $3,000,000, which are available to reduce the amount of future federal income
taxes. These credits expire from 2002 through 2021. Unigene has New Jersey
operating loss carryforwards in the approximate amount of $26,700,000, expiring
from 2005 through 2008, which are available to reduce future earnings, which
would otherwise be subject to state income tax. As of December 31, 2001,
approximately $14,700,000 of these New Jersey loss carryforwards has been
approved for future sale under a program of the New Jersey Economic Development
Authority (the "NJEDA"). In order to realize these benefits, Unigene must apply
to the NJEDA each year and must meet various requirements for continuing
eligibility. In addition, the program must continue to be funded by the State of
New Jersey, and there are limitations based on the level of participation by
other companies. As a result, future tax benefits will be recognized in the
financial statements as specific sales are approved. In the fourth quarters of
2001 and 2000, Unigene realized $561,000 and $1,065,000, respectively, of tax
benefits arising from the sale of a portion of Unigene's New Jersey net
operating loss carryforwards and research credits that had previously been
subject to a full valuation allowance. In January 2002, Unigene realized an
additional $272,000 of tax benefits arising from the sale of New Jersey net
operating loss carryforwards.
Given Unigene's past history of incurring operating losses, any gross deferred
tax assets that are recognizable have been fully reserved. As of December 31,
2001 and 2000, Unigene had gross deferred tax assets of approximately
$34,000,000 and $29,000,000, respectively, subject to valuation allowances of
$34,000,000 and $29,000,000, respectively. The gross deferred tax assets were
generated primarily as a result of Unigene's net operating losses and tax
credits. Unigene's ability to use such net operating losses may be limited by
change in control provisions under Internal Revenue Code Section 382.
16. Employee Benefit Plan
Unigene maintains a deferred compensation plan covering all full-time employees.
The plan allows participants to defer a portion of their compensation on a
pre-tax basis pursuant to Section 401(k) of the Internal Revenue Code of 1986,
as amended, up to an annual maximum for each employee set by the Internal
Revenue Service. Unigene's discretionary matching contribution expense for 2001,
2000 and 1999 was approximately $43,000, $48,000 and $44,000, respectively.
17. Research and Licensing Revenue
In July 1997, Unigene entered into an agreement under which it granted to the
Parke-Davis division of Warner-Lambert Company a worldwide license to use
Unigene's oral calcitonin technology. In June 2000, Pfizer Inc. acquired
Warner-Lambert. During 1997, Unigene received $3 million for an equity
investment and $3 million for a licensing fee (see Note 3). Several milestones
were achieved during 1998, resulting in milestone revenue of $5 million. In
1999, two pilot human studies for Unigene's oral calcitonin formulation were
successfully concluded, resulting in milestone revenue totaling $5 million. Also
in 1999, Unigene and Pfizer identified an oral calcitonin formulation to be used
in the Phase I/II clinical study entitling Unigene to milestone revenue of an
additional $4.5 million. During 2000, two milestones were achieved resulting in
milestone revenue of $2 million. Patient dosing for this study was completed in
December 2000. Pfizer analyzed the results of this study and terminated the
agreement in March 2001 citing scientific and technical reasons.
-46-
As a result of the termination, Pfizer was no longer obligated to make
additional milestone payments or royalty payments to us (previously achieved
milestones had been paid in full prior to December 31, 2000). At the time the
agreement was terminated, there were remaining milestone payments in the
aggregate amount of $32 million. Of this total, $16 million was related to
commencement of clinical trials or regulatory submissions and $16 million was
related to regulatory approvals in the U.S. and overseas. While the Company does
not track costs on a specific research and development basis, management
estimates that Unigene's direct and indirect costs were approximately $4 million
per year (of which indirect costs represented approximately 33% of the total)
related to the Warner-Lambert program, based upon an estimate of research
personnel time and a review of batch production records. These costs primarily
consist of personnel costs, supplies, outside consultants and indirect costs and
are included in research and development expenses.
18. Legal Matters
In addition to the arbitration proceedings discussed in Note 7, Reseau de Voyage
Sterling, Inc. (Reseau) filed suit against Unigene in July 2000. Reseau, which
purchased from a third party a warrant to purchase one million shares of Unigene
common stock, alleges that Unigene breached a verbal agreement to extend the
term of the warrant beyond its expiration date. Reseau is seeking damages of $2
million. Unigene believes that the suit is completely without merit and intends
to continue to vigorously contest the claim.
19. Selected Quarterly Financial Data (Unaudited)
2001 1/st/ Quarter 2/nd/ Quarter 3/rd/ Quarter 4/th/ Quarter
- ------------------------- --------------- --------------- --------------- ---------------
Revenue $ 273,775 $ 88,042 $ 267,654 $ 235,174
Operating loss $ (2,636,210) $ (2,806,962) $ (2,702,972) $ (2,810,782)
Net loss $ (3,125,111) $ (3,308,729) $ (3,231,666) $ (2,806,840)
Net loss per share, basic
and diluted $ (.07) $ (.07) $ (.07) $ (.05)
2000 1/st/ Quarter 2/nd/ Quarter 3/rd/ Quarter 4/th/ Quarter
- ------------------------- --------------- --------------- --------------- ----------------
Revenue $ 1,201,250 $ 200,776 $ 1,559,164 $ 325,771
Operating loss $ (1,396,831) $ (3,748,686) $ (2,146,838) $ (4,092,528)
Loss before cumulative
effect of accounting
change $ (1,639,288) $ (4,016,917) $ (2,454,532) $ (3,358,668)
Net loss $ (2,639,288) $ (4,016,917) $ (2,454,532) $ (3,358,668)
Loss per share, before
cumulative effect of
accounting change $ (0.04) $ (0.09) $ (0.06) $ (0.07)
Net loss per share, basic
and diluted $ (0.06) $ (0.09) $ (0.06) $ (0.07)
The quarterly financial data for the first three quarters of 2000 reported above
differ from the data for those periods originally reported by us on Form 10-Q as
described below:
First Quarter Second Quarter Third Quarter
------------- -------------- -------------
Originally Originally Originally
Reported As Adjusted Reported As Adjusted Reported As Adjusted
-------- ----------- -------- ----------- -------- -----------
Revenue $ 1,001,250 $ 1,201,250 $ 776 $ 200,776 $ 1,359,164 $ 1,559,164
Operating loss $ (1,596,831) $ (1,396,831) $ (3,948,686) $ (3,748,686) $ (2,346,838) $ (2,146,838)
Net loss $ (1,839,288) $ (2,639,288) $ (4,216,917) $ (4,016,917) $ (2,654,532) $ (2,454,532)
Net loss per
share, basic
and diluted $ (.04) $ (.06) $ (.10) $ (.09) $ (.06) $ (.06)
As described in Note 3, we adopted SAB 101 in 2000, changing our revenue
recognition policy for up-front licensing fees that require services to be
performed in the future from immediate revenue recognition to deferral of
revenue with the up-front fee recognized over the life of the agreement. In
1997, we recognized $3,000,000 in revenue from an up-front licensing fee from
Pfizer. With the adoption of SAB 101, we are now recognizing this
-47-
revenue over a 45 month period, equivalent to the term of our oral calcitonin
agreement with Pfizer which was terminated in March 2001. We therefore
recognized a non-cash cumulative effect adjustment of $1,000,000 as of January
1, 2000 representing a revenue deferral over the remaining 15 months of the
agreement. We recognized $800,000 in revenue in 2000 and $200,000 of revenue in
2001 as a result of this deferral.
The quarterly financial data above has been adjusted to reflect retroactive
application of SAB 101. Therefore, in each of the first three quarters of 2000
we recognized $200,000 in additional revenue and $1,000,000 in the first quarter
of 2000 for the cumulative effect adjustment.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
-48-
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to Directors is included in
the section entitled "Election of Directors" of the Registrant's definitive
proxy statement for its Annual Meeting of Stockholders to be held on June 11,
2002 and is hereby incorporated by reference. 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
The information required by this item is included in the sections entitled
"Compensation Committee Interlocks and Insider Participation" and "Executive
Compensation" of the Registrant's definitive proxy statement for its Annual
Meeting of Stockholders to be held on June 11, 2002 and is hereby incorporated
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is included in the section entitled
"Security Ownership of Management" of the Registrant's definitive proxy
statement for its Annual Meeting of Stockholders to be held on June 11, 2002 and
is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is included in the section entitled
"Compensation Committee Interlocks and Insider Participation" of the
Registrant's definitive proxy statement for its Annual Meeting of Stockholders
to be held on June 11, 2002 and is hereby incorporated by reference.
-49-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The Financial Statements and Supplementary Data set forth under Item 8 of
this Report on Form 10-K are incorporated herein by reference.
(a) 2. Financial Statement Schedules.
None.
(a) 3. Exhibits.
See Index to Exhibits which appears on Pages 52-55.
(b) Reports on Form 8-K:
Unigene did not file any reports on Form 8-K during the quarter ended
December 31, 2001.
-50-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UNIGENE LABORATORIES, INC.
April 11, 2002 /s/ Warren P. Levy
-------------------------------------------------
Warren P. Levy, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
April 11, 2002 /s/ Warren P. Levy
--------------------------------------------------
Warren P. Levy, President, Chief Executive Officer
and Director
April 11, 2002 /s/ Jay Levy
-------------------------------------------------
Jay Levy, Treasurer, Chief Financial Officer,
Chief Accounting Officer and Director
April 11, 2002 /s/ Ronald S. Levy
-------------------------------------------------
Ronald S. Levy, Secretary, Executive Vice
President and Director
April 11, 2002 /s/ Allen Bloom
-------------------------------------------------
Allen Bloom, Director
April 11, 2002 /s/ J. Thomas August
-------------------------------------------------
J. Thomas August, Director
April 11, 2002 /s/ Bruce S. Morra
--------------------------------------------------
Bruce S. Morra, Director
-51-
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation of the Registrant and Amendments
thereto to July 1, 1986 (incorporated by reference to Exhibit 3.1
to the Registrant's Registration Statement No. 33-6877 on Form
S-1, filed July 1, 1986).
3.1.1 Certificate of Amendments of Certificate of Incorporation filed
July 29, 1986 and May 22, 1987 (incorporated by reference to
Exhibit 3.1.1 to the Registrant's Registration Statement No.
33-6877 on Form S-1, filed July 1, 1986).
3.1.2 Certificate of Amendments of Certificate of Incorporation filed
August 22, 1997 (incorporated by reference to Exhibit 3.1.2 of
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997).
3.1.3 Amendment to Certificate of Incorporation filed July 18, 2001
(incorporated by reference to Exhibit 3.1.3 of Post-Effective
Amendment No. 2 to Registrant's Registration Statement No.
333-04557 on Form S-1, filed December 12, 2001).
3.2 By-Laws of the Registrant (incorporated by reference to Exhibit
3.2 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993).
4.2 Specimen Certificate for Common Stock, par value $.01 per share
(incorporated by reference to Exhibit 3.1.1 to the Registrant's
Registration Statement No. 33-6877 on Form S-1, filed July 1,
1986).
10.1 Lease agreement between the Registrant and Fulton Street
Associates, dated May 20, 1993 (incorporated by reference to
Exhibit 10.1 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992 (File No. 0-16005)).
10.2 1994 Employee Stock Option Plan (incorporated by reference to the
Registrant's Definitive Proxy Statement dated April 28, 1994,
which is set forth as Appendix A to Exhibit 28 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993 (File No. 0-16005)).
10.3 Directors Stock Option Plan (incorporated by reference to Exhibit
10.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 (File No. 0-16005)).
10.4 Mortgage and Security Agreement between the Registrant and Jean
Levy dated February 10, 1995 (incorporated by reference to
Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994).
10.5 Loan and Security Agreement between the Registrant and Jay Levy,
Warren P. Levy and Ronald S. Levy dated March 2, 1995
(incorporated by reference to Exhibit 10.5 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994).
10.6 Employment Agreement between the Registrant and Warren P. Levy,
dated January 1, 2000 (incorporated by reference to Exhibit 10.6
of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.7 Employment Agreement between the Registrant and Ronald S. Levy,
dated January 1, 2000 (incorporated by reference to Exhibit 10.7
of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999).
-52-
10.8 Employment Agreement between the Registrant and Jay Levy, dated
January 1, 2000 (incorporated by reference to Exhibit 10.8 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.9 Split Dollar Agreement dated September 30, 1992 between the
Registrant and Warren P. Levy (incorporated by reference to
Exhibit 10.9 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992).
10.10 Split Dollar Agreement dated September 30, 1992 between the
Registrant and Ronald S. Levy (incorporated by reference to
Exhibit 10.10 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992).
10.12 Amendment to Loan Agreement and Security Agreement between the
Registrant and Jay Levy, Warren P. Levy and Ronald S. Levy, dated
March 20, 1995 (incorporated by reference to Exhibit 10.12 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.14 Amendment to Loan and Security Agreement between the Registrant
and Jay Levy, Warren P. Levy and Ronald S. Levy, dated June 29,
1995 (incorporated by reference to Exhibit 10.14 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.15 Promissory Note between the Registrant and Jay Levy, Warren P.
Levy and Ronald S. Levy, dated June 29, 1995 (incorporated by
reference to Exhibit 10.15 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.17 License Agreement, dated as of July 15, 1997, between the
Registrant and Warner-Lambert Company (incorporated by reference
to Exhibit 10.1 to the Registrant's Current Report on Form 8-K,
dated July 15, 1997).
10.19 Purchase Agreement, dated June 29, 1998, between the Registrant
and The Tail Wind Fund, Ltd. (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998).
10.20 Registration Rights Agreement, dated June 29, 1998, between the
Registrant and The Tail Wind Fund, Ltd. (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998).
10.21 Form of Promissory Note between the Registrant and Jay Levy
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999).
10.22 Form of Promissory Note between the Registrant and Warren Levy
and Ronald Levy (incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
10.23 Amendment to Loan Agreement and Security Agreement between the
Registrant and Jay Levy, Warren Levy and Ronald Levy, dated June
25, 1999 (incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
10.24 Amended and Restated Secured Note between the Registrant and Jay
Levy, dated July 13, 1999 (incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999).
10.25 Amended and Restated Security Agreement between the Registrant
and Jay Levy, Warren P. Levy and Ronald S. Levy, dated July 13,
1999 (incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
-53-
10.26 Subordination Agreement between the Registrant and Jay Levy,
Warren P. Levy and Ronald S. Levy, dated July 13, 1999
(incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
10.27 Mortgage and Security Agreement, dated July 13, 1999, between the
Registrant and Jay Levy (incorporated by reference to Exhibit
10.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999).
10.28 $70,000 Secured Note between the Registrant and Jay Levy dated
July 30, 1999 (incorporated by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
10.29 $200,000 Secured Note between the Registrant and Jay Levy dated
August 5, 1999 (incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
10.30 Modification of Mortgage and Security Agreement between the
Registrant and Jay Levy dated August 5, 1999 (incorporated by
reference to Exhibit 10.7 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999).
10.31 Amendment to Security Agreement and Subordination Agreement
between the Registrant and Jay Levy, Warren Levy and Ronald Levy,
dated August 5, 1999 (incorporated by reference to Exhibit 10.8
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999).
10.32 Joint Venture Contract between Shijiazhuang Pharmaceutical Group
Company, Ltd., and Unigene Laboratories, Inc., dated June 15,
2000 (incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, with certain confidential information omitted and
filed separately with the Secretary of the Commission).
10.33 Articles of Association of Shijiazhuang-Unigene Pharmaceutical
Corporation Limited, dated June 15, 2000 (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, with certain
confidential information omitted and filed separately with the
Secretary of the Commission).
10.34 2000 Stock Option Plan (incorporated by reference to Attachment A
to the Registrant's Schedule 14A, dated April 28, 2000,
containing the Registrant's Definitive Proxy Statement for its
2000 Annual Meeting of Stockholders (File No. 0-16005)).
10.35 Common Stock Purchase Agreement, dated May 9, 2001, between the
Registrant and Fusion Capital Fund II, LLC (incorporated by
reference to Exhibit 10.35 to the Registrant's Registration
Statement No. 333-60642 on Form S-1, filed May 10, 2001).
10.36 Registration Rights Agreement, dated April 23, 2001, between the
Registrant and Fusion Capital Fund II, LLC (incorporated by
reference to Exhibit 10.36 to the Registrant's Registration
Statement No. 333-60642 on Form S-1, filed May 10, 2001).
10.37 Warrant, dated March 30, 2001, between the Registrant and Fusion
Capital Fund II, LLC (incorporated by reference to Exhibit 10.37
to the Registrant's Registration Statement No. 333-60642 on Form
S-1, filed May 10, 2001).
10.38 Patent Security Agreement, dated March 13, 2001, between the
Registrant and Jay Levy (incorporated by reference to Exhibit
10.38 of Amendment No. 2 to Registrant's Registration Statement
No. 333-04557 on Form S-1, filed December 12, 2001).
-54-
10.39 First Amendment to Patent Security Agreement, dated May 29, 2001,
between the Registrant and Jay Levy (incorporated by reference to
Exhibit 10.39 of Amendment No. 2 to Registrant's Registration
Statement No. 333-04557 on Form S-1, filed December 12, 2001).
10.40 Letter Agreement between Fusion Capital Fund II, LLC and Unigene
Laboratories, Inc., dated November 1, 2001 (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001).
10.41 Letter Agreement between Fusion Capital Fund II, LLC and Unigene
Laboratories, Inc., dated November 26, 2001 (incorporated by
reference to Exhibit 10.41 of Amendment No. 2 to Registrant's
Registration Statement No. 333-04557 on Form S-1, filed December
12, 2001).
10.42 Settlement Agreement between The Tail Wind Fund, Ltd. and Unigene
Laboratories, Inc., dated April 9, 2002.
23 Consent of KPMG LLP.
-55-