-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SQwOOQZXk0QulrxRzbWsjM+uAtBJjrMpGetxHpkTgpQv5O5N013XGc89hdyV93Go 5dRXiXr64lweEQfq498ysQ== 0000914317-01-500067.txt : 20010511 0000914317-01-500067.hdr.sgml : 20010511 ACCESSION NUMBER: 0000914317-01-500067 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20010510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIGENE LABORATORIES INC CENTRAL INDEX KEY: 0000352747 STANDARD INDUSTRIAL CLASSIFICATION: MEDICINAL CHEMICALS & BOTANICAL PRODUCTS [2833] IRS NUMBER: 222328609 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-60642 FILM NUMBER: 1628824 BUSINESS ADDRESS: STREET 1: 110 LITTLE FALLS RD CITY: FAIRFIELD STATE: NJ ZIP: 07004-2193 BUSINESS PHONE: 9738820860 MAIL ADDRESS: STREET 1: 110 LITTLE FALLS RD CITY: FAIRFIELD STATE: NJ ZIP: 07004-2193 S-1 1 s-1_0509.txt As filed with the Securities and Exchange Commission on May 10, 2001 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------- UNIGENE LABORATORIES, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 2833 22-2328609 (State or Other (Primary Standard (I.R.S. Employer Jurisdiction of Incorporation Industrial Classification Identification Number) or Organization) Code Number) ----------- 110 Little Falls Road Fairfield, New Jersey 07004 (973) 882-0860 (Address, including Zip Code, and Telephone Number, including Area Code, of Registrant's Principal Executive Offices) ----------- WARREN P. LEVY President With copies to: Unigene Laboratories, Inc. D. Michael Lefever, Esq. 110 Little Falls Road Covington & Burling Fairfield, New Jersey 07004 1201 Pennsylvania Avenue, NW (973) 882-0860 Washington, D.C. 20004-2401 (Name, Address, including Zip Code, (202) 662-5276 and Telephone Number, including Area Code, of Agent For Service) ----------- Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [x] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ]
CALCULATION OF REGISTRATION FEE ===================================================================================================================== Title of Securities Amount to be Proposed Maximum Proposed Maximum Amount of To be Registered Registered (1) Offering Price Aggregate Registration Per Share Offering Price Fee - --------------------------------------------------------------------------------------------------------------------- Common Stock, par value 9,000,000 $.52(2) $4,680,000(2) $1,170(2) $.01 per share =====================================================================================================================
(1) This Registration Statement registers the offer and sale of 9,000,000 shares of common stock, par value $.01 per share of the registrant (the "Common Stock"). Pursuant to Rule 416 under the Securities Act of 1933, as amended, the number of shares registered hereby includes such additional number of shares of Common Stock as are required to prevent dilution resulting from stock splits, stock dividends or similar transactions. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) based on the average of the bid and asked prices of the Common Stock on the OTC Bulletin Board on April 17, 2001. Fee was paid in connection with Registration No. 333-54048. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant has filed a further amendment that specifically states that the registration statement shall thereafter become effective in accordance with section 8(a) of the securities act of 1933. ******************************************************************************** The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. ******************************************************************************** Prospectus Subject To Completion Dated May 10, 2001 Unigene Laboratories, Inc. 9,000,000 Shares of Common Stock ---------- This prospectus relates to the offer and sale by Fusion Capital Fund II, LLC of up to 9,000,000 shares of common stock of Unigene Laboratories, Inc., a Delaware corporation. The Unigene common stock is listed on the OTC Bulletin Board under the symbol "UGNE." Investing in the common stock involves risks. See "Risk Factors" beginning on page 4. Fusion is an "underwriter" within the meaning of the Securities Act of 1933, as amended. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. The date of this prospectus is May ___, 2001. -------------- TABLE OF CONTENTS Page PROSPECTUS SUMMARY........................................ 3 RISK FACTORS.............................................. 4 FORWARD-LOOKING STATEMENTS................................ 10 USE OF PROCEEDS........................................... 10 PRICE RANGE OF COMMON STOCK............................... 10 DIVIDEND POLICY........................................... 11 SELECTED FINANCIAL DATA................................... 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 15 BUSINESS.................................................. 22 MANAGEMENT................................................ 28 PRINCIPAL STOCKHOLDERS.................................... 32 THE FINANCING TRANSACTION................................. 33 SELLING STOCKHOLDER....................................... 37 PLAN OF DISTRIBUTION...................................... 37 LEGAL MATTERS............................................. 39 EXPERTS................................................... 39 ADDITIONAL INFORMATION.................................... 39 INDEX TO FINANCIAL STATEMENTS............................. F-1 2 Prospectus Summary The following summary highlights information contained elsewhere in this prospectus. It may not contain all of the information that is important to you. You should read the entire prospectus carefully, especially the discussion regarding the risks of investing in Unigene common stock under the heading "Risk Factors," before investing in Unigene common stock. "Unigene," "Forcaltonin," and "Fortical" are registered trademarks of Unigene Laboratories, Inc. Business Unigene is a biopharmaceutical company engaged in the research, production and delivery of small proteins, referred to as peptides, that have demonstrated or may have potential medical use. We have a patented manufacturing technology for producing many peptides cost-effectively. We also have patented technology that has been shown to deliver orally medically useful amounts of various peptides into the bloodstream. Our primary focus has been on the development of Calcitonin products for the treatment of osteoporosis and other indications. o Injectable Calcitonin. Our injectable Calcitonin product, which has the trade name FORCALTONIN TM, has been approved for the treatment of Paget's disease, a genetic bone disorder, and hypercalcemia, a disorder associated with high calcium blood levels, in the 15 member states of the European Union. Sales to date of this product have been minimal. o Nasal Calcitonin. In December 2000, we successfully completed a human study demonstrating similar blood levels between our formulation and that of an existing nasal Calcitonin product. We have initiated a second human study with final results expected in mid-2001. We are seeking to license our nasal Calcitonin product in the U.S. and other countries for the treatment of osteoporosis. o Oral Calcitonin. In 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 our oral Calcitonin technology. In December 1999, Warner Lambert filed an Investigational New Drug application with the U.S. Food and Drug Administration (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. Pfizer terminated the license agreement citing this conclusion. We believe that this study, in which an FDA approved product also did not work and which produced results contrary to many published studies, was not capable of determining the performance of our oral Calcitonin product. We believe that if patients in the study had also received calcium supplements, in addition to the Calcitonin, the results would have been more favorable. Therefore, we intend to continue the development of our oral Calcitonin product as a treatment of osteoporosis, and have begun discussions with potential licensees in the U.S. and other countries. In addition, due to the termination of the Pfizer agreement, we no longer have restrictions on selling bulk Calcitonin. 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 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. 3 Corporate Information Unigene is incorporated under the laws of the State of Delaware. Our executive offices are located at 110 Little Falls, Fairfield, New Jersey 07004, and our telephone number at this location is (973) 882-0860. The address of our web site is www.unigene.com. Information on our web site is not part of this prospectus. Unigene Common Stock Unigene common stock trades on the OTC Bulletin Board under the symbol "UGNE." The Offering On May 9, 2001, we entered into a common stock purchase agreement with Fusion under which Fusion has committed 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. The May 9, 2001 agreement replaces the agreement entered into on December 18, 2000 which was amended March 30, 2001. Fusion Capital Fund II, LLC, the selling stockholder, is offering for sale up to 9,000,000 shares of Unigene common stock. The shares being offered consist of up to 6,000,000 shares of common stock that Fusion has agreed to purchase from Unigene and 2,000,000 shares of common stock and 1,000,000 shares of common stock, issuable upon the exercise of a five-year warrant exercisable at $.50 per share that Unigene has issued to Fusion as compensation for its purchase commitment. As of April 2, 2001, there were 46,436,940 shares of Unigene common stock outstanding, including the 2,000,000 shares that Unigene has issued to Fusion as compensation for its purchase commitment but not including the 1,000,000 shares that are issuable upon the exercise of the warrant. The number of shares offered by this prospectus represent 19.4% of the total number of shares of common stock outstanding as of April 2, 2001. The number of shares ultimately offered for sale by Fusion is dependent upon the number of shares purchased by Fusion. This number may be affected by other factors more fully described under the heading "The Financing Transaction." Risk Factors An investment in Unigene common stock involves a high degree of risk. You should carefully consider the following factors and other information in this prospectus before deciding to invest in shares of Unigene common stock. If any of the following risks actually occur, our business, financial condition, results of operations and prospects for growth would likely suffer. As a result, the trading price of Unigene common stock could decline, and you could lose all or part of your investment. Prospective investors should consider carefully these factors concerning our business before purchasing the securities offered by this prospectus. We make various statements in this section which constitute "forward-looking statements" under Section 27A of the Securities Act of 1933. See "Forward-Looking Statements." We have significant historical losses and expect to continue to incur losses in the future. We have incurred annual operating losses since our inception. As a result, at December 31, 2000, we had an accumulated deficit of $75,378,000. Our gross revenues for the years ended December 31, 2000, 1999 and 1998 were $3,287,000, $9,589,000 and $5,050,000, respectively. However, our revenues have not been sufficient to sustain our operations. These revenues consisted principally of milestone payments received in connection with our terminated license agreement with Pfizer. As of March 31, 2001, we have no significant revenue generating license agreements. As a result, during the same periods, we have incurred losses from operations of $11,385,000 $1,997,000 and $6,060,000, respectively. Our net losses for the years ended December 31, 2000, 1999 and 1998 were $12,469,000 $1,577,000 and $6,881,000, respectively. While our injectable Calcitonin product has been approved for commercial sale in a number of European countries for the treatment of two minor indications, we do not anticipate that sales for these 4 indications will produce significant revenues. We believe that the profitability of Unigene will require the successful commercialization of our Calcitonin product or another peptide product in the United States and abroad. Unigene might never be profitable. We will require additional financing to sustain our operations. At December 31, 2000, we had a working capital deficiency of $13,267,000. The independent auditors' report for the year ended December 31, 2000, includes an explanatory paragraph stating that our recurring losses from operations and working capital deficiency discussed above raise substantial doubt about our ability to continue as a going concern. We had an operating cash flow deficit of $4,864,000 in 1998, an operating cash flow deficit of $1,400,000 in 1999 and for the year ended December 31, 2000, an operating cash flow deficit of $3,382,000. We do not have sufficient financial resources to fund our operations at the current level. Therefore, we need additional funds to continue our operations. Our agreement with Fusion could provide us with sufficient funding to sustain our operations for up to two years, beginning in the second quarter of 2001. The extent to which we 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 obtaining sufficient funding from Fusion were to prove prohibitively expensive and if we are unable to enter into a significant revenue generating license or other arrangement in the near term, we will need 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 the company. Should the funding we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences would be a material adverse effect on our business, operating results, financial condition and prospects. 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. In addition, our issuance of shares of common stock to Fusion under the common stock purchase agreement will result in dilution to existing stockholders. We only have the right to receive $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. In addition, the agreement may be terminated by Fusion in the event of a default under the agreement. See "The Financing Transaction-Events of Default." Since we have initially registered 6,000,000 shares for sale by Fusion, the selling price of our stock to Fusion will have to average at least $3.50 per share for us to receive the maximum proceeds of $21,000,000 without registering and issuing any additional shares. We may need to seek shareholder approval to increase the total number of authorized shares of our common stock. We cannot sell shares of Unigene common stock to Fusion until the SEC declares effective the registration statement registering the shares offered by this prospectus. Unigene cannot predict with any certainty if or when this will occur. We believe that satisfying our long-term capital requirements will require the successful commercialization of one of our peptide products. At this time, we cannot predict with certainty that any of our products will be commercially successful. We may not be successful in our efforts to develop a Calcitonin or other peptide product that will produce revenues that are sufficient to sustain our operations. We have obtained regulatory approval in Europe for the sale of our injectable Calcitonin product, but there is a limited market for the indications for which it has been approved. None of our products have been approved for sale in the U.S. The U.S. Food and Drug Administration must approve the commercial manufacture and sale of pharmaceutical products in the U.S. Similar regulatory approvals are required for the sale of pharmaceutical products outside of the United States. We must conduct further human testing on our products before they can be approved for commercial sale. We must show in these human trials that our products are safe and effective. If any of our products are approved for commercial sale, we will need to manufacture the product in commercial quantities at a reasonable cost in order for it to be a successful product that will generate profits. Because of our limited clinical, manufacturing and regulatory experience and the lack of a marketing organization, we are likely to rely on licensees or other parties to perform one or more tasks for the commercialization of pharmaceutical products. 5 We believe that expanded consumer acceptance of Calcitonin pharmaceutical products depends on the development of more desirable formulations. We have initiated human trials to evaluate a nasal Calcitonin product with final results expected in mid-2001. Pfizer recently completed a human trial for our oral Calcitonin product, but after analyzing the results it terminated our license agreement citing scientific and technical reasons. We disagree with Pfizer's conclusions and plan to seek other licensees to continue the development of our oral Calcitonin product. We may not be successful in licensing our Calcitonin products or any of our other peptide products. In addition, we may not be able to demonstrate the safety or effectiveness of our products in human trials and, accordingly, they may not receive the U.S. Food and Drug Administration and foreign governmental approvals that are necessary to market these products. Other companies may develop other products to compete with or surpass any nasal or oral product that we develop. We have made a substantial investment in our production facility which we will need to upgrade or expand in order to manufacture our products in commercial quantities. We have constructed and are operating a facility intended to produce Calcitonin and other peptides. This facility has been approved by European regulatory authorities for the manufacture of Calcitonin for human use, but has not yet been inspected or approved by the U.S. Food and Drug Administration. The risks associated with this facility include the failure to achieve targeted production and profitability goals, the development by others of superior processes and products, and the absence of a market for products produced by the facility. In addition, the successful commercialization of an oral Calcitonin product may require us to make additional expenditures to expand or upgrade our manufacturing operations. Currently, we cannot determine the cost or timing of these capital expenditures. We are dependent on partners for the commercial development of our products. We do not currently have, nor do we expect to have in the near future, sufficient financial resources and personnel to develop our products on our own. Accordingly, we expect to continue to depend on large pharmaceutical companies for revenues from sales of products, research sponsorship and distribution of our products. With the recent termination of our Pfizer collaboration, we currently have no licenses for any of our products in the U.S. In June 2000, we entered into a joint venture with a pharmaceutical company in the People's Republic of China for the manufacture and distribution of injectable and nasal Calcitonin products in China and possibly other Asian markets, for the treatment of osteoporosis. This joint venture has not yet commenced operations and it is uncertain whether it will generate meaningful revenues or profits for Unigene. We also have entered into distribution agreements for our injectable formulation of Calcitonin in the United Kingdom, Ireland and Israel. To date, we have not received material revenues from these distribution agreements. We intend to pursue additional opportunities to license, or enter into distribution arrangements for, our oral, nasal and injectable Calcitonin products as well as other possible peptide products. Due to the termination of the Pfizer agreement, we no longer have restrictions on selling bulk Calcitonin. However, we may not be successful in any of these efforts. Because we are a biopharmaceutical company, our operations are subject to extensive government regulations. Our laboratory research, development and production activities, as well as those of our collaborators and licensees, are subject to significant regulation by federal, state, local and foreign governmental authorities. In addition to obtaining U.S. Food and Drug Administration approval and other regulatory approvals of our products, we must obtain approvals for our manufacturing facility to produce Calcitonin and other peptides for human use. The regulatory approval process for a pharmaceutical product requires substantial resources and may take many years. Our inability to obtain approvals or delays in obtaining 6 approvals would adversely affect our ability to continue our development program, to manufacture and sell our products, and to receive revenue from milestone payments, product sales or royalties. The FDA or other regulatory agencies may audit our production facility at any time to ensure compliance with current Good Manufacturing Practice guidelines, referred to as cGMP. These guidelines require that we conduct our production operation in strict compliance with our established rules for manufacturing and quality controls. Any of these agencies can suspend production operations and product sales if they find significant or repeated changes from these guidelines. A suspension by any of these agencies could have a material adverse effect on our operations. Our competitors include large pharmaceutical companies with superior resources. Unigene is engaged in a rapidly changing and highly competitive field. To date, Unigene has concentrated its efforts on one product -- Calcitonin -- for treating osteoporosis and other indications. Like the market for any pharmaceutical product, the market for treating osteoporosis and these other indications has the potential for rapid, unpredictable and significant technological change. Competition is intense from specialized biotechnology companies, major pharmaceutical and chemical companies and universities and research institutions. Most of our competitors have substantially greater financial resources, research and development staffs and facilities, and regulatory experience than we do. Major competitors in the field of osteoporosis treatment include Novartis, American Home Products, Merck, Eli Lilly, and Procter and Gamble. Any one of these entities could, at any time, develop products or a manufacturing process that could render our technology or products noncompetitive or obsolete. Our success depends upon our ability to protect our intellectual property rights. We filed applications for U.S. patents relating to proprietary peptide manufacturing technology and oral formulations that we have invented in the course of our research. To date, six U.S. patents have issued and other applications are pending. We have also made patent application filings in selected foreign countries and numerous foreign patents have issued. We face the risk that any of our pending applications will not issue as patents. Our business also is subject to the risk that our issued patents will not provide us with significant competitive advantages if, for example, a competitor were to independently develop or obtain similar or superior technologies. Although we believe our patents and patent applications are valid, the invalidation of our key patents or the failure of our pending applications to issue as patents could have a material adverse effect upon our business. We also rely on trade secrets to protect our inventions. Our policy is to include confidentiality obligations in all research contracts, joint development agreements and consulting relationships that provide access to our trade secrets and other know-how. However, other parties with confidentiality obligations could breach their agreements causing us harm. If a secrecy obligation were to be breached, we may not have the financial resources necessary for a legal challenge. If licensees, consultants or other third parties use technological information independently developed by them or by others in the development of our products, disputes may arise from the use of this information and as to the ownership rights to products developed using this information. These disputes may not be resolved in our favor. Our technology or products could give rise to product liability claims. Our business exposes us to the risk of product liability claims that are a part of human testing, manufacturing and sale of pharmaceutical products. We may not have sufficient resources to defend against or satisfy these claims. Although we maintain product liability insurance coverage, product liability or other judgments against us, as well as the cost of defending such claims in excess of insurance limits, could have a material adverse effect upon our business and financial condition. The loss of our key executives could have a negative effect on our business. 7 Dr. Warren Levy and Dr. Ronald Levy have been the principal executive officers since our inception. We rely on them for their leadership and business direction. Each of them has entered into an agreement with us providing that he shall not engage in any other employment or business for the period of his employment with us. The loss of the services of either of these individuals could have a material adverse effect on our business. The outcome of our arbitration proceeding with The Tail Wind Fund is uncertain. In July 2000, the Tail Wind Fund, Ltd., the holder of $2,000,000 in principal amount of our 5% convertible debentures filed with the American Arbitration Association a demand for arbitration of its claim that it was owed, as of June 30, 2000, approximately $3,400,000, consisting of principal, interest and penalties, resulting from our default under various provisions of the debentures and related agreements. See "Business -- Litigation" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources and Liquidity." We have denied the amount of Tail Wind's claim and have made certain counterclaims. The outcome of the arbitration proceeding is uncertain. An extremely unfavorable ruling could have a material adverse effect on Unigene. The market price of Unigene common stock may be highly unstable. The market price of Unigene common stock has been and we expect it to continue to be highly unstable. Factors, including our announcement of technological improvements or announcements by other companies, regulatory matters, research and development activities, new or existing products or procedures, signing or termination of licensing agreements, concerns about our financial position, operating results, litigation, resolution of the arbitration involving our outstanding convertible debentures, government regulation, developments or disputes relating to agreements, patents or proprietary rights, and public concern over the safety of activities or products may have a significant impact on the market price of our stock. In addition, potential dilutive effects of future sales of shares of Unigene common stock by Unigene and its stockholders, including sales by Fusion under this prospectus and by the exercise and subsequent sale of Unigene common stock by the holders of outstanding and future warrants and options could have an adverse effect on the price of our stock. We do not anticipate paying cash dividends on the Unigene common stock. We have never paid any cash dividends on the Unigene common stock and we do not anticipate paying cash dividends in the foreseeable future. Rather, we intend to retain any cash flow we generate for investment in our business. Accordingly, Unigene common stock may not be suitable for investors who are seeking current income from dividends. The Unigene common stock is classified as a "penny stock" under SEC rules which may make it more difficult for Unigene stockholders to resell their Unigene common stock. The Unigene common stock is traded on the OTC Bulletin Board. As a result, the holders of Unigene common stock may find it more difficult to obtain accurate quotations concerning the market value of the stock. Stockholders also may experience greater difficulties in attempting to sell the stock than if it was listed on a stock exchange or quoted on the Nasdaq National Market or the Nasdaq Small-Cap Market. Because Unigene common stock is not traded on a stock exchange or on the Nasdaq National Market or the Nasdaq Small-Cap Market, and the market price of the common stock is less than $5.00 per share, the common stock is classified as a "penny stock." SEC Rule 15g-9 under the Exchange Act imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an "established customer" or an "accredited investor." This includes the requirement that a broker-dealer must make a determination that investments in penny stocks are suitable for the customer and must make special disclosures to the customer concerning the risks of penny stocks. Application of the penny stock rules to the Unigene common stock could adversely 8 affect the market liquidity of the shares, which in turn may affect the ability of holders of the Unigene common stock to resell the stock. The sale of Unigene common stock to Fusion could cause substantial dilution and the sale of the shares acquired by Fusion could cause the price of Unigene common stock to decline. The price at which Fusion is obligated to purchase shares of Unigene common stock under the common stock purchase agreement will fluctuate based on the market price of our common stock. See "The Financing Transaction--Purchase of shares under the common stock purchase agreement" for a detailed description of the purchase price. All of the shares offered for sale by Fusion under this prospectus are freely tradeable. However, Fusion has agreed that it will not sell or otherwise transfer the 2,000,000 commitment shares or the 1,000,000 shares issuable upon the exercise of its warrant which we issued as of March 30, 2001 to Fusion as part of its commitment fee until the earlier of the termination of the common stock purchase agreement, the occurrence of an event of default by us under this agreement or 480 trading days from the date of the agreement which is approximately two years from the date of this prospectus. 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 the date of this prospectus. Depending upon market liquidity at the time, the resale by Fusion of shares registered in this offering at any given time could cause the trading price of the Unigene common stock to decline. The sale by Fusion of a substantial number of shares purchased from Unigene, or the anticipation of such sales, could make it more difficult for Unigene to sell equity or equity related securities in the future at a time and at a price that it might otherwise wish to effect sales. If Fusion purchased the full amount of shares purchasable under the common stock purchase agreement on the date of this prospectus, at a price equal to $.55, the closing sale price of the Unigene common stock on April 2, 2001, Fusion would have been able to purchase a total of 38,181,818 shares of our common stock. These shares, along with the 2,000,000 shares and 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 48% of our outstanding common stock as of the date of this prospectus. 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. See "The Financing Transaction-Purchase of shares under the common stock purchase agreement" for a table that shows the number of shares issuable and potential dilution based on varying market prices. Although we have the right to 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. 9 Forward-Looking Statements Various statements that we make in this prospectus under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933. 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 and other factors discussed in this prospectus. Use of Proceeds Unigene will not receive any of the proceeds from the sale of the shares of Unigene common stock offered for sale by Fusion under this prospectus. However, we may receive up to $21,000,000 from the sale of our common stock to Fusion under the agreement with Fusion. Price Range of Common Stock The Unigene common stock has been quoted on the OTC Bulletin Board under the symbol UGNE since October 1999, when it was delisted from the Nasdaq National Market. The following table presents, for the periods indicated, the high and low sales prices per share of the Unigene common stock as reported on the Nasdaq National Market from January 1, 1999 to October 4, 1999, and on the OTC Bulletin Board from October 5, 1999 through the date of this prospectus. Fiscal Year Ended December 31, 1999 High Low ---- --- First Quarter $1.47 $0.94 Second Quarter $1.13 $0.63 Third Quarter $1.06 $0.63 Fourth Quarter $0.84 $0.23 Fiscal Year Ended December 31, 2000 High Low ---- --- First Quarter $5.38 $0.54 Second Quarter $3.66 $1.44 Third Quarter $3.03 $2.00 Fourth Quarter $3.00 $0.97 Fiscal Year Ended December 31, 2001 High Low ---- --- First Quarter $1.875 $0.375 Second Quarter (through April 6, 2001) $0.65 $0.47 10 On April 2, 2001, the last reported sale price of the Unigene common stock on the OTC Bulletin Board was $.55. As of April 2, 2001, there were 483 holders of record of the Unigene common stock. Dividend Policy Unigene has never paid a cash dividend on the Unigene common stock, and we do not anticipate paying cash dividends in the foreseeable future. Instead, we currently plan to retain all earnings, if any, for use in the operation of our business and to fund future growth. Selected Financial Data The selected financial data as of December 31, 2000 and 1999, and for the years ended December 31, 2000, 1999 and 1998, that is set forth below have been derived from Unigene's financial statements included in this prospectus, which have been audited by KPMG LLP, independent certified public accountants. The report of KPMG LLP covering these financial statements contains an explanatory paragraph that states that the Company's recurring losses from operations and working capital deficiency raise substantial doubt about the entity's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of that uncertainty. The selected financial data below as of December 31, 1998, 1997 and 1996, and for the years ended December 31, 1997 and 1996 have been derived from our audited financial statements that are not included in this prospectus. Historical results are not necessarily indicative of results to be expected for any future period. You should read the data below together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes included in this prospectus. STATEMENT OF OPERATIONS DATA (In thousands, except per share data)
Year Ended December 31, ------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Revenue: Licensing & other revenue $ 3,287 $ 9,589 $ 5,050 $ 3,003 $ 308 Costs and expenses: Research & development expenses 11,484 9,375 9,042 9,416 8,298 General and administrative 3,187 2,212 2,068 2,016 2,115 Loss before extraordinary item and cumulative effect of accounting change (11,469) (1,577) (6,737) (10,128) (10,597) Extraordinary item -- -- (144) -- -- Cumulative effect of accounting change (1,000) -- -- -- -- Net loss (12,469) (1,577) (6,881) (10,128) (10,597) Basic and diluted loss per share: Loss before extraordinary item and cumulative effect of accounting change (.26) (.04) (.17) (.27) (.38) Extraordinary item -- -- (.01) -- -- Cumulative effect of accounting change (.02) -- -- -- -- Net loss (.28) (.04) (.18) (.27) (.38) Weighted average number of shares outstanding 44,008 40,719 38,701 37,397 27,943
11
BALANCE SHEET DATA (In thousands) December 31, ----------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------- ---------- ---------- --------- --------- Cash and cash equivalents $ 17 $ 683 $ 403 $ 2,126 $ 4,491 Working capital (deficiency) (13,267) (2,759) (1,805) 310 2,954 Total assets 9,047 13,778 11,564 13,692 17,169 Long-term debt 546 1,003 3,931 1,608 2,788 Total liabilities 14,540 9,049 7,344 4,258 5,309 Total stockholders' equity (deficit) (5,493) 4,729 4,220 9,433 11,860
12 SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - ---- ----------- ----------- ----------- ----------- Revenue $1,201,250 $200,776 $1,559,164 $325,771 Operating loss ($1,396,831) ($3,748,686) ($2,146,838) ($4,092,528) Loss before cumulative effect of accounting change ($1,639,288) ($4,016,917) ($2,454,532) ($3,358,668) Net loss ($2,639,288) ($4,016,917) ($2,454,532) ($3,358,668) Loss per share, before cumulative effect of accounting change ($0.04) ($0.09) ($0.06) ($0.07) Net loss per share, basic and diluted ($0.06) ($0.09) ($0.06) ($0.07) 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - ---- ----------- ----------- ----------- ----------- Revenue $2,500,172 $ 26,670 $ 7,000,733 $ 61,838 Operating income (loss) $ (349,707) $(2,825,543) $ 3,787,338 $(2,608,981) Net income (loss) $ (563,755) $(2,977,610) $ 3,692,594 $(1,728,569) Net income (loss) per share, basic and diluted $ (.01) $ (.07) $ .09 $ (.05)
The quarterly financial data for the first three quarters of 2000 reported above differ from the data for those periods previously reported by us on Form 10-Q as described below:
First Quarter Second Quarter Third Quarter ------------- -------------- ------------- Previously As Previously As Previously As Reported Adjusted Reported Adjusted Reported Adjusted ---------- -------- ---------- -------- ---------- -------- Revenue $ 1,001,250 $ 1,201,250 $ 776 $ 200,776 $ 1,359,164 $ 1,559,164 Operating loss $(1,596,831) $(1,396,831) $(3,948,686) $(3,748,686) $(2,346,838) $(2,146,838) Net loss $(1,839,288) $(2,639,288) $(4,216,917) $(4,016,917) $(2,654,532) $(2,454,532) Net loss per share, basic and diluted $ (.04) $ (.06) $ (.10) $ (.09) $ (.06) $ (.06)
In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). Prior to the implementation of SAB 101, non-refundable license fees received upon execution of license agreements were recognized as revenue immediately. SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements and specifically addresses revenue 13 recognition in the biotechnology industry for non-refundable technology access fees and other non-refundable fees. We were required to adopt SAB 101, as amended, in the fourth quarter of 2000 with an effective date of January 1, 2000, and the recognition of a cumulative effect adjustment calculated as of January 1, 2000. We adopted SAB 101 in 2000, changing our revenue recognition policy for up-front licensing fees that require services to be performed in the future from immediate revenue recognition to deferral of revenue with the up-front fee recognized over the life of the agreement. In 1997, we recognized $3,000,000 in revenue from an up-front licensing fee from Pfizer. With the adoption of SAB 101, we are now recognizing this revenue over a 45 month period, equivalent to the term of our oral Calcitonin agreement with Pfizer which was terminated in March 2001. We therefore recognized a non-cash cumulative effect adjustment of $1,000,000 as of January 1, 2000 representing a revenue deferral over the remaining 15 months of the agreement. We recognized $800,000 in revenue in 2000 and will recognize $200,000 of revenue in 2001 as a result of this deferral. The quarterly financial data above has been adjusted to reflect retroactive application of SAB 101. Therefore, in each of the first three quarters of 2000 we recognized $200,000 in additional revenue related to the cumulative effect adjustment. 14 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 prospectus. 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 prospectus. Years ended December 31, 2000, 1999 and 1998 Revenue. Revenue decreased 66% to $3,287,000 for the year ended December 31, 2000 as compared to $9,589,000 for the year ended December 31, 1999. Revenue increased 90% to $9,589,000 for the year ended December 31, 1999 as compared to $5,050,000 for the year ended December 31, 1998. In all three years, revenue consists primarily of milestone revenue from Pfizer resulting from the achievement of milestones in the development of an oral Calcitonin product for treating osteoporosis. Yearly revenue was affected by the timing of the completion of the various milestones. In addition, revenue for the year ended December 31, 2000 included $800,000 from the amortization of deferred revenue related to the initial licensing fee paid by Pfizer in 1997 and $345,000 for analytical testing services provided to Pfizer. In March 2001, Pfizer terminated its license agreement with the Company. Research and Development Expenses. Research and development, the Company's largest expense, increased 22% in 2000 to $11,484,000 from $9,375,000 in 1999 and increased 4% in 1999 from $9,042,000 in 1998. The 2000 increase was primarily attributable to the Company's clinical trials for its nasal Calcitonin product and an increase in expenditures related to an increase in Calcitonin production and the write-off of inventory in the fourth quarter as a result of Pfizer's termination of our agreement, partially offset by a reduction in consulting fees related to the Pfizer collaboration. The 1999 increase was primarily attributable to development expenses related to the Company's nasal Calcitonin product, consulting and analytical testing expenses related to the Company's Type II variation for its injectable Calcitonin product, and consulting fees related to the Company's collaboration with Pfizer partially offset by a reduction in production supplies. Expenditures for the sponsorship of collaborative research programs were $411,000, $250,000 and $280,000 in 2000, 1999 and 1998, respectively, which are included as research and development expenses. A portion of these expenditures was reimbursed by Pfizer in 1999 and 1998. General and Administrative Expenses. General and administrative expenses increased 44% in 2000 to $3,187,000 from $2,212,000 in 1999 and increased 7% in 1999 from $2,068,000 in 1998. The 2000 increase was primarily due to the recognition of non-cash expenses of $220,000 due to the issuance of warrants to a consultant and stock option compensation of $399,000, in addition to the recognition of a $350,000 expense to terminate the Company's former joint venture in China. The 1999 increase was primarily due to increased personnel costs and professional fees partially offset by reductions in public relations and travel expenses. Interest Income. Interest income increased $12,000 or 31% in 2000 from 1999, after decreasing $70,000 or 65% in 1999 from 1998. The 2000 increase was due to higher interest rates on investments. The 1999 decrease was due to lower interest income resulting from reduced funds available for investment. Interest Expense. Interest expense increased $27,000 or 2% in 2000 to $1,199,000 from $1,171,000 in 1999 after increasing $386,000 or 49% in 1999 from $785,000 in 1998. Interest expense increased in 2000 due to increased notes payable to 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 15 related warrants on the 5% convertible debentures as compared to 1999. The annual interest rate on the $2,000,000 in outstanding principal amount of the 5% Debentures increased in 2000 to 20% resulting from the failure of the Company to make a semi-annual interest payment that was due in January 2000. In addition, since October 1999, the Company has been accruing additional interest expense monthly in an amount equal to 2% of the outstanding principal amount of the 5% Debentures as a result of the removal of the Company's Common Stock from trading on the Nasdaq Stock Market in October 1999. The expenses incurred in connection with the 5% Debentures in 2000 were partially offset by a 50% decrease in the principal balance outstanding as a result of conversions to Common Stock during 1999. Included in 1999 interest expense is $197,000 of the amortization of the value of the beneficial conversion feature and related warrants of the Company's 5% convertible debentures. Excluding the change in the amortization charged to interest, interest expense increased in 1999 as compared to 1998 as a result of an increase in notes payable to stockholders, redemption premium resulting from the Company exceeding the Share Limit on the 5% Debentures, and the 2% delisting penalty on the 5% Debentures, partially offset by a decrease in the balance outstanding under the Company's 5% Debentures as a result of partial conversions to Common Stock. Income Tax Benefit. Income tax benefit in 2000 of $1,065,000 and in 1999 of $1,553,000 consisted of proceeds received for the sale of a portion of the Company's state tax net operating loss carryforwards under a New Jersey Economic Development Authority ("NJEDA") program, which allows certain New Jersey taxpayers to sell their state tax benefits to third parties. The purpose of the New Jersey program is to provide financial assistance to high-tech and biotechnology companies in order to facilitate future growth and job creation. Extraordinary Item. Extraordinary item, loss on early extinguishment of debt, was $144,000 for 1998. The loss was due to redemption at a premium of a portion of our 10% convertible debentures in September 1998. Cumulative Effect of Accounting Change. In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). Prior to the implementation of SAB 101, non-refundable license fees received upon execution of license agreements were recognized as revenue immediately. SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements and specifically addresses revenue recognition in the biotechnology industry for non-refundable technology access fees and other non-refundable fees. The Company was required to adopt SAB 101, as amended, in the fourth quarter of 2000 with an effective date of January 1, 2000, and the recognition of a cumulative effect adjustment calculated as of January 1, 2000. The Company adopted SAB 101 in 2000, changing its revenue recognition policy for up-front licensing fees that require services to be performed in the future from immediate revenue recognition to deferral of revenue with the up-front fee recognized over the life of the agreement. In 1997, the Company recognized $3,000,000 in revenue from an up-front licensing fee from Pfizer. With the adoption of SAB 101, the Company is now recognizing this revenue over a 45 month period, equivalent to the term of its oral Calcitonin agreement with Pfizer which was terminated in March 2001. The Company therefore recognized a non-cash cumulative effect adjustment of $1,000,000 as of January 1, 2000 representing a revenue deferral over the remaining 15 months of the agreement. The Company recognized $800,000 in revenue in 2000 and will recognize $200,000 of revenue in 2001 as a result of this deferral. Net Loss. During 2000, revenue decreased approximately $6,300,000 principally due to the timing of the achievement of various milestones in the Pfizer agreement. In addition, operating expenses were higher as the Company increased its product commercialization efforts including its nasal Calcitonin clinical trials. Also, the Company recognized a cumulative charge from an accounting change offset by a realized income tax benefit. Therefore, net loss increased $10,892,000 for the year ended December 31, 2000 from the prior year. During 1999, revenue increased $4,540,000 from 1998 due to the achievement of various milestones in the Pfizer agreement. In addition, the Company received $1,553,000 in 1999 from the partial sale of its state tax benefits. These were partially offset by an increase in operating and 16 interest expenses. As a result, the Company's net loss decreased $5,304,000 or 77% for the year ended December 31, 1999, from the prior year. Liquidity and Capital Resources Unigene maintains its peptide production facility on leased premises in Boonton, New Jersey. We began production under current Good Manufacturing Practice guidelines at this facility in 1996. The current lease expires in 2004. Unigene has two consecutive ten-year renewal options under the lease, as well as an option to purchase the facility. During 2000, Unigene invested approximately $519,000 in fixed assets and leasehold improvements. The majority of these expenditures were to increase Unigene's analytical testing capabilities. Currently, we have no material commitments outstanding for capital expenditures relating to either the Boonton facility or our office and laboratory facility in Fairfield, New Jersey. At December 31, 2000, Unigene had cash and cash equivalents of $17,000, a decrease of $666,000 from December 31, 1999. We do not have sufficient financial resources to continue to fund our operations at the current level. Unigene has incurred annual operating losses since its inception and, as a result, at December 31, 2000, had an accumulated deficit of approximately $75,378,000 and a working capital deficiency of approximately $13,267,000. The independent auditors' report covering Unigene's 2000 financial statements includes an explanatory paragraph stating that our recurring losses from operations and working capital deficiency raise substantial doubt about our ability to continue as a going concern. However, the financial statements have been prepared on a going concern basis and as such do not include any adjustments that might result from the outcome of this uncertainty. In October 1999, the Nasdaq Stock Market delisted the Unigene common stock. The delisting of the common stock may have an adverse effect on our ability to raise capital. We had an operating cash flow deficit of $4,864,000 in 1998, an operating cash flow deficit of $1,400,000 in 1999 and for the year ended December 31, 2000, an operating cash flow deficit of $3,382,000. Unigene's future ability to generate cash from operations will depend primarily upon signing research or licensing agreements, achieving defined benchmarks in such agreements that entitle Unigene to receive milestone payments, receiving regulatory approval for its licensed products, and the sale of these products. In July 1997, Unigene entered into an agreement under which it granted to Warner-Lambert Company a worldwide license to use our oral Calcitonin technology. In June 2000, Pfizer Inc acquired Warner-Lambert. Through December 31, 2000, Unigene had received $3 million for an equity investment, $3 million for a licensing fee and recognized an aggregate of $16.5 million in milestone revenue under the agreement. Pfizer conducted a Phase I/II human study which was completed in December 2000. Pfizer analyzed the results the study and informed us in March 2001 that the study did not achieve Pfizer's desired results. Pfizer terminated the license agreement citing this conclusion. We believe that this study, in which an FDA approved product also did not work and which produced results contrary to many published studies, was not capable of determining the performance of our oral Calcitonin product. We believe that if patients in the study had also received calcium supplements, in addition to the Calcitonin, the results would have been more favorable. Therefore, we intend to continue the development of our oral Calcitonin product as a treatment of osteoporosis, and have begun discussions with potential licensees in the U.S. and other countries. In addition, due to the termination of the Pfizer agreement, we no longer have restrictions on selling bulk Calcitonin. Unigene also has the right to license the use of its technologies for injectable and nasal formulations of Calcitonin on a worldwide basis. Unigene has licensed distributors in the United Kingdom, Ireland and in Israel for its injectable product. However, these distribution agreements have not produced significant revenues. In June 2000, Unigene entered into a joint venture agreement in China with Shijiazhuang Pharmaceutical Group ("SPG") to manufacture and market our injectable and nasal products. See "Business -- Strategy -- China Joint Venture." We are actively seeking other licensing and/or supply agreements with pharmaceutical 17 companies for our injectable and nasal Calcitonin products and for other pharmaceutical products that can be manufactured and/or delivered using our patented technologies. However, we may not be successful in our efforts to enter into any additional revenue-generating agreements. Under the terms of the joint venture with SPG, Unigene is obligated to contribute up to $405,000 in cash during 2001 and up to an additional $495,000 in cash within two years thereafter. However, these amounts may be reduced or offset by our share of joint venture profits. However, as of December 31, 2000, we had not made any contributions to the joint venture. In addition, Unigene is obligated to pay to the Qingdao General Pharmaceutical Company an aggregate of $350,000 in 14 monthly installment payments of $25,000 in order to terminate its former joint venture in China, of which $75,000 had been paid as of December 31, 2000. We recognized the entire $350,000 obligation as an expense in 2000. In June 1998, Unigene completed a private placement of $4,000,000 in principal amount of 5% convertible debentures from which we realized net proceeds of approximately $3,750,000. The 5% debentures were convertible into shares of Unigene common stock. The interest on the debentures, at Unigene's option, was payable in shares of Unigene common stock. Upon conversion, the holder of a 5% debenture was entitled to receive warrants to purchase a number of shares of Unigene common stock equal to 4% of the number of shares issued as a result of the conversion. However, the number of shares of Unigene common stock that we are obligated to issue, in the aggregate, upon conversion, when combined with the shares issued in payment of interest and upon the exercise of the warrants, is limited to 3,852,500 shares. After this share limit is reached, Unigene is obligated to redeem all 5% debentures tendered for conversion at a redemption price equal to 120% of the principal amount, plus accrued interest. In December 1999, Unigene was unable to convert $200,000 in principal of the 5% debentures tendered for conversion because the conversion would have exceeded the share limit. As a result, we accrued, as of December 31, 1999, an amount equal to $400,000 representing the 20% premium on the outstanding $2,000,000 in principal amount of 5% debentures that had not been converted. As of December 31, 2000, all of the $2,000,000 in principal amount of 5% debentures were tendered for conversion and therefore are classified as a current liability in the amount of $2,400,000. Through December 31, 2000, we issued a total of 3,703,362 shares of Unigene common stock upon conversion of $2,000,000 in principal amount of the 5% debentures and in payment of interest on the 5% debentures. Also, we issued an additional 103,032 shares of Unigene common stock upon the cashless exercise of all of the 141,123 warrants issued upon conversion of the 5% debentures. On January 5, 2000, Unigene failed to make the required semi-annual interest payment on the outstanding 5% debentures. As a result, the interest rate on the outstanding 5% debentures has increased to 20% per year. The semi-annual interest payments due July 5, 2000 and January 5, 2001, also have not been made. As of December 31, 2000, the accrued and unpaid interest on the 5% debentures totaled approximately $467,000. In addition, due to the delisting of the Unigene common stock from the Nasdaq National Market in October 1999, Unigene became obligated under a separate agreement to pay the holder of the 5% debentures an amount equal to 2% of the outstanding principal amount of the debentures per month. Unigene has not made any of these payments to date, but has accrued the amounts as additional interest expense. As of December 31, 2000, the accrued and unpaid amount of this penalty totaled approximately $617,000. The holder of the 5% debentures has commenced an arbitration proceeding in which the holder claims that it is entitled, as of June 30, 2000, to payments in respect of the 5% debentures in the amount of approximately $3,400,000. See "Business -- Litigation." To satisfy Unigene's short-term liquidity needs, Jay Levy, the Chairman of the Board and an officer of Unigene, and Warren Levy and Ronald Levy, directors and officers of Unigene, and another Levy family member from time to time have made loans to Unigene. During February 2000, Jay Levy loaned us $300,000. This loan was repaid in April 2000. During the third and fourth quarters of 2000, Jay Levy and another family member loaned Unigene an aggregate of $1,655,000 in demand loans and Warren Levy and Ronald Levy loaned Unigene an aggregate of $78,323 in demand loans. As of December 31, 18 2000, total accrued interest on these loans was $922,000 and the outstanding loans by these individuals to Unigene, classified as short-term debt, totaled $4,743,323 and consisted of: o loans from the Levys in the aggregate principal amount of $2,873,323, which are evidenced by demand notes bearing a floating interest rate equal to the Merrill Lynch Margin Loan Rate plus .25% (9.875% at December 31, 2000) that are classified as short-term debt. These loans are secured by a security interest in Unigene's equipment and/or real property. o loans from Jay Levy in the aggregate principal amount of $1,870,000 evidenced by term notes maturing January 2002, and bearing interest at the fixed rate of 6% per year. These loans are secured by a security interest in all of Unigene's equipment and a mortgage on Unigene's real property. The terms of the notes require Unigene to make installment payments of principal and interest beginning in October 1999 and ending in January 2002 in an aggregate amount of $72,426 per month. No installment payments have been made to date Interest and principal payments required under these loans have not been made by Unigene, but the Levys have waived all default provisions including additional interest penalties due under these loans through December 31, 2000. From January 1, 2001 through March 30, 2001, Jay Levy, Warren Levy and Ronald Levy loaned to us an additional $1,610,000 at the Merrill Lynch Margin Loan Rate plus .25%, of which $500,000 is secured by a security interest in certain of our patents. No interest on these loans has been paid. Unigene's cash requirements to operate its research and peptide manufacturing facilities and develop its products are approximately $10 to 11 million per year. In addition to its obligations with respect to the 5% Debentures, Unigene has principal and interest obligations over the next several years under its outstanding notes payable to stockholders, which consist of loans made by the Levys, as described above, as well as obligations relating to its current and former joint ventures in China. We are actively seeking licensing and/or supply agreements with pharmaceutical companies for oral, nasal and injectable forms of Calcitonin as well as for other oral peptides. However, we may not be successful in licensing any of our products. Under the agreement with Fusion, after a registration statement is declared effective by the SEC for the resale of the shares of Unigene common stock to be sold to Fusion, Fusion will be required to purchase on each trading day during the term of the agreement $43,750 of our common stock over a period of 24 months, subject to our right to suspend or terminate the agreement. The Board of Directors has authorized the sale to Fusion of up to 6,000,000 shares of Unigene common stock. Assuming that all sales were to occur at the closing price on April 2, 2001, of $.55, we would be able to raise approximately $3,300,000 through the sale of the 6,000,000 shares to Fusion. We anticipate that, in order to sell significantly in excess of 6,000,000 shares to Fusion, it may be necessary to obtain stockholder approval of an amendment to our Certificate of Incorporation to increase the number of shares of Unigene common stock that we are authorized to issue. Assuming we have an adequate number of shares of common stock to sell, we stay in compliance with the agreement, and depending on the price at which shares are sold, Fusion could provide Unigene with sufficient funding to sustain its operations for up to two years, beginning in the second quarter of 2001. See "The Financing Transaction." However, we cannot predict when or if the SEC will declare the registration statement effective, if the stockholders will approve the amendment to our certificate of incorporation or if we will be able to meet the continuing requirements of the Fusion agreement. If we do not receive any financing from Fusion, or if obtaining sufficient funding from Fusion were to prove prohibitively expensive and if we are unable to enter into a significant revenue generating license or other arrangement in the near term, we will need to secure another source of funding in order to satisfy our working capital needs or consider alternative uses of our technology and manufacturing capability including the supply of Calcitonin to other companies, or significantly curtail our operations. We also could consider a sale or merger of the company. Assuming we are 19 able to raise additional capital through our agreement with Fusion, we still anticipate that we may need additional capital to implement fully our business plans. We believe that satisfying our capital requirements over the long term will require the successful commercialization of our Calcitonin product or another peptide product in the United States and abroad. However, it is uncertain whether or not any of our products will be approved or will be commercially successful. In addition, the commercialization of our oral Calcitonin product may require us to incur additional capital expenditures to expand or upgrade our manufacturing operations. However, we cannot determine either the cost or the timing of such capital expenditures at this time. As of December 31, 2000, the Company had available for federal income tax reporting purposes net operating loss carryforwards in the approximate amount of $68,000,000, expiring from 2001 through 2020, which are available to reduce future earnings which would otherwise be subject to federal income taxes. In addition, the Company has research and development credits in the approximate amount of $2,500,000, which are available to reduce the amount of future federal income taxes. These credits expire from 2001 through 2020. The Company has New Jersey operating loss carryforwards in the approximate amount of $23,300,000, expiring from 2003 through 2007, which are available to reduce future earnings, which would otherwise be subject to state income tax. As of December 31, 2000, approximately $11,400,000 of these New Jersey loss carryforwards has been approved for future sale under a program of the New Jersey Economic Development Authority (the "NJEDA"). In order to realize these benefits, the Company must apply to the NJEDA each year and must meet various requirements for continuing eligibility. In addition, the program must continue to be funded by the State of New Jersey, and there are limitations based on the level of participation by other companies. As a result, future tax benefits will be recognized in the financial statements as specific sales are approved. In the fourth quarters of 2000 and 1999, the Company realized $1,065,000 and $1,553,000, respectively, of tax benefits arising from the sale of a portion of the Company's New Jersey net operating loss carryforwards that had previously been subject to a full valuation allowance. Unigene follows Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Given our past history of incurring operating losses, any deferred tax assets that are recognizable under SFAS No. 109 were fully reserved. As of December 31, 2000 and 1999, under SFAS No. 109, we had deferred tax assets of approximately $29,000,000 and $26,000,000, respectively, subject to valuation allowances of $29,000,000 and $26,000,000, respectively. The deferred tax assets are primarily a result of our net operating losses and tax credits. Other The Unigene common stock has been delisted from the Nasdaq National Market System effective October 5, 1999, and is now trading on the OTC Bulletin Board. In order to be relisted on the Nasdaq National Market or the Nasdaq SmallCap Market, we must meet the initial listing requirements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended, will be effective for our fiscal year beginning January 1, 2001. We do not expect that the adoption of SFAS No. 133 will have a material effect on our financial position or results of operations. Market Risk In the normal course of business, Unigene is exposed to fluctuations in interest rates due to the use of debt as a component of the funding of its operations. We do not employ specific strategies, such as the use of derivative instruments or hedging, to manage our interest rate exposure. Unigene's interest rate exposure on the 5% convertible debentures has been affected by Unigene's delisting from the Nasdaq National Market and failure to make the semi-annual interest payment in January 2000. Our exposure to interest rate fluctuations over the near-term will continue to be affected by these events. 20 The information below summarizes Unigene's market risks associated with debt obligations as of December 31, 2000. The table below presents principal cash flows and related interest rates by year of maturity based on the terms of the debt. Under the terms of the 5% convertible debentures, no additional shares may be issued to convert the remaining principal balance. Therefore, the information presented as to the debentures is without consideration as to conversion features. Variable interest rates disclosed represent the rates at December 31, 2000. Given our financial condition described in "Liquidity and Capital Resources" it is not practicable to estimate the fair value of our debt instruments at December 31, 2000.
Year of Maturity ---------------------------------------- Carrying Amount 2001 2002 2003 2004 2005 ---------- ------------ -------- -------- -------- -------- Notes payable - stockholders $2,873,323 2,873,323 -- -- -- -- Variable interest rate 9.875% -- -- -- -- Notes payable - stockholders $1,870,000 1,870,000 -- -- -- -- Fixed interest rate 6% -- -- -- -- 5% convertible debentures $2,400,000 2,400,000 -- -- -- -- Fixed interest rate (1) 20%
(1) As a result of Unigene's failure to make the semi-annual interest payment that was due January 5, 2000, the interest rate on the 5% convertible debentures has increased from 7% at December 31, 1999, to 20% beginning January 5, 2000. In addition, due to the delisting of Unigene common stock from Nasdaq in 1999, Unigene became obligated to pay the holder of the 5% debentures an amount equal to 2% of the outstanding principal amount of the debentures per month. 21 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 technology that has been shown to deliver orally medically useful amounts of various peptides, into the bloodstream. Our primary focus has been on the development of Calcitonin products for the treatment of osteoporosis and other indications. We have the facilities and the technology for manufacturing Calcitonin in accordance with cGMP and have an injectable Calcitonin product that is approved for sale in the European Union for two minor indications. We are also engaged in the development of oral and nasal Calcitonin products. Our Accomplishments Among our major accomplishments are: o Development of a Proprietary Peptide Production Process. One of our principal scientific accomplishments is our success in developing a highly efficient biotechnology-based peptide production process. Several patents relating to this process have issued. We believe that these proprietary processes are key steps in the more efficient and economical commercial production of peptides with various medical applications. Many of these peptides cannot be produced at a reasonable cost in sufficient quantities for human testing or commercial use by currently available production processes. Using our proprietary process, we have produced laboratory-scale quantities of various peptides. We have constructed and are operating a manufacturing facility employing this process to produce Calcitonin. o Development of Proprietary Technology for Oral Delivery. We have also developed and patented a formulation that has successfully delivered orally Calcitonin into the bloodstream of human subjects. We and our collaborators have shown in repeated human studies that this formulation regularly delivers measurable quantities of the peptide into the human bloodstream. We believe that this formulation may accelerate the regulatory approval process for an oral Calcitonin product because it should be easier to establish its performance as compared to a formulation that does not produce measurable Calcitonin blood levels. We believe that the components of our patented oral product also can enable the delivery of other peptides and we have initiated studies to investigate this possibility internally and in collaboration with others. Strategy Our business strategy is to develop proprietary products and processes with applications in human health care to generate revenues from license fees, royalties on third-party sales and direct sales of bulk or finished products. Generally, we fund our internal research activities and rely on licensees, which are likely to be established pharmaceutical companies, to provide development funding. We also generally expect to rely on these licensees to take responsibility for obtaining appropriate regulatory approvals, human testing, and marketing of products derived from our research activities. However, we may, in some cases, retain the responsibility for human testing and for obtaining the required regulatory approvals for a particular product. o Pfizer License Agreement. In July 1997, we entered into an agreement under which we granted to the Parke-Davis division of Warner-Lambert Company (which merged with Pfizer in June 2000), a worldwide license to use our oral Calcitonin technology. Upon signing the agreement, we received $6.0 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. 22 Pfizer analyzed the results of the study and informed us in March 2001 that the study did not achieve Pfizer's desired results. Pfizer terminated the license agreement citing this conclusion. We believe that this study, in which an FDA approved product also did not work and which produced results contrary to many published studies, was not capable of determining the performance of our oral Calcitonin product. We believe that if patients in the study had also received calcium supplements, in addition to the Calcitonin, the results would have been more favorable. Therefore, we intend to continue the development of our oral Calcitonin product as a treatment of osteoporosis, and have begun discussions with potential licensees in the U.S. and other countries. In addition, due to the termination of the Pfizer agreement, we no longer have restrictions on selling bulk Calcitonin. o China Joint Venture. In June 2000, we entered into a joint venture with Shijiazhuang Pharmaceutical Group ("SPG"), a pharmaceutical company in the People's Republic of China. The joint venture will manufacture and distribute injectable and nasal Calcitonin products in China (and possibly other selected Asian markets) for the treatment of osteoporosis. We own 45% of the joint venture and will receive 45% of the joint venture profits. In the first phase of the collaboration, SPG will contribute its existing injectable Calcitonin license to the joint venture, which will allow the joint venture to sell our product in China. The joint venture will need to file a New Drug Application in China for its injectable and nasal products. In addition, the joint venture may be required to conduct brief local human trials. If the product is successful, the joint venture may establish a facility in China to fill injectable and nasal Calcitonin products using bulk Calcitonin produced at our Boonton, New Jersey plant. Eventually the joint venture may manufacture the bulk Calcitonin in China at a new facility that would be constructed by the joint venture. This would require local financing by the joint venture. The joint venture has not yet begun operations as of December 31, 2000. o Other License or Distribution Arrangements. In addition to the joint venture with SPG, we have entered into distribution agreements for our injectable Calcitonin product in the United Kingdom, Ireland and Israel. We continue to seek other licensing or distribution agreements with pharmaceutical companies for both the injectable and nasal Calcitonin products. However, we may not be successful in our efforts to sign any additional revenue generating agreements. Competition Our primary business activity has been biotechnology research and development. Biotechnology research is highly competitive, particularly in the field of human health care. We compete with specialized biotechnology companies, major pharmaceutical and chemical companies, universities and other non-profit research organizations, many of which can devote considerably greater financial resources to research activities. In 1999, we began manufacturing cGMP Calcitonin for use in pharmaceutical products. In the development, manufacture and sale of peptide products, we compete with contract laboratories and major pharmaceutical companies. Many of our competitors can devote considerably greater financial resources to these activities. Major competitors in the field of osteoporosis include Novartis, American Home Products, Merck, Eli Lilly, and Procter and Gamble. We believe that the unique safety and effectiveness of Calcitonin, combined with our patented peptide manufacturing process and our patented oral formulation, will enable 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. 23 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 initially is devoted exclusively to Calcitonin production, it also is suitable for producing other peptide products. We are following conventional procedures to secure the approval of the facility by regulatory agencies to allow us to manufacture Calcitonin for human use. European health authorities inspected the facility in connection with the filing of our injectable Calcitonin dossier and found it to be in compliance with cGMP guidelines. However, there is the risk that our operations might not remain in compliance or that approval by other agencies will not be obtained. The FDA must approve the facility in order to manufacture Calcitonin or other peptides for sale in the United States. Government Regulation Our laboratory research, development and production activities and those of our collaborators are subject to significant regulation by numerous federal, state, local and foreign governmental authorities. FDA approval, following the successful completion of various animal and human studies, is required for the sale of a pharmaceutical product in the United States. Foreign sales require similar studies and approval by regulatory agencies. The regulatory approval process for a pharmaceutical product requires substantial resources and can take many years. There is a risk that any additional regulatory approvals required for our production facility or for any of our products will not be obtained in a timely manner. Our inability to obtain, or delays in obtaining, these approvals would adversely affect our ability to continue to fund our programs, to produce marketable products, or to receive revenue from milestone payments, product sales or royalties. We also cannot predict the extent of any adverse governmental regulation that may arise from future legislative and administrative action. The FDA or other regulatory agencies may audit our production facility to ensure that it is operating in compliance with current Good Manufacturing Practice guidelines, referred to as cGMP. These guidelines require that production operations be conducted in strict compliance with our established rules for manufacturing and quality controls. These agencies are empowered to suspend production operations and/or product sales if, in their opinion, significant or repeated changes from these guidelines have occurred. A suspension by any of these agencies could have a material adverse impact on our operations. Regulatory Approval of Our Injectable Calcitonin Product In January 1999, we received approval from the European Committee for Proprietary Medicinal Products, referred to as the CPMP, to market our injectable Calcitonin product in all 15 member states of the European Union as a treatment for Paget's disease and for hypercalcemia. We began to market this product in Europe for these indications in 1999. We have filed a supplementary submission with the CPMP, called a Type II Variation, to expand the approved indications to include the treatment of osteoporosis. However, it is uncertain whether or when the Type II Variation will be approved by the CPMP. 24 Regulatory authorities in many non-European Union countries can cite the approved European dossier, which we believe could significantly reduce the registration requirements for injectable Calcitonin in those non-European Union countries, and thereby could speed up product launch. We have been notified by Switzerland that it intends to approve our injectable Calcitonin product for the treatment of osteoporosis, Paget's disease and hypercalcemia; however, the timing of that approval is uncertain. In addition, we believe that the human trials conducted to support the European filing of the injectable Calcitonin product can be used to support the filing of a New Drug Application with the FDA for use of our injectable Calcitonin product to treat osteoporosis and other indications. We believe that our abbreviated clinical program, which has been accepted by the FDA, will be sufficient to satisfy approval requirements in the United States and other countries. Accordingly, we expect that the review process for our injectable Calcitonin product in the United States and other countries may be shorter than that typically associated with a new drug submission for numerous reasons: o The active ingredient is structurally identical to and indistinguishable from the active ingredient in products already approved by many regulatory agencies. o The formulation is essentially similar to the formulations used in already approved products. o The human trial program that was accepted by the FDA is relatively brief and involved small numbers of subjects. As a result, the amount of information that must be reviewed is far less than would have been compiled for the lengthier trials required for a typical new drug submission. Development of our Oral Calcitonin Product In December 1995 and January 1996, we successfully tested a proprietary Calcitonin oral formulation in two separate human studies in the United Kingdom. These studies indicated that the majority of those who received oral Calcitonin showed levels of the peptide in blood samples taken during the trial that were greater than the minimum levels generally regarded as being required for maximum medical benefit. We believe that these were the first studies to demonstrate that significant blood levels of Calcitonin could be observed in humans following oral administration of the peptide. In April 1996, we successfully conducted a third pilot human study in the United Kingdom which used lower Calcitonin dosages than in the prior two human trials. The results of this trial indicated that every test subject showed levels of the peptide in their blood samples that exceeded the minimum levels generally regarded as required for maximum medical benefit. During 1999, with Warner-Lambert (now Pfizer), we successfully concluded two pilot human studies using an oral Calcitonin formulation manufactured by Warner-Lambert. Both studies showed significant measurable blood levels of Calcitonin. In December 1999, Warner-Lambert filed an Investigational New Drug application with the FDA, a Phase I/II study began in April 2000 and patient dosing for this study was completed in December 2000. Pfizer analyzed the results of the study and informed us in March 2001 that the study did not achieve Pfizer's desired results. Pfizer terminated the license agreement citing this conclusion. We believe that this study, in which an FDA approved product also did not work and which produced results contrary to many published studies, was not capable of determining the performance of our oral Calcitonin product. We believe that if patients in the study had also received calcium supplements, in addition to the Calcitonin, the results would have been more favorable. Therefore, we intend to continue the development of our oral Calcitonin product as a treatment of osteoporosis, and have begun discussions with potential licensees in the U.S. and other countries. In addition, due to the termination of the Pfizer agreement, we no longer have restrictions on selling bulk Calcitonin. We have filed patent applications for our oral formulation in the United States and in numerous foreign countries. In 1999, we received a U.S. patent for our basic technology covering the oral delivery of Calcitonin for the treatment of osteoporosis. In 2000, we received a U.S. patent extending this protection to the oral delivery of other peptides. There are risks that we will not be successful in licensing this product, that a safe and effective oral product will not be developed, that we will not be successful in obtaining regulatory approval of an oral 25 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 nasal spray Calcitonin product, which has substantially enlarged the U.S. market for Calcitonin. During 1999, we completed preliminary human studies for our proprietary nasal Calcitonin product. A patent application for the product was filed in February 2000. In January 2000 we filed an Investigational New Drug Application with the FDA to begin human testing of our nasal product as a treatment for osteoporosis. In February 2000, we began U.S. human studies. In December 2000, we successfully completed a human study demonstrating similar blood levels between our product and that of an existing nasal Calcitonin product. We have initiated a second human study with final results expected in mid-2001. We are seeking to license our nasal Calcitonin product in the U.S. and other countries for the treatment of osteoporosis. However, we may not be successful in our efforts to conclude a license agreement, to obtain governmental approval of our nasal Calcitonin product, or to manufacture and sell the product. Collaborative Research Programs We are currently engaged in two collaborative research programs: o Rutgers University College of Pharmacy continues to study oral delivery of Calcitonin and other peptides. o We are in collaboration with Yale University, to investigate new applications for various peptides, including Calcitonin gene-related peptide. In 1996, we reported that this peptide accelerated bone growth and prevented bone loss in an animal model system. However, this peptide may not have the same effect in humans. We may not be successful in developing, manufacturing or marketing any resulting product. Patents and Proprietary Technology We have filed a number of applications for U.S. patents relating to our proprietary peptide manufacturing process and our technology for oral delivery. To date, the following six U.S. patents have issued: o Immunization By Immunogenic Implant, a method for producing antibodies for developing diagnostic medical tests o two patents related to the Alpha-Amidation Enzyme and its use in manufacturing peptides o a patent covering an improvement in our manufacturing technology o two patents covering oral delivery of peptides Other applications are pending. We also have made filings in selected foreign countries, and numerous foreign patents have issued. However, our pending applications may not issue as patents and our issued patents may not provide us with significant competitive advantages. Furthermore, our competitors may independently develop or obtain similar or superior technologies. Although we believe our patents and patent applications are valid, the repeal of one or more of our key patents could have a significant adverse effect upon our business. Detecting and proving infringement generally is more difficult with process patents than with product patents. In addition, a process patent's value is diminished if others have patented the product that can be produced using the process. Under 27 these circumstances, we would require the cooperation of, and likely be required to share royalties with, the patent holder or its sublicensees in order to make and sell the product. In some cases, we rely on trade secrets to protect our inventions. Our policy is to include confidentiality provisions in all research contracts, joint development agreements and consulting relationships that provide access to our trade secrets and other know-how. However, there is a risk that these secrecy obligations could be breached causing us harm. To the extent licensees, consultants or other third parties apply technological information independently developed by them or by others to our projects, disputes may arise as to the ownership rights to information, which may not be resolved in our favor. Employees As of April 2, 2001 we had 67 full-time employees. Twenty-one were engaged in research, development and regulatory activities, 35 were engaged in production activities and 11 were engaged in general and administrative functions. Ten of our employees hold Ph.D. degrees. Our employees are experts in molecular biology, including DNA cloning, synthesis, sequencing and expression; protein chemistry, including purification, amino acid analysis, synthesis and sequencing of proteins; immunology, including tissue culture, monoclonal and polyclonal antibody production and immunoassay development; chemical engineering; pharmaceutical production; quality assurance; and quality control. None of our employees is covered by a collective bargaining agreement. Warren P. Levy, President and Ronald S. Levy, Executive Vice President, both executive officers and directors, have signed employment agreements with us. Research and Development We have established a multi-disciplinary research team to adapt proprietary amidation, biological production and oral delivery technologies to the development of proprietary products and processes. Approximately 83% of our employees are directly engaged in activities relating to production of, regulatory compliance for, and the research and development of pharmaceutical products. We spent $11.5 million on research activities in 2000, $9.4 million in 1999, and $9.0 million in 1998. Properties We own a one-story office and laboratory facility consisting of approximately 12,500 square feet. The facility is located on a 2.2 acre site in Fairfield, New Jersey. Our 32,000 square foot cGMP production facility, of which 18,000 square feet are currently being used for the production of Calcitonin and can be used for the production of other peptides, was constructed in a building located in Boonton, New Jersey. We lease the facility under a ten-year agreement, which began in February 1994. We have two 10-year renewal options and an option to purchase the facility. 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 -- Capital Resources and Liquidity." In July 2000, Unigene submitted to the American Arbitration Association a statement in which it denies the amount of Tail Wind's claim and makes certain 27 counterclaims. A hearing on the matter before an arbitrator appointed by the American Arbitration Association is expected to occur in June 2001. The outcome of the proceeding is uncertain. An extremely unfavorable ruling could have a material adverse effect on Unigene. In July 2000, Reseau de Voyage Sterling, Inc. filed suit against Unigene in the Supreme Court of the State of New York. Unigene removed 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. Following the deposition of the plaintiff, counsel for the plaintiff withdrew and the court has stayed the case until May 2001, to give the plaintiff an opportunity to seek new counsel. We believe that this suit is completely without merit, and we will continue to vigorously contest the claim. Management Executive Officers and Directors The following table sets forth information regarding Unigene's executive officers and directors: Name Age Position - ---------------------- --- ------------------------------------------------- Warren P. Levy (1) 49 President, Chief Executive Officer, and Director Ronald S. Levy (1) 52 Executive Vice President, Secretary, and Director Jay Levy (1) 77 Chairman of the Board and Treasurer James P. Gilligan 49 Vice President of Product Development Robert F. Hendrickson 68 Director Allen Bloom 57 Director - ------------- (1) Dr. Warren P. Levy and Dr. Ronald S. Levy are brothers and are the sons of Mr. Jay Levy. Each executive officer's term of office continues until the first meeting of the Board of Directors following the annual meeting of stockholders and until the election and qualification of his successor. All officers serve at the discretion of the Board of Directors. Warren P. Levy. Dr. Warren P. Levy, a founder of Unigene, has served as President and Chief Executive Officer, and as a director, since our formation in November 1980. Dr. Levy holds a Ph.D. in biochemistry and molecular biology from Northwestern University and a bachelor's degree in chemistry from the Massachusetts Institute of Technology. Ronald S. Levy. Dr. Ronald S. Levy, a founder of Unigene, has served as a director since our formation in November 1980, as Executive Vice President since April 1999, and as Secretary since May 1986. Dr. Levy served as Vice President from November 1980 through March 1999. Dr. Levy holds a Ph.D. in bioinorganic chemistry from Pennsylvania State University and a bachelor's degree in chemistry from Rutgers University. Jay Levy. Mr. Jay Levy, a founder of Unigene, has served as the Chairman of the Board of Directors and as Treasurer since our formation in November 1980. He served as Secretary from 1980 to May 1986. Mr. Levy is a part-time employee of Unigene and devotes approximately 15% of his time to Unigene. From 1985 through February 1991, he served as the principal financial advisor to the Estate of Nathan Cummings and its principal beneficiary, The Nathan Cummings Foundation, Inc., a large charitable foundation. From 1968 through 1985, he performed similar services for the late Nathan Cummings, a noted industrialist and philanthropist. 28 James P. Gilligan. Dr. James P. Gilligan has been employed by Unigene since 1981 and has served as Vice President of Product Development since April 1999. From February 1995 to March 1999, he served as Director of Product Development. Dr. Gilligan holds a Ph.D. in pharmacology from the University of Connecticut and a Masters of International Business from Seton Hall University. Robert F. Hendrickson. Mr. Robert F. Hendrickson was Senior Vice President, Manufacturing and Technology, for Merck & Co., Inc., an international pharmaceutical company, from 1985 to 1990. Since 1990, Mr. Hendrickson has been a management consultant with a number of biotechnology and pharmaceutical companies among his clients. He is currently a director of Envirogen, Inc. an environmental biotechnology company, and of Cytogen, Inc. and The Liposome Co, Inc., each of which is a biotechnology company. Dr. Allen Bloom. Dr. Allen Bloom, a patent attorney, has been a partner in Dechert Price & Rhoads, a law firm, for the past six years where he established and heads the patent practice group, which focuses on biotechnology, pharmaceuticals and medical devices. Prior to that time, he was Vice President, General Counsel and Secretary of The Liposome Company, Inc., a biotechnology company, for nine years. His responsibilities there included patent, regulatory and licensing activities. Dr. Bloom holds a Ph.D. in organic chemistry from Iowa State University. Committees of the Board of Directors The Board of Directors performs several important functions through committees. These committees are made up of members of the Board of Directors. Unigene's by-laws authorize the formation of these committees and grant the Board the authority to prescribe the functions of each committee and the standards for membership of each committee. The Board has the following four standing committees. The Board does not have a standing nominating committee. Audit Committee. The responsibilities of the Audit Committee include annually recommending a firm of independent public accountants to the Board to act as our auditors, reviewing the scope of the annual audit with the auditors in advance, and reviewing the results of the audit and the adequacy of our accounting, financial and operating controls. The Audit Committee also reviews our accounting and reporting principles, policies and practices; and approves fees paid to the auditors for audit and non-audit services. The current members of the Audit Committee are Messrs. Jay Levy, Bloom and Hendrickson. Compensation Committee. The responsibilities of the Compensation Committee include reviewing and approving the compensation, including salaries and bonuses, of our officers. The Compensation Committee also oversees the administration of our 401(k) plan and reviews and approves general benefits and compensation strategies. The current members of the Compensation Committee are Messrs. Jay Levy, Bloom and Hendrickson. Stock Option Committee (2000 Stock Option Plan). The Stock Option Committee for the 2000 Stock Option Plan, subject to the limitations of the plan, selects the employees to be granted options, fixes the number of shares to be covered by each option grant, and determines the exercise price and other terms and conditions of each option. The current members of this Stock Option Committee are Messrs. Bloom and Hendrickson. Stock Option Committee (Directors Stock Option Plan). The Stock Option Committee for the Directors Stock Option Plan, subject to the limitations of the plan, interprets the plan and makes all determinations necessary for the plan's administration. The current members of this Stock Option Committee are Messrs. Jay Levy, Warren Levy and Ronald Levy. 29 Director Compensation Directors who are not employees receive an annual retainer of $8,000 as well as a fee of $1,000 for each Board meeting attended. Mr. Hendrickson and Dr. Bloom were the only directors who received such fees in 2000. Board members do not earn additional compensation for service on a committee. Under the Director Stock Option Plan, each person elected to the Board who is not an employee receives, on the date of his initial election, an initial option to purchase 21,000 shares of Unigene common stock. On May 1st of each year, each non-employee director receives an additional option to purchase 10,000 shares of Unigene common stock if he has served as a non-employee director for at least six months prior to the grant date. Each option has a ten-year term and the exercise price is equal to the market price of Unigene common stock on the date of the grant. Each initial option vests in equal installments of 1/3 over a period of three years, commencing on the date of the grant, and each additional option vests in its entirety on the first anniversary of the grant. If the director's service as a non-employee director terminates prior to the expiration of the option term, the options will remain exercisable for a 90-day period following termination of service, except if a non-employee director resigns due to disability, the options will remain exercisable for 180 days following termination, and if a non-employee director dies while serving as a director, or within 90 days following termination of service (180 days in the case of disability), the options will remain exercisable for 180 days following the person's death. After such period, the options will terminate and cease to be exercisable. Employment Agreements Unigene entered into an employment agreement, effective January 1, 2000, with Dr. Warren P. Levy for an initial term of two years. Under the agreement, Dr. Levy will serve as President and Chief Executive Officer at an annual salary of $160,000 for the first year of the agreement. The Compensation Committee has discretion to approve salary increases beyond this first year. Unigene entered into an employment agreement, effective January 1, 2000, with Dr. Ronald S. Levy for an initial term of two years. Under the agreement, Dr. Levy will serve as Executive Vice President at an annual salary of $155,000 for the first year of the agreement. Salary increases beyond this first year are at the discretion of the Compensation Committee. Each agreement provides that, after the first two-year term, the agreement will be renewed on a year-to-year basis unless either party notifies the other of the desire not to renew the agreement. Either party must give this notice no later than three months prior to the scheduled termination date. Each agreement also provides that, if Unigene terminates the employment of the executive without cause or the executive resigns for good reason, which the executive has a right to do upon a change of control of Unigene or a significant reduction of the executive's responsibilities without his consent, Unigene will make a lump-sum severance payment to the executive equal to the salary that he would have earned for the remaining term of this agreement, if the remaining term (either the initial term or as extended) is more than one year; or if the remaining term of the agreement (either the initial term or as extended) is one year or less, a lump-sum payment equal to the executive's then-current annual salary. Compensation Committee Interlocks and Insider Participation The Board of Directors determined executive compensation for 2000. Three of the five Board members, Warren P. Levy, Ronald S. Levy and Jay Levy, are executive officers. Jay Levy is the father of Warren and Ronald Levy. To satisfy Unigene's short-term liquidity needs, Jay Levy, the Chairman of the Board and an officer of Unigene, and Warren Levy and Ronald Levy, directors and officers of Unigene, and another Levy family member from time to time have made loans to Unigene. During February 2000, Jay Levy loaned us $300,000. This loan was repaid in April 2000. During the third and fourth quarters of 2000, Jay Levy and another family member loaned Unigene an aggregate of $1,655,000 in demand loans and Warren Levy 30 and Ronald Levy loaned Unigene an aggregate of $78,323 in demand loans. As of December 31, 2000, total accrued interest on these loans was $922,000 and the outstanding loans by these individuals to Unigene totaled $4,743,323 and consisted of: o loans from the Levys in the aggregate principal amount of $2,873,323, which are evidenced by demand notes bearing a floating interest rate equal to the Merrill Lynch Margin Loan Rate plus .25% (9.875% at December 31, 2000) that are classified as short-term debt. These loans are secured by a security interest in Unigene's equipment and/or real property. o loans from Jay Levy in the aggregate principal amount of $1,870,000 evidenced by term notes maturing January 2002, and bearing interest at the fixed rate of 6% per year. These loans are secured by a security interest in all of Unigene's equipment and a mortgage on Unigene's real property. The terms of the notes require Unigene to make installment payments of principal and interest beginning in October 1999 and ending in January 2002 in an aggregate amount of $72,426 per month. No installment payments have been made to date. Interest and principal payments required under these loans have not been made by Unigene, but the Levys have waived all default provisions including additional interest penalties due under these loans through December 31, 2000. From January 1, 2001 through March 30, 2001, Jay Levy, Warren Levy and Ronald Levy loaned to us an additional $1,610,000 at the Merrill Lynch Margin Loan Rate plus .25%, of which $500,000 is secured by a security interest in certain of our patents. No interest has been paid on these loans. Executive Compensation The following table shows, for the years 1998, 1999 and 2000, the compensation paid to the Chief Executive Officer and to each other executive officer whose salary and bonus, for their services in all capacities in 2000 exceeded $100,000: Summary Compensation Table
Long-Term Compensation ------------ Annual Compensation Awards ------------------- ------ Payouts Other Restricted ------- Annual Stock Options/ LTIP All Other Name and Position Year Salary($) Bonus($) Compensation($)(2) Awards($) SARs(#) Payouts($) Compensation($)(1) - ------------------------------------------------------------------------------------------------------------------------------------ Warren P. Levy 2000 $160,175 $ 0 $ 0 $ 0 0 $ 0 $ 13,902 President, Chief 1999 146,211 0 0 0 0 0 13,866 Executive Officer 1998 146,231 0 0 0 0 0 13,830 Dr. Ronald S. Levy 2000 155,260 0 0 0 0 0 16,864 Executive Vice 1999 141,563 0 0 0 0 0 16,862 President 1998 141,618 0 0 0 0 0 16,792 Dr. James P. Gilligan 2000 148,034 0 7,615 0 0 0 0 Vice President 1999 139,216 0 7,235 0 135,000 0 0
1 Represents premium we paid on executive split-dollar life insurance. 2 Represents reimbursement for unused vacation days. 31 Aggregated Option Exercises and Year-End Option Values The following table shows information about any option exercises during the year ended December 31, 2000, and the number and value of unexercised options held as of December 31, 2000, by each of the executive officers named in the Summary Compensation Table:
Shares Underlying Value of Unexercised Exercises during Unexercised Options In-the-Money Options(1) the Fiscal Year ------------------- ----------------------- --------------- Number of Name Shares Acquired Value Realized Exercisable Unexercisable Exercisable Unexercisable - ---------------------- --------------- -------------- ----------- ------------- ----------- ------------- Dr. Warren P. Levy 0 0 0 0 0 0 Dr. Ronald S. Levy 0 0 0 0 0 0 Dr. James P. Gilligan 0 0 346,000 44,000 $77,595 $37,755
1 Based upon a closing price of $1.53 on December 31, 2000. Principal Stockholders The following table shows information as of March 31, 2001, concerning the beneficial ownership of Unigene common stock by each of Unigene's directors, each executive officer of Unigene listed in the Summary Compensation Table, and all directors and executive officers of Unigene as a group and each other person known by Unigene to be the beneficial owner of more than 5% of Unigene's common stock. The ownership percentages listed on the table are based on 46,436,940 shares of Unigene common stock outstanding as of March 31, 2001. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. A person generally is deemed to be the beneficial owner of shares over which he has either voting or investment power. Shares underlying options that are currently exercisable, or that will become exercisable within 60 days, are deemed to be beneficially owned by the person holding the options, and are deemed to be outstanding for the purpose of computing the beneficial ownership percentage of that person, but are not considered to be outstanding for the purpose of computing the ownership percentage of any other person. Except as otherwise noted, the persons and the group identified in the table have sole voting and sole investment power with respect to all the shares of Unigene common stock shown as beneficially owned by them. Except as otherwise indicated, the address of each beneficial owner listed below is c/o Unigene Laboratories, Inc., 110 Little Falls Road, Fairfield, New Jersey 07004. Amount and Nature of Name of Beneficial Owner Beneficial Ownership Percent of Class - ------------------------ -------------------- ---------------- Fusion Capital Fund II, LLC 3,000,000 (1) 6.3% 222 Merchandise Mart Plaza Chicago, IL 60654 Warren P. Levy 1,980,545 (2) 4.3% Ronald S. Levy 1,995,545 (2) 4.3% Jay Levy 578,095 (3) 1.2% James P. Gilligan 345,660 (4) 0.8% Robert F. Hendrickson 55,000 (5) 0.1% Allen Bloom 31,000 (6) 0.1% Officers and Directors as a Group (6 persons) 4,785,845 (2,7) 10.3% 1 Includes 1,000,000 shares that Fusion has the right to acquire upon the exercise of a warrant. 2 Includes 200,000 shares of Unigene common stock held in a family trust over which Warren P. Levy and Ronald S. Levy, in their capacity as trustees, share voting and dispositive power. 32 3 Includes 55,000 shares of Unigene common stock that Mr. Levy has the right to acquire upon the exercise of stock options that are exercisable either immediately or within 60 days. 4 Includes 326,000 shares of Unigene common stock that Dr. Gilligan has the right to acquire upon the exercise of stock options that are exercisable either immediately or within 60 days. 5 Includes 40,000 shares of Unigene common stock that Mr. Hendrickson has the right to acquire upon the exercise of stock options that are exercisable either immediately or within 60 days. 6 Includes 30,000 shares of Unigene common stock that Dr. Bloom has the right to acquire upon the exercise of stock options that are exercisable either immediately or within 60 days. 7 Includes an aggregate of 451,000 shares of Unigene common stock that such persons have the right to acquire upon the exercise of stock options that are exercisable either immediately or within 60 days. The Financing Transaction General On May 9, 2001, we entered into a common stock purchase agreement with Fusion Capital Fund II, LLC under which Fusion Capital 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 million. The $21 million is to be purchased over a 24 month period, which may be extended an additional six months at our discretion. The purchase price of the shares will be equal to a price based upon the future market price of our common stock without any fixed discount to the market price. Purchase of shares under the common stock purchase agreement Under the common stock purchase agreement, subject to our right to suspend purchases and our right to terminate the agreement with Fusion Capital, each as described below, Fusion Capital shall purchase on each trading day during the term of the agreement $43,750 of our common stock up to an aggregate of $21 million. This daily purchase amount may be decreased by us at any time as described below. We also have the right to increase the daily purchase amount at any time, provided, however, that we may not increase the daily purchase amount above $43,750 unless the closing sale price of our stock is above $4.00 for five (5) consecutive trading days. Under the common stock purchase agreement, the purchase price per share is equal to the lesser of: o the lowest sale price of our common stock on the purchase date; or o the arithmetic average of the five (5) lowest closing sale prices for the common stock during the fifteen (15) consecutive trading days ending on the trading day immediately preceding such purchase date, to be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock split or other similar transaction occurring during the fifteen (15) consecutive trading days. 33 However, Fusion Capital may not purchase shares of common stock under the common stock purchase agreement if Fusion Capital or its affiliates would beneficially own more than 4.9% of our then aggregate outstanding common stock immediately after the proposed purchase. If the 4.9% limitation is ever reached, we have the option to increase this limitation to 9.9%. If the 9.9% limitation is ever reached, this limitation will not limit Fusion Capital's obligation to fund the daily purchase amount. We have authorized the issuance and sale of up to 6,000,000 shares of our common stock to Fusion under the common stock purchase agreement. Based upon the number of shares we have authorized, our selling price will need to average at least $3.50 per share for us to receive the maximum proceeds of $21 million under the common stock purchase agreement. Assuming a selling price of $.55 per share (the closing sale price of the common stock on April 2, 2001) and the purchase by Fusion of the full amount of shares purchasable under the common stock purchase agreement, proceeds to us would be $3,300,000, unless we choose to issue more than 6,000,000 shares. The following table sets forth the number of shares of Unigene common stock that could be sold to Fusion under the terms of the common stock purchase agreement at varying purchase prices, assuming Unigene does not exercise its right under the common stock purchase agreement to suspend purchases by Fusion: Percentage of Outstanding Assumed Purchase Price Number Of Shares Shares (1) - -------------------------------------------------------------------------------- $0.55, the closing sale price on April 2, 2001 38,181,818 45.1% $1.00 21,000,000 31.1 - -------------------------------------------------------------------------------- $2.00 10,500,000 18.4 - -------------------------------------------------------------------------------- $3.00 7,000,000 13.1 - -------------------------------------------------------------------------------- $4.00 5,250,000 10.2 - -------------------------------------------------------------------------------- $5.00 4,200,000 8.3 - -------------------------------------------------------------------------------- $10.00 2,100,000 4.3 - -------------------------------------------------------------------------------- (1) Based on 46,436,940 shares of Unigene common stock outstanding as of the date of this prospectus, which includes the 2,000,000 commitment shares, but does not include the 1,000,000 shares issuable upon the exercise of the warrant. Our right to suspend purchases We have the right to suspend purchases by Fusion Capital upon one day's notice. A suspension of purchases will remain in effect until our cancellation of such suspension. To the extent we need to use the cash proceeds of the sales of common stock under the common stock purchase agreement for working capital or other business purposes, we do not intend to restrict purchases under the common stock purchase agreement. Our right to increase and decrease the daily base amount We have the right to decrease the daily amount to be purchased by Fusion Capital at any time and for any reason effective upon one trading day notice. We also have the right to increase the daily purchase amount at any time for any reason; provided, however, we may not increase the daily purchase amount above $43,750 unless the closing sales price of our common stock equals or exceeds $4.00 per share for at least five (5) consecutive trading days. For any trading day that the closing sale price of our common stock is below $4.00, the daily purchase amount shall not be greater than $43,750. 34 Our termination rights We may, at any time, terminate the common stock purchase agreement effective upon one trading day notice. Indemnification of Fusion Unigene has agreed to indemnify and hold harmless Fusion and its affiliates, shareholders, officers, directors, employees and direct or indirect investors and their agents or other representatives from and against any and all liabilities and related expenses, including reasonable attorneys' fees and disbursements incurred by any of them as a result of, or arising out of, or relating to, any breach of a Unigene representation or warranty made in the transaction documents or related instruments; any breach of any covenant, agreement or obligation of Unigene in the transaction documents or related instruments; or any cause of action, suit or claim brought or made against any of them arising out of or resulting from the execution, delivery, performance or enforcement of the transaction documents or any related instruments. Unigene's indemnification obligations do not extend to any liability or expenses that directly and primarily result from the gross negligence or willful misconduct of the person indemnified. To the extent that Unigene's indemnification obligations are unenforceable for any reason, Unigene has agreed to make the maximum contribution to the payment and satisfaction of any liability and expense that is permissible under applicable law. Effect of performance of the common stock purchase agreement on Unigene and our stockholders All shares registered in this offering will be freely tradable, however, 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 480 trading days from the date of the agreement, or the termination or a default under, the common stock purchase agreement. Fusion has advised Unigene that it anticipates that shares registered in this offering will be sold over a period of up to 24 months from the date of this prospectus. The sale of a significant amount of shares registered in this offering at any given time could cause the trading price of our common stock to decline and to be highly volatile. Fusion may ultimately purchase all of the shares of common stock issuable under the common stock purchase agreement, and it may sell all of the shares of common stock it acquires upon purchase. Therefore, the purchases under the common stock purchase agreement may result in substantial dilution to the interests of other holders of our common stock. However, we have the right to reduce or discontinue purchases under the common stock purchase agreement and to terminate the common 35 stock purchase agreement at any time. No short-selling or hedging 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. Events of default Fusion may terminate the common stock purchase agreement without any liability or payment to Unigene, and would not be required to purchase any additional shares of common stock, upon the occurrence of any of the following events of default: - if for any reason the shares offered by this prospectus cannot be sold under this prospectus for a period of 10 consecutive trading days or for more than an aggregate of 30 trading days in any 365-day period; - the suspension from trading or failure of our common stock to be listed 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 failure of Unigene or the Unigene common stock to meet the maintenance requirements for listing on the Nasdaq SmallCap Market for a period of 10 consecutive trading days or for more than an aggregate of 30 trading days in any 365-day period; - the failure of the transfer agent to issue shares of our common stock in connection with a purchase; - any breach of the representations or warranties or covenants contained in the common stock purchase agreement or any related agreements which has or which reasonably could be expected to have a material adverse affect on Unigene; - a default of any payment obligation of Unigene or any acceleration prior to maturity in excess of $1.0 million; or - commencement of insolvency or bankruptcy proceedings by or against Unigene. Commitment shares issued to Fusion Fusion has received, as consideration for its commitment to purchase our common stock, 2,000,000 shares of our common stock and a five-year warrant to purchase 1,000,000 shares of our common stock, exercisable at $.50 per share. Unless an event of default occurs, these shares and warrant shares must be held by Fusion until the earlier of 480 trading days from the date of the agreement, or the termination or a default under, the common stock purchase agreement. No variable priced financings Until the termination of the common stock purchase agreement, we have agreed not to issue, or enter into any agreement with respect to the issuance of, any variable priced equity or variable priced equity- 36 like securities unless associated with a pharmaceutical licensing transaction or we have obtained Fusion's prior written consent. Holdings of Fusion upon termination of the offering Because Fusion may sell all, some or none of the common stock offered by this prospectus, no estimate can be given as to the amount of common stock that will be held by Fusion upon early termination of the offering. SELLING STOCKHOLDER The selling stockholder is Fusion Fund II, LLC. Under the common stock purchase agreement, 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 million. The purchase price of our common stock is based upon the future market price of our common stock. We have authorized the issuance and sale of 6,000,000 shares of our common stock to Fusion under the common stock purchase agreement. We have the right to suspend and/or terminate the common stock purchase agreement without any payment or liability to Fusion. We have issued 2,000,000 shares of common stock to Fusion as a commitment fee under the common stock purchase agreement. In addition, we issued to Fusion a warrant to purchase 1,000,000 shares of our common stock exercisable at $.50 per share as part of its commitment fee. Unless an event of default occurs, these shares and warrant shares must be held by Fusion until the earlier of 480 trading days from the date of the agreement, or the date the common stock purchase agreement has been terminated. This prospectus relates to the offer and sale from time to time by Fusion of these shares. The common stock purchase agreement is described in detail under the heading "The Financing Transaction." Because the number of shares of Unigene common stock that will be purchased by Fusion under the common stock purchase agreement will depend on the purchase price of the purchase shares, which will be determined at the time of the purchase, and because we may decrease, and under certain circumstances increase, the rate at which we sell shares to Fusion, the aggregate number of purchase shares that will be offered for sale by Fusion is not determinable at this time. If the number of purchased shares offered for sale by this prospectus is insufficient to cover all of the purchased shares and the commitment shares, Unigene has agreed with Fusion to file a registration statement with the SEC registering the additional shares. Steven G. Martin and Joshua B. Scheinfeld, the principals of Fusion, are deemed to be beneficial owners of all of the shares owned by Fusion. Messrs. Martin and Scheinfeld have shared voting and dispositive power of the shares being offered under this prospectus. Except for the financing transaction, Fusion has had no position, office or other material relationship with Unigene or affiliates within the past three years. Under the terms of the common stock purchase agreement, Fusion has agreed that it will not purchase shares of Unigene common stock under the common stock purchase agreement if, after giving effect to the purchase, Fusion, together with its affiliates, would beneficially own in excess of 4.9% of the outstanding shares of Unigene common stock. If the 4.9% limitation is reached, Unigene, at its option, has the right to increase the limitation to 9.9%. If the 9.9% limitation is reached, Fusion will remain obligated to comply with its purchase obligations under the common stock purchase agreement, but otherwise would be prohibited from increasing its percentage ownership. PLAN OF DISTRIBUTION Fusion Capital Fund II, LLC, is offering the shares of Unigene common stock offered by this prospectus. The common stock may be sold or distributed from time to time by the selling stockholder, directly to one or more purchasers or through brokers, dealers or underwriters who may act solely as agents or may acquire such common stock as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market 37 prices, at negotiated prices, or at fixed prices, which may be changed. Fusion and its successors may effect the sale of the common stock offered by this prospectus in one or more of the following methods: - ordinary brokers' transactions; - transactions involving cross or block trades; - purchases by brokers, dealers or underwriters as principal and resale by such purchasers for their own accounts under this prospectus; - "at the market" to or through market makers or into an existing market for the common stock; - in other ways not involving market makers or established trading markets, including direct sales to purchasers or sales effected through agents; - in privately negotiated transactions; or - any combination of the foregoing. In order to comply with the securities laws of certain states, if applicable, the shares may be sold only through registered or licensed brokers or dealers. Under state securities laws, the shares may not be sold unless they have been registered or qualified for sale in such state or an exemption from such registration or qualification requirement is available and complied with. Brokers, dealers, underwriters or agents participating in the distribution of the shares as agents may receive compensation in the form of commissions, discounts or concessions from the selling stockholder and/or purchasers of the common stock for whom such broker-dealers may act as agent, or to whom they may sell as principal, or both. The compensation paid to a particular broker-dealer may be less than or in excess of customary commissions. The selling stockholder is an "underwriter" within the meaning of the Securities Act of 1933 with respect to this transaction. Any broker-dealers who act in connection with the sale of the shares hereunder may be deemed to be "underwriters" within the meaning of the Securities Act, and any commissions they receive and proceeds of any sale of the shares may be deemed to be underwriting discounts and commissions under the Securities Act. Neither we nor the selling stockholder can presently estimate the amount of compensation that any broker, dealer, underwriter or agent will receive. We know of no existing arrangements between the selling stockholder, any other stockholder, broker, dealer, underwriter or agent relating to the sale or distribution of the shares. At a time a particular offer of shares is made, a prospectus supplement, if required, will be distributed that will set forth the names of any agents, underwriters or dealers and any compensation from the selling stockholder and any other required information. We will pay all of the expenses incident to the registration, offering and sale of the shares to the public other than commissions or discounts of underwriters, broker-dealers or agents. Unigene has also agreed to indemnify the selling stockholder and related persons against specified liabilities, including liabilities under the Securities Act of 1933. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Unigene, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore, unenforceable. Fusion and its affiliates have agreed not to engage in any direct or indirect short selling or hedging of our common stock during the term of the common stock purchase agreement. 38 The selling stockholder and any other person participating in such distribution will be subject to applicable provisions of the exchange act and the rules and regulations thereunder, including, without limitation, Regulation M under the Securities Exchange Act of 1934, which may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholder and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock. Unigene has entered into a registration rights agreement with Fusion under which it has agreed to maintain the effectiveness under the Securities Act of 1933 of the registration statement to which this prospectus relates. Legal Matters The validity of the Unigene common stock offered by this prospectus will be passed upon for Unigene by Covington & Burling, Washington, D.C. Experts Unigene's audited financial statements as of December 31, 2000 and 1999, and for each of the years in the three-year period ended December 31, 2000, are included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of KPMG LLP as experts in accounting and auditing. The report of KPMG LLP covering these financial statements contains an explanatory paragraph that states that the Company's recurring losses from operations and working capital deficiency raise substantial doubt about the entity's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of that uncertainty. Also, the report of KPMG LLP covering the December 31, 2000 financial statements refers to a change in the method of revenue recognition for up-front non-refundable license fees in 2000. Additional Information Unigene has filed a Registration Statement on Form S-1 with the Securities and Exchange Commission. This prospectus, which forms a part of the Registration Statement, does not contain all of the information included in the Registration Statement. Some information is omitted from this prospectus in accordance with the rules of the Securities and Exchange Commission and you should refer to the Registration Statement and its exhibits for additional information. Unigene also files annual and quarterly reports, proxy statements and other information with the SEC. You may review a copy of the Registration Statement and any other documents filed with the Securities and Exchange Commission at its public reference room located at 450 Fifth Street, Washington, D.C. 20549, and at the SEC's regional offices in Chicago, Illinois and New York, New York. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Unigene's SEC filings and the Registration Statement can also be reviewed by accessing the SEC's Internet site at http://www.sec.gov. You should rely only on the information contained in this prospectus. Unigene has not authorized anyone to provide you with any information that is different from that contained in this prospectus. The information contained in this prospectus is accurate as of the date of this prospectus. You should not assume that there has been no changes in the affairs of Unigene since the date of this prospectus or that the information in this prospectus is correct as of any time after the date of this prospectus, regardless of the time that this prospectus is delivered or any sale of the common stock offered by this prospectus is made. This prospectus is not an offer to sell or a solicitation of an offer to buy the shares covered by this prospectus in any jurisdiction where the offer or solicitation is unlawful. In this prospectus, "Unigene," "we," "us" and "our" refer to Unigene Laboratories, Inc. 39 Unigene Laboratories, Inc. INDEX TO FINANCIAL STATEMENTS
Page ---- Fiscal Years Ended December 31, 2000, 1999 and 1998 Independent Auditors' Report.......................................................................... F-2 Balance Sheets--December 31, 2000 and December 31, 1999............................................... F-3 Statements of Operations--Years Ended December 31, 2000, 1999 and 1998................................ F-4 Statements of Stockholders' Equity (Deficit)--Years Ended December 31, 2000, 1999 and 1998............ F-5 Statements of Cash Flows--Years Ended December 31, 2000, 1999 and 1998................................ F-7 Notes to Financial Statements--Years Ended December 31, 2000, 1999 and 1998........................... F-8
F-1 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Unigene Laboratories, Inc.: We have audited the financial statements of Unigene Laboratories, Inc. as listed in the accompanying index. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Unigene Laboratories, Inc. as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 17 to the financial statements, the Company has suffered recurring losses from operations and has a working capital deficiency which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 17. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 2 to the financial statements, the Company changed its method of accounting for revenue recognition for up-front non-refundable license fees in 2000. /S/ KPMG LLP Short Hills, New Jersey March 30, 2001 F-2 UNIGENE LABORATORIES, INC. BALANCE SHEETS DECEMBER 31, 2000 and 1999
ASSETS 2000 1999 ------ ---- ---- Current assets: Cash and cash equivalents $ 17,108 $ 682,629 Contract receivables 165,671 3,526,229 Prepaid expenses 129,493 210,195 Inventory (Note 8) 415,420 867,566 ------------ ------------ Total current assets 727,692 5,286,619 Property, plant and equipment - net (Note 4) 5,684,127 6,740,354 Patents and other intangibles, net 1,288,686 1,264,268 Investment in joint venture (Note 5) 900,000 -- Other assets 446,894 486,612 ------------ ------------ $ 9,047,399 $ 13,777,853 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) --------------------------------------------- Current liabilities: Accounts payable $ 2,834,556 $ 1,258,334 Accrued expenses (Note 9) 3,761,277 2,217,413 Notes payable - stockholders (Note 3) 2,873,323 1,140,000 Current portion - long-term notes payable - stockholders 1,870,000 960,606 5% convertible debentures (Note 6) 2,400,000 2,400,000 Current portion - capital lease obligations (Note 10) 55,398 69,708 Deferred revenue 200,000 -- ------------ ------------ Total current liabilities 13,994,554 8,046,061 Notes payable - stockholders, excluding current portion (Note 3) -- 909,394 Joint venture obligation, excluding current portion 495,000 -- Capital lease obligations, excluding current portion (Note 10) 50,572 93,415 Commitments and contingencies (Notes 5,6,7,11 and 18) Stockholders' equity (deficit) (Notes 7,12 and 13): Common Stock - par value $.01 per share, authorized 60,000,000 shares, issued 44,441,855 shares in 2000 and 43,088,184 shares in 1999 444,419 430,882 Additional paid-in capital 70,053,710 67,207,604 Deferred stock option compensation (284,948) -- Deferred stock offering costs (327,000) -- Accumulated deficit (75,377,877) (62,908,472) Less: Treasury stock, at cost, 7,290 shares (1,031) (1,031) ------------ ------------ Total stockholders' equity (deficit) (5,492,727) 4,728,983 ------------ ------------ $ 9,047,399 $ 13,777,853 ============ ============
See accompanying notes to financial statements. F-3 UNIGENE LABORATORIES, INC. STATEMENTS OF OPERATIONS Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998 ---- ---- ---- Licensing and other revenue $ 3,286,961 $ 9,589,413 $ 5,049,844 ------------ ------------ ------------ Operating expenses: Research and development 11,484,379 9,374,528 9,041,618 General and administrative 3,187,465 2,211,778 2,067,958 ------------ ------------ ------------ 14,671,844 11,586,306 11,109,576 ------------ ------------ ------------ Operating loss (11,384,883) (1,996,893) (6,059,732) Other income (expense): Interest income 49,130 37,545 107,502 Interest expense (1,198,508) (1,171,260) (784,972) ------------ ------------ ------------ Loss before income taxes, extraordinary item and cumulative effect of accounting change (12,534,261) (3,130,608) (6,737,202) Income tax benefit (Note 14) 1,064,856 1,553,268 -- ------------ ------------ ------------ Loss before extraordinary item and cumulative effect of accounting change (11,469,405) (1,577,340) (6,737,202) Extraordinary item-loss on early extinguishment of debt (Note 6) -- -- (143,810) Cumulative effect of revenue recognition accounting change (Note 2) (1,000,000) -- -- ------------ ------------ ------------ Net loss $(12,469,405) $ (1,577,340) $ (6,881,012) ============ ============ ============ Loss per share - basic and diluted: Loss before extraordinary item and cumulative effect of accounting change $ (.26) $ (.04) $ (.17) Extraordinary item -- -- (.01) Cumulative effect of accounting change (.02) -- -- ------------ ------------ ------------ Net loss per share $ (.28) $ (.04) $ (.18) ============ ============ ============ Weighted average number of shares outstanding - basic and diluted 44,008,154 40,718,519 38,701,253 ============ ============ ============ Pro forma amounts assuming the new revenue recognition principle is applied retroactively, exclusive of cumulative effect adjustment: Loss before extraordinary item $(11,469,405) $ (777,340) $ (5,937,202) ============ ============ ============ Net loss $(11,469,405) $ (777,340) $ (6,081,012) ============ ============ ============ Earnings per share -- basic and diluted: Loss before extraordinary item $ (.26) $ (.02) $ (.15) ============ ============ ============ Net loss $ (.26) $ (.02) $ (.16) ============ ============ ============
See accompanying notes to financial statements. F-4 UNIGENE LABORATORIES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Years Ended December 31, 2000, 1999 and 1998
Common Stock Deferred Deferred ------------ Additional Stock Stock Number of Par Paid-in Option Offering Accumulated Treasury Shares Value Capital Compensation Costs Deficit Stock Total --------- ----- ---------- ------------ -------- ----------- --------- ----- Balance, January 1, 1998 38,517,722 $385,177 $63,499,439 $ -- $ -- $(54,450,120) $(1,031) $ 9,433,465 Conversion of 9.5% Debentures 448,834 4,489 495,705 -- -- -- -- 500,194 Conversion of notes payable - stockholders 163,635 1,636 220,091 -- -- -- -- 221,727 Conversion of 10% Debentures and accrued interest 214,131 2,141 202,234 -- -- -- -- 204,375 Value of 5% Debentures allocated to beneficial conversion feature and related warrants -- -- 686,796 -- -- -- -- 686,796 Exercise of stock options 40,500 405 47,564 -- -- -- -- 47,969 Issuance of warrants as compensation -- -- 6,574 -- -- -- -- 6,574 Net loss -- -- -- -- -- (6,881,012) -- (6,881,012) ------------ -------- ----------- ------ ------- ------------ ------- ----------- Balance, December 31, 1998 39,384,822 393,848 65,158,403 -- -- (61,331,132) (1,031) 4,220,088 Conversion of 5% Debentures into Common Stock and Warrants 3,528,125 35,281 1,859,994 -- -- -- -- 1,895,275 Issuance of Common Stock as payment of interest on 5% Debentures 175,237 1,753 189,207 -- -- -- -- 190,960 Net loss -- -- -- -- -- (1,577,340) -- (1,577,340) ------------ -------- ----------- ------ ------- ------------ ------- -----------
(Continued) F-5 UNIGENE LABORATORIES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued) Years Ended December 31, 2000, 1999 and 1998
Common Stock Deferred Deferred ------------ Additional Stock Stock Number of Par Paid-in Option Offering Accumulated Treasury Shares Value Capital Compensation Costs Deficit Stock Total --------- ----- ---------- ------------ -------- ----------- --------- ----- Balance, December 31, 1999 43,088,184 $ 430,882 $ 67,207,604 -- -- $(62,908,472) $ (1,031) $ 4,728,983 Exercise of warrants 1,118,071 11,181 1,317,087 -- -- -- -- 1,328,268 Exercise of stock options 235,600 2,356 298,177 -- -- -- -- 300,533 Deferred stock option compensation -- -- 683,733 (284,948) -- -- -- 398,785 Deferred stock offering costs -- -- 327,000 -- (327,000) -- -- -- Issuance of warrants as compensation -- -- 220,109 -- -- -- -- 220,109 Net loss -- -- -- -- -- (12,469,405) -- (12,469,405) ---------- --------- ----------- --------- --------- ------------ -------- ------------ Balance, December 31, 2000 44,441,855 $ 444,419 $ 70,053,710 $(284,948) $(327,000) $(75,377,877) $ (1,031) $ (5,492,727) ========== ========= ============ ========= ========= ============ ======== ============
See accompanying notes to financial statements. F-6 UNIGENE LABORATORIES, INC. STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------------------ 2000 1999 1998 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(12,469,405) $ (1,577,340) $ (6,881,012) Adjustments to reconcile net loss to net cash used by operating activities: Non-cash cumulative effect adjustment 1,000,000 -- -- Amortization of deferred revenue (800,000) -- -- Non-cash compensation 618,894 -- 6,574 Depreciation and amortization 1,617,957 1,558,663 1,552,734 Amortization of beneficial conversion feature on 5% Debentures -- 197,193 489,603 20% premium on 5% Debentures -- 400,000 -- Payment of interest through the issuance of Common Stock -- 190,960 44,060 Decrease in other assets 42,312 64,528 48,500 (Increase) decrease in contract receivables 3,360,558 (3,210,171) (316,058) (Increase) decrease in prepaid expenses and inventory 532,848 (188,092) (55,424) Increase in accounts payable and accrued expenses 2,715,086 1,163,795 247,237 ------------ ------------ ------------ Net cash used for operating activities (3,381,750) (1,400,464) (4,863,786) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Construction of leasehold and building improvements (235,764) (4,010) (8,384) Purchase of furniture and equipment (283,589) (134,127) (76,486) Increase in patents and other assets (69,389) (88,695) (264,959) ------------ ------------ ------------ Net cash used in investing activities (588,742) (226,832) (349,829) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt -- 1,870,000 4,000,000 Proceeds from issuance of short-term debt, net 1,733,323 100,000 -- Repayment of long-term debt and capital lease obligations (57,153) (62,739) (304,138) Exercise of stock options and warrants 1,628,801 -- 47,969 Debt issuance and other costs -- -- (253,879) ------------ ------------ ------------ Net cash provided by financing activities 3,304,971 1,907,261 3,489,952 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (665,521) 279,965 (1,723,663) Cash and cash equivalents at beginning of period 682,629 402,664 2,126,327 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 17,108 $ 682,629 $ 402,664 ============ ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Non-cash investing and financing activities: Investment in joint venture and related obligations $ 900,000 -- -- Acquisition of equipment through capital leases -- $ 36,617 $ 221,900 Conversion of convertible debentures and accrued interest into Common Stock -- $ 2,190,960 $ 707,069 Conversion of notes payable - stockholders into Common Stock -- -- $ 225,000 Value of beneficial conversion feature and related warrants on issuance of 5% Debentures -- -- $ 686,796 ============ ============ ============ Cash paid for interest $ 39,800 $ 24,700 $ 119,000 ============ ============ ============
See accompanying notes to financial statements. F-7 UNIGENE LABORATORIES, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 1. Description of Business Unigene Laboratories, Inc. (the "Company"), a biopharmaceutical company, was incorporated in the State of Delaware in 1980. The Company's single business segment focuses on research, production and delivery of peptides for medical use. The Company has concentrated most of its efforts to date on one product - Calcitonin, for the treatment of osteoporosis and other indications. The Company's initial products will be injectable, nasal and oral formulations of Calcitonin. The Company's Calcitonin products require clinical trials and approvals from regulatory agencies as well as acceptance in the marketplace. The Company's injectable Calcitonin product has been approved for marketing in all 15-member states of the European Union for the treatment of Paget's disease and hypercalcemia associated with malignancy. Through December 31, 2000, sales of injectable Calcitonin have not been significant. Although the Company believes its patents and patent applications are valid, the invalidation of its patents or the failure of certain of its pending patent applications to issue as patents could have a material adverse effect upon its business. The Company competes with specialized biotechnology companies, major pharmaceutical and chemical companies and universities and research institutions. Many of these competitors have substantially greater resources than does the Company. During 2000, 1999 and 1998, almost all of the Company's revenue was generated from one customer, Pfizer (see Note 16). The Pfizer agreement was terminated in March 2001. 2. Summary of Significant Accounting Policies & Practices Segment Information -The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. The Company does not operate separate lines of business or separate business entities with respect to any of its product candidates. Accordingly, the Company does not prepare discrete financial information with respect to separate product areas or by location and does not have separately reportable segments as defined by Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." Property, Plant and Equipment - Property, plant and equipment are carried at cost. Equipment under capital leases are stated at the present value of the minimum lease payments. Depreciation is computed using the straight-line method. Amortization of equipment under capital leases and leasehold improvements is computed over the shorter of the lease term or estimated useful life of the asset. Additions and improvements are capitalized, while repairs and maintenance are charged to expense as incurred. Research and Development - Research and development expenses include the costs associated with internal research and development by the Company and research and development conducted for the Company by outside advisors, sponsored university-based research partners, and clinical study partners. All research and development costs discussed above are expensed as incurred. Expenses reimbursed under research and development contracts, which are not refundable, are recorded as a reduction to research and development expense in the statement of operations. Revenue Recognition - Research and development contract revenues are recognized based upon the successful completion of various benchmarks as set forth in the individual agreements. Commencing in 2000, non-refundable license fees received upon execution of license agreements where the Company has continuing involvement are deferred and recognized as revenue over the life of the agreement. Prior to the implementation of SAB 101, non-refundable license fees received upon execution of license agreements were recognized as revenue immediately. Revenue from the sale of product is recognized upon shipment to the customer. In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements and specifically addresses revenue recognition in the biotechnology industry for non-refundable technology access fees and other non-refundable fees. The Company was required to adopt SAB 101, as amended, in the fourth quarter of 2000 with an effective date of January 1, 2000, and the recognition of a cumulative effect adjustment calculated as of January 1, 2000. The Company adopted SAB 101 in 2000, F-8 changing its revenue recognition policy for up-front licensing fees that require services to be performed in the future from immediate revenue recognition to deferral of revenue with the up-front fee recognized over the life of the agreement. In 1997, the Company recognized $3,000,000 in revenue from an up-front licensing fee from Pfizer. With the adoption of SAB 101, the Company is now recognizing this revenue over a 45 month period, equivalent to the term of its oral Calcitonin agreement with Pfizer which was terminated in March 2001. The Company therefore recognized a non-cash cumulative effect adjustment of $1,000,000 as of January 1, 2000 representing a revenue deferral over the remaining 15 months of the agreement. The Company recognized $800,000 of revenue in 2000 and $200,000 in revenue will be recognized in 2001 as a result of this deferral. The pro forma effects of retroactive application of this new revenue recognition principle on net loss and related per share amounts, for the years ended December 31, 2000, 1999 and 1998 are presented in the accompanying statements of operations. Patents and Other Intangibles - Patent costs are deferred pending the outcome of patent applications. Successful patent costs are amortized using the straight-line method over the lives of the patents. Unsuccessful patent costs are expensed when determined worthless. As of December 31, 2000, six of the Company's patents had issued in the U.S. and numerous have issued in various foreign countries. Various other applications are still pending. Other intangibles are recorded at cost and are amortized over their estimated useful lives. Accumulated amortization on patents and other intangibles is $186,000 and $143,600 at December 31, 2000 and 1999, respectively. Stock Option Plan - The Company accounts for stock options issued to employees and directors in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense is recorded on fixed stock option grants only if the current market price of the underlying stock exceeded the exercise price; compensation expense on variable stock option grants is estimated until the measurement date. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the Company provides pro forma net income and pro forma earnings per share disclosures for employee and director stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company accounts for stock options and warrants issued to consultants on a fair value basis in accordance with SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of - The Company accounts for the impairment of long-lived assets in accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Net Loss per Share - The Company computes and presents both basic and diluted earnings per share ("EPS") on the face of the statement of operations. Basic EPS is computed using the weighted average number of common shares outstanding during the period being reported on. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock at the beginning of the period being reported on and the effect was dilutive. The Company's net loss and weighted average shares outstanding used for computing diluted loss per share were the same as that used for computing basic loss per share for each of the years ended December 31, 2000, 1999 and 1998 because the Company's convertible debentures, stock options and warrants were not included in the calculation since the inclusion of such potential shares (approximately 3,200,000 potential shares of Common Stock at December 31, 2000) would be antidilutive. Cash Equivalents - The Company considers all highly liquid securities purchased with an original maturity of three months or less to be cash equivalents. Inventory - Inventories are stated at the lower of cost (using the first-in, first-out method) or market. Fair Value of Financial Instruments - The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Significant differences can arise between the fair value and carrying amounts of financial instruments that are recognized at historical F-9 cost amounts. Given our financial condition described in Note 17, it is not practicable to estimate the fair value of our financial instruments at December 31, 2000. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Related Party Transactions Notes payable - stockholders. Since 1995, Warren P. Levy, Ronald S. Levy and Jay Levy each an officer and director of the Company, and another member of their family (collectively, the "Levys"), have extended loans to the Company for working capital needs. Each of the loans is evidenced by a promissory note that sets the terms of the loan. The variable interest rate on these notes is equivalent to the Merrill Lynch Margin Loan Rate plus .25%. The principal amount is collateralized by security interests in the Company's Fairfield, New Jersey plant and equipment and Boonton, New Jersey equipment. During 1999, Jay Levy loaned the Company $1,500,000 evidenced by demand notes bearing interest at 6% per year. During the third quarter of 1999, Jay Levy loaned the Company an additional $370,000 evidenced by term notes maturing January 2002 and bearing interest at 6% per year, and the $1,500,000 of demand notes were converted into 6% term notes maturing January 2002. The Company has granted Jay Levy a security interest in all of its equipment and a mortgage on its real property to secure payment of the term notes, which are senior to all notes payable to Warren Levy and Ronald Levy. The Company is required to make installment payments on the term notes commencing in October 1999 and ending in January 2002 in an aggregate amount of $72,426 per month. No installment payments were made during 1999 or 2000. During 2000, the Levys loaned to the Company an additional $1,733,323 in short-term notes. As of December 31, 2000, the outstanding loans by the Levys to Unigene, all classified as short-term debt, consisted of: joint loans in the aggregate principal amount of $2,873,323, which are evidenced by demand notes bearing a floating interest rate equal to the Merrill Lynch Margin Loan Rate plus.25% (9.875% at December 31, 2000) and loans from Jay Levy in the aggregate principal amount of $1,870,000 evidenced by term notes maturing January 2002, and bearing interest at the fixed rate of 6% per year. During 2000, $4,600 in interest was paid on these loans. As of December 31, 2000, accrued interest on all Levy loans totalled approximately $922,000. Interest and principal payments required under these loans have not been made by Unigene, but the Levys have waived all default provisions including additional interest penalties due under these loans through December 31, 2000. From January 1, 2001 through March 30, 2001 the Levys loaned to the Company an additional $1,610,000 of demand notes at the Merrill Lynch Margin Loan Rate plus .25%, of which $500,000 is secured by a security interest in certain of our patents. F-10 4. Property, Plant and Equipment Property, plant and equipment consisted of the following at December 31, 2000 and 1999: Estimated Depreciable 2000 1999 Lives ---------- ----------- ----------- Building and improvements $1,397,210 $1,377,075 25 years Leasehold improvements 8,695,851 8,480,222 Lease Term Manufacturing equipment 4,000,940 3,842,038 10 years Laboratory equipment 2,815,870 2,704,820 5 years Other equipment 466,523 466,523 10 years Office equipment and furniture 340,843 327,206 5 years Equipment under capital leases 258,517 258,517 Lease Term ---------- ---------- 17,975,754 17,456,401 Less accumulated depreciation and amortization 12,412,794 10,837,214 ---------- ---------- 5,562,960 6,619,187 Land 121,167 121,167 ---------- ---------- $5,684,127 $6,740,354 ========== ========== Depreciation and amortization expense on property, plant and equipment was $1,576,000, $1,520,000, and $1,520,000 in 2000, 1999 and 1998, respectively. 5. China Joint Venture In June 2000, we entered into a joint venture with Shijiazhuang Pharmaceutical Group ("SPG"), a pharmaceutical company in the People's Republic of China. The joint venture will manufacture and distribute injectable and nasal Calcitonin products in China (and possibly other selected Asian markets) for the treatment of osteoporosis. We own 45% of the joint venture and will have a 45% interest in the joint venture profits and losses. In the first phase of the collaboration, SPG will contribute its existing injectable Calcitonin license to the joint venture, which will allow the joint venture to sell our product in China. The joint venture will need to file a New Drug Application in China for its injectable and nasal products. In addition, the joint venture may be required to conduct brief local human trials. If the product is successful, the joint venture may establish a facility in China to fill injectable and nasal Calcitonin products using bulk Calcitonin produced at our Boonton, New Jersey plant. Eventually the joint venture may manufacture the bulk Calcitonin in China at a new facility that would be constructed by the joint venture. This would require local financing by the joint venture. The joint venture has not yet begun operations as of December 31, 2000. Under the terms of the joint venture with SPG, Unigene is obligated to contribute up to $405,000 in cash during 2001 and up to an additional $495,000 in cash within two years thereafter. However, these amounts may be reduced or offset by our share of joint venture profits. As of December 31, 2000, we have not made any investments in the joint venture. In addition, Unigene is obligated to pay to the Qingdao General Pharmaceutical Company an aggregate of $350,000 in 14 monthly installment payments of $25,000 in order to terminate its former joint venture in China, of which $75,000 had been paid as of December 31, 2000. We recognized the entire $350,000 obligation as an expense in 2000. F-11 6. Convertible Debentures In March 1996, the Company issued $3,300,000 of 9.5% Senior Secured Convertible Debentures in exchange for a secured loan of an equal amount. All of these debentures had been converted into approximately 2,924,000 shares of Common Stock as of November 15, 1998, the due date of the debentures. In March 1996, the Company completed a private placement of $9,080,000 aggregate principal amount of 10% Convertible Debentures. The Company received net proceeds of approximately $8.1 million as a result of this placement. These debentures were to mature March 4, 1999, but as of December 31, 1998, all outstanding 10% Debentures have been converted or redeemed in full. Through December 31, 1998, $8,808,515 of principal amount of these debentures, plus approximately $355,000 of accrued interest, had been converted into approximately 4,838,000 shares of Common Stock. Due to restrictions on the total number of shares which could be issued upon conversion of the 10% Debentures, in October 1998 the Company redeemed in cash an additional $271,485 of principal, and in connection therewith paid to the holder $68,899 of accrued interest and $143,810 in redemption premiums, for an aggregate payment of $484,194. The cost of the redemption premium of $143,810 was recorded as an extraordinary loss in 1998. In June 1998, Unigene completed a private placement of $4,000,000 in principal amount of 5% convertible debentures from which we realized net proceeds of approximately $3,750,000. The 5% debentures were convertible into shares of Unigene common stock. The interest on the debentures, at Unigene's option, was payable in shares of Unigene common stock. Upon conversion, the holder of a 5% debenture was entitled to receive warrants to purchase a number of shares of Unigene common stock equal to 4% of the number of shares issued as a result of the conversion. However, the number of shares of Unigene common stock that we are obligated to issue, in the aggregate, upon conversion, when combined with the shares issued in payment of interest and upon the exercise of the warrants, is limited to 3,852,500 shares. After this share limit is reached, Unigene is obligated to redeem all 5% debentures tendered for conversion at a redemption price equal to 120% of the principal amount, plus accrued interest. In December 1999, Unigene was unable to convert $200,000 in principal of the 5% debentures tendered for conversion because the conversion would have exceeded the share limit. As a result, we accrued, as of December 31, 1999, an amount equal to $400,000 representing the 20% premium on the outstanding $2,000,000 in principal amount of 5% debentures that had not been converted. During 1999, all of the $2,000,000 in principal amount of 5% debentures were tendered for conversion and therefore are classified as a current liability in the amount of $2,400,000 as of December 31, 2000. Through December 31, 2000, we issued a total of 3,703,362 shares of Unigene common stock upon conversion of $2,000,000 in principal amount of the 5% debentures and in payment of interest on the 5% debentures. Also, we issued an additional 103,032 shares of Unigene common stock upon the cashless exercise of all of the 141,123 warrants issued upon conversion of the 5% debentures. On January 5, 2000, Unigene failed to make the required semi-annual interest payment on the outstanding 5% debentures. As a result, the interest rate on the outstanding 5% debentures has increased to 20% per year. The semi-annual interest payments due July 5, 2000 and January 5, 2001 also have not been made. As of December 31, 2000, the accrued and unpaid interest on the 5% debentures totaled approximately $467,000. In addition, due to the delisting of the Unigene common stock from the Nasdaq National Market in October 1999, Unigene became obligated under a separate agreement to pay the holder of the 5% debentures an amount equal to 2% of the outstanding principal amount of the debentures per month. Unigene has not made any of these payments to date, but has accrued the amounts as an expense. As of December 31, 2000, the accrued and unpaid amount of this penalty totaled approximately $617,000. The holder of the 5% debentures has commenced an arbitration proceeding in which the holder claims that it is entitled, as of June 30, 2000, to payments in respect of the 5% debentures in the amount of approximately $3,400,000, consisting of principal, interest and penalties, resulting from Unigene's default under various provisions of the debentures and related agreements. These alleged defaults included Unigene's failure to redeem the debentures after becoming obligated to do so, the failure to pay interest when due, and the failure to pay liquidated damages arising from the delisting of the Unigene common stock from the Nasdaq National Market. In July 2000, Unigene submitted to the American Arbitration Association a statement in which it denies the amount of Tail Wind's claim and makes certain counterclaims. A hearing on the matter before an arbitrator appointed by the American Arbitration Association is expected to occur in June 2001. The outcome of the proceeding is uncertain. An extremely unfavorable ruling could have a material adverse effect on Unigene. The Company in 1998 estimated the value of the beneficial conversion feature and related warrants at the issuance of the 5% Debentures to be approximately $687,000. Such amount was credited to additional paid-in capital and was amortized to F-12 interest expense over the earliest conversion periods using the effective interest method (approximately $197,000 and $490,000 for the years ended December 31, 1999 and 1998, respectively). 7. Fusion Capital Financing On December 18, 2000, and as amended March 30, 2001, Unigene entered into a common stock purchase agreement with Fusion Capital Fund II, LLC, under which Fusion has agreed to purchase up to $21,000,000 in shares of Unigene common stock at the rate of $875,000 per month. Fusion is committed to purchase the shares over a twenty-four month period, subject to a six-month extension or earlier termination at our discretion. We may decrease this amount at any time that the price of our common stock is less than $15 per share. If our stock price equals or exceeds $4 per share, we have the right to require Fusion to purchase, over a period of 60 days, up to the full remaining portion of the $21 million commitment. However, Fusion's commitment does not begin until a registration statement covering the resale of the shares purchased by Fusion is declared effective by the Securities and Exchange Commission. We cannot predict when or if the SEC will declare our registration statement effective. In addition, Unigene must continue to satisfy its requirements that are a condition to Fusion's obligation including: the continued effectiveness of the related registration statement, no default or acceleration of any obligations in excess of $1,000,000, no insolvency or bankruptcy proceedings, continued listing of Unigene common stock on the OTC Bulletin Board, and we must avoid the failure to meet the maintenance requirements for listing on the Nasdaq SmallCap Market for a period of 10 consecutive trading days or for more than an aggregate of 30 trading days in any 365-day period. The selling price per share is equal to the lesser of: the lowest sale price of our common stock on the day of submission of a purchase notice by Fusion; the average of any five closing sale prices of our common stock, selected by Fusion, during the 15 trading days prior to the date of submission of a purchase notice by Fusion; or $15. In addition to the 2,000,000 shares and five-year warrants to purchase 1,000,000 shares of common stock at an exercise price of $.50 per share that we issued to Fusion as of March 30, 2001 as compensation for its commitment, the Board of Directors has authorized the issuance and sale to Fusion of up to 6,000,000 shares of Unigene common stock in connection with the financing transaction. We may be required to obtain the approval of Unigene stockholders to an amendment to Unigene's certificate of incorporation increasing the number of shares of Unigene common stock that the Company is authorized to issue in order to issue and sell additional shares to Fusion. In December 2000, the Company issued a five-year warrant to purchase 373,002 shares of Unigene common stock to its investment banker as a fee for the Fusion financing agreement. The warrant has an exercise price of $1.126 and a fair value of $327,000 using the Black-Scholes pricing model. The fair value of the warrant has been deferred pending the closing of the Fusion financing. When the registration statement for the financing is declared effective, these deferred offering costs will be charged to additional paid-in capital. If the registration statement is not declared effective, or the offering is terminated, these deferred offering costs will be charged to operations. 8. Inventory - Inventory consists of the following: Dec. 31, 2000 Dec. 31, 1999 ------------- ------------- Finished goods $ 89,104 $ 596,359 Raw material 326,316 271,207 ---------- ----------- Total $ 415,420 $ 867,566 ========== =========== The Company wrote-off $515,000 of finished goods inventory in the fourth quarter of 2000 as a result of Pfizer's termination of its license agreement with the Company. 9. Accrued expenses - Accrued expenses consist of the following: Dec. 31, 2000 Dec. 31, 1999 ------------- ------------- Interest - notes payable to stockholders $ 921,722 $ 645,290 Interest - 5% convertible debentures 1,083,194 243,196 China joint ventures 680,000 -- Clinical trials/contract research 665,568 763,352 Vacation pay 204,948 187,710 Consultants 47,000 164,500 Other 158,845 213,365 ---------- ----------- Total $3,761,277 $2,217,413 ========== ========== F-13 10. Obligations Under Capital Leases The Company entered into various lease arrangements during 1999 and 1998 which qualify as capital leases. The future years' minimum lease payments under the capital leases, together with the present value of the net minimum lease payments, as of December 31, 2000 are as follows: 2001 $ 71,860 2002 48,347 2003 10,656 ---------- Total minimum lease payments 30,863 Less amount representing interest 24,893 ---------- Present value of net minimum lease payments 105,970 Less current portion 55,398 ---------- Obligations under capital leases, excluding current portion $ 50,572 ========== The discount rates on these leases vary from 12% to 18%. 11. Obligations Under Operating Leases The Company is obligated under a 10-year net-lease, which began in February 1994, for its manufacturing facility located in Boonton, New Jersey. The Company has two 10-year renewal options as well as an option to purchase the facility. In addition, the Company leases laboratory and office equipment under various operating leases expiring in 2001 through 2003. Total future minimum rentals under these noncancelable operating leases as of December 31, 2000 are as follows: 2001 $222,584 2002 207,936 2003 189,764 2004 15,444 --------- $635,728 Total rent expense was approximately $259,000, $243,000 and $209,000 for 2000, 1999 and 1998, respectively. 12. Stockholders' Equity In 1996, the placement agent, in connection with the issuance of the 10% Debentures, received a five-year warrant to purchase 454,000 shares of Common Stock at an exercise price of $2.10 per share as partial compensation for services rendered. Through December 31, 2000, an aggregate of 322,000 of these warrants have been exercised and 132,000 remain unexercised. In October 1996, the Company completed a private placement of 4,218,804 Units at a price of $1.75 per Unit. Each Unit consisted of (i) one share of Common Stock, (ii) one quarter of a Class C Warrant, (each whole Class C Warrant was exercisable to purchase one share of Common Stock) and (iii) one quarter of a Class D Warrant (each whole Class D Warrant was exercisable to purchase one share of Common Stock). The Class C Warrants and the Class D Warrants each had an exercise price of $3.00 and expired unexercised on October 11, 1999. The fee paid to the placement agent in the transaction consisted of an additional 296,935 Units in lieu of cash compensation. The net proceeds to the Company were approximately $7 million. In October 1994, the Company entered into an agreement with a consultant whose compensation for its services included the issuance of warrants, exercisable at $3.00 per share, for the purchase of 1,000,000 shares of Common Stock. These warrants expired unexercised in October 1998. During 1996, another consultant's compensation included warrants to purchase a total of 400,000 shares of Common Stock at exercise prices ranging from $1.63 to $3.50 per share. These warrants expire in April 2001. F-14 In connection with the services rendered by various consultants during 1997, the Company issued an aggregate of 75,000 stock purchase warrants, expiring from 1999 to 2002, exercisable at prices ranging from $2.25 to $3.41 per share, and 10,000 shares of Common Stock. Compensation expense recognized in 1997 as a result of these transactions was approximately $131,000. During 1998, the Company issued warrants to purchase 5,000 shares of Common Stock, expiring in 2003, to a consultant. These warrants are exercisable at $2.38, resulting in 1998 compensation expense of approximately $7,000. During 2000, the Company issued warrants to purchase 150,000 shares of Common Stock, expiring in 2005, to its investment banker. These warrants are exercisable at $2.66 and resulted in 2000 compensation expense of $220,000. The Company's investment bankers received an additional warrant to purchase 373,002 shares of Common Stock at an exercise price of $1.126 per share, expiring in 2005, for arranging the Fusion financing. During 2000, the Company issued to various consultants 850,536 shares of Common Stock upon the exercise of warrants at exercise prices ranging from $1.38 to $2.43 per share. In addition, the Company issued to various consultants 263,360 shares of Common Stock upon the cashless exercise of an aggregate of 475,623 warrants at exercise prices ranging from $.46 to $2 per share. During 1998, an aggregate of $681,000 in principal amount of convertible debentures, plus $44,000 of accrued interest, was converted into approximately 663,000 shares of Common Stock. During 1999, an aggregate of $2,000,000 in principal amount of convertible debentures, plus $191,000 of accrued interest, was converted into approximately 3,703,000 shares of Common Stock. See Note 6. In August 1998, an aggregate of $225,000 in principal amount of notes payable from stockholders was converted into 163,635 shares of Common Stock at a conversion price of $1.375 per share; such conversion was at a price slightly higher than the then market price of the Common Stock. As of December 31, 2000, there are warrants outstanding, all of which are currently exercisable, to purchase an aggregate of 989,000 shares of Common Stock at exercise prices ranging from $1.13 to $3.50 per share, with a weighted average exercise price of $2.11. 13. Stock Option Plans During 1994, the Company's stockholders approved the adoption of the 1994 Employee Stock Option Plan (the "1994 Plan"). All employees of the Company were eligible to participate in the 1994 Plan, including executive officers and directors who are employees of the Company. The 1994 Plan terminated on June 6, 2000; however, 1,729,965 options previously granted continue to be outstanding and exercisable under that plan as of December 31, 2000. At the Company's 1999 Annual Meeting, the stockholders approved the adoption of a 1999 Directors Stock Option Plan (the "1999 Plan") under which each person elected to the Board after June 23, 1999 who is not an employee will receive, on the date of his initial election, an option to purchase 21,000 shares of Common Stock. In addition, on May 1st of each year, commencing May 1, 1999, each non-employee director will receive an option to purchase 10,000 shares of Common Stock if he or she has served as a non-employee director for at least six months prior to the May 1st grant. Each option granted under the 1999 Plan will have a ten-year term and the exercise price of each option will be equal to the market price of the Company's Common Stock on the date of the grant. A total of 350,000 shares of Common Stock are reserved for issuance under the 1999 Plan. In November 1999, the Board of Directors approved, subject to stockholder approval, the adoption of a new Stock Option Plan (the "2000 Plan") to replace the 1994 Plan. All employees (including directors who are employees), as well as certain consultants, are eligible to receive option grants under the 2000 Plan. Options granted under the 2000 Plan have a ten-year term and an exercise price equal to the market price of the Common Stock on the date of the grant. A total of 4,000,000 shares of Common Stock are reserved for issuance under the 2000 Plan. In November 1999, the Board granted under the 2000 Plan, to employees of the Company, stock options to purchase an aggregate of 482,000 shares (of which 14,650 shares were subsequently cancelled) of Common Stock at an exercise price of $0.63 per share, the market price on the date of grant. Each of the grants was made subject to stockholder approval of the 2000 Plan. At the Company's June 6, 2000 Annual Meeting, the stockholders approved the 2000 Plan. In accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", the measurement date for valuing the stock options for the purpose of determining compensation expense was June 6, 2000, the date of stockholder approval. The market price of the Common Stock on this date was $2.093 per share. Therefore, an aggregate of $683,733 will be charged to compensation expense over the vesting periods of the options, which vest in approximately 50% F-15 increments on November 5, 2000 and November 5, 2001. The Company recognized $398,785 as compensation expense in 2000, leaving a balance of $284,948 as deferred stock option compensation at December 31, 2000. The following summarizes activity for options granted to directors and employees under the 1994, 1999 and 2000 Plans:
Options Weighted Weighted Exercisable Average Average At End of Grant-date Exercise Options Year Fair Value Price --------- ----------- -------------- ---------- Outstanding January 1, 1998 1,316,465 1,023,090 ========= Granted 610,750 $ 1.50 $ 1.99 Cancelled (91,600) -- 2.85 Exercised (40,500) -- 1.18 --------- Outstanding December 31,1998 1,795,115 1,382,615 ========= Granted 438,000 $ 0.55 $ 0.70 Cancelled (187,250) -- 2.17 Exercised -- -- -- --------- Outstanding December 31, 1999 2,045,865 1,639,615 ========= Granted 571,500 $ 1.96 $ 0.87 Cancelled (64,650) -- 1.78 Exercised (245,600) -- 1.28 --------- ======= ====== Outstanding December 31, 2000 2,307,115 1,968,540 ========= =========
A summary of options outstanding and exercisable as of December 31, 2000, follows:
Options Outstanding Options Exercisable ------------------------------------------------------ ---------------------------------- Weighted Ave. Range of Number Remaining Weighted Ave. Number Weighted Ave. Exercise Price Outstanding Life (years) Exercise Price Exercisable Exercise Price - -------------- ----------- ------------- -------------- ------------ -------------- $ .50-.98 773,250 9.0 $ .65 514,925 $ .65 1.00-1.97 858,365 6.6 1.81 812,115 1.83 2.16-4.69 675,500 5.8 2.81 641,500 2.80 --------- --------- 2,307,115 1.71 1,968,540 1.84 ========= ==== ========= ====
As of December 31, 2000, options to purchase 310,000 shares and 3,463,850 shares of Common Stock were available for grant under the 1999 and 2000 Plans. The Company accounts for options granted to employees and directors under APB Opinion No. 25. Had compensation cost for options granted to employees and directors been determined consistent with SFAS No. 123, the Company's pro forma net loss and pro forma net loss per share would have been as follows as of December 31:
2000 1999 1998 ------------- ------------- ------------ Net loss: As reported $(12,469,405) (1,577,340) (6,881,012) Pro forma (12,644,405) (2,182,340) (7,796,012) ============= ============= ============ Basic and diluted net loss per share: As reported $ (0.28) (0.04) (0.18) Pro forma (0.29) (0.05) (0.20) ============= ============= ============
F-16 The fair value of the stock options granted in 2000, 1999 and 1998 is estimated at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yields of 0%; expected volatility of 103% in 2000, 74% in 1999 and 63% in 1998; a risk-free interest rate of 4.7% in 2000, 6.4% in 1999 and 4.8% in 1998; and expected lives of 5 years in 2000 and 6 years in 1999 and 1998. During 1995, the Company granted to a consultant options to purchase 10,000 shares of the Company's Common Stock, expiring in 2000, immediately exercisable at $1.44 per share. These options were exercised in a cashless exercise during 2000, resulting in the issuance of 4,175 shares of Common Stock. 14. Income Taxes As of December 31, 2000, the Company had available for federal income tax reporting purposes net operating loss carryforwards in the approximate amount of $68,000,000, expiring from 2001 through 2020, which are available to reduce future earnings which would otherwise be subject to federal income taxes. In addition, the Company has research and development credits in the approximate amount of $2,500,000, which are available to reduce the amount of future federal income taxes. These credits expire from 2001 through 2020. The Company has New Jersey operating loss carryforwards in the approximate amount of $23,300,000, expiring from 2003 through 2007, which are available to reduce future earnings, which would otherwise be subject to state income tax. As of December 31, 2000, approximately $11,400,000 of these New Jersey loss carryforwards have been approved for future sale under a program of the New Jersey Economic Development Authority (the "NJEDA"). In order to realize these benefits, the Company must apply to the NJEDA each year and must meet various requirements for continuing eligibility. In addition, the program must continue to be funded by the State of New Jersey, and there are limitations based on the level of participation by other companies. As a result, future tax benefits will be recognized in the financial statements as specific sales are approved. In the fourth quarters of 2000 and 1999, the Company realized $1,065,000 and $1,553,000, respectively, of tax benefits arising from the sale of a portion of the Company's New Jersey net operating loss carryforwards that had previously been subject to a full valuation allowance. Given the Company's past history of incurring operating losses, any gross deferred tax assets that are recognizable under SFAS No. 109 have been fully reserved. As of December 31, 2000 and 1999, the Company had gross deferred tax assets of approximately $29,000,000 and $26,000,000, respectively, subject to valuation allowances of $29,000,000 and $26,000,000, respectively. The gross deferred tax assets were generated primarily as a result of the Company's net operating losses and tax credits. The Company's ability to use such net operating losses may be limited by change in control provisions under Internal Revenue Code Section 382. 15. Employee Benefit Plan The Company maintains a deferred compensation plan covering all full-time employees. The plan allows participants to defer a portion of their compensation on a pre-tax basis pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended, up to an annual maximum for each employee set by the Internal Revenue Service. The Company's discretionary matching contribution expense for 2000, 1999 and 1998 was approximately $48,000, $44,000 and $43,000, respectively. 16. Research and Licensing Revenue In July 1997, the Company entered into an agreement under which it granted to the Parke-Davis division of Warner-Lambert Company a worldwide license to use the Company's oral Calcitonin technology. In June 2000, Pfizer Inc. acquired Warner-Lambert. During 1997, the Company received $3 million for an equity investment and $3 million for a licensing fee (see Note 2). Several milestones were achieved during 1998, resulting in milestone revenue of $5 million. In 1999, two pilot human studies for the Company's oral calcitonin formulation were successfully concluded, resulting in milestone revenue totaling $5 million. Also in 1999, the Company and Pfizer identified an oral calcitonin formulation to be used in the Phase I/II clinical study entitling the Company to milestone revenue of an additional $4.5 million. During 2000, two milestones were achieved resulting in milestone revenue of $2 million. Patient dosing for this study was completed in December 2000. Pfizer analyzed the results of this study and terminated the agreement in March 2001 citing scientific and technical reasons. 17. Liquidity The Company has incurred annual operating losses since its inception and, as a result, at December 31, 2000 has an accumulated deficit of approximately $75,378,000 and has a working capital deficiency of approximately $13,267,000. F-17 These factors raise substantial doubt about the Company's ability to continue as a going concern. However, the financial statements have been prepared on a going concern basis and as such do not include any adjustments that might result from the outcome of this uncertainty. The Company's cash requirements are approximately $10 to 11 million per year to operate its research and peptide manufacturing facilities and develop its three Calcitonin products. In addition, the Company has principal and interest obligations under its outstanding notes payable to stockholders and 5% Convertible Debentures and its obligations relating to its current and former joint ventures in China. The Company's cash requirements related to the 5% Debentures include the redemption premium, delisting penalties and the increased interest rate described in Note 6. Management is actively seeking licensing and/or supply agreements with pharmaceutical companies for oral, nasal and injectable forms of Calcitonin as well as for other oral peptides. With the recent termination of our Pfizer collaboration, we currently have no licenses for any of our products in the U.S. We do not have sufficient financial resources to continue to fund our operations at the current level. We had an operating cash flow deficit of $4,864,000 in 1998, an operating cash flow deficit of $1,400,000 in 1999 and for the year ended December 31, 2000, an operating cash flow deficit of $3,382,000. The agreement that we have entered into with Fusion could provide Unigene with funding beginning in the first half of 2001. See Note 7. Under the agreement with Fusion, after a registration statement is declared effective by the SEC for the resale of the shares of Unigene common stock to be sold to Fusion, Fusion will be required to purchase, at the then current market price, shares of Unigene common stock at the rate of $875,000 per month over a period of 24 months, provided that Unigene continues to satisfy the requirements that are a condition to Fusion's obligation. The Board of Directors has authorized the sale to Fusion of up to 6,000,000 shares of Unigene common stock. We anticipate that, in order to sell significantly in excess of 6,000,000 shares to Fusion, it may be necessary to obtain stockholder approval of an amendment to our Certificate of Incorporation to increase the number of shares of Unigene common stock that we are authorized to issue. However, we cannot predict when or if the SEC will declare the registration statement effective, if the stockholders will approve an amendment to our Certificate of Incorporation or if we will be able to meet the continuing requirements of the Fusion agreement. If we do not receive any financing from Fusion, we will need to secure another source of financing in order to satisfy our working capital needs, which may be unavailable or the cost of which may be prohibitively expensive. Should such financing be unavailable or prohibitively expensive, it will be necessary for Unigene to curtail significantly its operations or consider alternative uses of its technology and manufacturing capability including the supply of Calcitonin to other companies. Assuming we are able to raise additional capital through our agreement with Fusion, we still anticipate that we may need additional capital to implement fully our business plans. We believe that satisfying our capital requirements over the long term will require the successful commercialization of our Calcitonin product or another peptide product in the United States and abroad. However, it is uncertain whether or not any of our products will be approved or will be commercially successful. The commercialization of our oral Calcitonin product may require us to incur additional capital expenditures to expand or upgrade our manufacturing operations to satisfy future supply obligations. However, we cannot determine either the cost or the timing of such capital expenditures at this time. 18. Legal Matters In addition to the arbitration proceedings discussed in Note 6, Reseau de Voyage Sterling, Inc. (Reseau) filed suit against the Company in July 2000. Reseau, which purchased from a third party a warrant to purchase one million shares of Unigene common stock, alleges that the Company breached a verbal agreement to extend the term of the warrant beyond its expiration date. Reseau is seeking damages of $2 million. We believe that the suit is completely without merit and we intend to vigorously contest the claim. F-18 Part II Information Not Required in Prospectus Item 13. Other Expenses of Issuance and Distribution* The expenses payable by the Registrant in connection with the issuance and distribution of the securities being registered (other than underwriting discounts and commissions, if any) are set forth below. Each item listed is estimated, except for the Securities and Exchange Commission registration fee. Securities and Exchange Commission registration fee.............. $ 1,170 Blue Sky fees and expenses....................................... 5,485 Accounting fees and expenses..................................... 25,000 Legal fees and expenses.......................................... 45,000 Registrar and transfer agent's fees and expenses................. 1,000 Printing and engraving expenses.................................. 0 Miscellaneous.................................................... 0 ---------- Total expenses................................................... $ 77,655 ========== Item 14. Indemnification of Directors and Officers Article VI of the Registrant's By-laws requires the Registrant to indemnify each of its directors and officers to the extent permitted by the Delaware General Corporation Law ("DGCL"). Section 145 of the DGCL provides that a corporation may indemnify any person, including any officer or director, who was or is a party, or who is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred by such person, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Section 145 also provides that a corporation may indemnify any person, including any officer or director, who was or is a party, or who is threatened to be made a party, to any threatened, pending or completed action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of the action, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that a court of competent jurisdiction shall determine that such indemnity is proper. To the extent that a director or officer is successful on the merits or otherwise in the defense of any action referred to above, the corporation is required under Delaware law to indemnify that person against expenses (including attorneys' fees) actually and reasonably incurred in connection therewith. The Registrant's Certificate of Incorporation provides that no director shall be liable to the Registrant or its stockholders for monetary damages for breach of his fiduciary duty as a director. However, a director will be liable for any breach of his duty of loyalty to the Registrant or its stockholders, for acts or omissions not in good faith or involving intentional misconduct or knowing violation of law, any transaction from which the director derived an improper personal benefit, or payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. II-1 Item 15. Recent Sales of Unregistered Securities Since September 30, 1997, Unigene has made the following sales of securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"): (1) During the quarter ended December 31, 1997, Unigene sold for cash 7,500 shares of Unigene common stock to a financial consultant upon the exercise of an equal number of warrants, each exercisable to purchase one share of Unigene common stock at an exercise price of $2.00 per share. The sale of such shares was effected without registration in reliance on an exemption under Section 4 (2) of the Securities Act. (2) On June 29, 1998, Unigene sold for cash $4,000,000 in aggregate principal amount of its 5% convertible debentures due December 31, 2001 (the "5% Debentures") to The Tail Wind Fund, Ltd. The sale of the 5% Debentures was effected without registration in reliance on an exemption under Section 4(2) of the Securities Act. Interest on the 5% Debentures is payable in cash or, at the option of Unigene, in Unigene common stock. Beginning January 1, 1999, the 5% Debentures became convertible into (i) Unigene common stock at a conversion price (the "Conversion Price") equal to the lower of (a) $ 1.59 (the "Cap Price") and (b) the average of the four lowest closing bid prices of the Unigene common stock during the 18 trading days prior to the date of conversion (the "Market Price") and (ii) warrants, expiring five years from the date of issuance, to purchase a number of shares of Unigene common stock equal to 4% of the number of shares issuable upon conversion at an exercise price equal to 125% of the Conversion Price. (3) On August 6, 1998, Unigene issued 163,635 shares of Unigene common stock upon the conversion of $225,000 in principal amount of loans made by officers of Unigene. All of such shares were issued by Unigene without registration in reliance on an exemption under Section 4 (2) of the Securities Act. (4) In the quarter ended September 30, 1998, Unigene issued 214,131 shares of Unigene common stock upon the conversion of $222,575 in principal amount of and accrued interest on Unigene's 10% Convertible Debentures due March 4, 1999. All of such shares were issued by Unigene without registration in reliance on an exemption under Section 3(a) (9) of the Securities Act. (5) In the quarter ended December 31, 1998, Unigene issued 448,834 shares of Unigene common stock upon the conversion of $502,694 in principal amount of Unigene's 9.5% Convertible Debentures. All of such shares were issued by Unigene without registration in reliance on an exemption under Section 3(a) (9) of the Securities Act. (6) In January 1999, Unigene issued 79,384 shares of Unigene common stock as payment of approximately $101,000 in accrued interest on the 5% Debentures. All of such shares were issued by Unigene without registration in reliance on an exemption under Section 4 (2) of the Securities Act. (7) In January 1999, Unigene issued 164,102 shares of Unigene common stock upon the conversion of $200,000 in principal amount of the 5% Debentures. All of the shares were issued by Unigene without registration in reliance on an exemption under Section 3(a)(9) of the Securities Act. (8) During the quarter ended June 30, 1999, $1,000,000 in principal amount of the 5% Debentures were converted into (a) 1,457,458 shares of Unigene common stock and (b) warrants, expiring April through June 2004, to purchase an aggregate of 58,298 shares of Unigene common stock at exercise prices ranging from $.78 to $1.15 per share. All of such shares and warrants were issued by Unigene without registration in reliance on an exemption under Section 3(a)(9) of the Securities Act. (9) In July 1999, Unigene issued 95,853 shares of Unigene common stock as payment of approximately $90,000 in accrued interest on the 5% Debentures. All of such shares were issued by Unigene without registration in reliance on an exemption under Section 4 (2) of the Securities Act. (10) During the quarter ended December 31, 1999, $800,000 of principal amount of the 5% Debentures were converted into (a) 1,906,565 shares of Unigene common stock and (b) warrants, expiring in 2004, to purchase an II-2 aggregate of 76,261 shares of Unigene common stock at exercise prices ranging from $.46 to $.60 per share. All of such shares and warrants were issued by Unigene without registration in reliance on an exemption under Section 3(a) (9) of the Securities Act. (11) In the quarter ended March 31, 2000, Unigene issued for cash 626,036 shares of Unigene common stock upon the exercise of an equal number of warrants exercisable to purchase one share of Unigene common stock at exercise prices ranging from $1.38 to $2.43 per share. An additional 103,032 shares of Unigene common stock were issued upon the cashless exercise of a total of 141,123 warrants at exercise prices ranging from $.46 to $1.52 per share. All of such shares were issued by Unigene without registration in reliance on an exemption under Section 4 (2) of the Securities Act. (12) In the quarter ended June 30, 2000, Unigene issued 56,007 shares of Unigene common stock upon the cashless exercise of a total of 116,666 warrants at exercise prices ranging from $1.38 to $1.44 per share. All of such shares were issued by Unigene without registration in reliance on an exemption under Section 4 (2) of the Securities Act. (13) In the quarter ended September 30, 2000, Unigene issued 95,685 shares of Unigene common stock upon the cashless exercise of a total of 195,834 warrants and options at exercise prices ranging from $1.38 to $1.44 per share. In addition, Unigene issued for cash 224,500 shares of Unigene common stock upon the exercise of warrants at exercise prices ranging from $1.38 to $1.50 per share. All of the shares were issued by Unigene without registration in reliance on an exemption under Section 4 (2) of the Securities Act. (14) In the quarter ended December 31, 2000, Unigene issued 8,636 shares of Unigene common stock upon the cashless exercise of a total of 22,000 warrants at an exercise price of $2.00 per share. All of the shares were issued by Unigene without registration in reliance on an exemption under Section 4 (2) of the Securities Act. (15) In the quarter ended March 31, 2001, Unigene issued to Fusion 2,000,000 shares of Unigene common stock and a warrant to purchase 1,000,000 shares of Unigene common stock. These securities were issued by Unigene without registration in reliance on an exemption under Section 4 (2) of the Securities Act. Item 16. Exhibits and Financial Statement Schedules (a) 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 Amendments to 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 Amendment to 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). 3.2 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). 5.1 Opinion of Covington & Burling, dated February 8, 2001 as to the legality of 7,331,009 of the shares of Unigene common stock being registered. * II-3 5.2 Opinion of Covington & Burling, dated April 2, 2001, as to the legality of 1,668,991 of the shares of Unigene common stock being registered.** 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). 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). II-4 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). 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 II-5 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.* 10.36 Registration Rights Agreement, dated April 23, 2001, between the Registrant and Fusion Capital Fund II, LLC.* 10.37 Warrant, dated March 30, 2001, between the Registrant and Fusion Capital Fund II, LLC.* 23.1 Consent of KPMG LLP.* 23.2 Consent of Covington & Burling (included in opinion filed as Exhibit 5.1).* 24.1 Powers of Attorney of Directors of Unigene Laboratories, Inc. (included on signature page) - -------- * Filed herewith (b) Financial Statement Schedules No financial statement schedules are required. Item 17. Undertakings (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: II-6 (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b), if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii)To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement." (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-7 Signatures Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Fairfield, New Jersey, on this 10th day of May 2001. UNIGENE LABORATORIES, INC. By: /s/ Warren P. Levy ------------------------- Warren P. Levy President Each person whose signature appears below hereby constitutes and appoints Warren P. Levy and Ronald S. Levy, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including, without limitation, post-effective amendments) to this Registration Statement and any subsequent registration statement filed by the Registrant pursuant to Rule 462(b) of the Securities Act of 1933, which relates to this Registration Statement, and to file the same, with all exhibits thereto, and all documents in connection herewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed on this 10th day of May 2001 by the persons and in the capacities indicated below. Signature Title - ----------------------------- ------------------------------------------ /s/ Warren P. Levy President and Chief Executive - ----------------------------- Officer (principal executive Warren P. Levy officer) and Director /s/ Jay Levy Treasurer (principal financial - ----------------------------- Officer (principal executive Jay Levy /s/ Ronald S. Levy Director - ----------------------------- Ronald S. Levy * Director - ----------------------------- Allen Bloom * Director - ----------------------------- Robert F. Hendrickson * By Power of Attorney /s/ Warren P. Levy - ----------------------------- Warren P. Levy II-8 EXHIBIT INDEX Exhibit Number Description - ------ --------------------------------------------------------------------- 5.1 Opinion of Covington & Burling. 10.35 Common Stock Purchase Agreement, dated April 23, 2001, between the Registrant and Fusion Capital Fund II, LLC. 10.36 Registration Rights Agreement, dated April 23, 2001, between the Registrant and Fusion Capital Fund II, LLC. 10.37 Warrant, dated March 30, 2001, between the Registrant and Fusion Capital Fund II, LLC. 23.1 Consent of KPMG LLP. 23.2 Consent of Covington & Burling (included in opinion filed as Exhibit 5.1). II-9 EX-5.1 2 exhibit5-1_0509.txt Exhibit 5.1 COVINGTON & BURLING 1201 PENNSYLVANIA AVENUE WASHINGTON WASHINGTON, DC 20004-2401 NEW YORK TEL 202.622.6000 LONDON FAX 202.662.6291 BRUSSELS WWW.COV.COM SAN FRANCISCO May 10, 2001 Unigene Laboratories, Inc. 110 Little Falls Road Fairfield, New Jersey 07004 Gentlemen: This opinion is being furnished to you in connection with a Registration Statement on Form S-1 (the "Registration Statement") being filed today by Unigene Laboratories, Inc., a Delaware corporation (the "Company"), with the Securities and Exchange Commission under the Securities Act of 1933, as amended, for the registration for resale by Fusion Capital Fund II, LLC ("Fusion") of 9,000,000 shares of the Company's common stock, par value $.01 per share (the "Common Stock"), consisting of: (a) up to 6,000,000 shares of Common Stock (the "Purchase Shares") that Fusion has agreed to purchase from the Company in accordance under the terms of a Common Stock Purchase Agreement, dated as of May 9, 2001, between the Company and Fusion (the "Common Stock Purchase Agreement), (b) 2,000,000 shares of Common Stock (the "Compensation Shares") that the Company has issued to Fusion as compensation for its commitment, and (c) 1,000,000 shares of Common Stock (the "Warrant Shares") that are issuable upon the exercise of a Warrant, dated as of March 30, 2001, that the Company has issued to Fusion (the "Warrant") also as compensation for its commitment. For purposes of this opinion, we have examined the Registration Statement and the relevant exhibits thereto, including: (1) the Common Stock Purchase Agreement, (2) a Registration Rights Agreement, dated as of April 23, 2001, between the Company and Fusion, and (3) the Warrant. 2 COVINGTON & BURLING We also have examined and relied upon a copy of the Company's Certificate of Incorporation, certified by the Secretary of State of the State of Delaware, and copies of the Company's By-Laws and certain resolutions adopted by the Board of Directors of the Company, each certified by the Corporate Secretary of the Company. We further have examined such other documents and made such other investigations as we have deemed necessary to form a basis for the opinion hereinafter expressed. In examining the foregoing documents, we have assumed the authenticity of documents submitted to us as originals, the genuineness of all signatures, the conformity to original documents of documents submitted to us as copies, and the accuracy of the representations and statements included therein. Based on the foregoing, we are of the opinion that: (1) the Purchase Shares have been duly authorized for issuance, and, if and when issued, sold and delivered by the Company to Fusion in accordance with the terms of the Common Stock Purchase Agreement, will be validly issued, fully paid and nonassessable (1) the Compensation Shares have been duly authorized and validly issued, and are fully paid and nonassessable. (2) the Warrant Shares have been duly authorized for issuance, and, if and when issued, sold and delivered by the Company to Fusion in accordance with the terms of the Warrant, will be validly issued, fully paid, and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" in the Prospectus forming a part thereof. Very truly yours, /s/ Covington & Burling ----------------------- COVINGTON & BURLING EX-10.35 3 exhibit10-35_0509.txt EXHIBIT 10.35 EXECUTION COPY COMMON STOCK PURCHASE AGREEMENT COMMON STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of May 09, 2001 by and between UNIGENE LABORATORIES, INC., a Delaware corporation (the "Company"), and FUSION CAPITAL FUND II, LLC (the "Buyer"). Capitalized terms used herein and not otherwise defined herein are defined in Section 10 hereof. WHEREAS: Subject to the terms and conditions set forth in this Agreement, the Company wishes to sell to the Buyer, and the Buyer wishes to buy from the Company, up to Twenty One Million Dollars ($21,000,000) of the Company's common stock, par value $.01 per share (the "Common Stock"). The shares of Common Stock to be purchased hereunder are referred to herein as the "Purchase Shares." NOW THEREFORE, the Company and the Buyer hereby agree as follows: 1. PURCHASE OF COMMON STOCK. Subject to the terms and conditions set forth in Sections 6, 7 and 9 below, the Company hereby agrees to sell to the Buyer, and the Buyer hereby agrees to purchase from the Company, shares of Common Stock as follows: (a) Commencement of Purchases of Common Stock. The purchase and sale of Common Stock hereunder shall commence (the "Commencement") within five (5) Trading Days following the date of satisfaction (or waiver) of the conditions to the Commencement set forth in Sections 6 and 7 below, (the date of such Commencement, the "Commencement Date"). (b) Buyer's Purchase Rights and Obligations. Subject to the Company's right to suspend purchases under Section 1(d)(ii) hereof, the Buyer shall purchase shares of Common Stock on each Trading Day during each Monthly Period equal to the Daily Base Amount at the Purchase Price. Within one (1) Trading Day of receipt of Purchase Shares, the Buyer shall pay to the Company an amount equal to the Purchase Amount with respect to such Purchase Shares as full payment for the purchase of the Purchase Shares so received. The Company shall not issue any fraction of a share of Common Stock upon any purchase. All shares of Common Stock (including fractions thereof) issuable upon a purchase under this Agreement shall be aggregated for purposes of determining whether the purchase would result in the issuance of a fraction of a share of Common Stock. If, after the aforementioned aggregation, the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up or down to the nearest whole share. All payments made under this Agreement shall be made in lawful money of the United States of America by wire transfer of immediately available funds to such account as the Company may from time to time designate by written notice in accordance with the provisions of this Agreement. Whenever any amount expressed to be due by the terms of this Agreement is due on any day which is not a Trading Day, the same shall instead be due on the next succeeding day which is a Trading Day. (c) Company's Right to Decrease or Increase the Daily Base Amount (i) Company's Right to Decrease the Daily Base Amount. The Company shall always have the right at any time to decrease the amount of the Daily Base Amount by delivering written notice (a "Daily Base Amount Decrease Notice") to the Buyer which notice shall specify the amount of the new Daily Base Amount. The decrease in the Daily Base Amount shall become effective one Trading Day after receipt by the Buyer of the Daily Base Amount Decrease. Any purchases by the Buyer which have a Purchase Date on or prior to the first (1st) Trading Day after receipt by the Buyer of a Daily Base Amount Decrease Notice must be honored by the Company as otherwise provided herein. The decrease in the Daily Base Amount shall remain in effect until the Company delivers to the Buyer a Daily Base Amount Increase Notice (as defined below). (ii) Company's Right to Increase Daily Base Amount. The Company shall always have the right at any time to increase amount of the Daily Base Amount up to the Original Daily Base Amount by delivering written notice to the Buyer stating the new amount of the Daily Base Amount (a "Daily Base Amount Increase Notice"). If the Closing Sale Price of the Common Stock on each of the five (5) consecutive Trading Days immediately prior to a Daily Base Amount Increase Notice is at least $4.00, the Company shall have the right to deliver a Daily Base Amount Increase Notice which increases the amount of the Daily Base Amount to any amount above the Original Daily Base Amount. A Daily Base Amount Increase Notice shall be effective one Trading Day after receipt by the Buyer. Such increase in the amount of the Daily Base Amount shall continue in effect until the delivery to the Buyer of a Daily Base Amount Decrease Notice. Notwithstanding anything to the contrary, if the Daily Base Amount then in effect is greater than the Original Daily Base Amount and the Sale Price of the Common Stock during any Trading Day is less than $4.00, the amount of the Daily Base Amount for such Trading Day on which the Sale Price of the Common Stock is less than $4.00 and for each Trading Day thereafter shall be the Original Daily Base Amount or such lesser amount as specified by the Company in a Daily Base Amount Decrease Notice. Thereafter, the Company shall again have the right to increase the amount of the Daily Base Amount to any amount above the Original Daily Base Amount only if the Closing Sale Price of the Common Stock is at least $4.00 on each of five (5) consecutive Trading Days (d) Limitations on Purchases. (i) Limitation on Beneficial Ownership. The Buyer shall not have the right to purchase shares of Common Stock under this Agreement to the extent that after giving effect to such purchase the Buyer together with its affiliates would beneficially own in excess of 4.9% of the outstanding shares of the Common Stock following such purchase. For purposes hereof, the number of shares of Common Stock beneficially owned by the Buyer and its affiliates or acquired by the Buyer and its affiliates, as the case may be, shall include the number of shares of Common Stock issuable in connection with a purchase under this Agreement with respect to which the determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (1) a purchase of the remaining Available Amount which has not been submitted for purchase, and (2) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company (including, without limitation, any warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Buyer and its affiliates. If the 4.9% limitation is ever reached the Company shall have the option to increase such limitation to 9.9% by delivery of written notice to the Buyer. Thereafter, if the 9.9% limitation is ever reached this shall not effect or limit the Buyer's obligation to purchase the Daily Base Amount as otherwise provided in this Agreement. For purposes of this Section, in determining the number of outstanding shares of Common Stock the Buyer may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company's most recent Form 10-Q or Form 10-K, as the case may be, (2) a more recent public announcement by the Company or (3) any other written communication by the Company or its transfer agent setting forth the number of shares of Common Stock outstanding. Upon the reasonable written or oral request of the Buyer, the Company shall promptly confirm orally and in writing to the Buyer the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to any purchases under this Agreement by the Buyer since the date as of which such number of outstanding shares of Common Stock was reported. Except as otherwise set forth herein, for purposes of this Section 1(d)(i), beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. (ii) Company's Right to Suspend Purchases. The Company may at any time give written notice (a "Purchase Suspension Notice") to the Buyer suspending purchases by the Buyer under this Agreement. The Purchase Suspension Notice shall be effective only for purchases which have a Purchase Date later than one (1) Trading Day after receipt of the Purchase Suspension Notice by the Buyer. Any purchase by the Buyer which has a Purchase Date on or prior to the first (1st) Trading Day after receipt by the Buyer of the Company's Purchase Suspension Notice must be honored by the Company as otherwise provided herein. Such purchase suspension shall continue in effect until the revocation in writing by the Company, at its sole discretion. So long as a Purchase Suspension Notice is in effect, the Buyer shall not be obligated to purchase any Purchase Shares from the Company under Section 1 of this Agreement. (e) Records of Purchases. The Buyer and the Company shall each maintain records showing the remaining Available Amount and the dates and Purchase Amounts for each purchase or shall use such other method, reasonably satisfactory to the Buyer and the Company (f) Taxes. The Company shall pay any and all taxes that may be payable with respect to the issuance and delivery of any shares of Common Stock to the Buyer made under of this Agreement. 2. BUYER'S REPRESENTATIONS AND WARRANTIES. The Buyer represents and warrants to the Company that: (a) Investment Purpose. The Buyer is entering into this Agreement and acquiring the Securities (as defined in Section 4(f) hereof) for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof; provided however, by making the representations herein, the Buyer does not agree to hold any of the Securities for any minimum or other specific term. (b) Accredited Investor Status. The Buyer is an "accredited investor" as that term is defined in Rule 501(a)(3) of Regulation D. (c) Reliance on Exemptions. The Buyer understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities. (d) Information. The Buyer has been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities that have been reasonably requested by the Buyer, including, without limitation, the SEC Documents (as defined in Section 3(f) hereof). The Buyer understands that its investment in the Securities involves a high degree of risk. The Buyer (i) is able to bear the economic risk of an investment in the Securities including a total loss, (ii) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the proposed investment in the Securities and (iii) has had an opportunity to ask questions of and receive answers from the officers of the Company concerning the financial condition and business of the Company and others matters related to an investment in the Securities. Neither such inquiries nor any other due diligence investigations conducted by the Buyer or its representatives shall modify, amend or affect the Buyer's right to rely on the Company's representations and warranties contained in Section 3 below. The Buyer has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities. (e) No Governmental Review. The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities. (f) Transfer or Resale. The Buyer understands that except as provided in the Registration Rights Agreement (as defined in Section 6(a) hereof): (i) the Securities have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder or (B) an exemption exists permitting such Securities to be sold, assigned or transferred without such registration; (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register the Securities or the Purchase Shares under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. (g) Validity; Enforcement. This Agreement has been duly and validly authorized, executed and delivered on behalf of the Buyer and is a valid and binding agreement of the Buyer enforceable against the Buyer in accordance with its terms, subject as to enforceability to general principles of equity and to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors' rights and remedies. (h) Residency. The Buyer is a resident of the State of Illinois. (i) No Prior Short Selling. The Buyer represents and warrants to the Company that at no time prior to the date of this Agreement has any of the Buyer, its agents, associates, representatives or affiliates engaged in or effected, in any manner whatsoever, directly or indirectly, any (i) "short sale" (as such term is defined in Rule 3b-3 of the 1934 Act) of the Common Stock or (ii) hedging transaction, which establishes a net short position with respect to the Common Stock. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Buyer that: (a) Organization and Qualification. The Company and its "Subsidiaries" (which for purposes of this Agreement means any entity in which the Company, directly or indirectly, owns 50% or more of the voting stock or capital stock or other similar equity interests) are corporations duly organized and validly existing in good standing under the laws of the jurisdiction in which they are incorporated, and have the requisite corporate power and authority to own their properties and to carry on their business as now being conducted. Each of the Company and its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing could not reasonably be expected to have a Material Adverse Effect. As used in this Agreement, "Material Adverse Effect" means any material adverse effect on any of: (i) the business, properties, assets, operations, results of operations or financial condition of the Company and its Subsidiaries, if any, taken as a whole, or (ii) the authority or ability of the Company to perform its obligations under the Transaction Documents (as defined in Section 3(b) hereof). The Company has no Subsidiaries except as set forth on Schedule 3(a). (b) Authorization; Enforcement; Validity. (i) The Company had and has the requisite corporate power and authority to enter into and perform its obligations under this Agreement, the Warrant (as defined in Section 4(f) hereof), the Registration Rights Agreement (as defined in Section 6(a) hereof) and each of the other agreements (the forms of which are attached hereto) to be entered into by the parties on the Commencement Date (collectively, the "Transaction Documents"), and to issue the Securities and the Purchase Shares in accordance with the terms hereof and thereof, (ii) the execution and delivery of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby, including without limitation, the issuance of the Commitment Shares (as defined in Section 4(f) hereof), and Warrant and the reservation for issuance and the issuance of the Purchase Shares issuable under this Agreement and the Warrant Shares (as defined in Section 4(f) hereof) under the Warrant, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its shareholders, (iii) this Agreement and the Warrant have been, and each other Transaction Document shall be on or prior to the Commencement Date, duly executed and delivered by the Company and (iv) this Agreement and the Warrant constitute, and each other Transaction Document upon its execution on behalf of the Company, shall constitute, the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies. (c) Capitalization. As of the date hereof, the authorized capital stock of the Company consists of 60,000,000 shares of Common Stock, of which as of the date hereof, 46,436,940 shares are issued and outstanding, 7,290 are held as treasury shares, 1,350,000 shares are reserved for issuance pursuant to the Company's stock option plans of which only approximately 765,000 shares remain available and 1,598,002 shares are issuable and reserved for issuance pursuant to securities (other than stock options issued pursuant to the Company's stock option plans) exercisable or exchangeable for, or convertible into, shares of Common Stock. No other shares or classes of capital stock of the Company have been authorized by the Company. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable. Except as disclosed in Schedule 3(c), (i) no shares of the Company's capital stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company, (ii) there are no outstanding debt securities, (iii) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries, (iv) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities under the 1933 Act (except the Registration Rights Agreement), (v) there are no outstanding securities or instruments of the Company or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries, (vi) there are no securities or instruments containing anti-dilution or similar provisions that were or will be triggered by the issuance of the Securities or the Purchase Shares as described in this Agreement and (vii) the Company does not have any stock appreciation rights or "phantom stock" plans or agreements or any similar plan or agreement. The Company has furnished to the Buyer true and correct copies of the Company's Certificate of Incorporation, as amended and as in effect on the date hereof (the "Certificate of Incorporation"), and the Company's By-laws, as amended and as in effect on the date hereof (the "By-laws"), and summaries of the terms of all securities convertible into or exercisable for Common Stock, if any, and copies of any documents containing the material rights of the holders thereof in respect thereto. (d) Issuance of Securities. The Commitment Shares and Warrant have been, and the Warrant Shares shall be, upon issuance, duly authorized in accordance with the terms hereof, validly issued, fully paid and non-assessable and (free from all taxes, liens and charges with respect to the issue thereof. 6,000,000 shares of Common Stock have been duly authorized and reserved for issuance upon purchase under this Agreement. Upon issuance and payment therefore in accordance with the terms and conditions of this Agreement, the Purchase Shares shall be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, with the holders being entitled to all rights accorded to a holder of Common Stock. (e) No Conflicts. Except as disclosed in Schedule 3(e), the execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the reservation for issuance and issuance of the Purchase Shares) will not (i) result in a violation of the Certificate of Incorporation, any Certificate of Designations, Preferences and Rights of any outstanding series of preferred stock of the Company or the By-laws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the Principal Market applicable to the Company or any of its Subsidiaries) or by which any property or asset of the Company or any of its Subsidiaries is bound or affected, except in the case of conflicts, defaults and violations under clause (ii), which could not reasonably be expected to result in a Material Adverse Effect. Except as disclosed in Schedule 3(e), neither the Company nor its Subsidiaries is in violation of any term of or in default under its Certificate of Incorporation, any Certificate of Designation, Preferences and Rights of any outstanding series of preferred stock of the Company or By-laws or their organizational charter or by-laws, respectively. Except as disclosed in Schedule 3(e), neither the Company nor any of its Subsidiaries is in violation of any term of or is in default under any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its Subsidiaries, except for possible conflicts, defaults, terminations or amendments which could not reasonably be expected to have a Material Adverse Effect. The business of the Company and its Subsidiaries is not being conducted, and shall not be conducted, in violation of any law, ordinance, regulation of any governmental entity, except for possible violations, the sanctions for which either individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the 1933 Act, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self-regulatory agency in order for it to execute, deliver or perform any of its obligations under or contemplated by the Transaction Documents in accordance with the terms hereof or thereof. Except as disclosed in Schedule 3(e), all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence shall be obtained or effected on or prior to the Commencement Date. Except as disclosed in Schedule 3(e), the Company is not and has not been since January 1, 1999, in violation of the listing requirements of the Principal Market. (f) SEC Documents; Financial Statements. Except as disclosed in Schedule 3(f), since January 1, 1999, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act") (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the "SEC Documents"). As of their respective dates (except as they have been correctly amended), the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC (except as they may have been correctly amended), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates (except as they have been correctly amended), the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). (g) Absence of Certain Changes. Except as disclosed in Schedule 3(g), since September 30, 2000, there has been no material adverse change in the business, properties, operations, financial condition or results of operations of the Company or its Subsidiaries. The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy law nor does the Company or any of its Subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings. (h) Absence of Litigation. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company, the Common Stock or any of the Company's Subsidiaries or any of the Company's or the Company's Subsidiaries' officers or directors in their capacities as such, which could reasonably be expected to have a Material Adverse Effect. A description of each action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body which, as of the date of this Agreement, is pending or threatened in writing against or affecting the Company, the Common Stock or any of the Company's Subsidiaries or any of the Company's or the Company's Subsidiaries' officers or directors in their capacities as such, is set forth in Schedule 3(h). (i) Acknowledgment Regarding Buyer's Status. The Company acknowledges and agrees that the Buyer is acting solely in the capacity of arm's length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby. The Company further acknowledges that the Buyer is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby and any advice given by the Buyer or any of its representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to the Buyer's purchase of the Purchase Shares. The Company further represents to the Buyer that the Company's decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives and advisors. (j) No General Solicitation. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Securities or the Purchase Shares other than the registration statement contemplated in Section 4(a) hereof. (k) No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of any of the Securities under the 1933 Act or cause this offering of the Securities or Purchase Shares to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable shareholder approval provisions, including, without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or designated, nor will the Company or any of its Subsidiaries take any action or steps that would require registration of any of the Securities or the Purchase Shares under the 1933 Act or cause the offering of the Securities or Purchase Shares to be integrated with other offerings. (l) Dilutive Effect. The Company understands and acknowledges that the number of Purchase Shares purchasable under this Agreement will increase in certain circumstances. The Company further acknowledges that its obligation to issue Purchase Shares under this Agreement in accordance with the term and conditions hereof is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company. (m) Intellectual Property Rights. The Company and its Subsidiaries own or possess adequate rights or licenses to use all material trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. Except as set forth on Schedule 3(m), none of the Company's material trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, government authorizations, trade secrets or other intellectual property rights have expired or terminated, or, by the terms and conditions thereof, are scheduled to expire or terminate within two years from the date of this Agreement. The Company and its Subsidiaries do not have any knowledge of any infringement by the Company or its Subsidiaries of any material trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, or of any such development of similar or identical trade secrets or technical information by others and, except as set forth on Schedule 3(m), there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its Subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement, which could reasonably be expected to have a Material Adverse Effect. (n) Environmental Laws. The Company and its Subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where, in each of the three foregoing clauses, the failure to so comply could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (o) Title. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in Schedule 3(o) or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and any of its Subsidiaries. Any real property and facilities held under lease by the Company and any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries. (p) Insurance. The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its Subsidiaries, taken as a whole. (q) Regulatory Permits. The Company and its Subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. (r) Tax Status. The Company and each of its Subsidiaries has made or filed all federal and state income and all other material tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. (s) Transactions With Affiliates. Except as set forth on Schedule 3(s) and other than the grant or exercise of stock options disclosed on Schedule 3(c), none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has an interest or is an officer, director, trustee or partner. (t) Application of Takeover Protections. The Company and its board of directors have taken or will take prior to the Commencement Date all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Certificate of Incorporation or the laws of the state of its incorporation which is or could become applicable to the Buyer as a result of the transactions contemplated by this Agreement, including, without limitation, the Company's issuance of the Securities and the Purchase Shares and the Buyer's ownership of the Securities and the Purchase Shares. (u) Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any of its Subsidiaries has, in the course of its actions for, or on behalf of, the Company, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. 4. COVENANTS. (a) Filing of Registration Statement. The Company shall within thirty (30) Trading Days from the date hereof file a new registration statement covering the sale of at least 6,000,000 Purchase Shares and all ofthe Commitment Shares and Warrant Shares. The Buyer and its counsel shall have a reasonable opportunity to review and comment upon such registration statement or amendment to such registration statement and any related prospectus prior to its filing with the SEC. The Company shall use its best efforts to have such registration statement or amendment declared effective by the SEC at the earliest possible date. (b) Blue Sky. The Company shall, on or before the Commencement Date, take such action, if any, as the Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify the Commitment Shares and the Purchase Shares for sale to the Buyer pursuant to this Agreement under securities or "Blue Sky" laws of the states of the United States designated by the Buyer, and shall provide evidence of any such action so taken to the Buyer on or prior to the Commencement Date. The Company shall make all filings and reports relating to the offer and sale of the Commitment Shares and the Purchase Shares required under applicable securities or "Blue Sky" laws of the states of the United States following the Commencement Date. (c) No Variable Priced Financing. Other than pursuant to this Agreement or in connection with a licensing agreement with a pharmaceutical company or current licensees of the Company, the primary purpose of which is not to make an equity investment in the Company, the Company agrees that beginning on the date of this Agreement and ending on the date of termination of this Agreement (as provided in Section 11(k) hereof), neither the Company nor any of its Subsidiaries shall, without the prior written consent of the Buyer, contract for any equity financing (including any debt financing with an equity component) or issue any equity securities of the Company or any Subsidiary or securities convertible or exchangeable into or for equity securities of the Company or any Subsidiary (including debt securities with an equity component) which, in any case (i) are convertible into or exchangeable for an indeterminate number of shares of common stock, (ii) are convertible into or exchangeable for Common Stock at a price which varies with the market price of the Common Stock, (iii) directly or indirectly provide for any "re-set" or adjustment of the purchase price, conversion rate or exercise price after the issuance of the security, or (iv) contain any "make-whole" provision based upon, directly or indirectly, the market price of the Common Stock after the issuance of the security, in each case, other than reasonable and customary anti-dilution adjustments for issuance of shares of Common Stock at a price which is below the market price of the Common Stock. (d) Listing. The Company shall promptly secure the listing of all of the Purchase Shares, Commitment Shares and Warrant Shares upon each national securities exchange and automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all such securities from time to time issuable under the terms of the Transaction Documents. The Company shall maintain the Common Stock's authorization for quotation on the Principal Market. Neither the Company nor any of its Subsidiaries shall take any action that would be reasonably expected to result in the delisting or suspension of the Common Stock on the Principal Market. The Company shall promptly, and in no event later than the following Trading Day, provide to the Buyer copies of any notices it receives from the Principal Market regarding the continued eligibility of the Common Stock for listing on such automated quotation system or securities exchange. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section. (e) Limitation on Short Sales and Hedging Transactions. The Buyer agrees that beginning on the date of this Agreement and ending on the date of termination of this Agreement as provided in Section 11(k), the Buyer and its agents, representatives and affiliates shall not in any manner whatsoever enter into or effect, directly or indirectly, any (i) "short sale" (as such term is defined in Rule 3b-3 of the 1934 Act) of the Common Stock or (ii) hedging or other transaction that establishes a net short position with respect to the Common Stock. (f) Previous Issuance of Securities/Limitation on Sales of Commitment Shares. The Company has previously issued to the Buyer (i) 2,000,000 shares of Common Stock (the "Commitment Shares") and (ii) a warrant (the "Warrant") to purchase 1,000,000 shares of Common Stock (the "Warrant Shares" and together with the Commitment Shares and the Warrant, the "Securities"). The Buyer agrees that the Buyer shall not transfer or sell the Commitment Shares or Warrant Shares until 480 Trading Days from the date of this Agreement or until this Agreement has been terminated, provided, however, that such restrictions shall not apply: (i) to transfers to or among affiliates (as defined in the 1934 Act), (ii) to a pledge in connection with a bona fide loan (but not the foreclosure thereon) or a deposit to a margin account, or (iii) if an Event of Default has occurred, or any event which, after notice and/or lapse of time, would become an Event of Default, including any failure by the Company to timely issue Purchase Shares under this Agreement. Notwithstanding the forgoing, the Buyer may transfer Commitment Shares or Warrant Shares to a third party in order to settle a sale made by the Buyer where the Buyer reasonably expects the Company to deliver Purchase Shares to the Buyer under this Agreement so long as the Buyer maintains ownership of the same overall number of shares of Common Stock by "replacing" the Commitment Shares or Warrant Shares so transferred with Purchase Shares when the Purchase Shares are actually issued by the Company to the Buyer. (h) Due Diligence. The Buyer shall have the right, from time to time as the Buyer may reasonably deem appropriate, to perform reasonable due diligence on the Company during normal business hours. The Company and its officers and employees shall reasonably cooperate with the Buyer in connection with any reasonable request by the Buyer related to the Buyer's due diligence of the Company. 5. TRANSFER AGENT INSTRUCTIONS. On the Commencement, the Company shall cause any restrictive legend on the Commitment Shares to be removed and all of the Purchase Shares to be issued under this Agreement and Warrant Shares to be issued under the Warrant shall be issued without any restrictive legend and shall be issued by the Company's transfer agent via The DTC Fast Automated Securities Transfer Program, by crediting the appropriate number of shares of Common Stock to which the Buyer shall be entitled to the Buyer's balance account with The DTC through The DTC DWAC system, or, if the Transfer Agent is not participating in The DTC Fast Automated Securities Transfer Program and DWAC system, issue and surrender to the Buyer, a certificate, registered in the name of the Buyer or its designee, for the number of shares of Common Stock to which the Buyer shall be entitled. The Company shall issue irrevocable instructions to its transfer agent, and any subsequent transfer agent, to issue Purchase Shares in the name of the Buyer for the Purchase Shares (the "Irrevocable Transfer Agent Instructions"). The Company warrants to the Buyer that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, will be given by the Company to its transfer agent with respect to the Purchase Shares and that the Commitment Shares and the Purchase Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Registration Rights Agreement subject to the provisions of Section 4(f) in the case of the Commitment Shares. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO COMMENCE SALES OF SHARES OF COMMON STOCK. The obligation of the Company hereunder to commence sales of the Purchase Shares is subject to the satisfaction of each of the following conditions on or before the Commencement Date (the date that sales begin) and once such conditions have been satisfied there shall not be any ongoing obligation to satisfy such conditions after the Commencement has occurred; provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion by providing the Buyer with prior written notice thereof: (a) The Buyer shall have executed each of the Transaction Documents to which it is a party and delivered the same to the Company including the Registration Rights Agreement substantially in the form of Exhibit A hereto (the "Registration Rights Agreement"). (b) Subject to the Company's compliance with Section 4(a), a registration statement covering the sale of the Commitment Shares and Warrant Shares and at least 6,000,000 Purchase Shares shall have been declared effective under the 1933 Act by the SEC and no stop order with respect to the Registration Statement shall be pending or threatened by the SEC. (c) The representations and warranties of the Buyer shall be true and correct in all material respects as of the date when made and as of the Commencement Date as though made at that time (except for representations and warranties that speak as of a specific date), and the Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Buyer at or prior to the Commencement Date. 7. CONDITIONS TO THE BUYER'S OBLIGATION TO COMMENCE PURCHASES OF SHARES OF COMMON STOCK. The obligation of the Buyer to commence purchases of Purchase Shares under this Agreement is subject to the satisfaction, of each of the following conditions on or before the Commencement Date (the date that sales begin) and once such conditions have been satified there shall not be any ongoing obligation to satisfy such conditions after the Commencemennt has occurred; provided that these conditions are for the Buyer's sole benefit and may be waived by the Buyer at any time in its sole discretion by providing the Company with prior written notice thereof: (a) The Company shall have executed each of the Transaction Documents and delivered the same to the Buyer including the Registration Rights Agreement substantially in the form of Exhibit A hereto. (b) The Company shall have removed any restrictive legend from the Commitment Shares. (c) The Common Stock shall be authorized for quotation on the Principal Market, trading in the Common Stock shall not have been within the last 365 days suspended by the SEC or the Principal Market and the Purchase Shares and the Commitment Shares shall be approved for listing upon the Principal Market. (d) The Buyer shall have received the opinions of the Company's legal counsel dated as of the Commencement Date covering customary matters in customary form. (e) The representations and warranties of the Company shall be true and correct in all material respects (except to the extent that any of such representations and warranties is already qualified as to materiality in Section 3 above, in which case, such representations and warranties shall be true and correct without further qualification) as of the date when made and as of the Commencement Date as though made at that time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Commencement Date. The Buyer shall have received a certificate, executed by the CEO, President or CFO of the Company, dated as of the Commencement Date, to the foregoing effect in the form attached hereto as Exhibit B. (f) The Board of Directors of the Company shall have adopted resolutions substantially in the form attached hereto as Exhibit C which shall be in full force and effect without any amendment or supplement thereto as of the Commencement Date. (g) As of the Commencement Date, the Company shall have reserved out of its authorized and unissued Common Stock, solely for the purpose of effecting purchases of Purchase Shares hereunder, at least 6,000,000 shares of Common Stock. (h) The Irrevocable Transfer Agent Instructions, in form acceptable to the Buyer, shall have been delivered to and acknowledged in writing by the Company and the Company's transfer agent. (i) The Company shall have delivered to the Buyer a certificate evidencing the incorporation and good standing of the Company in the State of Delaware issued by the Secretary of State of the State of Delaware as of a date within ten (10) Trading Days of the Commencement Date. (j) The Company shall have delivered to the Buyer a certified copy of the Certificate of Incorporation as certified by the Secretary of State of the State of Delaware within ten (10) Trading Days of the Commencement Date. (k) The Company shall have delivered to the Buyer a secretary's certificate executed by the Secretary of the Company, dated as of the Commencement Date, in the form attached hereto as Exhibit E. (l) A registration statement covering the sale of all of the Commitment Shares, the Warrant Shares and at least 6,000,000 Purchase Shares shall have been declared effective under the 1933 Act by the SEC and no stop order with respect to the registration statement shall be pending or threatened by the SEC. The Company shall have prepared and delivered to the Buyer a final form of Prospectus to be used by the Buyer in connection with any sales of any Commitment Shares, Warrant Shares or any Purchase Shares. The Company shall have made all filings under all applicable federal and state securities laws necessary to consummate the issuance of the Securities and the Purchase Shares pursuant to this Agreement in compliance with such laws. (m) No Event of Default has occurred, or any event which, after notice and/or lapse of time, would become an Event of Default has occurred. (n) On or prior to the Commencement Date, the Company shall take all necessary action, if any, and such actions as reasonably requested by the Buyer, in order to render inapplicable any control share acquisition, business combination, shareholder rights plan or poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Certificate of Incorporation or the laws of the state of its incorporation which is or could become applicable to the Buyer as a result of the transactions contemplated by this Agreement, including, without limitation, the Company's issuance of the Securities and the Purchase Shares and the Buyer's ownership of the Securities and the Purchase Shares. 8. INDEMNIFICATION. In consideration of the Buyer's execution and delivery of the Transaction Documents and acquiring the Securities and the Purchase Shares hereunder and in addition to all of the Company's other obligations under the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless the Buyer and all of its affiliates, shareholders, officers, directors, employees and direct or indirect investors and any of the foregoing person's agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Indemnitees") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by any Indemnitee as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made against such Indemnitee and arising out of or resulting from the execution, delivery, performance or enforcement of the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, other than with respect to Indemnified Liabilities which directly and primarily result from the gross negligence or willful misconduct of the Indemnitee. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. 9. EVENTS OF DEFAULT. An "Event of Default" shall be deemed to have occurred at any time as any of the following events occurs: (a) while any registration statement is required to be maintained effective pursuant to the terms of the Registration Rights Agreement, the effectiveness of such registration statement lapses for any reason (including, without limitation, the issuance of a stop order) or is unavailable to the Buyer for sale of all of the Registrable Securities (as defined in the Registration Rights Agreement) in accordance with the terms of the Registration Rights Agreement, and such lapse or unavailability continues for a period of ten (10) consecutive Trading Days or for more than an aggregate of thirty (30) Trading Days in any 365-day period; (b) the suspension from trading or failure of the Common Stock to be listed on the Principal Market for a period of ten (10) consecutive Trading Days or for more than an aggregate of thirty (30) Trading Days in any 365-day period; (c) the failure of the Company or the Common Stock to fully meet the requirements for continued listing on the Principal Market for a period of ten (10) consecutive Trading Days or for more than an aggregate of thirty (30) Trading Days in any 365-day period; (d) the failure for any reason by the Transfer Agent to issue Purchase Shares to the Buyer within five (5) Trading Days after the applicable Purchase Date which the Buyer is entitled to receive under this Agreement; or Warrant Shares to the Buyer within five (5) Trading Days after the applicable notice. (e) intentionally omitted; (f) the Company breaches any representation, warranty, covenant or other term or condition under any Transaction Document if such breach could reasonably be expected to have a Material Adverse Effect and except, in the case of a breach of a covenant which is reasonably curable, only if such breach continues for a period of at least ten (10) Trading Days; (g) except as set forth on Schedule 9(g), any payment default under any contract whatsoever or any acceleration prior to maturity of any mortgage, indenture, contract or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or for money borrowed the repayment of which is guaranteed by the Company, whether such indebtedness or guarantee now exists or shall be created hereafter, which with respect to any such payment default or acceleration prior to maturity, is in excess of $1,000,000; (h) if any Person commences a proceeding against the Company pursuant to or within the meaning of any Bankruptcy Law; (i) if the Company pursuant to or within the meaning of any Bankruptcy Law; (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, (D) makes a general assignment for the benefit of its creditors, (E) becomes insolvent, or (F) is generally unable to pay its debts as the same become due; or (j) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that; (A) is for relief against the Company in an involuntary case, (B) appoints a Custodian of the Company or for all or substantially all of its property, or (C) orders the liquidation of the Company or any Subsidiary. In addition to any other rights and remedies under applicable law and this Agreement, including the Buyer termination rights under Section 11(k) hereof, so long as an Event of Default has occurred and is continuing, or if any event which, after notice and/or lapse of time, would become an Event of Default, has occurred and is continuing, the Buyer shall not be obligated to purchase any shares of Common Stock under this Agreement. If pursuant to or within the meaning of any Bankruptcy Law, the Company commences a voluntary case or any Person commences a proceeding against the Company, a Custodian is appointed for the Company or for all or substantially all of its property, or the Company makes a general assignment for the benefit of its creditors, (any of which would be an Event of Default as described in Sections 9(h), 9(i) and 9(j) hereof) this Agreement shall automatically terminate without any liability or payment to the Company without further action or notice by any Person. No such termination of this Agreement shall affect the Company's or the Buyer's obligations under this Agreement with respect to pending purchases and the Company and the Buyer shall complete their respective obligations with respect to any pending purchases under this Agreement. 10. CERTAIN DEFINED TERMS. For purposes of this Agreement, the following terms shall have the following meanings: (a) "1933 Act" means the Securities Act of 1933, as amended. (b) "Available Amount" means initially Twenty One Million Dollars $21,000,000 in the aggregate which amount shall be reduced by the Purchase Amount as the Buyer purchases shares of Common Stock pursuant to Section 1 hereof. (c) "Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. (d) "Closing Sale Price" means, for any security as of any date, the last closing trade price for such security on the Principal Market as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the last closing trade price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg. (e) "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. (f) "Daily Base Amount" means initially Forty Three Thousand Seven Hundred Fifty Dollars ($43,750) per Trading Day, which amount may be increased or decreased from time to time pursuant to Section 1(c) hereof. (g) "Maturity Date" means the date that is 480 Trading Days (24 Monthly Periods) from the Commencement Date which such date may be extended by up to an additional six (6) Month Periods by the Company, in its sole discretion, by written notice to the Buyer. (h) "Monthly Base Amount" means Eight Hundred Seventy Five Thousand Dollars ($875,000) per Monthly Period. (i) "Monthly Period" means each successive 20 Trading Day period commencing with the Commencement Date. (j) "Original Daily Base Amount" means Forty Three Thousand Seven Hundred Fifty Dollars ($43,750) per Trading Day (k) "Person" means an individual or entity including any limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. (l) "Principal Market" means The Nasdaq OTC/ Bulletin Board market, provided, however, that (i) in the event the Company's Common Stock is ever listed for trading on the Nasdaq National Market, Nasdaq SmallCap Market or the American Stock Exchange, than the "Principal Market" shall mean such other market on which the Company's Common Stock is then listed, and (ii) for purposes of Section 9(c) hereof only, "Principal Market" shall mean The Nasdaq SmallCap Market in respect of the requirements for continued listing on the Principal Market. (m) "Purchase Amount means the portion of the Available Amount purchased by the Buyer pursuant to Section 1 hereof. (n) "Purchase Date" means the actual date that the Buyer is to buy Purchase Shares pursuant to Section 1 hereof. (o) "Purchase Price" means, as of any Purchase Date, the lower of the (A) the lowest Sale Price of the Common Stock on the Purchase Date or such other date of determination and(B) the arithmetic average of the five (5) lowest Closing Sale Prices for the Common Stock during the fifteen (15) consecutive Trading Days ending on the Trading Day immediately preceding such Purchase Date or other date of determination (to be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock split or other similar transaction). (p) "Sale Price" means, for any security as of any date, the trade price for such security (other than in a trade effected by the Buyer or any of its affiliates) on the Principal Market as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the trade price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg. (q) "SEC" means the United States Securities and Exchange Commission. (r) "Trading Day" means any day on which the Principal Market is open for customary trading. 11. MISCELLANEOUS. (a) Governing Law; Jurisdiction; Jury Trial. The corporate laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and its shareholders. All other questions concerning the construction, validity, enforcement and interpretation of this Agreement and the other Transaction Documents shall be governed by the internal laws of the State of Illinois, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Illinois or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Illinois. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of Chicago, for the adjudication of any dispute hereunder or under the other Transaction Documents or in connection herewith or therewith, or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. (b) Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature. (c) Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. (d) Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. (e) Entire Agreement; Amendments. Except for (1) the Confidentiality Agreement dated October 13, 2000 between the Company and the Buyer (the "Confidentiality Agreement") and (2) the Letter Agreement dated the date hereof between the Company and the Buyer (the "Letter Agreement"), (i) this Agreement supersedes all other prior oral or written agreements between the Buyer, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein including that certain Confidential Term Sheet dated November 14, 2000, and (ii) this Agreement, the other Transaction Documents and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein. Except as specifically set forth in the Confidentiality Agreement, the Letter Agreement, this Agreement or the other Transaction Documents and the instruments referenced herein or therein, neither the Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the Buyer, and no provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought. (f) Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one Trading Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Unigene Laboratories, Inc. 110 Little Falls Road Fairfield, New Jersey 07004 Telephone: 973-882-0860 Facsimile: 973-227-6088 Attention: Dr. Warren Levy With a copy to: Covington & Burling 1201 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Telephone: 202-662-5276 Facsimile: 202-778-5276 Attention: D. Michael Lefever If to the Buyer: Fusion Capital Fund II, LLC 222 Merchandise Mart Plaza, Suite 9-112 Chicago, IL 60654 Telephone: 312-644-6644 Facsimile: 312-644-6244 Attention: Steven G. Martin If to the Transfer Agent: Registrar & Transfer Company 10 Commerce Drive Cranford, NJ 07016 Telephone: 908-497-2300 Facsimile: 908-497-2310 Attention: Ms. Florence Bogaenko or at such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party three (3) Trading Days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, and recipient facsimile number or (C) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. (g) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Buyer, including by merger or consolidation. The Buyer may not assign its rights or obligations under this Agreement. (h) No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. (i) Publicity. The Buyer shall have the right to approve before issuance any press releases or any other public disclosure (including any filings with the SEC) with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of any Buyer, to make any press release or other public disclosure (including any filings with the SEC) with respect to such transactions as is required by applicable law and regulations (although the Buyer shall be consulted by the Company in connection with any such press release or other public disclosure prior to its release and shall be provided with a copy thereof). (j) Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. (k) Termination. This Agreement may be terminated only as follows: (i) By the Buyer any time an Event of Default exists without any liability or payment to the Company. However, if pursuant to or within the meaning of any Bankruptcy Law, the Company commences a voluntary case or any Person commences a proceeding against the Company, a Custodian is appointed for the Company or for all or substantially all of its property, or the Company makes a general assignment for the benefit of its creditors, (any of which would be an Event of Default as described in Sections 9(h), 9(i) and 9(j) hereof) this Agreement shall automatically terminate without any liability or payment to the Company without further action or notice by any Person. No such termination of this Agreement under this Section 11(k)(i) shall affect the Company's or the Buyer's obligations under this Agreement with respect to pending purchases and the Company and the Buyer shall complete their respective obligations with respect to any pending purchases under this Agreement. (ii) In the event that the Commencement shall not have occurred, the Company shall have the option to terminate this Agreement for any reason or for no reason without liability of any party to any other party. (iii) In the event that the Commencement shall not have occurred on or before May31, 2001, due to the failure to satisfy the conditions set forth in Sections 6 and 7 above with respect to the Commencement (and the nonbreaching party's failure to waive such unsatisfied condition(s)), the nonbreaching party shall have the option to terminate this Agreement at the close of business on such date or thereafter without liability of any party to any other party. (iv) If by the Maturity Date (including any extension thereof by the Company pursuant to Section 10(g) hereof), for any reason or for no reason the full Available Amount under this Agreement has not been purchased as provided for in Section 1 of this Agreement, by the Buyer without any liability or payment to the Company. (v) At any time after the Commencement Date, the Company the Company shall have the option to terminate this Agreement for any reason or for no reason by delivering written notice (a "Company Termination Notice") to the Buyer electing to terminate this Agreement without any liability or payment to the Buyer. The Company Termination Notice shall not be effective until one (1) Trading Days after it has been received by the Buyer. (vi) This Agreement shall automatically terminate on the date that the Company sells and the Buyer purchases Twenty One Million Dollars ($21,000,000) of Common Stock as provided herein, without any action or notice on the part of any party. Except as set forth in Sections 11(k)(i) and 11(k)(vi), any termination of this Agreement pursuant to this Section 11(k) shall be effected by written notice from the Company to the Buyer, or the Buyer to the Company, as the case may be, setting forth the basis for the termination hereof. The representations and warranties of the Company and the Buyer contained in Sections 2 and 3 hereof, the indemnification provisions set forth in Section 8 hereof and the agreements and covenants set forth in Section 11, shall survive the Commencement and any termination of this Agreement. No termination of this Agreement shall effect the Company's or the Buyer's obligations under this Agreement with respect to pending purchases and the Company and the Buyer shall complete their respective obligations with respect to any pending purchases under this Agreement. (l) No Financial Advisor, Placement Agent, Broker or Finder. The Company shall be responsible for the payment of any fees or commissions, if any, of any financial advisor, placement agent, broker or finder relating to or arising out of the transactions contemplated hereby. The Company shall pay, and hold the Buyer harmless against, any liability, loss or expense (including, without limitation, attorneys' fees and out of pocket expenses) arising in connection with any such claim. (m) No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. (n) Remedies, Other Obligations, Breaches and Injunctive Relief. The Buyer's remedies provided in this Agreement shall be cumulative and in addition to all other remedies available to the Buyer under this Agreement, at law or in equity (including a decree of specific performance and/or other injunctive relief), no remedy of the Buyer contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit the Buyer's right to pursue actual damages for any failure by the Company to comply with the terms of this Agreement. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyer and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Buyer shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required. (o) Changes to the Terms of this Agreement. This Agreement and any provision hereof may only be amended by an instrument in writing signed by the Company and the Buyer. The term "Agreement" and all reference thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented. (p) Enforcement Costs. If: (i) this Agreement is placed by the Buyer in the hands of an attorney for enforcement or is enforced by the Buyer through any legal proceeding; or (ii) an attorney is retained to represent the Buyer in any bankruptcy, reorganization, receivership or other proceedings affecting creditors' rights and involving a claim under this Agreement; or (iii) an attorney is retained to represent the Buyer in any other proceedings whatsoever in connection with this Agreement, then the Company shall pay to the Buyer, as incurred by the Buyer, all reasonable costs and expenses including attorneys' fees incurred in connection therewith, in addition to all other amounts due hereunder. (q) Failure or Indulgence Not Waiver. No failure or delay in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. * * * * * IN WITNESS WHEREOF, the Buyer and the Company have caused this Common Stock Purchase Agreement to be duly executed as of the date first written above. THE COMPANY: UNIGENE LABORATORIES, INC. By:___________________________ Name: Warren Levy Title: Chief Executive Officer BUYER: FUSION CAPITAL FUND II, LLC BY: FUSION CAPITAL PARTNERS, LLC BY: SGM HOLDINGS CORP. By:__________________________ Name: Steven G. Martin Title: President EX-10.36 4 exhibit10-36_0509.txt EXHIBIT 10.36 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of April 23, 2001, by and between UNIGENE LABORATORIES, INC. a Delaware corporation, (the "Company"), and FUSION CAPITAL FUND II, LLC (together with it permitted assigns, the "Buyer"). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Common Stock Purchase Agreement by and between the parties hereto dated as of May 9, 2001 (as amended, restated, supplemented or otherwise modified from time to time, the "Purchase Agreement"). WHEREAS: A. The Company has agreed, upon the terms and subject to the conditions of the Purchase Agreement, to issue to the Buyer up to Twenty One Million Dollars ($21,000,000) of the Company's common stock, par value $.01 per share (the "Common Stock") (the "Purchase Shares") and B. In connecton with the Purchase Agreement, the Company has issued to the Buyer (i) 2,000,000 shares of its Common Stock (the "Commitment Shares") and (ii) a common stock purchase warrant (the "Warrant") granting the Buyer the right to purchase from the Company 1,000,000 shares of Common Stock (the "Warrant Shares"); and C. To induce the Buyer to enter into the Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 Act"), and applicable state securities laws. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Buyer hereby agree as follows: 1. DEFINITIONS. ----------- As used in this Agreement, the following terms shall have the following meanings: a. "Investor" means the Buyer, any transferee or assignee thereof to whom a Buyer assigns its rights under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 9 and any transferee or assignee thereof to whom a transferee or assignee assigns its rights under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 9. b. "Person" means any person or entity including any corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency. c. "Register," "registered," and "registration" refer to a registration effected by preparing and filing one or more registration statements of the Company in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such registration statement(s) by the United States Securities and Exchange Commission (the "SEC"). d. "Registrable Securities" means (1) the Purchase Shares which have been, or which may from time to time be, issued or issuable upon purchases of the Available Amount under the Purchase Agreement (without regard to any limitation or restriction on purchases), (2) the Warrant Shares which have been, or which may, from time to time, be issued or issuable upon exercise of the Warrant (without regard to any limitation or restriction on exercise), and (3) the Commitment Shares issued to the Investor at or prior to the Commencement and any shares of capital stock issued or issuable with respect to the Purchase Shares, the Warrant, the Commitment Shares or the Purchase Agreement as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, without regard to any limitation on purchases under the Purchase Agreement or under the Warrant. e. "Registration Statement" means the registration statement of the Company which the Company has agreed to file pursuant to Section 4(a) of the Purchase Agreement with respect to the sale of the Registrable Securities. 2. REGISTRATION. a. Mandatory Registration. The Company shall use best efforts to keep the Registration Statement effective pursuant to Rule 415 promulgated under the 1933 Act and available for sales of all of the Registrable Securities at all times until the earlier of (i) the date as of which the Investor may sell all of the Registrable Securities without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto) or (ii) the date on which (A) the Investor shall have sold all the Registrable Securities and no Available Amount remains under the Purchase Agreement (the "Registration Period"). The Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. b. Rule 424 Prospectus. The Company shall, as required by applicable securities regulations, from time to time file with the SEC, pursuant to Rule 424 promulgated under the 1933 Act, the prospectus and prospectus supplements, if any, to be used in connection with sales of the Registrable Securities under the Registration Statement. The Investor and its counsel shall have a reasonable opportunity to review and comment upon such prospectus prior to its filing with the SEC. The Investor shall use its reasonable best efforts to comment upon such prospectus within one (1) Trading Day from the date the Investor receives the final version of such prospectus. c. Sufficient Number of Shares Registered. In the event the number of shares available under the Registration Statement is insufficient to cover all of the Registrable Securities, the Company shall amend the Registration Statement or file a new registration statement (a "New Registration Statement"), so as to cover all of such Registrable Securities as soon as practicable, but in any event not later than ten (10) Trading Days after the necessity therefor arises. The Company shall use it best efforts to cause such amendment and/or New Registration Statement to become effective as soon as practicable following the filing thereof. The Investor and its counsel shall have a reasonable opportunity to review and comment upon any such amendment and/or New Registration Statement prior to its filing with the SEC. The Investor shall use its reasonable best efforts to comment upon any such amendment and/or New Registration Statement within two (2) Trading Days from the date the Investor receives the final version of any such amendment and/or New Registration Statement. 3. RELATED OBLIGATIONS. With respect to the Registration Statement and whenever any Registrable Securities are to be registered pursuant to Section 2 including on any New Registration Statement, the Company shall use its reasonable best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, pursuant thereto, the Company shall have the following obligations: a. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to any registration statement and the prospectus used in connection with such registration statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep the Registration Statement or any New Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement or any New Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such registration statement. b. The Company shall permit the Investor to review and comment upon the Registration Statement or any New Registration Statement and all amendments and supplements thereto at least two (2) Trading Days prior to their filing with the SEC, and not file any document in a form to which Investor reasonably objects. The Investor shall use its reasonable best efforts to comment upon the Registration Statement or any New Registration Statement and any amendments or supplements thereto within two (2) Trading Days from the date the Investor receives the final version thereof. The Company shall furnish to the Investor, without charge any correspondence from the SEC or the staff of the SEC to the Company or its representatives relating to the Registration Statement or any New Registration Statement. c. The Company shall furnish to the Investor, (i) promptly after the same is prepared and filed with the SEC, at least one copy of such registration statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits, (ii) upon the effectiveness of any registration statement, ten (10) copies of the prospectus included in such registration statement and all amendments and supplements thereto (or such other number of copies as the Investor may reasonably request) and (iii) such other documents, including copies of any preliminary or final prospectus, as the Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by the Investor. d. The Company shall use reasonable best efforts to (i) register and qualify the Registrable Securities covered by a registration statement under such other securities or "blue sky" laws of such jurisdictions in the United States as the Investor reasonably requests, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify the Investor who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or "blue sky" laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threatening of any proceeding for such purpose. e. As promptly as practicable after becoming aware of such event or facts, the Company shall notify the Investor in writing of the happening of any event or existence of such facts as a result of which the prospectus included in any registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly prepare a supplement or amendment to such registration statement to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to the Investor (or such other number of copies as the Investor may reasonably request). The Company shall also promptly notify the Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a registration statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to the Investor by facsimile on the same day of such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to any registration statement or related prospectus or related information, and (iii) of the Company's reasonable determination that a post-effective amendment to a registration statement would be appropriate. f. The Company shall use its reasonable best efforts to prevent the issuance of any stop order or other suspension of effectiveness of any registration statement, or the suspension of the qualification of any Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify the Investor of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. g. The Company shall (i) cause all the Registrable Securities to be listed on each securities exchange or trading system on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) secure designation and quotation of all the Registrable Securities on the Principal Market. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section. h. The Company shall cooperate with the Investor to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to any registration statement and enable such certificates to be in such denominations or amounts as the Investor may reasonably request and registered in such names as the Investor may request. i. The Company shall at all times provide a transfer agent and registrar with respect to its Common Stock. j. If reasonably requested by the Investor, the Company shall (i) immediately incorporate in a prospectus supplement or post-effective amendment such information as the Investor believes should be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold, the purchase price being paid therefor and any other terms of the offering of the Registrable Securities; (ii) make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any registration statement. k. The Company shall use its reasonable best efforts to cause the Registrable Securities covered by any registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities. l. Within one (1) Trading Day after any registration statement which includes the Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Investor) confirmation that such registration statement has been declared effective by the SEC in the form attached hereto as Exhibit A. m. The Company shall take all other reasonable actions reasonably requested by the Investor to expedite and facilitate disposition by the Investor of Registrable Securities pursuant to any registration statement. 4. OBLIGATIONS OF THE INVESTOR. a. The Company shall notify the Investor in writing of the information the Company reasonably requires from the Investor in connection with any registration statement hereunder. The Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. b. The Investor agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any registration statement hereunder. c. The Investor agrees that, upon receipt of any notice from the Company of the happening of any event or existence of facts of the kind described in Section 3(f) or the first sentence of 3(e), the Investor will immediately discontinue disposition of Registrable Securities pursuant to any registration statement(s) covering such Registrable Securities until the Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or the first sentence of 3(e). Notwithstanding anything to the contrary, the Company shall cause its transfer agent to promptly deliver shares of Common Stock without any restrictive legend in accordance with the terms of the Purchase Agreement in connection with any sale of Registrable Securities with respect to which an Investor has entered into a contract for sale prior to the Investor's receipt of a notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e) and for which the Investor has not yet settled. 5. EXPENSES OF REGISTRATION. All reasonable expenses, other than sales or brokerage commissions and legal fees and disbursements of counsel to the Investor, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, and fees and disbursements of counsel for the Company, shall be paid by the Company. 6. INDEMNIFICATION a. To the fullest extent permitted by law, the Company shall, and hereby does, indemnify, hold harmless and defend the Investor, each Person, if any, who controls the Investor, the members, the directors, officers, partners, employees, agents, representatives of the Investor and each Person, if any, who controls the Investor within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 Act") (each, an "Indemnified Person"), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, attorneys' fees, amounts paid in settlement or expenses, joint or several, (collectively, "Claims") incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("Indemnified Damages"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in the Registration Statement, any New Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered ("Blue Sky Filing"), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such registration statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to the Registration Statement or any New Registration Statement or (iv) any material violation of this Agreement (the matters in the foregoing clauses (i) through (iv) being, collectively, "Violations"). The Company shall, subject to Section 6(d) reimburse each Indemnified Person for any legal fees or other expenses reasonably incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by such Indemnified Person expressly for use in connection with the preparation of the Registration Statement, any New Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(c) or Section 3(e); (ii) with respect to any preliminary prospectus, shall not inure to the benefit of any Indemnified Person from whom the person asserting a Claim purchased the Registrable Securities that are offered for sale by the preliminary prospectus (or to the benefit of any person controlling such person) if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the prospectus, as then amended or supplemented, if such prospectus was timely made available by the Company pursuant to Section 3(c) or Section 3(e), and the Indemnified Person was promptly advised in writing not to use the incorrect prospectus prior to the use giving rise to a violation and such Indemnified Person, notwithstanding such advice, used it; (iii) shall not be available to the extent such Claim is based on a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company, if such prospectus was timely made available by the Company pursuant to Section 3(c) or Section 3(e); and (iv) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investor pursuant to Section 9. b. In connection with the Registration Statement or any New Registration Statement, the Investor shall, and hereby does, indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement or any New Registration Statement, each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by the Investor expressly for use in connection with such registration statement; and, subject to Section 6(d), the Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to the Investor as a result of the sale of Registrable Securities pursuant to such registration statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investor pursuant to Section 9. c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such claim or litigation. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. d. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred. e. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law. 7. CONTRIBUTION. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (ii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS AND DISCLOSURE UNDER THE SECURITIES ACTS. With a view to making available to the Investor the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the Investor to sell the Registrable Securities to the public without registration ("Rule 144"), the Company agrees to: a. make and keep public information available, as those terms are understood and defined in Rule 144; b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and c. furnish to the Investor so long as the Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting and or disclosure provisions of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration. 9. ASSIGNMENT OF REGISTRATION RIGHTS. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Investor, including by merger or consolidation. The Investor may not assign its rights under this Agreement without the written consent of the Company, other than to an affiliate of the Investor controlled by Steven G. Martin or Joshua B. Scheinfeld. 10. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Investor. 11. MISCELLANEOUS. a. A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. b. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) Trading Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Unigene Laboratories, Inc. 110 Little Falls Road Fairfield, New Jersey 07004 Telephone: 973-882-0860 Facsimile: 973-227-6088 Attention: Warren Levy With a copy to: Covington & Burling 1201 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Telephone: 202-662-5276 Facsimile: 202-778-5276 Attention: D. Michael Lefever If to the Investor: Fusion Capital Fund II, LLC 222 Merchandise Mart Plaza, Suite 9-112 Chicago, IL 60654 Telephone: 312-644-6644 Facsimile: 312-644-6244 Attention: Steven G. Martin or at such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party three (3) Trading Days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. d. Except for the corporate laws of the State of Delaware which shall govern all issues concerning the relative rights of the Company and its stockholders, all questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of Illinois, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Illinois or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Illinois. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting the City of Chicago, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. e. This Agreement, and the Purchase Agreement constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement and the Purchase Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. f. Subject to the requirements of Section 9, this Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto. g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. h. This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. j. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party. k. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. * * * * * * IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of day and year first above written. THE COMPANY: UNIGENE LABORATORIES, INC. By:_______________________ Name: Title: BUYER: FUSION CAPITAL FUND II, LLC BY: FUSION CAPITAL PARTNERS, LLC BY: SGM HOLDINGS CORP. By:_______________________ Name: Steven G. Martin Title: President EX-10.37 5 exhibit10-37_0509.txt EXHIBIT 10.37 THIS WARRANT (THIS "WARRANT") HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW. NEITHER THIS WARRANT NOR ANY SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE SOLD, ASSIGNED, MORTGAGED, PLEDGED, HYPOTHECATED, ENCUMBERED OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH THE ACT AND APPLICABLE STATE SECURITIES LAWS. UNIGENE LABORATORIES, INC. WARRANT Warrant No. F-1 Original Issue Date: March 30, 2001 This Warrant has been issued in connection with and pursuant to that certain Common Stock Purchase Agreement (the "Purchase Agreement") dated as of April 23, 2001, by and between UNIGENE LABORATORIES, INC., a Delaware corporation (the "Company") and FUSION CAPITAL FUND II, LLC (the "Buyer"). FOR VALUE RECEIVED, the Buyer, the registered holder hereof, or its permitted assigns (the "Holder"), is entitled to purchase from the Company, during the period specified in this Warrant, 1,000,000 fully paid and non-assessable shares (subject to adjustment as hereinafter provided) of Common Stock (the "Warrant Shares"), of the Company at the purchase price per share provided in Section 1.2 of this Warrant (the "Warrant Exercise Price"), all subject to the terms and conditions set forth in this Warrant. All terms not otherwise defined herein shall have the meaning ascribed to them in the Purchase Agreement. Section 1. Period for Exercise and Exercise Price. 1.1 Period for Exercise. The right to purchase shares of Warrant Shares represented by this Warrant shall be immediately exercisable, and shall expire at 5:00 p.m., Chicago local time, March 31, 2006 (the "Expiration Date"). From and after the Expiration Date this Warrant shall be null and void and of no further force or effect whatsoever. 1.2 Warrant Exercise Price. The Warrant Exercise Price per share of Warrant Shares shall be $0.50 per share (subject to adjustment as hereinafter provided). Section 2. Exercise of Warrant. 2.1 Manner of Exercise. The Holder may exercise this Warrant, in whole or in part, immediately, but not after the Expiration Date, during normal business hours on any business day by surrendering this Warrant to the Company at the principal office of the Company, accompanied by a Warrant Exercise Form in substantially the form annexed hereto duly executed by the Buyer and by payment of the Warrant Exercise Price for the number of shares of Warrant Shares for which this Warrant is then exercisable, either (i) in immediately available funds, (ii) by delivery of an instrument evidencing indebtedness owing by the Company to the Holder in the appropriate amount, (iii) by authorizing the Company to retain shares of Common Stock which would otherwise be issuable upon exercise of this Warrant having a fair market value (defined as the last reported Closing Sale Price of the Common Stock on the date immediately preceding the date of the Warrant Exercise notice) on the date of delivery equal to the aggregate Warrant Exercise Price, or (iv) in a combination of (i), (ii) or (iii) above, provided, however, that in no event shall the Holder be entitled to exercise this Warrant for a number of Warrant Shares in excess of that number of Warrant Shares which, upon giving effect to such exercise, would cause the aggregate number of shares of Common Stock beneficially owned by the Holder and its affiliates to exceed 9.9% of the outstanding shares of the Common Stock following such exercise. For purposes of the foregoing proviso, the aggregate number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which determination of such proviso is being made, but shall exclude the shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised Warrants beneficially owned by the Holder and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by the Holder and its affiliates subject to a limitation on conversion or exercise analogous to the limitation contained herein. Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. The Holder may waive the foregoing limitation by written notice to the Company upon not less than 61 days prior written notice (with such waiver taking effect only upon the expiration of such 61 day notice period). 2.2 When Exercise Effective. Each exercise of this Warrant shall be deemed to have been effected on the day on which all requirements of Section 2.1 shall have been met with respect to such exercise. At such time the person in whose name any certificate for shares of Warrant Shares shall be issuable upon such exercise shall be deemed for all corporate purposes to have become the Holder of record of such shares, regardless of the actual delivery of certificates evidencing such shares. 2.3 Delivery of Stock Certificates. As soon as practicable after each exercise of this Warrant, and in any event no later than 3 days after such exercise, the Company at its expense will issue Warrant Shares via credit to the Buyer's account with DTC for the number of Warrant Shares to which such Buyer is entitled upon such Buyer's submission of the applicable Warrant Exercise Form or, if the Transfer Agent is not participating in The DTC Fast Automated Securities Transfer Program and DWAC system, issue and surrender to the address as specified in the Warrant Exercise Form,, a certificate, registered in the name of the Buyer or its designee, for the number of shares of Common Stock to which the Buyer shall be entitled to upon such exercise. Section 3. Adjustment of Purchase Price and Number of Shares. The Warrant Exercise Price and the kind of securities issuable upon exercise of the Warrant shall be adjusted from time to time as follows: 3.1 Subdivision or Combination of Shares (Stock Splits). If the Company at any time effects a subdivision or combination of the outstanding Common Stock (through a stock split or otherwise), the number of shares of Warrant Shares shall be increased, in the case of a subdivision, or the number of shares of Warrant Shares shall be decreased, in the case of a combination, in the same proportions as the Common Stock is subdivided or combined, in each case effective automatically upon, and simultaneously with, the effectiveness of the subdivision or combination which gives rise to the adjustment. 3.2 Stock Dividends. If the Company at any time pays a dividend, or makes any other distribution, to holders of Common Stock payable in shares of Common Stock, or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in shares of Common Stock, then the number of shares of Warrant Shares in effect immediately prior to such action shall be proportionately increased so that the Holder hereof may receive upon exercise of the Warrant the aggregate number of shares of Common Stock which he or it would have owned immediately following such action if the Warrant had been exercised immediately prior to such action. The adjustment shall become effective immediately as of the date the Company shall take a record of the holders of its Common Stock for the purpose of receiving such dividend or distribution (or if no such record is taken, as of the effectiveness of such dividend or distribution). 3.3 Reclassification, Consolidation or Merger. If at any time, as a result of: (a) a capital reorganization or reclassification (other than a subdivision, combination or dividend provided for elsewhere in this Section 3), or (b) a merger or consolidation of the Company with another corporation (whether or not the Company is the surviving corporation), the Common Stock issuable upon exercise of the Warrants shall be changed into or exchanged for the same or a different number of shares of any class or classes of stock of the Company or any other corporation, or other securities convertible into such shares, then, as a part of such reorganization, reclassification, merger or consolidation, appropriate adjustments shall be made in the terms of the Warrants (or of any securities into which the Warrants are exercised or for which the Warrants are exchanged), so that: (y) the Holders of Warrants or of such substitute securities shall thereafter be entitled to receive, upon exercise of the Warrants or of such substitute securities, the kind and amount of shares of stock, other securities, money and property which such Holders would have received at the time of such capital reorganization, reclassification, merger, or consolidation, if such Holders had exercised their Warrants immediately prior to such capital reorganization, reclassification, merger, or consolidation, and (z) the Warrants or such substitute securities shall thereafter be adjusted on terms as nearly equivalent as may be practicable to the adjustments theretofore provided in this Section 3.3. No consolidation or merger in which the Company is not the surviving corporation shall be consummated unless the surviving corporation shall agree, in writing, to the provisions of this Section 3.3. The provisions of this Section 3.3 shall similarly apply to successive capital reorganizations, reclassifications, mergers and consolidations. 3.4 Other Action Affecting Common Stock. If at any time the Company takes any action affecting its Common Stock, other than an action described in any of Sections 3.1 - 3.3 which, in the opinion of the Board of Directors of the Company (the "Board"), would have an adverse effect upon the exercise rights of the Warrants, the Warrant Exercise Price or the kind of securities issuable upon exercise of the Warrants, or both, shall be adjusted in such manner and at such time as the Board may in good faith determine to be equitable in the circumstances; provided, however, that the purpose of this Section is to prevent the Company from taking any action which has the effect of diluting the number of shares of Warrant Shares issuable upon exercise of this Warrant. 3.5 Notice of Adjustment Events. Whenever the Company contemplates the occurrence of an event which would give rise to adjustments under this Section 3, the Company shall mail to each Warrant Holder, at least 20 days prior to the record date with respect to such event or, if no record date shall be established, at least 20 days prior to such event, a notice specifying (i) the nature of the contemplated event, and (ii) the date on which any such record is to be taken for the purpose of such event, and (iii) the date on which such event is expected to become effective, and (iv) the time, if any is to be fixed, when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable in connection with such event. 3.6 Notice of Adjustments. Whenever the kind or number of securities issuable upon exercise of the Warrants, or both, shall be adjusted pursuant to Section 3, the Company shall deliver a certificate signed by its Chief Executive Officer and by its Chief Financial Officer, setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Board made any determination hereunder), and the Warrant Exercise Price and the kind of securities issuable upon exercise of the Warrants after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail postage prepaid) to each Warrant Holder promptly after each adjustment. Section 4. Reservation of Stock, etc. The Company covenants and agrees that it will at all times have authorized, reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, the number of shares of Warrant Shares from time to time issuable upon the exercise of this Warrant. The Company further covenants and agrees that this Warrant is, and any Warrants issued in substitution for or replacement of this Warrant and all Warrant Shares, will upon issuance be duly authorized and validly issued and, in the case of Warrant Shares, upon issuance will be fully paid and non-assessable and free from all preemptive rights of any stockholder, and from all taxes, liens and charges with respect to the issue thereof (other than transfer taxes) and, if the Common Stock of the Company is then listed on any national securities exchanges (as defined in the Exchange Act of 1934, as amended (the "Exchange Act")) or quoted on NASDAQ, shall be, subject to the restrictions set forth in Section 5, duly listed or quoted thereon, as the case may be. In the event that the number of authorized but unissued shares of such Common Stock shall not be sufficient to effect the exercise of this entire Warrant into Warrant Shares, then in addition to such other remedies as shall be available to the Holder of this Warrant, the Company shall promptly take such corporate action as may be necessary to increase its authorized but unissued shares of such Common Stock to such number of shares as shall be sufficient for such purpose. Section 5. Ownership, Transfer and Substitution of Warrants. 5.1 Ownership of Warrants. The Company may treat the person in whose name any Warrant is registered on the register kept at the principal office of the Company as the owner and Holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant. 5.2 Transfer and Exchange of Warrants. Upon the surrender of any Warrant, properly endorsed, for registration of transfer or for exchange at the principal office of the Company, the Company at its expense will execute and deliver to the Holder thereof, upon the order of such Holder, a new Warrant or Warrants of like tenor, in the name of such Holder or as such Holder may direct, for such number of shares with respect to each such Warrant, the aggregate number of shares in any event not to exceed the number of shares for which the Warrant so surrendered had not been exercised. 5.3 REGISTRATION RIGHTS. THE HOLDER OF THIS WARRANT IS ENTITLED TO CERTAIN REGISTRATION RIGHTS WITH RESPECT TO THE WARRANT SHARES ISSUABLE UPON EXERCISE THEREOF. SAID REGISTRATION RIGHTS ARE SET FORTH IN A REGISTRATION RIGHTS AGREEMENT DATED AS OF APRIL 23, 2001, BY AND BETWEEN THE BUYER AND THE COMPANY. 5.4 Exemption from Registration. If an opinion of counsel provides that registration is not required for the proposed exercise or transfer of this Warrant or the proposed transfer of the Warrant Shares and that the proposed exercise or transfer in the absence of registration would require the Company to take any action including executing and filing forms or other documents with the Securities and Exchange Commission (the "SEC") or any state securities agency, or delivering to the Holder any form or document in order to establish the right of the Holder to effectuate the proposed exercise or transfer, the Company agrees promptly, at its expense, to take any such action; and provided, further, that the Company will reimburse the Holder in full for any expenses (including but not limited to the fees and disbursements of such counsel, but excluding brokers' commissions) incurred by the Holder or owner of Warrant Shares on his, her or its behalf in connection with such exercise or transfer of the Warrant or transfer of Warrant Shares. Section 6. No Rights or Liabilities as Shareholder. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof any rights as a shareholder of the Company or as imposing any liabilities on such holder to purchase any securities or as a shareholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. Section 7. Rule 144 Sales. At the request of any Holder who proposes to sell securities in compliance with Rule 144 of the SEC, the Company will (i) forthwith furnish to such Holder a written statement of compliance with the filing requirements of the SEC as set forth in Rule 144, as such rules may be amended from time to time and (ii) make available to the public and such Holder such information as will enable the Holder to make sales pursuant to Rule 144. Section 8. Miscellaneous. 8.1 Amendment and Waiver. This Warrant may be amended with, and only with, the written consent of the Company and the Holder. Any waiver of any term, covenant, agreement or condition contained in this Warrant shall not be deemed a waiver of any other term, covenant, agreement or condition, and any waiver of any default in any such term, covenant, agreement or condition shall not be deemed a waiver of any later default thereof or of any default of any other term, covenant, agreement or condition. 8.2 Representations and Warranties to Survive Closing. All representations, warranties and covenants contained herein shall survive the execution and delivery of this Warrant and the issuance of any Warrant Shares upon the exercise hereof. 8.3 Severability. In the event that any court or any governmental authority or agency declares all or any part of any Section of this Warrant to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate any other Section of this Warrant, and in the event that only a portion of any Section is so declared to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate the balance of such Section. 8.4 Binding Effect; No Third Party Beneficiaries. All provisions of this Warrant shall be binding upon and inure to the benefit of the parties and their respective heirs, legatees, executors, administrators, legal representatives, successors, and permitted transferees and assigns. No person other than the holder of this Warrant and the Company shall have any legal or equitable right, remedy or claim under or in respect of, this Warrant. 8.5 Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Warrant must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one Trading Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Unigene Laboratories, Inc. 110 Little Falls Road Fairfield, New Jersey 07004 Telephone: 973-882-0860 Facsimile: 973-227-6088 Attention: Dr. Warren Levy With a copy to: Covington & Burling 1201 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Telephone: 202-662-5276 Facsimile: 202-778-5276 Attention: D. Michael Lefever If to the Buyer: Fusion Capital Fund II, LLC 222 Merchandise Mart Plaza, Suite 9-112 Chicago, IL 60654 Telephone: 312-644-6644 Facsimile: 312-644-6244 Attention: Steven G. Martin If to the Transfer Agent: Registrar & Transfer Company 10 Commerce Drive Cranford, NJ 07016 Telephone: 908-497-2300 Facsimile: 908-497-2310 Attention: Ms. Florence Bogaenko or at such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party three (3) Trading Days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, and recipient facsimile number or (C) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. 8.6 Taxes, Costs and Expenses. The Company covenants and agrees that it will pay when due and payable any and all federal, state and local taxes (other than income taxes) and any other costs and expenses which may be payable in respect of the preparation, issuance, delivery, exercise, surrender or transfer of this Warrant pursuant to the terms of this Warrant or the issuance of any shares of Warrant Shares as a result thereof. If any suit or action is instituted or attorneys employed to enforce this Warrant or any part thereof, the Company promises and agrees to pay all costs and expenses associated therewith, including reasonable attorneys' fees and court costs. 8.7 Governing Law; Jurisdiction; Jury Trial. The corporate laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and its shareholders. All other questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by the internal laws of the State of Illinois, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Illinois or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Illinois. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of Chicago, for the adjudication of any dispute hereunder or under the other Transaction Documents or in connection herewith or therewith, or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. 8.8 Loss of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnification in form and substance acceptable to the Company in its reasonable discretion, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. 8.9 Entire Agreement. This Warrant, the Purchase Agreement and the Registration Rights Agreement of even date herewith represent the entire agreement and understanding between the parties concerning the subject matter hereof and supercede all prior and contemporaneous agreements, understandings, representations and warranties with respect thereto. 8.10 Headings. The headings used herein are used for convenience only and are not to be considered in construing or interpreting this Warrant. COMPANY: UNIGENE LABORATORIES, INC. By:______________________________ Name: Warren Levy Title: Chief Executive Officer WARRANT EXERCISE FORM Date:_____________ Unigene Laboratories, Inc. 110 Little Falls Road Fairfield, NJ 07004 Attention: Dr. Warren Levy Ladies and Gentlemen: The undersigned, being the registered holder of your Warrant number ______ accompanying this letter, hereby irrevocably exercises such Warrant for _____ shares of Warrant Shares (as defined in said Warrant), and herewith makes payment therefor in the amount of ($___________ )(via "cash-less exercise" in accordance with the Warrant), and requests that such shares of Warrant Shares be issued in the name of, and delivered to Fusion Capital Fund II, LLC, at the address shown below the signature line hereof. If said number of shares shall not be all the shares issuable upon exercise of the attached Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of such shares less any fraction of a share paid in cash. Sincerely, Fusion Capital Fund II, LLC - -------------------------------------- Signature of Registered Warrant Holder Fusion Capital Fund II, LLC 222 Merchandise Mart Plaza, Suite 9-112 Chicago, IL 60654 FORM OF COMPANY CONFIRMATION OF WARRANT EXERCISE Reference is made to the Common Stock Purchase Agreement (the "Common Stock Purchase Agreement") between UNIGENE LABORATORIES, INC. (the "Company") and FUSION CAPITAL FUND II, LLC dated April 23, 2001. In accordance with and pursuant to the Common Stock Purchase Agreement, the Company has issued to FUSION CAPITAL FUND II, LLC a Warrant to Purchase 1,000,000 shares of common stock, par value $.01 per share (the "Common Stock") of the Company. The undersigned hereby confirms that FUSION CAPITAL FUND II, LLC has exercised the Warrant to purchase _____ shares of Common stock and authorizes the issuance of ______ shares of common stock, par value $.01 per share (the "Common Stock") of the Company, in connection with the Warrant Exercise Notice Specifically, the Company hereby confirms the following information: Number of shares of Common Stock to be issued: Remaining Number of shares Subject to Exercise: ______________________________________ Exercise Price: $.50/share of Common Stock (Subject to Adjustment pursuant to the Warrant) The shares of Common Stock shall be issued in the name and to the address as set forth in the applicable Warrant Exercise Notice. Authorized Signature _______________________________________ Name:__________________________________ Title:_________________________________ Phone #:_______________________________ Fax #:_________________________________ EX-10.38 6 exhibit10-38_0509.txt EXHIBIT 10.38 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of March 30, 2001, by and between UNIGENE LABORATORIES, INC. a Delaware corporation, (the "Company"), and FUSION CAPITAL FUND II, LLC (together with it permitted assigns, the "Buyer"). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Common Stock Purchase Agreement by and between the parties hereto dated as of _______, 200__ (as amended, restated, supplemented or otherwise modified from time to time, the "Purchase Agreement"). WHEREAS: A. The Company has agreed, upon the terms and subject to the conditions of the Purchase Agreement, to issue to the Buyer (i) up to Twenty One Million Dollars ($21,000,000) of the Company's common stock, par value $.01 per share (the "Common Stock") (the "Purchase Shares"), and (ii) such number of shares of Common Stock as is required pursuant to Section 7(b) of the Purchase Agreement (the "Commitment Shares"); and B. The Company has issued to the Buyer a common stock purchase warrant (the "Warrant") granting the Buyer the right to purchase from the Company 1,000,000 shares of Common Stock (the "Warrant Shares"); and C. To induce the Buyer to enter into the Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 Act"), and applicable state securities laws. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Buyer hereby agree as follows: 1. DEFINITIONS. ----------- As used in this Agreement, the following terms shall have the following meanings: a. "Investor" means the Buyer, any transferee or assignee thereof to whom a Buyer assigns its rights under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 9 and any transferee or assignee thereof to whom a transferee or assignee assigns its rights under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 9. b. "Person" means any person or entity including any corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency. c. "Register," "registered," and "registration" refer to a registration effected by preparing and filing one or more registration statements of the Company in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such registration statement(s) by the United States Securities and Exchange Commission (the "SEC"). d. "Registrable Securities" means (1) the Purchase Shares which have been, or which may from time to time be, issued or issuable upon purchases of the Available Amount under the Purchase Agreement (without regard to any limitation or restriction on purchases), (2) the Warrant Shares which have been, or which may, from time to time, be issued or issuable upon exercise of the Warrant (without regard to any limitation or restriction on exercise), and (3) the Commitment Shares issued to the Investor at or prior to the Commencement and any shares of capital stock issued or issuable with respect to the Purchase Shares, the Warrant, the Commitment Shares or the Purchase Agreement as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, without regard to any limitation on purchases under the Purchase Agreement or under the Warrant. e. "Registration Statement" means the registration statement of the Company which the Company has agreed to file pursuant to Section 4(a) of the Purchase Agreement with respect to the sale of the Registrable Securities. 2. REGISTRATION. a. Mandatory Registration. The Company shall use best efforts to keep the Registration Statement effective pursuant to Rule 415 promulgated under the 1933 Act and available for sales of all of the Registrable Securities at all times until the earlier of (i) the date as of which the Investor may sell all of the Registrable Securities without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto) or (ii) the date on which (A) the Investor shall have sold all the Registrable Securities and no Available Amount remains under the Purchase Agreement (the "Registration Period"). The Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. b. Rule 424 Prospectus. The Company shall, as required by applicable securities regulations, from time to time file with the SEC, pursuant to Rule 424 promulgated under the 1933 Act, the prospectus and prospectus supplements, if any, to be used in connection with sales of the Registrable Securities under the Registration Statement. The Investor and its counsel shall have a reasonable opportunity to review and comment upon such prospectus prior to its filing with the SEC. The Investor shall use its reasonable best efforts to comment upon such prospectus within one (1) Trading Day from the date the Investor receives the final version of such prospectus. c. Sufficient Number of Shares Registered. In the event the number of shares available under the Registration Statement is insufficient to cover all of the Registrable Securities, the Company shall amend the Registration Statement or file a new registration statement (a "New Registration Statement"), so as to cover all of such Registrable Securities as soon as practicable, but in any event not later than ten (10) Trading Days after the necessity therefor arises. The Company shall use it best efforts to cause such amendment and/or New Registration Statement to become effective as soon as practicable following the filing thereof. The Investor and its counsel shall have a reasonable opportunity to review and comment upon any such amendment and/or New Registration Statement prior to its filing with the SEC. The Investor shall use its reasonable best efforts to comment upon any such amendment and/or New Registration Statement within two (2) Trading Days from the date the Investor receives the final version of any such amendment and/or New Registration Statement. 3. RELATED OBLIGATIONS. With respect to the Registration Statement and whenever any Registrable Securities are to be registered pursuant to Section 2 including on any New Registration Statement, the Company shall use its reasonable best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, pursuant thereto, the Company shall have the following obligations: a. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to any registration statement and the prospectus used in connection with such registration statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep the Registration Statement or any New Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement or any New Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such registration statement. b. The Company shall permit the Investor to review and comment upon the Registration Statement or any New Registration Statement and all amendments and supplements thereto at least two (2) Trading Days prior to their filing with the SEC, and not file any document in a form to which Investor reasonably objects. The Investor shall use its reasonable best efforts to comment upon the Registration Statement or any New Registration Statement and any amendments or supplements thereto within two (2) Trading Days from the date the Investor receives the final version thereof. The Company shall furnish to the Investor, without charge any correspondence from the SEC or the staff of the SEC to the Company or its representatives relating to the Registration Statement or any New Registration Statement. c. The Company shall furnish to the Investor, (i) promptly after the same is prepared and filed with the SEC, at least one copy of such registration statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits, (ii) upon the effectiveness of any registration statement, ten (10) copies of the prospectus included in such registration statement and all amendments and supplements thereto (or such other number of copies as the Investor may reasonably request) and (iii) such other documents, including copies of any preliminary or final prospectus, as the Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by the Investor. d. The Company shall use reasonable best efforts to (i) register and qualify the Registrable Securities covered by a registration statement under such other securities or "blue sky" laws of such jurisdictions in the United States as the Investor reasonably requests, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify the Investor who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or "blue sky" laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threatening of any proceeding for such purpose. e. As promptly as practicable after becoming aware of such event or facts, the Company shall notify the Investor in writing of the happening of any event or existence of such facts as a result of which the prospectus included in any registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly prepare a supplement or amendment to such registration statement to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to the Investor (or such other number of copies as the Investor may reasonably request). The Company shall also promptly notify the Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a registration statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to the Investor by facsimile on the same day of such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to any registration statement or related prospectus or related information, and (iii) of the Company's reasonable determination that a post-effective amendment to a registration statement would be appropriate. f. The Company shall use its reasonable best efforts to prevent the issuance of any stop order or other suspension of effectiveness of any registration statement, or the suspension of the qualification of any Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify the Investor of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. g. The Company shall (i) cause all the Registrable Securities to be listed on each securities exchange or trading system on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) secure designation and quotation of all the Registrable Securities on the Principal Market. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section. h. The Company shall cooperate with the Investor to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to any registration statement and enable such certificates to be in such denominations or amounts as the Investor may reasonably request and registered in such names as the Investor may request. i. The Company shall at all times provide a transfer agent and registrar with respect to its Common Stock. j. If reasonably requested by the Investor, the Company shall (i) immediately incorporate in a prospectus supplement or post-effective amendment such information as the Investor believes should be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold, the purchase price being paid therefor and any other terms of the offering of the Registrable Securities; (ii) make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any registration statement. k. The Company shall use its reasonable best efforts to cause the Registrable Securities covered by any registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities. l. Within one (1) Trading Day after any registration statement which includes the Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Investor) confirmation that such registration statement has been declared effective by the SEC in the form attached hereto as Exhibit A. m. The Company shall take all other reasonable actions reasonably requested by the Investor to expedite and facilitate disposition by the Investor of Registrable Securities pursuant to any registration statement. 4. OBLIGATIONS OF THE INVESTOR. a. The Company shall notify the Investor in writing of the information the Company reasonably requires from the Investor in connection with any registration statement hereunder. The Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. b. The Investor agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any registration statement hereunder. c. The Investor agrees that, upon receipt of any notice from the Company of the happening of any event or existence of facts of the kind described in Section 3(f) or the first sentence of 3(e), the Investor will immediately discontinue disposition of Registrable Securities pursuant to any registration statement(s) covering such Registrable Securities until the Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or the first sentence of 3(e). Notwithstanding anything to the contrary, the Company shall cause its transfer agent to promptly deliver shares of Common Stock without any restrictive legend in accordance with the terms of the Purchase Agreement in connection with any sale of Registrable Securities with respect to which an Investor has entered into a contract for sale prior to the Investor's receipt of a notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e) and for which the Investor has not yet settled. 5. EXPENSES OF REGISTRATION. All reasonable expenses, other than sales or brokerage commissions and legal fees and disbursements of counsel to the Investor, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, and fees and disbursements of counsel for the Company, shall be paid by the Company. 6. INDEMNIFICATION a. To the fullest extent permitted by law, the Company shall, and hereby does, indemnify, hold harmless and defend the Investor, each Person, if any, who controls the Investor, the members, the directors, officers, partners, employees, agents, representatives of the Investor and each Person, if any, who controls the Investor within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 Act") (each, an "Indemnified Person"), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, attorneys' fees, amounts paid in settlement or expenses, joint or several, (collectively, "Claims") incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("Indemnified Damages"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in the Registration Statement, any New Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered ("Blue Sky Filing"), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such registration statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to the Registration Statement or any New Registration Statement or (iv) any material violation of this Agreement (the matters in the foregoing clauses (i) through (iv) being, collectively, "Violations"). The Company shall, subject to Section 6(d) reimburse each Indemnified Person for any legal fees or other expenses reasonably incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by such Indemnified Person expressly for use in connection with the preparation of the Registration Statement, any New Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(c) or Section 3(e); (ii) with respect to any preliminary prospectus, shall not inure to the benefit of any Indemnified Person from whom the person asserting a Claim purchased the Registrable Securities that are offered for sale by the preliminary prospectus (or to the benefit of any person controlling such person) if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the prospectus, as then amended or supplemented, if such prospectus was timely made available by the Company pursuant to Section 3(c) or Section 3(e), and the Indemnified Person was promptly advised in writing not to use the incorrect prospectus prior to the use giving rise to a violation and such Indemnified Person, notwithstanding such advice, used it; (iii) shall not be available to the extent such Claim is based on a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company, if such prospectus was timely made available by the Company pursuant to Section 3(c) or Section 3(e); and (iv) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investor pursuant to Section 9. b. In connection with the Registration Statement or any New Registration Statement, the Investor shall, and hereby does, indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement or any New Registration Statement, each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by the Investor expressly for use in connection with such registration statement; and, subject to Section 6(d), the Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to the Investor as a result of the sale of Registrable Securities pursuant to such registration statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investor pursuant to Section 9. c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such claim or litigation. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. d. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred. e. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law. 7. CONTRIBUTION. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (ii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS AND DISCLOSURE UNDER THE SECURITIES ACTS. With a view to making available to the Investor the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the Investor to sell the Registrable Securities to the public without registration ("Rule 144"), the Company agrees to: a. make and keep public information available, as those terms are understood and defined in Rule 144; b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and c. furnish to the Investor so long as the Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting and or disclosure provisions of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration. 9. ASSIGNMENT OF REGISTRATION RIGHTS. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Investor, including by merger or consolidation. The Investor may not assign its rights under this Agreement without the written consent of the Company, other than to an affiliate of the Investor controlled by Steven G. Martin or Joshua B. Scheinfeld. 10. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Investor. 11. MISCELLANEOUS. a. A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. b. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) Trading Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Unigene Laboratories, Inc. 110 Little Falls Road Fairfield, New Jersey 07004 Telephone: 973-882-0860 Facsimile: 973-227-6088 Attention: Warren Levy With a copy to: Covington & Burling 1201 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Telephone: 202-662-5276 Facsimile: 202-778-5276 Attention: D. Michael Lefever If to the Investor: Fusion Capital Fund II, LLC 222 Merchandise Mart Plaza, Suite 9-112 Chicago, IL 60654 Telephone: 312-644-6644 Facsimile: 312-644-6244 Attention: Steven G. Martin or at such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party three (3) Trading Days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. d. Except for the corporate laws of the State of Delaware which shall govern all issues concerning the relative rights of the Company and its stockholders, all questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of Illinois, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Illinois or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Illinois. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting the City of Chicago, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. e. This Agreement, and the Purchase Agreement constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement and the Purchase Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. f. Subject to the requirements of Section 9, this Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto. g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. h. This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. j. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party. k. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. * * * * * * IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of day and year first above written. THE COMPANY: UNIGENE LABORATORIES, INC. By:_______________________ Name: Title: BUYER: FUSION CAPITAL FUND II, LLC BY: FUSION CAPITAL PARTNERS, LLC BY: SGM HOLDINGS CORP. By:_______________________ Name: Steven G. Martin Title: President EXHIBIT A TO REGISTRATION RIGHTS AGREEMENT FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT [Date] [TRANSFER AGENT] - ------------------- - ------------------- Re: [__________] Ladies and Gentlemen: We are counsel to UNIGENE LABORATORIES, INC., a Delaware corporation (the "Company"), and have represented the Company in connection with that certain Common Stock Purchase Agreement (the "Purchase Agreement") entered into by and among the Company and Fusion Capital Fund II, LLC (the "Holder") pursuant to which the Company has agreed to issue to the Holder up to Twenty One Million Dollars ($21,000,000) of the Company's Common Stock, par value $0.01 per share (the "Common Stock") (the "Purchase Shares"), in accordance with the terms of the Purchase Agreement, and (ii) the Company issued to the Holder 2,000,000 shares of Common Stock (the "Commitment Shares"). Pursuant to the Common Stock Purchase Agreement, the Company also has also agreed to issue to the Buyer a warrant (the "Warrant") granting the Buyer the right to purchase from the Company 1,000,000 shares of Common Stock (the "Warrant Shares"). Pursuant to the Purchase Agreement, the Company also has entered into a Registration Rights Agreement with the Holder (the "Registration Rights Agreement") pursuant to which the Company agreed, among other things, to register the Purchase Shares, the Warrant Shares and the Commitment Shares under the Securities Act of 1933, as amended (the "1933 Act"). In connection with the Company's obligations under the Purchase Agreement and the Registration Rights Agreement, on _____________, the Company filed a Registration Statement (File No. 333-_____________) (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") relating to the sale of the Purchase Shares, the Warrant Shares and the Commitment Shares. In connection with the foregoing, we advise you that a member of the SEC's staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after telephonic inquiry of a member of the SEC's staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Purchase Shares, the Warrant Shares and the Commitment Shares are available for sale under the 1933 Act pursuant to the Registration Statement. The Buyer has confirmed it shall comply with all securities laws and regulations applicable to it including applicable prospectus delivery requirements upon sale of the Commitment Shares, the Warrant Shares or the Purchase Shares. Very truly yours, [Company Counsel] By:____________________ cc: Fusion Capital Fund II, LLC EX-10.39 7 exhibit10-39_0509.txt EXHIBIT 10.39 THIS WARRANT (THIS "WARRANT") HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW. NEITHER THIS WARRANT NOR ANY SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE SOLD, ASSIGNED, MORTGAGED, PLEDGED, HYPOTHECATED, ENCUMBERED OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH THE ACT AND APPLICABLE STATE SECURITIES LAWS. UNIGENE LABORATORIES, INC. WARRANT Warrant No. _________ Original Issue Date: March 30, 2001 This Warrant is issued in connection with and pursuant to that certain Common Stock Purchase Agreement (the "Purchase Agreement") dated as of December 18, 2000, as amended as of the date hereof, by and between UNIGENE LABORATORIES, INC., a Delaware corporation (the "Company") and FUSION CAPITAL FUND II, LLC (the "Buyer"). FOR VALUE RECEIVED, the Buyer, the registered holder hereof, or its permitted assigns (the "Holder"), is entitled to purchase from the Company, during the period specified in this Warrant, 1,000,000 fully paid and non-assessable shares (subject to adjustment as hereinafter provided) of Common Stock (the "Warrant Shares"), of the Company at the purchase price per share provided in Section 1.2 of this Warrant (the "Warrant Exercise Price"), all subject to the terms and conditions set forth in this Warrant. All terms not otherwise defined herein shall have the meaning ascribed to them in the Purchase Agreement. Section 1. Period for Exercise and Exercise Price. 1.1 Period for Exercise. The right to purchase shares of Warrant Shares represented by this Warrant shall be immediately exercisable, and shall expire at 5:00 p.m., Chicago local time, March 31, 2006 (the "Expiration Date"). From and after the Expiration Date this Warrant shall be null and void and of no further force or effect whatsoever. 1.2 Warrant Exercise Price. The Warrant Exercise Price per share of Warrant Shares shall be $0.50 per share (subject to adjustment as hereinafter provided). Section 2. Exercise of Warrant. 2.1 Manner of Exercise. The Holder may exercise this Warrant, in whole or in part, immediately, but not after the Expiration Date, during normal business hours on any business day by surrendering this Warrant to the Company at the principal office of the Company, accompanied by a Warrant Exercise Form in substantially the form annexed hereto duly executed by the Buyer and by payment of the Warrant Exercise Price for the number of shares of Warrant Shares for which this Warrant is then exercisable, either (i) in immediately available funds, (ii) by delivery of an instrument evidencing indebtedness owing by the Company to the Holder in the appropriate amount, (iii) by authorizing the Company to retain shares of Common Stock which would otherwise be issuable upon exercise of this Warrant having a fair market value (defined as the last reported Closing Sale Price of the Common Stock on the date immediately preceding the date of the subscription notice) on the date of delivery equal to the aggregate Warrant Exercise Price, or (iv) in a combination of (i), (ii) or (iii) above, provided, however, that in no event shall the Holder be entitled to exercise this Warrant for a number of Warrant Shares in excess of that number of Warrant Shares which, upon giving effect to such exercise, would cause the aggregate number of shares of Common Stock beneficially owned by the Holder and its affiliates to exceed 9.9% of the outstanding shares of the Common Stock following such exercise. For purposes of the foregoing proviso, the aggregate number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which determination of such proviso is being made, but shall exclude the shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised Warrants beneficially owned by the Holder and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by the Holder and its affiliates subject to a limitation on conversion or exercise analogous to the limitation contained herein. Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. The Holder may waive the foregoing limitation by written notice to the Company upon not less than 61 days prior written notice (with such waiver taking effect only upon the expiration of such 61 day notice period). 2.2 When Exercise Effective. Each exercise of this Warrant shall be deemed to have been effected on the day on which all requirements of Section 2.1 shall have been met with respect to such exercise. At such time the person in whose name any certificate for shares of Warrant Shares shall be issuable upon such exercise shall be deemed for all corporate purposes to have become the Holder of record of such shares, regardless of the actual delivery of certificates evidencing such shares. 2.3 Delivery of Stock Certificates. As soon as practicable after each exercise of this Warrant, and in any event no later than 3 days after such exercise, the Company at its expense will issue Warrant Shares via credit to the Buyer's account with DTC for the number of Warrant Shares to which such Buyer is entitled upon such Buyer's submission of the applicable Warrant Exercise Form or, if the Transfer Agent is not participating in The DTC Fast Automated Securities Transfer Program and DWAC system, issue and surrender to the address as specified in the Warrant Exercise Form,, a certificate, registered in the name of the Buyer or its designee, for the number of shares of Common Stock to which the Buyer shall be entitled to upon such exercise. Section 3. Adjustment of Purchase Price and Number of Shares. The Warrant Exercise Price and the kind of securities issuable upon exercise of the Warrant shall be adjusted from time to time as follows: 3.1 Subdivision or Combination of Shares (Stock Splits). If the Company at any time effects a subdivision or combination of the outstanding Common Stock (through a stock split or otherwise), the number of shares of Warrant Shares shall be increased, in the case of a subdivision, or the number of shares of Warrant Shares shall be decreased, in the case of a combination, in the same proportions as the Common Stock is subdivided or combined, in each case effective automatically upon, and simultaneously with, the effectiveness of the subdivision or combination which gives rise to the adjustment. 3.2 Stock Dividends. If the Company at any time pays a dividend, or makes any other distribution, to holders of Common Stock payable in shares of Common Stock, or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in shares of Common Stock, then the number of shares of Warrant Shares in effect immediately prior to such action shall be proportionately increased so that the Holder hereof may receive upon exercise of the Warrant the aggregate number of shares of Common Stock which he or it would have owned immediately following such action if the Warrant had been exercised immediately prior to such action. The adjustment shall become effective immediately as of the date the Company shall take a record of the holders of its Common Stock for the purpose of receiving such dividend or distribution (or if no such record is taken, as of the effectiveness of such dividend or distribution). 3.3 Reclassification, Consolidation or Merger. If at any time, as a result of: (a) a capital reorganization or reclassification (other than a subdivision, combination or dividend provided for elsewhere in this Section 3), or (b) a merger or consolidation of the Company with another corporation (whether or not the Company is the surviving corporation), the Common Stock issuable upon exercise of the Warrants shall be changed into or exchanged for the same or a different number of shares of any class or classes of stock of the Company or any other corporation, or other securities convertible into such shares, then, as a part of such reorganization, reclassification, merger or consolidation, appropriate adjustments shall be made in the terms of the Warrants (or of any securities into which the Warrants are exercised or for which the Warrants are exchanged), so that: (y) the Holders of Warrants or of such substitute securities shall thereafter be entitled to receive, upon exercise of the Warrants or of such substitute securities, the kind and amount of shares of stock, other securities, money and property which such Holders would have received at the time of such capital reorganization, reclassification, merger, or consolidation, if such Holders had exercised their Warrants immediately prior to such capital reorganization, reclassification, merger, or consolidation, and (z) the Warrants or such substitute securities shall thereafter be adjusted on terms as nearly equivalent as may be practicable to the adjustments theretofore provided in this Section 3.3. No consolidation or merger in which the Company is not the surviving corporation shall be consummated unless the surviving corporation shall agree, in writing, to the provisions of this Section 3.3. The provisions of this Section 3.3 shall similarly apply to successive capital reorganizations, reclassifications, mergers and consolidations. 3.4 Other Action Affecting Common Stock. If at any time the Company takes any action affecting its Common Stock, other than an action described in any of Sections 3.1 - 3.3 which, in the opinion of the Board of Directors of the Company (the "Board"), would have an adverse effect upon the exercise rights of the Warrants, the Warrant Exercise Price or the kind of securities issuable upon exercise of the Warrants, or both, shall be adjusted in such manner and at such time as the Board may in good faith determine to be equitable in the circumstances; provided, however, that the purpose of this Section is to prevent the Company from taking any action which has the effect of diluting the number of shares of Warrant Shares issuable upon exercise of this Warrant. 3.5 Notice of Adjustment Events. Whenever the Company contemplates the occurrence of an event which would give rise to adjustments under this Section 3, the Company shall mail to each Warrant Holder, at least 20 days prior to the record date with respect to such event or, if no record date shall be established, at least 20 days prior to such event, a notice specifying (i) the nature of the contemplated event, and (ii) the date on which any such record is to be taken for the purpose of such event, and (iii) the date on which such event is expected to become effective, and (iv) the time, if any is to be fixed, when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable in connection with such event. 3.6 Notice of Adjustments. Whenever the kind or number of securities issuable upon exercise of the Warrants, or both, shall be adjusted pursuant to Section 3, the Company shall deliver a certificate signed by its Chief Executive Officer and by its Chief Financial Officer, setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Board made any determination hereunder), and the Warrant Exercise Price and the kind of securities issuable upon exercise of the Warrants after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail postage prepaid) to each Warrant Holder promptly after each adjustment. Section 4. Reservation of Stock, etc. The Company covenants and agrees that it will at all times have authorized, reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, the number of shares of Warrant Shares from time to time issuable upon the exercise of this Warrant. The Company further covenants and agrees that this Warrant is, and any Warrants issued in substitution for or replacement of this Warrant and all Warrant Shares, will upon issuance be duly authorized and validly issued and, in the case of Warrant Shares, upon issuance will be fully paid and non-assessable and free from all preemptive rights of any stockholder, and from all taxes, liens and charges with respect to the issue thereof (other than transfer taxes) and, if the Common Stock of the Company is then listed on any national securities exchanges (as defined in the Exchange Act of 1934, as amended (the "Exchange Act")) or quoted on NASDAQ, shall be, subject to the restrictions set forth in Section 5, duly listed or quoted thereon, as the case may be. In the event that the number of authorized but unissued shares of such Common Stock shall not be sufficient to effect the exercise of this entire Warrant into Warrant Shares, then in addition to such other remedies as shall be available to the Holder of this Warrant, the Company shall promptly take such corporate action as may be necessary to increase its authorized but unissued shares of such Common Stock to such number of shares as shall be sufficient for such purpose. Section 5. Ownership, Transfer and Substitution of Warrants. 5.1 Ownership of Warrants. The Company may treat the person in whose name any Warrant is registered on the register kept at the principal office of the Company as the owner and Holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant. 5.2 Transfer and Exchange of Warrants. Upon the surrender of any Warrant, properly endorsed, for registration of transfer or for exchange at the principal office of the Company, the Company at its expense will execute and deliver to the Holder thereof, upon the order of such Holder, a new Warrant or Warrants of like tenor, in the name of such Holder or as such Holder may direct, for such number of shares with respect to each such Warrant, the aggregate number of shares in any event not to exceed the number of shares for which the Warrant so surrendered had not been exercised. 5.3 REGISTRATION RIGHTS. THE HOLDER OF THIS WARRANT IS ENTITLED TO CERTAIN REGISTRATION RIGHTS WITH RESPECT TO THE WARRANT SHARES ISSUABLE UPON EXERCISE THEREOF. SAID REGISTRATION RIGHTS ARE SET FORTH IN A REGISTRATION RIGHTS AGREEMENT DATED AS OF MARCH 30, 2001, BY AND BETWEEN THE BUYER AND THE COMPANY. 5.4 Exemption from Registration. If an opinion of counsel provides that registration is not required for the proposed exercise or transfer of this Warrant or the proposed transfer of the Warrant Shares and that the proposed exercise or transfer in the absence of registration would require the Company to take any action including executing and filing forms or other documents with the Securities and Exchange Commission (the "SEC") or any state securities agency, or delivering to the Holder any form or document in order to establish the right of the Holder to effectuate the proposed exercise or transfer, the Company agrees promptly, at its expense, to take any such action; and provided, further, that the Company will reimburse the Holder in full for any expenses (including but not limited to the fees and disbursements of such counsel, but excluding brokers' commissions) incurred by the Holder or owner of Warrant Shares on his, her or its behalf in connection with such exercise or transfer of the Warrant or transfer of Warrant Shares. Section 6. No Rights or Liabilities as Shareholder. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof any rights as a shareholder of the Company or as imposing any liabilities on such holder to purchase any securities or as a shareholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. Section 7. Rule 144 Sales. At the request of any Holder who proposes to sell securities in compliance with Rule 144 of the SEC, the Company will (i) forthwith furnish to such Holder a written statement of compliance with the filing requirements of the SEC as set forth in Rule 144, as such rules may be amended from time to time and (ii) make available to the public and such Holder such information as will enable the Holder to make sales pursuant to Rule 144. Section 8. Miscellaneous. 8.1 Amendment and Waiver. This Warrant may be amended with, and only with, the written consent of the Company and the Holder. Any waiver of any term, covenant, agreement or condition contained in this Warrant shall not be deemed a waiver of any other term, covenant, agreement or condition, and any waiver of any default in any such term, covenant, agreement or condition shall not be deemed a waiver of any later default thereof or of any default of any other term, covenant, agreement or condition. 8.2 Representations and Warranties to Survive Closing. All representations, warranties and covenants contained herein shall survive the execution and delivery of this Warrant and the issuance of any Warrant Shares upon the exercise hereof. 8.3 Severability. In the event that any court or any governmental authority or agency declares all or any part of any Section of this Warrant to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate any other Section of this Warrant, and in the event that only a portion of any Section is so declared to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate the balance of such Section. 8.4 Binding Effect; No Third Party Beneficiaries. All provisions of this Warrant shall be binding upon and inure to the benefit of the parties and their respective heirs, legatees, executors, administrators, legal representatives, successors, and permitted transferees and assigns. No person other than the holder of this Warrant and the Company shall have any legal or equitable right, remedy or claim under or in respect of, this Warrant. 8.5 Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Warrant must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one Trading Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Unigene Laboratories, Inc. 110 Little Falls Road Fairfield, New Jersey 07004 Telephone: 973-882-0860 Facsimile: 973-227-6088 Attention: Dr. Warren Levy With a copy to: Covington & Burling 1201 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Telephone: 202-662-5276 Facsimile: 202-778-5276 Attention: D. Michael Lefever If to the Buyer: Fusion Capital Fund II, LLC 222 Merchandise Mart Plaza, Suite 9-112 Chicago, IL 60654 Telephone: 312-644-6644 Facsimile: 312-644-6244 Attention: Steven G. Martin If to the Transfer Agent: Registrar & Transfer Company 10 Commerce Drive Cranford, NJ 07016 Telephone: 908-497-2300 Facsimile: 908-497-2310 Attention: Ms. Florence Bogaenko or at such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party three (3) Trading Days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, and recipient facsimile number or (C) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. 8.6 Taxes, Costs and Expenses. The Company covenants and agrees that it will pay when due and payable any and all federal, state and local taxes (other than income taxes) and any other costs and expenses which may be payable in respect of the preparation, issuance, delivery, exercise, surrender or transfer of this Warrant pursuant to the terms of this Warrant or the issuance of any shares of Warrant Shares as a result thereof. If any suit or action is instituted or attorneys employed to enforce this Warrant or any part thereof, the Company promises and agrees to pay all costs and expenses associated therewith, including reasonable attorneys' fees and court costs. 8.7 Governing Law; Jurisdiction; Jury Trial. The corporate laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and its shareholders. All other questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by the internal laws of the State of Illinois, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Illinois or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Illinois. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of Chicago, for the adjudication of any dispute hereunder or under the other Transaction Documents or in connection herewith or therewith, or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. 8.8 Loss of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnification in form and substance acceptable to the Company in its reasonable discretion, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. 8.9 Entire Agreement. This Warrant, the Purchase Agreement and the Registration Rights Agreement of even date herewith represent the entire agreement and understanding between the parties concerning the subject matter hereof and supercede all prior and contemporaneous agreements, understandings, representations and warranties with respect thereto. 8.10 Headings. The headings used herein are used for convenience only and are not to be considered in construing or interpreting this Warrant. COMPANY: UNIGENE LABORATORIES, INC. By:______________________________ Name: Warren Levy Title: Chief Executive Officer WARRANT EXERCISE FORM Date:_____________ - ---------------------- - ---------------------- - ---------------------- Ladies and Gentlemen: The undersigned, being the registered holder of your Warrant number ______ accompanying this letter, hereby irrevocably exercises such Warrant for _____ shares of Warrant Shares (as defined in said Warrant), and herewith makes payment therefor in the amount of ($___________ )(via "cash-less exercise" in accordance with the Warrant), and requests that such shares of Warrant Shares be issued in the name of, and delivered to (the undersigned) (_________________________), at the address shown below the signature line hereof. If said number of shares shall not be all the shares issuable upon exercise of the attached Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of such shares less any fraction of a share paid in cash. - ------------------------- Printed Name of Registered Warrant Holder - ------------------------- Signature of Registered Warrant Holder - ------------------------- - ------------------------- - ------------------------- Address FORM OF COMPANY CONFIRMATION OF WARRANT EXERCISE Reference is made to the Common Stock Purchase Agreement (the "Common Stock Purchase Agreement") between UNIGENE LABORATORIES, INC. (the "Company") and FUSION CAPITAL FUND II, LLC dated December 18, 2000, as amended March 30, 2001. In accordance with and pursuant to the Common Stock Purchase Agreement, the Company has issued to FUSION CAPITAL FUND II, LLC a Warrant to Purchase 1,000,000 shares of common stock, par value $.01 per share (the "Common Stock") of the Company. The undersigned hereby confirms that FUSION CAPITAL FUND II, LLC has exercised the Warrant to purchase _____ shares of Common stock and authorizes the issuance of ______ shares of common stock, par value $.01 per share (the "Common Stock") of the Company, in connection with the Warrant Exercise Notice Specifically, the Company hereby confirms the following information: Number of shares of Common Stock to be issued: Remaining Number of shares Subject to Exercise: ______________________________________ Exercise Price: $.50/share of Common Stock (Subject to Adjustment pursuant to the Warrant) The shares of Common Stock shall be issued in the name and to the address as set forth in the applicable Warrant Exercise Notice. Authorized Signature _______________________________________ Name:__________________________________ Title:_________________________________ Phone #:_______________________________ Fax #:_________________________________ EX-23 8 exhibit23_0509.txt Exhibit 23 Independent Auditors' Consent The Board of Directors Unigene Laboratories, Inc.: We consent to the use of our report included herein and to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the prospectus. Our report dated March 30, 2001 contains an explanatory paragraph that states that Unigene Laboratories, Inc. 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. The financial statements do not include any adjustments that might result from the outcome of that uncertainty. Also, our report refers to a change in the method of accounting for revenue recognition for up-front non-refundable license fees in 2000. /s/ KPMG LLP ------------ KPMG LLP Short Hills, New Jersey May 10, 2001 -----END PRIVACY-ENHANCED MESSAGE-----