ITEM 1. BUSINESS - -----------------
The information appearing in the Annual Report under the caption "Description of Business" on page 43 is herein incorporated by reference.
REGULATION AND SUPERVISION
THE CORPORATION
The Corporation is a one-bank holding company formed under the provisions of Section 3 of the Federal Reserve Act. The Corporation is under the direct supervision of the Federal Reserve Board and must comply with the reporting requirements of the Federal Bank Holding Company Act.
A one-bank or multi-bank holding company is prohibited under Section 3 (a)(3) of the Act from acquiring either directly or indirectly 5% or more of the voting shares of any bank or bank holding company without prior Board approval. Additionally, Section 3 (a)(3) prevents, without prior Board approval, an existing bank holding company from increasing its ownership in an existing subsidiary bank unless a majority (greater than 50 percent) of the shares are already owned (Section 3 (a)(B) ). A bank holding company which owns more than 50 percent of a bank's shares may buy and sell those shares freely without Board approval, provided the ownership never drops to 50 percent or less. If the holding company owns 50 percent or less of a bank's shares, prior Board approval is required before such additional acquisition of shares takes place until ownership exceeds 50 percent.
Under current Pennsylvania law, which became effective March 4, 1990, bank holding companies located in any state may acquire banks and bank holding companies located in Pennsylvania provided that the laws of such state grant reciprocal rights to Pennsylvania bank holding companies and that 75% of the domestic deposits are located in a state granting reciprocity.
THE BANK
The Bank is a state chartered nonmember bank, supervised by and under the reporting requirements of the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation.
ITEM 2.

ITEM 2. PROPERTIES - -------------------
The Bank fully owns fifteen (15) banking offices as listed below. All offices have been modernized to meet the demands for the Bank's services and to give a pleasant and comfortable atmosphere in which to conduct the Bank's business.
1. Executive Offices - 90-92 Main Street, Wellsboro, PA 16901 2. Corporate Headquarters - Thompson Street, Ralston, PA 17763 3. 428 South Main Street, Athens, PA 18810 4. 111 Main Street, Dushore, PA 18614 5. Main Street, East Smithfield, PA 18817 6. Main Street, Elkland, PA 16920 7. Route 49, Knoxville, PA 16928 8. Main Street, Laporte, PA 18626 9. Route 15, Liberty, PA 16930 10. Route 220, Monroeton, PA 18832 11. RD 2, Sayre, PA 18840 12. Route 15, Tioga, PA 16946
13. 428 Main Street, Towanda, PA 18848 14. Elmira and East Main Street, Troy, PA 16947 15. Route 6, Wysox, PA 18854
All offices offer a full range of banking services, except the Monroeton office, which does not offer safe deposit boxes.
There are no encumbrances against any of the properties owned by the Bank.
ITEM 3.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report.
PART II -------
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER - --------------------------------------------------------------------- MATTERS -------
The information appearing in the Annual Report under the caption "Quarterly Share Data" on page 39 and the "Summary of Quarterly Financial Data" on page 41 is herein incorporated by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA - --------------------------------
The "Five Year Summary of Operations" on page 40 of the Annual Report is herein incorporated by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------
RESULTS OF OPERATIONS ---------------------
The information appearing in the Annual Report under the caption "Management's Discussion and Analysis of the Financial Condition and Results of Operations" on pages 24 through 38, is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
The Consolidated Financial Statements (and footnotes thereto) and the Summary of Quarterly Financial Data presented in the Annual Report is herein incorporated by reference.
ITEM 9.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
(a) Identification of Directors. The information appearing under the caption "Election of Directors" on pages 2 through 4 of the Corporation's Proxy Statement dated March 18, 1996, is herein incorporated by reference.
(b) Identification of Executive Officers. The information appearing under the caption "Corporation's and Bank's Executive Officers" on pages 4 through 6 of the Corporation's Proxy Statement dated March 18, 1996, is herein incorporated by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION - --------------------------------
Information appearing under the caption "Executive Compensation" on page 8 of the Corporation's Proxy Statement dated March 18, 1996, is herein incorporated by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------
Information appearing under the caption "Election of Directors" on pages 2 through 4 and under the caption "Corporation's and Bank's Executive Officers" on pages 4 through 6 of the Corporation's Proxy Statement is herein incorporated by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS - --------------------------------------------------------
Information appearing in footnote 12 to the Consolidated Financial Statements included on page 21 in the Annual Report is herein incorporated by reference.
Information appearing under the caption "Certain Transactions" on page 11 of the Corporation's Proxy Statement is herein incorporated by reference.
PART IV -------
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - --------------------------------------------------------------------------
(a) (1). The following consolidated financial statements and reports are set forth in Item 8.
(2). Financial statement schedules are either omitted because inapplicable or included in the financial statements or related notes. Individual financial statements of Bucktail Life Insurance Company, a consolidated subsidiary have been omitted, as neither the assets nor the income from continuing operations before taxes exceed ten percent of the consolidated totals.
(3). Exhibits (numbered as in Item 601 of Regulation S-K)
2. Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession Not applicable
3. (i) Articles of Incorporation *
3. (ii) Bylaws of the Registrant *
4. Articles of Incorporation of the Registrant as Currently in effect *
9. Voting Trust Agreement Not applicable
10. Material Contracts Not applicable
11. Statement re Computation of Per Share Earnings Not applicable
12. Statements re Computation of Ratios Not applicable
13. Annual Report to Shareholders
16. Letter re Change in Certifying Accountant Not applicable
18. Letter re Change in Accounting Principles Not applicable
21. List of Subsidiaries 9
22. Published Report Regarding Matters Submitted to Vote of Security Holders Not applicable
23. Consents of Experts and Counsel Not applicable
24. Power of Attorney Not applicable
27. Financial Data Schedules None
28. Information from Reports Furnished to State Insurance Regulatory Authorities Not applicable
99. Additional Exhibits Not applicable
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1995.
*omitted in the interest of brevity
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CITIZENS & NORTHERN CORPORATION
March 20, 1996 By: WILLIAM K. FRANCIS /s/. - ------------------------- ----------------------------- Date William K. Francis Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
March 20, 1996 By: JAMES W. SEIPLER /s/. - ------------------------- ----------------------------- Date James W. Seipler Treasurer
BOARD OF DIRECTORS
J. ROBERT BOWER /s/ . LAWRENCE F. MASE /s/ . ------------------------------- -------------------------------- J. Robert Bower Lawrence F. Mase
R. ROBERT DECAMP /s/ . ROBERT J. MURPHY /s/ . ------------------------------- -------------------------------- R. Robert DeCamp Robert J. Murphy
R. JAMES DUNHAM /s/ . EDWARD H. OWLETT, III /s/ . ------------------------------- -------------------------------- R. James Dunham Edward H. Owlett, III
ADELBERT E. ELDRIDGE /s/ . F. DAVID PENNYPACKER /s/ . ------------------------------- -------------------------------- Adelbert E. Eldridge F. David Pennypacker
WILLIAM K. FRANCIS /s/ . LEONARD SIMPSON /s/ . ------------------------------- -------------------------------- William K. Francis Leonard Simpson
LAURENCE R. KINGSLEY /s/ . HOWARD W. SKINNER /s / . ------------------------------- -------------------------------- Laurence R. Kingsley Howard W. Skinner
EDWARD L. LEARN /s/ . DONALD E. TREAT /s/ . ------------------------------- -------------------------------- Edward L. Learn Donald E. Treat
JOHN H. MACAFEE /s/ . ------------------------------- John H. Macafee
EXHIBIT INDEX
3. (i) Articles of Incorporation of the Registrant as currently in effect are herein incorporated by reference to Exhibit D to Registrant's Form S-4, Registration Statement dated March 27, 1987.
3. (ii) Bylaws of the Registrant as currently in effect are herein incorporated by reference to Exhibit E to Registrant's Form S-4, Registration Statement dated March 27, 1987
4. Articles of Incorporation of the Registrant as currently in effect are herein incorporated by reference to Exhibit D to Registrant's Form S-4, Registration Statement dated March 27, 1987.
10. Page 29 of Registrant's Form S-4, Registration Statement dated March 27, 1987, is herein incorporated by reference.
13. Annual Report to Shareholders
21. List of Subsidiaries
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Citizens & Northern Corporation
We have audited the accompanying consolidated balance sheets of Citizens & Northern Corporation and subsidiaries ("Corporation") as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens & Northern Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Corporation changed its method of accounting for securities and income taxes in 1993.
Williamsport, Pennsylvania January 22, 1996


ITEM 1. BUSINESS
Mark Twain Bancshares, Inc. ("Company") is a Missouri chartered multi-bank holding company which owns or controls substantially all the capital stock of three banks: Mark Twain Bank, which operates 20 separate banking locations in the metropolitan St. Louis areas; Mark Twain Kansas City Bank, which operates eleven separate locations in the metropolitan Kansas City bi-state area; and Mark Twain Illinois Bank, which operates four locations on the Illinois side of the St. Louis metropolitan area. The Company was organized in 1967.
The Company's subsidiaries encounter substantial competition in all of their banking and related financial service activities from other banking institutions and from an increasing number of non-banking financial institutions in its primary market areas.
Non-Banking Subsidiaries
The Company wholly owns the following: Mark Twain Properties, Inc., which owns, holds under lease, or manages properties occupied by present banking centers; Mark Twain Community Development Corporation, which provides services and housing opportunities for low- to moderate-income persons; Tarquad Corporation, which acts as trustee of deeds of trust of which Company subsidiaries are the lenders and beneficiaries; and Mark Twain Asset Recovery, Inc., which acts as purchaser of certain assets acquired by subsidiary banks in the collection of loans.
Mark Twain Bank wholly owns Mark Twain Brokerage Services, Inc., a member of the National Association of Securities Dealers, which provides customers with complete brokerage services on all exchanges and provides the sale of various insurance company products. Mark Twain Bank and Mark Twain Kansas City Bank each wholly own a Mark Twain Real Estate Development Corporation subsidiary and a Mark Twain Community Development Corporation subsidiary.
Supervision and Regulation
The Company is registered with and subject to regulation by the Board of Governors of the Federal Reserve System and is subject to the Missouri Bank Holding Company Act. All Company-owned non-bank subsidiaries are subject to regulation by the Board of Governors of the Federal Reserve System. The subsidiary state-chartered banks are subject to regulation and supervision by the banking regulators of the states in which the banking units are located and the states in which the bank is chartered. All subsidiary banks are subject to regulation by and are members of the Federal Deposit Insurance Corporation.
The earnings of the subsidiary banks are affected not only by competing financial institutions and general economic conditions, but also by the policies of various governmental regulatory authorities, and state and federal laws, particularly as they relate to powers authorized to banks and bank holding companies. The Company and all subsidiary banks are subject to the provisions of the Community Reinvestment Act. Mark Twain Brokerage Services, Inc., is subject to supervision and regulation by the National Association of Securities Dealers, Securities and Exchange Commission, Missouri Division of Securities, Missouri Division of Insurance, and Missouri Division of Finance, among others. The mortgage department is subject to supervision by Department of Housing and Urban Development, Federal Housing Authority, Veteran's Administration, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, and Government National Mortgage Association, among others, concerning mortgage lending.
Further information called for by this item is contained on pages 17 to 29 and Note 2 "Acquisitions" on page 36 of the Company's 1995 Annual Report to Shareholders and is incorporated by reference herein.
ITEM 2.

ITEM 2. PROPERTIES
The Company leases its principal executive office which is located at 8820 Ladue Road, Ladue, Missouri. As of December 31, 1995, the Company conducts its business and operations
out of 39 locations, which are either owned or leased, in the St. Louis bi-state, Kansas City bi-state and Chicago metropolitan areas. The Company's physical properties are in satisfactory condition and suitable and adequate for present operations.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to a number of lawsuits, most of which are considered routine litigation incidental to doing business. The Company, after consultation with legal counsel, does not expect the outcome of any litigation to have a material effect on its consolidated financial position.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 1995.
No family relationship exists among any of the Executive Officers of Registrant.
Each officer of the Registrant is appointed to serve, at the pleasure of its Board of Directors, for the annual period next following the Annual Meeting of the Shareholders of the Registrant, and until his respective successor shall have been appointed and qualified. Certain officers were offered employment agreements; see Exhibit 10.9 below.
No officer of the Registrant was selected so to serve pursuant to any arrangement or understanding between him and any person other than the directors and one or more officers of Registrant acting solely in that capacity.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
At December 31, 1995, there were approximately 2,500 holders of record of Common Stock. The information in Note 14, "Restrictions of Subsidiary Dividends," on page 40 of the Company's 1995 Annual Report to Shareholders is incorporated by reference herein.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Information called for by this item is contained on page 16 of the Company's 1995 Annual Report to Shareholders and is incorporated by reference herein.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information called for by this item is contained on pages 17 to 29 of the Company's 1995 Annual Report to Shareholders and is incorporated by reference herein.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information called for by this item is contained on pages 30 to 46 of the Company's 1995 Annual Report to Shareholders and is incorporated by reference herein.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors, some of whom are executive officers of the Registrant, required by this item is set forth on pages 4 to 6 of the Company's Proxy Statement for its Annual Meeting to be held April 23, 1996 and is incorporated by reference herein.
The information concerning executive officers who are not directors of the Registrant required by this item is reported in Part I of this Form 10-K.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Information called for by this item is contained on pages 9 to 16 and pages 18 to 19 of the Company's Proxy Statement for its Annual Meeting to be held April 23, 1996 and is incorporated by reference herein.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners - Information concerning persons who are known to own beneficially more than 5% of any class of the Company's voting shares on March 6, 1996 is contained on page 3 of the Company's Proxy Statement for its Annual Meeting to be held April 23, 1996, which is incorporated by reference herein.
(b) Security Ownership of Management - Information called for by this item is contained on pages 7 to 9 of the Company's Proxy Statement for its Annual Meeting to be held April 23, 1996, and is incorporated by reference herein.
(c) Changes in Control - The Company knows of no contractual arrangements which may at a subsequent date result in a change in control of the Company.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by this item is contained on page 19 of the Company's Proxy Statement for its Annual Meeting to be held April 23, 1996, which is incorporated by reference herein.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements - The following consolidated financial statements of Mark Twain Bancshares, Inc. and Subsidiaries and the accountants' report thereon are incorporated by reference from the 1995 Annual Report to Shareholders of Mark Twain Bancshares, Inc.:
Consolidated Balance Sheet - December 31, 1995 and 1994
Consolidated Statement of Income - Years ended December 31, 1995, 1994 and 1993
Consolidated Statement of Changes in Shareholders' Equity - Years ended December 31, 1995, 1994 and 1993
Consolidated Statement of Cash Flows - Years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules - All schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or the notes thereto.
(a) (3) Exhibits
Exhibit 10 Material contracts:
Exhibit 10.1 - Mark Twain Bancshares, Inc. 1983 Incentive Stock Option Plan, as amended 4/4/84, 2/11/87, 3/1/90 and 2/28/95 (incorporated by reference from exhibit 10 of the Registrant's Form 10-K for the year ended December 31, 1994).
Exhibit 10.2 - Mark Twain Bancshares, Inc. 1992 Stock Option Plan, as amended 2/28/95 (restated electronically herewith pursuant to Regulation S-T, Item 102).
Exhibit 10.3 - Mark Twain Bancshares, Inc. 1995 Stock Option Plan, as amended 1/12/96.
Exhibit 10.4 - Mark Twain Bancshares, Inc. Executive Benefit Plan, as amended and restated 7/1/83 (incorporated by reference from exhibit 10 of the Registrant's Form 10-K for the year ended December 31, 1994).
Exhibit 10.5 - First Amendment to Mark Twain Bancshares, Inc. Executive Benefit Plan dated 8/4/92 (incorporated by reference from exhibit 10 of the Registrant's Form 10-K for the year ended December 31, 1994).
Exhibit 10.6 - Second Amendment to Mark Twain Bancshares, Inc. Executive Benefit Plan dated 10/15/93 (incorporated by reference from exhibit 10 of the Registrant's Form 10-K for the year ended December 31, 1994).
Exhibit 10.7 - Third Amendment to Mark Twain Bancshares, Inc. Executive Benefit Plan dated 10/15/93 (incorporated by reference from exhibit 10 of the Registrant's Form 10-K for the year ended December 31, 1994).
Exhibit 10.8 - Supplemental Executive Retirement Plan for Joseph N. Millard (incorporated by reference from exhibit 10 of the Registrant's Form 10-K for the year ended December 31, 1994).
Exhibit 10.9 - Form of Employment Agreements (incorporated by reference from exhibit 10 of the Registrant's Form 10-K for the year ended December 31, 1994):
The initial term of the Employment Agreements offered was for either 12, 18, or 24 months. The initial terms of the Employment Agreements offered to Executive Officers named in Part I of this Form were as follows:
Initial Term of 24 months - Alvin Siteman, John P. Dubinsky, Peter F. Benoist, Keith Miller, W. Thomas Reeves and Frederick E. Zimmer.
Initial Term of 18 months - Sandra Friedman Burnham, Nancy E. Graves, Timothy C. Peterson, Carl A. Wattenberg, Jr. and Thomas R. Wickenhauser.
Initial Term of 12 months - Kevin J. Cody.
Exhibit 11 - Computation of Earnings Per Share.
Exhibit 13 - Portions of Mark Twain Bancshares, Inc.'s Annual Report to Shareholders for the year ended December 31, 1995.
Exhibit 21 - Subsidiaries of Mark Twain Bancshares, Inc.
Exhibit 23 - Consent of Independent Auditors.
Exhibit 27 - Financial Data Schedule.
Exhibit 99 - The Company's Proxy Statement dated March 18, 1996 for the Annual Meeting to be held April 23, 1996.
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated October 12, 1995 announcing earnings for the three and nine month periods ending September 30, 1995. The Company filed a Form 8-K dated January 16, 1996 announcing earnings for the three and twelve month periods ended December 31, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Bancshares has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of St. Louis, and the State of Missouri, on the 20th day of March, 1996.
MARK TWAIN BANCSHARES, INC.
/s/ JOHN P. DUBINSKY ------------------------------------- John P. Dubinsky President and Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated.


ITEM 1. BUSINESS.
Unimed Pharmaceuticals, Inc. and its consolidated subsidiaries (the Company) develops and markets prescription pharmaceutical products. Currently the Company promotes one approved drug and is developing others targeted for the HIV/AIDS, endocrinology, and urology markets. The Company developed and promotes Marinol(R) through a specialty sales force in the U.S. to AIDS-treating physicians. Marinol is sold in international markets through the Company's foreign licensees. The Company is a Delaware corporation and is successor to a firm incorporated in 1948.
The Company's business strategy is to in-license and develop drugs that have, at a minimum, successfully completed milestones required to begin human clinical testing. The Company expects to acquire a diversified portfolio of late-stage development products in several therapeutic classes. During 1995, the Company licensed development and marketing rights to an anti-parasitic drug and two hormone replacement drugs that meet these criteria.
The Company expects to actively pursue new late-stage development in-licensing opportunities in the foreseeable future. In addition, the Company intends to acquire approved products that are or can be marketed in the U.S. After the close of 1995, the Company completed a private placement of its common stock, generating funds to be used primarily to accelerate product acquisition activities.
The Company believes that its focus on serving "niche" markets in which relatively few physicians treat affected patients, allows a small specialty sales force to reach the targeted physicians. The Company expects to expand its sales force as products are approved and new business opportunities arise.
The Company's products and clinical development supplies are manufactured through contractors, using specialized equipment, which in one case is owned by the Company. The Company believes that well qualified contract manufacturers are available to produce both currently marketed drugs and those now under development. Consequently, the Company expects to continue to utilize contract manufacturing in the foreseeable future.
In 1994, a new President and Chief Executive Officer was hired and a new business strategy was developed. In 1995, the Company stopped distributing several over-the-counter (OTC) nutritional and palliative care products, in order to concentrate on the prescription pharmaceutical market. For the same reason, the Company also converted its equity interest in Medisperse L.P. into a product royalty agreement.
In connection with the Company's in-licensing program, it entered into agreements in which the licensors provided the Company with non-refundable research and development payments.
MARINOL (DRONABINOL)
Marinol was first approved for marketing by the Food and Drug Administration (FDA) in 1985 for treating nausea and vomiting associated with cancer chemotherapy in patients failing to respond adequately to conventional antiemetic treatments. In 1992, the FDA approved for marketing a second indication for Marinol: treating anorexia associated with weight-loss in patients with AIDS.
Marinol is given orally in a round soft gelatin capsule. The active ingredient, dronabinol, is a naturally occurring chemical found in Cannabis Sativa L. (marijuana). However, Marinol is chemically synthesized to maximize purity and consistency. Cannabinoid plants were among the first medicinals used by man, believed to be used over the last 5,000 years as stimulants, antidepressants and analgesics. Cannabinoids have been used as muscle relaxants to counter spasms, convulsions and insomnia. The Company began systematic study of the therapeutic properties of Marinol in the 1980s.
Use of Marinol in Cancer
Marinol has been shown to be an effective oral anti-emetic (relieving drug-induced nausea and vomiting) in numerous clinical studies involving large patient populations. The drug is believed to exert psychoactive effects through binding with cannabinol neural receptor sites in the brain. Marinol has been shown effective when used as a single agent or in combination with other anti-emetic therapies.
Use of Marinol in AIDS
A number of pharmaceuticals are being used to improve the nutritional status of the HIV-infected patient. Use of appetite stimulants to manage anorexia has expanded. Two pharmacologic agents are approved for marketing in this indication, Marinol and the progestational agent, Megace(R) Oral Suspension.
Infection from the human immunodeficiency virus (HIV) has a largely irreversible and progressive effect on the nutritional status of the patient. Eventually the compromised status of the patient leads to profound weight-loss, known as HIV wasting syndrome. Studies of people with AIDS have shown a high correlation between weight-loss and death. Patients who have lost more than 34% of normal body mass have a high probability of death. Other studies have shown that malnutrition can impair T-cell immune function, gastrointestinal absorption and the body's response to infection. AIDS-treating physicians are becoming increasingly aware of the importance of monitoring and treating nutritional deficiencies.
Weight-loss observed in AIDS is due to one or more of four known mechanisms: poor intestinal absorption, abnormal cellular utilization, increased energy requirements due to HIV and opportunistic infections, and inadequate dietary intake. In addition, recent studies suggest a high correlation between endocrine dysfunction (low testosterone serum levels) and weight-loss.
Low serum levels of testosterone, known as hypogonadism, is the most common endocrine abnormality found in AIDS, affecting approximately 50% of male patients. This condition is believed to be associated with reduced protein biosynthesis or a slowdown in the body's replacement of muscle mass.
Malnutrition is caused by inadequate caloric intake and affects as many as 80% of AIDS patients. It is observed clinically in response to anorexia (loss of appetite), intestinal malabsorption and starvation. The patient's metabolic rate also is reduced as a result of insufficient caloric intake. Usually, fat reserves and extracellular water are expended by the body before the loss of LBM (lean body mass). However, HIV infection, secondary infections and drug interactions deplete the body's reserves in AIDS patients. Abnormally low protein synthesis and cytokine production occur and immune parameters also are suppressed in malnourished individuals.
In 1987, the Company initiated clinical development of Marinol in treatment of weight-loss in cancer patients. The emerging AIDS pandemic led the Company to expand the clinical program and then concentrate on an AIDS application. A subsequent Phase III multi-center double-blind, placebo-controlled trial in AIDS patients with anorexia and weight-loss of at least five pounds demonstrated statistically significant improvement in patient's appetite by the fourth week of therapy. Patients in the study were permitted to continue treatment in an open-label study, in which there was sustained improvement in appetite. Treatment was well tolerated by most patients. The incidence of side-effects was decreased by dose reduction. This pivotal study also demonstrated clinical trends toward improvement in the patients' weight, mood and reduced nausea. The Company completed the multi-center Phase III clinical trial in early 1992, filed a New Drug Application in August 1992, and received approval to market from the FDA in December 1992.
In 1993, Megace Oral Suspension (megestrol acetate), a synthetic, antineoplastic and progestational drug, first used to treat advanced carcinoma of the breast, was approved for marketing as an appetite stimulant. Recently, recombinant human growth hormone has been tested as an agent to increase LBM. Thalidomide also is being tested in HIV wasting, due to its anti-TNF activity. TNF (tumor necrosis factor) may play a role in the pathogenesis of AIDS wasting.
With a growing potential arsenal of pharmacologic agents, AIDS-treating physicians increasingly monitor and treat patients with nutritional and hormonal imbalances. The patient's caloric intake has an impact on the effectiveness of anabolic agents used to treat endocrine dysfunction and HIV wasting syndrome. The Company believes that Marinol may be used successfully in combination with these agents. Combination clinical trials are planned.
PRODUCT DEVELOPMENT
NITAZOXANIDE
In June 1995, the Company entered into a licensing agreement with Romark Laboratories, L.C. (Romark), for the rights to Romark's know-how and patent rights covering certain products containing an anti-parasitic drug, Nitazoxanide, in the U.S., Canada, Australia and New Zealand (NTZ). The agreement with Romark provides for rights to oral and intravenous routes of administration for treatment of cryptosporidiosis. In addition, the Company has marketing rights to oral uses of NTZ for all indications and is investigating other therapeutic applications of the drug.
Preliminary human clinical trials conducted outside the United States and sponsored by Romark demonstrated that NTZ showed effectiveness in treating patients with cryptosporidiosis. A Phase III clinical trial sponsored by a Romark licensee is under way in Mexico.
It is estimated that 15-20% of people with AIDS in the United States are infected with a single cell microscopic parasite, Cryptosporidium parvum (C. parvum). This protozoan inhabits the respiratory and gastrointestinal tracts of animals and, increasingly, humans. The first case in the U.S. was not reported in humans until 1976. In 1982, according to the Centers for Disease Control (CDC), the number of cases of C. parvum began to increase dramatically as part of the AIDS epidemic. The parasite is highly contagious through contact with infected humans. C. parvum has been found in the public water supply throughout the U.S., further exposing at-risk individuals.
Symptoms of cryptosporidiosis include diarrhea, nausea, vomiting and weight-loss. The severity of symptoms varies with the degree of immunosuppression. In healthy people, the infection is self-limiting, lasting for a few days to four or more weeks. Patients with AIDS can be affected for months or even years. Currently there is no FDA approved drug to treat cryptosporidiosis.
A Company-sponsored Phase II clinical trial is underway at Cornell Medical Center, in New York City, investigating the use of NTZ to treat cryptosporidiosis in 28 patients with AIDS. The purpose of the trial is to demonstrate safety and efficacy and identify the optimal dose. Enrollment is dependent upon patients meeting clinical entry criteria. These criteria include clinically defined AIDS, cryptosporidiosis and the absence of other gastrointestinal infections. Assuming safety and efficacy are demonstrated in the Phase II trial, the Company will initiate a multi-center Phase III clinical trial.
The FDA initially approved NTZ for Compassionate Use in up to 30 AIDS patients not meeting the clinical entry criteria for the Cornell Study, or not in geographical proximity to participate in the trial. The full 30 patient enrollment of the Compassionate Use program was completed and FDA subsequently authorized expanding enrollment to 100 patients.
ANDROGEL(TM) AND ANDROGEL(TM)-DHT
During 1995, the Company acquired exclusive rights in the U.S., Canada and Mexico to develop and market topical gel formulations of testosterone and dihydrotestosterone (DHT), the principal active metabolite of testosterone in the human body. The gel formulations are applied to the arms or abdomen and absorbed through the skin into the blood stream. One of these drugs, DHT, is currently marketed in France and Belgium as treatment for low levels of testosterone (hypogonadism). This deficiency has been associated with
a variety of adverse effects, such as: impotence, lack of sex drive, muscle weakness, low bone density and HIV wasting syndrome (in AIDS patients).
Hypogonadism can be caused by a number of factors. They include: congenital abnormalities (e.g., Klinefelter's syndrome -- a condition in male newborns having an extra X chromosome); disease or injuries affecting the pituitary gland, hypothalamus, or testes; chronic illnesses (e.g., diabetes, kidney failure, AIDS); or declining testosterone production associated with aging (geriatric hypogonadism).
While not as abrupt as the decline in estrogen levels women experience during menopause, studies suggest that testosterone levels may decline 30-40% in men from their late 40s to their early 70s. This hormonal change correlates with physical changes commonly observed in middle-aged men -- decreased bone and muscle mass; an increase in body fat; diminished energy, virility, fertility; and decreased sexual function.
The Company intends to initially focus clinical development on geriatric hypogonadal men and in AIDS patients with HIV wasting syndrome. The Company has begun this program in 1996.
SERC(R)
SERC (betahistine HCl) was developed by the Company in the 1960s. It is widely used around the world and supplied by several manufacturers. SERC generates an estimated $80 million in sales by these manufacturers. The majority of international sales come from Solvay-Duphar of the Netherlands. Through December 1995, the Company also generated sales of SERC through distributors in Canada, Australia and South Africa. SERC is not approved for sale in the United States.
Subsequent to year-end 1995, the Company agreed to sell the SERC trademark in Canada, Australia and South Africa and to assign the Company's Canadian Serc approval and all of the Company's international distribution agreements to Solvay-Duphar. In return, the Company received a cash payment and access to certain clinical data, technical information and know-how that may be useful in obtaining marketing approval from FDA in the United States.
SERC is a histamine analogue, given orally. It has two principal effects in the body: increasing blood supply to the brain and inner ear and a neurological effect in the brain. Animal studies have shown that capillary size increases three-fold and the speed of blood flow increases by 50% with use of the drug. Neurological research has demonstrated that SERC stops histamine binding to H3 receptors in pre-synaptic nerves, stimulating production of H1 receptors. This process is believed to regulate vasodilation (widening of blood vessels) and to increase permeability of minute capillaries in the inner ear.
The vascular and neural effects produced by SERC have been shown to reduce symptoms in vertigo. Vertigo is an unpleasant sensation of imbalance, spinning and disorientation. Nausea and vomiting are common and, during an acute attack, people experience feelings of panic and are emotionally traumatized. Patients may experience visual disorientation, ringing in the ears or hearing loss (which can be progressive).
Acute recurrent vertigo can be caused by migraine, hypoglycemia (an abnormal decrease of sugar in the blood), head injuries, tumors and surgical trauma, but is more common in Meniere's disease, a degenerative nerve disorder of the inner ear. Vertigo also is associated with dizziness or giddiness, feelings of faintness, light-headedness or being unsteady on the feet.
Approximately 44 million patients have used SERC outside the United States since 1976. Less than 200 cases of adverse events have been reported during this time, indicating SERC's excellent safety profile. The Company estimates that approximately three million people suffer from vertigo in the United States. In the U.S., vertigo and Meniere's disease are treated with vasodilators, anti-emetics and various sedatives. The Company believes there is a significant unmet need for a better therapeutic agent in this market.
The Company intends to use clinical data and expertise available from Solvay-Duphar to develop SERC in the United States. Solvay-Duphar has provided research and development funds to assist in the U.S. development program.
MEDISPERSE
In November 1995, the Company exchanged its equity ownership in Medisperse, L.P. for rights to receive royalties on compounds developed using the proprietary Medisperse drug delivery technology in an amount at least as attractive as if Unimed remained in the partnership. The Company entered into the Medisperse limited partnership in 1988 with Sterilization Technical Services (STS) to commercialize a novel drug formulation and delivery technology that may allow for drug compounds with low solubility. The Company will make no further equity contributions. The Company is aiding in the search for licensees for further development of the Medisperse technology.
MARKETING AND DISTRIBUTION
The Company's sales force details Marinol to AIDS-treating physicians in the United States, subject to the terms of a co-promotional agreement with Roxane Laboratories, Inc. (Roxane), a member of the Boehringer Ingelheim group of companies. Salespeople are located in territories throughout the U.S. with a high incidence of AIDS.
The Company's business strategy is to develop drugs for niche markets -- therapeutic areas such as HIV/AIDS and endocrinology where fewer than 10,000 physicians manage the majority of patients. The Company hopes to leverage its presence in the HIV/AIDS medical market with new FDA approvals from current clinical development programs. The Company intends to expand its sales and marketing resources as new products and new indications for current products become available. The Company plans to focus sales and marketing resources on U.S. markets and to pursue partnerships and corporate alliances to market its products abroad.
MANUFACTURING
Manufacture of the Company's marketed product and drugs under development is done on a contract basis by third parties.
The NORAC Company, Inc. (NORAC) supplies Delta-9 tetrahydrocannabinol, the active ingredient in Marinol, to the Company. The Company owns the principal equipment used by NORAC to manufacture Delta-9. Delta-9 is synthesized and purified through a complex and time-consuming process. The loss of NORAC as a supplier could have a material adverse effect on the Company. Currently, the Company maintains a three-year supply of Delta-9.
The Company has supply agreements with Romark for NTZ, Besins for Androgel and Androgel-DHT, and Solvay-Duphar for SERC. Under these agreements, the Company purchases clinical supplies, and after approval by the FDA, finished drug products in accordance with the Company's specifications.
COMPETITION
There are many companies, both public and private, including well-known pharmaceutical companies, chemical companies and specialized genetic engineering companies, engaged in developing pharmaceuticals and biotechnology compounds for human therapeutic applications. Many of these companies have substantially greater financial, research and development, manufacturing, marketing and human resources than the Company, and represent significant competition. Such companies may succeed in developing products that are more effective or less costly than any developed by the Company and may also prove to be more successful in
manufacturing and marketing. The Company does not have a significant position in the pharmaceutical market.
GOVERNMENT REGULATION
The FDA and comparable agencies in other countries impose substantial requirements on the introduction of therapeutic pharmaceutical products through lengthy and detailed laboratory and clinical testing procedures and other costly and time-consuming procedures. Satisfaction of these requirements typically takes a number of years and varies substantially based upon the type, complexity and novelty of the product. In general, the FDA approval process for pharmaceuticals involves the submission of an Investigational New Drug (IND) application following preclinical studies, clinical trials in humans to demonstrate the safety and efficacy of the product under the protocols set forth in the IND, and submission of preclinical and clinical data as well as other information to the FDA in an New Drug Application (NDA). The conduct of clinical trials requires substantial time and expense, and there is no assurance that the results of the trials will be sufficient to support the submission or the approval of an NDA. The failure of Unimed to receive FDA approval for its products under development would preclude the Company from marketing and selling newly developed products in the United States.
Pharmaceutical manufacturers are subject to extensive regulation by federal and state regulatory agencies. The Federal Food, Drug and Cosmetic Act, the Controlled Substance Act, and other federal statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record-keeping, approval, advertising and promotion of pharmaceutical products. Noncompliance with applicable requirements can result in fines, recall and seizure of products, total or partial suspension of production, and governmental refusal to approve new products or indications. The manufacture and sale of Marinol also is regulated by the Drug Enforcement Agency (DEA) and by statutes and regulations promulgated by a number of states and foreign countries.
PATENTS AND PROPRIETARY RIGHTS
In 1991, Marinol was designated as an Orphan Drug by the FDA for use as an appetite stimulant in patients with AIDS. Under the Orphan Drug Act of 1983, the Company has seven years of marketing exclusivity for this use in the U.S. The seven-year period began with receipt of marketing approval from the FDA in December 1992.
Nitazoxanide, when combined with a wetting agent, and optionally, a starch derivative, in an oral composition, is the subject of a patent and patent application. Unimed has certain rights with respect to those patents under its license agreement; however, Unimed does not now hold any patents directly, nor is there any other patent protection available for Unimed's other products. The Company has obtained an Orphan Drug Designation for the use of NTZ in the treatment of cryptosporidiosis in patients with AIDS.
The Company owns the Marinol and SERC trademarks in the U.S.
EMPLOYEES
The Company has 16 full-time employees and one part-time employee. Unimed expects to add technical, sales and marketing, and administration staff to support development of the business. The Company believes employee relations are satisfactory and that it will be able to attract additional personnel as needed.
ITEM 2.

ITEM 2. PROPERTIES.
The Company leases approximately 5,000 square feet of executive office space in Buffalo Grove, Illinois, at an annualized cost of approximately $165,000, under a lease that expires in 1998. The Company also leased approximately 1,900 square feet of laboratory space in Mundelein, Illinois, at an annualized cost of $18,000 under a lease that expired December 31, 1995.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the over-the-counter market. Its Common Stock is quoted on the NASDAQ National Market System (NMS) under the symbol UMED. The following table lists the high and low closing prices of the Common Stock for the two most recent fiscal years.
The Company had approximately 1,225 holders of record of Common Stock on March 8, 1996. Unimed's Board of Directors anticipates the retention of all available earnings to support expected growth and does not anticipate payment of dividends in the foreseeable future.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
Selected financial data for all periods prior to December 31, 1995, have been restated to conform to the 1995 presentation. These restatements had no effect on net income (loss).
Results for the fiscal year ended September 30, 1992, include a $2.5 million restructuring charge.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
In late 1994, a new President and Chief Executive Officer was hired and a new business strategy was developed. Fiscal 1995 marks the first full year of Unimed operations under this strategy. The strategy includes increasing sales of Unimed's principal product, Marinol(R), implementation of cost control programs, and using the resulting positive cash flow as a foundation to purchase or acquire rights to additional pharmaceutical products under late-stage development or already on the market. In 1995, Unimed's gross sales increased to $9.7 million, a 12% increase over 1994 gross sales of $8.6 million. In addition, in 1995 the Company increased Marinol(R) gross sales by 19% over 1994, decreased total operating expenses 18% compared with 1994, and acquired rights to three late-stage development products.
The Company reported net income of $.09 per share in 1995 compared to net income of $.01 per share in 1994 and a net loss of $.14 per share in 1993.
The Company generated cash flow from operations of $1,640,000 and reported year-end cash, cash equivalents and short-term investments of $8,401,000. In 1996, the Company expects to concentrate on further commercializing Marinol(R) and to continue implementation of the Company's new business strategy, focusing on acquiring and developing new products that enhance the Company's total product portfolio.
REVENUES
Fiscal 1995 Marinol(R) gross sales, marketed during the year as a refractory antiemetic in cancer chemotherapy and as an appetite stimulant in anorexia associated with weight loss in AIDS, increased 19% over 1994 levels, ending the year at $8,395,000. This compares with a 13% increase in sales growth for 1994 to $7,054,000. For the year ended December 31, 1995 and for all periods presented, the Company reclassified, for financial reporting purposes, a normally recurring provision for estimated Medicaid rebates on Marinol(R) sales. This provision for Medicaid rebates, previously reported as a cost of sales, has been reclassified as a reduction to gross sales. This change had no effect on gross profit or net income. Marinol(R) is marketed by the Company's licensee, Roxane Laboratories, Inc. Roxane maintains an approximately 55-person sales force engaged in both multi-source product distribution and ethical detailing activities. The Company maintains an eight-person specialty sales force detailing Marinol(R) only to AIDS-treating physicians. The Company reports the royalty income it receives from Roxane as revenues from Marinol(R) sales. Unimed continues to pursue opportunities to form international alliances to sell Marinol(R) outside of the U.S. During 1994, Marinol(R) was re-introduced in Canada for use as an antiemetic. Marinol(R) is currently under regulatory review in South Africa for use as an appetite stimulant and as an anti-emetic. Other regulatory submissions are expected in 1996. During 1995, Marinol(R) sales to countries outside the United States totaled approximately $134,000.
Serc(R) is marketed by others in Canada and other international markets to treat recurrent vertigo. In early 1993, the Company entered into a new distribution agreement with Sanofi Winthrop Canada (Sanofi). In addition to Serc(R), the agreement provides for distribution of Marinol(R), as an antiemetic, and for registration of Marinol(R) as an appetite stimulant in patients with AIDS with the Health Protection Branch (Canadian equivalent of the FDA) and post-approval marketing rights in Canada. During 1995, Serc(R) sales decreased slightly to $1,049,000 from $1,060,000 in 1994. The Company believes Serc(R) to be a mature product in Canada. In January 1996, Unimed entered into an agreement with Solvay Duphar whereby Unimed licensed the rights to proprietary know-how and manufacturing for the drug SERC(R) in the U.S. As part of the agreement, the Company received a $1.4 million payment to help fund product development and for Unimed's product and trademark rights to SERC(R) in Canada, Australia and South Africa.
During 1994, after analyzing market research results that suggested significant new resources would be required to build market share in the over-the-counter (OTC) business, the Company concluded that better opportunities exist in proprietary prescription drug development and marketing. Unimed ended active promotion of these products and stopped taking orders for these products in late December 1995. The OTC products, consisting of ONDROX and the MouthKote product line, generated gross sales of $279,000 during 1995. 1994 sales were $579,000.
Other income (net of other expenses) increased 28% in 1995 because of growth in interest income. Interest income increased 70% to $430,000 due to higher cash balances and higher interest rates on short-term holdings. Other income increased 7% during fiscal 1994 relative to 1993, largely due to a slight growth in interest income. To reflect conversion of the Company's equity interest in the Medisperse partnership into the right to receive royalties on products developed using the Medisperse technologies, the Company reduced the Medisperse investment by $106,000. This was a noncash transaction.
COSTS AND EXPENSES
Cost of sales increased 8% from $2,958,000 in 1994 to $3,201,000 in 1995. The higher cost of sales was due to revenue growth from the Company's pharmaceutical products. 1994 cost of sales was slightly lower than 1993 cost of sales due to changes in product mix.
Total expenses in 1995 were $3.8 million, representing an 18% decrease from 1994 total expenses of $4.6 million. This was due primarily to a 50% reduction in sales and marketing expenses. Sales and marketing expenses also decreased between 1994 and 1993, lowering total expenses by 6%. Marinol promotional programs were unaffected by these reductions.
Operating and administrative expenses for 1995 were approximately $2,129,000, a decrease of 3% from 1994. This decrease resulted in part from strong cost control programs introduced by management in late 1994, but also from the termination of active promotion of the OTC portfolio. Operating and administrative expenses were 17% higher in 1994 than in 1993. Part of the increase reflected having a full-time Chief Executive Officer in 1994 compared with 1993, when the Company's Chairman of the Board served as CEO without receiving cash compensation. Operating and administrative expenses as a percent of net sales were 29% in 1995 compared with 30% in 1994.
Sales and marketing expenses were $1,059,000 in 1995, compared to $2,113,000 in 1994. This decline in spending was primarily the result of ending aggressive promotion of the OTC product line and reducing the number of Unimed sales representatives.
Net research and development expenses increased from $328,000 in 1994 to $618,000 in 1995. The increase was due to further development activities of Marinol(R) and new pharmaceutical development programs, including hiring additional personnel to manage these programs. This expense category increased by $35,000 from 1993 to 1994.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had cash, cash equivalents and short-term investments of $8,401,000, compared with $6,612,000 at December 31, 1994. During 1995, Unimed generated cash from operations of $1,640,000. The Company's working capital remained essentially unchanged from 1994. The Company expects to increase research and development expenditures in 1996, partially offsetting this increase with licensor's research and development payments.
During 1995, the Company obtained approximately $250,000 from the exercise of stock options. In addition, in 1995 Unimed invested $600,000 for a 6% equity interest in Romark Laboratories, L.C.(Romark). Romark is the licensor of NTZ, used in the treatment of a broad spectrum of parasitic infections, including a potentially life-threatening infection in AIDS patients.
Inventories increased by $894,000, which includes $81,000 of inventory depreciation, at December 31, 1995 over 1994 levels, as the Company accepted annual delivery of Delta-9 tetrahydrocannabinol, the active component in Marinol(R), from its contract manufacturer. Marinol(R) inventories normally are depleted throughout the year until the delivery of the new annual production lot. The Company's distributor, Roxane, advances funds to Unimed required to maintain Marinol(R) inventories. The current liability, due to Roxane, is relieved on a quarterly basis from royalties remitted to the Company. The reduction in the quarter's royalty payment corresponds to the cost of Marinol(R) inventory sold during the quarter.
On February 29, 1996, the Company completed a private placement of 1.4 million unregistered shares of Common Stock at $6 per share, for $8.4 million. The Company anticipates that all of the net proceeds of
approximately $7.5 million will be used to acquire currently marketed niche pharmaceutical products and acquire and further develop pharmaceutical products in late stages of clinical development.
In February 1996, The John N. Kapoor Trust exercised warrants to purchase 800,000 shares of the Company's Common Stock at an exercise price of $2.125, yielding $1.7 million to the Company.
The Company maintains adequate cash reserves and short-term investments to meet anticipated working capital, capital expenditure and business investment requirements.
BACKLOG, SEASONALITY AND IMPACT OF INFLATION
Sales orders are typically filled shortly after receipt and, normally, do not result in a backlog. In general, the Company's products experience minor seasonal fluctuations. While raw material inputs to certain products are subject to price escalation, due to a limited number of suppliers, the complexity of manufacturing processes and regulatory procedures, the Company does not attribute this to inflation and does not anticipate inflation to have a significant impact on costs in the near future.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data are listed under Item 14 in this report.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation for services to the Company for the fiscal year ended December 31, 1995, by the Chief Executive Officer and two highly compensated senior executive officers.
- ------------------------- (1) Mr. Simes joined the Company on October 25, 1994. The 360,000 option shares granted in 1995 represents a new grant of 60,000 options on September 22, 1995, and a repricing of the 300,000 options granted in 1994. An employment agreement entered into between Mr. Simes and the Company provides for severance payments, upon termination, equal to his annual salary.
(2) Mr. Riggs joined the Company on May 1, 1992. Effective November 1, 1995, Mr. Riggs began devoting 50% of his time to the Company. The 90,000 option shares granted in 1995 represents a new grant of 10,000 options on September 22, 1995, and a repricing of the 80,000 options granted in 1994.
(3) Dr. Dudley joined the Company on December 12, 1994. An employment agreement entered into between Dr. Dudley and the Company provides for severance payments, upon termination, equal to 75% of his annual salary.
(4) Represents the compensation portion of car allowances advanced to the executive officers listed above.
(5) Represents the matching contribution ($4,620 per officer) made by the Company to the Unimed Pharmaceuticals, Inc. 401(k) Plan for each of the executive officers listed above. In addition to the Company 401(k) matching contribution, for Mr. Simes this amount represents insurance premiums paid ($4,018) by the Company for Mr. Simes, and the taxes ($1,932) associated with these premiums. For Dr. Dudley, this number represents the Company 401(k) matching contribution, expenses paid by the Company related to Dr. Dudley's relocation ($35,469), and the taxes associated with these relocation expenses ($11,676).
The following table sets forth information with respect to grants of options to purchase Common Stock granted to the Named Executive Officers during the fiscal year ended December 31, 1995:
The following table sets forth information with respect to stock options exercised during the fiscal year ended December 31, 1995 and the value at December 31, 1995 of unexercised stock options held by the Named Executive Officers:
- ------------------------- * Represents the fair market value at December 31, 1995, of the Common Stock underlying the options minus the exercise price.
The following table shows stock options granted to the Named Executive Officers where the exercise price was adjusted (repriced) during the fiscal year ended December 31, 1995:
Directors who are not officers of the Company receive an annual stipend of $6,000 for serving on the Board and its committees, and additional $1,000 for each directors meeting they attend (excluding meetings held by telephone), $500 for each committee meeting they attend (excluding meetings held by telephone), and reimbursement of out-of-pocket expenses in connection with their attendance at directors meetings. The 1991 Stock Option Plan provides for a grant of options to purchase 10,000 shares of Common Stock to each new director who is not an officer on the date this person first becomes a director. The 1991 Stock Option Plan also provides for annual option grants of 7,500 shares of Common Stock to directors who are not officers.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------- (1) Includes incentive stock options and non-qualified stock options exercisable within 60 days to purchase 160,000, 112,500, 42,328, 42,328, 41,170, 45,000, 17,500, and 15,000 shares of Common Stock held by Kapoor, Simes, Lempenau, Hunter, Weiser, Riggs, Holubow, and Dudley, respectively.
(2) Includes 1,667,429 shares of Common Stock beneficially owned by the John N. Kapoor Trust, an "affiliate" of Dr. Kapoor. Includes 505,000 shares of Common Stock held by a limited partnership created for the benefit of Dr. Kapoor's family members, of which Dr. Kapoor is the General Partner.
(3) Includes 2,100 shares of Common Stock owned of record by Mr. Hunter's wife.
(4) See Footnotes 1 through 3.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See "Note 13 -- Related Parties" in the Notes to Consolidated Financial Statements included herein.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
(a) and (d) Financial Statements
See Index to Consolidated Financial Statements and Schedules on page 28.
(b) Reports on Form 8-K
None
(c) Exhibits
- ------------------------- * Filed herewith.
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors Unimed Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Unimed Pharmaceuticals, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Unimed Pharmaceuticals, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations, stockholders' equity and cash flows for the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois February 13, 1996, except for Note 14, as to which the date is February 29, 1996
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
See accompanying notes to consolidated financial statements
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND DECEMBER 31, 1994
See accompanying notes to consolidated financial statements
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
See accompanying notes to consolidated financial statements
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
See accompanying notes to consolidated financial statements
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unimed Pharmaceuticals, Inc. (the Company) and its subsidiaries develop and market proprietary ethical pharmaceutical products in niche medical markets.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany balances and transactions.
(B) TRANSLATION OF FOREIGN CURRENCY AND RELATED MATTERS
The financial statements of the Company's foreign subsidiaries have been translated into U.S. dollars. Assets and liabilities of the subsidiaries have been translated using exchange rates in effect at the balance sheet date. The statements of operations have been translated using the average rates of exchange for the year. Adjustments resulting from the translations are accumulated in the stockholders' equity section of the consolidated balance sheets. Exchange gains or losses arising from the settlement of foreign currency transactions during the year are reflected in the consolidated statements of operations.
(C) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include liquid instruments purchased with original maturities of 90 or fewer days.
The Company has investments in short-term debt securities that have been classified under the provisions of SFAS No. 115 as held-to-maturity. Accordingly, these investments are measured at amortized cost and temporary unrealized gains or losses are not recognized.
(D) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
(E) LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Depreciation is provided on a straight-line basis over the estimated useful lives of the applicable assets. Amortization of leasehold improvements is provided on a straight-line basis over the lesser of the estimated useful lives of improvements or the terms of the related leases. Expenditures for repairs and maintenance are charged to operations; replacements, renewals and betterments are capitalized. The cost and accumulated depreciation of assets retired or otherwise disposed of are eliminated from the accounts and any gains or losses on such dispositions are reflected in operations.
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(F) INCOME TAXES
Deferred tax liabilities and assets at the end of each period are determined using the tax rate expected to be in effect when taxes actually are paid or recovered. Accordingly, income tax expense will increase or decrease in the same period in which a change in the tax rates is enacted.
(G) REVENUE RECOGNITION
Revenues are recognized as earned in accordance with specific terms of each distribution, royalty and licensing agreement.
(H) INCOME (LOSS) PER SHARE
Primary net income per share is computed by dividing net income by the weighted average number of common stock and common stock equivalents (when dilutive). Common stock equivalents include unexercised stock options and warrants. Fully diluted net income per share is computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period, as if the common stock equivalents were converted into common stock at the beginning of the period.
(I) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
(J) ACCOUNTING FOR STOCK OPTIONS
The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", for its stock-based compensation program, and does not intend to adopt the fair value accounting rules as permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation"(SFAS 123) which becomes effective for 1996. The Company intends to adopt the disclosure provision of SFAS 123 beginning in 1996.
(K) RECLASSIFICATIONS
Certain 1994 and 1993 amounts have been reclassified to conform to the 1995 presentation. These reclassifications had no effect on gross profit or net income (loss) for such periods.
(2) INVENTORIES
A summary of inventory components at December 31 follows:
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) LEASEHOLD IMPROVEMENTS AND EQUIPMENT
A summary of leasehold improvements and equipment at December 31 follows:
The Company has purchased and retains title to the majority of the equipment used by The NORAC Company, Inc. (NORAC) to manufacture Marinol (dronabinol). As of December 31, 1995 and 1994, the equipment had a net book value of $490,285 and $571,668, respectively.
(4) PRODUCT DEVELOPMENT AND LICENSING AGREEMENTS
Romark Laboratories, L.C.
In June 1995, the Company entered into a license agreement with Romark for the rights to develop and market NTZ, which treats a broad spectrum of parasitic infections, including a potentially life-threatening infection in AIDS patients. The agreement grants Unimed exclusive marketing rights to NTZ for all therapeutic indications for oral use in the United States, Canada, Australia and New Zealand. The Company also received rights to the IV formulations for use in treating cryptosporidiosos. In exchange for these exclusive marketing rights, Unimed will pay Romark royalties if Unimed receives regulatory approval to market NTZ. Romark will manufacture NTZ exclusively for Unimed in Unimed countries. To date, Unimed has invested $600,000 in Romark in exchange for a 6% equity interest in Romark. The Company will invest another $400,000 for an additional 4% equity interest in Romark as certain development milestones are met.
Besins Iscovesco
In August 1995, Unimed entered into a licensing agreement with Besins Iscovesco (Besins) of Paris, France, for two products to treat testosterone deficiency in men. The products are gel formulations of testosterone, the natural male hormone, and dihydrotestosterone (DHT), which is the active metabolite of testosterone in the human body. Unimed acquired exclusive marketing rights to the testosterone products for all therapeutic indications in the United States, Canada and Mexico. In exchange for the license to the two testosterone products, Unimed issued Besins 72,600 Common shares and warrants to purchase 72,550 shares of Unimed Common Stock at $8.00 per share in 1995 and will issue Besins 72,500 Common shares in 1996. These rights have been included in other assets and will be amortized over 10 years after the products become available in the market. Besins will manufacture the products for Unimed, which will pay royalties to Besins if the products are approved for marketing. Besins was required to make two $500,000 payments to Unimed, to be applied to product development classified as deferred revenues as of December 31, 1995.
Simultaneous to the signing of the Besins agreement, the Company recognized an other asset of approximately $585,000 in marketing/property rights, which included a $280,000 payable that was paid through the issuance of the Company's Common Stock in January 1996.
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Medisperse Restructure Agreement
In November 1995, Unimed entered into a restructuring and royalty agreement relative to the Medisperse partnership. While Unimed withdrew (through its wholly owned subsidiary) as a general partner and also transferred its limited partnership interest, its financial investment in the partnership remains protected. It will receive royalties on any products that result from the Medisperse partnership in an amount at least as attractive as if Unimed remained in the partnership. The Company is aiding in the search for a licensee for further development of the Medisperse technology. Unimed has no future funding obligations associated with the partnership. As of December 31, 1995, the Company's investment in Medisperse was reduced by $106,000 to its net realizable value.
(5) SHORT-TERM INVESTMENTS
Short-term investments in debt securities, were as follows:
(6) INCOME TAXES
The provision for income taxes is comprised of the following:
Income tax provisions from continuing operations differed from the taxes calculated at the statutory federal rate as follows:
At December 31, 1995, the Company has a tax loss carryforward of approximately $10,033,000 for federal income tax purposes, which expires in the years 2001 through 2010. The Company had a capital loss carryforward of approximately $380,000 that expired in 1995. The Company has available a research and development credit carryforward at December 31, 1995, of approximately $430,000, which expires in the years 2003 through 2010. Management has recorded a 100% valuation allowance against deferred tax assets as a result of unexpected future taxable income.
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect of the components of net deferred taxes are as follows:
(7) DISTRIBUTION, RESEARCH, ROYALTY AND LICENSING AGREEMENTS
In February 1986, the Company entered into a distribution agreement with Roxane, making Roxane the Company's exclusive distributor of Marinol in the United States. The Company and Roxane subsequently agreed that Puerto Rico is not part of the United States territory. Roxane distribution of Marinol began in July 1986 in the United States. From October 1991 through March 1993, Boehringer Ingelheim distributed Marinol in Canada. In March 1993, Sanofi Winthrop started to distribute Marinol in Canada under a separate agreement. The Roxane Marinol agreement sets forth a formula for the royalties paid on net sales of Marinol on an equal basis. The Sanofi agreement pays a royalty-based commission on net sales of 55% to Sanofi Winthrop and 45% to Unimed. Marinol gross sales were $8,395,292 (1995), $7,054,417 (1994) and $6,229,202 (1993). As of December 31, 1995 and 1994, trade receivables included $1,468,040 and $969,278, respectively, due from Roxane. Under a separate contract, Roxane has agreed to reimburse the Company for half of the external research costs incurred in further clinical development of Marinol. Roxane and Unimed have agreed to fund additional Marinol clinical trials for which budgeted costs have been mutually agreed upon. Such reimbursements shall not exceed $3 million without prior written approval by the parties. Roxane paid $92,334 (1995), $33,889 (1994) and $48,990 (1993) of these costs, which is netted against research and development expenses.
In November 1990, the Company entered into an inventory agreement with Roxane, under which Roxane will advance funds at no interest to the Company for the purpose of producing and maintaining a three-year raw material inventory of Marinol. Roxane advances funds to the Company for the Marinol encapsulation process as capsules are produced. Advances are offset as inventory is sold by Roxane.
The Company has various other licensing, marketing and distribution agreements typical to its business.
(8) WARRANTS
In March 1991, The John N. Kapoor Trust (the Trust) purchased for $1.5 million, 1.2 million shares of the Company's Common Stock and warrants to purchase 800,000 shares of the Company's Common Stock at an exercise price of $2.125. These warrants, which would have expired March 31, 1996, contained certain antidilution provisions for adjustment of the exercise price and the number of warrants. If the Company were
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to issue Common Stock or securities convertible into Common Stock, the Trust, with certain specified exceptions, would have had the right to maintain its percentage ownership of the Common Stock of the Company and/or a right of first refusal on all or any portion of the Common Stock proposed to be sold. These rights could not be exercised if this would cause the Trust and its affiliates to own more than 38% of Unimed's Common Stock, assuming exercise of the Trust Warrant. As of December 31, 1995, the 800,000 share warrant had not been exercised. The Trust had an option expiring February 24, 1993, to purchase 153,529 shares of Common Stock at a purchase price of $2.35 in satisfaction of its right to maintain ownership. The Trust exercised this option and shares were issued in April 1993. See "Note 14 -- Subsequent Events" in Notes to Consolidated Financial Statements.
In April 1992, the Company granted to LifeScience Corporation warrants to purchase 50,000 shares of Common Stock at an exercise price of $8.375 per share, with an expiration date of April 1, 1997. As of December 31, 1995, the 50,000 share warrant had not been exercised.
(9) STOCK OPTIONS
(A) INCENTIVE STOCK OPTION PLAN
The following summarizes transactions under the 1981 Incentive Stock Option Plan for the periods ended December 31, 1993, 1994 and 1995:
As of December 31, 1995, there were no stock options exercisable under the Plan.
(B) 1991 STOCK OPTION PLAN
Under the 1991 Stock Option Plan (the Plan), 1,000,000 shares of the Company's Common Stock were reserved for granting stock options to directors, officers, and key employees and consultants of the Company and its subsidiaries. The holder of the option must remain in the continuous employ of the Company for at least one year from the date the option is granted before exercising any part of the option. Options expire 10 years from the date of grant or 90 days after termination of employment.
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes transactions under the Plan for the three years ended December 31, 1995:
Through December 31, 1995, options issued had an exercise price ranging from $2.75 to $9.25 per share, and as of December 31, 1995, there were 309,504 stock options exercisable. The Company repriced certain options to current market levels in 1994 and 1995.
(C) OTHER STOCK OPTIONS
In November 1986, reflecting employment contracts with certain executives, the Company granted to these executives nonqualified options to purchase 220,000 shares of Common Stock through March 1999 at $15.00 per share as adjusted and amended. In January 1988, the exercise price of these options was changed to $5.38. In March 1991, the exercise price of those options was changed to $4.36, and the number of options was adjusted to 271,216 shares of Common Stock pursuant to certain antidilution provisions discussed below. In addition during March 1991, the Board of Directors extended the expiration date of the outstanding options to March 1999. Through December 31, 1995, 29,500 options had been exercised, none had been canceled, and 241,716 options were outstanding.
In March 1987, the Company granted to non-officer members of the Board of Directors nonqualified options to purchase an aggregate of 50,000 shares of Common Stock at $8.50 per share. In January 1988, the exercise price of these options was changed to $5.38. During fiscal 1991 and fiscal 1990, the options to purchase 10,000 and 20,000 of these shares, respectively, were canceled. In March 1991, the exercise price of those options remaining was changed to $4.36 and the number of options was adjusted to 24,656 shares of Common Stock, reflecting certain antidilution provisions discussed below. In addition, during March 1991, the Board of Directors extended the expiration date of the outstanding options to March 1999. There were no exercises or cancellations during 1993, 1994, or 1995.
In November 1989, additional nonqualified options to purchase 20,000 shares of Common Stock at $2.63 per share were granted to non-officer members of the Board. During fiscal 1991, the option to purchase 10,000 of these shares was canceled. In March 1991, the exercise price of the remaining options was changed to $2.35 and the number of options remaining was adjusted to 11,170 shares of Common Stock pursuant to certain antidilution provisions discussed below. In addition, during March 1991, the Board extended the expiration date of the outstanding options to March 1999. There were no exercises or cancellations during 1993, 1994, or 1995.
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1991, the Company granted to employees nonqualified options to purchase 120,000 shares of Common Stock at $3.00 per share. A majority of these options vest over four years. The option price was below the market price at the date of grant, and the Company has recognized the pro rata compensation expense representing the difference between the option price and fair market value at the date of grant of approximately $27,000 in 1993. As of December 31, 1995, 60,000 options had been exercised, 51,500 had been canceled and 8,500 options were outstanding.
In March 1991, the Company granted to past and present members of the Board nonqualified options to purchase 20,000 shares of Common Stock at $3.00 per share for prior years of service. The grant price was below the market price. The Company recognized a compensation expense at the date of grant of $35,000. There were no exercises or cancellations during 1993, 1994, or 1995.
In March 1991, the Company granted to non-officer members of the Board nonqualified options to purchase 20,000 shares of Common Stock at $4.75 per share. There were no exercises or cancellations during 1993, 1994, or 1995.
In addition during April, May and October 1991, the Company granted to employees nonqualified options to purchase 26,000 shares of Common Stock with exercise prices ranging from $4.25 to $7.75. As of December 31, 1995, 8,750 options had been exercised, 15,000 had been canceled and 2,250 options were outstanding.
In August 1992, the Company granted to John Kapoor, Chairman of the Board, nonqualified options to purchase 200,000 shares of Common Stock at $7.75 per share. There were no exercises or cancellations during 1993, 1994, or 1995.
The exercise price and number of shares of Common Stock which can be purchased upon the exercise of the nonqualified stock options are adjusted in the event of stock dividends, split-ups, combinations or exchanges of shares by recapitalization or reclassification. The exercise price and number of shares of Common Stock purchasable upon the exercise of certain nonqualified stock options also are adjusted in the case of the issuance of Common Stock by the Company (other than pursuant to the grant of stock options and restricted stock grants) below the then existing exercise price.
There are 528,292 shares of the Company's Common Stock reserved for these arrangements as of December 31, 1995.
(10) RETIREMENT PLAN
The Company offers a discretionary 401(k)Plan (the Plan) to its employees. Under the Plan, employees may defer income on a tax exempt basis, subject to IRS limitation. All employees are eligible to participate in the Plan. Under the Plan, the Company may make discretionary matching contributions. Company contributions paid and expensed in 1995 totaled $42,901. There were no Company contributions to the Plan in 1994 or 1993.
(11) COMMITMENTS
The Company is obligated for rental expense under a noncancellable operating lease relating to an office facility. Real estate taxes, insurance and maintenance expenses generally are Company obligations. Rental
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expenses charged to operations were approximately $193,000 in 1995, $225,000 in 1994, and $155,000 in 1993. At December 31, 1995, approximate amounts committed for future fiscal years are as follows:
Management expects that in the normal course of business, leases that expire will be renewed or replaced by other leases.
The Company has an agreement with NORAC to purchase Delta-9, the raw material in Marinol. The Company has come to terms on a five-year extension to the agreement to December 31, 1999. Delta-9 is synthesized and purified through a complex and time-consuming process. NORAC is the Company's sole supplier of Delta-9. Currently, the Company maintains a three-year supply of Delta-9.
(12) CONTINGENCIES
The pharmaceutical industry has traditionally experienced difficulty in maintaining product liability insurance coverage at desired levels. To date, no significant product liability suit has ever been filed against the Company. However, if a suit were filed and a judgment entered against the Company that significantly exceeded the policy limits, it could have a material adverse effect upon the Company's operations and financial condition.
(13) RELATED PARTIES
EJ Financial Enterprises, Inc. (EJ) is a healthcare investment and consulting company owned by the Company's chairman, an indirect majority stockholder. In addition to the distribution, research, royalty and licensing agreements discussed in Note 7 which were terminated, the Company and EJ currently have a consulting agreement, ending in 1996, which provides for EJ's assistance in the Company's product licensing, development and marketing efforts. The agreement can be cancelled by either party upon 30 days prior written notice. Expenditures under this agreement totaled approximately $50,000 (1995), $106,250 (1994) and $150,000 (1993).
The Company has an interest-bearing note of approximately $132,000 from one of the Company's officers. The note bears interest at a rate of 6% and is included in other assets.
(14) SUBSEQUENT EVENTS
(A) SERC(R) LICENSE AGREEMENT; SALE OF PRODUCT AND TRADEMARK RIGHTS
The Company entered into an agreement in January 1996 with Solvay Duphar of The Netherlands. Unimed licensed the rights to proprietary know-how and manufacturing for the drug SERC(R) (betahistine hydrochloride) in the United States. As part of the agreement, the Company received a $1.4 million payment to help fund product development and for Unimed's product and trademark rights to SERC(R) in Canada, Australia and South Africa. The Company will buy all requirements of Serc(R) from Solvay Duphar, and will pay a royalty on sales of Serc(R) in the United States, if the drug is approved for marketing.
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(B) WARRANT EXERCISE
In February 1996, The John N. Kapoor Trust exercised warrants to purchase 800,000 shares of the Company's common stock at an exercise price of $2.125. These warrants, which yielded $1.7 million to the Company, were issued in March 1991 and were to expire March 31, 1996.
(C) PRIVATE PLACEMENT OF COMMON STOCK
On February 29, 1996, the Company completed a private placement of 1.4 million unregistered shares of common stock at $6 per share, for $8.4 million. The Company will use its best efforts to file, within 30 days of the final closing, a registration statement with the Securities and Exchange Commission on Form S-3 covering the resale of the shares of Common Stock.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors Unimed Pharmaceuticals, Inc.
Our report on the consolidated financial statements of Unimed Pharmaceuticals, Inc. and Subsidiaries is included on page of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois February 13, 1996
SCHEDULE II
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
EXHIBIT 11
UNIMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
COMPUTATION OF INCOME (LOSS) PER SHARE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- ------------------------- Note:
(1) The fully diluted calculation is not presented in the 1994 and 1993 computations since they would have been antidilutive, as the resultant net income (loss) per share is the same as for primary net income (loss) per share.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the Undersigned, thereunder duly authorized.
UNIMED PHARMACEUTICALS, INC.
By: /s/ STEPHEN M. SIMES
------------------------------------ Stephen M. Simes President and Chief Executive Officer
April 1, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX