-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M6mpk1pr3oUhENVjksipmwfBaIfuijljKbPAaQyIpREdAQXxYI87SIGhBjETuvYn IyS810jSEv5IAYTtDEyu6A== 0000912057-97-010924.txt : 19970401 0000912057-97-010924.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-010924 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIMA LABS INC CENTRAL INDEX KEY: 0000833298 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 411569769 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24424 FILM NUMBER: 97568475 BUSINESS ADDRESS: STREET 1: 10000 VALLEY VIEW ROAD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344-9361 BUSINESS PHONE: 6129478700 MAIL ADDRESS: STREET 1: 10000 VALLEY VIEW ROAD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344-9361 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission File No. 0-24424 CIMA LABS INC. (Exact name of Registrant as specified in its charter) _______________________________ DELAWARE 41-1569769 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10000 VALLEY VIEW ROAD, EDEN PRAIRIE, MINNESOTA 55344-9361 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (612) 947-8700 SECURITIES REGISTERED PURSUANT TO Section 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO Section 12(g) OF THE ACT: COMMON STOCK $.01 PAR VALUE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The approximate aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 24, 1997, based upon the last trade price of the Common Stock reported on the Nasdaq National Market on March 24, 1997, was $23,448,767.* The number of shares of Common Stock outstanding as of March 24, 1997 was 9,452,051. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Definitive Proxy Statement which will be filed with the Commission pursuant to Regulation 14A in connection with the 1996 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Report. ______________________ * Excludes approximately 5,773,813 shares of common stock held by Directors, Officers and holders of 5% or more of the Registrant's outstanding Common Stock at March 10, 1997. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant. PART I. Unless the context otherwise indicates, all references to the "Registrant," the "Company," or "CIMA" in this Annual Report on Form 10-K relate to CIMA LABS INC., a Delaware corporation. The following registered trademarks of the Company are used in this Annual Report on Form 10-K: "CIMA-Registered Trademark-," "CIMA LABS INC.-Registered Trademark-," "OraSolv-Registered Trademark-" and "AutoLution-Registered Trademark-." ITEM 1. BUSINESS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "ANTICIPATE," "EXPECT," "ESTIMATE" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDETIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE SUCCESS OF THE COMPANY IN MANUFACTURING THE COMPANY'S TECHNOLOGY, THE AVAILABILITY OF ADEQUATE FUNDS FOR THE COMPANY'S OPERATIONS, THE SUCCESS OF THE COMPANY IN COMMERCIALIZING ITS NEW DRUG DELIVERY PROGRAMS, AND THE COMPANY'S RELIANCE ON ITS KEY PERSONNEL AND PARTNERS, WHICH ARE DISCUSSED IN THIS SECTION, AND UNDER THE CAPTIONS "BUSINESS RISK", AND "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." OVERVIEW CIMA is a drug delivery company focused primarily on the development and manufacture of pharmaceutical products based upon its patented OraSolv technology for marketing by multi-national pharmaceutical companies. OraSolv is an oral dosage formulation incorporating microencapsulated active drug ingredients into a tablet which dissolves quickly in the mouth without chewing or water and which effectively masks the taste of the medication being delivered. OraSolv's fast-dissolving capability may enable patients in certain age groups or those with a variety of conditions that limit their ability to swallow conventional tablets to receive medication in a more convenient oral dosage form. The Company believes that OraSolv is more convenient than traditional tablet-based oral dosages as it does not require water to be ingested, thereby enabling immediate medication at the onset of symptoms. In addition, OraSolv can provide more accurate administration of doses than liquid or suspension formulations as no measuring is required. The Company believes OraSolv's ease of use and effective taste masking will foster greater patient compliance with recommended dosage regimens, both for over-the-counter ("OTC") and prescription products, thereby improving therapeutic outcomes and reducing costs in the healthcare system. CIMA's business focus has evolved over the last several years. From inception until 1992, the Company focused on the development of liquid effervescent products and technologies. In 1993, the U.S. patent covering OraSolv was issued and the Company, perceiving a greater commercial opportunity, shifted its focus to the development of OraSolv products. CIMA's strategy is to commercialize its OraSolv technology through collaborations with pharmaceutical and other healthcare companies under which the Company will manufacture OraSolv formulations of its collaborators' pharmaceutical products. Since the issuance of the OraSolv patent in 1993, the Company has: - - Completed construction of a 75,000 square foot manufacturing facility in Eden Prairie, Minnesota. This production facility has been validated, registered with the FDA, undergone an FDA establishment inspection and licensed by the State of Minnesota. - - The Research & Development facility in Brooklyn Park, Minnesota successfully completed an FDA establishment inspection and was granted a Drug Enforcement Agency (DEA) License. 2 - - Entered into a License and Development Agreement with Glaxo to develop an OraSolv version of Glaxo's Zantac in the U.S. and internationally, for both the OTC and prescription markets. - - Entered into a License Agreement and Development and a License Option Agreement with SmithKline Beecham to develop a series of OraSolv versions of SmithKline Beecham products for international and domestic distribution. - - Entered into agreements with other partners for the development and manufacture of products in CIMA's OraSolv dosage form. - - In the fourth quarter of 1996, entered into a Supply Agreement with an undisclosed major multi-national pharmaceutical company for full-scale production of an over-the-counter product in CIMA's OraSolv dosage form. - - Added key scientific, technical and management personnel. CIMA's business strategy is to commercialize its OraSolv technology through collaborations with multi-national pharmaceutical companies with emphasis on products which command a large market share and/or are in large market segments. The Company is currently focused on the development and manufacture of OraSolv products for the OTC market. Product differentiation and brand name identity are critical to the successful marketing of OTC products. The Company believes that OraSolv affords pharmaceutical companies a means to significantly differentiate their products in the competitive OTC marketplace. Because it is a patented technology, OraSolv affords more enduring product differentiation than the more traditional approaches of changing product flavor or packaging innovations, which can be easily replicated. The Company has entered into agreements with a number of pharmaceutical companies for development, manufacture and commercialization of OTC or OTC switch products. The Company also intends to develop OraSolv products for selected prescription drug applications. The Company believes that such prescription OraSolv products might result in improved taste acceptance and ease of administration, and so enhance patient compliance with the recommended dosage regimen for such prescription pharmaceuticals. The Company has also initiated the development of new drug technologies. These technologies include new oral solid delivery systems, unique sustained-released delivery systems and improved efficacy delivery systems. The goal is to focus on technologies that improve efficacy. CIMA is a Delaware corporation incorporated in 1986. BUSINESS RISKS The Company is a development stage company and must be evaluated in light of the uncertainties and complications present for any such company and, in particular, in the pharmaceutical industry. The Company has accumulated aggregate net losses from inception through December 31, 1996, of $35,511,000. Losses have resulted principally from costs incurred in research and development of the Company's technologies and from general and administrative costs. These costs have exceeded the Company's revenues, which have been derived primarily from the manufacturing of AutoLution and other non-OraSolv products under agreements with third parties. The Company no longer manufactures such products and no longer derives revenues from their manufacture. In more recent years, revenues have been generated from research and development fees, and licensing arrangements. The Company expects to continue to incur losses through 1997. There can be no assurance that the Company will ever generate substantial revenues or achieve profitability. The Company believes that its currently available funds, including any license fees and sales revenue anticipated to be received in the future, will meet its needs at least through 1997. Thereafter, or sooner if conditions 3 make it necessary, the Company will need to raise additional funds through public or private financings, including equity financings which may be dilutive to stockholders. There can be no assurance that the Company will be able to raise additional funds if its capital resources are exhausted, or that funds will be available on terms attractive to the Company or at all. The Company is dependent upon its ability to enter into and perform under collaborative arrangements with pharmaceutical companies for the development and commercialization of its products. Failure of these partners to market the Company's products successfully could have a material adverse effect on the Company's financial condition and results of operations. The Company's revenues are also dependent upon ultimate consumer acceptance of the OraSolv drug delivery system as an alternative to conventional oral dosage forms. The Company expects that OraSolv products will be priced slightly higher than conventional swallow tablets. Although the Company believes that initial consumer research has been encouraging, there can be no assurance that market acceptance for the Company's OraSolv products will ever develop or be sustained. To date no commercial sales of OraSolv products have been made, and the Company has not derived any revenues from sales of OraSolv products. However, the Company expects to derive such revenues by the second quarter 1997. The Company has begun manufacturing OraSolv products in commercial quantities beginning in February 1997. To achieve future desired levels of production, the Company will be required to increase substantially its manufacturing capabilities. There can be no assurance that manufacturing can be scaled-up in a timely manner to allow production in sufficient quantities to meet the needs of the Company's corporate partners. The Company intends to increase its research and development expendures to enhance its current technologies, and pursue internal proprietary drug delivery technologies. Even if these technologies appear promising during various stages of development, they may not reach the commercialization stage for a number of reasons. Such reasons include the possibilities of not finding a partner to market the product, of being difficult to manufacture on a large scale or be uneconomical to market. The foregoing risks reflect the Company's early stage of development and the nature of the Company's industry and products. Also inherent in the Company's stage of development is a range of additional risks, including competition, uncertainties regarding the effects of health care reform on the pharmaceutical industry, including pressures exerted on the prices charged for pharmaceutical products, and uncertainties regarding protection of patents and proprietary rights. BACKGROUND DRUG DELIVERY TECHNOLOGY Patient medications are available in a variety of delivery forms, including solid dosage forms, liquids, effervescents, transdermal delivery methods and intramuscular and intravenous injections. Enteral medication delivery includes those medications delivered through the stomach, including tablets, liquids and effervescents. Enteral medications are frequently patient-administered, because of their non-invasive delivery method. Parenteral medications are those delivered by injection. Parenteral medications are often administered by a healthcare provider. The Company believes the convenience of patient administration has made enteral medications in general, and tablets in particular, popular with patients, providers and payors. Industry sources estimate that patients most frequently receive medications in an oral tablet form. However, children and the elderly, as well as those with certain physiological or medical indications, frequently experience difficulty in swallowing tablets. These patients often receive medications in liquid or effervescent form, or through parenteral methods as an alternative to tablets. The Company believes that tablets are a more convenient, accurate and effective medication form than are liquids or 4 effervescents (which may spill in the process of administering the medication, especially to children) and are easier for patients to self-administer than parenteral therapeutics. RECENT TRENDS IN THE HEALTHCARE AND PHARMACEUTICAL INDUSTRIES The healthcare industry has experienced significant change in the past and the Company expects this change to continue for the foreseeable future. The emergence of managed care organizations has focused providers and payors on the efficient utilization of healthcare resources. In addition, the trend towards the "capitation" of fees, or management of a patient's health requirements for a pre-determined, regular payment, has created an awareness among providers of the cost-effectiveness of various medical treatments. Healthcare providers and payors have implemented a variety of strategies to reduce the cost of medical care, including the use of generic versions of prescription and non-prescription drugs, the use of non-prescription remedies and the use of therapies that have improved patient compliance. The Company believes that patient non-compliance with medicinal dosing regimens is widespread, and that such non-compliance results in unnecessary costs to the healthcare system. These changes in the healthcare industry have also had an impact on participants in the pharmaceutical industry. In particular, a greater emphasis on cost effectiveness by providers and payors has resulted in pharmaceutical companies developing products that reduce the cost of therapy. These pharmaceutical companies have responded by developing treatments with improved efficacy, reduced complications and side effects, easier delivery and lower costs. The focus on cost-effectiveness has also led to the development of generic versions of off-patent prescription drugs. Increasingly, healthcare payors and providers have embraced generic equivalents of branded drugs because generic drugs provide a substantial cost savings. In addition, many pharmaceutical companies are extending their presence in a particular therapeutic area with the introduction of a non-prescription, or OTC, version of a prescription drug. Many patients and providers have indicated a preference for OTC versions of prescription formulations because of the convenience that patient-administration of OTC therapies provides as well as the cost savings. In addition, healthcare providers and payors have indicated a continuing interest in therapies that improve patient compliance which ultimately leads to significant healthcare cost savings. As these pharmaceutical companies adjust to the evolving healthcare industry, they must differentiate their products in an increasingly crowded therapeutic market. To do this effectively, they must develop products or product extensions that can successfully compete in the prescription, generic and OTC market for drugs, develop products or product extensions that enhance patient compliance, and do all of this within a highly regulated and cost-constrained environment. Another change affecting the healthcare industry has been the number and size of business combinations, strategic alliances, and mergers in both the pharmaceutical and the managed care industries. In the pharmaceutical industry, these changes are driving the major pharmaceutical companies to focus more and more on major new chemical entities (NCE's) which might be block-buster drugs. The significant revenue and profit from drugs like Prozac, Zoloft, EPO and Fosamax present the major growth area for these companies. Drug delivery product development is increasingly being given to specialty drug delivery companies to provide unique development products that contribute important sales revenue and profit, but not at the level of block-buster drugs. The new managed care business environment provides even greater focus on patient benefits which, in most cases, are derived from a combination of blockbuster drugs and drug delivery development. MARKET OPPORTUNITY The Company believes that its OraSolv drug delivery system will provide benefits to patients as well as healthcare industry providers and payors. These benefits, in turn, should provide marketing advantages to CIMA's pharmaceutical partners. The benefit to patients is convenience, which the Company believes will result in improved compliance with dosing regimens. The benefits to providers and payors are lower costs resulting from such 5 improved compliance with dosing regimens. The benefits to pharmaceutical partners are the capabilities to leverage their drug delivery development programs by going to specialized drug delivery companies, like CIMA, for brand differentiation and the ability to retain brand integrity. ADVANTAGES FOR PATIENTS, PROVIDERS AND PAYORS The Company believes a broad group of patients will benefit from the OraSolv rapid dissolve technology because it enables immediate medication at symptom emergence and facilitates conformance to dosing regimens. Patient non-compliance with dosing regimens has been associated with increased costs of medical therapies by prolonging treatment duration, increasing the likelihood of secondary or tertiary disease manifestation and contributing to over-utilization of medical personnel and facilities. By improving patient compliance, providers and payors may reduce unnecessary expenditures and improve therapeutic outcomes. Reduction of expenditures is an increasingly important issue to providers as capitated payment plans become more prevalent in the healthcare industry. In addition to the general market applications, the Company believes the OraSolv technology provides benefits to certain patient groups which experience significant difficulty in swallowing tablets. Such patient groups include children and the elderly and patients with certain anatomical or physiological deformities, certain disease indications or medication-associated dysphagia. The Company has completed quantitative consumer testing with children and qualitative testing with physicians, nurses and managed care administrators for the elderly which indicate the potential for these demographic groups to better comply with dosing regimens and thus to benefit from the OraSolv technology. ADVANTAGES FOR PHARMACEUTICAL PARTNERS The Company believes that pharmaceutical companies are facing challenges to adjust to the evolving healthcare industry. These challenges include: the impact of generic competition, which generally results in lower pricing as well as a loss of market share; the impact of the increased role of managed care organizations, forcing increased economic considerations in patient care, the results of which can include shorter therapies and therapeutic substitution (including less expensive products); and the need to maintain brand integrity with its inherent economic benefits. Pharmaceutical companies are addressing these issues in several ways. They are attempting to develop new product forms which will demonstrate a medical and economic benefit to the patient. For the most part, they use specialized drug delivery companies to do that. They are also trying to develop products which will help to improve patient compliance, which should result in a patient's more rapid return to health. Finally, they are attempting to use approaches which can be patented or provide a technological differentiation in order to reduce the threat of competition. The Company believes that the OraSolv technology provides a means for its pharmaceutical partners to meet each of these challenges. TECHNOLOGY ORASOLV The Company's OraSolv technology is an oral dosage form which combines taste-masked, microencapsulated drug ingredients with an effervescent disintegration agent. The effervescent disintegration agent aids in rapid dissolution of the tablet, permitting swallowing before the pharmaceutical ingredients are released. The OraSolv tablet dissolves quickly without chewing or water and allows for effective taste-masking of a wide variety of both prescription and OTC active drug ingredients. 6 The microencapsulation of the drug ingredients used in OraSolv products is accomplished using a variety of coating techniques, including spray coating, spray drying, spray congealing, melt dispersion, phase separation or solvent evaporation methods. Certain of these coating techniques have been developed by the Company's scientists in collaboration with coating materials suppliers. Coating materials are designed to prevent the active drug ingredient in the OraSolv tablet from coming in contact with the taste buds and provide for immediate release of the active ingredient in the stomach. Coating materials are chosen based on the dose and taste of the active ingredients. A series of experiments is then performed to determine the suitability of various microencapsulation techniques. From these experiments, a technique is chosen based on reproducibility, stability, dissolution, effectiveness in taste masking and cost-effectiveness. The microencapsulated drug is then combined with the fast-dissolving tablet materials, which can include a variety of flavoring and coloring agents, one or more sweetening agents and commonly used tablet excipients, such as binding agents and lubricants. In addition, an effervescent system composed of a dry acid and a dry base is added to the tablet excipients to facilitate a mild effervescent reaction when the tablet contacts saliva. This effervescent reaction accelerates the disintegration of the tablet through the release of carbon dioxide. As the OraSolv tablet dissolves, it releases the microparticles of drug into the saliva forming a micro-suspension of the drug in the saliva. This microencapsulated drug suspension enters the stomach through the normal swallowing process. AUTOLUTION The Company's AutoLution technology is a drug delivery system that creates a liquid effervescent solution from dry drugs or chemicals. It involves the preparation of the active ingredients into a tablet or powder which is subsequently added to water to create a liquid drug solution. The Company has shifted its focus away from the development of AutoLution products to the development of OraSolv-based products. However, the Company will continue to develop its AutoLution technology under current contractual agreements it has with corporate partners or other third parties. STRATEGY The Company's goal is to have its proprietary drug delivery technology incorporated into as many pharmaceutical products as possible with an emphasis on pharmaceutical products which command a large market share or are in large market segments. The Company has developed a strategic plan to accomplish this goal. The Company's primary strategies are to: - - COLLABORATE WITH CORPORATE PARTNERS FOR MARKETING OF PRODUCTS. The Company has entered into and intends to continue to enter into agreements with pharmaceutical and other healthcare companies for the development and marketing of products that incorporate the OraSolv technology. The Company will refine the OraSolv formulation of a particular oral therapeutic and manufacture it for its collaborators. These collaborators will market and sell the OraSolv versions of the therapeutic. The Company believes this strategy will reduce the time required to market products and take advantage of the industry knowledge and presence of its partners. - - FOCUS INITIALLY ON OTC APPLICATIONS. The Company has focused initially on developing OraSolv products for the OTC cough/cold/flu, allergy and sinus, and analgesic markets. The Company intends to target both adult and pediatric applications. The Company believes that OTC products which are subject to the FDA's OTC drug review process can generally be introduced without FDA preapproval and thus can generate revenues sooner than prescription products. The Company believes that OTC products using its OraSolv delivery system can establish distinct brand identities among otherwise largely undifferentiated OTC products, particularly in the large but competitive cough/cold/flu, allergy and sinus, and analgesic markets. 7 - - PURSUE OPPORTUNITIES IN OTC SWITCH PRODUCTS. The Company intends to develop OraSolv products for drugs that are being switched from the prescription to the OTC market. The Company believes that as prescription products are switched into the OTC market, pharmaceutical companies will seek methods for product differentiation. The Company believes that the OraSolv delivery system offers significant differentiation potential for these products. The Company's initial focus in this area is in the gastric relief market, where opportunities have been created by the FDA approval of the switch to OTC of three significant anti-ulcer drugs, Zantac 75, Pepcid AC and Tagamet HB, and expiration of the patent on Tagamet. - - DEVELOP SELECTED PRESCRIPTION DRUG APPLICATIONS. The Company is investigating the development of OraSolv pediatric antibiotic products and expects in the future to develop certain other prescription drug applications. Qualitative market research studies (focus groups) with pediatricians conducted by the Company have demonstrated a strong interest by this group in utilizing OraSolv technology to improve compliance among children taking antibiotic products. Other potential OraSolv prescription applications include anti-nauseants, psychotherapeutics and cancer therapy drugs. OraSolv products may offer improved taste acceptance and improved compliance with respect to these drugs. They may also offer benefits where patients have difficulty swallowing tablets or ingesting liquids. - - DEVELOP PROPRIETARY TECHNOLOGIES. The Company continues to develop proprietary technology and obtain patents thereon. To date, the Company has six U.S. and two Australian patents and nine patent applications. The Company believes that patented products and technologies provide attractive marketing features for use by its corporate partners. In 1996, the Company initiated the development of three new technologies: new oral solid delivery systems, unique sustained-release systems, and improved efficacy systems. Consumer use testing has already been completed on one system demonstrating the feasibility of that system. Feasibility studies of the other systems are either underway or planned. Patent applications are also underway. - - RETAIN MANUFACTURING RIGHTS. The Company intends to continue to develop OraSolv formulations of oral therapeutics for its collaborators, to manufacture commercial quantities of these products in its facility in Eden Prairie, and to rely on its collaborators to market and sell the OraSolv formulations. The Company believes this strategy enables it to better and more effectively manage increasing manufacturing volumes, control quality of the products it manufactures and manufacture in small or varying batch sizes, each of which provide it with a competitive business advantage. - - RETAIN OWNERSHIP OF PRODUCTS DEVELOPED IN COLLABORATIONS. The Company has retained and intends to continue to retain ownership of the OraSolv formulations developed for its collaborators. The Company believes this practice will provide it with the flexibility of entering into collaborations with other potential partners should the initial partner decide not to pursue the commercialization of a particular OraSolv product. TARGET MARKETS KEY OTC MARKETS The Company is pursuing numerous business development opportunities in some of the larger OTC market segments namely Cough/Cold/Flu, Allergy and Sinus, Analgesics, and Gastric Relief. These segments have been undergoing dynamic changes specifically as caused by the recent introductions of several Rx-to-OTC switches (e.g. Zantac 75, Pepcid and Tagamet HB in the gastric relief market; Aleve, Orudis and Actron in the analgesic market). The Company has entered into Agreements with multi-national pharmaceutical companies to develop a series of products in these markets. See "--Agreements With Corporate Partners." 8 PRESCRIPTION DRUG MARKET The Company is investigating the development of OraSolv pediatric antibiotic products and expects in the future to develop OraSolv products for prescription drug applications, including products for which Abbreviated New Drug Applications may be filed for special niche branded use. Certain antibiotics must be manufactured at a separate facility from other pharmaceuticals, which may impede the development of such products. Other potential OraSolv prescription applications include anti-nauseants, psychotherapeutics, AIDS and cancer therapy drugs. The Company also believes that additional prescription opportunities exist in the analgesic, anti-inflammatory and cough/cold/flu, allergy and sinus markets. AGREEMENTS WITH CORPORATE PARTNERS The Company's business development efforts are focused on entering into development, licensing and manufacturing agreements with pharmaceutical and other healthcare companies. Under these agreements, the corporate partner will be responsible for marketing the Company's products either worldwide, or in specified markets or territories. The collaborative arrangements typically begin with a research and development phase which, if successful, may be followed by a development and license option agreement for development of product prototypes and then license and manufacturing agreements for commercialization of such products. Alternatively, the Company may develop product prototypes internally and enter directly into a development, manufacturing or license agreement for commercialization of those products. The Company's future ability to generate revenue is dependent upon the Company's ability to enter into collaborative arrangements with pharmaceutical and other corporate partners to develop products that meet the requirements of its corporate partners and upon the marketing efforts of these corporate partners. The Company believes these partners will have an economic motivation to market the Company's products; however, the amount and timing of resources to be devoted to marketing are not within the control of the Company. These partners independently could make material marketing and other commercialization decisions which could adversely affect the Company's future revenues. Failure of these partners to market the Company's products successfully would have a material adverse effect on the Company's financial condition and results of operations. Moreover, certain of the Company's OTC products are seasonal in nature and the Company's revenues could vary materially from one financial period to another depending on which of such products, if any, are then being marketed. In an attempt to alleviate such risk, the Company is focused on developing for its partners a mix of OTC and prescription products. There can be no assurance that the Company will be able to enter into additional collaborative arrangements in the future or that any current or future collaborative arrangements will result in successful product commercialization. To the extent that agreements with corporate partners cover products to be sold internationally, such sales could be adversely affected by governmental, political and economic conditions in other countries, including tariff regulations, taxes, import quotas and other factors. The table below summarizes certain elements of the Company's major collaborative arrangements, including partners, market segments, types of agreements and CIMA technology.
PARTNER MARKET SEGMENT TYPE OF AGREEMENT CIMA TECHNOLOGY Glaxo Wellcome plc Gastric Relief License & Development OraSolv (Rx to OTC) Agreement SmithKline Beecham plc (1) License Agreement OraSolv SmithKline Beecham plc/ Analgesics and Option and Development OraSolv Sterling Winthrop, Inc. (2) Cough/Cold/Flu Agreement Undisclosed Partner (1) Supply Agreement OraSolv
9 (1) Further information is confidential as disclosure of the partner company or product category may force the collaborative partner to alter its marketing plans, which could have a material adverse effect on the eventual marketing of the product. (2) As a result of corporate restructuring due to the sale of Sterling's OTC business to SmithKline Beecham, SmithKline Beecham assumed most of Sterling's rights under this agreement, and certain rights with respect to the U.S. and Canada reverted to the Company. GLAXO AGREEMENT The Company has entered into a License and Development Agreement with Glaxo (the "Glaxo Agreement") to produce an OraSolv version of Zantac to be marketed exclusively by Glaxo in the U.S. and internationally, for both the OTC and prescription markets. In late 1995, the FDA approved the switch to OTC of a version of Zantac for heartburn indications (Zantac 75). Pursuant to the Glaxo Agreement, the Company will receive certain fees to develop product prototypes and all development costs will be borne by Glaxo. The Company will also receive payments upon completion of certain milestones. Glaxo will pay specified royalties to the Company on net sales of the products. The Glaxo Agreement provides that the Company retains the right to manufacture certain minimum quantities of the OraSolv products for the first five years following the first commercial sale of the products. At any time during the term of the Glaxo Agreement, however, Glaxo may terminate the Company's manufacturing rights for specified reasons. Termination of the Company's manufacturing rights or of the Glaxo Agreement could have a material adverse effect on the Company's business. Timing of product introductions under the Glaxo Agreement is within the control of Glaxo. SMITHKLINE BEECHAM LICENSE AGREEMENT The Company entered into a License Agreement with SmithKline Beecham in April 1996. The License Agreement grants SmithKline Beecham exclusive marketing rights for certain specific OraSolv OTC products. SmithKline Beecham will have the right to market such products throughout the world, except in the U.S. and Canada. Under the License Agreement, the Company will receive a license fee which is refundable under certain circumstances, and is also entitled to receive certain milestone payments upon the occurrence of specified events. The Company will also receive royalties on net sales of the products by SmithKline Beecham. SmithKline Beecham has a unilateral right to terminate the License Agreement for any reason upon written notice to the Company within specified time periods. The License Agreement also contemplates that the parties will negotiate and enter into a manufacturing and supply agreement pursuant to which the Company would manufacture and supply SmithKline Beecham with its requirements of the products. There can be no assurance, however, that such an agreement will be reached or, if reached, that such supply relationship will be profitable to the Company. If the parties are unable to agree upon such manufacture and supply terms, then SmithKline Beecham may elect to have such products manufactured by either SmithKline Beecham or a third party manufacturer approved by the Company. SMITHKLINE BEECHAM OPTION AND DEVELOPMENT AGREEMENT The Company entered into an Option and Development Agreement with Sterling Winthrop, Inc. ("Sterling") in May 1994. Subsequently, Sterling's worldwide OTC business was purchased by SmithKline Beecham, which assumed Sterling's development and license option rights to all 15 products under the agreement for markets outside the U.S. and Canada, but relinquished rights to five of the products for sales in the U.S. and Canada. The agreement provides that the Company will develop a series of analgesic and cough/cold/flu, allergy and sinus OraSolv products. The Company will receive certain fees to develop a number of different product prototypes for SmithKline Beecham's evaluation and will grant to SmithKline Beecham, upon payment of additional specified fees, options to enter into license agreements for the marketing of any of the products developed. While this agreement describes the basic terms to be contained in any license agreement subsequently entered into between the Company and SmithKline Beecham, SmithKline Beecham is not obligated to enter into any definitive license agreement with the Company and generally has the right to abandon a product at any time for any reason without significant penalty, or to terminate the agreement entirely. If the Company does not enter into a definitive license agreement with SmithKline Beecham within a specified time period, the Company retains the right to seek an alternative corporate 10 partner for the products being developed, although there can be no assurance that the Company could locate a suitable alternative corporate partner. A decision by SmithKline Beecham to abandon one or more products, once licensed, could materially adversely affect the Company's financial condition and results of operations. The agreement with SmithKline Beecham specifies certain products for which any license granted would be co-exclusive, permitting the Company to enter into another collaborative arrangement with a different corporate partner with respect to each such product. As to the other products to be developed, the license granted to SmithKline Beecham would be exclusive. The agreement provides that if any definitive license agreement is entered into, the Company would receive certain license fees and a royalty on net sales of each of the products subject to the license agreement. While the SmithKline Beecham agreement does not specify the terms of any manufacture and supply agreement, the Company intends to negotiate to retain the right to manufacture the licensed products in connection with any definitive license agreement entered into with SmithKline Beecham. There can be no assurance that the Company will retain manufacturing rights or that any such rights retained will be profitable for the Company. The failure by the Company to retain manufacturing rights could have a material adverse effect on the Company's profitability. OTHER ORASOLV AGREEMENT In the first quarter of 1996, the Company entered into a full-scale stability, manufacturing and testing agreement with an undisclosed multinational pharmaceutical company for development or manufacture of an OraSolv product. Because the marketplace for pharmaceutical products is highly competitive, disclosure of the potential partner and market category or product may result in the prior implementation of competitive strategies which would be damaging or destructive to the marketing plans of the potential partner. That activity could result in the loss of brand equity and the nonrecovery of substantial advertising and promotional costs. Accordingly, at the present time both the identity of the other Company and the nature of the product involved remains confidential. This agreement provides for the partner to pay the Company certain fees and provides the partner an exclusive negotiation period for additional rights with respect to the specific class of pharmaceutical products being evaluated by the partner. In October 1996, this agreement was expanded to a Supply Agreement which requires the partner to launch the product by a specified date in 1997, or CIMA has the right to terminate the Agreement. There can be no assurance that the partner will perform as anticipated, or that the Company will receive substantial revenues from this product and agreement. To date, the Company has not derived any revenues from sales of OraSolv products. In connection with agreements with corporate partners for OraSolv products, the Company has received research and development fees and licensing revenues of $1,472,000, $684,000 and $1,168,000, in 1996, 1995, and 1994, respectively. Net sales of AutoLution and other products decreased to zero in 1996 from $151,000 in 1995 and $1,451,000 in 1994. In 1995 and 1994, the Company spent $5,403,000, $6,505,000, and $3,549,000, respectively, on research and product development activities. PATENTS AND PROPRIETARY RIGHTS The Company actively seeks, when appropriate, protection for its products and proprietary information by means of U.S. and foreign patents, trademarks and contractual arrangements. In addition, the Company relies upon trade secrets and contractual arrangements to protect certain of its proprietary information and products. The Company holds five U.S. patents. The most significant U.S. patent issued to the Company covers the taste-masking, microencapsulation and quick-dissolving excipient technology incorporated in the OraSolv products. The OraSolv patent and two others were issued in 1993 and expire in 2010, the fourth patent was issued in 1995 and expires in 2012 and the fifth patent was issued in 1996 and expires in 2013. Two of the issued U.S. patents relate to the production of compressed effervescent and non-effervescent tablets using a particular lubricant developed by the Company. Another patent relates to an effervescent pediatric vitamin and mineral supplement. The fifth patent 11 relates to the formulation of a base coated acid effervescent mixture manufactured by a controlled acid-base reaction. The obtained mixture can be used in the formulation of acid sensitive compounds with OraSolv technology or other effervescent-based products. The Company holds two patents in Australia, which issued in 1990. The Company also has a total of nine U.S. and foreign patent applications, including two European Patent Office filings. The Company's success will depend in part on its ability to obtain and maintain patent protection for its products and preserve its trade secrets. No assurance can be given, however, that the Company's patent applications will be approved or that any issued patents will provide competitive advantages for its products or will not be challenged or circumvented by competitors. The ability to commercialize the Company's products will depend on not infringing the patents of others. Although the Company is not aware of any claim of patent infringement against it, the Company has entered into a licensing agreement with Beecham Group plc ("Beecham") to avoid the possibility of litigation. Under the license, the Company has a non-exclusive, worldwide license to make, have made, use and sell products covered by a particular U.S. patent issued to Beecham and corresponding rights in other countries (the "Beecham Patent Rights"), which may cover certain OraSolv products. Under the terms of the license, the Company is required to pay a royalty of 2% of amounts received by the Company in respect to OraSolv products. The license extends for the life of the Beecham Patent Rights and is terminable upon default by either party. Whether or not the outcome of any litigation concerning patents and proprietary technologies is favorable to the Company, the cost of such litigation and the diversion of the Company's resources during such litigation could have a material adverse effect on the Company. Much of the Company's technology is dependent upon the knowledge, experience and skills of key scientific and technical personnel. To protect rights to its proprietary know-how and technology, Company policy requires all employees and consultants to execute confidentiality agreements that prohibit the disclosure of confidential information to anyone outside the Company. These agreements also require disclosure and assignment to the Company of discoveries and inventions made by such persons while devoted to Company activities. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any such breach or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. In addition, it is possible others may infringe the patent rights of the Company. The Company may desire or be required to obtain licenses from others with respect to materials used in the Company's products or manufacturing processes, including drug coating techniques. There can be no assurance that such licenses will be obtainable on commercially reasonable terms, if at all, or that any licensed patents or proprietary rights will be valid and enforceable. MANUFACTURING A key component of the Company's strategy is to be the primary manufacturer of OraSolv products. Advantages of this strategy include the control of the technology, the ability to quickly increase production, and to refine the production process as necessary to rapidly and successfully bring OraSolv products to market. Although the OraSolv process uses standard pharmaceutical production equipment, certain modifications were required to meet the specific needs of OraSolv products, including the need for producing softer tablets, special protective packaging and dehumidification. During the refining process and the process validation runs, the Company identified the key product quality issues. The manufacturing equipment, process, and facility have now been fully validated. In 1996, CIMA successfully completed an FDA establishment inspection, and a Minnesota State inspection. The Company believes that this manufacturing experience gives it an advantage over its competitors. The Company 12 believes that its ability to manufacture OraSolv products provides economies of scale, therefore making the Company more attractive to its partners by allowing them access to smaller volume line extensions without making significant capital investments. The Company's OraSolv production facility is located in Eden Prairie, Minnesota, which also houses the Company's corporate headquarters. The Company began occupying and making leasehold improvements to the new facility in late June 1994 and the facility was completed in December 1994. See "Item 2. -- Properties." Initially, the Company will operate one production line at this facility which it believes will be capable of producing 250 to 300 million tablets a year. The facility is designed to be expandable to six production lines. This is expected to be sufficient capacity to meet our short-and long-term manufacturing needs. The production equipment consists of an integrated blending, tableting and packaging operation. The configuration of the production flow layout and this equipment has been designed by Company personnel and the Company's consultants. Most of the equipment consists of components commonly used in pharmaceutical manufacturing. Modern technology for environmental control is utilized. The equipment was selected for ease of operation, cleaning and changeover and cost effectiveness. The production line is capable of packaging a variety of package designs with rapid conversion between sizes. During 1996, the facility was validated and inspected by the FDA. In addition, there have been numerous successful site audits conducted by major pharmaceutical companies. CIMA has conducted over 60 full-scale runs of the production line as well as full process validation. During February 1997, CIMA began commercial production for its first commercial launch by one of its corporate partners, of a product incorporating its OraSolv technology. The OraSolv production process begins with the purchase of the pharmaceutical ingredients to be used in manufacturing the products. The active drug ingredients may be shipped to coating materials suppliers where appropriate coating materials are applied to microencapsulate the ingredients. In some cases, the Company purchases the microencapsulated active ingredient from a supplier. These coating materials suppliers are subject to extensive government regulation, including current Good Manufacturing Practice regulations ("cGMP") promulgated by the FDA. After coating, the active drug ingredients are sent to the Company where they are tested again by CIMA's Analytical Quality Control group and released to the production department. The active and inactive drug ingredients that have been quality control released are further processed and pressed into OraSolv tablets. The tablets are immediately transferred into blister-foil packages and packed in cartons in a high-speed, continuous operation. The pharmaceutical ingredients and other supplies to be used in manufacturing OraSolv products are standard pharmaceutical products available from numerous suppliers. Most coating materials are also available from numerous suppliers. In some instances, however, certain coating materials or techniques may be available only from a single supplier. If any such coating materials or techniques were to become unavailable, the Company believes that satisfactory alternative materials or techniques could be substituted. However, there can be no assurance that the Company's manufacturing operations would not be disrupted. Any such disruption could have an adverse effect on the Company's business and could possibly damage relations with its corporate partners. By producing many full-scale trial and validation batches, the Company believes it has identified and minimized potential problems that could affect product manufacturing in commercial quantities. There can be no assurance, however, that manufacturing and control problems will not arise as the Company begins manufacturing at commercial scale. If manufacturing or control problems arise and are not corrected for any reason, the Company's business could be materially adversely affected. MARKETING The Company's marketing strategy is to rely on its corporate partners for the marketing and sale of its products. The Company believes this strategy will enable it to respond quickly to market demands, while avoiding the effort and expense associated with the establishment of an end-user marketing capability. The Company's internal marketing department has focused on promoting the benefits of OraSolv to its corporate pharmaceutical 13 partners and with conducting consumer surveys and physician research of various OraSolv formulations. The Company believes that its rapid dissolving tablet technology competes favorably to its competition. In a recent quantitative consumer study conducted by a major independent market research company and sponsored by the Company, significantly more consumers liked the OraSolv formulation versus the Zydis formulation of the same drug. Currently, the Company has entered into corporate collaborations with Glaxo, SmithKline Beecham, and with other major pharmaceutical companies. RESEARCH AND DEVELOPMENT The research and development ("R&D") department at CIMA is primarily focused on the development of oral dosage forms based on CIMA proprietary technologies. The R&D department includes scientists recruited from the research and development groups of major U.S. pharmaceutical companies. Currently R&D personnel and support systems and facilities are organized in a way to effectively develop formulations from bench scale through full scale/commercial size. Such development is carried out at the R&D facilities in Brooklyn Park, Minnesota and in the full scale manufacturing facility in Eden Prairie, Minnesota. The Company believes that its R&D facilities are in compliance with cGMP. In both facilities, small cGMP batches are manufactured, packaged and released to support initial studies in humans, including both consumer studies for OTC products and clinical studies for prescription products. These efforts are conducted to support the CIMA strategic and business goals. The Company's R&D department is devoted to the development of drug delivery technologies and dosage forms for pharmaceutical applications. The key goals for the R&D team are: develop innovative drug delivery systems that fulfill the pharmaceutical partners' needs and meet the strategy of the Company; develop, expand and support systems required to fulfill cGMP production at commercial levels necessary to meet the requirements of major pharmaceutical companies; recruit and train high quality technical and scientific personnel; and support the Company's intellectual property process. In 1996, the Company's R&D department began to investigate several new drug delivery programs associated with its drug delivery technology. Out of these efforts three programs have emerged as leading candidates for new delivery systems: a new oral solid delivery system; unique sustained-release systems and an improved efficacy system. The new oral solid dosage form program involves both incremental improvements to the current OraSolv technology and the development of new patentable platform for solid oral dose systems. These platform technologies are expected to extend the patent coverage of the current OraSolv technology. These efforts have resulted in tangible improvements in formulations currently under development with several major partners. The unique sustained release program is targeting the oral delivery of sustained release beads of particles in a quick-dissolving effervescent matrix. Discussions are on-going with several partners regarding these technologies. The development of clinical formulations is expected to begin in 1997. The enhanced efficacy program is targeting improvement of the bioavailability of specific compounds with high first-pass effects by using the sublingual and buccal delivery of compounds in an effervescent matrix. The Company expects to submit an IND permitting clinical formulations to be evaluated in human subjects in 1997. At the early stage of development, the feasibility of these technologies appears promising. However, there are numerous risks and uncertainties inherent in any research development program. Factors that could cause these programs not to reach the commercialization stage include, but are not limited to, the possibilities that the research will not be able to be patented, or the patent enforced, the inability to scale-up and manufacture these new technologies in a cost-effective manner, the ability to find a partner to market the product, and the eventual market acceptance of this new technology. 14 During the three years ended December 31, 1996, CIMA's total expenditures for research and development were $5,403,000, $6,505,000 and $3,549,000, respectively, of which amounts research and development fees from the Company's collaborative partners were $1,197,000, $497,000 and $453,000, respectively. COMPETITION Competition in the areas of pharmaceutical products and drug delivery systems is intense. The Company's primary competitors in the business of developing and applying drug delivery systems include companies which have substantially greater financial, technological, marketing, personnel and research and development resources than the Company. The Company's products will compete not only with products employing advanced drug delivery systems but also with products employing conventional dosage forms. New drugs or future developments in alternative drug delivery technologies may provide therapeutic or cost advantages over the Company's potential products. There can be no assurance that developments by others will not render the Company's products or technologies noncompetitive or obsolete. Among the technologies expected to provide competition for the Company's OraSolv technology is the Zydis technology developed by R.P. Scherer Corporation ("Scherer") and the Shearform Matrix technology developed by Fuisz Technologies, Ltd. ("Fuisz"). The Zydis technology is a fast-dissolving oral drug delivery system based on a freeze-dried gelatin tablet. The Shearform Matrix technology has application to two tablet formats, one of which involves waterless, fast dissolving oral delivery which Fuisz calls "FlashDose." The principal competitive factors in the market for rapid dissolving tablet technologies are compatibility with taste-masking techniques, dosage capacity, drug compatibility, cost and ease of manufacture and required capital investment for manufacturing. The Company believes that its rapid dissolving tablet technology competes favorably with respect to these factors. Both Scherer and Fuisz have been successful in licensing their technologies to a number of pharmaceutical companies. The Company also believes that certain pharmaceutical companies may be developing other rapid dissolving tablet technologies which might be competitive with the Company's technology. GOVERNMENT REGULATION All pharmaceutical manufacturers are subject to extensive regulation of their activities, including research and development and production and marketing, by numerous governmental authorities in the U.S. and other countries. In the U.S., pharmaceutical products are subject to rigorous regulation by the FDA. The federal Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, record keeping, labeling, advertising and promotion, and marketing and distribution of pharmaceutical products. If a company fails to comply with applicable requirements, it may be subject to administrative or judicially imposed sanctions such as warning letters, civil penalties, criminal prosecution of the company, its officers and employees, injunctions, product seizure or detention, product recalls, total or partial suspension of production and FDA refusal to approve pending premarket approval applications or supplements to approved applications. In general, FDA approval is required before a new drug product may be marketed in the U.S. However, most OTC drug products are exempt from the FDA's premarketing approval requirements. In 1972, the FDA instituted the ongoing OTC Drug Review in order to evaluate the safety and effectiveness of all OTC drugs then on the market. Through the OTC Drug Review process, the FDA issues monographs that set forth the specific active ingredients, dosages, indications, and labeling statements for OTC drugs that the FDA will consider generally recognized as safe and effective and therefore not subject to premarket approval. For certain categories of OTC drug products not yet subject to a final monograph, the FDA usually will not take regulatory action against such a product unless failure to do so poses a potential health hazard to consumers. The Company initially intends to emphasize 15 OTC drug products that generally do not require FDA approval. Products subject to final monographs, however, are subject to various FDA regulations such as those outlining cGMP requirements, general and specific OTC labeling requirements (including warning statements), the restriction against advertising for conditions other than those stated in product labeling, and the requirement that OTC drugs contain only suitable inactive ingredients. OTC products and manufacturing facilities are subject to FDA inspection, and failure to comply with applicable regulatory requirements may lead to administrative or judicially imposed penalties. Future marketing of products not formulated in compliance with final OTC drug monographs typically will require a formal submission to the FDA, such as an Abbreviated New Drug Application ("ANDA"), New Drug Application ("NDA") or Supplement to existing New Drug Application ("SNDA"), and ultimate approval by the FDA. This application and approval process can be expensive and time consuming, typically taking from six months to several years to complete. Further, there can be no assurance that approvals can be obtained, or that any such approvals will be on the terms or have the scope necessary for successful commercialization of these products. The Company expects that any required FDA approvals in connection with the introduction of new, non-monographed products, such as an OraSolv version of Zantac, would be sought by the Company's corporate partners. Marketing of such products could be delayed or prevented because of this process. Even after an ANDA, NDA or SNDA has been approved, existing FDA procedures may delay initial product shipment. Delays caused by the FDA approval process may materially reduce the period during which there is an exclusive right to exploit patented products or technologies. Even if any required FDA approval has been obtained with respect to a product, foreign regulatory approval of a product must be obtained prior to marketing the product internationally. Foreign approval procedures vary from country to country and the time required for approval may result in delays in or ultimately prevent marketing. The Company expects to rely on its pharmaceutical company partners to obtain any necessary government approvals in foreign countries. Prescription drug products with proven safety and efficacy profiles may be "switched" to OTC status through the submission to and approval by the FDA of a supplement to an existing NDA. The information and data required to support a switch application vary with individual drugs. In some cases, the manufacturer may be required to conduct clinical investigations or other scientific studies to assess the safety and effectiveness of the drug for OTC use. In evaluating an OTC switch, the FDA considers whether the drug product is safe for use by consumers without the supervision of an appropriate licensed healthcare professional. As prescription drug products are switched to the OTC market, pharmaceutical companies face the same challenges to establish brand identification and product differentiation as they face with current OTC drug products. Although switched products in certain cases may be eligible for a three-year period of market exclusivity (during which time the FDA will not consider any ANDAs for the same drug), the Company believes that its OraSolv drug delivery system can help its corporate partners differentiate their products during any exclusivity period and maintain a competitive advantage thereafter. If a generic version of a drug already approved under an NDA and no longer subject to any FDA marketing exclusivity, is bioequivalent to the approved product, preparation and submission of an ANDA will be the most time and cost-effective approach to FDA approval. The methodology for establishing bioequivalence through in vitro or in vivo methods is viewed to be straightforward. Because CIMA's taste-masking systems are used in immediate release dosage forms, this approach is generally the most expeditious. Certain drugs may raise distinctive issues, such as a need for a unique approach to proving bioequivalence. In those cases, premarket approval under Section 505(b)(2) of the Food, Drug, and Cosmetic Act would be more appropriate. Section 505(b)(2) allows the FDA to approve an NDA using shortened procedures, usually for drugs that have proven safety profiles because of their marketplace performance among a large population group. In a 505(b)(2) application, a company may rely on clinical investigations conducted by others to which it does not hold a right of reference. In general, a 505(b)(2) application is supported by two or three clinical studies among the target population group designed to verify the safety and efficacy of the drug product in that population using the target dose and dose sequence. The cost of this approach, which is generally used when a new delivery system or indication is added to an existing drug product, is typically much less than a standard NDA. 16 Each domestic drug product manufacturing facility must be registered with the FDA. Each manufacturer must inform the FDA of every drug product it has in commercial distribution and keep such list updated. Domestic manufacturing facilities are also subject to at least biennial inspection by the FDA for compliance with cGMP regulations. Compliance with cGMP is required at all times during the manufacture and processing of drug products. CIMA's existing manufacturing facilities have been inspected periodically by the FDA. The FDA last inspected the facility in November 1996 and no observations were cited. While the Company's new OraSolv manufacturing facility is required to be registered with the FDA and to comply with cGMP regulations at all times, FDA approval will not be required prior to commencement of manufacturing of OTC drug products. Even though the Company has worked diligently to assure compliance with FDA regulations and has been audited by the quality control/compliance groups of several of its current and potential corporate partners, there can be no guarantee that FDA inspections will proceed without any compliance issues requiring the expenditure of money and resources to resolve. The Company's facilities have been inspected by and the Company has received a license from the Minnesota Board of Pharmacy to manufacture drug products in its facilities. The Company is also subject to regulation under various federal and state laws regarding, among other things, occupational safety, environmental protection, hazardous substance control and product advertising and promotion. In connection with its research and development activities and its manufacturing, the Company is subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes. The Company believes that it has complied with these laws and regulations in all material respects and it has not been required to take any action to correct any material noncompliance. The Company does not currently anticipate that any material capital expenditures will be required in order to comply with federal, state and local environmental laws or that compliance with such laws will have a material effect on the earnings or competitive position of the Company. The Company is unable to predict, however, the impact on the Company's business of any changes in such environmental laws or of any new laws or regulations that may be imposed in the future and there can be no assurance that the Company will not be required to incur significant compliance costs or be held liable for damages resulting from violations of these laws and regulations EMPLOYEES On December 31, 1996, the Company had 64 full-time employees, of whom 18 were engaged in research and development (including 7 with Ph.D.s), 19 in manufacturing, 6 in compliance, 8 in quality control and 13 in administration, business development, finance and human resources. Most of the Company's scientific and engineering employees have had prior experience with pharmaceutical or medical products companies. No employee is represented by a union, and the Company has never experienced a work stoppage. The Company believes its employee relations are good. The success of the Company and of its business strategy is dependent in large part on the ability of the Company to attract and retain key management and operating personnel. Such individuals are in high demand and are often subject to competing offers. In particular, the Company's success will depend, in part, on its ability to attract and retain the services of its executive officers and scientific and technical personnel. The loss of the services of one or more members of management or key employees or the inability to hire additional personnel as needed may have a material adverse effect on the Company. LIABILITY INSURANCE The Company's business involves exposure to potential product liability risks that are inherent in the production and manufacture of pharmaceutical products. Although the Company has not experienced any product 17 liability claims to date, any such claims could have a material adverse impact on the Company. The Company currently has general liability insurance and product liability insurance with coverage limits of $5,000,000 per occurrence and $5,000,000 on an annual aggregate basis. The Company's insurance policies provide coverage on a claims made basis and are subject to annual renewal. There can be no assurance, however, that the Company will be able to maintain such insurance on acceptable terms or that the Company will be able to secure increased coverage as the commercialization of its products proceeds or that any insurance will provide adequate protection against potential liabilities. ITEM 2. PROPERTIES The Company maintains its headquarters and a production facility in a 75,000 square foot building in Eden Prairie, Minnesota, a suburb of Minneapolis. The Company had been subleasing this facility. The sublandlord filed for bankruptcy and rejected the sublease on September 30, 1996. Pursuant to an existing consent agreement, the prime landlord is obligated not to disturb the Company's possession and occupancy of this facility, and to enter into a new lease with the Company on prearranged terms. The Company has remained in the facility pursuant to the consent agreement, and is paying annual base rent (exclusive of real estate taxes and maintenance fees) of $372,830. The Company is negotiating to execute the prearranged lease, which will have a term through June 1, 2009, with an option to extend the term for an additional ten years. The annual base rent under the prearranged lease will remain the same as the current annual base rent, subject to adjustment on June 1, 2001 and every five years thereafter based on the change in average rental rates for office and warehouse properties in the surrounding area. This adjustment may not result in an annual base rent lower than any previously established annual base rent. If the Company elects to exercise its extension option, the minimum annual base rent will be $500,000 during the first five years of the extended term, and $550,000 during the second five years of the extended term. Although pursuant to the consent agreement the prime landlord is obligated to enter into a new lease on the prearranged terms, the parties are currently in negotiations regarding such new lease and there can be no assurance that disagreements regarding the obligations of the parties under the consent agreement will not arise, that the parties will be able to agree to terms not provided for in the consent agreement, or that the parties will otherwise be able to successfully conclude such negotiations. In addition to its new OraSolv production facility, the Company also leases 32,000 square feet located in an industrial park in Brooklyn Park, Minnesota. The Brooklyn Park facility contains offices as well as research and development and certain other pilot development and manufacturing operations. The lease for this facility expires in September 1998 and is renewable for an additional three-year period and two five-year periods. The Company currently pays approximately $144,600 in annual base rent (exclusive of real estate taxes and maintenance fees) under this lease. The Company's non-OraSolv manufacturing operations, including AutoLution, are located in the Brooklyn Park facility. The Company believes that its facilities are adequate for its current and anticipated future operations and that any necessary lease renewals or additional leased space could be obtained on commercially reasonable terms. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 18 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock began trading on the Nasdaq National Market under the symbol "CIMA" on July 29, 1994. Prior to that date, there was no public market for the Company's Common Stock. The following table sets forth, for the periods indicated, the high and low sales prices of the Common Stock reported on the Nasdaq National Market. These over-the-counter quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not necessarily represent the sales prices in actual transactions. HIGH LOW -------- ------- 1995 First Quarter....................................... $ 10 7/8 $ 4 3/4 Second Quarter...................................... 5 5/8 3 7/8 Third Quarter....................................... 8 1/8 3 7/8 Fourth Quarter...................................... 8 4 3/4 1996 First Quarter....................................... $ 7 1/4 $ 4 1/4 Second Quarter...................................... 11 3/4 6 1/8 Third Quarter....................................... 8 3/8 5 1/4 Fourth Quarter...................................... 8 3/8 5 1/2 On March 24, 1997, the last sale price reported on the Nasdaq National Market for the Company's Common Stock was $ 6.38 per share. HOLDERS As of March 24, 1997 there were approximately 100 stockholders of record of the Company's Common Stock. DIVIDENDS The Company has not paid dividends on its Common Stock and currently does not plan to pay any cash dividends in the foreseeable future. SALES OF UNREGISTERED SECURITIES On May 24 and November 11, 1996, the Company issued 9,088 and 92 shares of its Common Stock, respectively, to North Star Ventures III pursuant to the net exercise of outstanding warrants. Such stock issuances were deemed exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to Section 3(a)(9) and Section 4(2) of the Act. On May 28 and June 19, 1996, the Company sold 725 and 145 shares of its Common Stock, respectively, to Terrence W. Glarner, a director of the Company, for an aggregate purchase price of $5,220 pursuant to the exercise of outstanding warrants. Such sales of stock were deemed exempt from the registration requirements of the Act pursuant to Section 4(2) of the Act. 19 ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31 ---------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- --------- -------- STATEMENTS OF OPERATIONS DATA: (in thousands, except per share amounts) Revenues: Net sales $ -- $ 151 $ 1,451 $ 1,857 $ 3,251 Research and development fees 1,197 497 453 272 208 Licensing revenues 275 187 715 96 237 -------- -------- -------- --------- -------- Total revenues 1,472 835 2,619 2,225 3,696 Costs and expenses: Costs of goods sold -- 240 2,799 2,844 3,279 Research and product development 5,403 6,505 3,550 1,857 759 Selling, general and administrative 2,909 3,658 2,972 1,208 1,306 -------- -------- -------- --------- -------- Total costs and expenses 8,312 10,403 9,321 5,909 5,344 Other income (expenses): Interest income (expense), net 498 448 452 6 (84) Other income (expense) (4) 13 38 (2) 50 -------- -------- -------- --------- -------- Total other income (expense) 494 461 490 4 (34) -------- -------- -------- --------- -------- Net loss $ (6,346) $ (9,107) $ (6,212) $ (3,680) $ (1,682) -------- -------- -------- --------- -------- -------- -------- -------- --------- -------- Net loss per share $ (.72) $ (1.16) $ (.95) $ (.78) $ (.53) Weighted average number of shares outstanding 8,827 7,822 6,505 4,727 3,198 DECEMBER 31 ---------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- --------- -------- BALANCE SHEET DATA: (in thousands) Cash and cash equivalents $ 2,666 $ 3,559 $ 2,912 $ 1,178 $ 5,480 Total assets 22,065 15,519 25,122 4,927 9,051 Capital lease obligations -- -- -- -- 263 Accumulated deficit (35,660) (29,259) (20,058) (13,846) (10,167) Total stockholders' equity 21,021 14,282 22,554 4,093 7,773
20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "ANTICIPATE," "EXPECT," "ESTIMATE" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION AS WELL AS THOSE DISCUSSED IN THE COMPANY'S PROSPECTUS, DATED MAY 10, 1996, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. GENERAL The Company was founded in 1986 to develop effervescent drug delivery technologies and focused initially on contract manufacturing liquid effervescent products. Over CIMA's history, the business focus has evolved. In September 1992, patent claims were allowed on the Company's OraSolv-Registered Trademark- technology. OraSolv-Registered Trademark- is an oral dosage form which incorporates microencapsulated drug ingredients into a tablet that dissolves quickly in the mouth without chewing or water and which effectively masks the taste of the medication being delivered. Following issuance of the U.S. patent covering OraSolv-Registered Trademark-, the Company began to emphasize and focus on the development of OraSolv-Registered Trademark- products and currently focuses primarily on such products. Additional drug delivery technologies are also under development. CIMA continues to be a development stage company. At December 31, 1996, the Company had accumulated net losses of approximately $35,660,000. The Company's revenues have been from product sales using the Company's AutoLution-Registered Trademark- (a liquid effervescent) technology, license fees paid by corporate partners in consideration of the transfer of rights under collaboration agreements, and research and development fees paid by corporate partners to fund the Company's research and development efforts for products developed under such agreements. To date, such revenues have been derived primarily from manufacturing agreements with third parties for liquid effervescent and other products, and to a lesser extent from research and development fees and licensing arrangements, the latter generated primarily in the last five years. In 1996, there were no revenues from manufacturing liquid effervescent products. This is a result of the Company's decision to discontinue contract manufacturing liquid effervescent products and focus almost exclusively on developing its OraSolv-Registered Trademark- technology. The last revenues for manufacturing liquid effervescent products were recognized in 1995. In addition to revenues from such manufacturing, research and development and licensing, the Company has funded operations from private and public sales of equity securities, realizing net proceeds of approximately $25,963,000 from private sales of equity securities and $16,379,000 and $12,038,000 from the Company's July 1994 initial public offering and May 1996 public offering of its Common Stock, respectively. The total shares outstanding at December 31, 1996 were 9,411,589. The Company expects that losses will continue through at least 1997, even though CIMA expects to be generating sales revenue from manufacturing OraSolv-Registered Trademark- products. Research and development expenses will increase as CIMA investigates new drug delivery technologies, including the possibility of utilizing microencapsulation for the development of controlled release systems, as well as sublingual systems which could deliver faster absorption of drug ingredients. Personnel costs for research and development, and administration are expected to remain relatively stable as the majority of the necessary personnel for these functions have already been hired. As CIMA prepares for its first commercial launch of a product incorporating its OraSolv-Registered Trademark- technology, additional operations personnel may need to be added. Operating expenses will increase prior to the initial product launch by one of CIMA's corporate partners. 21 The Company's ability to generate revenues is dependent upon its ability to develop new, innovative drug delivery technologies and to enter into and be successful in collaborative arrangements with pharmaceutical and other healthcare companies for the development and manufacture of OraSolv-Registered Trademark- products to be marketed by these corporate partners. The Company is highly dependent upon the efforts of the corporate partners to successfully market OraSolv-Registered Trademark- products. Although the Company believes these partners will have an economic motivation to market these products vigorously, the amount and timing of resources to be devoted to marketing are not within the control of the Company. These partners independently could make material marketing and other commercialization decisions which could adversely affect the Company's future revenues. Moreover, certain of the Company's products are seasonal in nature and the Company's revenues could vary materially from quarter to quarter depending on which of such products, if any, are then being marketed. In recent years, the Company has actively marketed its OraSolv-Registered Trademark- technology to the pharmaceutical industry. The Company is presently engaged in product development and manufacturing scale-up efforts and negotiations with several different pharmaceutical companies regarding a variety of potential products. In the fourth quarter of 1996, the Company signed a supply agreement with an undisclosed major pharmaceutical company. The Agreement covers full-scale production of an over-the-counter product in CIMA's OraSolv-Registered Trademark- dosage form. The retail launch for this product is expected in 1997. Regarding the other efforts mentioned above, there can be no assurance that these activities or discussions will result in license agreements or the marketing of products using the OraSolv-Registered Trademark- technology. The Company believes that mergers and acquisitions in the pharmaceutical industry in recent years, together with changes in product plans by potential partners, may have had an adverse effect on the progress of certain projects, and the eventual marketing of products incorporating the Company's technology. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994. The Company's results of operations for the year ended December 31, 1996 reflect the increased focus on development of OraSolv-Registered Trademark- products with an anticipated commercial launch of an OraSolv-Registered Trademark- product in 1997. In 1996, product sales were zero as the Company ceased to manufacture liquid effervescent products in the second quarter of 1995. Net sales decreased to $151,000 in 1995 from $1,451,000 in 1994 due to the termination of contract manufacturing such liquid effervescent products. In the future, the Company expects to derive revenue from the sale of OraSolv-Registered Trademark- products, and no longer from the sale of contract manufactured liquid effervescent products. Research and development fees and licensing revenues were $1,472,000, $684,000 and $1,168,000 in 1996, 1995 and 1994, respectively. Research and development fees alone were $1,197,000, $497,000 and $453,000 in 1996, 1995 and 1994, respectively. This increase in research and development fees is a reflection of the progress of the development agreements with multinational pharmaceutical companies. The licensing revenues in 1996, 1995, and 1994 reflect completion of obligations under license and development agreements with multinational pharmaceutical companies that provided for one-time licensing fees, milestone payments, royalties and manufacturing fees. So long as the Company has relatively few agreements with corporate partners, these revenues will tend to fluctuate on a quarter to quarter basis. Cost of goods sold decreased to zero in 1996 from $240,000 and $2,799,000 in 1995 and 1994, respectively, resulting from the discontinuation of liquid effervescent contract manufacturing. Cost of sales will increase due to the beginning of commercial production of OraSolv-Registered Trademark- products, which the Company commenced in February 1997. Research and product development expenses were $5,403,000 in 1996, compared to $6,505,000 in 1995, and $3,549,000 in 1994. The decrease in 1996 from 1995 was the result of a one-time product development/optimization charge in 1995 of $1,385,000 from an independent consultant for improving product taste and packaging of OraSolv-Registered Trademark- products. The increase in 1996 compared to 1994 is due to the increased staffing levels to support the projects of CIMA's corporate partners. Selling, general and administrative expenses were $2,909,000 in 1996, compared to $3,658,000 in 1995, and $2,972,000 in 1994. Selling, general and administrative expenses decreased in 1996 from 1995 due to downsizing and reduced executive bonus payouts. 22 Expenses increased in 1995, compared to 1994, resulting from increased consumer marketing studies to support OraSolv-Registered Trademark-, and one-time expenses for changes in top management. Net interest income was $498,000 in 1996 compared to $448,000 in 1995 and $452,000 in 1994. Net interest is dependent upon the cash position of the Company. Interest income is recognized from cash balances resulting primarily from the initial public offering in 1994, and the public offering in 1996. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations to date primarily through private and public sales of its equity securities and revenues from manufacturing agreements. Through December 31, 1996, CIMA has received net offering proceeds from such private and public sales of approximately $54,500,000 and had net sales from manufacturing agreements of approximately $13,800,000. Among other things, these funds were used to purchase approximately $14,461,000 of capital equipment, including approximately $7,500,000 in the last two quarters of 1994 in connection with completing the Company's new Eden Prairie manufacturing facility. In July 1994 the Company completed an initial public offering of shares of its Common Stock, realizing net proceeds of approximately $16,379,000, and in May 1996 the Company completed another public offering of shares of its Common Stock, realizing net proceeds of approximately $12,038,000. The funds raised in CIMA's initial public offering have been used to build out the manufacturing facility, purchase and validate the appropriate production equipment, complete the research and development facilities and purchase the necessary equipment for that facility. In 1996, CIMA successfully completed an FDA establishment inspection, a Minnesota State inspection and was granted a Drug Enforcement Agency license. The Company has used the funds raised in its May 1996 public offering primarily to prepare for commercial production in its new manufacturing facility and to fund research and development for the application of the OraSolv-Registered Trademark- technology, and new technologies, to pharmaceutical products. The balance of such funds will be used for working capital and other general corporate purposes. The Company's long-term capital requirements will depend upon numerous factors, including the status of the Company's collaborative arrangements, the progress of the Company's research and development programs and receipt of revenues from sales of the Company's products. Cash, cash equivalents and short-term investments were approximately $10,263,000 at December 31, 1996. The Company believes that its currently available funds, including any license fees and sales revenue anticipated to be received in the future, will meet its needs at least through 1997. There can be no assurance that, prior to such time the Company may need to raise additional funds through public or private financings, including equity financing which may be dilutive to stockholders. There can be no assurance that the Company will be able to raise additional funds if its capital resources are exhausted, or that funds will be available on terms attractive to the Company. The Company has not generated taxable income through December 1996. At December 31, 1996, the net operating losses available to offset taxable income were approximately $35,247,000. Because the Company has experienced ownership changes, pursuant to Internal Revenue Code regulations, future utilization of the operating loss carryforwards will be limited in any one fiscal year. The carryforwards expire beginning in 2001. As a result of the annual limitations, a portion of these carryforwards may expire before ultimately becoming available to reduce potential federal income tax liabilities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Financial Statements and notes thereto appear on pages F-1 to F-17 of this Annual Report on Form 10-K. 23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 24 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference from the information under the captions "Election of Directors", "Executive Officers of the Company" and "Compliance with the Reporting Requirements of Section 16(a)" contained in the Company's definitive proxy statement to be filed no later than April 30, 1997 in connection with the solicitation of proxies for the Company's Annual Meeting of Stockholders to be held May 14, 1997 (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the information under the caption "Compensation of Executive Officers" contained in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the information under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the information under the caption "Certain Transactions" contained in the Proxy Statement. 25 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Index to Financial Statements The Financial Statements required by this item are submitted in a separate section beginning on page F-1 of this report Page ---- Report of Ernst & Young LLP, Independent Auditors.............. F-3 Balance Sheets ................................................ F-4 Statements of Operations ...................................... F-6 Statement of Changes in Stockholders' Equity .................. F-7 Statements of Cash Flows ...................................... F-9 Notes to Financial Statements.................................. F-10 (2) Index to Financial Statements Schedules Schedule II: Valuation and Qualifying Accounts ................ F-17 (3) Exhibits. Exhibit Number Description of Document 3.1 Fifth Restated Certificate of Incorporation of the Company. (1) 3.2 Second Restated Bylaws of the Company. (1) 4.1 Form of Certificate for Common Stock. (2) 4.2 Rights Agreement, dated March 14, 1997, between the Registrant and Norwest Bank Minnesota, N.A. (11) 10.1 Technology and Sponsored Research Agreement, dated December 9, 1996, between the Company and Joseph R. Robinson, Ph.D., and James McGinity. (3)(4) 10.2 Preferred Stock Purchase Agreement (Series C Convertible), dated April 15, 1992, as amended. (2) 10.3 Preferred Stock Purchase Agreement (Series D Convertible), dated January 2, 1994, as amended. (2) 10.4 Preferred Stock Purchase Agreement (Series E Convertible), dated January 7, 1994. (2) 10.5 Real Property Lease, dated July 2, 1987, between Stuebner Properties and the Company, as amended. (2) 10.6 License Agreement, dated April 22, 1996, between the Company and SmithKline Beecham Plc. (5) 10.7 Employment Agreement, dated July 1, 1995, between the Company and John M. Siebert, Ph.D. (3)(6) 10.8 Supply Agreement, dated October 10, 1996, between the Company and an Undisclosed Partner. (4) 10.9 Real Property Sublease, dated February 16, 1994, between Braun's Fashion, Inc. and the Company, including Prime Lease as amended and Consent, Non-Disturbance and Prime Lessor's Agreement dated February 22, 1994. (2) 10.10 Offer Letter between the Company and Keith P. Salenger, dated August 8, 1996. (3)(7) 10.11 Equity Incentive Plan, as amended. (3)(8) 10.12 1994 Directors' Stock Option Plan, as amended. (3)(8) 10.13 Form of Director and Officer Indemnification Agreement. (3)(9) 26 10.14 Form of Employment Agreement. (2)(3) 10.15 Letter Agreement, dated December 23, 1992, between the Company and Dr. Jerry A. Weisbach, as amended. (2)(3) 10.16 Form of Confidentiality Agreement (for discussions with other companies). (2) 10.17 Form of Visitor's Agreement. (2) 10.18 License Agreement, dated January 28, 1994, between the Company and SRI International. (2) 10.19 Agreement, dated April 8, 1994, between the Company and Beecham Group plc. (2) 10.20 Supply Agreement, dated February 13, 1992, between the Company and Northhampton Medical, Inc. (12) 10.21 (Reserved) 10.22 Option and Development Agreement, dated May 19, 1994, between the Company and Sterling Winthrop, Inc. (2) 10.23 License and Development Agreement, dated April 15, 1994, between the Company and Glaxo Group Limited. (2) 23.1 Consent of Ernst & Young LLP. 24.1 Powers of Attorney. (See page 28.) 27.1 Financial Data Schedule. - -------------------------- (1) Incorporated herein by reference to the correspondingly numbered exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (2) Incorporated herein by reference to the correspondingly numbered exhibit to the Registrant's Registration Statement on Form S-1, File No. 33-80194. (3) Items that are management contracts or compensatory plans or arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K. (4) Confidential treatment has been requested for this exhibit. (5) Incorporated by reference from Exhibit 10.28 to Registrant's Registration Statement on Form S-1 Registration No. 333-4174. (6) Incorporated by reference from Exhibit 99.1 to Registrant's Registration Statement on Form S-3, Registration No. 33-93616. (7) Incorporated by reference from Exhibit 10.29 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 0-24424. (8) Incorporated by reference to the like-numbered exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 0-24424. (9) Incorporated by reference from exhibit number 10.27 to the Registrant's Registration Statement on Form S-1, File No. 33-80194. (10) Incorporated by reference from Exhibit 10 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, File No. 0-24424. (11) Incorporated by reference herein to Exhibit 2 to the Registrant's Current Report on Form 8-K, filed March 25, 1997. (12) Incorporated by reference from Exhibit 10.26 to Registrant's Registration Statement on Form S-1, File No. 33-80194. (b) The Registrant filed no reports on Form 8-K during the last three months of the fiscal year ended December 31, 1996. (c) See Exhibits listed under Item 14(a)(3). (d) The financial statement schedules required by this Item are listed under Item 14(a)(2). 27 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 on the 28th day of March, 1997. CIMA LABS INC. By: /s/ John M. Siebert ------------------------------ John M. Siebert Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on the following page constitutes and appoints each of John M. Siebert and Keith P. Salenger, his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that the said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. 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 indicated on the dates indicated.
SIGNATURE TITLE DATE /s/ John M. Siebert Chief Executive Officer and Director March 28, 1997 - -------------------------------- (PRINCIPAL EXECUTIVE OFFICER) John M. Siebert /s/ Keith P. Salenger Vice President, Finance and March 28, 1997 - -------------------------------- Chief Financial Officer Keith P. Salenger (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) /s/ Terrence W. Glarner Director March 28, 1997 - -------------------------------- Terrence W. Glarner /s/ David B. Musket Director March 28, 1997 - -------------------------------- David B. Musket /s/ Steven B. Ratoff Director March 28, 1997 - -------------------------------- Steven B. Ratoff /s/ Joseph R. Robinson Director March 28, 1997 - -------------------------------- Joseph R. Robinson /s/ Jerry A. Weisbach Director March 28, 1997 - -------------------------------- Jerry A. Weisbach
28 FINANCIAL STATEMENTS CIMA LABS INC. YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND PERIOD FROM DECEMBER 12, 1986 (INCEPTION) TO DECEMBER 31, 1996 F-1 CIMA LABS INC. FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND PERIOD FROM DECEMBER 12, 1986 (INCEPTION) TO DECEMBER 31, 1996 CONTENTS Report of Indepedent Auditors...................................... F-3 Audited Financial Statements Balance Sheets..................................................... F-4 Statements of Operations........................................... F-6 Statement of Changes in Stockholders' Equity....................... F-7 Statements of Cash Flows........................................... F-9 Notes to Financial Statements...................................... F-10 F-2 REPORT OF INDEPENDENT AUDITORS Board of Directors CIMA LABS INC. We have audited the accompanying balance sheets of CIMA LABS INC. (a development stage company) as of December 31, 1996 and 1995, and the related statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996, and for the period from December 12, 1986 (inception) to December 31, 1996. Our audits also included the financial statement schedule listed in the index at item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial and schedule statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CIMA LABS INC. at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, and the period from December 12, 1986 (inception) to December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 10 to the financial statements, the Company's deficit accumulated during the development stage and recurring losses from operations raises substantial doubt about its ability to continue as a going concern. The Company intends to obtain additional capital through a financing transaction to permit it to continue its operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Ernst & Young LLP ------------------------ Ernst & Young LLP Minneapolis, Minnesota February 5, 1997 F-3 CIMA LABS INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS DECEMBER 31 ASSETS 1996 1995 -------------------------- Current assets: Cash and cash equivalents $ 2,666,032 $ 3,558,743 Short-term investments 7,597,162 - Accounts receivable 247,578 212,971 Inventories 534,587 324,610 Prepaid expenses 71,880 287,279 -------------------------- Total current assets 11,117,239 4,383,603 Other assets: Lease deposits 290,650 290,650 Patents and trademarks, net of amortization $258,687--1996; $248,846--1995) 252,404 262,244 -------------------------- 543,054 552,894 Property, plant and equipment: Construction in progress 469,513 278,770 Equipment 7,754,097 7,659,448 Leasehold improvements 4,600,960 4,572,586 Furniture and fixtures 552,515 551,032 -------------------------- 13,377,085 13,061,836 Less accumulated depreciation (2,972,474) (2,479,688) -------------------------- 10,404,611 10,582,148 -------------------------- Total assets $22,064,904 $15,518,645 -------------------------- -------------------------- F-4 DECEMBER 31 1996 1995 --------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 264,370 $ 291,868 Accrued expenses 529,402 695,127 Advance royalties 250,000 250,000 --------------------------- Total current liabilities 1,043,772 1,236,995 Commitments and contingencies Stockholders' equity: Convertible Preferred Stock, $.01 par value: Authorized shares--5,000,000 Issued and outstanding shares-- -0- - - Common Stock, $.01 par value: Authorized shares--20,000,000 Issued and outstanding shares--9,411,589-- 1996 and 7,821,974--1995 94,116 78,201 Additional paid-in capital 56,586,958 43,462,921 Deficit accumulated during the development stage (35,659,942) (29,259,472) --------------------------- Total stockholders' equity 21,021,132 14,281,650 --------------------------- Total liabilities and stockholders' equity $ 22,064,904 $ 15,518,645 --------------------------- --------------------------- SEE ACCOMPANYING NOTES. F-5 CIMA LABS INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
PERIOD FROM DECEMBER 12, 1986 (INCEPTION) TO YEAR ENDED DECEMBER 31 DECEMBER 31, 1996 1995 1994 1996 ---------------------------------------------------------- Revenues: Net sales $ - $ 151,074 $ 1,450,675 $ 13,750,884 Research and development fees 1,196,859 496,637 452,945 3,693,594 Licensing revenue 275,000 187,500 714,665 1,652,996 ---------------------------------------------------------- 1,471,859 835,211 2,618,285 19,097,474 Costs and expenses: Cost of goods sold - 240,038 2,799,179 17,831,415 Research and product development 5,402,557 6,504,528 3,548,938 20,522,848 Selling, general and administrative 2,909,041 3,658,572 2,972,453 17,644,075 ---------------------------------------------------------- 8,311,598 10,403,138 9,320,570 55,998,338 Other income (expense): Interest income 497,534 453,737 473,037 2,032,793 Interest expense - (5,989) (20,678) (913,393) Other income (expense) (3,738) 13,084 37,891 270,030 ---------------------------------------------------------- 493,796 460,832 490,250 1,389,430 ---------------------------------------------------------- Net loss and deficit accumulated during the development stage $(6,345,943) $(9,107,095) $(6,212,035) $(35,511,434) ---------------------------------------------------------- ---------------------------------------------------------- Net loss per share: Primary $(.72) $(1.16) $(1.82) $(12.37) Fully diluted $(.72) $(1.16) $ (.95) $(8.32) Weighted average shares outstanding: Primary 8,827,177 7,821,974 3,413,176 2,871,220 Fully diluted 8,827,177 7,821,974 6,504,946 4,267,545
SEE ACCOMPANYING NOTES. F-6 CIMA LABS INC. (A Development Stage Company) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
DEFICIT CONVERTIBLE PREFERRED ACCUMULATED STOCK COMMON STOCK ADDITIONAL DURING THE ----------------------------------------- PAID-IN DEVELOPMENT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL -------------------------------------------------------------------------------------- Sale of Common Stock to founders at $.09 per share on December 12, 1986 -- $ -- 500,000 $5,000 $ 40,000 $ -- $ 45,000 Issuance of stock warrant -- -- -- -- 50 -- 50 Net loss for the period from December 12, 1986 (inception) to December 31, 1986 -- -- -- -- -- (1,679) (1,679) -------------------------------------------------------------------------------------- Balance at December 31, 1986 -- -- 500,000 5,000 40,050 (1,679) 43,371 Issuance of Convertible Preferred Stock at $2.78 per share in five closing dates between May and December 1987 899,275 8,993 -- -- 2,491,007 -- 2,500,000 Net loss for the year -- -- -- -- -- (714,125) (714,125) -------------------------------------------------------------------------------------- Balance at December 31, 1987 899,275 8,993 500,000 5,000 2,531,057 (715,804) 1,829,246 Issuance of Convertible Preferred Stock at $5.60 per share in April 1988 357,132 3,571 -- -- 1,996,429 -- 2,000,000 Net loss for the year -- -- -- -- -- (1,825,173) (1,825,173) -------------------------------------------------------------------------------------- Balance at December 31, 1988 1,256,407 12,564 500,000 5,000 4,527,486 (2,540,977) 2,004,073 Issuance of Convertible Preferred Stock at 5.60 per share in June 1989, net of offering costs of $29,594 767,854 7,679 -- -- 4,262,726 -- 4,270,405 Issuance of stock warrants -- -- -- -- 200 -- 200 Net loss for the year -- -- -- -- -- (1,747,306) (1,747,306) -------------------------------------------------------------------------------------- Balance at December 31, 1989 2,024,261 20,243 500,000 5,000 8,790,412 (4,288,283) 4,527,372 Net loss for the year -- -- -- -- -- (1,881,779) (1,881,779) -------------------------------------------------------------------------------------- Balance at December 31, 1990 2,024,261 20,243 500,000 5,000 8,790,412 (6,170,062) 2,645,593 Stock options exercised -- -- 5,000 50 13,950 -- 14,000 Exercise of stock warrants -- -- 35,971 360 99,639 -- 99,999 Net loss for the year -- -- -- -- -- (2,314,688) (2,314,688) -------------------------------------------------------------------------------------- Balance at December 31, 1991 (carried forward) 2,024,261 20,243 540,971 5,410 8,904,001 (8,484,750) 444,904
F-7 CIMA LABS INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
DEFICIT CONVERTIBLE ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE ----------------------------------------- PAID-IN DEVELOPMENT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL ----------------------------------------------------------------------------------- Balance at December 31, 1991 (brought forward) 2,024,261 $ 20,243 540,971 $ 5,410 $ 8,904,001 $ (8,484,750) $ 444,904 Issuance of Convertible Preferred Stock at $6.00 per share in May 1992, net of offering costs of $401,900 1,558,319 15,583 -- -- 8,932,455 -- 8,948,038 Stock options exercised -- -- 24,331 243 61,889 -- 62,132 Conversion of Preferred Stock to Common Stock (633,989) (6,340) 633,989 6,340 -- -- -- Net loss for the year -- -- -- -- -- (1,681,986) (1,681,986) ---------- ------- --------- ------- ----------- ------------ ----------- Balance at December 31, 1992 2,948,591 29,486 1,199,291 11,993 17,898,345 (10,166,736) 7,773,088 Net loss for the year -- -- -- -- -- (3,679,625) (3,679,625) ---------- ------- --------- ------- ----------- ------------ ----------- Balance at December 31, 1993 2,948,591 29,486 1,199,291 11,993 17,898,345 (13,846,361) 4,093,463 Issuance of Convertible Preferred Stock at $7.00 per share in January 1994, net of offering costs of $531,762 1,214,282 12,143 -- -- 7,956,087 -- 7,968,230 Conversion of Convertible Preferred Stock (4,162,873) (41,629) 4,162,873 41,629 -- -- -- Issuance of Common Stock at $9.00 per share in August 1994, net of offering costs of $2,071,371 -- -- 2,050,000 20,500 16,358,132 -- 16,378,632 Stock options exercised -- -- 108,482 1,085 284,843 -- 285,928 Exercise of stock warrants -- -- 7,142 71 39,933 -- 40,004 Net loss for the year -- -- -- -- -- (6,212,035) (6,212,035) ---------- ------- --------- ------- ----------- ------------ ----------- Balance at December 31, 1994 -- -- 7,527,788 75,278 42,537,340 (20,058,396) 22,554,222 Stock options exercised -- -- 278,487 2,766 831,763 -- 834,529 Exercise of stock warrants -- -- 15,699 157 93,818 (93,981) (6) Net loss for the year -- -- -- -- -- (9,107,095) (9,107,095) ---------- ------- --------- ------- ----------- ------------ ----------- Balance at December 31, 1995 -- -- 7,821,974 78,201 43,462,921 (29,259,472) 14,281,650 Issuance of Common Stock at $9.50 per share in May 1996, net of offering costs of $1,405,794 -- -- 1,415,096 14,151 12,023,467 -- 12,037,618 Stock options exercised -- -- 109,787 1,117 712,824 -- 713,941 Exercise of stock warrants -- -- 64,732 647 387,746 (54,527) 333,866 Net loss for the year -- -- -- -- -- (6,345,943) (6,345,943) ---------- ------- --------- ------- ----------- ------------ ----------- Balance at December 31, 1996 -- $ -- 9,411,589 $94,116 $56,586,958 $(35,659,942) $21,021,132 ---------- ------- --------- ------- ----------- ------------ ----------- ---------- ------- --------- ------- ----------- ------------ -----------
SEE ACCOMPANYING NOTES. F-8 CIMA LABS INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
PERIOD FROM DECEMBER 12, 1986 (INCEPTION) TO YEAR ENDED DECEMBER 31 DECEMBER 31, 1996 1995 1994 1996 --------------------------------------------------------- OPERATING ACTIVITIES Net loss $ (6,345,943) $ (9,107,095) $ (6,212,035) $(35,511,434) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 606,339 582,760 667,483 4,020,563 Preferred stock issued for accrued interest -- -- -- 141,448 Gain on sale of property, plant and equipment -- (44,028) (9,242) (53,270) Changes in operating assets and liabilities: Accounts receivable (34,607) 324,895 (195,812) (247,578) Inventories (209,977) (2,363) (108,270) (534,587) Other current assets 215,399 (76,103) (125,502) (71,880) Accounts payable (27,497) (1,115,115) 1,259,884 264,366 Accrued expenses (165,725) (215,839) 735,710 529,402 Advance royalties -- -- -- 250,000 --------------------------------------------------------- Net cash used in operating activities (5,962,011) (9,652,888) (3,987,784) (31,212,970) INVESTING ACTIVITIES Purchases of and deposits on property, plant and equipment (315,276) (1,620,518) (7,529,697) (14,461,336) Purchases of short-term investments (7,597,162) (6,819,276) (11,727,864) (26,144,302) Proceeds from sale of property, plant and equipment -- 434,383 37,500 471,883 Proceeds from maturities of short-term investments -- 17,562,458 984,682 18,547,140 Patents and trademarks (103,685) (92,089) (176,332) (615,428) --------------------------------------------------------- Net cash (used in) provided by investing activities (8,016,123) 9,464,958 (18,411,711) (22,202,043) FINANCING ACTIVITIES Proceeds from issuance of stock: Common Stock 13,085,423 834,523 16,704,564 30,832,175 Preferred Stock -- -- 7,968,230 25,458,690 Lease financing of equipment -- -- -- 2,441,650 Security deposits on leases -- -- -- (290,651) Proceeds from issuance of notes payable and warrants -- -- (278,125) 1,923,951 Payments on notes payable -- -- -- (1,823,700) Payments on capital leases -- -- (260,747) (2,441,650) Organization costs -- -- -- (19,420) --------------------------------------------------------- Net cash provided by financing activities 13,085,423 834,523 24,133,922 56,081,045 --------------------------------------------------------- Increase (decrease) in cash and cash equivalents (892,711) 646,593 1,734,427 2,666,032 Cash and cash equivalents at beginning of period 3,558,743 2,912,150 1,177,723 -- --------------------------------------------------------- Cash and cash equivalents at end of period $ 2,666,032 $ 3,558,743 $ 2,912,150 $ 2,666,032 --------------------------------------------------------- --------------------------------------------------------- Supplemental schedule of noncash investing and financing activities: Note payable exchanged for issuance of Preferred Stock $ -- $ -- $ -- $ 1,517,500 Preferred Stock issued for note receivable $ -- $ -- $ -- $ 50,000
SEE ACCOMPANYING NOTES. F-9 CIMA LABS INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS 1. DEVELOPMENT STAGE COMPANY CIMA LABS INC. is a development stage company formed on December 12, 1986 to develop effervescent delivery technologies and focused initially on contract manufacturing liquid effervescent products. Initial sales commenced on January 28, 1988 and have been derived principally from manufacturing liquid effervescent and other products for third parties. In September 1992, patent claims were allowed on the Company's OraSolv-Registered Trademark- technology and the Company began to emphasize and focus on the development of products using this new technology. OraSolv-Registered Trademark- is an oral dosage formulation incorporating microencapsulated active drug ingredients into a tablet which dissolves quickly in the mouth without chewing or water and which effectively masks the taste of the medication being delivered. The Company's strategy is to enter into collaborative arrangements with multinational pharmaceutical companies to have OraSolv-Registered Trademark- technology incorporated into pharmaceutical products with an emphasis on products which command a large market share and/or are in large market segments. The Company will refine the OraSolv-Registered Trademark- formulation of a particular oral therapeutic and manufacture it for its corporate partner. The corporate partners will market and sell the product. The Company's future profitability is, therefore, dependent upon the Company's ability to develop new, innovative drug delivery technologies that meet the requirements of its corporate partners and upon the marketing efforts of these corporate partners. Although the Company believes these partners will have an economic motivation to market these products vigorously, the amount and timing of resources to be devoted to marketing are not within the control of the Company. These partners independently could make material marketing and other commercialization decisions which could adversely affect the Company's future revenues. Failure of these partners to market the Company's products successfully could have a material adverse effect on the Company's financial condition and result of operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers highly liquid investments with maturities of ninety days or less when purchased to be cash equivalents. Cash equivalents are carried at cost which approximates fair market value. SHORT-TERM INVESTMENTS The Company's investments are primarily comprised of certificates of deposit and U.S. Government obligations and are classified as available for sale. Realized gains and losses and declines in value judged to be other than temporary are included in other income. PATENTS AND TRADEMARKS Costs incurred in obtaining patents and trademarks are amortized on a straight-line basis over sixty months. The Company periodically reviews its patents and trademarks for impairment in value. Any adjustment from the analysis is charged to operations. F-10 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation is provided for at rates calculated to amortize the cost of the property over its estimated useful life using the straight-line method. INVENTORIES Inventories, consisting of materials and packaging, are valued at cost under the first-in, first-out (FIFO) method which is not in excess of market. IMPAIRMENT OF LONG-LIVED ASSETS The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. STOCK-BASED COMPENSATION The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in accounting for its stock options. Under APB 25, when the exercise price of stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. INCOME TAXES Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities. REVENUE RECOGNITION Sales of product are recorded upon shipment. Research and development fees are recognized as the services are provided. Revenues from license agreements are recorded when obligations under the agreement have been substantially completed. Royalties are recorded when earned. NET LOSS PER COMMON SHARE The primary net loss per share is computed using the weighted average number of shares of common stock and common stock equivalents, if dilutive, outstanding during the periods presented. The fully diluted loss per share is presented using the "if converted" method and reflects the impact of the conversion of the preferred stock to common stock at the beginning of the earliest period presented or at the date of issuance, if later. For periods prior to July 1994 (the initial public offering), the loss per share amounts give effect to the application of Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 83. Pursuant to SBA No. 83, common stock issued by the Company at prices less than the initial public offering price during the twelve months immediately preceding the initial public offering, plus the common stock equivalent shares granted at exercise prices less than the initial public offering price during the same period, have been included in the calculation of shares used in the calculation of net loss per share as if they were outstanding for all periods prior to the initial public offering. RECLASSIFICATIONS Certain amounts presented in the 1995 and 1994 financial statements have been reclassified to conform with the 1996 presentation. F-11 3. SHORT-TERM INVESTMENTS At December 31, 1996, short-term investments, including $1,993,904 classified as cash equivalents, consisted of U.S. Treasury securities and U.S. Government obligations. 4. INCOME TAXES Deferred income taxes are due to temporary differences between the carrying values of certain assets and liabilities for financial reporting and income tax purposes. Significant components of deferred income taxes as of December 31, 1996 and 1995 are as follows: 1996 1995 --------------------------- Deferred assets: Net operating loss $ 14,099,000 $ 11,899,425 Inventory capitalization -- 31,163 Accrued vacation 67,000 61,288 Inventory reserve 56,000 132,883 Other accruals -- 101,218 --------------------------- 14,222,000 12,225,977 Deferred liability: Depreciation and amortization 633,000 492,440 --------------------------- Net deferred income tax assets 13,589,000 11,733,537 Valuation allowance (13,589,000) (11,733,537) --------------------------- Net deferred income taxes $ -- $ -- --------------------------- --------------------------- The Company will be subject to federal income taxes when operations become profitable. The Company's tax operating loss carryforwards of approximately $35,247,000 can be carried forward to offset future taxable income, limited due to changes in ownership under the net operating loss limitation rules, and expire in the year 2011. 5. CONVERTIBLE PREFERRED STOCK In January 1994, the Company obtained proceeds of $8.5 million in additional equity financing. A total of 1,214,282 shares of Series E Convertible Preferred Stock at $7.00 per share were issued in two closings. The Series E Convertible Preferred Stock was convertible into Common Stock at $7.00 per share and had similar terms and conditions to the other series of Preferred Stock. Along with Series D Preferred Stockholders, Series E Preferred Stockholders had liquidation preference over the remainder of the Preferred Stockholders. A Board member acted as the Company's sales agent in connection with the issuance of the Series E Convertible Preferred Stock in January 1994 and received $484,000 in compensation. Seventy-five percent of the amount was payable in cash and the remaining twenty-five percent was paid in stock. The Convertible Preferred Stock outstanding at December 31, 1993, which consisted of 265,286 shares of Series A, 357,132 shares of Series B, 767,854 shares of Series C, and 1,558,319 shares of Series D, as well as the Series E described above, was converted to Common Stock concurrently with the closing of the initial public offering by the Company in August 1994. 6. LEASES The Company leases office, research and development, and manufacturing facilities in Brooklyn Park and Eden Prairie. The Brooklyn Park premises are leased under a non-cancelable operating lease expiring in September 1998. In addition to base rent, the Company pays a pro rata portion of the operating expenses for the total facility. The Company has the option to renew this lease for one F-12 additional three year term, and two additional five year terms. The facility in Eden Prairie was under a sub-lease agreement. The sublessor filed for bankruptcy and rejected the sublease on September 30, 1996. The $500,000 stand-by letter of credit, required under the sublease, has been returned to the Company. The Company has been operating under the terms of the original lease, and is currently negotiating a long-term lease through June 1, 2009. Future minimum lease commitments for all operating leases with initial or remaining terms of one year or more are as follows: Year ending December 31: 1997 $ 541,733 1998 489,111 1999 374,546 2000 372,830 2001 372,830 Thereafter 2,765,156 ---------- $4,916,206 ---------- ---------- Rent expense on operating leases, excluding operating expenses, for the years ended December 31, 1996, 1995 and 1994 was $493,876, $414,600 and $375,000, respectively. 7. STOCK OPTIONS AND WARRANTS The Company has an Equity Incentive Plan ("the Plan") under which options to purchase up to 2,000,000 shares of Common Stock may be granted to employees, consultants and others. The Compensation Committee, established by the Board of Directors, establishes the terms and conditions of all stock option grants, subject to the plan and applicable provisions of the Internal Revenue Code. The options expire ten years from the date of grant and are usually exercisable in annual increments ranging from 25% to 33% beginning one year from the date of grant. F-13 CIMA LABS INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS Shares available and options granted are as follows:
NON- WEIGHTED SHARES INCENTIVE QUALIFIED AVERAGE AVAILABLE FOR STOCK STOCK EXERCISE PRICE GRANT OPTIONS OPTIONS TOTAL PER SHARE --------------------------------------------------------- Balance at December 31, 1993 481,047 505,468 163,485 668,953 $2.84 Reserved 600,000 -- -- -- Granted (612,016) 595,944 16,072 612,016 7.31 Forfeited 28,231 (28,231) -- (28,231) 2.91 Exercised -- (57,496) (50,986) (108,482) 2.64 ------------------------------------------------ Balance at December 31, 1994 497,262 1,015,685 128,571 1,144,256 6.47 Granted (477,750) 477,750 -- 477,750 5.70 Forfeited 180,724 (175,061) (34,999) (210,060) 7.15 Exercised -- (269,915) (8,572) (278,487) 3.00 ------------------------------------------------ Balance at December 31, 1995 200,236 1,048,459 85,000 1,133,459 5.36 Reserved 250,000 -- -- -- -- Granted (199,300) 129,300 70,000 199,300 6.33 Forfeited 84,940 (78,967) (5,973) (84,940) 6.24 Exercised -- (91,314) (18,473) (109,787) 6.31 ------------------------------------------------ Balance at December 31, 1996 335,876 1,007,478 130,554 1,138,032 $6.27 ------------------------------------------------ ------------------------------------------------ Exercisable: December 31, 1994 298,163 $2.77 December 31, 1995 253,152 5.23 December 31, 1996 548,221 6.47
The following table summarizes information about stock options outstanding at December 31, 1996:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE RANGE OF EXERCISE NUMBER REMAINING EXERCISE EXERCISEABLE EXERCISE PRICES OUTSTANDING CONTRACTURAL LIFE PRICE AT 12/31/96 PRICE - ------------------------------------------------------------------------------------ $2.00 - 3.00 256,140 7 years $2.91 246,828 $2.90 $3.50 - 4.75 351,250 8 years 3.80 175,625 3.50 $5.625 - 7.625 270,238 9 years 6.77 51,873 6.22 $8.625 - 10.125 260,404 9.5 years 8.99 73,895 9.14 ----------------------------------------------------------------- 1,138,032 8.5 YEARS $6.27 548,221 $6.47 ----------------------------------------------------------------- -----------------------------------------------------------------
Options outstanding under the plan expire at various dates during the period from July 1999 through December 2006. Exercise prices for options outstanding as of December 31, 1996 ranged from $2.00 to $10.125 per share. The weighted average fair values of options granted during the years ended December 31, 1995 and 1996 were $3.04 and $ 3.96 respectively. The Company also has a Directors' Stock Option Plan (the "Plan") which provides for the granting to non-management directors of the Company options to purchase shares of Common Stock. The maximum F-14 number of shares with respect to which options may be granted under this Plan is 350,000 shares. As of December 31, 1996, options to purchase 195,000 shares of Common Stock have been granted at prices ranging from $4.75 to $10.125 per share. To date, none of these options have been exercised. In connection with a bridge financing in 1989, the Company issued warrants to purchase 7,365 shares of its Common Stock at $5.60 per share. Of these warrants, 7,142 were exercised in April 1994. The remaining warrants expired in the same month. In connection with $950,000 of bridge financing in 1991 and $467,500 of bridge financing in 1992, the Company issued warrants to purchase 189,801 shares of its Common Stock at $6.00 per share. The warrants are exercisable at various dates from January 1996 to January 1997. Of these warrants, 77,506 were exercised during 1996 and 94,170 warrants expired. The 18,125 remaining warrants are exercisable in January 1997. In connection with an equipment lease agreement entered into during 1991, the Company issued warrants to purchase 37,917 shares of Series D Preferred Stock at $6.00 per share. The warrants were exercised in a cashless transaction in January 1995. The Company has elected to follow Accounting Principles Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related interpretations in accounting for employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value for these options was estimated at the date of grant using the Black Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.29% and 6.03%; volatility factor of the expected market price of the Company's common stock of .641 and a weighted-average expected life of the option of 4 years. In management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options because the Company's employee stock options have characteristics significantly different from those of traded options and have vesting restrictions and because changes in the subjective input assumptions can materially affect the fair value estimates. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. During the initial phase-in period, the effects of applying Statement 123 for recognizing pro-forma compensation cost may not be representative of the effects on reported pro-forma net loss or income for future years because the options in the Stock Option Plans vest over several years and additional options will be made in the future. F-15 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows: 1996 1995 ------------------------- Pro forma net loss $(6,812,761) $(9,249,988) Pro forma net loss per common share $(.77) $(1.18) 8. DEFINED CONTRIBUTION PLAN The Company has a 401(k) plan (the "Plan") which covers substantially all employees of the Company. Contributions to the Plan are made through employee wage deferrals and employer matching contributions. The employer matching contribution percentage is discretionary and determined each year. In addition, the Company may contribute two discretionary amounts; one to non-highly compensated individuals and another to all employees. To qualify for the discretionary amounts, an employee must be employed by the Company on the last day of the Plan year or have been credited with a minimum of 500 hours of service during the Plan year. The 401(k) expense for the years ended December 31, 1996, 1995 and 1994 was $25,360, $28,335 and $16,289, respectively. 9. STOCK SPLIT The Company's Board of Directors and stockholders approved a 1-for-2 reverse stock split that was effective upon the closing of the initial public offering in July 1994. All share and per share information has been adjusted to give effect to the stock split in the financial statements. 10. GOING CONCERN Net losses since the Company's inception have resulted in an accumulated deficit balance of $35,659,942 at December 31, 1996. The Company's ability to continue as a going concern and the realization of its assets and orderly satisfaction of its liabilities are dependent on obtaining additional funds from outside sources and generating sufficient working capital from operations. The Company is currently exploring financing alternatives and may need to complete a financing transaction in 1997. The Company believes that the successful completion of a financing transaction will satisfy its future cash requirements. However, there can be no assurance that the Company will be successful in completing a financing transaction. F-16 CIMA LABS INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Balance Charged to at Beginning Costs and Less Balance at Description of Year Expenses Deductions End of Year - ----------------------------------------------------------------------------------------------- Year ended December 31, 1996: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ -- $ -- $ -- $ -- Obsolescence reserve 332,207 -- (332,207) -- -------------------------------------------------- Total $332,207 $ -- $(332,207) $ -- -------------------------------------------------- -------------------------------------------------- Year ended December 31, 1995: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $100,000 $(100,000) -- $ -- Obsolescence reserve -- 332,207 -- 332,207 -------------------------------------------------- Total $100,000 $232,207 $ -- $332,207 -------------------------------------------------- -------------------------------------------------- Year ended December 31, 1994: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ -- $100,000 $ -- $100,000 Obsolescence reserve -- -- -- -- -------------------------------------------------- Total $ -- $100,000 $ -- $100,000 -------------------------------------------------- --------------------------------------------------
F-17 EX-10.1 2 EX-10.1 TECHNOLOGY AND SPONSORED RESEACH AGREEMENT *** TEXT OMITTED AND FILED SEPARATELY CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. Sections 200.80(B)(4), 200.83 AND 240.24B-2 TECHNOLOGY AND SPONSORED RESEARCH AGREEMENT This TECHNOLOGY AND SPONSORED RESEARCH AGREEMENT (the "Agreement") is made as of December 9, 1996 (the "Effective Date") between JOSEPH R. ROBINSON PH.D., at 41 Chequamegon Bay, Madison, WI 53719 ("Dr. Robinson"), and JAMES MCGINITY, PH.D. at 4209 Dunning Lane, Austin, Texas 78746 ("Dr. McGinity") and CIMA LABS, INC., A DELAWARE CORPORATION, WITH ITS PRINCIPAL PLACE OF BUSINESS AT 10000 VALLEY VIEW ROAD, EDEN PRAIRIE, MINNESOTA 55346 ("SPONSOR"). RECITALS A. Sponsor desires that Drs. Robinson and McGinity perform certain research work hereinafter described and is willing to advance funds to sponsor such research; B. Sponsor desires to obtain certain rights to patents and technology developed during the course of such research with a view to profitable commercialization of such patents and technology for Sponsor's benefit; and C. Drs. Robinson and McGinity will perform such research and Drs. Robinson and McGinity will grant certain rights to such patents and technology. NOW, THEREFORE, in consideration of the mutual covenants and promises herein contained, Drs. Robinson and McGinity and the Sponsor agree as follows: 1. DEFINITIONS 1.1 LICENSED SUBJECT MATTER shall mean inventions and discoveries covered by patent rights or technology rights which is within licensed field. 1.2 TECHNOLOGY RIGHTS shall mean Drs. Robinson and McGinity's rights in any technical information, know-how, process, procedure, composition, device, method, formula, protocol, technique, software, design drawing or data related to the development of [...***...] technology. 1.3 LICENSED FIELD shall mean medical human pharmaceutical use. 1.4 LICENSED TERRITORY shall mean worldwide. - --------------------------------------- * CONFIDENTIAL TREATMENT REQUESTED 1. 1.5 LICENSED PRODUCT shall mean any product sold by licensee comprising licensed subject matter pursuant to this Agreement and the Technology Rights of this Agreement. 1.6 SALE OR SOLD shall mean the transfer or disposition of a licensed product for value to a party other than licensee or a subsidiary. 1.7 SUBSIDIARY shall mean any business entity more than 50% owned by licensee, any business entity which owns more than 50% of licensee, or any business entity that is more than 50% owned by a business entity that owns more than 50% of licensee. 1.8 NET SALES shall mean the gross amount actually received on all sales of Licensed Products by Sponsor or its sublicensee, less (a) discounts actually allowed, (b) credits for claims, allowances, retroactive price reductions or returned goods, (c) prepaid freights, (d) sales taxes or other governmental charges actually paid in connection with the sale (but excluding what is commonly known as income taxes chargeable to Sponsor profits), and (e) reasonably and customary brokerage, commissions and other fees paid to others for or in connection with sales of Licensed Products. For purposes of determining Net Sales, a sale shall be deemed to have occurred when payment is received for the sale by Sponsor. 1.9 PATENT RIGHTS shall mean any U.S. or foreign patent application or patent or Joint Improvement arising from the performance of the Research program, for which Sponsor elected to obtain an exclusive license under Article 5, below. Patent rights shall include any provisionals, continuation, continuing-in-part, or divisional applications, substitutions or extensions to such applications, and any corresponding foreign patent applications or patents corresponding to any of the foregoing applications or patents. 1.10 PRINCIPAL INVESTIGATOR. The Principal Investigator will be Dr. Joseph R. Robinson. Dr. McGinity will work with Dr. Robinson. 1.11 RESEARCH PROGRAM shall mean the Research Program undertaken by Drs. Robinson and McGinity as described in the attached Exhibit A. The Research Program will have as its primary objectives the development of [...***...]. 1.12 ROBINSON AND MCGINITY INVENTIONS shall mean an invention conceived solely by Drs. Robinson and McGinity, or jointly by them. 1.13 SPONSOR TECHNOLOGY RIGHTS shall mean Sponsor rights under state and federal laws, including without limitation the laws of copyright, trade secret, and unfair competition, in unpatented inventions, materials know- how, software and other technology developed by the Sponsor, its employees and agents. 1.14 INVENTION shall mean any discovery, concept, or idea, whether or not patentable, conceived by Drs. Robinson and McGinity or others in their laboratories during the Research Program, and arising directly from the performance of the Research Program, - --------------------------------------- * CONFIDENTIAL TREATMENT REQUESTED 2. including but not limited to processes, methods, software, tangible research tools and products, formulas and techniques, improvements thereto, and know-how related thereto. 1.15 ROBINSON AND MCGINITY TECHNOLOGY RIGHTS shall mean Drs. Robinson or McGinity's rights under state and federal laws, including without limitation the laws of copyright, trade secret, and unfair competition, in unpatented inventions, know-how materials, software and other technology developed by Drs. Robinson and McGinity during the Research Program and arising directly from the performance of the Research Program. 1.16 SPONSOR CONTACT shall mean the CIMA contact between the Sponsor and Drs. Robinson and McGinity. 2. RESEARCH PROGRAM 2.1 Drs. Robinson and McGinity will use best efforts to conduct the Research Program described in Exhibit A, and will furnish the facilities necessary to carry out the Research Program. The Research Program will be under the direction of Drs. Robinson and McGinity. The program will be performed without using the University of Wisconsin or the University of Texas facilities or employees unless such employees are not on University time. 2.2 The Research Program shall be performed during the period from the Effective Date and continue for one (1) year thereafter (the "Research Term"). Sponsor shall have the option to extend the Research Program under mutually agreeable terms to be negotiated in good faith by Sponsor with Drs. Robinson and McGinity. 2.3 Drs. Robinson and McGinity will keep accurate scientific records relating to the Research program and will make such records available to Sponsor or its authorized representative throughout the Term of the Agreement (as defined in Section 11) during normal business hours upon reasonable notice. 2.4 The Research Program may be modified from time to time, upon mutual written agreement of the parties. 3. COMPENSATION 3.1 As consideration for the performance by Drs. Robinson and McGinity of its obligations under this Agreement, Sponsor will pay them according to the schedule set forth in Exhibit B. An initial payment of $15,000 will be made to Dr. Robinson and an initial payment of $15,000 will be made to Dr. McGinity within ten (10) days of the Effective Date of this Agreement. Sponsor will further reimburse Drs. Robinson and McGinity for legal fees, travel or other expenses associated with the preparation of provisional patent applications and other patent applications related to the Licensed Subject Matter, provided the Sponsor agrees to the patent counsel and other legal revisions required to prepare and file these applications. 3. 3.2 Dr. McGinity shall retain title to all equipment purchased and/or fabricated by him with funds provided by Sponsor under this Agreement. 4. REPORTS Drs. Robinson and McGinity agree to provide monthly written summaries to Sponsor to work resulting from the Research Program. An outline of goals and objectives for the next month will also be included. A final report will be submitted to Sponsor from Drs. Robinson and McGinity within thirty (30) days of termination of the Agreement. This final report shall contain a summary of all work and data collection. 5. OPTION FOR EXCLUSIVE LICENSE TO TECHNOLOGY 5.1 Subject to the terms of this Agreement, Drs. Robinson and McGinity hereby grant to Sponsor an exclusive option of any of the Licensed Subject Matter, to acquire an exclusive worldwide license to make, have made, use, sell or offer to sell Licensed Products, with rights to sublicense. 5.2 In Sponsor exercises its option, Drs. Robinson and McGinity shall and hereby do, grant to Sponsor, under their right, title and interest in Technology Rights and Patent rights in the Invention as defined pursuant to Section 5.1, an exclusive, worldwide license,with the right to sublicense, to make, have made, use, sell, offer for sale and import Licensed Products incorporating or based upon such invention. The royalty rate under such license shall be three percent (3%) of Net Sales of the Licensed Product or product employing the Licensed Subject Matter. Net Sales will be defined as Sponsor's net sales. Any such license shall be subject to the terms and conditions of this Agreement, including, without limitation, Sections 6 and 9. 6. PATENT MATTERS 6.1 For each Invention or Joint Improvement, Sponsor shall have the right to request Drs. Robinson and McGinity to file a patent application. If such a request is made, Drs. Robinson and McGinity shall direct, control, and diligently conduct the patent application process (including interferences and foreign oppositions) and carry out such process as appropriate for extension, renewal or other maintenance of each resulting patent, subject to such requirements, limitations and conditions as are expressly set forth in this Agreement. Dr. Robinson and McGinity shall use their best efforts to implement all reasonable requests made by Sponsor with regard to the patent application and maintenance processes for patents covering an Invention or Joint Invention licensed by Sponsor. Drs. Robinson and McGinity will assure patent attorney charges are reasonable and discussed with Sponsor in advance whenever possible. 6.2 Drs. Robinson and McGinity shall keep Sponsor informed with regard to all patent related matters, the patent application and maintenance process of licensed Subject Matter. Drs. Robinson and McGinity shall promptly deliver to Sponsor copies of all patent applications, amendments, related correspondence, and other pertinent documents of Licensed Subject Matter. 4. 6.3 Sponsor shall pay for all reasonable expenses incurred in preparing, filing and prosecuting patent applications and maintaining provisional patent applications, patent applications, and domestic and foreign patents which have been or are obtained for each Invention or Joint Invention for which Sponsor requests Drs. Robinson and McGinity to file. Sponsor agrees to pay said expenses. 6.4 Each patent application filed and patent obtained for each Invention or Joint Invention shall be owned by Drs. Robinson and McGinity, and shall be deemed a part of Patent Rights. 6.5 If, at any time during the Agreement Term, Sponsor's rights with respect to an Invention or Joint Invention are terminated pursuant to Article 9, Drs. Robinson and McGinity shall have the right to take whatever action they deem appropriate to maintain the corresponding application at their own expense. If Drs. Robinson and McGinity pursue patents under this section, Sponsor agrees to cooperate fully, including by providing, at no charge to Drs. Robinson and Mcginity, all appropriate technical data and executing all necessary legal documents. 6.6 Sponsor shall be entitled to prosecute any and all infringements of any Patent Rights to which Sponsor obtains rights hereunder, and to defend all charges of infringement brought against it or Drs. Robinson or McGinity, arising as a result of its making, using, selling, offering for sale Licensed Products, and to enter all settlements, judgments or other arrangements respecting the same, at its own expense. Drs. Robinson and McGinity shall permit action to be brought in their respective names if required by law, and Sponsor shall hold Drs. Robinson and McGinity harmless from any cost, expense, or liability respecting all such infringements or charges of infringement. Upon request of Sponsor, Drs. Robinson and McGinity agree to provide reasonable assistance of a technical nature that Sponsor may require in any litigation arising in accordance with the provisions of this section. Sponsor agrees to reimburse Drs. Robinson and McGinity for all reasonable expenses incurred as a result of providing such assistance requested by Sponsor. 7. PUBLICATION AND ACADEMIC RIGHTS 7.1 Drs. Robinson and McGinity have the right to publish or otherwise publicly disclose information gained in the course of this Agreement. In order to avoid loss of Patent rights as a result of premature public disclosure of patentable information, Drs. Robinson and McGinity will submit any prepublication materials to Sponsor for review and comment by the Sponsor through their patent attorney at least sixty (60) days prior to planned submission for publication. Sponsor shall notify Drs. Robinson and McGinity to file patent applications on any inventions contained in the materials; and, if Drs. Robinson and McGinity agree to do so, which agreement shall not be unreasonably withheld, Drs. Robinson and McGinity will proceed to file a patent application in due course pursuant to the provisions of Article 6. 7.2 It is understood that Drs. Robinson and McGinity may discuss the research being performed under this Agreement with other investigators but shall not reveal information which is Sponsor's Confidential Information under Article 8; provided that Drs. Robinson and McGinity shall not make any disclosure of information that could impair or result in the loss of 5. the ability to obtain patent protection on any conceived and/or owned by CIMA Invention. In this regard, Drs. Robinson and McGinity further agree that they will not permit the laboratory workers to engage in activities that could lead to joint ownership in an Invention with a third party without first advising Sponsor of such activities and obtaining Sponsor's written consent to the performance of such activities. In the event that any Patent Rights result from a collaboration with third party investigators, Drs. Robinson and McGinity shall grant to Sponsor the rights defined in Article 5 of this Agreement, to the extent these are not in conflict with obligations to another party as a result of the involvement of the other investigator(s). In this latter case, Drs. Robinson and McGinity shall, in good faith, exercise reasonable efforts to enable Sponsor to obtain rights to the joint invention. 8. CONFIDENTIAL INFORMATION 8.1 The parties may wish, from time to time, in connection with work contemplated under this Agreement, to disclose confidential information to each other ("Confidential Information"). Each party will use reasonable efforts to prevent the disclosure of any of the other party's Confidential Information to third parties for a period of three (3) years from receipt thereof, provided that the recipient party's obligation shall not apply to information that: (a) is not disclosed in writing or reduced to writing and so marked with an appropriate confidentiality legend within thirty (30) days of disclosure; (b) is already in the recipient's party's possession at the time of disclosure thereof; (c) is or later becomes part of the public domain through no fault of the recipient party; (d) is received from a third party having no obligations of confidentiality to the disclosing party; (e) is independently developed by the recipient party; or (f) is required by law or regulation to be disclosed. 8.2 In the event that information is required to be disclosed pursuant to subsection (f), the party required to make disclosure shall notify the other to allow that party to assert whatever exclusions or exemptions may be available to it under such law or regulation. 9. TERM AND TERMINATION 9.1 This Agreement shall remain in full force and effect during the Research Term, unless otherwise terminated by operation of law or by acts of the parties in accordance with the terms of this Agreement, or unless extended by mutual agreement of the parties. 6. 9.2 This Agreement may be terminated at anytime by the written agreement of both parties. 9.3 In the event that either party shall be in default of its material obligations under this Agreement and shall fail to remedy such default within thirty (30) days after receipt of written notice thereof, the non- breaching party has the right to terminate upon expiration of the thirty (30) days period. 9.4 Termination or cancellation of this Agreement shall not affect the rights and obligations of the parties accrued prior to termination. 9.5 Any provisions of this Agreement which by their nature extend beyond termination shall survive such termination. Upon termination of this Agreement or election of Sponsor to not pursue development of the licensed subject matter, all Technology Rights and intellectual property rights shall remain with Drs. Robinson and McGinity. Sponsor may, after the Effective Date of such termination, sell all Licensed Product and parts thereof that it may have or had at the date of termination, provided that it pay earned royalty thereon as provided in the Agreement. 9.6 Upon and effective as of the date of termination of this Agreement, Drs. Robinson and McGinity may license the technology to others to develop and commercialize the entire technology package. 10. ASSIGNMENT; SUCCESSORS 10.1 This Agreement shall not be assignable by either of the parties without the prior written consent of the other party except to a successor in interest to all or substantially all of the business assets of a party hereto. 10.2 Subject to the limitations on assignment herein, this Agreement shall be binding upon and inure to the benefit of said successors in interest and assigns of Drs. Robinson and McGinity and Sponsor. 11. WARRANTIES Drs. Robinson and McGinity hereby warrant and represent that they each have the full right and power to grant the exclusive license, with the right of sublicense, as set forth in this Agreement. Drs. Robinson and McGinity make no other warranties concerning the rights covered by this Agreement. 12. GENERAL PROVISIONS 12.1 This Agreement constitutes the entire and only agreement between the parties relating to the Research Program and license, and all prior negotiations, representations, agreements and understandings are superseded hereby. No agreements altering or supplementing 7. the terms hereof may be made except by means of a written document signed by the duly authorized representatives of the parties. 12.2 The relationship between Drs. Robinson and McGinity and Sponsor is that of independent contractors. Drs. Robinson and McGinity and Sponsor are not joint venturers, partners, principal and agent, master and servant, employer and employee, and have no other relationship other than independent contracting parties. Drs. Robinson and McGinity shall have no power to bind or obligate Sponsor in any manner, other than as is expressly set forth in this Agreement. Likewise Sponsor shall have no power to bind or obligate Drs. Robinson and McGinity in any manner, other than as is expressly set forth in this Agreement. 12.3 If any provision of this Agreement is ultimately held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired hereby. 12.4 Any delay in enforcing a party's rights under this Agreement or any waiver as to a particular default or other matter shall not constitute a waiver of such party's rights to the future enforcement of its rights under this Agreement, except as to an express written and signed waiver as to a particular matter for a particular period of time. 12.5 Any delays in performance by any party under this Agreement shall not be considered a breach of this Agreement if and or to the extent said delays caused by occurrences beyond the reasonable control of the party affected, including, but not limited to, acts of God, embargoes, governmental restrictions, strikes or other concerted acts of workers, fire, flood, explosion, riots, wars, civil disordered, rebellion or sabotage. The party suffering such occurrence shall immediately notify the other party and any time for performance hereunder shall be extended by the actual time of delay caused by the occurrence. 12.6 Whenever there has been an assignment or a sublicense as permitted by this Agreement, the term "Sponsor" as used in this Agreement shall also include and refer to such assignee and sublicensee. 12.7 Headings included herein are for convenience only and shall not be used to construe this Agreement. 12.8 Any notice required by this Agreement shall be given by personal delivery (including delivery by reputable messenger services such as Federal Express) or by prepaid, first class, certified mail, return receipt requested, addressed in the case of Drs. Robinson and McGinity to: Dr. Joseph R. Robinson 41 Chequamegon Bay Madison, WI 53719 Fax: (608) 262-4054 Phone: (608) 262-7968 8. Dr. James W. McGinity 4209 Dunning Lane Austin, Texas 78746 Fax: (512) 471-2746 Phone: (512) 328-8149 or in the case of Sponsor to: John M. Siebert, Ph.D. CIMA Labs, Inc. Attn: John M. Siebert, Ph.D. 10000 Valley View Road Eden Prairie, MN 55344 Fax: (612) 947-8770 Phone: (612) 947-8762 or at such other addresses as may be given from time to time in accordance with the terms of this notice provision. 12.9 This Agreement shall be governed by, construed, and enforced in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives. CIMA LABS, INC. /s/ Dr. Joseph R. Robinson By: /s/ John M. Siebert, Ph.D. - ----------------------------------- ----------------------------- DR. JOSEPH R. ROBINSON John M. Siebert, Ph.D. President and CEO Dated: December 10, 1996 ---------------------------- Dated: December 9, 1996 -------------------------- /s/ Dr. James W. McGinity - ----------------------------------- DR. JAMES W. MCGINITY Dated: December 5, 1996 ---------------------------- 9. EXHIBIT A RESEARCH PROGRAM The Research Program will be directed to the development of [...* * *...]. The Research Program will be conducted outside of any university or State owned premises. The development of specific drugs (i.e., ranitidine), in the form of a [...* * *...], is not part of the present research proposal. - --------------------------------------- * CONFIDENTIAL TREATMENT REQUESTED 10. EXHIBIT B BUDGET PROGRAM The following defined the schedule of payments and milestone events relative to the Technology and Sponsored Research Agreement (the "Agreement") between Drs. Robinson and McGinity. Stage 1. CIMA will pay $15,000 to Joseph R. Robinson and $15,000 to James W. McGinity within ten (10) days of the Effective Date of the Agreement. CIMA will reimburse Drs. Robinson and McGinity for travel expenses and legal fees associated with the preparation and filing of each provisional patent application which is directed to Licensed Subject Matter within ten (10) days of presentation of an invoice for same. Stage 2. CIMA will make a second payment of $30,000 to Joseph R. Robinson and a second payment of $30,000 to James W. McGinity within one (1) month from the effective date of the Agreement. Fees are directed to development of [...* * *...] as defined in Exhibit A. Delivery of these samples will be made within six (6) months of payment. Sponsor will have an option of terminating the Research Program upon evaluation of the [...* * *...]. Sponsor will be given ninety (90) days to evaluate the [...* * *...] and to notify Drs. Robinson and McGinity in writing of either termination or continuation of the Research Program (Exhibit A). Extension of the period to evaluate the [...* * *...] may be obtained by Agreement of the parties. Termination of the Agreement or the Research Program does not relieve Sponsor of the obligation to make the second payment of $30,000 to Drs. Robinson and McGinity, but does relieve Sponsor of obligations/payments defined in Stage 3 and 4 of the Budget Program. Stage 3. CIMA will pay $40,000 to Joseph R. Robinson and $40,000 to James W. McGinity for continued development and characterization of the [...* * *...] during Stage 2. This payment will be made within thirty (30) days of Sponsor's written request for Drs. Robinson and McGinity to begin development of a prototype for one or both of the [...* * *...] described in Exhibit A, or modifications thereof. Delivery of these samples will be made within six (6) months of payment. Stage 4. CIMA will pay $40,000 to Joseph R. Robinson and $40,000 to James W. McGinity within thirty (30) days of the granting of a patent application directed to [...* * *...] and a patent application directed to [...* * *...] or upon the introduction of a commercial product of the Licensed Subject Matter, whichever occurs sooner. - --------------------------------------- * CONFIDENTIAL TREATMENT REQUESTED 11. EX-10.8 3 EX-10.8 SUPPLY AGREEMENT *** TEXT OMITTED AND FILED SEPARATELY CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. Sections 200.80(B)(4), 200.83 AND 240.24B-2 SUPPLY AGREEMENT THIS SUPPLY AGREEMENT (the "Agreement") is made and entered into as of the 10th day of October, 1996 (the "Effective Date"), by and between [...***...], a corporation organized and existing under the laws of [...***...] having an office at [...***...] and CIMA LABS INC. (hereinafter referred to as "CIMA"), a corporation organized and existing under the laws of the State of Delaware, having an office at 10000 Valley View Road, Eden Prairie, Minnesota 55344. WITNESSETH: WHEREAS, [...***...] and CIMA have previously entered into a Stability, Manufacturing and Testing Agreement dated March 1, 1996, pursuant to which [...***...] sponsored the manufacture by CIMA of stability batches of certain OraSolv-Registered Trademark- pharmaceutical product formulations for [...***...] evaluation; and WHEREAS, [...***...] has evaluated such product formulations and seeks to validate and potentially commercialize such formulations in the [...***...]; and WHEREAS, CIMA desires to supply [...***...], and [...***...] desires to be supplied by CIMA, with all of [...***...] requirements of Products (as hereinafter defined); NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties hereby agree as follows: 1. DEFINITIONS For purposes of this Agreement, the following definitions shall be applicable (it being understood that the terms defined shall include the singular number in the plural, and the plural number in the singular): (a) "AFFILIATE" shall mean, with respect to each party, any corporation or other business entity directly or indirectly controlling, controlled by or under common control with such party; as used herein, the term "control" means possession of the power to direct, or cause the direction of the management and policies of a corporation or other entity whether through the ownership of voting securities, by contract or otherwise. (b) "COMMERCIAL LAUNCH" shall mean the date of first commercial sale of a Product by [...***...] in the Territory. - ---------------------------------------- *CONFIDENTIAL TREATMENT REQUESTED 1. (c) "FDA" shall mean the United States Food and Drug Administration or any successor agency. (d) "PRODUCTS" shall mean any of the OraSolv-Registered Trademark- [...***...] products listed in Exhibit A attached hereto and made a part hereof, as may be amended from time to time by mutual written agreement of the parties. (e) "SPECIFICATIONS" shall mean the specifications for the manufacture of Products set forth in Exhibit B hereof. (f) "TERRITORY" shall mean the [...***...] (g) "X-FACTORY PRICE" shall mean [...***...] list selling price as published to the trade. 2. VALIDATION WORK; COSTS CIMA shall produce seven thousand two hundred (7200) sales sample cartons of the Products for [...***...] (three thousand six hundred (3600) cartons of the 80 mg. Product and three thousand six hundred (3600) cartons of the 160 mg. Product). The parties agree that [...***...] shall pay to CIMA a total amount of [...***...] for such sales sample cartons. CIMA shall also produce six (6) full-scale process validation batches for the Products (three (3) for the 80 mg. Product and three (3) for the 160 mg. Product). The parties agree that all commercially salable validation batches shall be paid for by [...***...] according to the Base Purchase Price for Products (as set forth in Exhibit A and described in Paragraph 3(d) below). The parties agree that "commercially salable validation batches" are defined as validation batches that have been manufactured according to the validation protocol and that meet the Product Specifications. 3. SUPPLY AND GENERAL TERMS (a) SUPPLY OF THE PRODUCTS; TERMS OF EXCLUSIVITY. During the term of this Agreement and subject to the terms and conditions contained herein, [...***...] agrees to purchase all of its requirements of Products in the Territory exclusively from CIMA, and CIMA agrees to sell and deliver to [...***...] its requirements of Products in the Territory. Provided [...***...] pays to CIMA [...***...] exclusivity fee within sixty (60) days of the Effective Date hereof, and provided further that Commercial Launch occurs by [...***...],1997, CIMA will not allow [...***...] until the first anniversary of Commercial Launch. [...***...] Upon either (i) [...***...], 1997, if Commercial Launch has not yet occurred, or (ii) the first anniversary of Commercial Launch, CIMA shall be free to enable one or more third parties to sell the Products in the Territory. (b) SPECIFICATIONS. Products shall be manufactured by CIMA in accordance with the Specifications as presented in Exhibit B. The Specifications (i) may be reasonably modified upon the written consent of both [...***...] and CIMA, such consent not to be unreasonably withheld, and (ii) shall be modified to the extent that they do not comply with FDA - ---------------------------------------- *CONFIDENTIAL TREATMENT REQUESTED 2. requirements, in order to comply therewith; provided, however, that if the parties mutually agree upon any modification pursuant to (i), or in the event any modification is required under (ii), the purchase price for Products pursuant to this Agreement shall be adjusted to reflect any resulting change in manufacturing or testing costs. (c) [...***...] COVENANTS; DILIGENCE. [...***...] hereby covenants and agrees that it shall not sell, distribute, transfer or otherwise dispose of the Products for use outside the Territory. [...***...] further agrees that in the event it becomes aware of any unauthorized use of the Products outside the Territory, it shall promptly notify CIMA and shall take all reasonable steps to halt such activities. [...***...] agrees that it will apprise CIMA of [...***...] marketing initiatives regarding the Products. (d) BASE PURCHASE PRICE. The "Base Purchase Price" for the Products to be supplied initially by CIMA to [...***...] pursuant to this Agreement shall be as set forth on Exhibit A. Subject to the provisions of Paragraph 3(e) below, manufacturing cost reductions conceived and realized by CIMA shall be retained by it and will not result in reductions to the Base Purchase Price for any Products. The Base Purchase Prices will be adjusted annually commencing [...***...]. The initial such adjustment will be based on the percentage change in the U.S. Producer Price Index (the "PPI"), if any, from the date of first commercial shipment of Products to [...***...] to [...***...]. Thereafter, the Base Purchase Price shall be adjusted on each [...***...] of the term of this Agreement, in an amount equal to the [...***...] for the prior year. In addition, Base Purchase Prices hereunder may be increased by CIMA, in its reasonable discretion, in the event any changes occur in FDA or other governmental requirements which increase CIMA's manufacturing costs for the Products. In such event, CIMA will furnish [...***...] with supporting documentation of such increased costs and regulatory changes. [...***...] [...***...] also agrees to reimburse CIMA, at CIMA's cost, for inventory, printing plates and other items rendered unsalable as a result of discontinuance of any Product by [...***...] or from changes in the Specifications (collectively called "Discontinued Inventory"). Upon payment of such reimbursement, [...***...] will own the Discontinued Inventory, and CIMA will cooperate with [...***...], at no cost to CIMA, in the disposition of the Discontinued Inventory. [...***...] will further reimburse CIMA, at CIMA's cost, for raw materials inventory obtained to accommodate the ninety (90) day forecast provided by [...***...] to CIMA pursuant to Section 3(f)(i). In the event that CIMA becomes free to enable one or more third parties to sell the Products in the Territory pursuant to Section 3(a), the Base Purchase Price for Products shall be equal to or less than the price third parties pay to CIMA for supply of the Product. (e) [...***...] SUGGESTED COST SAVINGS. [...***...] shall be permitted to suggest to CIMA production cost savings measures which are intended to result in a reduction in the Base Purchase Price hereunder. CIMA agrees to give reasonable consideration to any and all such suggestions by [...***...] and agrees further that it will implement any such change as to which: - ---------------------------------------- *CONFIDENTIAL TREATMENT REQUESTED 3. (i) [...***...] can reasonably demonstrate shall result in immediate cost savings of at least [...***...]; (ii) [...***...] can reasonably demonstrate is readily implementable by CIMA; and (iii) [...***...] agrees in writing to be responsible for, by prompt reimbursement or otherwise, all reasonable costs of implementation. Notwithstanding the above, however, CIMA shall have the right to decline any such suggestion which in CIMA's reasonable opinion would create an inordinate disruption to CIMA's operations or would give rise to a significant safety hazard or risk of loss or damage to property. (f) FORECASTS AND ORDERS. (i) FORECASTS. [...***...] will provide to CIMA a binding purchase order for the quantity of Products which [...***...] requires for the initial three (3) months following the date upon which [...***...] commences sales of Products, at least ninety (90) days prior to the commencement of Product sales. [...***...] will provide to CIMA each month after submission of such initial purchase order a twelve (12) month forecast for each SKU [...***...] will purchase from CIMA. Each such monthly forecast will be binding for (a) the first two (2) months following submission of such forecast to CIMA with respect to CIMA's scheduled production capacity, and (b) the first three (3) months following submission of such forecast to CIMA with respect to supply of materials necessary to support such forecast. The parties agree that the remaining nine (9) months of each forecast submitted to CIMA are nonbinding and shall be used for planning purposes only. CIMA is only required to fill orders amounting to [...***...] of the most recent [...***...] forecast for that calendar quarter. CIMA agrees to use reasonable efforts to fill any [...***...] order in excess of such required quantities. Notwithstanding anything to the contrary herein, at such time as any [...***...] quarterly forecast exceeds [...***...] tablets or an aggregate of [...***...] tablets for a twelve (12) month period, [...***...] acknowledges that CIMA will be required to increase its manufacturing capacity and will require twelve (12) months to install and start-up such capacity. [...***...] will therefore use reasonable efforts to give CIMA as much advance notice as possible of its requirements in excess of said quarterly and annual amounts, and CIMA shall not be obligated to deliver Products in excess of such quarterly or annual amounts until the date which is fifteen (15) months following the first such notice by [...***...] to CIMA. (ii) ORDERS. Orders for Products may be placed in writing on [...***...] purchase order form or by telephone. All telephone orders shall be confirmed by [...***...] in writing within ten (10) business days. CIMA shall fill all orders within ninety (90) days of receipt. No preprinted terms or any other terms, except for the quantity and the requested delivery date, on any such purchase order or any acknowledgment or other form used by either - ---------------------------------------- *CONFIDENTIAL TREATMENT REQUESTED 4. party shall become part of this Agreement between the parties unless explicitly addressed by a separate signed, written agreement between the parties which purports to amend this Agreement. (g) MINIMUM PURCHASES. During the period commencing with the Commercial Launch and concluding [...***...], [...***...] shall purchase a total of not less than [...***...] tablets of Product for the two Product formulations listed on Exhibit A. (h) PAYMENT. [...***...] shall pay for all Products supplied by CIMA within [...***...] of [...***...] receipt of CIMA's invoice. Payment is to be made in United States Dollars, and shall be remitted to CIMA at the address specified herein. (i) SHIPMENT. CIMA shall ship the Products in a commercially reasonable manner to [...***...] sites within the Territory as directed by [...***...], at [...***...] expense. Except as otherwise agreed by the parties, all shipments of Products shall be F.O.B. CIMA's facility. CIMA shall ship Products upon accumulation of full truckload quantities of Products. [...***...] may request that CIMA ship Products prior to accumulation of a full truckload quantity to accommodate rush customer orders, provided that [...***...] shall pay any additional costs of shipping such partial truckload quantity. (j) ACCEPTANCE AND REJECTION. Any Products shipped hereunder shall be received by [...***...] subject to inspection and performance testing by [...***...] in accordance with [...***...]' quality assurance program in effect at the time of delivery to ensure, to the extent possible, that the Products meet the Specifications and otherwise comply with the warranties provided in Paragraph 4(b) of this Agreement. [...***...] shall be allowed a maximum of [...***...] from the date of receipt of any shipment for inspection and provision of written notice to CIMA of rejection of any portion or all of that shipment. If [...***...] does not deliver such written notice to CIMA within such [...***...] period, [...***...] shall be deemed to have accepted the shipment. Promptly following notice of rejection, CIMA and [...***...] agree to mutually determine whether the rejected Product conformed to the Specifications and warranties. If the parties cannot agree after a period of [...***...], [...***...] shall nominate an independent laboratory reasonably satisfactory to CIMA to carry out tests on representative samples from the rejected portion of the shipment. The results of these tests shall be binding on both parties. If it is determined, with or without reference to an independent laboratory, that the rejected Products were non-conforming, CIMA shall, at [...***...]' election, make replacement delivery free of any additional charge, or reimburse [...***...] the purchase price, including freight and insurance (if the purchase price had actually been paid by [...***...] for the rejected Products. Such replacement or reimbursement shall be [...***...] sole remedy for non-conforming Products, and CIMA shall not be liable for any special, compensatory, incidental or consequential damages resulting from non-conforming Products, or the recall thereof. Rejected Products shall be returned to CIMA or disposed of at CIMA's expense, in accordance with CIMA's instructions. In the event of any destruction of non-conforming Products, the party - ---------------------------------------- *CONFIDENTIAL TREATMENT REQUESTED 5. directing the destruction shall deliver to the other an appropriate certificate of destruction. CIMA shall pay for or reimburse [...***...] costs of disposal of rejected Products. (k) ADDITIONAL DUTIES OF CIMA. CIMA shall also: (i) forward to [...***...] all inquiries from any person in the Territory concerning Products within [...***...] days after CIMA receives each such inquiry, and provide [...***...] with any reasonable assistance requested in connection with customer complaints relating to Products; (ii) inform [...***...] of any defective Product or of information of which CIMA is aware that suggests that a defect may exist, within [...***...] business days after becoming aware of any such defective Product or information; (iii) inform [...***...] of any pending or threatened litigation, governmental investigation, proceeding or action involving Products or CIMA's manufacturing or other facilities for Products, within [...***...] business days after receiving notice thereof; (iv) obtain and maintain all necessary permits, registrations and licenses required to manufacture and supply Products under this Agreement in the United States; (v) manufacture and handle Products in accordance with all applicable [...***...] laws, government regulations, rules and orders, [...***...]to CIMA by [...***...] with respect to Products ordered for sale [...***...], and in compliance with current Good Manufacturing Practices promulgated by the FDA applicable to Products. [...***...] shall have the right during normal business hours not more often than once during any calendar year, and upon reasonable notice to CIMA, to inspect and audit in a reasonable manner CIMA's manufacturing and other facilities in order to ensure such compliance; (vi) inform [...***...] within two (2) business days of any FDA general GMP inspection or other FDA inspection involving the Products, and provide [...***...] with a copy of the FD 483 and CIMA's response within fifteen (15) business days of such inspection; (vii) provide [...***...] with a copy of the annual product review for the Products; and (viii) provide [...***...] with a Certificate of Analysis for each batch of Product released for distribution. (l) ADDITIONAL DUTIES OF [...***...]. [...***...] shall also: (i) forward to CIMA copies of any significant complaints it receives from customers concerning Products for which CIMA's assistance is requested, within [...***...] business days after receiving any such complaint; - ---------------------------------------- *CONFIDENTIAL TREATMENT REQUESTED 6. (ii) inform CIMA of any defective Product or of information that suggests that a defect may exist within [...***...] business days after becoming aware of such defective Product or information; (iii) inform CIMA of any pending or threatened litigation or governmental investigation involving the Products within [...***...] business days after [...***...] receives notice thereof; (iv) comply with applicable laws and governmental regulations affecting the sale and distribution of Products; and (v) inform CIMA (and provide copies when available) of regulations and requirements of applicable [...***...] authorities with respect to Products ordered by [...***...] for sale in [...***...]. (m) RECALLS. (i) In the event [...***...] shall be required (or shall voluntarily decide) to initiate a recall, product withdrawal or field correction of any Product manufactured by CIMA pursuant to this Agreement, whether or not such recall has been requested or ordered by any federal or state agency, [...***...] shall notify CIMA's Vice President of Regulatory Compliance, at the address set forth in Article 8 of this Agreement, and CIMA shall fully cooperate with [...***...]. In the event CIMA believes that a recall, product withdrawal, or field correction by [...***...] may be necessary and/or appropriate, CIMA shall notify [...***...] Vice President of Technical Operations at the address set forth in Article 8 of this Agreement, of its belief, and the parties shall cooperate with each other in determining the necessity and nature of such action. (ii) With respect to any recall, product withdrawal, or field correction, [...***...] shall make all contacts with the FDA and any foreign regulatory agencies and shall be responsible for coordinating all of the necessary activities in connection with such recall, product withdrawal, or field correction, and shall make any statements to the media, including, but not limited to, press releases and interviews for publication or broadcast. (iii) If any recall, product withdrawal, or field correction is initiated solely because of a defect in any Product arising from the manufacture, processing, packaging or holding of the Product by CIMA, CIMA will [...***...] (iv) If any recall, product withdrawal or field correction is required due to circumstances beyond the reasonable control of CIMA (e.g., defective materials supplied by [...***...], handling by [...***...] or other circumstances), the costs of such recall, including the costs of any of CIMA's work in process affected by the recall, shall be borne by [...***...]. - ---------------------------------------- *CONFIDENTIAL TREATMENT REQUESTED 7. (n) TERMS OF RESALE. Terms of all sales of Products by [...***...] or its Affiliates, including price, credit, discounts, billing and shipments, shall be established by [...***...] in its sole discretion. (o) PACKAGING AND LABELING. Subject to CIMA's right of prior review of materials containing any trademarks owned or controlled by CIMA, the final packaging and labeling content for Products shall be determined by [...***...] but shall comply with all applicable laws, rules and regulations in the Territory. (p) PACKAGE INTEGRITY; [...***...]. CIMA will notify [...***...] of any incidence of [...***...] observed by CIMA during stability evaluation of the Products packaged comparably to those batches of Products designated as [...***...], which are scheduled to reach the [...***...] [...***...] may, at its election, physically participate in the evaluation of the [...***...] batches. If CIMA observes [...***...] in the [...***...] batches which is determined to be solely due to [...***...], [...***...] obligations to pay the amounts set forth in Paragraph 2 above, and to achieve Commercial Launch by [...***...], 1997 as specified in Paragraph 3(a), will be suspended. Within [...***...] days after CIMA notifies [...***...] of any observed [...***...] in the [...***...] batches, the parties will meet to determine a [...***...] and preventing [...***...] in future batches of Products. If CIMA and [...***...] agree upon such remedial measures, [...***...] payment obligations under Paragraph 2 above [...***...] Commercial Launch date with respect to Products. If CIMA and [...***...] do not agree upon such remedial measures, [...***...] may elect to terminate this Agreement upon [...***...] days written notice to CIMA. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS (a) [...***...] represents, warrants and covenants that: Subject to CIMA's compliance with its representations, warrants and covenants set forth in Paragraph 4(b) below, the Products that [...***...] distributes and sells shall not be adulterated or misbranded within the meaning of any applicable law, rule, order or regulation and shall otherwise comply with all such laws, rules, orders and regulations. (b) CIMA represents, warrants and covenants that: The Products manufactured by CIMA and delivered to [...***...] under this Agreement: 1) will not be adulterated or misbranded within the meaning of any applicable [...***...] laws, rules, orders and regulations; and 2) will be in compliance with the Specifications and any [...***...] regulatory authorities, with respect to Products ordered by [...***...] for sale in [...***...]. EXCEPT AS SET FORTH IN THIS PARAGRAPH 4(b), THE PRODUCTS ARE BEING SUPPLIED TO [...***...] WITH NO WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR THAT THEY ARE FREE FROM THE RIGHTFUL CLAIM OF ANY THIRD PARTY, BY WAY OF INFRINGEMENT OR THE LIKE, OF ANY PATENT OR OTHER PROPRIETARY RIGHTS OF SUCH PARTY. - ---------------------------------------- *CONFIDENTIAL TREATMENT REQUESTED 8. 5. TERM AND TERMINATION (a) TERM. This Agreement shall be effective as of the Effective Date and shall remain in effect for a period of one (1) year from Commercial Launch. In the event [...***...] desires to renew the Agreement after such initial term for an additional six (6) month term on a non-exclusive basis, the parties shall negotiate the terms of such renewal in good faith. (b) TERMINATION OF AGREEMENT. (i) This Agreement may be terminated by either party if the other party breaches or defaults in the performance or observance of any of the material provisions of this Agreement, and such breach or default is not cured within ninety (90) days after the other party gives notice specifying such breach or default, provided, however, that no cure period shall be allowed to [...***...] if the material breach is a failure to pay amounts owed to CIMA hereunder and termination shall be effective immediately upon written notice to [...***...]. (ii) This Agreement may be suspended by [...***...] by notice to CIMA in the event of a failure by CIMA to supply conforming Products to [...***...] in accordance with this Agreement for ninety (90) consecutive days as a result of Force Majeure, as discussed in Paragraph 8(f). In such event, [...***...] and CIMA shall consult with each other as to the best practical method of assuring a source of supply of Products during the continuance of CIMA's inability to supply. Such method may include (a) assignment to [...***...] by CIMA of any contracts with secondary sources of supply or services; or (b) technical assistance from CIMA to [...***...], including the temporary assignment of CIMA's production experts to [...***...] manufacturing facility and the delivery to [...***...] of all recipes, formulas, production policies and procedures necessary for the manufacture of Products, to assist [...***...] in manufacturing the Products. When CIMA is again able to supply required quantities of the Products, CIMA shall give [...***...] notice of such fact and the parties shall mutually agree upon when to resume supply and purchase of the Products as provided for herein, in light of any commitments [...***...] may have reasonably incurred in the interim. However, should such suspension continue for twelve (12) months without CIMA again being able to consistently supply quantities of the Products requested by [...***...] in accordance with Paragraphs 3(a) and 3(b) above, [...***...] may, at its election, terminate this Agreement. (iii) In the event Commercial Launch has not occurred by [...***...], 1997, CIMA shall have the right to terminate this Agreement immediately upon written notice to [...***...]. (c) EFFECT OF TERMINATION. Payment obligations of [...***...] that accrue prior to the effective date of any termination hereunder (or prior to the effective date of suspension under Paragraph 5(b)(ii) if such suspension immediately precedes termination) shall survive termination. In addition, in the event of termination of this Agreement pursuant to Paragraph 5(b)(i) (by CIMA), 5(b)(ii) or 5(b)(iii) above, [...***...] shall reimburse CIMA for all expenses actually incurred or contractually committed (without ability to cancel) by CIMA or its Affiliates - ---------------------------------------- *CONFIDENTIAL TREATMENT REQUESTED 9. in connection with the performance of CIMA's obligations under this Agreement. Articles 6 and 7 shall survive any expiration or termination of this Agreement. 6. INDEMNIFICATION (a) [...***...] shall at all times during and after the term of this Agreement be responsible for, and shall defend, indemnify and hold CIMA harmless from and against any and all losses, claims, suit, proceedings, expenses, recoveries and damages, including reasonable legal expenses and costs, including attorneys fees, arising out of any claim by a third party relating to the Products or any aspect of the performance of this Agreement, except to the extent such liability results from (i) the negligence or willful misconduct of CIMA, or (ii) any breach of a representation or warranty given herein by CIMA. (b) CIMA shall at all times during and after the term of this Agreement be responsible for, and shall defend, indemnify and hold [...***...] harmless from and against any and all losses, claims, suits, proceedings, expenses, recoveries and damages, including reasonable legal expenses and costs, including attorneys' fees, arising out of any claim by a third party relating to the Products, or any aspect of the performance of this Agreement, to the extent such liability results from the negligence or willful misconduct of CIMA, or any breach of a representation or warranty given herein by CIMA. (c) In the event any third party asserts a claim covered by Paragraph 6(a) or 6(b), the indemnified party shall give prompt notice to the indemnifying party, who shall have the right at its election to handle and control the defense or settlement of the claim at its own expense by giving prompt notice to the indemnified party; provided, however, that the indemnifying party shall not settle any such claim without the indemnified party's prior written consent, which shall not be unreasonably withheld. If the indemnifying party does not give such notice and does not proceed diligently to defend the claim within thirty (30) days after receipt of notice, the indemnifying party shall be bound by any defense or settlement that the indemnified party may make as to that claim and shall reimburse the indemnified party for any expenses related to the defense or settlement of the claim. The parties shall cooperate in defending against any asserted third-party claims. Indemnification of the indemnified party shall also cover the indemnified party's directors, officers, employees, agents, Affiliates, and third parties performing services for the indemnified party. 7. CONFIDENTIALITY; USE LIMITATIONS (a) LIMITATIONS ON USE. [...***...] agrees that it shall use the Products and the Confidential Information (as defined in Paragraph 7(b) below) of CIMA solely for the purposes specified in this Agreement and for no other purpose. [...***...] specifically agrees that it will not use the Confidential Information for any research or commercial activities other than those which relate directly to the purposes specified herein, nor will it perform any reverse-engineering or other research on the Products not contemplated by this Agreement. [...***...] permitted use of the Products shall be in compliance with all applicable laws and regulations. Upon expiration or termination of the Agreement, [...***...] shall return or destroy, as directed - ---------------------------------------- *CONFIDENTIAL TREATMENT REQUESTED 10. by CIMA, all copies of any and all information, data and results obtained from conduct of evaluations under this Agreement (the "Results"). [...***...] shall not sell, transfer, disclose or otherwise provide access to the Results, any method or process relating thereto or any material that could not have been made but for access to the Results or the Confidential Information, to any person or entity without the prior expressed written consent of CIMA, except that [...***...] may allow access to the Results to employees, subcontractors or agents during the term of, and solely for purposes consistent with, this Agreement. [...***...] will make diligent efforts to ensure that such employees, agents and subcontractors will use the Results in a manner consistent with the terms of this Agreement. (b) CONFIDENTIALITY. Each of the parties shall be bound by the following terms and conditions: (i) Subject to the limitations set forth in Subparagraph (ii) below, all Results and all information disclosed to the other party and identified by the disclosing party as confidential shall be deemed "Confidential Information" of the disclosing party. In particular, Confidential Information shall be deemed to include, but not be limited to, the Products and any documentation relating thereto, the Results, any patent application or drawing or potential patent claim the subject matter of which is directly or indirectly derived from information disclosed hereunder, any trade secret, information, invention, idea, samples, process, method, procedures, formulations, test data relating to any research project, work in process, future development, engineering, manufacturing, regulatory, marketing, servicing, financing, or personnel matter relating to the disclosing party, its present or future products, sales, suppliers, clients, customers, employees, investors or business, whether in oral, written, graphic or electronic form. (ii) The term "Confidential Information" shall not be deemed to include information which (a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving party, generally known or available; (b) is known by the receiving party at the time of receiving such information, as evidenced by its records; (c) is hereafter furnished to the receiving party by a third party, as a matter of right and without restriction on disclosure; (d) is independently developed by the receiving party without use of Confidential Information of the other party; (e) is the subject of a written permission to disclose provided by the disclosing party; (f) is required to be disclosed by law; or (vii) is required to be disclosed to establish rights or enforce obligations under this Agreement, but only to the extent such disclosure is necessary. (iii) During the term of this Agreement and for a period of five (5) years after termination hereof (seven (7) years with respect to information pertaining to manufacturing processes and know-how), each party shall maintain all Confidential Information in trust and confidence and shall not disclose any Confidential Information to any third party or use any Confidential Information for any unauthorized purpose. Each party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Confidential Information shall not be used for any purpose or in any manner that would constitute a violation of any laws or regulations, including without limitation the export control - ---------------------------------------- *CONFIDENTIAL TREATMENT REQUESTED 11. laws of the United States. Each party hereby agrees that it will not in any way attempt to obtain, either directly or indirectly, any information regarding any Confidential Information from any third party who has been employed by, provided consulting services to, or received in confidence information from, the other party. (iv) The parties under this Agreement shall advise their employees who might have access to Confidential Information of the confidential nature thereof and agree that their employees and agents shall be bound by the terms of this Agreement. No Confidential Information shall be disclosed to any employee who does not have a need for such information. (c) OWNERSHIP. Title and ownership rights in the OraSolv-Registered Trademark- pharmaceutical product formulations and other Confidential Information of CIMA shall remain at all times with CIMA. [...***...] acknowledges that the OraSolv-Registered Trademark- pharmaceutical product formulations and such Confidential Information shall remain the sole property of CIMA and [...***...] will acquire no title thereto as a result of this Agreement. Nothing in this Agreement shall be construed as conferring on either party an expressed or implied license or option to license any disclosed Confidential Information, technology, or any patent or patent application except as expressly provided herein. 8. MISCELLANEOUS (a) ENTIRE AGREEMENT. This Agreement, including the exhibits attached hereto and incorporated herein, sets forth the entire agreement and understanding between the parties and supersedes all prior and contemporaneous agreements, promises, representations, understandings and negotiations, whether written or oral, between the parties with respect to the subject matter hereof. None of the terms of this Agreement shall be amended or modified except in a writing signed by each of the parties hereto. (b) ASSIGNMENT. Except as otherwise provided herein, neither this Agreement nor any interest hereunder will be assignable in whole or in part by either party without the prior written consent of the other; provided, however, that either party may assign this Agreement to an Affiliate or to any successor by merger or sale of all or substantially all of such party's business unit to which this Agreement relates. This Agreement shall be binding upon and inure to the benefit of the parties' respective successors and assigns. Any attempted assignment in violation of this provision shall be void and of no effect. (c) SEVERABILITY. If and solely to the extent that any provision of this Agreement shall be invalid or unenforceable, or shall render this entire Agreement to be unenforceable or invalid, such offending provision shall be of no effect and shall not effect the validity of the remainder of this Agreement or any of its provisions; provided, however, the parties shall use their respective reasonable efforts to renegotiate the offending provisions to best accomplish the original intentions of the parties. (d) WAIVERS. A waiver by either party of any term or condition of this Agreement in any one instance shall not be deemed or construed to be a waiver of such term or condition for any similar instance in the future or of any subsequent breach hereof. All rights, remedies, undertaking, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement. (e) FURTHER DOCUMENTS. Each party hereto agrees to execute such further documents and take such further steps as the other party reasonably determines may be necessary or desirable to effectuate the purposes of this Agreement. (f) FORCE MAJEURE. No party shall be liable for failure to perform or delay in performing obligations set forth in this Agreement, and no party shall be deemed in breach or default of its obligations, if, to the extent and for so long as, such failure, delay, breach or default is due to natural disasters or any similar causes reasonably beyond the control of such party. Any party desiring to invoke the protection of Force Majeure shall promptly notify the other party of such desire and shall use reasonable efforts to resume performance of its obligations. - --------------------------------- CONFIDENTIAL TREATMENT REQUESTED 12. (g) GOVERNING LAW. This Agreement is deemed to have been entered into in the State of Delaware, and its interpretation, construction, and the remedies for its enforcement or breach are to be applied pursuant to and in accordance with the laws of the State of Delaware. (h) NOTICES. Any notice, consent or approval permitted or required under this Agreement shall be in writing sent by registered or certified airmail, postage pre-paid, or by overnight courier or by facsimile (confirmed by mail) and addressed as follows: If to [...***...]: [...***...] with copy to: [...***...] If to CIMA: CIMA LABS INC. 10000 Valley View Road Eden Prairie, Minnesota 55344 Attention: Chief Executive Officer with a copy to: COOLEY GODWARD LLP Five Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306 Attention: Robert L. Jones, Esq. All notices shall be deemed to be effective on the date of mailing. In case any party changes its address at which notices are to be received, written notice of such change shall be given as soon as practicable to the other party. (i) HEADINGS. Headings in this Agreement are included for ease of reference only and shall have no legal effect. (j) RELATIONSHIP OF THE PARTIES. The relationship hereby established between [...***...] and CIMA is solely that of independent contractors. This Agreement shall not create an agency, partnership, joint venture or employer/employee relationship, and nothing hereunder shall be deemed to authorize either party to act for, represent or bind the other except as expressly provided in this Agreement. (k) PUBLICITY. Neither party shall issue any press release or other publicity materials, or make any presentation with respect to the existence of this Agreement or the terms and conditions hereof without the prior written consent of the other party, which consent shall not be unreasonably withheld. This restriction shall not, however, apply to disclosures required by law or regulation, including as may be required in connection with any filings made with the Securities and Exchange Commission or by the disclosure policies of a major Stock Exchange, in which event the party required by law or regulation to disclose shall give the other party, at least ten (10) days in advance of the anticipated date of disclosure, written notice of its intent to disclose such information and a copy of such proposed disclosure for review and approval by the other party, which approval shall not be unreasonably withheld. - --------------------------------- CONFIDENTIAL TREATMENT REQUESTED 13. (l) COUNTERPARTS. This Agreement may be executed in one or more counterparts with the same force and effect as if the parties had executed the same instrument. (m) PATENT MARKING. The Product packaging and labeling shall identify any applicable CIMA patent consistent with marking requirements. [...***...] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above by their duly authorized officers. [...***...] CIMA LABS INC. By: [...***...] By: /s/ Robert Z. Arnold --------------------------------- Title: [...***...] Title: Sr.V.P. Business Development ------------------------------- - --------------------------------- CONFIDENTIAL TREATMENT REQUESTED 14. EXHIBIT A PRODUCTS AND BASE PURCHASE PRICES PRODUCT FLAVOR ACTIVE INGREDIENT MG. PER TABLET BASE PURCHASE PRICE PER CARTON [...***...] [...***...] - - Pricing assumes finished Product to ship FOB point of manufacture, and includes royalty. - - Carton: 24 tablets are packed four cards of six tablets per carton, six cartons banded in a tray, four banded trays per shipper with appropriate palletizing and stretch wrapping. - - Quality Control procedures normal to CIMA, which include: a) Testing and release of raw materials, packaging components, and finished product, b) In-Process sampling and testing, c) Ongoing market stability studies. - - Released finished Product not to be stored at CIMA. - - Cost incurred by CIMA as mandated by regulatory revisions (i.e., plate and die charges due to label changes, and product identification requirements, etc.) shall be additional and paid for by [...***...]. - --------------------------------- CONFIDENTIAL TREATMENT REQUESTED 15. EXHIBIT B SPECIFICATIONS [...***...] - --------------------------------- CONFIDENTIAL TREATMENT REQUESTED 16. EX-23.1 4 EX-23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-05741, Form S-8 No. 33-82794 and Form S-8 No. 33-82790) pertaining to certain stock option plans of the Company, of our report dated February 5, 1997, with respect to the financial statements and schedule of CIMA LABS INC., included in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ Ernst & Young LLP ------------------------- Ernst & Young LLP Minneapolis, Minnesota March 26, 1997 EX-27 5 EX-27 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,666,032 7,597,162 247,578 0 534,587 11,117,239 13,377,085 2,972,474 22,064,904 1,043,772 0 0 0 94,116 56,586,958 22,064,904 0 1,471,859 0 8,311,598 3,738 0 0 (6,345,943) 0 0 0 0 0 (6,345,943) (.72) (.72)
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