-----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, NLpg+cdsDF55riFY9tevtbsInViMb9K6J2mCuPkPvnqTtDKuJux5mxgRlm1gmq8E k8VlAhyDtMdN/biDeZ4qKw== 0000912057-97-017278.txt : 19970514 0000912057-97-017278.hdr.sgml : 19970514 ACCESSION NUMBER: 0000912057-97-017278 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24424 FILM NUMBER: 97602830 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-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 0-24424 CIMA LABS INC. (Exact name of registrant as specified in its charter) DELAWARE 41-1569769 - ------------------------------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 10000 Valley View Road, Eden Prairie, Minnesota 55344-9361 (Address of principal executive offices including zip code) (612) 947-8700 (Registrant's telephone number, including area code) --------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK $.01 PAR VALUE 9,457,051 SHARES ----------------------------- --------------------------------- (Class) (Outstanding at April 30, 1997) CIMA LABS INC. TABLE OF CONTENTS PAGE NUMBER ----------- COVER PAGE 1 TABLE OF CONTENTS 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Condensed Balance Sheets as of March 31, 1997 and December 31, 1996 3 Condensed Statements of Operations for the three month periods ended March 31, 1997 and 1996 and the period from December 12, 1986 (inception) to March 31, 1997 4 Condensed Statements of Cash Flows for the three-month periods ended March 31, 1997 and 1996 and the period from December 12, 1986 (inception) to March 31, 1997 5 Notes to Condensed Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 8 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. 13 ITEM 2. CHANGES IN SECURITIES. 13 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 14 ITEM 5. OTHER INFORMATION. 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 14 SIGNATURE 15 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CIMA LABS INC. (A Development Stage Company) Condensed Balance Sheets March 31, December 31, 1997 1996 (1) ---------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $3,684,338 $2,666,032 Short-term investments 4,400,508 7,597,162 Accounts receivable 253,012 247,578 Inventories--Note B 670,927 534,587 Prepaid expenses 233,121 71,880 ----------- ------------ Total current assets 9,241,906 11,117,239 Property, plant and equipment 13,510,131 13,377,085 Less accumulated depreciation (3,096,373) (2,972,474) ----------- ------------ 10,413,758 10,404,611 Other assets: Lease deposits 40,651 290,650 Patents and trademarks, net of amortization 246,640 252,404 ----------- ------------ 287,291 543,054 ----------- ------------ Total assets $19,942,955 $22,064,904 ----------- ------------ ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $358,291 $264,370 Accrued expenses 464,032 529,402 Advance royalties 250,000 250,000 ----------- ---------- Total current liabilities 1,072,323 1,043,772 Commitments and contingencies Stockholders' equity Convertible Preferred Stock, $.01 par value: Authorized shares--5,000,000; issued and outstanding shares-- none - - Common Stock, $.01 par value: Authorized shares--20,000,000; issued and outstanding shares--9,457,051--March 31, 1997; 9,411,589--December 31, 1996 94,570 94,116 Additional paid-in capital 56,768,338 56,586,958 Deficit accumulated during the development stage (37,992,276) (35,659,942) ------------ ----------- Total stockholders' equity 18,870,632 21,021,132 ------------ ----------- Total liabilities and stockholders' equity $19,942,955 $22,064,904 ----------- ----------- ----------- ----------- (1) The balance sheet at December 31, 1996 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed financial statements. 3 CIMA LABS INC. (A Development Stage Company) Condensed Statements of Operations (Unaudited) Period from December 12, Three Months Ended 1986 March 31, (Inception) to ---------------------------- March 31, 1997 1996 1997 -------------------------- ------------- Revenues: Net sales $191,708 $0 $13,942,592 Research and development fees & licensing revenues 76,548 391,858 5,423,138 -------------------------- ------------ 268,256 391,858 19,365,730 Costs and expenses: Cost of goods sold 580,874 0 18,412,289 Research and product 1,230,499 1,375,946 21,753,347 development Selling, general and 889,679 783,702 18,533,754 administrative -------------------------- ------------ 2,701,052 2,159,648 58,699,390 Other income (expense): Interest income, net 128,291 39,385 1,247,691 Other income (expense) 1,193 (5,379) 271,223 -------------------------- ------------ 129,484 34,006 1,518,914 -------------------------- ------------ Net loss and deficit accumulated during the development stage ($2,303,312) ($1,733,784) ($37,814,746) --------------------------- ------------- --------------------------- ------------- Net loss per share: Primary $(0.24) $(0.22) $(13.72) Fully diluted $(0.24) $(0.22) $(9.26) Weighted average shares outstanding: Primary 9,446,235 7,824,365 2,755,707 Fully diluted 9,446,235 7,824,365 4,085,540 See notes to condensed financial statements. 4 CIMA LABS INC. (A Development Stage Company) Condensed Statements of Cash Flows (Unaudited)
Three Months Ended Period from March 31, December 12, 1996 ----------------------------------- (Inception) to OPERATING ACTIVITIES 1997 1996 March 31, 1997 ----------------------------------- ------------------- Net loss ($2,303,312) ($1,733,784) ($37,814,746) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 155,385 147,030 4,175,948 Preferred stock issued for accrued interest 0 0 141,448 Gain on sale of property, plant and equipment 0 0 (53,270) Changes in operating assets and liabilities: Accounts receivable (5,433) (160,651) (253,011) Inventories (136,340) 228,832 (670,927) Other current assets (161,240) 24,648 (233,120) Accounts payable 93,921 274,138 358,287 Accrued expenses (65,370) 209,955 464,032 Advance royalties 0 0 250,000 ---------------------------------- ------------------- Net cash used in operating activities (2,422,389) (1,009,832) (33,635,359) INVESTING ACTIVITIES Purchase of and deposits on property, plant and equipment (132,450) (111,759) (14,593,786) Purchase of short-term investments 0 0 (26,144,302) Proceeds from sale of property, plant & equipment 0 0 471,883 Proceeds of maturities of short-term investments 3,196,656 0 21,743,796 Patents and trademarks (26,323) (15,572) (641,751) --------------------------------- ------------------- Net cash provided by (used in) investing activities 3,037,883 (127,331) (19,164,160) FINANCING ACTIVITIES Proceeds from issuance of stock: Common Stock 152,812 95,016 30,984,987 Preferred Stock 0 0 25,458,690 Lease financing of equipment 0 0 2,441,650 Security deposits on leases 250,000 0 (40,651) Proceeds from issuance of notes payable and warrants 0 0 1,923,951 Payments on notes payable 0 0 (1,823,700) Payments on capital leases 0 0 (2,441,650) Organization costs 0 0 (19,420) --------------------------------- ------------------- Net cash (used in) provided by financing activities 402,812 95,016 56,483,857 --------------------------------- ------------------- Increase (decrease) in cash and cash equivalents 1,018,306 (1,042,147) 3,684,338 Cash and cash equivalents at beginning of period 2,666,032 3,558,743 - --------------------------------- ------------------- Cash and cash equivalents at end of period $3,684,338 $2,516,596 $3,684,338 --------------------------------- ------------------- --------------------------------- ------------------- Supplemental schedule of noncash investing and financing activities: Note payable exchanged for issuance of common stock $1,517,500 Common stock issued for note receivable 50,000 See notes to condensed financial statements.
5 CIMA LABS INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS MARCH 31, 1997 (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1996. NOTE B - INVENTORIES Inventories are stated at the lower of cost (first in, first out) or fair market value. March 31, December 31, 1997 1996 -------- -------- Raw materials $424,347 $534,587 Work in process 116,050 -- Finished products 130,530 -- -------- -------- $670,927 $534,587 NOTE C - INITIAL PUBLIC OFFERING The Company completed its initial public offering ("IPO") of its Common Stock in August 1994. Outstanding shares of Series A, B, C, D and E Preferred Stock were automatically converted on a one-for-one basis to shares of Common Stock on the closing date of August 4, 1994. NOTE D - NET LOSS PER SHARE Net loss per share is computed using the weighted average number of common shares outstanding during the period. Common 6 equivalent shares from stock options and warrants are excluded from the computation as their effect is antidilutive. In February 1997, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 128, "EARNINGS PER SHARE." This Statement replaces the presentation of primary earnings per share (EPS) with basic EPS and also requires dual presentation of basic and diluted EPS for entities with complex capital structures. This Statement is effective for the fiscal year ended December 31, 1997. For the quarter ended March 31, 1997, there is no difference between basic earnings per share under Statement No. 128 primary net loss per share as reported. 7 ITEM 2. 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," "EXCEPT," "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, 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 COLLABORATIVE PARTNERS, AS WELL AS THOSE DISCUSSED IN "BUSINESS RISKS" BELOW. GENERAL CIMA, founded in 1986, is a drug delivery company focused primarily on the development and manufacture of pharmaceutical products based upon its patented OraSolv-Registered Trademark- 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 may 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 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 8 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. At March 31, 1997, the Company had accumulated losses of approximately $37,815,000. The Company recorded its first commercial sales using the Company's OraSolv technology in the three month period ending March 31, 1997. Prior to this the Company's revenues have been from 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. The Company is not currently manufacturing liquid effervescent products, and has not recognized any revenues from such products since 1995. As noted above, the Company began manufacturing OraSolv products in the first quarter 1997, and the Company expects to continue generating revenue from manufacturing OraSolv products. 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 March 31, 1997 were 9,457,051. 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 products to be marketed by these corporate partners. The Company is highly dependent upon the efforts of the corporate partners to successfully market OraSolv 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. The Company expects that losses will continue through at least 1998, even though CIMA expects to continue generating sales revenue from manufacturing OraSolv products in 1997. 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 are expected to remain relatively stable as the majority of the necessary personnel for this function has already been hired. Personnel costs for administration may decrease slightly in an effort to reduce corporate overhead. As CIMA continues production for its first commercial launch of a product incorporating its OraSolv technology, additional operations personnel may need to be added to meet a corporate partner's order. Manufacturing infrastructure costs should not need to increase materially as there is capacity to meet short-term production needs. 9 In recent years the Company has actively marketed its OraSolv 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 dosage form. CIMA began commercial production for this product during the first quarter of 1997. 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 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 THREE MONTHS ENDED MARCH 31, 1997 AND 1996 The Company's results of operations for the quarter ended March 31, 1997 reflect the increased emphasis on developing and manufacturing of OraSolv products with an anticipated commercial launch of an OraSolv product by one of our corporate partners in 1997. Product sales increased to $192,000 in the first quarter of 1997 from zero product sales in the first quarter of 1996 due to the first commercial sales of products using the OraSolv technology, which began in the first quarter of 1997. Research and development fees and licensing revenues were $77,000 and $392,000 in the first quarter of 1997 and 1996, respectively. The decrease in research and development fees and licensing revenue was primarily due to a $267,000 research and development fee paid by SmithKline Beecham in the first quarter of 1996 that was not repeated in 1997. 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 increased to $581,000 in the first quarter of 1997 from zero in the first quarter. The main component of the cost of goods sold in 1997 was the manufacturing infrastructure costs necessary for future anticipated sales levels. In 1996, these costs were classified as product development expenses. Research and development expenses decreased to $1,230,000 from $1,376,000 for the first quarter of 1997 and 1996, respectively. After the accounting for the reclassification of manufacturing infrastructure costs, as noted above, research and development expenses increased on a like to like comparison by approximately $340,000. This increase was due to expenses related to the hiring of the new Vice President of research and development, product development expenses related to the transition to commercial production and expenditures related to development work on the new technologies, discussed earlier. Selling, general and administrative expenses increased from $784,000 for the three month period ending March 31, 1996, to $890,000 for the three month period ending March 31, 1997, resulting from increased spending on consumer marketing studies to support OraSolv. Net interest income shows an increase from $39,000 to $128,000 for the three month period ending March 31, 1996, and 1997, respectively. Net interest income is dependent on the cash position of the Company. 10 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 March 31, 1997, CIMA had received net offering proceeds from such private and public sales of approximately $56,444,000 and had net sales from manufacturing agreements of approximately $13,943,000. Cash, cash equivalents and short-term investments were approximately $8,085,000 at March 31, 1997. 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. 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 through 1997. Thereafter, or sooner if conditions make it necessary, the Company will 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 March 1997. 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 limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce potential federal income tax liabilities. BUSINESS RISKS The Company has recently initiated commercial production of its first product in CIMA's OraSolv dosage form, and must be evaluated in light of the uncertainties and complications present for any such company and, in particular, a company in the pharmaceutical industry. The Company has accumulated aggregate net losses from inception through March 31, 1997 of $37,815,000. 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 Company's revenues, which have been derived primarily from the manufacturing of AutoLution (a liquid effervescent) and other non-OraSolv products for which the Company no longer manufactures. In more recent years, the Company has also received revenue from its commercial partners for product development and licensing of OraSolv, and to a lesser extent, OraSolv for which commercial production commenced in the first quarter of 1997 for a commercial partner. The Company expects to continue to incur quarterly losses at least through the first half of 1998. There can be no assurance that the Company will ever generate substantial revenues or achieve profitability. 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 11 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. The Company began manufacturing OraSolv products in commercial quantities in February 1997. Commercial sales have been made and revenue has been recognized from sales of an OraSolv product. To achieve future desired levels of production, the Company will be required to increase 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 expenditures to enhance its current technologies, and to 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, the product being difficult to manufacture on a large scale or of being uneconomical to market. The foregoing risks reflect the Company's stage of development and the nature of the Company's industry and products. Also inherent in the Company's stage of development and the nature of the Company's industry is a range of additional risks, including competition, uncertainties regarding the effects of healthcare reform on the pharmaceutical industry, including pressures exerted on the prices charged for pharmaceutical products, and uncertainties regarding protection of patents and proprietary rights. 12 CIMA LABS INC. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None ITEM 2. CHANGES IN SECURITIES. On March 13, 1997, the Board of Directors of CIMA LABS INC. (the "Company") declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of the Company's Common Stock (the "Common Shares"). The dividend was effective as of April 10, 1997 (the "Record Date") and the Rights also attached to new Common Shares issued after the Record Date. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share (the "Preferred Shares"), subject to adjustment. Each Preferred Share is designed to be the economic equivalent of 100 Common Shares. The description and terms of the Rights are set forth in a Rights Agreement dated as of March 14, 1997 between the Company and Norwest Bank Minnesota, N.A., which is incorporated by reference as Exhibit 4.2 to this Quarterly Report on Form 10-Q. Initially, the Rights are evidenced by the stock certificates representing Common Shares then outstanding. Upon the occurrence of certain events resulting in, or which are intended to result in, a person or group of persons (an "Acquiring Person") acquiring beneficial ownership of 15% or more of the outstanding Common Shares, (i) the Rights will be evidenced by Rights Certificates and (ii) the Rights will become exercisable. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the exercise price of the Right. In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. The Rights are subject to certain redemption provisions (at $.01 per Right) and exchange provisions (at a rate of one Common Share or one-hundredth of a Preferred Share per Right), in each case subject to adjustment, which are exercisable at the sole discretion of the Board of Directors. In addition, the terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, except that from 13 and after such time as any person or group of affiliated or associated persons becomes an Acquiring Person no such amendment may adversely affect the interests of the holders of the Rights. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS ITEM DESCRIPTION 4.2* Rights Agreement, dated as of March 14, 1997, between the Company and Norwest Bank Minnesota, N.A. 10.11 Equity Incentive Plan, as amended and restated. 10.24 Offer letter between the Company and John Hontz, Ph.D. dated November 26, 1996. 10.25 Non-Employee Directors' Fee Option Grant Program. 27 Financial Data Schedule. ___________ * Incorporated by reference herein to Exhibit 2 to the Company's Current Report on Form 8-K filed March 25, 1997. (b) REPORTS ON FORM 8-K On March 25, 1997 the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission disclosing under "Item 5-Other Events" that the Company had adopted a Shareholder Rights Plan by entering into a Rights Agreement dated March 14, 1997, with Norwest Bank Minnesota, N.A. 14 CIMA LABS INC. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. CIMA LABS INC. Date: MAY 14, 1997 By: /S/ JOHN M. SIEBERT -------------------------- John M. Siebert President and Chief Executive Officer Date: MAY 14, 1997 By: /S/ KEITH P. SALENGER --------------------------- Keith P. Salenger Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 15 EXHIBIT INDEX NO. OF EXHIBIT DESCRIPTION - -------------- ----------- 4.2* Rights Agreement, dated as of March 14, 1997, between the Company and Norwest Bank Minnesota, N.A. 10.11 Equity Incentive Plan, as amended and restated. 10.24 Offer letter between the Company and John Hontz, Ph.D. dated November 26, 1996. 10.25 Non-Employee Directors' Fee Option Grant Program. 27 Financial Data Schedule. ___________ * Incorporated by reference herein to Exhibit 2 to the Company's Current Report on Form 8-K filed March 25, 1997. 16 EX-10.11 2 EXHIBIT 10.11 CIMA LABS INC. EQUITY INCENTIVE PLAN AMENDED AND RESTATED MARCH 25, 1996 FURTHER AMENDED, EFFECTIVE SEPTEMBER 24, 1996 AS AMENDED BY THE BOARD OF DIRECTORS ON MARCH 13, 1997 INTRODUCTION. In 1987, the Board of Directors adopted the CIMA LABS, INC. Stock Option and Stock Award Plan, which was later amended and restated. On March 25, 1996, the Board of Directors adopted a subsequent amendment and restatement and retitled this the Equity Incentive Plan. PURPOSES. The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company, and its Affiliates, may be given an opportunity to benefit from increases in value of the stock of the Company through the granting of (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights to purchase restricted stock, and (v) stock appreciation rights, all as defined below. The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either (i) Options granted pursuant to Section 6 hereof, including Incentive Stock Options and Nonstatutory Stock Options, (ii) stock bonuses or rights to purchase restricted stock granted pursuant to Section 7 hereof, or (iii) stock appreciation rights granted pursuant to Section 8 hereof. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. DEFINITIONS. "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. "BOARD" means the Board of Directors of the Company. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. 17 "COMPANY" means CIMA LABS INC., a Delaware corporation. "CONCURRENT STOCK APPRECIATION RIGHT" or "CONCURRENT RIGHT" means a right granted pursuant to subsection 8(b)(2) of the Plan. "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the employment or relationship as a Director or Consultant is not interrupted or terminated. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board or chief executive officer of the Company, including sick leave, military leave, or any other personal leave; or (ii) transfers between locations of the Company or between the Company, Affiliates or their successors. "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to shareholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. "DIRECTOR" means a member of the Board. "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FAIR MARKET VALUE" means, as of any date, the value of the common stock of the Company determined as follows: If the common stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; If the common stock is quoted on the Nasdaq Stock Market (but not on the National Market thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of common stock shall be the mean between the bid and asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; 18 In the absence of an established market for the common stock, the Fair Market Value shall be determined in good faith by the Board. "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. "INDEPENDENT STOCK APPRECIATION RIGHT" or "INDEPENDENT RIGHT" means a right granted pursuant to subsection 8(b)(3) of the Plan. "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act of 1933 ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. "OPTION" means a stock option granted pursuant to the Plan. "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. "OPTIONEE" means an Employee, Director or Consultant who holds an outstanding Option. "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. "PLAN" means this CIMA LABS INC. Equity Incentive Plan. "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect with respect to the Company when discretion is being exercised with respect to the Plan. 19 "STOCK APPRECIATION RIGHT" means any of the various types of rights which may be granted under Section 8 of the Plan. "STOCK AWARD" means any right granted under the Plan, including any Option, any stock bonus, any right to purchase restricted stock, and any Stock Appreciation Right. "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. "TANDEM STOCK APPRECIATION RIGHT" or "TANDEM RIGHT" means a right granted pursuant to subsection 8(b)(1) of the Plan. ADMINISTRATION. The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock, a Stock Appreciation Right, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award; whether a person shall be permitted to receive stock upon exercise of an Independent Stock Appreciation Right; and the number of shares with respect to which a Stock Award shall be granted to each such person. To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. To amend the Plan or a Stock Award as provided in Section 13. Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members (the "Committee"), all of the members of which Committee may be, in the discretion of the Board, Non-Employee Directors and/or Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee of two (2) or more Outside Directors any of the administrative powers the Committee is authorized to exercise (and references 20 in this Plan to the Board shall thereafter be to the Committee or such subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Notwithstanding anything in this Section 3 to the contrary, at any time the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Stock Awards to eligible persons who (1) are not then subject to Section 16 of the Exchange Act and/or (2) are either (i) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award, or (ii) not persons with respect to whom the Company wishes to avoid the application of Section 162(m) of the Code. SHARES SUBJECT TO THE PLAN. Subject to the provisions of Section 12 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate Two Million Two Hundred Fifty Thousand (2,250,000) shares of the Company's common stock. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. Shares subject to Stock Appreciation Rights exercised in accordance with Section 8 of the Plan shall not be available for subsequent issuance under the Plan. The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. ELIGIBILITY. Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees. Stock Awards other than Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees, Directors or Consultants. No person shall be eligible for the grant of an Incentive Stock Option or an award to purchase restricted stock if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Incentive Stock Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Incentive Stock Option is not exercisable after the expiration of five (5) years from the date of grant. Subject to the provisions of Section 12 relating to adjustments upon changes in stock, no person shall be eligible to be granted Options and Stock Appreciation Rights covering more than five hundred thousand (500,000) shares of the Company's common stock in any three (3) calendar year period. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: 21 TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. PRICE. The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted; the exercise price of each Nonstatutory Stock Option shall be determined by the Board. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than that set forth in the preceding sentence or determined by the Board if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board. In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. TRANSFERABILITY. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person. A Nonstatutory Stock Option shall not be transferable, except by the Optionee upon such terms and conditions as are set forth in the Option Agreement for such Nonstatutory Stock Option, as the Board or the Committee shall determine in its discretion. Notwithstanding the foregoing, the person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option. VESTING. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the 22 Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. An Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director, or Consultant (other than upon the Optionee's death or disability) would result in liability under Section 16(b) of the Exchange Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day after the last date on which such exercise would result in such liability under Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (other than upon the Optionee's death or disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the first paragraph of this subsection 6(f), or (ii) the expiration of a period of three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant during which the exercise of the Option would not be in violation of such registration requirements. DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. DEATH OF OPTIONEE. In the event of the death of an Optionee during, or within a period specified in the Option after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option at the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. 23 RE-LOAD OPTIONS. Without in any way limiting the authority of the Board or Committee to make or not to make grants of Options hereunder, the Board or Committee shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionee to a further Option (a "Re-Load Option") in the event the Optionee exercises the Option evidenced by the Option agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option (i) shall be for a number of shares equal to the number of shares surrendered as part or all of the exercise price of such Option; (ii) shall have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (iii) shall have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option which is an Incentive Stock Option and which is granted to a 10% stockholder (as described in subsection 5(b)), shall have an exercise price which is equal to one hundred ten percent (110%) of the Fair Market Value of the stock subject to the Re-Load Option on the date of exercise of the original Option and shall have a term which is no longer than five (5) years. Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board or Committee may designate at the time of the grant of the original Option; PROVIDED, HOWEVER, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollar ($100,000) annual limitation on exercisability of Incentive Stock Options described in subsection 12(d) of the Plan and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares under subsection 4(a) and the limits on the grant of options under subsection 5(c) and shall be subject to such other terms and conditions as the Board or Committee may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK. Each stock bonus or restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. The terms and conditions of stock bonus or restricted stock purchase agreements may change from time to time, and the terms and conditions of separate agreements need not be identical, but each stock bonus or restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions as appropriate: (A) PURCHASE PRICE. The purchase price under each restricted stock purchase agreement shall be such amount as the Board or Committee shall determine and designate in such agreement. Notwithstanding the foregoing, the Board or the Committee may determine that eligible participants in the Plan may be awarded stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (B) TRANSFERABILITY. No rights under a stock bonus or restricted stock purchase agreement shall be transferable except by will or the laws of descent and distribution so long as stock awarded under such agreement remains subject to the terms of the agreement, except as specifically provided in the applicable stock bonus or restricted stock purchase agreement. 24 (C) CONSIDERATION. The purchase price of stock acquired pursuant to a restricted stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board or the Committee, according to a deferred payment or other arrangement with the person to whom the stock is sold; or (iii) in any other form of legal consideration that may be acceptable to the Board or the Committee in its discretion. Notwithstanding the foregoing, the Board or the Committee to which administration of the Plan has been delegated may award stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (D) VESTING. Shares of stock sold or awarded under the Plan may, but need not, be subject to a repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board or the Committee. (E) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event a Participant's Continuous Status as an Employee, Director or Consultant terminates, the Company may repurchase or otherwise reacquire, subject to the limitations described in subsection 7(d), any or all of the shares of stock held by that person which have not vested as of the date of termination under the terms of the stock bonus or restricted stock purchase agreement between the Company and such person. STOCK APPRECIATION RIGHTS. The Board or Committee shall have full power and authority, exercisable in its sole discretion, to grant Stock Appreciation Rights under the Plan to Employees or Directors of or Consultants to, the Company or its Affiliates. To exercise any outstanding Stock Appreciation Right, the holder must provide written notice of exercise to the Company in compliance with the provisions of the Stock Award Agreement evidencing such right. Except as provided in subsection 5(c), no limitation shall exist on the aggregate amount of cash payments the Company may make under the Plan in connection with the exercise of a Stock Appreciation Rights. Three types of Stock Appreciation Rights shall be authorized for issuance under the Plan: TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation Rights will be granted appurtenant to an Option, and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. Tandem Stock Appreciation Rights will require the holder to elect between the exercise of the underlying Option for shares of stock and the surrender, in whole or in part, of such Option for an appreciation distribution. The appreciation distribution payable on the exercised Tandem Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the Option surrender) in an amount up to the excess of (A) the Fair Market Value (on the date of the Option surrender) of the number of shares of stock covered by that portion of the surrendered Option in which the Optionee is vested over (B) the aggregate exercise price payable for such vested shares. 25 CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights will be granted appurtenant to an Option and may apply to all or any portion of the shares of stock subject to the underlying Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. A Concurrent Right shall be exercised automatically at the same time the underlying Option is exercised with respect to the particular shares of stock to which the Concurrent Right pertains. The appreciation distribution payable on an exercised Concurrent Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Concurrent Right) in an amount equal to such portion as shall be determined by the Board or the Committee at the time of the grant of the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Concurrent Right) of the vested shares of stock purchased under the underlying Option which have Concurrent Rights appurtenant to them over (B) the aggregate exercise price paid for such shares. INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights will be granted independently of any Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to Nonstatutory Stock Options as set forth in Section 6. They shall be denominated in share equivalents. The appreciation distribution payable on the exercised Independent Right shall be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Independent Right) of a number of shares of Company stock equal to the number of share equivalents in which the holder is vested under such Independent Right, and with respect to which the holder is exercising the Independent Right on such date, over (B) the aggregate Fair Market Value (on the date of the grant of the Independent Right) of such number of shares of Company stock. The appreciation distribution payable on the exercised Independent Right shall be in cash or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Independent Right. COVENANTS OF THE COMPANY. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of stock required to satisfy such Stock Awards. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Stock Award; provided, however, that this undertaking shall not require the Company to register under the Securities Act of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company. 26 MISCELLANEOUS. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest pursuant to subsection 6(e), 7(d) or 8(b), notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. Neither an Employee, Director or Consultant nor any person to whom a Stock Award is transferred under subsection 6(d), 7(b), or 8(b) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Director, Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee with or without cause the right of the Company's Board of Directors and/or the Company's shareholders to remove any Director pursuant to the terms of the Company's By-Laws and the provisions of the Delaware General Corporation Law, or the right to terminate the relationship of any Consultant pursuant to the terms of such Consultant's agreement with the Company or Affiliate. To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred pursuant to subsection 6(d), 7(b) or 8(b), as a condition of exercising or acquiring stock under any Stock Award, (1) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the 27 exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company. ADJUSTMENTS UPON CHANGES IN STOCK. If any change is made in the stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the type(s) and maximum number of securities subject to the Plan pursuant to subsection 4(a) and the maximum number of securities subject to award to any person during any three (3) calendar year period pursuant to subsection 5(c), and the outstanding Stock Awards will be appropriately adjusted in the type(s) and number of securities and price per share of stock subject to such outstanding Stock Awards. Such adjustments shall be made by the Board or the Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company".) In the event of: (1) a dissolution, liquidation or sale of substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) the acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or any Affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then to the extent permitted by applicable law: (i) any surviving or acquiring corporation or an Affiliate of such surviving or acquiring corporation shall assume any Stock Awards outstanding under the Plan or shall substitute similar Stock Awards (including a stock award resulting in the acquisition of the same consideration paid to the stockholders in the transaction described in this subsection 12(b)) for those outstanding under the Plan, or (ii) such Stock Awards shall continue in full force and effect. In the event any surviving or acquiring corporation or its Affiliates refuse to assume or continue such Stock Awards, or to substitute similar Stock Awards for those outstanding under the Plan, then, with respect to Stock Awards held by persons then performing services as Employees, Directors or Consultants, the time during which such Stock Awards may be exercised shall be accelerated and the Stock Awards terminated if not exercised after such acceleration and at or prior to such event. 28 AMENDMENT OF THE PLAN AND STOCK AWARDS. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 12 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: Increase the number of shares reserved for Stock Awards under the Plan; Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3. The Board may in its sole discretion submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees, Directors or Consultants with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. Rights and obligations under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. The Board at any time, and from time to time, may amend the terms of any one or more Stock Award; provided, however, that the rights and obligations under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. TERMINATION OR SUSPENSION OF THE PLAN. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on May 31, 2004, which shall be within ten (10) years from the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. 29 Rights and obligations under any Stock Award granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the Stock Award was granted. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Stock Awards granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 30 EX-10.24 3 EXHIBIT 10.24 OFFER LETTER November 26,1996 John Hontz, Ph.D. 210 Woodhaven Road Greenville, NC 27834 Dear John: It is a pleasure to offer you the position of Vice President, Research and Development at CIMA LABS INC. You will report directly to me. The details of your offer are as follows: 1. Base Salary: $5192.31 per pay period (bi-weekly) which is the equivalent of $135,000 annually. 2. Executive Bonus: Eligible to receive up to 40% of your salary as additional compensation in some combination of cash and stock options based on the performance of the company meeting objectives and your performance meeting objectives. 3. Executive Severance: If within the first year of employment you are terminated without cause by the company, you will receive six months salary. 4. Stock Options: 36,000 shares of stock at an option price of $X.XX per share subject to standard employee stock option requirements. The option price will be determined by the closing price on the first day of your employment. 5. Vacation: You will receive 4 weeks of vacation on an annual basis. 6. Moving Expenses. Relocation to the Minneapolis/St. Paul area according to the enclosed CIMA moving policy. In addition, you will receive a one-time moving bonus of $25,000. As an exception to the moving policy we will reimburse you for temporary living expenses for three months and will reimburse you for flights home every other weekend. You will also be reimbursed for two house hunting trips. This offer is contingent upon passing a physical at a medical clinic of our choice as well as agreeing to and completion of drug testing. CIMA is a drug free environment. Enclosed is a summary of company provided benefits and the medical and dental employee benefits costs. I am also providing you with a packet of information outlining the Medica medical insurance and the Guardian dental/life/AD&D/LTD/STD insurance. Also enclosed is a copy of the CIMA LABS INC., employment agreement for your signature. John, we are very excited about your joining CIMA. The development of new technology is the lifeblood of a company like ours. We believe you can help us be more innovative in that area. I look forward to hearing of your acceptance soon. Please sign and date in the space provided and fax back to me at (612) 947-8770. Sincerely, John M. Siebert, Ph.D. JMS:rjg Enclosures cc: Ronald Gay SIGNED AND ACCEPTED ____________________________________________ Date_____________________________ John Hontz, Ph.D. 31 EX-10.25 4 EXHIBIT 10.25 CIMA LABS INC. NON-EMPLOYEE DIRECTORS' FEE OPTION GRANT PROGRAM ADOPTED ON FEBRUARY 26, 1997 APPROVED BY STOCKHOLDERS ON MAY ___, 1997 PURPOSE. The purpose of the Non-Employee Directors' Fee Option Grant Program (the "Program") is to provide a means by which each member of the Board of Directors of CIMA LABS INC. (the "Company") who is not an employee of the Company (a "Non-Employee Director") will be given an opportunity to defer receipt of cash compensation attributable solely to service as a member of the Board of Directors of the Company (a "Director"), including, but not limited to, annual retainer fees and board and committee meeting fees (collectively, "Directors' Fees"), in the form of stock options to acquire common stock of the Company. The Company, by means of the Program, seeks to retain the services of persons now serving as Non-Employee Directors of the Company, to secure and retain the services of persons capable of serving in such capacity, and to provide incentives for such persons to exert maximum efforts for the success of the Company. EFFECTIVE DATE. The Program shall become effective on March 12, 1997 (the "Effective Date"). ADMINISTRATION. The Program shall be administered by the Board of Directors of the Company (the "Board") unless and until the Board delegates administration to a committee, as provided in subparagraph 3(c). The Board shall have the power, subject to, and within the limitations of, the express provisions of the Program: (1) To construe and interpret the Program and options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Program or in any option, in a manner and to the extent it shall deem necessary or expedient to make the Program effective. (2) To amend the Program or an option as provided in Section 13. (3) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Program. 32 (b) The Board may delegate administration of the Program to a committee composed of not fewer than two (2) members of the Board (the "Committee") who may be, in the discretion of the Board, "Non-Employee Directors" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any applicable successor thereto. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Program, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Program, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Program. 4. SHARES SUBJECT TO THE PROGRAM. (a) Subject to the provisions of Section 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to options granted under the Program shall not exceed in the aggregate Sixty Thousand (60,000) shares of the Company's common stock ("Common Stock"). If any option granted under the Program shall for any reason expire or otherwise terminate without having been exercised in full, the stock not purchased under such option shall again become available for the Program. (b) The stock subject to the Program may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. Options may be granted only to Non-Employee Directors. 6. PARTICIPATION. Each Non-Employee Director may elect to defer and apply all or any portion of the Directors' Fees otherwise payable in cash for his or her service on the Board to the acquisition of a special option grant under the Program, as follows: (a) ELECTIONS BY PERSONS SERVING AS NON-EMPLOYEE DIRECTORS ON THE EFFECTIVE DATE. Persons serving as Non-Employee Directors on the Effective Date may elect to defer Directors' Fees otherwise payable for services after the Effective Date and until and including the 1997 Annual Meeting of Stockholders of the Company ("1997 Annual Meeting"). Such election shall be submitted to the Company's Chief Financial Officer no later than the Effective Date. The deferral amount so elected (i) shall be irrevocable until such 1997 Annual Meeting, and (ii) shall remain in effect with respect to Directors' Fees otherwise payable after the 1997 Annual Meeting until the Non-Employee Director affirmatively submits a replacement election (including an election to cease all such deferrals), which replacement election may only affect prospectively Directors' Fees not yet earned as of the date of the replacement election. A replacement election (or an initial election, in the case of a Non-Employee Director who chooses not to submit a deferral election by the Effective Date) must be submitted at or prior to the 1997 Annual Meeting in order to be effective for Directors' Fees otherwise payable after the 1997 Annual Meeting. Beginning on the date of the 1997 Annual Meeting, deferral elections in effect must remain irrevocably in effect for Directors' Fees otherwise payable until and including the date of the next Annual Meeting. (b) ELECTIONS BY PERSONS NAMED TO SERVE AS NON-EMPLOYEE DIRECTORS ON OR AFTER THE EFFECTIVE DATE. Persons named to serve as Non-Employee Directors on or after the Effective Date may elect to defer Directors' Fees otherwise payable for services on or after becoming a Non-Employee Director by submitting an election to the Company's Chief Financial Officer within thirty (30) days of becoming a Non-Employee Director. Such election shall apply only as to amounts which the Non-Employee Director was not yet entitled to receive at the time of submission of the election. The deferral amount so elected (i) shall be irrevocable until and including the Annual Meeting first following submission, and (ii) shall remain in effect with respect to Directors' Fees otherwise payable after that first following Annual Meeting until the Non-Employee Director affirmatively submits a replacement election (including an election to cease all such deferrals); 33 which replacement election may only affect prospectively Directors' Fees not yet earned as of the date of the replacement election. A replacement election (or an initial election, in the case of a Non-Employee Director who chooses not to submit a deferral election within thirty (30) days of first becoming a Non-Employee Director) must be submitted at or prior to the date of an Annual Meeting in order to be effective for Directors' Fees otherwise payable after such Annual Meeting. Deferral elections in effect as of any Annual Meeting must remain in effect for Directors' Fees otherwise payable until and including the date of the next Annual Meeting. 7. NON-DISCRETIONARY GRANTS. (a) Each Non-Employee Director who timely files a deferral election as to Directors' Fees otherwise payable for services between the Effective Date and the 1997 Annual Meeting (as described in Section 6(a) hereof) shall automatically be granted an option to purchase common stock of the Company on the date of the 1997 Annual Meeting, on the terms and conditions set forth herein. (b) Each Non-Employee Director who timely files a deferral election within thirty (30) days of first becoming a Non-Employee Director as to Directors' Fees payable until and including the first Annual Meeting during such Non-Employee Director's service on the Board (as described in Section 6(b) hereof) shall automatically be granted an option to purchase common stock of the Company on the date on which the Non-Employee Director files the deferral election, on the terms and conditions set forth herein. (c) Each Non-Employee Director who has a deferral election in effect (or is deemed to have such an election in continuing effect, in accordance with Section 6) as of any Annual Meeting of the Stockholders of the Company occurring after the Effective Date shall automatically be granted an option to purchase common stock of the Company on the date of such Annual Meeting, on the terms and conditions set forth herein. 8. OPTION PROVISIONS. Each option shall be a nonstatutory stock option (not intended to meet the requirements of Section 422 of the Internal Revenue Code (the "Code")), subject to the following terms and conditions: (a) TERM. The term of each option commences on the date it is granted and, unless sooner terminated as set forth herein, expires on the date ("Expiration Date") ten (10) years from the date of grant. If the Non-Employee Director's service as a Director terminates for any reason or for no reason, the option shall terminate on the earlier of the Expiration Date or the date three (3) years following the date of termination of such service. Except as provided in Section 8(b) hereof, an option may be exercised following termination of service as a Director only as to that number of shares as to which it was exercisable as of the date of termination of such service under the provisions of Section 8(e). Each option held by a Director under the Program at the time of his or her cessation of service as a Director shall immediately terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. (b) DEATH OR PERMANENT DISABILITY. Should the Non-Employee Director's service as a Director cease by reason of death or permanent disability, then each option held by that Non-Employee Director under the Program shall immediately become exercisable for all the shares of Common Stock at the time subject to that option, and the option may be exercised for any or all of those shares as fully vested shares. For purposes of this plan, "permanent disability" shall mean an inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. 34 Should the Non-Employee Director die while holding one or more options under the Program, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Non-Employee Director's cessation of service as a Director (less any shares subsequently purchased by the Non-Employee Director prior to death), by the personal representative of the Non-Employee Director's estate or by the person or persons to whom the option is transferred pursuant to the Non-Employee Director's will or in accordance with the laws of descent and distribution. Such right of exercise under this Section 8(b) shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)-year option term described in Section 8(a), or (ii) the three (3)-year period measured from the date of the Non-Employee Director's cessation of service as a Director. (c) EXERCISE PRICE. (1) The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the fair market value (as defined in Section 11(e) hereof) of a share of Common Stock on the last day of the month prior to the option grant date. (2) The exercise price must be paid in full upon exercise of the option using one of the following alternatives: (I) in cash (including by check); or (II) by delivery of shares of Common Stock already owned by the Non-Employee Director, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interest, which Common Stock shall be valued at its fair market value (as defined in Section 11(e) hereof) on the date of exercise; or (III) by a combination of the methods of payment specified in Section 8(c)(ii)(1) or 8(c)(ii)(2) hereof. Notwithstanding the foregoing, this option may be exercised pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which results in the receipt of cash (or check) by the Company either prior to the issuance of shares of the Company's common stock or pursuant to the terms of irrevocable instructions issued by the Non-Employee Director prior to the issuance of shares of the Company's common stock. (d) NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A / (B x 66-2/3%), where X is the number of option shares, A is the maximum amount of the Director's Fees subject to the Non-Employee Director's deferral election and applied to the grant of such option under the Program, and B is the fair market value per share of Common Stock on the last day of the month prior to the option grant date. VESTING. Each option shall vest (become exercisable) as follows: Options granted pursuant to Section 7(a) shall be fully vested and exercisable on the date of grant. Options granted pursuant to Sections 7(b) and 7(c) shall become exercisable in installments on each date that Directors' Fees would have been payable in cash had no deferral election been in effect under the Program with respect to the number of shares equal to (1) the aggregate shares subject to the option multiplied by (2) the fraction obtained where the numerator is the cash Directors' Fees that the Non-Employee Director otherwise would have received on such date and the denominator is the aggregate Directors' Fees that the Non-Employee Director would have received in cash absent a deferral election under this Program following the date of the option's grant through and including that Board meeting held at the time of the next Annual Meeting of Stockholders of the Company. (a) The Company may require any Non-Employee Director, or any person to whom an option is transferred 35 under Section 8(b) or 8(h), as a condition of exercising any such option: (i) to give written assurances satisfactory to the Company as to the optionee's knowledge and experience in financial and business matters; and (ii) to give written assurances satisfactory to the Company stating that such person is acquiring the Common Stock subject to the option for such person's own account and not with any present intention of selling or otherwise distributing the Common Stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of shares of Common Stock upon the exercise of the option has been registered under a then-currently-effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii), as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may require any optionee to provide such other representations, written assurances or information which the Company shall determine is necessary, desirable or appropriate to comply with applicable securities laws as a condition of granting an option to the optionee or permitting the optionee to exercise the option. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Program as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock. (b) Notwithstanding anything to the contrary contained herein, an option may not be exercised unless the shares of Common Stock issuable upon exercise of such option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. Options granted under the Program shall not be transferable, except (i) by will or by the laws of descent and distribution, (ii) by written designation which takes effect upon the Non-Employee Director's death, (iii) by written instruction, in a form accepted by the Company, to the Non-Employee Director's spouse, children, stepchildren, or grandchildren (whether adopted or natural), to a trust created solely for the benefit of the Non-Employee Director and the foregoing persons, or (iv) to the Non-Employee Director's former spouse (if transfer is pursuant to a judicial decree dissolving the Non-Employee Director's marriage). During a Non-Employee Director's life the Non-Employee Director's option is exercisable only by the Non-Employee Director or a transferee satisfying the above conditions. The right of a transferee to exercise the transferred portion of an option after the Non-Employee Director's termination of service as a Director shall terminate in accordance with the Non-Employee Director's right of exercise under Sections 8(a) or 8(b) hereof (after the Non-Employee Director's death, treating the transferee as a person who acquired the right to exercise the Non-Employee Director's option by bequest or inheritance). The terms of the Non-Employee Director's option shall be binding upon the transferees, executors, administrators, heirs, successors, and assigns of the Non-Employee Director. 9. COVENANTS OF THE COMPANY. (a) During the terms of the options granted under the Program, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such options. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Program such authority as may be required to issue and sell shares of Common Stock upon exercise of the options granted under the Program; PROVIDED, HOWEVER, that this undertaking shall not require the Company to register under the Securities Act either the Program, any option granted under the Program, or any Common Stock issued or issuable pursuant to any such option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Program, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such options. 36 10. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to the exercise of options granted under the Program shall constitute general funds of the Company. 11. MISCELLANEOUS. (a) Neither a Non-Employee Director nor any person to whom an option is transferred under Section 8(b) or 8(h) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option unless and until such person has satisfied all requirements for exercise of the option pursuant to its terms. (b) Nothing in the Program or in any instrument executed pursuant thereto shall confer upon any Director any right to continue in the service of the Company in any capacity or shall affect any right of the Company, its Board or stockholders to remove any Director pursuant to the Company's By-Laws and the provisions of the Delaware General Corporation Law (or the applicable laws of the Company's state of incorporation if the Company's state of incorporation should change in the future). (c) No Director, individually or as a member of a group, and no beneficiary, transferee or other person claiming under or through him or her, shall have any right, title or interest in or to any option reserved for the purposes of the Program except as to such shares of Common Stock, if any, as shall have been reserved for such person pursuant to an option granted (or transferred) to such person. (d) In connection with each option made pursuant to the Program, it shall be a condition precedent to the Company's obligation to issue or transfer shares to any person, or to evidence the removal of any restrictions on transfer, that such person make arrangements satisfactory to the Company to insure that the amount of any federal or other withholding tax required to be withheld with respect to such sale or transfer, or such removal or lapse, is made available to the Company for timely payment of such tax. (e) As used in this Program, "fair market value" means, as of any date, the value of the Common Stock of the Company determined as follows: (1) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the fair market value of a share of Common Stock shall be the closing sales price for such Common Stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Company's Common Stock in the event that the Company's Common Stock is traded on more than one such exchange or market) on the last market trading day prior to the day of determination, as reported in THE WALL STREET JOURNAL or such other source as the Board deems reliable; or (2) In the absence of such markets for the Common Stock, the fair market value shall be determined in good faith by the Board. 37 12. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Program, or subject to any option granted under the Program (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Program and outstanding options will be appropriately adjusted in the class(es) and maximum number of shares subject to the Program and the class(es) and number of shares and price per share of stock subject to outstanding options. Such adjustments shall be made by the Board, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.") (b) In the event of: (1) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) the acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or any Affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then to the extent not prohibited by applicable law, the time during which options outstanding under the Program vest and may be exercised shall be accelerated prior to the occurrence of such event and the options terminated if not exercised after such acceleration and at or prior to the occurrence of such event. 13. AMENDMENT OF THE PROGRAM. (a) The Board at any time, and from time to time, may amend the Program and/or some or all of the outstanding options granted under the Program. Except as provided in Section 12 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (1) Increase the number of shares which may be issued under the Program; (2) Modify the requirements as to eligibility for participation in the Program (to the extent such modification requires stockholder approval in order for the Program to comply with the requirements of Rule 16b-3 promulgated under the Exchange Act); or (3) Modify the Program in any other way if such modification requires stockholder approval in order for the Program to comply with the requirements of Rule 16b-3 promulgated under the Exchange Act. (b) Rights and obligations under any option granted before any amendment of the Program shall not be impaired by such amendment unless (i) the Company requests the consent of the person to whom the option was granted and (ii) such person consents in writing. 14. TERMINATION OR SUSPENSION OF THE PROGRAM. (a) The Board may suspend or terminate the Program at any time. Unless sooner terminated, the Program upon the issuance of all of the shares of Common Stock reserved for issuance hereunder. No options may be granted under the Program while the Program is suspended or after it is terminated. (b) Rights and obligations under any option granted while the Program is in effect shall not be impaired by 38 suspension or termination of the Program, except with the consent of the person to whom the option was granted. (c) The Program shall terminate upon the occurrence of any of the events described in Section 12(b) above. 15. EFFECTIVE DATE OF PROGRAM; CONDITIONS OF EXERCISE. (a) The Program shall become effective on the date specified in Section 2, subject to the condition subsequent that the Program is approved by the stockholders of the Company. In the event that the stockholders of the Company do not approve the Program at the 1997 Annual Meeting, then any Non-Employee Director's election to defer Directors' Fees hereunder shall be void, and such deferred Directors' Fees shall be paid in cash to such Non-Employee Director as soon as reasonably practicable following the 1997 Annual Meeting. (b) No option granted under the Program shall be exercised or exercisable unless and until the conditions of Section 9(b) or Section 15(a) hereof has been met. EX-27 5 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 3,684,338 4,400,508 253,012 0 670,927 9,241,906 13,510,131 3,096,373 19,942,955 1,072,323 0 0 0 94,570 56,768,338 19,942,955 191,708 268,256 580,872 2,701,052 0 0 0 (2,303,312) 0 0 0 0 0 (2,303,312) (.24) (.24)
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