-----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, JaVW2vNo5XQDIq+3OJTt7m+XxObH+7DthyHQHakIyr5j2eykDt4pkEOO091Ff91t uHrGSVeG2l9YfOFc7UF9Lg== /in/edgar/work/20000811/0000950124-00-004930/0000950124-00-004930.txt : 20000921 0000950124-00-004930.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950124-00-004930 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIMA LABS INC CENTRAL INDEX KEY: 0000833298 STANDARD INDUSTRIAL CLASSIFICATION: [2834 ] IRS NUMBER: 411569769 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24424 FILM NUMBER: 695155 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 e10-q.txt FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 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 June 30, 2000 - ------- 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 (I.R.S. Employer Identification Number) incorporation or organization) 10000 VALLEY VIEW ROAD, EDEN PRAIRIE, MN 55344-9361 (952) 947-8700 (Address of principal executive offices (Registrant's telephone number, and zip code) including area code) 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, 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 practical date. Common Stock, $.01 par value 10,862,989 ---------------------------- ---------- (Class) (Outstanding at August 10, 2000) 2 INDEX CIMA LABS INC.
Page No. -------- PART I. FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements (Unaudited) Balance Sheets - June 30, 2000 and December 31, 1999. 3 Statements of Operations - Three months and six months ended June 30, 2000 and June 30, 1999. 4 Statements of Cash Flows - Six months ended June 30, 2000 and June 30, 1999 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8 Item 3. Quantitative and Qualitative Disclosures about Market Risks 13 PART II. OTHER INFORMATION - --------------------------- Items 1, 2, 3 and 5 have been omitted since all items are inapplicable or answers negative. Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 13 Signature 14
We have registered "CIMA(TM)," "CIMA LABS INC.(R)," "OraSolv(R)," and "OraSolv(R)SR" as trademarks with the U.S. Patent and Trademark Office. These registered trademarks are used in this Form 10-Q. We also use the trademarks "DuraSolv(TM)," "PakSolv(TM)," "OraVescent(TM)SL/BL" and "OraVescent(TM)SS" in this Form 10-Q. Triaminic(R)and Softchews(R)are registered trademarks of Novartis. Zomig(R)and Rapimelt(R)are registered trademarks of AstraZeneca. Remeron(R)is a registered trademark of N.V. Organon. Tempra(R)is a registered trademark of Bristol-Myers Squibb Canada. Quicklets(TM)and FirsTabs(TM)are trademarks of Bristol-Myers Squibb. 2 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements BALANCE SHEETS CIMA LABS INC.
June 30, December 31, 2000 1999 (Unaudited) (See note) ASSETS Current assets: Cash and cash equivalents $ 9,775,295 $ 2,480,698 Available-for-sale securities 5,919,222 - Accounts receivable, less allowance for doubtful accounts and returns of $25,000 and $36,000 5,209,276 3,058,258 Inventories 1,902,529 2,772,429 Prepaid expenses 109,371 73,042 ---------------- ---------------- Total current assets 22,915,693 8,384,427 Other assets, net 358,973 525,942 Property and equipment: Property, plant and equipment 22,082,099 16,355,463 Accumulated depreciation (7,900,490) (5,996,024) ---------------- ---------------- 14,181,609 10,359,439 ---------------- ---------------- Total assets $ 37,456,275 $ 19,269,808 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 687,397 $ 2,402,726 Accrued expenses 1,167,939 1,229,179 Other current liabilities 374,968 554,317 ---------------- ---------------- Total current liabilities 2,230,304 4,186,222 Long term debt 3,578,472 3,509,660 ---------------- ---------------- Total liabilities 5,808,776 7,695,882 Stockholders' equity: Convertible preferred stock, $.01 par value; 50,000 shares authorized; -0- shares issued and outstanding - - Common Stock, $.01 par value; 20,000,000 shares authorized; 10,851,569 and 9,646,241 shares issued and outstanding 108,586 96,462 Additional paid-in capital 77,373,340 57,454,661 Retained earnings (deficit) (45,834,427) (45,977,197) ---------------- ---------------- 31,647,499 11,573,926 Unrealized gain (loss) on available-for-sale securities - - ---------------- ---------------- Total stockholders' equity 31,647,499 11,573,926 ---------------- ---------------- Total liabilities and stockholders' equity $ 37,456,275 $ 19,269,808 ================ ================
Note: The balance sheet at December 31, 1999 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 accompanying notes. 3 4 STATEMENTS OF OPERATIONS CIMA LABS INC. (Unaudited)
For the Three Months Ended For the Six Months Ended ------------------------------------ ------------------------------------ June 30, June 30, June 30, June 30, 2000 1999 2000 1999 ----------------- ----------------- ----------------- ----------------- Revenues: Net sales $ 3,318,777 $ 1,398,862 $ 6,096,355 $ 1,433,862 Product development fees and licensing 2,194,528 1,738,153 4,391,213 3,382,605 Royalties 241,500 90,631 979,000 193,967 --------------- -------------- -------------- -------------- 5,754,805 3,227,646 11,466,568 5,010,434 Operating expenses: Cost of sales 3,568,575 2,036,313 6,725,214 2,968,254 Research and product development 1,190,564 808,270 2,217,109 1,826,968 Selling, general and administrative 900,354 775,088 1,848,842 1,443,598 --------------- -------------- -------------- -------------- 5,659,493 3,619,671 10,791,165 6,238,820 Other income: Interest, net 293,315 6,756 282,546 27,987 Other income (expense) (5,309) 16,712 (15,842) 16,440 --------------- -------------- -------------- -------------- 288,006 23,468 266,704 44,427 --------------- -------------- -------------- -------------- Income (loss) before cumulative effect of a change in accounting principle 383,318 $ (368,557) 942,107 $ (1,183,959) Cumulative effect of change in accounting principle - - (799,337) - --------------- -------------- -------------- -------------- Net income (loss) $ 383,318 $ (368,557) $ 142,770 $ (1,183,959) =============== ============== ============== ============== Net income (loss) per share: Basic Income per share before cumulative effect of a change in accounting principle $ .04 $ (.04) $ .09 $ (.12) Loss per share from the cumulative effect of a change in accounting principle .00 .00 (.08) .00 --------------- -------------- -------------- -------------- Net income (loss) per basic share $ .04 $ (.04) $ .01 $ (.12) --------------- -------------- -------------- -------------- Diluted Income per share before cumulative effect of a change in accounting principle $ .03 $ (.04) $ .08 $ (.12) Loss per share from the cumulative effect of a change in accounting principle .00 .00 (.07) .00 --------------- -------------- -------------- -------------- Net income (loss) per diluted share $ .03 $ (.04) $ .01 $ (.12) --------------- -------------- -------------- -------------- Weighted average of number of shares: Basic 10,857,106 9,610,394 10,375,963 9,610,394 Diluted 11,841,178 9,610,394 11,393,366 9,610,394 Pro forma amounts assuming the accounting change were applied retroactively: Net income (loss) $ 383,318 $ (140,155) $ 942,107 $ (622,044) Net income (loss) per diluted share $ .03 $ (.01) $ .08 $ (.06) Weighted average number of diluted shares 11,841,178 9,610,394 11,393,366 9,610,394 See accompanying notes.
5 STATEMENTS OF CASH FLOWS CIMA LABS INC. (Unaudited)
For the Six Months Ended June 30, -------------------------------------- 2000 1999 ----------------- ----------------- OPERATING ACTIVITIES: Net income (loss) $ 142,770 $ (1,183,959) Adjustments to reconcile net income or loss to net cash used in operating activities: Depreciation and amortization 743,808 897,299 Loss on impairment of assets 400,000 - Cumulative effect of change in accounting principle 799,337 - Changes in operating assets and liabilities: Accounts receivable and current assets (2,187,347) (704,736) Inventories 869,900 (1,185,933) Accounts payable (1,715,329) 660,674 Accrued expenses and other (198,324) (43,741) Deferred revenue (649,337) 9,229 ----------------- ----------------- Net cash used in operating activities (1,794,522) (1,551,167) INVESTING ACTIVITIES: Purchases of property, plant and equipment (4,913,955) (420,478) Patents and trademarks (37,139) (32,280) Purchases of available-for-sale securities (5,919,222) - ----------------- ----------------- Net cash provided by (used in) investing activities (10,870,316) (452,758) FINANCING ACTIVITIES: Stock option exercise proceeds 530,803 - Net proceeds from stock offerings 19,400,000 - Security deposits on leases 152,085 - Notes payable (88,561) - Payments on capital lease obligations (34,892) - ----------------- ----------------- Net cash provided by financing activities 19,959,435 - ----------------- ----------------- Increase (decrease) in cash and cash equivalents 7,294,597 (2,003,925) Cash and cash equivalents at beginning of period 2,480,698 2,722,590 ----------------- ----------------- Cash and cash equivalents at end of period $ 9,775,295 $ 718,665 ================= =================
See accompanying notes 6 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION CIMA LABS INC. is a Delaware corporation that develops and manufactures fast-dissolve and enhanced-absorption oral drug delivery systems. OraSolv and DuraSolv, our leading proprietary fast-dissolve technologies, are oral dosage forms incorporating taste-masked active drug ingredients into tablets, which dissolve quickly in the mouth without chewing or water. We develop applications for our technologies that are licensed to pharmaceutical company partners. We currently manufacture and package six commercial products incorporating our proprietary fast-dissolve technologies. Revenues are generated from the sale of products we manufacture, license agreements, product development fees and royalties. The accompanying unaudited 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. These financial statements 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, which are considered necessary for fair presentation have been included. Operating results for the three and six month periods ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. For further information, you should refer to the audited financial statements and accompanying notes contained in our Annual Report on Form 10-K, as amended, for the year ended December 31, 1999. 2. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that may affect the amounts we report in our financial statements and accompanying notes. Actual results could differ from those estimates. 3. REVENUE RECOGNITION The Company recognizes revenue from product sales upon shipment; revenue from product development fees as services are rendered and as milestones are achieved; revenues from non-refundable up-front license fees are deferred and amortized over the related contract period consistent with SAB 101 (as described below); and revenues from royalties are accrued quarterly based on the sales made by a licensee. In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial Statements." SAB 101 requires that up-front license fees received from research collaborators be recognized over the term of the agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a separate earnings process. The Company implemented SAB 101 in its second quarter ended on June 30, 2000, retroactive to January 1, 2000. The Company reported a charge to earnings of $799,337 for the cumulative effect of a change in accounting 6 7 principle, which is included in income for the six-month period ended June 30, 2000. The effect of the change on the six-month period ended June 30, 2000 was to increase income before cumulative effect of the change in accounting principle $649,337 or $0.06 per diluted share. The effect of the change on the three-month period ended March 31, 2000, which has been restated for the change, was to increase income before cumulative effect of the change in accounting principle $550,852 or $0.05 per diluted share. The pro forma amounts presented in the income statement were calculated assuming the accounting change was made retroactively to prior periods. For the three-month periods ended March 31, 2000 and June 30, 2000, the Company recognized $700,852 and $98,485, respectively, in revenue that is included in the cumulative effect adjustment as of January 1, 2000. The effect of that revenue in the three-month periods ended March 31, 2000 and June 30, 2000 was to increase income by $700,852 and $98,485, respectively. 4. CASH EQUIVALENTS AND INVESTMENTS We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. We invest our cash and cash equivalents in money market funds, investment grade commercial paper and United States government agency securities, including discount notes and U.S Treasury obligations. Our short-term investments consist of investment grade commercial paper and United States government agency securities, including discount notes and U.S Treasury obligations, with maturities ranging from three to six months. We classify our short-term investments as available-for-sale. Available-for-sale investments are recorded at fair value with unrealized gains and losses reported in the shareholders' equity. Fair values of investments are based on quoted market prices, where available, and accrued interest, if applicable. No realized gains and losses have been recorded to date. Dividend and interest income is recognized when earned. 5. INCOME (LOSS) PER SHARE Income (loss) per share for the three-month and six-month periods ended June 30, 2000 and 1999 are summarized in the following table:
(In thousands, except share and per share data) Three Months Ended June 30, -------------------------------------------------------------------------------------------- 2000 1999 -------------------------------------------- --------------------------------------------- Net Per Net Per Income Share Income Share (Loss) Shares Amount (Loss) Shares Amount ------------- ------------ ----------- -------------- ------------- ----------- Basic $ 383 10,857,106 $ .04 $ (369) 9,610,394 $(.04) Effect of dilutive stock options - 984,172 (.01) - - - ------------- ------------ ----------- -------------- ------------- ----------- Diluted $ 383 11,841,178 $ .03 $ (369) 9,610,394 $(.04) ------------- ------------ ----------- -------------- ------------- -----------
7 8
Six Months Ended June 30, -------------------------------------------------------------------------------------------- 2000 1999 -------------------------------------------- --------------------------------------------- Net Per Per Income Share Net Income Share (Loss) Shares Amount (Loss) Shares Amount ------------- ------------ ----------- -------------- ------------- ----------- Basic $ 143 10,375,963 $ .01 $ (1,184) 9,610,394 $(.12) Effect of dilutive stock options - 1,017,403 - - - - ------------- ------------ ----------- -------------- ------------- ----------- Diluted $ 143 11,393,366 $ .01 $(1,184) 9,610,394 $(.12) ------------- ------------ ----------- -------------- ------------- -----------
For loss periods, basic and diluted share amounts are identical, as the effect of potential common shares is antidilutive. 6. INVENTORIES Inventories at June 30, 2000 and December 31, 1999 are summarized as follows:
June 30, 2000 December 31, 1999 -------------------------- ------------------------- Raw materials $ 29,785 $ 916,259 Work in process 55,422 20,535 Finished products 1,817,322 1,835,635 -------------------------- ------------------------- $ 1,902,529 $ 2,772,429 -------------------------- -------------------------
7. PRIVATE PLACEMENT OF COMMON STOCK On March 17, 2000, we issued 1.1 million shares of Common Stock through a private placement. We received approximately $19.4 million in net cash proceeds and expect to use the funds for capital additions to our manufacturing facility and for working capital. We have invested the net proceeds in interest-bearing money market accounts, pending such uses. 8. RECLASSIFICATIONS Certain prior period balances have been reclassified in order to conform to the presentation for the three-month and six-month periods ended June 30, 2000. These reclassifications have no impact on the net loss or shareholders' equity as previously reported. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT This Quarterly Report on Form 10-Q contains statements that are not descriptions of historical facts and contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or our future performance. We caution readers not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date this report was filed. Forward-looking statements are not descriptions of historical facts. The words or 8 9 phrases "will likely result," "look for," "may result," "will continue," "is anticipated," "expect," "project," or similar expressions are intended to identify forward-looking statements, and are subject to numerous known and unknown risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those identified in the "Risk Factors" filed as Exhibit 99.1 to this Form 10-Q, and in our other filings with the SEC. GENERAL We develop and manufacture pharmaceutical products based on our proprietary OraSolv and DuraSolv fast-dissolve technologies. We have agreements with several pharmaceutical companies regarding a variety of potential products, with an emphasis on prescription products. We currently manufacture six commercial products using our fast-dissolve technologies. These products include four formulations of Triaminic for Novartis, Tempra for a Canadian affiliate of Bristol-Meyers Squibb, and Zomig for AstraZeneca. We operate within a single segment: the development and manufacture of fast-dissolve and enhanced-absorption oral drug delivery systems. Our revenues are comprised of three components: net sales of products we manufacture for pharmaceutical companies utilizing our proprietary fast-dissolve technologies; product development fees and licensing revenues for development activities we conduct through collaborative agreements with pharmaceutical companies; and royalties on the sales of products we manufacture, which are sold by pharmaceutical companies under licenses from us. In addition, we are currently developing other drug delivery technologies. Revenues from product sales and from royalties will fluctuate from quarter to quarter and from year to year depending on, among other factors, demand for our products by patients, new product introductions, the seasonal nature of some of our products and pharmaceutical company ordering patterns. Our ability to generate product sales and royalty revenues in excess of our current forecasts for 2000 and 2001 may be constrained by our manufacturing capacity. We expect our second production line, now being developed, to be operational in the second half of 2001. Revenues from product development fees and licensing revenue will fluctuate from quarter to quarter and from year to year depending on, among other factors, the number of new collaborative agreements that we enter into; the number and timing of product development milestones we achieve under collaborative agreements, including making submissions to, and obtaining approvals from, the FDA for products in development; and the level of our development activity conducted for pharmaceutical companies under collaborative agreements. RESULTS OF OPERATIONS THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND JUNE 30, 1999. REVENUES Our total revenues increased 78% from $3.2 million in the three-month period ended June 30, 1999 to $5.8 million in three-month period ended June 30, 2000, and increased 129% from $5.0 million in the first half of 1999 to $11.5 million in first half of 2000. The increases are primarily due to higher sales volume of commercial products. All three components of revenues increased for the quarter and for the first half of 2000 in comparison to the same periods in 1999. Revenues from net sales of products using our drug delivery technologies increased 137% from $1.4 million in the three-month period ended June 30, 1999 to $3.3 million in the three-month 9 10 period ended June 30, 2000, and increased 325% from $1.4 million in the first half of 1999 to $6.1 million in the first half of 2000. The increases are primarily due to increased shipments of Triaminic to Novartis. Triaminic accounted for 95% and 93% of net sales of products for the three and six-month periods ended June 30, 2000, respectively, compared to 93% for both the three and six-month periods ended June 30, 1999. We continue to expect additional growth in product sales in the last half of 2000, but this growth will depend on pending FDA regulatory approvals for the N.V. Organon product, Remeron, and the AstraZeneca product, Zomig, FDA approval of our manufacturing compliance for prescription pharmaceuticals and the receipt of firm purchase order commitments for these new products. Revenues from product development fees and licensing increased 26% from $1.7 million for the three-month period ended June 30, 1999 to $2.2 million for the three-month period ended June 30, 2000, and increased 30% from $3.4 million for the first half of 1999 to $4.4 million for the first half of 2000. Licensing revenues in 1999 are not directly comparable to 2000 due to a change in accounting policy for up-front license fees resulting from the implementation of SAB 101. During the second quarter of 2000, licensing revenues included milestone payments that were earned under agreements with American Home Products and N.V. Organon. In addition, we entered into a Development, License and Supply Agreement with Schwarz Pharma during the second quarter of 2000 and received an up-front license fee, the recognition of which was deferred and will be ratably amortized into revenue in subsequent quarters. Licensing revenues for the three and six-month periods include amortization of deferred revenue of $0.1 and $0.6 million, respectively, resulting from implementation of SAB 101 in the second quarter of 2000 (see Note 3--Revenue Recognition). Product development fees and licensing revenues in subsequent quarters will depend on our success in signing new license and development agreements with pharmaceutical companies and on expected FDA regulatory approvals for fast dissolving formulations of Remeron and Zomig. Revenues from royalties increased 166% from $0.1 million for the three-month period ended June 30, 1999 compared to $0.2 million for the three-month period ended June 30, 2000, and increased 405% from $0.2 million for the first half of 1999 to $1.0 million for the first half of 2000. The increases are primarily due to increased sales of Triaminic by Novartis in the U.S., which was introduced in the second quarter of 1999, and sales of Zomig Rapimelt by AstraZeneca, which was introduced in several countries in Europe during the third quarter of 1999. OPERATING EXPENSES AND GROSS MARGIN. Cost of sales increased 75% from $2.0 million in the three-month period ended June 30, 1999 to $3.6 million in the three-month period ended June 30, 2000, and increased 127% from $3.0 million for the first half of 1999 to $6.7 million for the first half of 2000. The increases are primarily due to higher Triaminic unit volumes being manufactured and shipped to Novartis and due to costs incurred to establish multi-shift production capabilities. In subsequent quarters, we expect cost of sales to increase as a result of expected unit volume increases. Gross margins on product sales were negative in the three and six-month periods ended June 30, 10 11 2000, and negative in the comparable periods of 1999. Gross profit margins improved 38 percentage points from (46%) for the three-month period ended June 30, 1999 to (8%) for the three-month period ended June 30, 2000, and improved 97 percentage points from (107%) for the first half of 1999 to (10%) for the first half of 2000. Cost of sales have resulted in negative gross profit margins because we have incurred additional costs to establish multi-shift production capabilities and a product mix that has been weighted towards lower margin products. In subsequent quarters, we expect improved gross margins because manufacturing efficiencies should improve at higher unit volumes and with a more favorable mix of higher margin products. However, future gross profit margins will depend primarily, among other things, on the pricing of our products, our ability to effectively use our manufacturing and plant capacity, and changes in our product lines and mix of products. Research and product development expenses increased 47% from $0.8 million in the three-month period ended June 30, 1999 to $1.2 million in the three-month period ended June 30, 2000, and increased 21% from $1.8 million for the first half of 1999 to $2.2 million for the first half of 2000. These expenses increased as the level of product development activities increased over last year's levels and due to expenses related to the OraVescent clinical trial, which commenced late in the first quarter of 2000. We expect research and product development expenses to increase in subsequent quarters. Selling, general and administrative expenses increased 16% from $0.8 million in the three-month period ended June 30, 1999 to $0.9 million in the quarter ended June 30, 2000, and increased 28% from $1.4 million for the first half of 1999 to $1.8 million for the first half of 2000. The increases are primarily due to marketing and related consulting costs associated with our business development efforts. We expect selling, general and administrative expenses to increase in subsequent quarters. OTHER INCOME. Other income increased from less than $0.1 million in the three-month period ended June 30, 1999 to $0.4 million in the three-month period ended June 30, 2000, and increased from less than $0.1 million in the first half of 1999 to $0.3 million in the first half of 2000. Other income consists primarily of interest income on invested funds, net of interest expense on bank lines, loan agreements and capitalized leases. The increases in other income were due to higher balances of invested funds from the proceeds of our March 2000 private placement. In subsequent quarters, we expect interest income to decrease as we use the proceeds of our March 2000 private placement to complete plant improvements and additions over the next twelve months. NET INCOME (LOSS). Our net loss of $(0.4) million in the three-month period ended June 30, 1999 compares to net income of $0.4 million in the three-month period ended June 30, 2000, and our net loss of $(1.2) million for the first half of 1999 compares to net income of $0.1 million for the first half of 2000. Net operating results improved in the three and six-month periods ended June 30, 2000 due to increases in total revenues of 78% and 129%, respectively, compared to the same periods in 1999, while associated total operating expenses increased by 56% and 73%, respectively, 11 12 compared to the same periods in 1999. Net income (loss) in 1999 is not directly comparable to 2000 due a change in accounting policy for up-front license fees resulting from the implementation of SAB 101 in 2000. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations to date primarily through private and public sales of equity securities and revenues from product sales, product development fees and licensing revenue and royalties. Net working capital increased from $2.2 million at June 30, 1999 to $20.7 million at June 30, 2000. The increase of $18.5 million is primarily due to the positive effect of a $3.5 million loan we received from AstraZeneca and from $19.4 million we received from the private placement of 1.1 million shares of common stock, which were partially offset by approximately $7.3 million in expenditures for capital improvements to our manufacturing facility. We invest excess cash in interest-bearing money market accounts and investment grade securities. In December 1999, we received a $3.5 million unsecured loan from AstraZeneca. We granted AstraZeneca a first right of refusal to exploit any new technology to which we may have the right from time to time and which may have application in conjunction with any technology or products of AstraZeneca or its affiliates. We may repay this loan at any time, but if the loan is not repaid by the time we are due royalties under a license agreement with an affiliate of the lender, the affiliate may offset up to half of the royalties otherwise due to us and the lender will treat the amount offset by its affiliate as a payment by us on this loan. Interest is payable on the outstanding balance of the loan at LIBOR plus one half of one percent. Interest accrues quarterly and is added to the then outstanding principal balance of the loan. In March 2000, we issued 1.1 million shares of common stock through a private placement. We received approximately $19.4 million in net cash proceeds and are using the funds for capital additions to our manufacturing facility and for working capital. We currently expect to spend approximately $6.0 to $8.0 million over the next 12 months to complete various manufacturing facility improvements, including construction of a coating unit and a second production line. We believe our cash and cash equivalents, together with expected revenues from operations, will be sufficient to meet our anticipated capital requirements for the foreseeable future. However, we may elect to pursue additional financing at any time to more aggressively pursue development of new drug delivery technologies and expand manufacturing capacity beyond that currently planned. In addition, other factors that will affect future capital requirements and may require us to seek additional financing, include the level of expenditures necessary to develop new products or technologies, the progress of our research and product development programs, the need to construct a larger than currently anticipated manufacturing facility or to construct a new manufacturing facility at an alternative site to meet demand for our products, results of our collaborative efforts with current and potential pharmaceutical company partners, and the timing of and amounts received from future product sales, product development fees and licensing revenue and royalties. We cannot be sure that additional financing will be available to us or, if available, will be on acceptable terms. 12 13 Item 3. Quantitative and Qualitative Disclosures about Market Risks Not Applicable PART II - OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders The annual meeting of the shareholders of the Company was held on June 2, 2000. Two matters were submitted to the stockholders for approval: (1) the election of directors and (2) a proposal to ratify the selection of Ernst & Young LLP as the independent public accountants for the Company. Four nominees, namely John M. Siebert, Ph.D., Terrence W. Glarner, Steven B. Ratoff, and Joseph R. Robinson, Ph.D., and were duly elected as directors of the Company until the next annual meeting of stockholders. Each nominee received at least approximately eighty-three percent of the votes cast in favor of his election. Further results of the voting were as follows:
Votes Cast for the Votes Director Director Withheld - ---------------------------- -------------- ------------------ John M. Siebert, Ph.D. 9,099,223 93,661 Terrence W. Glarner 9,099,348 93,536 Steven B. Ratoff 9,126,848 63,036 Joseph R. Robinson, Ph.D. 9,127,440 65,444
The proposal to ratify the selection of Ernst & Young LLP as the independent public accountants for the Company was approved by the Company's stockholders. A total of 9,189,174 shares of the Company's common stock were voted in favor of the proposal, 2,410 shares of the Company's common stock were voted against the proposal and holders of 1,300 shares of the Company's common stock abstained from voting. The proposal to ratify the selection of Ernst & Young LLP as the independent public accountants for the Company received approximately ninety-nine percent of the vote cast. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits EXHIBIT INDEX
- ------------------------ ---------------------------------------------------------------------- --------------------- Exhibit Number Description Method of Filing - ------------------------ ---------------------------------------------------------------------- --------------------- 10.23 Employment Agreement, dated June 30, 2000, between CIMA and John M. Filed herewith Siebert, Ph.D. - ------------------------ ---------------------------------------------------------------------- --------------------- 10.24 Development, License and Supply Agreement by and between CIMA and Filed herewith Schwarz Pharma, Inc. dated June 30, 2000 - ------------------------ ---------------------------------------------------------------------- --------------------- 27.1 Financial Data Schedule - For SEC EDGAR filing Filed herewith - ------------------------ ---------------------------------------------------------------------- --------------------- 99.1 Risk Factors Filed herewith - ------------------------ ---------------------------------------------------------------------- ---------------------
13 14 (b) Reports on Form 8-K No reports on Form 8-K were filed for the quarter ended June 30, 2000. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CIMA LABS INC. Registrant Date August 11, 2000 By /s/ David A. Feste --------------- ------------------ David A. Feste Chief Financial Officer (principal financial and accounting officer) 14 EX-10.23 2 ex10-23.txt EMPLOYMENT AGREEMENT 1 EXHIBIT 10.23 CIMA LABS INC. EMPLOYMENT AGREEMENT WITH JOHN M. SIEBERT THIS AGREEMENT is entered into effective as of the date of signing by and between CIMA LABS INC., a Delaware corporation (the "Company"), and John M. Siebert, Ph.D. (the "Employee"). WHEREAS the Company desires to engage the Employee in the position of President and Chief Executive Officer to render services for the Company on the terms and conditions set forth in this Agreement; WHEREAS, the Employee desires to be retained by the Company as its President and Chief Executive Officer; and WHEREAS, both parties recognize the critical importance to the Company, its employees, and its investors of preserving the confidentiality of the Company's trade secrets and confidential information and of protecting the Company against competition from former executives or other key employees of the Company following their separation from the Company; NOW, THEREFORE, in consideration of the foregoing premises and the parties' mutual covenants and undertakings contained in this Agreement, the sufficiency of which is hereby acknowledged, the Company and the Employee agree as follows: 1. EMPLOYMENT AND TERM. Subject to the terms and conditions herein provided, the Company hereby continues employment of the Employee, and the Employee hereby accepts employment by the Company, for a term continuing as of January 1, 2001 and thereafter for three (3) years to January 1, 2004. The employment 2 EXHIBIT 10.23 term of the Employee will expire at the expiration of this (3) year employment continuation term, without further obligation for either party. On or before January 1, 2003, the Company expects to indicate to the Employee whether the Company is interested in continuing employment of the Employee with respect to a new employment agreement. Notwithstanding the foregoing, the Company may terminate the Employee's employment for cause and without notice and without further obligation of any kind to the Employee. For purposes of this Agreement, "cause" means: (a) any felony conviction; (b) use of intoxicating beverages or chemical abuse that negatively affects job performance (following at least one written warning); (c) an act or acts of personal dishonesty taken by the Employee and intended to result in personal enrichment of the Employee at the expense of the Company; (d) any material breach of the Employee's obligations under this Agreement; (e) the willful misconduct or gross negligence of the Employee in connection with the performance of his duties, responsibilities, agreements, and covenants hereunder, or his failure to comply with the reasonable rules, regulations, policies, directions, and restrictions as may be established from time to time by the Board of Directors, and which misconduct, negligence, or failure shall continue for a period of thirty (30) days after written notice to the Employee; or 2 3 EXHIBIT 10.23 (f) willful conduct of the Employee which brings discredit to the Company, its products, or its services. It is further agreed that the term of the Employee's employment under this Agreement shall automatically terminate in the event of the Employee's death. In the event the Employee becomes mentally or physically disabled during the term of employment hereunder, his employment under this Agreement shall terminate as of the date such disability is established. As used in this paragraph, the term "disabled" shall have the meaning as set forth in the Americans with Disabilities Act, as amended. Upon termination for disability, the Employee shall be entitled to receive continuation of his base salary (as herein defined) for a period of one hundred eighty (180) days. Upon termination in the event of the Employee's death, the Company shall continue to pay the Employee's base salary (as herein defined) for a period of one hundred eighty (180) days. 2. DUTIES AND REPRESENTATIONS OF THE EMPLOYEE. During the Employee's employment hereunder, he shall serve as the Company's President and Chief Executive Officer. The Employee shall devote his full time, attention, knowledge, and skill exclusively to the loyal service of the Company. The Employee represents and warrants to the Company that: (a) his acceptance of employment under this Agreement and his performance of the duties contemplated herein are not in conflict with any obligation, undertaking, or agreement between the Employee and any third party; and (b) he has not and will not, during the course of his employment with the Company, disclose or utilize without permission, any confidential or proprietary information, trade 3 4 EXHIBIT 10.23 secrets, materials, documents, or property owned by any third party. The Company through the Compensation Committee expects to evaluate the Employee's performance every twelve (12) months during the term of this Agreement. 3. COMPENSATION. The Company shall pay to the Employee the following compensation: (a) BASE SALARY. The Company shall pay to the Employee an annual base salary of $305,000 beginning January 1, 2001, less legally required deductions and withholdings, payable in periodic installments in accordance with the standard payroll practices of the Company in effect from time-to-time. On January 1, 2002, the annual base salary will be adjusted upwards by 5%. On January 1, 2003, the annual base salary will be adjusted upwards from the 2002 increase by an incremental 5%. In the event of change of control of the Company which leads to the termination or separation of the Employee (1) because the position is eliminated, (2) because continuing to work in the position would require the Employee to transfer to a work site outside a 100-mile radius of his work location at the time of change in control and Employee is unwilling to relocate, or because his responsibilities change so substantially that the Employee has effectively been removed from the position held by him prior to the change in control, the Employee will automatically get an additional twelve (12) months of compensation or the remainder of his contract (less any amount of salary received in a subsequent job during such twelve (12) month period or remainder of contract, as applicable), whichever is longer, in addition to the benefits of any corporate severance plan, during which time the terms of the Agreement will remain in full force and effect. 4 5 EXHIBIT 10.23 (b) INCENTIVE BONUS. The Employee will be entitled to receive an incentive bonus award of up to seventy percent (70%) of his base salary depending upon the achievement of objectives defined and agreed to by the Compensation Committee of the Board of Directors prior to the last Board meeting of each calendar year. The award for achievement that occurs against objectives in that year will be agreed-upon by the Compensation Committee and paid before February 1 of the next year. The determination of whether and when any of the objectives are achieved shall be in the reasonable discretion of the Compensation Committee. The determination of any additional incentive bonus programs shall be in the sole discretion of the Compensation Committee. In the event of change of control of the Company, a minimum bonus of $150,000 will be paid for each year of compensation remaining under the terms of this Agreement for which a bonus has not yet been paid. (c) PARTICIPATION IN BENEFIT PLANS. The Employee shall also be entitled to participate in all employee benefit plans or programs of the Company, including any disability and life insurance group plans, to the extent that his position, title, tenure, salary, age, health, and other qualifications make him eligible to participate. The Company will provide a life insurance policy with minimum payout of $500,000 in the event the Employee is killed or disabled during travel which is undertaken in the course of business. (d) VACATION. During the term of the Employee's employment under this Agreement, the Employee shall be entitled to take twenty-five (25) days of vacation per year with pay, at such times as shall be mutually convenient to the Company and the 5 6 EXHIBIT 10.23 Employee. Vacation time may be accumulated throughout the term of this and any prior Agreements. Two weeks before the final Board meeting of each year, the Vice President, CFO will provide the Compensation Committee with a report outlining the Employee's paid time off (PTO) taken and remaining for that year. (e) EMPLOYMENT-RELATED EXPENSES. The Company shall pay or reimburse the Employee for all reasonable and necessary out-of-pocket expenses incurred by him in the performance of his duties under this Agreement, subject to the presentment of appropriate vouchers in accordance with the Company's normal policies for expenses verification. (f) CAR ALLOWANCE. The Employee will be paid a car allowance in the amount of six hundred fifty dollars ($650.00) per month, consistent with the Company's payroll and accounting practices. (g) STOCK OPTION. Subject to the terms of the Company's Equity Incentive Plan, and subject to the Employee executing this document, the Company shall issue to the Employee an incentive stock option to purchase one hundred thousand (100,000) shares of common stock in the Company effective at the date of signing this Agreement. This award will vest as follows: (i) thirty-three percent (34%) of the shares subject to the option will vest on December 31, 2002; (ii) thirty-three percent (33%) of the shares subject to the option will vest on December 31, 2003; (iii) thirty-three percent (33%) of the shares subject to the option will vest on December 31, 2004; subject to accelerated vesting as provided in the Equity Incentive Plan. 6 7 EXHIBIT 10.23 Any payment or benefit hereunder shall be reduced to the extent that, due to the excise tax on excess parachute payments under Section 4999 of the Internal Revenue Code of 1986, such reduction would increase the Employee's after-tax income. The Employee shall determine which payments or benefits shall be so reduced." 4. CONFIDENTIAL INFORMATION. Except as permitted or directed by the Company's Board of Directors, during the term of this Agreement or at any time thereafter, the Employee shall not divulge, furnish, or make accessible to anyone or use in any way (other than in the ordinary course of business of the Compete) any confidential or secret knowledge of the Company which the Employee has acquired or become acquainted with or will acquire or become acquainted with prior to the termination of the period of his employment by the Company, whether developed by himself or by others, concerning any trade secrets, confidential or secret designs, processes, formulae, plans, devices, or materials (whether or not patented or patentable), directly or indirectly useful in any aspect of the business of the Company, any customer or supplier list of the Company, any confidential or secret development or research work of the Company, or any other confidential information or secret aspects of the business of the Company. The Employee acknowledges that the above-described knowledge or information constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company and its predecessors, and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company would be wrong and would cause irreparable harm to the Company. Both during and after the 7 8 EXHIBIT 10.23 term of this Agreement, the Employee will refrain from any acts or omissions that would reduce the value of such knowledge or information to the Company. The foregoing obligations of confidentiality, however, shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known in the form in which it was obtained from the Company, other than as a direct or indirect result of a breach of this Agreement by the Employee. 5. RETURN OF PROPRIETARY PROPERTY. The Employee agrees that all property in the Employee's possession belonging to the Company, including without limitation, all documents, reports, manuals, memoranda, computer print-outs, customer lists, credit cards, keys, identification, products, access cards, and all other property relating in any way to the business of the Company are the exclusive property of the Company, even if the Employee authored, created, or assisted in authoring or creating such property. The Employee shall return to the Company all such documents and property immediately upon termination of employment or at such earlier time as the Company may reasonably request. 6. RESTRICTIVE COVENANT. The Employee acknowledges that the Company needs to be protected against the potential for unfair competition and impairment of the Company's good will by the Employee's use of the Company's training, assistance, confidential information, and trade secrets in direct competition with the Company. The Employee therefore agrees that for a period of one (1) year from the date of termination of his employment hereunder, the Employee shall not operate, join, control, be employed by, or participate in ownership, management, operation, or control of, or be 8 9 EXHIBIT 10.23 connected in any manner as an independent contractor, consultant, or otherwise, with any person or organization engaged in any business activity which is the same as, or directly competitive with any business of the Company or any successor of the Company as of the date of the termination of his employment hereunder within the states of the United States of America. The Employee expressly agrees that the provisions of this paragraph 6 shall survive the termination of the Employee's employment hereunder or the termination of this Agreement for a period of one (1) year, whether such termination be voluntary or involuntary or with or without cause. 7. COVENANT NOT TO RECRUIT. The Employee recognizes that the Company's work force constitutes an important and vital aspect of its business. The Employee agrees that for a period of one (1) year following the termination of his employment hereunder or the termination of this Agreement for any reason whatsoever, he shall not recruit, or assist anyone else in the solicitation of, any of the Company's then current employees to terminate their employment with the Company and to become employed by any business enterprise with which the Employee may then be associated or connected, whether as an owner, employee, partner, agent, investor, consultant, contractor or otherwise. 8. ASSIGNMENT. The rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company. The Employee may not assign this Agreement or any rights hereunder. Any purported or attempted assignment or transfer by the Employee of this 9 10 EXHIBIT 10.23 Agreement or any of the Employee's duties, responsibilities, or obligations hereunder shall be void. 9. NOTICES. For purposes of this Agreement, notices provided in this Agreement shall be in writing; and shall be deemed to have been given when personally served, sent by courier or mailed by United States registered or certified mail, return receipt requested, postage prepaid, to the last known residence address of the Employee or, in the case of the Company, to its principal office to the attention of the Board of Directors, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 10. CONSTRUCTION AND SEVERABILITY. The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Minnesota. In the event any provision of this Agreement shall be held illegal or invalid for any reason, said illegality or invalidity will not in any way affect the legality or validity of any other provision hereof. It is the intention of the parties hereto that the Company be given the broadest possible protection respecting its confidential information and trade secrets; and respecting competition by the Employee following his separation by the Company. 11. ARBITRATION. Except as provided in this paragraph, any claims or disputes of any nature between the parties arising from or related to the performance, breach, termination, expiration, application, or meaning of this Agreement or any matter relating to the Employee's employment and the termination of that employment by the 10 11 EXHIBIT 10.23 Company, shall be resolved exclusively by arbitration before the American Arbitration Association in Minneapolis, Minnesota, in accordance with the applicable rules then obtaining of the American Arbitration Association. The decision of the arbitrator(s) shall be final and binding upon both parties Judgment of the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. In the event of submission of any dispute to arbitration, each party shall, not later than thirty (30) days prior to the date set for hearing, provide to the other party and to the arbitrator(s) a copy of all exhibits upon which the party intends to rely at the hearing and a list of all persons each party intends to all at the hearing. This paragraph shall have no obligation to claims by the Company asserting a violation of or seeking to enforce, by injunction or otherwise, the terms of paragraphs 4, 5, 6 and 7 above. Such claims may be maintained by the Company in a lawsuit subject to the terms of paragraph 12 below. The Employee agrees that, in addition to, but not to the exclusion of any other available remedy, the Company shall have the right to enforce the provisions of paragraphs 4, 5, 6 and 7 by applying for and obtaining temporary and permanent restraining orders or injunctions from a court of competent jurisdiction without the necessity of filing a bond therefore, and the Company shall be entitled to recover from the Employee its reasonable attorneys' fees and costs in enforcing the provisions of paragraphs 4, 5, 6 and 7. 12. VENUE. Any action at law, suit in equity, or judicial proceeding arising directly, indirectly, or otherwise in connection with, out of, related to or from this 11 12 EXHIBIT 10.23 Agreement or any provision hereof, shall be litigated only in the courts of the State of Minnesota, County of Hennepin. The Employee waives any right the Employee may have to transfer or change the venue of any litigation brought against the Employee by the Company. 13. ENTIRE AGREEMENT. This Agreement sets forth the entire Agreement between the Company and the Employee with respect to his employment by the Company and there are no undertakings, covenants, or commitments other than as set forth herein. This Agreement may not be altered or amended, except by a writing executed by the party against whom such alteration or amendment is to be enforced. This Agreement supersedes any and all prior understandings or agreements between the parties. 14. COUNTERPARTS. This Agreement may be simultaneously executed in any number of counterparts, and such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. 15. CAPTIONS AND HEADINGS. The captions and paragraph headings used in this Agreement are for convenience of reference only, and shall not affect the construction or interpretation of this Agreement or any of the provisions hereof. 16. SURVIVAL. The parties expressly acknowledge and agree that the provisions of this Agreement which by their express or implied terms extend beyond the expiration of this Agreement or the termination of the Employee's employment hereunder, shall continue in full force and effect, notwithstanding the Employee's termination of employment hereunder or the expiration of this Agreement. 12 13 EXHIBIT 10.23 17. WAIVERS. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof, or the exercise of any other right or remedy granted hereby or by any related document or by law. No single or partial waiver of rights or remedies hereunder, nor any course of conduct of the parties, shall be construed as a waiver of rights or remedies by either party (other than as expressly and specifically waived). 18. RELIANCE BY THIRD PARTIES. This Agreement is intended for the exclusive benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors, and permitted assigns, and no other person or entity shall have any right to rely on this Agreement or to claim or derive any benefit therefrom, absent the express written consent of the party to be charged with such reliance or benefit. IN WITNESS WHEREOF, the parties have signed this Agreement.
CIMA LABS INC. CIMA LABS INC. By: Terrence W. Glarner By: John M. Siebert -------------------------------------------- ------------------------------------------- Print Name Print Name Its: Chairman of the Board Its: President and CEO -------------------------------------------- ------------------------------------------- Title Title -------------------------------------------- ------------------------------------------- Signature Signature Dated: Dated: -------------------------------------------- -------------------------------------------
13 EX-10.24 3 ex10-24.txt DEVELOPMENT, LICENSE AND SUPPLY AGREEMENT 1 Exhibit 10.24 DEVELOPMENT, LICENSE AND SUPPLY AGREEMENT by and between CIMA LABS INC. and SCHWARZ PHARMA, INC. dated as of June 30, 2000 2 TABLE OF CONTENTS
Page SECTION 1 DEFINITIONS 2 SECTION 2 GRANT OF LICENSES; LICENSE OPTION 6 2.1 Grant of Licenses.......................................................................................6 2.2 Sublicenses.............................................................................................7 2.3 Marketing, Distribution and Sale........................................................................7 2.4 Additional Development Option...........................................................................7 2.5 Minimum Annual Net Sales................................................................................8 SECTION 3 PRODUCT DEVELOPMENT ..............................................................................8 3.1 Obligations of CIMA.....................................................................................8 3.2 Obligations of Schwarz..................................................................................8 3.3 License of Schwarz Technology...........................................................................8 3.4 Regulatory Matters......................................................................................8 SECTION 4 ROYALTY, COST OF GOODS AND MILESTONE PAYMENTS ....................................................9 4.1 Royalty and Milestone Payments..........................................................................9 4.2 Records and Audit.......................................................................................9 4.3 Quarterly Reports of Royalties.........................................................................10 SECTION 5 SUPPLY OF PRODUCT ...............................................................................10 5.1 Supply of Product......................................................................................10 5.2 Identification.........................................................................................11 5.3 Trade, Sample and Placebo Product Price................................................................12 5.4 Forecasts, Delivery and Quality........................................................................12 5.5 Rejection and Replacement..............................................................................12 5.6 Invoice and Payment....................................................................................13 5.7 Supply Disruption; Alternate Manufacturing Site........................................................13 SECTION 6 CONDITIONS PRECEDENT TO THE CLOSING; CLOSING DATE ...............................................13 6.1 Conditions Precedent to Schwarz?s Obligations..........................................................13 6.2 Conditions Precedent to CIMA?s Obligations.............................................................14 6.3 Closing Date...........................................................................................15 SECTION 7 REPRESENTATIONS AND WARRANTIES OF CIMA ..........................................................15 7.1 Organization, Power and Authority......................................................................16 7.2 Due Authority; No Breach...............................................................................16 7.3 Intellectual Property..................................................................................16 7.4 Technology Rights......................................................................................17 7.5 Litigation.............................................................................................17 7.6 Governmental Approval..................................................................................17 7.7 Brokerage..............................................................................................17 SECTION 8 REPRESENTATIONS AND WARRANTIES OF SCHWARZ .......................................................17 8.1 Organization, Power and Authority......................................................................17 8.2 Due Authority; No Breach...............................................................................18
3 8.3 Brokerage...............................................................................................18 8.4 Litigation..............................................................................................18 8.5 Governmental Approval...................................................................................19 SECTION 9 ADDITIONAL COVENANTS AND AGREEMENTS OF THE PARTIES 19 9.1 Governmental Filings....................................................................................19 9.2 Compliance with Law.....................................................................................19 9.3 Recall..................................................................................................19 9.4 Confidentiality.........................................................................................20 9.5 Expenses................................................................................................21 9.6 Reasonable Efforts......................................................................................21 9.7 Publicity...............................................................................................21 9.8 Cooperation.............................................................................................21 9.9 Competition; No Sale for Resale.........................................................................21 9.10 Conflicting Rights......................................................................................22 9.11 Patent and Trademark Maintenance........................................................................22 9.12 Infringement; Enforcement of Proprietary Rights.........................................................24 9.13 Supply of Product.......................................................................................24 9.14 Liability Insurance.....................................................................................24 9.15 Referral of Orders and Inquiries........................................................................25 9.16 Deemed Breach of Covenant...............................................................................25 SECTION 10 INDEMNIFICATION 25 10.1 Indemnification.........................................................................................25 10.2 Notice and Opportunity To Defend........................................................................26 10.3 Indemnification Payment Obligation......................................................................27 10.4 Indemnification Payment Adjustments.....................................................................27 10.5 Indemnification Payment.................................................................................27 10.6 Survival................................................................................................27 SECTION 11 TERMINATION 28 11.1 Termination............................................................................................28 SECTION 12 MISCELLANEOUS 29 12.1 Successors and Assigns..................................................................................29 12.2 Notices.................................................................................................29 12.3 Waiver; Remedies........................................................................................30 12.4 Survival of Representations.............................................................................30 12.5 Independent Contractors.................................................................................30 12.6 Entire Agreement........................................................................................30 12.7 Amendment...............................................................................................30 12.8 Counterparts............................................................................................30 12.9 Governing Law...........................................................................................31 12.10 Arbitration.............................................................................................31 12.11 Captions................................................................................................31 12.12 No Third-Party Rights...................................................................................31 12.13 Severability............................................................................................31 12.14 Attachments.............................................................................................31 12.15 Force Majeure...........................................................................................31
4 SCHEDULES Schedule 2.4 [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] Extended Release Term Sheet Schedule 2.5 Minimum Annual Net Sales Targets Schedule 3.1 Development Schedule Schedule 4.1(a) Royalty Rates Schedule 4.1(b) Milestone Payments Schedule 5.1(b) Schwarz Purchase Order Schedule 5.3 Cost of Goods Schedule 5.4(d) Quality Assurance Addendum Schedule 9.9(a) Competitive Products
5 DEVELOPMENT, LICENSE AND SUPPLY AGREEMENT This DEVELOPMENT, LICENSE AND SUPPLY AGREEMENT ("this Agreement"), dated as of June 30, 2000, is by and between CIMA LABS INC., a Delaware corporation ("CIMA"), and SCHWARZ PHARMA, INC., a Delaware corporation ("Schwarz"). W I T N E S S E T H WHEREAS, CIMA is engaged, among other things, in the business of research, development, manufacturing and commercialization of pharmaceutical products through its proprietary drug delivery technologies; WHEREAS, Schwarz is engaged, among other things, in the business of marketing and selling of pharmaceutical products; WHEREAS, subject to the terms and conditions set forth in this Agreement, CIMA and Schwarz wish to collaborate in the development, registration, marketing and sale of a certain prescription product; and WHEREAS, subject to the terms and conditions set forth in this Agreement, CIMA wishes to license to Schwarz and Schwarz wishes to license from CIMA rights to CIMA's DuraSolv(R) technology for use with such prescription product. NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: SECTION 1 DEFINITIONS For purposes of this Agreement, the following terms shall have the meanings set forth below: "Activities" shall mean the development, manufacturing, marketing, selling and distributing of the Product in the Territory as contemplated by this Agreement. "Affiliates" shall mean, with respect to any Person, any Persons directly or indirectly controlling, controlled by, or under common control with, such other Person. For purposes hereof, the term controlled" (including the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the direct or indirect ability or power to direct or cause the direction of management policies of such Person or otherwise direct the affairs of such Person, whether through ownership of voting securities or otherwise. 6 "Annual Net Sales" shall mean, for any Year, the Net Sales for such Year. "API" shall mean the active ingredient [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***]. "cGMP" shall mean current Good Manufacturing Practices, as determined by the FDA from time to time. "CIMA" shall have the meaning given in the preamble and shall include its Affiliates. "CIMA Intellectual Property" shall mean, collectively, (1) the CIMA Patents, (2) the CIMA Technology, (3) the CIMA Trademarks, and (4) the CIMA Marketing Materials. "CIMA Marketing and Market Research Data" shall mean, with respect to the Product, all CIMA marketing data, studies, market research data and reports that pertain to the Product, and any further market research data whose disclosure to Schwarz is not prohibited by confidentiality obligations under agreements, dated prior to the date hereof, between CIMA and Persons who are not Affiliates of CIMA. "CIMA Marketing Materials" shall mean all labeling, marketing and promotional materials and inserts currently used by CIMA that are useful in connection with the Activities. "CIMA Patents" shall mean United States patent no. 6024981 (Rapidly Dissolving Robust Dosage Form) and any patents and patent applications resulting therefrom, including any extension, reissue, renewal, reexamination or continuation-in-part of such patent or patent application. "CIMA Technology" shall mean all of CIMA's Patents, trade secrets, technology, know-how and all other information necessary for the manufacture of the Product including, without limitation, that related to CIMA's DuraSolv(R) technology. "CIMA Trademarks" shall mean the CIMA(R), DuraSolv(R) and Meltabs(R) trademarks. "Closing Date" shall have the meaning given in Section 6.3 hereof. "Damages" shall mean any and all actions, costs, losses, lost profits, claims, liabilities, fines, penalties, demands, damages and expenses, court costs, and reasonable fees and disbursements of counsel, consultants and expert witnesses incurred by a party hereto (including interest which may be imposed in connection therewith). -3- 7 "Defective" shall mean, as to the Product, the failure of such to strictly conform to the Specifications, this Agreement and all applicable law, including, without limitation, PDMA. "Development Schedule" shall mean the schedule of development activities set forth on Schedule 3.1 hereto. "FDA" shall mean the United States Food and Drug Administration. "Force Majeure" shall mean acts of God, explosion, fire, flood, tornadoes, thunderstorms, earthquake or tremor, war whether declared or not, civil strife, riots, embargo, losses or shortages of power, labor stoppage, substance shortages, damage to or loss or product in transit, currency restrictions, or events caused by reason of laws, regulations or orders by any government, governmental agency or instrumentality or by an other supervening or unforeseeable circumstances reasonably beyond the control of each party. "GAAP" shall mean generally accepted accounting practices in the United States as in effect from time to time. "Indemnified Party" shall have the meaning given in Section 10.2 hereof. "Indemnifying Party" shall have the meaning given in Section 10.2 hereof. "Launch" shall mean the date when the Product is first made commercially available by Schwarz. "[***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***]" shall mean a pharmaceutical product containing [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***], either alone or in combination with other pharmaceutical active ingredients. "[***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] Extended Release" shall mean a pharmaceutical product containing [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] of the active ingredient [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] in an extended release dosage form consisting of a fast-dissolving tablet using the CIMA Technology. "Licensed Assets" shall have the meaning set forth in Section 2.1 hereof. -4- 8 "Net Sales" shall mean, with respect to the Product, the gross amount invoiced to unrelated third parties for the Product in the Territory, less: (a) trade and reasonable and customary cash discounts allowed; (b) refunds, rebates, chargebacks, retroactive price adjustments and any other allowances which effectively reduce the net selling price; and (c) returns, credits and allowances. Such amounts shall be determined from books and records maintained in accordance with GAAP, consistently applied. "PDMA" shall mean the Prescription Drug Marketing Act of 1987, as amended from time to time, together with any rules or regulations promulgated thereunder. "Person" shall mean a natural person, a corporation, a partnership, a trust, a joint venture, a limited liability company, any governmental authority or any other entity or organization. "Product" shall mean a pharmaceutical product containing [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] of the active ingredient [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***], in a fast-dissolving tablet using the CIMA Technology, as more specifically described below: Active ingredient and potency: [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] Tablet size: 1/4" Tablet weight: 50 - 120 mg Flavor: Mint Color: White Tablet disintegration: 30 seconds or less Intagliation (Engraving): [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] "Promotional Materials" shall mean any advertising and promotional labeling bearing a name (trade name or generic name) used in the promotion of the Product, including, without limitation, promotional materials produced by or on behalf of Schwarz (examples include, but are not limited to, journal ads, brochures, service items, managed care pull through sheets, formulary -5- 9 presentations, price lists, monographs, Internet pages and telephone or television advertisements) and materials produced by outside sources (examples include, but are not limited to, medical reprints, textbooks and CME materials) to the extent funded by, created in cooperation with, reviewed, or distributed by Schwarz. The definition of Promotional Materials shall also include press releases and other releases of information to the media regarding the Product. "Quarter" shall mean, as the case may be, the three months ending on March 31, June 30, September 30 or December 31 in any Year. "Schwarz" shall have the meaning given in the preamble and shall include its Affiliates. "Schwarz Technology" shall mean all of Schwarz's patents, trade secrets, technology, know-how and all other information necessary to the manufacture of the Product including, without limitation, that related to [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***]. "Schwarz Trademarks" shall have the meaning given in Section 9.11(c). "Specifications" shall mean, at any time, the specifications for the Product that are included in the Quality Assurance Addendum set forth on Schedule 5.4(d). "Territory" shall mean the fifty (50) states, the District of Columbia and the territories and possessions comprising the United States of America, including Puerto Rico. "Year" shall mean a calendar year during the term of this Agreement. SECTION 2 GRANT OF LICENSES; LICENSE OPTION 2.1 Grant of Licenses. (1) CIMA hereby grants to Schwarz an exclusive, subject to Section 2.5, license for the term of this Agreement under the following assets to develop, manufacture, market, distribute and sell the Product, for all indications and for all agreed upon product line extensions, in the Territory (such assets are referred to herein collectively as the "Licensed Assets"): (i) all current and future regulatory filings, approvals, registrations and governmental authorizations that relate to the Product in the Territory; -6- 10 (ii) the CIMA Intellectual Property; and (iii) the CIMA Marketing and Market Research Data. (2) CIMA grants to Schwarz an exclusive, royalty bearing license to use the CIMA Trademarks to market, distribute and sell the Product, during the term of this Agreement, for all indications and for all agreed upon product line extensions in the Territory. (3) The license to Schwarz will be exclusive in that CIMA will not grant any licenses of the Licensed Assets of the CIMA trademarks to any other Person with respect to the Product or any other [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] products during the term of this Agreement except as provided in Section 2.5. 2.2 Sublicenses. Schwarz shall have the right to extend the licenses granted pursuant to this Section 2 in whole or in part to any Affiliate of Schwarz, provided that Schwarz is not then in default with respect to any of its obligations to CIMA under this Agreement. All the terms and provisions of this Agreement shall apply to the Affiliate to which this license has been extended to the same extent as they apply to Schwarz, and the operations of the Affiliate shall be deemed to be the operations of Schwarz and Schwarz shall account therefor and be responsible for the performance of such Affiliate of all of its obligations hereunder. In addition, Schwarz shall have the right to extend the licenses granted pursuant to this Section 2 in whole or in part to Persons who are not Affiliates of Schwarz with the prior written consent of CIMA, such consent not to be unreasonably withheld or delayed. 2.3 Marketing, Distribution and Sale. After the Launch, Schwarz shall use its commercially reasonable efforts to market, distribute and sell the Product in the Territory. Such efforts shall be consistent with industry norms, given the product profile, product potential and the state of the market at Launch. 2.4 Additional Development Option. Schwarz shall have the one-time option to cause CIMA to collaborate with Schwarz for the development of [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] Extended Release utilizing the CIMA Technology (the "Additional Development Option"). Schwarz may exercise the Additional Development Option by delivering to CIMA an Additional Development Option Notification (an "ADO Notification") at any time prior to December 31, 2001. The ADO Notification shall set forth the specifications for the product that Schwarz proposes to develop and the principal terms under which Schwarz proposes to undertake such development. Upon receipt of an ADO Notification by CIMA, Schwarz and CIMA shall use their commercially reasonable efforts to -7- 11 finalize a Development, License and Supply Agreement substantially in the form and substance of this Agreement within sixty (60) days after CIMA's receipt of such ADO Notification; provided, however, that the terms of any such Development, License and Supply Agreement in respect of [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] Extended Release shall incorporate the terms reflected on Schedule 2.4 hereto. 2.5 Minimum Annual Net Sales. Subject to Section 4.1(c), Schwarz shall endeavor to meet or exceed the minimum Annual Net Sales targets set forth on Schedule 2.5 hereto. Any provision in this Agreement to the contrary notwithstanding (but still subject to Section 4.1(c)), in the event that Schwarz fails to meet the minimum Annual Net Sales targets set forth on Schedule 2.5 hereto, CIMA's sole remedy for such failure shall be, subject to Section 4.1(c), to (i) convert the exclusive licenses granted in Sections 2.1 to non-exclusive licenses, and/or (ii) reduce the list of pharmaceutical products on Schedule 9.9(a) to those pharmaceutical products that contain [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] as their primary active ingredient. In the event that Schwarz fails to meet the minimum Annual Net Sales targets set forth on Schedule 2.5 hereto, CIMA may exercise any remedies it is entitled to pursuant to this Section 2.5, if at all, by the delivery of written notice thereof to Schwarz. SECTION 3 PRODUCT DEVELOPMENT 3.1 Obligations of CIMA. CIMA shall be responsible for the satisfactory performance of each of the development activities set forth on Schedule 3.1 at least by the times set forth on Schedule 3.1. 3.2 Obligations of Schwarz. Schwarz shall, in a timely fashion, supply CIMA with sufficient quantities of API for CIMA to perform the development activities described on Schedule 3.1 and the supply activities described in Sections 5.1 and 5.5. 3.3 License of Schwarz Technology. Schwarz hereby grants to CIMA a non-exclusive license under the Schwarz Technology so that CIMA may carry out its obligations under Section 3.1. Such license may not be sublicensed without the prior written consent of Schwarz. 3.4 Regulatory Matters. All Product supplied to Schwarz shall be produced under cGMP and in accordance with the Specifications. CIMA shall furnish Schwarz with a Certificate of Analysis with a cGMP statement to demonstrate that each shipment of Product has been manufactured under cGMP and other FDA guidelines and in accordance with the Specifications. In addition, Schwarz reserves the right, at its own expense, to audit the facility of CIMA, -8- 12 including its processes, records and other facets of the operation as may be necessary to assure that all applicable regulations have been complied with, and the Specifications have been met. CIMA shall permit duly authorized representatives of Schwarz to audit all manufacturing and processing operations at reasonable times with a prior appointment. The right to audit shall commence with the effective date of this Agreement. These audits will be conducted to assure compliance with all pertinent acts, regulations, and guidelines promulgated by the FDA and other regulatory authorities, as well as standards then in effect in the regulatory environment. Such audits will be permitted during normal business hours and will be performed with a minimum of disruption. SECTION 4 ROYALTY, COST OF GOODS AND MILESTONE PAYMENTS 4.1 Royalty and Milestone Payments. (1) Schwarz shall make royalty payments to CIMA, at the times, in the amounts and subject to the conditions set forth on Schedule 4.1(a). (2) Schwarz shall make milestone payments to CIMA as set forth on Schedule 4.1(b). (3) In the event of (i) any patent infringement, illegality or severe side effect profile, that, in each case, has a materially adverse effect on the Product, and/or (ii) the occurrence of an interruption in the supply of the Product for a period of 120 days or more, then, in each case, the obligation of Schwarz to make any payments pursuant to Sections 4.1(a) or 4.1(b) or Schedules 4.1(a) or 4.1(b) or to meet any minimum Annual Net Sales targets pursuant to Section 2.5 or Schedule 2.5 shall, in each case, terminate and be deemed waived by CIMA and shall be promptly renegotiated in good faith by Schwarz and CIMA. Any renegotiated obligations pursuant to this Section 4.1(c) shall be retroactively effective to the date the applicable event described above occurred. 4.2 Records and Audit. Schwarz and its Affiliates shall keep full, true and accurate books of account containing all particulars that may be necessary for the purpose of showing the amounts payable to CIMA hereunder. Such books of account shall be kept at Schwarz's principal place of business or the principal place of business of the appropriate Affiliate of Schwarz to which this Agreement relates. Such books and the supporting data shall be open, at all reasonable times and upon reasonable notice during the term of this Agreement and for 2 years after its termination, to the inspection by a firm of certified public accountants selected by CIMA and reasonably acceptable to Schwarz, for the limited purpose of verifying Schwarz's royalty statements; provided, however, that such examination shall not take place more often than once each Year and shall not cover more than the preceding 3 Years, with no right to audit any period -9- 13 previously audited. Except as otherwise provided in this Section, the cost of any such examination shall be paid by CIMA. In the event that any such inspection reveals a deficiency in excess of 5% of the reported royalty for the period covered by the inspection, Schwarz shall promptly pay CIMA the deficiency, plus interest at the rate of 8% per annum, and shall reimburse CIMA for the fees and expenses paid to such accountants in connection with their inspection. In the event that any such inspection reveals a deficiency that is less than 5% of the reported royalty for the period covered by the inspection, Schwarz shall promptly pay CIMA the deficiency, plus interest at the rate of 8% per annum. The parties agree that neither party shall be required to retain books and records with respect to the above other than books and records relating to the current Year and the immediately preceding 3 Years. 4.3 Quarterly Reports of Royalties. In any Year, Schwarz shall, within 60 days after the end of each Quarter, deliver to CIMA true and accurate reports, certified by an authorized official of Schwarz, setting forth the actual Annual Net Sales and total royalties due under Section 4.1(a) for such Year. If no royalties are due, Schwarz shall so report. SECTION 5 SUPPLY OF PRODUCT 5.1 Supply of Product. (1) For the term of this Agreement, or for as long as CIMA manufactures the Product, whichever is shorter, Schwarz agrees to purchase from CIMA and CIMA agrees to supply Schwarz with all of Schwarz's requirements for the Product, Product samples and Product placebos for their subsequent use, sale, lease or transfer by Schwarz. (2) Schwarz agrees to initiate purchases of the Product, Product samples and Product placebos hereunder by issuing CIMA binding purchase orders not less than 90 days prior to the required shipping date set forth therein. CIMA agrees to accept any order issued in accordance with this Section 5.1(b) and to meet the delivery dates specified thereon. All purchase orders hereunder shall be on Schwarz's standard purchase order form (a copy of which is attached as Schedule 5.1(b) hereto and which shall not, for purposes of this Agreement only, be modified in any material respect without CIMA's prior written consent, such consent not to be unreasonably withheld or delayed) and shall be directed to CIMA at the address set forth below. The terms and conditions of purchase enumerated on the reverse side of such standard purchase order form shall prevail over any inconsistent or conflicting language as may exist on invoices, confirmation or order acknowledgment forms of CIMA, provided, however, that in the event any terms thereof are in conflict, or are inconsistent with any terms of this Agreement, the terms and conditions hereof shall prevail. No Product delivered by CIMA shall have a shelf life that is more than two months less than the maximum shelf life of such product; and, in any case, all Product delivered by -10- 14 CIMA shall have at least 22 months of shelf life remaining upon delivery to Schwarz (other than batches that were under investigation and batches for validation which shall have at least 18 months of shelf life remaining upon delivery to Schwarz). (3) Purchase order quantities shall be in batch sizes of 1,000,000 tablets per batch unless otherwise mutually agreed by the parties. The delivery quantity of blistered tablets shall not exceed 4,000,000 tablets in any calendar month; provided that this limitation shall not apply to bulk tablets. (4) Schwarz shall provide the amount of API that CIMA requires to perform its obligations pursuant to Schedule 3.1 and Sections 5.1 and 5.5 at no charge to CIMA sixty (60) days prior to date of tablet manufacture, as well as one (1) month of safety stock. API must conform to Schwarz's then current raw materials specifications. CIMA shall not be accountable for production or shipment delays due to lack of API. (5) EXCEPT AS SPECIFICALLY PROVIDED HEREIN, THE PRODUCT WILL BE SUPPLIED BY CIMA WITH NO WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABLILITY OR FITNESS FOR A PARTICULAR PURPOSE. 5.2 Identification. Schwarz may market the Product under its name, with its packaging and logo; Schwarz will, however, identify CIMA as the supplier in a fair manner, reasonably acceptable to CIMA. CIMA will bear all the costs of labeling the Product so as to appropriately display the Schwarz name provided Schwarz supplies all the appropriate graphics, designs, logos and related and appropriate artwork; provided that Schwarz shall reimburse CIMA for any costs incurred by CIMA in making changes to the packaging required to manufacture the Product in accordance with changes to the PDMA or other applicable law or changes required by Schwarz, including, but not limited to plate and die charges due to label changes and product identification requirements, and for any packaging components rendered obsolete by the changes. In addition, CIMA shall pay for all initial one-time, set-up charges incurred by CIMA in respect of packaging the Product. Schwarz may use CIMA's name and derivations thereof in promoting, marketing and selling the Product in the Territory; provided, however, that the particular formulation of any reference to CIMA's name in any promotional material shall be subject to CIMA's review and consent; and provided, further, that once the formulation of any such reference has been reviewed and consented to by CIMA, any subsequent reference to CIMA's name using such formulation shall not be subject to the further review or consent of CIMA. All samples shall be clearly marked "for sample use only" or some similar phrasing suggested by Schwarz. 5.3 Trade, Sample and Placebo Product Price. CIMA shall supply Product, Product samples and Product placebos to Schwarz at the price set forth on Schedule 5.3. -11- 15 5.4 Forecasts, Delivery and Quality. (1) Schwarz shall provide CIMA with 12-month non-binding forecasts within 15 days after the end of each Quarter. Such forecasts shall be revised and extended in each succeeding Quarter. (2) Delivery of the Product, Product samples and Product placebos shall be in accordance with the means of transportation, destination and dates set forth in Schwarz's purchase order. Delivery shall be F.O.B. point of origin, freight collect. (3) All deliveries of the Product hereunder shall include a Certificate of Analysis provided by the quality control manager of CIMA attesting to the fact that such the Product (i) has been manufactured by a process which complies with cGMP and (ii) are of quality which is in accordance with criteria established in the Specifications and all FDA requirements. (4) The Product, Product samples and Product placebos supplied hereunder shall have been manufactured by a process which complies with the quality assurance addendum set forth on Schedule 5.4(d). 5.5 Rejection and Replacement. (1) In the event Schwarz determines that any Product, Product samples or Product placebos as manufactured and/or packaged by CIMA is Defective, then, within 30 days after delivery of such Product, Product samples or Product placebos to Schwarz (or, in the event that such Product, Product samples or Product placebos is Defective as a result of a latent defect, within 30 days of the discovery of such latent defect), Schwarz shall provide to CIMA a written notice of rejection, specifying in reasonable detail the manner in which the Product is Defective (the "Notice of Rejection"). If no written Notice of Rejection is given to CIMA by Schwarz within such 30 day period, such Product, Product samples or Product placebos shall be deemed to have been accepted by Schwarz, provided, however, that nothing contained in this Section 5.5(a) shall be deemed to relieve CIMA of its obligations under the warranties set forth in Section 7 below. (2) Upon receipt of a Notice of Rejection from Schwarz and in order to minimize any hardship to Schwarz's customers, CIMA shall use its best efforts to promptly supply to Schwarz a quantity of replacement Product, Product samples or Product placebos meeting the Specifications equal to the size of the lot which Schwarz claims was Defective so that such replacement Product shall be received by Schwarz within 30 days following CIMA's receipt of Schwarz's Notice of Rejection. All actual and documented costs and expenses directly relating to any rejection and replacement pursuant to this Section 5.5 shall be paid by CIMA. -12- 16 5.6 Invoice and Payment. Upon shipment of any Product, Product samples or Product placebos, CIMA shall be entitled to submit invoices therefor to Schwarz, and Schwarz agrees to remit payment within 45 days from receipt of the invoice. 5.7 Supply Disruption; Alternate Manufacturing Site. (1) CIMA shall use its best efforts to supply Schwarz with the Product in a timely manner in accordance with the orders and forecasts received by CIMA pursuant to Sections 5.1(b) and 5.4(a), respectively. In any consecutive 120 day period, should CIMA fail to supply Schwarz with any of the Product ordered for such 120 day period pursuant to Section 5.1(b), Schwarz shall have the right to require CIMA to transfer the manufacture of the Product to Schwarz's Seymour facility or other designated facility. CIMA will assume all costs of such transfer. Should CIMA cure its failure to supply, CIMA shall have the right to resume the manufacture of the Product and Schwarz and CIMA shall, at CIMA's expense, transfer the manufacture of the Product back to CIMA within a commercially reasonable amount of time. (2) CIMA and Schwarz shall, as soon as practicable following the date of Launch, qualify a manufacturing plant designated by Schwarz as an alternate FDA approved manufacturing and packaging site for the Product. The costs of obtaining such approval shall be borne equally by CIMA and Schwarz. 5.8 CIMA's Obligation to Continue Manufacture. If this Agreement terminates or expires through no breach of Schwarz, CIMA shall reasonably cooperate with Schwarz in transferring the manufacture of the product to Schwarz, its Affiliate or a third-party appointed by Schwarz, the parties shall develop a schedule for the transfer of the manufacture of the Product and CIMA shall continue to supply the Product to Schwarz pursuant to the terms of this Agreement until twenty-four (24) months from the date this Agreement is terminated or expires pursuant to Section 11.1. SECTION 6 CONDITIONS PRECEDENT TO THE CLOSING; CLOSING DATE 6.1 Conditions Precedent to Schwarz's Obligations. Subject to waiver as set forth in Section 12.3, all obligations of Schwarz to close the transactions contemplated under this Agreement are subject to the fulfillment or satisfaction of each of the following conditions precedent: (1) Representations and Warranties True as of the Closing Date. The representations and warranties of CIMA contained in this Agreement or in any schedule, -13- 17 certificate or document delivered by CIMA to Schwarz pursuant to the provisions hereof shall have been true on the date hereof and shall be true on the Closing Date with the same effect as though such representations and warranties were made as of such date. (2) Compliance with this Agreement. CIMA shall have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or by the Closing Date. (3) Closing Certificate. Schwarz shall have received a certificate from CIMA, executed by an officer of CIMA, certifying in such detail as Schwarz may reasonably request that the conditions specified in Sections 6.1(a) and 6.1(b), above, have been fulfilled and certifying that CIMA has obtained all consents and approvals required hereunder. (4) No Threatened or Pending Litigation. On the Closing Date, no suit, action or other proceeding, or injunction or final judgment relating thereto, shall, to the best of CIMA's knowledge, be threatened or be pending before any court or governmental or regulatory official, body or authority in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby, and no investigation that might result in any such suit, action or proceeding shall be pending or, to the best of CIMA's knowledge, threatened. 6.2 Conditions Precedent to CIMA's Obligations. Subject to waiver as set forth in Section 12.3, all obligations of CIMA to close the transactions contemplated under this Agreement are subject to the fulfillment or satisfaction of each of the following conditions precedent: (1) Representations and Warranties True as of the Closing Date. The representations and warranties of Schwarz contained in this Agreement or in any schedule, certificate or document delivered by Schwarz to CIMA pursuant to the provisions hereof shall have been true on the date hereof and shall be true on the Closing Date with the same effect as though such representations and warranties were made as of such date. (2) Compliance with this Agreement. Schwarz shall have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or by the Closing Date. (3) Closing Certificate. CIMA shall have received a certificate from Schwarz, executed by an officer of Schwarz, certifying in such detail as CIMA may reasonably request that the conditions specified in Sections 6.2(a) and 6.2(b), above, have been -14- 18 fulfilled and certifying that Schwarz has obtained all consents and approvals required hereunder. (4) No Threatened or Pending Litigation. On the Closing Date, no suit, action or other proceeding, or injunction or final judgment relating thereto, shall, to the best of Schwarz's knowledge, be threatened or be pending before any court or governmental or regulatory official, body or authority in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby, and no investigation that might result in any such suit, action or proceeding shall be pending or, to the best of Schwarz's knowledge, threatened. 6.3 Closing Date. (1) Subject to Section 6.3(b), below, the closing of the transactions contemplated by this Agreement shall take place at 10:00 a.m., local time, on June 30, 2000, or on such other date as may be mutually agreed upon in writing by the parties (the "Closing Date"), at the offices of Mayer, Brown & Platt, 1675 Broadway, New York, New York 10019. (2) Each party hereby agrees to use its best efforts to consummate the transactions contemplated herein, as modified, on or before June 30, 2000; provided, however, that if the parties are unable to close the transactions contemplated hereby by August 31, 2000, or such later date as shall be mutually agreed to in writing by CIMA and Schwarz, then all of the rights and obligations of the parties under this Agreement shall terminate without liability. SECTION 7 REPRESENTATIONS AND WARRANTIES OF CIMA CIMA hereby represents and warrants to Schwarz that: 7.1 Organization, Power and Authority. CIMA is a corporation duly organized and validly existing under the laws of the State of Delaware. CIMA has all necessary corporate power and authority to enter into, and be bound by the terms and conditions of, this Agreement, and to license the Licensed Assets and the CIMA Trademarks to Schwarz pursuant hereto. 7.2 Due Authority; No Breach. The execution, delivery and performance by CIMA of this Agreement and each agreement or instrument contemplated by this Agreement, and the performance of the transactions contemplated hereby and thereby, have been duly authorized by -15- 19 all necessary corporate action by CIMA. This Agreement is, and each agreement or instrument contemplated by this Agreement, when executed and delivered by CIMA in accordance with the provisions hereof, will be (assuming the due execution and delivery hereof and thereof by Schwarz) the legal, valid and binding obligation of CIMA, in each case enforceable against CIMA in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, or similar laws from time to time in effect which affect the enforcement of creditors' rights generally and by legal and equitable limitations on the availability of specific performance and other equitable remedies against CIMA. All persons who have executed this Agreement on behalf of CIMA, or who will execute on behalf of CIMA any agreement or instrument contemplated by this Agreement, have been duly authorized to do so by all necessary corporate action. Neither the execution and delivery of this Agreement or any such other agreement or instrument by CIMA, nor the performance of the obligations contemplated hereby and thereby, will (i) conflict with or result in any violation of or constitute a breach of any of the terms or provisions of, or result in the acceleration of any obligation under, or constitute a default under any provision of the articles of incorporation or by-laws of CIMA or any material contract or any other material obligation to which CIMA is a party or to which it is subject or bound, or (ii) violate any judgment, order, injunction, decree or award of any court, administrative agency, arbitrator or governmental body against, or affecting or binding upon, CIMA or upon the securities, property or business of CIMA, or (iii) constitute a violation by CIMA of any applicable law or regulation of any jurisdiction as such law or regulation relates to CIMA, or to the property or business of CIMA except for such conflict, acceleration, default, breach or violation that is not reasonably likely to have a material adverse effect on CIMA's ability to perform its obligations under this Agreement or under any agreement or instrument contemplated hereby. 7.3 Intellectual Property. CIMA is the lawful owner of the Licensed Assets and CIMA Trademarks, CIMA can license the Licensed Assets and CIMA Trademarks without the consent of any third party, there is no pending or overtly threatened claim against CIMA asserting that any of the Licensed Assets and CIMA Trademarks infringes or violates the rights of third parties or that Schwarz, by practicing under the Licensed Assets and CIMA Trademarks in performing the Activities, would violate any of the intellectual property rights of any third party, and nothing has come to the attention of CIMA which has, or reasonably should have, led CIMA to believe that any of the Licensed Assets and CIMA Trademarks infringes or violates the right of third parties. CIMA has not given any notice to any third parties asserting infringement by such third parties upon any of the Licensed Assets and CIMA Trademarks. CIMA is not aware of and has not received any communications challenging the ownership, validity or effectiveness of any of the Licensed Assets and CIMA Trademarks. CIMA has not granted any right to any third party relating to the Activities which would violate the terms of or conflict with the rights granted to Schwarz pursuant to this Agreement. -16- 20 7.4 Technology Rights. The CIMA Technology, when combined with the Schwarz Technology, includes all the technology, patents, know-how, trade secrets and other intellectual property necessary to manufacture the Product. 7.5 Litigation. There are no pending or, to the best of CIMA's knowledge, threatened judicial, administrative or arbitral actions, claims, suits or proceedings pending as of the date hereof against CIMA relating to the Activities, the Licensed Assets or the CIMA Trademarks which, either individually or together with any other, would have a material adverse effect on the Activities, the Licensed Assets, the CIMA Trademarks or the ability of CIMA to perform its obligations under this Agreement or any agreement or instrument contemplated hereby. There are no pending, and CIMA does not presently contemplate bringing, any actions or suits relating to the Activities, the Licensed Assets or the CIMA Trademarks against others. 7.6 Governmental Approval. No consent, approval, waiver, order or authorization of, or registration, declaration or filing with, any governmental authority is required in connection with the execution, delivery and performance of this Agreement, or any agreement or instrument contemplated by this Agreement, by CIMA or the performance by CIMA of its obligations contemplated hereby and thereby. 7.7 Brokerage. No broker, finder or similar agent has been employed by or on behalf of CIMA, and no Person with which CIMA has had any dealings or communications of any kind is entitled to any brokerage commission, finder's fee or any similar compensation, in connection with this Agreement or the transactions contemplated hereby. SECTION 8 REPRESENTATIONS AND WARRANTIES OF SCHWARZ Schwarz represents and warrants to CIMA that: 8.1 Organization, Power and Authority. Schwarz is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Schwarz has all necessary corporate power and authority to enter into, and be bound by the terms and conditions of, this Agreement, to license the Licensed Assets, the Patents and the CIMA Technology from CIMA, and to license the Schwarz Technology to CIMA pursuant hereto. 8.2 Due Authority; No Breach. The execution, delivery and performance by Schwarz of this Agreement, and each agreement or instrument contemplated by this Agreement, and the performance of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action by Schwarz. This Agreement is, and each agreement or instrument contemplated by this Agreement, when executed and delivered by Schwarz in accordance with the -17- 21 provisions hereof, will be (assuming due execution and delivery hereof and thereof by CIMA) the legal, valid and binding obligation of Schwarz, in each case enforceable against Schwarz in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, or similar laws from time to time in effect which affect the enforcement of creditors' rights generally and by legal and equitable limitations on the availability of specific performance and other equitable remedies against Schwarz. All persons who have executed this Agreement on behalf of Schwarz, or who will execute on behalf of Schwarz any agreement or instrument contemplated by this Agreement, have been duly authorized to do so by all necessary corporate action. Neither the execution and delivery of this Agreement by Schwarz, or any such other agreement or instrument by Schwarz, nor the performance of the obligations contemplated hereby and thereby, will (i) conflict with or result in any violation of or constitute a breach of any of the terms or provisions of, or result in the acceleration of any obligation under, or constitute a default under any provision of its articles of incorporation or by-laws or any material contract or any other material obligation to which Schwarz is a party or to which it is subject or bound, or (ii) violate any judgment, order, injunction, decree or award of any court, administrative agency, arbitrator or government body against, or affecting or binding upon, Schwarz or upon the securities, property or business of Schwarz, or (iii) constitute a violation by Schwarz of any applicable law or regulation of any jurisdiction as such law or regulation relates to Schwarz or to the property or business of Schwarz, except for such conflict, acceleration, default, breach or violation that is not reasonably likely to have a material adverse effect on Schwarz's ability to perform its obligations under this Agreement or any agreement or instrument contemplated hereby. 8.3 Brokerage. No broker, finder or similar agent has been employed by or on behalf of Schwarz and no Person with which Schwarz has had any dealings or communications of any kind is entitled to any brokerage commission, finder's fee or any similar compensation, in connection with this Agreement or the transactions contemplated hereby. 8.4 Litigation. There are no pending or, to the best of Schwarz's knowledge, threatened judicial, administrative or arbitral actions, claims, suits or proceedings pending as of the date hereof against Schwarz which, either individually or together with any other, will have a material adverse effect on the ability of Schwarz to perform its obligations under this Agreement or any agreement or instrument contemplated hereby or affect adversely the grant to CIMA of the non-exclusive license of the Schwarz Technology pursuant to Section 3.3. 8.5 Governmental Approval. No consent, approval, waiver, order or authorization of, or registration, declaration or filing with, any governmental authority is required in connection with the execution, delivery and performance of this Agreement, or any agreement or instrument contemplated by this Agreement, by Schwarz or the performance by Schwarz of its obligations contemplated hereby and thereby. -18- 22 SECTION 9 ADDITIONAL COVENANTS AND AGREEMENTS OF THE PARTIES 9.1 Governmental Filings. CIMA and Schwarz each agree to prepare and file whatever filings, listings, requests or applications are required to be filed with any governmental authority in connection with this Agreement or the Product and to cooperate with one another as reasonably necessary to accomplish the foregoing. 9.2 Compliance with Law. Schwarz and CIMA shall each comply with all federal, state and local laws and regulations applicable to developing, approving, manufacturing, marketing and selling the Product in the Territory, the Licensed Assets, the Patents and the Technology or the performance of their respective obligations hereunder. CIMA and Schwarz each shall keep all records and reports required to be kept by applicable laws and regulations, and each shall make its facilities available at reasonable times during business hours for inspection by representatives of governmental agencies. CIMA and Schwarz each shall notify the other within forty-eight (48) hours of receipt of any notice or any other indication whatsoever of any FDA or other governmental agency inspection, investigation or other inquiry, or other material notice or communication of any type, involving the Product. Schwarz and CIMA shall cooperate with each other during any such inspection, investigation or other inquiry including, but not limited to, allowing upon request a representative of the other to be present during the applicable portions of any such inspection, investigation or other inquiry and providing copies of all relevant documents. Schwarz and CIMA shall discuss any written response to observations or notifications received in connection with any such inspection, investigation or other inquiry and each shall give the other an opportunity to comment upon any proposed response before it is made. In the event of disagreement concerning the form or content of such response, however, CIMA shall be responsible for deciding the appropriate form and content of any response with respect to any of its cited activities and Schwarz shall be responsible for deciding the appropriate form and content of any response with respect to any of its cited activities. 9.3 Recall. Schwarz and CIMA shall consult with one another as to all decisions concerning recall or withdrawal of the Product from the market, including, but not limited to, determining whether or not to make any such recall or withdrawal, the timing and scope thereof, and the means of conducting any recall or withdrawal. The party requesting any recall or withdrawal must receive the prior written consent of the other party, such consent not to be unreasonably withheld, prior to initiating such recall or withdrawal. No consent shall be necessary if the recall or withdrawal is requested by the FDA or other governmental authority. CIMA shall bear the costs (including but not limited to, shipping and product credits) for any recall or withdrawal primarily due to the failure of the product integrity of the Product, including but not limited to, CIMA's failure to comply with this Agreement, cGMP, the PDMA or the Specifications. The costs for any other recall or withdrawal shall be the responsibility of Schwarz. -19- 23 9.4 Confidentiality. Schwarz shall treat as confidential the Licensed Assets, the Patents, the CIMA Technology, and all other information of CIMA of which Schwarz becomes aware in connection with this Agreement (collectively, "CIMA Proprietary Information"). Schwarz shall neither disclose CIMA Proprietary Information to any third party nor use CIMA Proprietary Information for any purpose other than as set forth in this Agreement. CIMA shall treat as confidential the Schwarz Technology and all other information of Schwarz of which CIMA becomes aware in connection with this Agreement (collectively, "Schwarz Proprietary Information"). CIMA shall neither disclose Schwarz Proprietary Information to any third party nor use Schwarz Proprietary Information for any purpose other than as set forth in this Agreement. Nothing contained herein will in any way restrict or impair either party's (the "Using Party's") right to use, disclose or otherwise deal with any Proprietary Information of the other party which: (1) at the time of disclosure is known to the public or thereafter becomes known to the public by publication or otherwise through no fault of the Using Party; (2) the Using Party can establish was in its possession prior to the time of the disclosure and was not obtained directly or indirectly from the other party; (3) is independently made available as a matter of right to the Using Party by a third party who is not thereby in violation of a confidential relationship with the other party; (4) is developed by the Using Party independently of the Proprietary Information received from the other party and the Using Party can establish such development; or (5) is information required to be disclosed by legal or regulatory process; provided, in each case the Using Party timely informs the other party and uses reasonable efforts to limit the disclosure and maintain confidentiality to the extent possible and permits the other party to intervene and contest or attempt to limit the disclosure. Schwarz shall obtain no right or license of any kind under the CIMA Proprietary Information except as set forth in this Agreement. CIMA shall obtain no right or license of any kind under the Schwarz Proprietary Information except as set forth in this Agreement. 9.5 Expenses. CIMA and Schwarz shall each bear their own direct and indirect expenses incurred in connection with the negotiation and preparation of this Agreement and, except as set forth in this Agreement, the performance of the obligations contemplated hereby. -20- 24 9.6 Reasonable Efforts. CIMA and Schwarz each hereby agrees to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done all things necessary or proper to make effective the transactions contemplated by this Agreement, including such actions as may be reasonably necessary to obtain approvals and consents of governmental Persons and other Persons. 9.7 Publicity. The parties agree that no publicity release or announcement concerning the transactions contemplated hereby shall be issued without the advance written consent of the other, except as such release or announcement may be required by law, in which case the party making the release or announcement shall, before making any such release or announcement, afford the other party a reasonable opportunity to review and comment upon such release or announcement. 9.8 Cooperation. If either party shall become engaged in or participate in any investigation, claim, litigation or other proceeding with any third party, including the FDA, relating in any way to the Product or any of the Licensed Assets, the Patents or the Technology, the other party shall cooperate in all reasonable respects with such party in connection therewith, including, without limitation, using its reasonable efforts to make available to the other such employees who may be helpful with respect to such investigation, claim, litigation or other proceeding, provided that, for purposes of this provision, reasonable efforts to make available any employee shall be deemed to mean providing a party with reasonable access to any such employee at no cost for a period of time not to exceed 24 hours (e.g., three 8-hour business days). Thereafter, any such employee shall be made available for such time and upon such terms and conditions (including, but not limited to, compensation) as the parties may mutually agree. 9.9 Competition; No Sale for Resale. (1) CIMA agrees that, commencing on the Closing Date and continuing for the period ending five (5) years after the term of this Agreement, it shall not directly or indirectly, engage in any activity in competition with the Activities in the Territory. Subject to Section 2.5, such prohibited activity shall include, without limitation, using or licensing to any third party for use, the Licensed Assets or CIMA Trademarks in connection with (i) any pharmaceutical product listed on Schedule 9.9(a)(i) in the Territory during the period commencing on the Closing Date and ending at the end of the term of this Agreement; provided, however, that the non-competition period with respect to any pharmaceutical product containing the active ingredient [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] shall continue for an additional five (5) years after the term of this Agreement or (ii) any pharmaceutical product listed on Schedule 9.9(a)(ii) in the Territory during the period commencing on the Closing Date and ending five (5) years after the Closing. It is further understood that the remedies at law are inadequate in the case of any breach of this covenant and that Schwarz -21- 25 shall be entitled to equitable relief, including the remedy of specific performance, with respect to any breach of such covenant. (2) Neither Schwarz nor any sublicensee of Schwarz shall knowingly sell any Product to anyone in the Territory for subsequent distribution or resale outside the Territory and each shall take all reasonable precautions to prevent such distribution or resale outside the Territory. CIMA shall not knowingly sell any Product to anyone in the Territory or outside the Territory for subsequent distribution or resale in the Territory and CIMA shall take all reasonable precautions to prevent such distribution or resale in the Territory. 9.10 Conflicting Rights. CIMA shall not grant any right to any third party relating to the Activities which would violate the terms of or conflict with the rights granted to Schwarz pursuant to this Agreement. 9.11 Patent and Trademark Maintenance. (1) CIMA shall be solely responsible for filing, prosecuting, and maintaining all of the CIMA Patents, and CIMA shall pay the costs associated therewith. CIMA shall file, prosecute, and maintain all CIMA Patents so as to fully continue the benefits under the licenses granted to Schwarz hereunder. CIMA may, however, discontinue prosecuting and maintaining any CIMA Patent if (i) CIMA has a valid business reason to do so, and (ii) obtains the prior written approval of Schwarz, such approval not to be unreasonably withheld or delayed. (2) CIMA shall be solely responsible for filing, prosecuting, and maintaining all CIMA Trademarks, and CIMA shall pay the costs associated therewith. All registrations, variations, logos, goodwill and other rights under or acquired through use of the CIMA Trademarks shall accrue and belong to CIMA. Except as provided herein, Schwarz shall have no rights to use the CIMA Trademarks. Schwarz will not use in its business, in or outside of the Territory, any other mark or name which is similar to or nearly resembles any of the CIMA Trademarks in use by CIMA to indicate the source and origin of the CIMA Technology as to be likely to cause deception or confusion. Schwarz recognizes that CIMA is the owner of all CIMA Trademarks used in commerce to indicate the source of the CIMA Technology and agrees that the CIMA Trademarks shall remain vested in CIMA both during the term of this Agreement and thereafter. Schwarz shall not contest the validity of the CIMA Trademarks or CIMA's ownership of the CIMA Trademarks. Use of the CIMA Trademarks by Schwarz in conjunction with the manufacture, use, and sale of the Product and all goodwill related thereto shall inure to the benefit of CIMA for purposes of building the longevity and extent of use of the CIMA Trademarks. -22- 26 (3) Schwarz shall be solely responsible for filing, prosecuting, and maintaining all trademarks it develops or owns for the Product (the "Schwarz Trademarks"), and Schwarz shall pay the costs associated therewith. All registrations, variations, logos, goodwill and other rights under or acquired through use of the Schwarz Trademarks shall accrue and belong to Schwarz. CIMA shall have no rights to use the Schwarz Trademarks, including, without limitation, in connection with any product subsequently developed by CIMA pursuant to Section 2.4. CIMA will not use in its business, in or outside of the Territory, any other mark or name which is similar to or nearly resembles the Schwarz Trademarks in use by Schwarz in a manner that is likely to cause deception or confusion. CIMA recognizes that Schwarz is the owner of all of the Schwarz Trademarks used in commerce to indicate the source of the Product and agrees that the Schwarz Trademarks shall remain vested in Schwarz both during the term of this Agreement and thereafter. CIMA shall not contest the validity of the Schwarz Trademarks or Schwarz's ownership of the Schwarz Trademarks. Use of the Schwarz Trademarks by Schwarz in conjunction with the manufacture, use, and sale of the Product and all goodwill related thereto shall inure to the benefit of Schwarz for purposes of building the longevity and extent of use of the Schwarz Trademarks. (4) Schwarz and CIMA agree that, where applicable, all packaging of the Product shall identify (i) the number of the CIMA Patents and CIMA as the owner thereof and (ii) Schwarz as the owner of the Schwarz Trademarks. (5) Any improvements to the CIMA Technology (whether or not patentable) shall be owned solely by CIMA. (6) Any improvements to the Schwarz Technology (whether or not patentable) shall be owned solely by Schwarz. (7) Schwarz shall have full ownership rights to the Product and, with the exception of any improvements to the CIMA Technology as contemplated by Section 9.11(e), any patents, know-how or other intellectual property that relate to the Product and are discovered during the development process contemplated hereby. (8) Any provisions in this Agreement to the contrary notwithstanding, Schwarz acknowledges that, for all purposes, CIMA is the owner of the CIMA Technology and CIMA acknowledges that, for all purposes, Schwarz is the owner of the Schwarz Technology. 9.12 Infringement; Enforcement of Proprietary Rights. (1) Infringement of Patent Rights. Each party shall promptly notify the other of any alleged infringement by third parties of any CIMA Patent and provide any -23- 27 information available to that party relating to such alleged infringement. CIMA shall have the responsibility to investigate such alleged infringement and act diligently, at its own expense, to end any infringement of such rights that materially affect Schwarz's rights pursuant to this Agreement, including, but not limited to, bringing suit against such third party infringer. In the event that CIMA does not bring suit against such third party infringer, Schwarz may, at its own expense, bring suit against such third party infringer on CIMA's behalf. (2) Procedures. No settlement, consent judgment or other voluntary final disposition of any suit contemplated by Section 9.12(a) may be entered into without the consent of each party, which consent shall not be unreasonably withheld or delayed. Any recovery of damages in any such suit shall be retained by the party bearing the costs of such suit. In the event of any infringement suit against a third party brought by either party pursuant to this Section 9.12, the party not bringing such suit shall cooperate in all respects, execute any documents reasonably necessary to permit the other party to prosecute such suit, and to the extent reasonable shall make available its employees and relevant records to provide evidence for such suit. (3) Infringement of Third Party Rights. If, during the term of this Agreement, any third party (other than an Affiliate of Schwarz) claims that Schwarz's marketing or selling of the Product hereunder infringes on a third party patent based upon claims that dominate claims in the Patents, within 120 days after notice by Schwarz, CIMA shall procure for Schwarz the right to exercise all rights licensed under this Agreement without any additional payment therefor by Schwarz. 9.13 Supply of Product. CIMA shall maintain sufficient capacity throughout the term of this Agreement to meet the requirements of Schwarz for the supply of Product hereunder. 9.14 Liability Insurance. At and after Launch, CIMA shall use its best efforts to obtain and carry in full force and effect product liability insurance in respect of the Product in the amount of $10,000,000 per occurrence, $10,000,000 in the aggregate. At and after Launch, Schwarz shall use its best efforts to obtain and carry in full force and effect product liability insurance in respect of the Product in the amount of $10,000,000 per occurrence, $10,000,000 in the aggregate. 9.15 Referral of Orders and Inquiries. CIMA shall refer all Persons sending orders or making inquiries regarding the Product within the Territory to Schwarz and shall promptly notify Schwarz of the name of each such Person and the nature of the inquiry of such Person. 9.16 Deemed Breach of Covenant. Neither CIMA nor Schwarz shall be deemed to be in breach of any covenant contained in this Section 9 if such party's deemed breach is the result of any action or inaction on the part of the other party. -24- 28 SECTION 10 INDEMNIFICATION 10.1 Indemnification. (1) CIMA shall indemnify, defend and hold Schwarz (and its directors, officers, employees, and Affiliates) harmless from and against any and all Damages incurred or suffered by Schwarz (and its directors, officers, employees, and Affiliates) as a consequence of: (1) any breach of any representation or warranty made by CIMA in this Agreement or any agreement, instrument or document delivered by CIMA pursuant to the terms of this Agreement; (2) any failure to perform duly and punctually any covenant, agreement or undertaking on the part of CIMA contained in this Agreement; (3) any act or omission of CIMA with respect to the operation of CIMA's business, or the handling, manufacturing, sale, consumption or use of the Product by CIMA; or (iv) the infringement of the Licensed Assets, the Patent or the Technology of any patent, trademark, copyright, trade secret or other intellectual property right of any person other than CIMA or Schwarz. (2) Schwarz shall indemnify, defend and hold CIMA (and its directors, officers, employees, and Affiliates) harmless from and against any and all Damages incurred or suffered by CIMA (and its directors, officers, employees, and Affiliates) as a consequence of: (1) any breach of any representation or warranty made by Schwarz in this Agreement or any agreement, instrument or document delivered by Schwarz pursuant to the terms of this Agreement; (2) any failure to perform duly and punctually any covenant, agreement or undertaking on the part of Schwarz contained in this Agreement; or (3) any act or omission of Schwarz with respect to the operation of Schwarz's business or the handling, manufacturing, sale, consumption or use of the Product by Schwarz, including Schwarz's supply of API hereunder. -25- 29 10.2 Notice and Opportunity To Defend. Promptly after receipt by a party hereto of notice of any claim which could give rise to a right to indemnification pursuant to Section 10.1. such party (the "Indemnified Party") shall give the other party (the "Indemnifying Party") written notice describing the claim in reasonable detail. The failure of an Indemnified Party to give notice in the manner provided herein shall not relieve the Indemnifying Party of its obligations under this Section, except to the extent that such failure to give notice materially prejudices the Indemnifying Party's ability to defend such claim. The Indemnifying Party shall have the right, at its option, to compromise or defend, at its own expense and by its own counsel, any such matter involving the asserted liability of the party seeking such indemnification. If the Indemnifying Party shall undertake to compromise or defend any such asserted liability, it shall promptly (and in any event not less than 10 days after receipt of the Indemnified Party's original notice) notify the Indemnified Party in writing of its intention to do so, and the Indemnified Party agrees to cooperate fully with the Indemnifying Party and its counsel in the compromise or defense against any such asserted liability. All reasonable costs and expenses incurred in connection with such cooperation shall be borne by the Indemnifying Party. If the Indemnifying Party elects not to compromise or defend the asserted liability, fails to notify the Indemnified Party of its election to compromise or defend as herein provided, fails to admit its obligation to indemnify under this Agreement with respect to the claim, or, if in the reasonable opinion of the Indemnified Party, the claim could result in the Indemnified Party becoming subject to injunctive relief or relief other than the payment of money damages that could materially adversely affect the ongoing business of the Indemnified Party in any manner, the Indemnified Party shall have the right, at its option, to pay, compromise or defend such asserted liability by its own counsel and its reasonable costs and expenses shall be included as part of the indemnification obligation of the Indemnifying Party hereunder. Notwithstanding the foregoing, neither the Indemnifying Party nor the Indemnified Party may settle or compromise any claim over the objection of the other; provided, however, that consent to settlement or compromise shall not be unreasonably withheld. In any event, the Indemnified Party and the Indemnifying Party may participate, at their own expense, in the defense of such asserted liability. If the Indemnifying Party chooses to defend any claim, the Indemnified Party shall make available to the Indemnifying Party any books, records or other documents within its control that are necessary or appropriate for such defense. Notwithstanding anything to the contrary in this Section 10.2, (i) the party conducting the defense of a claim shall (A) keep the other party informed on a reasonable and timely basis as to the status of the defense of such claim (but only to the extent such other party is not participating jointly in the defense of such claim), and (B) conduct the defense of such claim in a prudent manner, and (ii) the Indemnifying Party shall not cease to defend, settle or otherwise dispose of any claim without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld). 10.3 Indemnification Payment Obligation. No Indemnifying Party will have any obligations under Sections 10.1(a) or 10.1(b) until the cumulative aggregate amount of Damages incurred or suffered by the Indemnified Party which the Indemnifying Party is otherwise subject to under this Agreement exceeds $50,000 at which time the entire cumulative aggregate amount of -26- 30 such Damages shall be covered. The provisions of this Section 10.3 shall not limit or otherwise affect the obligations of any Indemnifying Party under any other Section of this Agreement. 10.4 Indemnification Payment Adjustments. The amount of any Damages for which indemnification is provided under this Section 10 shall be reduced to take account of any net tax benefit and shall be increased to take account of any net tax detriment arising from the incurrence or payment of any such Damages or from the receipt of any such indemnification payment and shall be reduced by the insurance proceeds received and any other amount recovered, if any, by the Indemnified Party with respect to any Damages; provided, however, that an Indemnified Party shall not be subject to an obligation to pursue an insurance claim relating to any Damages for which indemnification is sought hereunder. If any Indemnified Party shall have received any payment pursuant to this Section 10 with respect to any Damages and shall subsequently have received insurance proceeds or other amounts with respect to such Damages, then such Indemnified Party shall pay to the Indemnifying Party an amount equal to the difference (if any) between (i) the sum of the amount of those insurance proceeds or other amounts received and the amount of the payment by such Indemnifying Party pursuant to this Section 10 with respect to such Damages and (ii) the amount necessary to fully and completely indemnify and hold harmless such Indemnified Party from and against such Damages; provided, however, in no event will such Indemnified Party have any obligation pursuant to this sentence to pay to such Indemnifying Party an amount greater than the amount of the payment by such Indemnifying Party pursuant to this Section 10 with respect to such Damages. 10.5 Indemnification Payment. Upon the final determination of liability and the amount of the indemnification payment under this Section 10, the appropriate party shall pay to the other, as the case may be, within 10 business days after such determination, the amount of any claim for indemnification made hereunder. 10.6 Survival. The provisions of Section 10 shall survive any termination of this Agreement. Each Indemnified Party's rights under Section 10 shall not be deemed to have been waived or otherwise affected by such Indemnified Party's waiver of the breach of any representation, warranty, agreement or covenant contained in or made pursuant this Agreement, unless such waiver expressly and in writing also waives any or all of the Indemnified Party's right under Section 10. SECTION 11 TERMINATION 11.1 Termination. The term of this Agreement shall begin upon the Closing Date and, unless sooner terminated as hereinafter provided, shall end upon the expiration of the last Patent to expire or, if later, the expiration of any other patent resulting from the development process -27- 31 contemplated hereby. Notwithstanding the foregoing, this Agreement may be terminated as follows: (1) Termination for Insolvency. If either Schwarz or CIMA (i) makes a general assignment for the benefit of creditors or becomes insolvent; (ii) files an insolvency petition in bankruptcy; (iii) petitions for or acquiesces in the appointment of any receiver, trustee or similar officer to liquidate or conserve its business or any substantial part of its assets; (iv) commences under the laws of any jurisdiction any proceeding involving its insolvency, bankruptcy, reorganization, adjustment of debt, dissolution, liquidation or any other similar proceeding for the release of financially distressed debtors; or (v) becomes a party to any proceeding or action of the type described above in (iii) or (iv) and such proceeding or action remains undismissed or unstayed for a period of more than 60 days, then the other party may by written notice terminate this Agreement in its entirety with immediate effect. (2) Termination for Default. Schwarz and CIMA each shall have the right to terminate this Agreement for default upon the other's failure to comply in any material respect with the terms and conditions of this Agreement. At least 60 days prior to any such termination for default, the party seeking to so terminate shall give the other written notice of its intention to terminate this Agreement in accordance with the provisions of this Section 11.1(b), which notice shall set forth the default(s) which form the basis for such termination. If the defaulting party fails to correct such default(s) within 60 days after receipt of notification, then such party immediately may terminate this Agreement. This Section 11.1(b) shall not be exclusive and shall not be in lieu of any other remedies available to a party hereto for any default hereunder on the part of the other party. (3) Continuing Obligations. Termination of this Agreement for any reason shall not relieve the parties of any obligation accruing prior thereto with respect to the Product and any ongoing obligations hereunder with respect to the remaining Product and shall be without prejudice to the rights and remedies of either party with respect to any antecedent breach of the provisions of this Agreement. Without limiting the generality of the foregoing, no termination of this Agreement, whether by lapse of time or otherwise, shall serve to terminate the obligations of the parties hereto under Sections 5.8, 9.3, 9.4, 9.5, 9.7, 9.9(a), 10, 11.1(c) and 12 hereof, and such obligations shall survive any such termination. SECTION 12 MISCELLANEOUS -28- 32 12.1 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that neither CIMA nor Schwarz may assign any of its rights, duties or obligations hereunder without the prior written consent of the other, which consent shall not be unreasonably withheld, except that no prior written consent shall be required in the event that a third party acquires substantially all of the assets or outstanding shares of, or merges with, Schwarz or CIMA, as the case may be. 12.2 Notices. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or facsimile and confirmed in writing, or mailed first class, postage prepaid, by registered or certified mail, return receipt requested (mailed notices and notices sent by facsimile shall be deemed to have been given on the date received) as follows: If to CIMA, as follows: CIMA LABS INC. 10000 Valley View Road Eden Prairie, MN 55344 Facsimile: 952-947-8770 Attention: President and CEO If to Schwarz, as follows: Schwarz Pharma, Inc. 6140 West Executive Drive Mequon, Wisconsin 53092 Facsimile: 262-242-1641 Attention: General Counsel or in any case to such other address or addresses as hereafter shall be furnished as provided in this Section 12.2 by any party hereto to the other party. 12.3 Waiver; Remedies. Any term or provision of this Agreement may be waived at any time by the party entitled to the benefit thereof by a written instrument executed by such party. No delay on the part of CIMA or Schwarz in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of either CIMA or Schwarz of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. The indemnification provided in Section 10 shall be the sole remedy available -29- 33 for any Damages arising out of or in connection with this Agreement except for any rights or remedies which the parties hereto may otherwise have in equity. 12.4 Survival of Representations. Each of the representations and warranties made in this Agreement shall continue for the term of this Agreement and shall thereafter be extinguished. 12.5 Independent Contractors. The parties hereto are independent contractors and nothing contained in this Agreement shall be deemed to create the relationship of partners, joint venturers, or of principal and agent, franchisor and franchisee, or of any association or relationship between the parties other than as expressly provided in this Agreement. Schwarz acknowledges that it does not have, and Schwarz shall not make representations to any third party, either directly or indirectly, indicating that Schwarz has any authority to act for or on behalf of CIMA or to obligate CIMA in any way whatsoever. CIMA acknowledges that it does not have, and it shall not make any representations to any third party, either directly or indirectly, indicating that it has any authority to act for or on behalf of Schwarz or to obligate Schwarz in any way whatsoever. 12.6 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements or understandings of the parties relating thereto. 12.7 Amendment. This Agreement may be modified or amended only by written agreement of the parties hereto. 12.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute a single instrument. 12.9 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York excluding any choice of law rules which may direct the application of the law of another state. 12.10 Arbitration. Any dispute, controversy or claim arising out of or in connection with this Agreement shall be determined and settled by arbitration in New York, New York, pursuant to the Rules of Arbitration then in effect of the American Arbitration Association. Any award rendered shall be final and conclusive upon the parties and a judgment thereon may be entered in a court having competent jurisdiction. Any arbitration hereunder shall be (i) submitted to an arbitration tribunal comprised of three (3) independent members knowledgeable in the pharmaceutical industry, one of whom shall be selected by Schwarz, one of whom shall be selected by CIMA, and one of whom shall be selected by the other two arbitrators; (ii) allow for the parties to request discovery pursuant to the rules then in effect under the Federal Rules of Civil Procedure for a period not to exceed 90 days; and (iii) require the award to be accompanied -30- 34 by findings of fact and a statement of reasons for the decision. Each party shall bear its own costs and expenses, including attorney's fees incurred in any dispute which is determined and/or settled by arbitration pursuant to this Section. Except where clearly prevented by the area in dispute, both parties agree to continue performing their respective obligations under this Agreement while the dispute is being resolved. Arbitration shall not prevent any party from seeking injunctive relief where such remedy is an appropriate form of remedy under the circumstances. 12.11 Captions. All section titles or captions contained in this Agreement, in any Schedule referred to herein or in any Exhibit annexed hereto, and the table of contents, if any, to this Agreement are for convenience only, shall not be deemed a part of this Agreement and shall not affect the meaning or interpretation of this Agreement. 12.12 No Third-Party Rights. No provision of this Agreement shall be deemed or construed in any way to result in the creation of any rights or obligation in any Person not a party or not affiliated with a party to this Agreement. 12.13 Severability. If any provision of this Agreement is found or declared to be invalid or unenforceable by any court or other competent authority having jurisdiction, such finding or declaration shall not invalidate any other provision hereof, and this Agreement shall thereafter continue in full force and effect. 12.14 Attachments. All Schedules, Exhibits and other attachments to this Agreement are by this reference incorporated herein and made a part of this Agreement. 12.15 Force Majeure. In the event that a party is prevented from carrying out its obligations under this Agreement by an event of Force Majeure, then such party's performance of its obligations under this Agreement shall be excused during the period of such event and for a subsequent reasonable period of recovery. -31- 35 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered on the day and year first above written. CIMA LABS INC. By: /s/ John Siebert -------------------------------- Name: John Siebert Ph.D. Title: President and CEO SCHWARZ PHARMA, INC. By: /s/ Ron Stratton ------------------------------- Name: Ron Stratton Title: President and COO 36 Schedule 2.4 to Development License and Supply Agreement [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] EXTENDED RELEASE TERM SHEET I. Royalties: Tiers of [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***], with Annual Net Sales thresholds TBD II. COGs: TBD III. Product Specifications: TBD IV. Development Schedule and Performance Milestones: COMPLETION DATE FOR DEVELOPMENT ACTIVITY PHASES DEVELOPMENT PHASE 1) Prototype Development TBD Extended release coating & formulation development - Analytical methods development - Methods validation - Excipient compatibility - Final prototype: Initiation of accelerated stability study, and a room temperature stability study. 2) Stability Data TBD Acceptable 3 month stability data on prototype batch 3) Process Optimization TBD Scale-up, demonstration batch stability, and process validation (finished product and coated active) - Initial scale-up activities - Full scale experimental batch - Demonstration batch - Initiation and acceptable 3 month data from demonstration batch, blister package stability studies as per agreed upon stability protocol - Process Validation 4) Process Validation stability TBD Initiation of blister stability studies on process validation batches (total 3 studies) as per agreed upon stability protocol Milestone Payments (a) Schwarz shall pay to CIMA each of the milestone payments set forth below (each a "Milestone Payment") promptly after CIMA demonstrates the Satisfactory Completion (as defined below) of the research and development milestone (each a "Milestone") set forth opposite such Milestone Payment: Earned upon signing but payable ### 90 days after Effective Date Completion of Development 37 Activity Phases 1 & 2 ### Completion of Development of Phase 3 (Product acceptable for Launch) ### ### - [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] (b) Promptly after the completion of each Milestone, CIMA shall notify Schwarz of such completion and shall provide Schwarz sufficient written materials to allow Schwarz to evaluate whether or not such Milestone has been Satisfactorily Completed. Unless CIMA satisfactorily completes a Milestone within 60 days after the deadline therefor, the underlying Milestone shall have been deemed not to be Satisfactorily Completed for purposes of paragraph (a) above and Schwarz's obligation to make the related Milestone Payment shall terminate and be deemed waived by CIMA. For purposes of this term sheet and as to any Milestone described herein, "Satisfactory Completion" shall mean the completion of such Milestone in a manner which is (i) appropriate to support the commercialization of the Product and (ii) consistent with this Agreement. 38 Schedule 2.5 to Development License and Supply Agreement Minimum Annual Net Sales Targets Subject to Section 4.1(c), Schwarz shall endeavor to meet or exceed the minimum Annual Net Sales targets set forth below. References to Years below are to full calendar years after the Year in which the Product is Launched.
Year Minimum Annual Net Sales Target - ---- ------------------------------- Year 1 ### Year 2 ### Year 3 ### Year 4 ### Year 5 ###
### - [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] 39 Schedule 3.1 to Development License and Supply Agreement Development Schedule
------------------------------------------------------------------- ----------------------------- COMPLETION DATE FOR DEVELOPMENT ACTIVITY PHASES DEVELOPMENT PHASE* ------------------------------------------------------------------- ----------------------------- 1) Prototype Development ### ------------------------------------------------------------------- ----------------------------- - Formulation development** - Analytical methods development - Methods validation - Excipient compatibility - Final prototype: Initiation of accelerated stability, and a room temperature bulk stability study. ------------------------------------------------------------------- ----------------------------- 2) Acceptable 3 month stability data on prototype batch in ### blisters and bulk ------------------------------------------------------------------- ----------------------------- 3) Process optimization, scale-up, demonstration batch ### stability and process validation ------------------------------------------------------------------- ----------------------------- - Initial scale-up activities - Full scale experimental batch - Demonstration batch - Initiation and acceptable 3 month data from demonstration batch and blister package stability studies as per mutually agreed upon stability protocol - Process Validation ------------------------------------------------------------------- ----------------------------- 4) Process Validation Stability ### - Initiation of blister stability studies on process validation batches (total 3 studies) as per mutually agreed upon stability protocol ------------------------------------------------------------------- -----------------------------
### - [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] *These are the completion dates if direct blending or geometric dilution techniques yield acceptable tablet content uniformity. Otherwise, 8 additional weeks will be added to the completion date schedules of Development Activity Phases 1 and 2, and 4 weeks shall be added to the completion date schedule of Development Activity Phase 3. ** Schwarz shall increase the applicable milestone referenced in Schedule 4.1(b) by [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] if any process other than milling or geometric dilution are needed to meet the CU requirements. 40 Schedule 4.1(a) to Development License and Supply Agreement Royalty Rates In any Year, Schwarz shall pay to CIMA a percentage of Annual Net Sales, if any, actually recorded during such Year, as indicated on the following schedule.
----------------------------------------- ---------------------------------- ANNUAL NET SALES ROYALTY ----------------------------------------- ---------------------------------- Less than $4,000,000 ### ----------------------------------------- ---------------------------------- Greater than $4,000,000, ### Less than $15,000,000 ----------------------------------------- ---------------------------------- Greater than $15,000,000 ### ----------------------------------------- ----------------------------------
### - [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] Schwarz shall pay the royalty payment due in respect of any Quarter (a "Quarterly Installment") by remitting a check, together with the report required by Section 4.3, to CIMA within 60 days after the end of each Quarter during such Year. For purposes of determining the royalty payment pursuant to this Schedule 4.1(a) the amount of each Quarterly Installment shall be calculated based on actual Net Sales recorded during such Quarter. 41 Schedule 4.1(b) to Development, License and Supply Agreement Milestone Payments (a) Subject to paragraph (b) of this Schedule 4.1(b), Schwarz shall pay to CIMA any of the milestone payments set forth below (each a "Milestone Payment") promptly after CIMA demonstrates the Satisfactory Completion (as defined below) of the research and development milestone (each a "Milestone") set forth opposite such Milestone Payment: Earned on signing and payable within 90 days of the date hereof ### Timely and satisfactory completion of Development Activity ### * Phases 1 & 2 ### Timely and satisfactory completion of Development Activity Phase 3 (Product acceptable for Launch) * Schwarz shall increase the applicable milestone referenced in Schedule 4.1(b) by ### if any process other than milling or geometric dilution are needed to meet the CU requirements.
### - [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] (b) Promptly after the completion of each Milestone, CIMA shall notify Schwarz of such completion and shall provide Schwarz sufficient written materials (a "Milestone Notice") to allow Schwarz to evaluate whether or not such Milestone has been Satisfactorily Completed. Unless CIMA satisfactorily completes a Milestone within 60 days after the deadline therefor, as stated in Schedule 3.1, the underlying Milestone shall have been deemed not to be Satisfactorily Completed for purposes of paragraph (a) above and Schwarz's obligation to make the related Milestone Payment shall terminate and be deemed waived by CIMA. As to any Milestone, "Satisfactory Completion" shall mean the completion of such Milestone in a manner which is (i) appropriate to support the commercialization of the Product and (ii) consistent with this Agreement. 42 Schedule 5.1(b) to Development, License and Supply Agreement Schwarz Purchase Order [See Attached] 43 Schedule 5.4(d) to Development, License and Supply Agreement Quality Assurance Addendum [To be mutually agreed by parties on or prior to October 31, 2000] 44 Schedule 5.3 to Development, License and Supply Agreement Cost of Goods Schwarz shall pay to CIMA the amounts indicated on the following schedule in respect of CIMA's manufacturing obligations hereunder. Such payment shall be made in accordance with Section 5.6. SAMPLES
-------------------------------------------- -------------------------------------------- Volumes -------------------------------------------- -------------------------------------------- 20MM max. per year -------------------------------------------- ---------------------- --------------------- costs per tablet ###* -------------------------------------------- ---------------------- ---------------------
PLACEBOS
-------------------------------------------- -------------------------------------------- Volumes -------------------------------------------- -------------------------------------------- Bulked, cost per tablet ### -------------------------------------------- --------------------------------------------
TRADE
-------------------------------------------- -------------------------------------------- Volumes -------------------------------------------- -------------------------------------------- Configuration <30MM >30MM -------------------------------------------- ---------------------- --------------------- Bulked, cost per tablet ### ### -------------------------------------------- ---------------------- --------------------- 5 cards of 6 cartoned, cost per ### ### tablet -------------------------------------------- ---------------------- --------------------- Bottles of 100, cost per tablet ** ### ### -------------------------------------------- ---------------------- ---------------------
### - [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] * To be [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] per tablet for the initial 6,132,000 tablets. ** Complete finished package, only upon installation and validation of bottling line at CIMA's facility. 45 Schedules 9.9(a)(i) and (ii) to Development, License and Supply Agreement COMPETITIVE PRODUCTS UNDER SECTION 9.9(a)(i) [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] COMPETITIVE PRODUCTS UNDER SECTION 9.9(a)(ii) [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] EX-27.1 4 ex27-1.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING BALANCE SHEETS OF CIMA LABS, INC. AS OF JUNE 30, 2000, AND THE RELATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 9,775,295 5,919,222 5,234,276 25,000 1,902,529 22,915,693 22,082,099 7,900,490 37,456,275 2,230,304 0 0 0 108,586 77,373,340 31,647,499 6,096,355 11,466,568 6,725,214 4,065,951 15,842 0 (282,546) 942,107 0 942,107 0 0 (799,337) 142,770 .01 .01
EX-99.1 5 ex99-1.txt RISK FACTORS 1 Exhibit 99.1 RISK FACTORS Certain statements made in this Annual Report on Form 10-Q are forward-looking statements based on our current expectations, assumptions, estimates and projections about our business and our industry. These forward-looking statements involve risks and uncertainties. Our business, financial condition and results of operations could differ materially from those anticipated in these forward-looking statements as a result of certain factors, as more fully described below and elsewhere in this Form 10-Q. You should consider carefully the risks and uncertainties described below, which are not the only ones facing our company. Additional risks and uncertainties also may impair our business operations. RISK RELATED TO OUR COMPANY BECAUSE WE HAVE A LIMITED OPERATING HISTORY, POTENTIAL INVESTORS IN OUR STOCK MAY HAVE DIFFICULTY EVALUATING OUR PROSPECTS. We recorded the first commercial sales of products using our fast-dissolve technologies in early 1997. Accordingly, we have only a limited operating history, which may make it difficult for you and other potential investors to evaluate our prospects. The difficulty investors may have in evaluating our prospects may cause volatile fluctuations, including decreases, in the market price of our common stock as investors react to information about our prospects. Since 1997, we have generated revenues from product development fees, licensing arrangements, sales of products using our fast-dissolve technologies and from royalties. We are currently making the transition from research and product development operations with limited production to commercial operations with expanding production capabilities in addition to research and product development activities. Our business and prospects, therefore, must be evaluated in light of the risks and uncertainties of a company with a limited operating history and, in particular, one in the pharmaceutical industry. We discuss many of these risks that are particularly relevant to us in the subheadings below. However, we are also subject to general business risks and uncertainties. You should evaluate any potential investment in our common stock accordingly. IF WE ARE NOT PROFITABLE IN THE FUTURE, THE VALUE OF YOUR INVESTMENT IN OUR STOCK MAY FALL. We have not been profitable for much of our past. If we are not profitable in the future, the market price of our stock may fall. We have accumulated aggregate net losses from inception through June 30, 2000 of approximately $46 million. The costs for research and product development of our drug delivery technologies and general and administrative expenses have been the principal causes of our losses. Our ability to achieve sustained profitable operations depends on a number of factors, many of which are beyond our direct control. These factors include: - the demand for our products; - our ability to manufacture our products efficiently and with the required quality; - our ability to increase our manufacturing capacity; - the level of product and price competition; - our ability to develop additional commercial applications for our products; - our ability to control our costs; and - general economic conditions. WE MAY REQUIRE ADDITIONAL FINANCING, WHICH MAY NOT BE AVAILABLE ON FAVORABLE TERMS OR AT ALL AND WHICH MAY RESULT IN DILUTION OF YOUR EQUITY INTEREST. We may require additional financing to fund expected increases in operating expenses and capital expenditures as we commercialize additional applications of our drug delivery technologies and increase our production capacity. If we cannot obtain financing when needed, or obtain it on favorable terms, we may be required to curtail our development of new drug delivery technologies or our expansion of manufacturing capacity. Further, if we issue equity securities, our stockholders may experience dilution. We believe our cash and cash equivalents, together with the net proceeds from our private placement of common stock in March, 2000 and expected revenues from operations, will be sufficient to meet our anticipated capital requirements for the foreseeable future. However, we may elect to pursue additional financing at any time to more aggressively pursue development of new drug delivery technologies and expand manufacturing capacity beyond that currently planned. 2 Exhibit 99.1 Other factors that will affect future capital requirements and may require us to seek additional financing include: - the level of expenditures necessary to develop new products or technologies; - the progress of our research and product development programs; - the need to construct a larger than currently anticipated manufacturing facility to meet demand for our products; - results of our collaborative efforts with current and potential pharmaceutical company partners; and - the timing of, and amounts received from, future product sales, product development fees and licensing revenue and royalties. THE LOSS OF ONE OF OUR MAJOR CUSTOMERS COULD REDUCE OUR REVENUES SIGNIFICANTLY. Revenues from AstraZeneca, N.V. Organon and Novartis together represented over 85% of our total revenues for the year ended December 31, 1999. The loss of any one of these customers could cause our revenues to decrease significantly, resulting in, or increasing, our losses from operations. If we cannot broaden our customer base, we will continue to depend on a few customers for the majority of our revenues. We may be unable to negotiate favorable business terms with customers that represent a significant portion of our revenues. If we cannot, our revenues and gross profits may be insufficient to allow us to achieve sustained profitability. IF WE DO NOT ENTER INTO ADDITIONAL COLLABORATIVE AGREEMENTS WITH PHARMACEUTICAL COMPANIES, WE MAY NOT BE ABLE TO ACHIEVE SUSTAINED PROFITABILITY. We depend upon collaborative agreements with pharmaceutical companies to develop, test, obtain governmental approval for, and commercialize oral dosage forms of, active pharmaceutical ingredients using our drug delivery technologies. The number of products that we successfully develop under these collaborative agreements will affect our revenues. If we do not enter into additional agreements in the future, or if our current or future agreements do not result in successful marketing of our products, our revenues and gross profits may be insufficient to allow us to achieve sustained profitability. We currently have collaborative agreements with American Home Products, AstraZeneca, Bristol-Myers Squibb, N.V. Organon, Novartis and Schwartz Pharma. Additional risks that we face related to our collaborative agreements include: - we may not be able to enter into collaborative agreements to develop additional products using our drug delivery technologies; - any existing or future collaborative agreements may not result in additional commercial products; - additional commercial products that we may develop may not be successful; - we may not be able to meet the milestones established in our current or future collaborative agreements; and - we may not be able to successfully develop new drug delivery technologies that will be attractive to potential pharmaceutical company partners. 3 Exhibit 99.1 WE RELY ON THIRD PARTIES TO MARKET, DISTRIBUTE AND SELL THE PRODUCTS INCORPORATING OUR DRUG DELIVERY TECHNOLOGIES AND THOSE THIRD PARTIES MAY NOT PERFORM. Our pharmaceutical company partners help us develop, manufacture and sell our products. If one or more of our pharmaceutical company partners fails to pursue the development or marketing of our products as planned, our revenues and gross profits may not reach our expectations, or may decline. We sometimes cannot control the timing and other aspects of the development of products because our pharmaceutical company partners may have priorities that differ from ours. Therefore, our commercialization of products under development may be delayed unexpectedly. Further, we incorporate our drug delivery technologies into the oral dosage forms of products marketed and sold by our pharmaceutical company partners. We do not have a direct marketing channel to consumers for our drug delivery technologies. Therefore, the success of the marketing organizations of our pharmaceutical company partners, as well as the level of priority assigned to the marketing of our products by these entities, which may differ from our priorities, will determine the success of the products incorporating our technologies. IF WE CANNOT INCREASE OUR PRODUCTION CAPACITY, WE MAY BE UNABLE TO MEET EXPECTED DEMAND FOR OUR PRODUCTS AND WE MAY LOSE REVENUES. We must increase our production capacity to meet expected demand for our products. We currently have one production line and a second line is being developed. If we are unable to increase our production capacity as scheduled, we may be unable to meet expected demand for our products, we may lose revenues and we may not be able to maintain our relationships with our pharmaceutical company partners on good terms. Production lines in the pharmaceutical industry generally take 16 to 24 months to complete because of the long lead times required for precision production equipment and the lengthy testing and approval process. We expect our second production line to be operational in the second half of 2001, although we may experience difficulties that could delay our ability to increase our manufacturing capacity. We may not be able to increase our production capacity quickly enough to meet the requirements of our pharmaceutical company partners with whom we are developing our drug delivery technologies. WE HAVE A SINGLE MANUFACTURING FACILITY AND WE MAY LOSE REVENUES AND BE UNABLE TO MAINTAIN OUR RELATIONSHIPS WITH OUR PHARMACEUTICAL COMPANY PARTNERS IF WE LOSE ITS PRODUCTION CAPACITY. We manufacture all of the products that we produce on our existing production line in our Eden Prairie facility. If our existing production line or facility becomes incapable of manufacturing products for any reason, we may be unable to meet production requirements, we may lose revenues and we may not be able to maintain our relationships with our pharmaceutical company partners. Without our existing production line, we would have no other means of manufacturing products incorporating our drug delivery technologies until we were able to restore the manufacturing capability at our facility or develop an alternative manufacturing facility. Although we carry business interruption insurance to cover lost revenues and profits in an amount we consider adequate, this insurance does not cover all possible situations. In addition, our business interruption insurance would not compensate us for the loss of opportunity and potential adverse impact on relations with our existing pharmaceutical company partners resulting from our inability to produce products for them. WE RELY ON A SINGLE SOURCE FOR SOME OF OUR RAW MATERIALS, WE MAY LOSE REVENUES AND WE MAY NOT BE ABLE TO MAINTAIN OUR RELATIONSHIP WITH OUR PHARMACEUTICAL COMPANY PARTNERS IF THOSE MATERIALS WERE NOT AVAILABLE FROM THEIR CURRENT SOURCE. We rely on single suppliers for some of our raw materials and packaging supplies. If these raw materials or packaging supplies were no longer available we may be unable to meet production requirements, we may lose revenues and we may not be able to maintain our relationships with our pharmaceutical company partners. Without adequate supplies of raw materials or packaging supplies, our manufacturing operations may be interrupted until another supplier could be identified, its products validated and trading terms with it negotiated. We may not be able to identify an alternative supplier in a timely manner, or at all. Furthermore, we may not be able to negotiate favorable terms with an alternative supplier. Any disruptions in our manufacturing operations from the loss of a supplier could potentially damage our relations with our pharmaceutical company partners. 4 Exhibit 99.1 IF WE CANNOT DEVELOP ADDITIONAL PRODUCTS, OUR ABILITY TO INCREASE OUR REVENUES WOULD BE LIMITED. We intend to continue to enhance our current technologies and pursue additional proprietary drug delivery technologies. If we are unable to do so, we may be unable to achieve our objectives of revenue growth and sustained profitability. Even if enhanced or additional technologies appear promising during various stages of development, we may not be able to develop commercial applications for them because: - the potential technologies may fail clinical studies; - we may not find a pharmaceutical company to adopt the technologies; - it may be difficult to apply the technologies on a commercial scale; or - the technologies may be uneconomical to market. IF PATIENTS AND PHYSICIANS DO NOT ACCEPT OUR DRUG DELIVERY TECHNOLOGIES, WE MAY BE UNABLE TO GENERATE SIGNIFICANT REVENUES. Our revenues depend on ultimate patient and physician acceptance of our drug delivery technologies as an alternative to conventional drug delivery systems. If our drug delivery technologies are not accepted in the marketplace, our pharmaceutical company partners may be unable to successfully market and sell our products, which would limit our ability to generate revenues and to achieve sustained profitability. The degree of acceptance of any drug delivery system depends on a number of factors. These factors include: - demonstrated clinical efficacy and safety; - cost-effectiveness; - convenience and ease of administration; - advantages over alternative drug delivery systems; and - marketing and distribution support. In addition, we expect that our pharmaceutical company partners will price products incorporating our drug delivery technologies slightly higher than conventional swallowable or chewable tablets, which may impair their acceptance. Because only a limited number of products incorporating our drug delivery technologies are commercially available, we cannot yet assess the level of market acceptance of our drug delivery technologies. DEMAND FOR SOME OF OUR PRODUCTS IS SEASONAL, AND OUR SALES AND PROFITS MAY SUFFER DURING PERIODS WHEN DEMAND IS LIGHT. Certain non-prescription products that we manufacture for our pharmaceutical company partners to treat seasonal ailments such as colds and the flu. Our pharmaceutical company partners may choose to not market those products in off-seasons and our sales and profits may decline in those periods as a result. In 1999, revenues from Novartis, which included revenues related to Triaminic, a cold and flu product, represented 42% of our total revenues. We may not be successful in developing a mix of non-prescription and prescription products to reduce these seasonal variations. IF WE CANNOT ADEQUATELY PROTECT OUR TECHNOLOGY AND PROPRIETARY INFORMATION, WE MAY BE UNABLE TO SUSTAIN A COMPETITIVE ADVANTAGE. Our success depends, in part, on our ability to obtain and enforce patents for our products, processes and technologies and to preserve our trade secrets and other proprietary information. If we cannot do so, our competitors may exploit our innovations and deprive us of the ability to realize revenues and profits from our developments. We have been granted seven patents on our drug delivery systems in the U.S., which will expire beginning in 2010. Any patent applications we may have made or may make relating to our potential products, processes and technologies may not result in patents being issued. Our current patents may not be valid or enforceable. They may not protect us against competitors that challenge our patents, obtain patents that may have an adverse effect on our ability to conduct business or are able to circumvent our patents. Further, we may not have the necessary financial resources to enforce our patents. 5 Exhibit 99.1 To protect our trade secrets and proprietary technologies and processes, we rely, in part, on confidentiality agreements with our employees, consultants and advisors. These agreements may not provide adequate protection for our trade secrets and other proprietary information in the event of any unauthorized use or disclosure, or if others lawfully develop the information. THIRD PARTIES MAY CLAIM THAT OUR TECHNOLOGIES, OR THE PRODUCTS IN WHICH THEY ARE USED, INFRINGE ON THEIR PROPRIETARY RIGHTS AND WE MAY INCUR SIGNIFICANT COSTS RESOLVING THESE CLAIMS. Third parties may claim that the manufacture, use or sale of our drug delivery technologies infringe their patent rights. If such claims are asserted, we may have to seek licenses, defend infringement actions or challenge the validity of those patents in court. If we could not obtain required licenses, are found liable for infringement or are not able to have these patents declared invalid, we may be liable for significant monetary damages, encounter significant delays in bringing products to market or be precluded from participating in the manufacture, use or sale of products or methods of drug delivery covered by the patents of others. We may not have identified, or be able to identify in the future, U.S. and foreign patents that pose a risk of potential infringement claims. We enter into collaborative agreements with pharmaceutical companies to apply our drug delivery technologies to drugs developed by others. Ultimately, we receive license revenues and product development fees, as well as revenues from the sale of products incorporating our technology and royalties. The drugs to which our drug delivery technologies are applied are generally the property of the pharmaceutical companies. Those drugs may be the subject of patents or patent applications and other forms of protection owned by the pharmaceutical companies or third parties. If those patents or other forms of protection expire, become ineffective or are subject to the control of third parties, sales of the drugs by the collaborating pharmaceutical company may be restricted or may cease. Our revenues, in that event, may decline. WE MAY INCUR SIGNIFICANT COSTS SEEKING APPROVAL FOR OUR PRODUCTS AND IF WE ARE NOT SUCCESSFUL, WE MAY BE UNABLE TO ACHIEVE OUR ANTICIPATED REVENUES AND PROFITS. The federal government, principally the U.S. Food and Drug Administration, and state and local government agencies regulate all new pharmaceutical products, including our existing products and those under development. We may incur significant costs attempting to obtain regulatory approval for our products. If we are not successful, our revenues and profitability may decline. Applicants for FDA approval often must submit extensive clinical data and supporting information to the FDA. Varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit or prevent regulatory approval of a drug product. Changes in FDA approval policy during the development period, or changes in regulatory review for each submitted new drug application also may cause delays or rejection of an approval. Even if the FDA approves a product, the approval may limit the uses or "indications" for which a product may be marketed, or may require further studies. The FDA also can withdraw product clearances and approvals for failure to comply with regulatory requirements or if unforeseen problems follow initial marketing. Manufacturers of drugs also must comply with applicable good manufacturing practices requirements. If we cannot comply with applicable good manufacturing practices we may be required to suspend the production and sale of our products, which would reduce our revenues and gross profits. We may not be able to comply with the applicable good manufacturing practices and other FDA regulatory requirements for manufacturing as we expand our manufacturing operations. If our products are marketed in foreign jurisdictions, we, and the pharmaceutical companies with whom we are developing our technologies, must obtain required regulatory approvals from foreign regulatory agencies and comply with extensive regulations regarding safety and quality. If approvals to market our products are delayed, if we fail to receive these approvals, or if we lose previously received approvals, our revenues would be reduced. We may not be able to obtain all necessary foreign regulatory approvals. We may be required to incur significant costs in obtaining or maintaining foreign regulatory approvals. WE MAY BE SUBJECT TO SANCTIONS IF WE FAIL TO COMPLY WITH REGULATORY REQUIREMENTS. 6 Exhibit 99.1 If we, or pharmaceutical companies with whom we are developing our technologies, fail to comply with applicable FDA and other regulatory requirements, we, and they, may be subject to sanctions, including: - warning letters; - fines; - product seizures or recalls; - injunctions; - refusals to permit products to be imported into or exported out of the U.S.; - total or partial suspension of production; - withdrawals of previously approved marketing applications; and - criminal prosecutions. IF THE MARKETING CLAIMS ASSERTED ABOUT OUR PRODUCTS ARE NOT APPROVED, OUR REVENUES MAY BE LIMITED. Once a drug product is approved by the FDA, the Division of Drug Marketing, Advertising and Communication, the FDA's marketing surveillance department within the Center for Drugs, must approve marketing claims asserted by our pharmaceutical company partners. If our pharmaceutical company partners fail to obtain from the Division of Drug Marketing acceptable marketing claims for a product incorporating our drug technology, our revenues from that product may be limited. Marketing claims are the basis for a product's labeling, advertising and promotion. The claims our pharmaceutical company partners are asserting about our drug delivery technology, or the drug product itself, may not be approved by the Division of Drug Marketing. IF WE DO NOT PROPERLY MANAGE OUR GROWTH, WE MAY BE UNABLE TO SUSTAIN THE LEVEL OF REVENUES WE HAVE ATTAINED OR EFFECTIVELY PURSUE ADDITIONAL BUSINESS OPPORTUNITIES. Our revenues increased 76% from the year ended December 31, 1998 to the year ended December 31, 1999, placing significant stress on our management, administrative and operational resources. If we do not properly manage the growth we have recently experienced and expect in the future, our revenues may decline or we may be unable to pursue sources of additional revenues. To properly manage our growth, we must, among other things, implement additional and improve existing administrative, financial and operational systems, procedures and controls on a timely basis. We will also need to expand our finance, administrative and operations staff. We may not be able to complete the improvements to our systems, procedures and controls necessary to support our future operations in a timely manner. We may not be able to hire, train, integrate, retain, motivate and manage required personnel and may not be able to successfully identify, manage and exploit existing and potential market opportunities. Improving our systems and increasing our staff will increase our operating expenses. If we fail to generate additional revenue in excess of increased operating expenses in any fiscal period we may incur losses, or our losses may increase in that period. IF WE CANNOT ATTRACT AND RETAIN KEY PERSONNEL, ON WHICH WE DEPEND, WE MAY NOT BE ABLE TO EXECUTE OUR BUSINESS PLAN AS ANTICIPATED. During our operating history, we have assigned many key responsibilities within our company to a relatively small number of individuals. If we lose the services of John Siebert, our Chief Executive Officer, or John Hontz, our Chief Operating Officer, we may have difficulty executing our business plan in the manner we currently anticipate. The competition for qualified personnel is intense, and the loss of services of key personnel could adversely affect our business. We have an employment agreement through December 31, 2000 with Dr. Siebert. We do not maintain key person insurance for any of our key personnel. We rely on our consultants to assist us in formulating our research and development strategy. All of our consultants are otherwise employed and each of these consultants may have commitments to other entities that may limit their availability to us or other interests that may conflict with our interests. 7 Exhibit 99.1 WE MAY FACE PRODUCT LIABILITY CLAIMS RELATED TO PARTICIPATION IN CLINICAL TRIALS OR THE USE OR MISUSE OF OUR PRODUCTS. The testing, manufacturing and marketing of products utilizing our drug delivery technologies may expose us to potential product liability and other claims resulting from their use. If any such claims against us are successful, we may be required to make significant compensation payments. Any indemnification that we have obtained, or may obtain, from contract research organizations or pharmaceutical companies conducting human clinical trials on our behalf may not protect us from product liability claims or from the costs of related litigation. Similarly, any indemnification we have obtained, or may obtain, from pharmaceutical companies with whom we are developing our drug delivery technologies may not protect us from product liability claims from the consumers of those products or from the costs of related litigation. If we are subject to a product liability claim, our product liability insurance, which has an aggregate policy limit of $5 million, may not reimburse us, or be sufficient to reimburse us, for any expenses or losses we may suffer. A successful product liability claim against us, if not covered by, or if in excess of, our product liability insurance, may require us to make significant compensation payments, which would be reflected as expenses on our statement of operations. RISKS RELATED TO OUR INDUSTRY IF WE CANNOT KEEP PACE WITH THE RAPID TECHNOLOGICAL CHANGE AND MEET THE INTENSE COMPETITION IN OUR INDUSTRY, WE MAY LOSE BUSINESS. Our success depends, in part, upon maintaining a competitive position in the development of products and technologies in a rapidly evolving field. If we cannot maintain competitive products and technologies, our current and potential pharmaceutical company partners may choose to adopt the drug delivery technologies of our competitors. Fast-dissolve tablet technologies that compete with our OraSolv and DuraSolv technologies include the Zydis technology developed by R.P. Scherer Corporation, the WOWTab technology developed by Yamanouchi Shaklee Pharmaceuticals, the Flashtab technology developed by Laboratories Prographarm, and FlashDose technology developed by Fuizz Technologies Ltd. We also compete generally with other drug delivery, biotechnology and pharmaceutical companies, engaged in the development of alternative drug delivery technologies or new drug research and testing. Many of these competitors have substantially greater financial, technological, manufacturing, marketing, managerial and research and development resources and experience than we do, and, therefore, represent significant competition for us. Our competitors may succeed in developing competing technologies or obtaining governmental approval for products before we do. The products of our competitors may gain market acceptance more rapidly than our products. Developments by competitors may render our products, or potential products, noncompetitive or obsolete. OUR COMMERCIAL PRODUCTS ARE SUBJECT TO CONTINUING REGULATION AND WE MAY BE SUBJECT TO ADVERSE CONSEQUENCES IF WE FAIL TO COMPLY WITH APPLICABLE REGULATIONS. Even if our products receive regulatory approval, either in the U.S. or internationally, we will continue to be subject to extensive regulatory requirements. These regulations are wide-ranging and govern, among other things: - adverse drug experience reporting regulations; - product promotion; - product manufacturing, including good manufacturing practice requirements; and - product changes or modifications. If we fail to comply or maintain compliance with these laws and regulations, we may be fined or barred from selling our products. If the FDA believes that we are not complying with the law, it can: - seize our products; - mandate a recall; - stop future sales through injunctive procedures; and/or - assess civil and criminal penalties against us. 8 Exhibit 99.1 RISKS RELATED TO OUR COMMON STOCK ANTI-TAKEOVER PROVISIONS OF OUR CORPORATE CHARTER DOCUMENTS, DELAWARE LAW AND OUR STOCKHOLDERS' RIGHTS PLAN MAY AFFECT THE PRICE OF OUR COMMON STOCK. Our corporate charter documents, Delaware law and our stockholders' rights plan include provisions that may discourage or prevent parties from attempting to acquire us. These provisions may have the effect of depriving our stockholders of the opportunity to sell their stock at a price in excess of prevailing market prices in an acquisition of us by another company. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the rights, preferences and privileges of those shares without any further vote or action by our stockholders. The rights of holders of our common stock may be adversely affected by the rights of the holders of any preferred stock that may be issued in the future. Additional provisions of our certificate of incorporation and bylaws could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting common stock. These include provisions that limit the ability of stockholders to call special meetings or remove a director for cause. We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an "interested stockholder" is a person who, either alone or together with affiliates and associates, owns (or within the past three years, did own) 15% or more of the corporation's voting stock. We also have a stockholders' rights plan, commonly referred to as a poison pill, which makes it difficult, if not impossible, for a person to acquire control of us without the consent of our board of directors. OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE. The trading price of our common stock has been, and is likely to continue to be highly volatile. The market value of your investment in our common stock may fall sharply at any time due to this volatility. In the year ended December 31, 1999, the trading price of our common stock ranged from $2.53 to $13.50. In the year ended December 31, 1998, the trading price for our common stock ranged from $2.09 to $4.97. The market prices for securities of drug delivery, biotechnology and pharmaceutical companies historically have been highly volatile. Factors that could adversely affect our stock price include: - fluctuations in our operating results; - announcements of technological collaborations, innovations or new products by us or our competitors; - governmental regulations; - developments in patent or other proprietary rights; - public concern as to the safety of drugs developed by us or others; - the results of pre-clinical testing and clinical studies or trials by us or our competitors; - litigation; and - general market conditions. OUR OPERATING RESULTS MAY FLUCTUATE, CAUSING OUR STOCK PRICE TO FALL. Fluctuations in our operating results may lead to fluctuations, including declines, in our stock price. Our operating results may fluctuate from quarter to quarter and from year to year depending on: - demand by patients for the products we produce; - new product introductions; - the seasonal nature of the products we produce to treat seasonal ailments; - pharmaceutical company ordering patterns; - the number of new collaborative agreements that we enter into; 9 Exhibit 99.1 - our achievement of product development milestones under collaborative agreements; and - our level of activity conducted on behalf and at the direction of pharmaceutical companies. FUTURE SALES OF COMMON STOCK, OR THE PROSPECT OF FUTURE SALES, MAY DEPRESS OUR STOCK PRICE. Sales of a substantial number of shares of common stock, or the perception that sales may occur, could adversely affect the market price of our common stock. On March 17, 2000, we issued and sold 1,100,000 shares of our common stock to a limited number of investors in a private placement, exempt from registration under the Securities Act of 1933. Under the stock purchase agreement with the investors, we were required to file a registration statement with the Securities and Exchange Commission within thirty days after March 17, 2000 for the resale by the investors of the shares of common stock issued in the private placement. We also are required to use our reasonable efforts to have the registration statement declared effective by the Securities and Exchange Commission and maintain its effectiveness until the earlier of March 17, 2002, the time at which all shares acquired in the private placement have been sold under the registration statement, or the date on which each investor may sell all of the shares of common stock acquired by the investor in the private placement without registration or without regard to any volume limitations. Significant resales of the common stock issued in the private placement could adversely affect the market price of our common stock ders may experience dilution. -----END PRIVACY-ENHANCED MESSAGE-----