-----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, G1WAx7L7dO7JbzBau8FAOTAD2OP6SwLCOd1twrSOD6RCOJpsImwvG55+h8vqreus glX+jBRtNJfgM2eOkDCVyQ== /in/edgar/work/0000950124-00-006063/0000950124-00-006063.txt : 20001017 0000950124-00-006063.hdr.sgml : 20001017 ACCESSION NUMBER: 0000950124-00-006063 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20001013 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: S-3/A SEC ACT: SEC FILE NUMBER: 333-47558 FILM NUMBER: 740254 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 S-3/A 1 c57747a1s-3a.txt AMENDMENT NO. 1 TO FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 2000 REGISTRATION NO. 333-47558 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ CIMA LABS INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 41-1569769 (State or Other Jurisdiction of Incorporation) (I.R.S. Employer Identification Number)
10000 VALLEY VIEW ROAD EDEN PRAIRIE, MINNESOTA 55344-9361 (952) 947-8700 (Address and Telephone Number of Principal Executive Offices) ------------------------ JOHN M. SIEBERT, PH.D. CHIEF EXECUTIVE OFFICER CIMA LABS INC. 10000 VALLEY VIEW ROAD EDEN PRAIRIE, MINNESOTA 55344-9361 (952) 947-8700 (Name, Address, and Telephone Number of Agent for Service) ------------------------ Copies to: GALE R. MELLUM, ESQ. AMY E. AYOTTE, ESQ. KEYNA PIDCOCK SKEFFINGTON, ESQ. DORSEY & WHITNEY LLP FAEGRE & BENSON LLP 220 SOUTH SIXTH STREET 2200 WELLS FARGO CENTER MINNEAPOLIS, MINNESOTA 55402 MINNEAPOLIS, MINNESOTA 55402 (612) 340-2600 (612) 336-3000 FAX (612) 340-2868 FAX (612) 336-3026
------------------------ APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - ------------ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - ------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission becomes effective. This preliminary prospectus is not an offer to sell these securities nor does it seek offers to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 13, 2000 [CIMA LOGO] - -------------------------------------------------------------------------------- 2,500,000 SHARES COMMON STOCK - -------------------------------------------------------------------------------- This is a public offering of common stock of CIMA LABS INC. We are offering 2,500,000 shares of common stock. Our common stock trades on the Nasdaq National Market under the symbol "CIMA." On October 5, 2000, the last reported sale price of our common stock on the Nasdaq National Market was $55.63 per share. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PRICE DISCOUNTS AND PROCEEDS TO TO PUBLIC COMMISSION CIMA LABS Per Share $ $ $ Total $ $ $
The underwriters may also purchase up to 180,000 additional shares from us and 195,000 shares from selling stockholders at the public offering price to cover over-allotments. DEUTSCHE BANC ALEX. BROWN SG COWEN FAHNESTOCK & CO. INC. THE DATE OF THIS PROSPECTUS IS , 2000 3 SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including "Risk Factors" and the financial statements, before making an investment decision. We develop and manufacture fast dissolve and enhanced-absorption oral drug delivery systems. OraSolv and DuraSolv, our proprietary fast dissolve technologies, are oral dosage forms that dissolve quickly in the mouth without chewing or water. We currently manufacture and package six commercial products incorporating our proprietary fast dissolve technologies. These products include four formulations of Triaminic Softchews for Novartis, Tempra FirsTabs for Bristol-Myers Squibb and Zomig Rapimelt for AstraZeneca. The FDA is currently reviewing submissions for approval of three additional products that we are developing for our pharmaceutical company partners. The products currently under review by the FDA are loratadine for American Home Products, Zomig Rapimelt for AstraZeneca and Remeron SolTab for N.V. Organon. We believe that the attributes of our OraSolv and DuraSolv fast dissolve technologies may enable consumers in certain age groups or with limited ability to swallow conventional tablets to receive medication in an oral dosage form that is more convenient than traditional tablet-based oral dosages. Both OraSolv and DuraSolv technologies are capable of incorporating taste masked active drug ingredients into tablets that have the following potential benefits: - ease of administration; - improved dosing compliance; and - increased dosage accuracy compared to liquid formulations. We generate revenue from net sales of products we manufacture for pharmaceutical companies using 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. Our proprietary technologies enable our pharmaceutical company partners to differentiate their products from competing products. In addition to providing a competitive advantage in the marketplace, our proprietary technologies also may enable our pharmaceutical company partners to extend the product life cycles of their patented drug compounds beyond existing patent expiration dates. Our technologies may also provide benefits to the healthcare system more generally. For example, improved compliance can enhance therapeutic outcomes and potentially reduce overall costs. We currently have collaborative agreements with American Home Products, AstraZeneca, Bristol-Myers Squibb, N.V. Organon, Novartis and Schwarz Pharma. In addition to our proprietary OraSolv and DuraSolv fast dissolve technologies, we are developing several new drug delivery technologies. Our OraSolv SR technology adds sustained release properties to the fast dissolve and taste masking attributes of our OraSolv technology. We also are developing new OraVescent drug delivery technologies that include OraVescent SL for drug delivery under the tongue and OraVescent BL for drug delivery between the gum and the cheek. An additional technology, OraVescent SS, is designed for site-specific administration, which may allow for an active drug ingredient to be transported to a specific part of the gastrointestinal tract where it is released for absorption. We designed the OraVescent technologies to improve the transport of poorly absorbed active drugs across mucosal membranes in the oral cavity or the gastrointestinal tract. 1 4 THE OFFERING Common stock offered by CIMA.... 2,500,000 shares Common stock to be outstanding upon completion of this offering...................... 13,453,774 shares Use of proceeds................. Expansion of our production capabilities and facilities, drug delivery technology development, working capital, general corporate purposes and possible future acquisitions. Nasdaq National Market symbol... CIMA The number of shares of common stock to be outstanding upon completion of this offering is based on the number of shares outstanding as of September 30, 2000 and excludes: - 1,849,163 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $10.74 per share; and - 250,147 shares of common stock available for issuance under our stock plans. ------------------ Unless otherwise indicated, the information in this prospectus assumes no exercise of the underwriters' over-allotment option. We were incorporated in Delaware in 1986. Our executive offices are located at 10000 Valley View Road, Eden Prairie, Minnesota 55344-9361. Our telephone number is (952) 947-8700 and our web site is www.cimalabs.com. The information on our website is not incorporated into and is not intended to be a part of this prospectus. CIMA and the CIMA logo are trademarks of CIMA. All other trademarks used in this prospectus are the property of their respective owners. We have registered "CIMA(R)," "CIMA LABS INC.(R)," and "OraSolv(R)" as trademarks with the U.S. Patent and Trademark Office. We also use the trademarks "OraSolv SR(TM)," "DuraSolv(TM)," "PakSolv(TM)," "OraVescent SL/BL(TM)" and "OraVescent SS(TM)". Triaminic(R) and Softchews(R) are trademarks of Novartis. Zomig(R) and Rapimelt(TM) are trademarks of AstraZeneca. Remeron(R) and Remeron SolTab(TM) are trademarks of N.V. Organon. Tempra(R) is a registered trademark of a Canadian affiliate of Bristol-Myers Squibb. FirsTabs(TM) is a trademark of Bristol-Myers Squibb. 2 5 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
Six Months Ended Year Ended December 31, June 30, ------------------------------ ------------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------------- (unaudited) STATEMENT OF OPERATIONS DATA: Revenues: Net sales.......................... $ 2,628 $ 1,097 $ 4,839 $ 1,434 $ 6,097 Product development fees and licensing........................ 2,282 6,141 7,818 3,383 4,391 Royalties.......................... -- 374 735 194 979 -------- -------- -------- -------- -------- Total revenues......................... 4,910 7,612 13,392 5,011 11,467 -------- -------- -------- -------- -------- Operating expenses: Cost of goods sold................. 4,376 4,476 7,546 2,968 6,725 Research and product development... 3,364 3,307 4,388 1,827 2,217 Selling, general and administrative................... 3,487 3,138 2,836 1,444 1,849 -------- -------- -------- -------- -------- Total operating expenses............... 11,227 10,921 14,770 6,239 10,791 -------- -------- -------- -------- -------- Other income, net...................... 479 122 116 44 266 -------- -------- -------- -------- -------- Income (loss) before cumulative effect of a change in accounting principle............................ (5,838) (3,187) (1,262) (1,184) 942 Cumulative effect of a change in accounting principle, net of income taxes................................ -- -- -- -- (799) -------- -------- -------- -------- -------- Net income (loss)...................... $ (5,838) $ (3,187) $ (1,262) $ (1,184) $ 143 ======== ======== ======== ======== ======== Net income (loss) per share: Basic Net income (loss) per share before cumulative effect of a change in accounting principle............. $ (.61) $ (.33) $ (.13) $ (.12) $ .09 Net loss per share from cumulative effect of a change in accounting principle........................ -- -- -- -- (.08) -------- -------- -------- -------- -------- Net income (loss) per basic share.... $ (.61) $ (.33) $ (.13) $ (.12) $ .01 ======== ======== ======== ======== ======== Diluted Net income (loss) per share before cumulative effect of a change in accounting principle............. $ (.61) $ (.33) $ (.13) $ (.12) $ .08 Net loss per share from cumulative effect of a change in accounting principle........................ -- -- -- -- (.07) -------- -------- -------- -------- -------- Net income (loss) per diluted share.............................. $ (.61) $ (.33) $ (.13) $ (.12) $ .01 ======== ======== ======== ======== ======== Weighted average shares outstanding: Basic................................ 9,519 9,610 9,615 9,610 10,376 Diluted.............................. 9,519 9,610 9,615 9,610 11,393
As of December 31, As of June 30, 2000 ------------------------------ ------------------------- 1997 1998 1999 Actual As Adjusted(1) -------- -------- -------- -------- -------------- (unaudited) BALANCE SHEET DATA: Cash and investments................. $ 4,423 $ 2,723 $ 2,481 $ 15,695 $146,014 Total assets......................... 17,328 14,916 19,270 37,456 167,775 Accumulated deficit.................. (41,527) (44,715) (45,977) (45,834) (45,834) Total stockholders' equity........... 15,837 12,656 11,574 31,647 161,966
- ------------ (1) The as adjusted column reflects the sale of 2,500,000 shares of our common stock in the public offering at an assumed public offering price of $55.63 per share, after deducting underwriting discounts and commissions and estimated offering expenses. 3 6 RISK FACTORS Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this prospectus, before you decide whether to buy our common stock. If any of the following risks actually occur, our business, results of operations and financial condition could suffer significantly. In any such case, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock. RISKS RELATED TO OUR BUSINESS THE LOSS OF ONE OF OUR MAJOR CUSTOMERS COULD REDUCE OUR REVENUES SIGNIFICANTLY. Revenues from AstraZeneca, N.V. Organon and Novartis together represented approximately 85% of our total revenues for the year ended December 31, 1999 and for the six months ended June 30, 2000. The loss of any one of these customers could cause our revenues to decrease significantly, resulting in losses from our 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 not grow as expected and may be insufficient to allow us to achieve sustained profitability. 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 market and sell the products we develop and manufacture. If one or more of our pharmaceutical company partners fails to pursue the marketing of our products as planned, our revenues and gross profits may not reach our expectations, or may decline. We often cannot control the timing and other aspects of the development of products incorporating our technologies because our pharmaceutical company partners may have priorities that differ from ours. Therefore, our commercialization of products under development may be delayed unexpectedly. Because 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. The marketing organizations of our pharmaceutical company partners may be unsuccessful, or they may assign a low level of priority to the marketing of our products that is different from our priorities. Further, they may discontinue marketing the products that incorporate our drug delivery technologies. If marketing efforts for our products are not successful, our revenues may fail to grow as expected or may decline. 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 and obtain regulatory 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 Schwarz Pharma. 4 7 We face additional risks related to our collaborative agreements, including the risks that: - 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 in the future to potential pharmaceutical company partners. 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. Production lines in the pharmaceutical industry generally take 16 to 24 months to complete due to the long lead times required for precision production equipment to be manufactured and installed, as well as the required testing and validation process that must be completed once the equipment is installed. 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. 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 129% from the six months ended June 30, 1999 to the six months ended June 30, 2000, placing significant strain 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 pursue 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 that runs to January 1, 2004 with Dr. Siebert 5 8 and an employment agreement that runs to September 1, 2004 with Dr. Hontz. We do not maintain key person life insurance for any of our key personnel. WE MAY EXPERIENCE SIGNIFICANT DELAYS IN EXPECTED PRODUCT RELEASES WHILE OUR PHARMACEUTICAL COMPANY PARTNERS SEEK REGULATORY APPROVALS FOR THE PRODUCTS WE DEVELOP AND, IF THEY ARE NOT SUCCESSFUL IN OBTAINING THE APPROVALS, 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. Our pharmaceutical company partners may experience significant delays in expected product releases while attempting to obtain regulatory approval for the products we develop. If they are not successful, our revenues and profitability may decline. We cannot control, and our pharmaceutical company partners cannot control, the timing of regulatory approval for the products we develop. 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 company partners 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 be required to incur significant costs in obtaining or maintaining foreign regulatory approvals. 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. 6 9 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 determines that we are not complying with the law, it can: - issue warning letters; - impose fines; - seize products or order recalls; - issue injunctions to stop future sales of products; - refuse to permit products to be imported into, or exported out of, the U.S.; - totally or partially suspend our production; - withdraw previously approved marketing applications; and - initiate criminal prosecutions. 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. Although we currently plan to build a second manufacturing facility to reduce this risk, we may encounter unforeseen difficulties or delays in doing so. WE RELY ON SINGLE SOURCES FOR SOME OF OUR RAW MATERIALS AND WE MAY LOSE REVENUES AND BE UNABLE TO MAINTAIN OUR RELATIONSHIPS 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. 7 10 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 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, on 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, a wholly-owned subsidiary of Cardinal Health, Inc., the WOWTab technology developed by Yamanouchi Shaklee Pharmaceuticals, the Flashtab technology developed by Laboratories Prographarm and the FlashDose technology developed by Fuisz Technologies Ltd., a wholly-owned subsidiary of Biovail Corporation. 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 represent significant competition for us. Our competitors may succeed in developing competing technologies or obtaining governmental approval for products before us. 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. 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. 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 8 11 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 cannot 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, are challenged or become ineffective, sales of the drugs by the collaborating pharmaceutical company may be restricted or may cease. 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 and licensing arrangements, sales of products using our fast dissolve technologies and 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. IF WE ARE NOT PROFITABLE IN THE FUTURE, THE VALUE OF YOUR INVESTMENT IN OUR STOCK MAY FALL. We have accumulated aggregate net losses from inception through June 30, 2000, of approximately $45.8 million. If we are not profitable in the future, the market price of our stock may fall. 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; 9 12 - 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 the development and possible acquisition of new drug delivery technologies and to increase our production capacity beyond what is currently anticipated. If we cannot obtain financing when needed, or obtain it on favorable terms, we may be required to curtail our plans to develop and possibly to acquire new drug delivery technologies or limit the expansion of our manufacturing capacity. We believe our cash and cash equivalents, our net proceeds from this offering 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. Other factors that will affect future capital requirements and may require us to seek additional financing include: - the level of expenditures necessary to develop and, or, acquire 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 additional manufacturing facilities, 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. 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 treat seasonal ailments such as colds, coughs and allergies. 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 seasonal cold, cough and allergy product, represented 42% of our total revenues. We may not be successful in developing a mix of products to reduce these seasonal variations. IF THE MARKETING CLAIMS ASSERTED ABOUT OUR PRODUCTS ARE NOT APPROVED, OUR REVENUES MAY BE LIMITED. Once a drug product incorporating our technologies is approved by the FDA, the Division of Drug Marketing, Advertising and Communication, the FDA's marketing surveillance department within the Center for Drug Evaluation and Research, must approve marketing claims asserted about it by our pharmaceutical company partners. If our pharmaceutical company partners fail to 10 13 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. 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 using 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 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 and reduce our earnings. RISKS RELATED TO THIS OFFERING 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. 11 14 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 nine months ended September 30, 2000, the closing sale price for our common stock ranged from $12.13 to $52.06. In the year ended December 31, 1999, the closing sale price of our common stock ranged from $2.53 to $13.50. 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 owned by us or others; - 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; - decisions by our pharmaceutical company partners relating to the products incorporating our technologies; - actions by the FDA in connection with submissions related to the products incorporating our technologies; 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 consumers for the products we produce; - new product introductions; - the seasonal nature of the products we produce to treat seasonal ailments; - pharmaceutical company ordering patterns; - our production schedules; - the number of new collaborative agreements that we enter into; - the number and timing of product development milestones that we achieve under collaborative agreements; and - the level of our development activity conducted for, and at the direction of, pharmaceutical companies under collaborative agreements. OUR MANAGEMENT WILL HAVE BROAD DISCRETION AS TO THE USE OF PROCEEDS OF THIS OFFERING, AND THE EFFECTIVENESS OF OUR USE OF PROCEEDS MAY AFFECT THE PRICE OF OUR COMMON STOCK. Our management, including our board of directors, will have broad discretion regarding how we use the net proceeds of the offering. Investors will be relying on the judgment of management regarding the application of the proceeds of the offering. The result and effectiveness of our use of proceeds are uncertain. 12 15 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS We make many statements in this prospectus under the captions Summary, Risk Factors, Management's Discussion and Analysis of Financial Condition and Results of Operations and Business and elsewhere that are forward-looking and are not based on historical facts. These statements relate to our future plans, objectives, expectations and intentions. We may identify these statements by the use of words such as believe, expect, will, anticipate, intend and plan and similar expressions. These forward looking statements involve a number of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those we discuss in Risk Factors and elsewhere in this prospectus. These forward-looking statements speak only as of the date of this prospectus, and we caution you not to rely on these statements without considering the risks and uncertainties associated with these statements and our business that are addressed in this prospectus. These forward-looking statements include statements relating to: - the timing of the operation, and potential capacity, of our second production line; - expected growth in product sales in the second half of 2000; - the expected construction of a second manufacturing facility; - future expense levels; - the timing of availability of products; - expected demand for products using our technologies and the adequacy of our production capacity; and - future research and development activities relating to our current or new technologies. We are not under any duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results except as required by law. Information regarding market and industry statistics contained in the Business section is included based on information available to us that we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources and cannot assure you of the accuracy of the data we have included. 13 16 USE OF PROCEEDS Our net proceeds from the sale of the 2,500,000 shares of common stock we are offering are estimated to be $130.3 million ($149.9 million if the underwriters' over-allotment option is exercised in full)assuming an offering price of $55.63 per share and after deducting the underwriting discounts and commissions and our estimated offering expenses. We intend to use approximately $50.0 million of the net proceeds of the offering for capital expenditures to meet future manufacturing requirements. We expect these capital expenditures to include the construction of a second manufacturing line in our Eden Prairie facility and a second production facility. The amount that we actually spend on capital expenditures may vary based on the demand for our products. We anticipate using the remainder of the net proceeds of the offering for the development of new drug delivery technologies and products, for working capital and for general corporate purposes. We may also use a portion of the net proceeds to acquire businesses, technologies or products that are complementary to our business. We have no present plans, understandings or commitments in this regard. Our management has broad discretion in determining how the proceeds of this offering will be applied. Pending such uses, the net proceeds of this offering will be invested in short-term, investment grade, interest-bearing securities. DIVIDEND POLICY We have never declared or paid any dividends. We anticipate that all of our earnings, if any, will be retained for development of our business and we do not anticipate paying any cash dividends in the foreseeable future. PRICE RANGE OF COMMON STOCK Our common stock is traded on the Nasdaq National Market under the symbol CIMA. The following table presents, for the periods indicated, the range of high and low closing sale prices for our common stock as reported on the Nasdaq National Market.
High Low ------ ------ YEAR ENDED DECEMBER 31, 1998: First Quarter............................................... $ 4.97 $ 3.13 Second Quarter.............................................. 4.75 3.19 Third Quarter............................................... 3.88 2.88 Fourth Quarter.............................................. 3.50 2.03 YEAR ENDED DECEMBER 31, 1999: First Quarter............................................... 3.44 2.53 Second Quarter.............................................. 4.63 2.63 Third Quarter............................................... 8.38 4.63 Fourth Quarter.............................................. 13.50 6.00 YEAR ENDING DECEMBER 31, 2000: First Quarter............................................... 25.25 12.13 Second Quarter.............................................. 20.69 12.56 Third Quarter............................................... 52.06 20.69 Fourth Quarter (through October 5, 2000).................... 59.25 55.63
On October 5, 2000, the last reported sale price of our common stock was $55.63 per share. We had 63 stockholders of record and an estimated 2,000 beneficial owners of our common stock as of September 30, 2000. 14 17 CAPITALIZATION The following table sets forth our actual capitalization as of June 30, 2000 and as adjusted to reflect the receipt of the net proceeds from our sale of 2,500,000 shares of common stock at an assumed public offering price of $55.63 per share in this offering, less the underwriting discounts and commissions and estimated offering expenses.
June 30, 2000 ---------------------------- Actual As Adjusted -------- ----------- (in thousands) Long-term obligations, less current portion................. $ 3,578 $ 3,578 -------- -------- Stockholders' equity: Preferred stock, $0.01 par value Authorized shares -- 5,000,000 shares Issued and outstanding -- -0- shares...................... -- -- Common stock, $0.01 par value Authorized shares -- 20,000,000 Issued and outstanding shares -- Actual -- 10,858,639 shares As Adjusted -- 13,358,639 shares.......................... 109 134 Additional paid-in capital.................................. 77,373 207,667 Accumulated deficit......................................... (45,834) (45,834) -------- -------- Total stockholders' equity.................................. 31,648 161,967 -------- -------- Total capitalization........................................ $ 35,226 $165,545 ======== ========
------------------ The number of shares of common stock referred to above excludes 1,724,109 shares of common stock issuable upon exercise of options outstanding at June 30, 2000 at a weighted average exercise price of $7.62 per share issued under our stock option plans. 15 18 DILUTION The net tangible book value of our common stock at June 30, 2000 was approximately $31.4 million, or approximately $2.90 per share of common stock. After giving effect to the sale of 2,500,000 shares of common stock in this offering at an assumed price of $55.63 per share and after deduction of the underwriting discount and estimated offering expenses, our net tangible book value after the offering would have been approximately $161.8 million, or $12.11 per share. Net tangible book value per share before the offering has been determined by dividing net tangible book value (total tangible assets less total liabilities) at June 30, 2000 by the number of shares of common stock outstanding at June 30, 2000. The offering will result in an increase in net tangible book value of $9.21 per share to existing investors and an immediate dilution of $43.52 per share to new investors, or approximately 78% of the assumed offering price of $55.63 per share. Dilution is determined by subtracting net tangible book value per share after the offering from the assumed public offering price. The following table illustrates this calculation of per share dilution: Assumed public offering price per share..................... $55.63 Net tangible book value per share as of June 30, 2000..... $2.90 Increase per share attributable to new investors.......... 9.21 ----- Net tangible book value per share after this offering....... 12.11 ------ Dilution per share to new investors......................... $43.52 ======
These calculations do not assume exercise of stock options outstanding at June 30, 2000. At June 30, 2000, there were 1,724,109 shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $7.62 per share. To the extent that any of these options are exercised, there will be further dilution to new investors. 16 19 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) This section presents our historical financial data. You should read carefully the financial statements included in this prospectus, including the notes to the financial statements, and Management's Discussion and Analysis of Financial Condition and Results of Operations. The statement of operations data for the years ended December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 have been derived from our financial statements that have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995, 1996 and 1997 have been derived from financial statements that have been audited by Ernst & Young LLP, and are not included elsewhere in this prospectus. The statement of operations data for the six months ended June 30, 1999 and 2000 and the balance sheet data as of June 30, 2000 have been derived from our unaudited financial statements included elsewhere in this prospectus and, in the opinion of management, include all material adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations for such periods and financial condition as of such dates. Historical results are not necessarily indicative of future performance. See the notes to the financial statements for an explanation of the method used to determine the number of shares used in computing basic and diluted net income (loss) per share.
Six Months Ended Year Ended December 31, June 30, ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- -------- -------- (unaudited) STATEMENT OF OPERATIONS DATA: REVENUES: Net sales............... $ 151 $ -- $ 2,628 $ 1,097 $ 4,839 $ 1,434 $ 6,097 Product development fees and licensing......... 684 1,472 2,282 6,141 7,818 3,383 4,391 Royalties............... -- -- -- 374 735 194 979 -------- -------- -------- -------- -------- -------- -------- Total revenues............ 835 1,472 4,910 7,612 13,392 5,011 11,467 -------- -------- -------- -------- -------- -------- -------- OPERATING EXPENSES: Cost of goods sold...... 240 -- 4,376 4,476 7,546 2,968 6,725 Research and product development........... 6,505 5,403 3,364 3,307 4,388 1,827 2,217 Selling, general and administrative........ 3,658 2,909 3,487 3,138 2,836 1,444 1,849 -------- -------- -------- -------- -------- -------- -------- Total operating expenses................ 10,403 8,312 11,227 10,921 14,770 6,239 10,791 -------- -------- -------- -------- -------- -------- -------- Other income, net......... 461 494 479 122 116 44 266 -------- -------- -------- -------- -------- -------- -------- Income (loss) before cumulative effect of a change in accounting principle............... (9,107) (6,346) (5,838) (3,187) (1,262) (1,184) 942 Cumulative effect of a change in accounting principle, net of income taxes................... -- -- -- -- -- -- (799) -------- -------- -------- -------- -------- -------- -------- Net income (loss)......... $ (9,107) $ (6,346) $ (5,838) $ (3,187) $ (1,262) $ (1,184) $ 143 ======== ======== ======== ======== ======== ======== ========
17 20
Six Months Ended Year Ended December 31, June 30, ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- -------- -------- (unaudited) Net income (loss) per share: Basic Net income (loss) per share before cumulative effect of a change in accounting principle........... $ (1.16) $ (.72) $ (.61) $ (.33) $ (.13) $ (.12) $ .09 Net loss per share from cumulative effect of a change in accounting principle........... -- -- -- -- -- -- (.08) -------- -------- -------- -------- -------- -------- -------- Net income (loss) per basic share........... $ (1.16) $ (.72) $ (.61) $ (.33) $ (.13) $ (.12) $ .01 ======== ======== ======== ======== ======== ======== ======== Diluted Net income (loss) per share before cumulative effect of a change in accounting principle........... $ (1.16) $ (.72) $ (.61) $ (.33) $ (.13) $ (.12) $ .08 Net loss per share from cumulative effect of a change in accounting principle........... -- -- -- -- -- -- (.07) -------- -------- -------- -------- -------- -------- -------- Net income (loss) per diluted share......... $ (1.16) $ (.72) $ (.61) $ (.33) $ (.13) $ (.12) $ .01 ======== ======== ======== ======== ======== ======== ======== Weighted average shares outstanding: Basic................... 7,822 8,827 9,519 9,610 9,615 9,610 10,376 Diluted................. 7,822 8,827 9,519 9,610 9,615 9,610 11,393
As of December 31, --------------------------------------------------- As of 1995 1996 1997 1998 1999 June 30, 2000 ------- -------- -------- -------- -------- ------------- (unaudited) BALANCE SHEET DATA: Cash and investments....... $ 3,559 $ 10,263 $ 4,423 $ 2,723 $ 2,481 $ 15,695 Total assets............... 15,519 22,065 17,328 14,916 19,270 37,456 Accumulated deficit........ (29,259) (35,660) (41,527) (44,715) (45,977) (45,834) Total stockholders' equity................... 14,282 21,021 15,837 12,656 11,574 31,647
18 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with "Selected Financial Data" and our financial statements and related notes appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under "Risk Factors" and elsewhere in this prospectus. OVERVIEW We develop and manufacture pharmaceutical products based on our proprietary OraSolv and DuraSolv fast dissolve technologies. We currently have collaborative agreements with six 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 Bristol-Myers Squibb and Zomig for AstraZeneca. We are also currently developing other drug delivery technologies. 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, including net sales of products we manufacture for pharmaceutical companies using 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. Revenues from product sales and from royalties will fluctuate from quarter to quarter and from year to year depending on, among other factors, demand by consumers for the products we produce, new product introductions, the seasonal nature of some of the products we produce to treat seasonal ailments, pharmaceutical company ordering patterns and our production schedules. Our ability to generate product sales and royalty revenues 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 depending on, among other factors, the number of new collaborative agreements that we enter into, the number and timing of product development milestones that we achieve under collaborative agreements and the level of our development activity conducted for pharmaceutical companies. RESULTS OF OPERATIONS SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 2000 Revenues. Our total revenues increased 129% from $5.0 million in the first half of 1999 to $11.5 million in the first half of 2000. The increase of $6.5 million was due primarily to higher sales volume of commercial products. All three components of total revenues increased for the first half of 2000 in comparison to the same period in 1999. Revenues from net sales of products using our drug delivery technologies increased 325% from $1.4 million in the first half of 1999 to $6.1 million in the first half of 2000. The increase of $4.7 million was due primarily to increased shipments of Triaminic to Novartis. Triaminic accounted for 93% of product sales in both the six-month period ended June 30, 1999 and the six-month period ended June 30, 2000. We expect revenues from net sales of products using our drug delivery technologies to increase in the second half of 2000. Revenues from product development fees and licensing 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 19 22 are not directly comparable to 2000 due to a change in accounting policy for up-front license fees resulting from the implementation of Securities and Exchange Commission Staff Accounting Bulletin No. 101, or SAB 101. During the first half 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, which was deferred and will be recognized as revenue in the second half of 2000. Licensing revenues for the six-month period ended June 30, 2000 include amortization of deferred revenue of $649,000 resulting from implementation of SAB 101 in the second quarter of 2000. 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 from $194,000 for the first half of 1999 to $1.0 million for the first half of 2000. The increase was due primarily to increased sales of Triaminic by Novartis in the U.S., where it was introduced in the second quarter of 1999, and sales by AstraZeneca of Zomig Rapimelt, which was introduced in several countries in Europe during the third quarter of 1999. Cost of goods sold. Cost of goods sold increased 127% from $3.0 million for the first half of 1999 to $6.7 million for the first half of 2000. The increase was due primarily to higher Triaminic unit volumes being manufactured and shipped to Novartis and due to costs incurred to establish multi-shift production capabilities. We expect cost of goods sold to increase as a result of expected unit volume increases in subsequent quarters. Gross profit margins on product sales were negative for the six-month periods ended June 30, 1999 and June 30, 2000. Negative margins in the six-month period ended June 30, 1999 related primarily to excess production capacity and our sales of low-margin, over-the-counter products. Negative margins in the six-month period ended June 30, 2000 related to both the weighting of low-margin, over-the-counter products in our sales mix and costs incurred to establish multi-shift production capabilities. Future gross profit margins will depend primarily 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 expense. Research and product development expenses increased 21% from $1.8 million for the first half of 1999 to $2.2 million for the first half of 2000. The increase was due primarily to increased levels of product development activities and expenses related to an OraVescent clinical trial, which commenced late in the first quarter of 2000. We expect research and product development expenses to increase in subsequent quarters as we continue to develop our drug delivery technologies. Selling, general and administrative expense. Selling, general and administrative expenses increased 28% from $1.4 million for the first half of 1999 to $1.8 million for the first half of 2000. The increase was due primarily to marketing and related consulting costs associated with our business development efforts. We expect selling, general and administrative expenses to increase in subsequent quarters to support our expected increased production levels and business activity. Other income, net. Other income increased from $44,000 in the first half of 1999 to $267,000 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 increase in other income was due primarily to higher balances of invested funds. 20 23 YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 Revenues. Our total revenues were $4.9 million in 1997, compared to $7.6 million in 1998 and $13.4 million in 1999. Revenues from AstraZeneca, N.V. Organon and Novartis together represented 30%, 72% and 85% of our total revenues in 1997, 1998 and 1999, respectively. The increases in revenues in each year were due primarily to increased development activity for new products that resulted in significantly higher product development fees and licensing revenue. In 1999, total revenues also increased due to higher sales volume of commercial products. Revenues from net sales of products using our drug delivery technologies were $2.6 million in 1997, compared to $1.1 million in 1998 and $4.8 million in 1999. The decrease from 1997 to 1998 was due primarily to the decision by a pharmaceutical company to discontinue U.S. distribution of a product line. The increase from 1998 to 1999 was due primarily to increased shipments to Novartis that began in the second quarter of 1999. Product development fees and licensing revenues were $2.3 million in 1997, compared to $6.1 million in 1998 and $7.8 million in 1999. The increase from 1997 to 1998 was due primarily to our increased development activity for proposed new products and the achievement of development milestones for Novartis, AstraZeneca and Schering-Plough. The increase from 1998 to 1999 was due primarily to our increased development activity for proposed new products and the achievement of development milestones for N.V. Organon and AstraZeneca. We received no royalty revenue in 1997. Royalties were $374,000 in 1998, compared to $735,000 in 1999. The increase from 1998 to 1999 was due to increased sales by Novartis of Triaminic. Royalties paid by Bristol-Myers Squibb in 1998 and 1999 on sales of Tempra were based on annual minimum contractual payments, which are expected to expire in 2002. Cost of goods sold. Cost of goods sold was $4.4 million in 1997, compared to $4.5 million in 1998 and $7.5 million in 1999. Cost of goods sold from 1997 to 1998 was approximately the same even though production unit volumes decreased, principally due to an increase in manufacturing overhead in 1998. The increase from 1998 to 1999 was principally due to an increase in sales of Triaminic products to Novartis. Gross margins on product sales from 1997 through 1999 were negative because we had significant excess production capacity. Research and product development expense. Research and product development expenses were $3.4 million in 1997, compared to $3.3 million in 1998 and $4.4 million in 1999. From 1997 to 1998, these expenses were consistent, as the level of product development activities between years was comparable. The increase from 1998 to 1999 was due primarily to increased development activity on fast dissolve prescription products for N.V. Organon and American Home Products. Selling, general and administrative expense. Selling, general and administrative expenses were $3.5 million in 1997, compared to $3.1 million in 1998 and $2.8 million in 1999. The decline in these expenses year over year was due primarily to a restructuring of management responsibilities, which began in 1996 and ended in 1999, resulting in a general reduction in management headcount and related expenses. Other income, net. Other income was $479,000 in 1997, compared to $122,000 in 1998 and $116,000 in 1999. Other income consists primarily of interest income on invested funds, net of interest expense on bank lines, loan agreements and capitalized leases. Other income has declined since 1997 as we used cash to fund business operations and our level of invested funds decreased. 21 24 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 revenues and royalties. Working capital increased from $4.2 million at December 31, 1999 to $20.7 million at June 30, 2000. The increase was due primarily to the $19.4 million in net proceeds we received from the private placement of 1,100,000 shares of our common stock in March 2000, partially offset by approximately $4.9 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 repaid the loan, with accrued interest of $153,000, in September 2000 and obtained a release from AstraZeneca of all further liabilities and obligations under the agreement related to the loan. We plan to spend approximately $6.0 to $8.0 million over the next twelve months to complete various improvements to our Eden Prairie manufacturing facility, including construction of a second production line. During the next twelve months, we also expect to use a portion of the proceeds from this offering to complete the planning for, and commence the construction of, a second manufacturing and distribution facility. We expect this facility to be operational in 2003. In addition, we expect to use a portion of the proceeds from this offering to fund additional product development activities related to our OraVescent technology, as well as to acquire new technologies. We believe that our cash and cash equivalents and marketable securities, together with expected revenues from operations and the net proceeds from this offering, will be sufficient to meet our anticipated capital requirements for the foreseeable future. However, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise such additional funds through public or private equity financings or from other sources. We cannot be certain that additional financing will be available on terms favorable to us, or at all, or that any additional financing will not be dilutive. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 is effective for fiscal years beginning in 2000. We do not currently hold derivative instruments or engage in hedging activities. 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. We implemented SAB 101 in the quarter ended on June 30, 2000. Implementation of SAB 101 was retroactive to January 1, 2000. We reported a charge to earnings of $799,000 for the cumulative effect of a change in accounting 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 by $649,000 or $0.06 per diluted share. For the six-month period ended June 30, 2000, we recognized $799,000 in revenue that is included in the cumulative effect adjustment as of January 1, 2000. 22 25 BUSINESS We develop and manufacture fast dissolve and enhanced-absorption oral drug delivery systems. OraSolv and DuraSolv, our proprietary fast dissolve technologies, are oral dosage forms that dissolve quickly in the mouth without chewing or water. We currently manufacture and package six commercial products incorporating our proprietary fast dissolve technologies. These products include four formulations of Triaminic Softchews for Novartis, Tempra FirsTabs for Bristol-Myers Squibb and Zomig Rapimelt for AstraZeneca. The FDA is currently reviewing submissions for approval of three additional products that we are developing for our pharmaceutical company partners. The products currently under review by the FDA are loratadine for American Home Products, Zomig Rapimelt for AstraZeneca and Remeron SolTab for N.V. Organon. We believe that the attributes of our OraSolv and DuraSolv fast dissolve technologies may enable consumers in certain age groups or with limited ability to swallow conventional tablets to receive medication in an oral dosage form that is more convenient than traditional tablet-based oral dosages. Both OraSolv and DuraSolv technologies are capable of incorporating taste masked active drug ingredients into tablets that have the following potential benefits: - ease of administration; - improved dosing compliance; and - increased dosage accuracy compared to liquid formulations. We generate revenue from net sales of products we manufacture for pharmaceutical companies using our proprietary fast dissolve technologies, product development fees and licensing revenues for development activities we conduct thorough collaborative agreements with pharmaceutical companies, and royalties on the sales of products we manufacture, which are sold by pharmaceutical companies under licenses from us. Our proprietary technologies enable our pharmaceutical company partners to differentiate their products from competing products. In addition to providing a competitive advantage in the marketplace, our proprietary technologies also may enable our pharmaceutical company partners to extend the product life cycles of their patented drug compounds beyond existing patent expiration dates. Our technologies may also provide benefits to the healthcare system more generally. For example, improved compliance can enhance therapeutic outcomes and potentially reduce overall costs. We currently have collaborative agreements with American Home Products, AstraZeneca, Bristol-Myers Squibb, N.V. Organon, Novartis and Schwarz Pharma. In addition to our proprietary OraSolv and DuraSolv fast dissolve technologies, we are developing several new drug delivery technologies. Our OraSolv SR technology adds sustained release properties to the fast dissolve and taste masking attributes of our OraSolv technology. We also are developing new OraVescent drug delivery technologies that include OraVescent SL for drug delivery under the tongue and OraVescent BL for drug delivery between the gum and the cheek. An additional technology, OraVescent SS, is designed for site-specific administration, which may allow for an active drug ingredient to be transported to a specific part of the gastrointestinal tract where it is released for absorption. We designed the OraVescent technologies to improve the transport of poorly absorbed active drugs across mucosal membranes in the oral cavity or the gastrointestinal tract. INDUSTRY OVERVIEW DRUG DELIVERY METHODS Historically, pharmaceutical products were available primarily through two delivery methods, oral dosage forms or injections. Recently, drug delivery technologies have been developed for the enhanced delivery of a variety of therapeutic compounds, improving safety, efficacy, ease of 23 26 patient use and patient compliance. In addition, drug delivery technologies can be used to expand markets for existing products, as well as to develop new products. Industry sources have estimated the total sales of branded products using drug delivery technologies to be $40 billion in 1998, of which approximately $22 billion were derived from orally administered drugs. These sources also predict that the drug delivery market will grow at a compound annual growth rate of 10% per year over the next five years. Fast dissolve technology has recently emerged as an important type of drug delivery technology that enables tablets to dissolve quickly in the mouth without the use of water or chewing. Children and the elderly, as well as others with certain physiological or medical conditions, frequently experience difficulty in swallowing tablets. Although fast dissolve does not generally affect speed of absorption, it may improve compliance with a prescribed drug regimen, as fast dissolve medications are easier to swallow and may taste better than non-taste masked alternatives. In addition, fast dissolve technology may improve dosing accuracy relative to liquid formulations. Finally, and most importantly, fast dissolve technology may provide a significant commercial benefit, as studies we have conducted indicate that people often prefer it to conventional tablets and other formulations. TRENDS AFFECTING THE DRUG DELIVERY INDUSTRY Several significant trends in the health care industry have important implications for drug delivery companies. These trends include: Drug Patent Expirations. Over the next five years, a number of branded drugs with total 1999 sales exceeding $25 billion will lose patent protection. In order to maintain their revenues, large pharmaceutical companies will seek to defend against generic competition by enhancing existing drug products with drug delivery technologies. These enhancements may include increased efficacy, reduced side effects and more convenient administration. We believe that pharmaceutical companies will use drug delivery systems to preserve or increase market share, enhance therapeutic performance and, in some cases, extend product life cycles. Direct-to-Consumer Marketing. Pharmaceutical companies spent an estimated $2 billion in the U.S. on direct-to-consumer marketing and promotion of prescription medications in 1999 and are expected to increase that spending to approximately $6 billion annually by 2005. We believe that the significant trend towards direct-to-consumer marketing may focus consumers on patient-friendly pharmaceutical products, including products that incorporate innovative drug delivery technologies, such as fast dissolve. This focus may encourage pharmaceutical companies to develop products incorporating these technologies. Influence of Managed Care. Many managed care plans and other insurers actively manage the costs of prescription drugs for their clients by monitoring patient dosing compliance as well as the efficacy, quality and cost of medications. Payors have demonstrated acceptance of drug delivery technologies, such as fast dissolve and taste masking, that improve patient compliance. OUR ORAL DRUG DELIVERY PRODUCTS AND TECHNOLOGIES Our proprietary products and technologies focus on innovative oral drug delivery methods that meet the needs of consumers for convenient and effective medications and the needs of pharmaceutical companies for differentiated products and accurate dosing methods. Our most developed technologies are our OraSolv, OraSolv SR and DuraSolv fast dissolve drug delivery technologies. We have developed all of our fast dissolve technologies internally. We currently manufacture six products incorporating our proprietary fast dissolve technologies, of which five products use our OraSolv technology and one product uses our DuraSolv technology. We have entered into collaborations with pharmaceutical companies to develop one additional product incorporating our OraSolv technology and two additional products incorporating our DuraSolv technology. We are also developing innovative transmucosal oral drug delivery technologies. 24 27 These technologies include OraVescent SL for drug delivery under the tongue, OraVescent BL for drug delivery between the gum and the cheek and OraVescent SS for swallowable site-specific drug delivery in the gastrointestinal tract. FAST DISSOLVE TECHNOLOGIES Our two primary fast dissolve oral drug delivery technologies are OraSolv and DuraSolv. Our OraSolv technology incorporates active drug ingredients in lightly compacted fast dissolve tablets. The low level of compaction pressure applied to OraSolv tablets allows larger amounts of taste masked active drug ingredients to be compressed into the tablets without damage to the taste masked active drug ingredients. The low level of compaction pressure applied to OraSolv tablets also allows for a minimal portion of the tablet's contents to be dedicated to effervescent and other fast dissolve agents, providing OraSolv tablets with the capacity for high doses of taste masked active ingredients. Our DuraSolv technology uses higher compaction pressures to produce fast dissolve tablets incorporating active drug ingredients in a more durable fast dissolve tablet. Due to their greater durability, DuraSolv tablets are easier to handle and package, and may have a lower cost to produce, than OraSolv tablets. DuraSolv is best suited for applications involving low doses of active drug ingredients. OraSolv. Our OraSolv technology is an oral dosage form that combines taste masked drug ingredients with a fast dissolving, low-effervescence system. The OraSolv tablet dissolves quickly in the mouth without chewing or the need for water. We currently manufacture four OraSolv formulations of Triaminic Softchews for Novartis and one OraSolv formulation of Tempra FirsTabs for Bristol-Myers Squibb. In addition, we are developing an OraSolv formulation of N.V. Organon's Remeron, which we expect will be approved in the fourth quarter of 2000 by the FDA for marketing. To create our fast dissolving tablets, we combine the taste masked active drug ingredients with fast dissolving tablet materials, which can include a variety of flavoring, coloring and sweetening agents, all of which are generally recognized as safe materials, and commonly used tablet ingredients, such as binding agents and lubricants. We add an effervescent system, composed of a dry acid and a dry base, to the tablet formulation to cause a mild effervescent reaction when the tablet contacts saliva. This reaction accelerates the disintegration of the tablet through the release of carbon dioxide. As our OraSolv tablet dissolves, it releases the coated particles of the drug into the saliva, forming a suspension of the drug in the saliva, which is then swallowed. We mask the taste of the active drug ingredients in our OraSolv products to prevent or minimize unpleasant tastes. The active drugs are taste masked using a variety of coating techniques. The coating materials prevent the active drug substance in the OraSolv tablet from contacting the patient's taste buds, and provide for the immediate or controlled release of the active ingredient in the stomach. The taste masking process is effective with a wide variety of active ingredients, in both prescription and non-prescription products. DuraSolv. The fast dissolve, taste masking and sustained release attributes of OraSolv are also available with our DuraSolv technology. DuraSolv is a fast dissolve oral dosage system that we designed to improve manufacturing efficiency and reduce production costs. DuraSolv is a higher compaction, more durable, solid oral dosage system formulated to achieve the primary benefits of the OraSolv fast dissolve dosage form. However, DuraSolv is capable of being packaged in conventional packaging such as foil pouches or bottles at much higher production rates and with lower packaging costs. DuraSolv is an appropriate technology for drug products requiring lower levels of active ingredient. Consumer testing by us and our pharmaceutical company partners has demonstrated high acceptability of this technology. We recently were granted a U.S. patent for the DuraSolv technology. 25 28 A DuraSolv formulation of AstraZeneca's Zomig Rapimelt is currently being marketed in Europe. We expect the FDA to approve this product for marketing in the U.S. in early 2001. In addition, we are currently developing DuraSolv formulations of new products for American Home Products, AstraZeneca and Schwarz Pharma. Sustained Release. Our OraSolv SR technology combines OraSolv technology with a sustained release formulation to extend the period of the drug's effectiveness. In preparing OraSolv SR formulations, we incorporate time-release beads into our tablets, to provide the benefits of a sustained or controlled release of drug ingredients with the improved convenience of a fast dissolve formulation that allows easy swallowing of the tablet. To date, we have not commercialized a product incorporating our OraSolv SR technology. PakSolv. PakSolv is our proprietary packaging system for soft, brittle tablets. PakSolv is a light and moisture-proof packaging system that is used for all of our OraSolv products. We have applied, and the U.S. Patent and Trademark Office has allowed claims, for a patent for our PakSolv packaging system. TRANSMUCOSAL TECHNOLOGIES Our OraVescent technologies are based on an enhanced-absorption oral drug delivery system intended to improve the transport of active drug ingredients across mucosal membranes. These technologies may improve the bioavailability, and accelerate the onset of action, of some drugs. We have conducted the first human testing and have initiated two prototype projects with pharmaceutical company partners using elements of these technologies. Our initial human clinical study compared our OraVescent BL formulation to a similar formulation without the absorption enhancing characteristics and to a currently marketed formulation of the same active drug ingredient. We believe the preliminary results of this study demonstrate OraVescent BL's superior absorption characteristics across mucosal membranes when compared to the other two formulations. We expect to perform additional human clinical testing in 2001 using the same active drug ingredient, as well as other active drug ingredients. We have applied for several U.S. and foreign patents for our OraVescent technologies. We have received two notices of allowance with respect to a U.S. patent application for our OraVescent technologies. BUSINESS STRATEGY Our objective is to become a leader in fast dissolve and other innovative oral drug delivery technologies. Our strategy to achieve this objective incorporates the following principal elements: Partner with pharmaceutical companies to market our technologies. We pursue collaborative relationships that leverage the sales and marketing capability of our pharmaceutical company partners, allowing us to focus on technology development and manufacturing. We believe that pharmaceutical companies are attracted to our technologies for their significant advantages over our competition. Those advantages include excellent taste masking, applicability to a wide range of pharmaceutical compounds, lower product cost, enhanced convenience and other patient benefits. Our technologies also may enable pharmaceutical companies to differentiate their products in the market, facilitating the extension of product life cycles. By demonstrating the advantages and benefits of our technologies through our collaborations with leading pharmaceutical companies, we intend to establish our technology as the preferred fast dissolve drug delivery solution. Maximize the value of OraSolv and DuraSolv fast dissolve technologies. We leverage our technologies by actively identifying and marketing to pharmaceutical companies whose prescription products would benefit by incorporating our fast dissolve technologies. We believe there are a large number of pharmaceutical products that could benefit from our technologies. 26 29 At times, in an effort to expand the market for our technologies, we develop what we believe will be promising applications using active ingredients that have already been successfully marketed by leading pharmaceutical companies. When these development efforts produce positive results, we market the new formulation to the pharmaceutical companies. Develop and commercialize new, innovative drug delivery technologies. We intend to develop new drug delivery technologies based on our expertise in fast dissolve and taste masking technologies. Our OraVescent technology represents an extension of this expertise, and we will continue to develop this and other novel drug delivery technologies. We also intend to acquire or license attractive new technologies as we encounter such opportunities. In addition, we will seek patents and other intellectual property protection to ensure our ability to commercialize new technologies as we develop them. Enhance and expand our manufacturing capabilities. In an effort to control our technologies and the quality of our products, we manufacture all of our products internally. We are currently adding a second manufacturing line to our Eden Prairie facility in order to meet production requirements for our current pharmaceutical company partners. On the basis of expected future partnerships and associated volume requirements, we plan to develop a second state-of-the-art manufacturing plant. Adding a second manufacturing site will help mitigate manufacturing risks and will enhance our ability to market to potential pharmaceutical company partners desiring dual-site production. AGREEMENTS WITH PHARMACEUTICAL COMPANY PARTNERS Our business development efforts focus on entering into development, licensing and manufacturing supply agreements with pharmaceutical companies. Our agreements provide that the collaborating pharmaceutical company is responsible for marketing and distributing the developed products either worldwide or in specified markets or territories. Our collaborative agreements typically begin with a product prototyping phase. If successful, this phase may be followed by an agreement to complete development of the product. We subsequently enter into license and manufacturing supply agreements to commercialize the product. In some cases, we may develop product prototypes internally and enter directly into development, manufacturing or license agreements for commercialization of those products. We currently have development and license agreements with six pharmaceutical company partners. In each of these agreements, we have received an up-front fee, which is a non-refundable payment for future product development activities. We have also received milestone and development payments under each of these agreements for achieving certain product development milestone events and for completing certain predetermined product development activities, as defined in the agreements. In the aggregate for all of our agreements with pharmaceutical companies, we were paid approximately $1.9 million, $6.3 million and $8.1 million in 1997, 1998 and 1999, respectively, for up-front fees, milestone and development payments and royalties. We have manufacturing supply agreements in place with Novartis for Triaminic, American Home Products for loratadine and Schwarz Pharma for an undisclosed product and we are negotiating manufacturing supply agreements with N.V. Organon for Remeron and with AstraZeneca for Zomig. We do not have a manufacturing supply agreement with Bristol-Myers Squibb for Tempra. Generally, the supply agreements define the terms by which we will manufacture and release for shipment a product for a pharmaceutical company partner and the obligations both parties have relating to payment for products and services, as well as defining the process of communicating and agreeing to expected production requirements and other economic terms for product supply. These agreements have varying terms of duration ranging from three to 10 years. In general, our pharmaceutical company partners direct our production and shipments. In the pharmaceutical industry, parties to manufacturing supply agreements 27 30 generally consider these arrangements long-term due to the complexity and lead-time required to qualify a new manufacturer with the FDA. The qualification of a new manufacturer can take up to a year while the new manufacturer completes scale-up, produces validation lots and implements stability programs. We do not consider the backlog for our products to be significant. We currently manufacture six commercial fast dissolve products for three major pharmaceutical company partners. Revenue from sales of our products were approximately 54%, 14% and 36% of our total revenue in 1997, 1998 and 1999, respectively. Our revenue also includes product development fees and licensing revenue for development activities, which were approximately 46%, 81% and 58% of our total revenue in 1997, 1998 and 1999, respectively. We also receive revenue from royalties on product sales, which were approximately 5% of our total revenue in 1998 and 1999. We received no revenue from royalties on product sales in 1997. Less than 10% of our total revenues in 1997, 1998 and 1999 were derived from product development and licensing activities outside the U.S. The table below sets forth the partner, product brand name or active ingredient, therapeutic application, technology and current status for each of our major collaborative agreements.
Product Pharmaceutical Brand Name Company Partner or Active Ingredient Therapeutic Application Technology Current Status - --------------- -------------------- --------------------------- ---------- --------------------------- American Home Loratadine Non-sedating antihistamine DuraSolv Regulatory submission Products (generic prescription) accepted by the FDA AstraZeneca Zomig Rapimelt Anti-migraine (branded DuraSolv Regulatory submission prescription) accepted by the FDA and commercially available in Europe Bristol-Myers Tempra FirsTabs Pediatric pain reliever OraSolv Commercially available in Squibb (over-the-counter) Canada N.V. Organon Remeron SolTab Anti-depression (branded OraSolv Regulatory submission prescription) accepted by the FDA Novartis Triaminic Softchews Pediatric cold, cough and OraSolv Commercially available in allergy (over-the-counter) the U.S. and Canada Schwarz Pharma Undisclosed Undisclosed (branded DuraSolv Under development prescription)
AMERICAN HOME PRODUCTS In January 2000, we entered into an exclusive development and license agreement and a supply agreement with an affiliate of American Home Products for a fast dissolve formulation of loratadine, a prescription non-sedating antihistamine product. Loratadine is the active drug compound in Claritin and Claritin Reditabs, for which Schering Corporation has a U.S. patent that is scheduled to expire in 2002. The FDA granted Schering market exclusivity for six months beyond June 2002 and Schering is seeking an extension of its patent. American Home Products is expected to market our DuraSolv formulation of loratadine as a generic alternative to Claritin Reditabs in 2003, unless Schering is successful in its efforts to secure extended exclusive rights to market Claritin. Based on the anticipated life of our patents, we expect the development and license agreement to expire in the U.S. market in 2018. The supply agreement expires on the tenth anniversary of the first commercial shipment of product. However, either agreement may be terminated by American Home Products after a six month notice or by either party upon the occurrence of a default event, such as a material breach of the agreement, that is not cured by the defaulting party within 60 days. Under the development and license agreement, we receive development and milestone payments upon achieving specific milestones and will receive royalties on any sales of the prescription product. Under the supply agreement, we receive payments based on our costs of manufacturing the products. The U.S. 28 31 regulatory submission for our DuraSolv formulation of loratadine was accepted for filing by the FDA in the second quarter of 2000. For the three years ending December 31, 1999, we received approximately $1.0 million in development payments from American Home Products. Revenues from American Home Products represented 7% of total revenues in 1999. ASTRAZENECA In September 1997, we entered into a development and license option agreement with an affiliate of AstraZeneca to develop a fast dissolve formulation of AstraZeneca's prescription anti-migraine drug, Zomig. Under the agreement, we received product development and option fees. The development and license option agreement terminated in May 1999 when we entered into a definitive global license agreement with an affiliate of AstraZeneca. Under the license agreement, which is exclusive for the class of anti-migraine compounds of which Zomig is a member, we receive license and product development fees, payments upon achieving specific milestones, and royalties on any sales of the prescription product. Based on the anticipated life of our patents, we expect the license agreement to expire for the U.S. market in 2018. However, the license agreement may be terminated by AstraZeneca after a notice of 180 days or by either party upon the occurrence of a default event, such as a material breach of the agreement, that is not cured by the defaulting party within 30 days. In addition, we have the right to terminate the license agreement if AstraZeneca fails to meet certain regulatory and commercialization obligations. Upon the failure of AstraZeneca to meet minimum sales requirements, or to pay the difference between the royalty amount due on the minimum sales requirement and the royalty amount due on actual sales, we may convert AstraZeneca's exclusive license into a non-exclusive license. In June 1999, the first European regulatory approval of the DuraSolv formulation of AstraZeneca's Zomig Rapimelt was received. In September 1999, AstraZeneca launched Zomig Rapimelt in Europe and it has been approved for marketing in eleven European counties. The U.S. regulatory submission for our DuraSolv formulation of Zomig Rapimelt was accepted for filing by the FDA in the second quarter of 2000. For the three years ending December 31, 1999, we received approximately $5.2 million in net sales of products, up-front fees, milestone and development payments from AstraZeneca. Revenues from AstraZeneca represented 18% of total revenues in 1999. We are currently negotiating a supply agreement with AstraZeneca. BRISTOL-MYERS SQUIBB In June 1997, we signed a multi-country, non-exclusive license agreement with Bristol-Myers Squibb, covering multiple products to be developed using the OraSolv technology. We began manufacturing commercial quantities of the OraSolv dosage form of Tempra, Bristol-Myers Squibb's pediatric pain reliever, in 1997. Mead Johnson, an affiliate of Bristol-Myers Squibb, introduced Tempra in Canada during 1997. During 1998, Bristol-Myers Squibb decided to discontinue marketing Tempra in the U.S., but expects to continue marketing Tempra in Canada through Mead Johnson. In the fourth quarter of 1998, the license agreement was amended to return to us the rights to pediatric pain relievers in the U.S. Bristol-Myers Squibb may terminate the license agreement at anytime by giving us a notice of 60 days and paying us a termination fee equal to the minimum annual royalty amount due for the year of termination less any royalty payments made during the same year. Upon the occurrence of a default event, such as a material breach of the agreement, that is not cured by the defaulting party within 40 days, either party may terminate the agreement. We expect to continue to receive at least minimum royalty payments in connection with sales in Canada through 2002. For the three years ending December 31, 1999, we received approximately $3.9 million in net sales of products, development payments, and royalties from Bristol-Myers Squibb. Revenues from Bristol-Myers Squibb represented 4% of total revenues in 1999. 29 32 N.V. ORGANON In December 1998, we entered into a development and license option agreement with N.V. Organon, the pharmaceuticals business unit of Akzo Nobel. In December 1999, after expiration of the development and license option agreement, we entered into an exclusive license agreement with Organon International and N.V. Organon for an OraSolv formulation of Remeron, a prescription anti-depression product. The license agreement expires upon expiration of all patents covered under the agreement. Based on the anticipated life of our existing patents, we expect the license agreement to expire in the U.S. market in 2010. The agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, that is not cured by the defaulting party within 90 days. In addition, we may terminate the license agreement upon failure to enter into a supply agreement with N.V. Organon by the end of December 2000. Under the agreement, we receive license and product development fees, milestone payments upon achieving specific milestones, and royalties on any sales of the prescription product. The U.S. regulatory submission for the OraSolv formulation of Remeron was accepted for filing by the FDA in the first quarter of 2000. For the three years ending December 31, 1999, we received approximately $3.6 million in up-front fees, milestone and development payments from N.V. Organon. Revenues from N.V. Organon represented 25% of total revenues in 1999. We are currently negotiating a supply agreement with N.V. Organon. NOVARTIS In November 1997, we entered into a development and license option agreement with Novartis Consumer Health, Inc. that covers the use of OraSolv technology with the Novartis Triaminic non-prescription pediatric cold, cough and allergy product line. We received option and product development fees in exchange for the license option and development work. In July 1998, after expiration of the development and license option agreement, we signed a license and a supply agreement with Novartis which is exclusive for pediatric cold, cough and allergy in the U.S. and Canada. In addition, the license agreement includes an option for a second exclusive license covering additional products, and the supply agreement includes an option for Novartis to manufacture the product itself or through a third party. The license agreement expires on a country by country basis upon the later of January 12, 2010 or the expiration of all patents covered by the agreement. Based on the anticipated life of our patents, we expect the license agreement to expire in the U.S. market in 2010. The initial term of the supply agreement expires in 2001. Either agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, that is not cured by the defaulting party within 90 days for the license agreement or within 60 days for the supply agreement. In addition, Novartis may terminate the license agreement on or after July 1, 2003, after giving us a notice of nine months and paying us a termination fee of $200,000 plus all accrued amounts owed to us under the agreement. We received product development and milestone payments upon achieving specific milestones under the agreement, and will receive royalties on any sales of Triaminic products. Novartis launched three Triaminic products nationally in July 1999 and launched a fourth Triaminic product during the third quarter of 2000. Through December 31, 1999, we received approximately $9.7 million in net sales of products, up-front fees, milestone and development payments, and royalties from Novartis. Revenues from Novartis, which were principally product sales, represented 42% of total revenues in 1999. SCHWARZ PHARMA In June 2000, we entered into an exclusive development, license and supply agreement with Schwarz Pharma, Inc. to develop and manufacture a DuraSolv formulation of an undisclosed prescription product for distribution in the U.S. Under the agreement, we also 30 33 granted Schwarz an option that, if exercised before December 31, 2000, requires us to collaborate with Schwarz to develop one additional product. Upon the failure of Schwarz Pharma to meet minimum sales requirements, we may convert Schwarz Pharma's exclusive license into a non-exclusive license. Based on the anticipated life of our patents, we expect the agreement to expire in the U.S. in 2018. However, the agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, that is not cured by the defaulting party within 60 days. Under the agreement, we will receive milestone payments upon achieving specific milestones and will receive manufacturing revenue and royalties on sales of the prescription product. A U.S. regulatory submission for our DuraSolv formulation of the undisclosed prescription product is not required. We expect the product to be commercially available in the U.S. during the first half of 2001. Through June 30, 2000, we have not earned any revenues under this agreement. INTELLECTUAL PROPERTY We actively seek, when appropriate, to protect our products and proprietary information by means of U.S. and foreign patents, trademarks and contractual arrangements. We hold seven issued U.S. patents and 14 issued foreign patents covering our technologies. The core U.S. and European patents relate to our fast dissolve and taste masking technologies. We also have 35 U.S. and foreign patent applications pending. A description of our issued U.S. patents and their dates of expiration are set forth in the table below. The majority of these patents are composition-of-matter patents. The actual scope of coverage for a patent is governed by the specific claims applicable to the patent. The descriptions set forth below are intended solely to identify patents relevant to various technologies and are not intended to represent the scope of these patents.
Patented Technologies Expiration Date --------------------- --------------- Core OraSolv fast dissolve technology....................... 2010 The production of compressed effervescent and non- effervescent tablets using a tableting aid developed by us........................................................ 2010 and 2012 Effervescent pediatric vitamin and mineral supplement....... 2010 The formulation of a base coated, acid effervescent mixture manufactured by controlled acid base reaction The obtained mixture can be used in the formulation of acid sensitive compounds with OraSolv technology or other effervescent based products............................................ 2013 Taste masking of micro-particles for oral dosage forms...... 2015 Core DuraSolv fast dissolve technology...................... 2018
Our success will depend in part on our ability to obtain and enforce patents for our products, processes and technology, to preserve our trade secrets and other proprietary information and to avoid infringing the patents or proprietary rights of others. In addition to patents, we rely on trade secrets and proprietary know-how to protect our products, processes and technologies. To protect our rights to trade secrets and proprietary know-how, we require all employees, consultants and advisors to sign confidentiality agreements that prohibit the disclosure or use of confidential information to or by any third party. These agreements also require disclosure and assignment to us of discoveries and inventions made by these individuals while devoted to our activities. RESEARCH AND PRODUCT DEVELOPMENT Our research and product development efforts are focused on developing new product applications for our drug delivery technologies and expanding our technology platform to new 31 34 areas of drug delivery. As of September 30, 2000, we had 27 scientists and other technicians working on research and product development. Our research and product development personnel, support systems and facilities are organized to develop drug delivery formulations from bench-scale through full-scale commercial production under current good manufacturing practice conditions. The key goals for our research and product development efforts include: - developing innovative drug delivery products and systems that fulfill pharmaceutical companies' needs; - developing, expanding and supporting systems to fulfill good manufacturing practice production at commercial levels required by pharmaceutical company partners; - recruiting and training high-quality technical and scientific personnel; and - supporting our intellectual property portfolio development. For the six months ended June 30, 1999 and 2000, we spent approximately $1.8 million and $2.2 million, respectively, on research and product development. For the years ended December 31, 1997, 1998 and 1999, we spent approximately $3.4 million, $3.3 million and $4.4 million, respectively, on research and product development. We estimate that most of these expenditures were directly related to product development activities for which we received fees and licensing revenues from our pharmaceutical company partners. BUSINESS DEVELOPMENT We market directly to leading pharmaceutical companies for products that we believe would benefit from our fast dissolve technologies. Our strategy has been to leverage the brand names, marketing and sales capabilities of these pharmaceutical companies to maximize the value of our fast dissolve drug delivery technologies. We build our credibility with major pharmaceutical companies by speaking at technical seminars, publishing in technical journals and hosting booths at pharmaceutical and drug delivery conferences. We pursue agreements with leading pharmaceutical companies to fund the development of new products incorporating our drug delivery technologies. Once specific milestones have been met under these agreements, we generally enter into license and supply agreements. MANUFACTURING Our primary manufacturing facility is located at our headquarters in Eden Prairie, Minnesota. In 1996, we completed our first production line, which has an estimated production capacity of 200 to 220 million tablets a year. We anticipate that our production requirements in 2000 will use substantially all of our existing capacity. We are developing a second production line using state-of-the-art material transfer and blending systems and integrated high-speed tableting and packaging operations, which we expect will at least double our existing capacity to more than 500 million tablets. We have begun construction of the second production line and expect to integrate it into our operations in the second half of 2001. We currently anticipate spending approximately $6.0 to $8.0 million in total for construction of the second production line. In addition, we plan to construct a second manufacturing and distribution facility. We expect this facility to more than double our production capacity. In November 1999, we started construction of a coating unit to provide taste masked active ingredients for our pharmaceutical company partners. We completed construction and placed the new coating unit into service in July 2000. We expect to commercialize our first coated active ingredient, Remeron, in the fourth quarter of 2000 for N.V. Organon. We believe our in-house coating capability will be a key factor in signing new agreements related to prescription pharmaceutical drugs. 32 35 We currently purchase taste masked active drug ingredients for each of our non-prescription products from single sources of supply. We expect to continue to purchase taste masked active ingredients for our non-prescription products. We believe that all other ingredients used in the manufacture of our products are readily available from multiple suppliers or from our pharmaceutical company partners. PakSolv, our proprietary packaging process, allows high-speed packing of soft, brittle tablets without breakage, into specially designed protective, child resistant packages and normal blister packages. We believe that this technology, which is the subject of two patent applications, gives us a competitive advantage. We plan our manufacturing cycles in advance of actual production in order to address lead times our suppliers may require. We generally do not stock significant quantities of raw materials for a product in excess of a partner's orders nor do we manufacture finished product in excess of a partner's orders. COMPETITION Competition among pharmaceutical products and drug delivery systems is intense. Our primary competitors for developing drug delivery systems and manufacturing the products we develop include other drug delivery, biotechnology and pharmaceutical companies. Many of these competitors have substantially greater financial, technological, manufacturing, marketing, managerial and research and development resources and experience than we have. Our products compete not only with products employing advanced drug delivery systems, but also with products employing conventional dosage forms. These competing products may obtain governmental approval or gain market acceptance more rapidly than our products. New drugs or future developments in alternative drug delivery technologies also may provide therapeutic or cost advantages over our current or future products. Fast dissolve tablet technologies that compete with our OraSolv and DuraSolv technologies include the Zydis technology developed by R.P. Scherer Corporation, a wholly-owned subsidiary of Cardinal Health, Inc., the WOWTab technology developed by Yamanouchi Shaklee Pharmaceuticals, the Flashtab technology developed by Laboratories Prographarm and the FlashDose technology developed by Fuisz Technologies Ltd., a wholly-owned subsidiary of Biovail Corporation. The Zydis technology is a fast dissolving oral drug delivery system based on a freeze-dried gelatin tablet. The WOWTab and Flashtab technologies are fast dissolving technologies used in an oral fast dissolving tablet, which are similar to our DuraSolv tablet. R.P. Scherer has commercialized its Zydis technology in several major prescription products in the U.S., including Claritin Reditabs. We believe that other pharmaceutical companies may be developing fast dissolve tablet technologies, which may compete with our technology in the future. The principal competitive factors in the market for fast dissolving tablet technologies are compatibility with taste masking techniques, dosage capacity, drug compatibility, cost, ease of manufacture, patient acceptance and required capital investment for manufacturing. We believe that our fast dissolving tablet technologies compete favorably with respect to each of these factors. In a 1997 quantitative consumer study that we conducted, consumers generally preferred the OraSolv formulation to the Zydis formulation of the same active drug ingredient. We believe we also offer potential pharmaceutical company partners the largest selection of oral fast dissolve drug delivery technologies. GOVERNMENT REGULATION Numerous governmental authorities in the U.S. and other countries extensively regulate the activities of pharmaceutical manufacturers. In the U.S., pharmaceutical products are subject to rigorous regulation by the Food and Drug Administration. The Federal Food, Drug, and Cosmetic 33 36 Act and other federal and state statutes and regulations govern, among other things, the research, development, testing, manufacture, safety, storage, record keeping, labeling advertising, promotion, marketing and distribution of pharmaceutical products. If we fail to comply with the applicable requirements, we may be subject to administrative or judicially imposed sanctions such as warning letters, fines, injunctions, product seizures or recalls, total or partial suspension of production, or FDA refusal to approve pending pre-market approval applications or supplements to approved applications, as well as criminal prosecution. FDA approval generally is required before a new drug product may be marketed in the U.S. Many over-the-counter, or OTC, drug products are exempt, however, from the FDA's pre-marketing approval requirements. Whether or not products require FDA approval, drug products remain subject to various ongoing FDA regulations, including good manufacturing practice requirements, labeling requirements and warning statements, advertising restrictions related to product labeling and drug ingredient specifications. Products and their manufacturing facilities are subject to FDA inspection, and failure to comply with applicable regulatory requirements may lead to administrative or judicially imposed penalties. We expect that our pharmaceutical company partners will seek any required FDA approvals in connection with the introduction of new products we develop for them under a collaborative agreement. The FDA submission and approval process may require significant commitments of our time and resources. The FDA approval process may delay or prevent the marketing of our products. We cannot be sure that approvals will be obtained, or that any such approvals will have the scope necessary for successful commercialization of these products. Even after an addendum or supplement to a new drug application is approved, existing FDA procedures may delay initial product shipment and materially reduce the period during which there is an exclusive right to exploit patented products or technologies. Prior to marketing a product internationally, we are likely to be required to obtain foreign regulatory approval. Foreign approval procedures vary from country to country and the time required for approval may result in delays in, or ultimately prevent, the marketing of a product. We expect our pharmaceutical company partners to obtain any necessary government approvals in foreign countries. However, we may have to spend considerable amounts of time and resources to support the submission and approval of these foreign filings. In addition, our manufacturing facility may be subject to inspections by foreign agencies, similar to the FDA, to allow for the marketing of our products in a foreign country. Our manufacturing facility is registered with the FDA. We must inform the FDA of every drug product we have in commercial distribution and keep an updated list of those drugs. Our manufacturing facility also is inspected by the FDA and must comply with good manufacturing practices regulations at all times during the manufacture and processing of drug products. The FDA completed inspections of our Eden Prairie and Brooklyn Park facilities in August 2000, as part of the pre-approval inspection process for three regulatory submissions currently under review by the FDA. We were not cited for any significant shortcomings relating to the pre-approval inspections nor were we cited for any significant shortcomings in compliance with good manufacturing practices regulations. We cannot guarantee that any future FDA inspections will proceed without any compliance issues requiring time and resources to resolve. Our facilities also must be inspected by, and we have received a license from, the Minnesota Board of Pharmacy for the manufacture of drug products. We are subject to regulation under various federal, state and local laws, rules, regulations and policies regarding, among other things, occupational safety, environmental protection, the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain regulated materials and wastes, and product advertising and promotion. We believe that we have complied with these laws and regulations in all material respects, and we have not been required to take any action to correct any material noncompliance. We do not currently 34 37 anticipate that any material capital expenditures will be required in order to comply with these laws or that compliance with these laws will have a material effect on our business or financial condition. We are unable to predict, however, the impact on our business of any changes that may be made in these laws or of any new laws or regulations that may be imposed in the future. We cannot be sure that we will not be required to incur significant compliance costs or be held liable for damages resulting from any violation of these laws and regulations. EMPLOYEES As of September 30, 2000, we had 119 full-time employees, with 87 employees in Eden Prairie and 32 in Brooklyn Park. Of these employees, 71 are engaged in manufacturing, 27 in research and development and 21 in executive management and office support. None of our employees is subject to a collective bargaining agreement nor have we ever experienced a work stoppage. We believe our employee relations are good. FACILITIES We lease a 75,000 square foot facility in Eden Prairie, Minnesota, a suburb of Minneapolis, which houses our corporate headquarters, manufacturing facility and warehouse space. This facility has adequate space for two production lines, the second of which is under construction. The lease has an initial term expiring on June 1, 2009. We have the option to extend the lease term for one period of ten years with a minimum annual base rent (exclusive of real estate taxes and maintenance fees) of $500,000 for the first five years and $550,000 for the second five years of the ten-year option term. We also lease 32,000 square feet of office, research and development and manufacturing space in Brooklyn Park, Minnesota. The lease expires in September 2001, but is renewable at our option for two additional five-year periods. 35 38 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth information regarding our executive officers and directors as of September 30, 2000.
Name Age Position(s) ---- --- ----------- John M. Siebert, Ph.D................... 60 President, Chief Executive Officer and Director John Hontz, Ph.D........................ 44 Chief Operating Officer David A. Feste.......................... 49 Vice President, Chief Financial Officer and Secretary Mark D. Hankins......................... 40 Vice President, Business Development Donald P. Sims, Ph.D.................... 46 Vice President, Quality Assurance Terrence W. Glarner(1)(2)............... 57 Chairman of the Board and Director Steven B. Ratoff(1)(2).................. 58 Director Joseph R. Robinson, Ph.D.(1)............ 60 Director
- ------------ (1) Member of the Audit Committee (2) Member of the Compensation Committee John M. Siebert, Ph.D. has been our President and Chief Executive Officer since September 1995 and has served as a director since May 1992. From 1992 to 1995, Dr. Siebert was Vice President, Technical Affairs at Dey Laboratories, Inc., a pharmaceutical company. From 1988 to 1992, Dr. Siebert worked at Miles, Inc. Dr. Siebert has also been employed by E.R. Squibb & Sons, Inc., G.D. Searle & Co. and The Procter & Gamble Company. John Hontz, Ph.D. has been our Chief Operating Officer since January 2000. From 1997 to January 2000, Dr. Hontz was our Vice President of Research and Development. From 1995 to 1997, Dr. Hontz was senior Group Leader of Product Development at Glaxo Wellcome plc, a pharmaceutical company. From 1987 to 1995, Dr. Hontz was with Burroughs-Wellcome, which was acquired by Glaxo in 1995, most recently as Section Head of Product Development. David A. Feste has been our Vice President, Chief Financial Officer and Secretary since March 2000. From 1995 to 1999, Mr. Feste was Vice President and Chief Financial Officer for Orphan Medical, Inc., a pharmaceutical company. From 1992 to 1995, Mr. Feste was self-employed as a financial consultant. From 1985 to 1991, Mr. Feste was with Tonka Corporation, most recently as its Corporate Vice President of Financial Services and Audit. Mark D. Hankins has been our Vice President, Business Development since September 2000. From 1984 to 2000, Mr. Hankins was Director, Technology Licensing and Acquisition at Aventis Pasteur, the vaccine division of Aventis Corporation, a pharmaceutical and agricultural company. Prior to his employment at Aventis Pasteur, Mr. Hankins was a Technology Licensing Specialist at the National Institutes of Health's Office of Technology Transfer. Mr. Hankins is a registered patent attorney at the U.S. Patent and Trademark Office. Donald P. Sims, Ph.D. has been our Vice President, Quality Assurance since September 2000. From 1997 to 2000, Dr. Sims was Director, Quality Operations at Solvay Pharmaceuticals. From 1989 to 1997, Dr. Sims was a director of quality for three biotechnology companies. Prior to that, Dr. Sims was Director, Quality Control for Boehringer Ingelheim Pharmaceuticals and worked for the Mead Johnson division of Bristol Myers. Terrence W. Glarner has served as a director since July 1990 and has served as the Chairman of the Board of Directors since April 1995. Mr. Glarner has been President of West Concord Ventures, Inc., a venture capital firm, since 1993. He also consults with Norwest 36 39 Venture Capital. Mr. Glarner was President of North Star Ventures, Inc. from 1988 to 1993 and held various other positions there since 1976. Mr. Glarner is a Chartered Financial Analyst. He serves as a director of Aetrium Incorporated, Datakey, Inc., FSI International, Inc. and Premis Corporation, as well as of several privately-held corporations. Steven B. Ratoff has served as a director since March 1995. Mr. Ratoff has been Executive Vice President and Chief Financial Officer of Brown-Forman Corporation, a consumer products company, since 1994. From 1992 to 1994, Mr. Ratoff was a private investor in a number of small privately-held companies. Mr. Ratoff was Senior Vice President and Chief Financial Officer of the Pharmaceutical Group of Bristol-Myers Squibb from 1990 to 1992. Mr. Ratoff serves as a director of Inkine Pharmaceutical Company. Joseph R. Robinson, Ph.D. has served as a director since January 1993. Dr. Robinson is Professor of Pharmacy, University of Wisconsin at Madison. Dr. Robinson is the past President of the Controlled Release Society and of the American Association of Pharmaceutical Scientists. Dr. Robinson serves as a director of Emisphere Technologies, Inc. He also serves on the scientific advisory boards of several companies. 37 40 PRINCIPAL AND SELLING STOCKHOLDERS The following table presents information regarding beneficial ownership of our common stock as of September 30, 2000, held by each person known by us to be the beneficial owner of more than 5% of our common stock, each executive officer, each director, each selling stockholder and all executive officers and directors as a group. The table also presents the same information as adjusted to reflect the sale of shares offered hereby. In addition, the table provides information with respect to the number of shares of common stock that certain of our stockholders are obligated to sell if the underwriters exercise their over-allotment option and the impact that this will have on those stockholders' post-offering common stock holdings. In accordance with the rules of the SEC, beneficial ownership includes the shares issuable pursuant to stock options that are exercisable within 60 days of September 30, 2000. Shares issuable pursuant to stock options are considered outstanding for computing the percentage of the person holding the options but are not considered outstanding for computing the percentage of any other person. The number of shares of common stock outstanding after this offering includes the 2,500,000 shares of common stock being offered for sale by us in this offering. The percentage of beneficial ownership for the following table is based on 10,953,774 shares of common stock outstanding as of September 30, 2000 and 13,453,774 shares of common stock outstanding after the completion of this offering, assuming no exercise of the underwriters' over-allotment option and 13,803,774 shares of common stock outstanding after completion of this offering assuming full exercise of the underwriters' over-allotment option. To our knowledge, except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of common stock.
Assuming the Over-Allotment Option is Exercised by the Underwriters in Full Shares Beneficially Shares Beneficially -------------------------------- Owned Prior to the Owned After the Shares Owned After Offering Offering Shares the Offering ---------------------- ---------------------- to be ---------------------- Beneficial Owner Number Percentage Number Percentage Offered Number Percentage - ---------------- --------- ---------- --------- ---------- ------- --------- ---------- Franklin Resources, Inc. 777 Mariners Island Boulevard San Mateo, California 94404(1).............. 1,088,000 9.9 1,088,000 8.1 -- 1,088,000 7.9 President and Fellows Of Harvard College c/o Harvard Management Company, Inc. 600 Atlantic Avenue Boston, Massachusetts 02210(2).............. 646,900 5.9 646,900 4.8 -- 646,900 4.7 Capital Research and Management Company And SMALLCAP World Fund, Inc. 333 South Hope Street Los Angeles, California 90071(3)............ 617,200 5.6 617,200 4.6 -- 617,200 4.5 Douglas C. Floren 600 Steamboat Road Greenwich, Connecticut 06830(4)............. 572,000 5.2 572,000 4.3 -- 572,000 4.1 Raymond A. Lipkin 161 Ferndale Avenue South Wayzata, Minnesota 55391(5)................. 565,100 5.2 565,100 4.2 -- 565,100 4.1 John M Siebert, Ph.D.(6)..................... 385,166 3.4 385,166 2.8 40,000 345,166 2.4 David A. Feste(7)............................ 28,667 * 28,667 * 20,000 8,667 * John Hontz, Ph.D.(8)......................... 138,999 1.3 138,999 1.0 40,000 98,999 * Terrence W. Glarner(9)....................... 119,957 1.1 119,957 * 25,000 94,957 * Steven B. Ratoff(10)......................... 120,855 1.1 120,855 * 35,000 85,855 * Joseph R. Robinson, Ph.D.(11)................ 92,095 * 92,095 * 35,000 57,095 * All executive officers and directors as a group (6 persons)(12)....................... 885,739 7.6 885,739 6.2 195,000 690,739 4.8
38 41 - ------------ * Less than one percent. (1) The securities reported are beneficially owned by one or more open or closed-end investment companies or other managed accounts, which are advised by direct and indirect investment advisory subsidiaries of Franklin Resources, Inc. The adviser subsidiaries may be deemed to be the beneficial owner of the securities reported. Franklin Advisers, Inc. has sole voting and dispositive power on the entire 1,088,000 shares. Charles B. Johnson and Reupert H. Johnson, Jr. each own in excess of 10% of the outstanding common stock of Franklin Resources. Franklin Resources, Charles B. Johnson and Reupert H. Johnson, Jr. may be deemed to be the beneficial owner of securities held by persons and entities advised by Franklin Resources. Franklin Resources, Charles B. Johnson, Reupert H. Johnson, Jr. and each of Franklin Resources' adviser subsidiaries disclaim any economic interest or beneficial ownership in any of the securities reported. The information relating to the beneficial ownership of Franklin Resources, Inc. has been derived from the Schedule 13G filed by Franklin Resources, Charles B. Johnson, Reupert H. Johnson, Jr. and Franklin Advisers, Inc. on August 10, 2000. (2) The information relating to the beneficial ownership of President and Fellows of Harvard College has been derived from the Schedule 13G filed by President and Fellows of Harvard College on April 10, 2000. (3) The information relating to the beneficial ownership of Capital Research and Management Company and SMALLCAP World Fund, Inc. has been derived from the Schedule 13G filed by Capital Research and Management Company and SMALLCAP World Fund, Inc. on February 11, 2000. (4) Includes shares held by DCF Advisers, L.L.C., DCF Partners, L.P. and DCF Capital, L.L.C. The information relating to the beneficial ownership of Douglas C. Floren, DCF Advisers, L.L.C., DCF Partners, L.P. and DCF Capital, L.L.C. has been derived from the Schedule 13D filed by Douglas C. Floren, DCF Advisers, L.L.C., DCF Partners, L.P. and DCF Capital, L.L.C. on September 8, 2000. (5) Includes (i) 15,000 shares held jointly with Mr. Lipkin's spouse; (ii) 56,500 shares held by Koloa Limited Partnership, a family partnership in which Mr. Lipkin and his spouse are general partners; and (iii) 22,000 shares held by Mr. Lipkin on behalf of certain members of his family. Mr. Lipkin disclaims beneficial ownership with respect to all but the 471,600 shares over which he has sole voting and dispositive power, 71,500 shares held jointly with Mrs. Lipkin and his proportionate interest in the family partnership. The information relating to the beneficial ownership of Raymond A. Lipkin has been derived from the Schedule 13D filed by Raymond A. Lipkin on September 5, 2000. (6) Includes 339,166 shares that may be acquired within 60 days of September 30, 2000, pursuant to outstanding options. The shares to be offered will be acquired pursuant to option exercises. (7) Includes 28,667 shares that may be acquired within 60 days of September 30, 2000, pursuant to outstanding options. The shares to be offered will be acquired pursuant to option exercises. (8) Includes 132,499 shares that may be acquired within 60 days of September 30, 2000, pursuant to outstanding options. The shares to be offered will be acquired pursuant to option exercises. (9) Includes 89,517 shares that may be acquired within 60 days of September 30, 2000, pursuant to outstanding options. (10) Includes 82,855 shares that may be acquired within 60 days of September 30, 2000, pursuant to outstanding options. The shares to be offered will be acquired pursuant to option exercises. (11) Includes 92,095 shares that may be acquired within 60 days of September 30, 2000, pursuant to outstanding options. The shares to be offered will be acquired pursuant to option exercises. (12) Includes 764,799 shares that may be acquired within 60 days of September 30, 2000, pursuant to outstanding options. Of the shares to be offered, 170,000 will be acquired pursuant to option exercises. 39 42 UNDERWRITING Subject to the terms and conditions of the underwriting agreement, the underwriters named below have severally agreed to purchase from CIMA the following respective number of shares of common stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus:
Number Underwriter of Shares ----------- --------- Deutsche Bank Securities Inc................................ SG Cowen Securities Corporation............................. Fahnestock & Co. Inc........................................ --------- Total................................................ 2,500,000 =========
The underwriting agreement provides that the obligations of the several underwriters to purchase the shares of common stock offered hereby are subject to certain conditions precedent, including the absence of any material adverse change in our business and the receipt of certificates, opinions and letters from us, our counsel and independent auditors. The underwriters have committed to purchase all shares of common stock offered by this prospectus, other than those covered by the over-allotment option described below, if any of the shares are purchased. The underwriters propose to offer the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus and to dealers at a price that represents a concession not in excess of $ per share under the public offering price. The underwriters may allow, and these dealers may re-allow, a concession of not more than $ per share to other dealers. After the public offering, the representatives of the underwriters may change the offering price and other selling terms. We and the selling stockholders have granted to the underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to 180,000 additional shares of common stock from us, and up to 195,000 shares of common stock from the selling stockholders, at the public offering price less the underwriting discounts and commissions, set forth on the cover page of this prospectus. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the common stock offered hereby. To the extent that the underwriters exercise this option, each of the underwriters will become obligated, subject to conditions, to purchase approximately the same percentage of additional shares of common stock as the number of shares of common stock to be purchased by it in the above tables bears to the total number of shares of common stock offered hereby. We will be obligated, pursuant to the option, to sell these additional shares of common stock to the underwriters to the extent the option is exercised. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the 2,500,000 shares are being offered. The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us per share of common stock. The underwriting fee is expected to be 6% of the public offering price. We have agreed to pay the underwriters the following fees, assuming either no exercise or full exercise by the underwriters of the underwriters' over-allotment option:
Without With Exercise of Exercise of Over-Allotment Over-Allotment Per Share Option Option --------- -------------- -------------- Fees paid by CIMA LABS INC..................... $ $ $ Fees paid by the selling stockholders.......... $ $ $
40 43 We estimate that our expenses for this offering, excluding underwriting discounts and commissions, will be approximately $400,000. The selling stockholders will not pay any of these expenses. We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, and to contribute to payments the underwriters may be required to make with regard to these potential liabilities. We and all of our executive officers and directors have agreed not to offer, sell, contract to sell, or otherwise dispose of any shares of common stock, or options to acquire shares of common stock or securities exchangeable for or convertible into shares of common stock during the 90 day period following the date of this prospectus without the prior written consent of Deutsche Bank Securities Inc., except, in our case, pursuant to our employee benefit plans, qualified stock plans and other employee compensation plans existing on the date of this prospectus and pursuant to currently outstanding options and rights. Deutsche Bank Securities Inc. may give this consent at any time without public notice. The underwriters have advised us that they do not intend to confirm sales to any account over which they exercise discretionary authority. In order to facilitate the offering of our common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of our common stock. Specifically, the underwriters may over-allot shares of our common stock in connection with this offering, thus creating a short position in our common stock for their own account. A short position results when an underwriter sells more shares of common stock than that underwriter is committed to purchase. Additionally, to cover these over-allotments or to stabilize the market price of our common stock, the underwriters may bid for, and purchase, shares of our common stock in the open market. Any of these activities may maintain the market price of our common stock at a level above that which might otherwise prevail in the open market. These transactions may be effected on the Nasdaq National Market or otherwise. The underwriters are not required to engage in these activities and, if commenced, may end any of these activities at any time. In connection with this offering, certain underwriters or their affiliates may engage in passive market making transactions in the common stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act of 1934, as amended. Rule 103 permits passive market making during the period when Regulation M would otherwise prohibit market making activity by the participants in this offering. Passive market making consists of displaying bids on the Nasdaq National Market limited by the bid prices of independent market makers and making purchases limited by such prices and effected in response to order flow. Rule 103 limits the net purchases by a passive market maker on each day to a specified percentage of the passive market maker's average daily trading volume in the common stock during a specified period. The passive market maker must stop its passive market making transactions for the rest of that day when such limit is reached. Passive market making may stabilize the market price of our common stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. In March 2000, we engaged Deutsche Bank Securities Inc., to act as the placement agent in the private placement of 1,100,000 shares of our common stock to a limited number of institutional investors. We paid Deutsche Bank Securities Inc. a customary fee for its services in the private placement. 41 44 LEGAL MATTERS Faegre & Benson LLP, Minneapolis, Minnesota, will provide us with an opinion as to the validity of the common stock offered under this prospectus. Dorsey & Whitney LLP, Minneapolis, Minnesota, will pass upon certain legal matters related to the offering for the underwriters. EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements as of December 31, 1998 and 1999 and for each of the three years in the period ended December 31, 1999. We have included our financial statements in this prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given upon their authority as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION We file reports, proxy statements and other information with the Securities and Exchange Commission. You can read and copy these reports, proxy statements and other information at the Commission's Public Reference Room located at 450 Fifth Street, N.W., Washington, D.C. 20549. Call (800) SEC-0330 for more information on the Public Reference Room. The Commission maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The site's address is "www.sec.gov." We have filed a Registration Statement on Form S-3 under the Securities Act with respect to this offering. For further information regarding us and our common stock you should refer to the Registration Statement and its exhibits and schedules. INCORPORATION BY REFERENCE The Commission allows us to "incorporate by reference" the information in documents that we file with them. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus, and information in documents that we file later with the Commission will automatically update and supersede this information. We incorporate by reference the documents listed below: - Our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 1999 (including information specifically incorporated by reference into our Form 10-K from our 2000 Annual Report to Stockholders and our definitive Notice and Proxy Statement for our 2000 Annual Meeting of Stockholders); - Quarterly reports on Form 10-Q for the quarters ended March 31, 2000 and June 30, 2000; and - The description of our Common Stock contained in our Registration Statement on Form 8-A, dated September 11, 1990. We also incorporate by reference into this prospectus all documents that we file pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and prior to the termination of this offering. We will provide to each person, including any beneficial owner, to whom a prospectus is delivered a copy of any or all of these documents (other than exhibits unless the exhibits are specifically incorporated by reference into the document), without charge, upon written or oral 42 45 request to: CIMA LABS INC., 10000 Valley View Road, Eden Prairie, MN 55344-9361, Attention: Secretary, telephone (952) 947-8700. Any statement contained in a document incorporated or deemed to be incorporated by reference in this prospectus shall be deemed to be modified or superseded for the purposes of this prospectus to the extent that a statement contained in this prospectus or in any other subsequently filed document which also is or is deemed to be incorporated by reference modifies or supersedes that statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus. 43 46 CIMA LABS INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors.............................. F-2 Balance Sheets.............................................. F-3 Statements of Operations.................................... F-4 Statements of Cash Flows.................................... F-5 Statements of Changes in Stockholders' Equity............... F-6 Notes to Financial Statements............................... F-7
F-1 47 REPORT OF INDEPENDENT AUDITORS Board of Directors CIMA LABS INC. We have audited the accompanying balance sheets of CIMA LABS INC. as of December 31, 1999 and 1998, and the related statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CIMA LABS INC. at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Minneapolis, Minnesota February 11, 2000, except for Note 9 as to which the date is March 17, 2000 F-2 48 CIMA LABS INC. BALANCE SHEETS
AS OF DECEMBER 31, -------------------------- AS OF 1998 1999 JUNE 30, 2000 ----------- ----------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................... $ 2,722,590 $ 2,480,698 $ 9,775,295 Available-for-sale securities............... -- -- 5,919,222 Accounts receivable, net.................... 1,654,796 3,058,258 5,209,276 Inventories, net............................ 479,045 2,772,429 1,902,529 Prepaid expenses............................ 79,866 73,042 109,371 ----------- ----------- ----------- Total current assets.......................... 4,936,297 8,384,427 22,915,693 Other assets: Lease deposits.............................. 345,146 318,699 166,614 Patents and trademarks, net................. 204,648 207,243 192,359 ----------- ----------- ----------- Total other assets............................ 549,794 525,942 358,973 Property, plant and equipment: Construction in progress.................... 72,204 2,150,508 6,664,463 Equipment................................... 9,314,867 8,817,331 8,817,331 Leasehold improvements...................... 4,757,169 4,783,420 4,783,420 Furniture and fixtures...................... 604,204 604,204 604,204 ----------- ----------- ----------- 14,748,444 16,355,463 20,869,418 Less accumulated depreciation............... (5,318,107) (5,996,024) (6,687,809) ----------- ----------- ----------- 9,430,337 10,359,439 14,181,609 ----------- ----------- ----------- Total assets........................... $14,916,428 $19,269,808 $37,456,275 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................ $ 670,597 $ 2,402,726 $ 687,397 Accrued expenses............................ 835,043 1,229,179 1,317,939 Notes payable............................... -- 195,748 -- Advance royalties........................... 459,105 137,084 -- Current portion of long term debt........... -- 150,000 150,000 Current portion of lease obligations........ 64,998 71,485 74,968 ----------- ----------- ----------- Total current liabilities..................... 2,029,743 4,186,222 2,230,304 Long term debt................................ -- 3,350,000 3,457,187 Lease obligations............................. 231,145 159,660 121,285 ----------- ----------- ----------- Total liabilities............................. 2,260,888 7,695,882 5,808,776 Stockholders' equity: Convertible preferred stock, $0.01 par value: 5,000,000 shares authorized; none outstanding.............................. -- -- -- Common stock, $0.01 par value: 20,000,000 shares authorized; 9,610,394, 9,646,241, and 10,858,639 shares issued and outstanding at December 31, 1998 and 1999, and at June 30, 2000, respectively............................. 96,104 96,462 108,586 Additional paid-in capital............... 57,274,274 57,454,661 77,373,340 Accumulated deficit...................... (44,714,838) (45,977,197) (45,834,427) ----------- ----------- ----------- Total stockholders' equity.................... 12,655,540 11,573,926 31,647,499 ----------- ----------- ----------- Total liabilities and stockholders' equity.............................. $14,916,428 $19,269,808 $37,456,275 =========== =========== ===========
See accompanying notes. F-3 49 CIMA LABS INC. STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------- ------------------------- 1997 1998 1999 1999 2000 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Revenues: Net sales....................... $ 2,628,069 $ 1,097,465 $ 4,839,511 $ 1,433,862 $ 6,096,355 Product development fees and licensing..................... 2,282,166 6,140,894 7,817,846 3,382,605 4,391,213 Royalties....................... -- 373,764 735,107 193,967 979,000 ----------- ----------- ----------- ----------- ----------- Total revenues.................... 4,910,235 7,612,123 13,392,464 5,010,434 11,466,568 ----------- ----------- ----------- ----------- ----------- Operating expenses: Cost of goods sold.............. 4,376,412 4,475,867 7,545,341 2,968,254 6,725,214 Research and product development................... 3,363,544 3,307,582 4,388,902 1,826,968 2,217,109 Selling, general and administrative................ 3,487,239 3,137,952 2,836,573 1,443,598 1,848,842 ----------- ----------- ----------- ----------- ----------- Total operating expense........... 11,227,195 10,921,401 14,770,816 6,238,820 10,791,165 ----------- ----------- ----------- ----------- ----------- Other income (expense): Interest income, net............ 336,310 152,366 10,327 27,987 282,546 Other income (expense).......... 142,255 (30,567) 105,666 16,440 (15,842) ----------- ----------- ----------- ----------- ----------- 478,565 121,799 115,993 44,427 266,704 ----------- ----------- ----------- ----------- ----------- Income (loss) before cumulative effect of a change in accounting principle....................... (5,838,395) (3,187,479) (1,262,359) (1,183,959) 942,107 Cumulative effect of a change in accounting principle, net of income taxes.................... -- -- -- -- (799,337) ----------- ----------- ----------- ----------- ----------- Net income (loss)................. $(5,838,395) $(3,187,479) $(1,262,359) $(1,183,959) $ 142,770 =========== =========== =========== =========== =========== Net income (loss) per share: Basic Net income (loss) per share before cumulative effect of a change in accounting principle................... $ (.61) $ (.33) $ (.13) $ (.12) $ .09 Net loss per share from cumulative effect of a change in accounting principle................... -- -- -- -- (.08) ----------- ----------- ----------- ----------- ----------- Net income (loss) per basic share......................... $ (.61) $ (.33) $ (.13) $ (.12) $ .01 =========== =========== =========== =========== =========== Diluted Net income per share before cumulative effect of a change in accounting principle................... $ (.61) $ (.33) $ (.13) $ (.12) $ .08 Net loss per share from cumulative effect of a change in accounting principle................... -- -- -- -- (.07) ----------- ----------- ----------- ----------- ----------- Net income (loss) per diluted share......................... $ (.61) $ (.33) $ (.13) $ (.12) $ .01 =========== =========== =========== =========== =========== Weighted average shares outstanding: Basic........................... 9,518,679 9,610,104 9,615,280 9,610,394 10,375,963 Diluted......................... 9,518,679 9,610,104 9,615,280 9,610,394 11,393,366 Pro forma amounts assuming the accounting change were applied retroactively (unaudited): Net income (loss)............. $(6,257,851) $(3,955,980) $ (873,738) $ (622,044) $ 942,107 Net income (loss) per diluted share....................... $ (.66) $ (.41) $ (.09) $ (.06) $ .08 Weighted average diluted shares...................... 9,518,679 9,610,104 9,615,280 9,610,394 11,393,366
See accompanying notes F-4 50 CIMA LABS INC. STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------ --------------------------- 1997 1998 1999 1999 2000 ------------ ----------- ----------- ----------- ------------ (UNAUDITED) OPERATING ACTIVITIES Net loss......................... $ (5,838,395) $(3,187,479) $(1,262,359) $(1,183,959) $ 142,770 Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization................. 1,051,679 1,653,319 1,635,017 897,299 743,808 Loss on impairment of assets... -- -- 358,291 -- 400,000 Gain on sale of property, plant and equipment................ -- 4,734 -- -- -- Cumulative effect of change in accounting principle......... -- -- -- -- 799,337 Changes in operating assets and liabilities: Accounts receivable.......... (1,350,236) (56,982) (1,403,462) (666,404) (2,151,018) Inventories.................. (96,032) 151,574 (2,293,384) (1,185,934) 869,900 Prepaid expenses............. (74,925) 66,939 6,824 (38,333) (36,329) Accounts payable............. (135,658) 541,885 1,732,129 660,674 (1,715,329) Accrued expenses............. 91,178 214,462 394,136 (43,739) (61,240) Advance royalties............ 491,405 (282,300) (322,021) 9,229 (137,084) Deferred revenue............. -- -- -- -- (649,337) ------------ ----------- ----------- ----------- ------------ Net cash used in operating activities..................... (5,860,984) (893,848) (1,154,829) (1,551,167) (1,794,522) ------------ ----------- ----------- ----------- ------------ INVESTING ACTIVITIES Purchases of property, plant and equipment...................... (772,262) (406,686) (2,819,700) (420,478) (4,913,955) Purchases of available-for-sale securities..................... (29,469,496) -- -- -- (5,919,222) Proceeds from maturities of available-for-sale securities..................... 33,789,358 3,277,300 -- -- -- Proceeds from sale of property, plant and equipment............ -- 33,000 -- -- -- Patents and trademarks........... (111,470) (88,841) (105,305) (32,280) (37,139) ------------ ----------- ----------- ----------- ------------ Net cash (used in) provided by investing activities........... 3,436,130 2,814,773 (2,925,005) (452,758) (10,870,316) ------------ ----------- ----------- ----------- ------------ FINANCING ACTIVITIES Proceeds from exercises of stock options........................ 654,582 5,700 180,745 -- 530,803 Net proceeds from stock offering....................... -- -- -- -- 19,400,000 Proceeds from long term debt..... -- -- 3,500,000 -- -- Notes payable.................... -- -- 195,748 -- (88,561) Security deposits on leases...... 250,000 (304,495) 26,447 -- 152,085 Payments on capital lease obligations.................... -- (45,300) (64,998) -- (34,892) ------------ ----------- ----------- ----------- ------------ Net cash provided by (used in) financing activities........... 904,582 (344,095) 3,837,942 -- 19,959,435 ------------ ----------- ----------- ----------- ------------ Increase (decrease) in cash and cash equivalents............... (1,520,272) 1,576,830 (241,892) (2,003,925) 7,294,597 Cash and cash equivalents at beginning of period............ 2,666,032 1,145,760 2,722,590 2,722,590 2,480,698 ------------ ----------- ----------- ----------- ------------ Cash and cash equivalents at end of period...................... $ 1,145,760 $ 2,722,590 $ 2,480,698 $ 718,665 $ 9,775,295 ============ =========== =========== =========== ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of equipment pursuant to capital lease............... $ -- $ 341,443 $ -- $ -- $ --
See accompanying notes. F-5 51 CIMA LABS INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK --------------------- ADDITIONAL ACCUMULATED SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL ---------- -------- --------------- ------------ ----------- BALANCE AT DEC. 31, 1996.......... 9,411,589 $ 94,116 $56,586,958 $(35,659,942) $21,021,132 Stock options exercised......... 191,968 1,920 652,662 -- 654,582 Exercise of stock warrants...... 4,837 48 28,974 (29,022) -- Net loss........................ -- -- -- (5,838,395) (5,838,395) ---------- -------- ----------- ------------ ----------- BALANCE AT DEC. 31, 1997.......... 9,608,394 96,084 57,268,594 (41,527,359) 15,837,319 Stock options exercised......... 2,000 20 5,680 -- 5,700 Net loss........................ -- -- -- (3,187,479) (3,187,479) ---------- -------- ----------- ------------ ----------- BALANCE AT DEC. 31, 1998.......... 9,610,394 96,104 57,274,274 (44,714,838) 12,655,540 Stock options exercised......... 35,847 358 180,387 -- 180,745 Net loss........................ -- -- -- (1,262,359) (1,262,359) ---------- -------- ----------- ------------ ----------- BALANCE AT DEC 31, 1999........... 9,646,241 96,462 57,454,661 (45,977,197) 11,573,926 Issuance of common stock in connection with a private placement, net of offering costs of $1,500,000........... 1,100,000 11,000 19,389,000 -- 19,400,000 Stock options exercised......... 112,398 1,124 529,679 -- 530,803 Net income...................... -- -- -- 142,770 142,770 ---------- -------- ----------- ------------ ----------- BALANCE AT JUNE 30, 2000 (UNAUDITED)..................... 10,858,639 $108,586 $77,373,340 $(45,834,427) $31,647,499 ========== ======== =========== ============ ===========
See accompanying notes. F-6 52 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 1. BUSINESS ACTIVITY CIMA LABS INC. (the "Company"), a Delaware corporation, develops and manufactures fast-dissolve and enhanced-absorption oral drug delivery systems. OraSolv and DuraSolv, the Company's 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. The Company develops applications for technologies that are licensed to pharmaceutical company partners. The Company currently manufactures and packages six commercial products incorporating its proprietary fast-dissolve technologies. Revenues are generated from license agreements, product development fees, products manufactured using fast-dissolve technologies and royalties. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents The Company considers highly liquid investments with maturities of ninety days or less when purchased to be cash equivalents. Cash equivalents are carried at cost, which approximates fair market value. Patents and Trademarks Costs incurred in obtaining patents and trademarks are amortized on a straight-line basis over sixty months. Accumulated amortization was approximately $625,000 at December 31, 1998, $728,000 at December 31,1999 and $803,000 at June 30, 2000. The Company periodically reviews its patents and trademarks for impairment in value. Any adjustment from the analysis is charged to operations. Property, Plant and Equipment Property, plant and equipment is stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives ranging from three to twelve years. Depreciation expense was approximately $919,000 in 1997; $1,538,000 in 1998; $1,533,000 in 1999; and $700,000 for the six months ended June 30, 2000. Inventories Inventories, consisting of materials and packaging, are valued at a standard cost method using the first-in first-out (FIFO) for inventory turn over and control. Inventories are shown net of reserves for obsolescence of approximately $157,000 at December 31, 1998, $537,000 at December 31, 1999 and $160,000 at June 30, 2000. Impairment of Long-Lived Assets The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flow estimated to be generated by those assets are less than the assets' carrying amount. During the year ended December 31, 1999, the Company recognized approximately $358,000 of impairment losses on equipment no longer used in operations with an original cost of $1,200,000. The cost and associated accumulated depreciation have been removed from the equipment balances on the accompanying December 31, 1999 balance sheet. F-7 53 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock-Based Compensation The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related interpretations in accounting for its stock options. Under APB 25, when the exercise price of stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Income Taxes Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities. Revenue Recognition The Company recognizes revenues from product sales upon shipment; revenues from product development fees as services are rendered and as milestones are achieved; revenues from non-refundable up-front license fees upon signing the related development and license agreement; 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 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 pro forma amounts presented in the income statement were calculated assuming the accounting change was made retroactively to prior periods. For the six months ended June 30, 2000, the Company recognized $799,337 in revenue that is included in the cumulative effect adjustment as of January 1, 2000. The effect of that revenue in the six-month period ended June 30, 2000 was to increase income by $799,337. Research and Development Costs For financial reporting purposes, all costs of research and development activities are expensed as incurred. F-8 54 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing income (loss) by the weighted average number of common shares outstanding during the period, increased to include dilutive potential common shares issuable upon the exercise of stock options that were outstanding during the period. For loss periods, basic and diluted share amounts are identical, as the effect of potential common shares is antidilutive.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------- -------------------------- 1997 1998 1999 1999 2000 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Numerator: Net income (loss)..... $(5,838,395) $(3,187,479) $(1,262,359) $(1,183,959) $ 142,770 =========== =========== =========== =========== =========== Denominator: Denominator for basic earnings (loss) per share -- weighted average shares outstanding......... 9,518,679 9,610,104 9,615,280 9,610,394 10,375,963 Effect of dilutive stock options....... -- -- -- -- 1,017,403 ----------- ----------- ----------- ----------- ----------- Denominator for diluted earnings (loss) per share -- weighted average shares outstanding........... 9,518,679 9,610,104 9,615,280 9,610,394 11,393,366 =========== =========== =========== =========== =========== Basic earnings (loss) per share............. $ (.61) $ (.33) $ (.13) $ (.12) $ .01 Diluted earnings (loss) per share............. $ (.61) $ (.33) $ (.13) $ (.12) $ .01
Reclassifications Certain amounts presented in the 1998 and 1997 financial statements have been reclassified to conform to the 1999 presentation. Unaudited Interim Financial Statements The accompanying unaudited financial statements as of June 30, 1999 and 2000 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 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. Interim financial information included in the accompanying footnotes is unaudited. F-9 55 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 3. NOTES PAYABLE AND LONG-TERM DEBT Notes Payable The Company had a $2,000,000 bank line of credit payable on demand expiring July 14, 2000. Interest is paid at prime plus 2% (10.5% at December 31, 1999). The line was secured by accounts receivable and inventory. In May 2000, the Company terminated this bank line after repaying its obligations in full. The Company paid $24,000 in interest for the year ended December 31, 1998, $60,000 in interest for the year ended December 31, 1999 and $7,000 for the six months ended June 30, 2000. Long-Term Debt In December 1999, the Company entered into an agreement with one of its pharmaceutical partners whereby the Company received a loan of $3,500,000. Timing of the loan repayments is based upon royalties due to the Company from an affiliate of the lender that signed a license agreement with the Company in May 1999. The Company shall pay the lender 50% of any royalty amount due per the license agreement with the affiliate. The term of the loan is three years, unless the loan repayments based on the royalty amounts due to the Company have not yet covered the loan principal plus any unpaid interest. In such a case, the loan will be extended in annual increments. Interest is payable on the outstanding amount at LIBOR plus one half of one percent, accrues quarterly and is added to the then outstanding balance. The loan becomes payable in full upon the sale of the Company or a change in control, as defined in the agreement. If the loan becomes payable in full, the affiliate shall withhold 100% of the royalties due until the outstanding balance and any accrued interest are paid in full. The Company does not expect to have any repayment obligations to the lender before the second half of 2000. The Company paid approximately $120,000 in interest for the six months ended June 30, 2000. 4. INCOME TAXES The Company's deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Significant components of deferred income taxes as of December 31, 1998 and 1999, and as of June 30, 2000 are as follows (in thousands):
YEAR ENDED DECEMBER 31, SIX MONTHS ------------------------ ENDED JUNE 30, 1998 1999 2000 ---------- ---------- -------------- (UNAUDITED) Deferred assets: Net operating loss......................... $ 18,475 $ 18,731 $ 18,654 Accrued vacation........................... 75 86 92 Inventory reserve.......................... 63 217 65 -------- -------- -------- 18,613 19,034 18,811 Deferred liability: Depreciation and amortization.............. 625 524 550 -------- -------- -------- Net deferred income tax asset................ 17,988 18,510 18,261 Valuation allowance.......................... (17,988) (18,510) (18,261) -------- -------- -------- Net deferred income taxes.................... $ -- $ -- $ -- ======== ======== ========
F-10 56 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 4. INCOME TAXES -- (CONTINUED) The Company may be subject to federal income taxes when operations become profitable. The Company's tax operating loss carryforwards of approximately $46 million may be carried forward to offset future taxable income, limited due to changes in ownership under the net operating loss limitation rules, and expire in the years 2001 to 2019. 5. LEASES Operating Leases The Company leases office, research and development and manufacturing facilities in Brooklyn Park and Eden Prairie, Minnesota. The 75,000 square foot Eden Prairie facility houses the general and administrative offices and the manufacturing operation. The lease has an initial term expiring on June 1, 2009. The rent payments will be recalculated on June 1, 2001 and 2006, based on a market index. The Company has an option to extend the lease for one ten-year period. The Company also has the option to renew this lease for two additional five-year terms. Future minimum lease commitments for all operating leases with initial or remaining terms of one year or more are as follows: Year ending December 31: 2000........................................................ $ 629,160 2001........................................................ 640,460 2002........................................................ 459,030 2003........................................................ 380,460 2004........................................................ 380,460 Thereafter.................................................. 1,902,300
Rent expense of operating leases, excluding operating expenses, for the years ended December 31, 1997, 1998, and 1999 was $517,000, $519,000, $525,000, respectively, and $262,000 and $262,000 for the six months ended June 30, 1999 and 2000, respectively. Capital Leases The Company has three leases between 48 and 60 months in length extending through 2003 with Norwest Equipment Finance, Inc. The deposit balance for the leases was $278,048 at December 31, 1999 and $125,963 at June 30, 2000, respectively, and is reviewed on an annual basis each December and adjusted to the balance required to secure the assets being leased. Future minimum lease commitments for all capital leases with initial or remaining terms of one year or more are as follows: Year ending December 31: 2000........................................................ $ 90,499 2001........................................................ 90,499 2002........................................................ 75,644 2003........................................................ 9,986 ---------- 266,628 Less lease interest:........................................ (35,483) ---------- Total................................................ $ 231,145 ==========
F-11 57 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 6. STOCK OPTIONS The Company has an Equity Incentive Plan (the "Plan") under which options to purchase up to 2,650,000 shares of Common Stock may be granted to employees, consultants and others. The Compensation Committee, established by the Board of Directors, establishes the terms and conditions of all stock option grants, subject to the Plan and applicable provisions of the Internal Revenue Code. The options expire ten years from the date of grant and are usually exercisable in annual increments ranging from 25% to 33% beginning one year from the date of grant. The Company also has a Directors' Stock Option Plan which provides for the granting of non-management directors of the Company options to purchase shares of Common Stock. The maximum number of shares with respect to the non-management directors plan which options may be granted is 410,000 shares. Shares available and options granted for the Equity Incentive Plan are as follows:
NON- WEIGHTED SHARES INCENTIVE QUALIFIED AVERAGE AVAILABLE STOCK STOCK TOTAL EXERCISE PRICE FOR GRANT OPTIONS OPTIONS OUTSTANDING PER SHARE --------- --------- --------- ----------- -------------- Balance at Dec. 31, 1996...... 367,480 765,859 340,569 1,106,428 $6.27 Granted..................... (390,700) 292,604 98,096 390,700 5.89 Forfeited................... 203,038 (166,575) (36,463) (203,038) 7.32 Exercised................... -- (149,217) (42,751) (191,968) 3.24 -------- -------- -------- --------- Balance at Dec. 31, 1997...... 179,818 742,671 359,451 1,102,122 5.71 Granted..................... (492,679) 101,428 391,251 492,679 4.47 Reserved.................... 400,000 -- -- -- Forfeited................... 230,955 (156,259) (74,696) (230,955) 6.88 Exercised................... -- (2,000) -- (2,000) 2.85 -------- -------- -------- --------- Balance at Dec. 31, 1998...... 318,094 685,840 676,006 1,361,846 5.08 Granted..................... (395,273) 330,596 64,677 395,273 6.51 Reserved.................... 250,000 -- -- -- Forfeited................... 279,024 (126,641) (152,383) (279,024) 5.01 Exercised................... -- (30,087) -- (30,087) 5.76 -------- -------- -------- --------- Balance at Dec. 31, 1999...... 451,845 859,708 588,300 1,448,008 $5.47 ======== ======== ======== ========= Exercisable: December 31, 1997 506,460 $5.27 December 31, 1998 556,626 $5.21 December 31, 1999 649,137 $5.51
F-12 58 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 6. STOCK OPTIONS -- (CONTINUED) The following table summarizes information about Equity Incentive Plan options outstanding at December 31, 1999:
WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE NUMBER WEIGHTED RANGE OF NUMBER CONTRACTUAL OUTSTANDING EXERCISABLE AVERAGE EXERCISE PRICES OUTSTANDING LIFE PRICE AT 12/31/99 EXERCISE PRICE --------------- ----------- ----------- ----------- ----------- -------------- $2.625 - $3.00.............. 125,745 8.6 years $2.77 14,419 $2.94 $3.01 - $4.00............... 254,625 8.0 years $3.79 237,300 $3.88 $4.01 - $5.00............... 356,000 8.0 years $4.42 104,000 $4.52 $5.01 - $7.00............... 312,033 6.0 years $5.81 162,168 $5.83 $7.01 - $8.00............... 98,125 6.0 years $7.76 68,750 $7.82 $8.01 - $10.1875............ 301,480 8.0 years $9.79 62,500 $9.02 --------- $2.00 - $10.1875............ 1,448,008 7.4 years $5.47 649,137 $5.51 ========= =======
Shares available and options granted for Directors Stock Option Plan are as follows:
WEIGHTED NON- AVERAGE QUALIFIED EXERCISE SHARES AVAILABLE STOCK PRICE PER FOR GRANT OPTIONS SHARE ---------------- --------- --------- Balance at Dec. 31, 1996............................... 147,500 202,500 7.93 Granted.............................................. (56,070) 56,070 3.92 Reserved............................................. 60,000 -- -- Forfeited............................................ -- -- -- Exercised............................................ -- -- -- ------- ------- Balance at Dec. 31, 1997............................... 151,430 258,570 7.06 Granted.............................................. (37,860) 37,860 2.96 Forfeited............................................ -- -- -- Exercised............................................ -- -- -- ------- ------- Balance at Dec. 31, 1998............................... 113,570 296,430 6.54 Granted.............................................. (40,960) 40,960 2.27 Forfeited............................................ 4,320 (4,320) 1.30 Exercised............................................ -- (5,760) 1.30 ------- ------- Balance at Dec. 31, 1999............................... 76,930 327,310 $6.17 ======= =======
Options to purchase 445,086 common shares are available for grant under the plans at June 30, 2000. At June 30, 2000 the weighted average remaining contractual life of outstanding options was 7.4 years and 903,219 were exercisable. Options outstanding under the plans expire at various dates during the period from March 2000 through December 2009. Exercise prices for options outstanding as of December 31, 1999, ranged from $2.6250 to $10.1875 per share. The weighted average fair values of options granted during the years ended December 31, 1997, 1998 and 1999 were $5.64, $4.36, and $3.71 respectively. The Company issued warrants to purchase 189,801 shares of its Common Stock at $6.00 per share. Of these warrants, 77,506 were exercised during 1996 and 4,837 during 1997. The remaining 107,458 warrants have expired. F-13 59 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 6. STOCK OPTIONS -- (CONTINUED) The Company has elected to follow Accounting Principles Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation ("Statement 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1998, and 1999 respectively; risk-free interest rates of 5.70%, 5.00%, and 5.50%; volatility factor of the expected market price of the Company's common stock of .682, .630, and .649; and a weighted-average expected life of the option of 5 years. In management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options because the Company's employee stock options have characteristics significantly different from those of traded options and have vesting restrictions and because changes in the subjective input assumptions can materially affect the fair value estimates. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require input of highly subjective assumptions. During the initial phase-in period, the effects of applying Statement 123 for recognizing compensation cost may not be representative of the effects on reported net loss or income for future years because the options in the Stock Option Plans vest over several years and additional awards will be made in the future. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
1997 1998 1999 ------- ------- ------- Pro forma net loss (in thousands)................... $(6,477) $(4,240) $(2,433) Pro forma net loss per common share, basic and diluted........................................... $ (0.68) $ (0.44) $ (0.25)
7. DEFINED CONTRIBUTION PLAN The Company has a 401(k) plan (the "Plan"), which covers substantially all employees of the Company. Contributions to the Plan are made through employee wage deferrals and employer matching contributions. The employer matching contribution percentage is discretionary and determined each year. In addition, the Company may contribute two discretionary amounts; one to non-highly compensated individuals and another to all employees. To qualify for the discretionary amounts, an employee must be employed by the Company on the last day of the Plan year or have been credited with a minimum of 500 hours of service during the Plan year. F-14 60 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 7. DEFINED CONTRIBUTION PLAN -- (CONTINUED) The 401(k) expense for the years ended December 31, 1997, 1998 and 1999, and for the six months ended June 30, 2000 was $29,000, $36,000, $38,000 and $30,000. 8. EMPLOYMENT AGREEMENT The Company entered into an employment agreement with the current President and Chief Executive Officer in 1997 to continue in said position. The agreement includes provisions for compensation, stock options and bonuses based upon the achievement of certain performance targets. The current agreement expires on January 1, 2004. 9. SUBSEQUENT EVENT In March, 2000, the Company completed a private placement of 1.1 million shares of common stock at $19 per share, before commissions and expenses. The offering provided approximately $19.4 million in net cash proceeds to the Company. 10. SEGMENT INFORMATION -- MAJOR CUSTOMERS The Company has adopted the SFAS 131, Disclosures of an Enterprise and Related Information, in the year ended December 31, 1999. 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 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. Less than 10 percent of our revenues are earned from activities conducted or products shipped outside the United States. Revenues as a percentage of total revenues from major customers are as follows:
FOR THE YEAR ENDED SIX MONTHS DECEMBER 31, ENDED -------------------- JUNE 30, 1997 1998 1999 2000 ---- ---- ---- -------------- (UNAUDITED) AstraZeneca.............................................. 15% 26% 18% 11% Bristol-Myers Squibb..................................... 57 8 4 3 N.V. Organon............................................. - 2 25 20 Novartis................................................. 15 44 42 54 Schering-Plough.......................................... 5 17 - - Other.................................................... 8 3 11 12 --- --- --- --- Total............................................. 100% 100% 100% 100% --- --- --- ---
F-15 61 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. TABLE OF CONTENTS
PAGE ---- Summary.............................. 1 Risk Factors......................... 4 Special Note Regarding Forward- Looking Statements................. 13 Use of Proceeds...................... 14 Dividend Policy...................... 14 Price Range of Common Stock.......... 14 Capitalization....................... 15 Dilution............................. 16 Selected Financial Data.............. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 19 Business............................. 23 Management........................... 36 Principal and Selling Stockholders... 38 Underwriting......................... 40 Legal Matters........................ 42 Experts.............................. 42 Where You Can Find Additional Information........................ 42 Incorporation by Reference........... 42 Index to Financial Statements........ F-1
[CIMA LOGO] 2,500,000 SHARES COMMON STOCK DEUTSCHE BANC ALEX. BROWN SG COWEN FAHNESTOCK & CO. INC. PROSPECTUS , 2000 62 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of common stock being registered. None of these expenses will be borne by the selling stockholders. All amounts are estimates except the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market listing fee. Securities and Exchange Commission registration fee......... $ 37,928 NASD filing fee............................................. 14,867 Nasdaq National Market listing fee.......................... 17,500 Legal fees and expenses..................................... 210,000 Accounting fees and expenses................................ 20,000 Blue Sky fees and expenses.................................. 1,000 Transfer agent fees and expenses............................ 10,000 Printing and engraving expenses............................. 80,000 Miscellaneous............................................... 8,705 -------- Total..................................................... $400,000 ========
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS. CIMA LABS INC. ("CIMA LABS") is a Delaware corporation. Section 145 of the General Corporation Law of the State of Delaware ("Delaware Law") contains detailed provisions on indemnification of directors and officers of a Delaware corporation against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with certain litigation. CIMA LABS' Fifth Restated Certificate of Incorporation (the "Certificate"), together with CIMA LABS' Third Restated Bylaws (the "Bylaws" and together with the Certificate, the "Corporate Documents") provide for indemnification of directors and officers. CIMA LABS' Corporate Documents provide that CIMA LABS will indemnify each director, officer, employee or agent of CIMA LABS or any individual serving in such a capacity with another business entity at CIMA LABS' request (an "Indemnitee") to the full extent permitted by Delaware Law, as now enacted or hereinafter amended, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such Indemnitee in connection therewith. CIMA LABS' Corporate Documents provide that expenses incurred by a director, officer or employee in defending an action, suit or proceeding shall be paid by CIMA LABS in advance of the final disposition of such action upon receipt of an undertaking by or on behalf of such person that he will repay such amount if it is ultimately determined that he is not entitled to be indemnified by CIMA LABS. Delaware Law provides that the indemnification provisions of the statute shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. CIMA LABS has entered into agreements with its directors and certain of its officers, which agreements may require CIMA LABS to indemnify such directors and officers against certain liabilities that may arise by reason of their status or service as directors or officers, to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified and to obtain directors and officers insurance to the extent available on reasonable terms. II-1 63 The directors and officers of CIMA LABS are covered by an insurance policy indemnifying them against certain civil liabilities, including liabilities under the federal securities laws, which might be incurred by them in such capacity. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
NUMBER DESCRIPTION - ------ ----------- 1 Form of Underwriting Agreement. 4.1 Fifth Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-K for the year ended December 31, 1994 (File No. 0-24424)). 4.2 Third Restated Bylaws (incorporated by reference to the corresponding exhibit number of the Company's Form 10-Q for the period ended June 30, 1999 (File No. 0-24424)). 4.3 Rights Agreement dated March 14, 1997, between the Registrant and Norwest Bank Minnesota, N.A. as Rights Agent (incorporated by reference to Exhibit 2 to the Company's Form 8-K, filed March 25, 1997 (File No. 0-24424)). 5 Opinion of Faegre & Benson LLP. (previously filed) 23.1 Consent of Faegre & Benson LLP (included in Exhibit 5 to this Registration Statement). (previously filed) 23.2 Consent of Ernst & Young LLP. 24 Powers of Attorney. (previously filed)
ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant II-2 64 pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 65 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Eden Prairie, state of Minnesota, on October 13, 2000. CIMA LABS INC. By /s/ JOHN M. SIEBERT ------------------------------------ John M. Siebert, Ph.D. President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 has been signed by the following persons in the capacities indicated on October 13, 2000.
SIGNATURE TITLE --------- ----- * President, Chief Executive Officer (Principal - --------------------------------------------- Executive Officer) and Director John M. Siebert, Ph.D. * Chief Financial Officer (Principal Financial and - --------------------------------------------- Accounting Officer) and Secretary David A. Feste * Director - --------------------------------------------- Terrence W. Glarner * Director - --------------------------------------------- Steven B. Ratoff * Director - --------------------------------------------- Joseph R. Robinson
* John M. Siebert, by signing his name hereto, does hereby sign this document on behalf of himself and each of the other above-named executive officer and directors of the Registrant pursuant to powers of attorney duly executed by such person. /s/ JOHN M. SIEBERT - ------------------------------------ John M. Siebert II-4 66 EXHIBIT INDEX
EXHIBIT DESCRIPTION OF DOCUMENT METHOD OF FILING - ------- ----------------------- ------------------------ 1 Form of Underwriting Agreement. Filed Electronically 4.1 Fifth Restated Certificate of Incorporation.(1) Incorporated by Reference 4.2 Third Restated Bylaws.(2) Incorporated by Reference 4.3 Rights Agreement dated March 14, 1997, between the Incorporated by Registrant and Norwest Bank Minnesota, N.A. as Rights Reference Agent.(3) 5 Opinion of Faegre & Benson LLP. Previously Filed Electronically 23.1 Consent of Faegre & Benson LLP (included in Exhibit 5). Previously Filed Electronically 23.2 Consent of Ernst & Young LLP. Filed Electronically 24 Powers of Attorney. Previously Filed Electronically
- ------------ (1) Incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-K for the year ended December 31, 1994, File No. 0-24424. (2) Incorporated by reference to Exhibit 3.2 to the Registrant's Form 10-Q for the period ended June 30, 1999, File No. 0-24424. (3) Incorporated by reference to Exhibit 2 to the Registrant's Current Report of Form 8-K, filed March 25, 1997, File No. 0-24424. II-5 EX-1 2 c57747a1ex1.txt FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1 2,500,000 Shares CIMA LABS, INC. Common Stock ($0.01 Par Value) EQUITY UNDERWRITING AGREEMENT October , 2000 --- Deutsche Bank Securities Inc. SG Cowen Securities Corporation Fahnestock & Co., Inc. As Representatives of the Several Underwriters c/o Deutsche Bank Securities Inc. 101 California Street San Francisco, California 94111 Ladies and Gentlemen: CIMA LABS, INC., a Delaware corporation (the "Company") proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representatives (the "Representatives") an aggregate of 2,500,000 shares of the Company's Common Stock, $0.01 par value (the "Firm Shares"). The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Company, and certain shareholders of the Company named in Schedule II hereto (the "Selling Shareholders"), also propose to sell at the Underwriters' option an aggregate of up to 375,000 additional shares of the Company's Common Stock (the "Option Shares") as set forth below. The Company and the Selling Shareholders are sometimes referred to herein collectively as the "Sellers." As the Representatives, you have advised the Company and the Selling Shareholders (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." 2 In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SELLING SHAREHOLDERS. (a) The Company represents and warrants to each of the Underwriters as follows: (i) A registration statement on Form S-3 (File No. 333-47558) with respect to the Shares has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. The Company has complied with the conditions for the use of Form S-3 under the Act. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462(b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means the form of prospectus first filed with the Commission pursuant to Rule 424(b). Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." Any reference herein to the Registration Statement, any Preliminary Prospectus or to the Prospectus shall be deemed to refer to and include any documents incorporated by reference therein, and, in the case of any reference herein to any Prospectus, also shall be deemed to include any documents incorporated by reference therein, and any supplements or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rules 424(b) or 430A, and prior to the termination of the offering of the Shares by the Underwriters. (ii) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Company has the power and authority to enter into this Agreement and to authorize, issue and sell the Shares it will sell hereunder as contemplated hereby. This Agreement has been duly and validly authorized, executed and delivered by the Company. The Company is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification or in which the failure to qualify would have a material adverse effect upon the business of the Company taken as a whole. (iii) The outstanding shares of Common Stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable. All options to purchase the Company's Common Stock held by the Selling Shareholders were duly authorized and validly issued to the Selling Shareholders. All offers and sales by the Company of outstanding shares of capital stock and other securities of the Company, prior to the date hereof, were made in compliance with the Act 2 3 and all applicable state securities or Blue Sky laws and were not issued in violation of any preemptive right. The Shares to be issued and sold by the Company have been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and non-assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock. The Company does not own an equity interest in any corporation, partnership, joint venture or other enterprise. (iv) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. All of the Shares conform to the description thereof contained in the Registration Statement. The form of certificates for the Shares conforms to the corporate law of the jurisdiction of the Company's incorporation. (v) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform, to the requirements of the Act and the Rules and Regulations. The documents incorporated by reference in the Prospectus at the time they were filed with the Commission conformed in all respects to the requirements of the Securities Exchange Act of 1934 (the "Exchange Act") or the Act, as applicable, and the rules and regulations of the Commission thereunder. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. (vi) The financial statements of the Company, together with related notes and schedules as set forth and incorporated by reference in the Registration Statement, present fairly the financial position and the results of operations and cash flows of the Company, at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, except as disclosed therein, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data included and incorporated by reference in the Registration Statement presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. 3 4 (vii) Ernst & Young LLP, who have certified certain of the financial statements filed with the Commission as part of, and incorporated by reference in, the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (viii) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company before any court or administrative agency or otherwise which if determined adversely to the Company might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company taken as a whole or to prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. (ix) The Company has good and marketable title to all of the properties and assets reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The Company occupies its leased properties under valid and binding leases conforming in all material respects to the description thereof set forth in the Registration Statement. (x) The Company has filed all Federal, State, local and foreign tax returns which have been required to be filed and has paid all taxes indicated by said returns and all assessments received by it to the extent that such taxes have become due and are not being contested in good faith and for which an adequate reserve for accrual has been established in accordance with generally accepted accounting principles. All tax liabilities have been adequately provided for in the financial statements of the Company, and the Company does not know of any actual or proposed additional material tax assessments. (xi) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, (A) there has not been any material adverse change, or any development that could reasonably be expected to result in a material adverse change, in or affecting the earnings, business, management, properties, assets, rights, operations, conditions (financial or otherwise), or prospects of the Company taken as a whole, whether or not occurring in the ordinary course of business, (B) there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company, other than transactions in the ordinary course of business and changes and transactions described or contemplated in the Registration Statement, (C) the Company has not incurred any material liabilities or obligations, direct or indirect or contingent or non-contingent, which are not in the ordinary course of business or which could result in a material reduction in the future earnings of the Company, (D) the Company has not sustained any material loss or interference with their respective businesses or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance, (E) there has not been any change in the capital stock of the Company (other than upon the exercise of options and warrants described in the Registration Statement), or any material increase in the short-term or long-term debt (including capitalized lease obligations) of the Company, taken as a whole, (F) there has not been any declaration or payment of any dividends or any distributions of any kind with respect to the capital stock of the Company, other than any dividends or distributions described or contemplated in the Registration 4 5 Statement, or (G) there has not been any issuance of warrants, options, convertible securities or other rights to purchase or acquire capital stock of the Company (other than options granted under the Company's employee stock option plans referred to in the Prospectus). (xii) The Company is not, or with the giving of notice or lapse of time or both, will not be, in violation of or in default under its Certificate of Incorporation or By-Laws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default is of material significance in respect of the condition, financial or otherwise of the Company taken as a whole or the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company taken as a whole. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company is a party, or of the Certificate of Incorporation or By-Laws of the Company or any order, rule or regulation applicable to the Company of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (xiii) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (xiv) The Company holds all material licenses, certificates and permits from governmental authorities which are necessary to the conduct of its businesses; the Company owns or possesses the right to use all patents, patent rights, trademarks, trade names, service marks, service names, copyrights, license rights, know-how (including trade secrets and other unpatented and unpatentable proprietary or confidential information, systems or procedures) and other intellectual property rights ("Intellectual Property") necessary to carry on its business in all material respects; the Company has not infringed, and has not received notice of conflict with, any Intellectual Property of any other person or entity. The Company has taken all reasonable steps necessary to secure interests in such Intellectual Property from its contractors. There are no outstanding options, licenses or agreements of any kind relating to the Intellectual Property of the Company that are required to be described in the Prospectus and are not described in all material respects. The Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property of any other person or entity that are required to be set forth in the Prospectus and are not described in all material respects. None of the technology employed by the Company has been obtained or is being used by the Company in violation of any contractual obligation binding on the Company or any of its officers, directors or employees or otherwise in violation of the rights of any persons; the Company has not received any written or oral communications alleging that the Company has violated, infringed or conflicted with, or, by conducting its business as set forth in the Prospectus, would violate, infringe or 5 6 conflict with, any of the Intellectual Property of any other person or entity. The Company knows of no infringement by others of Intellectual Property owned by or licensed to the Company. (xv) Neither the Company, nor to the Company's knowledge, any of its affiliates, has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. The Company acknowledges that the Underwriters may engage in passive market making transactions in the Shares on The Nasdaq Stock Market in accordance with Regulation M under the Exchange Act. (xvi) The Company is not an "investment company" within the meaning of such term under the Investment Company Act of 1940, (as amended, the "1940 Act") and the rules and regulations of the Commission thereunder. (xvii) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xviii) The Company carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of its business and the value of its properties and as is customary for companies engaged in similar industries. (xix) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (A) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (B) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (xx) To the Company's knowledge, there are no affiliations or associations between any member of the NASD and any of the Company's officers, directors or 5% or greater securityholders, except as set forth in the Registration Statement. 6 7 (xxi) The Company has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectus or the Prospectus or other materials permitted by the Act to be distributed by the Company. (xxii) The Company is in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business, except for such instances of non-compliance as would not individually or in the aggregate have a material adverse effect on the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company. The Company has not received notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus and is not so disclosed. To the knowledge of the Company, the Company will not be required to make future material capital expenditures to comply with Environmental Laws and, no property which is owned, leased or occupied by the Company has been designated as a Superfund site pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. ss. 9601, et seq.), or otherwise designated as a contaminated site under applicable state or local law. (b) Each of the Selling Shareholders severally represents and warrants as follows: (i) Such Selling Shareholder has good and marketable title to the Option Shares to be sold at the Option Closing Date (as such date is herein defined) by such Selling Shareholder or holds, and has the full right, power and ability to exercise, an option, or options, to purchase from the Company the Option Shares to be sold at the Option Closing Date by such Selling Shareholder. Such Selling Shareholder, at the Option Closing Date will have good and marketable title to the Option Shares to be sold by such Selling Shareholder, free and clear of any liens, encumbrances, equities and claims, and full right, power and authority to effect the sale and delivery of such Option Shares; and upon the delivery of, against payment for, such Option Shares pursuant to this Agreement, the Underwriters will acquire good and marketable title thereto, free and clear of any liens, encumbrances, equities and claims. (ii) Such Selling Shareholder has full right, power and authority to execute and deliver this Agreement, the Power of Attorney, and the Custodian Agreement referred to below and to perform its obligations under such Agreements. The execution and delivery of this Agreement and the consummation by such Selling Shareholder of the transactions herein contemplated and the fulfillment by such Selling Shareholder of the terms hereof will not require any consent, approval, authorization, or other order of any court, regulatory body, administrative agency or other governmental body (except as may be required under the Act, state securities laws or Blue Sky laws) and will not result in a breach of any of the terms and provisions of, or constitute a default under, organizational documents of such Selling Shareholder, if not an individual, or any indenture, mortgage, deed of trust or other agreement or instrument to which such Selling Shareholder is a party, or of any order, rule or regulation applicable to such Selling Shareholder of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. 7 8 (iii) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to, or which has constituted, or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of the Common Stock of the Company and, other than as permitted by the Act, the Selling Shareholder will not distribute any prospectus or other offering material in connection with the offering of the Shares. (iv) Without having undertaken to determine independently the accuracy or completeness of either the representations and warranties of the Company contained herein or the information contained in the Registration Statement, such Selling Shareholder has no reason to believe that the representations and warranties of the Company contained in this Section 1 are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement which has adversely affected or may adversely affect the business of the Company; and the sale of the Option Shares by such Selling Shareholder pursuant hereto is not prompted by any information concerning the Company which is not set forth in the Registration Statement or the documents incorporated by reference therein. The information pertaining to such Selling Shareholder under the caption "Selling Shareholders" in the Prospectus is complete and accurate in all material respects. 2. PURCHASE, SALE AND DELIVERY OF THE SHARES. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $[net price] per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. (b) Certificates representing a number of the Option Shares or the option agreements, representing the options granted by the Company to the Selling Shareholders to purchase a number of the Option Shares (the "Option Agreements"), have been placed and, upon exercise of such options, certificates for such Shares to be sold hereunder by the Selling Shareholders shall be placed, in custody with Wells Fargo Bank Minnesota, N.A. as custodian (the "Custodian") pursuant to the Custodian Agreement executed by each Selling Shareholder for delivery of any Option Shares to be sold hereunder by the Selling Shareholders. Each of the Selling Shareholders specifically agrees that the Option Agreements, and Option Shares represented by the certificates, held, and to be held, in custody for the Selling Shareholders under the Custodian Agreement are, and will be, subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Shareholders for such custody are to that extent irrevocable, and that the obligations of the Selling Shareholders hereunder shall not be terminable by any act or deed of the Selling Shareholders (or by any other person, firm or corporation including the Company, the Custodian or the Underwriters) or by operation of law (including the death of an individual Selling Shareholder or the dissolution of a corporate Selling Shareholder) or by the occurrence of any other event or events, except as set forth in the Custodian Agreement. If any such event should occur prior to the delivery to the Underwriters of the Option Shares hereunder, the Option Agreements and the certificates for the Options Shares shall be delivered 8 9 by the Custodian in accordance with the terms and conditions of this Agreement as if such event has not occurred. The Custodian is authorized to receive and acknowledge receipt of the proceeds of sale of the Option Shares held by it against delivery of such Option Shares. (c) Payment for the Firm Shares to be sold hereunder is to be made in Federal (same day) funds to an account designated by the Company for the shares to be sold by it, in each case against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made through the facilities of the Depository Trust Company at 10:00 a.m., New York time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.) (d) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company and the Selling Shareholders hereby grant an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. The maximum number of Option Shares to be sold by the Company and the Selling Shareholders is set forth opposite their respective names on Schedule II hereto. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Company, the Attorney-in-Fact, and the Custodian setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. If the option granted hereby is exercised in part, the respective number of Option Shares to be sold by the Company and each of the Selling Shareholders listed in Schedule II hereto shall be determined on a pro rata basis in accordance with the percentages set forth opposite their names on Schedule II hereto, adjusted by you in such manner as to avoid fractional shares. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to the total number of Firm Shares, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company and the Attorney-in-Fact. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in Federal (same day) funds drawn to the order of the Company for the Option Shares to be sold by it and to the order of "Wells Fargo Bank Minnesota, 9 10 N.A., as Custodian" for the Option Shares to be sold by the Selling Shareholders against delivery of certificates therefor through the facilities of the Depository Trust Company, New York, New York. (e) Upon receipt by the Company and the Attorney-in-Fact of notice from you, as Representatives of the several Underwriters, of their intent to exercise their option to purchase the Option Shares, the Attorney-in-Fact, on behalf of the Selling Shareholders, shall exercise the options to purchase the Option Shares, and the Selling Shareholders shall deliver to the Company the appropriate exercise price under such option as soon as possible, but in no event later than one business day following the receipt of such notice. Upon receipt thereof, the Company shall deliver to the Custodian certificate(s) representing such Option Shares. (f) If on the Option Closing Date, any Selling Shareholder fails to sell the Option Shares which such Selling Shareholder has agreed to sell on such date as set forth in Schedule II hereto, the Company agrees that it will sell or arrange for the sale of that number of shares of Common Stock to the Underwriters which represents the number of Option Shares which such Selling Shareholder has failed to so sell, as set forth in Schedule II hereto, or such lesser number as may be requested by the Representatives. 3. OFFERING BY THE UNDERWRITERS. It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deem it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. 4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS. (a) The Company covenants and agrees with the several Underwriters that: (i) The Company will (A) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, (B) not file any amendment to the Registration Statement or supplement to the Prospectus or document incorporated by reference therein of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations and (C) 10 11 file on a timely basis all reports and any definitive proxy or information statements required to be filed by the Company with the Commission subsequent to the date of the Prospectus and prior to the termination of the offering of the Shares by the Underwriters. (ii) The Company will advise the Representatives promptly (A) when the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (iii) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (iv) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives, at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), including documents incorporated by reference therein, and of all amendments thereto, as the Representatives may reasonably request. (v) The Company will comply with the Act and the Rules and Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will either (A) prepare and file with the Commission an appropriate amendment to the 11 12 Registration Statement or supplement to the Prospectus or (B) prepare and file with the Commission an appropriate filing under the Exchange Act which shall be incorporated by reference in the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (vi) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (vii) Prior to the Closing Date, the Company will furnish to the Underwriters, as soon as they have been prepared by or are available to the Company, a copy of any unaudited interim financial statements of the Company for any period subsequent to the period covered by the most recent financial statements appearing in the Registration Statement and the Prospectus. (viii) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivative of Common Stock (or agreement for such) will be made for a period of 90 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of Deutsche Bank Securities Inc. ("DBSI"), except for (A) the issuance of shares of Common Stock of the Company upon exercise of currently outstanding options, warrants or other securities convertible into or exchangeable or exercisable for shares of Common Stock and (B) the grant or issuance of options to purchase shares of Common Stock pursuant to the Company's currently existing stock option plans and the issuance of shares of Common Stock upon exercise of such options. (ix) The Company will use its best efforts to maintain the designation of, subject to notice of issuance, the Shares on The Nasdaq Stock Market. (x) The Company has caused each officer and director of the Company to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters, pursuant to which each such person shall agree not to offer, sell, sell short or otherwise dispose of any shares of Common Stock of the Company or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for Common Shares or derivative of Common Shares owned by such person or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition of) for a period of 90 days after the date of this Agreement, directly or indirectly, except with the prior written consent of DBSI ("Lockup Agreements"). 12 13 (xi) The Company shall apply the net proceeds of its sale of the Shares as set forth in the Prospectus. (xii) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Shares in such a manner as would require the Company to register as an investment company under the 1940 Act. (xiii) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock. (xiv) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. (b) Each of the Selling Shareholders covenants and agrees with the several Underwriters that: (i) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other capital stock of the Company or other securities convertible, exchangeable or exercisable for Common Stock or derivative of Common Stock owned by the Selling Shareholder or request the registration for the offer or sale of any of the foregoing (or as to which the Selling Shareholder has the right to direct the disposition of) will be made for a period of 90 days after the date of this Agreement, directly or indirectly, by such Selling Shareholder otherwise than hereunder or with the prior written consent of DBSI. (ii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with respect to the transactions herein contemplated, each of the Selling Shareholders agrees to deliver to you prior to or at the Option Closing Date a properly completed and executed United States Treasury Department Form W-8 or W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). (iii) Such Selling Shareholder will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 5. COSTS AND EXPENSES. The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Sellers under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company and the Selling Shareholders, except as provided below with respect to the Selling Shareholders; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters' Invitation Letter, the Blue Sky Memorandum and any supplements or amendments thereto; the filing 13 14 fees of the Commission; the filing fees and expenses (including legal fees and disbursements) incident to securing any required review by the NASD of the terms of the sale of the Shares; the fees and expense incurred in connection with the designation of the Shares on the Nasdaq Stock Market; the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws; the costs of preparing stock certificates; and the costs and fees of any registrar or transfer agent. The Selling Shareholders have agreed with the Company to reimburse the Company for a portion of such expenses. To the extent, if at all, that any of the Selling Shareholders engage special legal counsel to represent them in connection with this offering, the fees and expenses of such counsel shall be borne by such Selling Shareholder. Any transfer taxes imposed on the sale of the Shares to the several Underwriters will be paid by the Sellers pro rata. The Company shall not be required to pay for any of the Underwriters' expenses (other than those related to qualification under NASD regulation and State securities or Blue Sky laws) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied, or because this Agreement is terminated by the Representatives pursuant to Section 11 hereof (other than by reason of Section 9 hereof), or by reason of any failure, refusal or inability on the part of the Company or the Selling Shareholders to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on their part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company and the Selling Shareholders shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company and the Selling Shareholders contained herein, and to the performance by the Company and the Selling Shareholders of their covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares. 14 15 (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Faegre & Benson LLP, counsel for the Company and the Selling Shareholders, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, or in which the failure to qualify would have a material adverse effect upon the business of the Company taken as a whole. (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's Common Stock have been duly authorized; the outstanding shares of the Company's Common Stock have been duly authorized and validly issued and are fully paid and non-assessable; all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares, assuming they are in the form filed with the Commission, are in due and proper form; the shares of Common Stock, including the Option Shares, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and non-assessable when issued and paid for as contemplated by this Agreement; and, to such counsel's knowledge, no preemptive rights of stockholders exist with respect to any of the Shares or the issue or sale thereof. (iii) Except as described in or contemplated by the Prospectus, to such counsel's knowledge, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order proceedings with respect thereto have been instituted or are pending or threatened by the Commission. (v) The Registration Statement, the Prospectus and each amendment or supplement thereto and document incorporated by reference therein comply as to form in all material respects with the requirements of the Act or the Exchange Act and the applicable rules and regulations thereunder 15 16 (except that such counsel need express no opinion as to the financial statements and related schedules and statistical information included or incorporated by reference therein). The conditions for the use of Form S-3, set forth in the General Instructions thereto, have been satisfied. (vi) Such counsel does not know of any contracts or documents required to be filed as exhibits to or incorporated by reference in the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed, incorporated by reference or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (vii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company except as set forth in the Prospectus. (viii) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Certificate of Incorporation or By-Laws of the Company, or any agreement or instrument known to such counsel to which the Company is a party or by which the Company may be bound. (ix) This Agreement has been duly authorized, executed and delivered by the Company. (x) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xi) The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act. (xii) This Agreement has been duly authorized, executed and delivered on behalf of the Selling Shareholders. (xiii) Each Selling Shareholder has full legal right, power and authority, and any approval required by law (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion), to sell, assign, transfer and deliver the portion of the Shares to be sold by such Selling Shareholder. (xiv) The Custodian Agreement and the Power of Attorney executed and delivered by each Selling Shareholder is valid and binding. 16 17 (xv) The Underwriters (assuming that they are bona fide purchasers within the meaning of the Uniform Commercial Code) have acquired good and marketable title to the Shares being sold by each Selling Shareholder on the Option Closing Date free and clear of all liens, encumbrances, equities and claims. (xvi) Each of the options to be exercised by the Selling Shareholders have been duly and validly issued by the Company to the Selling Shareholders, are currently exercisable in full by the Selling Shareholders, and the shares of Common Stock issuable upon exercise of such options, when issued upon exercise of such options in accordance with the terms thereof, shall be duly authorized, validly issued, fully paid and non-assessable. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Faegre & Benson LLP may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Representatives shall have received from Dorsey & Whitney LLP, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, to the effect that: (i) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. (ii) The authorized capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus. The outstanding shares of the capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. The Shares have been duly authorized and, upon issuance, delivery and payment therefore as described in this Agreement, will be validly issued, fully paid and nonassessable. The certificates representing the Shares are in proper form under the Delaware General Corporation Law. (iii) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order proceedings with respect thereto have been instituted or are pending or threatened by the Commission. 17 18 (iv) The execution and delivery of this Agreement and issue and sale of the Shares will not violate or conflict with the Certificate of Incorporation or By-laws of the Company, or any agreement or instrument filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. (v) No consent, approval, authorization or order of, and notice to or filing with, any governmental agency or body or any court is required to be obtained or made by the Company for the issuance and sale of the Shares pursuant to the terms of this Agreement, (other than as may be required by the NASD or as required by State securities and Blue Sky laws), expect as have been obtained or made, specifying the same. In rendering such opinion Dorsey & Whitney LLP may rely as to all matters governed other than by the laws of the State of Delaware or Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact, necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Dorsey & Whitney LLP may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Representatives shall have received at or prior to the Closing Date from Dorsey & Whitney LLP a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (e) You shall have received, on each of the date hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to you, of Ernst & Young LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. 18 19 (f) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission; (ii) The representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be, and the Company has performed all of its obligations under this Agreement to be performed at or prior to the Closing Date or the Option Closing Date, as the case may be; (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made; (iv) He has carefully examined the Registration Statement and the Prospectus and, in his opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company taken as a whole, whether or not arising in the ordinary course of business. (g) The Company and the Selling Shareholders shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested. (h) The Firm Shares and Option Shares, if any, have been approved for designation upon notice of issuance on the Nasdaq Stock Market. (i) The Lockup Agreements described in Section 4(a)(x) are in full force and effect. 19 20 The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to Dorsey & Whitney LLP, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company and the Selling Shareholders of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Selling Shareholders, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS. The obligations of the Sellers to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. (a) The Company agrees: (i) to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (A) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, (B) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (C) any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon matters covered by clause (A) or (B) above (provided, that the Company shall not be liable under this clause (C) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct); provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or 20 21 such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. (ii) to reimburse each Underwriter and each such controlling person upon demand for any legal or other out-of-pocket expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding. In the event that it is finally judicially determined that the Underwriters were not entitled to receive payments for legal and other expenses pursuant to this subparagraph, the Underwriters will promptly return all sums that had been advanced pursuant hereto. (b) The Selling Shareholders agree to indemnify the Underwriters and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or controlling person may become subject under the Act or otherwise to the same extent as indemnity is provided by the Company pursuant to Section 8(a) above. In no event, however, shall the liability of any Selling Shareholder for indemnification under this Section 8(b) exceed the proceeds received by such Selling Shareholder from the Underwriters in the offering. This indemnity obligation will be in addition to any liability which the Company may otherwise have. (c) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, the Selling Shareholders, and each person, if any, who controls the Company or the Selling Shareholders within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, Selling Shareholder or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, Selling Shareholder or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such 21 22 person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a), (b) or (c) shall be available to any party who shall fail to give notice as provided in this Section 8(d) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a), (b) or (c). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) or (b) and by the Company and the Selling Shareholders in the case of parties indemnified pursuant to Section 8(c). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (e) To the extent the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a), (b) or (c) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by 22 23 applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Shareholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(e) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section (e), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation, and (iii) no Selling Shareholders shall be required to contribute any amount in excess of the proceeds received by such Selling Shareholder from the Underwriters in the offering. Underwriters' obligations in this Section 8(e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The 23 24 indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company or a Selling Shareholder), you, as Representatives of the Underwriters, shall use your reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company and the Selling Shareholders such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of shares of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company or you as the Representatives of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: (a) if to the 24 25 Underwriters, to Deutsche Bank Securities Inc., 101 California Street, San Francisco, California 94111. Attention: [H. Michael Cohen]; with a copy to Deutsche Bank Securities Inc., 31 West 52nd Street, New York, New York 10019, Attention: General Counsel and a copy to Dorsey & Whitney LLP, Pillsbury Center South, 220 South Sixth Street, Minneapolis, Minnesota, 55402, Attention: Amy E. Ayotte; (b) if to the Company and the Selling Shareholders, to CIMA Labs, Inc., 10000 Valley View Road, Eden Prairie, Minnesota 55344, Attention: John M. Siebert; with a copy to Faegre & Benson LLP, 2200 Wells Fargo Center, 90 South Seventh Street, Minneapolis, Minnesota 55402, Attention: Gale R. Mellum. 11. TERMINATION. This Agreement may be terminated (a) by you by notice to the Sellers at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company taken as a whole, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable or inadvisable to market the Shares or to enforce contracts for the sale of the Shares, or (iii) suspension of trading in securities generally on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or may materially and adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by United States or New York State authorities, (vi) any downgrading, or placement on any watch list for possible downgrading, in the rating of the Company's debt securities by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Exchange Act); (vii) the suspension of trading of the Company's Common Stock by the Nasdaq Stock Market, the Commission, or any other governmental authority or, (viii) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (b) as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of the Underwriters, the Company, the Selling Shareholders and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any 25 26 right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase. 13. INFORMATION PROVIDED BY UNDERWRITERS. The Company and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), legends required by Item 502(d) of Regulation S-K under the Act and the information under the caption "Underwriting" in the Prospectus. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of: (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers, and (c) delivery of and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms. Any person executing and delivering this Agreement as Attorney-in-Fact for a Selling Shareholder represents by so doing that he has been duly appointed as Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and binding Power of Attorney which authorizes such Attorney-in-Fact to take such action. Very truly yours, CIMA LABS, INC. By ----------------------------------------- Its ----------------------------------------- Selling Shareholders listed on Schedule II By ----------------------------------------- 26 27 Attorney-in-Fact The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. DEUTSCHE BANK SECURITIES INC. SG COWEN SECURITIES CORPORATION FAHNESTOCK & CO. INC. As Representatives of the several Underwriters listed on Schedule I By: Deutsche Bank Securities Inc. By: ---------------------------- Authorized Officer 27 28 SCHEDULE I SCHEDULE OF UNDERWRITERS
Number of Firm Shares Underwriter to be Purchased ----------- --------------------- Deutsche Bank Securities Inc. SG Cowen Securities Corporation Fahnestock & Co. Inc. ------------- Total 2,500,000 -------------
28 29 SCHEDULE II SCHEDULE OF OPTION SHARES
Maximum Number Percentage of of Option Shares Total Number of Name of Seller to be Sold Option Shares -------------- ---------------- --------------- ------- --- Total 375,000 100% ------- ---
29 EX-23.2 3 c57747a1ex23-2.txt CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.2 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and in the headnote to "Selected Financial Data" and to the inclusion and incorporation by reference in the Registration Statement (Amendment No. 1 to Form S-3) pertaining to the registration of 2,875,000 shares of common stock, of our report dated February 11, 2000, except for Note 9, as to which the date is March 17, 2000, with respect to the financial statements and schedule of CIMA LABS INC., included in such Registration Statement and included in the Annual Report (Form 10-K/A) for the year ended December 31, 1999. /s/ Ernst & Young LLP Minneapolis, Minnesota October 13, 2000 -----END PRIVACY-ENHANCED MESSAGE-----