-----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, O49ektpl1FMvR98XZLvtYjloaR9Pk3tXzqi03UBdVvMOKbRwqXzwqvEyFu4d50fY T5QDwnNywU5T+/zo6+1AHQ== 0000950124-01-001621.txt : 20010328 0000950124-01-001621.hdr.sgml : 20010328 ACCESSION NUMBER: 0000950124-01-001621 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIMA LABS INC CENTRAL INDEX KEY: 0000833298 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 411569769 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24424 FILM NUMBER: 1579651 BUSINESS ADDRESS: STREET 1: 10000 VALLEY VIEW ROAD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344-9361 BUSINESS PHONE: 9529478700 MAIL ADDRESS: STREET 1: 10000 VALLEY VIEW ROAD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344-9361 10-K405 1 c61004e10-k405.txt FORM 10-K PURSANT TO ITEM 405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2000 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 0-24424 CIMA LABS INC. (Exact name of registrant as specified in its charter) DELAWARE 41-1569769 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 10000 VALLEY VIEW ROAD, EDEN PRAIRIE, MN 55344-9361 (952) 947-8700 (Address of principal executive (Registrant's telephone number, offices and zip code) including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of common stock held by non-affiliates of Registrant, based upon the last sale price of the Common Stock reported on the Nasdaq National Market tier of The Nasdaq Stock Market on March 22, 2001 was $471,492,004. Common stock outstanding at March 22, 2001 was 14,515,151 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Registrant's Annual Meeting of Stockholders to be held on May 11, 2001 are incorporated by reference in Part III, Items 10, 11, 12 and 13, of this Form 10-K. 2 PART I. FORWARD-LOOKING STATEMENTS We make many statements in this Annual Report on Form 10-K under the captions Business, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Factors That Could Affect Future Results and elsewhere, which 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 Factors That Could Affect Future Results and elsewhere in this report. These forward-looking statements speak only as of the date of this report, 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 report. 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 2001; 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 report 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 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. ITEM 1. BUSINESS COMPANY OVERVIEW 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 report. Unless the context otherwise indicates, all references to the "Registrant," the "Company," or "CIMA" in this Form 10-K relate to CIMA LABS INC. CIMA and the CIMA logo are trademarks of CIMA. All other trademarks used in this report 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 "OraSolvSR(TM)," "DuraSolv(TM)," "PakSolv(TM)," "OraVescent(TM)SL/BL" and "OraVescent(TM)SS." "Triaminic(R)" and "Softchews(R)" are trademarks of Novartis. "Zomig(R)," "Zomig-ZMT(TM)" and "Rapimelt(TM)" are trademarks of AstraZeneca. "Remeron(R)" and "SolTab(TM)" are trademarks of Organon. "Tempra(R)" is a registered trademark of a Canadian affiliate of Bristol-Myers Squibb. "FirsTabs(TM)" is a trademark of Bristol-Myers Squibb. "NuLev(TM)" is a trademark of Schwarz Pharma. 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 the need for water. We currently manufacture five pharmaceutical brands utilizing our DuraSolv and OraSolv fast dissolve technologies: three prescription brands and two over-the counter brands. These brands include Triaminic Softchews for Novartis, Tempra FirsTabs for Bristol-Myers Squibb, Zomig-ZMT and its equivalent for the European market, Zomig Rapimelt, for AstraZeneca, Remeron SolTab for Organon and NuLev for Schwarz Pharma. The FDA is currently reviewing American Home Products' regulatory submission for a product we developed, an orally disintegrating dosage form of loratadine. 2 3 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 dosage forms. 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, Organon, Novartis and Schwarz Pharma. In addition to our proprietary OraSolv and DuraSolv fast dissolve technologies, we are developing several new drug delivery technologies. Sustained release technology, which adds sustained release properties to the fast dissolve and taste masking attributes available with our DuraSolv and OraSolv technologies. 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 our OraVescent technologies to improve the transport of poorly absorbed active drug ingredients 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 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. 3 4 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 and DuraSolv fast dissolve drug delivery technologies. We have developed all of our fast dissolve technologies internally. We currently manufacture five pharmaceutical brands incorporating our proprietary fast dissolve technologies, of which three products use our OraSolv technology and two products use our DuraSolv technology. We have entered into collaborations with pharmaceutical companies to develop two additional products incorporating our DuraSolv technology, including one with sustained release properties. We are also developing innovative transmucosal oral drug delivery technologies. 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 have developed and manufacture several important OraSolv formulations, which include Triaminic Softchews for Novartis, Tempra FirsTabs for Bristol-Myers Squibb and Remeron SolTab for Organon. 4 5 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 drug ingredient. Consumer testing by us and our pharmaceutical company partners has demonstrated high acceptability of this technology. We were granted a U.S. patent for the DuraSolv technology in 2000. We have developed and manufacture several important DuraSolv formulations, which include Zomig-ZMT and Zomig Rapimelt for AstraZeneca and Nulev for Schwarz Pharma. In addition, we are currently developing DuraSolv formulations of new products for American Home Products and Schwarz Pharma. Sustained Release. Our OraSolv and DuraSolv technologies may be combined with a sustained release formulation to extend the period of an active drug ingredient's effectiveness. We incorporate time-release beads into our tablets, to provide the benefits of a sustained release of an active drug ingredient with the improved convenience of a fast dissolve dosage form. To date, we have not commercialized a product incorporating our sustained release 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. The U.S. Patent and Trademark Office has issued one patent and has allowed claims on one patent application 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 two studies in humans. Our first study in humans 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 from our first study in humans demonstrates OraVescent BL's superior absorption characteristics across mucosal membranes when compared to the other two formulations. Our second study in humans compared our OraVescent SL formulation using the same active drug ingredient we used in our first study in humans. We believe the preliminary results from the second study may demonstrate a quicker onset of action with OraVescent SL when compared to an OraVescent BL formulation using the same active drug ingredient. We expect to perform additional studies in humans and animals 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. 5 6 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. 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, taste masking and sustained release 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 6 7 companies, we were paid approximately $9.9 million, $8.1 million and $6.3 million in 2000, 1999 and 1998, respectively, for up-front fees, milestone and development payments and royalties. We have manufacturing supply agreements in place with Organon for Remeron SolTab, Novartis for Triaminic, American Home Products for loratadine and Schwarz Pharma for NuLev and an undisclosed product and we are negotiating manufacturing supply agreements with AstraZeneca for fast dissolve dosage forms of 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, 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 five pharmaceutical brands using our fast dissolve technologies for five major pharmaceutical company partners. Revenues from sales of our products were approximately 56%, 36% and 14% of our total revenue in 2000, 1999 and 1998, respectively. Our revenue also includes product development fees and licensing revenue for development activities, which were approximately 37%, 58% and 81% of our total revenue in 2000, 1999 and 1998, respectively. We also receive revenue from royalties on product sales, which were approximately 7%, 5% and 5% of our total revenue in 2000, 1999 and 1998. Less than 10% of our total revenues in 2000, 1999 and 1998 were derived from 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 BRAND NAME PHARMACEUTICAL OR ACTIVE THERAPEUTIC CURRENT COMPANY PARTNER INGREDIENT APPLICATION TECHNOLOGY STATUS - ------------------------------- -------------------- -------------------- --------------------- -------------------- American Home Products Loratadine Non-sedating DuraSolv Regulatory antihistamine submission accepted by the FDA AstraZeneca Zomig-ZMT and Anti-migraine DuraSolv Approved for Rapimelt marketing in the U.S. and commercially available in Europe Bristol-Myers Squibb Tempra FirsTabs Pediatric pain OraSolv Commercially reliever available in Canada Organon Remeron SolTab Anti-depression OraSolv Commercially available in the U.S. Novartis Triaminic Softchews Pediatric OraSolv Commercially cold, cough and available in the allergy U.S. and Canada Schwarz Pharma 1) NuLev 1) Gastrointestinal 1) DuraSolv 1) Commercially available in the U.S. 2) Undisclosed 2) Undisclosed 2) DuraSolv, 2) In development Product sustained release
7 8 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. 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, 2000, we received approximately $2.6 million in up-front fees, milestone and development payments from American Home Products. Revenues from American Home Products represented 7% of total revenues in 2000. 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, AstraZeneca received its first European regulatory approval for Zomig Rapimelt, our DuraSolv formulation of AstraZeneca's Zomig (zolmitriptan) tablets. In September 1999, AstraZeneca launched Zomig Rapimelt in Europe and it is currently marketed in fourteen European countries. In February 2001, AstraZeneca received FDA approval to market Zomig-ZMT, our DuraSolv formulation of Zomig (zolmitriptan) tablets. AstraZeneca is expected to commence U.S. marketing in the second quarter of 2001. For the three years ending December 31, 2000, we received approximately $6.5 million in net sales of products, up-front fees, milestone and development payments from AstraZeneca. Revenues from AstraZeneca represented 13% of total revenues in 2000. 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. The license agreement provides that upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 60 days, either party may terminate the agreement. In November 2000, we agreed with Bristol-Myers Squibb to amend the June 8 9 1997 license agreement again. The amendment provides that Bristol-Myers Squibb may not terminate the license agreement before December 31, 2005, and afterwards may terminate for any reason by giving us 60 days written notice and paying us any royalty payments accruing through the termination date. We expect to continue to receive at least minimum royalty payments in connection with sales in Canada through 2005. For the three years ending December 31, 2000, we received approximately $1.8 million in net sales of products, development payments, and royalties from Bristol-Myers Squibb. Revenues from Bristol-Myers Squibb represented 3% of total revenues in 2000. ORGANON In December 1998, we entered into a development and license option agreement with 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 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, which is not cured by the defaulting party within 90 days. We signed a supply agreement with Organon Inc. in February 2001, which has an initial term of five years. Under the license agreement, we receive license and product development fees, milestone payments upon achieving specific milestones, and royalties on any sales of the prescription product. In January 2001, Organon Inc. received FDA approval to market Remeron SolTab. In February 2001, Organon announced the U.S. market launch of Remeron SolTab and its agreement with Solvay Pharmaceuticals to co-promote this product through their respective sales forces. For the three years ending December 31, 2000, we received approximately $10.9 million in net sales of products, up-front fees, milestone and development payments from Organon. Revenues from Organon represented 33% of total revenues in 2000. 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. 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 June 2001, which automatically renews for periods of one year, unless Novartis gives us notice of termination within six months of the expiration date. Either agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, which 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, launched a fourth Triaminic product during the third quarter of 2000 and is expected to launch three new Triaminic products during the second half of 2001. For the three years ending December 31, 2000, we received approximately $16.6 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 36% of total revenues in 2000. SCHWARZ PHARMA In June 2000, we entered into an exclusive development, license and supply agreement with Schwarz Pharma, Inc. to develop and manufacture NuLev, our DuraSolv formulation of a hyoscyamine sulfate prescription product, which is indicated for irritable bowel syndrome. Under the agreement, we also granted Schwarz an option that, if exercised before December 31, 2001, requires us to collaborate with Schwarz to develop one additional 9 10 product. Schwarz Pharma exercised this option in September 2000, and we entered into a second exclusive development, license and supply agreement to develop and manufacture a new DuraSolv formulation for an undisclosed prescription product with sustained release properties. Upon the failure of Schwarz Pharma to meet minimum sales requirements under either the June or September 2000 agreements, 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, which 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 NuLev and for our DuraSolv formulation for an undisclosed prescription product is not required. Schwarz Pharma commenced the U.S. marketing launch of NuLev in March 2001. For the three years ending December 31, 2000, we received approximately $1.4 million in net sales of products, up-front fees, milestone and development payments from Schwarz Pharma. Revenues from Schwarz Pharma represented 6% of total revenues in 2000. 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 eight 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 over 40 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.
EXPIRATION DATE PATENTED TECHNOLOGIES - ---------------------------------------------------------------------------------------- --------------------- Core OraSolv fast-dissolve and taste-masking technology. 2010 The production of compressed effervescent and non-effervescent tablets using a 2010 and 2012 tableting aid developed by us. Effervescent pediatric vitamin and mineral supplement. 2010 The formulation of a base coated, acid effervescent mixture manufactured by controlled 2013 acid base reaction. The obtained mixture can be used in the formulation of acid sensitive compounds with OraSolv technology or other effervescent based products. Taste-masking of micro-particles for oral dosage forms. 2015 Core DuraSolv fast-dissolve and taste-masking technology. 2018 Blister package and packaged tablet 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 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 areas of drug delivery. As of December 31, 2000, we had 32 scientists and other technicians working on research and product development. 10 11 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 years ended December 31, 2000, 1999 and 1998, we spent approximately $5.0 million, $4.4 million and $3.3 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 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 anticipate that our production requirements in 2001 will use substantially all of our existing and planned capacity. We currently anticipate spending approximately $4.0 to $5.0 million during 2001 to complete the construction of the second production line. In addition, we plan to acquire or 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. During the third quarter of 2000, we commercialized our first coated active drug ingredient, mirtazapine, which is the active drug ingredient in Remeron SolTab. We believe our in-house coating capability will be a key factor in signing new agreements related to prescription pharmaceutical drugs. 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, but we may also commence taste masking using our coating unit in Eden Prairie selected active drug 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 has one issued patent and has allowed claims on one patent application, gives us a competitive advantage. 11 12 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 and Maxalt MLT. 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 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 12 13 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. 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 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 March 1, 2001, we had 140 full-time employees, with 102 employees in Eden Prairie and 38 in Brooklyn Park. Of these employees, 80 are engaged in manufacturing and quality assurance, 33 in research and development and 27 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. EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers and their ages as of March 1, 2001 are as follows:
Name Age Title - ------------------------------------ ----- ----------------------------------------------------- John M. Siebert, Ph.D. 60 Chief Executive Officer and President John H. Hontz, Ph.D. 44 Chief Operating Officer David A. Feste 49 Vice President, Chief Financial Officer and Secretary
Our executive officers serve at the discretion of the board of directors with no fixed term. There are no family relationships between or among any of our executive officers or directors. 13 14 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 February 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. ITEM 2. PROPERTIES 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. ITEM 3. LEGAL PROCEEDINGS On October 29, 1997, we instituted an opposition proceeding in the European Patent Office seeking cancellation of a patent owned by Laboratories Prographarm of Chateauneuf, France. We alleged that publications exist which are prior art against the European patent, including an international patent application owned by us, which was published prior to the priority date of the European patent. Subsequently, Prographarm changed the claims in its patent and refiled. In a written opinion issued on February 1, 2001, the European Patent Office revoked Prographarm's European patent. Prographarm has until April 1, 2001 to file an appeal with the European Patent Office. On February 27, 1997, the U.S. Patent and Trademark Office suspended prosecution of a U.S. patent application owned by us to consider our request that an interference proceeding be declared between a pending U.S. patent application owned by us and a U.S. patent owned by Prographarm. We are seeking a determination by the U.S. Patent Office that either (i) our personnel are the prior inventors of the invention encompassed by the Prographarm U.S. patent and accordingly that we are entitled to claims directed to the same invention in a new patent to be owned by us, or (ii) a determination that the claims are unpatentable to us or Prographarm. Either ruling would result in the cancellation of the Prographarm U.S. patent. We are making the same factual allegations in the European opposition with the addition of, our pending U.S. patent application and the priority date of such pending application. Subsequently, Prographarm changed the claims in its patent, refiled and submitted to re-examination in the U.S. Patent Office, and has offered to amend its claims. The U.S. Patent Office conducted a re-examination and a re-examination certificate has issued with new claims. No interference was ever declared between the Prographarm patent and CIMA's patent application and we do not expect one based on the scope of the revised claims in the re-examination certificate. However, a final decision has not been reached on the patentability of CIMA's U.S. patent application. 14 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 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, 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 ENDED DECEMBER 31, 2000: First Quarter........................................................................... 25.25 12.13 Second Quarter.......................................................................... 20.69 12.56 Third Quarter........................................................................... 52.06 20.69 Fourth Quarter.......................................................................... 72.13 48.25
HOLDERS On March 22, 2001 the last reported sale price of our common stock was $52.063 per share. We had 94 stockholders of record and an estimated 3,500 beneficial owners of our common stock as of March 22, 2001. DIVIDENDS 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. ITEM 6. SELECTED FINANCIAL DATA This section presents our historical financial data. You should read carefully the financial statements included in this Annual Report, 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, 2000, 1999 and 1998 and the balance sheet data as of December 31, 2000 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 Annual Report on Form 10-K. The statement of operations data for the years ended December 31, 1997 and 1996 and the balance sheet data as of December 31, 1998, 1997 and 1996 have been derived from financial statements that have been audited by Ernst & Young LLP, and are not included elsewhere in this Annual Report. 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 and see Item 7 of this report for an explanation of accounting changes regarding revenue recognition under the caption "Recently Issued Accounting Pronouncements." 15 16 SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Operating revenues: Net sales.......................................$ 13,407 $ 4,839 $ 1,097 $ 2,628 $ -- Product development fees and licensing.......... 8,817 7,818 6,141 2,282 1,472 Royalties....................................... 1,695 735 374 -- -- ---------- ---------- ---------- ---------- ---------- Total operating revenues.......................... 23,919 13,392 7,612 4,910 1,472 ---------- ---------- ---------- ---------- ---------- Operating expenses: Costs of goods sold............................. 12,410 7,546 4,476 4,376 -- Research and product development................ 4,958 4,388 3,307 3,364 5,403 Selling, general and administrative............. 3,880 2,836 3,138 3,487 2,909 ---------- ---------- ---------- ---------- ---------- Total operating expenses.......................... 21,248 14,770 10,921 11,227 8,312 ---------- ---------- ---------- ---------- ---------- Other income, net................................. 2,114 116 122 479 494 ---------- ---------- ---------- ---------- ---------- Income (loss) before cumulative effect of a change in accounting principle................... 4,785 (1,262) (3,187) (5,838) (6,346) Cumulative effect of a change in accounting principle, net of income taxes................... (799) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss).................................$ 3,986 $ (1,262) $ (3,187) $ (5,838) $ (6,346) ========== ========== ========== ========== ========== Net income (loss) per share: Basic Net income (loss) per share before cumulative effect of a change in $ .43 $ (.13) $ (.33) $ (.61) $ (.72) accounting principle......................... Net loss per share from cumulative effect of a change in accounting principle.......... (.07) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) per basic share...............$ .36 $ (.13) $ (.33) $ (.61) $ (.72) ========== ========== ========== ========== ========== Diluted Net income (loss) per share before cumulative effect of a change in $ .39 $ (.13) $ (.33) $ (.61) $ (.72) accounting principle......................... Net loss per share from cumulative effect of a change in accounting principle.......... (.07) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) per diluted share.............$ .32 $ (.13) $ (.33) $ (.61) $ (.72) ========== ========== ========== ========== ========== Weighted average of number of shares: Basic........................................... 11,151 9,615 9,610 9,519 8,827 Diluted......................................... 12,385 9,615 9,610 9,519 8,827
AS OF DECEMBER 31, --------------------------------------------------------------- BALANCE SHEET DATA: 2000 1999 1998 1997 1996 ---------- --------- ---------- ---------- ---------- Cash and investments..............................$ 163,162 $ 2,481 $ 2,723 $ 4,423 $ 10,263 Total assets...................................... 189,462 19,270 14,916 17,328 22,065 Accumulated deficit............................... (41,991) (45,977) (44,715) (41,527) (35,660) Total stockholders' equity........................ 186,925 11,574 12,656 15,837 21,021
ITEM 7. 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 report. 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 "Factors That Could Affect Future Results" and elsewhere in this report. 16 17 OVERVIEW We develop and manufacture pharmaceutical products based on our proprietary OraSolv and DuraSolv fast dissolve technologies. We currently manufacture five pharmaceutical brands utilizing our DuraSolv and OraSolv fast dissolve technologies: three prescription and two over-the counter brands. These products include Triaminic Softchews for Novartis, Tempra FirsTabs for a Canadian affiliate of Bristol-Myers Squibb, Zomig-ZMT and its equivalent for the European market, Zomig Rapimelt, for AstraZeneca, Remeron SolTab for Organon and NuLev for Schwarz Pharma. The FDA is currently reviewing American Home Products' regulatory submission for a product we developed, an orally disintegrating dosage form of loratadine. We are also currently developing other drug delivery technologies. We operate within a single business 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. Components of revenue, expenses and net income (loss) as a percentage of total operating revenue for the years ending December 31:
2000 1999 1998 ----------------- ---------------- ---------------- Net sales 56.0% 36.1% 14.4% Product development fees & licensing revenues 36.9% 58.4% 80.7% Royalty revenues 7.1% 5.5% 4.9% Cost of goods sold 51.9% 56.3% 58.8% Research & product development expense 20.7% 32.8% 43.5% Selling, general & administrative expense 16.2% 21.2% 41.2% Net income (loss) 16.7% (9.4)% (41.9)%
RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 Operating Revenues. Our total operating revenues were $23.9 million in 2000, compared to $13.4 million in 1999 and $7.6 million in 1998. Operating revenues from AstraZeneca, Organon and Novartis, our three largest pharmaceutical company partners, together represented 82%, 85% and 72% of our total revenues in 2000, 1999 and 1998, respectively. The increases in total operating revenues in each year were due to sequentially increasing development activity for new products that resulted in higher product development fees and licensing revenue, as well as sequentially increasing sales of products we manufacture and royalties on sales by our pharmaceutical company partners under license from us. Revenues from sales of products we manufacture were $13.4 million in 2000, compared to $4.8 million in 1999 and $1.1 million in 1998. The increase from 1999 to 2000 was due primarily to a $5.9 million increase in shipments of branded prescription products, U.S. launch supplies for Remeron SolTab and NuLev, as well as increased international shipments of Zomig Rapimelt. The increase from 1998 to 1999 was due primarily to 17 18 increased shipments of Triaminic that began in the second quarter of 1999. In 2001, revenues from sales of branded prescription products are expected to exceed 50% of total sales of products using our drug delivery technologies. Product development fees and licensing revenues were $8.8 million in 2000, compared to $7.8 million in 1999 and $6.1 million in 1998. The increase from 1999 to 2000 was due primarily to our increased development activity for proposed new products and the achievement of development milestones for American Home Products, AstraZeneca and Organon. Licensing revenues in 2000 are not directly comparable to 1999 due to the change in accounting policy for up-front license fees resulting from the implementation of SAB 101, retroactive to January 1, 2000. Product development fees and licensing revenues for 2000 include amortization of deferred revenue of $1.3 million. 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 Organon and AstraZeneca. Product development fees and licensing revenues in subsequent quarters will depend on our success in signing new license and development agreements with pharmaceutical companies. In 2001, we expect this revenue category to decline as a percentage of total operating revenues. Royalties were $1.7 million in 2000, compared to $735,000 in 1999 and $374,000 in 1998. The increase from 1999 to 2000 was due primarily to increased European sales by AstraZeneca of Zomig Rapimelt, which was launched in selected European countries in late 1999, and due to increased sales by Novartis of Triaminic. The increase from 1998 to 1999 was due to increased sales by Novartis of Triaminic. Royalties paid by Bristol-Myers Squibb for the three years for Tempra were based on annual minimum contractual payments. In 2001, we expect royalties to increase in terms of dollar amounts and as a percentage of total operating revenues. Cost of goods sold. Cost of goods sold was $12.4 million in 2000, compared to $7.5 million in 1999 and $4.5 million in 1999. The increase from 1999 to 2000 was principally due to the initial production volumes of U.S. launch supplies of Remeron SolTab for Organon and Nulev for Schwarz Pharma, as well as increased production volumes of Zomig Rapimelt for AstraZeneca. The increase from 1998 to 1999 was principally due to increased production volumes of Triaminic products for Novartis. In 2001, we expect cost of goods sold to increase, consistent with our expectation for higher production volumes of branded prescription products. Gross profit margins on product sales were $1.0 million in 2000, compared to negative gross margins in 1999 and 1998. The increase from 1999 to 2000 was principally due to significant increases in production volumes of higher margin branded prescription products. In 1999 and 1998, gross margins were negative because we had significant excess production capacity. In 2001, we expect gross profit margins on product sales to increase in terms of dollar amounts and as a percentage of sales of our products, but not necessarily in each quarter, consistent with our expectation for higher production volumes of branded prescription products. Research and product development expenses. Research and product development expenses were $5.0 million in 2000, compared to $4.4 million in 1999 and $3.3 million in 1998. The increase from 1999 to 2000 was due primarily to increased development activity for Organon, Novartis and Schwarz Pharma. The increase from 1998 to 1999 was due primarily to increased development activity on fast dissolve prescription products for Organon and American Home Products. In 2001, we expect research and product development expense to increase significantly in the second half of the year in support of additional development activities on our OraVescent technology and on internally developed products using our OraSolv and DuraSolv technologies. Selling, general and administrative expenses. Selling, general and administrative expenses were $3.9 million in 2000, compared to $2.8 million in 1999 and $3.1 million in 1998. The increase from 1999 to 2000 was due primarily to marketing and related consulting costs associated with our business development efforts, and hiring costs associated with increased professional staffing. The decrease from 1998 to 1999 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. In 2001, we expect selling, general and administrative expenses to increase moderately as we continue to make investments in people and systems to support our anticipated growth. Other income, net. Other income was $2.1 million in 2000, compared to $116,000 in 1999 and $122,000 in 1998. Other income consists primarily of interest income on invested funds, net of interest expense on bank lines, loan agreements and capitalized leases. The increase from 1999 to 2000 was due primarily due to higher levels of 18 19 cash available for investment as a result of the completion of our public offering in November 2000. In 2001, we expect other income to increase significantly due to anticipated levels of cash available for investment. 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 $109.7 million at December 31, 2000. The increase was due primarily to the $169.6 million in net proceeds we received from the private placement of 1,100,000 shares of our common stock in March 2000 and the public offering of approximately 3.2 million shares of common stock in November 2000, partially offset by approximately $7.5 million in expenditures for capital improvements to our manufacturing facility and the repayment of $3.6 million of debt and capital lease obligations. 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 $5.0 to $6.0 million over the next six 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 complete the planning for, and commence the construction or acquisition of, a second manufacturing and distribution facility. We expect this facility to be operational in 2003. We may also refinance or purchase our Eden Prairie and Brooklyn Park facilities, which are currently leased under operating leases. In addition, we expect to fund additional product development activities related to our OraVescent technology and to develop proprietary products using our OraSolv and DuraSolv technologies, as well as acquire new technologies. We believe that our cash and cash equivalents and marketable securities, together with expected revenues from operations, 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. FACTORS THAT COULD AFFECT FUTURE RESULTS Certain statements made in this Annual Report on Form 10-K are forward-looking statements based on our current expectations, assumptions, estimates and projections about our business and our industry. These forward-looking statements involve risks and uncertainties. Our business, financial condition and results of operations could differ materially from those anticipated in these forward-looking statements as a result of certain factors, as more fully described below and elsewhere in this Form 10-K. You should consider carefully the risks and uncertainties described below, which are not the only ones facing our company. Additional risks and uncertainties also may impair our business operations. The Loss Of One Of Our Major Customers Could Reduce Our Revenues Significantly. Revenues from AstraZeneca, Organon and Novartis together represented approximately 82% of our total revenues for the year ended December 31, 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. 19 20 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, Organon, Novartis and Schwarz Pharma. 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 79% from the year ended December 31, 1999 to the year ended December 31, 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 20 21 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, John Hontz, our Chief Operating Officer, or David Feste, our Chief Financial 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 and Mr. Feste, 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. 21 22 Our Commercial Products Are Subject To Continuing Regulations And We May Be Subject To Adverse Consequences If We Fail To Comply With Applicable Regulations. Even if our products receive regulatory approval, either in the U.S. or internationally, we will continue to be subject to extensive regulatory requirements. These regulations are wide-ranging and govern, among other things: - adverse drug experience reporting regulations; - product promotion; - product manufacturing, including good manufacturing practice - requirements; and - product changes or modifications. If we fail to comply or maintain compliance with these laws and regulations, we may be fined or barred from selling our products. If the FDA 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. 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. 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 22 23 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 eight patents on our drug delivery and packaging 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 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 Rights And We May Incur Significant Costs Resolving These Claims. Third parties may claim that the manufacture, the use or the sale of our drug delivery technologies infringe on 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 23 24 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 Our Stock May Fall. Although we were profitable for the year ended December 31, 2000, we have accumulated aggregate net losses from inception of approximately $42.0 million. If we are unable to sustain profitable operations in future periods, 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; - 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, 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. 24 25 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 2000, revenues from Novartis, which included revenues related to Triaminic, a seasonal cold, cough and allergy product, represented 36% 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 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 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. 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 25 26 action by our stockholders. The rights of holders of our common stock may be adversely affected by the rights of the holders of any preferred stock that may be issued in the future. Additional provisions of our certificate of incorporation and bylaws could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting common stock. These include provisions that limit the ability of stockholders to call special meetings or remove a director for cause. We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an "interested stockholder" is a person who, either alone or together with affiliates and associates, owns (or within the past three years, did own) 15% or more of the corporation's voting stock. We also have a stockholders' rights plan, commonly referred to as a poison pill, which makes it difficult, if not impossible, for a person to acquire control of us without the consent of our board of directors. Our Stock Price Has Been Volatile And May Continue To Be Volatile. The trading price of our common stock has been, and is likely to continue to be, highly volatile. The market value of your investment in our common stock may fall sharply at any time due to this volatility. In the year ended December 31, 2000, the closing sale price for our common stock ranged from $12.13 to $72.13. 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; o the level of our development activity conducted for, and at the direction of, pharmaceutical companies under collaborative agreements; and - the level of our spending on new drug delivery technology development and technology acquisition, and internal product development. 26 27 RECENT 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. We adopted SFAS 133 on January 1, 2001, and the adoption did not materially impact our financial statements. 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 year ended December 31, 2000. The effect of the change on the year ended December 31, 2000 was to increase income before cumulative effect of the change in accounting principle by $799,000 or $0.06 per diluted share. For the year ended December 31, 2000, we recognized $799,000 in revenue that is included in the cumulative effect adjustment as of January 1, 2000. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to interest rate and foreign currency risks. Our investments in fixed-rate debt securities, which are classified as available-for-sale at December 31, 2000 have remaining maturities ranging from 3 to 36 months and thus are exposed to the risk of fluctuating interest rates. Available-for-sale securities had a market value of $71.6 million at December 31, 2000, and represented 38% of total assets. We have a contractual commitment to purchase assets for our manufacturing expansion, which commitment is denominated in foreign currency, but we have entered into forward foreign exchange contracts to limit our exposure to fluctuating exchange rates. We performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign exchange rates to the underlying currency exposures described above and in interest rates applicable to fixed rate investments maturing during the next twelve months that are subject to reinvestment risk. As of December 31, 2000, the analysis indicated that these hypothetical market movements would not have a material effect on our financial position, results of operations or cash flow. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Our financial statements as of December 31, 2000 and 1999 and for each of the years ended December 31, 2000, 1999 and 1998 begin on page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 27 28 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1). Financial Statements
PAGE NUMBER IN THIS DESCRIPTION ANNUAL REPORT - ------------------------------------------------------------------------------- ----------------- Audited Financial Statements: Report of Independent Auditors F-1 Balance Sheets F-2 Statements of Operations F-3 Statements of Cash Flows F-4 Statement of Changes in Stockholders' Equity F-5 Notes to Financial Statements F-6 to F-16
(a)(2). Financial Statement Schedules The following financial statement schedule should be read in conjunction with the Audited Financial Statements referred to under Item 14 (a)(1) above. Financial statement schedules not included in this Form 10-K have been omitted because they are not applicable or the required information is shown in the Audited Financial Statement or Notes thereto.
PAGE NUMBER IN THIS DESCRIPTION ANNUAL REPORT - ------------------------------------------------------------------------------- ----------------- Schedule II - Valuation and Qualifying Accounts: Years Ended December 31, 2000, 1999 and 1998 F-17
(a)(3). Listing of Exhibits
Exhibit Method of Number Description Filing - --------- ---------------------------------------------------------------------------------------- ----------- 3.1 Fifth Restated Certificate of Incorporation of CIMA. (1) 3.2 Third Restated Bylaws of CIMA. (12) 4.1 Form of Certificate for Common Stock. (2) 4.2 Rights Agreement, dated March 14, 1997, between CIMA and Norwest Bank Minnesota, N.A. (3) (3) 4.3 Form of Stock Purchase Agreement dated March 13, 2000 between CIMA and certain (14) institutional investors. 10.1 Letter Agreement, dated January 28, 1998, between CIMA and Joseph R. Robinson, Ph.D. *# (4) 10.2 Development and License Option Agreement, dated November 18, 1997, between Novartis (4) Consumer Health, Inc. and CIMA. * 10.3 Development and License Option Agreement, dated December 2, 1998, between N.V. Organon (10) and CIMA. * 10.4 Real Property Lease, dated March 6, 1998, between Braun-Kaiser & Company and CIMA. (4) 10.5 Equity Incentive Plan, as amended and restated. # (12) 10.6 1994 Directors' Stock Option Plan, as amended. # (7) 10.7 Form of Director and Officer Indemnification Agreement. (2) 10.8 License Agreement, dated July 1, 1998, between Novartis Consumer Health Inc. and CIMA.* (8) 10.9 Supply Agreement, dated July 1, 1998, between Novartis Consumer Health Inc. and CIMA. * (8) 10.10 License Agreement, dated January 28, 1994, between SRI International and CIMA. * (2) 10.11 Non-Employee Directors' Fee Option Grant Program. # (9) 10.12 License Agreement, dated June 26, 1997, between Bristol-Myers Squibb Company and CIMA. * (9) 10.13 Development and Option Agreement, dated August 11, 1997, between Schering Corporation and (5) CIMA. *
28 29
Exhibit Method of Number Description Filing - --------- ---------------------------------------------------------------------------------------- ----------- 10.14 Development and License Option Agreement, September 10, 1997, between IPR (5) Pharmaceuticals, Inc. and CIMA. * 10.15 Real Property Lease, Amendment No. 8, dated September 23, 1998, between Principal Life (11) Insurance Company and CIMA. 10.16 License Agreement dated May 28, 1999, between IPR Pharmaceuticals, Inc. and CIMA. * (12) 10.17 Credit and Security Agreement dated July 14, 1999, between Wells Fargo Business Credit, (13) Inc. and CIMA. 10.18 Loan Agreement dated December 15, 1999 between Astra AB and CIMA. * (14) 10.19 License Agreement dated December 29, 1999 between Organon International AG and N.V. (14) Organon, and CIMA. * 10.20 Development and License Agreement dated January 14, 2000 between CIMA and American Home (14) Products Corporation. * 10.21 Supply Agreement dated January 14, 2000 between CIMA and American Home Products (14) Corporation. * 10.22 Employment Agreement, dated June 30, 2000, between CIMA and John M. Siebert, Ph.D. # (15) 10.23 Development, License and Supply Agreement by and between CIMA and Schwarz Pharma, Inc. (15) dated June 30, 2000 * 10.24 Employment Agreement, dated August 23, 2000, between CIMA and John Hontz, Ph.D. # (16) 10.25 Development, License and Supply Agreement by and between CIMA and Schwarz Pharma, Inc. (16) dated September 29, 2000 * 10.26 Employment Agreement, dated January 26, 2001, between CIMA and David Feste. # Filed Herewith 10.27 Toll Manufacturing Agreement between Organon Inc. and CIMA * Filed herewith 23.1 Consent of Ernst & Young LLP. Filed herewith 24.1 Power of Attorney. Filed Herewith 27.1 Financial Data Schedule. Filed herewith
* Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934. # Management contract, compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. (1) Incorporated herein by reference to the correspondingly numbered exhibit to CIMA's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (2) Filed as an exhibit to CIMA's Registration Statement on Form S-1, File No. 33-80194, and incorporated herein by reference. (3) Incorporated by reference herein to Exhibit 2 to CIMA's Current Report on Form 8-K, filed March 25, 1997. (4) Incorporated by reference to the correspondingly numbered exhibit to CIMA's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-24424. (5) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 0-24424, and incorporated herein by reference. 29 30 (6) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-24424, and incorporated herein by reference. (7) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 0-24424, and incorporated herein by reference. (8) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 0-24424, and incorporated herein by reference. (9) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, File No. 0-24424, and incorporated herein by reference. (10) Incorporated herein by reference to the correspondingly numbered exhibit to CIMA's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 0-24424. (11) Incorporated herein by reference to the correspondingly numbered exhibit to CIMA's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (12) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, File No. 0-24424, and incorporated herein by reference. (13) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 0-24424, and incorporated herein by reference. (14) Filed as an exhibit to CIMA's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 0-24424, and incorporated herein by reference. (15) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-24424, and incorporated herein by reference. (16) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 0-24424, and incorporated herein by reference. (b). Reports on Form 8-K On October 26, 2000, we filed a report on Form 8-K, which reported under Item 5 the Company's earnings for the three and nine-month period ended September 30, 2000. (c). Exhibits See Item 14(a)(3) above. (d). Financial Statement Schedules See Item 14(a)(2) above. 30 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Eden Prairie, Minnesota, on the 27th day of March, 2001. CIMA LABS INC. By: /s/ David A. Feste David A. Feste Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1934 this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated as of March 27, 2001.
SIGNATURE TITLE - ----------------------------------------- ------------------------------------------------------------------ * Chief Executive Officer (Principal Executive Officer) and Director - ----------------------------------------- John M. Siebert /s/David A. Feste Vice President and Chief Financial Officer (Principal Financial - ----------------------------------------- and Accounting Officer) David A. Feste * Director - ----------------------------------------- Terrence W. Glarner * Director - ----------------------------------------- Steven B. Ratoff * Director - ----------------------------------------- Joseph R. Robinson, Ph.D. By: /s/ David A. Feste ------------------------------------- David A. Feste, Attorney-In-Fact
* David A. Feste, pursuant to the Powers of Attorney executed by each of the officers and directors above whose name is marked by a "*", by signing his name hereto, does hereby sign and execute this Annual Report on Form 10-K on behalf of each of the officers and directors in the capacities in which the name of each appears above. 31 32 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, 2000 and 1999, 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, 2000. Our audits also included the financial statement schedule listed in the index at item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 2 to the financial statements, in 2000 the Company changed its method of accounting for revenue recognition. /s/ Ernst & Young LLP Minneapolis, Minnesota February 21, 2001 F-1 33 CIMA LABS INC. BALANCE SHEETS
AS OF DECEMBER 31, ---------------------------------- 2000 1999 --------------- -------------- ASSETS Current assets: Cash and cash equivalents................................ $ 91,587,716 $ 2,480,698 Available-for-sale securities............................ 10,425,456 -- Trade accounts receivable, net........................... 7,679,617 3,058,258 Interest receivable...................................... 970,997 -- Inventories, net......................................... 1,381,476 2,772,429 Prepaid expenses......................................... 226,908 73,042 ------------- ------------- Total current assets........................................ 112,272,170 8,384,427 Other assets: Available-for-sale securities............................ 61,149,019 -- Lease deposits........................................... 40,651 318,699 Patents and trademarks, net.............................. 258,382 207,243 ------------- ------------- Total other assets.......................................... 61,448,052 525,942 Property, plant and equipment: Construction in progress................................. 3,437,915 2,150,508 Equipment................................................ 12,023,053 8,817,331 Leasehold improvements................................... 7,206,712 4,783,420 Furniture and fixtures................................... 601,008 604,204 --------------- ------------- 23,268,688 16,355,463 Less accumulated depreciation............................ (7,527,218) (5,996,024) ------------- ------------- 15,741,470 10,359,439 ------------- ------------- Total assets................................................ $ 189,461,692 $ 19,269,808 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable......................................... $ 976,576 $ 2,402,726 Accrued compensation..................................... 1,046,453 654,311 Other accrued expenses................................... 438,478 574,868 Notes payable............................................ -- 195,748 Deferred revenue......................................... 75,000 137,084 Current portion of long term debt........................ -- 150,000 Current portion of lease obligations..................... -- 71,485 ------------- ------------- Total current liabilities................................... 2,536,507 4,186,222 Long term debt.............................................. -- 3,350,000 Lease obligations........................................... -- 159,660 ------------- ------------- Total liabilities........................................... 2,536,507 7,695,882 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; 14,358,370, and 9,646,241 shares issued and outstanding at December 31, 2000 and 1999, respectively............ 143,584 96,462 Additional paid-in capital............................. 228,631,594 57,454,661 Accumulated deficit.................................... (41,990,951) (45,977,197) Accumulated other comprehensive income................. 140,958 -- ------------- ------------- Total stockholders' equity.................................. 186,925,185 11,573,926 ------------- ------------- Total liabilities and stockholders' equity.................. $ 189,461,692 $ 19,269,808 ============= =============
See accompanying notes. F-2 34 CIMA LABS INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2000 1999 1998 --------------- --------------- --------------- Operating revenues: Net sales............................... $ 13,406,571 $ 4,839,511 $ 1,097,465 Product development fees and licensing.. 8,817,209 7,817,846 6,140,894 Royalties............................... 1,695,315 735,107 373,764 -------------- ------------- ------------- Total operating revenues................... 23,919,095 13,392,464 7,612,123 -------------- ------------- ------------- Operating expenses: Costs of goods sold..................... 12,409,468 7,545,341 4,475,867 Research and product development........ 4,958,223 4,388,902 3,307,582 Selling, general and administrative..... 3,880,257 2,836,573 3,137,952 -------------- ------------- ------------- Total operating expense.................... 21,247,948 14,770,816 10,921,401 -------------- ------------- ------------- Other income (expense) Interest income, net.................... 2,172,481 10,327 152,366 Other income (expense).................. (58,045) 105,666 (30,567) -------------- ------------- ------------- 2,114,436 115,993 121,799 -------------- ------------- ------------- Income (loss) before cumulative effect of a change in accounting principle.......... $ 4,785,583 $ (1,262,359) $ (3,187,479) Cumulative effect of a change in accounting principle............................... (799,337) -- -- -------------- ------------- ------------- Net income (loss).......................... $ 3,986,246 $ (1,262,359) $ (3,187,479) ============== ============= ============= Net income (loss) per share: Basic Net income (loss) per share before cumulative effect of a change in accounting principle.................. $ .43 $ (.13) $ (.33) Net loss per share from cumulative effect of a change in accounting principle.... (.07) -- -- -------------- ------------- ------------- Net income (loss) per basic share....... $ .36 $ (.13) $ (.33) ============== ============= ============= Diluted Net income (loss) per share before cumulative effect of a change in accounting principle................... $ .39 $ (.13) $ (.33) Net loss per share from cumulative effect of a change in accounting principle (.07) -- -- -------------- ------------- ------------- Net income (loss) per diluted share..... $ .32 $ (.13) $ (.33) ============== ============= ============= Weighted average shares outstanding: Basic................................... 11,150,581 9,615,280 9,610,104 Diluted................................. 12,384,900 9,615,280 9,610,104 Proforma amounts assuming the accounting change were applied retroactively (unaudited): Net income (loss)....................... $ 4,785,583 $ (873,738) $ (3,955,980) Net income (loss) per diluted share..... $ .39 $ (.09) $ (.41) Weighted average diluted shares......... 12,384,900 9,615,280 9,610,104
See accompanying notes F-3 35 CIMA LABS INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 2000 1999 1998 ---------------- -------------- --------------- OPERATING ACTIVITIES Net income (loss).......................... $ 3,986,246 $ (1,262,359) $ (3,187,479) Adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization........... 1,804,276 1,653,319 1,653,017 Loss on impairment of assets............ 374,809 358,291 -- Gain on sale of property, plant and equipment............................. -- -- 4,734 Value of options granted in exchange for services 186,471 -- -- Cumulative effect of change in accounting principle............................. 799,337 -- -- Changes in operating assets and liabilities: Accounts receivable................... (5,592,356) (1,403,462) (56,982) Inventories........................... 1,390,953 (2,293,384) 151,574 Prepaid expenses...................... (153,866) 6,824 66,939 Accounts payable...................... (1,426,150) 1,732,129 541,885 Accrued expenses...................... 255,752 394,136 214,462 Deferred revenue...................... (861,421) (322,021) (282,300) ------------- ------------- ------------- Net cash provided by (used in) operating activities 764,051 (1,154,829) (893,848) ------------- ------------- ------------- INVESTING ACTIVITIES Purchases of property, plant and equipment. (7,470,095) (2,819,700) (406,686) Purchases of available-for-sale securities. (77,352,739) -- -- Proceeds from maturities of available-for-sale securities.............................. 5,919,222 -- 3,277,300 Proceeds from sale of property, plant and equipment 15,000 -- 33,000 Patents and trademarks..................... (157,160) (105,305) (88,841) ------------- ------------- ------------- Net cash (used in) provided by investing activities (79,045,772) (2,925,005) 2,814,773 ------------- ------------- ------------- FINANCING ACTIVITIES Proceeds from exercises of stock options... 1,410,084 180,745 5,700 Net proceeds from stock offerings.......... 169,627,500 -- -- Proceeds from (repayment of) long term debt (3,500,000) 3,500,000 -- Notes payable.............................. (195,748) 195,748 -- Security deposits on leases................ 278,048 26,447 (304,495) Payments on capital lease obligations...... (231,145) (64,998) (45,300) ------------- ------------- ------------- Net cash provided by (used in) financing activities 167,388,739 3,837,942 (344,095) ------------- ------------- ------------- Increase (decrease) in cash and cash equivalents............................. 89,107,018 (241,892) 1,576,830 Cash and cash equivalents at beginning of year 2,480,698 2,722,590 1,145,760 ------------- ------------- ------------- Cash and cash equivalents at end of year... $ 91,587,716 $ 2,480,698 $ 2,722,590 ============= ============= ============= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of equipment pursuant to capital lease $ -- $ -- $ 341,443
See accompanying notes. F-4 36 CIMA LABS INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK RETAINED OTHER ----------------------- ADDITIONAL EARNINGS COMPREHENSIVE SHARES AMOUNT PAID-IN CAPITAL (DEFICIT) INCOME TOTAL ------------ --------- ------------------ -------------- --------------- -------------- BALANCE AT DEC. 31, 1997....... 9,608,394 96,084 57,268,594 (41,527,359) -- 15,837,319 Net loss..................... -- -- -- (3,187,479) -- (3,187,479) Stock options exercised...... 2,000 20 5,680 -- -- 5,700 ------------ --------- ------------ ------------- -------- ------------- BALANCE AT DEC. 31, 1998....... 9,610,394 96,104 57,274,274 (44,714,838) -- 12,655,540 Net loss..................... -- -- -- (1,262,359) -- (1,262,359) Stock options exercised...... 35,847 358 180,387 -- -- 180,745 ------------ --------- ------------ ------------- -------- ------------- BALANCE AT DEC 31, 1999........ 9,646,241 96,462 57,454,661 (45,977,197) -- 11,573,926 Net income................... -- -- -- 3,986,246 -- 3,986,246 Unrealized investment gain... -- -- -- -- 140,958 140,958 ------------- Comprehensive income 4,127,204 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 Issuance of common stock in connection with a public offering, net of offering costs of $10,482,500...... 3,197,500 31,975 149,360,525 -- -- 149,392,500 Stock options exercised in connection with public offering.................. 135,000 1,350 833,650 -- -- 835,000 Stock options exercised...... 279,629 2,797 1,407,287 -- -- 1,410,084 Value of options granted in exchange for services..... -- -- 186,471 -- -- 186,471 ------------ --------- ------------ ------------- -------- ------------- BALANCE AT DEC 31, 2000.......$ 14,358,370 $ 143,584 $228,631,594 $ (41,990,951) 140,958 $ 186,925,185 ============ ========= ============ ============= ======== =============
See accompanying notes. F-5 37 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 the need for water. The Company develops applications for technologies that are licensed to pharmaceutical company partners. The Company currently manufactures and packages five pharmaceutical brands incorporating its proprietary fast-dissolve technologies. Revenues are comprised of three components: net sales of products it manufactures; product development fees and licensing revenues for development activities conducted through collaborative agreements with pharmaceutical companies; and royalties on the sales of products sold by pharmaceutical companies under license from the Company. 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. Available-for-sale securities We classify our investments with maturities of over ninety days when purchased as available-for-sale. Available-for-sale investments are recorded at fair value with unrealized gains and losses reported as other comprehensive income in stockholders' equity. Fair values of investments are based on quoted market prices, where available, and include accrued interest, if applicable. Dividend and interest income is recognized when earned. As of December 31, 2000, approximately $61.1 million of available-for-sale securities had remaining maturities of 12 to 36 months, while the balance, $10.4 million, had remaining maturities of less than 12 months. Financial Instruments The Company has entered into forward foreign exchange contracts to hedge firm purchase commitments of assets denominated in foreign currency. Gains and losses are deferred until the specific asset is acquired, and then are recognized as part of the purchase transaction. The total value of foreign exchange contracts at December 31, 2000 and 1999 was approximately $1,850,000 and $0, respectively. Patents and Trademarks Costs incurred in obtaining patents and trademarks are amortized on a straight-line basis over sixty months. Accumulated amortization was approximately $834,000 at December 31, 2000 and $728,000 at December 31, 1999. 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 $1,698,000 in 2000; $1,533,000 in 1999; and $1,538,000 in 1998. F-6 38 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Inventories Inventories, consisting of finished goods, raw materials and packaging, are valued at cost using the first-in first-out (FIFO) for inventory turn over and control. Inventories are shown net of reserves for obsolescence of approximately $225,000 at December 31, 2000 and $537,000 at December 31, 1999. At December 31, 2000 inventories consisted solely of raw materials and packaging. 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 years ended December 31, 2000 and 1999, the Company recognized approximately $375,000 and $358,000, respectively, of impairment losses on equipment no longer used in operations with an original cost of approximately $557,000 and $1,200,000, respectively, shown as other expense on the Statements of Operations. The cost and associated accumulated depreciation have been removed from the equipment balances on the accompanying December 31, 2000 and 1999 balance sheets. 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. 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 are amortized over the term of the related development 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 year ended December 31, 2000. The effect of the change on the year ended December 31, 2000 was to increase income before cumulative effect of the change in accounting principle $724,337 or $0.06 per diluted share. The pro forma amounts presented in the Statements of Operations were calculated assuming the accounting change was made retroactively to prior periods. For the year ended December 31, 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 year ended December 31, 2000 was to increase income by $799,337. F-7 39 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Research and Development Costs For financial reporting purposes, all costs of research and development activities are expensed as incurred. Research and development activities are performed under contract with the Company's pharmaceutical partners to adapt the Company's fast-dissolve technology to the specific active drug ingredients required by the pharmaceutical partner's products. Revenues earned from these activities are reported as product development fees, licensing revenues and royalties in the Statements of Operations, and related costs are expensed as incurred as research and development expense. Reclassifications Certain amounts presented in the 1999 and 1998 financial statements have been reclassified to conform to the 2000 presentation. 3. NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed by dividing income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (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.
YEAR ENDED DECEMBER 31, ------------------------------------------------- 2000 1999 1998 ------------- ------------ ----------- Numerator: Net income (loss) $ 3,986,246 $(1,262,359) $(3,187,479) ----------- ----------- ----------- Denominator: Denominator for basic net income (loss) per share - weighted average shares outstanding 11,150,581 9,615,280 9,610,104 Effect of dilutive stock options 1,234,319 -- -- ----------- ----------- ----------- Denominator for diluted net income (loss) per share - weighted average shares outstanding 12,384,900 9,615,280 9,610,104 =========== =========== ========== Basic net income (loss) per share $ .36 $ (.13) $ (.33) Diluted net income (loss) per share $ .32 $ (.13) $ (.33)
F-8 40 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 4. AVAILABLE-FOR-SALE SECURITIES The Company's investments in available-for-sale securities are carried at fair value, with unrealized gains and losses included in accumulated other comprehensive income as a separate component of stockholders' equity. The Company did not have any available-for-sale securities for the year ended December 31, 1999. As of December 31, 2000, the amortized cost and estimated market value of available-for-sale securities, all of which have contractual maturities of three years or less, are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------- ------------- ------------ -------------- As of December 31, 2000 Commercial paper $ 4,449,373 $ -- $ 813 $ 4,448,560 Asset backed securities 23,217,006 71,690 -- 23,288,696 Corporate bonds and notes 35,445,721 158,688 10,541 35,593,868 Euro notes 5,338,075 -- 77,860 5,260,215 Floating rate notes 1,998,791 -- 31 1,998,760 U.S. government securities 984,551 -- 175 984,376 ----------- --------- ------- ------------ $71,433,517 $ 230,378 $ 89,420 $ 71,574,475 =========== ========= ========= ============
5. 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 was paid at prime plus 2%. 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 $7,000, $60,000 and $24,000 in interest for the years ended December 31, 2000, 1999 and 1998, respectively. 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 was 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 repaid the loan in full, along with accrued interest, in September 2000. The Company paid approximately $198,000 in interest for the year ended December 31, 2000. 6. INCOME TAXES There is no current or deferred tax expense for the years ended December 31, 2000, 1999 and 1998. The Company utilized net operating loss carry forwards in 2000, and was in a loss position in 1999 and 1998. 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, 2000 and 1999 are as follows (in thousands): F-9 41 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 6. INCOME TAXES (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------------- 2000 1999 ---------- --------- Deferred assets: Net operating loss....................... $ 20,630 $ 18,731 Research tax credit...................... 754 600 Accrued vacation......................... 143 86 Inventory reserve........................ 91 217 Deferred revenue and other 112 -- --------- --------- 21,730 19,634 Deferred liability: Unrealized gains on cash equivalents..... 139 -- Depreciation and amortization............ 187 524 --------- --------- 326 524 --------- --------- Net deferred income tax asset............... 21,404 19,110 Valuation allowance......................... (21,404) (19,110) ---------- --------- Net deferred income taxes................... $ -- $ -- ========== =========
The reconciliation between the statutory federal income tax rate of 34% and the effective rate of income tax expense for the years ended December 31:
2000 1999 1998 ----------------- ----------------- ----------------- Statutory federal income tax rate 34% (34%) (34%) Increase (decrease) in taxes resulting from: Increase in (utilization) of net operating loss carry forwards (34) 34 34 ----------------- ----------------- ----------------- Effective income tax rate --% --% --% ================= ================= =================
The Company's net operating loss carryforwards and research tax credits of approximately $51 million and $754,000, respectively, may be carried forward to offset future taxable income, limited due to changes in ownership under the net operating loss limitation rules. The net operating loss and research tax credit carryforwards expire in the years 2001 to 2020 and the years 2003 to 2015, respectively. 7. 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. F-10 42 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 7. LEASES (CONTINUED) 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: 2001.......................................................................... $ 569,609 2002.......................................................................... 472,145 2003.......................................................................... 380,285 2004.......................................................................... 380,285 2005.......................................................................... 380,285 Thereafter.................................................................... 1,322,123
Rent expense of operating leases, excluding operating expenses, for the years ended December 31, 2000, 1999, and 1998 was $490,000, $525,000, $519,000, respectively. Capital Leases The Company had three leases between 48 and 60 months in length extending through 2003 with Norwest Equipment Finance, Inc. These leases were paid off early in October 2000 and the deposit balance for the leases was recovered at that time. 8. 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. F-11 43 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 8. STOCK OPTIONS (CONTINUED) Shares available and options granted for the Equity Incentive Plan are as follows:
WEIGHTED SHARES AVERAGE AVAILABLE FOR INCENTIVE NON-QUALIFIED TOTAL EXERCISE PRICE GRANT STOCK OPTIONS STOCK OPTIONS OUTSTANDING PER SHARE --------------- ------------- ------------- ------------ --------------- Balance at Dec. 31, 1997.... 145,435 742,671 359,451 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.... 283,711 685,840 676,006 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.... 417,462 859,708 588,300 1,448,008 $ 5.47 Granted.................. (456,962) 147,527 309,435 456,962 24.98 Forfeited................ 224,590 (119,867) (104,723) (224,590) 4.90 Exercised................ -- (245,601) (143,314) (388,915) 5.28 --------- --------- --------- ---------- Balance at Dec. 31, 2000.... 185,090 641,767 649,698 1,291,465 $ 12.53 ========= ========= ========= ========== Exercisable: December 31, 1998 556,626 $ 5.21 December 31, 1999 649,137 $ 5.51 December 31, 2000 506,530 $ 5.62
The following table summarizes information about Equity Incentive Plan options outstanding at December 31, 2000:
WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE NUMBER WEIGHTED RANGE OF NUMBER CONTRACTUAL OUTSTANDING EXERCISABLE AVERAGE EXERCISE PRICES OUTSTANDING LIFE PRICE AT 12/31/00 EXERCISE PRICE - ------------------------------ ---------------- ---------------- -------------- --------------- ------------------ $ 2.625 - $ 3.99 108,880 7.6 years $ 2.91 35,164 $ 3.20 4.00 - 4.99 328,550 6.1 years 4.22 225,549 4.15 5.00 - 5.99 154,087 6.9 years 5.77 129,337 5.79 6.00 - 9.99 107,086 6.3 years 7.48 78,336 7.64 10.00 - 12.99 135,900 8.9 years 10.08 27,365 10.09 13.00 - 19.99 124,762 9.3 years 16.53 9,429 15.09 20.00 - 25.00 202,700 9.5 years 22.26 1,350 23.06 25.00 - 64.375 129,500 9.7 years 37.38 -- -- ----------- ---------- $ 2.625 - $64.375 1,291,465 7.8 years $ 12.53 506,530 $ 5.62 =========== ==========
F-12 44 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 8. STOCK OPTIONS (CONTINUED) Shares available and options granted for Directors' Stock Option Plans are as follows:
WEIGHTED AVERAGE SHARES AVAILABLE NON-QUALIFIED EXERCISE PRICE FOR GRANT STOCK OPTIONS PER SHARE ----------------- -------------- ------------------ Balance at Dec. 31, 1997 151,430 258,570 $ 7.06 Granted............... (37,860) 37,860 2.96 --------- -------- Balance at Dec. 31, 1998 113,570 296,430 6.54 Granted............... (40,960) 40,960 2.27 Exercised............. -- (5,760) 1.30 --------- -------- Balance at Dec. 31, 1999 72,610 331,630 6.10 Granted............... (28,551) 28,551 16.42 Exercised............. -- (25,714) 7.39 Balance at Dec. 31, 2000 44,059 334,467 $ 6.88 ========= =========
The following table summarizes the Directors' Stock Option Plans options outstanding at December 31, 2000:
WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE NUMBER WEIGHTED RANGE OF NUMBER CONTRACTUAL OUTSTANDING EXERCISABLE AVERAGE EXERCISE PRICES OUTSTANDING LIFE PRICE AT 12/31/00 EXERCISE PRICE - ------------------------------ ---------------- ---------------- -------------- --------------- ------------------ $ 1.083 - $ 3.00 40,936 7.5 years $ 1.34 40,936 $ 1.34 3.01 - 5.00 133,551 6.4 years 4.47 133,551 4.47 5.01 - 10.00 100,000 3.7 years 8.33 100,000 8.33 10.01 - 19.50 60,000 6.9 years 13.64 60,000 13.64 ---------- -------- $ 1.083 - $19.50 334,467 5.8 years $ 6.88 334,467 $ 6.88 ========== ========
Options outstanding under the plans expire at various dates during the period from December 2002 through October 2010. Exercise prices for options outstanding as of December 31, 2000, ranged from $1.083 to $64.375 per share. The weighted average fair values of options granted at market during the years ended December 31, 2000, 1999 and 1998 were $15.85, $3.71, and $4.36, respectively. Shares granted at prices other than market in the year ended December 31, 2000 had a fair value of $15.23, and an exercise price of $4.95. 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 for most option grants. However, since options granted under the Non-Employee Directors' Fee Option Plan are granted at a price below market, compensation expense of approximately $72,000 was recognized in the year ended December 31, 2000. F-13 45 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 8. STOCK OPTIONS (CONTINUED) Pro forma information regarding net income (loss) and income (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 2000, 1999, and 1998 respectively; risk-free interest rates of 6.50%, 5.50%, and 5.00%; volatility factor of the expected market price of the Company's common stock of .707, .649, and .630; 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:
2000 1999 1998 -------------- ------------ ------------ Pro forma net income (loss) (in thousands)........ $ 2,171 $ (2,433) $ (4,240) Pro forma net income (loss): per common share, basic........................ $ .19 $ (0.25) $ (0.44) per common share, diluted...................... $ .18 $ (0.25) $ (0.44)
9. DEFINED CONTRIBUTION PLAN The Company has a 401(k) plan (the "Plan"), which covers substantially all employees of the Company. Contributions to the Plan are made through employee wage deferrals and employer matching contributions. The employer matching contribution percentage is discretionary and determined each year. In addition, the Company may contribute two discretionary amounts; one to non-highly compensated individuals and another to all employees. To qualify for the discretionary amounts, an employee must be employed by the Company on the last day of the Plan year or have been credited with a minimum of 500 hours of service during the Plan year. The 401(k) expense for the years ended December 31, 2000, 1999 and 1998 was $68,000, $38,000 and $36,000, respectively. F-14 46 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 10. STOCK OFFERINGS 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. In November 2000, the Company completed a public offering of 3,197,500 shares of common stock at $50 per share, before commissions and expenses. In connection with the offering, certain directors and officers exercised 135,000 stock options, which became part of the public offering. The offering provided approximately $150.2 million in net cash proceeds to the Company. 11. COMMITMENTS The Company has future commitments to purchase fixed assets and leasehold improvements at December 31, 2000 of $4,042,000. These fixed assets are required to complete the second manufacturing line at its Eden Prairie facility. 12. SEGMENT INFORMATION - MAJOR CUSTOMERS The Company operates within a single segment: the development and manufacture of fast-dissolve and enhanced-absorption oral drug delivery systems. Revenues are comprised of three components: net sales of products utilizing the Company's proprietary fast-dissolve technologies; product development fees and licensing revenues for development activities conducted by the Company through collaborative agreements with pharmaceutical companies; and royalties on the sales of products manufactured by the Company, which are sold by pharmaceutical companies under licenses from the Company. Less than 10 percent of the Company's 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 DECEMBER 31, -------------------------------------------------- 2000 1999 1998 ----------- --------- ---------- American Home Products 7% 7% 0% AstraZeneca 13 18 26 Bristol-Myers Squibb 3 4 8 N.V. Organon 33 25 2 Novartis 36 42 44 Schering-Plough -- -- 17 Schwarz Pharma 6 -- -- Other 2 4 3 ------ ------- ------- Total 100% 100% 100%
Trade accounts receivable at December 31, 2000 of approximately $7,680,000 were comprised primarily of the following customers: Organon (48%), Schwarz (15%), Novartis (12%) and AstraZeneca (11%). F-15 47 CIMA LABS INC. NOTES TO FINANCIAL STATEMENTS 13. QUARTERLY FINANCIAL DATA -- UNAUDITED
FOR THE THREE MONTHS ENDED IN THOUSANDS, EXCEPT PER SHARE MOUNTS MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - ---------------------------------------- ------------ ---------- -------------- ------------ 2000 Total operating revenues (a)......................$ 5,712 $ 5,755 $ 5,366 $ 7,086 Cost of goods sold................................ 3,156 3,569 2,692 2,992 Total operating expenses.......................... 1,976 2,090 2,265 2,508 Other income (expense), net....................... (21) 288 213 1,634 ---------- ---------- ---------- ---------- Income (loss) before cumulative effect of a change in accounting principle (a)............... 559 383 623 3,220 Cumulative effect of a change in accounting principle, net of income taxes (a)............... (799) -- -- -- ---------- ---------- ---------- ---------- Net income (loss).................................$ (240) $ 383 $ 623 $ 3,220 ========== ========== ========== ========== Per share amounts: Basic -- Net income (loss) per share (a)........$ (.02) $ .04 $ .06 $ .25 ========== ========== ========== ========== Diluted -- Net income (loss) per share (a)......$ (.02) $ .03 $ .05 $ .22 ========== ========== ========== ========== Range of closing stock prices on NASDAQ...........$12.13 - $25.25 $12.56 - $20.69 $20.69 - $52.06 $48.25 - $72.13 1999 Total operating revenues..........................$ 1,555 $ 3,228 $ 4,208 $ 4,402 Cost of goods sold................................ 824 1,905 2,359 2,457 Total operating expenses.......................... 1,795 1,715 2,028 1,688 Other income (expense), net....................... 249 23 (2) (155) ---------- ---------- ---------- ---------- Net income (loss).................................$ (815) $ (369) $ (181) $ 103 ========== ========== ========== ========== Per share amounts: Basic -- Net income (loss) per share............$ (.08) $ (.04) $ (.02) $ .01 ========== ========== ========== ========== Diluted -- Net income (loss) per share..........$ (.08) $ (.04) $ (.02) $ .01 ========== ========== ========== ========== Range of closing stock prices on NASDAQ...........$2.53 - $3.44 $2.63 - $4.63 $4.63 - $8.38 $6.00 - $13.50
(a) The Company reported a charge to earnings of $799,337 for the cumulative effect of a change in accounting principle, which was included in income in the Company's Form 10-Q for the six-month period ended June 30, 2000, and reflected herein on a proforma basis for the three-month period ended March 31, 2000. The effect of the change on the three-month period ended March 31, 2000, which has been restated herein for the change, was to increase income before cumulative effect of the change in accounting principle by $550,852. Per share amounts for the three-month period ended March 31, 2000 are presented herein on a pro-forma basis and were calculated assuming the accounting change was made retroactively to January 1, 2000. F-16 48 CIMA LABS INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS CHARGED BEGINNING OF TO COSTS AND LESS BALANCE AT END DESCRIPTION YEAR EXPENSES DEDUCTIONS OF YEAR - --------------------------------------- -------------- ------------------ --------------- ------------------ Year ended December 31, 2000: Reserves and allowance deducted From asset accounts: Allowance for doubtful accounts $ 36,000 $ 0 $ (36,000) $ 0 Obsolescence reserve 536,736 375,091 (686,827) 225,000 --------- --------- --------- ---------- TOTAL $ 572,736 $ 411,091 $(686,827) $ 225,000 Year ended December 31, 1999: Reserves and allowance deducted From asset accounts: Allowance for doubtful accounts $ 0 $ 36,000 $ 0 $ 36,000 Obsolescence reserve 156,770 379,966 0 536,736 --------- --------- --------- ---------- TOTAL $ 156,770 $ 415,966 $ 0 $ 572,736 Year ended December 31, 1998: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 32,150 $ 32,150 ($64,300) $ 0 Obsolescence reserve 46,388 110,382 0 156,770 --------- --------- --------- ---------- TOTAL $ 78,538 $ 142,532 ($64,300) $ 156,770
F-17 EX-10.26 2 c61004ex10-26.txt EMPLOYMENT AGREEMENT, DATED JANUARY 26, 2001 1 EXHIBIT 10.26 CIMA LABS INC. EMPLOYMENT AGREEMENT WITH DAVID FESTE THIS AGREEMENT is entered into effective as of the date of signing by and between CIMA LABS INC., a Delaware corporation (the "Company"), and David Feste (the "Employee"). WHEREAS, the Company desires to engage the Employee in the position of Chief Financial Officer to render services for the Company on the terms and conditions set forth in this Agreement; WHEREAS, the Employee desires to be retained by the Company as its Chief Financial Officer; and WHEREAS, both parties recognize the critical importance to the Company, its employees, and its investors of preserving the confidentiality of the Company's trade secrets and confidential information and of protecting the Company against competition from former Employees or other key employees of the Company following their separation from the Company; NOW, THEREFORE, in consideration of the foregoing premises and the parties' mutual covenants and undertakings contained in this Agreement, the sufficiency of which is hereby acknowledged, the Company and the Employee agree as follows: 1. Employment and Term. Subject to the terms and conditions herein provided, the Company hereby continues employment of the Employee, and the Employee hereby accepts employment by the Company, for a term continuing as of January 1, 2001, and thereafter for three (3) years to January 1, 2004. The employment term of the Employee will expire at the expiration of this three (3) year employment continuation term, without further obligation for 2 EXHIBIT 10.26 either party. On or before July 1, 2003, the Company expects to indicate to the Employee whether the Company is interested in continuing employment of the Employee with respect to a new employment agreement. Notwithstanding the foregoing, the Company may terminate the Employee's employment at any time with or without cause. In the event the Employee's employment is terminated without cause prior to the end prior to January 1, 2004, the Board of Directors shall approve a resolution, effective on the date of the Employee's date of termination, to immediately accelerate any option(s) granted under the Company's Equity Incentive Plan, or a successor plan, that would have otherwise vested by the terms of the Employee's option agreement(s) on or before January 1, 2004. For the sake of clarity, the Employee will not receive any acceleration of vesting with respect to his then outstanding options, nor severance pay, should the Employee terminate his employment voluntarily or should the Company terminate his employment for cause. For purposes of this Agreement, "cause" means: (a) any felony conviction; (b) use of intoxicating beverages or chemical abuse that negatively affects job performance (following at least one written warning); (c) an act or acts of personal dishonesty taken by the Employee and intended to result in personal enrichment of the Employee at the expense of the Company; (d) any material breach of the Employee's obligations under this Agreement: (e) the willful misconduct or gross negligence of the Employee in connection with the performance of his duties, responsibilities, agreements, and covenants hereunder, or his failure to comply with the reasonable rules, regulations, policies, directions, and restrictions as may be established from time to time by the Board of Directors, and which 2 3 EXHIBIT 10.26 misconduct, negligence, or failure shall continue for a period of thirty (30) days after written notice to the Employee; or (f) willful conduct of the Employee which brings discredit to the Company, its products, or its services. It is further agreed that the term of the Employee's employment under this Agreement shall automatically terminate in the event of the Employee's death. 2. Duties and Representations of the Employee. During the Employee's employment hereunder, he shall serve as the Company's Chief Financial Officer. The Employee shall devote his full time, attention, knowledge, and skill exclusively to the loyal service of the Company. The Employee represents and warrants to the Company that: (a) his acceptance of employment under this Agreement and his performance of the duties contemplated herein are not in conflict with any obligation, undertaking, or agreement between the Employee and any third party; and (b) he has not and will not, during the course of his employment with the Company, disclose or utilize without permission, any confidential or proprietary information, trade secrets, materials, documents, or property owned by any third party. The Company through the Compensation Committee expects to evaluate the Employee's performance annually during the term of this Agreement. 3. Compensation. The Company shall pay to the Employee the following compensation: (a) Base Salary. The Company shall pay to the Employee an annual base salary of $185,000 beginning January 1, 2001, less legally required deductions and withholdings, payable in periodic installments in accordance with the standard payroll 3 4 EXHIBIT 10.26 practices of the Company in effect from time-to-time. On January 1, 2002, the annual base salary will be adjusted upwards by not less than 5%. On January 1, 2003, the annual base salary will be adjusted upwards from the 2002 increase by not less than 5%. Employee may elect to forego all or any portion of this increase and direct at his sole discretion that the bonus of one or more employees at the Company be increased in the aggregate by the amount of such increase. (b) Incentive Bonus. The Employee will be entitled to receive an incentive bonus award of up to fifty percent (50%) of his base salary depending upon the achievement of objectives defined and agreed to by the Compensation Committee of the Board of Directors prior to the last Board meeting of each calendar year. The award for achievement that occurs against objectives in that year will be agreed-upon by the Compensation Committee and paid before March 1 of the next year. The determination of whether and when any of the objectives are achieved shall be in the reasonable discretion of the Compensation Committee. The determination of any additional incentive bonus programs shall be in the sole discretion of the Compensation Committee. (c) Participation in Benefit Plans. The Employee shall also be entitled to participate in all employee benefit plans or programs of the Company, including any disability and life insurance group plans, to the extent that his position, title, tenure, salary, age, health, and other qualifications make him eligible to participate. (d) Paid Time Off. During the term of the Employee's employment under this Agreement, the Employee shall be entitled to take twenty (20) days of 4 5 EXHIBIT 10.26 paid time off ("PTO")per year with pay, at such times as shall be mutually convenient to the Company and the Employee. (e) Employment-Related Expenses. The Company shall pay or reimburse the Employee for all reasonable and necessary out-of-pocket expenses incurred by him in the performance of his duties under this Agreement, subject to the presentment of appropriate vouchers in accordance with the Company's normal policies for expenses verification. (f) Stock Option. Subject to the terms of a successor plan to the Company's Equity Incentive Plan, and subject to the Employee executing this document and the Board of Directors granting the option, the Company shall cause to be issued to the Employee an incentive stock option to purchase up to seventy-five thousand (75,000) shares of common stock in the Company, effective with the approval by stockholders of any successor plan to the Equity Incentive Plan. This award to the Employee will vest as follows: (i) thirty-three percent (33%) of the shares subject to the option will vest on December 31, 2001; (ii) thirty-three percent (33%) of the shares subject to the option will vest on December 31, 2002; (iii) thirty-three percent (34%) of the shares subject to the option will vest on December 31, 2003; subject to accelerated vesting as provided in a successor plan to the Equity Incentive Plan. (g) Car Allowance. The Employee will be paid a car allowance in the amount of five hundred fifty dollars ($550.00) per month, consistent with the Company's payroll and accounting practices. 4. Change in Control 5 6 EXHIBIT 10.26 (a) In the event (x) a Change in Control (as defined in Section 4(b)) occurs which leads to the termination or separation of the Employee because (1) his position is eliminated, (2) continuing to work in the position would require the Employee to transfer to a work site outside a 100-mile radius of his work location at the time of change in control and the Employee is unwilling to relocate, or (3) his responsibilities change so substantially that the Employee has effectively been removed from the position held by him prior to the Change in Control, or (y) Employee reasonably demonstrates that his termination or separation arose in connection with or in anticipation of a Change in Control, the Employee (i) shall be entitled to receive from the Company or its successor, upon such termination of employment with the Company or its successor, a cash payment in an amount equal to 2 times the average annual base salary and bonus payable by the Company and included in the gross income for federal income tax purposes of the Employee during the shorter of the period consisting of the five most recently completed taxable years of the Employee ending before the Change in Control or that portion of such period during which the Employee was employed by the Company (for which purpose compensation for a partial year shall be annualized, in accordance with temporary or final regulations promulgated under Section 280G(d) of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor provision thereto, before determining average annual compensation for the period, such average annual compensation to be determined in accordance with temporary or final regulations promulgated under Section 280G(d) of the Code or any successor provision thereto and such 6 7 EXHIBIT 10.26 payment to be made to the Employee by the Company or its successor in a lump sum at the time of such termination of employment; and (ii) shall be entitled for two years after the termination of the Employee's employment with the Company to participate in any health, disability and life insurance plan or program in which the Employee was entitled to participate immediately prior to the Change in Control as if he were an employee of the Company during such one-year period (except, with respect to health insurance coverage, for those portions remaining during such one-year period that duplicate health insurance coverage that is in place for the Employee under any other policy provided at the expense of another employer); provided however, that in the event that the Employee's participation in any such health, disability or life insurance plan or program of the Company is barred, the Company or its successor, at its sole cost and expense, shall arrange to provide the Employee with benefits substantially similar to those which the Employee would be entitled to receive under such plan or program if he were not barred from participation. (b) "Change in Control" means: (i) a majority of the directors of the Company shall be persons other than persons (A) for whose election proxies shall have been solicited by the Board or (B) who are then serving as directors appointed by the Board to fill vacancies on the Board caused by death or resignation (but not by removal) or to fill newly-created directorships, 7 8 EXHIBIT 10.26 (ii) 30% or more of the (1) combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors ("Outstanding Company Voting Securities") or (2) the then outstanding shares of the Company's common stock ("Outstanding Company Common Stock") is directly or indirectly acquired or beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 as amended (the "Exchange Act"), or any successor rule thereto) by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), provided, however, that the following acquisitions and beneficial ownership shall not constitute Changes in Control pursuant to this paragraph 2(b)(ii): (A) any acquisition or beneficial ownership by the Company or a subsidiary of the Company (a "Subsidiary"), or (B) any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its Subsidiaries, (C) any acquisition or beneficial ownership by the participant, who has received an award under the Plan (a "Participant"), or any group that includes the Participant, or (D) any acquisition or beneficial ownership by a parent corporation, as that term is defined in Section 424(e) of the Code, or any successor provision (a "Parent"), or its wholly-owned subsidiaries, as long as they shall remain wholly-owned subsidiaries, of 100% of the Outstanding Company Voting Securities as a result of a merger or 8 9 EXHIBIT 10.26 statutory share exchange which complies with paragraph 2(b)(iii)(A)(2) or the exception in paragraph 2(b)(iii)(B) hereof in all respects, (iii) the shareholders of the Company approve a definitive agreement or plan to (A) merge or consolidate the Company with or into another corporation (other than (1) a merger or consolidation with a Subsidiary or (2) a merger in which (a) the Company is the surviving corporation, (b) no Outstanding Company Voting Securities or Outstanding Company Common Stock (other than fractional shares) held by shareholders of the Company immediately prior to the merger is converted into cash, securities, or other property (except (i) voting stock of a Parent owning directly or indirectly through wholly-owned subsidiaries, both beneficially and of record 100% of the Outstanding Company Voting Securities immediately after the merger or (ii) cash upon the exercise by holders of Outstanding Company Voting Securities of statutory dissenters' rights), (c) the persons who were the beneficial owners, respectively, of the Outstanding Company Voting Securities and Outstanding Company Common Stock immediately prior to such merger beneficially own, directly or indirectly, immediately after the merger, more than 70% of, respectively, the then outstanding 9 10 EXHIBIT 10.26 common stock and the voting power of the then outstanding voting securities of the surviving corporation or its Parent entitled to vote generally in the election of directors, and (d) if voting securities of the Parent are exchanged for Outstanding Company Voting Securities in the merger, all holders of any class or series of Outstanding Company Voting Securities immediately prior to the merger have the right to receive substantially the same per share consideration in exchange for their Outstanding Company Voting Securities as all other holders of such class or series), (B) exchange, pursuant to a statutory share exchange, Outstanding Company Voting Securities of any one or more classes or series held by shareholders of the Company immediately prior to the exchange for cash, securities or other property, except for (a) voting stock of a Parent owning directly, or indirectly through wholly-owned subsidiaries, both beneficially and of record 100% of the Outstanding Company Voting Securities immediately after the statutory share exchange if (i) the persons who were the beneficial owners, respectively, of the Outstanding Company Voting Securities and Outstanding Company Common Stock immediately prior to such statutory share exchange own, directly or indirectly, immediately after the statutory share exchange more than 70% of, respectively, the then outstanding common stock and the voting power of the then outstanding voting securities of such Parent 10 11 EXHIBIT 10.26 entitled to vote generally in the election of directors, and (ii) all holders of any class or series of Outstanding Company Voting Securities immediately prior to the statutory share exchange have the right to receive substantially the same per share consideration in exchange for their Outstanding Company Voting Securities as all other holders of such class or series or (b) cash with respect to fractional shares of Outstanding Company Voting Securities or payable as a result of the exercise by holders of Outstanding Company Voting Securities of statutory dissenters' rights, (C) sell or otherwise dispose of all or substantially all of the assets of the Company (in one transaction or a series of transactions), or (D) liquidate or dissolve the Company, except that it shall not constitute a Change in Control with respect to any Participant if a majority of the voting stock (or the voting equity interest) of the surviving corporation or its parent corporation or of any corporation (or other entity) acquiring all or substantially all of the assets of the Company (in the case of a merger, consolidation or disposition of assets) or the Company or its Parent (in the case of a statutory share exchange) is, immediately following the merger, consolidation, statutory share exchange or disposition of assets, beneficially owned by the Participant or a group of persons, including the Participant, acting in concert. 11 12 EXHIBIT 10.26 (c) Notwithstanding any provision to the contrary contained herein except the last sentence of this Section 4(c), if the lump sum cash payment due and the other benefits to which the Employee shall become entitled under Section 4 hereof, either alone or together with other payments in the nature of compensation to the Employee which are contingent on a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company or otherwise, would constitute a "parachute payment" as defined in Section 280G of the Code or any successor provision thereto, such lump sum payment and/or such other benefits and payments shall be reduced (but not below zero) to the largest aggregate amount as will result in no portion thereof being subject to the excise tax imposed under Section 4999 of the Code (or any successor provision thereto) or being non-deductible to the Company for federal income tax purposes pursuant to Section 280G of the Code (or any successor provision thereto). The Employee in good faith shall determine the amount of any reduction to be made pursuant to this Section 4(c) and shall select from among the foregoing benefits and payments those which shall be reduced. No modification of, or successor provision to, Section 280G or Section 4999 subsequent to the date of this Agreement shall, however, reduce the benefits to which the Employee would be 12 13 EXHIBIT 10.26 entitled under this Agreement in the absence of this Section 4(c) to a greater extent than they would have been reduced if Section 280G and Section 4999 had not been modified or superseded subsequent to the date of this Agreement, notwithstanding anything to the contrary provided in the first sentence of this Section 4(c). The Employee shall determine which payments or benefits shall be so reduced. 5. Confidential Information. Except as permitted or directed by the Company's Board of Directors, during the term of this Agreement or at any time thereafter, the Employee shall not divulge, furnish, or make accessible to anyone or use in any way (other than in the ordinary course of business of the Compete) any confidential or secret knowledge of the Company which the Employee has acquired or become acquainted with or will acquire or become acquainted with prior to the termination of the period of his employment by the Company, whether developed by himself or by others, concerning any trade secrets, confidential or secret designs, processes, formulae, plans, devices, or materials (whether or not patented or patentable), directly or indirectly useful in any aspect of the business of the Company, any customer or supplier list of the Company, any confidential or secret development or research work of the Company. or any other confidential information or secret aspects of the business of the Company. The Employee acknowledges that the above-described knowledge or information constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company and its predecessors, and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company would be wrong and would cause irreparable harm to the Company. Both during and after the term of this 13 14 EXHIBIT 10.26 Agreement, the Employee will refrain from any acts or omissions that would reduce the value of such knowledge or information to the Company. The foregoing obligations of confidentiality, however, shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known in the form in which it was obtained from the Company, other than as a direct or indirect result of a breach of this Agreement by the Employee. 6. Return of Proprietary Property. The Employee agrees that all property in the Employee's possession belonging to the Company, including without limitation, all documents, reports, manuals, memoranda, computer print-outs, customer lists, credit cards, keys, identification, products, access cards, and all other property relating in any way to the business of the Company are the exclusive property of the Company, even if the Employee authored, created, or assisted in authoring or creating such property. The Employee shall return to the Company all such documents and property immediately upon termination of employment or at such earlier time as the Company may reasonably request. 7. Restrictive Covenant. The Employee acknowledges that the Company needs to be protected against the potential for unfair competition and impairment of the Company's good will by the Employee's use of the Company's training, assistance, confidential information, and trade secrets in direct competition with the Company. The Employee therefore agrees that for a period of one (1) year from the date of termination of his employment hereunder, the Employee shall not operate, join, control, be employed by, or participate in ownership, management, operation, or control of, or be connected in any manner as an independent contractor, consultant, or otherwise, with any person or organization engaged in any business activity which is the same as, or directly competitive with any business of the Company or any successor of the Company as of the date of the termination of his employment hereunder within the states of the United 14 15 EXHIBIT 10.26 States of America. The Employee expressly agrees that the provisions of this paragraph 6 shall survive the termination of the Employee's employment hereunder or the termination of this Agreement for a period of one (1) year, whether such termination be voluntary or involuntary or with or without cause. 8. Covenant Not to Recruit. The Employee recognizes that the Company's work force constitutes an important and vital aspect of its business. The Employee agrees that for a period of one (1) year following the termination of his employment hereunder or the termination of this Agreement for any reason whatsoever, he shall not recruit, or assist anyone else in the solicitation of, any of the Company's then current employees to terminate their employment with the Company and to become employed by any business enterprise with which the Employee may then be associated or connected, whether as an owner, employee, partner, agent, investor, consultant, contractor or otherwise. 9. Assignment. The rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company. The Employee may not assign this Agreement or any rights hereunder. Any purported or attempted assignment or transfer by the Employee of this Agreement or any of the Employee's duties, responsibilities, or obligations hereunder shall be void. 10. Notices. For purposes of this Agreement, notices provided in this Agreement shall be in writing; and shall be deemed to have been given when personally served, sent by courier or mailed by United States registered or certified mail, return receipt requested, postage prepaid, to the last known residence address of the Employee or, in the case of the Company, to its principal office to the attention of the Board of Directors, or to such other address as either 15 16 EXHIBIT 10.26 party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11. Construction and Severability. The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Minnesota. In the event any provision of this Agreement shall be held illegal or invalid for any reason, said illegality or invalidity will not in any way affect the legality or validity of any other provision hereof. It is the intention of the parties hereto that the Company be given the broadest possible protection respecting its confidential information and trade secrets; and respecting competition by the Employee following his separation by the Company. 12. Arbitration. Except as provided in this paragraph, any claims or disputes of any nature between the parties arising from or related to the performance, breach, termination, expiration, application, or meaning of this Agreement or any matter relating to the Employee's employment and the termination of that employment by the Company, shall be resolved exclusively by arbitration before the American Arbitration Association in Minneapolis, Minnesota, in accordance with the applicable rules then obtaining of the American Arbitration Association. The decision of the arbitrator(s) shall be final and binding upon both parties Judgment of the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. In the event of submission of any dispute to arbitration, each party shall, not later than thirty (30) days prior to the date set for hearing, provide to the other party and to the arbitrator(s) a copy of all exhibits upon which the party intends to rely at the hearing and a list of all persons each party intends to all at the hearing. 16 17 EXHIBIT 10.26 This paragraph shall have no obligation to claims by the Company asserting a violation of or seeking to enforce, by injunction or otherwise, the terms of paragraphs 4, 5, 6 and 7 above. Such claims may be maintained by the Company in a lawsuit subject to the terms of paragraph 12 below. The Employee agrees that, in addition to, but not to the exclusion of any other available remedy, the Company shall have the right to enforce the provisions of paragraphs 4, 5, 6 and 7 by applying for and obtaining temporary and permanent restraining orders or injunctions from a court of competent jurisdiction without the necessity of filing a bond therefore, and the Company shall be entitled to recover from the Employee its reasonable attorneys' fees and costs in enforcing the provisions of paragraphs 4, 5, 6 and 7. 13. Venue. Any action at law, suit in equity, or judicial proceeding arising directly, indirectly, or otherwise in connection with, out of, related to or from this Agreement or any provision hereof, shall be litigated only in the courts of the State of Minnesota, County of Hennepin. The Employee waives any right the Employee may have to transfer or change the venue of any litigation brought against the Employee by the Company. 14. Entire Agreement. This Agreement sets forth the entire Agreement between the Company and the Employee with respect to his employment by the Company and there are no undertakings, covenants, or commitments other than as set forth herein. This Agreement may not be altered or amended, except by a writing executed by the party against whom such alteration or amendment is to be enforced. This Agreement supersedes any and all prior understandings or agreements between the parties. 15. Counterparts. This Agreement may be simultaneously executed in any number of counterparts, and such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. 17 18 EXHIBIT 10.26 16. Captions and Headings. The captions and paragraph headings used in this Agreement are for convenience of reference only, and shall not affect the construction or interpretation of this Agreement or any of the provisions hereof. 17. Survival. The parties expressly acknowledge and agree that the provisions of this Agreement which by their express or implied terms extend beyond the expiration of this Agreement or the termination of the Employee's employment hereunder, shall continue in full force and effect, notwithstanding the Employee's termination of employment hereunder or the expiration of this Agreement. 18. Waivers. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof, or the exercise of any other right or remedy granted hereby or by any related document or by law. No single or partial waiver of rights or remedies hereunder, nor any course of conduct of the parties, shall be construed as a waiver of rights or remedies by either party (other than as expressly and specifically waived). 19. Reliance By Third Parties. This Agreement is intended for the exclusive benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors, and permitted assigns, and no other person or entity shall have any right to rely on this Agreement or to claim or derive any benefit therefrom, absent the express written consent of the party to be charged with such reliance or benefit. IN WITNESS WHEREOF, the parties have signed this Agreement. This Agreement terminates the prior Agreement. 18 19 EXHIBIT 10.26 CIMA LABS INC. Dated: 26 January 2001 By: John M. Siebert, Ph.D. ------------------------------- ------------------------ Type Name /s/ John M. Siebert ------------------------- Signature Its: President and CEO ------------------------- Dated:. 26 January 2001 By: David Feste ------------------------------- ------------------------- Type Name /s/ David Feste ------------------------- Signature 19 EX-10.27 3 c61004ex10-27.txt TOLL MANUFACTURING AGRMT. B/W ORGANON INC. & CIMA 1 EXHIBIT 10.27 TOLL MANUFACTURE AGREEMENT This Agreement [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] by and between Organon Inc., a corporation duly organized and existing under the laws of New Jersey (USA) and having its registered offices at 375 Mt. Pleasant Ave., West Orange, New Jersey 07052, USA on the one hand, hereinafter referred to as "Organon," And CIMA LABS Inc., a corporation duly organized and existing under the laws of the State of Delaware and having its principal offices at 10000 Valley View Road, Eden Prairie, Minnesota 55344, USA, hereinafter referred to as "Manufacturer." Organon and Manufacturer may hereinafter be referred to as "Party," or collectively as "Parties." WHEREAS: A. An Affiliated Company of Organon and Manufacturer have entered into a License Agreement dated [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**], whereby Manufacturer granted Organon and/or Organon's Affiliated Companies a license to, among others, make the Product (as hereinafter defined) under certain conditions; B. Organon wishes Manufacturer to manufacture the Product on its behalf; C. Manufacturer has knowledge and sufficient capacity to manufacture the Product based on Product forecast supplied to Manufacturer by Organon, and is willing to perform such manufacturing under the terms and conditions as contained herein. NOW, THEREFORE, in consideration of the foregoing and the mutual agreement as set forth herein, the Parties agree as follows: 1 2 EXHIBIT 10.27 Section 1: DEFINITIONS Whenever used in this Agreement, unless otherwise clearly required by the context, the following terms shall have the meaning as defined hereinafter (in alphabetical order) and shall include both the single and the plural. 1.1 The term "Affiliated Company" shall mean any company which by means of a majority of shares or otherwise, either directly or indirectly, controls, is controlled by or is under common control with either Party hereto. 1.2 The term "Effective Date" shall mean the date first written above. 1.3 The term "Manufacturing Know-How" shall mean and include any and all data, information and any experience or other data, in the possession of the Manufacturer necessary for Organon to effectively and efficiently manufacture the Product. 1.4 The term "License Agreement" shall mean the license agreement referenced under preamble A above. 1.5 The term "GMP Agreement" shall mean: the agreements entitled "Agreement On Tasks And The Division Of Responsibilities In Contract Manufacturing" Between NV Organon and Manufacturer and between Organon and Manufacturer, as amended from time to time, which is incorporated by reference herein. 1.6 The term "Product" shall mean an effervescent prescription tablet in [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] mg mirtazapine(R) dosage strengths, manufactured using the technology of the Manufacturer commonly known as Orasolv(R), containing the Substance as the sole active ingredient and adapted to disperse in the mouth of a human adult, which tablet incorporates the Substance together with a matrix or coating in microparticles or microcapsules which provide essentially complete release of the Substance into the gastrointestinal tract in a period of less than one hour after dissolution of the tablet, which is packaged utilizing PakSolv(TM) technology. 1.7 The term "Specifications" shall mean the specifications for the Product as set forth in the Remeron(R) Soltab(TM) NDA as amended and as supplemented from time to time and as included in the GMP Agreement. 1.8 The term Substance shall mean mirtazapine. 2 3 EXHIBIT 10.27 1.9 The term "Requirements" shall mean all quantities of the Product to be used by Organon, its Affiliated Companies or sublicensee(s) for clinical trial materials and for distribution, marketing and sale of the Product and samples thereof during the term of this Agreement. 1.10 The term "Self-Supply" shall mean the manufacture of the Product by Organon or its Affiliated Companies or third parties as permitted by Sections 2.3 and 2.4 hereof. 1.11 Third Party Manufacturer -- Third Party Manufacturer shall mean a manufacturer familiar with and capable of producing product using Orasolv(R) and PakSolv(TM) technologies. Any Third Party Manufacturer chosen by the Manufacturer must be approved by Organon which approval will not be unreasonably withheld. 1.12 "Coated Substance" shall mean mirtazapine coated as per the NDA [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] for Remeron(R)and any supplements and amendments thereto. 1.13 Production Yield: Let Output Y be, the amount of blistered Product made expressed in kg of [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] Substance. Let Input X be, the amount of [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] Substance, as delivered by Organon, expressed in kg used to produce Output Y. Production Yield will be defined as (Output Y divided by Input X) multiplied by 100%. Section 2: APPOINTMENT 2.1 Organon herewith appoints Manufacturer to perform the manufacture of the Product, in accordance with the Specifications and with the use of the Substance in accordance with the terms of this Agreement, on behalf of Organon and Manufacturer accepts this appointment. Manufacturer may, with Organon's approval, have the Product manufactured by an Affiliated Company of the Manufacturer. 3 4 EXHIBIT 10.27 2.2 For a period of five years commencing from January 15, 2001 and upon the terms and conditions contained herein, Organon will purchase all of its Requirements of the Product exclusively from the Manufacturer and the Manufacturer will sell and deliver to Organon F.O.B. Origin, Freight Collect, Organon's Requirements of the Product under the terms of this Agreement. 2.3 If Manufacturer is unable to supply Organon with Organon's Requirements within sixty (60) days of a delivery date, as determined pursuant to Section 9.2, for any reason other than Organon's failure to provide Substance to Manufacturer according to the lead time in Section 9.4 or a condition of force majeure (which will include but is not limited to, acts of God, explosion, fire, flood, earthquake or tremor, war whether declared or not, civil strife, riots, embargo, losses or shortages of power, supply shortages other than Substance, labor stoppages other than those of Manufacturer, damage to or loss of Product in transit, currency restrictions, or events caused by reason of laws, regulations or orders by any government, governmental agency or instrumentality or by any other supervening, unforeseeable circumstances whatsoever reasonably beyond the control of such party), Manufacturer will be considered in material breach and Organon may, in addition to any other remedy available to it, elect to Self-Supply, including supply in the Americas, without the payments in Sections 2.4 and 2.5, during the period that Manufacturer is unable to supply Organon's requirements and for such additional time so that such Self-Supply will be an economically reasonable endeavor. In the event of force majeure, Organon may also elect to Self-Supply under the same conditions and terms as for breach. In the event of breach or force majeure, Manufacturer agrees, at its own costs and expense in the case of breach and at Organon's costs and expense in case of force majeure, to provide technical support and assistance to ensure smooth and satisfactory establishment of the Orasolv(R) technology at Organon's Self-Supply site. 2.4 Organon may also elect to Self Supply at any time after the five (5) year period described in Section 2.2 by a minimum of an eighteen (18) month notice to Manufacturer. If Organon so elects to Self Supply, Manufacturer will provide to Organon, at Organon's sole expense, technical support and assistance to ensure the smooth and satisfactory establishment of the OraSolv Technology at the new manufacturing site. Organon will pay Manufacturer under this section a $[**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] technology transfer fee, $[**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] 4 5 EXHIBIT 10.27 eighteen (18) months after notification and $[**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] after FDA approval and will promptly reimburse Manufacturer for all of its reasonable actual out of pocket expenses incurred in support of the technology transfer. 2.5 If Organon elects to Self Supply according to Section 2.4, then there will be a good faith negotiation between both parties of an additional per tablet payment by Organon and the period of the duration of these payments to cover the then value of Manufacturer's capital investments to meet the requirements under this Agreement. 2.6 Any Third Party Manufacturer selected by Organon pursuant to Section 2.3 for Self-Supply, must be approved by Manufacturer and such approval will not be unreasonably withheld or delayed. As a condition of Manufacturer's approval, Organon shall have the selected third party enter into an agreement with Manufacturer with a confidentiality clause consistent with Section 4 of the License Agreement referred to in the first whereas clause of this agreement. Section 3: MANUFACTURING INSTRUCTIONS 3.1 Manufacturer shall perform the manufacture of the Product strictly in conformity with the instructions as specified in the GMP Agreement. 3.2 Manufacturer shall make no alterations in the Specifications of the Product or to the manufacturing process, without the prior written approval of Organon and as provided in the GMP Agreement. Any and all process deviations will be documented and reported to Organon. Documented evidence of all process deviations will be provided as part of manufacturing records to be forwarded to Organon prior to final release of Product. Organon shall have sole responsibility for determining the marketability of all batches for which a process deviation occurred. Section 4: QUALITY CONTROL 4.1 Manufacturer shall be responsible for the quality control of the Product manufactured by the Manufacturer and shall carry out the tests and analysis included in such quality control strictly in conformity with the instructions as specified in the GMP Agreement. Organon may test the 5 6 EXHIBIT 10.27 Product after receipt, as Organon deems appropriate. Organon will maintain a post-marketing stability program for the Product in conformity with the GMP Agreement. Organon may request Manufacturer to maintain such post-marketing stability program. If elected to do so, Manufacturer and Organon will agree upon a price for such program. 4.2 Manufacturer shall maintain complete and adequate records of all tests and analysis carried out in accordance as specified in the GMP Agreement and shall deliver a Certificate of Analysis with each batch of Product. 4.3 Manufacturer shall keep sealed samples of: each batch of Product, each batch of raw material used, and samples of each batch of components used for the manufacture of each batch of Product will be retained for a minimum of one year past the expiration date of each batch of Product, to verify the quality of the pertinent batch of Product at the time it was delivered to Organon. All documentation with respect to batch of Product, raw material, components and production of Product will be retained by Manufacturer a minimum of one year past the expiration date of the batch of Product. 4.4 Manufacturer agrees to conduct additional validation activities as required by regulatory authorities or at the request of Organon. Organon agrees to pay, a mutually agreed upon sum, for Manufacturer to perform such validation activities and supply sufficient quantity of Substance to complete such validation activities. 4.5 Manufacturer represents and warrants that the Product shall not be adulterated or misbranded, and shall be free of all defects of any kind whatsoever and to the best of the Manufacturer's knowledge, Manufacturer's technology does not infringe in any way whatsoever any rights of any third party. MANUFACTURER MAKES NO OTHER WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, AND EXPRESSLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND ANY AND ALL LIABILITY FOR SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES. 4.6 The GMP Agreement will supplement the terms of this Agreement with regard to quality control. Section 5: PACKAGING OF THE PRODUCT 6 7 EXHIBIT 10.27 5.1 The Product shall undergo primary packaging and labeling by Manufacturer according to Organon's instructions. The current primary packaging instructions are included in the GMP Agreement and shall not be modified by Organon without the prior written consent of Manufacturer, which consent shall not be unreasonably withheld or delayed. Approved blister artwork shall be provided to the Manufacturer by Organon at least forty-five (45) days prior to the delivery date for that shipment of Product specified in the applicable purchase order. 5.2 Country specific labeling may be required. The text appearing on primary packing and labeling of the Product shall be as determined by Organon subject to Manufacturer's prior written approval, which shall not be unreasonably withheld or delayed. Manufacturer and Organon agree to no more than [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] variants required per batch of Product, unless previously agreed. A premium, which, if needed, will be $[**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] for batches of Product with blistering variants which exceed [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**]. The text shall be as specified in the packaging instructions. Organon shall ensure that all packaging for the Product complies with applicable laws and regulations in each country in which it will be sold. 5.3 Organon will reimburse Manufacturer for reasonable costs incurred by Manufacturer in making changes to its packaging line required to manufacture the Product as mandated by regulatory revisions or as required by Organon. This will include, but not be limited to, plate and die charges due to label changes and Product identification requirements, and for any packaging components rendered obsolete by the changes. Section 6: REJECTIONS AND YIELD 6.1 Within forty-five (45) days after delivery of each of the batches of the Product Organon shall inform Manufacturer of any obvious non-conformance of the delivered batches with the specifications and/or significant deviations from cGMP's. Within forty five (45) days after such notification, and in the event it appears that such a specification and/or cGMP non-conformance is due to faulty manufacture, release, primary packaging or labeling of the relevant batch(es) of the Product, which fact 7 8 EXHIBIT 10.27 shall be established on the basis of the corresponding sealed samples retained by Manufacturer, utilizing an outside independent laboratory if necessary, the cost of which is borne by the party found at fault and whose findings shall be binding, or based on the process deviation documentation provided to Organon, the Manufacturer shall replace such batches free of charge. In the event Organon does not notify Manufacturer of any such obvious non-conformance within said period, the relevant batches shall be deemed to be in conformance with the Specifications, except for non-obvious defects or non-conformance relating to the manufacturing or testing of Product by Manufacturer, and Manufacturer shall have no further obligations and liabilities towards Organon with regard to those batches. 6.2 If found at fault, Manufacturer's liability, to Organon, for defective or non-conforming Product shall be replacement of the Product, exclusive of the cost of the Substance. For Substance lost through mishandling or negligence (non-batch processing related) Manufacturer shall promptly reimburse Organon, at the rate of $[**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] per gm. In the case of defective or non-conforming Product, Manufacturer shall replace Product at its cost within sixty (60) days of notification of the findings. In no event shall Manufacturer be liable for any indirect or consequential damages in connection with any non-conforming batch of Product. Annual increases to the rate of reimbursement of Substance will commence on January 1, 2002 and are to be established January of each calendar year thereafter. [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**]. 6.3 In 2001, Manufacturer will complete the validation batches for Remeron SolTab using [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] pursuant to sufficient supply of [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] from Organon. Thereafter, but subject to FDA approval if needed, all future production of Product will be produced using the process with the [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**]. After twenty-five (25) batches of coated Substance are manufactured, Manufacturer and Organon will agree upon a minimum Production Yield. If the average of the Production Yield of the batches of Product produced by Manufacturer during a calendar year is less than the minimum Production Yield, 8 9 EXHIBIT 10.27 Manufacturer will pay to Organon by January 31 of the subsequent year the amount equal to the difference between the amount of Substance required to make the number of batches of products in that calendar year using the minimum Production Yield and the amount of Substance used for such batches using the actual Production Yield times [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] according to Section 6.2. Section 7: RECALLS 7.1 If Organon is required (or voluntarily decides) to initiate a recall, product withdrawal or field correction of any Product manufactured by Manufacturer under this Agreement, whether or not such recall has been requested or ordered by any governmental agency, Organon will notify Manufacturer's President or Chief Operating Officer, and Manufacturer shall fully cooperate with Organon. If Manufacturer believes that a recall, product withdrawal, or field correction by Organon may be necessary or appropriate, Manufacturer will notify Organon of its beliefs, and after Organon's decision the parties will cooperate in promptly implementing Organon's decision. 7.2 With respect to any recall, product withdrawal, or field correction, Organon will make all contacts with the FDA and any foreign regulatory agencies and will be responsible for coordinating all of the necessary activities in connection with such recall, product withdrawal, or field correction, and shall make any statements to the media, including, but not limited to, press releases and interviews for publication or broadcast. 7.3 If any recall, product withdrawal, or field correction is initiated solely because of non conformance or a defect in any Product arising from the manufacture, processing, primary packaging or holding of the Product by Manufacturer, Manufacturer will (i) replace all defective Product free of charge, (ii) reimburse Organon for out-of-pocket costs actually paid by Organon to third parties for transportation, secondary packaging and destruction of the recalled Product, and (iii) reimburse Organon for its out of pocket administrative expenses incurred in implementing the recall. Manufacturer shall provide, within a reasonable amount of time, a full replacement of the recalled Product due to recall, product withdrawal or field correction. The maximum time for Manufacturer to provide full replacement will be sixty (60) days except for Product covered by a pending investigation or subject to a condition of force majeure. 9 10 EXHIBIT 10.27 7.4 If any recall, product withdrawal or field correction is required due to reasons other than those specified in Section 7.3, i.e., defective materials supplied by Organon or improper handling of Product by Organon, the costs of such recall, including the costs of any of Manufacturer's work in process affected by the recall, will be borne by Organon. Section 8: MATERIALS 8.1 Except for Substance, the materials and components for the manufacture of the Product, as well as the primary packaging materials shall be purchased by Manufacturer for its own account and responsibility. All such materials and components shall be in conformity with any quality requirements included in the GMP Agreement. 8.2 All vendors or suppliers used by the Manufacturer shall be approved through the Manufacturer's internal certification program. Manufacturer shall send a certificate of conformance to Organon certifying each vendor's compliance with cGMP's or other appropriate quality standards on an annual basis or upon Organon's request. 8.3 Organon shall supply to Manufacturer the required amounts of Substance free of charge, which shall only be used to manufacture Product for Organon, according to the delivery schedule described in Section 9. The Substance supplied by Organon hereunder shall conform to the Specifications contained in the GMP Agreement and shall be accompanied by a suitable Certificate of Analysis. While under the control of Manufacturer, Substance remains the property of Organon. Within 5 working days of month end Manufacturer will provide Organon with the following: a. A list of the balance of Substance and Substance related inventory at CIMA Labs at month end by lot. This list will include the Substance in raw material form reported in grams by lot number. Work in Process ("WIP") or Finished Goods which include Substance will be reported in the appropriate unit of measure for each WIP or Finished Goods level, i.e.: grams, tablets or strips, by WIP or Finished Goods lot number. b. Inventory records for all Substance and Substance related inventory. These records will include, for each lot at each manufacturing stage, a beginning balance, plus or minus all increases or decreases to the lot with adequate descriptions or explanations, and the balance of the lot at month end. The above requirements can be changed if mutually agreed upon. 10 11 EXHIBIT 10.27 Any non-batch processing related loss of Substance, while under the control of the Manufacturer, which has been determined to be the fault of the Manufacturer, will result in reimbursement by Manufacturer to Organon in the terms described in Section 6.2. Organon will provide to Manufacturer a Certificate of Insurance covering the Substance while it is in the control of the Manufacturer. 8.4 Manufacturer shall inspect and test the materials, components and Substance before processing in order to verify their conformity with the requirements included in the GMP Agreement. 8.5 Organon shall reimburse Manufacturer for all materials and components as well as primary packaging materials purchased specifically for the manufacture of the Product that can not be used to manufacture the Product due to reductions in Organon's purchase orders or due to changes to the manufacturing process or primary packaging art work mandated by regulatory authorities or Organon, or due to Organon's decision to Self-Supply for reason other than Manufacturer's material breach. In no event will Organon be responsible for more than 6 (six) months' worth of inventory based on the current forecast at the time of the changes within the limits stated within Section 9.1. 8.6 Organon and its representatives shall have the right to inspect and audit Manufacturer's book, records and inventories relating to Product during regular business hours, giving at least forty-eight (48) hours prior notice. Section 9: FORECAST, ORDERS AND DELIVERY 9.1 Before the tenth (10th) day of each calendar quarter, Organon shall provide Manufacturer with a written 12 month rolling forecast of its Requirements of Product and Samples and shall update such forecasts on a quarterly basis or more frequently. Organon will place firm orders with a minimum of a ninety (90) day lead-time before delivery is required. Along with this forecast Organon, will communicate in Q1 and Q4 of each year a Long Range Plan (LRP), which will indicate Organon's Products needs over a maximum period of 2 years. The LRP is not a commitment for future purchase orders. 9.2 Each Organon purchase order for Product will be considered accepted by Manufacturer and Product will be delivered according to the times and location in that purchase order if such purchase order is in accordance 11 12 EXHIBIT 10.27 with this Section. Manufacturer reserves the right to reject any purchase order for Product in which the first delivery date for Product is substantially earlier than 90 days from the date Manufacturer received that purchase order. Organon has the right to reconfirm orders in writing, up to forty-five (45) days before the delivery date specified on the purchase order, to issue change orders to increase the quantity of Product ordered on a initial purchase order(s) by up to [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] of stated tablet requirement or decrease the quantity of Product ordered on the initial purchase order(s) by up to [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.** ] of stated tablet requirements. In the event Organon decreases by more than [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] the quantity of Product requested on a purchase order(s) during the period commencing on the date of receipt of that purchase order by Manufacturer up to forty-five (45) days of the delivery date for that shipment specified on such purchase order or decreases by any amount the quantity of Product ordered within forty-five (45) days of the delivery date specified on such purchase order(s), Organon shall pay Manufacturer within 30 days of the Manufacturer's invoice date a Cancellation Fee equal to [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**]. Manufacturer agrees to commit an annual manufacturing capacity of [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] for the manufacture of the Product ("AMC"). As from 2002, if Organon fails to utilize a minimum of [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] of the AMC ([**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**]) in a given year then a new lower AMC will be agreed to by the parties for future years. Manufacturer's available production capacity (APC) is projected to be [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] in 2002 and [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] in 2003. The APC will be mutually agreed to by both parties for years 2004 and beyond; provided, however, the APC for any 12 13 EXHIBIT 10.27 year will not be less than the previous year's (AMC plus RAMC) unless Organon wishes to lower such amount. Organon may, based on its LRP, reserve additional manufacturing capacity beyond the AMC up to the Manufacturer's APC for that year [herein called "(RAMC)"]. In the event Organon does not order an amount of Product for delivery in a calendar year which is at least [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] of the RAMC established by Organon for that calendar year, Organon shall pay the Manufacturer within 30 days of the Manufacturer's invoice date a Capacity Reservation Fee, which is equal to $[**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] times [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] of the difference between the RAMC and the actual amount of Product ordered for delivery in such calendar year by Organon. Organon has the right to increase or decrease the RAMC for a calendar year without any penalty or fee whatsoever, provided the change is communicated to the manufacturer no later than December 1 of the calendar year immediately preceding the calendar year to which a Capacity Reservation Fee would apply. Organon agrees to be held liable for all obsolesce, for no more than 6 months worth of inventory, pursuant to Section 8.5, of materials resulting from changes in Product or changes in purchase order requirements. 9.3 Quantities of Product shall be delivered to Organon or an Affiliated Company of Organon designated by Organon, F.O.B. Origin Freight Collect (latest edition of the Incoterms) and risk of loss shall pass at the time of such delivery. 9.4 Before the twentieth (20th) day of each calendar quarter, Manufacturer shall provide Organon with written rolling-forecasts of its requirements of Substance for each of the twelve (12) forthcoming calendar months and shall update such forecasts on a quarterly basis. The Substance shall be delivered by Organon to Manufacturer, sixty (60) days prior to the delivery date for that shipment of Product on that purchase order. If Organon fails to deliver Substance sixty days prior to such delivery date the parties will agree to a new purchase order delivery date. 13 14 EXHIBIT 10.27 9.5 After January 15, 2001, unless otherwise mutually agreed, if Manufacturer delivers Product twenty (20) business days after or ten (10) business days before the specified delivery date Manufacturer shall pay to Organon a penalty of [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] of the value of Product for that delivery per business day for each business day that such order is late or early, not including any Product covered by a pending investigation or subject to a condition of force majeure. Any such penalty shall not exceed [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] percent of the value of Organon's Purchase Order. 9.6 If Organon fails to deliver Substance in sufficient quantities for the Manufacturer to maintain safety stock as describe in Section 9.4 in time for the Manufacturer to meet delivery times of accepted purchase orders, this shall result, to Organon, in a penalty of $[**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] for the number of tablets specified for that delivery in that purchase order; provided, however, that any such penalty will only be due and payable in the event Manufacturer can prove that this resulted in idle time of allocated machine capacity for such delivery in that purchase order by failure of Organon to deliver Substance. Such idle time of allocated machine capacity means the machine availability was not used for e.g., required maintenance or other production orders. This Section will only be in effect when both Organon and the Manufacturer have agreed on a minimum Production Yield factor as mentioned in Section 6.3. Section 10: PRICES AND PAYMENTS 10.1 As a consideration for the manufacture of the Product by Manufacturer, Organon shall pay to Manufacturer the purchase prices as specified in Exhibit I attached hereto. Annual price increases will commence on January 1, 2002, and are to be established January of each calendar year thereafter. Any price increases will be mutually agreed upon by both the Manufacturer and Organon [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] 10.2 All invoices for delivery of the Product shall be paid by Organon in US$ within thirty (30) days after the date of the invoice. The date of the 14 15 EXHIBIT 10.27 invoice shall not precede the Manufacturer's release of the Product. Each invoice shall be accompanied with a Certificate of Analysis for the Coated Substance and a Certificate of Conformance for the blistered Product for each batch of Product included in the invoice. There will be a [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**], of invoice price, penalty per month, for each month a payment is past due. Such penalty shall not exceed [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] per annum. Section 11: INSPECTION 11.1 Manufacturer shall keep such books and records regarding the manufacture and quality control of the Product in accordance with the instructions included in the Manufacturing Instructions, QC Instructions as defined in the Good Manufacturing Practices (GMP) Agreement and/or in compliance with 21CFR 211. With at least forty-eight (48) hours notice Organon shall have the right to inspect such books and records at any time during regular business hours. 11.2 Organon shall have the right to inspect Manufacturer's facilities to see if Manufacturer is in compliance with the Manufacturing Instructions, the QC Instructions as defined in the GMP Agreement and cGMP's. Any representatives of Organon designated for this purpose shall have the right to inspect the manufacturing and quality control facilities and warehouses of Manufacturer during regular business hours, giving at least forty-eight (48) hours prior notice. Section 12: ADDITIONAL RESPONSIBILITIES OF MANUFACTURER 12.1 Manufacturer shall forward to Organon all inquiries from any person concerning the Product within fifteen (15) business days after Manufacturer receives each such inquiry, and provide Organon with any reasonable assistance requested in connection with customer complaints relating to the Product. This assistance shall include inspection of retains, review of appropriate test records, testing of samples and issuance of formal reports summarizing complaint investigations. 15 16 EXHIBIT 10.27 12.2 Manufacturer shall inform Organon of any defective Product, manufacturing process deviation or information of which Manufacturer is aware that suggests that a defect may exist, within five (5) business days after becoming aware of any such defective Product or deviation information. 12.3 Manufacturer shall inform Organon of any pending or threatened litigation, governmental investigation, proceeding or action involving the Product or Manufacturer's manufacturing or other facilities for the Product, within five (5) business days after receiving notice thereof. 12.4 Manufacturer shall inform Organon within forty-eight (48) hours of any FDA general GMP inspection or other FDA inspection involving the Product. The Manufacturer will provide Organon with a copy of the form 483, or any other pertinent governmental agency form or document, as well as the Manufacturer's response thereto within Forty-eight (48) hours after Manufacturer's receipt of such form or document or response. Manufacturer may redact any confidential information of third parties from such documents. 12.5 Manufacturer shall supply an Annual Product Review, as required by 21CFR 211.180(e), no more than 30 days following each sNDA anniversary date throughout the life of this Agreement. Section 13: ADDITIONAL RESPONSIBILITIES OF ORGANON 13.1 Organon shall forward to Manufacturer copies of any complaints it receives from customers concerning the Product for which Manufacturer's assistance is requested, within fifteen (15) business days after receiving any such complaint. 13.2 Organon shall inform Manufacturer of any defective Product or of information that suggests that a defect may exist within five (5) business days after becoming aware of such defective Product or information. 13.3 Organon shall inform Manufacturer of any pending or threatened litigation or governmental investigation involving the manufacture of the Product within five (5) business days after Organon receives notice thereof. 13.4 Organon shall comply with applicable laws and governmental regulations affecting the sale and distribution of the Product. 16 17 EXHIBIT 10.27 13.5 Organon shall inform Manufacturer (and provide copies when available) of regulations and requirements of applicable foreign country regulatory authorities with respect to the Product ordered by Organon for sale in a foreign country. Section 14: INDEMNIFICATION 14.1 Manufacturer will indemnify and hold Organon and Organon's Affiliated Companies harmless from and against all claims, suits and proceedings, and all damages, losses, costs, recoveries and expenses, including reasonable legal expenses and costs (including attorneys' fees) that Organon or Organon's Affiliated Companies may incur, arising out of any third party's claim of property damage or personal injury or death arising from Manufacturer's negligent or willful misconduct in its performance of this Agreement, any non-conformance or defective Product relating to the manufacturing or testing of Product by Manufacturer or any breach of a representation or warranty given herein by Manufacturer. However, Manufacturer will in no event be liable for any such claims, damages, losses, costs or expenses to the extent they arise out of or result from materials, including the Substance, supplied by Organon to Manufacturer, or from Organon's or Organon's Affiliated Companies' negligence or willful misconduct. 14.2 Organon will indemnify and hold Manufacturer and Manufacturer's Affiliated Companies harmless from and against all claims, suits and proceedings, and all damages, losses, costs, recoveries and expenses, including reasonable legal expenses and costs (including attorneys' fees) that Manufacturer or Manufacture's Affiliated Companies may incur, arising out of any third party's claim of property damage or personal injury or death arising from materials, including the Substance, supplied by Organon to Manufacturer or from Organon's or Organon's Affiliated Companies' negligent or willful misconduct in its performance of this Agreement or any breach of a representation or warranty given herein by Organon or from the sale or use of Product except to the extent Manufacturer is responsible to indemnify Organon under Section 14.1 with respect thereto. However, Organon will in no event be liable for any such claims, damages, losses, costs or expenses to the extent they arise out of or result from materials supplied by Manufacturer to Organon, or from Manufacturer or Manufacturer's Affiliated Companies' negligence or willful misconduct. 17 18 EXHIBIT 10.27 14.3 In the event any third party asserts a claim covered by Sections 14.1 or 14.2, the indemnified party will give prompt notice to the indemnifying party, who may, at its election, handle and control the defense or settlement of the claim at its own expense by giving prompt notice to the indemnified party. However, the indemnifying party will not settle any such claim without the indemnified party's prior written consent, which will not be unreasonably withheld. If the indemnifying party does not give such notice and does not proceed diligently to defend the claim within thirty (30) days after receipt of notice, the indemnifying party will be bound by any defense or settlement that the indemnified party may make as to that claim and will reimburse the indemnified party for any expenses related to the defense or settlement of the claim. The parties will cooperate in defending against any asserted third-party claims. Indemnification of the indemnified party will also cover the indemnified party's directors, officers, employees, agents, Affiliated Companies, and third parties performing services for the indemnified party. Section 15: CONFIDENTIALITY 15.1 It is understood and agreed by Manufacturer, that any and all information and data disclosed by Organon to Manufacturer under this Agreement is and shall remain the exclusive property of Organon. It is acknowledged by Manufacturer that the information and data are only disclosed to Manufacturer for the purposes and use described in this Agreement and that they are to be regarded as trade secrets containing unpublished results of private research and experience which are used in Organon's business and which are of a nature customarily held in strict confidence and regarded as privileged knowledge; consequently, any other use or any disclosure by Manufacturer of information and data in violation of this Section 15.1 may harm and damage Organon's legitimate business interests. Manufacturer hereby undertakes to keep secret and confidential the above-mentioned information and data during the term of this Agreement as well as thereafter and not to use or disclose the information and data to any third party, person, or government institution without Organon's prior written approval and not to use it for any other use or purpose than those described in this Agreement. 15.2 The obligations described in Section 15.1 above shall not be applicable to any part of the information and data disclosed by Organon under this Agreement which: - at the moment of disclosure is general (public) knowledge; - after disclosure, through no fault of Manufacturer, becomes 18 19 EXHIBIT 10.27 general (public) knowledge; - properly and lawfully becomes available to Manufacturer, from the source not bound to Organon by a secrecy obligation and provided this can be adequately substantiated; - is required to be disclosed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or which is otherwise required by law to be disclosed. 15.3 Upon termination or expiration of this Agreement Manufacturer hereby undertakes, upon such request from Organon, to promptly return all information and data on any and all media received from Organon and not to retain any copy or photocopy of such information and data and to stop any further use of Organon's information and data as referred to in Section 15.1 above. 15.4 The terms of Section 4 of the License Agreement shall apply to the know how, information and data disclosed by Manufacturer to Organon under this Agreement. Section 16: TERM AND TERMINATION 16.1 This Agreement shall be effective for a term of five years from the date specified in Section 2.2 and shall automatically renew for successive three year periods, unless Organon notifies Manufacturer that it will terminate this agreement or any renewal thereof within at least 18 months prior to the end of the current term or unless terminated under Section 16.2. For each renewal period, the parties agree to negotiate in good faith any increase or decrease of the prices for Product for such renewal period. 16.2 Notwithstanding the preceding paragraph, this Agreement may be terminated forthwith by registered mail or overnight courier: a) by either Party in the event the other Party shall materially breach any of its obligations under this Agreement and shall fail to remedy such breach within sixty (60) days from receipt of written notice of such breach by the Party not in default; or b) by either Party in the event of the other Party's liquidation, bankruptcy or state of insolvency; or c) by Organon in the event Manufacturer without the written consent of Organon assigns this Agreement in whole or in part to any third party (not 19 20 EXHIBIT 10.27 as provided for in Section 18.3) or if the majority of the shares of Manufacturer are acquired by a current or future competitor of Organon in the antidepressant market. If either clause b or c occurs, Organon shall have the right to Self Supply without payments set forth in Sections 2.4 and 2.5. Section 17: APPLICABLE LAW AND DISPUTE RESOLUTION 17.1 The validity, construction and performance of this Agreement shall be governed by and construed in accordance with the laws of the state of Delaware and the federal law of the United States of America. 17.2 The Parties shall attempt in good faith to resolve promptly any dispute arising out of or relating to this Agreement by negotiation. If the matter can not be resolved in the normal course of business any interested Party shall give the other Party written notice of any such dispute not resolved, after which the dispute shall be referred to more senior executives of both Parties, who shall likewise attempt to resolve the dispute. 17.3 If any dispute has not been resolved by non-binding means as provided in Section 17.2 above within forty-five (45) days of the initiation of such procedure, the dispute shall be finally and exclusively settled by arbitration by three (3) independent arbitors in Minneapolis, Minnesota under the Uncitral Arbitration Rules. Each party shall appoint one (1) arbitrator, and those two (2) arbitrators shall appoint a third by mutual agreement and in accordance with the Uncitral Arbitration Rules. The appointing authority shall be the London Court of International Arbitration in London, England. The language of the arbitration shall be English. The arbitration shall be in lieu of any other remedy and the award shall be final, binding and enforceable by any court having jurisdiction for that purpose. The Parties further agree that the arbitrators are not authorized to award punitive damages in connection with any controversy or claim settled by arbitration. 17.4 This Section shall, however, not be construed to limit or to preclude either Party from bringing any action in any court of competent jurisdiction for injunctive or other provisional relief as necessary or appropriate. Section 18: MISCELLANEOUS 20 21 EXHIBIT 10.27 18.1 Headings. All headings of this Agreement are added for the purpose of convenience only and the contents and meaning of such headings shall in no way limit the meaning and applicability of the relevant Sections. 18.2 Entire Agreement. This Agreement, the License Agreement and the GMP Agreement constitutes the entire agreement between the Parties and annuls and replaces any other agreement or understanding whether written or oral which may have existed between the Parties with respect to the subject matter hereof. All Exhibits attached hereto form an integral part of this Agreement. This Agreement can be modified or amended and rights under this Agreement waived only in writing signed by the Party to be charged. 18.3 No Assignment. Manufacturer shall not assign or otherwise transfer this Agreement or any part thereof to any third party, without the written consent of Organon, which will not be unreasonably withheld or delayed. Organon may assign this Agreement to an affiliate without Manufacturer's consent or to a third party with Manufacturer's consent, which will not be unreasonable withheld or delayed. 18.4 Binding upon Successors. This Agreement shall bind and benefit the Parties and their respective successors and permitted assigns. 18.5 Notices. All notices in connection with this Agreement shall be in writing and be in the English language (as shall all other written communications and correspondence) and may be given by personal delivery, prepaid registered airmail letter, telegram or telefax, addressed to the Party required or entitled to receive same at its address set forth below, or to such other address as it shall later designate by like notice to the other Party. Notice of termination of this Agreement if given by telegram or telefax, shall be confirmed by prepaid registered airmail letter dated and posted the same day. The effective date of any notice if served by telegram, telex or telefax shall be deemed the first business day in the city of destination following the dispatch thereof and if given by prepaid registered airmail letter only, it shall unless earlier received, be deemed served not later than seven (7) days after date of posting. Notice to Organon shall be to: Organon Inc. 375 Mt. Pleasant Avenue West Orange, New Jersey 07052 21 22 EXHIBIT 10.27 Attention: Vice President, Production with a copy to: Vice President & General Counsel Organon Inc. 375 Mt. Pleasant Ave. West Orange, New Jersey 07052 Notice to Manufacturer shall be to: CIMA Labs Inc. Telefax: 1-612-947-8770 Attention: President and Chief Operating Officer 18.6 Severability. All stipulations contained in this Agreement shall be so construed as not to infringe any provision of any law prevailing to this Agreement. To the extent that, and only to the extent that, any stipulation does infringe any such provisions, said stipulation shall be deemed void and shall be replaced by a stipulation in such a way as in accordance with the prevailing law is possible and in such a way as will be the least prejudicable to the interest of either Party. The infringement of any provision by a stipulation shall not affect the validity of any other stipulation of this Agreement. 18.7 Independent Contractors. The Parties are independent contractors and nothing in this Agreement shall imply any principal or agent relationship or other joint relationship and neither Party shall have the power or authority, either express or implied, to obligate the other Party. 18.8 Language. This Agreement is written in the English language and executed in two (2) counterparts, each of which shall be deemed an original. The English language text of this Agreement shall prevail over any translation thereof. 18.9 No Waiver. Failure of either party to insist upon the strict and punctual performance of any provision of this Agreement shall not constitute a waiver of, or estoppel against asserting the right to require such performance, nor should a waiver or estoppel in one case constitute a waiver or estoppel with respect to a later breach whether of similar nature or otherwise. 22 23 EXHIBIT 10.27 18.10 Back-up Facility. Manufacturer represents and warrants that it will have a back-up manufacturing facility [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] from [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**]. As soon as the manufacturing facility is operational, Organon and Manufacturer will establish the Product, subject to FDA SUPAC Guidelines, at the back-up facility. Once the Product is established at the back-up facility, pending regulatory approval, the back-up facility will be available immediately for production of Product including where the manufacturing of Product is for practical reasons of any kind no longer possible in the facility that is normally used to manufacture Product. The back-up manufacturing facility may be located at a Third Party Manufacturer's facility or facilities, provided Manufacturer obtains Organon's prior written approval, such approval will not be unreasonably withheld or delayed. As mutually agreed, Organon will pay Manufacturer for regulatory, development, clinical, stability and validation expenses required to establish a back-up facility or facilities. The Product will be transferred to the back-up facility or facilities under the FDA SUPAC Guidelines, as a Level 3 Change. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their duly authorized representatives to be effective as of the date first written above ORGANON INC. CIMA LABS INC. By:/s/ Patrick J. Osinski By: /s/ John M. Siebert ---------------------------------------------- -------------------------------------------- Name: Patrick J. Osinski Name: John M. Siebert -------------------------------------------- ------------------------------------------ Title: Vice President Title: President and CEO ------------------------------------------- ------------------------------------------ By:/s/ Dante Serricchio By:/s/ John Hontz ---------------------------------------------- --------------------------------------------- Name: Dante Serricchio Name: John Hontz -------------------------------------------- ------------------------------------------- Title: Vice President Title: Chief Operation Officer ------------------------------------------- ------------------------------------------
23 24 EXHIBIT 10.27
Purchase Price per SolTab(TM) ------------------------------------------ CUMULATIVE PURCHASES* OF PRODUCT PER YEAR #### mg #### mg #### mg - ---------------------------------------------------------- ------- ------- ------- [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED $#### $#### $#### SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED $#### $#### $#### SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**] [**CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED $#### $#### $#### SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.**]
For each calendar year the initial forecast for that year will be used for pricing Product invoiced in that year. At the end of each calendar year if the actual Product purchases are different than such initial forecast and such actual purchases of Product fall in a higher or lower pricing level, the difference will be calculated and the Manufacturer or Organon shall pay that amount to the other Party as the case may be. Notwithstanding the foregoing, no adjustment will be made if during that year there was an event of material breach by the Manufacturer or of force majeure. * Purchases for purposes of this exhibit mean Product invoiced by Manufacturer during the applicable calendar year. #### = [***CONFIDENTIAL TREATMENT REQUESTED, PORTION OMITTED FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.***] 24 EX-23.1 4 c61004ex23-1.txt CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 Consent of Ernst & Young LLP We consent to the reference to our firm under the caption, Selected Financial Data, and to the incorporation by reference in the Registration Statement (Form S-3 No. 333-34828) and in the related prospectus and the Registration Statements (Form S-8 No. 333-42354, Form S-8 No. 33-32233, Form S-8 No. 333-05741, Form S-8 No. 333-05741, Form S-8 No. 33-82794 and Form S-8 No. 33-82790) pertaining to certain stock option plans of the Company, of our report dated February 21, 2001, with respect to the financial statements and schedule of CIMA LABS, INC. included in the Annual Report (Form 10-K) for the year ended December 31, 2000. Minneapolis, Minnesota /s/ Ernst & Young LLP March 22, 2001 EX-24.1 5 c61004ex24-1.txt POWER OF ATTORNEY 1 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below hereby constitutes and appoints John M. Siebert and David A. Feste and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of CIMA Labs Inc. for the twelve months ended December 31, 2000, and all amendments to such Annual Report on Form 10-K and to file same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof IN WITNESS WHEREOF, the undersigned has executed this power of attorney on the date set forth below.
Signature Date --------- ---- /s/ John M. Siebert March 26, 2001 - -------------------------------------------- John M. Siebert President & Chief Executive Officer (Principal Executive Officer) and Director /s/ Terrence W. Glarner March 26, 2001 - -------------------------------------------- Terrence W. Glarner Director /s/ Steven B. Ratoff March 26, 2001 - -------------------------------------------- Steven B. Ratoff Director /s/ Joseph R. Robinson March 26, 2001 - -------------------------------------------- Joseph R. Robinson Director
EX-27.1 6 c61004ex27-1.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING BALANCE SHEETS OF CIMA LABS INC. AS OF DECEMBER 31, 2000, AND THE RELATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-2000 JAN-01-2000 DEC-31-2000 91,587,716 71,574,475 8,650,614 0 1,381,476 173,421,189 23,268,688 7,527,218 189,461,692 2,536,507 0 0 0 143,584 228,631,594 186,925,185 13,406,571 23,919,095 12,409,468 8,838,480 58,045 0 (2,172,481) 4,785,583 0 4,785,583 0 0 (799,337) 3,986,246 .36 .32
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