-----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, HFYnJkEz/SnAsJy8vgNwFMBNVHU3custznaMfD5MX0WaDorQcMv7FuqVWSDm0oiT dh6UfVwW1V/OXztT+8cPCw== 0001047469-99-013071.txt : 19990402 0001047469-99-013071.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-013071 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIMA LABS INC CENTRAL INDEX KEY: 0000833298 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 411569769 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24424 FILM NUMBER: 99583432 BUSINESS ADDRESS: STREET 1: 10000 VALLEY VIEW ROAD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344-9361 BUSINESS PHONE: 6129478700 MAIL ADDRESS: STREET 1: 10000 VALLEY VIEW ROAD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344-9361 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File No. 0-24424 CIMA LABS INC. (Exact name of Registrant as specified in its charter) -------------------------- DELAWARE 41-1569769 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10000 VALLEY VIEW ROAD, EDEN PRAIRIE, MINNESOTA 55344-9361 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (612) 947-8700 SECURITIES REGISTERED PURSUANT TO Section 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO Section 12(g) OF THE ACT: COMMON STOCK $.01 PAR VALUE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The approximate aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 15, 1999, based upon the last trade price of the Common Stock reported on the Nasdaq National Market on March 15, 1999, was $18,542,055.* The number of shares of Common Stock outstanding as of March 15, 1999 was 9,610,394. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Definitive Proxy Statement which will be filed with the Commission pursuant to Regulation 14A in connection with the 1998 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Report. - ------------------------------ * Excludes approximately 3,794,191 shares of common stock held by Directors, Officers and holders of 5% or more of the Registrant's outstanding Common Stock at March 15, 1999. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant. 1 PART I. Unless the context otherwise indicates, all references to the "Registrant," the "Company," or "CIMA" in this Annual Report on Form 10-K relate to CIMA LABS INC., a Delaware corporation. The following trademarks of the Company are used in this Annual Report on Form 10-K: "CIMA-Registered Trademark-," "CIMA LABS INC.-Registered Trademark-," "OraSolv-Registered Trademark-," "OraSolv-Registered Trademark-SR", DuraSolv-TM-, PakSolv-TM-, "OraVescent-TM-SL/BL and "OraVescent-TM-SS." ITEM 1. BUSINESS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "BELIEVE," "ANTICIPATE," "EXPECT," "ESTIMATE" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE SUCCESS OF THE COMPANY IN MANUFACTURING THE COMPANY'S TECHNOLOGIES, THE AVAILABILITY OF ADEQUATE FUNDS FOR THE COMPANY'S OPERATIONS, THE SUCCESS OF THE COMPANY IN COMMERCIALIZING ITS NEW DRUG DELIVERY PROGRAMS, AND THE COMPANY'S RELIANCE ON ITS KEY PERSONNEL AND PARTNERS, WHICH ARE DISCUSSED IN THIS SECTION, AND IN GREATER DETAIL UNDER THE CAPTION "BUSINESS RISKS," AND IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." OVERVIEW CIMA, a Delaware corporation incorporated in 1986, is a drug delivery company focused primarily on the development and manufacture of pharmaceutical products based upon its patented oral drug delivery technologies for marketing by national and multinational pharmaceutical companies. The Company offers technologies in the fast-dissolve and oral transmucosal areas. OraSolv and DuraSolv, its premier fast-dissolve technologies, are oral dosage formulations incorporating microencapsulated active drug ingredients into tablets which dissolve quickly in the mouth without chewing or water and which effectively mask the taste of the medication being delivered. OraSolv's and DuraSolv's fast-dissolving capability may enable patients in certain age groups or those with a variety of conditions that limit their ability to swallow conventional tablets to receive medication in a more convenient oral dosage form. The Company believes that OraSolv and DuraSolv are more convenient than traditional tablet-based oral dosages as they dissolve quickly in the mouth and do not require water to be ingested, thereby enabling immediate medication at the onset of symptoms. In addition, OraSolv and DuraSolv can provide more accurate administration of doses than liquid or suspension formulations as no measuring is required. The Company believes OraSolv's and DuraSolv's ease of use and effective taste-masking may foster greater patient compliance with recommended dosage regimens, both for over-the-counter ("OTC") and prescription products, thereby improving therapeutic outcomes and reducing costs in the healthcare system. In addition to OraSolv and DuraSolv, CIMA is developing several new technologies; OraSolv SR, PakSolv, OraVescent SL/BL and OraVescent SS. CIMA's business focus has evolved over the last several years. From inception until 1992, the Company focused on the development of liquid effervescent products and technologies. In 1993, the U.S. patent covering OraSolv was issued and the Company, perceiving a greater commercial opportunity, shifted its focus to the development of OraSolv products. Since the issuance of the OraSolv patent in 1993, the Company completed construction on its current manufacturing facility and produced numerous full-scale trial and validation batches, entered into various license and product development agreements with pharmaceutical companies, and launched the first commercial product using the OraSolv dosage form in the first-half of 1997. The Company generates its revenue from signing license agreements, product development fees, sales of products in the OraSolv dosage form, and royalties. 2 The Company's business strategy is to commercialize its drug delivery technologies through collaborations with pharmaceutical companies worldwide with emphasis on products which command a large market share and/or are in large market segments. The Company's current focus is primarily on the development and manufacture of OraSolv and DuraSolv products for the prescription market. Product differentiation and brand name identity are becoming more critical than ever to the successful marketing of pharmaceutical products. Increasingly pharmaceutical companies are emphasizing the development of strong prescription franchises through branding and direct-to-consumer promotional efforts. The Company believes that OraSolv and DuraSolv afford pharmaceutical companies a means to significantly differentiate their products in the competitive marketplace. Because they are the subject of issued patents or patent applications, OraSolv and DuraSolv can allow extended market life to products that may go off-patent and become subject to generic competition. OraSolv and DuraSolv also afford more enduring product differentiation than the more traditional approaches of changing product flavor or packaging innovations, which can be easily replicated. The Company believes that this has allowed it to enter into agreements with a number of pharmaceutical companies for development, manufacture and commercialization of prescription and non-prescription products. The Company has also initiated the development of new OraVescent drug delivery technologies in the oral transmucosal area. These technologies are designed to deliver poorly absorbed and large molecule drugs through membranes in the oral cavity or the gastrointestinal tract. Major events that affected the Company in 1998 included: - - The Company announced the launch of Triaminic-Registered Trademark- pediatric cough cold products using the OraSolv technology by Novartis Consumer Health. This represents the third commercial launch of a product using the Company's OraSolv technology. - - The Company announced that a major milestone, the completion of the clinical study, was reached in its collaboration with Zeneca on the development of an OraSolv fast-dissolving form of Zomig-Registered Trademark-. - - The Company announced the completion of a clinical study on its new oral transmucosal technology. - - The Company entered into a prescription agreement with N.V. Organon to develop and manufacture an OraSolv quick-dissolving dosage form for one of Organon's prescription drugs. - - The Company's collaboration with SmithKline Beecham Consumer Healthcare on the development of OraSolv formulations for over-the-counter products was terminated. - - The Company entered into exclusive license and supply license agreements with Novartis Consumer Health for the development and manufacture of several Triaminic-Registered Trademark- pediatric cough cold products in CIMA's OraSolv dosage form. The Company also announced that Novartis Consumer Health took an exclusive option on a second license covering additional products. 3 BACKGROUND DRUG DELIVERY TECHNOLOGY Patient medications are available in a variety of delivery forms, including solid dosage forms, liquids, effervescents, transdermal delivery methods, inhalation devices and products, and intramuscular and intravenous injections. Enteral medication delivery includes those medications delivered through the stomach, including tablets, liquids and effervescents. Enteral medications are most frequently patient-administered, because of their non-invasive delivery method. Parental medications are those delivered by injection. Parenteral medications are most often administered by a healthcare provider. The Company believes the convenience of patient administration has made enteral medications in general, and tablets in particular, popular with patients, providers and payors. Industry sources estimate that patients most frequently receive medications in an oral tablet form. However, children and the elderly, as well as those with certain physiological or medical conditions, frequently experience difficulty in swallowing tablets. These patients often receive medications in liquid or effervescent form, or through parenteral methods as an alternative to tablets. The Company believes that tablets are a more convenient, accurate and effective medication form than are liquids or effervescents (which may spill in the process of administering the medication, especially to children) and are easier for patients to self-administer than parenteral therapeutics. RECENT TRENDS IN THE HEALTHCARE AND PHARMACEUTICAL INDUSTRIES The healthcare industry has experienced significant change in the past and the Company expects this change to continue for the foreseeable future. The emergence of managed care organizations has focused providers and payors on the efficient utilization of healthcare resources. In addition, the trend towards the "capitation" of fees, or management of a patient's health requirements for a pre-determined, regular payment, has created an awareness among providers of the cost-effectiveness of various medical treatments. Healthcare providers and payors have implemented a variety of strategies to reduce the cost of medical care, including the use of generic versions of prescription and non-prescription drugs, the use of non-prescription remedies and the use of therapies that have improved patient compliance. The Company believes that patient non-compliance with medicinal dosing regimens is widespread, and that such non-compliance results in unnecessary costs to the healthcare system. These changes in the healthcare industry have also had an impact on participants in the pharmaceutical industry. In particular, a greater emphasis on cost effectiveness by providers and payors has resulted in pharmaceutical companies developing products that reduce the cost of therapy. These pharmaceutical companies have responded by developing treatments with improved efficacy, reduced complications and side effects, easier delivery and lower costs. The focus on cost-effectiveness has also led to the development of generic versions of off-patent prescription drugs. Increasingly, healthcare payors and providers have embraced generic equivalents of branded drugs because generic drugs provide a substantial cost savings. In addition, many pharmaceutical companies are extending their presence in a particular therapeutic area with the introduction of a non-prescription, versions of a prescription drug. Many patients and providers have indicated a preference for OTC versions of prescription formulations because of the convenience that patient-administration of OTC therapies provides as well as the cost savings. In addition, healthcare providers and payors have indicated a continuing interest in therapies that improve patient compliance which ultimately leads to significant healthcare cost savings. As these pharmaceutical companies adjust to the evolving healthcare industry, they must differentiate their products in an increasingly crowded therapeutic market. To do this effectively, they must develop products or product extensions that can successfully compete in the prescription, generic and non-prescription market for drugs, develop products or product extensions that enhance patient compliance, and do all of this within a highly regulated and cost-constrained environment. 4 Another change affecting the healthcare industry has been the number and size of business combinations, strategic alliances, and mergers in both the pharmaceutical and the managed care industries. In the pharmaceutical industry these changes are driving the major pharmaceutical companies to focus more and more on major new chemical entities (NCE's) which might be block-buster drugs. The significant revenue and profit from these drugs present the major growth area for these companies. Drug delivery product development is increasingly being given to specialty drug delivery companies to provide unique development products that contribute important sales revenue and profit, but not at the level of block-buster drugs. The managed care business environment provides even greater focus on patient benefits which, in most cases, are derived from a combination of blockbuster drugs and drug delivery development. Several pharmaceutical companies are taking advantage of the recent U.S. federal legislation which would grant them an additional six months of market exclusivity if they conduct clinical studies on pediatric patients. This serves to highlight the growing regulatory pressure to encourage the development of drugs formulated specifically for children. The Company sees this as a potential benefit as pharmaceutical companies explore various drug delivery systems. MARKET OPPORTUNITY The Company believes that its OraSolv, DuraSolv and OraVescent drug delivery systems will provide benefits to patients as well as healthcare industry providers and payors. These benefits, in turn, should provide marketing advantages to CIMA's pharmaceutical partners. The benefit to patients is ease of medication and convenience, which the Company believes will result in improved compliance with dosing regimens. The benefits to providers and payors are lower costs resulting from better efficacy and improved compliance with dosing regimens. The benefits to pharmaceutical partners are the capabilities to leverage their drug delivery development programs by going to specialty drug delivery companies, like CIMA, for brand differentiation, the ability to retain brand integrity and brand life cycle management. ADVANTAGES FOR PATIENTS, PROVIDERS AND PAYORS The Company believes a broad group of patients could benefit from its fast-dissolve and oral transmucosal technologies because they enable immediate medication at symptom emergence and facilitate conformance to dosing regimens. Patient non-compliance with dosing regimens has been associated with increased costs of medical therapies by prolonging treatment duration, increasing the likelihood of secondary or tertiary disease manifestation and contributing to over-utilization of medical personnel and facilities. By improving patient compliance, providers and payors may reduce unnecessary expenditures and improve therapeutic outcomes. Reduction of expenditures is an increasingly important issue to providers as capitated payment plans become more prevalent in the healthcare industry. In addition to the general market applications, the Company believes its technologies provide benefits to certain patient groups which experience significant difficulty in swallowing tablets. Such patient groups include children, the elderly and patients with certain anatomical or physiological deformities, certain disease indications or medication-associated dysphagia. The Company has completed quantitative consumer testing with children and qualitative testing with physicians, nurses and managed care administrators for the elderly which indicate the potential for these demographic groups to better comply with dosing regimens and thus to benefit from the OraSolv, DuraSolv and OraVescent technologies. 5 ADVANTAGES FOR PHARMACEUTICAL PARTNERS The Company believes that pharmaceutical companies are facing challenges to adjust to the evolving healthcare industry. These challenges include: the impact of generic competition, which generally results in lower pricing as well as a loss of market share; the impact of direct to consumer marketing; the impact of the increased role of managed care organizations, forcing increased economic considerations in patient care, the results of which can include shorter therapies and therapeutic substitution (including less expensive products); and the need to maintain brand integrity with its inherent economic benefits. Pharmaceutical companies are addressing these issues in several ways. They are attempting to develop new product forms which will demonstrate a medical and economic benefit to the patient. For the most part, they use specialty drug delivery companies to do that. They are also trying to develop products which will help to improve patient compliance, which should result in a patient's more rapid return to health. Finally, they are attempting to use approaches which can be patented or provide a technological differentiation in order to reduce the threat of competition. The Company believes that the OraSolv, DuraSolv and OraVescent technologies provide a means for its pharmaceutical partners to meet each of these challenges. TECHNOLOGY ORASOLV The Company's OraSolv technology is an oral dosage form which combines taste-masked drug ingredients with a quick dissolving effervescent excipient system. Taste-masking is achieved through a process of microencapsulation, which coats or entraps the active compound in an immediate release matrix. The effervescent excipient system aids in rapid dissolution of the tablet, permitting swallowing of the pharmaceutical ingredients before they come in contact with the taste buds. The OraSolv tablet dissolves quickly without chewing or water and allows for effective taste-masking of a wide variety of active drug ingredients, both prescription and non-prescription. Taste-Masking The taste-masking of the drug ingredients used in OraSolv products is accomplished using a variety of coating techniques, including spray coating, spray drying, spray congealing, melt dispersion, phase separation or solvent evaporation methods. The coating materials are intended to prevent the active drug substance in the OraSolv tablet from coming into contact with the patient's taste buds but to provide for the immediate or the controlled release of the active ingredient in the stomach. In the past, the Company contracted out taste-masking actives with a number of different suppliers. Since late 1997, this activity has been brought in-house, to date the Company scientists have developed several taste-masked actives, the first of which we expect to be in commercial distribution in late 1999. The Company has one issued patent and two pending patents covering taste-masking of pharmaceuticals actives ingredients. Quick Dissolve The microencapsulated drug is combined with fast-dissolving tablet materials, which can include a variety of flavoring, coloring and sweetening agents all materials Generally Recognized As Safe materials (GRAS) and commonly used tablet excipients, such as binding agents and lubricants. In addition, an effervescent system composed of a dry acid and a dry base is added to the tablet excipient to facilitate a mild effervescent reaction when the tablet contacts saliva. This effervescent reaction accelerates the disintegration of the tablet through the release of the carbon dioxide. As the OraSolv tablet dissolves, it releases the microparticles of drug into the saliva, forming a micro-suspension of the drug in the saliva. This microencapsulated drug suspension enters the stomach through the normal swallowing process. 6 NEW TECHNOLOGIES DuraSolv is an oral dosage system designed to improve manufacturing efficiency and reduce production costs. Currently, a significant component of OraSolv's manufacturing cost is a consequence of the sophisticated packaging systems necessary to protect the softer, more friable OraSolv tablets. DuraSolv is a higher compaction solid oral dosage system formulated to achieve all the benefits of a quick dissolve dosage system, such as OraSolv, but capable of being packaged in traditional packaging systems such as foil pouches or bottles at much higher production rates and lower packaging costs. The key advantages of a harder tablet are a more robust tablet leading to lower manufacturing costs, and simpler, faster and more cost effective packaging. The Company has successfully developed prototypes in this dosage system, filed a patent application, and conducted stability tests. Consumer testing has demonstrated high acceptability of this technology, comparable to that of OraSolv. To date, the Company has no agreements with any corporate partner related to this technology. OraSolv SR is a sustained or controlled release, quick dissolve system designed to improve convenience and compliance. This system incorporates time release beads, providing the traditional benefits of a sustained or controlled release of active ingredients with quick dissolve's improved convenience. The two key advantages are: 1) use of the sustained release systems of our partners' which has already been approved by the FDA; and 2) unique formulations that allow easy swallowing of the sustained release active. The Company's agreement with Schering-Plough utilizes this new technology. OraVescent SL/BL is an improved efficacy technology designed to enhance the transport of active drug substances across oral mucosal membranes. This technology improves the bioavailability and accelerates the onset of action of some molecules. The Company has completed its first human testing of this technology and expects to initiate two prototype projects with partners in 1999. OraVescent SS is an improved efficacy technology designed to enhance the absorption of active drug substances at selected sites along the patients G.I. tract. This technology is currently being tested in laboratory animal studies. The Company expects to conduct the first human clinical testing of this technology in 1999 and to initiate a prototype development project with a partner in 1999. PATENTS AND PROPRIETARY RIGHTS The Company actively seeks, when appropriate, protection for its products and proprietary information by means of U.S. and foreign patents, trademarks and contractual arrangements. In addition, the Company relies upon trade secrets and contractual arrangements to protect certain of its proprietary information and products. CIMA holds six issued U.S. patents and several foreign patents covering its technologies. The core patent relating to the OraSolv technology relates to the taste masking, microencapsulation and quick dissolving excipient technology incorporated in products utilizing the OraSolv technology. A corresponding European patent has been issued. The OraSolv U.S. patent was issued in 1993 and expires in 2010. Two of the issued U.S. patents relate to the production of compressed effervescent and non-effervescent tablets using a particular lubricant developed by the Company. Issued U.S. patents held by CIMA and their dates of expiration are set out in the table below. As with any patent, the actual scope of coverage afforded by each of CIMA's patents is governed by the language of the patent claims themselves. The descriptions set forth in the table below are intended solely for ease of identifying patents relevant to various technologies. They are not intended as a representation regarding the scope of patents.
- ------------------------------------------------------------------------------------------------------------------------------- PATENT TECHNOLOGY COVERED DATE ISSUED DATE EXPIRES - ------------------------------------------------------------------------------------------------------------------------------- 5,178,878 Certain OraSolv-Registered Trademark- technology. 1993 2010 - ------------------------------------------------------------------------------------------------------------------------------- 5,219,574 The production of compressed effervescent and non- 1993 and 1995 2010 and 2012 - -------------------------------------------------------------------------------------------------------------------------------
5,401,513 effervescent tablets using a particular lubricant developed by the Company (two patents). - ------------------------------------------------------------------------------------------------------------------------------- 5,223,264 Effervescent pediatric vitamin and mineral supplement. 1993 2010 - ------------------------------------------------------------------------------------------------------------------------------- 5,503,846 The formulation of a base coated, acid effervescent mixture 1996 2013 manufactured by controlled acid base reaction. The obtained mixture can be used in the formulation of acid sensitive compounds with OraSolv-Registered Trademark- technology or other effervescent based products. - ------------------------------------------------------------------------------------------------------------------------------- 5,607,697 Taste-masking of microparticles for oral dosage forms. 1997 2015 - -------------------------------------------------------------------------------------------------------------------------------
As a consequence of the Company's patent position, an off-patent or near off-patent drug active can be combined with the Company's technology in a new, competitively differentiated and patent-protected dosage form. The Company holds two patents in Australia, issued in 1990, one Euro Patent, issued in 1996 and one Canadian patent, issued in 1999. The Company also holds a total of 18 U.S. and foreign patent applications, including two European Patent Office filings. The Company's success will depend in part on its ability to obtain and maintain patent protection for its products, its new technology and to preserve its trade secrets. No assurance can be given, however, that the Company's patent applications will be approved or that any issued patents will provide competitive advantages for its products or will not be challenged or circumvented by competitors. The Company's ability to commercialize its products will depend on not infringing the patents of others, and protecting the Company's own proprietary technology, which may involve litigation. Whether or not the outcome of any litigation concerning patents and proprietary technologies is favorable to the Company, the cost of such litigation and the diversion of the Company's resources during such litigation could have a material adverse effect on the Company. See "Item 3. Legal Proceedings." Much of the Company's technology is dependent upon the knowledge, experience and skills of key scientific and technical personnel. To protect rights to its proprietary know-how and technology, Company policy requires all employees and consultants to execute confidentiality agreements that prohibit the disclosure of confidential information to anyone outside the Company. These agreements also require disclosure and assignment to the Company of discoveries and inventions made by such persons while devoted to Company activities. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any such breach or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. In addition, it is possible others may infringe the patent rights of the Company. The Company may desire or be required to obtain licenses from others with respect to materials used in the Company's products or manufacturing processes, including drug coating techniques. There can be no assurance that such licenses will be obtainable on commercially reasonable terms, if at all, or that any licensed patents or proprietary rights will be valid and enforceable. STRATEGY The Company's goal is to have its proprietary drug delivery technologies incorporated into as many pharmaceutical products as possible with an emphasis on pharmaceutical products which command a large market segment. Initially the Company focused its efforts on non-prescription marketed products which benefit from quicker time to regulatory approval and marketing which has served to establish CIMA and its technology in the 8 market and provide near term revenue. The Company's longer term strategy is to build on this base and expand into the prescription market. The prescription market offers significantly more attractive royalty rates and higher manufacturing margins. CIMA's priority is to focus on developing OraSolv and DuraSolv formulations of prescription branded pharmaceuticals as well as generics and, in particular, those products which have application to pediatric and geriatric markets. CIMA has embarked on the development of specifically identified pharmaceutical products which will go off patent in the next several years. The Company intends to develop such products through the product registration phase with or without a partner. Product therapeutic classes to which the Company believes its technologies potentially can be applied are highlighted in the table below, together with the target patient population.
Prescription Markets Potential Areas of Orasolv Application --------------------------------------- Therapeutic Area Patient Population ---------------- ------------------ Antibiotics Pediatric Anti-asthmatics Pediatric Anti-epileptics Pediatric Cough/Cold/Allergy All Cardiovascular Adult/Geriatric Anti-migraine Adult/Geriatric Anti-emetics All Anti-depressants Pediatric/Geriatric Anti-psychotics Pediatric/Geriatric Anti-anxiety Pediatric/Geriatric Cancer Geriatric AIDS Adult/Pediatric Parkinson's/Alzheimer's Geriatric
9 The Company's primary strategies are to: - - COLLABORATE WITH CORPORATE PARTNERS FOR MARKETING OF PRODUCTS. The Company has entered into and intends to continue to enter into agreements with pharmaceutical and other healthcare companies for the development and marketing of products that incorporate its technologies. These partners will market and sell their products which utilize one of the Company's technologies. The Company believes this strategy will reduce the time required to market products, extend patent life for certain actives and take advantage of the industry knowledge and presence of its partners. - - DEVELOP PROPRIETARY TECHNOLOGIES. The Company continues to develop proprietary technologies and obtain patents thereon. To date, the Company has six U.S., two Australian and one Canadian patents, one Euro Patent and thirteen patent applications. The Company believes that patented products and technologies provide attractive marketing features for use by its corporate partners. In 1996, the Company initiated the development of new technologies: DuraSolv, OraSolv SR, OraVescent SL/BL and OraVescent SS. Consumer use testing has already been completed on DuraSolv demonstrating its feasibility and acceptance by patients. OraSolv SR has also passed the feasibility stage and is the technology being utilized in the Schering-Plough partnership. The OraVescent systems have been and are currently the subject of several feasibility studies. - - RETAIN MANUFACTURING RIGHTS. The Company intends to continue to develop formulations of oral therapeutics for its partners using its technologies, to manufacture commercial quantities of these products in its facility in Eden Prairie, and to rely on its partners to market and sell the developed products. The Company believes this strategy enables it to better and more effectively manage increasing manufacturing volumes, control quality of the products it manufactures and manufacture in small or varying batch sizes, each of which provide it with a competitive business advantage. - - RETAIN OWNERSHIP OF PRODUCTS DEVELOPED IN COLLABORATIONS. In most cases the Company retains and intends to continue to retain ownership of the developed products using its technologies. The Company believes this practice, in the case of generic and OTC monographed products, will provide it with the flexibility of entering into collaborations with other potential partners should the initial partner decide not to pursue the commercialization of a particular product. - - DEVELOP KEY PRODUCTS THROUGH REGISTRATION. A Company objective to develop key products through registration was established as a part of the strategic planning process. A complete list of key prescription pharmaceuticals already off patent and those coming off patent was prepared and subjected to key criteria identified as part of the process. A grading system was developed which allowed the Company to identify and rank a number of key prescription pharmaceuticals for development. In 1998, the first of these products was developed, scaled up and placed on stability. One of the products completed stability testing, patient testing and pharmacokinetic (bioequivalence testing) successfully. A second product that was identified has been developed, scaled up and placed on stability. Initial results on this product have been positive. Additional products are being identified for development during 1999. The number of products and the extent of that development will depend on the availability of resources. 10 AGREEMENTS WITH CORPORATE PARTNERS The Company's business development efforts are focused on entering into development, licensing and manufacturing agreements with pharmaceutical and other healthcare companies. Under these agreements, the corporate partner will be responsible for marketing and distributing the developed products either worldwide, or in specified markets or territories. The collaborative arrangements typically begin with a product development phase which, if successful, may be followed by a development and license option agreement for development of product prototypes and then license and manufacturing agreements for commercialization of such products. Alternatively, the Company may develop product prototypes internally and enter directly into a development, manufacturing or license agreement for commercialization of those products. The Company's future ability to generate revenue is dependent upon the Company's ability to enter into collaborative arrangements with pharmaceutical and other corporate partners to develop products that meet the requirements of its corporate partners, and upon the marketing efforts of these corporate partners. The Company believes these partners will have an economic motivation to market the Company's products; however, the amount and timing of resources to be devoted to marketing are not within the control of the Company. Certain of the Company's non-prescription products are seasonal in nature and the Company's revenues could vary materially from one financial period to another depending on which of such products, if any, are then being marketed. In an attempt to alleviate such risk, the Company is focused on developing for its partners a mix of non-prescription and prescription products. There can be no assurance that the Company will be able to enter into additional collaborative arrangements in the future or that any current or future collaborative arrangements will result in successful product commercialization. To the extent that agreements with corporate partners cover products to be sold internationally, such sales could be adversely affected by governmental, political and economic conditions in other countries, including tariff regulations, taxes, import quotas and other factors. The table below sets forth the partners, market segments and CIMA technology for the Company's major collaborative arrangements. PHARMACEUTICAL COLLABORATIONS
PARTNER MARKET SEGMENT TECHNOLOGY ------- -------------- ---------- Bristol-Myers Squibb Pediatric Analgesics OraSolv Bristol-Myers Squibb Multiple Products OraSolv Novartis Pediatric Cough Cold OraSolv Schering-Plough UNDISCLOSED(1) OraSolv SR Zeneca Anti-migraine OraSolv Organon UNDISCLOSED(1) OraSolv
(1) Further information is confidential as disclosure of the product category may force the collaborative partner to alter its marketing plans, which could have a material effect on the eventual marketing of the product. BRISTOL-MYERS SQUIBB The Company started manufacturing commercial quantities in 1997 of an OraSolv dosage form of Tempra-Registered Trademark- Bristol-Myers Squibb's pediatric analgesic. Tempra Quicklets-TM-, launched in the United States, competes directly against children's Tylenol-Registered Trademark- and contains the drug active common to these products: acetaminophen. The product was also introduced as Tempra-Registered Trademark- FirstTabs-TM- by Mead Johnson, Canada, a subsidiary of Bristol-Myers Squibb. The Company has received milestone payments for the development of this product, manufacturing fees, and royalty payments on end market sales. 11 In addition, the Company announced in 1997 the signing of a global non-exclusive license agreement with Bristol-Myers Squibb, which covers multiple products to be developed by Bristol-Myers Squibb applying or utilizing the OraSolv technology to be sold in various territories. This agreement makes provision for advanced royalty payments, minimum royalty payments over a four-year period and royalties at market rates on total end market sales. In the fourth quarter of 1998, the global non-exclusive license agreement with Bristol-Myers Squibb was amended. The Company was given back the rights to pediatric analgesics in the United States. NOVARTIS CONSUMER HEALTH In December 1997, the Company announced that Novartis entered into a Development and License Option Agreement which covers the application of OraSolv to the Novartis Triaminic-Registered Trademark- product line. Similar to the above agreements, the Company will receive option and development fees in exchange for the license option and development work. In July 1998, the Company announced that Novartis Consumer Health launched three Triaminic products using the OraSolv technology. The Company also announced the signing of exclusive license and supply agreement which include an option to a second exclusive license covering additional products. SCHERING-PLOUGH The Company entered into a Development and Option Agreement with Schering-Plough in August 1997. The Agreement calls for the development of an OraSolv SR version of an undisclosed, currently marketed prescription product. In exchange for the development work and license option, the Company will receive an option fee and development fees. ZENECA In September 1997, the Company entered into a Development and License Option Agreement with Zeneca to develop an OraSolv version of Zeneca's anti-migraine drug, Zomig-Registered Trademark-. The Agreement entitles the company to development and option fees. In October 1998, the Company announced that it had achieved completion of a major milestone. The clinical study on the OraSolv formulation of Zomig was completed. ORGANON In December 1998, the Company entered into a Development and License Option Agreement with N.V. Organon, the pharmaceuticals business unit of Nobel. The Agreement is for the development of an OraSolv version of one of Organon's prescription products. The Agreement entitles the Company to receive development and option fees. RESEARCH AND DEVELOPMENT The Research and Development ("R&D") department at CIMA is focused on the development of oral dosage forms based on CIMA proprietary technologies and new proprietary oral dosage forms focused on improving both compliance and efficacy. The R&D department includes scientists recruited from the R&D groups of major U.S. pharmaceutical companies. Currently R&D personnel and support systems and facilities are organized in a way to effectively develop formulations from bench scale through full scale/commercial size under GMP conditions. Such development is carried out at the R&D facilities in Brooklyn Park, Minnesota and in the full scale manufacturing facility in Eden Prairie, Minnesota. The Company believes that its R&D facilities are in compliance with current Good Manufacturing Practice (cGMP). In both facilities, small cGMP batches are manufactured, packaged and released to support initial studies in humans, including both consumer studies for OTC products and clinical studies for prescription products. 12 These efforts are conducted to support the Company's strategic and business goals. The Company's R&D department is devoted to the development of drug delivery technologies and dosage forms for pharmaceutical applications. The key goals for the R&D team are: develop innovative drug delivery systems that fulfill the pharmaceutical partners' needs and meet the strategy of the Company; develop, expand and support systems required to fulfill cGMP production at commercial levels necessary to meet the requirements of our partners; recruit and train high quality technical and scientific personnel; and support the Company's intellectual property process. In 1998, the Company began internal development of coated actives for the manufacture of OraSolv products. To date, the Company has developed numerous coated actives and is in the process of scaling-up five coated actives to commercial scale. The Company expects to commercialize its first coated active in the year 2000. Bringing the taste-masking process in-house has enabled the Company to commit to a number of very aggressive product development timelines. The Company believes that the ability to deliver on aggressive development timelines is an important competitive advantage over our competition and is a key factor in signing new prescription pharmaceutical agreements. In 1997, the Company submitted a provisional patent filing on DuraSolv, a more robust rapidly dissolving tablet technology that can be packaged using traditional pharmaceutical packaging equipment. Accelerated stability data has been collected on product packaged in bottles and foil packets for several DuraSolv prototype formulations. These efforts have not only resulted in a new potential technology but significant enhancements which have been incorporated in the base OraSolv technology as a result of these efforts. In 1997, the Company signed its first agreement to develop an OraSolv SR product. Due to partner related development activities the timeline for the Company's first internally developed OraSolv SR product has been delayed. The Company expects to resume this activity in 1999. Additional R&D personnel were hired in 1998. They have focused exclusively on research and development of new drug delivery systems. This has resulted in the dosing in human subjects of an enhanced efficacy dosage form, OraVescent SL/BL. Additional human and animal studies will be conducted utilizing this and another enhanced efficacy dosage form in 1999. At the early stage of development, the feasibility of these technologies appears promising. However, there are numerous risks and uncertainties inherent in any R&D program. Factors that could cause these programs not to reach the commercialization stage include, but are not limited to, the possibilities that the research will not be able to be patented or the patent enforced, the inability to scale-up and manufacture these new technologies in a cost-effective manner, the ability to find a partner to market the product, and the eventual market acceptance of this new technology. For the years ended December 31, 1998, 1997 and 1996, CIMA's total expenditures for R&D were $4,488,000, $3,364,000 and $5,403,000, respectively. Some of these expenses were directly related to product development fees earned from the Company's collaborative partners. For the years ended December 31, 1998, 1997 and 1996, these revenues were $3,458,000, $1,557,000 and $1,197,000, respectively. 13 MANUFACTURING A key component of the Company's strategy is to be the primary manufacturer of OraSolv, DuraSolv and its other future drug delivery products. Advantages of this strategy include the ability to: - retain control of its technology; - increase production quickly; - refine the production process as necessary to bring OraSolv and other future products to market rapidly and successfully; and - generate a revenue stream from manufacturing. The Company's OraSolv production facility, which also houses the Company's headquarters is located in Eden Prairie, Minnesota. The Company began occupying and making leasehold improvements to the new facility in late June 1994 and the facility was completed in December 1994. The Company has operated one production line at this facility which is capable of producing 200 to 250 million tablets a year. The facility is designed to be expandable to six production lines and efforts are underway to design and select a second production line as warranted. The Company expects six production lines to be more than sufficient capacity to meet the Company's long-term manufacturing needs. The production equipment consists of state-of-the-art material transfer and blending systems and integrated high speed tableting and packaging operations. The configuration of the facility, the production flow layout and the equipment has been designed by the Company's personnel and consultants. Most of the equipment consists of high quality components commonly used in pharmaceutical manufacturing, selected for ease of operation, cleaning, changeover and cost effectiveness. The production line is capable of packaging a variety of package designs with rapid conversion between sizes. Modern technology is also utilized for 24 hour environmental control and monitoring of air quality, temperature, humidity and pressure differentials in all production areas. Although the OraSolv process uses many standard pharmaceutical production components, some equipment was specifically developed to meet the unique requirements of OraSolv products. The Company has developed a manufacturing process that allows high speed packing of soft, friable tablets, without breakage, into specially designed protective, child resistant packages in a controlled, low humidity environment. To date, CIMA is the only company that has proven it has this capability in a production mode. After conducting over 60 full scale developmental runs and making production equipment refinements, the manufacturing facility, equipment and process have all been successfully validated. Additionally, extensive package transit testing and consumer testing confirmed the integrity of the package through all modes of transport to the final customer without product damage. After completion of validation, the quality of the manufacturing facility, equipment and procedures were confirmed through the successful inspection by the State of Minnesota, the FDA and Medicines Control Agency authorities. In addition, there have been numerous successful site audits conducted by major pharmaceutical companies. The production facility complies with (cGMP) requirements. The active ingredients used by the Company are readily available from suppliers or our partners. In certain cases, the active ingredients are shipped to coating material suppliers where appropriate coating materials are applied to microencapsulate the ingredients. In other cases, the Company may purchase the microencapsulated active ingredient from a supplier. The pharmaceutical ingredients and other supplies to be used in manufacturing OraSolv products are standard pharmaceutical products available from numerous suppliers. Most coating materials are also available from numerous suppliers. In some instances, however, certain coating materials or techniques may be available only from a single supplier. If any such coating materials or techniques were to become unavailable, the Company believes that satisfactory alternative materials or techniques could be substituted. However, there can be no assurance that the Company's manufacturing operations would not be disrupted. Any such disruption could have an adverse effect on the Company's business and potentially damage relations with its corporate partners. 14 In February 1997, CIMA began commercial production for the first commercial launch by Bristol-Myers Squibb of a product incorporating the OraSolv technology. Since then, the Company has been producing commercial OraSolv product utilizing multiple shifts. It has gained valuable knowledge to make improvements in production efficiencies and operating speed and to reduce wastage. There are currently seven SKU in the marketplace. MARKETING The Company's marketing strategy is to rely on its corporate partners for the marketing and sale of its products. The Company believes this strategy will enable it to respond quickly to market demands, while avoiding the effort and expense associated with the establishment of an end-user marketing capability. The Company's marketing department has focused on promoting the benefits of its technologies to its corporate pharmaceutical partners. The Company believes that it is a leader in the drug delivery industry in the fast-dissolve area by offering potential pharmaceutical partners the largest selection of technologies. Also, its fast-dissolve tablet technology competes favorably to its competition. In quantitative consumer studies conducted by a major independent market research company and sponsored by the Company, significantly more consumers liked the OraSolv formulation versus the Zydis-Registered Trademark- formulation (R.P. Scherer Corporation) of the same drug. Currently, the Company has corporate collaborations with Bristol-Myers Squibb, Schering-Plough, Zeneca, Novartis Consumer Health and Organon. COMPETITION Competition in the areas of pharmaceutical products and drug delivery systems is intense. The Company's primary competitors in the business of developing and applying drug delivery systems include companies which have substantially greater financial, technological, marketing, personnel and research and development resources than the Company. The Company's products will compete not only with products employing advanced drug delivery systems but also with products employing conventional dosage forms. New drugs or future developments in alternative drug delivery technologies may provide therapeutic or cost advantages over the Company's potential products. Among the technologies expected to provide competition for the Company's OraSolv and Durasolv technologies are the Zydis technology developed by R.P. Scherer Corporation ("Scherer"), the Shearform Matrix technology developed by Fuisz Technologies, Ltd. ("Fuisz"), the Wowtab technology developed by Yamanouchi Shaklee Pharmaceuticals, and the Flashtab developed by Prographarm. The Zydis technology is a fast-dissolving oral drug delivery system based on a freeze-dried gelatin tablet. The Shearform Matrix technology has application to two tablet formats, one of which involves waterless, fast-dissolving oral delivery which Fuisz calls "FlashDose-Registered Trademark-." The Wowtab and Flashtab technologies are fast-dissolving technologies which result in an oral fast-dissolving tablet which is more like the Company's DuraSolv tablet. The principal competitive factors in the market for rapid dissolving tablet technologies are compatibility with taste-masking techniques, dosage capacity, drug compatibility, cost and ease of manufacture, patient acceptance and required capital investment for manufacturing. The Company believes that its rapid dissolving tablet technologies compete favorably with respect to these factors. In a recent quantitative consumer study conducted by the Company, significantly more consumers liked the OraSolv formulation versus the Zydis formulation of the same drug. Scherer, Fuisz , Yamanouchi Shaklee and Prographarm have been successful in licensing their technologies to a number of pharmaceutical companies. The Company also believes that certain pharmaceutical companies may be developing other rapid dissolving tablet technologies which might be competitive with the Company's technology. 15 GOVERNMENT REGULATION All pharmaceutical manufacturers are subject to extensive regulation of their activities, including research and development and production and marketing, by numerous governmental authorities in the U.S. and other countries. In the U.S., pharmaceutical products are subject to rigorous regulation by the FDA. The federal Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, record keeping, labeling, advertising and promotion, and marketing and distribution of pharmaceutical products. If a company fails to comply with applicable requirements, it may be subject to administrative or judicially imposed sanctions such as civil penalties, criminal prosecution of the company, its officers and employees, injunctions, product seizure or detention, product recalls, total or partial suspension of production and FDA refusal to approve pending premarket approval applications or supplements to approved applications. In general, FDA approval is required before a new drug product may be marketed in the U.S. However, most OTC drug products are exempt from the FDA's premarketing approval requirements. In 1972, the FDA instituted the ongoing OTC Drug Review in order to evaluate the safety and effectiveness of all OTC drugs then on the market. Through the OTC Drug Review process, the FDA issues monographs that set forth the specific active ingredients, dosages, indications, and labeling statements for OTC drugs that the FDA will consider generally recognized as safe and effective and therefore not subject to premarket approval. For certain categories of OTC drug products not yet subject to a final monograph, the FDA usually will not take regulatory action against such a product unless failure to do so poses a potential health hazard to consumers. The Company's initial product launch was an OTC drug product that did not require FDA approval. Products subject to final monographs, however, are subject to various FDA regulations such as those outlining cGMP requirements, general and specific OTC labeling requirements (including warning statements), the restriction against advertising for conditions other than those stated in product labeling, and the requirement that OTC drugs contain only suitable inactive ingredients. OTC products and manufacturing facilities are subject to FDA inspection, and failure to comply with applicable regulatory requirements may lead to administrative or judicially imposed penalties. Future marketing of products not formulated in compliance with final OTC drug monographs typically will require a formal submission to the FDA, such as a New Drug Application ("NDA") or Supplement to existing New Drug Application ("sNDA"), and ultimate approval by the FDA. This application and approval process can be expensive and time consuming, typically taking from six months to several years to complete. Further, there can be no assurance that approvals can be obtained, or that any such approvals will be on the terms or have the scope necessary for successful commercialization of these products. The Company expects that any required FDA approvals in connection with the introduction of new, non-monographed products would be sought by the Company's corporate partners. Marketing of such products could be delayed or prevented because of this process. Even after a NDA or sNDA has been approved, existing FDA procedures may delay initial product shipment. Delays caused by the FDA approval process may materially reduce the period during which there is an exclusive right to exploit patented products or technologies. Even if any required FDA approval has been obtained with respect to a product, foreign regulatory approval of a product must be obtained prior to marketing the product internationally. Foreign approval procedures vary from country to country and the time required for approval may result in delays in or ultimately prevent marketing. The Company expects to rely on its pharmaceutical company partners to obtain any necessary government approvals in foreign countries. However, considerable amounts of company time and resources may be required to support the approvals of these foreign filings. Prescription drug products with proven safety and efficacy profiles may be "switched" to OTC status through the submission to and approval by the FDA of a supplement to an existing NDA. The information and data required to support a switch application vary with individual drugs. In some cases, the manufacturer may be required to conduct clinical investigations or other scientific studies to assess the safety and effectiveness of the drug for non-prescription use. In evaluating an OTC switch, the FDA considers whether the drug product is safe for use by consumers without the supervision of an appropriate licensed healthcare professional. As prescription 16 drug products are switched to the OTC market, pharmaceutical companies face the same challenges to establish brand identification and product differentiation as they face with current OTC drug products. Although switched products in certain cases may be eligible for a three-year period of market exclusivity (during which time the FDA will not consider any ANDAs for the same drug), the Company believes that its OraSolv drug delivery system can help its corporate partners differentiate their products during any exclusivity period and maintain a competitive advantage thereafter. If a generic version of a drug already approved under an NDA and no longer subject to any FDA marketing exclusivity, is bioequivalent to the approved product, preparation and submission of an ANDA will be the most time and cost-effective approach to FDA approval. The methodology for establishing bioequivalence through in vitro or in vivo methods is viewed to be straightforward. Because CIMA's taste-masking systems are used in immediate release dosage forms, this approach is generally the most expeditious. Certain drugs may raise distinctive issues, such as a need for a unique approach to proving bioequivalence. In those cases, premarket approval under Section 505(b)(2) of the Food, Drug, and Cosmetic Act would be more appropriate. Section 505(b)(2) allows the FDA to approve an NDA using shortened procedures, usually for drugs that have proven safety profiles because of their marketplace performance among a large population group. In a 505(b)(2) application, a company may rely on clinical investigations conducted by others to which it does not hold a right of reference. In general, a 505(b)(2) application is supported by two or three clinical studies among the target population group designed to verify the safety and efficacy of the drug product in that population using the target dose and dose sequence. The cost of this approach, which is generally used when a new delivery system or indication is added to an existing drug product, is typically much less than a standard NDA. The time to approve may also be shorter than a traditional NDA and, in some cases, an ANDA. Each domestic drug product manufacturing facility must be registered with the FDA. Each manufacturer must inform the FDA of every drug product it has in commercial distribution and keep such list updated. Domestic manufacturing facilities are also subject to at least biennial inspection by the FDA for compliance with cGMP regulations. Compliance with cGMP is required at all times during the manufacture and processing of drug products. CIMA's existing manufacturing facilities have been inspected periodically by the FDA. The FDA last inspected the Eden Prairie facility in November 1996, and the Brooklyn Park facility in January 1997. No observations were cited during either inspection. While the Company's new OraSolv manufacturing facility is required to be registered with the FDA and to comply with cGMP regulations at all times, FDA approval was not required prior to commencement of manufacturing OTC drug products. Even though the Company has worked diligently to assure compliance with FDA regulations and has been audited by the quality control/compliance groups of several of its current and potential corporate partners, there can be no guarantee that FDA inspections will proceed without any compliance issues requiring the expenditure of money and resources to resolve. The Company's facilities have been inspected by and the Company has received a license from the Minnesota Board of Pharmacy to manufacture drug products in its facilities. The Company is also subject to regulation under various federal and state laws regarding, among other things, occupational safety, environmental protection, hazardous substance control and product advertising and promotion. In connection with its research and development activities and its manufacturing, the Company is subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes. The Company believes that it has complied with these laws and regulations in all material respects and it has not been required to take any action to correct any material noncompliance. The Company does not currently anticipate that any material capital expenditures will be required in order to comply with federal, state and local environmental laws or that compliance with such laws will have a material effect on the earnings or competitive position of the Company. The Company is unable to predict, however, the impact on the Company's business of any changes in such environmental laws or of any new laws or regulations that may be imposed in the future and there can be no assurance that the Company will not be required to incur significant compliance costs or be held liable for damages resulting from violations of these laws and regulations. 17 BUSINESS RISKS The Company considered itself a development stage company until the fourth quarter of 1997 and must be evaluated in light of the uncertainties and complications present for any such company and, in particular, one in the pharmaceutical industry. The Company has accumulated aggregate net losses from inception through December 31, 1998 of $44,715,000. Losses have resulted principally from costs incurred in research and development of the Company's technologies and from general and administrative costs. These costs have exceeded the Company's revenues . In early 1997, the Company recorded the first commercial sales using it's OraSolv technology. Prior to this the Company's revenues had been derived primarily from the manufacturing of AutoLution and other non-OraSolv products under agreements with third parties. The Company no longer manufactures such products and no longer derives revenues from their manufacture. In more recent years, revenues have been generated from research and development fees, licensing arrangements and to a lesser extent sales of products using the OraSolv technology to our corporate partners. The Company expects to continue to incur losses through 1999. There can be no assurance that the Company will ever generate substantial revenues or achieve profitability. The Company believes that its currently available funds, together with any license fees, product development fees and sales revenue anticipated to be received in the future, may not meet its needs through 1999. It is anticipated that in the first half of 1999, the Company will need to raise additional funds. The Company is considering numerous types of financing. These include public or private financings, including equity financing which may be dilutive to shareholders, debt financing with a potential partner that may include product development projects and/or establishing a line of credit with a financial institution. There can be no assurance that the Company will be able to raise additional funds if its capital resources are exhausted, or that funds will be available on terms attractive to the Company. The Company is dependent upon its ability to enter into and perform under collaborative arrangements with pharmaceutical companies for the development and commercialization of its products. Failure of these partners to market the Company's products successfully could have a material adverse effect on the Company's financial condition and results of operations. The Company's revenues are also dependent upon ultimate consumer acceptance of the OraSolv drug delivery system and/or its new drug delivery technologies as an alternative to conventional oral dosage forms. The Company expects that OraSolv products will be priced slightly higher than conventional swallow or chewable tablets. Although the Company believes that its initial consumer research, and a competitors launch of a fast-dissolve product has been encouraging, there can be no assurance that market acceptance of the Company's OraSolv products will ever develop or be sustained. The Company began manufacturing OraSolv products in commercial quantities in February 1997. Commercial sales have been made and revenue has been recognized from sales of OraSolv products. To achieve future desired levels of production, the Company will be required to increase its manufacturing capabilities. There can be no assurance that manufacturing can be scaled-up in a timely manner to allow production in sufficient quantities to meet the needs of the Company's corporate partners. Furthermore, the Company has only one manufacturing line and one facility capable of manufacturing products. If this production line and/or facility becomes damaged or becomes incapable of manufacturing products due to natural disaster, governmental regulatory issues or otherwise, the Company would have no other means of producing OraSolv products. The Company intends to increase its research and development expenditures to enhance its current technologies, and pursue internal proprietary drug delivery technologies. Even if these technologies appear promising during various stages of development, they may not reach the commercialization stage for a number of reasons. Such reasons include the possibilities of not finding a partner to market the product, of being difficult to manufacture on a large scale or be uneconomical to market. 18 The quick dissolve drug delivery field is fairly new and rapidly evolving and it is expected to continue to undergo improvements and rapid technological changes. There can be no assurance that current or new competitors will not succeed in developing technologies and products that are more effective than any which are being developed by the Company or which could render the Company's technology and products non-competitive or that any technology developed by the Company will be preferred to any existing or newly developed technologies. The foregoing risks reflect the Company's stage of development and the nature of the Company's industry. The Company is also subject to a range of additional risks, including competition, uncertainties regarding the effects of healthcare reform on the pharmaceutical industry, including pressures exerted on the prices charged for pharmaceutical products and uncertainties regarding protection of patents and proprietary rights, all of which may have a material adverse effect on the Company's business. 19 EMPLOYEES As of March 15, 1999, the Company had 74 full-time employee, of whom 12 hold degrees at the doctorate level. Of these employees 26 are engaged in research and development, 19 in manufacturing, 6 in compliance,11 in quality control and 12 in administration, business development, finance and human resources. Most of the Company's scientific and engineering employees have prior experience with pharmaceutical or medical products companies. No employee is represented by a union, and the Company has never experienced a work stoppage. The Company believes its employee relations are good. The success of the Company and of its business strategy is dependent in large part on the ability of the Company to attract and retain key management and operating personnel. Such individuals are in high demand and are often subject to competing offers. In particular, the Company's success will depend, in part, on its ability to attract and retain the services of its executive officers and scientific and technical personnel. The loss of the services of one or more members of management or key employees or the inability to hire additional personnel as needed may have a material adverse effect on the Company. LIABILITY INSURANCE The Company's business involves exposure to potential product liability risks that are inherent in the production and manufacture of pharmaceutical products. Although the Company has not experienced any product liability claims to date, any such claims could have a material adverse impact on the Company. The Company currently has product liability insurance with coverage limits of $5,000,000 per occurrence and $5,000,000 on an annual aggregate basis. The Company's insurance policies provide coverage on a claims made basis and are subject to annual renewal. There can be no assurance, however, that the Company will be able to maintain such insurance on acceptable terms or that the Company will be able to secure increased coverage as the commercialization of its products proceeds or that any insurance will provide adequate protection against potential liabilities. ITEM 2. PROPERTIES The Company has leased a 75,000 square foot facility in Eden Prairie, Minnesota, a suburb of Minneapolis, which houses its corporate headquarters and has been prepared for use as an OraSolv production facility. This lease has an initial term expiring on June 1, 2009 with minimum annual base rent payments (exclusive of real estate taxes) of approximately $373,000 through June 1, 2001. The rent payments will be recalculated on June 1, 2001, and June 1, 2006 based on an index rate. The rent may increase, but will not decrease. The Company has the option to extend the lease term one period of ten years with a minimum annual base rent payment (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 term. The Company also leases 32,000 square feet of office, research and development and manufacturing space in Brooklyn Park, Minnesota. The lease on the Brooklyn Park facility expires in September 2001, but is renewable at the Company's option for two additional five-year periods. The Company currently pays $151,392 in annual base rent (exclusive of real estate taxes and maintenance fees). The Company's existing facilities are believed to be adequate to meet its present and future requirements, and the Company currently believes that suitable additional space will be available to it, when needed, on commercially reasonable terms. 20 ITEM 3. LEGAL PROCEEDINGS On October 29, 1997, the Company instituted an opposition proceeding in the European Patent Office seeking cancellation of a patent owned by Laboratories Prographarm of Chateauneuf, France ("Prographarm"). The Company has alleged in the opposition proceeding that publications exist which are prior art against the European patent, including an international patent, application owned by the Company which was published prior to the priority date of the European patent. On February 27, 1997, the United States Patent and Trademark Office ("USPTO") suspended prosecution of a U.S. patent application owned by the Company to consider the Company's request that an interference proceeding be declared between a pending U.S. patent application owned by the Company and a U.S. patent owned by Prographarm. The Company is seeking a determination by the USPTO that either (i) the Company's personnel are the prior inventors of the invention encompassed by the Prographarm U.S. patent and accordingly that the Company is entitled to claims directed to the same invention in a new patent to be owned by the Company, or (ii) in the alternative, a determination that the claims are unpatentable to the Company or Prographarm. Either holding would result in cancellation of the Prographarm U.S. patent. The Company's factual allegations are the same as in the European opposition, and further include the Company's pending U.S. patent application itself and the priority date of such pending application. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 21 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on the Nasdaq National Market under the symbol "CIMA". The following table sets forth, for the periods indicated, the high and low sales prices of the Common Stock reported on the Nasdaq National Market.
HIGH LOW ---- ---- 1997 First Quarter . . . . . . . . . . . . . . . . $ 8.25 $ 6.00 Second Quarter . . . . . . . . . . . . . . . . 6.13 3.88 Third Quarter . . . . . . . . . . . . . . . . 6.88 3.88 Fourth Quarter . . . . . . . . . . . . . . . . 7.19 3.94 1998 First Quarter . . . . . . . . . . . . . . . . $ 4.97 $ 2.59 Second Quarter . . . . . . . . . . . . . . . . 4.88 3.25 Third Quarter . . . . . . . . . . . . . . . . 3.91 2.75 Fourth Quarter . . . . . . . . . . . . . . . . 3.53 2.09
On March 15, 1999, the last sale price reported on the Nasdaq National Market for the Company's Common Stock was $3.188 per share. HOLDERS As of March 15, 1999, there were approximately 86 stockholders of record of the Company's Common Stock. DIVIDENDS The Company has not paid dividends on its Common Stock and currently does not plan to pay any cash dividends in the foreseeable future. 22 ITEM 6. SELECTED FINANCIAL DATA CIMA LABS INC. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31 ---------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENTS OF OPERATIONS DATA: Revenues: Net sales...................................... $ 1,097 $ 2,628 $ - $ 151 $ 1,451 R&D fees and licensing revenues................ 6,141 2,282 1,472 684 1,168 ---------------------------------------------------------------------- Total revenues................................... 7,238 4,910 1,472 835 2,619 Costs and expenses: Costs of goods sold............................ 2,444 4,376 - 240 2,799 Research and product development............... 4,488 3,364 5,403 6,505 3,550 Selling, general and administrative............ 3,615 3,487 2,909 3,658 2,972 ---------------------------------------------------------------------- Total costs and expenses......................... 10,547 11,227 8,312 10,403 9,321 Other income (expense): Interest income, net........................... 152 337 498 448 452 Other income (expense), net.................... (30) 142 (4) 13 38 ---------------------------------------------------------------------- Total other income............................... 122 479 494 461 490 ---------------------------------------------------------------------- Net loss: $ 3,187 $ (5,838) $ (6,346) $ (9,107) $ (6,212) ---------------------------------------------------------------------- ---------------------------------------------------------------------- Net loss per share: Basic.......................................... $ (.33) $ (.61) $ (.72) $ (1.16) $ (1.82) Diluted........................................ (.33) (.61) (.72) (1.16) (0.95) Weighted average number of shares outstanding: Basic.......................................... 9,610 9,519 8,827 7,822 3,413 Diluted........................................ 9,610 9,519 8,827 7,822 5,505 DECEMBER 31 ---------------------------------------------------------------------- BALANCE SHEET DATA: 1998 1997 1996 1995 1994 ---------------------------------------------------------------------- (IN THOUSANDS) Cash and investments............................. $ 3,027 $ 4,423 $ 0,263 $ 3,559 $ 2,912 Total assets..................................... 14,916 17,328 22,065 15,519 25,122 Retained earnings (deficit)...................... (44,715) (41,527) (35,660) (29,259) (20,058) Total stockholders' equity....................... 12,656 15,837 21,021 14,282 22,554
23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "BELIEVE", "ANTICIPATE", "EXPECT", "ESTIMATE" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE , BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION AS WELL AS THOSE DISCUSSED IN "ITEM 1. BUSINESS-BUSINESS RISKS." GENERAL The Company was founded in 1986, and focused initially on contract manufacturing liquid effervescent products. In September 1992, patent claims were allowed on the Company's OraSolv-Registered Trademark- technology. Following issuance of the OraSolv patent, CIMA changed its focus and emerged as a drug delivery company emphasizing primarily developing and manufacturing pharmaceutical products based upon OraSolv. OraSolv is an oral dosage form which incorporates mircoencapsulated drug ingredients into a tablet that dissolves quickly in the mouth without chewing or water and which effectively masks the taste of the medication being delivered. Additional drug delivery technologies are also under development by the Company. In early-1997 the Company recorded its first commercial sales using the Company's OraSolv technology. In 1998, another OTC product for a second partner was launched using the OraSolv technology. The Company anticipates that the first prescription pharmaceutical product using the OraSolv technology will be launched by one of its partners later in 1999. Prior to this, the Company's revenues had been from sales using the Company's AutoLution (a liquid effervescent) technology, license fees paid by corporate partners in consideration of the transfer of rights under collaboration agreements, and product development fees paid by corporate partners to fund the Company's research and development efforts for products developed under such agreements. Approximately 44% of the Company's total revenues through 1998 have been generated from development work and sales of AutoLution products. The Company does not anticipate that it will manufacture liquid effervescent products, and has not recognized any revenues from such products since 1995. Over the last three years, approximately $13,620,000 of revenue has been generated from three major sources: product development fees ( approximately 46% of the total) for work related to OraSolv products, and to a lesser extent sales (approximately 27%) of OraSolv products and licensing revenues (approximately 27%) related to OraSolv products. In addition to revenues from the above sources, the Company has funded operations from private and public sales of equity securities, realizing net proceeds of approximately $26,000,000 from private sales of equity securities and $16,400,000 and $12,000,000 from the Company's July 1994 initial public offering and May 1996 public offering of its Common Stock, respectively. At December 31, 1998, the company had 9,610,394 shares of its Common Stock outstanding. The Company expects that losses will continue through at least 1999, even though CIMA expects to be generating revenues from manufacturing, licensing arrangements, and product development fee related to OraSolv products. At December 31, 1998, the Company had accumulated net losses of approximately $44,715,000. Research and development expenses will increase as CIMA investigates new drug technologies, including the possibility of utilizing sublingual systems. Personnel costs for research and development are expected to increase as personnel will be needed to support the development programs for our new corporate partners and if efforts investigating new technologies prove to be successful. As CIMA continues production, the Company anticipates additional operations personnel may need to be added to meet corporate partners' orders. Management expects administrative support to remain stable. Manufacturing infrastructure should not increase as there is capacity to meet short-term production needs. 24 The Company's ability to generate revenues is dependent upon its ability to develop new, innovative drug delivery technologies and to enter into and be successful in collaborative arrangements with pharmaceutical and other healthcare companies for the development and manufacture of OraSolv products and other technologies to be marketed by these corporate partners. The Company is highly dependent upon the efforts of the corporate partners to successfully market the products in the technologies developed by the Company. Although the Company believes their partners have and will continue to have an economic motivation to market these products vigorously, the amount and timing of resources to be devoted to marketing are not within the control of the Company. Their partners independently could make material marketing and other commercialization decisions which could adversely affect the Company's future revenue. The Company's revenues could vary materially from quarter to quarter due to the Company having relatively few agreements with corporate partners, causing product development fees to fluctuate, and the fact that certain of the Company's products are seasonal in nature and revenues could vary depending on corporate partners' ordering patterns. In recent years, the Company has actively marketed its OraSolv technology to the pharmaceutical industry. The Company is presently engaged in product development and manufacturing scale-up efforts with several different pharmaceutical companies regarding a variety of potential products, with an emphasis on prescription products. In the first quarter of 1997, the Company began commercial production for Bristol-Myers Squibb Company ("Bristol-Myers") of the first product in the Company's OraSolv dosage form, which was officially launched in September 1997. In the second quarter of 1997, the Company expanded its relationship with Bristol-Myers and signed a global non-exclusive license agreement which covers multiple products. In the third quarter of 1997, the first two prescription product license option and development agreements were signed. Each agreement is for a product which is currently marketed by the Company's partners, Schering Corporation ("Schering-Plough") and Zeneca Pharmaceuticals ("Zeneca"). The product under development for Zeneca is its new antimigraine compound zolmitriptan (Zomig-Registered Trademark-). In the third quarter of 1998, the development and option agreement with Schering-Plough was amended to extend the previously executed agreement. In October of 1998, the Company and Smithkline Beecham terminated their License Agreement related to an OTC product. The Company continues to focus its efforts on the development of prescription pharmaceuticals. In the fourth quarter of 1997, the development and license option agreement was signed with Novartis which has been converted to exclusive license and supply agreements effective July 1, 1998. In the third quarter 1998, sales are recorded to Novartis for shipment of Triaminic-Registered Trademark- Softchews-Registered Trademark- for a regional launch. In the fourth quarter 1998, the Company signed its third prescription product license option and development agreement with Organon. However, there can be no assurance that any of these activities or discussions will result in the eventual marketing of products using OraSolv or the Company's other technologies. The Company has substantially completed the assessment of the impact that the Year 2000 date conversion may have on its internal systems and software, including information technology ("IT") and non-IT, or embedded technology systems. The Company believes its risks relating to Year 2000 problems in its systems to be very low, as its IT systems are relatively small and predominately new and its software consists entirely of "off the shelf" packages for which Year 2000 compliant upgrades are available and have largely already been implemented. The Company's engineers also believe that its non-IT systems will not experience adverse effects from the Year 2000 date conversion. The Company has designated an individual to oversee Year 2000 compliance, and has implemented a plan to ensure that during 1999 the Company will have upgraded each of its software packages to versions, or have converted to a replacement package, that the vendors thereof claim to be free of Year 2000 problems. The Company plans to replace any hardware that may be affected by the Year 2000 date conversion, or alter its use to one not sensitive to Year 2000 issues. The Company has spent to date approximately $3,000 on software upgrades and expects the total expenditure for such upgrades to be less than $10,000. The Company has largely completed is replacement or reallocation of hardware that may present Year 2000 concerns, and estimates the total cost of any such replacement to be less than $10,000. The Company spent approximately $2,000 during the fourth quarter of 1998 to hire a consultant to review the Company's plans and actions relating to Year 2000 compliance. The review indicated that the consultant believed there were no major risks to the Company. The Company believes that its risks related to Year 2000 compliance of its internal systems to be immaterial. The Company has also initiated discussions with its corporate partners to determine that those parties have appropriate plans to remediate Year 2000 issues. To date, none of the Company's partners has indicated significant concerns about their ability to do so. However, a substantial negative impact of Year 2000 issues on one of the Company's few large corporate partners that significantly affects the partner's ability to do business could have a material adverse effect on the operations and financial condition of the Company. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 The Company's results of operations for the year ended December 31, 1998, includes the sales of an additional OTC product in the marketplace in the United States that uses the OraSolv technology and significant revenues for prescription product development work from our partners. In 1998, product sales were $1,097,000. These sales were preliminary for Novartis' test market of Triaminic-Registered Trademark- Softchews-Registered Trademark- and to a lesser extent for Mead Johnson Canada for Tempra* FirsTabs*. In 1998, product sales decreased compared to 1997 product sales that were $2,628,000. Management believes that the 1997 sales, which primarily were for Bristol-Myers launch of Tempra-Registered Trademark- Quicklets-TM-, were for quantities greater than a one year period. The Company expects that its current product development efforts will result in additional commercial production in the near future. In 1996, product sales were zero as the Company ceased to manufacture liquid effervescent products, as contract manufacturing was de-emphasized. Product development fees and licensing revenues were $6,141,000, $2,282,000 and $1,472,000 in 1998, 1997 and 1996, respectively. This increase in fees and revenues is a reflection of the progress of the Company's development agreements and expansion of relationships in the prescription pharmaceutical marketplace. In 1998, revenues and fees from Novartis 25 Consumer Health, Zeneca and Schering Plough represented over 90% of the total. The Company continues to have relatively few agreements with corporate partners and, therefore, it expects that these revenues and fees will tend to fluctuate on a quarter-to-quarter basis. In 1998, cost of goods sold were $2,444,000 as compared to $4,376,000 in 1997. This decrease is directly related to the decreased production levels and lower product sales in 1998 as compared to 1997. As noted earlier, the Company expects that its current product development efforts will result in increased production levels, and therefore, it expects that costs of sales to increase in the near future. In 1996, cost of goods sold were zero as there was no commercial production. Any fixed cost for the production facility were considered development expenses, and as such were recorded as research and development expenses. Research and development expenses were $4,488,000, $3,364,000 and $5,403,000 in 1998, 1997 and 1996, respectively. The increase in 1998, as compared to 1997, is directly related to the increased product development fees earned in 1998. This included increased payroll and related costs in research and development in 1998 to support these product development projects, and efforts on new technologies. The decrease in 1997 from 1996 is directly related to the commercial production efforts in 1997. In 1997, fixed costs related to the production facility were charged to cost of goods sold, and in 1996 were charged to research and development expenses. Selling, general and administrative expenses were $3,615,000 in 1998 compared to $3,487,000 in 1997 and $2,909,000 in 1996. Spending in 1998 is still below 1995 spending levels. Selling, general and administrative costs increased slightly in 1998, only 3.6%, as compared to 1997. In both the years 1998 and 1997, the Company has made a concerted effort to perform market research studies to demonstrate consumer preference for its OraSolv technology. In 1998, it also initiated direct marketing efforts. Comparing 1997 to 1996, expenses increased primarily due to increased bonus payouts to management and increased marketing efforts for OraSolv. Net other income was $122,000 in 1998 compared to $479,000 in 1997 and $494,000 in 1996. Interest income is the main component of net other income and is dependent upon the cash position of the Company and the decreases represent the reduced cash position. In addition, the 1997 figures include $120,000 for a state sales and use tax refund for previously purchased fixed assets. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations to date primarily through private and public sales of its equity securities and revenues from manufacturing agreements. Through December 31, 1998, CIMA has received net offering proceeds from such private and public sales of $57,268,000. In addition, the Company has had net sales of approximately $17,500,000, and has received $13,800,000 for product development fees and license revenues. Among other things, these funds were used to purchase approximately $15,685,000 of capital equipment, including approximately $7,500,000 in the last two quarters of 1994 in connection with completing the Company's Eden Prairie manufacturing facility. In July 1994, the Company completed an initial public offering of shares of its common stock, realizing net proceeds of approximately $16,379,000; and in May 1996 the Company completed another public offering of shares of its Common Stock, realizing net proceeds of approximately $12,038,000. The funds raised in CIMA's initial public offering have been used to build out the manufacturing facility, purchase and validate the appropriate production equipment, complete the research and development facilities, and purchase the necessary equipment for that facility. In 1996, CIMA successfully completed an FDA establishment inspection, a Minnesota state inspection, and has been granted a Drug Enforcement Agency license. The Company has used the funds raised in its May 1996 public offering primarily to prepare for commercial production in its manufacturing facility, which began in the first quarter of 1997, and to fund research and development for the application of the OraSolv-Registered Trademark- technology and other new technologies to pharmaceutical products. The balance of such funds have been used for working capital and other general corporate purposes. 26 The Company's long-term capital requirements will depend upon numerous factors, including the status of the Company's collaborative arrangements, the progress of the Company's research and development programs, receipt of revenues from the collaborative agreements, sales of the Company's products, and the need to expand production capacity. Cash, cash equivalents, and restricted cash were approximately $3,027,000 at December 31, 1998. The Company believes that its currently available funds, together with any license fees, product development fees, and sales revenue anticipated to be received in the future, may not meet its needs through 1999. It is anticipated that in the first half of 1999, the Company will need to raise additional funds. The Company is considering numerous types of financing. These include public or private financings, including equity financing which may be dilutive to shareholders, debt financing with a potential partner that may include product development projects and/or establishing a line of credit with a financial institution. There can be no assurance that the Company will be able to raise additional funds if its capital resources are exhausted, or that funds will be available on terms attractive to the Company. The Company has not generated taxable income through December 1998. At December 31, 1998, the net operating losses available to offset taxable income were approximately $45,700,000. Because the Company has experienced ownership changes, pursuant to Internal Revenue Code regulations, future utilization of the operating loss carry-forwards will be limited in any one fiscal year. The carryforwards expire beginning in 2001. As a result of the annual limitations, a portion of these carryforwards may expire before ultimately becoming available to reduce potential federal income tax liabilities. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's operations are not currently subject to market risks for interest rates, foreign currency exchange rates, commodity prices or other market price risks of a material nature. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Financial Statements and notes thereto appear on pages F-1 to F-17 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference from the information under the captions "Election of Directors", "Executive Officers of the Company" and "Compliance with the Reporting Requirements of Section 16(a)" contained in the Company's definitive proxy statement to be filed no later than April 30, 1999 in connection with the solicitation of proxies for the Company's Annual Meeting of Stockholders to be held June 2, 1999 (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the information under the caption "Compensation of Executive Officers" contained in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the information under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the information under the caption "Certain Transactions" contained in the Proxy Statement. 28 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Index to Financial Statements The Financial Statements required by this item are submitted in a separate section beginning on page F-1 of this report
PAGE ---- Report of Independent Auditors.. . . . . . . . . . . . . . . . . . . . F-3 Balance Sheets at December 31, 1998 and 1997 . . . . . . . . . . . . . F-4 Statements of Operations for the three years ended December 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . F-6 Statements of Changes for Stockholders' Equity for the three years ended December 31, 1998. . . . . . . . . . . . . . . . . . . . F-7 Statements of Cash Flows for the three years ended December 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . F-8 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . F-9 (2) Index to Financial Statement Schedules Schedule II: Valuation and Qualifying Accounts. . . . . . . . . . . .F-17 (3) Exhibits.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 3.1 Fifth Restated Certificate of Incorporation of the Company. (1) 3.2 Second Restated Bylaws of the Company. (1) 4.1 Form of Certificate for Common Stock. (2) 4.2 Rights Agreement, dated March 14, 1997, between the Company and Norwest Bank Minnesota, N.A. (3) 10.1 Letter Agreement, dated January 28, 1998, between the Company and Joseph R. Robinson, Ph.D.*(4)(5) 10.2 Development and License Option Agreement, dated November 18, 1997, between Novartis Consumer Health, Inc. and the Company. (4)(5) 10.3 Employment Agreement, dated October 29, 1997, between the Company and John M. Siebert, Ph.D.* (6) 10.4 Development and License Option Agreement, dated December 2, 1998, between N.V. Organon and the Company. 10.5 Real Property Lease, dated March 6, 1998, between Braun-Kaiser & Company and the Company.(4) 10.6 Equity Incentive Plan, as amended and restated.*(7) 10.7 1994 Directors' Stock Option Plan, as amended.*(8) 10.8 Form of Director and Officer Indemnification Agreement.*(2) 10.9 License Agreement, dated July 1, 1998, between Novartis Consumer Health Inc. and the Company.(5)(9) 10.10 Supply Agreement, dated July 1, 1998, between Novartis Consumer Health Inc. and the Company.(5)(9) 10.11 License Agreement, dated January 28, 1994, between SRI International and the Company. (2)(5) 10.12 Non-Employee Directors' Fee Option Grant Program.(10) 10.13 Amendment to Supply Agreement, dated June 26, 1997, between Bristol-Myers Squibb Company and the Company.(5)(10) 10.14 License Agreement, dated June 26, 1997, between Bristol-Myers Squibb Company and the Company.(5)(10) 29 10.15 Development and Option Agreement, dated August 11, 1997, between Schering Corporation and the Company.(5)(6) 10.16 Development and License Option Agreement, September 10, 1997, between IPR Pharmaceuticals, Inc. and the Company.(5)(6) 23 Consent of Ernst & Young LLP. 24 Powers of Attorney (See page [31]). 27 Financial Data Schedule.
- ---------------------------------- * Items that are management contracts or compensatory plans or arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K. (1) Incorporated herein by reference to the correspondingly numbered exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (2) Filed as an exhibit to the Company'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 the Company's Current Report on Form 8-K, filed March 25, 1997. (4) Incorporated by reference to the correspondingly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-24424. (5) Confidential treatment has been requested for this exhibit. (6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 0-24424, and incorporated herein by reference. (7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-24424, and incorporated herein by reference. (8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 0-24424, and incorporated herein by reference. (9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 0-24424, and incorporated herein by reference. (10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, File No. 0-24424, and incorporated herein by reference. 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 31th day of March, 1999. CIMA LABS INC. By: /s/ John M. Siebert ------------------------------------- John M. Siebert Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on the following page constitutes and appoints John M. Siebert and Keith P. Salenger, his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that the said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the dates indicated.
SIGNATURE TITLE DATE /s/ John M. Siebert Chief Executive Officer and Director March 31, 1999 - ----------------------- (PRINCIPAL EXECUTIVE OFFICER) John M. Siebert /s/ Keith P. Salenger Vice President, Finance and - ----------------------- Chief Financial Officer Keith P. Salenger (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) March 31, 1999 /s/ Terrence W. Glarner Director March 31, 1999 - ----------------------- Terrence W. Glarner /s/ Steven B. Ratoff Director March 31, 1999 - ----------------------- Steven B. Ratoff /s/ Joseph R. Robinson Director March 31, 1999 - ----------------------- Joseph R. Robinson
31 FINANCIAL STATEMENTS CIMA LABS INC. YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 F-1 CIMA LABS INC. FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 CONTENTS Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . F-3 AUDITED FINANCIAL STATEMENTS: Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 Statements of Changes in Stockholders' Equity. . . . . . . . . . . . . . . . F-7 Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . F-8 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . F-9 F-2 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, 1998 and 1997, 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, 1998. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CIMA LABS INC. at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 2 to the financial statements, the Company's accumulated deficit and recurring losses from operations raise substantial doubt about its ability to continue as a going concern. The Company intends to obtain additional capital through outside sources to permit it to continue its operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/Ernst & Young LLP Minneapolis, Minnesota February 12, 1999 F-3 CIMA LABS INC. BALANCE SHEETS
DECEMBER 31 ----------------------------- 1998 1997 ----------------------------- ASSETS Cash and cash equivalents $ 2,722,590 $ 1,145,760 Short-term investments - 3,277,300 Accounts receivable: Net of allowance for doubtful accounts $0-1998;$32,150--1997 1,654,796 1,597,814 Inventories, net 479,045 630,619 Prepaid expenses 79,866 146,805 ----------------------------- Total current assets 4,936,297 6,798,298 Other assets: Lease deposits 345,146 40,651 Patents and trademarks, net 204,648 230,889 ----------------------------- Total other assets 549,794 271,540 Property, plant and equipment: Construction in progress 72,204 174,565 Equipment 9,314,867 8,657,885 Leasehold improvements 4,757,169 4,712,691 Furniture and fixtures 604,204 604,204 ----------------------------- 14,748,444 14,149,345 Less accumulated depreciation (5,318,107) (3,891,167) ----------------------------- 9,430,337 10,258,178 ----------------------------- Total assets $ 14,916,428 $ 17,328,016 ----------------------------- -----------------------------
F-4
DECEMBER 31 ----------------------------- 1998 1997 ----------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 670,597 $ 128,712 Accrued expenses 835,043 620,580 Advance royalties 459,105 741,405 Current portion of lease obligations 64,998 - ----------------------------- Total current liabilities 2,029,743 1,490,697 Lease obligations 231,145 - ----------------------------- Total liabilities 2,260,888 1,490,697 Stockholders' equity: Convertible preferred stock, $0.01 par value Authorized shares -- 5,000,000 Issued and outstanding shares -- -0- Common stock, $0.01 par value: Authorized shares -- 20,000,000 Issued and outstanding shares -- 9,610,394--1998 9,608,394--1997 96,104 96,084 Additional paid-in capital 57,274,274 57,268,594 Retained earnings (deficit) (44,714,838) (41,527,359) ----------------------------- Total stockholders' equity 12,655,540 15,837,319 ----------------------------- Total liabilities and stockholders' equity $ 14,916,428 $ 17,328,016 ----------------------------- -----------------------------
SEE ACCOMPANYING NOTES. F-5 CIMA LABS INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 ------------------------------------------- 1998 1997 1996 ------------------------------------------- REVENUES: Net sales $ 1,097,465 $ 2,628,069 $ -- R&D fees and licensing revenue 6,140,894 2,282,166 1,471,859 ------------------------------------------- 7,238,359 4,910,235 1,471,859 COSTS AND EXPENSES: Cost of goods sold 2,443,812 4,376,412 -- Research and product development 4,488,212 3,363,544 5,402,557 Selling, general and administrative 3,615,613 3,487,239 2,909,041 ------------------------------------------- 10,547,637 11,227,195 8,311,598 OTHER INCOME (EXPENSE) Interest income, net 152,366 336,310 497,534 Other income (expense) (30,567) 142,255 (3,738) ------------------------------------------- 121,799 478,565 493,796 ------------------------------------------- NET LOSS: $(3,187,479) $(5,838,395) $(6,345,943) ------------------------------------------- ------------------------------------------- Net loss per share: Basic and diluted $ (.33) $ (.61) $ (.72) WEIGHTED AVERAGE SHARES OUTSTANDING: Basic and diluted 9,610,104 9,518,679 8,827,177
SEE ACCOMPANYING NOTES F-6 CIMA LABS INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL PAID-IN RETAINED EARNINGS --------------------------- CAPITAL (DEFICIT) SHARES AMOUNT TOTAL ----------------------------------------------------------------------------------------- Balance at Dec. 31, 1995 7,821,974 $78,201 $43,462,921 $(29,259,472) $14,281,650 Issuance of common stock at $9.50 per share in May 1996, net of offering costs of $1,405,794 1,415,096 14,151 12,023,467 -- 12,037,618 Stock options exercised 109,787 1,117 712,824 -- 713,941 Exercise of stock warrants 64,732 647 387,746 (54,527) 333,866 Net loss -- -- -- (6,345,943) (6,345,943) ----------------------------------------------------------------------------------------- Balance at Dec. 31, 1996 9,411,589 94,116 56,586,958 (35,659,942) 21,021,132 Stock options exercised 191,968 1,920 652,662 -- 654,582 Exercise of stock warrants 4,837 48 28,974 (29,022) -- Net loss - - - (5,838,395) (5,838,395) ----------------------------------------------------------------------------------------- Balance at Dec. 31, 1997 9,608,394 96,084 57,268,594 (41,527,359) 15,837,319 Stock options exercised 2,000 20 5,680 - 5,700 Net loss - - - (3,187,479) (3,187,479) ----------------------------------------------------------------------------------------- Balance at Dec. 31, 1998 9,610,394 $96,104 $57,274,274 $(44,714,838) $12,655,540 ----------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------
F-7 CIMA LABS INC. STATEMENTS OF CASH FLOWS
------------------------------------------------------- 1998 1997 1996 ------------------------------------------------------- OPERATING ACTIVITIES Net loss $ (3,187,479) $ (5,838,395) $ (6,345,943) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,653,319 1,051,679 606,339 Gain on sale of property, plant and equipment 4,734 - - Changes in operating assets and liabilities: Accounts receivable (56,982) (1,350,236) (34,607) Inventories 151,574 (96,032) (209,977) Prepaid expenses 66,939 (74,925) 215,399 Accounts payable 541,885 (135,658) (27,497) Accrued expenses 214,462 91,178 (165,725) Advance royalties (282,300) 491,405 -- ------------------------------------------------------- Net cash used in operating activities (893,848) (5,860,984) (5,962,011) ------------------------------------------------------- INVESTING ACTIVITIES Purchases of property, plant and equipment (451,986) (772,262) (315,276) Purchases of short-term investments - (29,469,496) (7,597,162) Proceeds from maturities of short-term investments 3,277,300 33,789,358 - Proceeds from sale of property, plant and equipment 33,000 - - Patents and trademarks (88,841) (111,470) (103,685) ------------------------------------------------------- Net cash provided by (used in) investing activities 2,769,473 3,436,130 (8,016,123) ------------------------------------------------------- FINANCING ACTIVITIES Proceeds from issuance of common stock 5,700 654,582 13,085,423 Security deposits on leases (304,495) 250,000 - ------------------------------------------------------- Net cash (used in) provided by financing activities (298,795) 904,582 13,085,423 ------------------------------------------------------- Increase (decrease) in cash and cash equivalents 1,576,830 (1,520,272) (892,711) Cash and cash equivalents at beginning of period 1,145,760 2,666,032 3,558,743 Cash and cash equivalents at end of period 2,722,590 $ 1,145,760 $ 2,666,032 ------------------------------------------------------- ------------------------------------------------------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of equipment pursuant to capital lease 341,443 - -
SEE ACCOMPANYING NOTES. F-8 CIMA LABS INC Notes to Financial Statements December 31, 1998 1. BUSINESS ACTIVITY CIMA LABS INC., a Delaware Corporation, was incorporated on December 12, 1986. CIMA, based in Minneapolis, Minnesota, is a drug delivery company that specializes in oral drug delivery systems to improve patient compliance and drug efficacy. The Company currently develops and manufactures products based primarily upon its OraSolv-Registered Trademark- technology for marketing by multinational pharmaceutical companies. OraSolv is an oral dosage form which combines taste-masked, micro-encapsulated drug ingredients with an effervescent disintegration agent. The effervescent disintegration agent aids in rapid dissolution of the tablet, permitting swallowing before the pharmaceutical ingredients are released. The OraSolv tablet dissolves quickly without chewing or water and allows for effective taste-masking of a wide variety of both prescription and OTC active drug ingredients to improve patient compliance and drug efficacy. The Company's strategy is to enter into collaborative arrangements with multinational pharmaceutical companies to have its proprietary drug delivery technologies incorporated into pharmaceutical products with an emphasis on products which command a large market share and/or are in large market segments. The Company will incorporate its proprietary drug delivery technology into a particular oral therapeutic and manufacture it for its corporate partner. The corporate partner will then market and sell the product. The Company's future profitability will be dependent upon the Company's ability to develop new, innovative drug delivery technologies that meet the requirements of its corporate partners. Although the Company believes these partners will have an economic motivation to market these products vigorously, the amount and timing of resources to be devoted to marketing are not within the control of the Company. These partners independently could make material marketing and other commercialization decisions which could adversely affect the Company's future revenues. Failure of these partners to market the Company's products successfully could have a material adverse effect on the Company's financial condition and result of operations. 2. GOING CONCERN AND MANAGEMENT PLAN Net losses since the Company's inception have resulted in an accumulated deficit of $44,714,858 at December 31, 1998. The Company's ability to continue as a going concern and the realization of its assets and orderly satisfaction of its liabilities are dependent upon obtaining additional funds from outside sources and generating sufficient working capital from operations. The Company is currently exploring financing alternatives and may need to complete a financing transaction in 1999. The Company believes that the successful completion of a financing transaction will satisfy its future cash requirements. However, there can be no assurance that the Company will be able to raise additional funds if capital resources are exhausted, or that funds will be available on terms attractive to the Company. 3. 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. F-9 SHORT -TERM INVESTMENTS The Company's investments are primarily U. S. Treasury securities and U.S. Government obligations with maturities of greater than ninety days and are classified as available for sale. Realized gains and losses and declines in value judged to be other than temporary are included in other income. The investments are carried at cost which approximates market. PATENTS AND TRADEMARKS Costs incurred in obtaining patents and trademarks are amortized on a straight-line basis over sixty months. Accumulated amortization was approximately $ 625,000 at December 31,1998 and $510,000 at December 31, 1997. 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 $1,538,000 in 1998; $919,000 in 1997; and $493,000 in 1996. INVENTORIES Inventories, consisting of materials and packaging, are valued at cost under the first-in, first-out (FIFO); method which is not in excess of market. Inventories are shown net of reserves for obsolescence of approximately $157,000 at December 31, 1998 and $46,000 at December 31, 1997. IMPAIRMENT OF LONG - LIVED ASSETS The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flow estimated to be generated by those assets are less than the assets' carrying amount. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. STOCK-BASED COMPENSATION The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB25"), 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. F-10 INCOME TAXES Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities. REVENUE RECOGNITION Sales of product are recorded upon shipment. Product and development fees are recognized as the services are provided. Revenues from license agreements are recorded when obligations under the agreement have been substantially completed. Royalties are recorded when earned. RESEARCH AND DEVELOPMENT COSTS For financial reporting purposes, all costs of research and development activities are expensed as incurred. EARNINGS (LOSS) PER SHARE The Company has adopted Financial Accounting Standards Board Statement No. 128, EARNINGS PER SHARE. This Statement replaces previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary EPS, basic EPS excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to Statement 128 requirements. 4. INCOME TAXES Deferred income taxes are due to temporary differences between the carrying values of certain assets and liabilities for financial reporting and income tax purposes. Significant components of deferred income taxes as of December 31, 1998 and 1997 are as follows:
1998 1997 -------------------------------------- (IN THOUSANDS) Deferred assets: Net operating loss $ 18,475 $ 15,213 Accrued vacation 75 61 Inventory reserve 63 17 Other - 11 -------------------------------------- 18,613 15,302
F-11 Deferred liability: Depreciation and amortization 625 448 -------------------------------------- Net deferred income tax asset 17,988 14,854 Valuation allowance $ (17,988) $ (14,854) -------------------------------------- Net deferred income taxes $ - $ - -------------------------------------- --------------------------------------
The Company may be subject to federal income taxes when operations become profitable. The Company's tax operating loss carryforwards of approximately $45,700,000 may be carried forward to offset future taxable income, limited due to changes in ownership under the net operating loss limitation rules, and begin to expire in the Year 2001. 5. LEASES OPERATING LEASES The Company leases office, research and development and manufacturing facilities in Brooklyn Park and Eden Prairie, Minnesota. The 75,000 square foot Eden Prairie facility houses the general and administrative offices and the manufacturing operation. The lease has an initial term expiring on June 1, 2009. The rent payments will be recalculated on June 1, 2001 and 2006, based on a market index. The Company has an option to extend the lease for one ten-year period. The research and development facility in Brooklyn Park is leased under a non-cancelable lease that expired in September 1998. The Company opted to renew the lease for an additional three year term. The Company also has the option to renew this lease for two additional five-year terms. Future minimum lease commitments for all operating leases with initial or remaining terms of one year or more are as follows:
Year ending December 31: 1999 ............................................... $ 622,360 2000 ............................................... 622,360 2001 ............................................... 622,360 2002 ............................................... 459,030 2003 ............................................... 380,460 Thereafter .......................................... 2,282,760
Rent expense of operating leases, excluding operating expenses, for the years ended December 31, 1998, 1997 and 1996 was $519,000, $517,000 and $494,000 respectively. CAPITAL LEASES The Company has three leases between 48 and 60 months in length with Norwest Equipment Finance, Inc. The deposit balance for the leases is $304,495 at December 31, 1998 and is reviewed on an annual basis in December and adjusted to the balance required to F-12 secure the assets being leased. Future minimum lease commitments for all capital leases with initial or remaining terms of one year or more are as follows:
Year ending December 31: 1999 ............................................ $ 90,499 2000 ............................................ 90,499 2001 ............................................ 90,499 2002 ............................................ 77,291 2003 ............................................ 4,993 ----------- 353,781 Less lease interest: ................... ............. (57,638) ----------- Total $296,143 ----------- -----------
6. STOCK OPTIONS The Company has an Equity Incentive Plan ("the Plan") under which options to purchase up to 2,400,000 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 which options may be granted under this Plan is 410,000 shares. As of December 31, 1998, options to purchase 296,430 shares have been granted ranging from $1.30 to $10.125 per share. To date, none of these options have been exercised. Shares available and options granted for the Equity Incentive Plan are as follows:
NON- INCENTIVE QUALIFIED WEIGHTED SHARES AVAILABLE STOCK STOCK TOTAL AVERAGE EXERCISE FOR GRANT OPTIONS OPTIONS OUTSTANDING PRICE PER SHARE ------------------------------------------------------------------------------------------ Balance at Dec.31, 1995 225,487 820,408 287,800 1,108,208 $5.36 Reserved 250,000 - - - - Granted (199,300) 122,085 77,215 199,300 6.33 Forfeited 91,293 (85,320) (5,973) (91,293) 6.24 Exercised - (91,314) (18,473) (109,787) 6.31 --------------------------------------------------------------------- Balance at Dec.31, 1996 367,480 765,859 340,569 1,106,428 6.27 Granted (390,700) 292,604 98,096 390,700 5.89 Forfeited 203,038 (166,575) (36,463) (203,038) 7.32 Exercised - (149,217) (42,751) (191,968) 3.24 --------------------------------------------------------------------- Balance at Dec.31, 1997 179,818 742,671 359,451 1,102,122 5.71
F-13 Granted (492,679) 101,428 391,251 492,679 4.47 Reserved 400,000 - - - Forfeited 230,955 (156,259) (74,696) (230,955) 6.88 Exercised - (2,000) - (2,000) 2.85 --------------------------------------------------------------------- Balance at Dec.31, 1998 318,094 658,840 676,006 1,361,846 5.08 Exercisable: December 31, 1996 548,221 $6.47 December 31, 1997 506,460 $5.27 December 31, 1998 556,626 $5.21
The following table summarizes information about stock options outstanding at December 31, 1998:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE NUMBER REMAINING OUTSTANDING EXERCISABLE AT EXERCISEABLE RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE 12/31/98 PRICE - ---------------------------------------------------------------------------------------------------------------------------------- $ 2.00 - $ 3.00 54,476 4.9 years $2.98 52,528 $2.98 $ 3.01 - $ 5.00 696,437 6.0 years 3.86 310,041 3.88 $ 5.01 - $ 8.00 593,612 8.0 years 6.26 114,065 6.93 $ 8.01 - $10.125 17,321 3.0 years 8.87 79,992 8.91 - -------------------------------------------------------------------------------------------------------------- ------------ $ 2.00 - $10.125 1,361,846 6.9 years $5.71 556,626 $5.27 ------------ -------------- ------------ --------------
Shares available and options granted for Directors Stock Option Plan are as follows:
NON- INCENTIVE QUALIFIED WEIGHTED SHARES AVAILABLE STOCK STOCK TOTAL AVERAGE EXERCISE FOR GRANT OPTIONS OPTIONS OUTSTANDING PRICE PER SHARE -------------------------------------------------------------------------------------------- Balance at Dec.31, 1995 185,000 - 165,000 165,000 $ 7.43 Granted (37,500) - 37,500 37,500 10.13 Forfeited - - - - - Exercised - - - - - -------------------------------------------------------------------- Balance at Dec.31, 1996 147,500 - 202,500 202,500 7.93 Granted (56,070) - 56,070 56,070 3.92 Reserved 60,000 - - - - Forfeited - - - - - Exercised - - - - - -------------------------------------------------------------------- Balance at Dec.31, 1997 151,430 - 258,570 258,570 7.06 F-14 Granted (37,860) - 37,860 37,860 2.96 Forfeited - - - - - Exercised - - - - - --------------------------------------------------------------------- Balance at Dec.31, 1998 113,570 - 296,430 296,430 $6.54
Options outstanding under the plans expire at various dates during the period from March 1998 through December 2008. Exercise prices for options outstanding as of December 31, 1998, ranged from $2.80 to $10.125 per share. The weighted average fair values of options granted during the years ended December 31, 1998, 1997 and 1996 were $4.36, $5.89 and $3.96 respectively. The Company issued warrants to purchase 189,801 shares of its Common Stock at $6.00 per share. Of these warrants, 77,506 were exercised during 1996 and 4,837 during 1997. The remaining 107,458 warrants have expired. The Company has elected to follow Accounting Principles Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related interpretations in accounting for employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996 respectively; risk-free interest rates of 5.00%, 5.70% and 5.29%; volatility factor of the expected market price of the Company's common stock of .630, .649 and .641; 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. F-15 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
1998 1997 1996 -------------------------------------------------------------- Pro forma net loss ............ $ (4,239,938) $ (6,476,902) $ (6,812,761) Pro forma net loss per common share, basic and diluted ............ $ (0.44) $ (0.68) $ (0.77)
7. DEFINED CONTRIBUTION PLAN The Company has a 401(k) plan (the "Plan") which covers substantially all employees of the Company. Contributions to the Plan are made through employee wage deferrals and employer matching contributions. The employer matching contribution percentage is discretionary and determined each year. In addition, the Company may contribute two discretionary amounts; one to non-highly compensated individuals and another to all employees. To qualify for the discretionary amounts, an employee must be employed by the Company on the last day of the Plan year or have been credited with a minimum of 500 hours of service during the Plan year. The 401(k) expense for the years ended December 31, 1998, 1997, and 1996 was $36,000, $29,000, and $25,000. 8. EMPLOYMENT AGREEMENT The Company entered into a new employment agreement with the current President and Chief Executive Officer in 1997 to continue in said position. The agreement includes provisions for compensation, stock options and bonuses based upon the achievement of certain performance targets. The agreement expires on December 31, 2000. F-16 CIMA LABS INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BEGINNING OF CHARGED TO COSTS LESS BALANCE AT END DESCRIPTION YEAR AND EXPENSES DEDUCTIONS OF YEAR - --------------------------------------------------------------------------------------------------------------------- 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 Year ended December 31, 1997: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 0 $ 32,150 $ 0 $ 32,150 Obsolescence reserve 140,795 0 (94,407) 46,388 ---------------------------------------------------------------------------- TOTAL $ 140,795 $ 32,150 $ (94,407) $ 78,538 Year ended December 31, 1996: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 0 $ 0 $ 0 $ 0 Obsolescence reserve 332,207 0 (191,412) 140,795 ---------------------------------------------------------------------------- TOTAL $ 332,207 $ 0 $ (191,412) $ 140,795
F-17 EXHIBIT INDEX
NO. OF EXHIBIT DESCRIPTION - -------------- ----------- 10.4 Development and License Option Agreement, dated December 2, 1998, between N.V. Organon and the Company. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule
EX-10.4 2 EXHIBIT 10.4 ***TEXT OMITTED AND FILED SEPARATELY CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(B)(4), 200.83 AND 240.24B-2 CIMA LABS INC. DEVELOPMENT AND LICENSE OPTION AGREEMENT WITH N.V. ORGANON THIS DEVELOPMENT AND LICENSE OPTION AGREEMENT (the "Agreement") is entered into by and between CIMA LABS INC., a Delaware corporation ("CIMA") and N.V. ORGANON, a Dutch corporation (Organon), on this 2nd day of December, 1998 (the "EFFECTIVE DATE"). RECITALS WHEREAS, CIMA owns or has rights to certain patented oral drug-delivery technology referred to as ORASOLV-Registered Trademark-, which has applications in the field of pharmaceutical product formulation; and WHEREAS, ORGANON has substantial expertise and experience in the development, commercialization and marketing of human pharmaceutical products; and WHEREAS, the parties desire to explore the possibility of entering into future agreements regarding the development and commercialization of Orasolv-Registered Trademark- formulations of certain pharmaceutical products for sale [...***...]; and WHEREAS, ORGANON wishes to sponsor the development by CIMA of prototypes of certain pharmaceutical product formulations for Organon's evaluation, subject to the granting by CIMA to Organon of an option to enter into a license agreement with CIMA. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants set forth below, the parties hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 "DEVELOPMENT PLAN" shall mean the plan set forth on Exhibit A for the development of the Prototypes. 1.2 "FIELD" shall mean [...***...]. 1.3 "PRODUCTS" shall mean the pharmaceutical products which are formulated using OraSolv-Registered Trademark- technology (in any flavor) and which contain [...***...] as their sole active ingredient. 1.4 "OPTION" shall have the meaning assigned thereto in Section 3.1. 1.5 "ORASOLV-Registered Trademark- TECHNOLOGY" shall mean CIMA's effervescent, fast-dissolving, oral drug-delivery tablet technology, which technology includes, to the extent applicable to the formulation of products, the sole active ingredient of which is [...***...], (i) the inventions disclosed in patents and patent applications owned, controlled or licensed (with the right to sublicense) by CIMA during the term of this Agreement, including those listed on Exhibit B, and (ii) all know-how, technology, trade secrets, data, processes and methods, or other information owned, controlled or licensed (with the right to sublicense) by CIMA during the term of this Agreement. 1.6 "PROTOTYPES" shall mean the prototypes of the Products to be developed by CIMA pursuant to the Development Plan and in accordance with the general specifications set forth on Exhibit C, and any further specifications agreed to by the parties. ARTICLE 2 PROTOTYPE DEVELOPMENT 2.1 DEVELOPMENT SCHEDULE. Following the Effective Date and receipt of the materials from Organon delineated under phase A of the Development Plan, CIMA shall initiate development of the Prototypes. CIMA will develop the Prototypes in one flavor, such flavor to be determined by mutual agreement as described in Exhibit C. CIMA and Organon each acknowledge and agree that the Development Plan is expected to be completed within twenty four (24) weeks from the date of initiation of phase B of the Development Plan. To that end, during the implementation of the Development Plan, CIMA agrees to use commercially reasonable best efforts to complete the Development Plan within the specified time period and Organon agrees to evaluate promptly each iteration of the Prototypes and/or report of results delivered by CIMA and respond to CIMA within thirty (30) days of receipt thereof. Organon's response will indicate the acceptability of such proposed Prototypes and/or the need, if any, for modification of the specifications in light of the results of Organon's evaluation. 2 2.2 DEVELOPMENT FEES. In consideration for CIMA's development and production of the Prototypes in accordance with this Agreement, Organon shall make the non-refundable payments delineated in Exhibit A to CIMA within thirty days of invoice date. ARTICLE 3 OPTION; EXCLUSIVITY; LICENSE 3.1 OPTION. Effective upon delivery of the Option Fee described in Section 3.3 below, CIMA hereby grants to Organon an option to acquire an exclusive, royalty-bearing [...***...] license to utilize the OraSolv-Registered Trademark- Technology to make, have made, use, sell, offer for sale, import or otherwise distribute the Products in the Field [...***...] (the "OPTION"). The term of such Option shall extend from the Effective Date until [...***...]. Organon may exercise the Option by (i) providing CIMA with written notice thereof, and (ii) negotiating and entering into a license agreement (the "LICENSE AGREEMENT" with CIMA prior to the end of the Option term. In the event that Organon fails to enter into the License Agreement by the end of the Option term, CIMA's obligations under Section 3.2 hereof shall terminate and CIMA shall be free to enter into any license agreement with respect to any product in the Field with any third party, on any terms CIMA may, in its sole discretion, deem appropriate. 3.2 EXCLUSIVITY. In consideration for the Option Fee, CIMA hereby agrees that from the Effective Date until the expiration or termination of the Option term set forth in Section 3.1, CIMA shall not enter into any agreements with any third party relating to the development or commercialization of any product in the Field. 3.3 OPTION FEE. In consideration for the exclusivity obligations set forth in Section 3.2 and the Option granted in Section 3.1, Organon shall pay to CIMA the sum of [...***...] on the Effective Date. The total Option Fee payable hereunder shall be creditable against the upfront license fee payable to CIMA upon execution of the license agreement. 3.4 COMMERCIALIZATION AND SUPPLY AGREEMENT. Simultaneously with the execution of the License Agreement, the parties shall enter into a commercialization and supply agreement pursuant to which CIMA shall be the exclusive supplier of Organon's commercial requirements of the Products, [...***...]. Such agreement shall also set forth the obligations of CIMA and Organon with respect to finalization of development, scale-up and validation of the Products, and the financial terms of the products' supply and technology transfer. 3.5 FACILITIES VISITS. During the term of this Agreement, CIMA shall allow personnel of Organon, at Organon's expense, to visit the manufacturing and research facilities of CIMA and to consult with CIMA personnel, at mutually agreeable times, to discuss and review the development of the Products. 3 ARTICLE 4 GENERAL PROVISIONS 4.1 LIMITATIONS ON USE. Organon agrees that it shall use the Prototypes and the Confidential Information (as defined in Section 4.3.1) of CIMA solely for the purposes specified in this Agreement and for no other purpose, including without limitation, use of the Prototypes in any research or commercial activities other than those which relate directly to the purposes specified herein. Organon's permitted use of the Prototypes shall be in compliance with all applicable laws and regulations. Upon expiration or termination of the Agreement, CIMA shall return or destroy, as directed by Organon, all unused quantities of [...***...] and copies of any and all information received from Organon under this Agreement. Upon expiration or termination of the Agreement, Organon shall return or destroy, as directed by CIMA, all unused quantities of the Prototypes and copies of any and all information, data and results obtained from conduct of evaluations under this Agreement or relating to the use of the Prototypes (the "RESULTS"). However, following expiration or termination of this Agreement, Organon and CIMA may retain one copy of the other party's Confidential Information, for archival purposes only, at the offices of their legal counsel. Organon shall not sell, transfer, disclose or otherwise provide access to the Prototypes or the Results, any method or process relating thereto or any material that could not have been made but for access to the foregoing, to any person or entity without the prior expressed written consent of CIMA, except that Organon may allow access to the Prototypes to employees, subcontractors or agents during the term of, and solely for purposes consistent with, this Agreement. Organon will make diligent efforts to ensure that such employees, agents and subcontractors will use the Prototypes in a manner consistent with the terms of this Agreement. 4.2 TERM AND TERMINATION. 4.2.1 TERM. Unless sooner terminated in accordance with Section 4.2.2 or 4.2.3 below, this Agreement shall expire upon the expiration or termination of the Option. 4.2.2 TERMINATION FOR BREACH. CIMA may terminate this Agreement upon sixty (60) days' written notice to Organon in the event Organon commits a material breach of a provision of this Agreement and fails to cure such breach prior to the end of such sixty (60) day period. 4.2.3 TERMINATION BY ORGANON. Organon shall have the right to terminate this Agreement prior to exercise of the Option upon sixty (60) days' written notice to CIMA. 4.2.4 EFFECT OF TERMINATION. Upon termination or expiration of this Agreement pursuant to Sections 4.2.1, 4.2.2, or 4.2.3 above, Organon shall not be entitled to a refund of any portion of the Option Fee. Nothing in this Agreement shall be construed to relieve either party of any obligations incurred by it hereunder prior to the effective date of termination hereof. This Article 4 shall survive any termination or expiration of this Agreement. 4 4.3 CONFIDENTIALITY. Each of the parties shall be bound by the following terms and conditions: 4.3.1 Subject to the limitations set forth in Section 4.3.2 below, all information disclosed to the other party and identified by the disclosing party as confidential shall be deemed "CONFIDENTIAL INFORMATION" of the disclosing party. In particular, Confidential Information shall be deemed to include, but not be limited to, the Prototypes and any documentation relating thereto, the Results, any patent application or drawing or potential patent claim the subject matter of which is directly or indirectly derived from information disclosed hereunder, any trade secret, information, invention, idea, samples, process, method, procedures, formulations, test data relating to any research project, work in process, future development, engineering, manufacturing, regulatory, marketing, servicing, financing, or personnel matter relating to the disclosing party, its present or future products, sales, suppliers, clients, customers, employees, investors or business, whether in oral, written, graphic or electronic form. 4.3.2 The term "Confidential Information" shall not be deemed to include information which (i) is now, or hereafter becomes, through no act or failure to act on the part of the receiving party, generally known or available; (ii) is known by the receiving party at the time of receiving such information, as evidenced by its records; (iii) is hereafter furnished to the receiving party by a third party, as a matter of right and without restriction on disclosure; (iv) is independently developed by the receiving party without use of Confidential Information of the other party; (v) is the subject of a written permission to disclose provided by the disclosing party (vi) is required to be disclosed by law; or (vii) is required to be disclosed to establish rights or enforce obligations under this Agreement, but only to the extent such disclosure is necessary. 4.3.3 During the term of this Agreement and for a period of five (5) years after termination hereof (ten (10) years with respect to information pertaining to manufacturing processes and know-how), each party shall maintain all Confidential Information in trust and confidence and shall not disclose any Confidential Information to any third party or use any Confidential Information for any unauthorized purpose. Each party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Confidential Information shall not be used for any purpose or in any manner that would constitute a violation of any laws or regulations, including without limitation the export control laws of the United States. Each party hereby agrees that it will not in any way attempt to obtain, either directly or indirectly, any information regarding any Confidential Information from any third party who has been employed by, provided consulting services to, or received in confidence information from, the other party. 4.3.4 The parties under this Agreement shall advise their employees who might have access to Confidential Information of the confidential nature thereof and agree that their employees and agents shall be bound by the terms of this Agreement. No Confidential Information shall be disclosed to any employee who does not have a need for such information. 5 4.4 OWNERSHIP. Title and ownership rights in the Prototypes and other Confidential Information of CIMA shall remain at all times with CIMA. Organon acknowledges that the Prototypes and such Confidential Information shall remain the sole property of CIMA and Organon will acquire no title thereto as a result of this Agreement. Nothing in this Agreement shall be construed as conferring on either party an expressed or implied license or option to license any disclosed Confidential Information, technology, or any patent or patent application except as expressly provided herein. 4.5 INVENTIONS. In the event that any invention is made jointly by employees of CIMA and Organon ("JOINT INVENTION") in the course of any research conducted pursuant to this Agreement, or in the course of research using any of the Prototypes supplied hereunder, then the following shall apply: Any Joint Invention which is applicable to products containing active ingredients other than [...***...] (whether or not such invention is also applicable to products containing [...***...]) shall be owned by CIMA, but Organon shall have an exclusive, [...***...], royalty-free license to use such invention in connection with products containing [...***...] as the sole active ingredient. Any Joint Invention which is applicable only to products containing ONLY [...***...] shall be owned by Organon. ANY INVENTION MADE BY EMPLOYEES OF CIMA WHICH IS APPLICABLE ONLY TO PRODUCTS CONTAINING ONLY [...***...] AND DOES NOT INCLUDE FAST-DISSOLVE TECHNOLOGY SHALL BE OWNED BY ORGANON. The party owning any invention pursuant to this Agreement (the "OWNER") shall have the right, but not the obligation, to obtain patents and other forms of protection for such invention at its own expense, and the other party hereto shall cooperate with the owner in obtaining such protection as requested by the Owner. The Owner shall reimburse the other party hereto for reasonable expenses and reasonable charges for staff time devoted to such cooperation. IF THE PARTY DOES NOT EXERCISE ITS RIGHT TO OBTAIN PATENT PROTECTION, IT SHALL ENABLE THE OTHER PARTY TO GET SUCH PROTECTION. The ownership and licenses granted under this section do not include any license or right under any other patent, technology, trade secrets, know-how or other Confidential Information owned or licensed by either party hereto. 4.6 If, during the term of this Agreement, Organon discovers that the combination of [...***...] and a fast-dissolve dosage form has an effect outside the Field, then [...***...]. 4.7 REPRESENTATIONS AND WARRANTIES. 4.7.1 CIMA WARRANTS THAT DEVELOPMENT AND PILOT-SCALE MANUFACTURE BY CIMA OF THE PROTOTYPES SHALL BE CONDUCTED IN A WORKMANLIKE MANNER AND, WHERE PROVIDED HEREIN, IN ACCORDANCE WITH CURRENT GOOD MANUFACTURING PRACTICES PROMULGATED BY THE U.S. FDA. EXCEPT AS SET FORTH ABOVE, THE PROTOTYPES ARE BEING SUPPLIED TO ORGANON WITH NO WARRANTIES OF ANY KIND, EXPRESSED OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR THAT IT IS FREE FROM THE RIGHTFUL CLAIM OF ANY THIRD PARTY, BY WAY OF INFRINGEMENT OR THE LIKE, OF ANY PATENT OR OTHER PROPRIETARY RIGHTS OF SUCH PARTY. 6 4.7.2 CIMA represents and warrants that: (i) CIMA is a corporation duly organized, existing and in good standing under the laws of the State of Delaware, with full right, power and authority to enter into and perform this Agreement and to grant all of the rights, powers and authorities herein granted. (ii) The execution, delivery and performance of this Agreement do not conflict with, violate or breach any agreement to which CIMA is a party, or CIMA's Certificate of Incorporation or Bylaws. (iii) This Agreement has been duly executed and delivered by CIMA and is a legal, valid and binding obligation enforceable against CIMA in accordance with its terms. 4.7.3 Organon represents and warrants that: (i) Organon is a corporation duly organized, existing and in good standing under the laws of the Netherlands with full right, power and authority to enter into and perform this Agreement and to grant all of the rights, powers and authorities herein granted. (ii) The execution, delivery and performance of this Agreement do not conflict with, violate or breach any agreement to which Organon is a party, or Organon's Certificate of Incorporation or Bylaws. (iii) This Agreement has been duly executed and delivered by Organon, and is a legal, valid and binding obligation enforceable against Organon in accordance with its terms. 4.8 INDEMNITY. 4.8.1 CIMA agrees to and hereby does indemnify and hold Organon 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), which Organon may incur, arising out of any third party claim of property damages or personal injury or death arising from CIMA's negligent or willful misconduct in its performance of this Agreement or any breach of a representation or warranty given herein by CIMA; PROVIDED, HOWEVER, that in no event shall CIMA be liable for any such claims, damages, losses, costs or expenses to the extent arising out of or resulting from active ingredients supplied by Organon to CIMA, or Organon's negligence or willful misconduct. 4.8.2 Organon agrees to and hereby does indemnify and hold CIMA 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) which CIMA may incur, arising out of any third party claim relating to the products developed by 7 CIMA for Organon hereunder or any aspect of Organon's performance of this Agreement, to the extent such liability results from the negligence or willful misconduct of Organon, or any breach of a representation or warranty given herein by Organon. 4.9 INDEPENDENT CONTRACTORS. The parties shall perform their obligations under this Agreement as independent contractors and nothing contained in this Agreement shall be construed to be inconsistent with such relationship or status. This agreement shall not constitute, create or in any way be interpreted as a joint venture or partnership of any kind. 4.10 PUBLICITY. Any public disclosure of this Agreement or of the activities or rights hereunder, including but not limited to press releases, shall be reviewed and consented to by each party prior to such disclosure; PROVIDED, HOWEVER, that either party may make such disclosures as may be required by law (including securities laws) without such consent. Any consent required hereunder shall not be untimely or unreasonably withheld by either party. 4.11 FINAL AGREEMENT; AMENDMENTS. This Agreement sets forth the complete and final agreement of the parties and supersedes all prior and contemporaneous negotiations, understandings and agreements with respect to the subject matter hereof. No subsequent amendment or modification to this Agreement shall be binding upon the parties hereto unless reduced to writing and signed by the respective officers of the parties hereto. 4.12 ASSIGNMENT. Except as otherwise provided herein, neither this Agreement nor any interest hereunder will be assignable in part or in whole by any party without the prior written consent of the other; PROVIDED, HOWEVER, that either party may assign this Agreement to an Affiliate or any successor by merger or sale of substantially all of its business unit to which this Agreement relates without such consent. This Agreement will be binding upon the successors and permitted assigns of the parties and the name of a party appearing herein will be deemed to include the names of such party's successors and permitted assigns to the extent necessary to carry out the intent of this Agreement. Any assignment which is not in accordance with this Section 4.12 will be void. 4.13 MISCELLANEOUS. This Agreement shall be governed by the laws of the State of Delaware of the United States of America. If any provision of this Agreement is found by a proper authority to be unenforceable, that provision shall be severed and the remainder of this Agreement will continue in full force and effect. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original. 4.14 NOTICES. Any notices required or permitted hereunder shall be given in writing to the appropriate party at the address specified below or at such other address as the party shall specify in writing. 8 IN WITNESS WHEREOF, the parties have by duly authorized persons, executed this Agreement, as of the date first written above. CIMA LABS INC. N.V. ORGANON 10000 Valley View Road KLOOSTERSTRAAT 6 Eden Prairie, Minnesota 55344 5340 AB OSS, THE NETHERLANDS By: /s/ Jack A. Khattar By: /s/ President ----------------------------- --------------------------------- Title: V.P., Business Development By: /s/ Managing Director, R&D -------------------------- --------------------------------- 9 EX-23 3 EX-23 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-322233, 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 12, 1999, 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, 1998. /s/ Ernst & Young LLP Minneapolis, Minnesota March 30, 1999 EX-27 4 EXHIBIT 27
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1999 2,722,590 0 1,654,796 0 479,045 4,936,297 14,748,444 5,318,107 14,916,428 2,029,743 0 0 0 96,104 57,274,274 14,916,428 1,097,465 7,238,359 2,443,812 8,103,825 30,567 0 0 (3,187,479) 0 0 0 0 0 (3,187,479) (.33) (.33)
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