EX-20.2 4 w41190ex20-2.txt ANESTA'S AUDITED YEAR END FINANCIAL STATEMENTS 1 EXHIBIT 20.2 Report of Independent Accountants To the Shareholders of Anesta Corp.: In our opinion, the accompanying balance sheets and the related statements of operations and comprehensive loss, stockholders' equity, and cash flows present fairly, in all material respects, the financial position of Anesta Corp. (the "Company") at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah February 18, 2000, except as to the information presented in Note 14 for which the date is March 13, 2000 38 2 ANESTA CORP. BALANCE SHEETS as of December 31, 1999 and 1998
ASSETS 1999 1998 ----- ---- Current assets: Cash and cash equivalents $11,746,093 $55,889,226 Current portion of certificate of deposit 340,000 255,000 Marketable debt securities, available-for-sale 59,031,849 24,661,040 Accounts receivable 1,956,357 276,476 Prepaid expenses and other current assets 667,960 194,802 ----------- ----------- Total current assets 73,742,259 81,276,544 ----------- ----------- Property and equipment, at cost: Furniture and equipment 1,099,529 947,598 Leasehold improvements 2,813,166 2,330,136 Accumulated depreciation (1,447,484) (1,151,126) ----------- ----------- 2,465,211 2,126,608 ----------- ----------- Other assets: Certificate of deposit 1,700,000 1,530,000 Other assets 301,327 196,202 ----------- ----------- 2,001,327 1,726,202 ----------- ----------- Total assets $78,208,797 $85,129,354 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 ---- ---- Current liabilities: Accounts payable $ 409,584 $ 1,478,521 Accrued liabilities: Accrued compensation 655,870 1,117,909 Other 139,062 236,783 Current portion of unearned revenues 746,389 299,296 Current portion of note payable 333,333 250,000 ----------- ------------ Total current liabilities 2,284,238 3,382,509 Unearned revenues 1,831,759 227,500 Note payable 1,666,667 1,500,000 ----------- ------------ Total liabilities 5,782,664 5,110,009 ----------- ------------ Commitments (Note 11) Stockholders' equity: Common stock, par value, $.001 per share; Authorized: 35,000,000 shares; Issued: 13,311,839 shares in 1999 and 13,054,934 shares in 1998 13,312 13,055 Additional paid-in capital 130,742,839 128,634,691 Accumulated deficit (58,166,809) (48,679,075) Accumulated other comprehensive income (loss) (163,209) 50,674 ----------- ------------ Total stockholders' equity 72,426,133 80,019,345 ----------- ------------ Total liabilities and stockholders' equity $78,208,797 $ 85,129,354 ----------- ------------
The accompanying notes are an integral part of the financial statements 39 3 ANESTA CORP. STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- Revenues: Product sales $ 2,231,732 $ 193,531 $ 183,752 Royalty revenue 62,275 5,744 5,449 Revenues from contract research/license agreements 4,221,148 475,704 ------------ ------------ ------------ Total revenues 6,515,155 674,979 189,201 ------------ ------------ ------------ Operating costs and expenses: Cost of goods sold 671,366 53,804 52,082 Royalties 34,410 2,989 2,838 Research and development 9,840,204 8,627,606 7,889,021 Depreciation 309,652 296,241 269,595 Marketing, general and administrative 9,019,525 8,585,679 6,368,094 ------------ ------------ ------------ Total costs and expenses 19,875,157 17,566,319 14,581,630 ------------ ------------ ------------ Loss from operations (13,360,002) (16,891,340) (14,392,429) Non operating income (expense): Interest income 4,016,267 1,333,597 1,992,739 Interest expense (124,289) (142,916) (139,407) Other 459 201 (8,215) ------------ ------------ ------------ Loss before provision for income taxes (9,467,565) (15,700,458) (12,547,312) Provision for income taxes (20,169) (16,411) (1,741) ------------ ------------ ------------ Net loss (9,487,734) (15,716,869) (12,549,053) ------------ ------------ ------------ Other comprehensive income (loss): Foreign currency translation adjustment (8,754) 15,604 Unrealized gain (loss) on marketable debt securities, available-for-sale (205,129) 26,663 9,710 ------------ ------------ ------------ Total other comprehensive income (loss) (213,883) 42,267 9,710 ------------ ------------ ------------ Comprehensive loss $ (9,701,617) $(15,674,602) $(12,539,343) ============ ============ ============ Basic and diluted loss per common share (Note 13)-- Net loss per common share $ (0.72) $ (1.59) $ (1.32) ============ ============= ============ Weighted average shares outstanding 13,226,637 9,897,978 9,500,055 ============ ============= ============
The accompanying notes are an integral part of the financial statements 40 4 ANESTA CORP. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY for the period from January 1, 1997 to December 31, 1999
Common Stock -------------------------------------------- Treasury Stock Additional Accumulated ---------------- Shares Amount Paid-in Capital Deficit Shares Amount ------ ------ --------------- ------- ------ ------ Balance at January 1, 1997 9,440,129 $ 9,440 $ 61,531,623 ($20,413,153) $345 ($4,226) Exercise of stock options for cash and stock 105,716 105 530,788 Issuance of stock under stock purchase plan 5,965 6 84,054 Retirement of treasury stock in July 1997 (345) (4,226) (345) 4,226 Collection on notes receivable from issuance of common stock Other comprehensive income 1997 net loss (12,549,053) ----------- ------- ------------ ------------- ---- ------- Balance at December 31, 1997 9,551,465 9,551 62,142,239 (32,962,206) -- -- Exercise of stock options for cash and stock 244,300 245 1,889,684 Issuance of common stock for cash on December 17, 1998 (at $21.25 per share), net of offering costs of $4,584,067 3,250,000 3,250 64,475,183 Issuance of stock under stock purchase plan 9,169 9 127,585 Other comprehensive income 1998 net loss (15,716,869) ----------- ------- ------------ ------------- ---- ------- Balance at December 31, 1998 13,054,934 13,055 128,634,691 (48,679,075) -- -- Exercise of stock options for cash and stock 250,178 250 2,016,521 Issuance of stock under stock purchase plan 6,727 7 91,627 Other comprehensive loss 1999 net loss (9,487,734) ----------- ------- ------------ ------------- ---- ------- Balance at December 31, 1999 13,311,839 $13,312 $130,742,839 ($53,166,809) -- -- =========== ======= ============ ============= ==== =======
Notes Receivable Accumulated from Issuance Other of Common Comprehensive Stock Income (Loss) Total ----- ------------- ----- Balance at January 1, 1997 ($7,000) ($1,303) $ 41,115,381 Exercise of stock options for cash and stock 530,893 Issuance of stock under stock purchase plan 84,060 Retirement of treasury stock in July 1997 Collection on notes receivable from issuance of common stock 7,000 7,000 Other comprehensive income 9,710 9,710 1997 net loss (12,549,053) ------- --------- ------------ Balance at December 31, 1997 -- 8,407 29,197,991 Exercise of stock options for cash and stock 1,889,929 Issuance of common stock for cash on December 17, 1998 (at $21.25 per share), net of offering costs of $4,584,067 64,478,433 Issuance of stock under stock purchase plan 127,594 Other comprehensive income 42,267 42,267 1998 net loss (15,716,869) ------- --------- ------------ Balance at December 31, 1998 -- 50,674 80,019,345 Exercise of stock options for cash and stock 2,016,771 Issuance of stock under stock purchase plan 91,634 Other comprehensive loss (213,883) (9,701,617) 1999 net loss -- ------- --------- ------------ Balance at December 31, 1999 -- ($163,209) $ 72,426,133 ======= ========= ============
The accompanying notes are an integral part of the financial statements 41 5 ANESTA CORP. STATEMENTS OF CASH FLOWS for the years ended December 31, 1999, 1998 and 1997 --------
1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net loss $ (9,487,734) $(15,716,869) $(12,549,053) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 309,652 296,241 269,595 (Gain) Loss on retirement of assets (332) 3,823 12,245 Increase (decrease) due to changes in: Accounts receivable (1,679,882) (193,613) 402,785 Prepaid expenses and other current assets (473,159) 233,688 (136,507) Other assets (105,124) 9,067 (89,796) Accounts payable (1,068,937) 728,436 (85,299) Accrued liabilities (559,760) 624,715 105,454 Unearned revenues 2,051,352 176,796 ------------ ------------ ------------ Net cash used in operating activities (11,013,924) (13,837,716) (12,070,576) ------------ ------------ ------------ Cash flows from investing activities: Capital expenditures (648,411) (108,186) (894,791) Proceeds from sale of assets 489 50 1,621 Purchases of marketable debt securities, available-for-sale (79,553,714) (28,925,882) (12,754,249) Maturities and sales of marketable debt securities, available-for-sale 44,977,776 22,167,216 12,062,198 Purchase of certificate of deposit (816,000) Proceeds from maturity of certificate of deposit (255,000) 255,000 153,000 ------------ ------------ ------------ Net cash used in investing activities (35,478,860) (6,611,802) (2,248,221) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of notes payable 500,000 800,000 Principal payments on notes payable (250,000) (250,000) (150,000) Net proceeds from issuance of common stock 2,108,405 66,812,375 614,954 Collections on notes receivable from issuance of common stock 7,000 ------------ ------------ ------------ Net cash provided by financing activities 2,358,405 66,562,375 1,271,954 ------------ ------------ ------------ Effect of exchange rate changes on cash (8,754) 15,604 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (44,143,133) 46,128,461 (13,046,843) Cash and cash equivalents at beginning of period 55,889,226 9,760,765 22,807,608 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 11,746,093 $ 55,889,226 $ 9,760,765 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 129,714 $ 144,035 $ 136,715 Cash paid during the year for taxes 20,169 16,411 1,741
The accompanying notes are an integral part of these financial statements 42 6 NOTES TO FINANCIAL STATEMENTS ------------ 1. Significant Accounting Policies: Description of the Business Anesta Corp. is involved in the development of new pharmaceutical products for oral transmucosal drug administration. Since its inception in August 1985, Anesta has been a development stage company. However, during the fourth quarter of 1999, Anesta began generating sales from its principal product, Actiq, and accordingly is no longer in the development stage. The Company's products are based on its proprietary OTS for drug delivery. Anesta's principal product is Actiq, an OTS fentanyl product, which was approved by the FDA on November 4, 1998. Revenues recognized to date represent revenues under research and development contracts, license agreements and sales of the Company's products, Fentanyl Oralet and Actiq. The Company's ability to achieve profitability depends in part upon its ability alone, or with others, to commercialize successfully these products, to complete development of its proposed products, to obtain required regulatory approvals and to manufacture and market such proposed products. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. Substantially all of the Company's cash and cash equivalents are held in two financial institutions in San Francisco, California. Marketable Debt Securities The Company's marketable debt securities are classified as available-for-sale and carried at market value, with the unrealized gain or loss reflected as a component of other comprehensive income (loss). Gross realized gains and losses, with cost determined using the specific identification method, have not been material. Property and Equipment Expenditures that materially increase asset lives are capitalized at cost, while normal maintenance and repairs are expensed as incurred. Depreciation is reported on a straight-line basis over the shorter of the estimated useful lives of the assets, or the term of the lease, which range from 3 to 15 years. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and the gain or loss is reflected in the statements of operations and comprehensive loss. Translation of Foreign Currency Assets and liabilities of foreign operations, where the functional currency is the local currency, are translated into U.S. dollars at the fiscal year end exchange rate. The related translation adjustments are reflected as a component of other comprehensive income, a separate component of stockholders' equity. Revenues and expenses are translated using average exchange rates prevailing during the year. 43 7 NOTES TO FINANCIAL STATEMENTS, Continued 1. Significant Accounting Policies (Continued): Net Loss Per Share Basic and diluted earnings per share are computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share (EPS). Basic EPS excludes dilution and is computed by dividing income or loss available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities or contracts to issue common stock. Common equivalent shares are excluded from the computation of diluted EPS when their effect is antidilutive. Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, Accounting For Income Taxes. Deferred income taxes are provided for differences between the financial statement and tax bases of assets and liabilities using enacted future tax rates. Revenue Recognition The Company recognized revenues from contract research and license agreements based on qualifying expenditures. Where applicable, revenues from the licensing of Anesta's technology, including milestone payments under license agreements, are deferred and recognized on a straight-line basis over the defined period in the related license agreement. Research and development expense in the accompanying statements of operations and comprehensive loss includes funded and unfunded amounts. Revenue from the sale of products manufactured by Abbott is recognized when Abbott ships product against a customer order. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior year balances have been reclassified to conform with current year presentation. 44 8 NOTES TO FINANCIAL STATEMENTS, Continued 2. Marketable Debt Securities: The cost and estimated market value of marketable debt securities, available- for-sale at December 31, 1999, are as follows:
Gross Gross Estimated Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- Commercial Paper $22,151,274 $6,453 $22,157,727 Corporate Term Notes 15,824,568 $ (73,244) 15,751,324 Federal Home Loan Bank Notes 8,500,194 (35,669) 8,464,525 Certificates of Deposit 6,008,717 (14,877) 5,993,840 Federal National Mortgage Notes 4,985,522 (46,772) 4,938,750 U.S. Treasury Note 1,006,890 (5,950) 1,000,940 Accrued Interest 724,743 724,743 ----------- ------ --------- ----------- $59,201,908 $6,453 $(176,512) $59,031,849 ----------- ------ --------- -----------
The cost and estimated market value of marketable debt securities, available- for-sale at December 31, 1999, by contractual maturity, are shown below:
Estimated Market Cost Value ---- ----- Due in one year or less $51,402,038 $51,287,805 Due after one year through five years 7,799,870 7,744,044 ----------- ----------- $59,201,908 $59,031,849 ----------- -----------
The cost and estimated market value of marketable debt securities, available- for-sale at December 31, 1998, are as follows:
Gross Gross Estimated Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- Corporate Term Notes $15,698,462 $14,750 $15,713,212 Federal Home Loan Bank Notes 4,499,584 12,961 4,512,545 Federal National Mortgage Notes 2,967,280 5,540 2,972,820 Certificates of Deposit 999,537 1,663 1,001,200 Commercial Paper 261,638 156 261,794 Accrued Interest 199,469 199,469 ----------- ------- ---------- ----------- $24,625,970 $35,070 $24,661,040 ----------- ------- ---------- -----------
45 9 NOTES TO FINANCIAL STATEMENTS, Continued 3. Related Party Transactions: The Company paid expenses of $314,108, $250,368 and $284,030 in 1999, 1998 and 1997, respectively, to the Stanley Research Foundation for preclinical and clinical research. The Stanley Research Foundation and its principal trustee are shareholders of the Company. 4. Note Payable: The note payable at December 31, 1999 and 1998 is comprised of the following:
1999 1998 ---- ---- Term note payable to a bank with interest payable monthly at 7%. Principal payments of $333,333 are due each July through July 2005. The note is collateralized by a certificate of deposit in the amount of $2,040,000 at December 31, 1999. $2,000,000 $1,750,000 Current portion (333,333) (250,000) ---------- ---------- Long-term portion $1,666,667 $1,500,000 ---------- ----------
The Company's note payable matures in periods ending December 31, as follows: 2000 $ 333,333 2001 333,333 2002 333,333 2003 333,333 Thereafter 666,667 ---------- $2,000,000 ----------
Rates currently available to the Company for notes payable with similar terms and maturities are used to estimate the fair value of notes payable. At December 31, 1999 and 1998, the carrying value of the note payable approximates fair value. 46 10 NOTES TO FINANCIAL STATEMENTS, Continued 5. Stock Based Compensation Plan: The Company maintains three stock option plans: the 1989 Stock Option Plan (the "1989 Plan"), the 1993 Stock Option Plan (the "1993 Plan"), and the 1993 Non- Employee Directors' Stock Option Plan (The "Non-Employee Directors' Plan"). The 1989 Plan provides for the issuance of nonqualified stock options ("NQSOs") to employees of, directors of and consultants to the Company. The 1993 Plan provides for the issuance of Incentive Stock Options ("ISOs") to employees of the Company and NQSOs to employees of, directors of and consultants to the Company. The Non-Employee Directors' Plan provides for the issuance of NQSOs to non-employee members of the Company's Board of Directors who are not prohibited by their employer from receiving options. Additionally, the Company has granted NQSOs to non-employee directors and consultants on an individual basis and not under a plan. Under the 1989 Plan, NQSOs to purchase a total of 250,000 shares were authorized for issuance, of which none were outstanding and exercisable at December 31, 1999. All options have been granted at the market price of the Company's common stock at the date of grant. The NQSOs vest over a period not to exceed four years from the date of grant and terminate five years from the date of grant. At the 1997 annual meeting, stockholders approved an amendment to the 1993 Plan to increase the number of shares authorized for issuance from an aggregate of 750,000 shares to an aggregate of 1,500,000 shares. At the 1998 annual meeting, stockholders approved an amendment to the 1993 Plan to increase the number of shares authorized for issuance from an aggregate of 1,500,000 shares to an aggregate of 1,850,000 shares. At the 1999 annual meeting, stockholders approved an amendment to the 1993 Plan to increase the number of shares authorized for issuance from an aggregate of 1,850,000 shares to an aggregate of 2,400,000 shares. As of December 31, 1999, 1,539,579 options were outstanding and 726,952 options were exercisable. All options have been granted at the market price of the Company's common stock at the date of grant. The ISOs and NQSOs vest over a period not to exceed four years from the date of grant and terminate from five to ten years from the date of grant. At the 1997 annual meeting, stockholders approved an amendment to the Non- Employee Directors' Plan to increase the annual non-discretionary grant made to each non-employee director by 3,500 shares, from 1,500 shares to 5,000 shares. At the 1998 annual meeting, stockholders approved an amendment to the Non- Employee Directors' Plan to increase the non-discretionary grant made to each newly elected non-employee director from 10,000 shares to 15,000 shares, to grant 2,000 shares per year to each non-employee director serving as a committee chair, and to grant 400 shares to each non-employee director for each meeting of the Board of Directors attended in person or by teleconference. At the 1999 annual meeting, stockholders approved an amendment to the Non-Employee Directors' Plan to increase the number of shares authorized for issuance from an aggregate of 150,000 shares to an aggregate of 350,000 shares. At December 31, 1999, 105,800 options were outstanding and 42,282 options were exercisable. All options have been granted at the market price of the Company's common stock at the date of grant. The NQSOs vest over a period not to exceed four years from the date of grant and terminate five years from the date of grant. The Company has granted NQSOs to purchase shares on an individual basis and not under a plan, on terms similar to the 1989 Plan. At December 31, 1999, 7,800 options were outstanding and 7,800 options were exercisable. 47 11 NOTES TO FINANCIAL STATEMENTS, Continued 5. Stock Based Compensation Plan (Continued): The Company has adopted the disclosure provisions of SFAS No. 123. Under these provisions, the Company is allowed to continue to apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its option plans. Accordingly, no compensation expense has been recognized as options are granted to employees and directors at the stock's then market price. Had compensation expense for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under the option plans as recommended by SFAS No. 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below:
1999 1998 1997 ---- ---- ---- Net loss As reported $ (9,487,734) $(15,716,869) $(12,549,053) Pro forma $(13,185,307) $(16,617,806) $(13,282,846) Loss per share As reported $ (0.72) $ (1.59) $ (1.32) Pro forma $ (1.00) $ (1.68) $ (1.40)
NOTE: Basic and diluted loss per share are the same. The pro forma compensation expense may not be representative of such expense in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997, respectively: expected volatility of 77 -- 81 percent, risk-free interest rates of 4.4 -- 7.1 percent, expected lives of 0.01 -- 10.0 years, and a dividend yield of zero for all years. Changes in all outstanding options are as follows:
1999 1998 1997 --------------------------- --------------------------- --------------------------- Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average Fixed Options (000) Exercise Price (000) Exercise Price (000) Exercise Price ----- -------------- ----- -------------- ----- -------------- Outstanding at beginning of year 1,527 $12.18 1,341 $10.86 1,002 $ 8.63 Granted 462 11.50 479 13.70 458 14.48 Exercised (261) 8.41 (246) 7.82 (110) 5.48 Forfeited (74) 14.00 (47) 12.84 (9) 13.16 ----- ------ ----- ----- ----- ------ Outstanding at end of year 1,653 $12.51 1,527 12.18 1,341 $10.86 ===== ====== ===== ===== ===== ====== Options exercisable at year-end 777 659 536 Weighted-average fair value of options granted during the year $ 8.63 $11.00 $11.96
48 12 NOTES TO FINANCIAL STATEMENTS, Continued 5. Stock Based Compensation Plan (Continued): The following table summarizes information about fixed stock options outstanding at December 31, 1999:
Weighted- Number Average Weighted- Number Range of Outstanding Remaining Average Exercisable at Weighted-Average Exercise Prices at 12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price --------------- ----------- ---------------- -------------- -------- -------------- $5.0376 - $ 7.5563 30,032 0.2 years $ 5.25 30,032 $ 5.25 $7.5564 - $10.0750 3,800 1.8 9.30 3,000 9.25 $10.0751 - $12.5938 1,039,130 7.3 11.30 449,704 11.31 $12.5939 - $15.1125 359,093 7.6 13.87 208,232 13.83 $15.1126 - $17.6313 183,124 6.0 16.55 67,942 16.50 $17.6314 - $20.1500 30,000 4.5 18.57 16,248 18.64 $20.1501 - $22.6688 4,800 4.1 21.06 804 21.19 $22.6689 - $25.1875 3,200 3.9 23.97 1,072 23.97 --------- ---------- ------ ------- ------ 1,653,179 7.0 $12.51 777,034 $12.37 ========= ========== ====== ======= ======
In November 1993, the Company adopted the Employee Stock Purchase Plan (the "Purchase Plan"), authorizing the issuance of 250,000 shares pursuant to purchase rights granted to employees of the Company. Participants may use up to 10% of their compensation to purchase the Company's common stock at the end of each year at a price equal to 85% of the lower of the beginning or ending stock price in the plan period. As of December 31, 1999, there were 208,917 shares available for issuance under the Purchase Plan. Compensation expense under the fair value method of SFAS No. 123 is not significant relative to shares purchased under the Purchase Plan for 1999, 1998 and 1997. 6. Capital Stock: The Company has 1,000,000 shares of authorized voting preferred shares with a par value of $.001. At December 31, 1999 and 1998 there were no voting preferred shares issued and outstanding. At the 1999 Annual Meeting, stockholders approved an increase in authorized common stock from aggregate 15,000,000 shares to an aggregate of 35,000,000 shares. 7. Technology License Agreement: In September 1985, the Company obtained an exclusive worldwide license from UURF to use technology and knowledge developed or to be developed under Dr. Theodore H. Stanley's direction at the University of Utah, for anesthetic and other drug delivery systems based on oral transmucosal technology. In return, the UURF received 6,000 shares of Company stock and certain royalty rights based on product sales incorporating the technology. The license expires on the date of the last expiring patent, which occurs in 2014. 49 13 NOTES TO FINANCIAL STATEMENTS, Continued 8. Income Taxes: As of December 31, 1999, net operating losses (NOLs) totaling approximately $58.6 million are available to offset future taxable income, and research and development (R&D) tax credits totaling approximately $1,381,000 are available to offset future tax liabilities. The NOLs and the R&D tax credit carryforwards expire from 2002 to 2020. The Company's utilization of NOL carryforwards and R&D credits is limited to approximately $7,802,000 annually as a result of an ownership change in 1996. In addition to the limitation imposed in 1996, utilization of approximately $1,380,000 of the NOLs against future taxable income will be subject to an annual limitation of approximately $140,000 per year because of a cumulative change in ownership within a three-year period exceeding 50%. Approximately $110,000 of the R&D tax credit carryforwards is subject to the same annual limitation, under the constraint that the total NOLs must be utilized before the R&D credits may be used. To the extent the $140,000 annual limitation is not fully utilized in any given year, the unused portion of the NOLs and the R&D tax credit carryforwards are available for potential utilization in future years. SFAS No. 109 requires that a valuation allowance be provided if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company's ability to realize the benefit of its deferred tax asset will depend on the generation of future taxable income. Because the Company's operations are not currently generating taxable income, the Company believes that a full valuation allowance should be provided. The valuation allowance increased $3,903,000 during 1999, $7,274,000 during 1998 and $5,170,000 during 1997 primarily as a result of the increase in net operating loss carryforwards. The components of the net deferred tax asset as of December 31, 1999 and 1998 under SFAS 109 are as follows:
1999 1998 ---- ---- Deferred tax assets (liabilities): Net operating loss carryforwards $ 21,869,000 $ 18,182,000 Charitable contribution carryforwards 80,000 64,000 Research and development tax credit carryforwards 1,381,000 1,111,000 Depreciation 106,000 228,500 Book/tax difference related to license agreements 759,000 713,500 Other -- (7,000) Valuation allowance (24,195,000) (20,292,000) ------------ ------------ Net deferred tax asset $ -- $ -- ------------ ------------
50 14 NOTES TO FINANCIAL STATEMENTS, Continued 9. Research and Development: In December 1989, the Company entered into a research and development, license, supply and distribution agreement with Abbott. Under the agreement as amended, the Company granted to Abbott the exclusive right to make, use and sell in the U.S., oral transmucosal products resulting from technology owned or licensed by the Company, consisting of Oral Transmucosal Fentanyl Citrate (OTFC/(R)/) or other central nervous system acting drugs or intermediates thereof used for premedication, sedation, analgesia, diagnostic procedures, emergency room procedures, post-operative pain, burn treatment or cancer-related pain management. The first product developed under this agreement is being marketed for use in surgical premedication and for sedation/analgesia prior to diagnostic or therapeutic procedures in hospital settings under Abbott's trademark Fentanyl Oralet. The second product under the agreement is being marketed for breakthrough cancer pain under Anesta's trademark Actiq (See Note 14). Under the Company's agreements with Abbott, Abbott manufactures Anesta's OTS fentanyl product line (Fentanyl Oralet and Actiq) and sells these products to the Company at a price which reflects Abbott's cost of manufacturing. The Company then sells the products to Abbott at a price related to Abbott's selling price which results in a gross profit to the Company ranging from approximately 40-70%. In addition, the Company is entitled to receive a royalty from OTS fentanyl product sales by Abbott. By agreement, Abbott committed and paid a total of $10.05 million to the Company to fund the clinical development of and to obtain the regulatory approval for Fentanyl Oralet and Actiq. During 1998 and 1997 the Company received $300,000 and $375,000, and incurred $9,862,933 and $7,834,457 of costs relating to the agreements, respectively. Revenue of $300,000 related to the agreements was recognized in 1998. In connection with such development funding, Abbott was granted, and has exercised, warrants to purchase 1,202,840 shares of the Company's common stock at prices ranging from $1.00 to $2.40 per share. 51 15 NOTES TO FINANCIAL STATEMENTS, Continued 10. Unearned Revenues: Effective August 31, 1995, the Company entered into an amendment to a prior agreement between Abbott International (A.I.) and the Company to provide the Company the right to terminate or cause to become nonexclusive A.I.'s license rights to OTS fentanyl products in one or more countries in the world except the U.S. The amendment also eliminated $100,000 of the $450,000 of unearned revenue, which amount was recognized as royalty revenue during the year ended December 31, 1995. In January 1998, the Company exercised its right to terminate A.I.'s license rights to OTS fentanyl products in all countries in the world except the U.S. However, Abbott has agreed to be the Company's contract manufacturer and if requested by the Company, both parties have agreed to consult with each other regarding product supply by Abbott to any Anesta licensee. On January 28, 1998, the Company announced the signing of an exclusive agreement with Ferrer for the marketing, sales and distribution of Anesta's OTS fentanyl product line, including Actiq, in Spain and Portugal. Under terms of the agreement, Ferrer made a payment to the Company in 1998, a portion of which will be recognized as revenue in future years over the term of the agreement. The OTS fentanyl product line will be manufactured for Ferrer by Anesta, however, the Company does not believe commercial manufacturing will begin before December 31, 2000. Ferrer is a leading private Spanish pharmaceutical company. On June 4, 1998, the Company announced the signing of an exclusive agreement with Lafon for the marketing, sales and distribution of Anesta's OTS fentanyl product line, including Actiq, in France. Under terms of the agreement, Lafon made payments to the Company in 1998, a portion of which will be recognized as revenue in future years. The OTS fentanyl product line will be manufactured for Lafon by Anesta, however, the Company does not believe commercial manufacturing will begin before December 31, 2000. Lafon is a leading private French pharmaceutical company. On February 23, 1999, the Company announced the signing of an option agreement with Novartis involving the Company's proprietary OTS for drug delivery. Under terms of the agreement, Novartis made a payment to the Company in 1999, which will be recognized as revenue over the term of the agreement. Novartis and the Company will assess the worldwide commercial opportunity of potential products which combine the OTS with undisclosed compounds, with the goal of entering into an exclusive licensing agreement. On May 6, 1999, the Company announced the signing of an exclusive agreement with SWO for the marketing, sales and distribution of Anesta's OTS fentanyl product line, including Actiq, for Scandinavia (Denmark, Finland, Iceland, Norway, and Sweden). Under terms of the agreement, SWO made a payment to the Company which was recognized as revenue. The OTS fentanyl product line will be manufactured for SWO by Anesta, however, the Company does not believe commercial manufacturing will begin before December 31, 2000. SWO is a leading private Swedish pharmaceutical company. On October 6, 1999, the Company announced the signing of an exclusive agreement with Elan for the marketing, sales and distribution of Anesta's OTS fentanyl product line, including Actiq, for Austria, Belgium, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Philippines, Switzerland, Taiwan, and the United Kingdom. Under terms of the agreement, Elan made payments to the Company, a portion of which will be recognized as revenue in future years over the term of the agreement. The OTS fentanyl product line will be manufactured for Elan by Anesta. Elan is a leading public Irish pharmaceutical company. 52 16 NOTES TO FINANCIAL STATEMENTS, Continued 11. Leases: In December 1994, the Company entered into a five year operating lease agreement for a building which has two additional five-year renewal options. In February 2000, the Company renegotiated this lease for three years with two additional three-year renewal options. During 1999, 1998 and 1997 the Company also entered into operating lease agreements for furniture and equipment. Future minimum rental payments under operating leases as of December 31, 1999 are as follows: 2000 $1,345,180 2001 1,213,192 2002 913,973 2003 271,264 ---------- $3,743,609 ----------
Total expense under operating lease agreements for 1999, 1998 and 1997 was $1,285,841, $944,856, and $726,763, respectively. 12. Employee Benefits: In October 1995, the Board of Directors approved the adoption of a 401(k) Retirement Plan (the "401(k) Plan") effective January 1, 1996. Under the terms of the 401(k) Plan, all employees who are at least 21 years of age are eligible to participate. Participants may contribute up to 25% of their annual compensation to the 401(k) Plan, subject to statutory limitations. The Company may make discretionary matching contributions to the 401(k) Plan equal to 25 percent of participant contributions up to 6% of participant compensation. For 1999, 1998 and 1997, the Company declared and paid discretionary matching contributions to the 401(k) Plan in the amount of $57,849, $52,959 and $40,784, respectively. 13. Computation of Diluted Loss Per Share: As of December 31, 1999, options to purchase 1,653,179 shares of common stock at prices between $5.25 and $28.19 per share were outstanding. As of December 31, 1998, options to purchase 1,526,940 shares of common stock at prices between $5.25 and $25.19 per share were outstanding. As of December 31, 1997, options to purchase 1,340,230 shares of common stock at prices between $0.80 and $19.25 were outstanding. None of these options were included in the computation of diluted loss per share because the effect would have been antidilutive. 14. Subsequent Events: In March 2000, Anesta renegotiated the U.S. marketing rights for Actiq and Fentanyl Oralet with Abbott. Under terms of the agreements, effective April 2000 Anesta will have responsibility for sales and marketing in the United States. As part of the renegotiation, Anesta will make cash payments to Abbott and is obligated to make on-going earn-out payments to Abbott until the end of the first patent covering oral transmucosal fentanyl citrate. Abbott will continue to manufacture Actiq and Fentanyl Oralet for Anesta in the U.S. for a period of 24 to 36 months, after which the right of Anesta to manufacture such products after such period of time. Anesta will recognize revenue when Abbott ships product against a customer order. Anesta's gross margin therefore is directly affected by Abbott's manufacturing costs. Anesta is also obligated to pay a small royalty on its sales of Actiq and Fentanyl Oralet to the UURF. 53