Back to GetFilings.com
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, 1996
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 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 24, 1997, based upon the last
trade price of the Common Stock reported on the Nasdaq National Market on
March 24, 1997, was $23,448,767.*
The number of shares of Common Stock outstanding as of March 24, 1997 was
9,452,051.
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 1996 Annual
Meeting of Stockholders are incorporated herein by reference in Part III of
this Report.
______________________
* Excludes approximately 5,773,813 shares of common stock held by
Directors, Officers and holders of 5% or more of the Registrant's
outstanding Common Stock at March 10, 1997. 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.
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 registered 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-" and
"AutoLution-Registered Trademark-."
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 "ANTICIPATE," "EXPECT," "ESTIMATE"
AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE
INTENDED TO IDETIFY 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 TECHNOLOGY, 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 UNDER THE CAPTIONS "BUSINESS RISK", AND "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
OVERVIEW
CIMA is a drug delivery company focused primarily on the development and
manufacture of pharmaceutical products based upon its patented OraSolv
technology for marketing by multi-national pharmaceutical companies. OraSolv
is an oral dosage formulation incorporating microencapsulated active drug
ingredients into a tablet which dissolves quickly in the mouth without
chewing or water and which effectively masks the taste of the medication
being delivered. OraSolv'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 is more
convenient than traditional tablet-based oral dosages as it does not require
water to be ingested, thereby enabling immediate medication at the onset of
symptoms. In addition, OraSolv can provide more accurate administration of
doses than liquid or suspension formulations as no measuring is required.
The Company believes OraSolv's ease of use and effective taste masking will
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.
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. CIMA's
strategy is to commercialize its OraSolv technology through collaborations
with pharmaceutical and other healthcare companies under which the Company
will manufacture OraSolv formulations of its collaborators' pharmaceutical
products. Since the issuance of the OraSolv patent in 1993, the Company has:
- - Completed construction of a 75,000 square foot manufacturing
facility in Eden Prairie, Minnesota. This production facility has
been validated, registered with the FDA, undergone an FDA establishment
inspection and licensed by the State of Minnesota.
- - The Research & Development facility in Brooklyn Park, Minnesota
successfully completed an FDA establishment inspection and was granted
a Drug Enforcement Agency (DEA) License.
2
- - Entered into a License and Development Agreement with Glaxo to
develop an OraSolv version of Glaxo's Zantac in the U.S. and
internationally, for both the OTC and prescription markets.
- - Entered into a License Agreement and Development and a License
Option Agreement with SmithKline Beecham to develop a series of OraSolv
versions of SmithKline Beecham products for international and domestic
distribution.
- - Entered into agreements with other partners for the development
and manufacture of products in CIMA's OraSolv dosage form.
- - In the fourth quarter of 1996, entered into a Supply Agreement
with an undisclosed major multi-national pharmaceutical company for
full-scale production of an over-the-counter product in CIMA's OraSolv
dosage form.
- - Added key scientific, technical and management personnel.
CIMA's business strategy is to commercialize its OraSolv technology
through collaborations with multi-national pharmaceutical companies with
emphasis on products which command a large market share and/or are in large
market segments. The Company is currently focused on the development and
manufacture of OraSolv products for the OTC market. Product differentiation
and brand name identity are critical to the successful marketing of OTC
products. The Company believes that OraSolv affords pharmaceutical companies
a means to significantly differentiate their products in the competitive OTC
marketplace. Because it is a patented technology, OraSolv affords more
enduring product differentiation than the more traditional approaches of
changing product flavor or packaging innovations, which can be easily
replicated. The Company has entered into agreements with a number of
pharmaceutical companies for development, manufacture and commercialization
of OTC or OTC switch products.
The Company also intends to develop OraSolv products for selected
prescription drug applications. The Company believes that such prescription
OraSolv products might result in improved taste acceptance and ease of
administration, and so enhance patient compliance with the recommended dosage
regimen for such prescription pharmaceuticals. The Company has also
initiated the development of new drug technologies. These technologies
include new oral solid delivery systems, unique sustained-released delivery
systems and improved efficacy delivery systems. The goal is to focus on
technologies that improve efficacy.
CIMA is a Delaware corporation incorporated in 1986.
BUSINESS RISKS
The Company is a development stage company and must be evaluated in
light of the uncertainties and complications present for any such company
and, in particular, in the pharmaceutical industry. The Company has
accumulated aggregate net losses from inception through December 31, 1996, of
$35,511,000. 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,
which have 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, and licensing arrangements. The Company
expects to continue to incur losses through 1997. There can be no assurance
that the Company will ever generate substantial revenues or achieve
profitability.
The Company believes that its currently available funds, including
any license fees and sales revenue anticipated to be received in the
future, will meet its needs at least through 1997. Thereafter, or
sooner if conditions
3
make it necessary, the Company will need to raise additional funds through
public or private financings, including equity financings which may be
dilutive to stockholders. 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 or at all.
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 as an alternative to conventional oral
dosage forms. The Company expects that OraSolv products will be priced
slightly higher than conventional swallow tablets. Although the Company
believes that initial consumer research has been encouraging, there can be no
assurance that market acceptance for the Company's OraSolv products will
ever develop or be sustained.
To date no commercial sales of OraSolv products have been made, and the
Company has not derived any revenues from sales of OraSolv products.
However, the Company expects to derive such revenues by the second quarter
1997. The Company has begun manufacturing OraSolv products in commercial
quantities beginning in February 1997. To achieve future desired levels of
production, the Company will be required to increase substantially 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.
The Company intends to increase its research and development expendures
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.
The foregoing risks reflect the Company's early stage of development and
the nature of the Company's industry and products. Also inherent in the
Company's stage of development is a range of additional risks, including
competition, uncertainties regarding the effects of health care reform on the
pharmaceutical industry, including pressures exerted on the prices charged
for pharmaceutical products, and uncertainties regarding protection of
patents and proprietary rights.
BACKGROUND
DRUG DELIVERY TECHNOLOGY
Patient medications are available in a variety of delivery forms,
including solid dosage forms, liquids, effervescents, transdermal delivery
methods and intramuscular and intravenous injections. Enteral medication
delivery includes those medications delivered through the stomach, including
tablets, liquids and effervescents. Enteral medications are frequently
patient-administered, because of their non-invasive delivery method.
Parenteral medications are those delivered by injection. Parenteral
medications are 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
indications, 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
4
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, or OTC, version 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 OTC 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.
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 drugs like
Prozac, Zoloft, EPO and Fosamax 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 new 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.
MARKET OPPORTUNITY
The Company believes that its OraSolv drug delivery system 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 convenience, which the
Company believes will result in improved compliance with dosing regimens.
The benefits to providers and payors are lower costs resulting from such
5
improved compliance with dosing regimens. The benefits to pharmaceutical
partners are the capabilities to leverage their drug delivery development
programs by going to specialized drug delivery companies, like CIMA, for
brand differentiation and the ability to retain brand integrity.
ADVANTAGES FOR PATIENTS, PROVIDERS AND PAYORS
The Company believes a broad group of patients will benefit from the
OraSolv rapid dissolve technology because it enables immediate medication at
symptom emergence and facilitates 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 the
OraSolv technology provides benefits to certain patient groups which
experience significant difficulty in swallowing tablets. Such patient groups
include children and 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 technology.
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 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
specialized 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 technology provides 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, microencapsulated 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.
6
The microencapsulation 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. Certain of these coating techniques have been
developed by the Company's scientists in collaboration with coating
materials suppliers. Coating materials are designed to prevent the active
drug ingredient in the OraSolv tablet from coming in contact with the taste
buds and provide for immediate release of the active ingredient in the
stomach. Coating materials are chosen based on the dose and taste of the
active ingredients. A series of experiments is then performed to determine
the suitability of various microencapsulation techniques. From these
experiments, a technique is chosen based on reproducibility, stability,
dissolution, effectiveness in taste masking and cost-effectiveness. The
microencapsulated drug is then combined with the fast-dissolving tablet
materials, which can include a variety of flavoring and coloring agents, one
or more sweetening agents 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 excipients to facilitate
a mild effervescent reaction when the tablet contacts saliva. This
effervescent reaction accelerates the disintegration of the tablet through
the release of 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.
AUTOLUTION
The Company's AutoLution technology is a drug delivery system that
creates a liquid effervescent solution from dry drugs or chemicals. It
involves the preparation of the active ingredients into a tablet or powder
which is subsequently added to water to create a liquid drug solution. The
Company has shifted its focus away from the development of AutoLution
products to the development of OraSolv-based products. However, the Company
will continue to develop its AutoLution technology under current contractual
agreements it has with corporate partners or other third parties.
STRATEGY
The Company's goal is to have its proprietary drug delivery technology
incorporated into as many pharmaceutical products as possible with an
emphasis on pharmaceutical products which command a large market share or are
in large market segments. The Company has developed a strategic plan to
accomplish this goal. 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 the OraSolv
technology. The Company will refine the OraSolv formulation of a
particular oral therapeutic and manufacture it for its collaborators.
These collaborators will market and sell the OraSolv versions of the
therapeutic. The Company believes this strategy will reduce the time
required to market products and take advantage of the industry
knowledge and presence of its partners.
- - FOCUS INITIALLY ON OTC APPLICATIONS. The Company has focused
initially on developing OraSolv products for the OTC cough/cold/flu,
allergy and sinus, and analgesic markets. The Company intends to
target both adult and pediatric applications. The Company believes
that OTC products which are subject to the FDA's OTC drug review
process can generally be introduced without FDA preapproval and thus
can generate revenues sooner than prescription products. The Company
believes that OTC products using its OraSolv delivery system can
establish distinct brand identities among otherwise largely
undifferentiated OTC products, particularly in the large but
competitive cough/cold/flu, allergy and sinus, and analgesic markets.
7
- - PURSUE OPPORTUNITIES IN OTC SWITCH PRODUCTS. The Company intends
to develop OraSolv products for drugs that are being switched from the
prescription to the OTC market. The Company believes that as
prescription products are switched into the OTC market, pharmaceutical
companies will seek methods for product differentiation. The Company
believes that the OraSolv delivery system offers significant
differentiation potential for these products. The Company's initial
focus in this area is in the gastric relief market, where opportunities
have been created by the FDA approval of the switch to OTC of three
significant anti-ulcer drugs, Zantac 75, Pepcid AC and Tagamet HB, and
expiration of the patent on Tagamet.
- - DEVELOP SELECTED PRESCRIPTION DRUG APPLICATIONS. The Company is
investigating the development of OraSolv pediatric antibiotic products
and expects in the future to develop certain other prescription drug
applications. Qualitative market research studies (focus groups) with
pediatricians conducted by the Company have demonstrated a strong
interest by this group in utilizing OraSolv technology to improve
compliance among children taking antibiotic products. Other potential
OraSolv prescription applications include anti-nauseants,
psychotherapeutics and cancer therapy drugs. OraSolv products may
offer improved taste acceptance and improved compliance with respect to
these drugs. They may also offer benefits where patients have
difficulty swallowing tablets or ingesting liquids.
- - DEVELOP PROPRIETARY TECHNOLOGIES. The Company continues to
develop proprietary technology and obtain patents thereon. To date,
the Company has six U.S. and two Australian patents and nine 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
three new technologies: new oral solid delivery systems, unique
sustained-release systems, and improved efficacy systems. Consumer use
testing has already been completed on one system demonstrating the
feasibility of that system. Feasibility studies of the other systems
are either underway or planned. Patent applications are also underway.
- - RETAIN MANUFACTURING RIGHTS. The Company intends to continue to
develop OraSolv formulations of oral therapeutics for its
collaborators, to manufacture commercial quantities of these products
in its facility in Eden Prairie, and to rely on its collaborators to
market and sell the OraSolv formulations. 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. The
Company has retained and intends to continue to retain ownership of the
OraSolv formulations developed for its collaborators. The Company
believes this practice 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
OraSolv product.
TARGET MARKETS
KEY OTC MARKETS
The Company is pursuing numerous business development opportunities in
some of the larger OTC market segments namely Cough/Cold/Flu, Allergy and
Sinus, Analgesics, and Gastric Relief. These segments have been undergoing
dynamic changes specifically as caused by the recent introductions of several
Rx-to-OTC switches (e.g. Zantac 75, Pepcid and Tagamet HB in the gastric
relief market; Aleve, Orudis and Actron in the analgesic market). The
Company has entered into Agreements with multi-national pharmaceutical
companies to develop a series of products in these markets. See
"--Agreements With Corporate Partners."
8
PRESCRIPTION DRUG MARKET
The Company is investigating the development of OraSolv pediatric
antibiotic products and expects in the future to develop OraSolv products for
prescription drug applications, including products for which Abbreviated New
Drug Applications may be filed for special niche branded use. Certain
antibiotics must be manufactured at a separate facility from other
pharmaceuticals, which may impede the development of such products. Other
potential OraSolv prescription applications include anti-nauseants,
psychotherapeutics, AIDS and cancer therapy drugs. The Company also believes
that additional prescription opportunities exist in the analgesic,
anti-inflammatory and cough/cold/flu, allergy and sinus markets.
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 the Company's products either worldwide, or
in specified markets or territories. The collaborative arrangements
typically begin with a research and 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. 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 would have a material adverse effect on the Company's financial
condition and results of operations. Moreover, certain of the Company's OTC
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 OTC 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 summarizes certain elements of the Company's major
collaborative arrangements, including partners, market segments, types of
agreements and CIMA technology.
PARTNER MARKET SEGMENT TYPE OF AGREEMENT CIMA TECHNOLOGY
Glaxo Wellcome plc Gastric Relief License & Development OraSolv
(Rx to OTC) Agreement
SmithKline Beecham plc (1) License Agreement OraSolv
SmithKline Beecham plc/ Analgesics and Option and Development OraSolv
Sterling Winthrop, Inc. (2) Cough/Cold/Flu Agreement
Undisclosed Partner (1) Supply Agreement OraSolv
9
(1) Further information is confidential as disclosure of the partner
company or product category may force the collaborative partner to
alter its marketing plans, which could have a material adverse effect
on the eventual marketing of the product.
(2) As a result of corporate restructuring due to the sale of
Sterling's OTC business to SmithKline Beecham, SmithKline Beecham
assumed most of Sterling's rights under this agreement, and certain
rights with respect to the U.S. and Canada reverted to the Company.
GLAXO AGREEMENT
The Company has entered into a License and Development Agreement with
Glaxo (the "Glaxo Agreement") to produce an OraSolv version of Zantac to be
marketed exclusively by Glaxo in the U.S. and internationally, for both the
OTC and prescription markets. In late 1995, the FDA approved the switch to
OTC of a version of Zantac for heartburn indications (Zantac 75). Pursuant
to the Glaxo Agreement, the Company will receive certain fees to develop
product prototypes and all development costs will be borne by Glaxo. The
Company will also receive payments upon completion of certain milestones.
Glaxo will pay specified royalties to the Company on net sales of the
products. The Glaxo Agreement provides that the Company retains the right
to manufacture certain minimum quantities of the OraSolv products for the
first five years following the first commercial sale of the products. At any
time during the term of the Glaxo Agreement, however, Glaxo may terminate the
Company's manufacturing rights for specified reasons. Termination of the
Company's manufacturing rights or of the Glaxo Agreement could have a
material adverse effect on the Company's business. Timing of product
introductions under the Glaxo Agreement is within the control of Glaxo.
SMITHKLINE BEECHAM LICENSE AGREEMENT
The Company entered into a License Agreement with SmithKline Beecham in
April 1996. The License Agreement grants SmithKline Beecham exclusive
marketing rights for certain specific OraSolv OTC products. SmithKline
Beecham will have the right to market such products throughout the world,
except in the U.S. and Canada. Under the License Agreement, the Company will
receive a license fee which is refundable under certain circumstances, and is
also entitled to receive certain milestone payments upon the occurrence of
specified events. The Company will also receive royalties on net sales of
the products by SmithKline Beecham. SmithKline Beecham has a unilateral right
to terminate the License Agreement for any reason upon written notice to the
Company within specified time periods. The License Agreement also
contemplates that the parties will negotiate and enter into a manufacturing
and supply agreement pursuant to which the Company would manufacture and
supply SmithKline Beecham with its requirements of the products. There can
be no assurance, however, that such an agreement will be reached or, if
reached, that such supply relationship will be profitable to the Company. If
the parties are unable to agree upon such manufacture and supply terms, then
SmithKline Beecham may elect to have such products manufactured by either
SmithKline Beecham or a third party manufacturer approved by the Company.
SMITHKLINE BEECHAM OPTION AND DEVELOPMENT AGREEMENT
The Company entered into an Option and Development Agreement with
Sterling Winthrop, Inc. ("Sterling") in May 1994. Subsequently, Sterling's
worldwide OTC business was purchased by SmithKline Beecham, which assumed
Sterling's development and license option rights to all 15 products under the
agreement for markets outside the U.S. and Canada, but relinquished rights to
five of the products for sales in the U.S. and Canada. The agreement
provides that the Company will develop a series of analgesic and
cough/cold/flu, allergy and sinus OraSolv products. The Company will receive
certain fees to develop a number of different product prototypes for
SmithKline Beecham's evaluation and will grant to SmithKline Beecham, upon
payment of additional specified fees, options to enter into license
agreements for the marketing of any of the products developed. While this
agreement describes the basic terms to be contained in any license agreement
subsequently entered into between the Company and SmithKline Beecham,
SmithKline Beecham is not obligated to enter into any definitive license
agreement with the Company and generally has the right to abandon a product
at any time for any reason without significant penalty, or to terminate the
agreement entirely. If the Company does not enter into a definitive license
agreement with SmithKline Beecham within a specified time period, the Company
retains the right to seek an alternative corporate
10
partner for the products being developed, although there can be no assurance
that the Company could locate a suitable alternative corporate partner. A
decision by SmithKline Beecham to abandon one or more products, once
licensed, could materially adversely affect the Company's financial condition
and results of operations.
The agreement with SmithKline Beecham specifies certain products for
which any license granted would be co-exclusive, permitting the Company to
enter into another collaborative arrangement with a different corporate
partner with respect to each such product. As to the other products to be
developed, the license granted to SmithKline Beecham would be exclusive. The
agreement provides that if any definitive license agreement is entered into,
the Company would receive certain license fees and a royalty on net sales of
each of the products subject to the license agreement. While the SmithKline
Beecham agreement does not specify the terms of any manufacture and supply
agreement, the Company intends to negotiate to retain the right to
manufacture the licensed products in connection with any definitive license
agreement entered into with SmithKline Beecham. There can be no assurance
that the Company will retain manufacturing rights or that any such rights
retained will be profitable for the Company. The failure by the Company to
retain manufacturing rights could have a material adverse effect on the
Company's profitability.
OTHER ORASOLV AGREEMENT
In the first quarter of 1996, the Company entered into a full-scale
stability, manufacturing and testing agreement with an undisclosed
multinational pharmaceutical company for development or manufacture of an
OraSolv product. Because the marketplace for pharmaceutical products is
highly competitive, disclosure of the potential partner and market category
or product may result in the prior implementation of competitive strategies
which would be damaging or destructive to the marketing plans of the
potential partner. That activity could result in the loss of brand equity
and the nonrecovery of substantial advertising and promotional costs.
Accordingly, at the present time both the identity of the other Company and the
nature of the product involved remains confidential. This agreement provides
for the partner to pay the Company certain fees and provides the partner an
exclusive negotiation period for additional rights with respect to the
specific class of pharmaceutical products being evaluated by the partner. In
October 1996, this agreement was expanded to a Supply Agreement which
requires the partner to launch the product by a specified date in 1997, or
CIMA has the right to terminate the Agreement. There can be no assurance
that the partner will perform as anticipated, or that the Company will
receive substantial revenues from this product and agreement.
To date, the Company has not derived any revenues from sales of OraSolv
products. In connection with agreements with corporate partners for OraSolv
products, the Company has received research and development fees and
licensing revenues of $1,472,000, $684,000 and $1,168,000, in 1996, 1995, and
1994, respectively. Net sales of AutoLution and other products decreased to
zero in 1996 from $151,000 in 1995 and $1,451,000 in 1994. In 1995 and 1994,
the Company spent $5,403,000, $6,505,000, and $3,549,000, respectively, on
research and product development activities.
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. The Company holds five U.S. patents.
The most significant U.S. patent issued to the Company covers the
taste-masking, microencapsulation and quick-dissolving excipient technology
incorporated in the OraSolv products. The OraSolv patent and two others were
issued in 1993 and expire in 2010, the fourth patent was issued in 1995 and
expires in 2012 and the fifth patent was issued in 1996 and expires in 2013.
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. Another patent relates to an effervescent
pediatric vitamin and mineral supplement. The fifth patent
11
relates to the formulation of a base coated acid effervescent mixture
manufactured by a controlled acid-base reaction. The obtained mixture can be
used in the formulation of acid sensitive compounds with OraSolv technology
or other effervescent-based products.
The Company holds two patents in Australia, which issued in 1990. The
Company also has a total of nine 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 and 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 ability to commercialize the Company's products will depend on not
infringing the patents of others. Although the Company is not aware of any
claim of patent infringement against it, the Company has entered into a
licensing agreement with Beecham Group plc ("Beecham") to avoid the
possibility of litigation. Under the license, the Company has a
non-exclusive, worldwide license to make, have made, use and sell products
covered by a particular U.S. patent issued to Beecham and corresponding
rights in other countries (the "Beecham Patent Rights"), which may cover
certain OraSolv products. Under the terms of the license, the Company is
required to pay a royalty of 2% of amounts received by the Company in respect
to OraSolv products. The license extends for the life of the Beecham Patent
Rights and is terminable upon default by either party.
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.
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.
MANUFACTURING
A key component of the Company's strategy is to be the primary
manufacturer of OraSolv products. Advantages of this strategy include the
control of the technology, the ability to quickly increase production, and to
refine the production process as necessary to rapidly and successfully bring
OraSolv products to market. Although the OraSolv process uses standard
pharmaceutical production equipment, certain modifications were required to
meet the specific needs of OraSolv products, including the need for producing
softer tablets, special protective packaging and dehumidification. During
the refining process and the process validation runs, the Company identified
the key product quality issues. The manufacturing equipment, process, and
facility have now been fully validated. In 1996, CIMA successfully completed
an FDA establishment inspection, and a Minnesota State inspection. The
Company believes that this manufacturing experience gives it an advantage
over its competitors. The Company
12
believes that its ability to manufacture OraSolv products provides economies
of scale, therefore making the Company more attractive to its partners by
allowing them access to smaller volume line extensions without making
significant capital investments.
The Company's OraSolv production facility is located in Eden Prairie,
Minnesota, which also houses the Company's corporate headquarters. The
Company began occupying and making leasehold improvements to the new facility
in late June 1994 and the facility was completed in December 1994. See
"Item 2. -- Properties." Initially, the Company will operate one production
line at this facility which it believes will be capable of producing 250 to
300 million tablets a year. The facility is designed to be expandable to six
production lines. This is expected to be sufficient capacity to meet our
short-and long-term manufacturing needs. The production equipment consists of
an integrated blending, tableting and packaging operation. The configuration
of the production flow layout and this equipment has been designed by Company
personnel and the Company's consultants. Most of the equipment consists of
components commonly used in pharmaceutical manufacturing. Modern technology
for environmental control is utilized. The equipment was selected for ease
of operation, cleaning and changeover and cost effectiveness. The production
line is capable of packaging a variety of package designs with rapid
conversion between sizes.
During 1996, the facility was validated and inspected by the FDA. In
addition, there have been numerous successful site audits conducted by major
pharmaceutical companies. CIMA has conducted over 60 full-scale runs of the
production line as well as full process validation. During February 1997,
CIMA began commercial production for its first commercial launch by one of
its corporate partners, of a product incorporating its OraSolv technology.
The OraSolv production process begins with the purchase of the
pharmaceutical ingredients to be used in manufacturing the products. The
active drug ingredients may be shipped to coating materials suppliers where
appropriate coating materials are applied to microencapsulate the
ingredients. In some cases, the Company purchases the microencapsulated
active ingredient from a supplier. These coating materials suppliers are
subject to extensive government regulation, including current Good
Manufacturing Practice regulations ("cGMP") promulgated by the FDA. After
coating, the active drug ingredients are sent to the Company where they are
tested again by CIMA's Analytical Quality Control group and released to the
production department. The active and inactive drug ingredients that have
been quality control released are further processed and pressed into OraSolv
tablets. The tablets are immediately transferred into blister-foil packages
and packed in cartons in a high-speed, continuous operation. 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 could possibly damage relations with its
corporate partners.
By producing many full-scale trial and validation batches, the Company
believes it has identified and minimized potential problems that could affect
product manufacturing in commercial quantities. There can be no assurance,
however, that manufacturing and control problems will not arise as the
Company begins manufacturing at commercial scale. If manufacturing or control
problems arise and are not corrected for any reason, the Company's business
could be materially adversely affected.
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 internal marketing department has focused
on promoting the benefits of OraSolv to its corporate pharmaceutical
13
partners and with conducting consumer surveys and physician research of
various OraSolv formulations. The Company believes that its rapid dissolving
tablet technology competes favorably to its competition. In a recent
quantitative consumer study conducted by a major independent market research
company and sponsored by the Company, significantly more consumers liked the
OraSolv formulation versus the Zydis formulation of the same drug. Currently,
the Company has entered into corporate collaborations with Glaxo, SmithKline
Beecham, and with other major pharmaceutical companies.
RESEARCH AND DEVELOPMENT
The research and development ("R&D") department at CIMA is primarily
focused on the development of oral dosage forms based on CIMA proprietary
technologies. The R&D department includes scientists recruited from the
research and development 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. 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 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.
These efforts are conducted to support the CIMA 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 major
pharmaceutical companies; recruit and train high quality technical and
scientific personnel; and support the Company's intellectual property process.
In 1996, the Company's R&D department began to investigate several new
drug delivery programs associated with its drug delivery technology. Out of
these efforts three programs have emerged as leading candidates for new
delivery systems: a new oral solid delivery system; unique sustained-release
systems and an improved efficacy system. The new oral solid dosage form
program involves both incremental improvements to the current OraSolv
technology and the development of new patentable platform for solid oral dose
systems. These platform technologies are expected to extend the patent
coverage of the current OraSolv technology. These efforts have resulted in
tangible improvements in formulations currently under development with
several major partners. The unique sustained release program is targeting the
oral delivery of sustained release beads of particles in a quick-dissolving
effervescent matrix. Discussions are on-going with several partners regarding
these technologies. The development of clinical formulations is expected to
begin in 1997. The enhanced efficacy program is targeting improvement of the
bioavailability of specific compounds with high first-pass effects by using
the sublingual and buccal delivery of compounds in an effervescent matrix.
The Company expects to submit an IND permitting clinical formulations to be
evaluated in human subjects in 1997.
At the early stage of development, the feasibility of these technologies
appears promising. However, there are numerous risks and uncertainties
inherent in any research development 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.
14
During the three years ended December 31, 1996, CIMA's total
expenditures for research and development were $5,403,000, $6,505,000 and
$3,549,000, respectively, of which amounts research and development fees from
the Company's collaborative partners were $1,197,000, $497,000 and $453,000,
respectively.
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. There
can be no assurance that developments by others will not render the Company's
products or technologies noncompetitive or obsolete.
Among the technologies expected to provide competition for the Company's
OraSolv technology is the Zydis technology developed by R.P. Scherer
Corporation ("Scherer") and the Shearform Matrix technology developed by
Fuisz Technologies, Ltd. ("Fuisz"). 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."
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 and required
capital investment for manufacturing. The Company believes that its rapid
dissolving tablet technology competes favorably with respect to these
factors. Both Scherer and Fuisz 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.
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 warning
letters, 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 initially intends to emphasize
15
OTC drug products that generally do 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 an Abbreviated New Drug Application ("ANDA"), 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, such as an OraSolv version of Zantac, would be
sought by the Company's corporate partners. Marketing of such products could
be delayed or prevented because of this process. Even after an ANDA, 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.
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 OTC
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 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.
16
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 facility in November 1996 and no
observations were cited. 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 will not be required prior to
commencement of manufacturing of 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
EMPLOYEES
On December 31, 1996, the Company had 64 full-time employees, of whom 18
were engaged in research and development (including 7 with Ph.D.s), 19 in
manufacturing, 6 in compliance, 8 in quality control and 13 in
administration, business development, finance and human resources. Most of
the Company's scientific and engineering employees have had 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
17
liability claims to date, any such claims could have a material adverse
impact on the Company. The Company currently has general liability insurance
and 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 maintains its headquarters and a production facility in a
75,000 square foot building in Eden Prairie, Minnesota, a suburb of
Minneapolis. The Company had been subleasing this facility. The sublandlord
filed for bankruptcy and rejected the sublease on September 30, 1996.
Pursuant to an existing consent agreement, the prime landlord is obligated
not to disturb the Company's possession and occupancy of this facility, and
to enter into a new lease with the Company on prearranged terms. The Company
has remained in the facility pursuant to the consent agreement, and is paying
annual base rent (exclusive of real estate taxes and maintenance fees) of
$372,830. The Company is negotiating to execute the prearranged lease, which
will have a term through June 1, 2009, with an option to extend the term for
an additional ten years. The annual base rent under the prearranged lease
will remain the same as the current annual base rent, subject to adjustment
on June 1, 2001 and every five years thereafter based on the change in
average rental rates for office and warehouse properties in the surrounding
area. This adjustment may not result in an annual base rent lower than any
previously established annual base rent. If the Company elects to exercise
its extension option, the minimum annual base rent will be $500,000 during
the first five years of the extended term, and $550,000 during the second
five years of the extended term. Although pursuant to the consent agreement
the prime landlord is obligated to enter into a new lease on the prearranged
terms, the parties are currently in negotiations regarding such new lease and
there can be no assurance that disagreements regarding the obligations of the
parties under the consent agreement will not arise, that the parties will be
able to agree to terms not provided for in the consent agreement, or that the
parties will otherwise be able to successfully conclude such negotiations.
In addition to its new OraSolv production facility, the Company also
leases 32,000 square feet located in an industrial park in Brooklyn Park,
Minnesota. The Brooklyn Park facility contains offices as well as research
and development and certain other pilot development and manufacturing
operations. The lease for this facility expires in September 1998 and is
renewable for an additional three-year period and two five-year periods. The
Company currently pays approximately $144,600 in annual base rent (exclusive
of real estate taxes and maintenance fees) under this lease. The Company's
non-OraSolv manufacturing operations, including AutoLution, are located in
the Brooklyn Park facility. The Company believes that its facilities are
adequate for its current and anticipated future operations and that any
necessary lease renewals or additional leased space could be obtained on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
18
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock began trading on the Nasdaq National Market
under the symbol "CIMA" on July 29, 1994. Prior to that date, there was no
public market for the Company's Common Stock. 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. These over-the-counter quotations
reflect inter-dealer prices, without retail markup, markdown or commission,
and may not necessarily represent the sales prices in actual transactions.
HIGH LOW
-------- -------
1995
First Quarter....................................... $ 10 7/8 $ 4 3/4
Second Quarter...................................... 5 5/8 3 7/8
Third Quarter....................................... 8 1/8 3 7/8
Fourth Quarter...................................... 8 4 3/4
1996
First Quarter....................................... $ 7 1/4 $ 4 1/4
Second Quarter...................................... 11 3/4 6 1/8
Third Quarter....................................... 8 3/8 5 1/4
Fourth Quarter...................................... 8 3/8 5 1/2
On March 24, 1997, the last sale price reported on the Nasdaq National
Market for the Company's Common Stock was $ 6.38 per share.
HOLDERS
As of March 24, 1997 there were approximately 100 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.
SALES OF UNREGISTERED SECURITIES
On May 24 and November 11, 1996, the Company issued 9,088 and 92 shares
of its Common Stock, respectively, to North Star Ventures III pursuant to the
net exercise of outstanding warrants. Such stock issuances were deemed exempt
from the registration requirements of the Securities Act of 1933, as amended
(the "Act"), pursuant to Section 3(a)(9) and Section 4(2) of the Act.
On May 28 and June 19, 1996, the Company sold 725 and 145 shares of its
Common Stock, respectively, to Terrence W. Glarner, a director of the
Company, for an aggregate purchase price of $5,220 pursuant to the exercise
of outstanding warrants. Such sales of stock were deemed exempt from the
registration requirements of the Act pursuant to Section 4(2) of the Act.
19
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- --------- --------
STATEMENTS OF OPERATIONS DATA: (in thousands, except per share amounts)
Revenues:
Net sales $ -- $ 151 $ 1,451 $ 1,857 $ 3,251
Research and development fees 1,197 497 453 272 208
Licensing revenues 275 187 715 96 237
-------- -------- -------- --------- --------
Total revenues 1,472 835 2,619 2,225 3,696
Costs and expenses:
Costs of goods sold -- 240 2,799 2,844 3,279
Research and product development 5,403 6,505 3,550 1,857 759
Selling, general and administrative 2,909 3,658 2,972 1,208 1,306
-------- -------- -------- --------- --------
Total costs and expenses 8,312 10,403 9,321 5,909 5,344
Other income (expenses):
Interest income (expense), net 498 448 452 6 (84)
Other income (expense) (4) 13 38 (2) 50
-------- -------- -------- --------- --------
Total other income (expense) 494 461 490 4 (34)
-------- -------- -------- --------- --------
Net loss $ (6,346) $ (9,107) $ (6,212) $ (3,680) $ (1,682)
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
Net loss per share $ (.72) $ (1.16) $ (.95) $ (.78) $ (.53)
Weighted average number of shares outstanding 8,827 7,822 6,505 4,727 3,198
DECEMBER 31
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- --------- --------
BALANCE SHEET DATA: (in thousands)
Cash and cash equivalents $ 2,666 $ 3,559 $ 2,912 $ 1,178 $ 5,480
Total assets 22,065 15,519 25,122 4,927 9,051
Capital lease obligations -- -- -- -- 263
Accumulated deficit (35,660) (29,259) (20,058) (13,846) (10,167)
Total stockholders' equity 21,021 14,282 22,554 4,093 7,773
20
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 "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 THE COMPANY'S PROSPECTUS, DATED MAY 10, 1996,
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
GENERAL
The Company was founded in 1986 to develop effervescent drug delivery
technologies and focused initially on contract manufacturing liquid
effervescent products. Over CIMA's history, the business focus has evolved.
In September 1992, patent claims were allowed on the Company's
OraSolv-Registered Trademark- technology. OraSolv-Registered Trademark- is an
oral dosage form which incorporates microencapsulated 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. Following
issuance of the U.S. patent covering OraSolv-Registered Trademark-, the
Company began to emphasize and focus on the development of OraSolv-Registered
Trademark- products and currently focuses primarily on such products.
Additional drug delivery technologies are also under development. CIMA
continues to be a development stage company.
At December 31, 1996, the Company had accumulated net losses of
approximately $35,660,000. The Company's revenues have been from product
sales using the Company's AutoLution-Registered Trademark- (a liquid
effervescent) technology, license fees paid by corporate partners in
consideration of the transfer of rights under collaboration agreements, and
research and development fees paid by corporate partners to fund the
Company's research and development efforts for products developed under such
agreements. To date, such revenues have been derived primarily from
manufacturing agreements with third parties for liquid effervescent and other
products, and to a lesser extent from research and development fees and
licensing arrangements, the latter generated primarily in the last five
years. In 1996, there were no revenues from manufacturing liquid effervescent
products. This is a result of the Company's decision to discontinue contract
manufacturing liquid effervescent products and focus almost exclusively on
developing its OraSolv-Registered Trademark- technology. The last revenues
for manufacturing liquid effervescent products were recognized in 1995. In
addition to revenues from such manufacturing, research and development and
licensing, the Company has funded operations from private and public sales of
equity securities, realizing net proceeds of approximately $25,963,000 from
private sales of equity securities and $16,379,000 and $12,038,000 from the
Company's July 1994 initial public offering and May 1996 public offering of
its Common Stock, respectively. The total shares outstanding at December 31,
1996 were 9,411,589.
The Company expects that losses will continue through at least 1997,
even though CIMA expects to be generating sales revenue from manufacturing
OraSolv-Registered Trademark- products. Research and development expenses
will increase as CIMA investigates new drug delivery technologies, including
the possibility of utilizing microencapsulation for the development of
controlled release systems, as well as sublingual systems which could deliver
faster absorption of drug ingredients. Personnel costs for research and
development, and administration are expected to remain relatively stable as
the majority of the necessary personnel for these functions have already been
hired. As CIMA prepares for its first commercial launch of a product
incorporating its OraSolv-Registered Trademark- technology, additional
operations personnel may need to be added. Operating expenses will increase
prior to the initial product launch by one of CIMA's corporate partners.
21
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-Registered Trademark- products to be marketed by these corporate
partners. The Company is highly dependent upon the efforts of the corporate
partners to successfully market OraSolv-Registered Trademark- products.
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. Moreover, certain of the Company's products are seasonal in nature
and the Company's revenues could vary materially from quarter to quarter
depending on which of such products, if any, are then being marketed.
In recent years, the Company has actively marketed its
OraSolv-Registered Trademark- technology to the pharmaceutical industry. The
Company is presently engaged in product development and manufacturing
scale-up efforts and negotiations with several different pharmaceutical
companies regarding a variety of potential products. In the fourth quarter of
1996, the Company signed a supply agreement with an undisclosed major
pharmaceutical company. The Agreement covers full-scale production of an
over-the-counter product in CIMA's OraSolv-Registered Trademark- dosage form.
The retail launch for this product is expected in 1997. Regarding the other
efforts mentioned above, there can be no assurance that these activities or
discussions will result in license agreements or the marketing of products
using the OraSolv-Registered Trademark- technology. The Company believes that
mergers and acquisitions in the pharmaceutical industry in recent years,
together with changes in product plans by potential partners, may have had an
adverse effect on the progress of certain projects, and the eventual
marketing of products incorporating the Company's technology.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994.
The Company's results of operations for the year ended December 31, 1996
reflect the increased focus on development of OraSolv-Registered Trademark-
products with an anticipated commercial launch of an OraSolv-Registered
Trademark- product in 1997. In 1996, product sales were zero as the Company
ceased to manufacture liquid effervescent products in the second quarter of
1995. Net sales decreased to $151,000 in 1995 from $1,451,000 in 1994 due to
the termination of contract manufacturing such liquid effervescent products.
In the future, the Company expects to derive revenue from the sale of
OraSolv-Registered Trademark- products, and no longer from the sale of
contract manufactured liquid effervescent products. Research and development
fees and licensing revenues were $1,472,000, $684,000 and $1,168,000 in 1996,
1995 and 1994, respectively. Research and development fees alone were
$1,197,000, $497,000 and $453,000 in 1996, 1995 and 1994, respectively. This
increase in research and development fees is a reflection of the progress of
the development agreements with multinational pharmaceutical companies. The
licensing revenues in 1996, 1995, and 1994 reflect completion of obligations
under license and development agreements with multinational pharmaceutical
companies that provided for one-time licensing fees, milestone payments,
royalties and manufacturing fees. So long as the Company has relatively few
agreements with corporate partners, these revenues will tend to fluctuate on
a quarter to quarter basis.
Cost of goods sold decreased to zero in 1996 from $240,000 and
$2,799,000 in 1995 and 1994, respectively, resulting from the discontinuation
of liquid effervescent contract manufacturing. Cost of sales will increase
due to the beginning of commercial production of OraSolv-Registered
Trademark- products, which the Company commenced in February 1997. Research
and product development expenses were $5,403,000 in 1996, compared to
$6,505,000 in 1995, and $3,549,000 in 1994. The decrease in 1996 from 1995
was the result of a one-time product development/optimization charge in 1995
of $1,385,000 from an independent consultant for improving product taste and
packaging of OraSolv-Registered Trademark- products. The increase in 1996
compared to 1994 is due to the increased staffing levels to support the
projects of CIMA's corporate partners. Selling, general and administrative
expenses were $2,909,000 in 1996, compared to $3,658,000 in 1995, and
$2,972,000 in 1994. Selling, general and administrative expenses decreased in
1996 from 1995 due to downsizing and reduced executive bonus payouts.
22
Expenses increased in 1995, compared to 1994, resulting from increased
consumer marketing studies to support OraSolv-Registered Trademark-, and
one-time expenses for changes in top management.
Net interest income was $498,000 in 1996 compared to $448,000 in 1995
and $452,000 in 1994. Net interest is dependent upon the cash position of the
Company. Interest income is recognized from cash balances resulting primarily
from the initial public offering in 1994, and the public offering in 1996.
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, 1996, CIMA has received net
offering proceeds from such private and public sales of approximately
$54,500,000 and had net sales from manufacturing agreements of approximately
$13,800,000. Among other things, these funds were used to purchase
approximately $14,461,000 of capital equipment, including approximately
$7,500,000 in the last two quarters of 1994 in connection with completing the
Company's new 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 was 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 new
manufacturing facility and to fund research and development for the
application of the OraSolv-Registered Trademark- technology, and new
technologies, to pharmaceutical products. The balance of such funds will be
used for working capital and other general corporate purposes.
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 and receipt
of revenues from sales of the Company's products. Cash, cash equivalents and
short-term investments were approximately $10,263,000 at December 31, 1996.
The Company believes that its currently available funds, including any
license fees and sales revenue anticipated to be received in the future, will
meet its needs at least through 1997. There can be no assurance that, prior
to such time the Company may need to raise additional funds through public or
private financings, including equity financing which may be dilutive to
stockholders. 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 1996. At
December 31, 1996, the net operating losses available to offset taxable
income were approximately $35,247,000. Because the Company has experienced
ownership changes, pursuant to Internal Revenue Code regulations, future
utilization of the operating loss carryforwards 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 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.
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
24
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, 1997 in connection with the solicitation of
proxies for the Company's Annual Meeting of Stockholders to be held May 14,
1997 (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.
25
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 Ernst & Young LLP, Independent Auditors.............. F-3
Balance Sheets ................................................ F-4
Statements of Operations ...................................... F-6
Statement of Changes in Stockholders' Equity .................. F-7
Statements of Cash Flows ...................................... F-9
Notes to Financial Statements.................................. F-10
(2) Index to Financial Statements 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 Registrant and
Norwest Bank Minnesota, N.A. (11)
10.1 Technology and Sponsored Research Agreement, dated December
9, 1996, between the Company and Joseph R. Robinson, Ph.D., and James
McGinity. (3)(4)
10.2 Preferred Stock Purchase Agreement (Series C Convertible), dated
April 15, 1992, as amended. (2)
10.3 Preferred Stock Purchase Agreement (Series D Convertible), dated
January 2, 1994, as amended. (2)
10.4 Preferred Stock Purchase Agreement (Series E Convertible), dated
January 7, 1994. (2)
10.5 Real Property Lease, dated July 2, 1987, between Stuebner Properties
and the Company, as amended. (2)
10.6 License Agreement, dated April 22, 1996, between the Company and
SmithKline Beecham Plc. (5)
10.7 Employment Agreement, dated July 1, 1995, between the Company and
John M. Siebert, Ph.D. (3)(6)
10.8 Supply Agreement, dated October 10, 1996, between the Company and
an Undisclosed Partner. (4)
10.9 Real Property Sublease, dated February 16, 1994, between Braun's
Fashion, Inc. and the Company, including Prime Lease as amended and
Consent, Non-Disturbance and Prime Lessor's Agreement dated
February 22, 1994. (2)
10.10 Offer Letter between the Company and Keith P. Salenger, dated
August 8, 1996. (3)(7)
10.11 Equity Incentive Plan, as amended. (3)(8)
10.12 1994 Directors' Stock Option Plan, as amended. (3)(8)
10.13 Form of Director and Officer Indemnification Agreement. (3)(9)
26
10.14 Form of Employment Agreement. (2)(3)
10.15 Letter Agreement, dated December 23, 1992, between the Company and
Dr. Jerry A. Weisbach, as amended. (2)(3)
10.16 Form of Confidentiality Agreement (for discussions with other
companies). (2)
10.17 Form of Visitor's Agreement. (2)
10.18 License Agreement, dated January 28, 1994, between the Company and
SRI International. (2)
10.19 Agreement, dated April 8, 1994, between the Company and
Beecham Group plc. (2)
10.20 Supply Agreement, dated February 13, 1992, between the Company and
Northhampton Medical, Inc. (12)
10.21 (Reserved)
10.22 Option and Development Agreement, dated May 19, 1994, between the
Company and Sterling Winthrop, Inc. (2)
10.23 License and Development Agreement, dated April 15, 1994, between the
Company and Glaxo Group Limited. (2)
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney. (See page 28.)
27.1 Financial Data Schedule.
- --------------------------
(1) Incorporated herein by reference to the correspondingly numbered exhibit
to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(2) Incorporated herein by reference to the correspondingly numbered exhibit
to the Registrant's Registration Statement on Form S-1, File No.
33-80194.
(3) 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.
(4) Confidential treatment has been requested for this exhibit.
(5) Incorporated by reference from Exhibit 10.28 to Registrant's
Registration Statement on Form S-1 Registration No. 333-4174.
(6) Incorporated by reference from Exhibit 99.1 to Registrant's Registration
Statement on Form S-3, Registration No. 33-93616.
(7) Incorporated by reference from Exhibit 10.29 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, File No.
0-24424.
(8) Incorporated by reference to the like-numbered exhibit to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996,
File No. 0-24424.
(9) Incorporated by reference from exhibit number 10.27 to the Registrant's
Registration Statement on Form S-1, File No. 33-80194.
(10) Incorporated by reference from Exhibit 10 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994, File No.
0-24424.
(11) Incorporated by reference herein to Exhibit 2 to the Registrant's
Current Report on Form 8-K, filed March 25, 1997.
(12) Incorporated by reference from Exhibit 10.26 to Registrant's Registration
Statement on Form S-1, File No. 33-80194.
(b) The Registrant filed no reports on Form 8-K during the last three months
of the fiscal year ended December 31, 1996.
(c) See Exhibits listed under Item 14(a)(3).
(d) The financial statement schedules required by this Item are listed under
Item 14(a)(2).
27
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 28th day
of March, 1997.
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 each of 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 28, 1997
- -------------------------------- (PRINCIPAL EXECUTIVE OFFICER)
John M. Siebert
/s/ Keith P. Salenger Vice President, Finance and March 28, 1997
- -------------------------------- Chief Financial Officer
Keith P. Salenger (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
/s/ Terrence W. Glarner Director March 28, 1997
- --------------------------------
Terrence W. Glarner
/s/ David B. Musket Director March 28, 1997
- --------------------------------
David B. Musket
/s/ Steven B. Ratoff Director March 28, 1997
- --------------------------------
Steven B. Ratoff
/s/ Joseph R. Robinson Director March 28, 1997
- --------------------------------
Joseph R. Robinson
/s/ Jerry A. Weisbach Director March 28, 1997
- --------------------------------
Jerry A. Weisbach
28
FINANCIAL STATEMENTS
CIMA LABS INC.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND PERIOD FROM DECEMBER 12, 1986
(INCEPTION) TO DECEMBER 31, 1996
F-1
CIMA LABS INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND PERIOD FROM DECEMBER 12, 1986
(INCEPTION) TO DECEMBER 31, 1996
CONTENTS
Report of Indepedent Auditors...................................... F-3
Audited Financial Statements
Balance Sheets..................................................... F-4
Statements of Operations........................................... F-6
Statement of Changes in Stockholders' Equity....................... F-7
Statements of Cash Flows........................................... F-9
Notes to Financial Statements...................................... F-10
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CIMA LABS INC.
We have audited the accompanying balance sheets of CIMA LABS INC. (a
development stage company) as of December 31, 1996 and 1995, 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, 1996, and for the
period from December 12, 1986 (inception) to December 31, 1996. 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 and schedule statements 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, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996, and the period
from December 12, 1986 (inception) to December 31, 1996, 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, present fairly in all material
respects the information set forth therein.
As discussed in Note 10 to the financial statements, the Company's deficit
accumulated during the development stage and recurring losses from operations
raises substantial doubt about its ability to continue as a going concern.
The Company intends to obtain additional capital through a financing
transaction 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
------------------------
Ernst & Young LLP
Minneapolis, Minnesota
February 5, 1997
F-3
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31
ASSETS 1996 1995
--------------------------
Current assets:
Cash and cash equivalents $ 2,666,032 $ 3,558,743
Short-term investments 7,597,162 -
Accounts receivable 247,578 212,971
Inventories 534,587 324,610
Prepaid expenses 71,880 287,279
--------------------------
Total current assets 11,117,239 4,383,603
Other assets:
Lease deposits 290,650 290,650
Patents and trademarks, net of amortization
$258,687--1996; $248,846--1995) 252,404 262,244
--------------------------
543,054 552,894
Property, plant and equipment:
Construction in progress 469,513 278,770
Equipment 7,754,097 7,659,448
Leasehold improvements 4,600,960 4,572,586
Furniture and fixtures 552,515 551,032
--------------------------
13,377,085 13,061,836
Less accumulated depreciation (2,972,474) (2,479,688)
--------------------------
10,404,611 10,582,148
--------------------------
Total assets $22,064,904 $15,518,645
--------------------------
--------------------------
F-4
DECEMBER 31
1996 1995
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 264,370 $ 291,868
Accrued expenses 529,402 695,127
Advance royalties 250,000 250,000
---------------------------
Total current liabilities 1,043,772 1,236,995
Commitments and contingencies
Stockholders' equity:
Convertible Preferred Stock, $.01 par value:
Authorized shares--5,000,000
Issued and outstanding shares-- -0- - -
Common Stock, $.01 par value:
Authorized shares--20,000,000
Issued and outstanding shares--9,411,589--
1996 and 7,821,974--1995 94,116 78,201
Additional paid-in capital 56,586,958 43,462,921
Deficit accumulated during the
development stage (35,659,942) (29,259,472)
---------------------------
Total stockholders' equity 21,021,132 14,281,650
---------------------------
Total liabilities and stockholders' equity $ 22,064,904 $ 15,518,645
---------------------------
---------------------------
SEE ACCOMPANYING NOTES.
F-5
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
PERIOD FROM
DECEMBER 12,
1986
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1996 1995 1994 1996
----------------------------------------------------------
Revenues:
Net sales $ - $ 151,074 $ 1,450,675 $ 13,750,884
Research and development fees 1,196,859 496,637 452,945 3,693,594
Licensing revenue 275,000 187,500 714,665 1,652,996
----------------------------------------------------------
1,471,859 835,211 2,618,285 19,097,474
Costs and expenses:
Cost of goods sold - 240,038 2,799,179 17,831,415
Research and product development 5,402,557 6,504,528 3,548,938 20,522,848
Selling, general and administrative 2,909,041 3,658,572 2,972,453 17,644,075
----------------------------------------------------------
8,311,598 10,403,138 9,320,570 55,998,338
Other income (expense):
Interest income 497,534 453,737 473,037 2,032,793
Interest expense - (5,989) (20,678) (913,393)
Other income (expense) (3,738) 13,084 37,891 270,030
----------------------------------------------------------
493,796 460,832 490,250 1,389,430
----------------------------------------------------------
Net loss and deficit accumulated
during the development stage $(6,345,943) $(9,107,095) $(6,212,035) $(35,511,434)
----------------------------------------------------------
----------------------------------------------------------
Net loss per share:
Primary $(.72) $(1.16) $(1.82) $(12.37)
Fully diluted $(.72) $(1.16) $ (.95) $(8.32)
Weighted average shares outstanding:
Primary 8,827,177 7,821,974 3,413,176 2,871,220
Fully diluted 8,827,177 7,821,974 6,504,946 4,267,545
SEE ACCOMPANYING NOTES.
F-6
CIMA LABS INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
DEFICIT
CONVERTIBLE PREFERRED ACCUMULATED
STOCK COMMON STOCK ADDITIONAL DURING THE
----------------------------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
--------------------------------------------------------------------------------------
Sale of Common Stock to
founders at $.09 per share
on December 12, 1986 -- $ -- 500,000 $5,000 $ 40,000 $ -- $ 45,000
Issuance of stock warrant -- -- -- -- 50 -- 50
Net loss for the period from
December 12, 1986
(inception) to December 31,
1986 -- -- -- -- -- (1,679) (1,679)
--------------------------------------------------------------------------------------
Balance at December 31, 1986 -- -- 500,000 5,000 40,050 (1,679) 43,371
Issuance of Convertible
Preferred Stock at $2.78
per share in five closing
dates between May and
December 1987 899,275 8,993 -- -- 2,491,007 -- 2,500,000
Net loss for the year -- -- -- -- -- (714,125) (714,125)
--------------------------------------------------------------------------------------
Balance at December 31, 1987 899,275 8,993 500,000 5,000 2,531,057 (715,804) 1,829,246
Issuance of Convertible
Preferred Stock at $5.60
per share in April 1988 357,132 3,571 -- -- 1,996,429 -- 2,000,000
Net loss for the year -- -- -- -- -- (1,825,173) (1,825,173)
--------------------------------------------------------------------------------------
Balance at December 31, 1988 1,256,407 12,564 500,000 5,000 4,527,486 (2,540,977) 2,004,073
Issuance of Convertible
Preferred Stock at 5.60 per
share in June 1989, net of
offering costs of $29,594 767,854 7,679 -- -- 4,262,726 -- 4,270,405
Issuance of stock warrants -- -- -- -- 200 -- 200
Net loss for the year -- -- -- -- -- (1,747,306) (1,747,306)
--------------------------------------------------------------------------------------
Balance at December 31, 1989 2,024,261 20,243 500,000 5,000 8,790,412 (4,288,283) 4,527,372
Net loss for the year -- -- -- -- -- (1,881,779) (1,881,779)
--------------------------------------------------------------------------------------
Balance at December 31, 1990 2,024,261 20,243 500,000 5,000 8,790,412 (6,170,062) 2,645,593
Stock options exercised -- -- 5,000 50 13,950 -- 14,000
Exercise of stock warrants -- -- 35,971 360 99,639 -- 99,999
Net loss for the year -- -- -- -- -- (2,314,688) (2,314,688)
--------------------------------------------------------------------------------------
Balance at December 31, 1991
(carried forward) 2,024,261 20,243 540,971 5,410 8,904,001 (8,484,750) 444,904
F-7
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
----------------------------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
-----------------------------------------------------------------------------------
Balance at December 31, 1991 (brought forward) 2,024,261 $ 20,243 540,971 $ 5,410 $ 8,904,001 $ (8,484,750) $ 444,904
Issuance of Convertible Preferred Stock at
$6.00 per share in May 1992, net of offering
costs of $401,900 1,558,319 15,583 -- -- 8,932,455 -- 8,948,038
Stock options exercised -- -- 24,331 243 61,889 -- 62,132
Conversion of Preferred Stock to Common Stock (633,989) (6,340) 633,989 6,340 -- -- --
Net loss for the year -- -- -- -- -- (1,681,986) (1,681,986)
---------- ------- --------- ------- ----------- ------------ -----------
Balance at December 31, 1992 2,948,591 29,486 1,199,291 11,993 17,898,345 (10,166,736) 7,773,088
Net loss for the year -- -- -- -- -- (3,679,625) (3,679,625)
---------- ------- --------- ------- ----------- ------------ -----------
Balance at December 31, 1993 2,948,591 29,486 1,199,291 11,993 17,898,345 (13,846,361) 4,093,463
Issuance of Convertible Preferred Stock at
$7.00 per share in January 1994, net of
offering costs of $531,762 1,214,282 12,143 -- -- 7,956,087 -- 7,968,230
Conversion of Convertible Preferred Stock (4,162,873) (41,629) 4,162,873 41,629 -- -- --
Issuance of Common Stock at $9.00 per share
in August 1994, net of offering costs of
$2,071,371 -- -- 2,050,000 20,500 16,358,132 -- 16,378,632
Stock options exercised -- -- 108,482 1,085 284,843 -- 285,928
Exercise of stock warrants -- -- 7,142 71 39,933 -- 40,004
Net loss for the year -- -- -- -- -- (6,212,035) (6,212,035)
---------- ------- --------- ------- ----------- ------------ -----------
Balance at December 31, 1994 -- -- 7,527,788 75,278 42,537,340 (20,058,396) 22,554,222
Stock options exercised -- -- 278,487 2,766 831,763 -- 834,529
Exercise of stock warrants -- -- 15,699 157 93,818 (93,981) (6)
Net loss for the year -- -- -- -- -- (9,107,095) (9,107,095)
---------- ------- --------- ------- ----------- ------------ -----------
Balance at December 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 for the year -- -- -- -- -- (6,345,943) (6,345,943)
---------- ------- --------- ------- ----------- ------------ -----------
Balance at December 31, 1996 -- $ -- 9,411,589 $94,116 $56,586,958 $(35,659,942) $21,021,132
---------- ------- --------- ------- ----------- ------------ -----------
---------- ------- --------- ------- ----------- ------------ -----------
SEE ACCOMPANYING NOTES.
F-8
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
PERIOD FROM
DECEMBER 12,
1986
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1996 1995 1994 1996
---------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (6,345,943) $ (9,107,095) $ (6,212,035) $(35,511,434)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 606,339 582,760 667,483 4,020,563
Preferred stock issued for accrued interest -- -- -- 141,448
Gain on sale of property, plant and equipment -- (44,028) (9,242) (53,270)
Changes in operating assets and liabilities:
Accounts receivable (34,607) 324,895 (195,812) (247,578)
Inventories (209,977) (2,363) (108,270) (534,587)
Other current assets 215,399 (76,103) (125,502) (71,880)
Accounts payable (27,497) (1,115,115) 1,259,884 264,366
Accrued expenses (165,725) (215,839) 735,710 529,402
Advance royalties -- -- -- 250,000
---------------------------------------------------------
Net cash used in operating activities (5,962,011) (9,652,888) (3,987,784) (31,212,970)
INVESTING ACTIVITIES
Purchases of and deposits on property,
plant and equipment (315,276) (1,620,518) (7,529,697) (14,461,336)
Purchases of short-term investments (7,597,162) (6,819,276) (11,727,864) (26,144,302)
Proceeds from sale of property, plant and equipment -- 434,383 37,500 471,883
Proceeds from maturities of short-term investments -- 17,562,458 984,682 18,547,140
Patents and trademarks (103,685) (92,089) (176,332) (615,428)
---------------------------------------------------------
Net cash (used in) provided by investing activities (8,016,123) 9,464,958 (18,411,711) (22,202,043)
FINANCING ACTIVITIES
Proceeds from issuance of stock:
Common Stock 13,085,423 834,523 16,704,564 30,832,175
Preferred Stock -- -- 7,968,230 25,458,690
Lease financing of equipment -- -- -- 2,441,650
Security deposits on leases -- -- -- (290,651)
Proceeds from issuance of notes payable and warrants -- -- (278,125) 1,923,951
Payments on notes payable -- -- -- (1,823,700)
Payments on capital leases -- -- (260,747) (2,441,650)
Organization costs -- -- -- (19,420)
---------------------------------------------------------
Net cash provided by financing activities 13,085,423 834,523 24,133,922 56,081,045
---------------------------------------------------------
Increase (decrease) in cash and cash equivalents (892,711) 646,593 1,734,427 2,666,032
Cash and cash equivalents at beginning of period 3,558,743 2,912,150 1,177,723 --
---------------------------------------------------------
Cash and cash equivalents at end of period $ 2,666,032 $ 3,558,743 $ 2,912,150 $ 2,666,032
---------------------------------------------------------
---------------------------------------------------------
Supplemental schedule of noncash investing
and financing activities:
Note payable exchanged for issuance of
Preferred Stock $ -- $ -- $ -- $ 1,517,500
Preferred Stock issued for note receivable $ -- $ -- $ -- $ 50,000
SEE ACCOMPANYING NOTES.
F-9
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. DEVELOPMENT STAGE COMPANY
CIMA LABS INC. is a development stage company formed on December 12, 1986 to
develop effervescent delivery technologies and focused initially on contract
manufacturing liquid effervescent products. Initial sales commenced on
January 28, 1988 and have been derived principally from manufacturing liquid
effervescent and other products for third parties. In September 1992, patent
claims were allowed on the Company's OraSolv-Registered Trademark- technology
and the Company began to emphasize and focus on the development of products
using this new technology. OraSolv-Registered Trademark- is an oral dosage
formulation incorporating microencapsulated active drug ingredients into a
tablet which dissolves quickly in the mouth without chewing or water and
which effectively masks the taste of the medication being delivered.
The Company's strategy is to enter into collaborative arrangements with
multinational pharmaceutical companies to have OraSolv-Registered Trademark-
technology 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 refine the OraSolv-Registered Trademark-
formulation of a particular oral therapeutic and manufacture it for its
corporate partner. The corporate partners will market and sell the product.
The Company's future profitability is, therefore, dependent upon the
Company's ability to develop new, innovative drug delivery technologies that
meet the requirements of its corporate partners and upon the marketing
efforts of these 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. 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.
SHORT-TERM INVESTMENTS
The Company's investments are primarily comprised of certificates of
deposit and U.S. Government obligations 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.
PATENTS AND TRADEMARKS
Costs incurred in obtaining patents and trademarks are amortized on a
straight-line basis over sixty months. The Company periodically reviews
its patents and trademarks for impairment in value. Any adjustment from
the analysis is charged to operations.
F-10
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is
provided for at rates calculated to amortize the cost of the property
over its estimated useful life using the straight-line method.
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.
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 flows estimated to be generated by those assets are
less than the assets' carrying amount.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related
interpretations in accounting for its stock options. Under APB 25, when
the exercise price of stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
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.
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. Research 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.
NET LOSS PER COMMON SHARE
The primary net loss per share is computed using the weighted average
number of shares of common stock and common stock equivalents, if
dilutive, outstanding during the periods presented. The fully diluted
loss per share is presented using the "if converted" method and
reflects the impact of the conversion of the preferred stock to common
stock at the beginning of the earliest period presented or at the date
of issuance, if later. For periods prior to July 1994 (the initial
public offering), the loss per share amounts give effect to the
application of Securities and Exchange Commission ("SEC") Staff
Accounting Bulletin ("SAB") No. 83. Pursuant to SBA No. 83, common
stock issued by the Company at prices less than the initial public
offering price during the twelve months immediately preceding the
initial public offering, plus the common stock equivalent shares
granted at exercise prices less than the initial public offering price
during the same period, have been included in the calculation of shares
used in the calculation of net loss per share as if they were
outstanding for all periods prior to the initial public offering.
RECLASSIFICATIONS
Certain amounts presented in the 1995 and 1994 financial statements
have been reclassified to conform with the 1996 presentation.
F-11
3. SHORT-TERM INVESTMENTS
At December 31, 1996, short-term investments, including $1,993,904 classified
as cash equivalents, consisted of U.S. Treasury securities and U.S.
Government obligations.
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, 1996 and 1995 are as follows:
1996 1995
---------------------------
Deferred assets:
Net operating loss $ 14,099,000 $ 11,899,425
Inventory capitalization -- 31,163
Accrued vacation 67,000 61,288
Inventory reserve 56,000 132,883
Other accruals -- 101,218
---------------------------
14,222,000 12,225,977
Deferred liability:
Depreciation and amortization 633,000 492,440
---------------------------
Net deferred income tax assets 13,589,000 11,733,537
Valuation allowance (13,589,000) (11,733,537)
---------------------------
Net deferred income taxes $ -- $ --
---------------------------
---------------------------
The Company will be subject to federal income taxes when operations
become profitable. The Company's tax operating loss carryforwards of
approximately $35,247,000 can be carried forward to offset future
taxable income, limited due to changes in ownership under the net
operating loss limitation rules, and expire in the year 2011.
5. CONVERTIBLE PREFERRED STOCK
In January 1994, the Company obtained proceeds of $8.5 million in
additional equity financing. A total of 1,214,282 shares of Series E
Convertible Preferred Stock at $7.00 per share were issued in two
closings. The Series E Convertible Preferred Stock was convertible into
Common Stock at $7.00 per share and had similar terms and conditions to
the other series of Preferred Stock. Along with Series D Preferred
Stockholders, Series E Preferred Stockholders had liquidation
preference over the remainder of the Preferred Stockholders.
A Board member acted as the Company's sales agent in connection with
the issuance of the Series E Convertible Preferred Stock in January
1994 and received $484,000 in compensation. Seventy-five percent of the
amount was payable in cash and the remaining twenty-five percent was
paid in stock.
The Convertible Preferred Stock outstanding at December 31, 1993, which
consisted of 265,286 shares of Series A, 357,132 shares of Series B,
767,854 shares of Series C, and 1,558,319 shares of Series D, as well
as the Series E described above, was converted to Common Stock
concurrently with the closing of the initial public offering by the
Company in August 1994.
6. LEASES
The Company leases office, research and development, and manufacturing
facilities in Brooklyn Park and Eden Prairie. The Brooklyn Park premises are
leased under a non-cancelable operating lease expiring in September 1998. In
addition to base rent, the Company pays a pro rata portion of the operating
expenses for the total facility. The Company has the option to renew this
lease for one
F-12
additional three year term, and two additional five year terms. The facility
in Eden Prairie was under a sub-lease agreement. The sublessor filed for
bankruptcy and rejected the sublease on September 30, 1996. The $500,000
stand-by letter of credit, required under the sublease, has been returned to
the Company. The Company has been operating under the terms of the original
lease, and is currently negotiating a long-term lease through June 1, 2009.
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:
1997 $ 541,733
1998 489,111
1999 374,546
2000 372,830
2001 372,830
Thereafter 2,765,156
----------
$4,916,206
----------
----------
Rent expense on operating leases, excluding operating expenses, for the
years ended December 31, 1996, 1995 and 1994 was $493,876, $414,600 and
$375,000, respectively.
7. STOCK OPTIONS AND WARRANTS
The Company has an Equity Incentive Plan ("the Plan") under which
options to purchase up to 2,000,000 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.
F-13
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Shares available and options granted are as follows:
NON- WEIGHTED
SHARES INCENTIVE QUALIFIED AVERAGE
AVAILABLE FOR STOCK STOCK EXERCISE PRICE
GRANT OPTIONS OPTIONS TOTAL PER SHARE
---------------------------------------------------------
Balance at December 31, 1993 481,047 505,468 163,485 668,953 $2.84
Reserved 600,000 -- -- --
Granted (612,016) 595,944 16,072 612,016 7.31
Forfeited 28,231 (28,231) -- (28,231) 2.91
Exercised -- (57,496) (50,986) (108,482) 2.64
------------------------------------------------
Balance at December 31, 1994 497,262 1,015,685 128,571 1,144,256 6.47
Granted (477,750) 477,750 -- 477,750 5.70
Forfeited 180,724 (175,061) (34,999) (210,060) 7.15
Exercised -- (269,915) (8,572) (278,487) 3.00
------------------------------------------------
Balance at December 31, 1995 200,236 1,048,459 85,000 1,133,459 5.36
Reserved 250,000 -- -- -- --
Granted (199,300) 129,300 70,000 199,300 6.33
Forfeited 84,940 (78,967) (5,973) (84,940) 6.24
Exercised -- (91,314) (18,473) (109,787) 6.31
------------------------------------------------
Balance at December 31, 1996 335,876 1,007,478 130,554 1,138,032 $6.27
------------------------------------------------
------------------------------------------------
Exercisable:
December 31, 1994 298,163 $2.77
December 31, 1995 253,152 5.23
December 31, 1996 548,221 6.47
The following table summarizes information about stock options
outstanding at December 31, 1996:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE NUMBER REMAINING EXERCISE EXERCISEABLE EXERCISE
PRICES OUTSTANDING CONTRACTURAL LIFE PRICE AT 12/31/96 PRICE
- ------------------------------------------------------------------------------------
$2.00 - 3.00 256,140 7 years $2.91 246,828 $2.90
$3.50 - 4.75 351,250 8 years 3.80 175,625 3.50
$5.625 - 7.625 270,238 9 years 6.77 51,873 6.22
$8.625 - 10.125 260,404 9.5 years 8.99 73,895 9.14
-----------------------------------------------------------------
1,138,032 8.5 YEARS $6.27 548,221 $6.47
-----------------------------------------------------------------
-----------------------------------------------------------------
Options outstanding under the plan expire at various dates during the period
from July 1999 through December 2006. Exercise prices for options outstanding
as of December 31, 1996 ranged from $2.00 to $10.125 per share. The weighted
average fair values of options granted during the years ended December 31,
1995 and 1996 were $3.04 and $ 3.96 respectively.
The Company also has a Directors' Stock Option Plan (the "Plan") which
provides for the granting to non-management directors of the Company options
to purchase shares of Common Stock. The maximum
F-14
number of shares with respect to which options may be granted under this Plan
is 350,000 shares. As of December 31, 1996, options to purchase 195,000
shares of Common Stock have been granted at prices ranging from $4.75 to
$10.125 per share. To date, none of these options have been exercised.
In connection with a bridge financing in 1989, the Company issued warrants to
purchase 7,365 shares of its Common Stock at $5.60 per share. Of these
warrants, 7,142 were exercised in April 1994. The remaining warrants expired
in the same month.
In connection with $950,000 of bridge financing in 1991 and $467,500 of
bridge financing in 1992, the Company issued warrants to purchase 189,801
shares of its Common Stock at $6.00 per share. The warrants are exercisable
at various dates from January 1996 to January 1997. Of these warrants, 77,506
were exercised during 1996 and 94,170 warrants expired. The 18,125 remaining
warrants are exercisable in January 1997.
In connection with an equipment lease agreement entered into during 1991, the
Company issued warrants to purchase 37,917 shares of Series D Preferred Stock
at $6.00 per share. The warrants were exercised in a cashless transaction in
January 1995.
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 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 1996 and 1995, respectively: risk-free interest rates of
5.29% and 6.03%; volatility factor of the expected market price of the
Company's common stock of .641 and a weighted-average expected life of the
option of 4 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 the input of highly subjective
assumptions.
During the initial phase-in period, the effects of applying Statement 123 for
recognizing pro-forma compensation cost may not be representative of the
effects on reported pro-forma net loss or income for future years because the
options in the Stock Option Plans vest over several years and additional
options 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:
1996 1995
-------------------------
Pro forma net loss $(6,812,761) $(9,249,988)
Pro forma net loss per common share $(.77) $(1.18)
8. 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, 1996, 1995 and 1994 was
$25,360, $28,335 and $16,289, respectively.
9. STOCK SPLIT
The Company's Board of Directors and stockholders approved a 1-for-2 reverse
stock split that was effective upon the closing of the initial public
offering in July 1994. All share and per share information has been adjusted
to give effect to the stock split in the financial statements.
10. GOING CONCERN
Net losses since the Company's inception have resulted in an accumulated
deficit balance of $35,659,942 at December 31, 1996. The Company's ability to
continue as a going concern and the realization of its assets and orderly
satisfaction of its liabilities are dependent on 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 1997. 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 successful in completing a financing transaction.
F-16
CIMA LABS INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance Charged to
at Beginning Costs and Less Balance at
Description of Year Expenses Deductions End of Year
- -----------------------------------------------------------------------------------------------
Year ended December 31, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ -- $ -- $ -- $ --
Obsolescence reserve 332,207 -- (332,207) --
--------------------------------------------------
Total $332,207 $ -- $(332,207) $ --
--------------------------------------------------
--------------------------------------------------
Year ended December 31, 1995:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $100,000 $(100,000) -- $ --
Obsolescence reserve -- 332,207 -- 332,207
--------------------------------------------------
Total $100,000 $232,207 $ -- $332,207
--------------------------------------------------
--------------------------------------------------
Year ended December 31, 1994:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ -- $100,000 $ -- $100,000
Obsolescence reserve -- -- -- --
--------------------------------------------------
Total $ -- $100,000 $ -- $100,000
--------------------------------------------------
--------------------------------------------------
F-17