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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, 1997
Commission File No. 0-24424
CIMA LABS INC.
(Exact name of Registrant as specified in its charter)
_______________________________
DELAWARE 41-1569769
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10000 VALLEY VIEW ROAD, EDEN PRAIRIE, MINNESOTA 55344-9361
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (612) 947-8700
SECURITIES REGISTERED PURSUANT TO Section 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO Section 12(g) OF THE ACT:
COMMON STOCK $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by
nonaffiliates of the Registrant as of March 13, 1998, based upon the last trade
price of the Common Stock reported on the Nasdaq National Market on March 13,
1998, was $17,951,433.*
The number of shares of Common Stock outstanding as of March 13, 1998 was
9,610,394.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement which will be filed with
the Commission pursuant to Regulation 14A in connection with the 1997 Annual
Meeting of Stockholders are incorporated herein by reference in Part III of
this Report.
______________________
* Excludes approximately 4,481,413 shares of common stock held by Directors,
Officers and holders of 5% or more of the Registrant's outstanding Common
Stock at February 28, 1998. 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 trademarks of the Company are used in this Annual Report
on Form 10-K: "CIMA-Registered Trademark-," "CIMA LABS INC.-Registered
Trademark-," "OraSolv-Registered Trademark-," "OraSolv-Registered
Trademark-SR", DuraSolv-TM-, PakSolv-TM- 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 "BELIEVE," "ANTICIPATE,"
"EXPECT," "ESTIMATE" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR
ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE
NOT LIMITED TO, THE SUCCESS OF THE COMPANY IN MANUFACTURING THE COMPANY'S
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 IN GREATER DETAIL UNDER THE CAPTION "BUSINESS
RISKS," AND "IN ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
OVERVIEW
CIMA is a drug delivery company focused primarily on the development and
manufacture of pharmaceutical products based upon its patented OraSolv-
Registered Trademark- technology for marketing by multinational 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 dissolves quickly
in the mouth and 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 may foster greater patient compliance with
recommended dosage regimens, both for over-the-counter ("OTC") and prescription
products, thereby improving therapeutic outcomes and reducing costs in the
healthcare system.
CIMA's business focus has evolved over the last several years. From
inception until 1992, the Company focused on the development of liquid
effervescent products and technologies. In 1993, the U.S. patent covering
OraSolv was issued and the Company, perceiving a greater commercial
opportunity, shifted its focus to the development of OraSolv products. Since
the issuance of the OraSolv patent in 1993, the Company completed construction
on its current manufacturing facility and produced numerous full-scale trial
and validation batches, entered into various license and development agreements
with pharmaceutical companies, and launched the first commercial product using
the OraSolv dosage form in the first-half of 1997. These product sales in the
OraSolv dosage form have resulted in significant revenues for the Company in
1997.
The Company's business strategy is to commercialize its OraSolv technology
through collaborations with multi-national pharmaceutical companies with
emphasis on products which command a
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large market share and/or are in large market segments. The Company's
current focus is primarily on the development and manufacture of OraSolv
products for the prescription market. Product differentiation and brand name
identity are becoming more critical than ever to the successful marketing of
pharmaceutical products. Increasingly pharmaceutical companies are
emphasizing the development of strong prescription franchises through
branding and direct-to-consumer promotional efforts. The Company believes
that OraSolv affords pharmaceutical companies a means to significantly
differentiate their products in the competitive marketplace. Because it is a
patented technology, OraSolv allows extended market life to products that may
go off-patent and become subject to generic competition. OraSolv also affords
more enduring product differentiation than the more traditional approaches of
changing product flavor or packaging innovations, which can be easily
replicated. The Company believes that this has allowed it to enter into
agreements with a number of pharmaceutical companies for development,
manufacture and commercialization of Rx and OTC products.
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.
Major events that affected the Company in 1997 included:
- - Bristol-Myers Squibb, one of our commercial partners, launched the first
commercial product using CIMA's OraSolv dosage form. The product, Tempra-
Registered Trademark-, was first launched in the United States and then in
Canada.
- - The Company established manufacturing credibility by producing
approximately 100 million tablets in 1997 under GMP conditions.
- - The Company entered into a prescription agreement with Schering-Plough to
use our new OraSolv-Registered Trademark-SR technology in an undisclosed
prescription product.
- - The Company entered into a prescription agreement with Zeneca to develop
and manufacture a quick-dissolving line extension for Zomig-Registered
Trademark-, one of their major new prescription drugs used to treat
migraines.
- - The Company entered into a global non-exclusive license agreement with
Bristol-Myers Squibb for several potential OTC products which would
provide royalties to the Company.
- - The Company announced the mutual intention to terminate the collaboration
with Glaxo Wellcome to produce an OraSolv version of Zantac for both the
OTC and prescription markets.
- - The Company entered into an exclusive development and license option
agreement with Novartis Consumer Health for an undisclosed over-the-
counter product in CIMA's OraSolv dosage form.
- - The Company initiated in-house taste-masking and drug coating activities.
CIMA is a Delaware corporation incorporated in 1986.
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BACKGROUND
DRUG DELIVERY TECHNOLOGY
Patient medications are available in a variety of delivery forms,
including solid dosage forms, liquids, effervescents, transdermal delivery
methods, inhalation devices and products, and intramuscular and intravenous
injections. Enteral medication delivery includes those medications delivered
through the stomach, including tablets, liquids and effervescents. Enteral
medications are most frequently patient-administered, because of their
non-invasive delivery method. Parental medications are those delivered by
injection. Parenteral medications are most often administered by a healthcare
provider.
The Company believes the convenience of patient administration has made
enteral medications in general, and tablets in particular, popular with
patients, providers and payors. Industry sources estimate that patients most
frequently receive medications in an oral tablet form. However, children and
the elderly, as well as those with certain physiological or medical conditions,
frequently experience difficulty in swallowing tablets. These patients often
receive medications in liquid or effervescent form, or through parenteral
methods as an alternative to tablets. The Company believes that tablets are a
more convenient, accurate and effective medication form than are liquids or
effervescents (which may spill in the process of administering the medication,
especially to children) and are easier for patients to self-administer than
parenteral therapeutics.
RECENT TRENDS IN THE HEALTHCARE AND PHARMACEUTICAL INDUSTRIES
The healthcare industry has experienced significant change in the past and
the Company expects this change to continue for the foreseeable future. The
emergence of managed care organizations has focused providers and payors on the
efficient utilization of healthcare resources. In addition, the trend towards
the "capitation" of fees, or management of a patient's health requirements for
a pre-determined, regular payment, has created an awareness among providers of
the cost-effectiveness of various medical treatments. Healthcare providers and
payors have implemented a variety of strategies to reduce the cost of medical
care, including the use of generic versions of prescription and
non-prescription drugs, the use of non-prescription remedies and the use of
therapies that have improved patient compliance. The Company believes that
patient non-compliance with medicinal dosing regimens is widespread, and that
such non-compliance results in unnecessary costs to the healthcare system.
These changes in the healthcare industry have also had an impact on
participants in the pharmaceutical industry. In particular, a greater emphasis
on cost effectiveness by providers and payors has resulted in pharmaceutical
companies developing products that reduce the cost of therapy. These
pharmaceutical companies have responded by developing treatments with improved
efficacy, reduced complications and side effects, easier delivery and lower
costs. The focus on cost-effectiveness has also led to the development of
generic versions of off-patent prescription drugs. Increasingly, healthcare
payors and providers have embraced generic equivalents of branded drugs because
generic drugs provide a substantial cost savings. In addition, many
pharmaceutical companies are extending their presence in a particular
therapeutic area with the introduction of a non-prescription, 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
4
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 these drugs present the major growth
area for these companies. Drug delivery product development is increasingly
being given to specialty drug delivery companies to provide unique development
products that contribute important sales revenue and profit, but not at the
level of block-buster drugs. The 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.
There is proposed U.S. federal legislation which would grant
pharmaceutical manufacturers who conduct pediatric research an additional six
months of market exclusivity. This serves to highlight the growing regulatory
pressure to encourage the development of drugs formulated specifically for
children. The Company sees this as a potential benefit as pharmaceutical
companies explore various drug delivery systems.
MARKET OPPORTUNITY
The Company believes that its OraSolv 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 improved
compliance with dosing regimens. The benefits to pharmaceutical partners are
the capabilities to leverage their drug delivery development programs by going
to specialty drug delivery companies, like CIMA, for brand differentiation and
the ability to retain brand integrity.
ADVANTAGES FOR PATIENTS, PROVIDERS AND PAYORS
The Company believes a broad group of patients could benefit from the
OraSolv rapid dissolve technologies 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 technologies provides benefits to certain patient groups which
experience significant difficulty in swallowing tablets. Such patient groups
include children, the elderly and patients with certain anatomical or
physiological deformities, certain disease indications or medication-associated
dysphagia. The Company has completed quantitative consumer testing with
children and qualitative testing with physicians, nurses and managed care
administrators for the elderly which indicate the potential for these
demographic groups to better comply with dosing regimens and thus to benefit
from the OraSolv technology.
5
ADVANTAGES FOR PHARMACEUTICAL PARTNERS
The Company believes that pharmaceutical companies are facing challenges
to adjust to the evolving healthcare industry. These challenges include: the
impact of generic competition, which generally results in lower pricing as well
as a loss of market share; the impact of the increased role of managed care
organizations, forcing increased economic considerations in patient care, the
results of which can include shorter therapies and therapeutic substitution
(including less expensive products); and the need to maintain brand integrity
with its inherent economic benefits.
Pharmaceutical companies are addressing these issues in several ways.
They are attempting to develop new product forms which will demonstrate a
medical and economic benefit to the patient. For the most part, they use
specialty drug delivery companies to do that. They are also trying to develop
products which will help to improve patient compliance, which should result in
a patient's more rapid return to health. Finally, they are attempting to use
approaches which can be patented or provide a technological differentiation in
order to reduce the threat of competition. The Company believes that the
OraSolv technologies 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 drug ingredients with a quick dissolving effervescent excipient
system. Taste-masking is achieved through a process of microencapsulation,
which coats or entraps the active compound in an immediate release matrix. The
effervescent excipient system aids in rapid dissolution of the tablet,
permitting swallowing of the pharmaceutical ingredients before they come in
contact with the taste buds. The OraSolv tablet dissolves quickly without
chewing or water and allows for effective taste-masking of a wide variety of
active drug ingredients, both prescription and OTC.
Microencapsulation
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. The Company typically
contracts for the supply of microencapsulated drug ingredients with a
number of different suppliers. These coating techniques have generally
been developed by the Company's scientists in collaboration with its
suppliers and are protected by patents or proprietary know how. Coating
materials are designed to prevent the active drug ingredient in the
OraSolv tablet from coming in contact with the taste buds, but provide
for immediate release or sustained release of the active ingredients in
the stomach. In 1997, the Company established its own, in-house taste-
masking capabilities. The Company is using these capabilities to
develop its own new products and support development of its partner's
development programs.
Quick Dissolve
The microencapsulated drug is combined with fast dissolving tablet
materials, which can include a variety of flavoring, coloring and
sweetening agents all materials Generally Recognized As Safe
materials (GRAS) and commonly used tablet excipients, such as binding
agents and lubricants. In addition, an effervescent system composed of
a dry acid and a dry base is added to the tablet excipient to facilitate
a mild effervescent reaction when the tablet contacts
6
saliva. This effervescent reaction accelerates the disintegration of
the tablet through the release of the carbon dioxide. As the OraSolv
tablet dissolves, it releases the microparticles of drug into the
saliva, forming a micro-suspension of the drug in the saliva. This
microencapsulated drug suspension enters the stomach through the
normal swallowing process.
NEW TECHNOLOGIES
DuraSolv-TM-, an oral dosage system designed to improve manufacturing
efficiency. Currently, a significant component of OraSolv's manufacturing cost
is a consequence of the sophisticated packaging systems necessary to protect
the softer, more friable OraSolv tablets. DuraSolv is a higher compaction
solid oral dosage system formulated to achieve all the benefits of a quick
dissolve dosage system, such as OraSolv, but capable of being packaged in
traditional packaging systems such as foil pouches or bottles at much higher
production rates and lower packaging costs. The key advantages of a harder
tablet are a more robust tablet leading to lower manufacturing costs, and
simpler, faster and more cost effective packaging.
The Company has successfully developed prototypes in this dosage system,
filed a patent application, and conducted stability tests. Consumer testing
has demonstrated high acceptability of this technology, comparable to that of
OraSolv. To date, the Company has no agreements with corporate partners
related to this technology.
OraSolv-Registered Trademark-SR is a sustained or controlled release,
quick dissolve system designed to improve convenience and compliance. This
system incorporates time release beads, providing the traditional benefits of a
sustained or controlled release of active ingredients with quick dissolve's
improved convenience. The two key advantages are: 1) use of the sustained
release systems of our partners which has already been approved by the FDA; and
2) unique formulations that allow easy swallowing of the sustained release
active. The Company's agreement with Schering-Plough utilizes this new
technology.
An improved efficacy system utilizing effervescent tablets, granules and
films. CIMA is developing effervescent systems to target buccal and sublingual
systemic and site specific drug delivery. Systemic delivery of active drug
ingredients through the oral mucosal membrane has the advantage of improving
bioavailability, advancing the onset of therapeutic action and avoiding first
pass metabolism effects. There is physiological and pharmacokinetic evidence
that effervescent agents can enhance the absorption rate of active ingredients
across mucosal membranes.
PATENTS AND PROPRIETARY RIGHTS
The Company actively seeks, when appropriate, protection for its products
and proprietary information by means of U.S. and foreign patents, trademarks
and contractual arrangements. In addition, the Company relies upon trade
secrets and contractual arrangements to protect certain of its proprietary
information and products.
CIMA holds six issued U.S. patents and several foreign patents covering
its technologies. The core patent relating to the OraSolv technology relates
to the taste masking, microencapsulation and quick dissolving excipient
technology incorporated in products utilizing the OraSolv technology. A
corresponding European patent has been issued. The OraSolv U.S. patent was
issued in 1993 and expires in 2010. Two of the issued U.S. patents relate to
the production of compressed effervescent and non-effervescent tablets using a
particular lubricant developed by the Company.
7
In 1994, the Company entered into a licensing agreement with SmithKline
Beecham, under which CIMA acquired a non-exclusive, worldwide license to make,
have made, use and sell products covered by a particular U.S. patent issued to
SmithKline Beecham which may cover certain OraSolv products. In consideration,
CIMA is obligated to pay SmithKline Beecham a royalty of 2% of amounts received
by the Company in respect of OraSolv products. The license extends for the
life of SmithKline Beecham's patent, which expires in 2010.
Issued U.S. patents held by CIMA and their dates of expiration are set
out in the table below. As with any patent, the actual scope of coverage
afforded by each of CIMA's patents is governed by the language of the patent
claims themselves. The descriptions set forth in the table below are
intended solely for ease of identifying patents relevant to various
technologies. They are not intended as a representation regarding the scope
of patents.
PATENT TECHNOLOGY COVERED DATE ISSUED DATE EXPIRES
- -----------------------------------------------------------------------------------------------------
5,178,878 Certain OraSolv technology. 1993 2010
- -----------------------------------------------------------------------------------------------------
5,219,574 The production of compressed effervescent and non- 1993 and 1995 2010 and 2012
5,401,513 effervescent tablets using a particular lubricant
developed by the Company (two patents).
- -----------------------------------------------------------------------------------------------------
5,223,264 Effervescent pediatric vitamin and mineral supplement. 1993 2010
- -----------------------------------------------------------------------------------------------------
5,503,846 The formulation of a base coated, acid effervescent 1996 2013
mixture manufactured by controlled acid base reaction.
The obtained mixture can be used in the formulation of
acid sensitive compounds with OraSolv technology or
other effervescent based products.
- -----------------------------------------------------------------------------------------------------
5,607,697 Taste masking of microparticles for oral dosage forms. 1997 2015
- -----------------------------------------------------------------------------------------------------
As a consequence of the Company's patent position, an off-patent or near
off-patent drug active can be combined with the Company's technology in a new,
competitively differentiated and patent-protected dosage form.
The Company holds two patents in Australia, which issued in 1990, and one
Euro Patent, which issued in 1997. The Company also has a total of 11 U.S. and
foreign patent applications, including two European Patent Office filings.
The Company's success will depend in part on its ability to obtain and
maintain patent protection for its products, its new technology and to preserve
its trade secrets. No assurance can be given, however, that the Company's
patent applications will be approved or that any issued patents will provide
competitive advantages for its products or will not be challenged or
circumvented by competitors.
The Company's ability to commercialize its products will depend on not
infringing the patents of others, and protecting the Company's own proprietary
technology, which may involve litigation. Whether or not the outcome of any
litigation concerning patents and proprietary technologies is favorable to the
Company, the cost of such litigation and the diversion of the Company's
resources during such litigation could have a material adverse effect on the
Company. See "Item 3. Legal Proceedings."
Much of the Company's technology is dependent upon the knowledge,
experience and skills of key scientific and technical personnel. To protect
rights to its proprietary know-how and technology, Company policy requires all
employees and consultants to execute confidentiality agreements that prohibit
the disclosure of confidential information to anyone outside the Company.
These agreements also require disclosure and assignment to the Company of
discoveries and inventions made by such persons while devoted to Company
activities. There can be no assurance that these agreements will not be
breached,
8
that the Company will have adequate remedies for any such breach or that the
Company's trade secrets will not otherwise become known or be independently
developed by competitors. In addition, it is possible others may infringe
the patent rights of the Company.
The Company may desire or be required to obtain licenses from others with
respect to materials used in the Company's products or manufacturing processes,
including drug coating techniques. There can be no assurance that such
licenses will be obtainable on commercially reasonable terms, if at all, or
that any licensed patents or proprietary rights will be valid and enforceable.
STRATEGY
The Company's goal is to have its proprietary drug delivery technology
incorporated into as many pharmaceutical products as possible with an emphasis
on pharmaceutical products which command a large market segment.
Initially the Company focused its efforts on OTC marketed products which
benefit from quicker time to regulatory approval and marketing which has served
to establish CIMA and its technology in the market and provide near term
revenue. The Company's longer term strategy is to build on this base and
expand into the prescription market. The prescription market offers
significantly more attractive royalty rates and higher manufacturing margins.
CIMA's priority is to focus on developing OraSolv formulations of prescription
branded pharmaceuticals as well as generics and, in particular, those products
which have application to pediatric and geriatric markets.
Product therapeutic classes to which the Company believes its OraSolv
technology potentially can be applied are highlighted in the table below,
together with the target patient population.
Prescription Markets
Potential Areas of OraSolv Application
--------------------------------------
Therapeutic Area Patient Population
---------------- ------------------
Antibiotics Pediatric
Anti-asthmatics Pediatric
Anti-epileptics Pediatric
Cough/Cold/Allergy All
Cardiovascular Adult/Geriatric
Anti-migraine Adult/Geriatric
Anti-emetics All
Anti-depressants Pediatric/Geriatric
Anti-psychotics Pediatric/Geriatric
Anti-anxiety Pediatric/Geriatric
Cancer Geriatric
AIDS Adult/Pediatric
Parkinson's/Alzheimer's Geriatric
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
9
that incorporate the OraSolv technologies. The Company will refine the
OraSolv formulation of a particular oral therapeutic and manufacture it
for its partners. These partners will market and sell the OraSolv
versions of the therapeutic. The Company believes this strategy will
reduce the time required to market products, extend patent life for
certain actives and take advantage of the industry knowledge and presence
of its partners.
- - DEVELOP PROPRIETARY TECHNOLOGIES. The Company continues to develop
proprietary technology and obtain patents thereon. To date, the Company
has six U.S. and two Australian patents, one Europatent and eleven 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: DuraSolv-TM-, OraSolv-Registered Trademark-SR and
improved efficacy systems. Consumer use testing has already been
completed on DuraSolv demonstrating its feasibility and acceptance by
patients. OraSolv SR has also passed the feasibility stage and is the
technology being utilized in the Schering-Plough partnership.
- - RETAIN MANUFACTURING RIGHTS. The Company intends to continue to develop
OraSolv formulations of oral therapeutics for its partners, to manufacture
commercial quantities of these products in its facility in Eden Prairie,
and to rely on its partners 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 its OraSolv
technologies developed for its partners. The Company believes this
practice, in the case of generic and OTC monographed products, will
provide it with the flexibility of entering into collaborations with other
potential partners should the initial partner decide not to pursue the
commercialization of a particular OraSolv product.
AGREEMENTS WITH CORPORATE PARTNERS
The Company's business development efforts are focused on entering into
development, licensing and manufacturing agreements with pharmaceutical and
other healthcare companies. Under these agreements, the corporate partner will
be responsible for marketing and distributing the developed products either
worldwide, or in specified markets or territories. The collaborative
arrangements typically begin with a 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. 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
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assurance that the Company will be able to enter into additional
collaborative arrangements in the future or that any current or future
collaborative arrangements will result in successful product
commercialization. To the extent that agreements with corporate partners
cover products to be sold internationally, such sales could be adversely
affected by governmental, political and economic conditions in other
countries, including tariff regulations, taxes, import quotas and other
factors.
The table below sets forth the partners, market segments and CIMA
technology for the Company's major collaborative arrangements.
PHARMACEUTICAL COLLABORATIONS
Partner Market Segment Technology
------- -------------- ----------
Bristol-Myers Squibb Pediatric Analgesics OraSolv-Registered Trademark-
Bristol-Myers Squibb Multiple Products OraSolv-Registered Trademark-
Novartis UNDISCLOSED(1) OraSolv-Registered Trademark-
SmithKline Beecham plc UNDISCLOSED(1) OraSolv-Registered Trademark-
Schering-Plough UNDISCLOSED(1) OraSolv-Registered Trademark-SR
Zeneca Anti-migraine OraSolv-Registered Trademark-
- -----------------------
(1) Further information is confidential as disclosure of the product category
may force the collaborative partner to alter its marketing plans, which could
have a material effect on the eventual marketing of the product.
BRISTOL-MYERS SQUIBB
The Company started manufacturing commercial quantities in 1997 of an
OraSolv dosage form of Tempra-Registered Trademark-, Bristol-Myers Squibb's
pediatric analgesic. Tempra Quicklets-TM-, launched in the United States,
competes directly against children's Tylenol-Registered Trademark- and
contains the drug active common to these products: acetaminophen. The
product was also introduced in Canada as Tempra-Registered Trademark-
FirstTabs-TM- by Mead Johnson, a subsidiary of Bristol-Myers Squibb. The
Company has received milestone payments for the development of this product,
manufacturing fees, and royalty payments on end market sales.
In addition, the Company announced in 1997 the signing of a global
non-exclusive license agreement with Bristol-Myers Squibb, which covers
multiple products to be developed by Bristol-Myers Squibb applying or
utilizing the OraSolv technology to be sold in various territories. This
agreement makes provision for advanced royalty payments, minimum royalty
payments over a four-year period and royalties at market rates on total end
market sales.
NOVARTIS CONSUMER HEALTH
In December 1997, the Company announced that Novartis entered into a
Development and License Option Agreement which covers the application of
OraSolv to Novartis' product line. Similar to the above agreements, the
Company will receive option and development fees in exchange for the license
option and development work.
SMITHKLINE BEECHAM
In April 1996, the Company entered into a License Agreement with
SmithKline Beecham to develop and commercialize an OraSolv dosage form of one
of SmithKline Beecham's major OTC products. Under this agreement, CIMA
received a license fee and has and will receive milestone payments and
royalties on end market sales in countries where the Company holds patents on
its OraSolv technology and half the base royalty rate on end market sales in
other countries. This product was covered by the original license and
development option agreement, which was between CIMA and Sterling Winthrop,
Inc., which has now expired. The Company is currently negotiating a supply
11
agreement to manufacture the product covered by the license agreement. If
the Company is successful in negotiations, it is anticipated that the Company
could start manufacturing this product as early as 1998.
SCHERING-PLOUGH
The Company entered into a Development and Option Agreement with
Schering-Plough in August 1997. The Agreement calls for the development of
an OraSolv SR version of an undisclosed, currently marketed prescription
product. In exchange for the development work and license option, the
Company will receive an option fee and development fees.
ZENECA
In September 1997, the Company entered into a Development and License
Option Agreement with Zeneca to develop an OraSolv version of Zeneca's
anti-migraine drug, Zomig-Registered Trademark-. The Agreement entitles the
company to development and option fees.
GLAXO WELLCOME PLC
The Company entered into a development and license agreement with Glaxo
Wellcome for the development of an OraSolv formulation of Zantac, Glaxo
Wellcome's OTC switch product for heartburn. In 1997, the Company and Glaxo
Wellcome announced their intention to end this collaboration. This will
allow CIMA to focus its resources on prescription collaborations and
strategic OTC opportunities which the Company believes are of greater
economic values.
RESEARCH AND DEVELOPMENT
The Research and Development ("R&D") department at CIMA is focused on
the development of oral dosage forms based on CIMA proprietary technologies
and new proprietary oral dosage forms focused on improving both compliance
and efficacy. The R&D department includes scientists recruited from the R&D
groups of major U.S. pharmaceutical companies. Currently R&D personnel and
support systems and facilities are organized in a way to effectively develop
formulations from bench scale through full scale/commercial size under GMP
conditions. Such development is carried out at the R&D facilities in
Brooklyn Park, Minnesota and in the full scale manufacturing facility in Eden
Prairie, Minnesota. The Company believes that its R&D facilities are in
compliance with 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 Company's strategic and
business goals. The Company's R&D department is devoted to the development
of drug delivery technologies and dosage forms for pharmaceutical
applications. The key goals for the R&D team are: develop innovative drug
delivery systems that fulfill the pharmaceutical partners' needs and meet the
strategy of the Company; develop, expand and support systems required to
fulfill cGMP production at commercial levels necessary to meet the
requirements of major pharmaceutical companies; recruit and train high
quality technical and scientific personnel; and support the Company's
intellectual property process.
In 1997, the Company submitted a provisional patent filing on DuraSolv,
a more robust rapidly dissolving tablet technology that can be packaged using
traditional pharmaceutical packaging equipment. Accelerated stability data
has been collected on product packaged in bottles and foil packets for
several prototype formulations. These efforts have not only resulted in a new
potential technology but significant enhancements which were incorporated in
the base OraSolv technology as a result of these efforts.
12
Another accomplishment in 1997 was the signing of CIMA's first agreement
to develop an OraSolv SR product. The current agreement calls for the use of
a partner's existing sustained release particles in a rapidly dissolving
dosage form. The next step in the development of this technology will be the
internal development of sustained or controlled release coated actives for
inclusion into OraSolv SR. The first internally developed OraSolv SR product
is expected to be on stability by the end of 1998.
Due to a significant increase in partner related development activity
during the second half of 1997, the timeline for submission of an IND for an
enhanced efficacy dosage form was delayed. Prototype formulations have been
developed and placed on stability. The first dosing of human subjects is
expected during the third quarter of 1998. Additional resources have been
hired to focus exclusively on the research and development of new drug
delivery systems.
At the early stage of development, the feasibility of these technologies
appears promising. However, there are numerous risks and uncertainties
inherent in any R&D program. Factors that could cause these programs not to
reach the commercialization stage include, but are not limited to, the
possibilities that the research will not be able to be patented or the patent
enforced, the inability to scale-up and manufacture these new technologies in
a cost-effective manner, the ability to find a partner to market the product,
and the eventual market acceptance of this new technology.
For the years ended December 31, 1997, 1996 and 1995, CIMA's total
expenditures for R&D were $3,364,000, $5,403,000 and $6,505,000,
respectively, of which amounts R&D fees from the Company's collaborative
partners were $1,557,000, $1,197,000 and $497,000, respectively.
MANUFACTURING
A key component of the Company's strategy is to be the primary
manufacturer of OraSolv and its other future drug delivery products.
Advantages of this strategy include the ability to:
- retain control of its technology;
- increase production quickly;
- refine the production process as necessary to bring OraSolv and other
future products to market rapidly and successfully; and
- generate a revenue stream from manufacturing.
The Company's OraSolv production facility, which also houses the
Company's headquarters is located in Eden Prairie, Minnesota. The Company
began occupying and making leasehold improvements to the new facility in late
June 1994 and the facility was completed in December 1994. The Company has
operated one production line at this facility which is capable of producing
200 to 300 million tablets a year. The facility is designed to be
expandable to six production lines and efforts are underway to design and
select a second production line as warranted. The Company expects six
production lines to be more than sufficient capacity to meet the Company's
long-term manufacturing needs. The production equipment consists of
state-of-the-art material transfer and blending systems and integrated high
speed tableting and packaging operations. The configuration of the facility,
the production flow layout and the equipment has been designed by the
Company's personnel and consultants. Most of the equipment consists of high
quality components commonly used in pharmaceutical manufacturing, selected
for ease of operation, cleaning, changeover and cost effectiveness. The
production line is capable of packaging a variety of package designs with
rapid conversion between sizes. Modern technology is also utilized for 24
hour environmental control and monitoring of air quality, temperature,
humidity and pressure differentials in all production areas.
13
Although the OraSolv process uses many standard pharmaceutical
production components, some equipment was specifically developed to meet the
unique requirements of OraSolv products. The Company has developed a
manufacturing process that allows high speed packing of soft, friable tablets
without breakage into specially designed protective, child resistant packages
in a controlled, low humidity environment. To date, CIMA is the only
company that has proven it has this capability in a production mode. After
conducting over 60 full scale developmental runs and making production
equipment refinements, the manufacturing facility, equipment and process have
all been successfully validated. Additionally, extensive package transit
testing and consumer testing confirmed the integrity of the package through
all modes of transport to the final customer without product damage. After
completion of validation, the quality of the manufacturing facility,
equipment and procedures were confirmed through the successful inspection by
the State of Minnesota, the FDA and Medicines Control Agency authorities. In
addition, there have been numerous successful site audits conducted by major
pharmaceutical companies. The production facility complies with current Good
Manufacturing Practice (cGMP) requirements.
The active ingredients used by the Company are readily available from
suppliers. In certain cases, the active ingredients are shipped to coating
material suppliers where appropriate coating materials are applied to
microencapsulate the ingredients. In other cases, the Company may purchase
the microencapsulated active ingredient from a supplier. The pharmaceutical
ingredients and other supplies to be used in manufacturing OraSolv products
are standard pharmaceutical products available from numerous suppliers. Most
coating materials are also available from numerous suppliers. In some
instances, however, certain coating materials or techniques may be available
only from a single supplier. If any such coating materials or techniques
were to become unavailable, the Company believes that satisfactory
alternative materials or techniques could be substituted. However, there can
be no assurance that the Company's manufacturing operations would not be
disrupted. Any such disruption could have an adverse effect on the Company's
business and potentially damage relations with its corporate partners.
In February 1997, CIMA began commercial production for the first
commercial launch by Bristol-Myers Squibb of a product incorporating the
OraSolv technology. Since then, the Company has been producing commercial
OraSolv product utilizing multiple shifts. It has gained valuable knowledge
to make improvements in production efficiencies and operating speed and to
reduce wastage.
MARKETING
The Company's marketing strategy is to rely on its corporate partners
for the marketing and sale of its products. The Company believes this
strategy will enable it to respond quickly to market demands, while avoiding
the effort and expense associated with the establishment of an end-user
marketing capability. The Company's marketing department has focused on
promoting the benefits of OraSolv to its corporate pharmaceutical 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-Registered Trademark- formulation (R.P. Scherer
Corporation) of the same drug. Currently, the Company has corporate
collaborations with Bristol-Myers Squibb, Schering-Plough, Zeneca, Novartis
Consumer Health and SmithKline Beecham.
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
14
products employing advanced drug delivery systems but also with products
employing conventional dosage forms. New drugs or future developments in
alternative drug delivery technologies may provide therapeutic or cost
advantages over the Company's potential products.
Among the technologies expected to provide competition for the Company's
OraSolv 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-Registered Trademark-."
The principal competitive factors in the market for rapid dissolving
tablet technologies are compatibility with taste-masking techniques, dosage
capacity, drug compatibility, cost and ease of manufacture, patient
acceptance and required capital investment for manufacturing. The Company
believes that its rapid dissolving tablet technology competes favorably with
respect to these factors. In a recent quantitative consumer study conducted
by the Company, significantly more consumers liked the OraSolv formulation
versus the Zydis formulation of the same drug. 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 civil
penalties, criminal prosecution of the company, its officers and employees,
injunctions, product seizure or detention, product recalls, total or partial
suspension of production and FDA refusal to approve pending premarket
approval applications or supplements to approved applications.
In general, FDA approval is required before a new drug product may be
marketed in the U.S. However, most OTC drug products are exempt from the
FDA's premarketing approval requirements. In 1972, the FDA instituted the
ongoing OTC Drug Review in order to evaluate the safety and effectiveness of
all OTC drugs then on the market. Through the OTC Drug Review process, the
FDA issues monographs that set forth the specific active ingredients,
dosages, indications, and labeling statements for OTC drugs that the FDA will
consider generally recognized as safe and effective and therefore not subject
to premarket approval. For certain categories of OTC drug products not yet
subject to a final monograph, the FDA usually will not take regulatory action
against such a product unless failure to do so poses a potential health
hazard to consumers. The Company's initial product launch was an OTC drug
product that did not require FDA approval. Products subject to final
monographs, however, are subject to various FDA regulations such as those
outlining cGMP requirements, general and specific OTC labeling requirements
(including warning statements), the restriction against advertising for
conditions other than those stated in product labeling, and the requirement
that OTC drugs contain only suitable inactive ingredients. OTC products and
manufacturing facilities are subject to FDA inspection, and failure to comply
with applicable regulatory requirements may lead to administrative or
judicially imposed penalties.
15
Future marketing of products not formulated in compliance with final OTC
drug monographs typically will require a formal submission to the FDA, such
as a New Drug Application ("NDA") or Supplement to existing New Drug
Application ("sNDA"), and ultimate approval by the FDA. This application and
approval process can be expensive and time consuming, typically taking from
six months to several years to complete. Further, there can be no assurance
that approvals can be obtained, or that any such approvals will be on the
terms or have the scope necessary for successful commercialization of these
products. The Company expects that any required FDA approvals in connection
with the introduction of new, non-monographed products would be sought by the
Company's corporate partners. Marketing of such products could be delayed or
prevented because of this process. Even after a NDA or sNDA has been
approved, existing FDA procedures may delay initial product shipment. Delays
caused by the FDA approval process may materially reduce the period during
which there is an exclusive right to exploit patented products or
technologies. Even if any required FDA approval has been obtained with
respect to a product, foreign regulatory approval of a product must be
obtained prior to marketing the product internationally. Foreign approval
procedures vary from country to country and the time required for approval
may result in delays in or ultimately prevent marketing. The Company expects
to rely on its pharmaceutical company partners to obtain any necessary
government approvals in foreign countries. However, considerable amounts of
company time and resources may be required to support the approvals of these
foreign filings.
Prescription drug products with proven safety and efficacy profiles may
be "switched" to OTC status through the submission to and approval by the FDA
of a supplement to an existing NDA. The information and data required to
support a switch application vary with individual drugs. In some cases, the
manufacturer may be required to conduct clinical investigations or other
scientific studies to assess the safety and effectiveness of the drug for 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. The time to approve may also be
shorter than a traditional NDA and, in some cases, an ANDA.
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 Eden Prairie facility in November 1996,
and the Brooklyn Park facility in January 1997. No observations were cited
during either inspection. While the Company's new OraSolv manufacturing
facility is required to be registered with the FDA and to comply with cGMP
regulations at all times, FDA approval was not required prior to commencement
of manufacturing OTC drug products. Even though the Company has worked
diligently to assure compliance with FDA regulations and has been audited by
the quality control/compliance groups of several of its current and potential
corporate partners, there can be no guarantee that FDA inspections will
proceed without any compliance issues requiring the expenditure of money and
resources to resolve. The Company's facilities have been inspected by and
the Company has received a license from the Minnesota Board of Pharmacy to
manufacture drug products in its facilities.
The Company is also subject to regulation under various federal and
state laws regarding, among other things, occupational safety, environmental
protection, hazardous substance control and product advertising and
promotion. In connection with its research and development activities and its
manufacturing, the Company is subject to federal, state and local laws,
rules, regulations and policies governing the use, generation, manufacture,
storage, air emission, effluent discharge, handling and disposal of certain
materials and wastes. The Company believes that it has complied with these
laws and regulations in all material respects and it has not been required to
take any action to correct any material noncompliance. The Company does not
currently anticipate that any material capital expenditures will be required
in order to comply with federal, state and local environmental laws or that
compliance with such laws will have a material effect on the earnings or
competitive position of the Company. The Company is unable to predict,
however, the impact on the Company's business of any changes in such
environmental laws or of any new laws or regulations that may be imposed in
the future and there can be no assurance that the Company will not be
required to incur significant compliance costs or be held liable for damages
resulting from violations of these laws and regulations.
BUSINESS RISKS
The Company considered itself a development stage company until the
fourth quarter of 1997 and must be evaluated in light of the uncertainties
and complications present for any such company and, in particular, one in the
pharmaceutical industry. The Company has accumulated aggregate net losses
from inception through December 31, 1997 of $41,527,000. Losses have
resulted principally from costs incurred in research and development of the
Company's technologies and from general and administrative costs. These
costs have exceeded the Company's revenues . In early 1997, the Company
recorded the first commercial sales using it's OraSolv technology. Prior to
this the Company's revenues had been derived primarily from the manufacturing
of AutoLution and other non-OraSolv products under agreements with third
parties. The Company no longer manufactures such products and no longer
derives revenues from their manufacture. In more recent years, revenues have
been generated from research and development fees, and licensing
arrangements. The Company expects to continue to incur losses through 1998.
There can be no assurance that the Company will ever generate substantial
revenues or achieve profitability.
The Company believes that its currently available funds, together with
any license fees and sales revenue anticipated to be received in the future,
will meet its needs at least through 1998. Thereafter, or sooner if
conditions 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
17
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 and/or its new drug delivery technologies as
an alternative to conventional oral dosage forms. The Company expects that
OraSolv products will be priced slightly higher than conventional swallow or
chewable tablets. Although the Company believes that initial consumer
research has been encouraging, there can be no assurance that market
acceptance of the Company's OraSolv products will ever develop or be
sustained.
The Company began manufacturing OraSolv products in commercial
quantities in February 1997. Commercial sales have been made and revenue has
been recognized from sales of OraSolv products. To achieve future desired
levels of production, the Company will be required to increase its
manufacturing capabilities. There can be no assurance that manufacturing can
be scaled-up in a timely manner to allow production in sufficient quantities
to meet the needs of the Company's corporate partners. Furthermore, the
Company has only one manufacturing line and one facility capable of
manufacturing products. If this production line and/or facility becomes
damaged or becomes incapable of manufacturing products due to natural
disaster, governmental regulatory issues or otherwise, the Company would have
no other means of producing OraSolv products.
The Company intends to increase its research and development
expenditures to enhance its current technologies, and pursue internal
proprietary drug delivery technologies. Even if these technologies appear
promising during various stages of development, they may not reach the
commercialization stage for a number of reasons. Such reasons include the
possibilities of not finding a partner to market the product, of being
difficult to manufacture on a large scale or be uneconomical to market.
The quick dissolve drug delivery field is fairly new and rapidly
evolving and it is expected to continue to undergo improvements and rapid
technological changes. There can be no assurance that current or new
competitors will not succeed in developing technologies and products that are
more effective than any which are being developed by the Company or which
could render the Company's technology and products non-competitive or that
any technology developed by the Company will be preferred to any existing or
newly developed technologies.
The Company has conducted an initial review regarding the effect the
upcoming year 2000 will have on its computer applications. The Company has
determined that the year 2000 issue will not have a material impact on it's
business, operations nor its financial condition. It is anticipated that
minimal financial and human resources will be utilized to address that issue.
The company computer support is provided by a server-supported, PC-based LAN
system. Software vendors for the software used by the Company are aware of
the issue and the Company has been informed that they have taken necessary
steps to address the date-field issue. However, the conversion is an
uncertainty and there can be no assurance that unforeseen problems will not
arise in connection with this issue.
EMPLOYEES
As of March 6, 1998, the Company had 63 full-time employee, of whom 10
hold degrees at the doctorate level. Of these employees 21 are engaged in
research and development, 18 in manufacturing, 5 in compliance, 8 in quality
control and 11 in administration, business development, finance and human
resources. Most of the Company's scientific and engineering employees have
prior experience with
18
pharmaceutical or medical products companies. No employee is represented by
a union, and the Company has never experienced a work stoppage. The Company
believes its employee relations are good.
The success of the Company and of its business strategy is dependent in
large part on the ability of the Company to attract and retain key management
and operating personnel. Such individuals are in high demand and are often
subject to competing offers. In particular, the Company's success will
depend, in part, on its ability to attract and retain the services of its
executive officers and scientific and technical personnel. The loss of the
services of one or more members of management or key employees or the
inability to hire additional personnel as needed may have a material adverse
effect on the Company.
LIABILITY INSURANCE
The Company's business involves exposure to potential product liability
risks that are inherent in the production and manufacture of pharmaceutical
products. Although the Company has not experienced any product liability
claims to date, any such claims could have a material adverse impact on the
Company. The Company currently has product liability insurance with coverage
limits of $5,000,000 per occurrence and $5,000,000 on an annual aggregate
basis. The Company's insurance policies provide coverage on a claims made
basis and are subject to annual renewal. There can be no assurance, however,
that the Company will be able to maintain such insurance on acceptable terms
or that the Company will be able to secure increased coverage as the
commercialization of its products proceeds or that any insurance will provide
adequate protection against potential liabilities.
ITEM 2. PROPERTIES
The Company has leased a 75,000 square foot facility in Eden Prairie,
Minnesota, a suburb of Minneapolis, which houses its corporate headquarters
and has been prepared for use as an OraSolv production facility. This lease
has an initial term expiring on June 1, 2009 with minimum annual base rent
payments (exclusive of real estate taxes) of approximately $373,000 through
June 1, 2001. The rent payments will be recalculated on June 1, 2001, and
June 1, 2006 based on an index rate. The rent may increase, but will not
decrease. The Company has the option to extend the lease term one period of
ten years with a minimum annual base rent payment (exclusive of real estate
taxes and maintenance fees) of $500,000 for the first five years, and
$550,000 for the second five years of the ten year term.
The Company also leases 32,000 square feet of office, research and
development and manufacturing space in Brooklyn Park, Minnesota. The lease
on the Brooklyn Park facility expires in September 1998, but is renewable at
the Company's option for an additional three-year period and two additional
five-year periods. The Company currently pays approximately $144,600 in
annual base rent (exclusive of real estate taxes and maintenance fees).
The Company's existing facilities are believed to be adequate to meet
its present and future requirements, and the Company currently believes that
suitable additional space will be available to it, when needed, on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
On October 29, 1997, the Company instituted an opposition proceeding in
the European Patent Office seeking cancellation of a patent owned by
Laboratories Prographarm of Chateauneuf, France ("Prographarm"). The Company
has alleged in the opposition proceeding that publications exist which are
prior art against the European patent, including an international patent,
application owned by the Company which was published prior to the priority date
of the European patent.
19
On February 27, 1997, the United States Patent and Trademark Office
("USPTO") suspended prosecution of a U.S. patent application owned by the
Company to consider the Company's request that an interference proceeding be
declared between a pending U.S. patent application owned by the Company and a
U.S. patent owned by Prographarm. The Company is seeking a determination by
the USPTO that either (i) the Company's personnel are the prior inventors of
the invention encompassed by the Prographarm U.S. patent and accordingly that
the Company is entitled to claims directed to the same invention in a new
patent to be owned by the Company, or (ii) in the alternative, a
determination that the claims are unpatentable to the Company or Prographarm.
Either holding would result in cancellation of the Prographarm U.S. patent.
The Company's factual allegations are the same as in the European opposition,
and further include the Company's pending U.S. patent application itself and
the priority date of such pending application.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
20
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "CIMA". The following table sets forth, for the periods indicated, the
high and low sales prices of the Common Stock reported on the Nasdaq National
Market.
HIGH LOW
1996 ------- ------
First Quarter $ 7.25 $ 4.25
Second Quarter 11.75 6.13
Third Quarter 8.38 5.25
Fourth Quarter 8.38 5.50
1997
First Quarter $ 8.25 $ 6.00
Second Quarter 6.13 3.88
Third Quarter 6.88 3.88
Fourth Quarter 7.19 3.94
On March 13, 1998, the last sale price reported on the Nasdaq National
Market for the Company's Common Stock was $3.50 per share.
HOLDERS
As of March 13, 1998 there were approximately 85 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.
21
ITEM 6. SELECTED FINANCIAL DATA
CIMA LABS INC.
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
Revenues:
Net sales $ 2,628 $ -- $ 151 $ 1,451 $ 1,857
R&D fees and licensing revenues 2,282 1,472 684 1,168 368
-------- --------- -------- -------- --------
Total revenues 4,910 1,472 835 2,619 2,225
Costs and expenses:
Costs of goods sold 4,376 240 2,799 2,844
Research and product development 3,364 5,403 6,505 3,550 1,857
Selling, general and administrative 3,847 2,909 3,658 2,972 1,208
-------- --------- -------- -------- --------
Total costs and expenses 11,227 8,312 10,403 9,321 5,909
Other income (expense):
Interest income, net 337 498 448 452 6
Other income (expense), net 142 (4) 13 38 (2)
-------- --------- -------- -------- --------
Total other income 479 494 461 490 4
-------- --------- -------- -------- --------
Net loss: $ (5,838) $ (6,346) $ (9,107) $ (6,212) $ (3,680)
-------- --------- -------- -------- --------
-------- --------- -------- -------- --------
Net loss per share:
Basic $ (.61) $ (.72) $ (1.16) $ (1.82) $ (2.07)
Diluted (.61) (.72) (1.16) (0.95) (0.78)
Weighted average number of shares
outstanding:
Basic 9,519 8,827 7,822 3,413 1,778
Diluted 9,519 8,827 7,822 5,505 4,727
DECEMBER 31
---------------------------------------------------------------------
BALANCE SHEET DATA: 1997 1996 1995 1994 1993
---------------------------------------------------------------------
(IN THOUSANDS)
Cash and investments $ 4,423 $ 10,263 $ 3,559 $ 2,912 $ 1,178
Total assets 17,328 22,065 15,519 25,122 4,927
Retained earnings (deficit) (41,527) (35,660) (29,259) (20,058) (13,846)
Total stockholders' equity 15,837 21,021 14,282 22,554 4,093
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "BELIEVE", "ANTICIPATE",
"EXPECT", "ESTIMATE" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY
OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD LOOKING STATEMENTS.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE ,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION AS WELL AS THOSE
DISCUSSED IN "ITEM 1. BUSINESS-BUSINESS RISKS."
GENERAL
The Company was founded in 1986, and focused initially on contract
manufacturing liquid effervescent products. In September 1992, patent claims
were allowed on the Company's OraSolv-Registered Trademark- technology.
Following issuance of the OraSolv-Registered Trademark- patent, CIMA changed
its focus and emerged as a drug delivery company emphasizing primarily
developing and manufacturing pharmaceutical products based upon
OraSolv-Registered Trademark-. OraSolv-Registered Trademark- is an oral
dosage form which incorporates mircoencapsulated drug ingredients into a
tablet that dissolves quickly in the mouth without chewing or water and which
effectively masks the taste of the medication being delivered. Additional
drug delivery technologies are also under development by the Company.
In early-1997, the Company recorded its first commercial sales using the
Company's OraSolv-Registered Trademark- technology. Prior to this, the
Company's revenues had been from 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. In 1997, commercial sales of
OraSolv-Registered Trademark- accounted for over half of the Company's
revenues, with the balance generated from research and development fees and
licensing arrangements. In the two prior years, the Company's revenues were
generated primarily from research and development fees and licensing
arrangements, and minor revenues were generated from manufacture of liquid
effervescent products. The Company no longer manufactures liquid effervescent
products, and has not recognized any revenues from such products since 1995.
In addition to revenues from manufacturing products, 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 and May 1996 public offerings of its
Common Stock, respectively. The total shares outstanding at December 31,
1997 were 9,608,394.
The Company expects that losses will continue through at least 1998,
even though CIMA expects to be generating revenues from manufacturing,
licensing arrangements, and research and development fee related to
OraSolv-Registered Trademark- products. At December 31, 1997, the Company
had accumulated net losses of approximately $41,527,000. Research and
development expenses will increase as CIMA investigates new drug
technologies, including the possibility of utilizing sublingual systems.
Personnel costs for research and development are expected to increase as
personnel will be needed to support the development programs for our new
corporate partners and if efforts investigating new technologies prove to be
successful. As CIMA continues production, additional operations personnel
may need to be added to meet corporate partners' orders. Management
anticipates administrative support to remain stable. Manufacturing
infrastructure should not increase as there is capacity to meet short-term
production needs.
23
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 have and 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 revenue. The Company's revenues could vary materially from quarter to
quarter due to the Company having relatively few agreements with corporate
partners, causing research and development fees to fluctuate, and the fact
that certain of the Company's products are seasonal in nature and revenues
could vary depending on corporate partners' ordering patterns.
In recent years, the Company has actively marketed its
OraSolv-Registered Trademark- technology to the pharmaceutical industry. The
Company is presently engaged in product development and manufacturing
scale-up efforts with several different pharmaceutical companies regarding a
variety of potential products. In the first quarter of 1997, CIMA began
commercial production for Bristol-Myers Squibb of the first product in CIMA's
OraSolv-Registered Trademark-dosage form, which was officially launched in
September 1997. In the second quarter of 1997, the Company expanded its
relationship with Bristol-Myers Squibb and signed a global non-exclusive
license agreement which covers multiple products. In the third quarter of
1997, the first two prescription product license and development agreements
were signed. Each agreement is for a product which is currently marketed by
the Company's partners, Schering-Plough and Zeneca. In the fourth quarter of
1997, a development and license option agreement was signed with Novartis
Consumer Health, Inc. There can be no assurance that any of these activities
or discussions will result in the eventual marketing of products using
OraSolv-Registered Trademark- or the Company's other technologies. 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
technologies.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
The Company's results of operations for the year ended December 31, 1997
reflect the initial sales of two product launches utilizing the Company's
OraSolv-Registered Trademark- technology and the signing of new agreements
with major multinational pharmaceutical companies. In 1997, product sales
were $2,628,000. In 1996, product sales were zero as the Company ceased to
manufacture liquid effervescent products. In 1995, liquid effervescent
product sales were $151,000 as contract manufacturing was de-emphasized.
Research and development fees and licensing revenues were $2,282,000,
$1,472,000, and $684,000 in 1997, 1996, and 1995 respectively. This increase
in fees and revenues is a reflection of the progress of the development
agreements and development of relationships in the prescription
pharmaceutical marketplace. The Company continues to have relatively few
agreements with corporate partners and, therefore, it expects that these
revenues will tend to fluctuate on a quarter-to-quarter basis.
In 1997, cost of goods sold were $4,376,000. These costs include the
costs of entering into production and sale of products utilizing the
OraSolv-Registered Trademark- technology. In 1996, cost of goods sold
decreased to zero from $240,000 in 1995, resulting from the discontinuation
of liquid effervescent contract manufacturing. Research and development
expenses were $3,364,000, $5,403,000, and $6,505,000 in 1997, 1996, and 1995,
respectively, reflecting the move to commercial production in
24
1997. 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. Selling, general and administrative expenses were
$3,487,000 in 1997 compared to $2,909,000 in 1996, and $3,658,000 in 1995.
Selling, general and administrative costs increased in 1997 from 1996,
primarily due to increased bonus payouts to management and spending on
consumer studies to support OraSolv-Registered Trademark- marketing claims,
but were still below 1995 levels. Expenses decreased in 1996 from 1995 due to
downsizing and reduced executive bonus payouts.
Net interest income was $337,000 in 1997 compared to $498,000 in 1996,
and $448,000 in 1995. Net interest income is dependent upon the cash
position of the Company and the decrease in 1997 is due to the reduced cash
position.
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, 1997, CIMA has received net
offering proceeds from such private and public sales of $57,268,000 and had
net sales of approximately $16,400,000. Among other things, these funds were
used to purchase approximately $15,233,000 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, which began in the first quarter of 1997,
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, receipt of
revenues from the collaborative agreements, sales of the Company's products,
and the need to expand production capacity. Cash, cash equivalents, and
short-term investments were approximately $4,423,000 at December 31, 1997.
The Company believes that its currently available funds, together with any
license fees, product development fees, and sales revenue anticipated to be
received in the future, will meet its needs through 1998. Thereafter, or
sooner if conditions make it necessary, the Company will need to raise
additional funds through public or private financings, including equity
financing which may be dilutive to shareholders. 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 1997. At
December 31, 1997, the net operating losses available to offset taxable
income were approximately $42,259,000. Because the Company has experienced
ownership changes, pursuant to Internal Revenue Code regulations, future
utilization of the operating loss carry-forwards will be limited in any one
fiscal year. The carryforwards expire beginning in 2001. As a result of
the annual limitations, a portion of these
25
carryforwards may expire before ultimately becoming available to reduce
potential federal income tax liabilities.
YEAR 2000 ISSUE
The Company has conducted an initial review regarding the effect the
upcoming year 2000 will have on its computer applications. The Company has
determined that it will not have a material impact on CIMA's business,
operations nor its financial condition. It is anticipated that minimal
financial and human resources will be utilized to address this issue. The
Company computer support is provided by a server-supported, PC-based LAN
system. Software vendors for the software used by the Company are aware of
the issue and the Company has been informed that they have taken necessary
steps to address the date-field issue. However, the conversion is an
uncertainty and there can be no assurance that unforeseen problems will not
arise in connection with this issue.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and notes thereto appear on pages F-1
to F-17 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from
the information under the captions "Election of Directors", "Executive
Officers of the Company" and "Compliance with the Reporting Requirements of
Section 16(a)" contained in the Company's definitive proxy statement to be
filed no later than April 30, 1998 in connection with the solicitation of
proxies for the Company's Annual Meeting of Stockholders to be held June 3,
1998 (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.
26
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements
The Financial Statements required by this item are submitted in a separate
section beginning on page F-1 of this report
PAGE
----
Report of Independent Auditors. F-3
Balance Sheets at December 31, 1997 and 1996 F-4
Statements of Operations for the three years ended December 31, 1997 F-6
Statements of Changes in Stockholders' Equity for the three years ended
December 31, 1997 F-7
Statements of Cash Flows for the three years ended December 31, 1997 F-8
Notes to Financial Statements F-9
(2) Index to Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts F-17
(3) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3.1 Fifth Restated Certificate of Incorporation of the Company. (1)
3.2 Second Restated Bylaws of the Company. (1)
4.1 Form of Certificate for Common Stock. (2)
4.2 Rights Agreement, dated March 14, 1997, between the Company and Norwest
Bank Minnesota, N.A. (3)
10.1 Technology and Sponsored Research Agreement, dated December 9, 1996,
between the Company and Joseph R. Robinson, Ph.D., and James McGinity. (4)(5)
10.2 Letter Agreement, dated January 28, 1998, between the Company and Joseph
R. Robinson, Ph.D. (4)(7)
10.3 Development and License Option Agreement, dated November 18, 1997,
between Novartis Consumer Health, Inc. and the Company. (7)
10.4 Real Property Lease, dated July 2, 1987, between Stuebner Properties and
the Company, as amended. (2)
10.5 License Agreement, dated April 22, 1996, between the Company and
SmithKline Beecham Plc. (8)
10.6 Employment Agreement, dated October 29, 1997, between the Company and
John M. Siebert, Ph.D. (4)(9)
10.7 Supply Agreement, dated October 10, 1996, between the Company and Bristol-
Myers Squibb Company. (6)
10.8 Real Property Lease, dated March 6, 1998, between Braun-Kaiser & Company
and the Company.
10.9 Offer Letter between the Company and Keith P. Salenger, dated August 8, 1996. (4)(10)
10.10 Equity Incentive Plan, as amended. (4)(11)
10.11 1994 Directors' Stock Option Plan, as amended. (4)(10)
10.12 Form of Director and Officer Indemnification Agreement. (2)(4)
27
10.13 Form of Employment Agreement. (2)(4)
10.14 Form of Confidentiality Agreement (for discussions with other companies). (2)
10.15 License Agreement, dated January 28, 1994, between the Company and SRI
International. (2)
10.16 Agreement, dated April 8, 1994, between the Company and Beecham Group plc. (2)
10.17 Supply Agreement, dated February 13, 1992, between the Company and
Northhampton Medical, Inc. (2)
10.18 Option and Development Agreement, dated May 19, 1994, between the Company
and Sterling Winthrop, Inc. (2)
10.19 Offer letter between the Company and John Hontz, Ph.D. dated November 26, 1996. (12)
10.20 Non-Employee Directors' Fee Option Grant Program.
10.21 Amendment to Supply Agreement between Bristol-Myers Squibb Company and
the Company, dated June 26, 1997. (11)
10.22 License Agreement between Bristol-Myers Squibb Company and the Company,
dated June 26, 1997. (11)
10.23 Development and Option Agreement between Schering Corporation and the
Company, dated August 11, 1997. (9)
10.24 Development and License Option Agreement between IPR PHARMACEUTICALS,INC.
and the Company, dated September 10, 1997. (9)
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney. (See page [30].)
27.1 Financial Data Schedule.
- ------------------------------------
(1) Incorporated herein by reference to the correspondingly numbered exhibit
to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1,
File No. 33-80194, and incorporated herein by reference.
(3) Incorporated by reference herein to Exhibit 2 to the Company's Current
Report on Form 8-K, filed March 25, 1997.
(4) 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.
(5) Incorporated by reference from Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, File No. 0-
24424.
(6) Incorporated by reference from Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, File No. 0-
24424.
(7) Confidential treatment has been requested for this exhibit.
(8) Incorporated by reference from Exhibit 10.28 to the Company's
Registration Statement on Form S-1 Registration No. 333-4174.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, File No. 0-24424, and incorporated
herein by reference.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, File No. 0-24424, and incorporated
herein by reference.
28
(11) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, File No. 0-24424, and incorporated
herein by reference.
(12) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, File No. 0-24424, and incorporated
herein by reference.
(b) The Registrant filed no reports on Form 8-K during the last three
months of the fiscal year ended December 31, 1997.
(c) See Exhibits listed under Item 14(a)(3).
(d) The financial statement schedules required by this Item are listed
under 14(a)(2).
29
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 26th day
of March, 1998.
CIMA LABS INC.
By: /s/ John M. Siebert
-----------------------
John M. Siebert
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
on the following page constitutes and appoints John M. Siebert and Keith P.
Salenger, his attorney-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any amendments to this Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that the said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the dates indicated.
SIGNATURE TITLE DATE
/s/ John M. Siebert Chief Executive Officer and Director March 26, 1998
- ------------------------ (PRINCIPAL EXECUTIVE OFFICER)
John M. Siebert
/s/ Keith P. Salenger Vice President, Finance and March 26, 1998
- ------------------------ Chief Financial Officer
Keith P. Salenger (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
/s/ Terrence W. Glarner Director March 26, 1998
- ------------------------
Terrence W. Glarner
/s/ David B. Musket Director March 26, 1998
- ------------------------
David B. Musket
/s/ Steven B. Ratoff Director March 26, 1998
- ------------------------
Steven B. Ratoff
/s/ Joseph R. Robinson Director March 26, 1998
- ------------------------
Joseph R. Robinson
/s/ Jerry A. Weisbach Director March 26, 1998
- ------------------------
Jerry A. Weisbach
30
FINANCIAL STATEMENTS
CIMA LABS INC.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
F-1
CIMA LABS INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
CONTENTS
Report of Independent Auditors F-3
AUDITED FINANCIAL STATEMENTS :
Balance Sheets F-4
Statements of Operations F-6
Statements of Changes in Stockholders' Equity F-7
Statements of Cash Flows F-8
Notes to Financial Statements F-9
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CIMA LABS INC.
We have audited the accompanying balance sheets of CIMA LABS INC. as of
December 31, 1997 and 1996 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, 1997. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit 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, 1997 and 1996 and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Minneapolis, Minnesota
February 5, 1998 /s/ Ernst & Young
F-3
CIMA LABS INC.
BALANCE SHEETS
DECEMBER 31
---------------------------
1997 1996
---------------------------
ASSETS
Cash and cash equivalents $ 1,145,760 $ 2,666,032
Short-term investments 3,277,300 7,597,162
Accounts receivable:
Net of allowance for doubtful accounts $32,150-1997; 1,597,814 247,578
0-1996
Inventories, net 630,619 534,587
Prepaid expenses 146,805 71,880
------------ ------------
Total current assets 6,798,298 11,117,239
Other assets:
Lease deposits 40,651 290,650
Patents and trademarks, net 230,889 252,404
------------ ------------
Total other assets 271,540 543,054
Property, plant and equipment:
Construction in progress 174,565 469,513
Equipment 8,657,885 7,754,097
Leasehold improvements 4,712,691 4,600,960
Furniture and fixtures 604,204 552,515
------------ ------------
14,149,345 13,377,085
Less accumulated depreciation (3,891,167) (2,972,474)
------------ ------------
10,258,178 10,404,611
------------ ------------
Total assets $ 17,328,016 $ 22,064,904
---------------------------
---------------------------
F-4
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 128,712 $ 264,370
Accrued expenses 620,580 529,402
Advance royalties 741,405 250,000
------------ ------------
Total current liabilities 1,490,697 1,043,772
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.01 par value
Authorized shares -- 5,000,000
Issued and outstanding shares -- -0-
Common stock, $0.01 par value:
Authorized shares -- 20,000,000
Issued and outstanding shares --
9,608,394--1997
9,411,589--1996 96,084 94,116
Additional paid-in capital 57,268,594 56,586,958
Retained earnings (deficit) (41,527,359) (35,659,942)
------------ ------------
Total stockholders' equity 15,837,319 21,021,132
------------ ------------
Total liabilities and stockholders' equity $ 17,328,016 $ 22,064,904
---------------------------
---------------------------
SEE ACCOMPANYING NOTES.
F-5
CIMA LABS INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
------------------------------------------
1997 1996 1995
------------------------------------------
REVENUES:
Net sales $ 2,628,069 $ - $ 151,074
R&D fees and licensing revenue 2,282,166 1,471,859 684,137
------------ ------------ ------------
4,910,235 1,471,859 835,211
COSTS AND EXPENSES:
Cost of goods sold 4,376,412 - 240,038
Research and product development 3,363,544 5,402,557 6,504,528
Selling, general and administrative 3,487,239 2,909,041 3,658,572
------------ ------------ ------------
11,227,195 8,311,598 10,403,138
OTHER INCOME (EXPENSE)
Interest income, net 336,310 497,534 447,748
Other income (expense) 142,255 (3,738) 13,084
------------ ------------ ------------
478,565 493,796 460,832
------------ ------------ ------------
NET LOSS: $ (5,838,395) $ (6,345,943) $ (9,107,095)
-------------------------------------------
-------------------------------------------
Net loss per share:
Basic and diluted $ (.61) $ (.72) $ (1.16)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 9,518,679 8,827,177 7,821,974
SEE ACCOMPANYING NOTES
F-6
CIMA LABS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED
----------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------------------------------------------------------------------
Balance at Dec. 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 - - - (9,107,095) (9,107,095)
--------- ------ ---------- ----------- ----------
Balance at Dec. 31, 1995 7,821,974 78,201 43,462,921 (29,259,472) 14,281,650
Issuance of common stock
at $9.50 per share in May
1996, net of offering costs
of $1,405,794 1,415,096 14,151 12,023,467 - 12,037,618
Stock options exercised 109,787 1,117 712,824 - 713,941
Exercise of stock warrants 64,732 647 387,746 (54,527) 333,866
Net loss - - - (6,345,943) (6,345,943)
--------- ------ ---------- ----------- ----------
Balance at Dec. 31, 1996 9,411,589 94,116 56,586,958 (35,659,942) 21,021,132
Stock options exercised 191,968 1,920 652,662 - 654,582
Exercise of stock warrants 4,837 48 28,974 (29,022) -
Net loss - - - (5,838,395) (5,838,395)
--------- ------ ---------- ----------- ----------
Balance at Dec. 31, 1997 9,608,394 96,084 57,268,594 (41,527,359) 15,837,319
--------------------------------------------------------------------
--------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
F-7
CIMA LABS INC.
STATEMENTS OF CASH FLOWS
-------------------------------------------
1997 1996 1995
-------------------------------------------
OPERATING ACTIVITIES
Net loss $ (5,838,395) $ (6,345,943) $ (9,107,095)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,047,228 606,339 582,760
Gain on sale of property, plant and
equipment - - 44,028
Changes in operating assets and
liabilities:
Accounts receivable (1,350,236) (34,607) 324,895
Inventories (96,032) (209,977) (2,363)
Prepaid expenses (74,925) 215,399 (76,103)
Accounts payable (135,658) (27,497) (1,115,115)
Accrued expenses 91,178 (165,725) (215,839)
Advance royalties 491,405 - -
------------ ------------ ------------
Net cash used in operating activities (5,865,435) (5,962,011) (9,652,888)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (771,655) (315,276) (1,620,518)
Purchases of short-term investments (29,469,496) (7,597,162) (6,819,276)
Proceeds from maturities of short-term investments 33,789,358 - 17,562,458
Proceeds from sale of property, plant and equipment - - 434,383
Patents and trademarks (107,626) (103,685) (92,089)
------------ ------------ ------------
Net cash provided by (used in) investing activities 3,440,581 (8,016,123) 9,464,958
------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 654,582 13,085,423 834,523
Security deposits on leases 250,000 - -
------------ ------------ ------------
Net cash provided by financing activities 904,582 13,085,423 834,523
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (1,520,272) (892,711) 646,593
Cash and cash equivalents at beginning of period 2,666,032 3,558,743 2,912,150
Cash and cash equivalents at end of period 1,145,760 2,666,032 3,558,743
------------------------------------------
------------------------------------------
SEE ACCOMPANYING NOTES.
F-8
CIMA LABS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BUSINESS ACTIVITY
CIMA LABS INC., a Delaware corporation, was incorporated on December 12,
1986. CIMA is a drug delivery company that develops and manufactures products
based primarily upon its OraSolv-Registered Trademark- technology for
marketing by multinational pharmaceutical companies. OraSolv-Registered
Trademark- 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-Registered Trademark- tablet dissolves quickly without
chewing or water and allows for effective taste-masking of a wide variety of
both prescription and OTC active drug ingredients to improve patient
compliance and drug efficacy.
The Company's strategy is to enter into collaborative arrangements with
multinational pharmaceutical companies to have 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 partner will then market and sell the
product. The Company's future profitability will be dependent upon the
Company's ability to develop new, innovative drug delivery technologies that
meet the requirements of its corporate partners 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. During
the fourth quarter of 1997, the Company no longer considered itself a
development stage company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers highly liquid investments with maturities of ninety
days or less when purchased to be cash equivalents. Cash equivalents are
carried at cost which approximates fair market value.
F-9
CIMA LABS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT-TERM INVESTMENTS
The Company's investments are primarily 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. Accumulated amortization was
approximately $510,000 at December 31, 1997 and $377,000 at December 31,
1996. The Company periodically reviews its patents and trademarks for
impairment in value. Any adjustment from the analysis is charged to
operations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives ranging from
three to twelve years. Depreciation expense was approximately $919,000 in
1997, $493,000 in 1996 and $490,000 in 1995.
INVENTORIES
Inventories, consisting of materials and packaging, are valued at cost under
the first-in, first-out (FIFO) method which is not in excess of market.
Inventories are shown net of reserves for obsolescence of approximately
$46,000 at December 31, 1997 and $141,000 at December 31, 1996.
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.
F-10
CIMA LABS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
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.
RESEARCH AND DEVELOPMENT COSTS
For financial reporting purposes, all costs of research and development
activities are expensed as incurred.
EARNINGS (LOSS) PER SHARE
The Company has adopted Financial Accounting Standards Board Statement No.
128, "Earnings Per Share." This Statement replaces previously reported
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary EPS, basic EPS excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is
very similar to previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to Statement 128 requirements.
RECLASSIFICATIONS
Certain amounts presented in the 1996 and 1995 financial statements have been
reclassified to conform with the 1997 presentation.
F-11
CIMA LABS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SHORT-TERM INVESTMENTS
At December 31, 1997, short-term investments, including $1,036,000 classified
as cash equivalents, consisted of U.S. Treasury securities and obligations of
U.S. Government agencies. The investments are carried at cost which
approximates market.
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,
1997 and 1996 are as follows:
-------------------------
1997 1996
(IN 000'S) (IN 000'S)
-------------------------
Deferred Assets:
Net operating loss $ 15,213 $ 14,099
Accrued vacation 61 67
Inventory reserve 17 56
Other 11 -
-------- --------
15,302 14,222
Deferred Liability:
Depreciation and amortization 448 633
-------- --------
Net deferred income tax asset 14,854 13,589
Valuation allowance (14,854) (13,589)
-------- --------
Net deferred income taxes $ - $ -
-------- --------
-------- --------
The Company may be subject to federal income taxes when operations become
profitable. The Company's tax operating loss carryforwards of approximately
$42,259,000 may be carried forward to offset future taxable income, limited
due to changes in ownership under the net operating loss limitation rules,
and begin to expire in the year 2001.
F-12
CIMA LABS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASES
The Company leases office, research and development and manufacturing
facilities in Brooklyn Park and Eden Prairie, Minnesota. The 75,000 square
foot Eden Prairie facility houses the general and administrative offices and
the manufacturing operation. The lease has an initial term expiring on June 1,
2009. The rent payments will be recalculated on June 1, 2001 and 2006 based on
a market index. The Company has an option to extend the lease for one ten-year
period. The research and development facility in Brooklyn Park is`` leased
under a non-cancelable lease expiring in September 1998. The Company has the
option to renew this lease for one additional three-year term, and two
additional five-year terms.
Future minimum lease commitments for all operating leases with initial or
remaining terms of one year or more are as follows:
Year ending December 31:
1998 $ 502,600
1999 388,800
2000 380,900
2001 372,800
2002 372,800
Thereafter 2,392,300
Rent expense of operating leases, excluding operating expenses, for the years
ended December 31, 1997, 1996, and 1995 was $517,000, $494,000, and $415,000,
respectively.
6. STOCK OPTIONS
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.
NOTES TO FINANCIAL STATEMENT (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
Shares available and options granted are as follows:
NON-
SHARES INCENTIVE QUALIFIED WEIGHTED
AVAILABLE STOCK STOCK AVERAGE
FOR GRANT OPTIONS OPTIONS TOTAL EXERCISE PRICE
-----------------------------------------------------------------------
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 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 91,293 (85,320) (5,973) (91,293) 6.24
Exercised - (91,314) (18,473) (109,787) 6.31
-------- --------- ------- ---------
Balance at December 31, 1996 342,229 1,001,125 130,554 1,131,679 6.27
Granted (390,700) 292,604 98,096 390,700 5.89
Forfeited 203,038 (166,575) (36,463) (203,038) 7.32
Exercised - (149,217) (42,751) (191,968) 3.24
-------- --------- ------- ---------
-------- --------- ------- ---------
Balance at December 31, 1997 154,567 977,937 149,436 1,127,373 5.71
Exercisable
December 31, 1995 253,152 $ 5.23
December 31, 1996 548,221 6.47
December 31, 1997 506,460 5.27
The following table summarizes information about stock options
outstanding at December 31, 1997:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE NUMBER AVERAGE
NUMBER CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE AT 12/31/97 PRICE
- --------------------------------------------------------------------------------------------------
$ 2.00 - $ 3.00 52,528 4.9 years $ 2.98 52,528 $ 2.98
$ 3.01 - $ 5.00 299,000 7.0 years 3.86 259,875 3.88
$ 5.01 - $ 8.00 670,975 9.1 years 6.26 114,065 6.93
$ 8.01 - $ 10.125 104,870 4.0 years 8.87 79,992 8.91
--------- -------
$ 2.00 - $ 10.125 1,127,373 7.9 years $ 5.71 506,460 $ 5.27
--------- -------
--------- -------
F-14
CIMA LABS INC.
NOTES TO FINANCIAL STATEMENT (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
Options outstanding under the plan expire at various dates during the period
from March 1998 through December 2007. Exercise prices for options
outstanding as of December 31, 1997 range from $2.80 to $10.125 per share.
The weighted average fair values of options granted during the years ended
December 31, 1997 and 1996 were $5.89 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 number of shares with
respect to which options may be granted under this Plan is 350,000 shares.
As of December 31, 1997, options to purchase 258,570 shares of Common Stock
have been granted at prices ranging from $1.75 to $10.125 per share. To
date, none of these options have been exercised.
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. Of these warrants, 77,506
were exercised during 1996 and 4,837 during 1997. The remaining 107,458
warrants have expired.
The Company has elected to follow Accounting Principles Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
interpretations in accounting for employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement
123"), requires use of option valuation models that were not developed for
use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of Statement 123. The
fair value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free interest rates of
5.70% and 5.29%; volatility factor of the expected market price of the
Company's common stock of .649 and .641; and a weighted-average expected life
of the option of 5 years.
In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options
because the Company's employee stock options have characteristics
significantly different from those of traded options and have vesting
restrictions and because changes in the subjective input assumptions can
materially affect the fair value estimates. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require input of highly subjective
assumptions.
F-15
CIMA LABS INC.
NOTES TO FINANCIAL STATEMENT (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
During the initial phase-in period, the effects of applying Statement 123 for
recognizing compensation cost may not be representative of the effects on
reported net loss or income for future years because the options in the Stock
Option Plans vest over several years and additional awards will be made in the
future.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
----------- -----------
1997 1996
----------- -----------
Pro forma net loss $(6,476,902) $(6,812,761)
Pro forma net loss per common share,
basic and diluted $ (0.68) $ (0.77)
7. DEFINED CONTRIBUTION PLAN
The Company has a 401(k) plan (the "Plan") which covers substantially all
employees of the Company. Contributions to the Plan are made through
employee wage deferrals and employer matching contributions. The employer
matching contribution percentage is discretionary and determined each year.
In addition, the Company may contribute two discretionary amounts; one to
non-highly compensated individuals and another to all employees. To qualify
for the discretionary amounts, an employee must be employed by the Company on
the last day of the Plan year or have been credited with a minimum of 500
hours of service during the Plan year.
The 401(k) expense for the years ended December 31, 1997, 1996, and 1995 was
$29,000, $25,000, and $28,000 respectively.
8. EMPLOYMENT AGREEMENT
The Company has entered into a new employment agreement with the current
President and Chief Executive Officer to continue in said position. The
agreement includes provisions for compensation, stock options and bonuses
based upon the achievement of certain performance targets. The agreement
expires on December 31, 2000.
9. NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the FASB issued Statements No. 130, REPORTING COMPREHENSIVE INCOME and
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
effective for fiscal years beginning after December 15, 1997. The adoption by
the Company of these statements in January 1998 is not expected to have a
material impact on the Company's financial statements.
F-16
CIMA LABS INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS CHARGED
BEGINNING OF TO COSTS AND LESS BALANCE AT
DESCRIPTION YEAR EXPENSES DEDUCTIONS END OF YEAR
- -----------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts $ -- $ 32,150 $ -- $ 32,150
Obsolescence reserve 140,795 -- $ (94,407) 46,388
--------- --------- --------- ---------
TOTAL $ 140,795 $ 32,150 $ (94,407) $ 78,538
Year ended December 31, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ -- $ -- $ -- $ --
Obsolescence reserve 332,207 -- (191,412) 140,795
--------- --------- --------- ---------
TOTAL $ 332,207 $ -- $(191,412) $ 140,795
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
F-17