<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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 11, 1996, based upon the last trade price of the
Common Stock reported on the Nasdaq National Market on March 11, 1996 was
$15,233,868.*
The number of shares of Common Stock outstanding as of March 11, 1996 was
7,821,974.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement which were filed with the
Commission pursuant to Regulation 14A in connection with the 1996 Annual Meeting
of Stockholders are incorporated herein by reference in Part III of this Report.
- -------------------------
* Excludes approximately 4,697,078 shares of common stock held by
Directors, Officers and holders of 5% or more of the Registrant's
outstanding Common Stock at March 11, 1996. 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.
<PAGE>
PART I.
Unless the context otherwise indicates, all references to the
"Registrant," the "Company," or "CIMA" in this Annual Report on Form 10-K relate
to CIMA LABS INC., a Delaware corporation.
The following registered trademarks of the Company are used in this
Annual Report on Form 10-K: "CIMA-Registered Trademark-," "CIMA LABS
INC.-Registered Trademark-," "OraSolv-Registered Trademark-" and
"AutoLution-Registered Trademark-." Certain other trademarks of the Company
and other companies, including Zantac-Registered Trademark-, Pepcid
AC-Registered Trademark- and Tagamet-Registered Trademark- HB-Trademark- are
used in this Annual Report on Form 10-K.
ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED IN THIS SECTION, AS WELL AS UNDER THE CAPTION "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
OVERVIEW
CIMA is a drug delivery company focused primarily on the development and
manufacture of pharmaceutical products based upon its patented OraSolv
technology. OraSolv is an oral dosage formulation incorporating
microencapsulated active drug ingredients into a tablet which dissolves quickly
in the mouth without chewing or water and which effectively masks the taste of
the medication being delivered. OraSolv's fast-dissolving capability may enable
patients in certain age groups or those with a variety of conditions that limit
their ability to swallow conventional tablets to receive medication in a more
convenient oral dosage form. The Company believes that OraSolv is more
convenient than traditional tablet-based oral dosages as it does not require
water to be ingested, thereby enabling immediate medication at the onset of
symptoms. In addition, OraSolv can provide more accurate administration of
doses than liquid or suspension formulations as no measuring is required. The
Company believes OraSolv's ability to be easily ingested by patients will foster
greater patient compliance, thereby improving therapeutic outcomes and reducing
costs in the healthcare system.
CIMA's business focus has evolved over the last several years. From
inception until 1992, the Company focused on the development of liquid
effervescent products and technologies. In 1993, the U.S. patent covering
OraSolv was issued and the Company, perceiving a greater commercial opportunity,
shifted its focus to the development of OraSolv products. CIMA intends to
commercialize its OraSolv technology through collaborations with pharmaceutical
and other healthcare companies under which the Company will manufacture OraSolv
formulations of its collaborators' pharmaceutical products. Since the issuance
of the OraSolv patent in 1993, the Company has:
- Completed construction of a 75,000 square foot manufacturing facility
in Eden Prairie, Minnesota, which has been registered with the FDA and
licensed by the State of Minnesota.
- Entered into a License and Development Agreement with Glaxo to develop
an OraSolv (liquid effervescent) version of Glaxo's Zantac.
- Entered into a License Agreement and Development and a License Option
Agreement with SmithKline Beecham to develop a series of OraSolv
versions of SmithKline Beecham products for international and domestic
distribution.
- Entered into agreements with three other potential partners for the
development and manufacture of OraSolv products.
- Entered into a License and Supply Agreement with Merck to provide an
AutoLution (a liquid effervescent) version of Merck's Pepcid AC.
- Added key scientific, technical and management personnel.
CIMA is a Delaware corporation incorporated in 1986.
2
<PAGE>
BUSINESS RISKS
The Company is a development stage company and must be evaluated in light
of the uncertainties and complications present for any such company and, in
particular, in the pharmaceutical industry. The Company has accumulated
aggregate net losses from inception through December 31, 1995, of $29,259,000.
Losses have resulted principally from costs incurred in research and development
of the Company's technologies and from general and administrative costs. These
costs have exceeded the Company's revenues, which have been derived primarily
from the manufacturing of AutoLution and other non-OraSolv products under
agreements with third parties. The Company no longer manufactures such products
and no longer derives revenues from their manufacture. The Company expects to
continue to incur losses through 1997. There can be no assurance that the
Company will ever generate substantial revenues or achieve profitability.
The Company believes that its currently available funds following its
public offering of Common Stock in May 1996 will meet its needs through the
first quarter of 1997. 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 assurance that the Company will be able to raise additional
funds if its capital resources are exhausted, or that funds will be available on
terms attractive to the Company or at all.
The Company is dependent upon its ability to enter into and perform under
collaborative arrangements with pharmaceutical companies for the development and
commercialization of its products. Failure of these partners to market the
Company's products successfully could have a material adverse effect on the
Company's financial condition and results of operations. The Company's revenues
are also dependent upon ultimate consumer acceptance of the OraSolv drug
delivery system as an alternative to conventional oral dosage forms. The
Company expects that OraSolv products will be priced higher than conventional
swallow tablets. Although the Company believes that initial consumer research
has been encouraging, there can be no assurance that market acceptance for the
Company's OraSolv products will ever develop or be sustained.
To date no commercial sales of OraSolv products have been made, and the
Company has not derived any revenues from sales of OraSolv products. Further,
the Company does not expect to derive any such revenues until at least 1997.
The Company has not yet manufactured OraSolv products in commercial quantities.
To achieve desired levels of production, the Company will be required to
increase substantially its manufacturing capabilities. There can be no
assurance that manufacturing can be scaled-up in a timely manner to allow
production in sufficient quantities to meet the needs of the Company's corporate
partners.
The foregoing risks reflect the Company's early stage of development and
the nature of the Company's industry and products. Also inherent in the
Company's stage of development is a range of additional risks, including
competition, uncertainties regarding the effects of health care reform on the
pharmaceutical industry, including pressures exerted on the prices charged for
pharmaceutical products, and uncertainties regarding protection of patents and
proprietary rights.
BACKGROUND
DRUG DELIVERY TECHNOLOGY
Patient medications are available in a variety of delivery forms,
including solid dosage forms, liquids, effervescents, transdermal delivery
methods and intramuscular and intravenous injections. Enteral medication
delivery includes those medications delivered through the stomach, including
tablets, liquids and effervescents. Enteral medications are frequently
patient-administered, because of their non-invasive delivery method. Parenteral
medications are those delivered by injection. Parenteral medications are often
administered by a healthcare provider.
The Company believes the convenience of patient administration has made
enteral medications in general, and tablets in particular, popular with
patients, providers and payors. Industry sources estimate that patients most
frequently receive medications in an oral tablet form. However, children and
the elderly, as well as those with certain physiological or medical indications,
frequently experience difficulty in swallowing tablets. These patients
often receive medications in liquid or effervescent form, or through parenteral
methods as an alternative to tablets. The Company believes that tablets are a
more convenient, accurate and
3
<PAGE>
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 high 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 generic and OTC market
for drugs, develop products or product extensions that enhance patient
compliance, and do all of this within a highly regulated and cost-constrained
environment.
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 pharmaceuticals partners are the
potential for brand differentiation and the ability to retain brand integrity
using proprietary technology.
ADVANTAGES FOR PATIENTS, PROVIDERS AND PAYORS
The Company believes a broad group of patients will benefit from the
OraSolv rapid dissolve technology because it enables immediate medication at
symptom emergence and facilitates conformance to dosing regimens. Patient
non-compliance with dosing regimens has been associated with increased costs of
medical therapies by prolonging treatment duration, increasing the likelihood
of secondary or tertiary disease manifestation and contributing to
over-utilization of medical personnel and facilities. By improving patient
compliance, providers and payors may reduce unnecessary expenditures and improve
therapeutic outcomes. Reduction of expenditures is an increasingly important
issue to providers as capitated payment plans become more prevalent in the
healthcare industry.
4
<PAGE>
In addition to the general market applications, the Company believes the
OraSolv technology provides benefits to certain patient groups which experience
significant difficulty in swallowing tablets. Such patient groups include
children and the elderly and patients with certain anatomical or physiological
deformities, certain disease indications or medication-associated dysphagia.
The Company has completed quantitative consumer testing with children and
qualitative testing with physicians for the elderly which indicate the potential
for these demographic groups to better comply with dosing regimens and thus to
benefit from the OraSolv technology.
ADVANTAGES FOR PHARMACEUTICAL PARTNERS
The Company believes that pharmaceutical companies are facing challenges
to adjust to the evolving healthcare industry. These challenges include: the
impact of generic competition, which generally results in lower pricing as well
as a loss of market share; the impact of the increased role of managed care
organizations, forcing increased economic considerations in patient care, the
results of which can include shorter therapies and therapeutic substitution
(including less expensive products); and the need to maintain brand integrity
with its inherent economic benefits.
Pharmaceutical companies are addressing these issues in several ways.
They are attempting to develop new product forms which will demonstrate a
medical and economic benefit to the patient. They are also trying to develop
products which will help to improve patient compliance, which should result in a
patient's more rapid return to health. Finally, they are attempting to use
approaches which can be patented or provide a technological differentiation in
order to reduce the threat of competition. The Company believes that the
OraSolv technology provides a means for its pharmaceutical partners to meet each
of these challenges.
TECHNOLOGY
ORASOLV
The Company's OraSolv technology is an oral dosage form which combines
taste-masked, microencapsulated drug ingredients with an effervescent
disintegration agent. The effervescent disintegration agent aids in rapid
dissolution of the tablet, permitting swallowing before the pharmaceutical
ingredients are released. The OraSolv tablet dissolves quickly without chewing
or water and allows for effective taste-masking of a wide variety of both
prescription and OTC active drug ingredients.
The microencapsulation of the drug ingredients used in OraSolv products
is accomplished using a variety of coating techniques, including spray coating,
spray drying, spray congealing, melt dispersion, phase separation or solvent
evaporation methods. Certain of these coating techniques have been developed
by the Company's scientists in collaboration with coating materials suppliers.
Coating materials are designed to prevent the active drug ingredient in the
OraSolv tablet from coming in contact with the taste buds and provide for
immediate release of the active ingredient in the stomach. Coating materials
are chosen based on the dose and taste of the active ingredients. A series of
experiments is then performed to determine the suitability of various
microencapsulation techniques. From these experiments, a technique is chosen
based on reproducibility, stability, effectiveness in taste masking and
cost-effectiveness. The microencapsulated drug is then combined with the
fast-dissolving tablet materials, which can include a variety of flavoring and
coloring agents, one or more sweetening agents and commonly used tablet
excipients, such as binding agents and lubricants. In addition, an effervescent
system composed of a dry acid and a dry base is added to the tablet excipients
to facilitate a mild effervescent reaction when the tablet contacts saliva.
This effervescent reaction accelerates the disintegration of the tablet through
the release of carbon dioxide. As the OraSolv tablet dissolves, it releases
the microparticles of drug into the saliva forming a micro-suspension of the
drug in the saliva. This microencapsulated drug suspension enters the stomach
through the normal swallowing process.
AUTOLUTION
The Company's AutoLution technology is a drug delivery system that
creates a liquid effervescent solution from dry drugs or chemicals. The
technology involves the preparation of the active ingredients into a tablet or
powder which is added to water to create a liquid drug solution. Since 1992,
the Company has shifted its focus away from the development of AutoLution
products to the development of OraSolv-based products. The Company will
continue to develop its AutoLution technology under contractual agreements with
corporate partners or other third parties, but it will no longer contract
manufacture products using this technology.
5
<PAGE>
STRATEGY
The Company's goal is to have its OraSolv technology incorporated into as
many pharmaceutical products as possible with an emphasis on pharmaceutical
products which command a large market share or are in large market segments.
The Company has developed a strategic plan to accomplish this goal. The
Company's primary strategies are to:
- COLLABORATE WITH CORPORATE PARTNERS FOR MARKETING OF PRODUCTS. The
Company has entered into and intends to continue to enter into
agreements with pharmaceutical and other healthcare companies for the
development and marketing of products that incorporate the OraSolv
technology. The Company will refine the OraSolv formulation of a
particular oral therapeutic and manufacture it for its collaborators.
These collaborators will market and sell the OraSolv versions of the
therapeutic. The Company believes this strategy will reduce the time
required to market products and take advantage of the industry
knowledge and presence of its partners.
- FOCUS INITIALLY ON OTC APPLICATIONS. The Company is focusing
initially on developing OraSolv products for the OTC cough/cold/flu,
allergy and sinus, and analgesic markets. The Company intends to
target both adult and pediatric applications. The Company believes
that OTC products which are subject to the FDA's OTC drug review
process can generally be introduced without FDA preapproval and thus
can generate revenues sooner than prescription products. The Company
believes that OTC products using its OraSolv delivery system can
establish distinct brand identities among otherwise largely
undifferentiated OTC products, particularly in the large but
competitive cough/cold/flu, allergy and sinus, and analgesic markets.
- PURSUE OPPORTUNITIES IN OTC SWITCH PRODUCTS. The Company intends to
develop OraSolv products for drugs that are being switched from the
prescription to the OTC market. The Company believes that as
prescription products are switched into the OTC market, pharmaceutical
companies will seek methods for product differentiation. The Company
believes that the OraSolv delivery system offers significant
differentiation potential for these products. The Company's initial
focus in this area is in the gastric relief market, where
opportunities have been created by the recent FDA approval of the
switch to OTC of three significant anti-ulcer drugs, Zantac 75,
Pepcid AC and Tagamet HB, and expiration of the patent on Tagamet.
- DEVELOP SELECTED PRESCRIPTION DRUG APPLICATIONS. The Company is
investigating the development of OraSolv pediatric antibiotic products
and expects in the future to develop certain other prescription drug
applications. Qualitative market research studies (focus groups)
with pediatricians conducted by the Company have demonstrated a strong
interest by this group in utilizing OraSolv technology to improve
compliance among children taking antibiotic products. Other potential
OraSolv prescription applications include anti-nauseants,
psychotherapeutics and cancer therapy drugs. OraSolv products may
offer improved taste acceptance and improved compliance with respect
to these drugs. They may also offer benefits where patients have
difficulty swallowing tablets or ingesting liquids.
- DEVELOP PROPRIETARY TECHNOLOGIES. The Company intends to continue to
develop proprietary technology and obtain patents thereon. To date,
the Company has five U.S. and two Australian patents and nine patent
applications. The Company believes that patented products and
technologies provide attractive marketing features for use by its
corporate partners.
- RETAIN MANUFACTURING RIGHTS. The Company intends to continue to
develop OraSolv formulations of oral therapeutics for its
collaborators, to manufacture commercial quantities of these products
in its facility in Eden Prairie, and to rely on its collaborators to
market and sell the OraSolv formulations. The Company believes this
strategy enables it to better and more effectively manage increasing
manufacturing volumes, control quality of the products it
manufactures and manufacture in small or varying batch sizes, each of
which provide it with a competitive business advantage.
- RETAIN OWNERSHIP OF PRODUCTS DEVELOPED IN COLLABORATIONS. The Company
has retained and intends to continue to retain ownership of the
OraSolv formulations developed for its collaborators. The
6
<PAGE>
Company believes this practice will provide it with the flexibility of
entering into collaborations with other potential partners should the
initial partner decide not to pursue the commercialization of a
particular OraSolv product.
TARGET MARKETS
KEY OTC MARKETS
OTC COUGH/COLD/FLU, ALLERGY AND SINUS. This large market is generally
segmented into cough/cold/flu, allergy, and sinus categories with approximately
77% of U.S. sales in terms of dollars in cough/cold/flu products, and 12% and
11% each in the allergy and sinus categories, respectively, in 1993.
Approximately 61% of sales in this market are of products using tablet, capsule
and lozenge dosage forms while the remaining 39% of sales are of products using
liquid dosage forms. This market is highly competitive. The cough/cold/flu
category is seasonal and is characterized by frequent new product entries as
companies attempt to gain market share through product differentiation. The
Company has entered into an agreement with a multinational pharmaceutical
company to develop a series of products for this market. See "-- Agreements
With Corporate Partners." The Company is also pursuing other development
opportunities in this market.
OTC ANALGESICS. This market includes the following market segments:
acetaminophen, which represented approximately 48% of U.S. dollar sales in this
market in 1993; ibuprofen, which represented approximately 30% of such sales;
and aspirin, which represented approximately 22% of such sales. New Rx-to-OTC
switch products (e.g., ketoprofen and naproxen sodium), have recently entered
this market and are expected to achieve significant growth. The Company's
initial focus in this market is on acetaminophen, the dominant segment, and the
fast-growing segments of the Rx-to-OTC products, as well as on analgesic
combinations. The Company is pursuing several development opportunities in
this market.
GASTRIC RELIEF. The Company believes that the gastric relief market for
OTC products will grow as the patents on certain anti-ulcer prescription drugs
expire. For example, the patent on a significant anti-ulcer prescription drug
recently expired. Generic versions of this drug are being introduced into the
prescription market and also switched into the OTC market. These generic
versions may be considered therapeutically equivalent to other patented,
anti-ulcer prescription drugs. The Company believes that OraSolv is an
attractive dosage form for the gastric relief market because it could provide
taste masking for anti-ulcer drugs, which tend to have a disagreeable taste.
PRESCRIPTION DRUG MARKET
The Company is investigating the development of OraSolv pediatric
antibiotic products and expects in the future to develop OraSolv products for
prescription drug applications, including products for which Abbreviated New
Drug Applications may be filed for special niche branded use. Certain
antibiotics must be manufactured at a separate facility from other
pharmaceuticals, which may impede the development of such products. Other
potential OraSolv prescription applications include anti-nauseants,
psychotherapeutics and cancer therapy drugs. The Company also believes that
additional prescription opportunities exist in the analgesic, anti-inflammatory
and cough/cold/flu, allergy and sinus markets.
PEDIATRIC VITAMINS
The Company has in the past developed and may in the future develop
OraSolv products for the pediatric vitamin market. The Company has focused on
the pediatric vitamin market rather than on the larger adult vitamin market
because the Company believes that OraSolv's improved taste acceptance and ease
of administration can offer greater compliance in the pediatric market, where
compliance with a regular dosage regimen can be difficult to achieve.
AGREEMENTS WITH CORPORATE PARTNERS
The Company's business development efforts are focused on entering into
development, licensing and manufacturing agreements with pharmaceutical and
other healthcare companies. Under these agreements, the corporate partner will
be responsible for marketing the Company's products either worldwide, or in
specified markets or territories. The collaborative arrangements typically
begin with a research and development phase which, if successful, may be
followed by a development and license option agreement for
7
<PAGE>
development of product prototypes and then license and manufacturing agreements
for commercialization of such products. Alternatively, the Company may develop
product prototypes internally and enter directly into a development,
manufacturing or license agreement for commercialization of those products.
The Company's future ability to generate revenue is dependent upon the
Company's ability to enter into collaborative arrangements with pharmaceutical
and other corporate partners to develop products that meet the requirements of
its corporate partners and upon the marketing efforts of these corporate
partners. The Company believes these partners will have an economic motivation
to market the Company's products; however, the amount and timing of resources to
be devoted to marketing are not within the control of the Company. These
partners independently could make material marketing and other commercialization
decisions which could adversely affect the Company's future revenues. Failure
of these partners to market the Company's products successfully would have a
material adverse effect on the Company's financial condition and results of
operations. Moreover, certain of the Company's OTC products are seasonal in
nature and the Company's revenues could vary materially from one financial
period to another depending on which of such products, if any, are then being
marketed. In an attempt to alleviate such risk, the Company is focused on
developing for its partners a mix of OTC and prescription products. There can
be no assurance that the Company will be able to enter into additional
collaborative arrangements in the future or that any current or future
collaborative arrangements will result in successful product commercialization.
To the extent that agreements with corporate partners cover products to be sold
internationally, such sales could be adversely affected by governmental,
political and economic conditions in other countries, including tariff
regulations, taxes, import quotas and other factors.
The table below summarizes certain elements of the Company's major
collaborative arrangements, including partners, market segments, types of
agreements and CIMA technology.
<TABLE>
<CAPTION>
PARTNER MARKET SEGMENT TYPE OF AGREEMENT CIMA TECHNOLOGY
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Glaxo Wellcome plc Gastric Relief License and Development OraSolv
(Rx and OTC) Agreement
SmithKline Beecham plc (1) License Agreement OraSolv
SmithKline Beecham plc/ Analgesics and Option and Development OraSolv
Sterling Winthrop, Inc.(2) Cough/Cold/Flu Agreement
(1) (1) Full-Scale Stability, OraSolv
Manufacturing and Testing
(1) (1) Development and License OraSolv
Option Agreement
Merck & Co., Inc. Gastric Relief License and Supply AutoLution
Agreement
</TABLE>
- ------------
(1) Further information is confidential as disclosure of the partner company
or product category may force the collaborative partner to alter its
marketing plans, which could have a material adverse effect on the
eventual marketing of the product.
(2) As a result of corporate restructuring due to the sale of Sterling's OTC
business to SmithKline Beecham, SmithKline Beecham assumed most of
Sterling's rights under this agreement, and certain rights with respect
to the U.S. and Canada reverted to the Company. See "-- Agreements With
Corporate Partners -- SmithKline Beecham Option and Development
Agreement."
GLAXO AGREEMENT
The Company has entered into a License and Development Agreement with
Glaxo (the "Glaxo Agreement") to produce an OraSolv version of Zantac to be
marketed exclusively by Glaxo in the U.S. and internationally, for both the OTC
and prescription markets. In late 1995, the FDA approved the switch to OTC of a
version of Zantac for heartburn indications (Zantac 75). Pursuant to the Glaxo
Agreement, the Company will receive certain fees to develop product prototypes
and all development costs will be borne by Glaxo. The Company will also
receive payments upon completion of certain milestones. Glaxo will pay
specified royalties to the Company on net sales of the products. The Glaxo
Agreement provides that the
8
<PAGE>
Company retains the right to manufacture certain minimum quantities of the
OraSolv products for the first five years following the first commercial sale of
the products. At any time during the term of the Glaxo Agreement, however,
Glaxo may terminate the Company's manufacturing rights for specified reasons.
Termination of the Company's manufacturing rights or of the Glaxo Agreement
could have a material adverse effect on the Company's business. Timing of
product introductions under the Glaxo Agreement is within the control of Glaxo,
and the Company estimates that products developed under the Glaxo Agreement will
be introduced no earlier than the second half of 1998.
SMITHKLINE BEECHAM LICENSE AGREEMENT
The Company entered into a License Agreement with SmithKline Beecham in
April 1996. The License Agreement grants SmithKline Beecham exclusive marketing
rights for certain specific OraSolv OTC products. SmithKline Beecham will have
the right to market such products throughout the world, except in the U.S. and
Canada. Under the License Agreement, the Company will receive a license fee
which is refundable under certain circumstances, and is also entitled to receive
certain milestone payments upon the occurrence of specified events. The Company
will also receive royalties on net sales of the products by SmithKline Beecham.
SmithKline Beecham has a unilateral right to terminate the License Agreement for
any reason upon written notice to the Company within specified time periods.
The License Agreement also contemplates that the parties will negotiate and
enter into a manufacturing and supply agreement pursuant to which the Company
would manufacture and supply SmithKline Beecham with its requirements of the
products. There can be no assurance, however, that such an agreement will be
reached or, if reached, that such supply relationship will be profitable to the
Company. If the parties are unable to agree upon such manufacture and supply
terms, then SmithKline Beecham may elect to have such products manufactured by
either SmithKline Beecham or a third party manufacturer approved by the Company.
SMITHKLINE BEECHAM OPTION AND DEVELOPMENT AGREEMENT
The Company entered into an Option and Development Agreement with
Sterling Winthrop, Inc. ("Sterling") in May 1994. Subsequently, Sterling's
worldwide OTC business was purchased by SmithKline Beecham, which assumed
Sterling's development and license option rights to all 15 products under the
agreement for markets outside the U.S. and Canada, but relinquished rights to
five of the products for sales in the U.S. and Canada. The agreement provides
that the Company will develop a series of analgesic and cough/cold/flu, allergy
and sinus OraSolv products. The Company will receive certain fees to develop a
number of different product prototypes for SmithKline Beecham's evaluation and
will grant to SmithKline Beecham, upon payment of additional specified fees,
options to enter into license agreements for the marketing of any of the
products developed. While this agreement describes the basic terms to be
contained in any license agreement subsequently entered into between the Company
and SmithKline Beecham, SmithKline Beecham is not obligated to enter into any
definitive license agreement with the Company and generally has the right to
abandon a product at any time for any reason without significant penalty, or to
terminate the agreement entirely. If the Company does not enter into a
definitive license agreement with SmithKline Beecham within a specified time
period, the Company retains the right to seek an alternative corporate partner
for the products being developed, although there can be no assurance that the
Company could locate a suitable alternative corporate partner. A decision by
SmithKline Beecham to abandon one or more products, once licensed, could
materially adversely affect the Company's financial condition and results of
operations.
The agreement with SmithKline Beecham specifies certain products for
which any license granted would be co-exclusive, permitting the Company to enter
into another collaborative arrangement with a different corporate partner with
respect to each such product. As to the other products to be developed, the
license granted to SmithKline Beecham would be exclusive. The agreement
provides that if any definitive license agreement is entered into, the Company
would receive certain license fees and a royalty on net sales of each of the
products subject to the license agreement. While the SmithKline Beecham
agreement does not specify the terms of any manufacture and supply agreement,
the Company intends to negotiate to retain the right to manufacture the licensed
products in connection with any definitive license agreement entered
9
<PAGE>
into with SmithKline Beecham. There can be no assurance that the Company will
retain manufacturing rights or that any such rights retained will be profitable
for the Company. The failure by the Company to retain manufacturing rights
could have a material adverse effect on the Company's profitability.
OTHER ORASOLV AGREEMENTS
In the first quarter of 1996, the Company entered into three additional
agreements with three undisclosed multinational pharmaceutical companies for
development or manufacture of OraSolv products. Because the marketplace for
pharmaceutical products is highly competitive, disclosure of the potential
partner and market category or product may result in the prior implementation of
competitive strategies which would be damaging or destructive to the marketing
plans of the potential partner. That activity could result in the loss of brand
equity and the nonrecovery of substantial advertising and promotional costs.
Accordingly, at the present time both the identities of the other companies and
the nature of the products involved remain confidential.
One of these confidential agreements, a full-scale stability,
manufacturing and testing agreement, provides for the Company to conduct
stability manufacturing and testing of an OraSolv formulation of a certain class
of pharmaceutical products. The agreement provides for the partner to pay the
Company certain fees and provides the partner an exclusive negotiation period
for additional rights with respect to the specific class of pharmaceutical
products being evaluated by the partner.
Under another confidential agreement, the Company is developing
prototypes of products formulated with the OraSolv technology for that partner's
evaluation. In exchange, the partner will make certain payments to CIMA. The
agreement also provides for an exclusive negotiation period for additional
rights with respect to the product.
Under the third such confidential agreement, each of the parties
performed in full and mutually agreed not to take any further actions under
such agreement at this time.
There can be no assurance that the potential partners under any of the
two continuing confidential agreements will perform as anticipated, or that
any of such confidential agreements will result in the commercialization of
products. In addition, each of the two continuing confidential agreements
permit the respective potential partner to terminate the agreement at any
time.
MERCK AGREEMENT
The Company has a license agreement and supply agreement with Merck
under which the Company has developed an AutoLution (liquid effervescent) form
of Pepcid AC, the OTC version of Pepcid, Merck's anti-ulcer product. The
license agreement provides that the Company will receive a royalty on net sales
of the product, which Merck plans to sell in Europe. Merck may terminate the
license agreement upon 90 days' written notice for any reason.
To date, the Company has not derived any revenues from sales of OraSolv
products. In connection with agreements with corporate partners for OraSolv
products, the Company has received research and development fees and licensing
revenues of $684,000, $1,168,000 and $368,000, in 1995, 1994, and 1993,
respectively. Net sales of AutoLution and other products decreased to $151,000
in 1995 from $1,451,000 in 1994, and $1,857,000 in 1993. In 1995, 1994, and
1993, the Company spent $3,983,000, $2,845,000, and $1,857,000, respectively,
on research and development activities.
PATENTS AND PROPRIETARY RIGHTS
The Company actively seeks, when appropriate, protection for its products
and proprietary information by means of U.S. and foreign patents, trademarks and
contractual arrangements. In addition, the Company relies upon trade secrets
and contractual arrangements to protect certain of its proprietary information
and products. The Company holds five U.S. patents. The most significant U.S.
patent issued to the Company covers the taste-masking, microencapsulation and
quick-dissolving excipient technology incorporated in the OraSolv products. The
OraSolv patent and two others were issued in 1993 and expire in 2010, the fourth
patent was issued in 1995 and expires in 2012 and the fifth patent was issued in
1996 and expires in 2013. Two of the issued U.S. patents relate to the
production of compressed effervescent and non-effervescent tablets using a
particular lubricant developed by the Company. Another patent relates to an
effervescent pediatric vitamin and mineral supplement. The fifth patent relates
to the formulation of a base coated acid effervescent mixture manufactured by a
controlled acid-base reaction. The obtained mixture can be used in the
formulation of acid sensitive compounds with OraSolv technology or other
effervescent-based products.
The Company holds two patents in Australia, which issued in 1990. The
Company also has a total of nine U.S. and foreign patent applications, including
two European Patent Office filings.
10
<PAGE>
The Company's success will depend in part on its ability to obtain and
maintain patent protection for its products and preserve its trade secrets. No
assurance can be given, however, that the Company's patent applications will be
approved or that any issued patents will provide competitive advantages for its
products or will not be challenged or circumvented by competitors.
The ability to commercialize the Company's products will depend on not
infringing the patents of others. Although the Company is not aware of any
claim of patent infringement against it, the Company has entered into a
licensing agreement with Beecham Group plc ("Beecham") to avoid the possibility
of litigation. Under the license, the Company has a non-exclusive, worldwide
license to make, have made, use and sell products covered by a particular U.S.
patent issued to Beecham and corresponding rights in other countries (the
"Beecham Patent Rights"), which may cover certain OraSolv products. Under the
terms of the license, the Company is required to pay a royalty of 2% of amounts
received by the Company in respect of OraSolv products. The license extends
for the life of the Beecham Patent Rights and is terminable upon default by
either party.
Whether or not the outcome of any litigation concerning patents and
proprietary technologies is favorable to the Company, the cost of such
litigation and the diversion of the Company's resources during such litigation
could have a material adverse effect on the Company.
Much of the Company's technology is dependent upon the knowledge,
experience and skills of key scientific and technical personnel. To protect
rights to its proprietary know-how and technology, Company policy requires all
employees and consultants to execute confidentiality agreements that prohibit
the disclosure of confidential information to anyone outside the Company. These
agreements also require disclosure and assignment to the Company of discoveries
and inventions made by such persons while devoted to Company activities. There
can be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any such breach or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors. In addition, it is possible others may infringe the patent rights
of the Company.
The Company may desire or be required to obtain licenses from others
with respect to materials used in the Company's products or manufacturing
processes, including drug coating techniques. There can be no assurance that
such licenses will be obtainable on commercially reasonable terms, if at all,
or that any licensed patents or proprietary rights will be valid and
enforceable.
MANUFACTURING
A key component of the Company's strategy is to be the primary
manufacturer of OraSolv products. Advantages of this strategy include the
control of the technology, the ability to quickly increase production, and to
refine the production process as necessary to rapidly and successfully bring
OraSolv products to market. Although the OraSolv process uses standard
pharmaceutical production equipment, certain modifications were required to meet
the specific needs of OraSolv products, including the need for producing softer
tablets, special protective packaging and dehumidification. During the refining
process and the process validation runs, the Company identified the key product
quality issues, which the Company has now built into the product specifications.
The Company believes that this manufacturing experience gives it an advantage
over its competitors. The Company believes that its ability to manufacture
OraSolv products provides economies of scale, therefore making the Company more
attractive to its partners by allowing them access to smaller volume line
extensions without making significant capital investments.
The Company's OraSolv production facility is located in Eden Prairie,
Minnesota, which also houses the Company's corporate headquarters. The Company
began occupying and making leasehold improvements to the new facility in late
June 1994 and the facility was completed in December 1994. See "Item 2. --
Properties." Initially, the Company will operate one production line at this
facility which it believes will be capable of producing 400 million tablets a
year. The facility is designed to be expandable to six production lines to
achieve a maximum capacity of 2.4 billion tablets a year. The production
equipment consists of an integrated blending, tableting and packaging operation.
The configuration of the production flow layout and this
11
<PAGE>
equipment has been designed by Company personnel and the Company's consultants.
Most of the equipment consists of components commonly used in pharmaceutical
manufacturing. Modern technology for environmental control is utilized. The
equipment was selected for ease of operation, cleaning and changeover and cost
effectiveness. The production line is capable of packaging a variety of package
designs with rapid conversion between sizes.
During 1995, the facility was validated, registered with the FDA and
licensed by the State of Minnesota. Numerous site audits by major
pharmaceutical companies have also successfully occurred. After the completion
of equipment validation, CIMA successfully conducted full scale-up runs of the
production line. To date, over 50 production batches have been manufactured
using the OraSolv production equipment.
The OraSolv production process begins with the purchase of the
pharmaceutical ingredients to be used in manufacturing the products. The active
drug ingredients may be shipped to coating materials suppliers where appropriate
coating materials are applied to microencapsulate the ingredients. In some
cases, the Company purchases the microencapsulated active ingredient from a
supplier. These coating materials suppliers are subject to extensive
government regulation, including current Good Manufacturing Practice regulations
("cGMP") promulgated by the FDA. After coating, the active drug ingredients are
sent to the Company where they are tested again by CIMA's Analytical Quality
Control group and released to the production department. The active and
inactive drug ingredients that have been quality control released are further
processed and pressed into OraSolv tablets. The tablets are immediately
transferred into blister-foil packages and packed in cartons in a high-speed,
continuous operation. The pharmaceutical ingredients and other supplies to be
used in manufacturing OraSolv products are standard pharmaceutical products
available from numerous suppliers. Most coating materials are also available
from numerous suppliers. In some instances, however, certain coating materials
or techniques may be available only from a single supplier. If any such coating
materials or techniques were to become unavailable, the Company believes that
satisfactory alternative materials or techniques could be substituted. However,
there can be no assurance that the Company's manufacturing operations would not
be disrupted. Any such disruption could have an adverse effect on the Company's
business and could possibly damage relations with its corporate partners.
By producing many full-scale trial batches, the Company believes it has
identified and minimized potential problems that could affect product
manufacturing in commercial quantities. There can be no assurance, however,
that manufacturing and control problems will not arise as the Company begins
manufacturing at commercial scale. If manufacturing or control problems arise
and are not corrected for any reason, the Company's business could be materially
adversely affected.
MARKETING
The Company's marketing strategy is to rely on its corporate partners for
the marketing and sale of its products. The Company believes this strategy
will enable it to respond quickly to market demands, while avoiding the effort
and expense associated with the establishment of an end-user marketing
capability. The Company's internal marketing department has focused on
promoting the benefits of OraSolv to its corporate pharmaceutical partners and
with conducting consumer surveys and physician research of various OraSolv
formulations. Currently, the Company has entered into corporate collaborations
with Glaxo, Merck and SmithKline Beecham, and with three other major
pharmaceutical companies.
RESEARCH AND DEVELOPMENT
The research and development ("R&D") department at CIMA is primarily
focused on the development of oral dosage forms based on CIMA proprietary
technologies. These efforts are conducted to support the CIMA strategic and
business goals. The Company's R&D department is devoted to the development of
drug delivery technologies and dosage forms for pharmaceutical applications.
The key goals for the R&D team are: develop innovative drug delivery systems
that fulfill the pharmaceutical partners' needs and meet the strategy of the
Company; develop, expand and support systems required to fulfill cGMP
production at commercial levels necessary to meet the requirements of major
pharmaceutical companies; recruit and train high quality technical and
scientific personnel; and support the Company's intellectual property process.
12
<PAGE>
The R&D department includes scientists recruited from the research and
development groups of major U.S. pharmaceutical companies. Currently R&D
personnel and support systems and facilities are organized in a way to
effectively develop formulations from bench scale through full scale/commercial
size. Such development is carried out at the R&D facilities in Brooklyn Park,
Minnesota and in the full scale manufacturing facility in Eden Prairie,
Minnesota. The Company believes that its R&D facilities are in compliance with
cGMP. In both facilities, small cGMP batches are manufactured, packaged and
released to support initial studies in humans, including both consumer studies
for OTC products and clinical studies for prescription products.
During the three years ended December 31, 1995, CIMA's total
expenditures for research and development were $1,856,900, $3,548,900 and
$6,504,500, respectively, of which amounts research and development fees from
the Company's collaborative partners were $271,800, $452,900 and $496,600,
respectively.
COMPETITION
Competition in the areas of pharmaceutical products and drug delivery
systems is intense. The Company's primary competitors in the business of
developing and applying drug delivery systems include companies which have
substantially greater financial, technological, marketing, personnel and
research and development resources than the Company. The Company's products
will compete not only with products employing advanced drug delivery systems but
also with products employing conventional dosage forms. New drugs or future
developments in alternative drug delivery technologies may provide therapeutic
or cost advantages over the Company's potential products. There can be no
assurance that developments by others will not render the Company's products or
technologies noncompetitive or obsolete.
Among the technologies expected to provide competition for the Company's
OraSolv technology is the Zydis technology developed by R.P. Scherer Corporation
("Scherer") and the Shearform Matrix technology developed by Fuisz Technologies,
Ltd. ("Fuisz"). The Zydis technology is a fast-dissolving oral drug delivery
system based on a freeze-dried gelatin tablet. The Shearform Matrix technology
has application to two tablet formats, one of which involves waterless, fast
dissolving oral delivery which Fuisz calls "FlashDose."
The principal competitive factors in the market for rapid dissolving
tablet technologies are compatibility with taste-masking techniques, dosage
capacity, drug compatibility, cost and ease of manufacture and required capital
investment for manufacturing. The Company believes that its rapid dissolving
tablet technology competes favorably with respect to these factors. However,
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, recordkeeping, 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
13
<PAGE>
FDA will consider generally recognized as safe and effective and therefore not
subject to premarket approval. For certain categories of OTC drug products not
yet subject to a final monograph, the FDA usually will not take regulatory
action against such a product unless failure to do so poses a potential health
hazard to consumers. The Company initially intends to emphasize OTC drug
products that generally do not require FDA approval. Products subject to final
monographs, however, are subject to various FDA regulations such as those
outlining cGMP requirements, general and specific OTC labeling requirements
(including warning statements), the restriction against advertising for
conditions other than those stated in product labeling, and the requirement that
OTC drugs contain only suitable inactive ingredients. OTC products and
manufacturing facilities are subject to FDA inspection, and failure to comply
with applicable regulatory requirements may lead to administrative or judicially
imposed penalties.
Future marketing of products not formulated in compliance with final OTC
drug monographs typically will require a formal submission to the FDA, such as
an Abbreviated New Drug Application ("ANDA"), New Drug Application ("NDA") or
Supplement to existing New Drug Application ("SNDA"), and ultimate approval by
the FDA. This application and approval process can be expensive and time
consuming, typically taking from six months to several years to complete.
Further, there can be no assurance that approvals can be obtained, or that any
such approvals will be on the terms or have the scope necessary for successful
commercialization of these products. The Company expects that any required FDA
approvals in connection with the introduction of new, non-monographed products,
such as an OraSolv version of Zantac, would be sought by the Company's corporate
partners. Marketing of such products could be delayed or prevented because of
this process. Even after an ANDA, NDA or SNDA has been approved, existing FDA
procedures may delay initial product shipment. Delays caused by the FDA
approval process may materially reduce the period during which there is an
exclusive right to exploit patented products or technologies. Even if any
required FDA approval has been obtained with respect to a product, foreign
regulatory approval of a product must be obtained prior to marketing the
product internationally. Foreign approval procedures vary from country to
country and the time required for approval may result in delays in or ultimately
prevent marketing. The Company expects to rely on its pharmaceutical company
partners to obtain any necessary government approvals in foreign countries.
Prescription drug products with proven safety and efficacy profiles may
be "switched" to OTC status through the submission to and approval by the FDA of
an 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 the FDA premarket 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
14
<PAGE>
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 that a standard NDA.
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 biannual 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. While the
Company's new OraSolv manufacturing facility is required to be registered with
the FDA and to comply with cGMP regulations at all times, FDA approval will not
be required prior to commencement of manufacturing of OTC drug products. An FDA
inspection of the premises once manufacturing has been initiated is very likely.
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. The Company has manufactured an herbicide product for a large
chemical company involving certain hazardous materials and chemicals. The
herbicide product was manufactured in a separate facility from the Eden Prairie
facility. The Company believes that its safety procedures for handling and
disposing of such materials and chemicals complied with the requirements of
federal and state law.
EMPLOYEES
On March 31, 1996, the Company had 49 full-time employees, of whom 12
were engaged in research and development (including 5 with Ph.D.s), 17 in
manufacturing, 7 in compliance, 3 in quality control and 10 in administration,
business development, finance and human resources. Most of the Company's
scientific and engineering employees have had prior experience with
pharmaceutical or medical products companies. No employee is represented by a
union, and the Company has never experienced a work stoppage. The Company
believes its employee relations are good.
The success of the Company and of its business strategy is dependent in
large part on the ability of the Company to attract and retain key management
and operating personnel. Such individuals are in high demand and are often
subject to competing offers. In particular, the Company's success will depend,
in part, on its ability to attract and retain the services of its executive
officers and scientific and technical personnel. The loss of the services of
one or more members of management or key employees or the inability to hire
additional personnel as needed may have a material adverse effect on the
Company. The Company currently has no full-time chief financial officer, but
is actively recruiting to fill this position.
15
<PAGE>
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 general liability insurance and product liability
insurance with coverage limits of $5,000,000 per occurrence and $5,000,000 on an
annual aggregate basis. The Company's insurance policies provide coverage on a
claims made basis and are subject to annual renewal. There can be no assurance,
however, that the Company will be able to maintain such insurance on acceptable
terms or that the Company will be able to secure increased coverage as the
commercialization of its products proceeds or that any insurance will provide
adequate protection against potential liabilities.
ITEM 2. PROPERTIES
The Company 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 of ten years with minimum annual base rent payments (exclusive of
real estate taxes and maintenance fees) of approximately $337,500 through the
third year, $375,000 for years four through seven and $412,500 for years eight
through ten of the lease. The Company has the option to extend the lease term
for an additional seventy months with a minimum annual base rent payment
(exclusive of real estate taxes and maintenance fees) of approximately $450,000.
In addition to its new OraSolv production facility, the Company also
leases 32,000 square feet located in an industrial park in Brooklyn Park,
Minnesota. The Brooklyn Park facility contains offices as well as research and
development and certain other pilot development and manufacturing operations.
The lease for this facility expires in September 1998 and is renewable for an
additional three-year period and two five-year periods. The Company currently
pays approximately $144,600 in annual base rent (exclusive of real estate taxes
and maintenance fees) under this lease. The Company's non-OraSolv manufacturing
operations, including AutoLution, are located in the Brooklyn Park facility.
The Company believes that its facilities are adequate for its current and
anticipated future operations and that any necessary lease renewals or
additional leased space could be obtained on commercially reasonable terms.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Net sales . . . . . . . . . . . . . . . . . . . . . $ 2,930 $ 3,251 $ 1,857 $ 1,451 $ 151
Research, development and licensing revenues. . . . 551 445 368 1,167 684
-------- -------- -------- -------- --------
Total revenues . . . . . . . . . . . . . . . . . . . . 3,481 3,696 2,225 2,618 835
Costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . . . . 3,339 3,279 2,844 2,799 240
Research and product development. . . . . . . . . . 843 759 1,857 3,549 6,505
Selling, general and administrative . . . . . . . . 1,365 1,306 1,208 2,972 3,658
-------- -------- -------- -------- --------
Total costs and expenses . . . . . . . . . . . . . . . 5,547 5,344 5,909 9,320 10,403
Other income (expense):
Interest income (expense), net. . . . . . . . . . . (214) (84) 6 452 448
Other income (expense). . . . . . . . . . . . . . . (35) 50 (2) 38 13
-------- -------- -------- -------- --------
Total other income (expense) . . . . . . . . . . . . . (249) (34) 4 490 461
-------- -------- -------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (2,315) $ (1,682) $ (3,680) $ (6,212) $ (9,107)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net loss per share . . . . . . . . . . . . . . . . . . $ (.90) $ (.53) $ (.78) $ (.95) $ (1.16)
Weighted average number of shares outstanding. . . . . 2,565 3,198 4,727 6,505 7,822
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 169 $ 5,480 $ 1,178 $ 2,912 $ 3,559
Working capital. . . . . . . . . . . . . . . . . . . . (1,703) 5,280 986 12,159 3,147
Total assets . . . . . . . . . . . . . . . . . . . . . 3,804 9,051 4,927 25,122 15,519
Capital lease obligations. . . . . . . . . . . . . . . 553 263 -- -- --
Deficit accumulated during the development stage . . . (8,485) (10,167) (13,846) (20,058) (29,259)
Total stockholders' equity . . . . . . . . . . . . . . 445 7,773 4,093 22,554 14,282
</TABLE>
17
<PAGE>
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. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION, AS WELL AS IN
THE SECTION ENTITLED "ITEM 1. BUSINESS."
GENERAL
The Company was founded in 1986 to develop effervescent drug delivery
technologies and focused initially on liquid effervescents. CIMA continues to
be a development stage company. CIMA's business focus has evolved over the last
several years with the development and patenting of OraSolv, an oral dosage form
which incorporates microencapsulated drug ingredients into a tablet that
dissolves quickly in the mouth without chewing or water and which effectively
masks the taste of the medication being delivered. In 1993, following issuance
of the U.S. patent covering OraSolv, the Company began to emphasize and focus on
the development of OraSolv products and currently focuses primarily on such
products.
At December 31, 1995, the Company has accumulated net losses of
approximately $29,259,000. The Company's revenues have been from product sales
using the Company's AutoLution (a liquid effervescent) technology, license fees
paid by corporate partners in consideration of the transfer of rights under
collaboration agreements, and research and development fees paid by corporate
partners to fund the Company's research and development efforts for products
developed under such agreements. To date, such revenues have been derived
primarily from manufacturing agreements with third parties for liquid
effervescent and other products, and to a lesser extent from research and
development fees and licensing arrangements, the latter generated primarily in
the last five years. Revenues from manufacturing liquid effervescent products
under agreements with third parties have decreased as a result of the Company's
decision to discontinue manufacturing that product and focus on developing its
OraSolv technology. The last revenues for manufacturing liquid effervescent
products were recognized in 1995. In addition to revenues from such
manufacturing, research and development and licensing, the Company has funded
operations from private sales of equity securities, realizing net proceeds of
approximately $25,963,000. In July 1994, the Company completed an initial
public offering of shares of its Common Stock, realizing net proceeds of
approximately $16,379,000.
The Company expects that losses will continue through at least 1997. Costs
and expenses are expected to remain relatively stable as the majority of the
necessary research and development personnel have already been hired. It is
expected that additional manufacturing personnel will be added and operating
expenses will increase at such time as the Company initiates the commercial
production of OraSolv products.
The Company's ability to generate revenues is dependent upon its ability to
enter into and be successful in collaborative arrangements with pharmaceutical
and other healthcare companies for the development and manufacture of OraSolv
products to be marketed by these corporate partners. The Company is highly
dependent upon the efforts of the corporate partners to successfully market
OraSolv products. Although the Company believes these partners will have an
economic motivation to market these products vigorously, the amount and timing
of resources to be devoted to marketing are not within the control of the
Company. These partners independently could make material marketing and other
commercialization decisions which could adversely affect the Company's future
revenues. Moreover, certain of the Company's products are seasonal in nature
and the Company's revenues could vary materially from quarter to quarter
depending on which of such products, if any, are then being marketed.
Since the Company's initial public offering in 1994, the Company has put
in place a substantially new management team. This new management team was
responsible for the buildout, validation and FDA registration of the Company's
Eden Prairie manufacturing facility.
18
<PAGE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
The Company's results of operations for the year ended December 31, 1995
reflect increased emphasis on the development of OraSolv products. Net sales
decreased from $1,857,000 in 1993 and $1,451,000 in 1994 to $151,000 in 1995 as
the Company ceased to manufacture liquid effervescent and other products. In
the future, the Company does not expect to derive revenues from the sale of
contract-manufactured liquid effervescent products. Research, development and
licensing revenues were $368,000, $1,168,000 and $684,000 in 1993, 1994 and
1995, respectively. The licensing revenues in 1994 and 1995 reflect receipt of
payments under license and development agreements with multinational
pharmaceutical companies that provided for licensing fees, milestone payments,
royalties and manufacturing fees. So long as the Company has relatively few
agreements with corporate partners, research and development fees and licensing
revenues will tend to fluctuate on a quarter to quarter basis.
Cost of goods sold was $2,844,000, $2,799,000 and $240,000 in 1993, 1994
and 1995, respectively. The decline in 1994 and 1995 resulted from the
Company's decision to discontinue manufacturing the liquid effervescent product
line and focus on the development of the OraSolv technology. Research and
product development expenses were $1,857,000 in 1993 compared with $3,549,000 in
1994 and $6,505,000 in 1995. The increase from 1994 to 1995 was the result of a
product development/optimization charge of $1,385,000 from an independent
consultant for improving product taste and packaging of OraSolv products. In
addition, the costs associated with validating the OraSolv production facility
and production process for the Company's corporate partners have been charged to
research and development. Selling, general and administrative expenses were
$1,208,000 in 1993 compared with $2,972,000 in 1994 and $3,658,000 in 1995. This
increase resulted from the Company's building of an infrastructure to support
the OraSolv business, together with increased expenses related to marketing and
one-time expenses for changes in senior management. The Company expects such
changes in senior management will reduce general and administrative expenses in
1996.
Net interest income was $5,500 in 1993 compared with $452,000 in 1994 and
$448,000 in 1995, reflecting interest income from increased cash levels after
the Company's initial public offering in 1994.
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, 1995, CIMA had received net
19
<PAGE>
offering proceeds from such private and public sales of approximately
$42,342,000 and had net sales from manufacturing agreements of approximately
$13,751,000. Among other things, these funds were used to purchase
approximately $14,146,000 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 $16,400,000. The funds raised in CIMA's initial
public offering have been used to buildout 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 May 1996, the Company completed a public offering of shares of its Common
Stock, realizing net proceeds of approximately $12,145,000.
The Company's long-term capital requirements will depend upon numerous
factors, including the status of the Company's collaborative arrangements, the
progress of the Company's research and development programs and receipt of
revenues from sales of the Company's products. Cash and cash equivalents,
including short-term investments, were $3,147,000 at December 31, 1995. The
Company believes that its currently available funds, including the proceeds from
its May 1996 offering of Common Stock, will meet its needs at least through the
first quarter of 1997. The Company will need to raise additional funds through
public or private financings, including equity financing which may be dilutive
to stockholders. There can be no assurance that the Company will be able to
raise additional funds if its capital resources are exhausted, or that funds
will be available on terms attractive to the Company.
The Company has not generated taxable income through December 31, 1995. At
December 31, 1995, the net operating losses available to offset future taxable
income were approximately $29,664,000. Because the Company has experienced
ownership changes, pursuant to Internal Revenue Code regulations, future
utilization of the operating loss carryforwards will be limited in any one
fiscal year. The carryforwards expire beginning in 2001. As a result of the
annual limitation, a portion of these carryforwards may expire before ultimately
becoming available to reduce potential federal income tax liabilities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and notes thereto appear on pages F-1 to
F-13 of this Annual Report on Form 10-K.
20
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements
The Financial Statements required by this item are submitted
in a separate section beginning on page F-1 of this report
PAGE
----
Report of Ernst & Young LLP, Independent Auditors.............. F-3
Balance Sheets at December 31, 1994 and 1995................... F-4
Statements of Operations for the three years ended
December 31, 1995.............................................. F-5
Statements of Stockholders' Equity for the three years
ended December 31, 1995....................................... F-6
Statements of Cash Flows for the three years ended
December 31, 1995............................................. F-7
Notes to Financial Statements.................................. F-8
(2) Index to Financial Statements Schedules
Schedule II: Evaluation and Qualifying Accounts............... F-14
(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)
10.1 Consulting Agreement, dated April 24, 1995, between the Company and
Randall J. Wall. (3)(4)
10.2 Preferred Stock Purchase Agreement (Series C Convertible), dated
April 15, 1992, as amended. (2)
10.3 Preferred Stock Purchase Agreement (Series D Convertible), dated
January 2, 1994, as amended. (2)
10.4 Preferred Stock Purchase Agreement (Series E Convertible), dated
January 7, 1994. (2)
10.5 Real Property Lease, dated July 2, 1987, between Stuebner Properties
and the Company, as amended. (2)
10.6 Letter Agreement, dated February 1, 1995, between the Company and
Ronnie J. Spivey Ph.D. (3)(5)
10.7 Employment Agreement, dated July 1, 1995, between the Company and John
M. Siebert, Ph.D. (3)(6)
10.8 Real Property Lease, dated January 6, 1994, between The Principal
Mutual Life Insurance Company and the Company. (2)
10.9 Real Property Sublease, dated February 16, 1994, between Braun's
Fashion, Inc. and the Company, including Prime Lease as amended and
Consent, Non-Disturbance and Prime Lessor's Agreement dated
February 22, 1994. (2)
21
<PAGE>
10.10 Real Property Lease, dated March 10, 1994, between Village Plaza, Inc.
and the Company. (2)
10.11 Amended and Restated Stock Option and Stock Award Plan. (2)(3)
10.12 1994 Directors' Stock Option Plan. (2)(3)
10.13 Employment Agreement, dated October 13, 1993, between the Company and
Randall J. Wall, as amended. (2)(3)
10.14 Form of Employment Agreement. (2)(3)
10.15 Letter Agreement, dated December 23, 1992, between the Company and Dr.
Jerry A. Weisbach, as amended. (2)(3)
10.16 Form of Confidentiality Agreement (for discussions with other
companies). (2)
10.17 Form of Visitor's Agreement. (2)
10.18 License Agreement, dated January 28, 1994, between the Company and SRI
International. (2)
10.19 Agreement, dated April 8, 1994, between the Company and Beecham Group
plc. (2)
10.20 License Agreement and Supply Agreement, dated August 15, 1991, between
the Company and Merck & Co., Inc. (2)
10.21 License Agreement and Supply Agreement, dated October 12, 1994, by and
between Pfizer Inc. and the Company. (7)
10.22 Option and Development Agreement, dated May 19, 1994, between the
Company and Sterling Winthrop, Inc. (2)
10.23 License and Development Agreement, dated April 15, 1994, between the
Company and Glaxo Group Limited. (2)
10.24 Formulation Agreement, dated August 1, 1992, between the Company and
Monsanto Company. (2)
10.25 Supply Agreement, dated April 18, 1990, between the Company and P.
Leiner Nutritional Products, Inc. (2)
10.26 Supply Agreement, dated February 13, 1992, between the Company and
Northhampton Medical, Inc. (2)
10.27 Form of Director and Officer Indemnification Agreement. (2)(3)
11.1 Statement of Calculation of Net Loss Per Share. (8)
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney. (8)
- -------------------------
(1) Incorporated herein by reference to the correspondingly numbered exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(2) Incorporated herein by reference to the correspondingly numbered exhibit to
the Registrant's Registration Statement on Form S-1, File No. 33-80194.
(3) Items that are management contracts or compensatory plans or arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
(4) Incorporated herein by reference to Exhibit 10.25 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
(5) Incorporated by reference from Exhibit 10.20 to Registrant's Registration
Statement on Form S-1 (amended to Form S-3), Registration No. 33-93616.
(6) Incorporated by reference from Exhibit 99.1 to Registrant's Registration
Statement on Form S-3, Registration No. 33-93616.
(7) Incorporated by reference from Exhibit 10 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994, File No. 0-24424.
(8) Previously filed.
22
<PAGE>
(b) The Registrant filed no reports on Form 8-K during the last three months of
the fiscal year ended December 31, 1995.
(c) See Exhibits listed under Item 14(a)(3).
(d) The financial statement schedules required by this Item are listed under
Item 14(a)(2).
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to
report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto
duly authorized on the 30th day of May, 1996.
CIMA LABS INC.
By: /s/ John M. Siebert
-----------------------------------
John M. Siebert
President, Chief Executive Officer
and Chief Financial Officer
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 President, Chief Executive Officer, May 30, 1996
- -------------------- Chief Financial Officer and Director
John M. Siebert (PRINCIPAL EXECUTIVE OFFICER; PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
* Director May 30, 1996
- --------------------
Terrence W. Glarner
* Director May 30, 1996
- --------------------
David B. Musket
* Director May 30, 1996
- --------------------
Steven B. Ratoff
* Director May 30, 1996
- --------------------
Joseph R. Robinson
* Director May 30, 1996
- --------------------
Jerry A. Weisbach
*By: /s/ John M. Siebert
---------------------
John M. Siebert
ATTORNEY-IN-FACT
<PAGE>
Amendment No. 1 to
ANNUAL REPORT ON FORM 10-K/A
Item 8, Item 14(a)(1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
Year ended December 31, 1995
CIMA LABS INC.
Eden Prairie, Minnesota
F-1
<PAGE>
Form 10-K -- Item 14(a)(1) and (2)
CIMA LABS INC.
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following statements of CIMA LABS INC. are included in Item 8:
Balance Sheets - December 31, 1994 and 1995
Statements of Operations - Years ended December 31, 1993, 1994 and 1995 and
period from December 12, 1986 (inception) to December 31, 1995
Statement of Changes in Stockholder's Equity - Period from
December 12, 1986 (inception) to December 31, 1995
Statements of Cash Flows - Years ended December 31, 1993, 1994 and 1995 and
period from December 12, 1986 (inception) to December 31, 1995
Notes to Financial Statements - December 31, 1995
The following financial statement schedule of CIMA LABS INC. is included in
Item 14(d):
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CIMA LABS INC.
We have audited the accompanying balance sheets of CIMA LABS INC. (a
development stage company) as of December 31, 1994 and 1995, and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995, and for the
period from December 12, 1986 (inception) to December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of CIMA LABS INC. at
December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, and
the period from December 12, 1986 (inception) to December 31, 1995, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 11 to the financial statements, the Company's deficit
accumulated during the development stage and recurring losses from operations
raise substantial doubt about its ability to continue as a going concern. The
Company intends to obtain additional capital through a financing transaction to
permit it to continue its operations. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Minneapolis, Minnesota
January 26, 1996
F-3
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 2,912,150 $ 3,558,743
Short-term investments............................................ 10,743,182 --
Accounts receivable, less allowance of $100,000 -- 1994; and
$0 -- 1995 ...................................................... 537,866 212,971
Inventories....................................................... 322,247 324,610
Prepaid expenses.................................................. 211,176 287,279
------------- -------------
Total current assets................................................ 14,726,621 4,383,603
Other assets:
Lease deposits.................................................... 290,650 290,650
Patents and trademarks, net of amortization ($156,074 -- 1994;
and $248,846 -- 1995) ........................................... 262,924 262,244
------------- -------------
553,574 552,894
Property, plant and equipment:
Construction in progress.......................................... 6,057,961 278,770
Equipment......................................................... 5,157,689 7,659,448
Leasehold improvements............................................ 921,499 4,572,586
Furniture and fixtures............................................ 250,899 551,032
------------- -------------
12,388,048 13,061,836
Less accumulated depreciation..................................... (2,546,072) (2,479,688)
------------- -------------
9,841,976 10,582,148
------------- -------------
Total assets........................................................ $ 25,122,171 $ 15,518,645
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 1,406,983 $ 291,868
Accrued expenses.................................................. 910,966 695,127
Advance royalties................................................. 250,000 250,000
------------- -------------
Total current liabilities........................................... 2,567,949 1,236,995
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value:
Authorized shares -- 5,000,000
Issued and outstanding shares -- 0.............................. -- --
Common Stock, $.01 par value:
Authorized shares -- 20,000,000
Issued and outstanding shares -- 7,527,788 -- 1994; and
7,821,974 -- 1995.............................................. 75,278 78,201
Additional paid-in capital........................................ 42,537,340 43,462,921
Deficit accumulated during the development stage.................. (20,058,396) (29,259,472)
------------- -------------
Total stockholders' equity.......................................... 22,554,222 14,281,650
------------- -------------
Total liabilities and stockholders' equity.......................... $ 25,122,171 $ 15,518,645
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 12,
1986
YEAR ENDED DECEMBER 31, (INCEPTION)
---------------------------------- TO DECEMBER
1993 1994 1995 31, 1995
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Revenues:
Net sales.................. $1,857,135 $1,450,675 $ 151,074 $13,750,884
Research and development
fees...................... 271,779 452,945 496,637 2,496,735
Licensing revenue.......... 95,831 714,665 187,500 1,377,996
---------- ---------- ---------- -----------
2,224,745 2,618,285 835,211 17,625,615
Costs and expenses:
Cost of goods sold......... 2,843,896 2,799,179 240,038 17,831,415
Research and product
development............... 1,856,932 3,548,938 6,504,528 15,120,291
Selling, general and
administrative............ 1,207,535 2,972,453 3,658,572 14,735,034
---------- ---------- ---------- -----------
5,908,363 9,320,570 10,403,138 47,686,740
Other income (expense):
Interest income............ 89,950 473,037 453,737 1,535,259
Interest expense........... (84,380) (20,678) (5,989) (913,393)
Other income (expense)..... (1,577) 37,891 13,084 273,768
---------- ---------- ---------- -----------
3,993 490,250 460,832 895,634
---------- ---------- ---------- -----------
Net loss and deficit
accumulated during the
development stage........... $(3,679,625) $(6,212,035) $(9,107,095) $(29,165,491)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Net loss per share:
Primary.................... $ (2.07) $ (1.82) $ (1.16) $ (12.80)
Fully diluted.............. $ (.78) $ (.95) $ (1.16) $ (7.79)
Weighted average shares
outstanding:
Primary.................... 1,778,370 3,413,176 7,821,974 2,278,099
Fully diluted.............. 4,726,985 6,504,946 7,821,974 3,742,427
</TABLE>
See accompanying notes.
F-5
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sale of Common Stock to founders at $.09 per share on
December 12, 1986....................................... -- $ -- 500,000 $ 5,000 $ 40,000
Issuance of stock warrant.............................. -- -- -- -- 50
Net loss for the period from December 12, 1986
(inception) to December 31, 1986...................... -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1986............................. -- -- 500,000 5,000 40,050
Issuance of Convertible Preferred Stock at $2.78 per
share in five closing dates between May and December
1987.................................................. 899,275 8,993 -- -- 2,491,007
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1987............................. 899,275 8,993 500,000 5,000 2,531,057
Issuance of Convertible Preferred Stock at $5.60 per
share in April 1988................................... 357,132 3,571 -- -- 1,996,429
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1988............................. 1,256,407 12,564 500,000 5,000 4,527,486
Issuance of Convertible Preferred Stock at $5.60 per
share in June 1989, net of offering costs of
$29,594............................................... 767,854 7,679 -- -- 4,262,726
Issuance of stock warrants............................. -- -- -- -- 200
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1989............................. 2,024,261 20,243 500,000 5,000 8,790,412
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1990............................. 2,024,261 20,243 500,000 5,000 8,790,412
Stock options exercised................................ -- -- 5,000 50 13,950
Exercise of stock warrants............................. -- -- 35,971 360 99,639
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1991............................. 2,024,261 20,243 540,971 5,410 8,904,001
Issuance of Convertible Preferred Stock at $6.00 per
share in May 1992, net of offering costs of
$401,900.............................................. 1,558,319 15,583 -- -- 8,932,455
Stock options exercised................................ -- -- 24,331 243 61,889
Conversion of Preferred Stock to Common Stock.......... (633,989) (6,340) 633,989 6,340 --
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1992............................. 2,948,591 29,486 1,199,291 11,993 17,898,345
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1993............................. 2,948,591 29,486 1,199,291 11,993 17,898,345
Issuance of Convertible Preferred Stock at $7.00 per
share in January 1994, net of offering costs of
$531,762.............................................. 1,214,282 12,143 -- -- 7,956,087
Conversion of Convertible Preferred Stock.............. (4,162,873) (41,629) 4,162,873 41,629 --
Issuance of Common Stock at $9.00 per share in August
1994, net of offering costs of $2,071,371............. -- -- 2,050,000 20,500 16,358,132
Stock options exercised................................ -- -- 108,482 1,085 284,843
Exercise of stock warrants............................. -- -- 7,142 71 39,933
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1994............................. -- -- 7,527,788 75,278 42,537,340
Stock options exercised................................ -- -- 278,487 2,766 831,763
Exercise of stock warrants............................. -- -- 15,699 157 93,818
Net loss for the year.................................. -- -- -- -- --
---------- ----------- --------- ----------- -----------
Balance at December 31, 1995............................. -- $ -- 7,821,974 $ 78,201 $43,462,921
---------- ----------- --------- ----------- -----------
---------- ----------- --------- ----------- -----------
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------- -----------
<S> <C> <C>
Sale of Common Stock to founders at $.09 per share on
December 12, 1986....................................... $ -- $ 45,000
Issuance of stock warrant.............................. -- 50
Net loss for the period from December 12, 1986
(inception) to December 31, 1986...................... (1,679) (1,679)
------------- -----------
Balance at December 31, 1986............................. (1,679) 43,371
Issuance of Convertible Preferred Stock at $2.78 per
share in five closing dates between May and December
1987.................................................. -- 2,500,000
Net loss for the year.................................. (714,125) (714,125)
------------- -----------
Balance at December 31, 1987............................. (715,804) 1,829,246
Issuance of Convertible Preferred Stock at $5.60 per
share in April 1988................................... -- 2,000,000
Net loss for the year.................................. (1,825,173) (1,825,173)
------------- -----------
Balance at December 31, 1988............................. (2,540,977) 2,004,073
Issuance of Convertible Preferred Stock at $5.60 per
share in June 1989, net of offering costs of
$29,594............................................... -- 4,270,405
Issuance of stock warrants............................. -- 200
Net loss for the year.................................. (1,747,306) (1,747,306)
------------- -----------
Balance at December 31, 1989............................. (4,288,283) 4,527,372
Net loss for the year.................................. (1,881,779) (1,881,779)
------------- -----------
Balance at December 31, 1990............................. (6,170,062) 2,645,593
Stock options exercised................................ -- 14,000
Exercise of stock warrants............................. -- 99,999
Net loss for the year.................................. (2,314,688) (2,314,688)
------------- -----------
Balance at December 31, 1991............................. (8,484,750) 444,904
Issuance of Convertible Preferred Stock at $6.00 per
share in May 1992, net of offering costs of
$401,900.............................................. -- 8,948,038
Stock options exercised................................ -- 62,132
Conversion of Preferred Stock to Common Stock.......... -- --
Net loss for the year.................................. (1,681,986) (1,681,986)
------------- -----------
Balance at December 31, 1992............................. (10,166,736) 7,773,088
Net loss for the year.................................. (3,679,625) (3,679,625)
------------- -----------
Balance at December 31, 1993............................. (13,846,361) 4,093,463
Issuance of Convertible Preferred Stock at $7.00 per
share in January 1994, net of offering costs of
$531,762.............................................. -- 7,968,230
Conversion of Convertible Preferred Stock.............. -- --
Issuance of Common Stock at $9.00 per share in August
1994, net of offering costs of $2,071,371............. -- 16,378,632
Stock options exercised................................ -- 285,928
Exercise of stock warrants............................. -- 40,004
Net loss for the year.................................. (6,212,035) (6,212,035)
------------- -----------
Balance at December 31, 1994............................. (20,058,396) 22,554,222
Stock options exercised................................ -- 834,529
Exercise of stock warrants............................. (93,981) (6)
Net loss for the year.................................. (9,107,095) (9,107,095)
------------- -----------
Balance at December 31, 1995............................. $(29,259,472) $14,281,650
------------- -----------
------------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 12,
1986
YEAR ENDED DECEMBER 31, (INCEPTION) TO
-------------------------------------- DECEMBER 31,
1993 1994 1995 1995
----------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................. $(3,679,625) $ (6,212,035) $(9,107,095) $(29,165,491)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 556,677 667,483 582,760 3,414,224
Preferred stock issued for accrued
interest........................... -- -- -- 141,448
Gain on sale of property, plant and
equipment.......................... -- (9,242) (44,028) (53,270)
Changes in operating assets and
liabilities:
Accounts receivable............... 8,738 (195,812) 324,895 (212,971)
Inventories....................... 94,465 (108,270) (2,363) (324,610)
Other current assets.............. 31,432 (125,502) (76,103) (287,279)
Accounts payable.................. (98,538) 1,259,884 (1,115,115) 291,863
Accrued expenses.................. (53,949) 735,710 (215,839) 695,127
Advance royalties................. -- -- -- 250,000
----------- ------------ ----------- --------------
Net cash used in operating
activities........................... (3,140,800) (3,987,784) (9,652,888) (25,250,959)
INVESTING ACTIVITIES
Purchases of and deposits on property,
plant and equipment.................. (845,242) (7,529,697) (1,620,518) (14,146,060)
Purchases of short-term investments... -- (11,727,864) (6,819,276) (18,547,140)
Proceeds from sale of property, plant
and equipment........................ -- 37,500 434,383 471,883
Proceeds from maturities of short-term
investments.......................... -- 984,682 17,562,458 18,547,140
Patents and trademarks................ (62,570) (176,332) (92,089) (511,743)
----------- ------------ ----------- --------------
Net cash (used in) provided by
investing activities................. (907,812) (18,411,711) 9,464,958 (14,185,920)
FINANCING ACTIVITIES
Net proceeds from issuance of stock:
Common Stock........................ -- 16,704,564 834,523 17,746,752
Preferred Stock..................... -- 7,968,230 -- 25,458,690
Borrowings under line of credit....... -- -- -- 450,000
Payment on line of credit............. -- -- -- (450,000)
Lease financing of equipment.......... -- -- -- 2,441,650
Security deposits on leases........... 38,774 (278,125) -- (290,650)
Proceeds from issuance of notes
payable and warrants................. -- -- -- 1,923,950
Payments on notes payable............. -- -- -- (1,823,700)
Payments on capital leases............ (292,331) (260,747) -- (2,441,650)
Organization costs.................... -- -- -- (19,420)
----------- ------------ ----------- --------------
Net cash (used in) provided by
financing activities................. (253,557) 24,133,922 834,523 42,995,622
----------- ------------ ----------- --------------
Increase (decrease) in cash and cash
equivalents.......................... (4,302,169) 1,734,427 646,593 3,558,743
Cash and cash equivalents at beginning
of period............................ 5,479,892 1,177,723 2,912,150 --
----------- ------------ ----------- --------------
Cash and cash equivalents at end of
period............................... $ 1,177,723 $ 2,912,150 $ 3,558,743 $ 3,558,743
----------- ------------ ----------- --------------
----------- ------------ ----------- --------------
Supplemental schedule of noncash
investing and financing activities:
Note payable exchanged for issuance
of Preferred Stock................. $ -- $ -- $ -- $ 1,517,500
Preferred Stock issued for note
receivable......................... $ -- $ -- $ -- $ 50,000
</TABLE>
See accompanying notes.
F-7
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. DEVELOPMENT STAGE COMPANY
CIMA LABS INC. is a development stage company formed on December 12, 1986
to develop and market certain effervescent delivery technologies and focused
initially on liquid effervescents. Initial sales commenced on January 28,
1988 and have been derived principally from manufacturing of liquid
effervescent and other products for third parties. In September 1992, patent
claims were allowed on the Company's OraSolv technology and the Company began
to emphasize development of products using this new technology.
The Company's strategy is to enter into collaborative arrangements with
pharmaceutical and other healthcare companies to develop OraSolv products to
be marketed by its corporate partners. The Company's future profitability
is, therefore, dependent upon the Company's ability to develop products that
meet the requirements of its corporate partners and upon the marketing
efforts of these corporate partners. Although the Company believes these
partners will have an economic motivation to market these products
vigorously, the amount and timing of resources to be devoted to marketing are
not within the control of the Company. These partners independently could
make material marketing and other commercialization decisions which could
adversely affect the Company's future revenues. Failure of these partners to
market the Company's products successfully could have a material adverse
effect on the Company's financial condition and result of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
ninety days or less when purchased to be cash equivalents. Cash equivalents are
carried at cost which approximates fair market value.
SHORT-TERM INVESTMENTS
Company investments are comprised of debt securities and are classified
as available for sale. These securities are carried at cost which
approximates fair value. Realized gains and losses and declines in value
judged to be other than temporary are included in other income.
PATENTS AND TRADEMARKS
Costs incurred in obtaining patents and trademarks are amortized on a
straight-line basis over sixty months. The Company periodically reviews its
patents and trademarks for impairment in value. Any adjustment from the
analysis is charged to operations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets
ranging from 3 to 15 years. Leasehold improvements are amortized over the
shorter of the term of the lease or life of the asset.
INVENTORIES
Inventories are valued at cost under the first-in, first-out (FIFO) method
which is not in excess of market.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF", which requires impairment losses to be
recorded 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'
F-8
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company will
adopt Statement No. 121 in the first quarter of fiscal 1996 and, based on
current circumstances, does not believe the effect of adoption will be
material.
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
Taxes are provided based on earnings reported for financial statement
purposes. Deferred income taxes are provided for temporary differences between
financial reporting and tax bases of assets and liabilities under the liability
method.
REVENUE RECOGNITION
Sales of product are recorded upon shipment. Research and development
fees are recognized as the services are provided. Revenues from license
agreements are recorded when obligations under the agreement have been
substantially completed. Royalties are recorded when earned.
NET LOSS PER COMMON SHARE
The primary net loss per share is computed using the weighted average
number of shares of common stock and common stock equivalents, if dilutive,
outstanding during the periods presented. The fully diluted loss per share
is presented using the "if converted" method and reflects the impact of the
conversion of the preferred stock to common stock at the beginning of the
earliest period presented or at the date of issuance, if later. For periods
prior to July 1994 (the initial public offering), the loss per share amounts
give effect to the application of Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 83. Pursuant to SAB No. 83, common
stock issued by the Company at prices less than the initial public offering
price during the twelve months immediately preceding the initial public
offering, plus the common stock equivalent shares granted at exercise prices
less than the initial public offering price during the same period, have been
included in the calculation of shares used in the calculation of net loss per
share as if they were outstanding for all periods prior to the initial public
offering.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform to the 1995 classifications.
3. SHORT-TERM INVESTMENTS
At December 31, 1994, short-term investments, including $1,491,293
classified as cash equivalents, consisted of U.S. Treasury securities and
obligations of U.S. Government agencies.
F-9
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Principal classifications of inventories were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Materials and packaging.............................. $ 287,346 $ 324,610
Work-in-process...................................... 22,456 --
Finished goods....................................... 12,445 --
---------- ----------
$ 322,247 $ 324,610
---------- ----------
---------- ----------
</TABLE>
5. 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, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
------------- --------------
<S> <C> <C>
Deferred assets:
Net operating loss........................................... $ 7,268,421 $ 11,899,425
UNICAP....................................................... 27,069 31,163
Accrued vacation............................................. 48,708 61,288
Inventory reserve............................................ 70,000 132,883
Accounts receivable allowance................................ 35,000 --
Other accruals............................................... 51,450 101,218
------------- --------------
7,500,648 12,225,977
Deferred liability:
Depreciation and amortization................................ 542,224 492,440
------------- --------------
Net deferred income tax assets................................. 6,958,424 11,733,537
Valuation allowance............................................ (6,958,424) (11,733,537)
------------- --------------
Net deferred income taxes...................................... $ -- $ --
------------- --------------
------------- --------------
</TABLE>
The Company will be subject to federal income taxes when operations
become profitable. The Company's tax operating loss carryforwards of
approximately $29,663,562 can be carried forward to offset future taxable
income, limited due to changes in ownership under the net operating loss
limitation rules, and expire in the year 2010.
6. CONVERTIBLE PREFERRED STOCK
In January 1994, the Company obtained proceeds of $8.5 million in
additional equity financing. A total of 1,214,282 shares of Series E
Convertible Preferred Stock at $7.00 per share were issued in two closings.
The Series E Convertible Preferred Stock was convertible into Common Stock at
$7.00 per share and had similar terms and conditions to the other series of
Preferred Stock. Along with Series D Preferred Stockholders, Series E
Preferred Stockholders had liquidation preference over the remainder of the
Preferred Stockholders.
A Board member acted as the Company's sales agent in connection with the
issuance of the Series E Convertible Preferred Stock in January 1994 and
received $484,000 in compensation. Seventy-five percent of the amount was
payable in cash and the remaining twenty-five percent was paid in stock.
F-10
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CONVERTIBLE PREFERRED STOCK (CONTINUED)
The Convertible Preferred Stock outstanding at December 31, 1993, which
consisted of 265,286 shares of Series A, 357,132 shares of Series B, 767,854
shares of Series C, and 1,558,319 shares of Series D, as well as the Series E
described above, were converted to Common Stock concurrently with the closing
of the initial public offering by the Company in August 1994.
7. LEASES
The Company leases office and manufacturing facilities in Brooklyn Park
and Eden Prairie, Minnesota. The Brooklyn Park facility is leased under a
non-cancelable operating lease expiring in September 1998. In addition to
base rent, the Company pays a pro rata portion of the operating expenses of
the facilities. The Company's facilities in Eden Prairie are under a
sub-lease agreement which provides for escalating rent payments. As part of
securing the sub-lease, the Company obtained a $500,000 stand-by letter of
credit from a bank. A $250,000 certificate of deposit was pledged as
collateral for the letter of credit. The certificate of deposit is included
in lease deposits in the balance sheet.
Future minimum lease commitments for all operating leases with initial or
remaining terms of one year or more are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996.......................................................... $ 482,100
1997.......................................................... 500,850
1998.......................................................... 483,450
1999.......................................................... 412,500
2000.......................................................... 375,000
Thereafter.................................................... 1,800,000
---------
$4,053,900
---------
---------
</TABLE>
Rent expense on operating leases, excluding operating expenses, for the
years ended December 31, 1993, 1994 and 1995 was $189,000, $375,000 and
$414,600, respectively.
8. STOCK OPTIONS AND WARRANTS
The Company has a Stock Option and Stock Award Plan ("the Plan") under
which options to purchase up to 1,750,000 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-11
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
Shares available and options granted are as follows:
<TABLE>
<CAPTION>
SHARES INCENTIVE RANGE IN
AVAILABLE STOCK NON-QUALIFIED OPTION PRICE PER
FOR GRANT OPTIONS STOCK OPTIONS TOTAL SHARE
---------- ---------- ------------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993............ 481,047 505,468 163,485 668,953 $ 2.00 to $ 3.00
Reserved.............................. 600,000 -- -- --
Granted............................... (612,016) 595,944 16,072 612,016 3.50 to 10.125
Forfeited............................. 28,231 (28,231) -- (28,231) 2.80 to 3.00
Exercised............................. -- (57,496) (50,986) (108,482) 2.00 to 3.00
---------- ---------- ------------- ----------
Balance at December 31, 1994............ 497,262 1,015,685 128,571 1,144,256 2.80 to 10.125
Granted............................... (477,750) 477,750 -- 477,750 4.75 to 7.625
Forfeited............................. 180,724 (175,061) (34,999) (210,060) 2.80 to 10.125
Exercised............................. -- (269,915) (8,572) (278,487) 2.80 to 3.50
---------- ---------- ------------- ----------
Balance at December 31, 1995............ 200,236 1,048,459 85,000 1,133,459 $ 2.80 to $10.125
---------- ---------- ------------- ----------
---------- ---------- ------------- ----------
Exercisable:
December 31, 1993..................... 264,003 $ 2.00 to $ 3.00
December 31, 1994..................... 298,163 2.80 to 3.50
December 31, 1995..................... 253,152 2.80 to 9.00
</TABLE>
The Company 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, 1995, options to purchase 165,000 shares of Common Stock
have been granted at prices ranging from $4.75 to $9.00 per share. To date,
none of these options have been exercised.
In connection with a bridge financing in 1989, the Company issued
warrants to purchase 7,365 shares of its Common Stock at $5.60 per share. Of
these, warrants to purchase 7,142 shares were exercised in April 1994. The
remaining warrants expired in the same month.
In connection with $950,000 of bridge financing in 1991 and $467,500 of
bridge financing in 1992, the Company issued warrants to purchase an
aggregate of 189,801 shares of its Common Stock at $6.00 per share. The
warrants are exercisable at various dates from January 1996 to January 1997.
In connection with an equipment lease agreement entered into during 1991,
the Company issued warrants to purchase 37,917 shares of Series D Preferred
Stock at $6.00 per share. The warrants were exercised in a cashless transaction
in January 1995.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION." The Company has not determined the impact of the
new statement on its financial statements. The Company currently accounts
for its options under the provisions of Accounting Standards Board Opinion
No. 25, "Accounting for Stock Issued to Employees."
F-12
<PAGE>
CIMA LABS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DEFINED CONTRIBUTION PLAN
The Company established a 401(k) plan (the "Plan") effective January 1993.
All personnel employed on January 1, 1993 were eligible to participate in the
Plan. Others become eligible to participate at age 21 with six months of
service.
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, 1993, 1994 and 1995 was
$14,078, $16,289 and $28,335, respectively.
10. STOCK SPLIT
The Company's Board of Directors and stockholders approved a 1-for-2 reverse
stock split that was effective upon the closing of the initial public offering
in July 1994. All share and per share information has been adjusted to give
effect to the stock split in the financial statements.
11. GOING CONCERN
Net losses since the Company's inception have resulted in an accumulated
deficit balance of $29,259,472 at December 31, 1995. The Company's ability
to continue as a going concern and the realization of its assets and orderly
satisfaction of its liabilities are dependent on obtaining additional funds
from outside sources and generating sufficient working capital from
operations. The Company is currently exploring financing alternatives and
anticipates completing a financing transaction in 1996. The Company believes
that the successful completion of a financing transaction will satisfy its
cash requirements for the next twelve months. However, there can be no
assurance that the Company will be successful in completing a financing
transaction.
F-13
<PAGE>
CIMA LABS INC.
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Balance Charged to
at Beginning Costs and Less Balance at
Description of Year Expenses Deductions End of Year
- --------------------------------------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts $100,000 $(100,000) $ -- $ --
Obsolescence reserve -- 332,207 -- 332,207
------------- ----------- ------------ -------------
Total $100,000 $232,207 $ -- $332,207
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
Year ended December 31, 1994:
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts $ -- $100,000 $ -- $100,000
Obsolescence reserve -- -- -- --
------------- ----------- ------------ -------------
Total $ -- $100,000 $ -- $100,000
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
</TABLE>
F-14
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
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)
10.1 Consulting Agreement, dated April 24, 1995, between the
Company and Randall J. Wall. (3)(4)
10.2 Preferred Stock Purchase Agreement (Series C Convertible),
dated April 15, 1992, as amended. (2)
10.3 Preferred Stock Purchase Agreement (Series D Convertible),
dated January 2, 1994, as amended. (2)
10.4 Preferred Stock Purchase Agreement (Series E Convertible),
dated January 7, 1994. (2)
10.5 Real Property Lease, dated July 2, 1987, between Stuebner
Properties and the Company, as amended. (2)
10.6 Letter Agreement, dated February 1, 1995, between the Company
and Ronnie J. Spivey Ph.D. (3)(5)
10.7 Employment Agreement, dated July 1, 1995, between the Company
and John M. Siebert, Ph.D. (3)(6)
10.8 Real Property Lease, dated January 6, 1994, between The
Principal Mutual Life Insurance Company and the Company. (2)
10.9 Real Property Sublease, dated February 16, 1994, between Braun's
Fashion, Inc. and the Company, including Prime Lease as amended
and Consent, Non-Disturbance and Prime Lessor's Agreement dated
February 22, 1994. (2)
10.10 Real Property Lease, dated March 10, 1994, between Village
Plaza, Inc. and the Company. (2)
10.11 Amended and Restated Stock Option and Stock Award Plan. (2)(3)
10.12 1994 Director's Stock Option Plan. (2)(3)
10.13 Employment Agreement, dated October 13, 1993, between the
Company and Randall J. Wall, as amended. (2)(3)
10.14 Form of Employment Agreement. (2)(3)
10.15 Letter Agreement, dated December 23, 1992, between the
Company and Dr. Jerry A. Weisbach, as amended. (2)(3)
10.16 Form of Confidentiality Agreement (for discussions with other
companies). (2)
10.17 Form of Visitor's Agreement. (2)
10.18 License Agreement, dated January 28, 1994, between the
Company and SRI International. (2)
10.19 Agreement, dated April 8, 1994, between the Company and
Beecham Group plc. (2)
10.20 License Agreement and Supply Agreement, dated August 15, 1991,
between the Company and Merck & Co., Inc. (2)
10.21 License Agreement and Supply Agreement, dated October 12, 1994,
by and between Pfizer Inc. and the Company. (7)
10.22 Option and Development Agreement, dated May 19, 1994, between
the Company and Sterling Winthrop, Inc. (2)
10.23 License and Development Agreement, dated April 15, 1994,
between the Company and Glaxo Group Limited. (2)
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
10.24 Formulation Agreement, dated August 1, 1992, between the
Company and Monsanto Company. (2)
10.25 Supply Agreement, dated April 18, 1990, between the Company
and P. Leiner Nutritional Products, Inc. (2)
10.26 Supply Agreement, dated February 13, 1992, between the
Company and Northhampton Medical, Inc. (2)
10.27 Form of Director and Officer Indemnification
Agreement. (2)(3)
11.1 Statement of Calculation of Net Loss Per Share. (8)
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney. (8)
- -------------------------
(1) Incorporated herein by reference to the correspondingly numbered exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(2) Incorporated herein by reference to the correspondingly numbered exhibit to
the Registrant's Registration Statement on Form S-1, File No. 33-80194.
(3) Items that are management contracts or compensatory plans or arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
(4) Incorporated herein by reference to Exhibit 10.25 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
(5) Incorporated by reference from Exhibit 10.20 to Registrant's Registration
Statement on Form S-1 (amended to Form S-3), Registration No. 33-93616.
(6) Incorporated by reference from Exhibit 99.1 to Registrant's Registration
Statement on Form S-3, Registration No. 33-93616.
(7) Incorporated by reference from Exhibit 10 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994, File No. 0-24424.
(8) Previously filed.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-82794 and Form S-8 No. 33-82790) pertaining to certain stock
option plans of the Company, of our report dated January 26, 1996, with
respect to the financial statements and schedule of CIMA LABS INC., included
in the Annual Report (Form 10-K/A Amendment No. 1) for the year ended
December 31, 1995.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 29, 1996
