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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-24424
CIMA LABS INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1569769
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10000 Valley View Road, Eden Prairie, Minnesota 55344-9361
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(Address of principal executive offices, including zip code)
(612) 947-8700
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(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.01 par value 9,610,394 Shares
---------------------------- ------------------------------
(Class) (Outstanding at July 31, 1998)
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CIMA LABS INC.
TABLE OF CONTENTS
PAGE NUMBER
-----------
COVER PAGE 1
TABLE OF CONTENTS 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of June 30, 1998
and December 31, 1997 3
Condensed Statements of Operations for the three-
month and six-month periods ended June 30, 1998
and 1997 4
Condensed Statements of Cash Flows for the six-month
periods ended June 30, 1998 and 1997 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIMA LABS INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997(1)
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(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $2,834,822 $1,145,760
Short-term investments - 3,277,300
Accounts receivable:
Net of allowance for doubtful accounts $32,150-1998; $32,150-1997 1,011,865 1,597,814
Inventories--Note B 1,175,841 630,619
Prepaid expenses 164,177 146,805
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Total current assets 5,186,705 6,798,298
Property, plant and equipment 14,618,231 14,149,345
Less accumulated depreciation (4,533,833) (3,891,167)
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10,084,398 10,258,178
Other assets:
Lease deposits 40,651 40,651
Patents and trademarks, net of amortization 230,872 230,889
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271,523 271,540
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Total assets $15,542,626 $17,328,016
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $338,535 $128,712
Accrued expenses 617,787 620,580
Advance royalties 651,405 741,405
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Total current liabilities 1,607,727 1,490,697
Long term liabilities:
Equipment Financing 209,326 -
Stockholders' equity
Preferred Stock, $.01 par value:
Authorized shares--5,000,000; issued and
outstanding shares-- none - -
Common Stock, $.01 par value:
Authorized shares--20,000,000; issued and
outstanding shares--9,610,394--June 30, 1998;
9,608,394-- December 31, 1997 96,104 96,084
Additional paid-in capital 57,274,274 57,268,594
Accumulated losses (43,644,805) (41,527,359)
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Total stockholders' equity 13,725,573 15,837,319
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Total liabilities and stockholders' equity $15,542,626 $17,328,016
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</TABLE>
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(1) The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. See notes to condensed
financial statements.
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CIMA LABS INC.
Condensed Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
1998 1997 1998 1997
------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ - $640,864 $157,692 $832,572
Research and development fees & 1,336,125 381,564 2,317,925 458,112
licensing revenues
------------------------- --------------------------
1,336,125 1,022,428 2,475,617 1,290,684
Costs and expenses:
Cost of goods sold 296,900 987,233 637,522 1,568,106
Research and product development 869,276 754,161 2,347,776 1,984,661
Selling, general and administrative 940,094 998,660 1,700,942 1,888,359
------------------------- --------------------------
2,106,270 2,740,074 4,686,240 5,441,126
Other income (expense):
Interest income, net 34,339 65,413 92,298 193,704
Other income (expense) (609) 123,029 882 124,222
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33,730 188,442 93,180 317,926
Net loss: $(736,415) $(1,529,204) $(2,117,443) $(3,832,516)
------------------------- --------------------------
------------------------- --------------------------
Net loss per share:
Basic and diluted $(0.08) $(0.16) $(0.22) $(0.40)
Weighted average shares outstanding:
Basic and diluted 9,610,394 9,490,541 9,609,808 9,468,893
See notes to condensed financial statements.
</TABLE>
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CIMA LABS INC.
Condensed Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,117,443) $(3,832,516)
Adjustments to reconcile net loss to net cash used in
operating activities:
depreciation and amortization 807,438 422,382
gain on sale of property, plant and equipment 2,982 -
Changes in operating assets and liabilities:
accounts receivable 545,662 (519,528)
inventories (545,222) (380,647)
other current assets 22,916 (59,333)
accounts payable 209,824 295,941
accrued expenses (35,958) 42,498
advance royalties (105,000) -
-------------------------
Net cash used in operating activities (1,214,801) (4,031,203)
INVESTING ACTIVITIES
Purchase of and deposits on property, plant and equipment (349,878) (360,943)
Proceeds from sale of property, plant & equipment 27,000 -
Proceeds of maturities of short-term investments 3,277,297 5,350,885
Patents and trademarks (56,255) (58,081)
-------------------------
Net cash used in investing activities 2,898,164 4,931,861
FINANCING ACTIVITIES
Proceeds from issuance of stock:
Common Stock 5,700 429,168
Preferred Stock - -
Security deposits on leases - 250,000
Payments on capital leases - -
-------------------------
Net cash (used in) provided by financing activities 5,700 679,168
-------------------------
Increase (decrease) in cash and cash equivalents 1,689,063 1,579,826
Cash and cash equivalents at beginning of period 1,145,760 2,666,032
-------------------------
Cash and cash equivalents at end of period $2,834,823 $4,245,858
-------------------------
-------------------------
Supplemental schedule of noncash
investing and financing activities:
Acquisition of equipment pursuant to equipment loan and capital
lease obligation 257,490 -
</TABLE>
See notes to condensed financial statements.
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CIMA LABS INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month and six-month periods ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1998. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997.
NOTE B - INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or fair market
value.
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- --------------
<S> <C> <C>
Raw materials $725,413 $484,582
Work in process -- --
Finished products 450,428 146,037
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$1,175,841 $630,619
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----------- --------------
</TABLE>
NOTE C - NET LOSS PER SHARE
The Company has adopted Financial Accounting Standards Board Statement No. 128,
EARNINGS PER SHARE. This statement replaces previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary EPS, basic EPS excludes any dilutive effect of options, warrants
and convertible securities. Diluted earnings per share is very similar to
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented to conform with Statement 128
requirements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "ANTICIPATE," "BELIEVE," "EXPECT,"
"ESTIMATE" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS
MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THE SUCCESS OF THE COMPANY IN MANUFACTURING THE COMPANY'S
TECHNOLOGY, THE AVAILABILITY OF ADEQUATE FUNDS FOR THE COMPANY'S OPERATIONS, THE
SUCCESS OF THE COMPANY IN COMMERCIALIZING ITS NEW DRUG DELIVERY PROGRAMS, AND
THE COMPANY'S RELIANCE ON ITS KEY PERSONNEL AND COLLABORATIVE PARTNERS, AS WELL
AS THOSE DISCUSSED IN "BUSINESS RISKS" BELOW.
GENERAL
CIMA LABS INC., (the "Company"), founded in 1986, is a drug delivery
company focused primarily on the development and manufacture of pharmaceutical
products based upon its patented OraSolv-Registered Trademark- technology for
marketing by multinational pharmaceutical companies. OraSolv is an oral dosage
formulation incorporating microencapsulated active drug ingredients into a
tablet which dissolves quickly in the mouth without chewing or water and which
effectively masks the taste of the medication being delivered. OraSolv's
fast-dissolving capability may enable patients in certain age groups or those
with a variety of conditions that limit their ability to swallow conventional
tablets to receive medication in a more convenient oral dosage form. The
Company believes that OraSolv is more convenient than traditional tablet-based
oral dosages as it does not require water to be ingested, thereby enabling
immediate medication at the onset of symptoms. In addition, OraSolv can provide
more accurate administration of doses than liquid or suspension formulations as
no measuring is required. The Company believes OraSolv's ease of use and
effective taste-masking may foster greater patient compliance with recommended
dosage regiments, both for over-the-counter ("OTC") and prescription products,
thereby improving therapeutic outcomes and reducing costs in the healthcare
system.
The Company's business strategy is to commercialize its OraSolv technology
through collaborations with multinational pharmaceutical companies with emphasis
on products which command a large market share, are in large market segments, or
are profitable prescription pharmaceuticals. Product differentiation and brand
name identity are critical to the successful marketing of pharmaceutical
products. The Company believes that OraSolv affords pharmaceutical companies a
means to significantly differentiate their products in the competitive
pharmaceutical marketplace. Because it is a patented technology, OraSolv
affords more enduring product differentiation than some of the more traditional
approaches of changing product flavor or packaging innovations, which can be
easily replicated. The Company has entered into agreements with a number of
pharmaceutical companies for development, manufacture and commercialization of
OraSolv products.
The Company is currently focusing on developing OraSolv products for
selected prescription drug applications. The Company believes that such
prescription OraSolv products should result in improved taste acceptance and
ease of administration, and so enhance patient compliance with the recommended
dosage regimen for such prescription pharmaceuticals. In the third quarter of
1997, the Company signed its first two pharmaceutical license option and product
development agreements with two multinational pharmaceutical companies. The
Company is continuing work on both of these projects. On July 1, 1998, the
Company signed Exclusive License & Supply Agreements with Novartis Consumer
Health, Inc. ("Novartis"), a multinational pharmaceutical company. The
agreements cover full scale production of three Triaminic-Registered Trademark-
products in the Company's OraSolv dosage form. The Company began commercial
production for this product during the second quarter of 1998. It is
anticipated that the retail launch for this product will be in late 1998. The
development of new oral drug delivery technologies has also been initiated.
These technologies include a new oral solid delivery system, DuraSolv-TM-; a
unique sustained-released delivery system, OraSolv-Registered Trademark-SR; and
an
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improved efficacy delivery system, OraVescent-TM-. One of the Company's
recently signed agreements utilizes the OraSolvSR technology. The goal of the
Company is to focus on drug delivery technologies that improve efficacy and
therefore provide greater value-added benefits.
At June 30, 1998, the Company had accumulated losses of approximately
$43,600,000. The Company recorded its first commercial sales using the
Company's OraSolv technology in the three-month period ended March 31, 1997.
Prior to this the Company's revenues have been from sales using the Company's
AutoLution-Registered Trademark- (a liquid effervescent) technology, license
fees paid by corporate partners in consideration of the transfer of rights under
collaborative 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. Approximately 52% of the Company's total
revenues to date have been generated from development work and sales for
AutoLution products. The Company is not currently manufacturing liquid
effervescent products, and has not recognized any revenues from such products
since 1995. Over the last three years, revenue has been generated primarily
from product development fees for work related to OraSolv products and to a
lesser extent sales and licensing revenue related to OraSolv products. In
addition to revenues from manufacturing, product development and licensing, the
Company has funded operations from private and public sales of equity
securities, realizing net proceeds of approximately $26,000,000 from private
sales of equity securities and $16,400,00 and $12,000,000 from the Company's
July 1994 initial public offering and May 1996 public offering of its Common
Stock, respectively. At June 30, 1998, the Company had 9,610,394 shares of its
Common Stock outstanding.
The Company's ability to generate revenues is dependent upon its ability to
develop new, innovative drug delivery technologies and to enter into and be
successful in collaborative arrangements with pharmaceutical and other
healthcare companies for the development and manufacture of OraSolv products and
products based on such new technologies to be marketed by these corporate
partners. The Company is highly dependent upon the efforts of their corporate
partners to successfully market OraSolv products. Although the Company believes
these partners have and will have an economic motivation to market these
products vigorously, the amount and timing of resources to be devoted to
marketing are not within the control of the Company. These partners
independently could make material marketing and other commercialization
decisions which could adversely affect the Company's future 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.
The Company expects that losses will continue through at least 1998, even
though the Company expects to continue generating sales revenue from
manufacturing OraSolv products in 1998. Research and development expenses will
increase as the Company continues to investigate new drug delivery technologies.
In addition, the Company is investigating the possibility of utilizing
microencapsulation for the development of sustained released systems. Personnel
costs for research and development are expected to remain relatively stable as
the majority of the necessary personnel for this function have already been
hired. Personnel costs for administration may decrease slightly as a reflection
of our effort to reduce corporate overhead. As the Company continues
production, additional operations personnel may need to be added to meet
corporate partners' orders. Manufacturing infrastructure costs should not need
to increase materially as there is capacity to meet short-term production needs.
In recent years, the Company has actively marketed its OraSolv technology
to the pharmaceutical industry. The Company is presently engaged in product
development and manufacturing scale-up efforts with several different
pharmaceutical companies regarding a variety of potential products. In the
first quarter of 1997, the Company began commercial production for Bristol-Myers
Squibb Company ("Bristol-Myers") of the first product in the Company's OraSolv
dosage form, which was officially launched in September 1997. In the second
quarter of 1997, the Company expanded its relationship with Bristol-Myers and
signed a global non-exclusive license agreement which covers multiple products.
In the third quarter of 1997, the first two
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prescription product license option and development agreements were signed.
Each agreement is for a product which is currently marketed by the Company's
partners, Schering Corporation ("Schering-Plough") and Zeneca Pharmaceuticals
("Zeneca"). The Company and Zeneca have already announced their collaboration
on Zeneca's new antimigraine compound zolmitriptan (Zomig-Registered
Trademark-). In the fourth quarter of 1997, a development and license option
agreement was signed with Novartis, and as previously noted, this has been
converted to exclusive license and supply agreements effective July 1, 1998.
There can be no assurance that any of these activities or discussions will
result in the eventual marketing of products using OraSolv or the Company's
other technologies.
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The Company's results of operations for the three- and six-month periods
ended June 30, 1998 reflect the continued emphasis of developing OraSolv
products for our corporate partners and research efforts for the Company's new
technologies. Total revenues increased to $1,337,000 and $2,476,000 in the
three- and six-month periods ended June 30, 1998, respectively, from $1,023,000
and $1,291,000 in the three- and six-month periods ended June 30, 1997. In
1998, over 90% of the revenue relates to license revenue and product development
fees earned from the Company's corporate partners. The majority of these
revenues were generated by two prescription product collaborations, one each
with Schering Plough and Zeneca, and the over-the-counter product collaboration
with Novartis. The 1997 revenues consisted of sales of $641,000 for the initial
commercial product using the OraSolv technology. Inventory levels at the
customer were higher than anticipated in the first half of 1998 which is
reflected in the 1998 sales figure of $158,000. The $458,000 in product
development fees in the first six-months of 1997 is substantially for product
development fees for the OTC product, Tempra-Registered Trademark- for
Bristol-Myers that was launched in September 1997.
These revenues reflect the signing of license option and development
agreements with multinational pharmaceutical companies that provide for
licensing fees, milestone payments, royalties and manufacturing fees. So long
as the Company has relatively few agreements with corporate partners, license
revenues and product development fees will tend to fluctuate on a
quarter-to-quarter basis.
Cost of goods sold decreased to $297,000 and $638,000 in the three- and
six-month periods ended June 30, 1998, respectively, from $987,000 and
$1,568,000 in the three- and six-month periods ended June 30, 1997. The
decrease in 1998 is primarily attributable to decreased production and to
certain non-recurring start-up costs that were incurred in 1997 due to the
initial commercial production of a product using OraSolv technology. Cost of
goods sold for the three months ended June 30, 1998, do include costs for the
production of the Triaminic-Registered Trademark- products for Novartis for
which the supply agreement was signed July 1, 1998. Research and development
expenses increased to $869,000 and $2,348,000 for the three- and six-month
periods ended June 30, 1998, respectively, from $754,000 and $1,985,000 in the
three- and six-month periods ended June 30, 1997. The increase is a direct
result of increased research and development efforts being performed for the
Company's corporate partners. In addition, additional research personnel have
been hired to focus their efforts on developing new technologies. Selling,
general and administrative expenses decreased to $940,000 and $1,701,000 in the
three- and six-month periods ended June 30, 1998, respectively, from $999,000
and $1,888,000 for the same periods in 1997, respectively. The decrease in
selling, general and administrative expenses was primarily due to the reduction
in spending on consumer marketing research studies conducted in 1997, to support
OraSolv and reductions in legal and outside consulting fees. Other income
decreased to $34,000 and $93,000 in the three- and six-month periods ended June
30, 1998, respectively, from $188,000 and $318,000 for the same periods in 1997,
respectively. Other income is comprised mainly of interest income which has
decreased as its dependent on the cash position of the Company. In addition,
other income in the three-month period ended June 30, 1997, included a $120,000
state sales and use tax refund for previously purchased fixed assets.
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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 and
supply agreements. Through June 30, 1998, the Company had received net offering
proceeds from such private and public sales of approximately $57,268,000, had
net sales from manufacturing and supply agreements of approximately $16,567,000,
and other revenues that include licensing fees, product and development and
milestone fees of $9,947,000. Among other things, these funds were used to
purchase approximately $16,000,000 of capital equipment, including approximately
$7,500,000 in the last two quarters of 1994 in connection with completing the
Company's new manufacturing facility. Cash, cash equivalents and short-term
investments were approximately $2,835,000 at June 30, 1998.
The Company's long-term capital requirements will depend upon numerous
factors, including the status of the Company's collaborative arrangements with
corporate partners, the progress of the Company's research and development
programs and receipt of revenues from the collaborative agreements, sales of the
Company's products, and the need to expand production capacity. The Company
believes that its currently available funds together with revenues from
operations will meet its anticipated needs through 1998. Thereafter, or sooner
if conditions make it necessary, the Company will need to raise additional funds
through research and development relationships with suitable potential corporate
partners and/or 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 June 1998. At
December 31, 1997, the net operating losses available to offset taxable income
were approximately $42,259,000. Because the Company has experienced ownership
changes, pursuant to Internal Revenue Code regulations, future utilization of
the operating loss 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.
BUSINESS RISKS
The Company began commercial production of its first product in the
Company's OraSolv dosage form only one year ago and must be evaluated in light
of the uncertainties and complications present for any company that has just
recently begun to derive product revenues and, in particular, a company in the
pharmaceutical industry. The Company has accumulated aggregate net losses from
inception through June 30, 1998 of $43,600,000. 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 historically had been derived primarily
from the manufacturing of AutoLution and other non-OraSolv products which the
Company no longer manufactures. In more recent years, the Company has received
revenue from its commercial partners for product development and licensing of
OraSolv and to a lesser extent commercial production of an OraSolv dosage form
product which commenced in the first quarter of 1997 for Bristol-Myers. The
Company expects to continue to incur additional losses at least through 1998.
There can be no assurance that the Company will ever generate substantial
revenues or achieve profitability.
The Company is dependent upon its ability to enter into and perform under
collaborative arrangements with pharmaceutical companies for the development
and commercialization of its products. Failure of these partners to market the
Company's products successfully could have a material adverse effect on the
Company's financial condition and results of operations. The Company's revenues
are also dependent upon ultimate consumer acceptance of the OraSolv drug
delivery system and newly developed technologies as alternatives to conventional
oral dosage forms. The Company expects that OraSolv products will be priced
slightly higher than conventional swallow tablets. Although the Company believes
that the consumer research it has conducted has been encouraging, there can be
no assurance that market acceptance for the Company's OraSolv products will ever
develop or be sustained.
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The Company began manufacturing OraSolv products in commercial quantities
in February 1997. To achieve future desired levels of production, the Company
will be required to increase its manufacturing capabilities. There can be no
assurance that manufacturing can be scaled-up in a timely manner to allow
production in sufficient quantities to meet the needs of the Company's corporate
partners. Furthermore, the Company has only one manufacturing line and one
facility capable of manufacturing OraSolv products. If this production line
and/or facility becomes damaged or becomes incapable of manufacturing products
due to natural disaster, governmental regulatory issues or otherwise, the
Company would have no other means of producing OraSolv products.
The quick dissolve drug delivery field is fairly new and rapidly evolving
and it is expected to continue to undergo improvements and rapid technological
changes. There can be no assurance that current or new competitors will not
succeed in developing technologies and products that are more effective than any
which are being developed by the Company or which could render the Company's
technology and products non-competitive or that any technology developed by the
Company will be preferred to any existing or newly developed technologies.
The Company intends to increase its research and development expenditures
to enhance its current technologies, to pursue internal proprietary drug
delivery technologies and to pursue new technologies. Even if these
technologies appear promising during various stages of development, they may not
reach the commercialization stage for a number of reasons. Such reasons include
the possibilities of not finding a partner to market the product, the product
being difficult to manufacture on a large scale or of being uneconomical to
market.
The Company has conducted an initial review regarding the effect the
upcoming Year 2000 will have on its computer applications. This review included
key financial, information and operational systems. A plan is being developed
to insure that the Company's systems and software infrastructure are Year 2000
compliant. Given the relatively small size of the Company's systems and the
predominantly new hardware, software and operating systems, the Company does not
anticipate the incremental costs, if any, of making the required systems
modifications will have a material impact on the Company's results of operations
or financial condition. However, the conversion is an uncertainty and there can
be no assurance that unforeseen problems will not arise in connection with this
issue. In addition, the Company is unable to control whether its current and
future corporate partners are Year 2000 compliant.
The foregoing risks reflect the Company's stage of development and the nature of
the Company's industry. The Company is also subject to a range of additional
risks, including competition, uncertainties regarding the effects of healthcare
reform on the pharmaceutical industry, including pressures exerted on the prices
charged for pharmaceutical products and uncertainties regarding protection of
patents and proprietary rights, all of which may have a material adverse effect
on the Company's business.
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CIMA LABS INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has instituted an opposition proceeding in the European
Patent Office, and has requested that the United States Patent and Trademark
Office declare an interference proceeding, each of which has been reported in
the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1997.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 3, 1998, the Company held its annual meeting of stockholders,
at which meeting the stockholders took the following actions:
(i) elected John M. Siebert, Ph.D., Terrence W. Glarner, Steven B.
Ratoff and Joseph R. Robinson, Ph.D., to serve as directors of the
Company for the ensuing year and until their successors are elected;
(ii) approved the amendment and restatement of the Company's Equity
Incentive Plan to increase the aggregate number of shares of Common
Stock authorized for issuance under such plan by 400,000 shares to
2,400,000; and
(iii) ratified the selection of Ernst & Young LLP as independent
auditors of the Company for its fiscal year ending December 31, 1998.
Such actions were taken by the following votes:
<TABLE>
<CAPTION>
VOTES
-----
VOTES FOR WITHHELD
--------- ---------
<S> <C> <C>
Election of Directors:
John M. Siebert, Ph.D. 7,497,467 287,727
Terrence W. Glarner 7,501,267 283,927
Steven B. Ratoff 7,501,367 283,827
Joseph R. Robinson, Ph.D. 4,418,642 3,366,552
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
<S> <C> <C> <C>
Amendment of Stock Plan 5,788,542 1,981,609 15,043
Ratification of Auditors 7,758,044 6,800 20,350
</TABLE>
ITEM 5. OTHER INFORMATION.
None
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Item Description
---- -----------
10.11 Equity Incentive Plan, as amended and restated.
27 Financial Data Schedule.
13
<PAGE>
CIMA LABS INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
CIMA LABS INC.
Date: August 12, 1998 By: /s/ John M. Siebert
---------------------- -------------------------------------
John M. Siebert
President and Chief Executive Officer
Date: August 12, 1998 By: /s/ Keith P. Salenger
---------------------- -------------------------------------
Keith P. Salenger
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
14
<PAGE>
EXHIBIT INDEX
NO. OF EXHIBIT DESCRIPTION
-------------- -----------
10.11 Equity Incentive Plan, as amended and restated.
27 Financial Data Schedule.
15
<PAGE>
CIMA LABS INC.
EQUITY INCENTIVE PLAN
AMENDED AND RESTATED MARCH 25, 1996
FURTHER AMENDED, EFFECTIVE SEPTEMBER 24, 1996
AMENDED AND RESTATED, EFFECTIVE JUNE 3, 1998
INTRODUCTION.
In 1987, the Board of Directors adopted the CIMA LABS, INC. Stock Option
and Stock Award Plan, which was later amended and restated. On March 25, 1996,
the Board of Directors adopted a subsequent amendment and restatement and
retitled this the Equity Incentive Plan. On February 23, 1998, the Board of
Directors amended and restated the Equity Incentive Plan to increase the number
of shares of Common Stock available for issuance pursuant to the grant of awards
hereunder.
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company, and its Affiliates,
may be given an opportunity to benefit from increases in value of the stock of
the Company through the granting of (i) Incentive Stock Options, (ii)
Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights to purchase
restricted stock, and (v) stock appreciation rights, all as defined below.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company or
its Affiliates, to secure and retain the services of new Employees, Directors
and Consultants, and to provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Stock Awards issued under the Plan shall,
in the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof, or (iii) stock
appreciation rights granted pursuant to Section 8 hereof. All Options shall be
separately designated Incentive Stock Options or Nonstatutory Stock Options at
the time of grant, and in such form as issued pursuant to Section 6, and a
separate certificate or certificates will be issued for shares purchased on
exercise of each type of Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(e) "COMPANY" means CIMA LABS INC., a Delaware corporation.
16
<PAGE>
(f) "CONCURRENT STOCK APPRECIATION RIGHT" or "CONCURRENT RIGHT" means a
right granted pursuant to subsection 8(b)(2) of the Plan.
(g) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the
employment or relationship as a Director or Consultant is not interrupted or
terminated. The Board or the chief executive officer of the Company, in that
party's sole discretion, may determine whether Continuous Status as an Employee,
Director or Consultant shall be considered interrupted in the case of: (i) any
leave of absence approved by the Board or chief executive officer of the
Company, including sick leave, military leave, or any other personal leave; or
(ii) transfers between locations of the Company or between the Company,
Affiliates or their successors.
(i) "COVERED EMPLOYEE" means the chief executive officer and the four (4)
other highest compensated officers of the Company for whom total compensation is
required to be reported to shareholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.
(j) "DIRECTOR" means a member of the Board.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of the common
stock of the Company determined as follows:
(1) If the common stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market, the Fair Market Value of a share of common stock shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such system or exchange (or the exchange with the greatest volume of
trading in common stock) on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable;
(2) If the common stock is quoted on the Nasdaq Stock Market (but not
on the National Market thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a share of common stock shall be the mean between the bid and asked prices for
the common stock on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable;
(3) In the absence of an established market for the common stock, the
Fair Market Value shall be determined in good faith by the Board.
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "INDEPENDENT STOCK APPRECIATION RIGHT" or "INDEPENDENT RIGHT" means a
right granted pursuant to subsection 8(b)(3) of the Plan.
17
<PAGE>
(p) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
of 1933 ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(q) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.
(r) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "OPTION" means a stock option granted pursuant to the Plan.
(t) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(u) "OPTIONEE" means an Employee, Director or Consultant who holds an
outstanding Option.
18
<PAGE>
(v) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(w) "PLAN" means this CIMA LABS INC. Equity Incentive Plan.
(x) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect with respect to the Company when discretion is being
exercised with respect to the Plan.
(y) "STOCK APPRECIATION RIGHT" means any of the various types of rights
which may be granted under Section 8 of the Plan.
(z) "STOCK AWARD" means any right granted under the Plan, including any
Option, any stock bonus, any right to purchase restricted stock, and any Stock
Appreciation Right.
(aa) "STOCK AWARD AGREEMENT" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to
the terms and conditions of the Plan.
(bb) "TANDEM STOCK APPRECIATION RIGHT" or "TANDEM RIGHT" means a right
granted pursuant to subsection 8(b)(1) of the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; whether a Stock Award will be an Incentive Stock Option, a
Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock,
a Stock Appreciation Right, or a combination of the foregoing; the provisions of
each Stock Award granted (which need not be identical), including the time or
times when a person shall be permitted to receive stock pursuant to a Stock
Award; whether a person shall be permitted to receive stock upon exercise of an
Independent Stock Appreciation Right; and the number of shares with respect to
which a Stock Award shall be granted to each such person.
(2) To construe and interpret the Plan and Stock Awards granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(3) To amend the Plan or a Stock Award as provided in Section 13.
19
<PAGE>
(4) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members (the "Committee"), all of the members
of which Committee may be, in the discretion of the Board, Non-Employee
Directors and/or Outside Directors. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board, including the power to
delegate to a subcommittee of two (2) or more Outside Directors any of the
administrative powers the Committee is authorized to exercise (and references in
this Plan to the Board shall thereafter be to the Committee or such
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Notwithstanding anything in this Section 3 to the
contrary, at any time the Board or the Committee may delegate to a committee of
one or more members of the Board the authority to grant Stock Awards to eligible
persons who (1) are not then subject to Section 16 of the Exchange Act and/or
(2) are either (i) not then Covered Employees and are not expected to be Covered
Employees at the time of recognition of income resulting from such Stock Award,
or (ii) not persons with respect to whom the Company wishes to avoid the
application of Section 162(m) of the Code.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 12 relating to adjustments upon
changes in stock, the stock that may be issued pursuant to Stock Awards shall
not exceed in the aggregate Two Million Four Hundred Thousand (2,400,000) shares
of the Company's common stock. If any Stock Award shall for any reason expire
or otherwise terminate, in whole or in part, without having been exercised in
full, the stock not acquired under such Stock Award shall revert to and again
become available for issuance under the Plan. Shares subject to Stock
Appreciation Rights exercised in accordance with Section 8 of the Plan shall not
be available for subsequent issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options and Stock Appreciation Rights appurtenant
thereto may be granted only to Employees. Stock Awards other than Incentive
Stock Options and Stock Appreciation Rights appurtenant thereto may be granted
only to Employees, Directors or Consultants.
(b) No person shall be eligible for the grant of an Incentive Stock Option
or an award to purchase restricted stock if, at the time of grant, such person
owns (or is deemed to own pursuant to Section 424(d) of the Code) stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or of any of its Affiliates unless the exercise
price of such Incentive Stock Option is at least one hundred ten percent (110%)
of the Fair Market Value of such stock at the date of grant and the Incentive
Stock Option is not exercisable after the expiration of five (5) years from the
date of grant.
(c) Subject to the provisions of Section 12 relating to adjustments upon
changes in stock, no person shall be eligible to be granted Options and Stock
Appreciation Rights covering more than five hundred thousand (500,000) shares of
the Company's common stock in any three (3) calendar year period.
6. OPTION PROVISIONS.
20
<PAGE>
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten (10)
years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be not
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted; the exercise price of
each Nonstatutory Stock Option shall be determined by the Board.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a
Nonstatutory Stock Option) may be granted with an exercise price lower than that
set forth in the preceding sentence or determined by the Board if such Option is
granted pursuant to an assumption or substitution for another option in a manner
satisfying the provisions of Section 424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other common stock of the Company,
(B) according to a deferred payment or other arrangement (which may include,
without limiting the generality of the foregoing, the use of other common stock
of the Company) with the person to whom the Option is granted or to whom the
Option is transferred pursuant to subsection 6(d), or (C) in any other form of
legal consideration that may be acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be payable
at least annually and shall be charged at the minimum rate of interest necessary
to avoid the treatment as interest, under any applicable provisions of the Code,
of any amounts other than amounts stated to be interest under the deferred
payment arrangement.
(d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Option is granted only
by such person. A Nonstatutory Stock Option shall not be transferable, except
by the Optionee upon such terms and conditions as are set forth in the Option
Agreement for such Nonstatutory Stock Option, as the Board or the Committee
shall determine in its discretion. Notwithstanding the foregoing, the person to
whom the Option is granted may, by delivering written notice to the Company, in
a form satisfactory to the Company, designate a third party who, in the event of
the death of the Optionee, shall thereafter be entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The provisions of this
subsection 6(e) are subject to any Option provisions governing the minimum
number of shares as to which an Option may be exercised.
(f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT.
In the event an Optionee's Continuous Status as an Employee, Director or
Consultant terminates (other than upon the Optionee's death or disability), the
Optionee may exercise his or her Option (to the extent that the Optionee was
21
<PAGE>
entitled to exercise it at the date of termination) but only within such period
of time ending on the earlier of (i) the date three (3) months after the
termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (or such longer or shorter period specified in the Option Agreement),
or (ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, after termination, the Optionee does not exercise his or her
Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
An Optionee's Option Agreement may also provide that if the exercise of the
Option following the termination of the Optionee's Continuous Status as an
Employee, Director, or Consultant (other than upon the Optionee's death or
disability) would result in liability under Section 16(b) of the Exchange Act,
then the Option shall terminate on the earlier of (i) the expiration of the term
of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day
after the last date on which such exercise would result in such liability under
Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may
also provide that if the exercise of the Option following the termination of the
Optionee's Continuous Status as an Employee, Director or Consultant (other than
upon the Optionee's death or disability) would be prohibited at any time solely
because the issuance of shares would violate the registration requirements under
the Act, then the Option shall terminate on the earlier of (i) the expiration of
the term of the Option set forth in the first paragraph of this subsection 6(f),
or (ii) the expiration of a period of three (3) months after the termination of
the Optionee's Continuous Status as an Employee, Director or Consultant during
which the exercise of the Option would not be in violation of such registration
requirements.
(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status
as an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period specified in
the Option Agreement), or (ii) the expiration of the term of the Option as set
forth in the Option Agreement. If, at the date of termination, the Optionee is
not entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(h) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within a period specified in the Option after the termination of, the
Optionee's Continuous Status as an Employee, Director or Consultant, the Option
may be exercised (to the extent the Optionee was entitled to exercise the Option
at the date of death) by the Optionee's estate, by a person who acquired the
right to exercise the Option by bequest or inheritance or by a person designated
to exercise the option upon the Optionee's death pursuant to subsection 6(d),
but only within the period ending on the earlier of (i) the date eighteen (18)
months following the date of death (or such longer or shorter period specified
in the Option Agreement), or (ii) the expiration of the term of such Option as
set forth in the Option Agreement. If, at the time of death, the Optionee was
not entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after death, the Option is not exercised
within the time specified herein, the Option shall terminate, and the shares
covered by such Option shall revert to and again become available for issuance
under the Plan.
7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be in such
form and shall contain such terms and conditions as the Board or the Committee
shall deem appropriate. The terms and conditions of stock bonus or restricted
stock purchase agreements may change from time to time, and the terms and
conditions of separate agreements need not be identical, but each stock bonus or
restricted stock purchase agreement shall
22
<PAGE>
include (through incorporation of provisions hereof by reference in the
agreement or otherwise) the substance of each of the following provisions as
appropriate:
(a) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board or Committee shall
determine and designate in such agreement. Notwithstanding the foregoing, the
Board or the Committee may determine that eligible participants in the Plan may
be awarded stock pursuant to a stock bonus agreement in consideration for past
services actually rendered to the Company or for its benefit.
(b) TRANSFERABILITY. No rights under a stock bonus or restricted stock
purchase agreement shall be transferable except by will or the laws of descent
and distribution so long as stock awarded under such agreement remains subject
to the terms of the agreement, except as specifically provided in the applicable
stock bonus or restricted stock purchase agreement.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to a
restricted stock purchase agreement shall be paid either: (i) in cash at the
time of purchase; (ii) at the discretion of the Board or the Committee,
according to a deferred payment or other arrangement with the person to whom the
stock is sold; or (iii) in any other form of legal consideration that may be
acceptable to the Board or the Committee in its discretion. Notwithstanding the
foregoing, the Board or the Committee to which administration of the Plan has
been delegated may award stock pursuant to a stock bonus agreement in
consideration for past services actually rendered to the Company or for its
benefit.
(d) VESTING. Shares of stock sold or awarded under the Plan may, but need
not, be subject to a repurchase option in favor of the Company in accordance
with a vesting schedule to be determined by the Board or the Committee.
(e) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT.
In the event a Participant's Continuous Status as an Employee, Director or
Consultant terminates, the Company may repurchase or otherwise reacquire,
subject to the limitations described in subsection 7(d), any or all of the
shares of stock held by that person which have not vested as of the date of
termination under the terms of the stock bonus or restricted stock purchase
agreement between the Company and such person.
8. STOCK APPRECIATION RIGHTS.
(a) The Board or Committee shall have full power and authority,
exercisable in its sole discretion, to grant Stock Appreciation Rights under the
Plan to Employees or Directors of or Consultants to, the Company or its
Affiliates. To exercise any outstanding Stock Appreciation Right, the holder
must provide written notice of exercise to the Company in compliance with the
provisions of the Stock Award Agreement evidencing such right. Except as
provided in subsection 5(c), no limitation shall exist on the aggregate amount
of cash payments the Company may make under the Plan in connection with the
exercise of a Stock Appreciation Rights.
(b) Three types of Stock Appreciation Rights shall be authorized for
issuance under the Plan:
(1) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation
Rights will be granted appurtenant to an Option, and shall, except as
specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains.
Tandem Stock Appreciation Rights will require the holder to elect between the
exercise of the underlying Option for shares of stock and the surrender, in
whole or in part, of such Option for an appreciation distribution. The
appreciation distribution payable on the exercised Tandem Right shall be in cash
(or, if so provided, in an equivalent number of shares of stock based on Fair
Market Value on the date of the Option surrender) in an amount up to the excess
of (A) the Fair Market Value (on the date of the Option surrender) of the number
of shares of stock
23
<PAGE>
covered by that portion of the surrendered Option in which the Optionee is
vested over (B) the aggregate exercise price payable for such vested shares.
(2) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights will be
granted appurtenant to an Option and may apply to all or any portion of the
shares of stock subject to the underlying Option and shall, except as
specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains. A
Concurrent Right shall be exercised automatically at the same time the
underlying Option is exercised with respect to the particular shares of stock to
which the Concurrent Right pertains. The appreciation distribution payable on
an exercised Concurrent Right shall be in cash (or, if so provided, in an
equivalent number of shares of stock based on Fair Market Value on the date of
the exercise of the Concurrent Right) in an amount equal to such portion as
shall be determined by the Board or the Committee at the time of the grant of
the excess of (A) the aggregate Fair Market Value (on the date of the exercise
of the Concurrent Right) of the vested shares of stock purchased under the
underlying Option which have Concurrent Rights appurtenant to them over (B) the
aggregate exercise price paid for such shares.
(3) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights will
be granted independently of any Option and shall, except as specifically set
forth in this Section 8, be subject to the same terms and conditions applicable
to Nonstatutory Stock Options as set forth in Section 6. They shall be
denominated in share equivalents. The appreciation distribution payable on the
exercised Independent Right shall be not greater than an amount equal to the
excess of (A) the aggregate Fair Market Value (on the date of the exercise of
the Independent Right) of a number of shares of Company stock equal to the
number of share equivalents in which the holder is vested under such Independent
Right, and with respect to which the holder is exercising the Independent Right
on such date, over (B) the aggregate Fair Market Value (on the date of the grant
of the Independent Right) of such number of shares of Company stock. The
appreciation distribution payable on the exercised Independent Right shall be in
cash or, if so provided, in an equivalent number of shares of stock based on
Fair Market Value on the date of the exercise of the Independent Right.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep available
at all times the number of shares of stock required to satisfy such Stock
Awards.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Stock Award; provided,
however, that this undertaking shall not require the Company to register under
the Securities Act of 1933, as amended (the "Securities Act") either the Plan,
any Stock Award or any stock issued or issuable pursuant to any such Stock
Award. If, after reasonable efforts, the Company is unable to obtain from any
such regulatory commission or agency the authority which counsel for the Company
deems necessary for the lawful issuance and sale of stock under the Plan, the
Company shall be relieved from any liability for failure to issue and sell stock
upon exercise of such Stock Awards unless and until such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall constitute
general funds of the Company.
11. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a Stock
Award may first be exercised or the time during which a Stock Award or any part
thereof will vest pursuant to subsection 6(e), 7(d)
24
<PAGE>
or 8(b), notwithstanding the provisions in the Stock Award stating the time at
which it may first be exercised or the time during which it will vest.
(b) Neither an Employee, Director or Consultant nor any person to whom a
Stock Award is transferred under subsection 6(d), 7(b), or 8(b) shall be deemed
to be the holder of, or to have any of the rights of a holder with respect to,
any shares subject to such Stock Award unless and until such person has
satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
(c) Nothing in the Plan or any instrument executed or Stock Award granted
pursuant thereto shall confer upon any Employee, Director, Consultant or other
holder of Stock Awards any right to continue in the employ of the Company or any
Affiliate (or to continue acting as a Director or Consultant) or shall affect
the right of the Company or any Affiliate to terminate the employment of any
Employee with or without cause the right of the Company's Board of Directors
and/or the Company's shareholders to remove any Director pursuant to the terms
of the Company's By-Laws and the provisions of the Delaware General Corporation
Law, or the right to terminate the relationship of any Consultant pursuant to
the terms of such Consultant's agreement with the Company or Affiliate.
(d) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(e) The Company may require any person to whom a Stock Award is granted,
or any person to whom a Stock Award is transferred pursuant to subsection 6(d),
7(b) or 8(b), as a condition of exercising or acquiring stock under any Stock
Award, (1) to give written assurances satisfactory to the Company as to such
person's knowledge and experience in financial and business matters and/or to
employ a purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters, and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (2) to
give written assurances satisfactory to the Company stating that such person is
acquiring the stock subject to the Stock Award for such person's own account and
not with any present intention of selling or otherwise distributing the stock.
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Stock Award has been registered under
a then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
(f) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of stock
under a Stock Award by any of the following means or by a combination of such
means: (1) tendering a cash payment; (2) authorizing the Company to withhold
shares from the shares of the common stock otherwise issuable to the participant
as a result of the exercise or acquisition of stock under the Stock Award; or
(3) delivering to the Company owned and unencumbered shares of the common stock
of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any Stock Award, without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization,
25
<PAGE>
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan will be appropriately adjusted in the
type(s) and maximum number of securities subject to the Plan pursuant to
subsection 4(a) and the maximum number of securities subject to award to any
person during any three (3) calendar year period pursuant to subsection 5(c),
and the outstanding Stock Awards will be appropriately adjusted in the type(s)
and number of securities and price per share of stock subject to such
outstanding Stock Awards. Such adjustments shall be made by the Board or the
Committee, the determination of which shall be final, binding and conclusive.
(The conversion of any convertible securities of the Company shall not be
treated as a "transaction not involving the receipt of consideration by the
Company".)
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise; or (4) the acquisition by any person, entity or group within
the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable
successor provisions (excluding any employee benefit plan, or related trust,
sponsored or maintained by the Company or any Affiliate of the Company) of the
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act, or comparable successor rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting power entitled
to vote in the election of directors, then to the extent permitted by applicable
law: (i) any surviving or acquiring corporation or an Affiliate of such
surviving or acquiring corporation shall assume any Stock Awards outstanding
under the Plan or shall substitute similar Stock Awards (including a stock award
resulting in the acquisition of the same consideration paid to the stockholders
in the transaction described in this subsection 12(b)) for those outstanding
under the Plan, or (ii) such Stock Awards shall continue in full force and
effect. In the event any surviving or acquiring corporation or its Affiliates
refuse to assume or continue such Stock Awards, or to substitute similar Stock
Awards for those outstanding under the Plan, then, with respect to Stock Awards
held by persons then performing services as Employees, Directors or Consultants,
the time during which such Stock Awards may be exercised shall be accelerated
and the Stock Awards terminated if not exercised after such acceleration and at
or prior to such event.
13. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(i) Increase the number of shares reserved for Stock Awards
under the Plan;
(ii) Modify the requirements as to eligibility for participation
in the Plan (to the extent such modification requires stockholder approval in
order for the Plan to satisfy the requirements of Section 422 of the Code); or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to satisfy the requirements
of Section 422 of the Code or to comply with the requirements of Rule 16b-3.
26
<PAGE>
(b) The Board may in its sole discretion submit any other amendment to the
Plan for stockholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and the
regulations promulgated thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide eligible Employees,
Directors or Consultants with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Stock Award granted before amendment
of the Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms of
any one or more Stock Award; provided, however, that the rights and obligations
under any Stock Award shall not be impaired by any such amendment unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
14. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on May 31, 2004, which shall be
within ten (10) years from the date the Plan is adopted by the Board or approved
by the stockholders of the Company, whichever is earlier. No Stock Awards may
be granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any Stock Award granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the consent of the person to whom the Stock Award was granted.
15. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Stock
Awards granted under the Plan shall be exercised unless and until the Plan has
been approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board.
27
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<PAGE>
<ARTICLE> 5
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,834,822
<SECURITIES> 0
<RECEIVABLES> 1,044,015
<ALLOWANCES> 32,150
<INVENTORY> 1,175,841
<CURRENT-ASSETS> 5,186,705
<PP&E> 14,618,231
<DEPRECIATION> 4,533,833
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<CURRENT-LIABILITIES> 1,607,727
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0
0
<COMMON> 96,104
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<TOTAL-LIABILITY-AND-EQUITY> 15,542,626
<SALES> 157,692
<TOTAL-REVENUES> 2,475,617
<CGS> 637,552
<TOTAL-COSTS> 4,686,240
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