UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported) August 12, 2004
Cephalon, Inc.
(Exact Name of Registrant as Specified in Charter)
Delaware | | 000-19119 | | 23-2484489 | |
(State or Other Jurisdiction
of Incorporation) | | (Commission
File Number) | | (IRS Employer
Identification No.) | |
| | | | | |
145 Brandywine Parkway
West Chester, Pennsylvania | | | | 19380 | |
(Address of Principal Executive Offices) | | | | (Zip Code) | |
Registrant’s telephone number, including area code (610) 344-0200
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.01 Completion of Acquisition or Disposition of Assets
(a) On August 12, 2004, Cephalon, Inc. (“Cephalon”) completed its previously announced acquisition (the “Acquisition”) of all of the outstanding shares of capital stock of CIMA LABS INC., a Delaware corporation (“CIMA”). The Acquisition was accomplished pursuant to an Agreement and Plan of Merger dated as of November 3, 2003 (the “Merger Agreement”), a copy of which was filed as Exhibit 2.1 to the Registrant’s Form 8-K dated November 3, 2003 and is incorporated herein by reference. Pursuant to the Merger Agreement, Cephalon acquired CIMA through the merger of C MergerCo, Inc., a Delaware corporation and wholly owned subsidiary of Cephalon, with and into CIMA, with CIMA surviving as a wholly-owned subsidiary of Cephalon (the “Merger”). In connection with the Merger, each outstanding share of CIMA common stock was converted into the right to receive $34.00 per share in cash. Each outstanding option to purchase CIMA common stock, whether or not vested or exercisable, was converted into the right to receive in cash an amount equal to $34.00 less the exercise price for such option. As a result of the Merger, CIMA became a privately-held company and wholly-owned subsidiary of Cephalon, and its stock is no longer publicly traded. The purchase price of the Acquisition was funded from existing cash on hand.
(b) The assets acquired pursuant to the Acquisition consist of two facilities, located in Minnesota, which house the CIMA headquarters, and research, manufacturing, and packaging and distribution operations, and are used by CIMA in connection with the development, sale and manufacture of pharmaceutical products. Cephalon intends to continue the use of these assets for the development, sale and manufacture of pharmaceutical products.
Item 9.01 Financial Statements
The following financial statements and schedule are filed as part of this Current Report on Form 8-K/A:
• CIMA LABS INC. Consolidated Financial Statements as of June 30, 2003 and 2004; and
• CIMA LABS INC. Consolidated Financial Statements as of December 31, 2001, 2002 and 2003.
• CIMA LABS INC. Schedule II - Valuation and Qualifying Accounts.
The following unaudited pro forma condensed consolidated financial information is filed as part of this Current Report on Form 8-K/A:
• Pro forma condensed consolidated balance sheet as of June 30, 2004;
• Pro forma condensed consolidated statement of operations for the six months ended June 30, 2004;
• Pro forma condensed consolidated statement of operations for the year ended December 31, 2003; and
• Notes to pro forma condensed consolidated balance sheet as of June 30, 2004 and statement of operations as of and for the six months ended June 30, 2004 and the year ended December 31, 2003.
2
(a) Financial Statements of Business Acquired
CIMA LABS INC. Consolidated Financial Statements as of June 30, 2003 and 2004
CIMA LABS INC.
Balance Sheets
(in thousands, except per share data)
| | June 30,
2004 | | December 31,
2003 | |
| | (Unaudited) | | (See note) | |
Assets | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 32,704 | | $ | 29,530 | |
Available-for-sale securities | | 51,475 | | 44,031 | |
Trade accounts receivable, net | | 10,003 | | 14,686 | |
Interest receivable | | 768 | | 697 | |
Inventories, net | | 6,168 | | 7,289 | |
Deferred taxes | | 5,519 | | 5,141 | |
Prepaid expenses and other assets | | 3,217 | | 4,868 | |
Total current assets | | 109,854 | | 106,242 | |
Other assets: | | | | | |
Available-for-sale securities | | 27,544 | | 36,596 | |
Patents and trademarks, net | | 492 | | 451 | |
Deferred taxes | | 9,150 | | 8,867 | |
Total other assets | | 37,186 | | 45,914 | |
Property, plant and equipment: | | | | | |
Property, plant and equipment | | 100,545 | | 94,967 | |
Accumulated depreciation | | (19,397 | ) | (16,855 | ) |
Property, plant and equipment, net | | 81,148 | | 78,112 | |
Total assets | | $ | 228,188 | | $ | 230,268 | |
Liabilities and stockholders’ equity | | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 2,625 | | $ | 6,437 | |
Accrued compensation | | 2,161 | | 1,602 | |
Accrued taxes payable | | 3,958 | | 4,196 | |
Accrued expenses | | 1,834 | | 3,231 | |
Deferred revenue | | 494 | | 223 | |
Total current liabilities | | 11,072 | | 15,689 | |
Stockholders’ equity: | | | | | |
Convertible preferred stock, $.01 par value; 5,000 shares authorized; none outstanding | | — | | — | |
Common stock, $.01 par value; 60,000 shares authorized; 14,691 and 14,550 shares issued and outstanding (net of 619 treasury shares), respectively | | 153 | | 152 | |
Additional paid-in capital | | 247,105 | | 244,277 | |
Accumulated deficit | | (10,082 | ) | (10,361 | ) |
Accumulated other comprehensive (loss) income | | (60 | ) | 511 | |
Treasury stock | | (20,000 | ) | (20,000 | ) |
Total stockholders’ equity | | 217,116 | | 214,579 | |
Total liabilities and stockholders’ equity | | $ | 228,188 | | $ | 230,268 | |
Note: The balance sheet at December 31, 2003 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 accompanying notes.
3
CIMA LABS INC.
Income Statements
(Unaudited)
(in thousands, except per share data)
| | For the Three Months Ended | | For the Six Months Ended | |
| | June 30,
2004 | | June 30,
2003 | | June 30,
2004 | | June 30,
2003 | |
| | | | | | | | | |
Revenues: | | | | | | | | | |
Net sales | | $ | 7,020 | | $ | 12,252 | | $ | 16,567 | | $ | 22,320 | |
Product development fees and licensing | | 2,401 | | 1,594 | | 4,114 | | 3,197 | |
Royalties | | 5,283 | | 4,426 | | 9,717 | | 9,428 | |
| | 14,704 | | 18,272 | | 30,398 | | 34,945 | |
Operating expenses: | | | | | | | | | |
Cost of goods sold | | 6,515 | | 7,434 | | 13,173 | | 15,202 | |
Research and product development | | 5,091 | | 2,703 | | 9,791 | | 5,210 | |
Selling, general and administrative | | 2,759 | | 3,645 | | 5,685 | | 6,179 | |
Merger-related | | 335 | | 250 | | 1,547 | | 250 | |
| | 14,700 | | 14,032 | | 30,196 | | 26,841 | |
Operating income | | 4 | | 4,240 | | 202 | | 8,104 | |
Other income: | | | | | | | | | |
Investment income | | 545 | | 841 | | 1,143 | | 1,864 | |
Other income | | 14 | | 8 | | 30 | | 51 | |
| | 559 | | 849 | | 1,173 | | 1,915 | |
Income before provision for income taxes | | 563 | | 5,089 | | 1,375 | | 10,019 | |
Provision for income taxes | | 336 | | 1,405 | | 1,095 | | 3,177 | |
Net income | | $ | 227 | | $ | 3,684 | | $ | 280 | | $ | 6,842 | |
Net income per share: | | | | | | | | | |
Basic | | $ | .02 | | $ | .26 | | $ | .02 | | $ | .48 | |
Diluted | | $ | .02 | | $ | .25 | | $ | .02 | | $ | .47 | |
Weighted average shares outstanding: | | | | | | | | | |
Basic | | 14,684 | | 14,374 | | 14,622 | | 14,328 | |
Diluted | | 15,094 | | 14,759 | | 15,034 | | 14,683 | |
| | | | | | | | | | | | | | | | |
See accompanying notes.
4
CIMA LABS INC.
Statements of Cash Flows
(Unaudited)
(in thousands)
| | For the Six Months Ended
June 30, | |
| | 2004 | | 2003 | |
| | | | | |
Operating activities: | | | | | |
Net income | | $ | 280 | | $ | 6,842 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | | 2,635 | | 2,177 | |
Income tax benefit of stock options exercised | | — | | 1,060 | |
Deferred income taxes | | (334 | ) | 1,719 | |
Gain on sale of investment securities | | (1 | ) | — | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable | | 4,683 | | 1,712 | |
Interest receivable | | (72 | ) | 119 | |
Inventories | | 1,121 | | (1,865 | ) |
Prepaid expenses and other assets | | 1,585 | | 80 | |
Accounts payable | | (3,812 | ) | (1,925 | ) |
Accrued expenses and other | | (1,076 | ) | 1,652 | |
Deferred revenue | | 271 | | 117 | |
Net cash provided by operating activities | | 5,280 | | 11,688 | |
Investing activities: | | | | | |
Purchases of property, plant and equipment | | (5,577 | ) | (11,543 | ) |
Patents and trademarks | | (134 | ) | (81 | ) |
Purchases of available-for-sale securities | | (26,408 | ) | (18,957 | ) |
Proceeds from sales of available-for-sale securities | | 27,184 | | 30,496 | |
Net cash used in investing activities | | (4,935 | ) | (85 | ) |
Financing activities: | | | | | |
Proceeds from exercises of stock options | | 2,698 | | 2,062 | |
Issuance of common stock related to employee stock purchase plan | | 131 | | 92 | |
Net cash provided by financing activities | | 2,829 | | 2,154 | |
Increase in cash and cash equivalents | | 3,174 | | 13,757 | |
Cash and cash equivalents at beginning of period | | 29,530 | | 26,102 | |
Cash and cash equivalents at end of period | | $ | 32,704 | | $ | 39,859 | |
See accompanying notes.
5
CIMA LABS INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data)
1. Basis of Presentation
CIMA LABS INC. (the “Company”), a Delaware corporation, develops and manufactures orally disintegrating tablets and enhanced-absorption oral drug delivery systems. The Company operates within a single business segment, the development and manufacture of orally disintegrating tablets and enhanced-absorption oral drug delivery systems. OraSolv and DuraSolv, the Company’s proprietary orally disintegrating tablet technologies, allow an active drug ingredient, which is frequently taste-masked, to be formulated into a new, orally disintegrating dosage form that dissolves quickly in the mouth without chewing or the need for water. The Company is also developing enhanced oral drug delivery technologies and independently developing new products based on its oral drug delivery technologies. The Company enters into collaborative agreements with pharmaceutical companies to develop products based on its oral drug delivery technologies. The Company currently manufactures eight pharmaceutical brands for its partners incorporating its proprietary orally disintegrating tablet technologies. Revenues are comprised of three components: net sales of products the Company manufactures for pharmaceutical partners; product development fees and licensing revenues for development activities conducted through collaborative agreements with pharmaceutical companies; and royalties on the sales of products sold by pharmaceutical companies under license from the Company.
The accompanying unaudited 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. These financial statements 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, which are considered necessary for fair presentation, have been included. Operating results for the three and six-month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. For further information, you should refer to the audited financial statements and accompanying notes contained in our Annual Report on Form 10-K for the year ended December 31, 2003.
2. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that may affect the amounts we report in our financial statements and accompanying notes. Actual results could differ from those estimates.
6
3. Investments
The Company’s investments in available-for-sale securities are carried at fair value, with unrealized gains and losses included in accumulated other comprehensive income as a separate component of stockholders’ equity. As of June 30, 2004 and December 31, 2003, the amortized cost and estimated market value of available-for-sale securities are as follows:
| | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Market
Value | |
| | | | | | | | | |
As of June 30, 2004: | | | | | | | | | |
Asset backed securities | | $ | 19,289 | | $ | 48 | | $ | 44 | | $ | 19,293 | |
Corporate bonds and notes | | 21,532 | | 133 | | 33 | | 21,632 | |
Non-U.S. corporate obligations | | 4,144 | | 0 | | 18 | | 4,126 | |
U.S. government securities | | 34,244 | | 0 | | 276 | | 33,968 | |
Totals – June 30, 2004 | | $ | 79,209 | | $ | 181 | | $ | 371 | | $ | 79,019 | |
As of December 31, 2003: | | | | | | | | | |
Asset backed securities | | $ | 24,329 | | $ | 210 | | $ | 10 | | $ | 24,529 | |
Corporate bonds and notes | | 29,266 | | 448 | | — | | 29,714 | |
Non-U.S. corporate obligations | | 5,216 | | 24 | | 1 | | 5,239 | |
U.S. government securities | | 21,123 | | 41 | | 19 | | 21,145 | |
Totals – December 31, 2003 | | $ | 79,934 | | $ | 723 | | $ | 30 | | $ | 80,627 | |
4. Stock Based Compensation
The Company accounts for its stock plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Under the requirements of FASB Statement No. 148, Accounting for Stock Based Compensation — Transition and Disclosure, the following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of that statement to stock based compensation:
| | For the Three Months Ended | | For the Six Months Ended | |
| | June 30,
2004 | | June 30,
2003 | | June 30,
2004 | | June 30,
2003 | |
| | | | | | | | | |
Net income, as reported | | $ | 227 | | $ | 3,684 | | $ | 280 | | $ | 6,842 | |
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards | | 1,183 | | 1,355 | | 2,520 | | 2,195 | |
Pro forma net (loss) income | | $ | (956 | ) | $ | 2,329 | | $ | (2,240 | ) | $ | 4,647 | |
Net income (loss) per share: | | | | | | | | | |
Basic—as reported | | $ | .02 | | $ | .26 | | $ | .02 | | $ | .48 | |
Basic—pro forma | | $ | (.07 | ) | $ | .16 | | $ | (.15 | ) | $ | .32 | |
Diluted—as reported | | $ | .02 | | $ | .25 | | $ | .02 | | $ | .47 | |
Diluted—pro forma | | $ | (.06 | ) | $ | .16 | | $ | (.15 | ) | $ | .32 | |
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5. Income Per Share
Income per share for the three and six months ended June 30, 2004 and 2003 is summarized in the following table:
| | Three Months Ended | | Six Months Ended | |
| | June 30, 2004 | | June 30, 2003 | | June 30, 2004 | | June 30, 2003 | |
| | | | | | | | | |
Numerator: Net income | | $ | 227 | | $ | 3,684 | | $ | 280 | | $ | 6,842 | |
Denominator: | | | | | | | | | |
Denominator for basic earnings per share – weighted average shares outstanding | | 14,684 | | 14,374 | | 14,622 | | 14,328 | |
Effect of dilutive stock options | | 410 | | 385 | | 412 | | 355 | |
Denominator for diluted earnings per share – weighted average shares outstanding | | 15,094 | | 14,759 | | 15,034 | | 14,683 | |
Basic earnings per share | | $ | .02 | | $ | .26 | | $ | .02 | | $ | .48 | |
Diluted earnings per share | | $ | .02 | | $ | .25 | | $ | .02 | | $ | .47 | |
6. Comprehensive Income
Comprehensive income consists of net income, fair value of forward contracts and net unrealized gains (losses) on available-for-sale securities.
| | Three Months Ended | | Six Months Ended | |
| | June 30, 2004 | | June 30, 2003 | | June 30, 2004 | | June 30, 2003 | |
| | | | | | | | | |
Net income | | $ | 227 | | $ | 3,684 | | $ | 280 | | $ | 6,842 | |
Fair value of forward contracts | | 59 | | 201 | | (19 | ) | 375 | |
Unrealized (loss) gain on available-for-sale securities | | (493 | ) | 87 | | (552 | ) | (159 | ) |
Total comprehensive (loss) income | | $ | (207 | ) | $ | 3,972 | | $ | (291 | ) | $ | 7,058 | |
7. Inventories
Inventories are stated at the lower of cost (first in, first out) or fair market value.
| | June 30, 2004 | | December 31, 2003 | |
| | | | | |
Raw materials | | $ | 4,637 | | $ | 5,634 | |
Work-in-process | | 114 | | 236 | |
Finished goods | | 1,417 | | 1,419 | |
Inventories, net | | $ | 6,168 | | $ | 7,289 | |
8. Tax Expense
Provisions for income taxes for the three- and six-month periods ended June 30, 2004 reflect provisions for U.S. federal and state income taxes. At December 31, 2003, the Company had a valuation reserve of $4,979 resulting in a net deferred tax asset of $14,008. As of June 30, 2004, the Company had a valuation reserve of $4,979 resulting in a net deferred tax asset of $14,669.
8
9. Segment Information – Major Customers
The Company operates within a single segment: the development and manufacture of orally disintegrating tablets and enhanced-absorption oral drug delivery systems. Revenues are comprised of three components: net sales of products utilizing the Company’s proprietary orally disintegrating tablet technologies; product development fees and licensing revenues for development activities conducted by the Company through collaborative agreements with pharmaceutical companies; and royalties on the sales of products manufactured by the Company, which are sold by pharmaceutical companies under licenses from the Company
Revenues from major customers are as follows:
| | For the Three Months Ended | | For the Six Months Ended | |
| | June 30,
2004 | | June 30,
2003 | | June 30,
2004 | | June 30,
2003 | |
| | | | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | | |
AstraZeneca | | $ | 3,113 | | 21.2 | % | $ | 2,485 | | 13.6 | % | $ | 6,505 | | 21.4 | % | $ | 5,385 | | 15.4 | % |
Organon | | 6,838 | | 46.5 | % | 9,741 | | 53.3 | % | 13,938 | | 45.9 | % | 15,355 | | 43.9 | % |
Wyeth | | 2,191 | | 14.9 | % | 3,659 | | 20.0 | % | 4,429 | | 14.6 | % | 8,235 | | 23.6 | % |
Other | | 2,562 | | 17.4 | % | 2,387 | | 13.1 | % | 5,526 | | 18.1 | % | 5,970 | | 17.1 | % |
Total | | $ | 14,704 | | 100.0 | % | $ | 18,272 | | 100.0 | % | $ | 30,398 | | 100.0 | % | $ | 34,945 | | 100.0 | % |
Trade accounts receivable at June 30, 2004 of approximately $10,003 were comprised primarily of the following customers: Organon (32%), AstraZeneca (24%) and Wyeth (18%).
All of the Company’s assets and operations are located in the U.S. While the Company does not directly conduct its activities outside the U.S., it considers international revenues to be those arising from shipments ultimately destined for non-U.S. end-users and from royalties generated by non-U.S. sales by partners.
| | For the Three Months Ended | | For the Six Months Ended | |
| | June 30,
2004 | | June 30,
2003 | | June 30,
2004 | | June 30,
2003 | |
| | | | | | | | | |
Revenues by source: | | | | | | | | | |
U.S. | | $ | 6,015 | | $ | 9,901 | | $ | 13,440 | | $ | 20,675 | |
International, excluding Germany | | 7,235 | | 6,313 | | 13,952 | | 10,154 | |
Germany | | 1,454 | | 2,058 | | 3,006 | | 4,116 | |
Total revenues | | $ | 14,704 | | $ | 18,272 | | $ | 30,398 | | $ | 34,945 | |
| | | | | | | | | | | | | | |
10. Merger with Cephalon, Inc.
In November 2003, the Company, Cephalon, Inc., a Delaware corporation (“Cephalon”), and C MergerCo, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Cephalon (“C MergerCo”), entered into an Agreement and Plan of Merger, dated as of November 3, 2003 (the “CIMA/Cephalon Agreement”). Pursuant to the CIMA/Cephalon Agreement, Cephalon will acquire the Company through the merger of C MergerCo with and into CIMA, with the Company surviving as a wholly-owned subsidiary of Cephalon (the “Merger”). In connection with the Merger, each outstanding share of the Company’s common stock will be converted into the right to receive $34.00 per share in cash. Each outstanding option to purchase the Company’s common stock, whether or not vested or exercisable, will be converted into the right to receive an amount of cash equal to $34.00 less the exercise price for such option. If the merger agreement is terminated in specified circumstances, either CIMA or Cephalon may be required to pay a termination fee of $16,250 to the other party or to reimburse the other party for up to $5,500 of its expenses.
The Merger is subject to regulatory approvals and the satisfaction of other customary closing conditions. The CIMA/Cephalon Agreement was approved at a special meeting of the Company’s stockholders on June 15, 2004.
9
CIMA LABS INC. Consolidated Financial Statements as of December 31, 2001, 2002 and 2003
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
CIMA LABS INC.
We have audited the accompanying balance sheets of CIMA LABS INC. as of December 31, 2003 and 2002, and the related income statements, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in Item 9.01. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with U.S. 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.
| /s/ Ernst & Young LLP | |
|
Minneapolis, Minnesota |
February 6, 2004 |
10
CIMA LABS INC.
BALANCE SHEETS
(in thousands, except per share data)
| | As of December 31, | |
| | 2003 | | 2002 | |
| | | | | |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 29,530 | | $ | 26,102 | |
Available-for-sale securities | | 44,031 | | 45,093 | |
Trade accounts receivable, net of allowance of $100 | | 14,686 | | 14,621 | |
Interest receivable | | 697 | | 1,119 | |
Inventories, net | | 7,289 | | 4,082 | |
Deferred taxes | | 5,141 | | 3,790 | |
Prepaid expenses | | 4,868 | | 944 | |
Total current assets | | 106,242 | | 95,751 | |
Other assets: | | | | | |
Available-for-sale securities | | 36,596 | | 60,486 | |
Patents and trademarks, net | | 451 | | 418 | |
Deferred taxes | | 8,867 | | 7,624 | |
Total other assets | | 45,914 | | 68,528 | |
Property, plant and equipment: | | | | | |
Construction in progress | | 13,944 | | 6,673 | |
Equipment | | 33,495 | | 27,076 | |
Building and improvements | | 43,896 | | 36,064 | |
Land | | 2,059 | | 2,059 | |
Furniture and fixtures | | 1,573 | | 1,547 | |
| | 94,967 | | 73,419 | |
Less accumulated depreciation | | (16,855 | ) | (12,345 | ) |
Property, plant and equipment, net | | 78,112 | | 61,074 | |
Total assets | | $ | 230,268 | | $ | 225,353 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 6,437 | | $ | 8,755 | |
Accrued compensation | | 1,602 | | 2,118 | |
Accrued taxes payable | | 4,196 | | 28 | |
Other accrued expenses | | 3,231 | | 609 | |
Deferred revenue | | 223 | | 542 | |
Total current liabilities | | 15,689 | | 12,052 | |
Stockholders’ equity: | | | | | |
Convertible preferred stock, $0.01 par value: | | | | | |
5,000 shares authorized; none outstanding | | — | | — | |
Common stock, $0.01 par value: | | | | | |
60,000 shares authorized;
14,550 shares issued and outstanding (net of 619 treasury shares) at December 31, 2003 and 14,251 shares issued and outstanding (net of 619 treasury shares) at December 31, 2002 | | 152 | | 149 | |
Additional paid-in capital | | 244,277 | | 240,027 | |
Accumulated deficit | | (10,361 | ) | (8,386 | ) |
Accumulated other comprehensive income | | 511 | | 1,511 | |
Treasury stock | | (20,000 | ) | (20,000 | ) |
Total stockholders’ equity | | 214,579 | | 213,301 | |
Total liabilities and stockholders’ equity | | $ | 230,268 | | $ | 225,353 | |
See accompanying notes.
11
CIMA LABS INC.
INCOME STATEMENTS
(in thousands, except per share data)
| | Year Ended December 31, | |
| | 2003 | | 2002 | | 2001 | |
| | | | | | | |
Operating revenues: | | | | | | | |
Net sales | | $ | 49,061 | | $ | 23,391 | | $ | 17,756 | |
Product development fees and licensing | | 6,163 | | 11,496 | | 8,867 | |
Royalties | | 20,852 | | 11,738 | | 5,403 | |
Total operating revenues | | 76,076 | | 46,625 | | 32,026 | |
Operating expenses: | | | | | | | |
Costs of goods sold | | 34,578 | | 18,481 | | 15,813 | |
Research and product development | | 13,519 | | 10,641 | | 6,226 | |
Selling, general and administrative | | 12,112 | | 7,710 | | 5,437 | |
Merger-related expenses | | 17,413 | | — | | — | |
Total operating expense | | 77,622 | | 36,832 | | 27,476 | |
Operating (loss) income | | (1,546 | ) | 9,793 | | 4,550 | |
Other income (expense) Investment income, net | | 3,238 | | 6,511 | | 10,335 | |
Other income (expense) | | 58 | | (128 | ) | (1 | ) |
| | 3,296 | | 6,383 | | 10,334 | |
Income before income tax expense (benefit) | | 1,750 | | 16,176 | | 14,884 | |
Income tax expense (benefit) | | 3,725 | | (2,441 | ) | (104 | ) |
Net (loss) income | | $ | (1,975 | ) | $ | 18,617 | | $ | 14,988 | |
Net (loss) income per share: | | | | | | | |
Basic net (loss) income per share | | $ | (.14 | ) | $ | 1.31 | | $ | 1.03 | |
Diluted net (loss) income per share | | $ | (.14 | ) | $ | 1.28 | | $ | .97 | |
Weighted average shares outstanding: | | | | | | | |
Basic | | 14,420 | | 14,193 | | 14,559 | |
Diluted | | 14,420 | | 14,599 | | 15,503 | |
See accompanying notes.
12
CIMA LABS INC.
STATEMENTS OF CASH FLOWS
(in thousands)
| | Year Ended December 31, | |
| | 2003 | | 2002 | | 2001 | |
| | | | | | | |
Operating activities | | | | | | | |
Net (loss) income | | $ | (1,975 | ) | $ | 18,617 | | $ | 14,988 | |
Adjustment to reconcile net (loss) income to net cash (used in) provided by operating activities: | | | | | | | |
Depreciation and amortization | | 4,932 | | 3,294 | | 2,334 | |
Income tax benefit of stock options exercised | | 1,522 | | 1,983 | | 5,634 | |
Deferred income taxes | | (2,902 | ) | (5,214 | ) | (6,200 | ) |
Gain on sale of investment securities | | — | | (923 | ) | (1,425 | ) |
Loss on disposal of property, plant, and equipment | | 85 | | 155 | | — | |
Value of options granted in exchange for services | | — | | — | | 6 | |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable | | (65 | ) | (5,658 | ) | (1,283 | ) |
Interest receivable | | 422 | | 1,008 | | (1,156 | ) |
Inventories | | (3,207 | ) | (311 | ) | (2,389 | ) |
Prepaid expenses | | (3,799 | ) | (728 | ) | 40 | |
Accounts payable | | (2,318 | ) | 7,148 | | 631 | |
Accrued expenses | | 6,274 | | 983 | | 287 | |
Deferred revenue | | (319 | ) | (233 | ) | 700 | |
Net cash (used in) provided by operating activities | | (1,350 | ) | 20,121 | | 12,167 | |
Investing activities | | | | | | | |
Purchases of property, plant and equipment | | (21,894 | ) | (36,610 | ) | (14,222 | ) |
Purchases of available-for-sale securities | | (24,057 | ) | (68,287 | ) | (180,041 | ) |
Proceeds from sales of available-for-sale securities | | 48,192 | | 110,548 | | 107,491 | |
Patents and trademarks | | (194 | ) | (181 | ) | (262 | ) |
Net cash provided by (used in) investing activities | | 2,047 | | 5,470 | | (87,034 | ) |
Financing activities | | | | | | | |
Proceeds from exercises of stock options | | 2,523 | | 590 | | 2,958 | |
Purchases of treasury stock | | — | | (2,144 | ) | (17,856 | ) |
Issuance of common stock related to employee stock purchase plan | | 208 | | 185 | | 45 | |
Security deposits on leases | | — | | — | | 12 | |
Net cash provided by (used in) financing activities | | 2,731 | | (1,369 | ) | (14,841 | ) |
Increase (decrease) in cash and cash equivalents | | 3,428 | | 24,222 | | (89,708 | ) |
Cash and cash equivalents at beginning of year | | 26,102 | | 1,880 | | 91,588 | |
Cash and cash equivalents at end of year | | $ | 29,530 | | $ | 26,102 | | $ | 1,880 | |
Supplemental disclosures of cash flow information | | | | | | | |
Income taxes paid | | $ | 1,068 | | $ | 509 | | $ | 378 | |
See accompanying notes.
13
CIMA LABS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
| | Common Stock | | Additional
Paid-In Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Treasury
Stock | | Total | |
Shares | | Amount |
| | | | | | | | | | | | | | | |
Balance at Dec. 31, 2000 | | 14,358 | | $ | 144 | | $ | 228,631 | | $ | (41,991 | ) | $ | 141 | | $ | — | | $ | 186,925 | |
Net income | | — | | — | | — | | 14,988 | | — | | — | | 14,988 | |
Unrealized investment gain | | — | | — | | — | | — | | 2,077 | | — | | 2,077 | |
Comprehensive income | | | | | | | | | | | | | | 17,065 | |
Stock options exercised | | 380 | | 4 | | 2,954 | | — | | — | | — | | 2,958 | |
Issuance of common stock related to employee stock purchase plan | | 1 | | — | | 45 | | — | | — | | — | | 45 | |
Treasury stock purchased | | — | | — | | — | | — | | — | | (17,856 | ) | (17,856 | ) |
Income tax benefit of stock options exercised | | — | | — | | 5,634 | | — | | — | | — | | 5,634 | |
Value of options granted in exchange for services | | — | | — | | 6 | | — | | — | | — | | 6 | |
Balance at Dec. 31, 2001 | | 14,739 | | 148 | | 237,270 | | (27,003 | ) | 2,218 | | (17,856 | ) | 194,777 | |
Net income | | — | | — | | — | | 18,617 | | — | | — | | 18,617 | |
Unrealized investment loss | | — | | — | | — | | — | | (707 | ) | — | | (707 | ) |
Comprehensive income | | | | | | | | | | | | | | 17,910 | |
Stock options exercised | | 120 | | 1 | | 589 | | — | | — | | — | | 590 | |
Issuance of common stock related to employee stock purchase plan | | 11 | | — | | 185 | | — | | — | | — | | 185 | |
Treasury stock purchased | | — | | — | | — | | — | | — | | (2,144 | ) | (2,144 | ) |
Income tax benefit of stock options exercised | | — | | — | | 1,983 | | — | | — | | — | | 1,983 | |
Balance at Dec. 31, 2002 | | 14,870 | | 149 | | 240,027 | | (8,386 | ) | 1,511 | | (20,000 | ) | 213,301 | |
Net (loss) | | — | | — | | — | | (1,975 | ) | — | | — | | (1,975 | ) |
Unrealized investment loss, net of tax | | — | | — | | — | | — | | (1,078 | ) | — | | (1,078 | ) |
Fair value of forward contracts, net of tax | | — | | — | | — | | — | | 78 | | — | | 78 | |
Comprehensive (loss) | | | | | | | | | | | | | | (2,975 | ) |
Stock options exercised | | 289 | | 3 | | 2,520 | | — | | — | | — | | 2,523 | |
Issuance of common stock related to employee stock purchase plan | | 10 | | — | | 208 | | — | | — | | — | | 208 | |
Income tax benefit of stock options exercised | | — | | — | | 1,522 | | — | | — | | — | | 1,522 | |
Balance at Dec. 31, 2003 | | 15,169 | | $ | 152 | | $ | 244,277 | | $ | (10,361 | ) | $ | 511 | | $ | (20,000 | ) | $ | 214,579 | |
See accompanying notes.
14
CIMA LABS INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
1. BUSINESS ACTIVITY
CIMA LABS INC., a Delaware corporation (the “Company”), develops and manufactures orally disintegrating tablet and enhanced-absorption oral drug delivery systems. The Company operates within a single business segment, the development and manufacture of orally disintegrating tablet and enhanced-absorption oral drug delivery systems. OraSolv and DuraSolv, the Company’s leading proprietary orally disintegrating tablet technologies, allow an active drug ingredient, which is frequently taste-masked, to be formulated into a new, orally disintegrating dosage form that dissolves quickly in the mouth without chewing or the need for water. The Company is also developing enhanced oral drug delivery technologies and independently developing new products based on its oral drug delivery technologies. The Company enters into collaborative agreements with pharmaceutical companies to develop products based on its oral drug delivery technologies. The Company currently manufactures seven pharmaceutical brands incorporating its proprietary orally disintegrating tablet technologies. Revenues are comprised of three components: net sales of products it manufactures; product development fees and licensing revenues for development activities conducted through collaborative agreements with pharmaceutical companies; and royalties on the sales of products sold by pharmaceutical companies under licenses from the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers highly liquid investments with maturities of ninety days or less when purchased to be cash equivalents. Cash equivalents are carried at cost, which approximates fair market value.
Available-for-sale securities
The Company classifies its investments with maturities of over ninety days when purchased as available-for-sale. Available-for-sale securities are recorded at fair value with unrealized gains and losses reported as other comprehensive income in stockholders’ equity. Fair values of investments are based on quoted market prices, where available, and include accrued interest, if applicable. Dividend and interest income is recognized when earned. Gains and losses on securities sold are determined based on the specific identification method and are included in investment income. As of December 31, 2003, $36,596 of available-for-sale securities had remaining maturities of twelve to forty-one months, while the balance, $44,031, had remaining maturities of less than twelve months.
Patents and Trademarks
Costs incurred in obtaining patents and trademarks are amortized on a straight-line basis over sixty months. Accumulated amortization was approximately $605 at December 31, 2003 and $444 at December 31, 2002. The Company wrote off some fully amortized patents and trademarks in 2002. 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 ranging from three to thirty-five years. Depreciation expense was approximately $4,771 in 2003; $3,142 in 2002; and $2,203 in 2001.
15
Inventories
Inventories are valued at cost using the first-in first-out (FIFO) basis for inventory turnover and control. Inventories are shown net of reserves for obsolescence of approximately $275 at December 31, 2003, and $320 at December 31, 2002. Significant components of inventory as of December 31 are as follows:
| | 2003 | | 2002 | |
| | | | | |
Finished Goods | | $ | 1,419 | | $ | 1,252 | |
Work-in-process | | 236 | | 116 | |
Raw Materials | | 5,634 | | 2,714 | |
Inventories, net | | $ | 7,289 | | $ | 4,082 | |
Forward Exchange Contracts
At December 31, 2003, the Company had a forward exchange contract to manage the foreign exchange risk related to a known third-party transaction for the purchase of equipment that will occur in early 2004. The Company had a similar forward exchange contract in effect in 2003 for the purchase of equipment that has since been completed. The gains related to these forward exchange contracts, which hedge the third-party transaction, are deferred in other comprehensive income with a corresponding asset until the underlying transaction occurs and are considered to have a cash flow hedging relationship. The gains were and will be reclassified as a reduction to the cost of the equipment upon completion of the underlying transaction being hedged. The value of the forward exchange contract, net of taxes, is $78 as of December 31, 2003. The Company enters into forward exchange contracts for specific transactions and not for trading purposes.
Impairment of Long - Lived Assets
The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flow estimated to be generated by those assets are less than the assets’ carrying amount.
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.
Revenue Recognition
The Company recognizes revenue in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, or SAB 101 as amended by SAB 104, Revenue Recognition in Financial Statements, and Emerging Issues Task Force 00-21 (EITF 00-21), Revenue Arrangements with Multiple Deliverables. SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an agreement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Revenues from the Company’s business activities are recognized from net sales of manufactured products upon shipment; from product development fees as the contracted services are rendered; from product development milestones upon completion of milestones; from nonrefundable up-front product development license fees as fees are amortized over the expected development term of the proposed products; and from royalties on the sales of products manufactured by the Company, which are sold by pharmaceutical companies under licenses from the Company. The determination of SAB 101 criteria (3) and (4) for each source of revenue is based on the Company’s judgment regarding the fixed nature and collectibility of each source of revenue.
16
Stock-Based Compensation
At December 31, 2003, the Company has stock-based employee compensation plans, which are described more fully in Note 7. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income (loss) for 2003, 2002, and 2001, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (“Statement 123”), to stock-based compensation.
| | Year Ended December 31, | |
| | 2003 | | 2002 | | 2001 | |
| | | | | | | |
Net (loss) income, as reported | | $ | (1,975 | ) | $ | 18,617 | | $ | 14,988 | |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of taxes | | (5,208 | ) | (3,904 | ) | (8,851 | ) |
Pro forma net (loss) income | | $ | (7,183 | ) | $ | 14,713 | | $ | 6,137 | |
Net (loss) income per share: | | | | | | | |
Basic-as reported | | $ | (.14 | ) | $ | 1.31 | | $ | 1.03 | |
Basic-pro forma | | $ | (.50 | ) | $ | 1.04 | | $ | .42 | |
Diluted-as reported | | $ | (.14 | ) | $ | 1.28 | | $ | .97 | |
Diluted-pro forma | | $ | (.50 | ) | $ | 1.01 | | $ | .40 | |
Income Taxes
Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities. The carrying value of our net deferred tax assets assumes that the Company will be able to generate sufficient taxable income in the United States, based on estimates and assumptions. The Company records a valuation allowance to reduce the carrying value of our net deferred tax assets to the amount that is more likely than not to be realized.
Research and Development Costs
All costs of research and development activities are expensed as incurred. Research and development activities are performed under collaborative agreements with pharmaceutical partners to adapt the Company’s orally disintegrating tablet technology to specific active drug ingredients. In addition, the Company incurs research and development expenses relating to the development of new oral drug delivery technologies and new pharmaceutical products based on our oral drug delivery technologies, which are not performed under a collaborative agreement. Revenues earned from activities performed pursuant to a collaborative agreement with a pharmaceutical company are reported as product development fees, licensing revenues and royalties in the Income Statements, and the related costs are expensed as incurred as research and development expense. These costs include salaries, building costs, utilities, depreciation on equipment used for research and development, and costs of outside contractors.
Reclassifications
Certain amounts presented in the 2002 and 2001 financial statements have been reclassified to conform to the 2003 presentation. These reclassifications have no impact on operating income, net income, or stockholders’ equity as previously reported.
17
3. NET (LOSS) INCOME PER SHARE
Basic net income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period, increased to include dilutive potential common shares issuable upon the exercise of stock options that were outstanding during the period. For loss periods, basic and diluted share amounts are identical, as the effect of potential common shares is antidilutive. Employee options of 1,641, 642, and 639 for 2003, 2002 and 2001, respectively, have been excluded from the diluted net (loss) income per share calculation because their effect would be antidilutive.
| | Year Ended December 31, | |
| | 2003 | | 2002 | | 2001 | |
| | | | | | | |
Numerator: | | | | | | | |
Net (loss) income | | $ | (1,975 | ) | $ | 18,617 | | $ | 14,988 | |
Denominator: | | | | | | | |
Denominator for basic net (loss) income per share - weighted average shares outstanding | | 14,420 | | 14,193 | | 14,559 | |
Effect of dilutive stock options | | — | | 406 | | 944 | |
Denominator for diluted net (loss) income per share - weighted average shares outstanding | | 14,420 | | 14,599 | | 15,503 | |
Basic net (loss) income per share | | $ | (.14 | ) | $ | 1.31 | | $ | 1.03 | |
Diluted net (loss) income per share | | $ | (.14 | ) | $ | 1.28 | | $ | .97 | |
4. AVAILABLE-FOR-SALE SECURITIES
The Company’s investments in available-for-sale securities are carried at fair value, with unrealized gains and losses included in accumulated other comprehensive income as a separate component of stockholders’ equity. As of December 31, 2003 and 2002, the amortized cost and fair value of available-for-sale securities, all of which have contractual maturities of forty-one months or less, are as follows:
| | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | |
As of December 31, 2003 | | | | | | | | | |
Asset-backed securities | | $ | 24,329 | | $ | 210 | | $ | 10 | | $ | 24,529 | |
Corporate bonds and notes | | 29,266 | | 448 | | — | | 29,714 | |
Non-US corporate obligations | | 5,216 | | 24 | | 1 | | 5,239 | |
U.S. government securities | | 21,123 | | 41 | | 19 | | 21,145 | |
| | $ | 79,934 | | $ | 723 | | $ | 30 | | $ | 80,627 | |
As of December 31, 2002 | | | | | | | | | |
Asset-backed securities | | $ | 35,230 | | $ | 447 | | $ | — | | $ | 35,677 | |
Corporate bonds and notes | | 54,311 | | 915 | | 16 | | 55,210 | |
Floating rate notes | | 8,997 | | 64 | | 1 | | 9,060 | |
U.S. government securities | | 5,530 | | 102 | | — | | 5,632 | |
| | $ | 104,068 | | $ | 1,528 | | $ | 17 | | $ | 105,579 | |
| | | | | | | | | | | | | | | | | | | | |
18
5. INCOME TAXES
The Company’s deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Management believes that it is more likely than not that future taxable income will be sufficient to realize a portion of the tax benefit from future deductible temporary differences and net operating loss carryforwards. Significant components of deferred income taxes as of December 31 are as follows:
| | 2003 | | 2002 | |
| | | | | |
Deferred assets: | | | | | |
Net operating loss | | $ | 16,669 | | $ | 16,024 | |
Research tax credit | | 1,733 | | 1,176 | |
Foreign tax credit | | 1,220 | | 972 | |
Accrued vacation | | 186 | | 237 | |
Inventory reserve | | 103 | | 130 | |
Deferred revenue | | 83 | | 220 | |
Other | | 317 | | 203 | |
| | 20,311 | | 18,962 | |
Deferred liabilities: | | | | | |
Depreciation and amortization. | | 1,017 | | 1,140 | |
Unrealized gain on investments | | 260 | | — | |
Other | | 47 | | — | |
| | 1,324 | | 1,140 | |
Net deferred income tax asset | | 18,987 | | 17,822 | |
Valuation allowance | | (4,979 | ) | (6,408 | ) |
Net deferred income tax asset | | $ | 14,008 | | $ | 11,414 | |
The income tax provision (benefit) consisted of the following for the years ended December 31:
| | 2003 | | 2002 | | 2001 | |
| | | | | | | |
Current tax provision (benefit): | | | | | | | |
Federal | | $ | 6,415 | | $ | 2,132 | | $ | 5,077 | |
State | | 823 | | 641 | | 2,042 | |
| | 7,238 | | 2,773 | | 7,119 | |
Deferred tax provision (benefit): | | | | | | | |
Federal | | (1,246 | ) | 3,869 | | (860 | ) |
State | | (227 | ) | 736 | | (163 | ) |
| | (1,473 | ) | 4,605 | | (1,023 | ) |
Valuation allowance | | (2,040 | ) | (9,819 | ) | (6,200 | ) |
Total tax provision (benefit) | | $ | 3,725 | | $ | (2,441 | ) | $ | (104 | ) |
The Company utilized net operating loss carryforwards of $13,300 in 2002 reducing the current tax provision by $4,865.
19
The reconciliation between the statutory federal income tax rate and the effective rate of income tax expense for the years ended December 31:
| | 2003 | | 2002 | | 2001 | |
| | | | | | | |
Statutory federal income tax rate | | 35 | % | 35 | % | 35 | % |
Increase (decrease) in taxes resulting from: | | | | | | | |
Change in valuation allowance | | (117 | ) | (26 | ) | (42 | ) |
Meals and entertainment | | 1 | | — | | — | |
Merger-related expenses | | 271 | | — | | — | |
Utilization of net operating loss carryforward | | — | | (30 | ) | | |
State taxes | | 23 | | 6 | | 6 | |
Effective income tax rate | | 213 | % | (15 | )% | (1 | )% |
The Company’s net operating loss carryforwards, foreign tax credits, and research tax credits of approximately $41,400, $1,220, and $1,733, respectively, may be carried forward to offset future taxable income, limited due to changes in ownership under the net operating loss limitation rules. The net operating loss, foreign tax credit, and research tax credit carryforwards expire in the years 2009 to 2013, the years 2005 to 2008, and the years 2004 to 2018, respectively. Included in the net operating loss carryforward is approximately $8,000 related to stock option exercises, which currently have a full valuation allowance and when realized for financial statement purposes will not result in a reduction to income tax expense. Rather the benefit will be recorded as an increase to additional paid-in capital.
6. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consists of the fair value of forward contracts and net unrealized gains on available-for-sale securities.
| | 2003 | | 2002 | |
| | | | | |
Fair value of forward contracts | | $ | 78 | | $ | — | |
Unrealized gain on available-for-sale securities | | 433 | | 1,511 | |
Accumulated other comprehensive income | | $ | 511 | | $ | 1,511 | |
| | | | | | | | |
7. STOCK OPTIONS AND PURCHASE PLANS
Stock Options
The Company has equity and stock incentive plans (the “Equity Plans”) under which options to purchase up to 4,150 shares of common stock may be granted to employees, directors, 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 terms and conditions of the Equity Plans 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 after the date of grant.
The Company also has stock option plans for directors (the “Directors’ Plans”), which through October 4, 2001, permitted option grants to non-employee directors of the Company. On October 4, 2001, the Board discontinued the Directors’ Plans and since that date, options issued to non-employee directors have been made under the Equity Plans.
20
Shares available for grants and options granted under the Equity Plans are as follows:
| | Shares
Available for
Grant | | Incentive
Stock
Options | | Non-
Qualified
Stock
Options | | Total
Outstanding | | Weighted
Average
Exercise Price | |
| | | | | | | | | | | |
Balance at Dec. 31, 2000 | | 185 | | 642 | | 649 | | 1,291 | | $ | 12.53 | |
Granted | | (797 | ) | 203 | | 594 | | 797 | | 60.98 | |
Reserved | | 1,500 | | — | | — | | — | | | |
Forfeited | | 149 | | (65 | ) | (84 | ) | (149 | ) | 42.98 | |
Exercised | | — | | (101 | ) | (94 | ) | (195 | ) | 6.48 | |
Balance at Dec. 31, 2001 | | 1,037 | | 679 | | 1,065 | | 1,744 | | 32.73 | |
Granted | | (351 | ) | 142 | | 209 | | 351 | | 24.58 | |
Forfeited | | 444 | | (84 | ) | (360 | ) | (444 | ) | 56.35 | |
Exercised | | — | | (114 | ) | — | | (114 | ) | 5.07 | |
Balance at Dec. 31, 2002 | | 1,130 | | 623 | | 914 | | 1,537 | | 26.21 | |
Granted | | (456 | ) | 234 | | 222 | | 456 | | 21.70 | |
Forfeited | | 229 | | (73 | ) | (156 | ) | (229 | ) | 41.67 | |
Exercised | | — | | (83 | ) | (186 | ) | (269 | ) | 8.72 | |
Balance at Dec. 31, 2003 | | 903 | | 701 | | 794 | | 1,495 | | 25.63 | |
Exercisable: | | | | | | | | | | | |
December 31, 2001 | | | | | | | | 488 | | $ | 8.97 | |
December 31, 2002 | | | | | | | | 761 | | $ | 18.62 | |
December 31, 2003 | | | | | | | | 764 | | $ | 23.38 | |
| | | | | | | | | | | | | |
The following table summarizes information about options granted under the Equity Plans that were outstanding at December 31, 2003:
Range of
Exercise Prices | | Number
Outstanding | | Weighted
Average
Remaining
Contractual
Life | | Weighted
Average
Exercise
Price | | Number
Exercisable | | Weighted
Average
Exercise Price | |
| | | | | | | | | | | | | | | |
$2.625 | | - | | $6.00 | | 170 | | 4.5 years | | $ | 4.29 | | 170 | | $ | 4.29 | |
6.01 | | - | | 12.00 | | 136 | | 4.3 years | | 8.60 | | 136 | | 8.60 | |
12.01 | | - | | 20.00 | | 207 | | 8.8 years | | 18.60 | | 18 | | 19.11 | |
20.01 | | - | | 25.00 | | 386 | | 8.0 years | | 22.70 | | 205 | | 22.53 | |
25.01 | | - | | 30.00 | | 317 | | 8.6 years | | 27.10 | | 68 | | 27.05 | |
30.01 | | - | | 50.00 | | 103 | | 7.3 years | | 40.52 | | 57 | | 40.25 | |
50.01 | | - | | 66.00 | | 176 | | 7.3 years | | 62.71 | | 110 | | 62.47 | |
2.625 | | - | | 66.00 | | 1,495 | | 7.4 years | | 25.63 | | 764 | | 23.38 | |
| | | | | | | | | | | | | | | | | |
21
Shares available for grants and options granted under the Directors’ Plans are as follows:
| | Shares
Available for
Grant | | Non-Qualified
Stock Options | | Weighted
Average
Exercise Price | |
| | | | | | | |
Balance at Dec. 31, 2000 | | 44 | | 334 | | $ | 6.88 | |
Reduction in shares available | | (21 | ) | — | | — | |
Granted | | (23 | ) | 23 | | 66.90 | |
Exercised | | — | | (185 | ) | 9.17 | |
Balance at Dec. 31, 2001 | | — | | 172 | | 12.31 | |
Exercised | | — | | (6 | ) | 1.75 | |
Balance at Dec. 31, 2002 | | — | | 166 | | 12.70 | |
Exercised | | — | | (20 | ) | 9.00 | |
Balance at Dec. 31, 2003 | | — | | 146 | | 13.20 | |
| | | | | | | | |
The following table summarizes information about options granted under the Directors’ Plans that were outstanding at December 31, 2003:
Range of
Exercise Prices | | Number
Outstanding | | Weighted
Average
Remaining
Contractual
Life | | Weighted
Average
Exercise
Price | | Number
Exercisable | | Weighted
Average
Exercise
Price | |
| | | | | | | | | | | | | | | |
$1.083 | | - | | $2.00 | | 35 | | 4.7 years | | $ | 1.28 | | 35 | | $ | 1.28 | |
2.01 | | - | | 4.00 | | 45 | | 4.9 years | | 3.50 | | 45 | | 3.50 | |
4.01 | | - | | 6.00 | | 44 | | 2.8 years | | 5.12 | | 44 | | 5.12 | |
6.01 | | - | | 66.90 | | 22 | | 7.4 years | | 66.90 | | 22 | | 66.90 | |
1.083 | | - | | 66.90 | | 146 | | 4.6 years | | 13.20 | | 146 | | 13.20 | |
| | | | | | | | | | | | | | | | | |
Options outstanding under the Equity Plans and Directors’ Plans expire at various dates during the period from March 2004 through September 2013.
The weighted average fair values of options granted at market during the years ended December 31, 2003, 2002, and 2001 were $14.01, $15.98, and $51.25, respectively.
Pro forma information regarding net (loss) income and net (loss) income per share is required by Statement 123, and has been determined as if the Company had accounted for its stock options under the fair value method of Statement 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 2003, 2002, and 2001 respectively; risk-free interest rates of 3.22%, 4.31%, and 5.54%; volatility factor of the expected market price of the Company’s common stock of .707, .705, and .763; and a weighted-average expected life of the option of 6, 6 and 10 years.
In management’s opinion, the model does not necessarily provide a reliable measure of the fair value of the Company’s stock options because the Company’s stock options have characteristics significantly different from those of traded options, including limits on transferability and vesting restrictions, and because changes in the subjective input assumptions can materially affect the fair value estimates. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require input of highly subjective assumptions.
Stock Purchase Plan
Effective August 1, 2001, the Company adopted an Employee Stock Purchase Plan to provide employees an opportunity to purchase shares of its common stock through accumulated payroll deductions. Under the plan, employees purchase shares of common stock, subject to certain limitations, at 85% of the fair market value of shares on the quarterly enrollment or exercise date, whichever is lower. A total of 200 shares were made available for
22
purchase under the plan. During 2003, 10 shares were issued at an average price of $20.18 per share and 178 shares remained available at December 31, 2003.
8. DEFINED CONTRIBUTION PLAN
The Company has a 401(k) plan (the “Plan”), which covers substantially all employees of the Company. Contributions to the Plan are made through employee wage deferrals and employer matching contributions. The employer matching contribution percentage is discretionary and determined each year. In addition, the Company may contribute two discretionary amounts; one to non-highly compensated individuals and another to all employees. To qualify for the discretionary amounts, an employee must be employed by the Company on the last day of the Plan year or have been credited with a minimum of 500 hours of service during the Plan year.
The 401(k) expense related to the employer contribution for the years ended December 31, 2003, 2002 and 2001 was $256, $168, and $83, respectively.
9. MERGER TRANSACTIONS
During 2003, the Company entered into agreements with two prospective merger partners.
The Company entered into an Agreement and Plan of Merger dated August 5, 2003, by and among the Company, aaiPharma Inc. (“aaiPharma”), Scarlet Holding Corporation, Scarlet MergerCo, Inc. and Crimson MergerCo, Inc. (the “CIMA/aaiPharma Agreement”). Under the terms of the CIMA/aaiPharma Agreement, a holding company was formed to acquire all of the outstanding shares of each company and each company would have become a wholly owned subsidiary of the holding company. Under the CIMA/aaiPharma Agreement, each share of the Company’s common stock would have been exchanged for 1.3657 shares of the holding company’s common stock.
On November 3, 2003, the Company announced that it terminated the CIMA/aaiPharma Agreement, and paid to aaiPharma a termination fee of $11,500 as required by the agreement.
Following the termination of the CIMA/aaiPharma Agreement, the Company, Cephalon, Inc., a Delaware corporation (“Cephalon”), and C MergerCo, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Cephalon (“C MergerCo”), entered into an Agreement and Plan of Merger, dated as of November 3, 2003 (the “CIMA/Cephalon Agreement”). Pursuant to the CIMA/Cephalon Agreement, Cephalon will acquire the Company through the merger of C MergerCo with and into the Company, with the Company surviving as a wholly owned subsidiary of Cephalon (the “Merger”). In connection with the Merger, each outstanding share of the Company’s common stock will be converted into the right to receive $34.00 per share in cash. Each outstanding option to purchase the Company’s common stock, whether or not vested or exercisable, will be converted into the right to receive an amount of cash equal to $34.00 less the exercise price for each share underlying such option. If the CIMA/Cephalon Agreement is terminated under certain circumstances, the Company may be required to pay Cephalon a termination fee and expenses up to $16,250.
The Merger is subject to approval by the Company’s stockholders, as well as regulatory approvals and the satisfaction of other customary closing conditions.
Total merger-related expenses for the year ended December 31, 2003 were $17,413. For financial reporting purposes, certain of the merger-related expenses incurred are not considered to be deductible for federal and state income tax purposes.
Upon successful consummation of the merger, an additional success fee of $6,500 will be payable to the Company’s financial advisors in the transaction.
10. COMMITMENTS
The Company has future commitments for clinical studies related to its proprietary product of approximately
23
$6,694 and for the purchase of production equipment and remodeling of facilities of approximately $3,184 at December 31, 2003. Of the amount related to clinical studies, approximately $1,500 will be paid out in 2005 through 2006. All other amounts are expected to be paid out in 2004.
11. SEGMENT INFORMATION - MAJOR CUSTOMERS AND GEOGRAPHIC
The Company operates within a single segment: the development and manufacture of orally disintegrating tablet and enhanced-absorption oral drug delivery systems. Revenues are comprised of three components: net sales of products it manufactures; product development fees and licensing revenues for development activities conducted through collaborative agreements with pharmaceutical companies; and royalties on the sales of products sold by pharmaceutical companies under licenses from the Company.
Revenues as a percentage of total revenues from major customers are as follows:
| | For the Year Ended December 31, | |
| | 2003 | | 2002 | | 2001 | |
| | | | | | | |
Organon | | 40 | % | 32 | % | 25 | % |
Wyeth (formerly, American Home Products) | | 28 | | 10 | | 1 | |
AstraZeneca | | 15 | | 19 | | 22 | |
Novartis | | 7 | | 13 | | 33 | |
Schwarz Pharma, Inc. | | 7 | | 18 | | 8 | |
Other | | 3 | | 8 | | 11 | |
Total | | 100 | % | 100 | % | 100 | % |
Trade accounts receivable at December 31, 2003 of approximately $14,686 were comprised primarily of the following customers: Organon (38%), Wyeth (27%), and AstraZeneca (16%). Trade accounts receivable at December 31, 2002 of approximately $14,621 were comprised primarily of the following customers: Wyeth (31%), Organon (21%), AstraZeneca (15%), and Schwarz Pharma, Inc. (13%).
All of the Company’s assets and operations are located in the U.S. While the Company does not directly conduct its activities outside the U.S., it considers international revenues to be those arising from shipments ultimately destined for non-U.S. end-users and revenues from royalties generated by non-U.S. sales by partners.
| | Year Ended December 31, | |
| | 2003 | | 2002 | | 2001 | |
| | | | | | | |
Operating revenues by source: | | | | | | | |
U.S. | | $ | 47,936 | | $ | 35,425 | | $ | 26,540 | |
International (except Germany) | | 19,591 | | 8,784 | | 5,100 | |
Germany | | 8,549 | | 2,416 | | 386 | |
Total operating revenues | | $ | 76,076 | | $ | 46,625 | | $ | 32,026 | |
24
12. QUARTERLY FINANCIAL DATA - UNAUDITED
For the three
months ended | | March 31 | | June 30 | | September 30 | | December 31 | |
| | | | | | | | | |
2003 | | | | | | | | | |
Total operating revenues | | $ | 16,673 | | $ | 18,272 | | $ | 20,337 | | $ | 20,794 | |
Cost of goods sold | | 7,768 | | 7,434 | | 9,484 | | 9,892 | |
Gross profit | | 8,905 | | 10,838 | | 10,853 | | 10,902 | |
Merger-related expenses | | — | | 250 | | 3,458 | | 13,705 | |
Total operating expenses (excluding merger-related) | | 5,041 | | 6,348 | | 6,465 | | 7,777 | |
Other income, net | | 1,066 | | 849 | | 757 | | 624 | |
Income tax expense (benefit) | | 1,772 | | 1,405 | | 715 | | (167 | ) |
Net income (loss) | | $ | 3,158 | | $ | 3,684 | | $ | 972 | | $ | (9,789 | ) |
Per share amounts: | | | | | | | | | |
Basic net income (loss) per share | | $ | .22 | | $ | .26 | | $ | .07 | | $ | (.67 | ) |
Diluted net income (loss) per share | | $ | .22 | | $ | .25 | | $ | .07 | | $ | (.67 | ) |
Range of closing stock prices on NASDAQ | | $ | 18.19-$28.01 | | $ | 21.66-$30.16 | | $ | 22.00-$29.68 | | $ | 27.80-$33.08 | |
2002 | | | | | | | | | |
Total operating revenues | | $ | 8,383 | | $ | 10,200 | | $ | 12,541 | | $ | 15,501 | |
Cost of goods sold | | 3,285 | | 3,743 | | 4,913 | | 6,540 | |
Gross profit | | 5,098 | | 6,457 | | 7,628 | | 8,961 | |
Total operating expenses | | 3,600 | | 4,499 | | 5,311 | | 4,941 | |
Other income, net | | 1,739 | | 1,937 | | 1,450 | | 1,257 | |
Income tax (benefit) | | (168 | ) | (272 | ) | (616 | ) | (1,385 | ) |
Net income | | $ | 3,405 | | $ | 4,167 | | $ | 4,383 | | $ | 6,662 | |
Per share amounts: | | | | | | | | | |
Basic net income per share | | $ | .24 | | $ | .29 | | $ | .31 | | $ | .47 | |
Diluted net income per share | | $ | .23 | | $ | .28 | | $ | .30 | | $ | .45 | |
Range of closing stock prices on NASDAQ | | $ | 19.60-$35.45 | | $ | 18.94-$28.60 | | $ | 16.06-$25.15 | | $ | 22.10-$28.58 | |
The quarters ended June 30, 2003, September 30, 2003 and December 31, 2003 included merger-related expenses of $250, $3,458 and $13,705, respectively.
25
CIMA LABS INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(all amounts in thousands)
Description | | Balance at
Beginning of
Year | | Additions
Charged to
Costs and
Expenses | | Less
Deductions | | Balance at
End of Year | |
Year ended December 31, 2003: | | | | | | | | | |
Reserves and allowance deducted from asset accounts: | | | | | | | | | |
Allowance for doubtful accounts | | $ | 100 | | $ | — | | $ | — | | $ | 100 | |
Obsolescence reserve | | 320 | | 397 | | (442 | ) | 275 | |
Total | | $ | 420 | | $ | 397 | | $ | (442 | ) | $ | 375 | |
Year ended December 31, 2002: | | | | | | | | | |
Reserves and allowance deducted from asset accounts: | | | | | | | | | |
Allowance for doubtful accounts | | $ | 58 | | $ | 50 | | $ | (8 | ) | $ | 100 | |
Obsolescence reserve | | 235 | | 372 | | (287 | ) | 320 | |
Total | | $ | 293 | | $ | 422 | | $ | (295 | ) | $ | 420 | |
Year ended December 31, 2001: | | | | | | | | | |
Reserves and allowance deducted from asset accounts: | | | | | | | | | |
Allowance for doubtful accounts | | $ | — | | $ | 58 | | $ | — | | $ | 58 | |
Obsolescence reserve | | 225 | | 302 | | (292 | ) | 235 | |
Total | | $ | 225 | | $ | 360 | | $ | (292 | ) | $ | 293 | |
26
(b) Pro forma Financial Information
On August 12, 2004, Cephalon, Inc. (“Cephalon”) completed its previously announced acquisition (the “Acquisition”) of all of the outstanding shares of capital stock of CIMA LABS INC., a Delaware corporation (“CIMA”). The Acquisition will be recorded using the purchase method of accounting and, accordingly, the purchase price will be allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their fair values on the acquisition date, as determined by management using third party valuation expertise, where necessary.
The following unaudited pro forma combined financial information was derived from the historical consolidated financial statements of Cephalon and CIMA. The following unaudited pro forma balance sheet as of June 30, 2004 is presented as if the merger had occurred on June 30, 2004. The unaudited pro forma statements of operations for the six months June 30, 2004 and for the year ended December 31, 2003 are presented as if the merger had occurred on January 1, 2003.
The unaudited pro forma condensed consolidated financial statements reflect pro forma adjustments that are based upon available information and certain assumptions that management believes are reasonable. The unaudited pro forma condensed consolidated financial statements do not purport to represent Cephalon’s results of operations or financial position that would have resulted had the transactions, to which pro forma effects are given, been consummated as of the date or for the periods indicated. The pro forma condensed consolidated financial statements reflect preliminary estimates of the allocation of the purchase price for the Acquisition that may be adjusted.
There were no material differences between the accounting policies of Cephalon and CIMA. Certain historical amounts of CIMA, such as depreciation expense, have been reclassified to conform to the pro forma presentation. No adjustments were necessary to eliminate intercompany transactions and balances in the unaudited pro forma condensed consolidated statements, as there were no intercompany transactions or balances between Cephalon and CIMA.
The unaudited pro forma condensed consolidated financial statements and accompanying notes should be read in conjunction with the historical financial statements of Cephalon contained in its 2003 Annual Report and the historical financial statements of CIMA contained herein.
27
CEPHALON, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2004
(in thousands, except share data)
| | Cephalon, Inc. | | CIMA LABS INC. | | Pro Forma Adjustments | | Note 4 | | Pro Forma Consolidated | |
| | | | | | | | | | | |
ASSETS: | | | | | | | | | | | |
CURRENT ASSETS: | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,045,994 | | $ | 32,704 | | $ | (514,125 | ) | (a) | | $ | 564,573 | |
Investments | | 162,836 | | 79,019 | | — | | | | 241,855 | |
Receivables, net | | 97,558 | | 10,771 | | — | | | | 108,329 | |
Inventory, net | | 68,184 | | 6,168 | | 443 | | (b) | | 74,795 | |
Deferred tax asset | | 59,870 | | 5,519 | | — | | | | 65,389 | |
Other current assets | | 23,862 | | 3,217 | | — | | | | 27,079 | |
Total current assets | | 1,458,304 | | 137,398 | | (513,682 | ) | | | 1,082,020 | |
| | | | | | | | | | | |
PROPERTY AND EQUIPMENT, net | | 136,590 | | 81,148 | | — | | | | 217,738 | |
GOODWILL | | 298,769 | | — | | 40,344 | | (c) | | 339,113 | |
OTHER INTANGIBLE ASSETS, net | | 308,074 | | — | | 113,100 | | (d) | | 421,174 | |
DEBT ISSUANCE COSTS, net | | 30,848 | | — | | — | | | | 30,848 | |
DEFERRED TAX ASSET, net | | 144,131 | | 9,150 | | — | | | | 153,281 | |
OTHER ASSETS | | 23,376 | | 492 | | — | | | | 23,868 | |
| | $ | 2,400,092 | | $ | 228,188 | | $ | (360,238 | ) | | | $ | 2,268,042 | |
| | | | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | | |
Current portion of long-term debt | | $ | 41,374 | | $ | — | | $ | — | | | | $ | 41,374 | |
Accounts payable | | 35,248 | | 2,625 | | — | | | | 37,873 | |
Accrued expenses | | 105,530 | | 7,953 | | — | | | | 113,483 | |
Current portion of deferred revenues | | 380 | | 494 | | — | | | | 874 | |
Total current liabilities | | 182,532 | | 11,072 | | — | | | | 193,604 | |
| | | | | | | | | | | |
LONG-TERM DEBT | | 1,363,843 | | — | | — | | | | 1,363,843 | |
DEFERRED REVENUES AND OTHER | | 1,576 | | — | | — | | | | 1,576 | |
DEFERRED TAX LIABILITIES | | 44,532 | | — | | 42,578 | | (e) | | 87,110 | |
OTHER LIABILITIES | | 16,557 | | — | | — | | | | 16,557 | |
Total liabilities | | 1,609,040 | | 11,072 | | 42,578 | | | | 1,662,690 | |
| | | | | | | | | | | |
COMMITMENTS AND CONTINGENCIES | | — | | — | | — | | | | — | |
| | | | | | | | | | | |
STOCKHOLDERS’ EQUITY: | | | | | | | | | | | |
Common stock and additional paid-in capital | | 1,066,477 | | 247,258 | | (247,258 | ) | (f) | | 1,066,477 | |
Treasury stock | | (13,706 | ) | (20,000 | ) | 20,000 | | (f) | | (13,706 | ) |
Accumulated deficit | | (306,445 | ) | (10,082 | ) | (175,618 | ) | (f), (g) | | (492,145 | ) |
Accumulated other comprehensive income | | 44,726 | | (60 | ) | 60 | | (f) | | 44,726 | |
Total stockholders’ equity | | 791,052 | | 217,116 | | (402,816 | ) | | | 605,352 | |
| | $ | 2,400,092 | | $ | 228,188 | | $ | (360,238 | ) | | | $ | 2,268,042 | |
See accompanying notes.
28
CEPHALON, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2004
(in thousands, except share data)
| | Cephalon, Inc. | | CIMA LABS INC. | | Pro Forma
Adjustments | | Note 4 | | Pro Forma
Consolidated | |
| | | | | | | | | | | |
REVENUES: | | | | | | | | | | | |
Sales | | $ | 445,381 | | $ | 16,567 | | $ | — | | | | $ | 461,948 | |
Other revenues | | 9,078 | | 13,831 | | — | | | | 22,909 | |
| | 454,459 | | 30,398 | | — | | | | 484,857 | |
| | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | |
Cost of sales | | 53,357 | | 13,173 | | — | | | | 66,530 | |
Research and development | | 130,525 | | 8,952 | | — | | | | 139,477 | |
Selling, general and administrative | | 167,704 | | 5,433 | | — | | | | 173,137 | |
Depreciation and amortization | | 23,143 | | 1,091 | | 4,558 | | (h) | | 28,792 | |
Merger-related expenses | | — | | 1,547 | | — | | | | 1,547 | |
Impairment charge | | 30,071 | | — | | — | | | | 30,071 | |
| | 404,800 | | 30,196 | | 4,558 | | | | 439,554 | |
| | | | | | | | | | | |
INCOME FROM OPERATIONS | | 49,659 | | 202 | | (4,558 | ) | | | 45,303 | |
| | | | | | | | | | | |
OTHER INCOME AND EXPENSE | | | | | | | | | | | |
Interest income | | 6,835 | | 1,143 | | (3,085 | ) | (i) | | 4,893 | |
Interest expense | | (11,712 | ) | — | | — | | | | (11,712 | ) |
Charge on early extinguishment of debt | | (961 | ) | — | | — | | | | (961 | ) |
Other income (expense), net | | (1,802 | ) | 30 | | — | | | | (1,772 | ) |
| | (7,640 | ) | 1,173 | | (3,085 | ) | | | (9,552 | ) |
| | | | | | | | | | | |
INCOME BEFORE INCOME TAXES | | 42,019 | | 1,375 | | (7,643 | ) | | | 35,751 | |
| | | | | | | | | | | |
INCOME TAX EXPENSE | | (27,159 | ) | (1,095 | ) | 2,881 | | (j) | | (25,373 | ) |
| | | | | | | | | | | |
NET INCOME | | $ | 14,860 | | $ | 280 | | $ | (4,762 | ) | | | $ | 10,378 | |
| | | | | | | | | | | |
BASIC INCOME PER COMMON SHARE | | $ | 0.26 | | | | | | | | $ | 0.18 | |
| | | | | | | | | | | |
DILUTED INCOME PER COMMON SHARE | | $ | 0.26 | | | | | | | | $ | 0.18 | |
| | | | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | | 56,007 | | | | | | | | 56,007 | |
| | | | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-ASSUMING DILUTION | | 57,228 | | | | | | | | 57,228 | |
See accompanying notes.
29
CEPHALON, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
TWELVE MONTHS ENDED DECEMBER 31, 2003
(in thousands, except share data)
| | Cephalon, Inc. | | CIMA LABS INC. | | Pro Forma Adjustments | | Note 4 | | Pro Forma Consolidated | |
| | | | | | | | | | | |
REVENUES: | | | | | | | | | | | |
Sales | | $ | 685,250 | | $ | 49,061 | | $ | — | | | | $ | 734,311 | |
Other revenues | | 29,557 | | 27,015 | | — | | | | 56,572 | |
| | 714,807 | | 76,076 | | — | | | | 790,883 | |
| | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | |
Cost of sales | | 92,375 | | 34,578 | | — | | | | 126,953 | |
Research and development | | 170,277 | | 11,525 | | — | | | | 181,802 | |
Selling, general and administrative | | 252,033 | | 11,615 | | — | | | | 263,648 | |
Depreciation and amortization | | 44,073 | | 2,491 | | 9,116 | | (h) | | 55,680 | |
Merger-related expenses | | — | | 17,413 | | — | | | | 17,413 | |
| | 558,758 | | 77,622 | | 9,116 | | | | 645,496 | |
| | | | | | | | | | | |
INCOME FROM OPERATIONS | | 156,049 | | (1,546 | ) | (9,116 | ) | | | 145,387 | |
| | | | | | | | | | | |
OTHER INCOME AND EXPENSE | | | | | | | | | | | |
Interest income | | 11,298 | | 3,238 | | (7,198 | ) | (i) | | 7,338 | |
Interest expense | | (28,905 | ) | — | | — | | | | (28,905 | ) |
Charge on early extinguishment of debt | | (9,816 | ) | — | | — | | | | (9,816 | ) |
Other income (expense), net | | 1,688 | | 58 | | — | | | | 1,746 | |
| | (25,735 | ) | 3,296 | | (7,198 | ) | | | (29,637 | ) |
| | | | | | | | | | | |
INCOME BEFORE INCOME TAXES | | 130,314 | | 1,750 | | (16,314 | ) | | | 115,750 | |
| | | | | | | | | | | |
INCOME TAX EXPENSE | | (46,456 | ) | (3,725 | ) | 5,873 | | (j) | | (44,308 | ) |
| | | | | | | | | | | |
NET INCOME | | $ | 83,858 | | $ | (1,975 | ) | $ | (10,441 | ) | | | $ | 71,442 | |
| | | | | | | | | | | |
* BASIC INCOME PER COMMON SHARE | | $ | 1.49 | | | | | | | | $ | 1.27 | |
| | | | | | | | | | | |
* DILUTED INCOME PER COMMON SHARE | | $ | 1.42 | | | | | | | | $ | 1.23 | |
| | | | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | | 55,560 | | | | | | | | 55,560 | |
| | | | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-ASSUMING DILUTION | | 64,072 | | | | | | | | 64,072 | |
| | | | | | | | | | | | | | | | | | | |
* Restated for adoption of guidance from EITF 03-6.
See accompanying notes.
30
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
1. Purchase Price Allocation
The purchase price of $514.1 million consists of $500.1 million for all outstanding shares of CIMA at $34.00 per share and $14.0 million in direct transaction costs. The Acquisition was funded from Cephalon’s existing cash and short-term investments. In connection with the Acquisition, CIMA used $18.8 million of their own funds to purchase all outstanding employee stock options, whether or not vested or exercisable, for an amount equal to $34.00 less the exercise price for such option.
The purchase price has been allocated to the tangible and intangible assets acquired, liabilities assumed and in-process research and development, with the excess purchase price being allocated to goodwill under the assumption the acquisition of CIMA was consummated on June 30, 2004. The final purchase price allocation will differ from that presented below due to adjustments primarily for items such as additional transaction costs and ongoing evaluations of deferred taxes and valuation allowances. Other adjustments may also be necessary.
The components and preliminary allocation of the purchase price consisted of the following under the assumption the acquisition of CIMA was consummated on June 30, 2004:
| | (In thousands) | |
Consideration and direct transaction costs: | | | |
Cash paid for common stock | | $ | 500,125 | |
Direct transaction costs | | 14,000 | |
Total purchase price | | $ | 514,125 | |
| | | |
Allocation of purchase price: | | | |
Cash and cash equivalents | | $ | 32,704 | |
Investments | | 79,019 | |
Accounts receivable | | 10,771 | |
Inventories | | 6,611 | |
Deferred tax assets, net | | 14,669 | |
Property, plant and equipment | | 81,148 | |
Other assets | | 3,709 | |
Current liabilities | | (11,072 | ) |
Deferred tax liabilities | | (42,578 | ) |
Goodwill | | 40,344 | |
Intangible assets | | 113,100 | |
Write-off of in-process research and development | | 185,700 | |
Total purchase price | | $ | 514,125 | |
| | | | | |
2. Intangible Assets
For purposes of preparing the unaudited pro forma condensed consolidated financial statements, the identifiable intangible assets acquired of $113.1 million are amortized as follows and are presented as if the merger had occurred on January 1, 2003:
| | Fair value | | Useful life | | Weighted-average
useful life | |
| | (In thousands) | | (years) | | | |
DuraSolv technology | | $ | 70,000 | | 16 | | 16 | |
OraSolv technology | | 32,700 | | 3 to 8 | | 8 | |
OraVescent technology | | 10,400 | | 17 | | 17 | |
| | $ | 113,100 | | | | | |
| | | | | | | | | |
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3. In-Process Research and Development
In-process research and development (“IPR&D”) represents the valuation of acquired, to-be-completed research projects. To assist in determining the value of the IPR&D, a third-party valuation was obtained as of the acquisition date. A discounted cash flow analysis was performed, utilizing anticipated revenues, expenses and net cash flow forecasts related to the associated technology. Given the high risk associated with the development of new drugs, the revenue and expense forecasts were probability adjusted to reflect the risk of advancement through the regulatory approval process. Such a valuation requires significant estimates and assumptions. Management believes that the fair value assigned to IPR&D is based on reasonable assumptions. However, we cannot be sure that the assumptions will transpire as estimated. At the date of acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. Accordingly, these costs will be charged to expense in the third quarter of 2004.
4. Pro forma Adjustments
The following adjustments were applied to Cephalon’s historical financial statements and those of CIMA to arrive at the pro forma consolidated financial information.
(a) To record the payment of $514.1 million for the purchase of all of the outstanding shares of capital stock of CIMA, plus transaction costs.
(b) Adjustment to record CIMA’s inventory at fair value.
(c) To record the fair value of goodwill acquired.
(d) To record the fair value of intangible assets acquired.
(e) To record deferred tax adjustment related to the fair value of inventory and intangible assets acquired, using CIMA’s estimated effective tax rate of 37.5%.
(f) Elimination of CIMA stockholders’ equity.
(g) Recognition of preliminary IPR&D charge of $185.7 million related to the acquisition of CIMA.
(h) To record the amortization of intangible assets acquired.
(i) To record the reduction of interest income related to the estimated $514.1 million cash payments for the purchase of CIMA using an average annual interest rate of 1.2% for the six months ended June 30, 2004 and 1.4% for the year ended December 31, 2003.
(j) To record the tax benefit related to the lower interest income and higher amortization expense at Cephalon’s consolidated marginal tax rate in the United States of 37.69% for the six months ended June 30, 2004 and 36.0% for the year ended December 31, 2003.
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(c) Exhibits
Exhibit No. | | Description of Document |
2.1 | | Agreement and Plan of Merger, dated as of November 3, 2003, by and between Cephalon, Inc., CIMA LABS INC., and C MergerCo., Inc. (previously filed as Exhibit 2.1 to the Registrant’s Form 8-K dated November 3, 2003 and incorporated herein by reference). |
23.1+ | | Consent of Ernst & Young LLP |
99.1 | | Press Release dated August 12, 2004: Cephalon, Inc. Announces Completion of Acquisition of CIMA LABS INC. previously filed as Exhibit 99.1 to the Registrant’s Form 8-K filed with the SEC on August 16, 2004 and incorporated herein by reference). |
+ Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| CEPHALON, INC. |
| | |
| | |
Date: October 22, 2004 | By: | /s/ J. KEVIN BUCHI | |
| | J. Kevin Buchi |
| | Senior Vice President & Chief Financial Officer |
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EXHIBIT INDEX
Exhibit
Number | | Description |
| | |
23.1 | | Consent of Ernst & Young LLP |
35
