1
EXHIBIT 20.2
Report of Independent Accountants
To the Shareholders of Anesta Corp.:
In our opinion, the accompanying balance sheets and the related statements of
operations and comprehensive loss, stockholders' equity, and cash flows present
fairly, in all material respects, the financial position of Anesta Corp. (the
"Company") at December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Salt Lake City, Utah
February 18, 2000, except as to the
information presented in Note 14 for
which the date is March 13, 2000
38
2
ANESTA CORP.
BALANCE SHEETS
as of December 31, 1999 and 1998
ASSETS 1999 1998
----- ----
Current assets:
Cash and cash equivalents $11,746,093 $55,889,226
Current portion of certificate of deposit 340,000 255,000
Marketable debt securities,
available-for-sale 59,031,849 24,661,040
Accounts receivable 1,956,357 276,476
Prepaid expenses and other current assets 667,960 194,802
----------- -----------
Total current assets 73,742,259 81,276,544
----------- -----------
Property and equipment, at cost:
Furniture and equipment 1,099,529 947,598
Leasehold improvements 2,813,166 2,330,136
Accumulated depreciation (1,447,484) (1,151,126)
----------- -----------
2,465,211 2,126,608
----------- -----------
Other assets:
Certificate of deposit 1,700,000 1,530,000
Other assets 301,327 196,202
----------- -----------
2,001,327 1,726,202
----------- -----------
Total assets $78,208,797 $85,129,354
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
---- ----
Current liabilities:
Accounts payable $ 409,584 $ 1,478,521
Accrued liabilities:
Accrued compensation 655,870 1,117,909
Other 139,062 236,783
Current portion of unearned revenues 746,389 299,296
Current portion of note payable 333,333 250,000
----------- ------------
Total current liabilities 2,284,238 3,382,509
Unearned revenues 1,831,759 227,500
Note payable 1,666,667 1,500,000
----------- ------------
Total liabilities 5,782,664 5,110,009
----------- ------------
Commitments (Note 11)
Stockholders' equity:
Common stock, par value,
$.001 per share; Authorized:
35,000,000 shares; Issued:
13,311,839 shares
in 1999 and 13,054,934 shares
in 1998 13,312 13,055
Additional paid-in capital 130,742,839 128,634,691
Accumulated deficit (58,166,809) (48,679,075)
Accumulated other comprehensive
income (loss) (163,209) 50,674
----------- ------------
Total stockholders' equity 72,426,133 80,019,345
----------- ------------
Total liabilities and
stockholders' equity $78,208,797 $ 85,129,354
----------- ------------
The accompanying notes are an integral
part of the financial statements
39
3
ANESTA CORP.
STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Revenues:
Product sales $ 2,231,732 $ 193,531 $ 183,752
Royalty revenue 62,275 5,744 5,449
Revenues from contract research/license agreements 4,221,148 475,704
------------ ------------ ------------
Total revenues 6,515,155 674,979 189,201
------------ ------------ ------------
Operating costs and expenses:
Cost of goods sold 671,366 53,804 52,082
Royalties 34,410 2,989 2,838
Research and development 9,840,204 8,627,606 7,889,021
Depreciation 309,652 296,241 269,595
Marketing, general and administrative 9,019,525 8,585,679 6,368,094
------------ ------------ ------------
Total costs and expenses 19,875,157 17,566,319 14,581,630
------------ ------------ ------------
Loss from operations (13,360,002) (16,891,340) (14,392,429)
Non operating income (expense):
Interest income 4,016,267 1,333,597 1,992,739
Interest expense (124,289) (142,916) (139,407)
Other 459 201 (8,215)
------------ ------------ ------------
Loss before provision for income taxes (9,467,565) (15,700,458) (12,547,312)
Provision for income taxes (20,169) (16,411) (1,741)
------------ ------------ ------------
Net loss (9,487,734) (15,716,869) (12,549,053)
------------ ------------ ------------
Other comprehensive income (loss):
Foreign currency translation adjustment (8,754) 15,604
Unrealized gain (loss) on marketable debt
securities, available-for-sale (205,129) 26,663 9,710
------------ ------------ ------------
Total other comprehensive income (loss) (213,883) 42,267 9,710
------------ ------------ ------------
Comprehensive loss $ (9,701,617) $(15,674,602) $(12,539,343)
============ ============ ============
Basic and diluted loss per common share (Note 13)--
Net loss per common share $ (0.72) $ (1.59) $ (1.32)
============ ============= ============
Weighted average shares outstanding 13,226,637 9,897,978 9,500,055
============ ============= ============
The accompanying notes are an integral
part of the financial statements
40
4
ANESTA CORP.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the period from January 1, 1997 to December 31, 1999
Common Stock
--------------------------------------------
Treasury Stock
Additional Accumulated ----------------
Shares Amount Paid-in Capital Deficit Shares Amount
------ ------ --------------- ------- ------ ------
Balance at January 1, 1997 9,440,129 $ 9,440 $ 61,531,623 ($20,413,153) $345 ($4,226)
Exercise of stock options for cash and stock 105,716 105 530,788
Issuance of stock under stock
purchase plan 5,965 6 84,054
Retirement of treasury stock in July 1997 (345) (4,226) (345) 4,226
Collection on notes receivable from
issuance of common stock
Other comprehensive income
1997 net loss (12,549,053)
----------- ------- ------------ ------------- ---- -------
Balance at December 31, 1997 9,551,465 9,551 62,142,239 (32,962,206) -- --
Exercise of stock options for cash and stock 244,300 245 1,889,684
Issuance of common stock for
cash on December 17, 1998
(at $21.25 per share), net of
offering costs of $4,584,067 3,250,000 3,250 64,475,183
Issuance of stock under stock
purchase plan 9,169 9 127,585
Other comprehensive income
1998 net loss (15,716,869)
----------- ------- ------------ ------------- ---- -------
Balance at December 31, 1998 13,054,934 13,055 128,634,691 (48,679,075) -- --
Exercise of stock options for cash and stock 250,178 250 2,016,521
Issuance of stock under stock
purchase plan 6,727 7 91,627
Other comprehensive loss
1999 net loss (9,487,734)
----------- ------- ------------ ------------- ---- -------
Balance at December 31, 1999 13,311,839 $13,312 $130,742,839 ($53,166,809) -- --
=========== ======= ============ ============= ==== =======
Notes
Receivable Accumulated
from Issuance Other
of Common Comprehensive
Stock Income (Loss) Total
----- ------------- -----
Balance at January 1, 1997 ($7,000) ($1,303) $ 41,115,381
Exercise of stock options for cash and stock 530,893
Issuance of stock under stock
purchase plan 84,060
Retirement of treasury stock in July 1997
Collection on notes receivable from
issuance of common stock 7,000 7,000
Other comprehensive income 9,710 9,710
1997 net loss (12,549,053)
------- --------- ------------
Balance at December 31, 1997 -- 8,407 29,197,991
Exercise of stock options for cash and stock 1,889,929
Issuance of common stock for
cash on December 17, 1998
(at $21.25 per share), net of
offering costs of $4,584,067 64,478,433
Issuance of stock under stock
purchase plan 127,594
Other comprehensive income 42,267 42,267
1998 net loss (15,716,869)
------- --------- ------------
Balance at December 31, 1998 -- 50,674 80,019,345
Exercise of stock options for cash and stock 2,016,771
Issuance of stock under stock
purchase plan 91,634
Other comprehensive loss (213,883) (9,701,617)
1999 net loss --
------- --------- ------------
Balance at December 31, 1999 -- ($163,209) $ 72,426,133
======= ========= ============
The accompanying notes are an integral
part of the financial statements
41
5
ANESTA CORP.
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997
--------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net loss $ (9,487,734) $(15,716,869) $(12,549,053)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 309,652 296,241 269,595
(Gain) Loss on retirement of assets (332) 3,823 12,245
Increase (decrease) due to changes in:
Accounts receivable (1,679,882) (193,613) 402,785
Prepaid expenses and other current assets (473,159) 233,688 (136,507)
Other assets (105,124) 9,067 (89,796)
Accounts payable (1,068,937) 728,436 (85,299)
Accrued liabilities (559,760) 624,715 105,454
Unearned revenues 2,051,352 176,796
------------ ------------ ------------
Net cash used in operating activities (11,013,924) (13,837,716) (12,070,576)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (648,411) (108,186) (894,791)
Proceeds from sale of assets 489 50 1,621
Purchases of marketable debt securities,
available-for-sale (79,553,714) (28,925,882) (12,754,249)
Maturities and sales of marketable debt securities,
available-for-sale 44,977,776 22,167,216 12,062,198
Purchase of certificate of deposit (816,000)
Proceeds from maturity of certificate of deposit (255,000) 255,000 153,000
------------ ------------ ------------
Net cash used in investing activities (35,478,860) (6,611,802) (2,248,221)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 500,000 800,000
Principal payments on notes payable (250,000) (250,000) (150,000)
Net proceeds from issuance of common stock 2,108,405 66,812,375 614,954
Collections on notes receivable from
issuance of common stock 7,000
------------ ------------ ------------
Net cash provided by financing activities 2,358,405 66,562,375 1,271,954
------------ ------------ ------------
Effect of exchange rate changes on cash (8,754) 15,604
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (44,143,133) 46,128,461 (13,046,843)
Cash and cash equivalents at beginning of period 55,889,226 9,760,765 22,807,608
------------ ------------ ------------
Cash and cash equivalents at end of period $ 11,746,093 $ 55,889,226 $ 9,760,765
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 129,714 $ 144,035 $ 136,715
Cash paid during the year for taxes 20,169 16,411 1,741
The accompanying notes are an integral
part of these financial statements
42
6
NOTES TO FINANCIAL STATEMENTS
------------
1. Significant Accounting Policies:
Description of the Business
Anesta Corp. is involved in the development of new pharmaceutical products for
oral transmucosal drug administration. Since its inception in August 1985,
Anesta has been a development stage company. However, during the fourth quarter
of 1999, Anesta began generating sales from its principal product, Actiq, and
accordingly is no longer in the development stage. The Company's products are
based on its proprietary OTS for drug delivery. Anesta's principal product is
Actiq, an OTS fentanyl product, which was approved by the FDA on November 4,
1998.
Revenues recognized to date represent revenues under research and development
contracts, license agreements and sales of the Company's products, Fentanyl
Oralet and Actiq. The Company's ability to achieve profitability depends in part
upon its ability alone, or with others, to commercialize successfully these
products, to complete development of its proposed products, to obtain required
regulatory approvals and to manufacture and market such proposed products.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents. Substantially all of
the Company's cash and cash equivalents are held in two financial institutions
in San Francisco, California.
Marketable Debt Securities
The Company's marketable debt securities are classified as available-for-sale
and carried at market value, with the unrealized gain or loss reflected as a
component of other comprehensive income (loss). Gross realized gains and losses,
with cost determined using the specific identification method, have not been
material.
Property and Equipment
Expenditures that materially increase asset lives are capitalized at cost, while
normal maintenance and repairs are expensed as incurred. Depreciation is
reported on a straight-line basis over the shorter of the estimated useful lives
of the assets, or the term of the lease, which range from 3 to 15 years.
The cost and related accumulated depreciation of assets sold or otherwise
disposed of are removed from the accounts and the gain or loss is reflected in
the statements of operations and comprehensive loss.
Translation of Foreign Currency
Assets and liabilities of foreign operations, where the functional currency is
the local currency, are translated into U.S. dollars at the fiscal year end
exchange rate. The related translation adjustments are reflected as a component
of other comprehensive income, a separate component of stockholders' equity.
Revenues and expenses are translated using average exchange rates prevailing
during the year.
43
7
NOTES TO FINANCIAL STATEMENTS, Continued
1. Significant Accounting Policies (Continued):
Net Loss Per Share
Basic and diluted earnings per share are computed in accordance with Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings per Share (EPS).
Basic EPS excludes dilution and is computed by dividing income or loss available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution from
securities or contracts to issue common stock. Common equivalent shares are
excluded from the computation of diluted EPS when their effect is antidilutive.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting For Income Taxes. Deferred income taxes are provided for differences
between the financial statement and tax bases of assets and liabilities using
enacted future tax rates.
Revenue Recognition
The Company recognized revenues from contract research and license agreements
based on qualifying expenditures. Where applicable, revenues from the licensing
of Anesta's technology, including milestone payments under license agreements,
are deferred and recognized on a straight-line basis over the defined period in
the related license agreement. Research and development expense in the
accompanying statements of operations and comprehensive loss includes funded and
unfunded amounts. Revenue from the sale of products manufactured by Abbott is
recognized when Abbott ships product against a customer order.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year balances have been reclassified to conform with current year
presentation.
44
8
NOTES TO FINANCIAL STATEMENTS, Continued
2. Marketable Debt Securities:
The cost and estimated market value of marketable debt securities, available-
for-sale at December 31, 1999, are as follows:
Gross Gross Estimated
Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Commercial Paper $22,151,274 $6,453 $22,157,727
Corporate Term Notes 15,824,568 $ (73,244) 15,751,324
Federal Home Loan Bank Notes 8,500,194 (35,669) 8,464,525
Certificates of Deposit 6,008,717 (14,877) 5,993,840
Federal National Mortgage Notes 4,985,522 (46,772) 4,938,750
U.S. Treasury Note 1,006,890 (5,950) 1,000,940
Accrued Interest 724,743 724,743
----------- ------ --------- -----------
$59,201,908 $6,453 $(176,512) $59,031,849
----------- ------ --------- -----------
The cost and estimated market value of marketable debt securities, available-
for-sale at December 31, 1999, by contractual maturity, are shown below:
Estimated
Market
Cost Value
---- -----
Due in one year or less $51,402,038 $51,287,805
Due after one year through five years 7,799,870 7,744,044
----------- -----------
$59,201,908 $59,031,849
----------- -----------
The cost and estimated market value of marketable debt securities, available-
for-sale at December 31, 1998, are as follows:
Gross Gross Estimated
Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Corporate Term Notes $15,698,462 $14,750 $15,713,212
Federal Home Loan Bank Notes 4,499,584 12,961 4,512,545
Federal National Mortgage Notes 2,967,280 5,540 2,972,820
Certificates of Deposit 999,537 1,663 1,001,200
Commercial Paper 261,638 156 261,794
Accrued Interest 199,469 199,469
----------- ------- ---------- -----------
$24,625,970 $35,070 $24,661,040
----------- ------- ---------- -----------
45
9
NOTES TO FINANCIAL STATEMENTS, Continued
3. Related Party Transactions:
The Company paid expenses of $314,108, $250,368 and $284,030 in 1999, 1998 and
1997, respectively, to the Stanley Research Foundation for preclinical and
clinical research. The Stanley Research Foundation and its principal trustee are
shareholders of the Company.
4. Note Payable:
The note payable at December 31, 1999 and 1998 is comprised of the following:
1999 1998
---- ----
Term note payable to a bank with interest
payable monthly at 7%. Principal payments of
$333,333 are due each July through July 2005.
The note is collateralized by a certificate of deposit
in the amount of $2,040,000 at December 31, 1999. $2,000,000 $1,750,000
Current portion (333,333) (250,000)
---------- ----------
Long-term portion $1,666,667 $1,500,000
---------- ----------
The Company's note payable matures in periods ending December 31, as follows:
2000 $ 333,333
2001 333,333
2002 333,333
2003 333,333
Thereafter 666,667
----------
$2,000,000
----------
Rates currently available to the Company for notes payable with similar terms
and maturities are used to estimate the fair value of notes payable. At December
31, 1999 and 1998, the carrying value of the note payable approximates fair
value.
46
10
NOTES TO FINANCIAL STATEMENTS, Continued
5. Stock Based Compensation Plan:
The Company maintains three stock option plans: the 1989 Stock Option Plan (the
"1989 Plan"), the 1993 Stock Option Plan (the "1993 Plan"), and the 1993 Non-
Employee Directors' Stock Option Plan (The "Non-Employee Directors' Plan").
The 1989 Plan provides for the issuance of nonqualified stock options ("NQSOs")
to employees of, directors of and consultants to the Company. The 1993 Plan
provides for the issuance of Incentive Stock Options ("ISOs") to employees of
the Company and NQSOs to employees of, directors of and consultants to the
Company. The Non-Employee Directors' Plan provides for the issuance of NQSOs to
non-employee members of the Company's Board of Directors who are not prohibited
by their employer from receiving options. Additionally, the Company has granted
NQSOs to non-employee directors and consultants on an individual basis and not
under a plan.
Under the 1989 Plan, NQSOs to purchase a total of 250,000 shares were authorized
for issuance, of which none were outstanding and exercisable at December 31,
1999. All options have been granted at the market price of the Company's common
stock at the date of grant. The NQSOs vest over a period not to exceed four
years from the date of grant and terminate five years from the date of grant.
At the 1997 annual meeting, stockholders approved an amendment to the 1993 Plan
to increase the number of shares authorized for issuance from an aggregate of
750,000 shares to an aggregate of 1,500,000 shares. At the 1998 annual meeting,
stockholders approved an amendment to the 1993 Plan to increase the number of
shares authorized for issuance from an aggregate of 1,500,000 shares to an
aggregate of 1,850,000 shares. At the 1999 annual meeting, stockholders approved
an amendment to the 1993 Plan to increase the number of shares authorized for
issuance from an aggregate of 1,850,000 shares to an aggregate of 2,400,000
shares. As of December 31, 1999, 1,539,579 options were outstanding and 726,952
options were exercisable. All options have been granted at the market price of
the Company's common stock at the date of grant. The ISOs and NQSOs vest over a
period not to exceed four years from the date of grant and terminate from five
to ten years from the date of grant.
At the 1997 annual meeting, stockholders approved an amendment to the Non-
Employee Directors' Plan to increase the annual non-discretionary grant made to
each non-employee director by 3,500 shares, from 1,500 shares to 5,000 shares.
At the 1998 annual meeting, stockholders approved an amendment to the Non-
Employee Directors' Plan to increase the non-discretionary grant made to each
newly elected non-employee director from 10,000 shares to 15,000 shares, to
grant 2,000 shares per year to each non-employee director serving as a committee
chair, and to grant 400 shares to each non-employee director for each meeting of
the Board of Directors attended in person or by teleconference. At the 1999
annual meeting, stockholders approved an amendment to the Non-Employee
Directors' Plan to increase the number of shares authorized for issuance from an
aggregate of 150,000 shares to an aggregate of 350,000 shares. At December 31,
1999, 105,800 options were outstanding and 42,282 options were exercisable. All
options have been granted at the market price of the Company's common stock at
the date of grant. The NQSOs vest over a period not to exceed four years from
the date of grant and terminate five years from the date of grant.
The Company has granted NQSOs to purchase shares on an individual basis and not
under a plan, on terms similar to the 1989 Plan. At December 31, 1999, 7,800
options were outstanding and 7,800 options were exercisable.
47
11
NOTES TO FINANCIAL STATEMENTS, Continued
5. Stock Based Compensation Plan (Continued):
The Company has adopted the disclosure provisions of SFAS No. 123. Under these
provisions, the Company is allowed to continue to apply Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its option
plans. Accordingly, no compensation expense has been recognized as options are
granted to employees and directors at the stock's then market price. Had
compensation expense for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under the
option plans as recommended by SFAS No. 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:
1999 1998 1997
---- ---- ----
Net loss As reported $ (9,487,734) $(15,716,869) $(12,549,053)
Pro forma $(13,185,307) $(16,617,806) $(13,282,846)
Loss per share As reported $ (0.72) $ (1.59) $ (1.32)
Pro forma $ (1.00) $ (1.68) $ (1.40)
NOTE: Basic and diluted loss per share are the same.
The pro forma compensation expense may not be representative of such expense in
future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: expected
volatility of 77 -- 81 percent, risk-free interest rates of 4.4 -- 7.1 percent,
expected lives of 0.01 -- 10.0 years, and a dividend yield of zero for all
years.
Changes in all outstanding options are as follows:
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average
Fixed Options (000) Exercise Price (000) Exercise Price (000) Exercise Price
----- -------------- ----- -------------- ----- --------------
Outstanding at beginning of year 1,527 $12.18 1,341 $10.86 1,002 $ 8.63
Granted 462 11.50 479 13.70 458 14.48
Exercised (261) 8.41 (246) 7.82 (110) 5.48
Forfeited (74) 14.00 (47) 12.84 (9) 13.16
----- ------ ----- ----- ----- ------
Outstanding at end of year 1,653 $12.51 1,527 12.18 1,341 $10.86
===== ====== ===== ===== ===== ======
Options exercisable at year-end 777 659 536
Weighted-average fair value of
options granted during the year $ 8.63 $11.00 $11.96
48
12
NOTES TO FINANCIAL STATEMENTS, Continued
5. Stock Based Compensation Plan (Continued):
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
Weighted-
Number Average Weighted- Number
Range of Outstanding Remaining Average Exercisable at Weighted-Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price 12/31/99 Exercise Price
--------------- ----------- ---------------- -------------- -------- --------------
$5.0376 - $ 7.5563 30,032 0.2 years $ 5.25 30,032 $ 5.25
$7.5564 - $10.0750 3,800 1.8 9.30 3,000 9.25
$10.0751 - $12.5938 1,039,130 7.3 11.30 449,704 11.31
$12.5939 - $15.1125 359,093 7.6 13.87 208,232 13.83
$15.1126 - $17.6313 183,124 6.0 16.55 67,942 16.50
$17.6314 - $20.1500 30,000 4.5 18.57 16,248 18.64
$20.1501 - $22.6688 4,800 4.1 21.06 804 21.19
$22.6689 - $25.1875 3,200 3.9 23.97 1,072 23.97
--------- ---------- ------ ------- ------
1,653,179 7.0 $12.51 777,034 $12.37
========= ========== ====== ======= ======
In November 1993, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan"), authorizing the issuance of 250,000 shares pursuant to
purchase rights granted to employees of the Company. Participants may use up to
10% of their compensation to purchase the Company's common stock at the end of
each year at a price equal to 85% of the lower of the beginning or ending stock
price in the plan period. As of December 31, 1999, there were 208,917 shares
available for issuance under the Purchase Plan. Compensation expense under the
fair value method of SFAS No. 123 is not significant relative to shares
purchased under the Purchase Plan for 1999, 1998 and 1997.
6. Capital Stock:
The Company has 1,000,000 shares of authorized voting preferred shares with a
par value of $.001. At December 31, 1999 and 1998 there were no voting preferred
shares issued and outstanding. At the 1999 Annual Meeting, stockholders approved
an increase in authorized common stock from aggregate 15,000,000 shares to an
aggregate of 35,000,000 shares.
7. Technology License Agreement:
In September 1985, the Company obtained an exclusive worldwide license from UURF
to use technology and knowledge developed or to be developed under Dr. Theodore
H. Stanley's direction at the University of Utah, for anesthetic and other drug
delivery systems based on oral transmucosal technology. In return, the UURF
received 6,000 shares of Company stock and certain royalty rights based on
product sales incorporating the technology.
The license expires on the date of the last expiring patent, which occurs in
2014.
49
13
NOTES TO FINANCIAL STATEMENTS, Continued
8. Income Taxes:
As of December 31, 1999, net operating losses (NOLs) totaling approximately
$58.6 million are available to offset future taxable income, and research and
development (R&D) tax credits totaling approximately $1,381,000 are available to
offset future tax liabilities. The NOLs and the R&D tax credit carryforwards
expire from 2002 to 2020.
The Company's utilization of NOL carryforwards and R&D credits is limited to
approximately $7,802,000 annually as a result of an ownership change in 1996. In
addition to the limitation imposed in 1996, utilization of approximately
$1,380,000 of the NOLs against future taxable income will be subject to an
annual limitation of approximately $140,000 per year because of a cumulative
change in ownership within a three-year period exceeding 50%. Approximately
$110,000 of the R&D tax credit carryforwards is subject to the same annual
limitation, under the constraint that the total NOLs must be utilized before the
R&D credits may be used. To the extent the $140,000 annual limitation is not
fully utilized in any given year, the unused portion of the NOLs and the R&D tax
credit carryforwards are available for potential utilization in future years.
SFAS No. 109 requires that a valuation allowance be provided if it is more
likely than not that some portion or all of a deferred tax asset will not be
realized. The Company's ability to realize the benefit of its deferred tax asset
will depend on the generation of future taxable income. Because the Company's
operations are not currently generating taxable income, the Company believes
that a full valuation allowance should be provided. The valuation allowance
increased $3,903,000 during 1999, $7,274,000 during 1998 and $5,170,000 during
1997 primarily as a result of the increase in net operating loss carryforwards.
The components of the net deferred tax asset as of December 31, 1999 and 1998
under SFAS 109 are as follows:
1999 1998
---- ----
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 21,869,000 $ 18,182,000
Charitable contribution
carryforwards 80,000 64,000
Research and development tax
credit carryforwards 1,381,000 1,111,000
Depreciation 106,000 228,500
Book/tax difference related to
license agreements 759,000 713,500
Other -- (7,000)
Valuation allowance (24,195,000) (20,292,000)
------------ ------------
Net deferred tax asset $ -- $ --
------------ ------------
50
14
NOTES TO FINANCIAL STATEMENTS, Continued
9. Research and Development:
In December 1989, the Company entered into a research and development, license,
supply and distribution agreement with Abbott. Under the agreement as amended,
the Company granted to Abbott the exclusive right to make, use and sell in the
U.S., oral transmucosal products resulting from technology owned or licensed by
the Company, consisting of Oral Transmucosal Fentanyl Citrate (OTFC/(R)/) or
other central nervous system acting drugs or intermediates thereof used for
premedication, sedation, analgesia, diagnostic procedures, emergency room
procedures, post-operative pain, burn treatment or cancer-related pain
management. The first product developed under this agreement is being marketed
for use in surgical premedication and for sedation/analgesia prior to diagnostic
or therapeutic procedures in hospital settings under Abbott's trademark Fentanyl
Oralet. The second product under the agreement is being marketed for
breakthrough cancer pain under Anesta's trademark Actiq (See Note 14).
Under the Company's agreements with Abbott, Abbott manufactures Anesta's OTS
fentanyl product line (Fentanyl Oralet and Actiq) and sells these products to
the Company at a price which reflects Abbott's cost of manufacturing. The
Company then sells the products to Abbott at a price related to Abbott's selling
price which results in a gross profit to the Company ranging from approximately
40-70%. In addition, the Company is entitled to receive a royalty from OTS
fentanyl product sales by Abbott.
By agreement, Abbott committed and paid a total of $10.05 million to the Company
to fund the clinical development of and to obtain the regulatory approval for
Fentanyl Oralet and Actiq. During 1998 and 1997 the Company received $300,000
and $375,000, and incurred $9,862,933 and $7,834,457 of costs relating to the
agreements, respectively. Revenue of $300,000 related to the agreements was
recognized in 1998. In connection with such development funding, Abbott was
granted, and has exercised, warrants to purchase 1,202,840 shares of the
Company's common stock at prices ranging from $1.00 to $2.40 per share.
51
15
NOTES TO FINANCIAL STATEMENTS, Continued
10. Unearned Revenues:
Effective August 31, 1995, the Company entered into an amendment to a prior
agreement between Abbott International (A.I.) and the Company to provide the
Company the right to terminate or cause to become nonexclusive A.I.'s license
rights to OTS fentanyl products in one or more countries in the world except the
U.S. The amendment also eliminated $100,000 of the $450,000 of unearned revenue,
which amount was recognized as royalty revenue during the year ended December
31, 1995. In January 1998, the Company exercised its right to terminate A.I.'s
license rights to OTS fentanyl products in all countries in the world except the
U.S. However, Abbott has agreed to be the Company's contract manufacturer and if
requested by the Company, both parties have agreed to consult with each other
regarding product supply by Abbott to any Anesta licensee.
On January 28, 1998, the Company announced the signing of an exclusive agreement
with Ferrer for the marketing, sales and distribution of Anesta's OTS fentanyl
product line, including Actiq, in Spain and Portugal. Under terms of the
agreement, Ferrer made a payment to the Company in 1998, a portion of which will
be recognized as revenue in future years over the term of the agreement. The OTS
fentanyl product line will be manufactured for Ferrer by Anesta, however, the
Company does not believe commercial manufacturing will begin before December 31,
2000. Ferrer is a leading private Spanish pharmaceutical company.
On June 4, 1998, the Company announced the signing of an exclusive agreement
with Lafon for the marketing, sales and distribution of Anesta's OTS fentanyl
product line, including Actiq, in France. Under terms of the agreement, Lafon
made payments to the Company in 1998, a portion of which will be recognized as
revenue in future years. The OTS fentanyl product line will be manufactured for
Lafon by Anesta, however, the Company does not believe commercial manufacturing
will begin before December 31, 2000. Lafon is a leading private French
pharmaceutical company.
On February 23, 1999, the Company announced the signing of an option agreement
with Novartis involving the Company's proprietary OTS for drug delivery. Under
terms of the agreement, Novartis made a payment to the Company in 1999, which
will be recognized as revenue over the term of the agreement. Novartis and the
Company will assess the worldwide commercial opportunity of potential products
which combine the OTS with undisclosed compounds, with the goal of entering into
an exclusive licensing agreement.
On May 6, 1999, the Company announced the signing of an exclusive agreement with
SWO for the marketing, sales and distribution of Anesta's OTS fentanyl product
line, including Actiq, for Scandinavia (Denmark, Finland, Iceland, Norway, and
Sweden). Under terms of the agreement, SWO made a payment to the Company which
was recognized as revenue. The OTS fentanyl product line will be manufactured
for SWO by Anesta, however, the Company does not believe commercial
manufacturing will begin before December 31, 2000. SWO is a leading private
Swedish pharmaceutical company.
On October 6, 1999, the Company announced the signing of an exclusive agreement
with Elan for the marketing, sales and distribution of Anesta's OTS fentanyl
product line, including Actiq, for Austria, Belgium, Germany, Greece, Ireland,
Italy, Luxembourg, Netherlands, Philippines, Switzerland, Taiwan, and the United
Kingdom. Under terms of the agreement, Elan made payments to the Company, a
portion of which will be recognized as revenue in future years over the term of
the agreement. The OTS fentanyl product line will be manufactured for Elan by
Anesta. Elan is a leading public Irish pharmaceutical company.
52
16
NOTES TO FINANCIAL STATEMENTS, Continued
11. Leases:
In December 1994, the Company entered into a five year operating lease agreement
for a building which has two additional five-year renewal options. In February
2000, the Company renegotiated this lease for three years with two additional
three-year renewal options. During 1999, 1998 and 1997 the Company also entered
into operating lease agreements for furniture and equipment.
Future minimum rental payments under operating leases as of December 31, 1999
are as follows:
2000 $1,345,180
2001 1,213,192
2002 913,973
2003 271,264
----------
$3,743,609
----------
Total expense under operating lease agreements for 1999, 1998 and 1997 was
$1,285,841, $944,856, and $726,763, respectively.
12. Employee Benefits:
In October 1995, the Board of Directors approved the adoption of a 401(k)
Retirement Plan (the "401(k) Plan") effective January 1, 1996. Under the terms
of the 401(k) Plan, all employees who are at least 21 years of age are eligible
to participate. Participants may contribute up to 25% of their annual
compensation to the 401(k) Plan, subject to statutory limitations. The Company
may make discretionary matching contributions to the 401(k) Plan equal to 25
percent of participant contributions up to 6% of participant compensation. For
1999, 1998 and 1997, the Company declared and paid discretionary matching
contributions to the 401(k) Plan in the amount of $57,849, $52,959 and $40,784,
respectively.
13. Computation of Diluted Loss Per Share:
As of December 31, 1999, options to purchase 1,653,179 shares of common stock at
prices between $5.25 and $28.19 per share were outstanding. As of December 31,
1998, options to purchase 1,526,940 shares of common stock at prices between
$5.25 and $25.19 per share were outstanding. As of December 31, 1997, options to
purchase 1,340,230 shares of common stock at prices between $0.80 and $19.25
were outstanding. None of these options were included in the computation of
diluted loss per share because the effect would have been antidilutive.
14. Subsequent Events:
In March 2000, Anesta renegotiated the U.S. marketing rights for Actiq and
Fentanyl Oralet with Abbott. Under terms of the agreements, effective April 2000
Anesta will have responsibility for sales and marketing in the United States. As
part of the renegotiation, Anesta will make cash payments to Abbott and is
obligated to make on-going earn-out payments to Abbott until the end of the
first patent covering oral transmucosal fentanyl citrate. Abbott will continue
to manufacture Actiq and Fentanyl Oralet for Anesta in the U.S. for a period of
24 to 36 months, after which the right of Anesta to manufacture such products
after such period of time. Anesta will recognize revenue when Abbott ships
product against a customer order. Anesta's gross margin therefore is directly
affected by Abbott's manufacturing costs. Anesta is also obligated to pay a
small royalty on its sales of Actiq and Fentanyl Oralet to the UURF.
53