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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-24424
------------------------------
CIMA LABS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1569769
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
10000 VALLEY VIEW ROAD, EDEN PRAIRIE,
MN 55344-9361 (952) 947-8700
(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of common stock held by non-affiliates of Registrant,
based upon the last sale price of the Common Stock reported on the Nasdaq
National Market tier of The Nasdaq Stock Market on March 24, 2000 was
$160,545,880. Common stock outstanding at March 24, 2000 was 10,825,894 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Registrant's Annual Meeting of Stockholders to be held on June
2, 2000 are incorporated by reference in Part III, Items 10, 11, 12 and 13, of
this Form 10-K.
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PART I.
This Annual Report on Form 10-K (the "Form 10-K") contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All forward-looking statements are
inherently uncertain as they are based on current expectations and assumptions
concerning future events or our future performance. We caution readers not to
place undue reliance on these forward-looking statements, which are only
predictions and speak only as of the date this report was filed. Forward-looking
statements are not descriptions of historical facts. The words or phrases "will
likely result," "look for," "may result," "will continue," "is anticipated,"
"expect," "project," or similar expressions are intended to identify
forward-looking statements, and are subject to numerous known and unknown risks
and uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified in the "Risk
Factors" filed as Exhibit 99 to this Form 10-K, and in our other filings with
the Securities and Exchange Commission (the "SEC"). We undertake no obligation
to update or publicly announce revisions to any forward-looking statements to
reflect future events or developments.
We were incorporated in Delaware in 1986. Unless the context otherwise
indicates, all references to the "Registrant," the "Company," or "CIMA" in this
Form 10-K relate to CIMA LABS INC., a Delaware corporation.
We have registered "CIMA(R)," "CIMA LABS INC.(R)," "OraSolv(R)," and
"OraSolv(R)SR" as trademarks with the U.S. Patent and Trademark Office. These
registered trademarks are used in this Form 10-K. We also use the trademarks
"DuraSolv(TM)," "PakSolv(TM)," "OraVescent(TM)SL/BL" and "OraVescent(TM)SS" in
this Form 10-K.
Triaminic(R)and Softchews(R)are registered trademarks of Novartis.
Zomig(R)and rapimelt(R)are registered trademarks of AstraZeneca. Pepcid(R)is a
registered trademark of Merck. Tempra(R)is a registered trademark of
Bristol-Myers Squibb. Quicklets(TM)and FirsTabs(TM)are trademarks of
Bristol-Myers Squibb. Zydis(R)is a registered trademark of R.P. Scherer
Corporation. Claritin(R)and Reditabs(R)are registered trademarks of
Schering-Plough. WOWTab(R)is a registered trademark of Yamanouchi Shaklee
Pharmaceuticals. Flashtab(R)is a registered trademark of Laboratories
Prographarm. FlashDose(R)is a registered trademark of Fuisz Technologies Ltd.
ITEM 1. BUSINESS
COMPANY OVERVIEW
We develop and manufacture fast-dissolve and enhanced-absorption oral drug
delivery systems. OraSolv and DuraSolv, our leading proprietary fast-dissolve
technologies, are oral dosage forms incorporating taste-masked active drug
ingredients into tablets which dissolve quickly in the mouth without chewing or
water. We currently manufacture and package five commercial products
incorporating our proprietary fast-dissolve technologies. We develop
applications for our technologies that we license to pharmaceutical company
partners. We generate revenue from licensing fees, product development fees,
selling products we have manufactured that use our fast-dissolve technologies
and royalties. We currently have agreements with American Home Products,
AstraZeneca, Bristol-Myers Squibb, N.V. Organon, Novartis and Schering-Plough.
We believe that the attributes of our OraSolv and DuraSolv fast-dissolve
technologies may enable patients in certain age groups or with limited ability
to swallow conventional tablets to receive medication in an oral dosage form
that is more convenient than traditional tablet-based oral dosages. Both OraSolv
and DuraSolv technologies incorporate taste-masked active drug ingredients into
tablets that have the following potential benefits:
o ease of administration;
o improved dosing compliance; and
o increased dosage accuracy compared to liquid formulations.
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Our proprietary technologies enable our pharmaceutical company partners to
differentiate their products from competing products. In addition to providing a
competitive advantage in the marketplace, our proprietary technologies also may
enable our pharmaceutical company partners to extend the product life cycles of
their patented drug compounds beyond existing patent expiration dates. Improving
compliance also can provide benefits to the healthcare system by enhancing
therapeutic outcomes and potentially reducing overall costs.
In addition to OraSolv and DuraSolv, we are developing several new
technologies. Our OraSolv SR (sustained release) product adds sustained or
controlled release properties to the coatings that surround the active drug
ingredient. We also are developing new OraVescent drug delivery technologies,
OraVescent SL/BL (sublingual/buccal transmucosal) and OraVescent SS
(site-specific transmucosal). Using the fast-dissolve technology of our OraSolv
products, we designed the OraVescent technology to improve the transport of
poorly absorbed and large molecule active drugs across mucosal membranes in the
oral cavity or the gastrointestinal tract.
INDUSTRY OVERVIEW
CURRENT DRUG DELIVERY METHODS
Medications are available in a variety of delivery forms, including solid
dosage forms, liquids, transdermal delivery methods, inhalation devices and
products and injections. Due to ease of administration, patients generally
prefer to receive medications in an oral tablet form over other delivery
methods. Children and the elderly, however, as well as those with certain
physiological or medical conditions, frequently experience difficulty in
swallowing tablets. These patients often receive medications in liquid form or
through injections as an alternative to tablets.
TRENDS AFFECTING THE DRUG DELIVERY INDUSTRY
Several significant trends in the healthcare industry have important
implications for drug delivery companies. After a drug loses patent protection,
the branded version of the drug often faces competition from generic
alternatives. Over the next four years, branded drugs with 1999 U.S. sales of
over $20 billion will lose patent protection. We expect producers of these
branded drugs to seek differentiating characteristics for their products to
defend against generic competition. We believe pharmaceutical companies will
adopt innovative drug delivery technologies, such as fast-dissolve and
taste-masking, as an increasingly significant means to differentiate their
branded products.
The significant trend towards direct-to-consumer marketing and recent focus
on patient rights may encourage the use of innovative drug delivery
technologies. In 1999, pharmaceutical companies spent an estimated $2 billion in
the U.S. on direct-to-consumer marketing and promotion of prescription
medications. Spending in the U.S. on direct-to-consumer marketing and promotion
is estimated to increase to approximately $7 billion a year by 2005. In
addition, there is also a growing trend in the U.S. to provide patients with
greater choice and more patient-friendly forms of treatment. We believe the
trend toward patient empowerment and patient rights, combined with
direct-to-consumer marketing, may give consumers greater influence on the type
or dosage form of medication a physician will prescribe. Patient-friendly
attributes, such as fast-dissolve and taste-masking, will become a more
significant influence in pharmaceutical marketing.
The growth of managed care organizations has focused providers and payors
on using healthcare resources efficiently, including increasing the
cost-effectiveness of medical treatments. We believe that patient non-compliance
with medicinal dosing regimens is widespread, and that such non-compliance
results in unnecessary costs to the healthcare system. Many managed care plans
and other insurers actively manage the costs of prescription drugs for their
clients by monitoring efficacy, quality, cost and compliance of medications.
Payors often encourage using therapies that improve patient compliance,
including those that use innovative drug delivery technologies, and we believe
these therapies will become more widespread.
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MARKET OPPORTUNITY
In March 2000, Specialty Pharmaceuticals estimated that sales of drugs
using drug delivery technologies would grow from approximately $11 billion in
1998 to approximately $24 billion in 2003. Net revenue to the drug delivery
industry, comprised of product sales, royalties and manufacturing fees,
similarly was estimated to grow in that time period from $1.1 billion to $2.9
billion. Drug delivery companies are expected to mature from research companies
to product development and product marketing companies, as innovative drug
delivery systems are commercialized and companies integrate manufacturing and
marketing functions to increase sales revenues.
BUSINESS STRATEGY
We intend to establish ourselves as the leader in fast-dissolve and other
innovative drug delivery technologies. We intend to implement the following
business strategies in pursuit of this objective:
o we will develop and protect innovative drug delivery technologies;
o we will collaborate with pharmaceutical companies for the marketing of
our technologies;
o we will identify attractive opportunities for pharmaceutical product
development; and
o we will control our technology through product manufacturing.
OUR TECHNOLOGY AND PRODUCTS
We currently manufacture five commercial products incorporating our
proprietary fast-dissolve technologies. Revenue from sales of our products were
approximately 36%, 14% and 54% of our total revenue in 1999, 1998 and 1997,
respectively. Our revenue also includes product development fees and licensing
revenue for development activities, which were approximately 58%, 81% and 46% of
our total revenue in 1999, 1998 and 1997, respectively. We also receive revenue
from royalties from product sales, which were approximately 6% and 5% of our
total revenue in 1999 and 1998 respectively. We had no revenue from royalties
from product sales in 1997. Less than 10% of our total revenues in 1999, 1998
and 1997 was from product sales and product development and licensing activities
outside the U.S.
ORASOLV
Our OraSolv technology is an oral dosage form, which combines taste-masked
drug ingredients with a fast-dissolving system that contains a low level of
effervescence. The OraSolv tablet dissolves quickly without chewing or the need
for water. Taste-masking coats the active compound, permitting the active
ingredients to be swallowed before they contact the taste buds. The
taste-masking process is effective with a wide variety of active ingredients,
both prescription and non-prescription.
FAST-DISSOLVE. To create our fast-dissolving tablets, we combine the
taste-masked active drug ingredients with fast-dissolving tablet materials,
which can include a variety of flavoring, coloring and sweetening agents, all of
which are generally recognized as safe materials, and commonly used tablet
ingredients, such as binding agents and lubricants. We add an effervescent
system, composed of a dry acid and a dry base, to the tablet formulation to
cause a mild effervescent reaction when the tablet contacts saliva. This
reaction accelerates the disintegration of the tablet through the release of
carbon dioxide. As our OraSolv tablet dissolves, it releases the coated
particles of drug into the saliva, forming a suspension of the drug in the
saliva, which is then swallowed.
TASTE-MASKING. To prevent or minimize patients from tasting drug
ingredients with unpleasant tastes, we taste mask the drug active ingredients in
our OraSolv products. The active drugs are taste-masked using a variety of
coating techniques. The coating materials prevent the active drug substance in
the OraSolv tablet from contacting the patient's taste buds, and provide for the
immediate or controlled release of the active ingredient in the stomach. We
currently purchase taste-masked drugs from outside vendors for use in our
over-the-counter products. We are developing taste-masked active ingredients for
use in prescription pharmaceutical products, the first of which we expect to
commercialize in 2000.
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SUSTAINED RELEASE. Our OraSolv technology also can be combined with a
sustained release formulation and used in FDA-approved products. We incorporate
time-release beads in our tablet, to provide the benefits of a sustained or
controlled release of drug ingredients with the improved convenience of a
fast-dissolve formulation that allows easy swallowing of the sustained release
active ingredient. To date, we have not commercialized a product incorporating
the sustained release properties of our OraSolv technology.
DURASOLV
Our DuraSolv technology is a fast-dissolve oral dosage system that we
designed to improve manufacturing efficiency and reduce production costs. A
significant component of the manufacturing cost for our OraSolv products
currently lies in the sophisticated packaging system necessary to protect the
softer, more brittle OraSolv tablets. DuraSolv is a higher compaction, more
durable, solid oral dosage system formulated to achieve the primary benefits of
the OraSolv fast-dissolve dosage form, but capable of being packaged in
conventional packaging such as foil pouches or bottles at much higher production
rates and with lower packaging costs. DuraSolv is an appropriate technology for
drug products requiring lower levels of active ingredient. Consumer testing has
demonstrated high acceptability of this technology, comparable to that of
OraSolv.
We recently completed development of the DuraSolv dosage system, and in
February 2000 we were granted a U.S. patent for this technology. Currently, we
are developing products for two pharmaceutical company partners using this
technology.
ORAVESCENT
Our OraVescent technology is an enhanced-absorption oral drug delivery
system intended to improve the transport of active drug ingredients across
mucosal membranes. This technology may improve the bioavailability, and
accelerate the onset of action, of some molecules. We have conducted the first
human testing and have initiated two prototype projects with pharmaceutical
company partners using this technology. We expect to perform additional human
clinical testing in the first half of 2000.
AGREEMENTS WITH PHARMACEUTICAL COMPANY PARTNERS
Our business development efforts focus on entering into development,
licensing and manufacturing supply agreements with pharmaceutical companies. Our
agreements provide that the collaborating pharmaceutical company is responsible
for marketing and distributing the developed products either worldwide, or in
specified markets or territories. Our collaborative agreements typically begin
with a product development phase. If successful, this phase may be followed by a
development and license option agreement for the development of product
prototypes. We will subsequently enter into license and manufacturing supply
agreements to address commercialization of products. Alternatively, we may
develop product prototypes internally and enter directly into a development,
manufacturing or license agreement for commercialization of those products.
We have manufacturing supply agreements with two pharmaceutical company
partners for all of our products that are currently being sold in the United
States and Canada. We are currently negotiating manufacturing supply agreements
with other pharmaceutical company partners for several prescription products.
Generally, these agreements define the terms by which we will manufacture and
release for shipment a product for a pharmaceutical company partner and the
obligations both parties have relating to payment for product and services, as
well as defining the process of communicating and agreeing to expected
production requirements and other economic terms for product supply. These
agreements have varying terms of duration ranging from 3 to 10 years and are
generally cancelable by either party with appropriate notice. However, in the
pharmaceutical industry, parties to manufacturing supply agreements generally
consider these arrangements long-term due to the complexity and lead-time
required to qualify a new manufacturer with the FDA, which could take up to a
year for the new manufacturer to scale-up and produce validation lots. Our
pharmaceutical company partners direct us on the timing and quantities of our
product shipment to them. We do not consider the backlog for our products to any
of our customers to be significant.
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The table below sets forth the partner, product brand name, market segment
and technology for each of our major collaborative agreements.
PHARMACEUTICAL PRODUCT MARKET
COMPANY PARTNER BRAND NAME SEGMENT TECHNOLOGY
- ---------------------- ----------- ------------- ----------
American Home Products Undisclosed Undisclosed DuraSolv
AstraZeneca Zomig Anti-migraine DuraSolv
Bristol-Myers Squibb Tempra Pediatric OraSolv
Analgesics
N.V. Organon Undisclosed Undisclosed OraSolv
Novartis Triaminic Pediatric OraSolv
Cough/Cold
Schering-Plough Undisclosed Undisclosed OraSolv SR
AMERICAN HOME PRODUCTS. In January 2000, we entered into a Development and
License Agreement, and a Supply Agreement with American Home Products for a
DuraSolv formulation of an undisclosed prescription product. We receive
development and milestone payments upon achieving specific milestones under the
agreements, and will receive royalties on any sales of the prescription product.
ASTRAZENECA. In September 1997, we entered into a Development and License
Option Agreement with an affiliate of AstraZeneca to develop an OraSolv and
DuraSolv formulation of AstraZeneca's prescription anti-migraine drug, Zomig. We
received product development and option fees under the agreement. In October
1998, we completed a major milestone, a clinical study on the OraSolv
formulation of Zomig. In May 1999, we entered into a definitive License
Agreement with an affiliate of AstraZeneca, which provides that we will receive
license and product development fees, and milestone payments upon achieving
specific milestones under the agreement, and will receive royalties on any sales
of the prescription product. In August 1999, European regulatory approval of the
DuraSolv formulation of AstraZeneca's Zomig rapimelt was received. In September
1999, AstraZeneca launched Zomig rapimelt internationally. We expect the U.S.
regulatory submission for the Dura Solv formulation of Zomig rapimelt to be made
in the second quarter of 2000. Revenues from AstraZeneca represented 18% of
total revenues in 1999.
In connection with a $3.5 million loan from AstraZeneca that we received in
December 1999, we granted AstraZeneca a first right of refusal to exploit any
new technology to which we may have the right from time to time and which may
have application in conjunction with any technology or products of AstraZeneca
or its affiliates.
BRISTOL-MYERS SQUIBB. In June 1997, we signed a global non-exclusive
license agreement with Bristol-Myers Squibb, covering multiple products to be
developed using the OraSolv technology. We started manufacturing commercial
quantities in 1997 of the OraSolv dosage form of Tempra, Bristol-Myers Squibb's
pediatric analgesic. Mead Johnson, an affiliate of Bristol-Myers Squibb,
introduced Tempra in Canada during 1997. We received product development fees
and will receive royalties on Tempra. During 1998, Bristol-Meyers Squibb decided
to discontinue marketing Tempra in the U.S., but expects to continue marketing
Tempra in Canada through its affiliate, Mead Johnson. In the fourth quarter of
1998, the agreement was amended to return to us the rights to pediatric
analgesics in the U.S. We will continue to receive at least minimum royalty
payments in connection with sales in Canada through 2002.
N.V. ORGANON. In December 1998, we entered into a Development and License
Option Agreement with N.V. Organon, the pharmaceuticals business unit of Akzo
Nobel. In December 1999, Organon exercised its option and we signed an exclusive
license for an OraSolv formulation of an undisclosed prescription product. We
receive license and product development fees, and milestone payments upon
achieving specific
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milestones under the agreement, and will receive royalties on any sales of the
prescription product. Revenues from N.V. Organon represented 26% of total
revenues in 1999.
NOVARTIS. In November 1997, we entered into a Development and License
Option Agreement with Novartis that covers the use of OraSolv technology with
the Novartis Triaminic non-prescription product line. We received option and
product development fees in exchange for the license option and development
work. In July 1998, we signed an exclusive license and a supply agreement with
Novartis, which include an option to a second exclusive license covering
additional products. We received product development and milestone payments upon
achieving specific milestones under the agreement, and will receive royalties on
any sales of Triaminic. In July 1999, Novartis launched nationally three
Triaminic products using our OraSolv technology. Revenues from Novartis, which
were principally product sales, represented 42% of total revenues in 1999.
SCHERING-PLOUGH. In August 1997, we entered into a Development and Option
Agreement with Schering-Plough. In exchange for development work and a license
option, we received an option fee and product development fees. The agreement
calls for the development of an OraSolv SR version of an undisclosed, currently
marketed prescription product. Our development of this product currently is on
hold.
INTELLECTUAL PROPERTY
We actively seek, when appropriate, to protect our products and proprietary
information by means of U.S. and foreign patents, trademarks and contractual
arrangements. In addition, we rely upon maintaining trade secrets and further
contractual arrangements to protect certain of our proprietary information and
products.
We hold seven issued U.S. patents and five issued foreign patents covering
our technologies. The core U.S. and European patents relate to our fast-dissolve
and taste-masking technologies. We also have 28 U.S. and foreign patent
applications pending, including two European Patent Office filings.
A description of our issued U.S. patents and their dates of expiration are
set forth in the table below. The majority of these patents are
composition-of-matter patents. The actual scope of coverage for a patent is
governed by the specific claims applicable to the patent. The descriptions set
forth below are intended solely to identify patents relevant to various
technologies, and are not intended to represent the scope of these patents.
EXPIRATION
PATENTED TECHNOLOGIES DATE
--------------------- ----------
Core OraSolv fast-dissolve and taste-masking 2010
technology.
The production of compressed effervescent and 2010 and 2012
non-effervescent tablets using a tableting aid
developed by us.
Effervescent pediatric vitamin and mineral supplement. 2010
The formulation of a base coated, acid effervescent 2013
mixture manufactured by controlled acid base
reaction. The obtained mixture can be used in the
formulation of acid sensitive compounds with OraSolv
technology or other effervescent based products.
Taste-masking of micro-particles for oral dosage 2015
forms.
Core DuraSolv fast-dissolve and taste-masking 2018
technology.
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Our success will depend in part on our ability to obtain and enforce
patents for our products, processes and technology, to preserve our trade
secrets and other proprietary information and to avoid infringing the patents or
proprietary rights of others. We cannot be sure that our patent applications
will be granted, that the coverage of any patents issued will provide adequate
protection or competitive advantages for our technology or that our competitors
will not challenge, infringe or circumvent our issued patents.
We rely on trade secrets and proprietary know-how to protect our products,
processes and technologies. To protect our rights to trade secrets and
proprietary know-how, we require all employees, consultants and advisors to sign
confidentiality agreements that prohibit the disclosure or use of confidential
information to or by any third party. These agreements also require disclosure
and assignment to us of discoveries and inventions made by these individuals
while devoted to our activities. These confidentiality agreements may not
prevent employees, consultants or advisors from disclosing our confidential
information, and may not adequately protect our confidential information if
unauthorized use or disclosure occurs, and we may not have adequate remedies for
a breach of these agreements. Furthermore, our trade secrets may otherwise
become known or be independently developed by competitors.
Our patents or proprietary information may become the subject of
litigation. We cannot be sure that any litigation concerning our patents or
proprietary information will be resolved in our favor. The costs of litigation,
and the diversion of our resources during litigation could have a material
adverse effect on our business and financial condition. See "Item 3. Legal
Proceedings."
We may desire, or be required to obtain, licenses from others with respect
to materials used in our products or manufacturing processes. We cannot be sure
that the required licenses will be available to us on commercially reasonable
terms, if at all, or that any licensed patents or proprietary rights will be
valid and enforceable.
RESEARCH AND PRODUCT DEVELOPMENT
Our research and product development efforts are focused on developing new
product applications for our drug delivery technologies and expanding our
technology platform to new areas of drug delivery. At December 31, 1999, we had
31 scientists and other technicians working on research and product development,
including 13 individuals with post-graduate degrees.
Our research and product development personnel, support systems and
facilities are organized to develop drug delivery formulations from bench-scale
through full-scale commercial production under current good manufacturing
practice conditions. The key goals for our research and product development
efforts are:
o develop innovative drug delivery products and systems that fulfill
pharmaceutical companies' needs and meet our strategic goals;
o develop, expand and support systems to fulfill good manufacturing
practice production at commercial levels required by pharmaceutical
company partners;
o recruit and train high-quality technical and scientific personnel; and
o support our intellectual property portfolio development.
For the years ended December 31, 1999, 1998 and 1997, we spent
approximately $4.4 million, $3.3 million and $3.4 million, respectively, on
research and product development. We estimate that most of these expenditures
were directly related to product development activities for which we received
fees and licensing revenues from our pharmaceutical company partners.
MANUFACTURING
Our manufacturing facility is located at our headquarters in Eden Prairie,
Minnesota. We completed our first production line in 1996, which has an
estimated production capacity of 200 to 220 million tablets a year. We
anticipate using substantially all of our existing capacity to satisfy our
anticipated production requirements in 2000. We are developing a second
production line using state-of-the-art material transfer and blending systems
and integrated high-speed tableting and packaging operations, which we expect
will at least
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double our existing capacity. We expect to begin construction of the second
production line in the first half of 2000, with operations to begin in the
second half of 2001. We currently anticipate spending approximately $10 to $12
million to construct the second production line.
In November 1999, we started construction of a coating unit to provide
taste-masked active ingredients for our pharmaceutical company partners. We
anticipate spending approximately $4.0 million for its construction, and expect
to begin operations in the first half of 2000. We expect to commercialize our
first coated active ingredient in 2000 for a prescription pharmaceutical company
partner. The coating unit will give us capacity to taste mask the active drug
ingredients we will use in the products to be manufactured on our two production
lines. We believe an in-house coating capability will be a key factor in signing
new agreements related to prescription pharmaceutical drugs.
We developed and implemented PakSolv, a proprietary packaging process that
allows high-speed packing of soft, brittle tablets without breakage, into
specially designed protective, child resistant packages and normal blister
packages. We believe that this technology, which is the subject of two patent
applications, gives us a competitive advantage.
We currently purchase taste-masked active ingredients for each of our
non-prescription products from a single source of supply. We expect to continue
to purchase taste-masked active ingredients for our non-prescription products.
We expect to be capable of manufacturing taste-masked active ingredients for new
prescription products in the first half of 2000. We believe that all other
ingredients used in the manufacture of our products are readily available from
multiple suppliers or from our pharmaceutical company partners.
We plan our manufacturing cycles in advance of actual production in order
to address lead times our suppliers may require to satisfy our requirements. We
generally do not stock significant quantities of raw materials for a product in
excess of a partner's orders nor do we manufacture finished product in excess of
a partner's orders. Although to date we have been able to satisfy our
pharmaceutical company partners' requirements for product, any extended
disruption in our supply of taste-masked active ingredients for non-prescription
products or in our supply of certain packaging material could have an adverse
effect on our business, and potentially damage relations with our pharmaceutical
company partners.
COMPETITION
Competition among pharmaceutical products and drug delivery systems is
intense. Our primary competitors for developing drug delivery systems, and
manufacturing the products we develop, include other drug delivery,
biotechnology and pharmaceutical companies. Many of these competitors have
substantially greater financial, technological, manufacturing, marketing,
managerial and research and development resources and experience than we do. Our
products compete not only with products employing advanced drug delivery
systems, but also with products employing conventional dosage forms. These
competing products may obtain governmental approval or gain market acceptance
more rapidly than our products. New drugs or future developments in alternative
drug delivery technologies also may provide therapeutic or cost advantages over
our current or future products.
Fast-dissolve tablet technologies that compete with our OraSolv and
DuraSolv technologies include the Zydis technology developed by R.P. Scherer
Corporation, the WOWTab technology developed by Yamanouchi Shaklee
Pharmaceuticals, and the Flashtab developed by Laboratories Prographarm. The
Zydis technology is a fast-dissolving oral drug delivery system based on a
freeze-dried gelatin tablet. The WOWTab and Flashtab technologies are
fast-dissolving technologies used in an oral fast-dissolving tablet, which are
similar to our DuraSolv tablet. Fuisz Technologies Ltd., a wholly-owned
subsidiary of Biovail Corporation, also has a fast-dissolving oral drug delivery
technology called FlashDose. All of these companies have licensed their
technologies to a number of pharmaceutical companies, but only R.P. Scherer has
successfully produced commercial prescription products using fast-dissolve
tablet technology. Only products using our fast-dissolve tablet technology and
the technology of Scherer have been commercialized in the U.S. Scherer has
commercialized its Zydis technology in a major prescription product in the U.S.,
Claritin Reditabs. We believe that certain pharmaceutical companies may be
developing other fast-dissolve tablet technologies, which may compete with our
technology in the future.
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The principal competitive factors in the market for fast-dissolving tablet
technologies are compatibility with taste-masking techniques, dosage capacity,
drug compatibility, cost, ease of manufacture, patient acceptance and required
capital investment for manufacturing. We believe that our fast-dissolving tablet
technologies compete favorably with respect to each of these factors. In a 1997
quantitative consumer study we conducted, significantly more consumers preferred
the OraSolv formulation to the Zydis formulation of the same drug. We believe we
also offer potential pharmaceutical company partners the largest selection of
oral fast-dissolve drug delivery technologies.
GOVERNMENT REGULATION
Numerous governmental authorities in the U.S. and other countries
extensively regulate the activities of pharmaceutical manufacturers. In the
U.S., pharmaceutical products are subject to rigorous regulation by the Food and
Drug Administration. The federal Food, Drug, and Cosmetic Act and other federal
and state statutes and regulations, govern, among other things, the research,
development, testing, manufacture, safety, storage, record keeping, labeling,
advertising, promotion, marketing and distribution of pharmaceutical products.
If we fail to comply with the applicable requirements, we may be subject to
administrative or judicially imposed sanctions such as warning letters, fines,
injunctions, product seizures or recalls, total or partial suspension of
production, or FDA refusal to approve pending premarket approval applications or
supplements to approved applications, as well as criminal prosecution.
FDA approval generally is required before a new drug product may be
marketed in the U.S. Many over-the-counter, or OTC, drug products are exempt,
however, from the FDA's premarketing approval requirements. Prescription drug
products with proven safety and efficacy profiles may be "switched" to OTC
status through the submission to and approval by the FDA of an addendum to an
existing new drug application. In addition, certain drug products may require
premarket approval, but may be approved through a shortened procedure under
Section 505(b)(2) of the Food, Drug, and Cosmetic Act, an approach generally
used when a new delivery system is added to an existing drug product.
Our initial product was an OTC drug product that did not require FDA
premarket approval. However, OTC drug products remain subject to various ongoing
FDA regulations, good manufacturing practice requirements, general and specific
OTC labeling requirements (including warning statements), advertising
restrictions related to product labeling, and OTC drug ingredient
specifications. OTC products and their manufacturing facilities are subject to
FDA inspection, and failure to comply with applicable regulatory requirements
may lead to administrative or judicially imposed penalties.
We expect that our pharmaceutical company partners will seek any required
FDA approvals in connection with the introduction of new products we develop for
them under a collaborative agreement. The FDA submission and approval process
may however, require significant commitments of our time and resources. The FDA
approval process may delay, or prevent, marketing of our products. We cannot be
sure that approvals will be obtained, or that any such approvals will be on the
terms or have the scope necessary for successful commercialization of these
products. Even after an application or a supplement or addendum is approved,
existing FDA procedures may delay initial product shipment and materially reduce
the period during which there is an exclusive right to exploit patented products
or technologies.
Prior to marketing a product internationally, we may need foreign
regulatory approval. Foreign approval procedures vary from country to country
and the time required for approval may result in delays in, or ultimately
prevent, marketing. We expect our pharmaceutical company partners to obtain any
necessary government approvals in foreign countries. However, we may have to
spend considerable amounts of company time and resources to support the
submission and approval of these foreign filings. In addition, our manufacturing
facility may be subject to inspections by foreign agencies, similar to the FDA,
to allow for the marketing of our products in a foreign country.
Our manufacturing facility is registered with the FDA. We must inform the
FDA of every drug product we have in commercial distribution and keep an updated
list of those drugs. Our manufacturing facility also is inspected by the FDA and
must comply with good manufacturing practices regulations at all
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times during the manufacture and processing of drug products. The FDA inspected
our Eden Prairie facility in November 1996, while the Brooklyn Park facility was
last inspected in January 1997. We were not cited during either inspection. We
cannot guarantee that FDA inspections will proceed without any compliance issues
requiring time and resources to resolve. Our facilities also must be inspected
by, and we have received a license from the Minnesota Board of Pharmacy for the
manufacture of drug products.
We are subject to regulation under various federal, state and local laws,
rules, regulations and policies regarding, among other things, occupational
safety, environmental protection, the use, generation, manufacture, storage, air
emission, effluent discharge, handling and disposal of certain regulated
materials and wastes, and product advertising and promotion. We believe that we
have complied with these laws and regulations in all material respects, and we
have not been required to take any action to correct any material noncompliance.
We do not currently anticipate that any material capital expenditures will be
required in order to comply with these laws or that compliance with these laws
will have a material effect on our business or financial condition. We are
unable to predict, however, the impact on our business of any changes that may
be made in these laws or of any new laws or regulations that may be imposed in
the future. We cannot be sure that we will not be required to incur significant
compliance costs or be held liable for damages resulting from any violation of
these laws and regulations.
EMPLOYEES
As of March 1, 2000, we had 99 full-time employees, with 68 employees in
Eden Prairie and 31 in Brooklyn Park. Of these employees, 55 are engaged in
manufacturing, 32 in research and development and 12 in executive management and
office support. None of our employees are subject to a collective bargaining
agreement nor have we ever experienced a work stoppage. We believe our employee
relations are good.
We believe our success depends in part on attracting additional senior
management personnel, as well as attracting and retaining highly skilled
scientific, business development and manufacturing employees. We face much
competition for these individuals from other companies and from research and
academic institutions. We cannot be sure that we will be able to attract and
retain high-quality employees.
LIABILITY INSURANCE
Providing health care products is inherently risky. We may from time to
time get sued as a result of our business. We carry product liability insurance
coverage, subject to annual renewal, determined on a "claims made" basis in
amounts we deem adequate, including coverage through a general liability
umbrella policy. We also carry a general business insurance policy in amounts we
deem adequate, in addition to the coverage of our general liability umbrella
policy. We do not carry any insurance to cover the financial risks associated
with a potential FDA mandated recall of a product. Although we have not been
subject to any product liability claims to date, any such claim could have a
material adverse impact on us.
ITEM 2. PROPERTIES
We lease a 75,000 square foot facility in Eden Prairie, Minnesota, a suburb
of Minneapolis, which houses our corporate headquarters, manufacturing facility
with adequate space for two production lines and the coating unit now under
construction, and warehouse space. The lease has an initial term expiring on
June 1, 2009. We have the option to extend the lease term for one period of ten
years with a minimum annual base rent (exclusive of real estate taxes and
maintenance fees) of $500,000 for the first five years, and $550,000 for the
second five years of the ten-year option term.
We also lease 32,000 square feet of office, research and development,
manufacturing space and warehouse space in Brooklyn Park, Minnesota. The lease
expires in September 2001 and is renewable at our option for two additional
five-year periods.
We believe our existing facilities are adequate to meet our anticipated
needs.
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ITEM 3. LEGAL PROCEEDINGS
On October 29, 1997, we instituted an opposition proceeding in the European
Patent Office seeking cancellation of a patent owned by Laboratories Prographarm
of Chateauneuf, France. We alleged that publications exist which are prior art
against the European patent, including an international patent application owned
by us, which was published prior to the priority date of the European patent.
Subsequently, Prographarm changed the claims in its patent and refiled, but the
European Patent Office has not yet responded.
On February 27, 1997, the U.S. Patent and Trademark Office suspended
prosecution of a U.S. patent application owned by us to consider our request
that an interference proceeding be declared between a pending U.S. patent
application owned by us and a U.S. patent owned by Prographarm. We are seeking a
determination by the U.S. Patent Office that either (i) our personnel are the
prior inventors of the invention encompassed by the Prographarm U.S. patent and
accordingly that we are entitled to claims directed to the same invention in a
new patent to be owned by us, or (ii) a determination that the claims are
unpatentable to us or Prographarm. Either ruling would result in the
cancellation of the Prographarm U.S. patent. We are making the same factual
allegations in the European opposition with the addition of, our pending U.S.
patent application and the priority date of such pending application.
Subsequently, Prographarm changed the claims in its patent, refiled and
submitted to re-examination in the U.S. Patent Office, and has offered to amend
its claims. The U.S. Patent Office granted a re-examination, but to our
knowledge, a final decision has not been reached.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and their ages as of March 1, 2000 are as follows:
Name Age Title
---- --- -----
John M. Siebert, Ph.D. 60 Chief Executive Officer and President
John H. Hontz, Ph.D. 43 Chief Operating Officer
David A. Feste 48 Vice President, Chief Financial Officer and Secretary
Our executive officers serve at the discretion of the board of directors
with no fixed term. There are no family relationships between or among any of
our executive officers or directors.
Dr. Siebert has been our President since July 1995, Chief Executive Officer
and President since September 1995, and a director since May 1992. From 1992 to
1995, Dr. Siebert was Vice President, Technical Affairs, at Dey Laboratories,
Inc., a pharmaceutical company. From 1988 to 1992, Dr. Siebert was with Miles,
Inc. Prior to 1988, Dr. Siebert held a variety of management positions with E.R.
Squibb & Sons, Inc., G.D. Searle & Co. and The Proctor & Gamble Company. He
received a B.S. in Chemistry from Illinois Benedictine College, an M.S. in
Chemistry from Wichita State University and a Ph.D. in Organic Chemistry from
the University of Missouri - Columbia.
Dr. Hontz has been our Chief Operating Officer since January 2000. From
1997 to January 2000, Dr. Hontz was our Vice President of Research and
Development. From 1995 to 1997, Dr. Hontz was senior Group Leader of Product
Development at Glaxo-Wellcome, a research-based pharmaceutical company. From
1987 to 1995, Dr. Hontz was Section Head of Product Development for
Burroughs-Wellcome, which was acquired by Glaxo in 1995. Dr. Hontz received his
B.Sc. in Pharmacy from the
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Philadelphia College of Pharmacy & Science, his M.S. and Ph.D. in Pharmaceutics
from the University of Maryland and his M.B.A. from Duke University.
Mr. Feste has been our Vice President, Chief Financial Officer and
Secretary since March 2000. From 1995 to 1999, Mr. Feste was Vice President and
Chief Financial Officer for Orphan Medical, Inc., a pharmaceutical company. From
1992 to 1995, Mr. Feste was self-employed as a financial consultant. From 1985
to 1991, Mr. Feste worked for Tonka Corporation, most recently as its Corporate
Vice President of Financial Services and Audit. Mr. Feste received his B.S. in
Accounting from the University of Minnesota and is a Certified Public
Accountant.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Common Stock trades on The Nasdaq Stock Market under the symbol "CIMA."
The following table presents for the periods indicated, the range of high and
low closing sales prices for our Common Stock for the years ended December 31,
1998 and December 31, 1999.
HIGH LOW
---- ---
1998
First Quarter ......................................................... $ 4.97 $ 2.59
Second Quarter ........................................................ 4.88 3.25
Third Quarter ......................................................... 3.91 2.75
Fourth Quarter ........................................................ 3.53 2.09
1999
First Quarter ......................................................... $ 3.44 $ 2.53
Second Quarter ........................................................ 4.63 2.63
Third Quarter ......................................................... 8.38 4.63
Fourth Quarter ........................................................ 13.50 6.00
HOLDERS
As of March 24, 2000, our Common Stock was held by 75 stockholders of
record and we estimate that there were approximately 1,700 beneficial owners of
its Common Stock on that date.
DIVIDENDS
We have never declared or paid any dividends and do not anticipate paying
dividends on our Common Stock in the foreseeable future. We currently intend to
retain future earnings, if any, for use in our business. The board of directors
determines whether or not to make any dividends on our Common Stock and bases it
decision on the conditions then existing, including our earnings, financial
condition and requirements, restrictions in financing agreements, business
conditions and other factors.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
STATEMENTS OF OPERATIONS DATA:
Revenues:
Net sales .......................................... $ 4,839 $ 1,097 $ 2,628 $ -- $ 151
Product development fees and licensing revenues .... 7,818 6,141 2,282 1,472 684
Royalties .......................................... 735 374 -- -- --
-------- -------- -------- -------- --------
Total revenues ........................................ 13,392 7,612 4,910 1,472 835
Operating expenses:
Costs of sales ..................................... 7,546 4,476 4,376 -- 240
Research and product development ................... 4,388 3,307 3,364 5,403 6,505
Selling, general and administrative ................ 2,836 3,138 3,487 2,909 3,658
-------- -------- -------- -------- --------
Total operating expenses .............................. 14,770 10,921 11,227 8,312 10,403
Other income (expense):
Interest income, net ............................... 10 152 337 498
448
Other income (expense), net ........................ 106 (30) 142 (4) 13
-------- -------- -------- -------- --------
Total other income .................................... 116 122 479 494 461
-------- -------- -------- -------- --------
Net loss: ............................................. $ (1,262) $ (3,187) $ (5,838) $ (6,346) $ (9,107)
======== ======== ======== ======== ========
Net loss per share:
Basic and diluted loss per common share ............ $ (.13) $ (.33) $ (.61) $ (.72) $ (1.16)
======== ======== ======== ======== ========
Weighted average number of shares outstanding:
Basic and diluted .................................. 9,615 9,610 9,519 8,827 7,822
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments .... $ 2,481 $ 2,723 $ 4,423 $ 10,263 $ 3,559
Total assets ......................................... 19,270 14,916 17,328 22,065 15,519
Long-term liabilities ................................ 3,510 231 -- -- --
Accumulated deficit .................................. (45,977) (44,715) (41,527) (35,660) (29,259)
Total stockholders' equity ........................... 11,574 12,656 15,837 21,021 14,282
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We develop and manufacture pharmaceutical products based on our proprietary
OraSolv and DuraSolv technologies. We have agreements with several
pharmaceutical companies regarding a variety of potential products, with an
emphasis on prescription products. We currently manufacture five commercial
products using our fast-dissolve technologies. These products include Triaminic
for Novartis, Tempra for Bristol- Meyers Squibb and Zomig for AstraZeneca. We
operate within a single segment: pharmaceutical product development. Our
revenues are comprised of three components: net sales of products utilizing our
proprietary fast-dissolve technologies; product development fees and licensing
revenues for development activities we conduct through collaborative agreements
with pharmaceutical companies; and royalties on the sales of products we
manufacture, which are sold by pharmaceutical companies under licenses from us.
In addition, we are currently developing other drug delivery technologies.
Revenues from product sales and from royalties will fluctuate from quarter
to quarter and from year to year depending on, among other factors, demand for
our products by patients, new product introductions, the seasonal nature of
some of our products and pharmaceutical company ordering patterns. Our ability
to generate product sales and royalty revenues in excess of our current forecast
for 2000 and 2001 may be constrained by our manufacturing capacity. We expect
our second production line, now being developed, to be operational in the second
half of 2001. Revenues from product development fees and licensing revenue will
fluctuate from quarter to quarter and from year to year depending on, among
other factors, the number of new collaborative agreements that we enter into;
the number of product development milestones we achieve under collaborative
agreements, including making submissions to, and obtaining approvals from, the
FDA for products in development; and the level of our development activity
conducted for pharmaceutical companies under collaborative agreements.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
REVENUES. Our total revenues were $13.4 million in 1999, as compared to
$7.6 million in 1998 and $4.9 million in 1997. The increases in revenues in each
year are due principally to increased development activity for new products that
resulted in significantly higher product development fees and licensing revenue.
In 1999, total revenues also increased due to higher sales volume of commercial
products.
Revenues from net sales of products using our drug delivery technologies
totaled $4.8 million in 1999, as compared to $1.1 million in 1998 and $2.6
million in 1997. The increase from 1998 to 1999 was due to increased shipments
to Novartis that began in the second quarter of 1999. The decrease from 1997 to
1998 was due to the decision by a pharmaceutical company to discontinue U.S.
distribution of a product line. We expect revenues from net sales of products
using our drug delivery technologies to increase in 2000 due to anticipated
shipments and pricing increases.
Product development fees and licensing revenues totaled $7.8 million in
1999, as compared to $6.1 million in 1998 and $2.3 million in 1997. The increase
from 1998 to 1999 was due to our increased development activity for proposed new
products and the achievement of development milestones for N.V. Organon and
AstraZeneca. The increase from 1997 to 1998 was due to our increased development
activity for proposed new products and the achievement of development milestones
for Novartis, AstraZeneca and Schering-Plough.
Royalties totaled $0.7 million in 1999, as compared to $0.4 million in
1998, and we received no royalty revenue in 1997. The increase from 1998 to 1999
was due to increased sales by Novartis of Triaminic. Royalties paid by
Bristol-Myers Squibb in 1998 and 1999 on sales of Tempra were based on annual
minimum contractual payments, which will expire in 2002. We expect royalties to
increase in 2000.
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OPERATING EXPENSES AND GROSS MARGIN. Cost of sales totaled $7.5 million in
1999, as compared to $4.5 million in 1998 and $4.4 million in 1997. The increase
from 1998 to 1999 was principally due to an increase in sales of Triaminic
products to Novartis. Cost of sales from 1997 to 1998 were approximately the
same even though production unit volumes decreased, principally due to an
increase in manufacturing overhead in 1998.
Gross margins on product sales from 1997 through 1999 were negative because
we had significant excess production capacity and product sales for each of
these years did not cover fixed manufacturing overhead costs. We expect to be
operating at or near full production capacity until our second production line
is operational, which is expected in the second half of 2001. We expect our
gross margins to improve in 2000 due to anticipated price increases on an
existing product line and expected unit volume increases. Future gross margins
will depend principally on the pricing of our products, our ability to
effectively use our manufacturing and plant capacity, and changes in our product
lines and mix of products.
Research and product development expenses were $4.4 million in 1999, as
compared to $3.3 million in 1998 and $3.4 million in 1997. The increase from
1998 to 1999 was principally a result of our increased development activity on
fast-dissolve prescription products for N.V. Organon and American Home Products.
From 1997 to 1998, these expenses were consistent, as the level of product
development activities between years was comparable. We expect these expenses to
increase in 2000.
Selling, general and administrative expenses were $2.8 million in 1999, as
compared to $3.1 million in 1998 and $3.5 million in 1997. The decline in these
expenses year over year was due primarily to a restructuring of management
responsibilities, which began in 1996 and ended in 1999, resulting in a general
reduction in management headcount and related expenses. We expect these expenses
to increase in 2000.
OTHER INCOME. Other income was $0.1 million in 1999 and 1998, and $0.5
million in 1997. Other income consists primarily of interest income on invested
funds, net of interest expense on bank lines, loan agreements and capitalized
leases. Other income has declined since 1997 as we used cash to fund business
operations and our level of invested funds decreased. We expect other income to
increase beginning in the second quarter of 2000, as a result of our sale in
March 2000 of common stock in a private placement, described below.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through private and
public sales of equity securities and revenues from product sales, product
development fees and licensing revenue and royalties.
Net working capital increased from $2.9 million at December 31, 1998 to
$4.2 million at December 31, 1999. The increase from 1998 to 1999 was
principally due to the positive effect of a $3.5 million loan we received from a
pharmaceutical company partner, which was partially offset by approximately $2.8
million in expenditures for capital improvements to our manufacturing facility.
We invest excess cash in interest-bearing money market accounts.
We signed a one-year secured revolving line of credit agreement with Wells
Fargo Business Credit, Inc. in July 1999. The agreement provided a credit
facility of $2.0 million, primarily for working capital purposes, secured
principally by inventories and accounts receivable. At the end of 1999, we owed
the lender approximately $0.2 million. We repaid the lender all amounts borrowed
in January 2000 and notified the lender in March 2000 that we would not renew
the agreement in July 2000, thus terminating the facility's availability.
In December 1999, we received a $3.5 million unsecured loan from one of our
pharmaceutical company partners. We may repay this loan at any time, but if the
loan is not repaid by the time we are due royalties under a license agreement
with an affiliate of the lender, the affiliate may offset up to half of the
royalties otherwise due to us and the lender will treat the amount offset by its
affiliate as a payment by us
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on this loan. Interest is payable on the outstanding balance of the loan at
LIBOR plus one half of one percent. Interest accrues quarterly and is added to
the then outstanding principal balance of the loan.
In March 2000, we issued 1.1 million shares of common stock through a
private placement. We received approximately $19.4 million in net cash proceeds
and expect to use the funds for capital additions to our manufacturing facility
and for working capital. We have invested the net proceeds in interest-bearing
money market accounts, pending such uses.
We currently expect to spend approximately $10.0 to $12.0 million during
2000 and 2001 to complete various manufacturing facility improvements, including
construction of a coating unit and a second production line. We expect to
finance the costs of construction with the proceeds of the private placement of
common stock described above. We believe our cash and cash equivalents, together
with the net proceeds from the private placement of common stock and expected
revenues from operations, will be sufficient to meet our anticipated capital
requirements for the foreseeable future. However, we may elect to pursue
additional financing at any time to more aggressively pursue development of new
drug delivery technologies and expand manufacturing capacity beyond that
currently planned. In addition, other factors that will affect future capital
requirements and may require us to seek additional financing, include the level
of expenditures necessary to develop new products or technologies, the progress
of our research and product development programs, the need to construct a larger
than currently anticipated manufacturing facility to meet demand for our
products, results of our collaborative efforts with current and potential
pharmaceutical company partners, and the timing of and amounts received from
future product sales, product development fees and licensing revenue and
royalties. We cannot be sure that additional financing will be available to us
or, if available, on acceptable terms.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 will be effective for fiscal years beginning in 2000. We do not currently
hold derivative instruments or engage in hedging activities.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in
Financial Statements." SAB 101 requires that license and other up-front fees
received from research collaborators be recognized over the term of the
agreement unless the fee is in exchange for products delivered or services
performed that represent the culmination of a separate earnings process. We have
not completed our analysis of the impact of implementing SAB 101 on the
reporting of our product development fees and licensing revenue, but expect to
complete this analysis by the end of the first quarter of 2000. We currently
expect to implement SAB 101 in the first quarter of 2000, if applicable, and
estimate that the cumulative effect of any resulting accounting change will be
in the range of $1 to $2 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investments consist of debt securities with contractual maturities of
less than one year. Therefore, we do not believe our operations are exposed to
significant market risk relating to interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Our financial statements as of December 31, 1999 and 1998 and for each of
the years ended December 31, 1999, 1998 and 1997 begin on page F-1 of this Form
10-K.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Registrant.
The information required by this item is incorporated by
reference herein from the information under the caption "Election of
Directors" contained in our Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation
of proxies for our Annual Meeting of Stockholders to be held on June
2, 2000 (the "Proxy Statement").
(b) Executive Officers of the Registrant.
Information concerning our Executive Officers is included in this
Form 10-K at Part I, Item 4A, under the caption "Executive Officers of
the Registrant."
(c) Compliance with 16(a) of the Securities Exchange Act of 1934.
The information required by this item is incorporated by
reference herein from the information under the caption "Section 16(a)
Reporting" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference herein from the information under the caption "Executive
Compensation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by
reference herein from the information under the caption "Stock
Ownership" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference herein from the information contained under the caption
"Certain Transactions" contained in the Proxy Statement.
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PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1). Financial Statements
PAGE NUMBER
IN THIS
DESCRIPTION ANNUAL REPORT
----------- -------------
Audited Financial Statements:
Report of Independent Auditors F-1
Balance Sheets F-2 and F-3
Statements of Operations F-4
Statements of Cash Flows F-5
Statement of Changes in Stockholders' Equity F-6
Notes to Financial Statements F-7 to F-13
(a)(2). Financial Statement Schedules
The following financial statement schedule should be read in conjunction
with the Audited Financial Statements referred to under Item 14 (a)(1) above.
Financial statement schedules not included in this Form 10-K have been omitted
because they are not applicable or the required information is shown in the
Audited Financial Statement or Notes thereto.
PAGE NUMBER
IN THIS
DESCRIPTION ANNUAL REPORT
----------- -------------
Schedule II - Valuation and Qualifying Accounts: Years Ended December 31, 1999, 1998 and 1997 F-14
(a)(3). Listing of Exhibits
Exhibit Method of
Number Description Filing
------ ----------- ------
3.1 Fifth Restated Certificate of Incorporation of CIMA. (1)
3.2 Third Restated Bylaws of CIMA. (12)
4.1 Form of Certificate for Common Stock. (2)
4.2 Rights Agreement, dated March 14, 1997, between CIMA and Norwest Bank Minnesota, N.A. (3) (3)
4.3 Form of Stock Purchase Agreement dated March 13, 2000 between CIMA and certain Filed
institutional investors. herewith
10.1 Letter Agreement, dated January 28, 1998, between CIMA and Joseph R. Robinson, Ph.D. *# (4)
10.2 Development and License Option Agreement, dated November 18, 1997, between Novartis (4)
Consumer Health, Inc. and CIMA. *
10.3 Employment Agreement, dated October 29, 1997, between CIMA and John M. Siebert, Ph.D.# (5)
10.4 Development and License Option Agreement, dated December 2, 1998, between N.V. Organon (10)
and CIMA. *
10.5 Real Property Lease, dated March 6, 1998, between Braun-Kaiser & Company and CIMA. (4)
10.6 Equity Incentive Plan, as amended and restated. # (12)
10.7 1994 Directors' Stock Option Plan, as amended. # (7)
10.8 Form of Director and Officer Indemnification Agreement. (2)
10.9 License Agreement, dated July 1, 1998, between Novartis Consumer Health Inc. and CIMA.* (8)
10.10 Supply Agreement, dated July 1, 1998, between Novartis Consumer Health Inc. and CIMA. * (8)
10.11 License Agreement, dated January 28, 1994, between SRI International and CIMA. * (2)
10.12 Non-Employee Directors' Fee Option Grant Program. # (9)
10.13 License Agreement, dated June 26, 1997, between Bristol-Myers Squibb Company and CIMA. * (9)
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Exhibit Method of
Number Description Filing
------ ----------- ------
10.14 Development and Option Agreement, dated August 11, 1997, between Schering Corporation and (5)
CIMA. *
10.15 Development and License Option Agreement, September 10, 1997, between IPR (5)
Pharmaceuticals, Inc. and CIMA. *
10.16 Real Property Lease, Amendment No. 8, dated September 23, 1998, between Principal Life (11)
Insurance Company and CIMA.
10.17 License Agreement dated May 28, 1999, between IPR Pharmaceuticals, Inc. and CIMA. * (12)
10.18 Credit and Security Agreement dated July 14, 1999, between Wells Fargo Business Credit, (13)
Inc. and CIMA.
10.19 Loan Agreement dated December 15, 1999 between Astra AB and CIMA. * Filed
herewith
10.20 License Agreement dated December 29, 1999 between Organon International AG and N.V. Filed
Organon, and CIMA. * herewith
10.21 Development and License Agreement dated January 14, 2000 between CIMA and American Home Filed
Products Corporation. * herewith
10.22 Supply Agreement dated January 14, 2000 between CIMA and American Home Products Filed
Corporation. * herewith
23.1 Consent of Ernst & Young LLP. Filed
herewith
24.1 Power of Attorney. Filed
herewith
27.1 Financial Data Schedule. Filed
herewith
99.1 Risk Factors. Filed
herewith
* Denotes confidential information that has been omitted from the
exhibit and filed separately, accompanied by a confidential treatment
request, with the Securities and Exchange Commission pursuant to Rule
24b-2 of the Securities Exchange Act of 1934.
# Management contract, compensatory plan or arrangement required to
be filed as an exhibit to this Form 10-K.
.
(1) Incorporated herein by reference to the correspondingly numbered
exhibit to CIMA's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
(2) Filed as an exhibit to CIMA's Registration Statement on Form S-1,
File No. 33-80194, and incorporated herein by reference.
(3) Incorporated by reference herein to Exhibit 2 to CIMA's Current
Report on Form 8-K, filed March 25, 1997.
(4) Incorporated by reference to the correspondingly numbered exhibit
to CIMA's Annual Report on Form 10-K for the year ended December 31,
1997, File No. 0-24424.
(5) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, File No. 0-24424, and
incorporated herein by reference.
20
21
(6) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998, File No. 0-24424, and incorporated
herein by reference.
(7) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, File No. 0-24424, and
incorporated herein by reference.
(8) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, File No. 0-24424, and
incorporated herein by reference.
(9) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, File No. 0-24424, and incorporated
herein by reference.
(10) Incorporated herein by reference to the correspondingly numbered
exhibit to CIMA's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, File No. 0-24424.
(11) Incorporated herein by reference to the correspondingly numbered
exhibit to CIMA's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
(12) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, File No. 0-24424, and incorporated
herein by reference.
(13) Filed as an exhibit to CIMA's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, File No. 0-24424, and
incorporated herein by reference.
(b). Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1999.
(c). Exhibits
See Item 14(a)(3) above.
(d). Financial Statement Schedules
See Item 14(a)(2) above.
21
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report on Form 10-K to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of Eden
Prairie, Minnesota, on the 29th day of March, 2000.
CIMA LABS INC.
By: /s/ John M. Siebert
--------------------------------------
John M. Siebert
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934 this report has been
signed by the following persons on behalf of the Registrant and in the
capacities indicated as of March 29, 2000.
SIGNATURE TITLE
--------- -----
/s/ John M. Siebert Chief Executive Officer (Principal Executive Officer) and Director
- --------------------------------------------------
John M. Siebert
/s/ David A. Feste Vice President and Chief Financial Officer (Principal Financial
- -------------------------------------------------- and Accounting Officer)
David A. Feste
* Director
- --------------------------------------------------
Terrence W. Glarner
* Director
- --------------------------------------------------
Steven B. Ratoff
* Director
- --------------------------------------------------
Joseph R. Robinson, Ph.D.
By: /s/ John M. Siebert
----------------------------------------------
John M. Siebert, Attorney-In-Fact
* John M. Siebert, pursuant to the Powers of Attorney executed by each of the
officers and directors above whose name is marked by a "*", by signing his name
hereto, does hereby sign and execute this Annual Report on Form 10-K on behalf
of each of the officers and directors in the capacities in which the name of
each appears above.
22
23
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CIMA LABS INC.
We have audited the accompanying balance sheets of CIMA LABS INC. as of December
31, 1999 and 1998, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. Our audits also included the financial statement
schedule listed in the index at item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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,
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. 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 11, 2000, except for Note 9
as to which the date is March 17, 2000
F-1
24
CIMA LABS INC.
BALANCE SHEETS
DECEMBER 31
-----------------------------
1999 1998
------------ ------------
ASSETS
Cash and cash equivalents $ 2,480,698 $ 2,722,590
Accounts receivable:
Net of allowance for doubtful accounts
$36,000-1999; $0-1998 3,058,258 1,654,796
Inventories, net 2,772,429 479,045
Prepaid expenses 73,042 79,866
------------ ------------
Total current assets 8,384,427 4,936,297
Other assets:
Lease deposits 318,699 345,146
Patents and trademarks, net 207,243 204,648
------------ ------------
Total other assets 525,942 549,794
Property, plant and equipment:
Construction in progress 2,150,508 72,204
Equipment 8,817,331 9,314,867
Leasehold improvements 4,783,420 4,757,169
Furniture and fixtures 604,204 604,204
------------ ------------
16,355,463 14,748,444
Less accumulated depreciation (5,996,024) (5,318,107)
------------ ------------
10,359,439 9,430,337
------------ ------------
Total assets $ 19,269,808 $ 14,916,428
============ ============
F-2
25
DECEMBER 31
----------------------------
1999 1998
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,402,726 $ 670,597
Accrued expenses 1,229,179 835,043
Notes payable 195,748 --
Advance royalties 137,084 459,105
Current portion of long term debt 150,000 --
Current portion of lease obligations 71,485 64,998
------------ ------------
Total current liabilities 4,186,222 2,029,743
Long term debt 3,350,000 --
Lease obligations 159,660 231,145
------------ ------------
Total liabilities 7,695,882 2,260,888
Stockholders' equity:
Convertible preferred stock, $0.01 par value
Authorized shares -- 5,000,000
Issued and outstanding shares -- -0-
Common stock, $0.01 par value:
Authorized shares -- 20,000,000
Issued and outstanding shares --
9,646,241--1999
9,610,394--1998 96,462 96,104
Additional paid-in capital 57,454,661 57,274,274
Retained earnings (deficit) (45,977,197) (44,714,838)
------------ ------------
Total stockholders' equity 11,573,926 12,655,540
------------ ------------
Total liabilities and stockholders' equity $ 19,269,808 $ 14,916,428
============ ============
See accompanying notes.
F-3
26
CIMA LABS INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
REVENUES:
Net sales $ 4,839,511 $ 1,097,465 $ 2,628,069
Product development fees and licensing 7,817,846 6,140,894 2,282,166
Royalties 735,107 373,764 --
------------ ------------ ------------
13,392,464 7,612,123 4,910,235
OPERATING EXPENSES:
Cost of sales 7,545,341 4,475,867 4,376,412
Research and product development 4,388,902 3,307,582 3,363,544
Selling, general and administrative 2,836,573 3,137,952 3,487,239
------------ ------------ ------------
14,770,816 10,921,401 11,227,195
OTHER INCOME (EXPENSE)
Interest income, net 10,327 152,366 336,310
Other income (expense) 105,666 (30,567) 142,255
------------ ------------ ------------
115,993 121,799 478,565
------------ ------------ ------------
NET INCOME (LOSS): $ (1,262,359) $ (3,187,479) $ (5,838,395)
============ ============ ============
Net income (loss) per share:
Basic and diluted $ (.13) $ (.33) $ (.61)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 9,615,280 9,610,104 9,518,679
See accompanying notes
F-4
27
CIMA LABS INC.
STATEMENTS OF CASH FLOWS
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
OPERATING ACTIVITIES
Net loss $ (1,262,359) $ (3,187,479) $ (5,838,395)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,635,017 1,653,319 1,051,679
Loss on impairment of assets 358,291 -- --
Gain on sale of property, plant and equipment -- 4,734 --
Changes in operating assets and liabilities:
Accounts receivable (1,403,462) (56,982) (1,350,236)
Inventories (2,293,384) 151,574 (96,032)
Prepaid expenses 6,824 66,939 (74,925)
Accounts payable 1,732,129 541,885 (135,658)
Accrued expenses 394,136 214,462 (91,178)
Advance royalties (322,021) (282,300) 491,405
------------ ------------ ------------
Net cash used in operating activities (1,154,829) (893,848) (5,860,984)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (2,819,700) (406,686) (772,262)
Purchases of short-term investments -- -- (29,469,496)
Proceeds from maturities of short-term investments -- 3,277,300 33,789,358
Proceeds from sale of property, plant and equipment -- 33,000 --
Patents and trademarks (105,305) (88,841) (111,470)
------------ ------------ ------------
Net cash (used in) provided by investing activities (2,925,005) 2,814,773 3,436,130
------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 180,745 5,700 654,582
Proceeds from long term debt 3,500,000 -- --
Proceeds from notes payable 195,748 -- --
Security deposits on leases 26,447 (304,495) 250,000
Payments on capital lease obligations (64,998) (45,300) --
------------ ------------ ------------
Net cash provided by (used in) financing activities 3,837,942 (344,095) 904,582
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (241,892) 1,576,830 (1,520,272)
Cash and cash equivalents at beginning of period 2,722,590 1,145,760 2,666,032
------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,480,698 $ 2,722,590 $ 1,145,760
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of equipment pursuant to capital lease -- $ 341,443 --
See accompanying notes.
F-5
28
CIMA LABS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK RETAINED
--------------------------- ADDITIONAL PAID- EARNINGS
SHARES AMOUNT IN CAPITAL (DEFICIT) TOTAL
------------ ------------ ---------------- ------------ ------------
Balance at Dec. 31, 1996 9,411,589 $ 94,116 $ 56,586,958 $(35,659,942) $ 21,021,132
Stock options exercised 191,968 1,920 652,662 -- 654,582
Exercise of stock warrants 4,837 48 28,974 (29,022) --
Net loss -- -- -- (5,838,395) (5,838,395)
------------ ------------ ------------ ------------ ------------
Balance at Dec. 31, 1997 9,608,394 96,084 57,268,594 (41,527,359) 15,837,319
Stock options exercised 2,000 20 5,680 -- 5,700
Net loss -- -- -- (3,187,479) (3,187,479)
------------ ------------ ------------ ------------ ------------
Balance at Dec. 31, 1998 9,610,394 96,104 57,274,274 (44,714,838) 12,655,540
Stock options exercised 35,847 358 180,387 -- 180,745
Net loss -- -- -- (1,262,359) (1,262,359)
------------ ------------ ------------ ------------ ------------
Balance at Dec 31, 1999 9,646,241 $ 96,462 $ 57,454,661 $(45,977,197) $ 11,573,926
============ ============ ============ ============ ============
F-6
29
CIMA LABS INC
Notes to Financial Statements
December 31, 1999
1. BUSINESS ACTIVITY
CIMA LABS INC., a Delaware corporation, develops and manufactures
fast-dissolve and enhanced-absorption oral drug delivery systems. OraSolv and
DuraSolv, CIMA's leading proprietary fast-dissolve technologies, are oral dosage
forms incorporating taste-masked active drug ingredients into tablets which
dissolve quickly in the mouth without chewing or water. CIMA develops
applications for technologies that are licensed to pharmaceutical company
partners. The Company currently manufactures and packages five commercial
products incorporating its proprietary fast-dissolve technologies. Revenues are
generated from license agreements, product development fees, products
manufactured using fast-dissolve technologies and royalties.
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.
PATENTS AND TRADEMARKS
Costs incurred in obtaining patents and trademarks are amortized on a
straight-line basis over sixty months. Accumulated amortization was
approximately $ 728,000 at December 31,1999 and $625,000 at December 31, 1998.
The Company periodically reviews its patents and trademarks for impairment in
value. Any adjustment from the analysis is charged to operations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives ranging from three to
twelve years. Depreciation expense was approximately $1,533,000 in 1999;
$1,538,000 in 1998; and $919,000 in 1997.
INVENTORIES
Inventories, consisting of materials and packaging, are valued at a standard
cost method using the first-in first-out (FIFO) for inventory turn over and
control. Inventories are shown net of reserves for obsolescence of approximately
$537,000 at December 31, 1999 and $157,000 at December 31, 1998.
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. During the year ended December 31, 1999, the Company recognized
approximately $358,000 of impairment losses on equipment no longer used in
operations with an original cost of $1,200,000. The cost and associated
accumulated depreciation have been removed from the equipment balances on the
accompanying December 31, 1999 balance sheet.
F-7
30
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.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock issued to Employees ("APB25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income taxes
are provided for temporary differences between financial reporting and tax bases
of assets and liabilities.
REVENUE RECOGNITION
Sales of product are recorded upon shipment or per contract requirements and
agreements. Product and development fees are recognized as the services are
provided and milestones are completed. Revenues from license agreements are
recorded when obligations under the agreement have been substantially completed.
Royalties are recorded when earned.
RESEARCH AND DEVELOPMENT COSTS
For financial reporting purposes, all costs of research and development
activities are expensed as incurred.
EARNINGS (LOSS) PER SHARE
Basic net loss per share is computed using the weighted average number of common
shares outstanding during the period. Fully diluted and basic net loss per share
are the same because the effects of common equivalent shares from stock options
are excluded from the computation as their effect is antidilutive.
RECLASSIFICATIONS
Certain amounts presented in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 presentation.
ADOPTION OF RECENT STAFF ACCOUNTING BULLETIN
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial
Statements." SAB 101 requires that license and other up-front fees received from
research collaborators be recognized over the term of the agreement unless the
fee is in exchange for products delivered or services performed that represent
the culmination of a separate earnings process. The Company expects to implement
SAB 101 in the first quarter of 2000 and estimates that the cumulative effect of
the resulting accounting change will range from $1 to 2 million.
F-8
31
3. NOTES PAYABLE AND LONG-TERM DEBT
NOTES PAYABLE
The Company has a $2,000,000 bank line of credit payable on demand expiring July
14, 2000. Interest is paid at prime plus 2% (10.5% at December 31, 1999). The
line is secured by accounts receivable and inventory. At December 31, 1999,
$195,748 was outstanding on the line. The Company paid $60,000 in interest for
the year ended December 31, 1999 and $24,000 for the year ended December 31,
1998.
LONG-TERM DEBT
In December 1999, the Company entered into an agreement with one of its
pharmaceutical partners whereby the Company received a loan of $3,500,000.
Timing of the loan repayments is based upon royalties due to the Company from an
affiliate of the lender that signed a license agreement with the Company in May
1999. The Company shall pay the lender 50% of any royalty amount due per the
license agreement with the affiliate. The term of the loan is three years,
unless the loan repayments based on the royalty amounts due to the Company have
not yet covered the loan principal plus any unpaid interest. In such a case, the
loan will be extended in annual increments. Interest is payable on the
outstanding amount at LIBOR plus one half of one percent, accrues quarterly and
is added to the then outstanding balance. The loan becomes payable in full upon
the sale of the Company or a change in control, as defined in the agreement. If
the loan becomes payable in full, the affiliate shall withhold 100% of the
royalties due until the outstanding balance and any accrued interest are paid in
full. The Company does not expect to have any repayment obligations to the
lender before the second half of 2000.
4. 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. Significant components of deferred income taxes as of December
31, 1999 and 1998 are as follows:
1999 1998
-------- --------
(In Thousands)
Deferred assets:
Net operating loss $ 18,716 $ 18,475
Accrued vacation 86 75
Inventory reserve 217 63
-------- --------
19,034 18,613
Deferred liability:
524 625
Depreciation and amortization
-------- --------
Net deferred income tax asset 18,510 17,988
Valuation allowance (18,510) (17,988)
-------- --------
Net deferred income taxes $ -- $ --
-------- --------
The Company may be subject to federal income taxes when operations become
profitable. The Company's tax operating loss carryforwards of approximately $46
million may be carried forward to offset future taxable income, limited due to
changes in ownership under the net operating loss limitation rules, and expire
in the years 2001 to 2019.
F-9
32
5. LEASES
OPERATING LEASES
The Company leases office, research and development and manufacturing facilities
in Brooklyn Park and Eden Prairie, Minnesota. The 75,000 square foot Eden
Prairie facility houses the general and administrative offices and the
manufacturing operation. The lease has an initial term expiring on June 1, 2009.
The rent payments will be recalculated on June 1, 2001 and 2006, based on a
market index. The Company has an option to extend the lease for one ten-year
period. The Company also has the option to renew this lease for two additional
five-year terms.
Future minimum lease commitments for all operating leases with initial or
remaining terms of one year or more are as follows:
Year ending December 31:
2000 .................................................... $ 629,160
2001 .................................................... 640,460
2002 .................................................... 459,030
2003 .................................................... 380,460
2004 .................................................... 380,460
Thereafter .............................................. $ 1,902,300
Rent expense of operating leases, excluding operating expenses, for the years
ended December 31, 1999, 1998, and 1997 was $525,000, $519,000, and $517,000
respectively.
CAPITAL LEASES
The Company has three leases between 48 and 60 months in length extending
through 2003 with Norwest Equipment Finance, Inc. The deposit balance for the
leases is $278,048 at December 31, 1999, and is reviewed on an annual basis in
December and adjusted to the balance required to secure the assets being leased.
Future minimum lease commitments for all capital leases with initial or
remaining terms of one year or more are as follows:
Year ending December 31:
2000................................................ $ 90,499
2001................................................ 90,499
2002................................................ 75,644
2003................................................ 9,986
--------
266,628
Less lease interest:.............................. (35,483)
--------
Total $231,145
========
6. STOCK OPTIONS
The Company has an Equity Incentive Plan ("the Plan") under which options to
purchase up to 2,650,000 shares of Common Stock may be granted to employees,
consultants and others. The Compensation Committee, established by the Board of
Directors, establishes the terms and conditions of all stock option grants,
subject to the Plan and applicable provisions of the Internal Revenue Code. The
options expire ten years from the date of grant and are usually exercisable in
annual increments ranging from 25% to 33% beginning one year from the date of
grant.
F-10
33
The Company also has a Directors' Stock Option Plan which provides for the
granting of non-management directors of the Company options to purchase shares
of Common Stock. The maximum number of shares with respect to the non-management
directors plan which options may be granted is 410,000 shares.
Shares available and options granted for the Equity Incentive Plan are as
follows:
NON-
SHARES INCENTIVE QUALIFIED WEIGHTED AVERAGE
AVAILABLE STOCK STOCK TOTAL EXERCISE PRICE
FOR GRANT OPTIONS OPTIONS OUTSTANDING PER SHARE
---------- ---------- ---------- ----------- ----------------
Balance at Dec.31, 1996 367,480 765,859 340,569 1,106,428 $ 6.27
Granted (390,700) 292,604 98,096 390,700 5.89
Forfeited 203,038 (166,575) (36,463) (203,038) 7.32
Exercised -- (149,217) (42,751) (191,968) 3.24
---------- ---------- ---------- ----------
Balance at Dec.31, 1997 179,818 742,671 359,451 1,102,122 5.71
Granted (492,679) 101,428 391,251 492,679 4.47
Reserved 400,000 -- -- --
Forfeited 230,955 (156,259) (74,696) (230,955) 6.88
Exercised -- (2,000) -- (2,000) 2.85
---------- ---------- ---------- ----------
Balance at Dec.31, 1998 318,094 658,840 676,006 1,361,846 5.08
Granted (395,273) 330,596 64,677 395,273 6.51
Reserved 250,000 -- -- --
Forfeited 279,024 (126,641) (152,383) (279,024) 5.01
Exercised -- (30,087) -- (30,087) 5.76
---------- ---------- ---------- ----------
Balance at Dec. 31, 1999 451,845 859,708 588,300 1,448,008 $ 5.47
Exercisable:
December 31, 1997 506,460 $ 5.27
December 31, 1998 556,626 $ 5.21
December 31, 1999 649,137 $ 5.51
The following table summarizes information about Equity Incentive Plan options
outstanding at December 31, 1999:
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE NUMBER WEIGHTED
NUMBER CONTRACTUAL OUTSTANDING EXERCISABLE AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE AT 12/31/99 EXERCISE PRICE
- ------------------------------ ---------------- --------------- --------------- -------------- -----------------
$ 2.625 - $ 3.00 125,745 8.6 years $ 2.77 14,419 $ 2.94
$ 3.01 - $ 4.00 254,625 8.0 years $ 3.79 237,300 $ 3.88
$ 4.01 - $ 5.00 356,000 8.0 years $ 4.42 104,000 $ 4.52
$ 5.01 - $ 7.00 312,033 6.0 years $ 5.81 162,168 $ 5.83
$ 7.01 - $ 8.00 98,125 6.0 years $ 7.76 68,750 $ 7.82
$ 8.01 - $ 10.1875 247,470 8.0 years $ 9.79 62,500 $ 9.02
- ------------------- --------- --------- ------ -------- ------
$ 2.00 - $10.1875 1,448,008 7.4 years $5.47 649,137 $ 5.51
========= ========
F-11
34
Shares available and options granted for Directors Stock Option Plan are as
follows:
WEIGHTED
NON- AVERAGE
INCENTIVE QUALIFIED EXERCISE
SHARES AVAILABLE STOCK STOCK TOTAL PRICE PER
FOR GRANT OPTIONS OPTIONS OUTSTANDING SHARE
---------------- ------------ ------------ ------------ ------------
Balance at Dec.31, 1996 147,500 -- 202,500 202,500 7.93
Granted (56,070) -- 56,070 56,070 3.92
Reserved 60,000 -- -- -- --
Forfeited -- -- -- -- --
Exercised -- -- -- -- --
------------ ------------ ----------- ------------
Balance at Dec.31, 1997 151,430 -- 258,570 258,570 7.06
Granted (37,860) -- 37,860 37,860 2.96
Forfeited -- -- -- -- --
Exercised -- -- -- -- --
------------ ------------ ----------- ------------
Balance at Dec.31, 1998 113,570 -- 296,430 296,430 6.54
Granted (40,960) -- 40,960 40,960 2.27
Forfeited 4,320 -- (4,320) (4,320) 1.30
Exercised -- -- (5,760) (5,760) 1.30
------------ ------------ ----------- ------------
Balance at Dec.31, 1999 76,930 -- 327,310 327,310 $ 6.17
Options outstanding under the plans expire at various dates during the period
from March 2000 through December 2009. Exercise prices for options outstanding
as of December 31, 1999, ranged from $2.6250 to $10.1875 per share. The weighted
average fair values of options granted during the years ended December 31, 1999,
1998 and 1997 were $3.71, $4.36, and $5.64 respectively. The Company issued
warrants to purchase 189,801 shares of its Common Stock at $6.00 per share. Of
these warrants, 77,506 were exercised during 1996 and 4,837 during 1997. The
remaining 107,458 warrants have expired.
The Company has elected to follow Accounting Principles Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998, and 1997 respectively; risk-free interest rates of
5.50%, 5.00%, and 5.70%; volatility factor of the expected market price of the
Company's common stock of .682, .630, and .649; and a weighted-average expected
life of the option of 5 years.
In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options because
the Company's employee stock options have
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characteristics significantly different from those of traded options and have
vesting restrictions and because changes in the subjective input assumptions can
materially affect the fair value estimates. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In addition, option
valuation models require input of highly subjective assumptions.
During the initial phase-in period, the effects of applying Statement 123 for
recognizing compensation cost may not be representative of the effects on
reported net loss or income for future years because the options in the Stock
Option Plans vest over several years and additional awards will be made in the
future.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
1999 1998 1997
------------ ------------ ------------
Pro forma net loss (in thousands) ...... $ (2,433) $ (4,240) $ (6,477)
Pro forma net loss
per common share,
basic and diluted ................. $ (0.25) $ (0.44) $ (0.68)
7. DEFINED CONTRIBUTION PLAN
The Company has a 401(k) plan (the "Plan") which covers substantially all
employees of the Company. Contributions to the Plan are made through employee
wage deferrals and employer matching contributions. The employer matching
contribution percentage is discretionary and determined each year. In addition,
the Company may contribute two discretionary amounts; one to non-highly
compensated individuals and another to all employees. To qualify for the
discretionary amounts, an employee must be employed by the Company on the last
day of the Plan year or have been credited with a minimum of 500 hours of
service during the Plan year.
The 401(k) expense for the years ended December 31, 1999, 1998 and 1997 was
$38,000, $36,000 and $29,000.
8. EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with the current President and
Chief Executive Officer in 1997 to continue in said position. The agreement
includes provisions for compensation, stock options and bonuses based upon the
achievement of certain performance targets. The agreement expires on December
31, 2000.
9. SUBSEQUENT EVENT
In March, 2000, the Company completed a private placement of 1.1 million shares
of common stock at $19 per share, before commissions and expenses. The offering
provided approximately $19.4 million in net cash proceeds to the Company.
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CIMA LABS INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO COSTS LESS BALANCE AT END
DESCRIPTION YEAR AND EXPENSES DEDUCTIONS OF YEAR
------------ ---------------- ------------ -------------
Year ended December 31, 1999:
Reserves and allowance deducted
From asset accounts:
Allowance for doubtful accounts ......... $ 0 $ 36,000 $ 0 $ 36,000
Obsolescence reserve .................... 156,770 379,966 0 536,736
------------ ------------ ------------ ------------
TOTAL ....................................... $ 156,770 $ 415,966 $ 0 $ 692,736
Year ended December 31, 1998:
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts ........... $ 32,150 $ 32,150 $ (64,300) $ 0
Obsolescence reserve ...................... 46,388 110,382 0 156,770
------------ ------------ ------------ ------------
TOTAL ....................................... $ 78,538 $ 142,532 $ (64,300) $ 156,770
Year ended December 31, 1997:
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts ........... $ 0 $ 32,150 $ 0 $ 32,150
Obsolescence reserve ...................... 140,795 0 (94,407) 46,388
------------ ------------ ------------ ------------
TOTAL ....................................... $ 140,795 $ 32,150 $ (94,407) $ 78,538
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