ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
Columbia Laboratories, Inc. (the "Company") was incorporated as a Delaware corporation in December 1986. The Company's objective is to develop unique pharmaceutical products that treat female specific diseases and conditions including infertility, dysmenorrhea, endometriosis, hormonal deficiencies and the prevention of sexually transmitted diseases. Columbia's research in endocrinology has also led to the development of a product to treat "Andropause" in men. Columbia's products primarily utilize the Company's patented bioadhesive delivery technology, the ("Bioadhesive Delivery System").
Formulated products utilizing the Bioadhesive Delivery System consist principally of a polymer, polycarbophil, and an active ingredient. The Bioadhesive Delivery System is based upon the principle of bioadhesion, a process by which the polymer adheres to epithelial surfaces and to mucin, a naturally occurring secretion of the mucous membranes. The polymer remains attached to epithelial surfaces and/or the mucin and is discharged upon normal cell turnover or upon the detachment of the mucin from the mucous membranes, a physiological process which, depending upon the area of the body, occurs every 12 to 72 hours. This extended period of attachment permits the Bioadhesive Delivery System to be utilized in products when extended duration of effectiveness is desirable or required.
The Company has focused on women's health care because of the significant number of women whose health and hygiene needs have not been met by available products and because the Company has found vaginal delivery to be particularly effective. The Company intends to continue to develop products that improve the delivery of previously approved drugs.
The Company is currently engaged solely in one business segment -- the development and sale of pharmaceutical products and cosmetics. See footnote 7 to the consolidated financial statements for information on foreign operations.
The Company's principal executive offices are located at 2875 Northeast 191st Street, Suite 400, Aventura, Florida 33180, and its telephone number is (305) 933-6089. The Company's subsidiaries, all of which are wholly-owned, are Columbia Laboratories (Bermuda) Ltd. ("Columbia Bermuda"), Columbia Laboratories (France) SA ("Columbia France"), Columbia Laboratories (UK) Limited ("Columbia UK") and Columbia Research Laboratories, Inc. ("Columbia Research").
Except for historical information contained herein, the matters discussed in this document are forward looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting the Company's operations, markets, products and prices, and other factors discussed elsewhere in this report.
PRODUCTS
CRINONE(R). The Company's first prescription drug is a sustained release, vaginally delivered, natural progesterone product. Crinone utilizes the Company's patented Bioadhesive Delivery System which enables the progesterone to achieve a "First Uterine Pass Effect"(C). Crinone is the first product to deliver progesterone directly to the uterus, thereby maximizing therapeutic benefit and avoiding side effects seen with orally-delivered synthetic progestins.
In May 1997, the Company received U.S. marketing approval for Crinone from the U.S. Food and Drug Administration ("FDA") for use as a progesterone supplementation or replacement as part of an Assisted Reproductive Technology (ART) treatment for infertile women with progesterone deficiency. In July 1997, the
Company received U.S. marketing approval for Crinone from the FDA for the treatment of secondary amenorrhea (loss of menstrual period).
Outside the U.S., Crinone has been approved for marketing for one or more medical indications in the following countries: the United Kingdom, Ireland, Finland, Argentina, Greece, Mexico, Colombia, Belgium, Italy, Germany and France. The medical indications include the treatment of secondary amenorrhea, progesterone supplementation or replacement as part of an ART treatment for infertile women, the prevention of hyperplasia and endometrial cancer in post-menopausal women receiving hormone replacement therapy ("HRT"), the reduction of symptoms of premenstrual syndrome ("PMS"), menstrual irregularities, dysmenorrhea and dysfunctional uterine bleeding.
In May 1995, the Company entered into a worldwide, except for South Africa, license and supply agreement with American Home Products Corporation ("AHP") under which the Wyeth-Ayerst Laboratories division of AHP market Crinone. Under the terms of the agreement, the Company earned $17 million in milestone payments to date and will continue to receive additional milestone payments. The Company also supplied Crinone at a price equal to 30% of AHP's net selling price. On July 2, 1999, AHP assigned the license and supply agreement to Ares-Serono ("Serono"), a Swiss pharmaceutical company. Serono paid $68 million to AHP for the rights to Crinone and assumed AHP's financial obligations to the Company.
ADVANTAGE-S(TM). Advantage-S, the Company's female contraceptive gel utilizes the Bioadhesive Delivery System with the active ingredient nonoxynol-9 (the"Product") and it has been marketed in the United States by the Company since July 1998 under an existing monograph for nonoxynol-9 spermicidal products. The Product had been marketed in the United States under the tradename Advantage 24(R) by Lake Pharmaceuticals, Inc. ("Lake"). In July 1997, the FDA alleged that the monograph did not permit a claim for 24-hour effectiveness. Although, the Company believes that its claim for 24-hour effectiveness was valid, it agreed with the FDA in February 1998 to market the Product without a claim for 24-hour effectiveness under the tradename of Advantage-S. During the period in which the Company was disputing the FDA allegations, the Company terminated its license agreement with Lake. In July 1998, the Company began marketing the Product in the United States under the tradename Advantage-S. Among Advantage-S benefits is that it utilizes the Company's Bioadhesive Delivery System, which enables the nonoxynol-9 to adhere to the cervix.
In August 1998, the Company signed a distribution agreement with Advantage Technology Development Co. Ltd. ("Advantech") for the distribution of the Product in China under the tradename Advantage-LA(R). An introduction test was conducted by Advantech and was satisfactorily completed. The product is now being sold in selected larger cities within China under an agreement with the Chinese Health Authorities for what is known as "Trial Sales". Upon successful completion of the "Trial Sales" in 1999, the Chinese Health Authorities issued a Family Planning Import Sales Certificate allowing distribution of Advantage-LA throughout China. In Europe, the Company intends to register Advantage-S as an over-the-counter drug.
Broader claims relating to prevention of sexually transmitted diseases (STD's) will be requested upon completion, if successful, of clinical studies now underway. The United Nations Global Program on AIDS (formerly known as the World Health Organization Global Program on AIDS) has completed a 600 women safety study on Advantage-S. Analysis of the data generated indicates that Advantage-S, as used in the study, was free of any serious side effects. In addition, Advantage-S was shown to be safer than any other nonoxynol-9 product studied. Studies to determine the efficacy of Advantage-S in preventing the heterosexual transmission of HIV and other STD's have begun in a National Institute of Health sponsored study in Kenya. Additional U.N. studies are underway in Thailand, India and the Ivory Coast.
REPLENS(R). Replens replenishes vaginal moisture on a sustained basis and relieves the discomfort associated with vaginal dryness. Replens was the first product utilizing the Bioadhesive Delivery System. Replens is marketed in the United States by the Company who reacquired the marketing rights from the Warner-Lambert Company on April 1, 1998. Replens is marketed by various pharmaceutical companies throughout the rest of the world. In October 1999, the Company engaged an investment banking firm to act as its exclusive advisor in a planned divesture of certain of the Company's over-the-counter products which includes Replens.
OTHER PRODUCTS. The Company also markets Advanced Formula Legatrin PM(R), for the relief of occasional pain and sleeplessness associated with minor muscle aches such as night leg cramps; Legatrin(R) GCM Formula(TM), which nutritionally supports healthy joint function; Vaporizer in a bottle(R), a portable cough suppressant for the temporary relief of a cough due to the common cold; and Diasorb(R), a pediatric antidiarrheal product. These products do not utilize the Bioadhesive Delivery System. In October 1999, the Company engaged an investment banking firm to act as its exclusive advisor in a planned divestiture of certain of the Company's over-the-counter products which include Advanced Formula Legatrin PM, Legatrin GCM Formula, Vaporizer in a Bottle and Diasorb.
In March 1999, the Company entered into a license and supply agreement with Mipharm SpA under which Mipharm SpA will be the exclusive marketer of the Company's previously unlicensed women's healthcare products in Italy, Portugal, Greece and Ireland with a right of first refusal for Spain. Under the terms of the agreement, the Company received $462,500, net of expenses, and expects to receive future milestone payments as products are made available by the Company.
RESEARCH AND DEVELOPMENT
The Company expended $6.7 million in 1999, $7.8 million in 1998 and $9.1 million in 1997 on research and development activities. The expenditures are primarily the result of costs associated with contracting for, supervising and administering the clinical studies on the Company's Crinone, Advantage-S, Chronodyne and Testosterone Bioadhesive Tablet products. These studies are coordinated from the Company's New York and Paris offices.
CHRONODYNE(R). In June 1998, the Company announced that it had been granted an Investigational New Drug Application ("IND") by the FDA for terbutaline in Columbia's patented bioadhesive vaginal delivery system. This product is intended to relax the uterus and prevent uterine dyskinesia (abnormal contractions), and therefore may be useful in the treatment of disorders such as dysmenorrhea, difficult and painful menstruation and for the treatment and prevention of endometriosis, the growth of endometrial tissue outside the uterus. Dysmenorrhea is a disorder that afflicts nearly 25 million women in the U.S. which is more than 30% of all menstruating women. Endometriosis effects 5 million women in the U.S. of whom 30 to 40% are infertile.
This vaginal form of terbutaline, trademarked Chronodyne by Columbia, takes advantage of the Company's patented "First Uterine Pass Effect" whereby the drug is preferentially delivered to the uterus. This results in high concentrations in the uterus, the target organ, and low concentrations in the systemic circulation thereby minimizing the potential for side effects. Pharmacokinetic studies have demonstrated that when Chronodyne is administered vaginally the common side effects of tachycardia (rapid heart rate) and tremor are avoided because the systemic serum levels of terbutaline are only a fraction of that seen after oral administration.
Chronodyne represents a new approach in the treatment of dysmenorrhea. Traditionally, analgesics are used by women after the pain occurs with the result that only partial relief is obtained. Chronodyne can prevent pain from occurring by addressing the root cause of dysmenorrhea painful uterine contractions. Chronodyne would be used at the first sign of dysmenorrhea, therefore preventing painful contractions.
It is a widely held theory that endometriosis is the result of retrograde (backward-flowing) menstruation. Endometriosis occurs when endometrial tissue flows backward through the fallopian tubes and attaches to nearby pelvic structures, such as the ovary, and then grows. It has been shown that women who develop endometriosis usually have a long history of dysmenorrhea. It has been shown that women with endometriosis have an abnormality of uterine contractility which prevents sperm from reaching the fallopian tubes, thereby causing infertility. The Company believes that Chronodyne can normalize uterine contractility and restore fertility.
TESTOSTERONE BIOADHESIVE BUCCAL TABLET. In August 1998, the Company announced that studies had been completed demonstrating that its patented bioadhesive buccal tablet can completely replace the normal amount of testosterone produced by men. The new bioadhesive buccal tablet which is only 9 mm in diameter and insensible after
being inserted into the mouth, has been shown to deliver physiologic levels of testosterone. This contrasts with large transdermal patches which produce sub-physiologic levels because they deliver only 5 mg per day.
Testosterone has traditionally been used to treat hypogonadel men. Hypogonadism in men is characterized by a deficiency or absence of endogenous testosterone production. However, recent data has demonstrated that men with low levels of testosterone may be at a greater risk of having a heart attack. Like the failure of the ovaries in menopausal women to produce estrogen, failure of the testes to product sufficient testosterone in men results in increasing levels of Follicle Stimulating Hormone (FSH) and Luteinizing Hormone (LH). The advent of "Andropause" in men may have the same impact as menopause in women- increased risk of cardiovascular disease, Alzheimer's disease and ultimately osteoporosis.
Research sponsored by the Company has shown that testosterone apparently plays the same role in men as estradiol does in women, i.e., it acts as a potent coronary dilator. Acute administration of testosterone improves exercise-induced myocardial ischemia in men with coronary artery disease. Columbia's testosterone bioadhesive buccal tablet may play an important role in the treatment of angina and in the secondary prevention of a heart attack.
PATENTS, TRADEMARKS AND PROTECTION OF PROPRIETARY INFORMATION
The Company purchased the patents underlying the Bioadhesive Delivery System from Bio-Mimetics, Inc. ("Bio-Mimetics"). The basic patent that covers the Bioadhesive Delivery System was issued in the United States in 1986 and by the European Patent Office in 1992. The Company has the exclusive right to the use of the Bioadhesive Delivery System subject to certain third party licenses issued by Bio-Mimetics that have been assigned to the Company and certain restrictions on the assignment of the patents. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations."
During 1999, there were two United States patents granted to the Company. The first patent was for a method of treating or reducing ischemia or incidence of cardiovascular events by administering progesterone. The second patent was for the composition and method of moisturizing mammalian membranous tissue.
During 1997, the Company was granted a United States patent covering the technology used in its product Advantage-S, which potentiates the activity of nonoxynol-9 against various organisms which can cause sexually transmitted diseases, including AIDS, gonorrhea, chlamydia, trichomonal infections, syphilis and genital herpes.
During 1996, the Company was granted United States patents covering vaginal moisturization and the direct transport of progesterone to the uterus. In addition, a patent covering the treatment of ischemia through the delivery of Crinone was filed in the United States. The Company is continuing to develop the core Bioadhesive Delivery System and has filed additional patent applications covering tissue moisturization, vaginal moisturization and progesterone delivery. While patent applications do not ensure the ultimate issuance of a patent, it is the Company's belief that patents based on these applications will issue.
Because the Company operates on a worldwide basis, the Company seeks worldwide patent protection for its technology and products. While having patent protection cannot ensure that no competitors will emerge, this is a fundamental step in protecting the technologies of the Company.
The Company has filed "Replens", "Advantage 24", "Advantage-S", "Advantage-LA", "Crinone" and "Chronodyne"as trademarks in countries throughout the world. Applications for the registration of trademarks do not ensure the ultimate registration of these marks. The Company believes these marks will be registered. In addition, there can be no assurance that such trademarks will afford the Company adequate protection or that the Company will have the financial resources to enforce its rights under such trademarks.
The Company also relies on confidentiality and nondisclosure agreements. There can be no assurance that other companies will not acquire information which the Company considers to be proprietary. Moreover, there can be
no assurance that other companies will not independently develop know-how comparable to or superior to that of the Company.
MANUFACTURING
Crinone, Advantage-S, Advantage 24, Advantage-LA and Replens are currently being manufactured and packaged by third-party manufacturers in Europe utilizing the "form, fill and seal" single step manufacturing process.
Medical grade, cross-linked polycarbophil, the polymer used in the Company's products utilizing the Bioadhesive Delivery System, is currently available from only one supplier, B.F. Goodrich Company ("Goodrich"). The Company believes that Goodrich will supply as much of the material as the Company may require because the Company's products rank among the highest value-added uses of the polymer. There can be no assurance that Goodrich will continue to supply the product. In the event that Goodrich cannot or will not supply enough of the product to satisfy the Company's needs, the Company will be required to seek alternative sources of polycarbophil. There can be no assurance that an alternative source of polycarbophil will be obtained.
All of the other raw materials used by the Company for its products utilizing the Bioadhesive Delivery System are available from several sources.
OVER-THE-COUNTER DRUGS
The Company currently markets six over-the-counter drugs: Advanced Formula Legatrin PM, for the relief of occasional pain and sleeplessness associated with minor muscle aches such as night leg cramps; Legatrin GCM Formula, which nutritionally supports healthy joint function; Diasorb, a pediatric antidiarrheal product; Vaporizer in a bottle, a portable cough suppressant, Replens and Advantage-S. These over-the-counter drugs are manufactured by third-party manufacturers. All of the raw materials for the non Bioadhesive Delivery System products used by the Company for its over-the-counter drugs are available from several sources.
The over-the-counter drugs are sold to drug wholesalers, mass merchandisers and chain drug stores. The Company utilizes approximately 20 drug manufacturers' representative firms to make calls on the Company's trade customers. The manufacturers' representatives receive commissions based on sales made within their respective territories. The Company supports the activities of the manufacturers' representatives by advertising in consumer publications and convention participation.
SALES
The following table sets forth the percentage of the Company's consolidated net sales by product, for each product accounting for 5% or more of consolidated net sales in any of the three years ended December 31, 1999.
1999 1998 1997 ---------- ---------- ----------- Crinone 56% 25% 68% Replens 24 40 10 Advantage-S 3 4 3* Legatrin PM/Legatrin GCM 12 26 15 Other Products 5 5 4 ---------- ---------- ----------- 100% 100% 100% ========== ========== ===========
* Prior to July 1997 the tradename was Advantage 24.
The Company anticipates the percentage of sales attributable to Legatrin PM and the other products to decrease in future years as additional products utilizing the Bioadhesive Delivery System are introduced. AHP and Ares-Serono accounted for approximately 56% of 1999 consolidated net sales. AHP accounted for approximately 25% and 68% of
1998 and 1997 consolidated net sales, respectively. A retail customer accounted for approximately 9%, 15% and 5% of 1999, 1998 and 1997 consolidated net sales, respectively. Another customer accounted for approximately 5%, of 1999, consolidated net sales.
COMPETITION
While the Company has entered into the strategic alliance agreements for the marketing of its women's health care products, there can be no assurance that the Company and its partners will have the ability to compete successfully. The Company's success to a great extent is dependent on the marketing efforts of its strategic alliance partners, over which the Company has limited ability to influence. The markets which the Company and its strategic alliance partners operate in or intend to enter are characterized by intense competition. The Company and its partners compete against established pharmaceutical and consumer product companies which market products addressing similar needs. In addition, numerous companies are developing or, in the future, may develop enhanced delivery systems and products competitive with the Company's present and proposed products. Some of the Company's and its partners' competitors possess greater financial, research and technical resources than the Company or its partners. Moreover, these companies may possess greater marketing capabilities than the Company or its partners, including the resources to implement extensive advertising campaigns.
Crinone, although a natural progesterone product, competes in markets with other progestins, both synthetic and natural, which may be delivered orally, by injections or by suppositories. Some of the more successful orally dosed products include Provera marketed by the Upjohn Company and Prempro and Premphase marketed by AHP. Although the Company is not aware of any product incorporating rate-controlled technology with respect to vaginal lubrication, the Company believes that Replens competes in the same markets as K-Y Jelly(R) and Gyne-Moisturin(R), vaginal lubricants marketed by Johnson & Johnson Products, Inc. and Schering-Plough Corporation, respectively. The Company also believes that Advantage-S, Legatrin PM and Diasorb compete against numerous products in their respective categories and that Vaporizer in a bottle(R) competes against Vicks Vaporsteam, a product distributed by Richardson-Vicks, Inc.
GOVERNMENT REGULATION
The Company is subject to both the applicable regulatory provisions of the FDA in the United States and the applicable regulatory agencies in those foreign countries where its products are manufactured and/or distributed.
As in the United States, a number of foreign countries require premarketing approval by health regulatory authorities. Requirements for approval may differ from country to country and may involve different types of testing. There can be substantial delays in obtaining required approvals from regulatory authorities after applications are filed. Even after approvals are obtained, further delays may be encountered before the products become commercially available.
In the United States, manufacturers of pharmaceutical products are subject to extensive regulation by various Federal and state governmental entities relating to nearly every aspect of the development, manufacture and commercialization of such products. The FDA, which is the principal regulatory authority in the United States for such products, has the power to seize adulterated or misbranded products and unapproved new drugs, to require their recall from the market, to enjoin further manufacture or sale and to publicize certain facts concerning a product. As a result of FDA regulations, pursuant to which new pharmaceuticals are required to undergo extensive and rigorous testing, obtaining premarket regulatory approval requires extensive time and cash expenditures. The manufacturing of the Company's products which are either manufactured and/or sold in the United States, is subject to current Good Manufacturing Practices prescribed by the FDA. The labeling of over-the-counter drugs in the United States, as well as advertising relating to such products, are subject to the review of the Federal Trade Commission ("FTC") pursuant to the general authority of the FTC to monitor and prevent unfair or deceptive trade practices.
PRODUCT LIABILITY
The Company may be exposed to product liability claims by consumers. Although the Company presently maintains product liability insurance coverage in the amount of $15 million, there can be no assurance that such insurance will be sufficient to cover all possible liabilities. In the event of a successful suit against the Company, insufficiency of insurance coverage could have a materially adverse effect on the Company.
EMPLOYEES
As of February 29, 2000, the Company had 37 employees, 3 in management, 14 in research and development administration, 5 in manufacturing, 2 in marketing, and 13 in support functions. None of the Company's employees are represented by a labor union. The Company believes that its relationship with its employees is satisfactory.
The Company has employment agreements with certain employees, some of whom are also stockholders of the Company. See "Executive Compensation-- Employment Agreements."
ITEM 2.
ITEM 2. PROPERTIES
As of February 29, 2000, the Company leases the following properties:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company filed an action in the United States District Court for the Southern District of Florida ("Florida Action") in November 1997 seeking a declaratory judgement on certain issues related to its relationship with Lake Consumer Products, Inc. ("Lake") as governed in the contract between the Company and Lake. Lake filed an action against the Company in the United States District Court, Northern District of Illinois ("Illinois Action") , for damages alleged by Lake to have been suffered by it as a result of the FDA's allegations in July 1997 that the Company's nonoxynol-9 product, then marketed by Lake under the tradename Advantage 24, was not permitted to be sold under the monograph. The IllinoisAction was dismissed by the Illinois Court and transferred to the Florida Court for consolidation as a counterclaim in the Florida Action. On March 16, 2000, the Company and Lake settled all outstanding issues in the consolidated Florida Action by the Company having bought out the contract for the sum of $1,200,000 ($600,000 in cash and $600,000 in the form of Company common stock). As a result, the Company reacquired the U.S. rights to the Advantage product and both parties agreed to have their legal actions dismissed.
Other claims and law suits have been filed against the Company. In the opinion of management and counsel, none of these lawsuits are material and they are all adequately reserved for or covered by insurance or, if not so covered, are without any or have little merit or involve such amounts that if disposed of unfavorably would not have a material adverse effect on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's $.01 par value Common Stock ("Common Stock") trades on the American Stock Exchange under the symbol COB. The following table sets forth the high and low sales prices of the Common Stock on the American Stock Exchange, as reported on the Composite Tape.
FISCAL YEAR ENDED DECEMBER 31, 1998 HIGH LOW - ------------------------------------ ------ ------- First Quarter $15.18 $11.25 Second Quarter 14.13 5.63 Third Quarter 8.94 2.50 Fourth Quarter 4.88 2.38
FISCAL YEAR ENDED DECEMBER 31, 1999 - -----------------------------------
First Quarter $6.81 $2.88 Second Quarter 9.06 5.88 Third Quarter 8.69 5.69 Fourth Quarter 8.31 5.50
At February 29, 2000, there were 396 shareholders of record of the Company's Common Stock, although the Company estimates that there are approximately 9,500 beneficial owners, 2 shareholders of record of the Company's Series A Convertible Preferred Stock ("Series A Preferred Stock"), 3 shareholders of record of the Company's Series B Convertible Preferred Stock ("Series B Preferred Stock") and 22 shareholders of record of the Company's Series C Convertible Preferred Stock ("Series C Preferred Stock").
Between January 7, 1999 and February 1, 1999 the Company sold (i) 6,660 shares of Series C Convertible Preferred Stock, convertible into shares of the Company's Common Stock, par value $.01 (the "Series C Convertible Preferred Stock"), and (ii) warrants to purchase up to an aggregate of 233,100 shares of Common Stock at an exercise price of $3.50 per share (the "Series C Warrants") for an aggregate purchase price of $6,660,000. The Series C Preferred Stock may be converted into Common Shares at a conversion price equal to the lesser of (i) $3.50 and (ii) 100% of the average of the closing prices of the Common Shares as reported on the AMEX for the three Trading Days immediately preceding the date of conversion. In accordance with Rule 501 of Regulation D under the Securities Act of 1933 (the "Securities Act"), it was not necessary in connection with the offer, sale and delivery of the Series C Preferred Stock to register the Series C Preferred Stock under the Securities Act.
On January 28, 1999 the Company granted to Shephard Lane and Anthony Campbell, in exchange for services performed, warrants to purchase up to an aggregate of 125,000 shares of Common Stock at an exercise price of $4.8125 per share.
On January 28, 1999 and September 23, 1999, the Company granted to James Apostolakis, warrants to purchase up to an aggregate of 100,000 and 75,000 shares, respectively, of common stock at an exercise price of $4.8125 and $7.50, respectively, per share.
On October 25, 1999, the Company granted to Ryan Beck & Co., Inc., as part of a services agreement, warrants to purchase up to an aggregate of 12,500 shares of common stock at an exercise price of $7.0625 per share.
On August 31, 1998 the Company granted to Value Management & Research AG a warrant to purchase up to an aggregate of 120,000 shares of Common Stock at an exercise price of $5.00 per share in exchange for consulting services performed.
The Series A Preferred Stock pays cumulative dividends at a rate of 8% per annum payable quarterly on the first business day of the subsequent quarter. As of December 31, 1999, dividends of $1,860 were payable on January 3, 2000. The Series C Preferred Stock issued in January 1999 pays cumulative dividends at a rate of 5% per annum payable quarterly on the last day of the quarter.
The Company has never paid a cash dividend on its Common Stock and does not anticipate the payment of cash dividends in the foreseeable future. The Company intends to retain any earnings for use in the development and expansion of its business.
Applicable provisions of the Delaware General Corporation Law may affect the ability of the Company to declare and pay dividends on its Common Stock as well as on its Preferred Stock. In particular, pursuant to the Delaware General Corporation Law, a company may pay dividends out of its surplus, as defined, or out of its net profits, for the fiscal year in which the dividend is declared and/or the preceding year. Surplus is defined in the Delaware General Corporation Law to be the excess of net assets of the company over capital. Capital is defined to be the aggregate par value of shares issued.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data of the Company for the five years ended December 31, 1999 (not covered by the auditors' report), should be read in conjunction with the consolidated financial statements and related notes thereto. See "Item 8. Financial Statements and Supplementary Data."
(1) 1999, 1998, 1997, 1996 and 1995 net income (loss) includes approximately $463,000, $73,000, $7.0 million, $2.0 million and $8.1 million, respectively, of license fee income.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
The Company and its representatives from time to time make written or verbal forward looking statements, including statements contained in this and other filings with the Securities and Exchange Commission and in the Company's reports to stockholders, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, the Company's expectations regarding sales, earnings or other future financial performance and liquidity, product introductions, entry into new geographic regions and general optimism about future operations or operating results. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors that could cause actual results to differ from expectations include, without limitation: (i) increased competitive activity from companies in the pharmaceutical industry, some of which have greater resources than the Company; (ii) social, political and economic risks to the Company's foreign operations, including changes in foreign investment and trade policies and regulations of the host countries and of the United States; (iii) changes in the laws, regulations and policies, including changes in accounting standards, that affect, or will affect, the Company in the United States and abroad; (iv) foreign currency fluctuations affecting the relative prices at which the Company and foreign competitors sell their products in the same market; and (v) the timely completion of studies and approvals by the FDA and other regulatory agencies. Additional information on factors that may affect the business and financial results of the Company can be found in filings of the Company with the Securities and Exchange Commission. All forward-looking statements should be considered in light of these risks and uncertainties. The Company assumes no responsibility to update forward-looking statements made herein or otherwise.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased from approximately $315,000 at December 31, 1998 to approximately $1,982,000 at December 31, 1999. The Company received approximately $6.4 million, net of expenses from the issuance and sale of Series C Convertible Preferred Stock. Offsetting this was the approximately $4.1 million of cash used in operating activities.
In May 1995, the Company entered into a worldwide, except for South Africa, license and supply agreement with American Home Products Corporation ("AHP") under which the Wyeth-Ayerst Laboratories division of AHP market Crinone. On July 2, 1999 AHP assigned this license and supply agreement to Ares-Serono ("Serono"), a swiss pharmaceutical company. Under the terms of the agreement, as of February 28, 2000, the Company has earned $17 million in milestone payments and will continue to receive additional milestone payments. The Company also supplied Crinone at a price equal to 30% of AHP's net selling price. Serono paid $68 million to AHP for the rights to Crinone and assumed AHP's financial obligations to the Company.
In connection with the 1989 purchase of the assets of Bio-Mimetics, Inc., which assets consisted of the patents underlying the Company's Bioadhesive Delivery System, other patent applications and related technology, the Company pays Bio-Mimetics, Inc. a royalty equal to two percent of the net sales of products based on the Bioadhesive Delivery System, to an aggregate of $7.5 million. The Company is required to prepay a portion of the remaining royalty obligation, in cash or stock at the option of the Company, if certain conditions are met. Through December 31, 1999, the Company has paid approximately $1.6 million in royalty payments.
As of December 31, 1999, the Company has outstanding exercisable options and warrants that, if exercised, would result in approximately $50.9 million of additional capital. However, there can be no assurance that such options or warrants will be exercised.
Significant expenditures anticipated by the Company in the near future are concentrated on research and development related to new products. The Company anticipates it will spend approximately $8.2 million on research and development in 2000 and an additional $200,000 on property and equipment.
As of December 31, 1999, the Company had available net operating loss carryforwards of approximately $45 million to offset its future U.S. taxable income.
In accordance with Statement of Financial Accounting Standards No. 109, as of December 31, 1999 and 1998, other assets in the accompanying consolidated balance sheet include deferred tax assets of approximately $17 million and $18 million, respectively, (comprised primarily of a net operating loss carryforward) for which a valuation allowance has been recorded since the realizability of the deferred tax assets are not determinable.
In January 1999, the Company raised approximately $6.4 million, net of expenses, from the issuance and sale of Series C Convertible Preferred Stock. ("Preferred Stock"). The Preferred Stock, sold to twenty-four accredited investors, has a stated value of $1,000 per share. The Preferred Stock is convertible into common stock at the lower of: (i) $3.50 per common share and (ii) 100% of the average of the closing prices during the three trading days immediately preceding the conversion notice. If conversion is based on the $3.50 conversion price, conversion may take place after the underlying common stock is registered. If conversion is based on the alternative calculation, conversion cannot take place for fifteen months. The Preferred Stock pays a 5% dividend, payable quarterly in arrears on the last day of the quarter.
Subsequent to year-end, the Company has received approximately $4.7 million from the exercise of outstanding options and warrants. The Company anticipates that cash generated from operations, together with the proceeds from the exercise of options and warrants will be sufficient to meet its working capital requirements for 2000.
In October 1999, the Company engaged an investment banking firm to act as its exclusive advisor in a planned divestiture of certain of the Company's over-the-counter products. Subsequent to year-end, the Company has received a letter of intent from a prospective party who is in the process of completing due diligence procedures. The terms of the agreement are being negotiated.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1999 VERSUS DECEMBER 31, 1998 VERSUS DECEMBER 31, 1997
Net sales increased by approximately 89% in 1999 to approximately $18.9 million as compared to $10.0 million in 1998 and $16.5 million in 1997. Sales of Crinone accounted for approximately $10.6 million of net sales in 1999 as compared to approximately $2.5 million and $11.2 million in 1998 and 1997, respectively. AHP, the Company's former licensee for Crinone, had purchased large initial quantities of Crinone from the Company in 1997 and used this inventory to fulfill most of their 1998 Crinone requirements. The approximately $8.9 million increase in 1999 over 1998 was attributable to the replenishment of inventory utilized in 1998 and increased usage by consumers. Sales of Replens were approximately $4.5 million, $4.2 million and $1.6 million in 1999, 1998 and 1997, respectively. The increase in 1998 reflects the reacquisition of the product by the Company from the Warner-Lambert Company in April 1998. As a result of the reacquisition, the Company sells Replens directly to chain drugstores, food stores and mass merchandisers at wholesale prices instead of to Warner-Lambert at contract manufacturing prices which are much lower than wholesale prices.
Gross profit as a percentage of sales increased in 1999 to approximately 70% as compared to approximately 43% in 1998 and approximately 60% in 1997. The increase in Crinone sales, with its approximately 80% gross profit, accounts for almost all of the increase in 1999
Selling and distribution expenses were approximately $3.9 million, $4.1 million and $2.9 million in 1999, 1998 and 1997, respectively. Selling and distribution expenses increased by approximately 41% in 1998 compared to 1997. Contributing to the approximately $1.2 million increase were additional expenses related to the reacquisition of Replens and the marketing of the product such as: amortization of the Replens trademark $230,000; media advertising $464,000; advertising billbacks $209,000; and broker commissions $133,000.
General and administrative expenses decreased approximately $1.2 million or 21% to approximately $4.6 million in 1999 from approximately $5.8 million in 1998. The decrease was principally the result of an approximately $249,000 reduction in salaries, an approximately $490,000 reduction in professional services, including investor relations, and an approximately $227,000 reduction in legal expenses related to dissident shareholder activities. General and administrative expenses increased by 46% to $5.8 million in 1998 from $4.0 million in 1997. The principal reasons for the $1.8 million increase were an increase in legal expense from $707,000 in 1997 to $1,793,000 in 1998 and an increase in investor/public relations expenses from $543,000 in 1997 to $966,000 in 1998. The increase in legal fees reflected additional attorney charges related to litigation and dissident shareholder activities. The increase in investor/public relation expenses reflected work done in 1998 on Crinone media promotion and investor relations work performed in Europe. The European investor relations expense included $264,000 which represented the value of warrants granted to non-employees. Other increases in 1998 general and administrative expenses included $135,000 for salaries and benefits and $84,000 for insurance
Research and development decreased in 1999 to approximately $6.7 million as compared to approximately $7.8 million in 1998. The $1.1 million decrease was primarily the result of a $125,000 reimbursement of expenses incurred in 1998 negotiated and received in 1999 and an approximately $742,000 reduction in Crinone studies and other research and development costs. Research and development expenditures decreased in 1998 to $7.8 million as compared to $9.1 million in 1997 as the number of Crinone studies continued to decline.
License fees in 1999 of $462,500, net of expenses totaling $137,500, represent payments received in connection with the licensing agreement with Mipharm SpA entered into in March 1999. License fees in 1998 were $73,088. License fees in 1997 were $7.0 million representing milestone payments received in connection with the licensing agreement with AHP.
Interest income in 1999 was $134,795. Interest income in 1998 was $141,564 as compared to $70,664 in 1997. The increase resulted from interest earned on the money received from the issuance of a $10 million note issued to SBC Warburg Dillon Read in March 1998, after paying $4.6 million to reacquire the rights to the product Replens in April 1998.
Interest expense amounted to $755,352, $599,773 and $24,186 in 1999, 1998 and 1997, respectively. Interest expense is primarily from interest on the $10 million note issued in March 1998 which bears an interest rate of 7.125%.
As a result, the net loss for 1999 was $2,210,208 or $.09 per share as compared to a net loss of $13,859,734 or $0.48 per share in 1998 and net income of $762,906 or $0.03 per share in 1997.
IMPACT OF THE YEAR 2000
Since January 1, 2000, the Company has not had any Year 2000-related problems associated with its internal systems or software, and is not aware of any Year 2000-related problems associated with the systems or software of its vendors, distributors or suppliers. Although the Company expects most material Year 2000 compliance problems to have arisen or occurred on or after January 1, 2000, there can be no assurance, however, that the Year 2000 problem will not adversely affect the Company's business, financial condition, results of operations or cash flows. It is possible that future Year 2000-related problems will arise after January 1, 2000.
EURO
On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing currencies ("legacy currencies") and one common currency (the "Euro"). The Euro trades on currency exchanges and may be used in business transactions. Under the regulations governing the transition to a single currency, there is a "no compulsion, no prohibition" rule which states that no one is obliged to use the Euro until the notes and coinage have been introduced on January 1, 2002. Beginning in January 2002, new euro-denominated bills and coins will be issued and legacy currencies will be withdrawn from circulation. The Company's operating subsidiaries affected by the Euro conversion have established plans to address the systems and business issues raised by the Euro currency conversion. These issues include: (1) the need to adapt computer and other business systems and equipment to accommodate Euro-denominated transactions, and (2) the competitive impact of cross-border price transparency, which may make it more difficult for business to charge different prices for the same products on a country-by-country basis particularly once the Euro currency is issued in 2002. Based upon current plans and assumptions, the Company does not expect that the Euro conversion will have a material adverse impact on its financial condition or results of operations.
IMPACT OF INFLATION
Sales revenues, manufacturing costs, selling and distribution expenses, general and administrative expenses and research and development costs tend to reflect the general inflationary trends.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are annexed to this report on pages through. An index to the financial statements appears on page. The financial statement schedules are also annexed to this report on pages S-1 through S-4. An index to the financial statement schedules appears on page S-1.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 7, 1999, the Board of Directors of Columbia Laboratories, Inc. (the "Registrant") approved the engagement of Goldstein Golub Kessler LLP as the Registrant's independent certified public accountants to audit the Registrant's consolidated financial statements. During the last two fiscal years and each subsequent interim period, the Registrant has not consulted with Goldstein Golub Kessler LLP regarding the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Registrant's financial statements or on any matter that was the subject of a disagreement or a reportable event.
Simultaneously with the approval of the Registrant's new accountants, the Board of Directors dismissed Arthur Andersen LLP as the Registraint's independent certified public accountants. During the two most recent fiscal years or any subsequent interim period, there have been no adverse opinions, disclaimers of opinion or qualifications or modifications as to uncertainty, audit scope or accounting principles regarding the reports of Arthur Andersen LLP, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure of a nature which if not resolved to the satisfaction of Arthur Andersen LLP would have caused it to make reference to the subject matter of such disagreement in connection with its report.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company as of February 29, 2000 are as follows:
WILLIAM J. BOLOGNA has been a director of the Company since inception, Chairman of the Company's Board of Directors since January 1992 and Chief Executive Officer since January 2000. From December 1988 to January 1992, Mr. Bologna served as Vice Chairman of the Company's Board of Directors. In addition, from 1980 to 1991, he was Chairman of Bologna & Hackett ("B&H"), an advertising agency specializing in pharmaceutical products which has in the past performed services for various international pharmaceutical companies. B&H ceased operations in May 1991. Prior to 1980, Mr. Bologna was employed by William Douglas McAdams, Inc., a company engaged in the marketing of pharmaceuticals, in a variety of positions, including Senior Vice President. In 1965, Mr. Bologna received his B.S. in Pharmacy from Fordham University. He received an MBA in Finance from Fordham University in 1971.
JAMES J. APOSTOLAKIS has been a director and Vice Chairman of the Company's Board of Directors since January 1999 and President since January 2000. Mr. Apostolakis has been a Managing Director at Poseidon Capital Corporation, an investment banking firm, since February of 1998. Mr. Apostolakis has also served as President of Lexington Shipping & Trading Corporation, a company engaged in shipping operations, since 1973. From 1989 until 1992, Mr. Apostolakis served as a director on the Board of Directors of Grow Group, a paint and specialty chemicals company. From 1982 to 1988, he served as a director for Macmillan, Inc., a publishing and information services company. Mr. Apostolakis received an A.B. in Economics from the University of Pennsylvania in 1962 and an LL.B from Harvard University Law School in 1965.
DAVID L. WEINBERG has been Vice President--Finance and Administration, Chief Financial Officer, Treasurer and Secretary of the Company from September 1997 to the present and previously from the inception of the Company to June 1991. From October 1991 until September 1997, Mr. Weinberg was employed by Transmedia Network Inc., a company specializing in consumer savings programs, where he served in various capacities including Vice President and Chief Financial Officer. From February 1981 until August 1986, Mr. Weinberg worked for Key Pharmaceuticals, Inc., a company engaged in the development, manufacturing, marketing and sales of pharmaceuticals until its sale to Schering-Plough Corporation. Mr. Weinberg served in various capacities including Vice President - - Finance, Treasurer and Secretary. Mr. Weinberg received a B.B.A. in Accounting from Hofstra University in 1968.
DOMINIQUE DE ZIEGLER, M.D. has been Vice President--Pharmaceutical Development of the Company since January 1996 and a director since January 1998. Dr. de Ziegler has been employed by the Company since 1992 as Director of Research Development. In addition, from 1988 through 1991, Dr. de Ziegler was an Associate Professor at the Department of Obstetrics and Gynecology, Hospital A. Beclere in Clamart, France. In 1990, Dr. de Ziegler became a Diplomat of the American Board of Obstetrics and Gynecology, Reproductive Endocrinology and Infertility. Dr. de Ziegler is a member of the American Fertility Society, the American Society for Reproductive Endocrinogolists, The American Endocrine Society, the Society of Gynecologic Investigation and the Association Francaise pour l'Etude de la Menopause. Dr. de Zeigler has also been a journal editor and an "ad hoc" reviewer for Fertility Sterility, Human Reproduction, The Journal of In Vitro Fertilization and Embryo Transfer, Contraception Fertilite Sexualite and Reproduction Humaine et Hormone.
HOWARD L. LEVINE, Pharm.D. has been Vice President-Research and Development since September, 1997. Dr. Levine has been employed by the Company since 1990. Prior to joining the Company, Dr. Levine was with the Medical Department of Pfizer Labs. Dr. Levine has held faculty and clinical practice positions at the University of Southern California, Long Island University and Duquesne University. He has instructed both pharmacy and medical students in clinical pharmacology, as well as providing numerous lectures for the continuing education of practitioners. Dr. Levine received his B.S. in Pharmacy from Oregon State University and Doctor of Pharmacy degree from the State University of New York at Buffalo in 1980.
ANNICK BLONDEAU, PH. D. has been Vice President--Regulatory Affairs since June 1996. Dr. Blondeau has been employed by the Company since 1993 as Director of Regulatory Affairs. From 1984 through 1993, Dr. Blondeau was responsible for all of the international filings for Debat Centre R&D Garches, a large French pharmaceutical company. Dr. Blondeau also worked at Pfizer as Head of the Pharmacology Department. Dr. Blondeau received her doctorate in pharmacology and physiology from the Faculte des Sciences de Potiers France in 1971.
JEAN CARVAIS, M.D. has been a director of the Company since October 1996. Since 1984, Dr. Carvais has been an independent consultant in the pharmaceutical industry. Prior to that time, Dr. Carvais was President of The Research Institute of Roger Bellon, S.A., now a division of Rhone-Poulenc Rorer. As such, he was involved in the development of a line of anti-cancer drugs, including Bleomycin and Adriamycin, as well as a new line of antibiotics and quinolones. Following the acquisition of Roger Bellon, S.A., Dr. Carvais became a member of Rhone-Poulenc's central research committee which directs the company's worldwide research and development activities.
NORMAN M. MEIER has been a director of the Company since inception and served as President and Chief Executive Officer from inception until January 2000. Beginning in January 2000, Mr. Meier will serve in a non-executive position as Chairman Emeritus. From 1971 to 1977, Mr. Meier was Vice President of Sales and Marketing for Key Pharmaceuticals, Inc., a company which had been engaged in the marketing and sales of pharmaceuticals until its sale to Schering-Plough Corporation in June 1986. From 1977 until June 1986, Mr. Meier served as a consultant to Key Pharmaceuticals, Inc. In 1960, Mr. Meier received his B.S. in Pharmacy from Columbia University. He received his M.S. in Pharmacy Administration from Long Island University in 1964. Mr. Meier is also a director of Universal Heights, Inc.
DENIS M. O'DONNELL, M.D. has been a director of the Company since January 1999. Dr. O'Donnell has been a Managing Director at Seaside Advisors LLC, a small cap investment fund, since 1997. From 1995 to 1997, Dr. O'Donnell served as President of Novavax, Inc., a pharmaceutical and drug delivery company. From 1991 to 1995, he was Vice President of IGI, Inc., a company engaged in the marketing of human and animal pharmaceuticals. Currently, Dr. O'Donnell served on the Board of Directors and the audit committees of both Novavax, Inc. and ELXSI, Inc., a restaurant and water inspection services company, and also serves on the Board of Directors of Ampersand Medical Corporation, a medical diagnostics company.
SELWYN P. OSKOWITZ, M.D. has been a director of the Company since January 1999. Dr. Oskowitz has been a clinical professor of obstetrics, gynecology and reproductive biology at Harvard Medical School since 1993. He is a reproductive endocrinologist at, and the Director of, Boston IVF, a fertility clinic with which he has been associated since 1986. Dr. Oskowitz is also a former President of the Boston Fertility Society.
ROBERT C. STRAUSS has been a director of the Company since January 1997. Since December 1997, Mr. Strauss has been the President & Chief Executive Officer of Noven Pharmaceuticals, Inc. Prior to joining Noven, Strauss was President, Chief Executive Officer and Chairman of the Board of Cordis Corporation. In the past he has held senior positions at Ivax Corporation, Touche-Ross & Company and Food Fair, Inc. Mr. Strauss received undergraduate and graduate degrees in physics and serves on the Board of Trustees for the University of Miami. Mr. Strauss holds a position on the Board of Directors of several companies including Procarda Corporation and Eclipse Surgical Corporation. Mr. Strauss also devotes his time to many civic duties, namely, the United Way of Miami-Dade County.
During 1999, all filings of Forms 3, 4 and 5 were made on a timely basis.
All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Directors receive no compensation for serving on the Board, except for the receipt of stock options and the reimbursement of reasonable expenses incurred in attending meetings. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. The Board of Directors has four standing committees, the Audit Committee, the Compensation/Stock Option Committee, the Finance Committee and Scientific Advisory Committee.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The tables, graph and descriptive information set forth below are intended to comply with the Securities and Exchange Commission compensation disclosure requirements applicable to, among other reports and filings, annual reports on Form 10-Ks. This information is being furnished with respect to the Company's Chief Executive officer ("CEO") and its four other executive officers, other than the CEO, whose salary and bonus exceeded $100,000 for the most recent fiscal year (collectively, the "Executive Officers").
SUMMARY COMPENSATION TABLE
(1) Norman M. Meier served as President and Chief Executive Officer until January 2000.
(2) Howard L. Levine was elected Vice President - Research and Development on September 29, 1997.
(3) David L. Weinberg was elected Vice President-Finance and Administration, Chief Financial Officer, Secretary and Treasurer on September 29, 1997.
OPTION GRANTS DURING 1999
(1) The estimated grant date present value reflected in the above table is determined using the Black-Scholes model. The material assumptions and adjustments incorporated in the Black-Scholes model in estimating the value of the options reflected in the above table include the following: (i) an exercise price equal to the fair market value of the underlying stock on the date of grant, (ii) an option term of three years, (iii) an interest rate of 6% that represents the interest rate on a U.S. Treasury security with a maturity date corresponding to that of the expected option term, (iv) volatility of 86.7% calculated using daily stock prices for the one-year period ending on December 31, 1999 and (v) no annualized dividends paid with respect to a share of Common Stock at the date of grant. The ultimate values of the options will depend on the future price of the Company's Common Stock, which cannot be forecast with reasonable accuracy. The actual value, if any, an optionee will realize upon exercise of an option will depend on the excess of the market value of the Company's Common Stock over the exercise price on the date the option is exercised.
AGGREGATED OPTION EXERCISES DURING 1999 AND FISCAL YEAR END OPTION VALUES
EMPLOYMENT AGREEMENTS
In January 1996, the Company entered into five-year employment agreements with each of William J. Bologna and Norman M. Meier, to serve as Chairman and President of the Company, respectively. Pursuant to their respective employment agreements, each such employee is entitled to a base salary of $250,000. In addition, each such employee was granted options to purchase 150,000 shares of the Company's Common Stock at an exercise price of $7.25. Pursuant to the terms of such agreements, each employee has agreed to dedicate his services on a substantially full-time basis and has agreed for the term of his agreement and for two years thereafter not to compete with the Company. The employment agreements were amended effective September 15, 1997 to increase the base salary to $400,000. Messrs. Bologna and Meier agreed to a voluntary 25% reduction in base salary for the six month period ending June 30, 1999. Effective January 1, 2000, Mr. Bologna's employment agreement was amended. Under the terms of the amendment, the term of Mr. Bologna's agreement was extended by one year. In January 2000, Mr. Meier's employment agreement was amended. Under the terms of the amendment, Mr. Meier will be employed by the Company for two years beginning January 1, 2000 in a non-executive position with the title, Chairman Emeritus, at a salary of $200,000 per year.
In January 2000, the Company entered into a two-year employment agreement with James J. Apostolakis to serve as Vice Chairman and President of the Company. Pursuant to his employment agreement, Mr. Apostolakis is entitled to a base salary of $200,000 per year.
In July 1995, the Company entered into a three-year employment agreement with Dominique de Ziegler, to serve as Director of Research Development. Pursuant to this agreement, Dr. de Ziegler was paid an annual salary of $203,500. As additional compensation, Dr. de Ziegler was granted options to purchase 25,000 shares of the Company's Common Stock at an exercise prices of $7.25 per share. Pursuant to the terms of such agreement, Dr. de Ziegler agreed to dedicate his services on a substantially full-time basis and has agreed for the term of his agreement and for two years thereafter not to compete with the Company. Dr. de Ziegler's contract expired in July 1998. For the calendar years
1997, 1998 and 1999, Dr. de Ziegler's salary was increased to $221,800. On December 30, 1999, the Company entered into a one-year employment agreement with Dr. de Ziegler to serve as Director of Research and Development. Pursuant to this agreement, Dr. de Ziegler will receive an annual salary of $210,000 plus a housing allowance of approximately $36,000.
The exercise price of all of the options granted pursuant to the aforementioned employment agreements are based on the closing price of the Company's Common Stock on the American Stock Exchange on the day of grant.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 29, 2000, directors and named executive officers, individually and as a group, beneficially owned Common Stock as follows:
Name of Shares, Nature of Interest Beneficial Owner and Percentage of Equity Securities(1) ----------------- ------------------------------------- Norman M. Meier (2) 1,927,850 6.3% William J. Bologna (3) 3,025,290 9.9% James J. Apostolakis (4) 1,307,078 4.4% David L. Weinberg (5) 94,000 * Dominique de Ziegler (5) 160,000 * Annick Blondeau (5) 135,000 * % Howard L. Levine (5) 300,000 1.0% Jean Carvais (5) 34,000 * Denis M. O'Donnell 11,000 * Selwyn P. Oskowitz 10,000 * Robert C. Strauss (5) 38,000 * The James J. Apostolakis Group (6) 1,524,900 5.2% c/o Lexington Shipping and Trading Corp. 950 Third Avenue, 27th Floor New York, New York 10022 The David M. Knott Group (7) 1,397,828 4.8% 485 Underhill Boulevard, Ste. 205 Syosset, New York 11791-3419 Anthony R. Campbell (8) 1,412,600 4.8% c/o TC Management 237 Park Avenue, Suite 800 New York, New York Officers and directors as a group (11 people) 7,042,218 21.4%
* Represents less than 1 percent.
(1) Includes shares issuable upon exercise of both options and warrants which are currently exercisable or which may be acquired within 60 days and shares issuable upon conversion of the Series A, Series B and Series C Preferred Stock (12.36 for the Series A Preferred Stock, 20.57 for the Series B Preferred Stock and 285.71 for the Series C Preferred Stock).
(2) Includes 1,162,250 shares issuable upon exercise of options and warrants, which are currently exercisable or which may be acquired within 60 days.
(3) Includes 20,570 shares issuable upon conversion of 1,000 shares of Series B Preferred Stock and 71,428 shares issuable upon conversion of 250 shares of Series C Preferred Stock. Includes 1,158,750 shares issuable upon exercise of options and warrants, which are currently exercisable or which may be acquired within 60 days. Includes 198,062 shares beneficially owned by Mr. Bologna's spouse.
(4) Includes 71,428 shares issuable upon conversion of 250 shares of Series C Preferred Stock. Includes 293,750 shares issuable upon exercise of warrants which are currently exercisable or which may be acquired within 60 days.
(5) Includes shares issuable upon exercise of options, which are currently exercisable or which may be acquired within 60 days, to purchase 90,000 shares with respect to Mr. Weinberg, 160,000 shares with respect to Dr. de
Ziegler, 135,000 shares with respect to Dr. Blondeau, 300,000 shares with respect to Dr. Levine, 34,000 shares with respect to Dr. Carvais, 11,000 shares with respect to Dr. O'Donnell, 10,000 shares with respect to Dr. Oskowitz and 37,000 shares with respect to Mr. Strauss.
(6) Based on a Schedule 13D dated July 6, 1998, as amended by an Amendment No. 1 to Schedule 13D dated July 16, 1998, an Amendment No. 2 dated October 2, 1998, an Amendment No. 3 dated November 4, 1998 and an Amendment No. 4 dated December 14, 1998, Messrs. James J. Apostolakis, David Ray and Bernard Marden and, by reference to a Schedule 13D separately filed by David M. Knott, Mr. Knott and certain affiliated entities and, by reference to a Schedule 13D dated separately filed by Mr. Campbell, Mr. Campbell may be deemed to have acted together as a group for certain purposes. The information contained in the Schedule 13D reflects that Messrs. Apostolakis, Ray and Marden beneficially own 935,900, 214,000 and 375,700 shares of the Company's Common Stock, respectively. And each has sole voting and dispositive power with respect to all shares beneficially owned by such person. Such persons have indicated that their filings do not constitute an admission that they are members of a "group" for any purpose.
(7) Base on a Schedule 13D dated July 6, 1998, as amended by an Amendment No. 1 to Schedule 13D dated October 2, 1998, an Amendment No. 2 dated November 23, 1998 and an Amendment No. 3 dated December 14, 1998, an Amendment No. 4 dated January 19, 1999 and an Amendment No. 5 dated January 27, 1999, Mr. Knott, Knott Partners, L.P., Dorset Management Corporation and Matterhorn Offshore Fund Limited, along with Messrs. Apostolakis, Ray, Marden and Campbell, may be deemed to have acted together as a group for certain purposes. Such persons have indicated, however, that their filings do not constitute an admission that they are members of a "group" for any purpose. The information contained in the Schedule 13D reflects that Mr. Knott beneficially owns 1,397,828 shares of the Company's Common Stock and (a) individually (i) has the sole power to vote and to dispose of (1) 52,120 shares of the Company's Common Stock held in his and his IRA's accounts and (2) 801,008 shares held in the account of Knott Partners, L.P., and (ii) shares with the respective account owners the power to dispose of (but not to vote) 600 shares held by the accounts of Mrs. Knott and her IRA, and (b) as President of Dorset Management Corporation (i) has the sole power to vote and dispose of 448,100 shares of the Company's Common Stock and (ii) shares with the respective account owner the power to vote and dispose of 96,100 shares held in the account of Matterhorn Offshore Fund Limited.
(8) Based on a Schedule 13D dated November 4, 1998, as amended by an Amendment No. 1 dated December 14, 1998, and an Amendment No. 2 dated December 18, 1998, Mr. Campbell, and Messrs. Apostolakis, Ray, Marden and Knott and certain affiliated entities may be deemed to have acted together as a group for certain purposes. The information contained in the Schedule 13D reflects that Mr. Campbell beneficially owns 1,412,600 shares of the Company's Common Stock and has sole voting and dispositive power with respect to all shares beneficially owned by such person. Additionally, Mr. Campbell individually owns 42,500 shares of Common Stock and a trust estate for the benefit of Mr. Campbell's children owns 30,000 shares of Common Stock (as to which Mr. Campbell disclaims beneficial ownership). Mr. Campbell expressly disclaims beneficial ownership of any Common Stock beneficially owned by Messrs. Apostolakis, Ray, Marden or any other person. Such persons have also indicated that their filings do not constitute an admission that they are members of a "group" for any purpose. TC Management, as the general partner of Windsor LP and manager of the TC Managed Account, may be deemed to beneficially own the shares directly owned by Windsor LP and the TC Managed Account. TC Management, Windsor LP and TC Managed Account own 1,382,600, 1,238,800 and 101,300 shares of the Company's Common Stock, respectively.
As of February 29, 2000, the Company knows of no persons other than shown above who beneficially own or exercise voting or dispositive control over 5% or more of the Company's outstanding Common Stock.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1993, the Company loaned Messrs. Meier and Bologna, $80,000 and $110,350, respectively. The notes, which bear interest at 10% per annum and are unsecured but with full recourse, were due on or before December 7, 1996. The due dates of these notes have subsequently been extended through December 7, 1999. At December 31, 1999, the balances including interest remain outstanding and total $128,667 and $178,017, respectively. At March 29, 2000 the above notes remain outstanding.
In connection with the issuance of the Series C Convertible Preferred Stock in January 1999, the Company received two notes receivable from Messrs. Meier and Bologna for $350,000 and $250,000, respectively. The notes bear interest at 5% per annum and were due on July 28, 1999. Mr. Meier's note was paid in December 1999 with interest through the date of payment and Mr. Bologna's note was paid in January 2000 with interest through the date of payment.
On January 28, 1999 and September 23, 1999, the Company granted to James Apostolakis, warrants to purchase up to an aggregate of 100,000 and 75,000 shares, respectively, of common stock at an exercise price of $4.8125 and $7.50, respectively, per share.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Indexes to financial statements and financial statement schedules appear on and S-1, respectively.
EXHIBITS 3.1 -- Restated Certificate of Incorporation of the Company, as amended (1/)
3.2 -- Amended and Restated By-laws of Company (10/)
4.1 -- Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock of the Company, dated as of January 7, 1999 (10/)
4.2 -- Securities Purchase Agreement, dated as of January 7, 1999, between the Company and each of the purchasers named on the signature pages thereto (10/)
4.3 -- Securities Purchase Agreement, dated as of January 19, 1999, among the Company, David M. Knott and Knott Partners, L.P. (10/)
4.4 -- Securities Purchase Agreement, dated as of February 1, 1999, between the Company and Windsor Partners, L.P. (10/)
4.5 -- Registration Rights Agreement, dated as of January 7, 1999, between the Company and each of the purchasers named on the signature pages thereto (10/)
4.6 -- Form of Warrant to Purchase Common Stock (10/)
4.7 -- Warrant to Purchase Common Stock granted to James J. Apostolakis on September 23, 1999
10.1 -- Employment Agreement dated as of January 1, 1996, between the Company and Norman M. Meier (6/)
10.2 -- Employment Agreement dated as of January 1, 1996, between the Company and William J. Bologna (6/)
10.3 -- 1988 Stock Option Plan, as amended, of the Company (4/)
10.4 -- 1996 Long-term Performance Plan (7/)
10.5 -- License and Supply Agreement between Warner-Lambert Company and the Company dated December 5, 1991 (3/)
10.6 -- Asset Purchase, License and Option Agreement, dated November 22, 1989 (1/)
10.7 -- Employment Agreement dated as of April 15, 1997, between the Company and Nicholas A. Buoniconti (8/)
10.8 -- License and Supply Agreement for Crinone between Columbia Laboratories, Inc. (Bermuda) Ltd. and American Home Products dated as of May 21, 1995 (5/)
10.9 -- Addendum to Employment Agreement dated as of September 1, 1997, between the Company and Norman M. Meier (8/)
10.10 -- Addendum to Employment Agreement dated as of September 1, 1997, between the Company and William J. Bologna (8/)
10.11 -- Addendum to Employment Agreement dated as of September 1, 1997, between the Company and Nicholas A. Buoniconti (8/)
10.12 -- Convertible Note Purchase Agreement, 7 1/8% Convertible Subordinated Note due March 15, 2005 and Registration Rights Agreement all dated as of March 16, 1998 between the Company and SBC Warburg Dillon Read Inc. (9/)
10.13 -- Termination Agreement dated as of April 1, 1998 between the Company and the Warner-Lambert Company (9/)
10.14 -- Addendum to Employment Agreement dated as of October 8, 1998, between the Company and Nicholas A. Buoniconti. (10/)
10.15 -- Agreement dated as of December 14, 1998, by and among Columbia Laboratories, Inc., William J. Bologna, Norman M. Meier, James J. Apostolakis, David Ray, Bernard Marden, Anthony R. Campbell, David M. Knott and Knott Partners, L.P. (10/)
10.16 -- License and Supply Agreement for Crinone between Columbia Laboratories (Bermuda) Limited and Ares Trading S.A. dated as of May 20, 1999
10.17 -- Addendum to Employment Agreement dated as of January 1, 2000 between the Company and Norman M. Meier
10.18 -- Addendum to Employment Agreement dated as of January 1, 2000 between the Company and William J. Bologna
10.19 -- Employment Agreement dated as of January 1, 2000 between the Company and James J. Apostolakis
10.20 -- Employment Agreement dated December 30, 1999 between the Company and Dominique de Ziegler
10.21 -- Settlement Agreement and Release dated as of March 16, 2000 between Columbia Laboratories (Bermuda) Ltd. and Lake Consumer Products, Inc.
21 -- Subsidiaries of the Company
27 -- Financial Data Schedule
1/ Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-31962) declared effective on May 14, 1990.
2/ Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990.
3/ Incorporated by reference to the Registrant's Current Report on Form 8-K, filed on January 2, 1992.
4/ Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
5/ Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-60123) declared effective August 28, 1995.
6/ Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
7/ Incorporated by reference to the Registrant's Proxy Statement dated August 26, 1996.
8/ Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended December 31, 1997.
9/ Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
10/ Incorporated by referenced to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998.
REPORTS ON FORM 8-K
On November 3, 1999, the Company filed a Form 8-K in which it exhibited its bi-monthly stockholders newsletter.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COLUMBIA LABORATORIES, INC.
Date: March 29, 2000 By: /s/ David L. Weinberg ---------------------------- ------------------------------
David L. Weinberg, Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES
Page
Report of Independent Certified Public Accountants
Report of Independent Certified Public Accountants
Consolidated Balance Sheets As of December 31, 1999 and 1998
Consolidated Statements of Operations for the Three Years Ended December 31, 1999
Consolidated Statements of Comprehensive Operations for the Three Years Ended December 31, 1999
Consolidated Statements of Stockholders' Equity (Deficiency) for the Three Years Ended December 31, 1999
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1999
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Columbia Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Columbia Laboratories, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, comprehensive operations, stockholders' equity (deficiency) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Columbia Laboratories, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York February 18, 2000, except for the first paragraph under the caption "Legal Proceedings" in Note 6 as to which the date is March 16, 2000
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Columbia Laboratories, Inc.:
We have audited the accompanying consolidated statements of operations, comprehensive operations, stockholders' equity (deficiency) and cash flows of Columbia Laboratories, Inc. (a Delaware corporation) and Subsidiaries for the year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Columbia Laboratories, Inc. and Subsidiaries for the year ended December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida, February 13, 1998.
COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
ASSETS
(Continued)
COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
The accompanying notes to consolidated financial statements are an integral part of these statements.
COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
The accompanying notes to consolidated financial statements are an integral part of these statements.
COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
The accompanying notes to consolidated financial statements are an integral part of these statements.
COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
(Continued)
COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
The accompanying notes to consolidated financial statements are an integral part of these statements.
COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
(Continued)
COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
(Continued)
The accompanying notes to consolidated financial statements are an integral part of these statements
COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - ----------------------------------------------
Organization- ------------
Columbia Laboratories, Inc. (the "Company") was incorporated as a Delaware corporation in December 1986. The Company's objective is to develop unique pharmaceutical products that treat female specific diseases and conditions including infertility, dysmenorrhea, endometriosis, hormonal deficiencies and the prevention of sexually transmitted diseases. Columbia's research in endocrinology has also led to the development of a product to treat "Andropause" in men. Columbia's products primarily utilize the Company's patented bioadhesive delivery technology.
Principles of Consolidation- ---------------------------
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Accounting Estimates- --------------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency- ----------------
The assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at current exchange rates and revenue and expense items are translated at average rates of exchange prevailing during the period. Resulting translation adjustments are accumulated as a separate component of stockholders' equity.
Inventories- -----------
Inventories are stated at the lower of cost (first-in, first-out) or market. Components of inventory cost include materials, labor and manufacturing overhead. Inventories consist of the following:
December 31, ------------------------------------------- 1999 1998 --------------- --------------- Finished goods $1,029,574 $1,550,917 Raw materials 819,242 860,517 --------------- --------------- $1,848,816 $2,411,434 =============== ===============
Property and Equipment- ----------------------
Property and equipment are stated at cost less accumulated depreciation. Leasehold improvements are amortized over the life of the respective leases. Depreciation is computed on the straight-line basis over the estimated useful lives of the respective assets, as follows: Years ------- Machinery and equipment 5 - 10 Furniture and fixtures 5
Costs of major additions and improvements are capitalized and expenditures for maintenance and repairs which do not extend the life of the assets are expensed. Upon sale or disposition of property and equipment, the cost and related accumulated depreciation are eliminated from the accounts and any resultant gain or loss is credited or charged to operations.
INTANGIBLE ASSETS-
Intangible assets consist of the following: December 31, ----------------------------------- 1999 1998 --------------- --------------- Patents $2,600,000 $2,600,000 Trademarks 4,956,644 4,956,644 Licensing rights 100,000 - --------------- --------------- 7,656,644 7,556,644 Less accumulated amortization (2,796,432) (2,273,367) --------------- --------------- $4,860,212 $5,283,277 =============== ===============
Patents are being amortized on a straight-line basis over their remaining lives (through 2003). Trademarks are being amortized on a straight-line basis over ten years to fifteen years. Licensing rights are being amortized over a period of five years.
In April 1998, the Company and the Warner-Lambert Company signed an agreement terminating their December 1991 license and supply agreement under which the Warner-Lambert Company had distributed Replens, a vaginal moisturizer which had been developed by the Company. Under the terms of the termination agreement, the Company agreed to pay $4.6 million for the right to reacquire the product Replens, effective on April 9, 1998. The $4.6 million cost has been capitalized and is being amortized over a 15 year period, which represents the remaining term on the terminated December 1991 license and the patent underlying the product.
Long-lived Assets- -----------------
Following the acquisition of any long-lived assets, the Company continually evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of the long-lived asset may warrant revision or that the remaining balance of the long-lived asset may not be recoverable. When factors indicate that a long-lived asset may be impaired, the Company uses an estimate of the underlying product's future cash flows, including amounts to be received over the remaining life of the long-lived asset from license fees, royalty income, and related deferred revenue, in measuring whether the long-lived asset is recoverable. Unrecoverable amounts are charged to operations.
Income Taxes- ------------
The reconciliation of the effective income tax rate to the Federal statutory rate is as follows:
1999 1998 1997 ----------- ------------ ------------ Federal income tax rate (34.0)% (34.0)% 34.0% Increase in valuation allowance 34.0 34.0 -- Utilization of net operating loss carryover -- -- (34.0) U.S. Alternative Minimum Tax 3.2 -- 10.0 ----------- ------------ ------------ Effective income tax rate 3.2% 0.0% 10.0% =========== ============ ============
As of December 31, 1999, the Company has U.S. tax net operating loss carryforwards of approximately $45 million which expire through 2013. The Company also has unused tax credits of approximately $949,000 which expire at
various dates through 2012. Utilization of net operating loss carryforwards may be limited in any year due to limitations in the Internal Revenue Code. Accordingly, the Company recorded a $69,000 and an $85,000 alternative minimum tax provision for U.S. Federal taxes in 1999 and 1997, respectively.
As of December 31, 1999 and 1998, other assets in the accompanying consolidated balance sheets include deferred tax assets of approximately $17 million and $18 million, respectively, (comprised primarily of a net operating loss carryforward) for which a valuation allowance has been recorded since the realizability of the deferred tax assets are not determinable.
Revenue Recognition- -------------------
Sales are recorded as products are shipped and services are rendered. Royalties and additional monies owed to the Company based on the strategic alliance partners sales are recorded as revenue as sales are made by the strategic alliance partners.
License Fees- ------------
License fees are recognized as other income when the Company has no further obligations with respect to the payments and thus, the earnings process is complete.
Advertising Expense- -------------------
All costs associated with advertising and promoting products are expensed in the year incurred. Advertising and promotion expense was approximately $858,000 in 1999, $758,000 in 1998 and $460,000 in 1997.
Research and Development Costs- ------------------------------
Company sponsored research and development costs related to future products are expensed as incurred. Costs related to research and development contracts are charged to cost of sales upon recognition of the related revenue.
Income/Loss Per Share- ---------------------
Basic income per share is computed by dividing net income less preferred dividends by the weighted average number of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period assuming the exercise or conversion of all securities that are exercisable or convertible into common stock. Basic loss per share is computed by dividing the net loss plus preferred dividends by the weighted average number of shares of common stock outstanding during the period. Shares to be issued upon the exercise of the outstanding options and warrants or the conversion of the preferred stock are not included in the computation of loss per share as their effect is antidilutive.
Statements of Cash Flows- ------------------------
For purposes of the statements of cash flows, the Company considers all investments purchased with an original maturity of three months or less to be cash equivalents.
Stock-Based Compensation- ------------------------
Under the provisions of Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation", companies can either measure the compensation cost of equity instruments issued under employee compensation plans using a fair value based method, or can continue to recognize compensation cost using the intrinsic value method under the provisions of Accounting Principles Board Opinion ("APB") No. 25. However, if the provisions of APB No. 25 are continued, pro forma disclosure of net income or loss and earnings or loss per share must be presented in the financial statements as if the fair value method had been applied. For the three years ended
December 31, 1999, the Company has recognized compensation costs under the provisions of APB No. 25, and has provided the expanded disclosure required by SFAS No. 123 (see Note 4).
Recent Accounting Pronouncements:
The Company does not believe that any recently issued, but not yet effective accounting standards will have a material effect on the Company's consolidated financial position, results of operations or cash flows.
(2) STRATEGIC ALLIANCE AGREEMENTS:
In May 1995, the Company entered into a worldwide, except for South Africa, license and supply agreement with American Home Products Corporation ("AHP") under which the Wyeth-Ayerst Laboratories division of AHP marketed Crinone. Under the terms of the agreement, the Company earned $7 million in milestone payments in 1997 and expects to receive additional milestone payments in the future. The Company also supplies Crinone to AHP at a price equal to 30% of AHP's net selling price. On July 2, 1999, AHP assigned the license and supply agreement to Ares-Serono, a Swiss pharmaceutical company. The Company will supply Crinone to Ares-Serono under the same terms as in the agreement with AHP.
The Company has also entered into strategic alliance agreements for the marketing and distribution of Replens and Advantage-S with various pharmaceutical companies. Pursuant to these agreements, the Company has received advance payments, of which $100,000 and $578,150, respectively, are reflected as deferred revenue in the accompanying December 31, 1999 and 1998 consolidated balance sheets. These advance payments will be recognized as products are shipped to the applicable strategic alliance partners or as sales are made by the strategic alliance partners.
In March 1999, the Company entered into a license and supply agreement with Mipharm SpA under which Mipharm SpA will be the exclusive marketer of the Company's previously unlicensed women's healthcare products in Italy, Portugal, Greece and Ireland with a right of first refusal for Spain. Under the terms of the agreement, the Company has received $462,500, net of expenses, and expects to receive future milestone payments as products are made available by the Company.
(3) CONVERTIBLE SUBORDINATED NOTE PAYABLE:
On March 16, 1998, the Company issued to an institutional investor a $10 million convertible subordinated note due March 15, 2005. The note is subordinate to other senior securities of the Company and bears interest at 7 1/8% which is payable semi-annually on March 15 and September 15. The note is convertible into 662,032 shares of common stock at a price equal to $15.105 per share. The Company also granted certain registration rights to the investor, under which the earliest the shares underlying the note could be registered would be March 19,1999. The carrying amount of the Company's convertible subordinated note payable approximates fair value using the Company's estimated incremental borrowing rate.
(4) STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred Stock-
In November 1989, the Company completed a private placement of 151,000 shares of Series A Convertible Preferred Stock ("Series A Preferred Stock"). The Series A Preferred Stock pays cumulative dividends at a rate of 8% per annum payable quarterly and each share is convertible into 12.36 shares of Common Stock.
In August 1991, the Company completed a private placement of 150,000 shares of Series B Convertible Preferred Stock ("Series B Preferred Stock"). Each share of Series B Preferred Stock is convertible into 20.57 shares of Common Stock.
Upon liquidation of the Company, the holders of the Series A and Series B Preferred Stock are entitled to $100 per share. In addition, the holders of Series A Preferred Stock are entitled to accumulated unpaid dividends. The Series A
Preferred Stock shares are redeemable for cash, at the option of the Company, at specified redemption prices. The Series B Preferred Stock will be automatically converted into Common Stock upon the occurrence of certain events. Holders of the Series A and Series B Preferred Stock are entitled to one vote for each share of Common Stock into which the preferred stock is convertible.
In January 1999, the Company raised approximately $6.4 million, net of expenses from the issuance and sale of Series C Convertible Preferred Stock ("Series C Preferred Stock"). The Series C Preferred Stock, sold to twenty-four accredited investors, has a stated value of $1,000 per share. The Series C Preferred Stock is convertible into common stock at the lower of: (i) $3.50 per common share and (ii) 100% of the average of the closing prices during the three trading days immediately preceding the conversion notice. If conversion is based on the $3.50 conversion price, conversion may take place after the underlying common stock is registered. If conversion is based on the alternative calculation, conversion cannot take place for fifteen months. The Series C Preferred Stock pays a 5% dividend, payable quarterly in arrears on the last day of the quarter.
Warrants- --------
As of December 31, 1999, the Company had warrants outstanding for the purchase of 750,853 shares of Common Stock. Information on outstanding warrants is as follows:
Exercise Price ----- $ 3.50 198,100 4.81 225,000 5.00 120,000 7.06 12,500 7.50 75,000 10.78 60,253 16.00 20,000 18.00 20,000 20.00 20,000 ---------- 750,853 ==========
All the warrants are exercisable as of December 31, 1999.
Stock Option Plan- -----------------
All employees, officers, directors and consultants of the Company or any subsidiary were eligible to participate in the Columbia Laboratories, Inc. 1988 Stock Option Plan, as amended (the "Plan"). Under the Plan, a total of 5,000,000 shares of Common Stock were authorized for issuance upon exercise of the options. As of October 1996, no further options will be granted pursuant to this Plan.
In October 1996, the Company adopted the 1996 Long-term Performance Plan ("Performance Plan") which provides for the grant of stock options, stock appreciation rights and restricted stock to certain designated employees of the Company, non-employee directors of the Company and certain other persons performing significant services for the Company as designated by the Compensation/Stock Option Committee of the Board of Directors. Pursuant to the Performance Plan, an aggregate of 3,000,000 shares of Common Stock have been reserved for issuance.
A summary of the status of the Company's two stock option plans as of December 31, 1999, 1998 and 1997 and changes during the years ending on those dates is presented below:
The following table summarizes information about stock options outstanding at December 31, 1999:
The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost been determined based on the fair value at the grant dates for those awards consistent with the method of FASB Statement 123, the Company's net income or loss per share would have been decreased or increased to the pro forma amounts indicated below:
The estimated grant date present value reflected in the above table is determined using the Black-Scholes model. The material assumptions and adjustments incorporated in the Black-Scholes model in estimating the value of the options reflected in the above table include the following: (i) an exercise price equal to the fair market value of the underlying stock on the dates of grant, (ii) an option term of three years, (iii) a risk free rate of 6% that represents the interest rate on a U.S. Treasury security with a maturity date corresponding to that of the option term, (iv) volatility of 86.7% for 1999 and 55% for 1998 and 1997 and (v) no annualized dividends paid with respect to a share of Common Stock at the date of grant. The ultimate values of the options will depend on the future price of the Company's Common Stock, which cannot be forecast with reasonable accuracy. The actual value, if any, an
optionee will realize upon exercise of an option will depend on the excess of the market value of the Company's Common Stock over the exercise price on the date the option is exercised.
(5) INCOME (LOSS) PER COMMON AND POTENTIAL COMMON SHARE:
The calculation of basic and diluted income (loss) per common and potential common share is as follows:
(6) COMMITMENTS AND CONTINGENCIES:
Cash and cash equivalents-
The Company maintains its cash in bank deposit accounts which at times may exceed federally insured limits. The Company believes that there is no credit risk with respect to these accounts.
Leases- ------
The Company leases office space, apartments and office equipment under noncancelable operating leases. Lease expense for each of the three years ended December 31, 1999, 1998 and 1997 totaled $641,569, $813,167 and $679,791 respectively. Future minimum lease payments as of December 31, 1999 are as follows:
2000 $ 612,774 2001 423,409 2002 209,158 2003 132,131 2004 60,684 Thereafter 9,425 ---------- $1,447,581
Royalties- ---------
In 1989, the Company purchased the assets of Bio-Mimetics, Inc. which consisted of the patents underlying the Company's Bioadhesive Delivery System, other patent applications and related technology, for $2,600,000, in the form of 9% convertible debentures which were converted into 500,000 shares of Common Stock during 1991, and $100,000 in cash. In addition, Bio-Mimetics, Inc. receives a royalty equal to two percent of the net sales of products based on the Bioadhesive Delivery System up to an aggregate amount of $7,500,000. In addition, beginning in March 1995, the Company agreed to prepay a portion of the remaining royalty obligation if certain conditions are met. The Company may not assign the patents underlying the Bioadhesive Delivery System without the prior written consent of Bio-Mimetics, Inc. until the aggregate royalties have been paid.
In May 1989, the Company signed an exclusive agreement to license the U.S. and Canadian marketing rights for Diasorb(R), a unique pediatric antidiarrheal product formerly marketed by Schering-Plough Corporation. Under the terms of the agreement, the Company is obligated to pay a royalty equal to 5% of the net sales of Diasorb.
Employment Agreements- ---------------------
The Company has employment agreements with certain employees, some of whom are also stockholders of the Company. The remaining terms of the employment agreements range from one to two years. Future base compensation to be paid under these agreements as of December 31, 1999 are as follows:
2000 $1,016,000 2001 801,750 ---------- $1,817,750
During 1993, the Company's stockholders approved an Incentive Compensation Plan covering all employees pursuant to which an aggregate of 5% of pretax earnings of the Company for any year will be awarded to designated employees of the Company. As a result of the Company's income in 1997, a provision for 5% of pretax income was included in general and administrative expenses. No provision was required in 1999 and 1998.
Legal Proceedings- -----------------
The Company filed an action in the United States District Court for the Southern District of Florida ("Florida Action") in November 1997 seeking a declaratory judgement on certain issues related to its relationship with Lake Consumer Products, Inc. ("Lake") as governed in the contract between the Company and Lake. Lake filed an action against the Company in the United States District Court, Northern District of Illinois ("Illinois Action") , for damages alleged by Lake to have been suffered by it as a result of the FDA's allegations in July 1997 that the Company's nonoxynol-9 product, then marketed by Lake under the tradename Advantage 24, was not permitted to be sold under the monograph. The Illinois Action was dismissed by the Illinois Court and transferred to the Florida Court for consolidation as a counterclaim in the Florida Action. On March 16, 2000, the Company and Lake settled all outstanding issues in the consolidated Florida Action by the Company having bought out the contract for the sum of
$1,200,000 ($600,000 in cash and $600,000 in the form of Company common stock). As a result, the Company reacquired the U.S. rights to the Advantage product and both parties agreed to have their legal actions dismissed.
Other claims and law suits have been filed against the Company. In the opinion of management and counsel, none of these lawsuits are material and they are all adequately reserved for or covered by insurance or, if not so covered, are without any or have little merit or involve such amounts that if disposed of unfavorably would not have a material adverse effect on the Company.
(7) OTHER RELATED-PARTY TRANSACTION:
During 1993, the Company loaned two individuals who are officers, directors and stockholders of the Company an aggregate of $190,350. These notes, which bear interest at 10% per annum and which were due on or before December 7, 1997 were subsequently extended through December 7, 1999. At December 31, 1999, the aggregate balance of $306,684 remains outstanding and is included in other current assets in the accompanying 1999 consolidated balance sheet.
In connection with the issuance of the Series C Convertible Preferred Stock in January 1999, the Company received two notes receivable from Norman M. Meier, the President and Chief Executive Officer, and from William J. Bologna, the Chairman of the Board, for $350,000 and $250,000, respectively. The notes bear interest at 5% per annum and were due on July 28, 1999. Mr. Meier's note was paid in December 1999 with interest through the date of payment and Mr. Bologna's note was paid in January 2000 with interest through the date of payment.
The above notes are reflected in the accompanying balance sheets at their face value plus interest which approximates fair value.
(8) SEGMENT INFORMATION: - -----------------------
The Company and its subsidiaries are engaged in one line of business, the development and sale of pharmaceutical products. Two customers (under the same contract) accounted for approximately 56% of 1999 consolidated net sales. One customer accounted for approximately 25% and 68% of 1998 and 1997 consolidated net sales, respectively. Another customer accounted for approximately 9%, 15% and 5% of 1999, 1998 and 1997 consolidated net sales, respectively. A third customer accounted for approximately 5%, of 1999, consolidated net sales. The following table shows selected information by geographic area:
(9) SUBSEQUENT EVENT:
In October 1999, the Company engaged an investment banking firm to act as its exclusive advisor in a planned divestiture of certain of the Company's over-the-counter products. Subsequent to year-end, the Company has received a letter of intent from a prospective party who is in the process of completing due diligence procedures. The terms of the agreement are being negotiated.
COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULE
Page ----
Report of Independent Certified Public Accountants S-2
Report of Independent Certified Public Accountants S-3
Schedule II - Valuation and Qualifying Accounts and Reserves S-4
S-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Columbia Laboratories, Inc.:
We have audited in accordance with generally accepted auditing standards, the 1999 and 1998 financial statements of Columbia Laboratories, Inc. and Subsidiaries included in this Form 10-K and have issued our report thereon dated February 18, 2000, except for the first paragraph under the caption "Legal Proceedings" in Note 6 as to which the date is March 16, 2000. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The years ended December 31, 1999 and 1998 portions of this schedule have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York February 18, 2000, except for the first paragraph under the caption "Legal Proceedings" in Note 6 as to which the date is March 16, 2000
S-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Columbia Laboratories, Inc.:
We have audited in accordance with generally accepted auditing standards, the 1997 financial statements of Columbia Laboratories, Inc. and Subsidiaries included in this Form 10-K and have issued our report thereon dated February 13, 1998. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The year ended December 31, 1997 portion of this schedule have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida, February 13, 1998.
S-3
COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
S-4
INDEX TO EXHIBITS
EXHIBIT NUMBERS
4.7 -- Warrant to Purchase Common Stock granted to James J. Apostolakis on September 23, 1999
10.16 -- License and Supply Agreement for Crinone between Columbia Laboratories (Bermuda) Limited and Ares Trading S.A. dated as of May 20, 1999
10.17 -- Addendum to Employment Agreement dated as of January 1, 2000 between the Company and Norman M. Meier
10.18 -- Addendum to Employment Agreement dated as of January 1, 2000 between the Company and William J. Bologna
10.19 -- Employment Agreement dated as of January 1, 2000, between the Company and James J. Apostolakis
10.20 -- Employment Agreement dated December 30, 1999 between the Company and Dominique de Ziegler
10.21 -- Settlement Agreement and Release dated as of March 16, 2000 between Columbia Laboratories (Bermuda) Ltd. and Lake Consumer Products, Inc.
21 -- Subsidiaries of the Company
27 -- Financial Data Schedule