-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AHrYWHtICV89512zxbYGYwEgC1/S4UP5Qba/94s78+L0JssUArZQl7j7HSNmQqHB 2JboEtThfyj+KH09I3tjWg== 0001021408-01-505385.txt : 20010815 0001021408-01-505385.hdr.sgml : 20010815 ACCESSION NUMBER: 0001021408-01-505385 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYPRESS BIOSCIENCE INC CENTRAL INDEX KEY: 0000716054 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 222389839 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12943 FILM NUMBER: 1713498 BUSINESS ADDRESS: STREET 1: 4350 EXECUTIVE DRIVE,SUITE 325 CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 2062989400 MAIL ADDRESS: STREET 1: 401 QUEEN ANNE AVE NORTH CITY: SEATTLE STATE: WA ZIP: 98109 FORMER COMPANY: FORMER CONFORMED NAME: IMRE CORP DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2001, or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________________ to _________________ Commission File Number 0-12943 CYPRESS BIOSCIENCE, INC. (Exact Name of Registrant as specified in its charter) DELAWARE 22-2389839 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4350 Executive Drive, Suite 325, San Diego, California 92121 (Address of principal executive offices) (zip code) (858) 452-2323 (Registrant's telephone number including area code) __________________________________ Indicate by check (X) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- At August 9, 2001, 6,342,553 shares of Common Stock of the Registrant were outstanding. This filing, without exhibits, contains 15 pages. TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page ---- Item 1 - Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000..................................... 3 Consolidated Statements of Operations for the three and six months ended June 30, 2001 and 2000 (unaudited)................................. 4 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 (unaudited)............................................ 5 Notes to Consolidated Financial Statements (unaudited).................................. 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 9 Item 3 - Quantitative and Qualitative Disclosures About Market Risk............................... 12 PART II - OTHER INFORMATION Item 1 - Legal Proceedings........................................................................ 13 Item 2 - Changes in Securities and Use of Proceeds............................................... 13 Item 3 - Defaults Upon Senior Securities.......................................................... 13 Item 4 - Submission of Matters to a Vote of Security Holders ..................................... 13 Item 5 - Other Information........................................................................ 14 Item 6 - Exhibits and Reports on Form 8-K......................................................... 14 Signatures........................................................................................ 15
2 CYPRESS BIOSCIENCE, INC. CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2001 2000 ----------------- --------------- (Unaudited) (Note) ASSETS Current assets: Cash and cash equivalents $ 10,169,943 $ 7,102,317 Restricted cash 1,366,584 - Accounts receivable from agreement with Fresenius 15,901 439,315 Prepaid expenses 73,622 104,178 Assets held for sale - 26,739 Debt acquisition costs 34,898 76,612 ------------ ------------ Total current assets 11,660,948 7,749,161 Property and equipment, net 128,849 102,048 Other assets 51,172 40,062 ------------ ------------ Total assets $ 11,840,969 $ 7,891,271 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 280,742 $ 936,251 Accrued compensation 74,916 171,360 Accrued liabilities 458,761 267,182 Current portion of deferred revenue from restructured Fresenius agreement 1,600,000 - Current portion of convertible debentures - 275,000 Current portion of long-term obligations 1,346,161 1,578,562 ------------ ------------ Total current liabilities 3,760,580 3,228,355 Long term portion of deferred revenue from restructured Fresenius agreement 5,600,000 - Long-term obligation, net of current portion - 563,688 Stockholders' equity: Common stock, $.02 par value; 75,000,000 shares authorized, 6,342,553 and 6,105,350 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 126,851 122,107 Additional paid-in capital 100,756,583 100,269,714 Accumulated deficit (98,403,045) (96,292,593) ------------ ------------ Total stockholders' equity 2,480,389 4,099,228 ------------ ------------ Total liabilities and stockholders' equity $ 11,840,969 $ 7,891,271 ============ ============
See accompanying Notes to Consolidated Financial Statements. Note: The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles. 3 CYPRESS BIOSCIENCE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Quarter ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ------------ -------------- --------------- --------------- Revenue: Revenue from restructured $ 400,000 $ - $ 800,000 $ - Fresenius agreement Revenue from Fresenius agreement - 847,878 - 1,414,745 ---------- ------------ ----------- ----------- Total revenue 400,000 847,878 800,000 1,414,745 Costs and expenses: Production costs - 115,859 - 179,569 Sales and marketing - 1,637,735 - 3,560,342 Research and development 285,786 435,119 457,009 1,282,219 General and administrative 1,109,258 748,271 2,551,542 1,480,108 ---------- ------------ ----------- ----------- Total costs and expenses 1,395,044 2,936,984 3,008,551 6,502,238 Other income (expense): Interest and other income, net 140,005 198,154 272,295 351,855 Interest expense (75,436) (157,742) (174,196) (294,466) ---------- ------------ ----------- ----------- 64,569 40,412 98,099 57,389 ---------- ------------ ----------- ----------- Net loss $ (930,475) $(2,048,694) $(2,110,452) $(5,030,104) ========== =========== =========== =========== Net loss per share $ (0.15) $ (0.34) $(0.34) $ (0.84) ========== =========== =========== =========== Shares used in computing net loss per share 6,203,526 6,080,986 6,155,745 6,016,633 ========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements. 4 CYPRESS BIOSCIENCE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 2001 2000 ------------- ---------------- Operating Activities Net loss $(2,110,452) $(5,030,104) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 39,209 55,238 Loss on sale of asset to Fresenius 16,714 - Assets held for sale (1,975) - Stock and stock options issued for services and expenses 345,966 107,739 Deferred revenue from Fresenius (800,000) - Changes in operating assets and liabilities, net (77,218) 154,536 ----------- ------------ Net cash used by operating activities (2,587,756) (4,712,591) Investing Activities Proceeds from restructure of Fresenius agreement 8,000,000 - Proceeds from sale of assets to Fresenius 12,000 - Purchase of equipment (64,592) (11,708) ----------- ------------ Net cash provided by (used by) investing activities 7,947,408 (11,708) Financing Activities Payment of notes payable (1,071,089) (246,235) Cash restricted for debt repayment (1,366,584) - Deferred financing costs - 82,415 Proceeds from exercise of stock options and warrants 145,647 4,453,527 Payment of capital lease obligations - (3,001) ----------- ------------ Net cash provided by (used by) financing activities (2,292,026) 4,286,706 Increase in cash and cash equivalents 3,067,626 (437,593) Cash and cash equivalents at beginning of period 7,102,317 11,569,966 ----------- ------------ Cash and cash equivalents at end of period $10,169,943 $11,132,373 =========== =========== Supplemental disclosure of cash flow information Interest paid $ 137,461 $ 205,469 =========== ===========
See accompanying Notes to Consolidated Financial Statements. 5 CYPRESS BIOSCIENCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Formation and Business of the Company The accompanying consolidated financial statements have been prepared by us (the management of Cypress Bioscience, Inc.) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the SEC. The consolidated financial statements include our accounts and those of our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. In the opinion of our management, all adjustments necessary for a fair presentation of the accompanying unaudited financial statements are reflected herein. All such adjustments are normal and recurring in nature. Interim results are not necessarily indicative of results for the full year. For more complete financial information, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our 2000 Annual Report on Form 10-K filed with the SEC. We are focusing our expertise and resources on developing products that improve the diagnosis and treatment of patients with fibromyalgia syndrome (FMS) and other pain disorders. We recently licensed our first drug candidate for development in the treatment of FMS, and have on-going internal research programs for FMS. In addition, we are evaluating our alternatives with respect to Cyplex(TM), a potential alternative to traditional platelet transfusions. We have in the past evaluated various possible strategic transactions, including the potential acquisitions of products, technologies and companies, and we expect to continue to do so in the future. 2. Fresenius Agreements Effective January 1, 2001, Cypress restructured its PROSORBA column partnership agreement with Fresenius AG of Bad Homburg, Germany and its U.S. subsidiary, Fresenius HemoCare, Inc. (Fresenius). Under the revised agreement, Fresenius is responsible for all PROSORBA column research and development, sales, marketing and clinical efforts worldwide. Cypress received an upfront payment of $8.0 million for certain assets and a partial prepayment of royalties related to the PROSORBA column. Cypress has the potential to receive future royalties for the life of the PROSORBA column if the sales exceed certain thresholds. The restructured agreement eliminates the profit and expense sharing arrangement with Fresenius for PROSORBA column sales and substitutes royalty provisions. Revenues from the first two quarters of 2000 consisted of reimbursement to Cypress by Fresenius of allowable expenses under the original agreement for royalty, research and development and sales and marketing expenses plus 50% share of any remaining net profit under the agreement. Revenues for the first two quarters of 2001 consisted of the amortization of the upfront payment from the restructured Fresenius agreement on a straight-line basis over a five- year term. The unamortized upfront payment amount is being recorded as deferred revenue from the restructured Fresenius agreement. As a result, revenues for the 2000 and 2001 periods are not directly comparable. 6 3. Net Loss Per Share The computation of net loss per share is based on the weighted average number of shares of common stock outstanding for each period. Common stock equivalents related to options, warrants and convertible debentures (which matured in March 2001 and are no longer outstanding) are excluded, as their effect is antidilutive. 4. Long Term Obligation The long-term obligation and current portion of long term obligations consist of a fully amortizing term loan that will be repaid in June 2002. Prior to the sale of PROSORBA related assets to Fresenius the loan was secured by certain assets of the Company. In January 2001, the debt covenants were restructured and the loan was secured with a $2.1 million interest bearing restricted cash account held as collateral by the lender. This interest bearing restricted cash will be used to retire the loan over its term. The 7% convertible debentures, which were due in March 2001, were repaid in full, in accordance with the terms of the debenture agreement, in the amount of $275,000. 5. Equity In June 2001, we received proceeds of approximately $146,000 in cash and $190,000 in a full recourse interest-bearing note from the exercise of options to purchase 134,248 shares of the Company's common stock. These shares were exercised in accordance with the terms of an stock option cancel and regrant program. Participants in the cancel and regrant program were required to forfeit existing options for new options at the exercise price equal to the fair market value of the common stock as of the date of the regrant. The new options have a four-year term as opposed to the original options, which had a ten-year term. In addition, participants were required to immediately exercise 20% of the regranted options. As a result of the option cancel and regrant program, which caused the options to be accounted as variable options, approximately $194,000, of expense was recorded this quarter as additional paid in capital and general and administrative expense to reflect the effect of the increase in market price of the regranted and outstanding options. 6. Subsequent Event In August 2001, Cypress signed a license agreement with Pierre Fabre Medicament (Pierre Fabre), the pharmaceutical division of bioMerieux Pierre Fabre of Paris, France. The agreement provides Cypress with an exclusive license to develop and sell any product with the compound, milnacipran, as an active ingredient, for the treatment of FMS and related chronic pain syndromes in the United States and Canada. The agreement also gives Cypress an option to expand the license to include other indications. Cypress will pay Pierre Fabre an upfront payment to license the compound. Additional payments to Pierre Fabre will be based on meeting certain clinical and regulatory milestones. If the drug is commercialized, Pierre Fabre will manufacture the active ingredient used in the 7 commercial product and Cypress will pay Pierre Fabre a transfer price and royalties based on net sales. Pierre Fabre retains the right to sell products developed by Cypress for the FMS indication outside of North America and will pay Cypress a royalty based on net sales for such marketing rights. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the following discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties. Our actual results could differ materially from those discussed below and elsewhere in this 10Q. Factors that could cause or contribute to such differences include, without limitation, those discussed in this section, as well as other sections of this 10Q, and those discussed in the our Annual Report on Form 10-K for the year ended December 31, 2000. Company Overview We are focusing our expertise and resources on developing products that improve the diagnosis and treatment of patients with fibromyalgia syndrome (FMS) and other pain disorders. We recently licensed our first drug candidate for development in the treatment of FMS, and have on-going internal research programs for FMS. In addition, we are evaluating our alternatives with respect to Cyplex(TM), a potential alternative to traditional platelet transfusions. We have in the past evaluated various possible strategic transactions, including the potential acquisitions of products, technologies and companies, and we expect to continue to do so in the future. As of June 30, 2001, we had working capital of approximately $7.9 million and an accumulated deficit of approximately $98.4 million. Our future success depends on our ability to develop and market new products for the treatment of FMS or other pain disorders as well as the success of Fresenius in marketing the PROSORBA(R) column. On January 19, 2001, we sold to Fresenius Hemocare, Inc. (Fresenius) the United States Food and Drug Administration (FDA) pre-market approvals and applications for the PROSORBA column as well as our furniture and equipment used in connection with research and development, clinical trials, quality control, and sales and marketing efforts associated with the PROSORBA column. In addition, Fresenius assumed our liability under a lease for a facility in Redmond, Washington and our obligations under contracts relating to the PROSORBA column, including our royalty obligations under assigned patent licenses. We also assigned a distribution agreement for the territory of Canada to Fresenius. We retained ownership of the patents and trademarks for the PROSORBA column. In connection with the sale of assets, we restructured the existing license agreement with Fresenius so that Fresenius assumed responsibility for the research and development, clinical trials and sales and marketing of the PROSORBA column in addition to the manufacturing responsibility that Fresenius has had since April 1999. The restructured agreement eliminates the profit sharing and expense sharing provisions and substitutes royalty provisions. At the closing, Fresenius paid us a license fee, which represents a prepayment of royalties for 10,000 columns in each of the five years beginning with 2001. In addition, we are entitled to receive royalties on any sales of columns in excess of the 10,000 columns within any of the five years and for all column sales beyond the five-year period. The license fee is not refundable to Fresenius under any circumstances. Fresenius paid approximately $8.0 million in cash for the assets, including the pre-marketing approval, and the license fee upon consummation of the transaction. 9 Prior to the amendment of the license and distribution agreement, the agreement entered into in March 1999 governed our relationship with Fresenius. The original agreement provided for the co-marketing and distribution of the PROSORBA column in the United States, and for the registration and distribution of the PROSORBA column in Europe, Latin America and subject to certain conditions, Japan and select Asian countries. The terms of the agreement with Fresenius specified joint efforts to introduce and market the PROSORBA column in the United States, with Fresenius having exclusive distribution rights and responsibility for clinical trials and registration overseas. The agreement included a 50/50 profit split in the territories other than the United States. The profit sharing was 50/50 in the United States for both the PROSORBA column and disposables sold by Fresenius for use with the PROSORBA column. Revenue from March 1999 when we entered into the original agreement with Fresenius and prior to the January 2001 revised agreement consisted of our pro rata share of PROSORBA column sales by Fresenius. Our pro rata share of PROSORBA column sales was determined as the total of allowable expenses incurred by us for royalty, research and development and sales and marketing expenses plus our share of any remaining net profit generated under the agreement. Our share of remaining net profit was calculated as the gross profit from PROSORBA column sales less reimbursed expenses incurred by Fresenius and us. Results of Operations Revenues for the quarter and six months ended June 30, 2001 totaled $400,000 and $800,000, respectively, compared to $848,000 and $1.4 million for the same period of 2000. Revenues for the first three and six months of 2001 consisted of amortization of the upfront payment of approximately $8.0 million we received under the restructured agreement with Fresenius. This upfront payment is being recognized as revenues on a straight-line basis over a five- year term. The unamortized amount of the upfront payment is recorded as deferred revenues. In contrast, revenues for the first quarter of 2000 consisted of reimbursement to us by Fresenius of our allowable expenses and our share of profits from the sale of the PROSORBA column under the original agreement. As a result, revenues for 2000 and 2001 periods are not directly comparable. In addition, we do not anticipate receiving any revenues in the third quarter other than those that will be recorded based on our restructured agreement with Fresenius. Therefore, we expect that our revenue for the third quarter will be $400,000. Research and development expenses for the quarter and six-month period ended June 30, 2001 were $286,000 and $457,000, respectively, compared to $435,000 and $1.3 million for the comparable periods in 2000. The decrease for the quarter and six-month period ended June 30, 2001 compared to the prior periods was due to the assumption of the research and development activities related to the PROSORBA column by Fresenius. Research and development expenses incurred for the quarter ended June 30, 2001 consisted of expenditures for the FMS and Cyplex programs. 10 We recently licensed our first drug candidate, milnacipran, for development in the treatment of FMS. Under the terms of the licensing agreement, Cypress will pay Pierre Fabre Medicament (Pierre Fabre), the pharmaceutical division of bioMeieux Pierre Fabre of Paris, France, an upfront payment of $750,000 in the third quarter of 2001. Assuming appropriate regulatory approvals, we expect to begin phase II clinical trials with milnacipran in FMS in early 2002. In addition, during the second quarter of 2001, we launched our genomic research program and began implementation of a database for our physician and patient registries. As a result, we anticipate that research and development costs will increase in future periods. Production costs incurred in 2000 were a result of royalties paid by us to third parties based on total PROSORBA column sales. We are no longer responsible for royalty payments to these third parties as Fresenius assumed these obligations under the restructured agreement. Sales and marketing expenses totaled $1.6 million and $3.6 million for the second quarter and six-monthly period ended June 30, 2000. There was no sales and marketing expenses incurred during 2001 due to the assumption of the sales and marketing efforts associated with the PROSORBA column by Fresenius, in accordance with the restructured agreement. We do not anticipate incurring marketing expenses until we are able to commercialize product for FMS or other pain disorders. General and administrative expenses for the quarter and six month period ended June 30, 2001 were $1.1 million and $2.6 million, respectively, compared to $748,000 and $1.5 million for the same time periods in 2000. The increase for the quarter of $361,000 and six month period of $1.1 million in general and administrative expenses was primarily due to business development activity associated completion of the research agreement with Georgetown University and effort to license drug candidates for the treatment of the FMS. We recorded a non-cash expense of approximately $194,000 in the second quarter of 2001 in connection with our stock option cancel and regrant program. We will continue to record a similar non-cash transaction in future quarters to reflect the difference between the exercise price of the regranted options, which is $2.50, and the fair market value of the options until each of the options held under the cancel and regrant program has been exercised or is terminated. We expect general and administrative costs will fluctuate from quarter to quarter depending on impact of the stock option and regrant program. Liquidity and Capital Resources Our cash and cash equivalents balance at June 30, 2001 totaled $10.2 million, compared to $7.1 million at December 31, 2000. The net increase in cash and cash equivalents was primarily due to the upfront payment from the restructured agreement with Fresenius, partially offset by cash used in operations and repayments of debt. Working capital at June 30, 2001 totaled $7.9 million, compared to $4.5 million at December 31, 2000. On August 1, 2001, we entered into a license and trademark agreement with Pierre Fabre. The agreement provides us with an exclusive license to develop and sell any product with the compound, milnacipran, as an active ingredient, for the treatment of FMS and related chronic pain syndromes in the United States and Canada. We also have an option to expand the license to include other indications. We will pay Pierre Fabre an upfront 11 payment to license the compound with the first payment of $750,000 to be made in the third quarter of 2001. Additional payments to Pierre Fabre will be based on meeting certain clinical and regulatory milestones. If the product is commercialized, Pierre Fabre will manufacture the active ingredient used in the commercial product and Cypress will pay Pierre Fabre a transfer price and royalties based on net sales. Pierre Fabre retains the right to sell products developed by Cypress for the FMS indication outside of North America and will pay Cypress a royalty based on net sales for such marketing rights. We believe our cash and cash equivalents balance on June 30, 2001, is sufficient to fund operations through mid-2002. We are actively seeking financing and considering possible strategic transactions to increase our cash position. In order to successfully develop the drug candidate that we have licensed from Pierre Fabre for the treatment of FMS and in order to acquire and develop any additional drug candidates for the treatment of FMS or other pain disorders, we will be required to raise additional capital. The amount of capital we require is dependent upon many factors, including the following: the cost of the clinical trials for the drug candidate that we have licensed from Pierre Fabre for the treatment of FMS, costs of in-licensing additional drug candidates for our FMS program, the costs associated with the clinical trials designed for any new developed and/or acquired drug candidate, results of research and development efforts, the FDA regulatory process, costs of commercialization of products and potential competitive and technological advances and levels of product sales, and the ability of Fresenius to successfully market the PROSORBA column for the treatment of RA. Because we are unable to predict the outcome of the foregoing factors, some of which are beyond our control, we are unable to estimate with certainty our mid to long-term capital needs. Although we are seeking to raise additional capital through equity or debt sources, we may not be able to raise additional capital through such sources and even if we do raise funds, these funds may not allow us to maintain our current and planned operations. And if we are able to raise capital through an equity financing, due to the recent trading price of our stock, any financing could substantially dilute our existing stockholders. If we are unable to obtain additional capital, we will be required to delay, scale back or eliminate our research activities associated with the drug candidate we have licensed from Pierre Fabre, our activities related to attempting to acquire additional drug candidates for the treatment of FMS or other pain disorders and our recent investor relations activities. Quantitative and Qualitative Disclosure About Market Risk We invest our excess cash in United States government securities and money market funds with strong credit ratings. As a result, our interest income is most sensitive to changes in the general level of United States interest rates. We do not use derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. Accordingly, we believe that, while the investment-grade securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments. 12 PART II Item 1 - Legal Proceedings From time to time we are involved in certain litigation arising out of our operations. We are not currently engaged in any legal proceedings that we expect would materially harm our business or financial condition. Item 2 - Changes in Securities and Use of Proceeds Not applicable Item 3 - Defaults Upon Senior Securities Not applicable Item 4 - Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders (the "Annual Meeting") of the Company was held on July 27, 2001. The Company had 6,911,900 shares of common stock outstanding and entitled to vote as of June 13, 2001, the date of record of the meeting. At the meeting holders of a total of 4,800,166 shares of common stock were present in person or represented by proxy. The following sets forth a brief description of each matter voted upon at the Annual Meeting and the results of the voting on each such matter: (1) For the elections of the nominees as class of 2004 directors: For Withheld Authority or Against Samuel D. Anderson 4,746,434 53,732 Jack Vaughn 4,746,434 53,732 The Company's Board of Directors is comprised of the individuals elected this year and the following directors completing the following terms: Larry J. Kessel, M.D. and Charles Nemeroff, M.D., Ph.D whose terms expire in 2002, Sheldon Drobny, Martin B. Keller, M.D and Jay D. Kranzler, M.D., Ph.D whose terms expire in 2003. (2) To ratify the Board's selection of Ernst & Young LLP to continue as the Company's independent auditors for the fiscal year ending December 31, 2001. Stockholder ratification of the selection of Ernst & Young as the Company's independent auditors is not required by the Company's Bylaws or otherwise. However, the Board is submitting the selection of Ernst & Young to the stockholders for ratification as a matter of good corporate practice. For Against Abstained 4,781,135 14,329 4,702 13 Item 5 - Other Information Not applicable Item 6 - Exhibits and Reports on Form 8-K Exhibit 10.1 Employment Agreement between the Company and John Bunfilio, M.D., Ph.D dated June 18, 2001 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Cypress Bioscience, Inc. August 14, 2001 /s/ Jay D. Kranzler ---------------------------- Chief Executive Officer, Chief Financial Officer and Chairman of the Board (Principal Executive Officer and Principal Financial and Accounting Officer) 15 EX-10.1 3 dex101.txt EMPLOYMENT AGREEMENT JOHN N. BONFIGLIO Executive Employment Agreement For John N. Bonfiglio, Ph.D. This Employment Agreement ("Agreement") is effective as of June 18, 2001 (the "Effective Date") between Cypress Bioscience, Inc. ("Employer") and John N. Bonfiglio, Ph.D. ("Executive"). RECITALS A. Employer desires assurance of the continued association and services of Executive in order to retain his experience, abilities and knowledge, and is therefore willing to engage his services on the terms and conditions set forth below. B. Executive desires to continue in the employ of Employer and is willing to do so on the terms and conditions set forth below. Therefore, in consideration of the above recitals and of the mutual promises and conditions in this Agreement, it is agreed as follows: 1. Engagement of Employment. In accordance with the terms and subject to the conditions set forth in this Agreement, Employer agrees to employ Executive, and Executive agrees to accept employment, as Chief Operating Officer and Executive Vice-President of Employer. 2. Term. Subject to earlier termination as provided in this Agreement, Executive shall be employed for a term (the "Term") of one (1) year beginning June 18, 2001 and ending June 18, 2002 provided, however, that unless the Employer or Executive give notice of failure to renew this Agreement, as provided in Sections 13.1.4 and 13.1.5, before any anniversary date of this Agreement, this Agreement's Term will be extended for an additional Term of one (1) year on the anniversary date ("Automatic Renewal Date"), and for each year thereafter. This Agreement's Term shall include any mutually agreed extensions pursuant to the proceeding sentence. 3. Place of Employment. Unless the Employer and the Executive agree otherwise in writing, during the employment Term Executive shall perform the services he is required to perform under this Agreement at Employer's offices, located at 4350 Executive Drive, Suite 325, San Diego, California; provided, however, that Employer may from time to time require Executive to travel temporarily to other locations on Employer's business. 4. Executive's Duties and Authority. Employer shall employ Executive as Chief Operating Office and Executive Vice-President. Executive shall serve in an executive capacity and shall perform such duties as are 1. consistent with his positions as Chief Operating Officer and Executive Vice- President and as may be reasonably required by Employer's Board of Directors. Such duties shall include, without limitation, leading and coordinating Employer's efforts to develop and implement strategic and operating plans for Employer; executing day-to-day general management of Employer; developing relationships with new partners, distributors, customers, and suppliers; maintaining and solidifying relationships with Employer's existing partners, distributors, customers, and suppliers; and supporting the development and growth of Employer. 5. LOYAL AND CONSCIENTIOUS PERFORMANCE; NONCOMPETITION. 5.1 Loyalty. During the Executive's employment by the Employer, the Executive shall devote Executive's full business energies, interest, abilities and productive time to the proper and efficient performance of Executive's duties under this Agreement. 5.2 Covenant not to Compete. Except with the prior written consent of the Employer's Board of Directors, the Executive will not, during the Term of this Agreement, and any period during which the Executive is receiving compensation or any other consideration from the Employer, including, but not limited to, severance pay pursuant to Section 13 herein, engage in competition with the Employer or any of its affiliates, either directly or indirectly, in any manner or capacity, as adviser, principal, agent, affiliate, promoter, partner, officer, director, employee, stockholder, owner, co-owner, consultant, or member of any association or otherwise, in any phase of the business of developing, manufacturing and marketing of products or services which are in the same field of use or which otherwise compete with the products or services or proposed products or services of the Employer or any of its affiliates. 5.3 Agreement not to Participate in Employer's Competitors. During the Term of this Agreement, the Executive agrees not to acquire, assume or participate in, directly or indirectly, any position, investment or interest known by Executive to be adverse or antagonistic to the Employer, its business or prospects, financial or otherwise or in any company, person or entity that is, directly or indirectly, in competition with the business of the Employer or any of its affiliates. Ownership by the Executive, as a passive investment, of less than two percent (2%) of the outstanding shares of capital stock of any corporation with one or more classes of its capital stock listed on a national securities exchange or publicly traded on the Nasdaq Stock Market or in the over-the-counter market shall not constitute a breach of this paragraph. 6. Executive's Compensation and Benefits. 6.1 Base Salary. During the term of this Agreement, Employer agrees to pay Executive a Base Salary ("Base Salary") of $260,000.00 per year. The Base Salary shall be payable as current salary, in pay is bi-monthly installments subject to all applicable withholdings and deductions. 6.2 Annual Base Salary Review. Employer's Board of Directors shall review Executive's Base Salary and additional benefits then being paid to Executive not less frequently then every twelve (12) months. Following such review, the Board may in its discretion increase (but shall not be required to increase) Executive's Base Salary or any other benefits, but may not 2. decrease Executive's Base Salary and additional benefits during the time he serves as Chief Operating Officer and Executive Vice-President. 6.3 Bonus. A cash and/or stock bonus may be awarded by the Employer at the Board's discretion to the Executive. 7. Stock Options. 7.1 Options. Concurrent with execution of this Agreement Executive shall receive a stock option (the "Option") to purchase 125,000 shares of Employer's common stock. To the extent possible, the Option will be treated as an Incentive Stock Option. The Option will be granted under Employer's 2000 Equity Incentive Plan, as amended (the "Plan") and the strike price will be the fair market value as determined under the Plan. Forty percent (40 %) of the shares subject to the Option shall vest upon the first day of Executive's employment and the remaining sixty percent (60 %) shall vest on a daily basis over a four (4) year period from the effective date of this Agreement. 8. Relocation and Living Expenses. 8.1 Relocation Expenses. Concurrent with the execution of this Agreement, Executive shall receive a gross payment of $5,000.00 to off-set moving expenses and related incidentals. 8.2 Living Expenses. Employer shall reimburse Executive for his monthly housing expense in the Employer's general geographic area not to exceed a gross payment of $2,000.00 per month payable until the first anniversary of the Effective Date. 9. Health and Dental Benefits. 9.1 Executive's Health and Dental Benefits. During the Term of employment, Executive shall be entitled to receive all benefits of employment generally available to Employer's other executive and managerial employees, including medical hospitalization, health and accident, dental, life and disability insurance benefits. With respect to life insurance, Employer shall provide life insurance coverage insuring Executive's life for two times his Base Salary (i.e., $570,000.00) at standard rates, subject to policy and plan limitations. 9.2 Health, Dental and Life Insurance Benefits for Executive's Family Members. During the Term of this Agreement, Executive shall be entitled to have his family members covered under Employer's group insurance, hospitalization, medical, dental, health and accident, disability, or similar plan or program of Employer now existing or established hereafter to the extent that Executive's family members are eligible for coverage under the plan or program's general provisions. 3. 10. Retirement Plan. 10.1 401K Plan. During the Term of this Agreement, Executive shall be eligible to participate in Employer's 401K plan pursuant to the terms of the plan. 11. Vacation. Executive shall be accrue four (4) weeks of paid vacation each 12- month period on a pro-rata basis from the date employment commences under this Agreement. Upon Executive's termination of employment with Employer, Executive shall be paid at his then current Base Salary rate for all accrued unused vacation time. If Executive's employment with Employer commences before July 13, 2001, the Employer shall permit Executive to take a week of paid vacation in July, in addition to the vacation Executive is entitled to accrue for the year 2001 pursuant to this Agreement. 12. Additional Benefits. 12.1 Attorneys' Fees. The Employer agrees to reimburse Executive for reasonable attorneys' fees in an amount not to exceed $5,000.00 incurred by Executive in having this Agreement drafted by Executive's attorney, William R. Hart, Esq. of the law firm of Hart, King & Coldren. 13. Termination. 13.1 Termination By the Employer. The Executive's employment with the Employer may be terminated under the following conditions: 13.1.1 Death or Disability. The Executive's employment with the Employer shall terminate effective upon the date of the Executive's death or "Complete Disability" (as defined in Section 13.4.1). 13.1.2 For Cause. The Employer may terminate the Executive's employment under this Agreement for "Cause" (as defined in Section 13.5.3) by delivery of written notice to the Executive specifying the Cause or Causes relied upon for such termination. Any notice of termination given pursuant to this Section 13.1.2 shall effect termination as of the date specified in such notice or, in the event no such date is specified, on the last day of the month in which such notice is delivered or deemed delivered as provided in Section 14 below. 13.1.3 Without Cause. The Employer may terminate the Executive's employment under this Agreement at any time and for any reason by delivery of written notice of such termination to the Executive. Any notice of termination given pursuant to this Section 13.1.3 shall effect termination as of the date specified in such notice or, in the event no such date is specified, on the last day of the month in which such notice is delivered or deemed delivered as provided in Section 14 below. 13.1.4 Non-Renewal Notice. The Employer may terminate this Agreement by providing the Executive with ninety (90) days notice (the "Notice Period") of non-renewal. 4. 13.1.5 Termination By The Executive. The Executive may terminate the Executive's employment with the Employer upon sixty (60) days written notice to the Employer. 13.2 Termination by Mutual Agreement of the Parties. The Executive's employment pursuant to this Agreement may be terminated at any time upon a mutual agreement in writing of the Parties. Any such termination of employment shall have the consequences specified in such agreement. The Company and Executive agree that in the event the CEO leaves his position as CEO of Employer for any reason and the Employer's Board of Directors begins a search to recruit a new CEO, the Board of Directors will give Executive the option of remaining with the Employer pursuant to the terms of this Agreement or resigning within 90 days of hire of the new CEO, and receiving, upon delivery of an effective Release and Waiver in the form attached hereto as Exhibit A: i) the greater of the remainder of Executive's pay due through the Term of the Agreement or six (6) months Base Salary, less standard deductions and withholdings; and ii) accelerated vesting of the number of shares subject to the Option that would have vested had Executive remained employed with Employer during the six (6) months following his termination date. 13.3 Compensation Upon Termination. 13.3.1 Death or Complete Disability. If the Executive's employment shall be terminated by death or Complete Disability as provided in Section 13.1.1, the Employer shall pay the Executive's accrued base salary and accrued and unused vacation benefits earned through the date of termination at the rate in effect at the time of termination to Executive and/or Executive's heirs, and the Employer shall thereafter have no further obligations to the Executive and/or Executive's heirs under this Agreement. 13.3.2 With Cause or Non-renewal. If the Executive's employment shall be terminated by the Employer with Cause, or if Employer provides the Executive with a non-renewal notice at least ninety (90) days prior to the Automatic Renewal Date and the Notice Period (as defined in Section 13.1.4) is complete as of the date of termination, the Employer shall pay the Executive's accrued base salary and accrued and unused vacation benefits earned through the date of termination at the rate in effect at the time of the notice of termination to Executive, and the Employer shall thereafter have no further obligations to the Executive under this Agreement. In the event the Notice Period extends beyond the Automatic Renewal Date and upon delivery of an effective Release and Waiver in the form attached as Exhibit A: i) Executive will be entitled to be paid his base salary, less standard deductions and withholdings, for each day that the Notice Period extends beyond the Automatic Renewal Date; and ii) Executive will receive accelerated vesting of the unvested shares subject to the Option, for each day that the Notice Period extends beyond the Automatic Renewal Date, so that all of Executive's unvested options that would have vested had he remained employed during the Notice Period will be vested as of the date of termination. 13.3.3 Without Cause. If the Employer terminates the Executive's employment without Cause, the Executive shall be entitled to the Executive's base salary and accrued and unused vacation earned through the date of termination, subject to standard deductions and withholdings. In addition, upon the Executive's furnishing to the Employer an 5. effective waiver and release of claims (a form of which is attached hereto as Exhibit A), the Executive shall be entitled to: (i) The equivalent of the Executive's annual base salary in effect at the time of termination for a period of the greater of three (3) months or the remainder of the Term (the "Severance Period"). In addition, the vesting of shares subject to the Option that would have vested had Executive remained employed during the Severance Period will be accelerated and immediately vested as of the date of termination and Executive will have one (1) year from his date of termination to exercise his vested shares subject to the Option. 13.3.4 Covenant not to Compete. Notwithstanding any provisions in this Agreement to the contrary, including any provisions contained in this Section 13.4, the Employer's obligations, and the Executive's rights, pursuant to Section 13.4.3 shall cease and be rendered a nullity immediately should the Executive violate any provision of Section 5 herein, or should the Executive violate the terms and conditions of the Executive's Proprietary Information and Inventions Agreement. 13.3.5 Termination of Obligations. In the event of the termination of the Executive's employment hereunder and pursuant to this Section 13.3, the Employer shall have no obligation to pay Executive any base salary, bonus or other compensation or benefits, except as provided in this Section 13.3 or for benefits due to the Executive (and/or the Executive's dependents) under the terms of the Employer's benefit plans. The Employer may offset any amounts Executive owes it or its subsidiaries against any amount it owes Executive pursuant to this Section 13.3. 13.4 Definitions. For purposes of this Agreement, the following terms shall have the following meanings: 13.4.1 Complete Disability. "Complete Disability" shall mean the inability of the Executive to perform the Executive's duties under this Agreement because the Executive has become permanently disabled within the meaning of any policy of disability income insurance covering employees of the Employer then in force. In the event the Employer has no policy of disability income insurance covering employees of the Employer in force when the Executive becomes disabled, the term "Complete Disability" shall mean the inability of the Executive to perform the Executive's duties under this Agreement by reason of any incapacity, physical or mental, which the Board, based upon medical advice or an opinion provided by a licensed physician acceptable to the Board, determines to have incapacitated the Executive from satisfactorily performing all of the Executive's usual services for the Employer for a period of at least one hundred twenty (120) days during any twelve (12) month period (whether or not consecutive). Based upon such medical advice or opinion, the determination of the Board shall be final and binding and the date such determination is made shall be the date of such Complete Disability for purposes of this Agreement. 6. 13.4.2 For Cause. "Cause" for the Employer to terminate Executive's employment hereunder shall mean the occurrence of any of the following events: (i) the Executive's repeated failure to satisfactorily perform the Executive's job duties after written notice of such deficiency and an opportunity to cure; (ii) has committed an act that materially injures the business of the Employer; (iii) has refused or failed to follow lawful and reasonable directions of the Board or the appropriate individual to whom Executive reports (iv) has been convicted of a felony involving moral turpitude that is likely to inflict or has inflicted material injury on the business of the Employer; (v) the Executive's engaging or in any manner participating in any activity which is directly competitive with or intentionally injurious to the Employer or any of its affiliates or which violates any material provisions of Section 5 hereof or the Executive's Proprietary Information and Inventions Agreement; or (vi) the Executive's commission of any fraud against the Employer, its affiliates, employees, agents or customers or use or intentional appropriation for his personal use or benefit of any funds or properties of the Employer not authorized by the Board to be so used or appropriated. 13.5 Survival of Certain Sections. Sections 5, 13, 18 and 23 of this Agreement will survive the termination of this Agreement. 14. Miscellaneous Provisions. 14.1 Notices. Any notices provided hereunder must be in writing and shall be deemed effective on the earlier of personal delivery (including personal delivery by telecopier or telex) or the third day after mailing by first class mail to the recipient at the address indicated below: To the employer Cypress Bioscience, Inc., 4350 Executive Drive Suite 325 San Diego, CA 92121 Attn: Chairman of the Board and Chief Financial Officer, To Executive: John N. Bonfiglio, 21022 Los Alisos Blvd., #1423, Rancho Santa Margarita, California 92688, 7. With a copy to William R. Hart of Hart, King & Coldren, 200 E. Sandpointe, Suite 400, Santa Ana, CA 92707, Or to such other address or to the attention of such other person as the recipient party will have specified by prior written notice to the sending party. 15. Severability. If any Term, provision, or part of this Agreement is found by a court to be invalid, illegal, or incapable of being enforced by any rule of law or public policy, all other terms, provisions and parts of this Agreement shall nevertheless remain in full force and affect as long as the economic or legal substance of the transaction contemplated hereby is not affected in any manner materially adverse to any party. On such determination that any term, provision, or part of this Agreement is invalid, illegal, or incapable of being enforced this Agreement and shall be deemed modified so as to effect the parties' original intent as closely as possible to the end that the transactions contemplated by this Agreement and the terms and provisions of this Agreement are fulfilled to the greatest extent possible. 16. Entire Agreement. This document constitutes the final, complete, and exclusive embodiment of the entire Agreement and understanding between the parties related to the subject matter of this Agreement and supercedes and preempts any prior or contemporaneous understandings, agreements, or representations by or between the parties, written or oral, including, but not limited to any offer letter between the parties. Without limiting the generality of the foregoing, except as provided in this Agreement, all understandings and agreements, written or oral, relating to Executive's employment by Employer, or the payment of any compensation or the provision of any benefit in connection therewith or otherwise, are hereby terminated and shall be of no future force and effect. 17. Counterparts. This Agreement may be executed on separate copies, any one of which need not contain signatures of more than one (1) party, but all of which taken together will constitute one and the same Agreement. 18. Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and Employer, and their respective successors and assigns, except that Executive may not assign any of his rights or duties under this Agreement without Employer's prior written consent. 8. 19. Confidential and Proprietary Information; Nonsolicitation. As a condition of employment the Executive agrees to execute and abide by the Proprietary Information and Inventions Agreement attached hereto as Exhibit B. 20. Attorney's Fees. If any legal proceeding is necessary to enforce or interpret the terms of this Agreement, or to recover damages for breach of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, as well as costs and disbursements, in addition to any other relief to which the prevailing party may be entitled. 21. Amendments. No amendments or other modifications to this Agreement may be made except by a writing signed by both parties. 22. Choice of Law. All questions concerning the construction, validity, and interpretation of this Agreement will be governed by the internal law, and not the law of conflicts, of the State of California. 23. Arbitration. To ensure the rapid and economical resolution of disputes that may arise in connection with Executive's employment with the Employer, Executive and the Employer agree that any and all disputes, claims, or causes of action, in law or equity, arising from or relating to Executive's employment, or the termination of Executive's employment, will be resolved, to the fullest extent permitted by law, by final, binding and confidential arbitration in San Diego, California conducted by the Judicial Arbitration and Mediation Services/Endispute, Inc. ("JAMS"), or its successors, under the then current rules of JAMS for employment disputes; provided that the arbitrator shall: (a) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief as would otherwise be permitted by law; and (b) issue a written arbitration decision including the arbitrator's essential findings and conclusions and a statement of the award. Both Executive and the Employer shall be entitled to all rights and remedies that Executive or the Employer would be entitled to pursue in a court of law. The Employer shall pay all fees in excess of those which would be required if the dispute was decided in a court of law. Nothing in this Agreement is intended to prevent either Executive or the Employer from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration. Notwithstanding the foregoing, Executive and the Employer each have the right to resolve any issue or dispute arising under the Proprietary Information and Inventions Agreement by Court action instead of arbitration. 24. Trade Secrets of Others. It is the understanding of both the Employer and the Executive that the Executive shall not divulge to the Employer and/or its subsidiaries any confidential information or trade 9. secrets belonging to others, including the Executive's former employers, nor shall the Employer and/or its affiliates seek to elicit from the Executive any such information. Consistent with the foregoing, the Executive shall not provide to the Employer and/or its affiliates, and the Employer and/or its affiliates shall not request, any documents or copies of documents containing such information. 25. Signatures. In Witness Whereof, the parties now execute this Agreement, to be effective on the date set forth in paragraph 2, hereinabove. Executive Date: 06/26/01 /s/ John N. Bonfiglio -------------- ----------------------------- John N. Bonfiglio, Ph.D. Employer Date:______________ Cypress Bioscience, Inc. By: /s/ Jay Kranzler ------------------------- Jay Kranzler President and CEO 10. EXHIBIT A RELEASE AND WAIVER OF CLAIMS In consideration of the payments and other benefits set forth in Section 13.3 of the Employment Agreement dated 06/26/01, to which this form is ----------- attached, I, John N. Bonfiglio, Ph.D., hereby furnish Cypress Bioscience, Inc. (the "Employer"), with the following release and waiver ("Release and Waiver"). I hereby release, and forever discharge the Employer, its officers, directors, agents, employees, stockholders, successors, assigns, affiliates, parent, subsidiaries, and benefit plans, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys' fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed, arising at any time prior to and including my employment termination date with respect to any claims relating to my employment and the termination of my employment, including but not limited to, claims pursuant to any federal, state or local law relating to employment, including, but not limited to, discrimination claims, claims under the California Fair Employment and Housing Act, and the Federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"), or claims for wrongful termination, breach of the covenant of good faith, contract claims, tort claims, and wage or benefit claims, including but not limited to, claims for salary, bonuses, commissions, stock, stock options, vacation pay, fringe benefits, severance pay or any form of compensation. I also acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to any claims I may have against the Employer. I acknowledge that, among other rights, I am waiving and releasing any rights I may have under ADEA, that this Release and Waiver is knowing and voluntary, and that the consideration given for this Release and Waiver is in addition to anything of value to which I was already entitled as an executive of the Employer. I further acknowledge that I have been advised, as required by the Older Workers Benefit Protection Act, that: (a) the release and waiver granted herein does not relate to claims under the ADEA which may arise after this Release and Waiver is executed; (b) I have the right to consult with an attorney prior to executing this Release and Waiver (although I may choose voluntarily not to do so); and if I am 40 years of age or older upon execution of this Release and Waiver: (c) I have twenty-one (21) days from the date of termination of my employment with the Employer in which to consider this Release and Waiver (although I may choose voluntarily to execute this Release and Waiver earlier); (d) I have seven (7) days following the execution of this Release and Waiver to revoke my consent to this Release and Waiver; and (e) this Release and Waiver shall not be effective until the seven (7) day revocation period has expired. Date: 06/26/01 By: /s/ John N. Bonfiglio ---------------- -------------------------------- John N. Bonfiglio, Ph.D. EXHIBIT B Cypress Bioscience, Inc. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT In consideration of my employment or continued employment by Cypress Bioscience, Inc. (the "Employer"), and the compensation now and hereafter paid to me, I, John N. Bonfiglio, Ph.D., hereby agree as follows: 1. Nondisclosure 1.1 Recognition of Employer's Rights; Nondisclosure. At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Employer's [and/or its Affiliates'] Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Employer, or unless an officer of the Employer expressly authorizes such in writing. I will obtain Employer's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Employer and/or incorporates any Proprietary Information. I hereby assign to the Employer any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Employer and its assigns. [For purposes of this Agreement, "Affiliate" means, with respect to any specific entity, any other entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such specified entity.] 1.2 Proprietary Information. The term "Proprietary Information" shall mean any and all confidential and/or proprietary knowledge, data or information of the Employer and/or its Affiliates. By way of illustration but not limitation, "Proprietary Information" includes (a) trade secrets, inventions, mask works, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as "Inventions"); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Employer [and/or its Affiliates]. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 Third Party Information. I understand, in addition, that the Employer has received and in the future will receive from third parties confidential or proprietary information ("Third Party Information") subject to a duty on the Employer's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Employer personnel who need to know such information in connection with their work for the Employer) or use, except in connection with my work for the Employer, Third Party Information unless expressly authorized by an officer of the Employer in writing. 1.4 No Improper Use of Information of Prior Employers and Others. During my employment by the Employer I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Employer any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Employer. 2. Assignment of Inventions. 2.1 Proprietary Rights. The term "Proprietary Rights" shall mean all trade secret, patent, copyright, mask work and other intellectual property rights throughout the world. 1. 2.2 Prior Inventions. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Employer are excluded from the scope of this Agreement. To preclude any possible uncertainty, I have set forth on Exhibit B-2 (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Employer, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit B-2 but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit B-2 for such purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the course of my employment with the Employer, I incorporate a Prior Invention into a Employer product, process or machine, the Employer is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Employer Inventions without the Employer's prior written consent. 2.3 Assignment of Inventions. Subject to Sections 2.4 and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Employer all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my employment with the Employer. Inventions assigned to the Employer, or to a third party as directed by the Employer pursuant to this Section 2, are hereinafter referred to as "Employer Inventions". 2.4 Nonassignable Inventions. This Agreement does not apply to an Invention which qualifies fully as a nonassignable Invention under Section 2870 of the California Labor Code (hereinafter "Section 2870"). I have reviewed the notification on Exhibit B-1 (Limited Exclusion Notification) and agree that my signature acknowledges receipt of the notification. 2.5 Obligation to Keep Employer Informed. During the period of my employment and for six (6) months after termination of my employment with the Employer, I will promptly disclose to the Employer fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others. In addition, I will promptly disclose to the Employer all patent applications filed by me or on my behalf within a year after termination of employment. At the time of each such disclosure, I will advise the Employer in writing of any Inventions that I believe fully qualify for protection under Section 2870; and I will at that time provide to the Employer in writing all evidence necessary to substantiate that belief. The Employer will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Employer pursuant to this Agreement relating to Inventions that qualify fully for protection under the provisions of Section 2870. I will preserve the confidentiality of any Invention that does not fully qualify for protection under Section 2870. 2.6 Government or Third Party. I also agree to assign all my right, title and interest in and to any particular Employer Invention to a third party, including without limitation the United States, as directed by the Employer. 2.7 Works for Hire. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire", pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.8 Enforcement of Proprietary Rights. I will assist the Employer in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Employer Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Employer may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such Proprietary Rights to the Employer or its designee. My obligation to assist the Employer with respect to Proprietary Rights relating to such Employer Inventions in any and all countries shall continue beyond the 2. termination of my employment, but the Employer shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Employer's request on such assistance. In the event the Employer is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding paragraph, I hereby irrevocably designate and appoint the Employer and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Employer any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Employer. 3. Records. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Employer) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Employer, which records shall be available to and remain the sole property of the Employer at all times. 4. Additional Activities. I agree that during the period of my employment by the Employer I will not, without the Employer's express written consent, engage in any employment or business activity which is competitive with, or would otherwise conflict with, my employment by the Employer. I agree further that for the period of my employment by the Employer and for one (l) year after the date of termination of my employment by the Employer I will not induce any employee of the Employer to leave the employ of the Employer. 5. No Conflicting Obligation. I represent that my performance of all the terms of this Agreement and as an executive of the Employer does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Employer. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 6. Return of Employer Documents. When I leave the employ of the Employer, I will deliver to the Employer any and all drawings, notes, memoranda, specifications, devices, formulas, and documents, together with all copies thereof, and any other material containing or disclosing any Employer Inventions, Third Party Information or Proprietary Information of the Employer. I further agree that any property situated on the Employer's premises and owned by the Employer, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Employer personnel at any time with or without notice. Prior to leaving, I will cooperate with the Employer in completing and signing the Employer's termination statement. 7. Legal and Equitable Remedies. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Employer, the Employer shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Employer may have for a breach of this Agreement. 8. Notices. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the Party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing. 9. Notification of New Employer. In the event that I leave the employ of the Employer, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. 10. General Provisions. 10.1 Governing Law; Consent to Personal Jurisdiction. This Agreement will be governed by and construed according to the laws of the State of California, as such laws are applied to agreements entered into and to be performed entirely within California between California residents. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in San Diego County, California for any lawsuit filed there against me by Employer arising from or related to this Agreement. 10.2 Severability. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality 3. or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 10.3 Successors and Assigns. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Employer, its successors, and its assigns. 10.4 Survival. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Employer to any successor in interest or other assignee. 10.5 Employment. I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Employer, nor shall it interfere in any way with my right or the Employer's right to terminate my employment at any time, with or without Cause. 10.6 Waiver. No waiver by the Employer of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Employer of any right under this Agreement shall be construed as a waiver of any other right. The Employer shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 10.7 Entire Agreement. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Employer as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the Parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the Party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. This Agreement shall be effective as of the first day of my employment with the Employer, namely: June 26, 2001. ----------------- I have read this Agreement carefully and understand its terms. I have completely filled out Exhibit B-1 to this Agreement. Dated: 06/26/01 ------------------------------------- /s/ John N. Bonfiglio - ------------------------------------------- (Signature) John N. Bonfiglio - ------------------------------------------- (Executive's Printed Name) Accepted and Agreed To: Cypress Bioscience, Inc. ____________________________ ____________________________ By: /s/ Jay Kranzler ---------------------------------------- Title: CEO ------------------------------------- Dated: 06/22/01 ------------------------------------- 4. Exhibit B-1 LIMITED EXCLUSION NOTIFICATION This is to notify The Executive in accordance with Section 2872 of the California Labor Code that the foregoing Agreement between the Executive and the Employer does not require the Executive to assign or offer to assign to the Employer any invention that the Executive developed entirely on Executive's own time without using the Employer's equipment, supplies, facilities or trade secret information except for those inventions that either: 1. Relate at the time of conception or reduction to practice of the invention to the Employer's business, or actual or demonstrably anticipated research or development of the Employer; 2. Result from any work performed by The Executive for the Employer. To the extent a provision in the foregoing Agreement purports to require the Executive to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of this state and is unenforceable. This limited exclusion does not apply to any patent or invention covered by a contract between the Employer and the United States or any of its agencies requiring full title to such patent or invention to be in the United States. I acknowledge receipt of a copy of this notification. /s/ John N. Bonfiglio ------------------------------------------ John N. Bonfiglio, Ph.D. Date: 06/26/01 ------------------------------------- Witnessed by: _________________________________ (Printed Name of Representative) Exhibit B-2 TO: Cypress Bioscience, Inc. FROM: John N. Bonfiglio, Ph.D. DATE: ________________, 2001 SUBJECT: Previous Inventions 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by Cypress Bioscience, Inc. (the "Employer") that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my engagement by the Employer: [X] No inventions or improvements. [_] See below: ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ [_] Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies): Invention or Improvement Party(ies) Relationship 1. ___________________________ _______________ ___________________________ 2. ___________________________ _______________ ___________________________ 3. ___________________________ _______________ ___________________________ [_] Additional sheets attached. 2. -----END PRIVACY-ENHANCED MESSAGE-----