10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2003
or
[   ]	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                      to

Commission File Number 0-24424

CIMA LABS INC.

(Exact name of registrant as specified in its charter)

Delaware	41-1569769
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
10000 Valley View Road, Eden Prairie, MN 55344-9361	(952) 947-8700
(Address of principal executive offices and zip code)	(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

     Yes   X                No       

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

     Yes   X                No       

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $.01 par value	14,315,255
(Class)	(Outstanding at April 30, 2003)

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
		Balance Sheets
		Income Statements
		Statements of Cash Flows
		Notes to Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risks
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
Exhibit Index
EX-10.3 Letter Agreement - John M. Siebert, Ph.D.
EX-10.4 Letter Agreement - Steven B. Ratoff
EX-99.1 Certification of CEO and CFO

INDEX
CIMA LABS INC.

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets — March 31, 2003 and December 31, 2002			3
Income Statements — Three months ended March 31, 2003 and March 31, 2002			4
Statements of Cash Flows — Three months ended March 31, 2003 and March 31, 2002			5
Notes to Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3. Quantitative and Qualitative Disclosures About Market Risks			22
Item 4. Controls and Procedures			23
PART II. OTHER INFORMATION
Items 2, 3, 4 and 5 have been omitted since all items are inapplicable or answers are negative
Item 1. Legal Proceedings			23
Item 6. Exhibits and Reports on Form 8-K			23
	Signature and Certifications		25
	Exhibit Index		27

We have registered “CIMA®,” “CIMA LABS INC.®,” “OraSolv®,” “OraVescent®,” “DuraSolv®” and “PakSolv®” as trademarks with the U.S. Patent and Trademark Office. We also use the trademarks “OraSolv®SR/CR,” “OraVescent®SL/BL” and “OraVescent®SS.” All other trademarks used in this report are the property of their respective owners. “Triaminic®” and “Softchews®” are trademarks of Novartis. “Zomig®,” “Zomig-ZMT®” and “Rapimelt™” are trademarks of AstraZeneca. “Remeron®” and “SolTab™” are trademarks of Organon. “Tempra®” is a registered trademark of a Canadian affiliate of Bristol-Myers Squibb. “FirsTabs™” is a trademark of Bristol-Myers Squibb. “NuLev™” is a trademark of Schwarz Pharma. “Alavert™” is a trademark of Wyeth. “Allegra®” is a registered trademark of Aventis Pharmaceuticals Inc. “Actiq®” is a registered trademark of Anesta Corporation. “Claritin®” and “Reditabs®” are registered trademarks of Schering Corporation. “Maxalt-MLT®” is a registered trademark of Merck & Co., Inc. “Zyprexa® Zydis” is a registered trademark of Eli Lilly and Company. “Zydis®” is a registered trademark of Cardinal Health, Inc. “FlashDose®” is a registered trademark of Biovail Corporation. “WOWTab®” is a registered trademark of Yamanouchi Pharma Technologies, Inc. “Flashtab®” is a registered trademark of Ethypharm. “OraQuick™” is a trademark of KV Pharmaceutical Company. “Pharmaburst™” is a trademark of SPI Pharma, Inc.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CIMA LABS INC.
Balance Sheets
(in thousands, except per share data)

		March 31,			December 31,
		2003			2002
		(Unaudited)			(See note)
Assets
Current assets:
	Cash and cash equivalents	$	31,178		$	26,102
	Available-for-sale securities		40,413			45,093
	Trade accounts receivable, net		13,427			14,621
	Interest receivable		1,137			1,119
	Inventories, net		4,764			4,082
	Deferred taxes		3,790			3,790
	Prepaid expenses and other assets		1,034			944
Total current assets			95,743			95,751
Other assets:
	Available-for-sale securities		61,365			60,486
	All other, net		6,530			8,042
Total other assets			67,895			68,528
Property and equipment:
	Property, plant and equipment		80,913			73,419
	Accumulated depreciation		(13,416	)		(12,345	)
			67,497			61,074
Total assets		$	231,135		$	225,353
Liabilities and stockholders’ equity
Current liabilities:
	Accounts payable	$	11,759		$	8,755
	Accrued compensation		1,137			2,118
	Accrued expenses		897			637
	Deferred revenue		400			542
Total current liabilities			14,193			12,052
Stockholders’ equity:
	Convertible preferred stock, $.01 par value; 5,000 shares authorized; none outstanding		—			—
	Common stock, $.01 par value; 60,000 shares authorized; 14,928 and 14,870 shares issued and outstanding (including 619 and 619 treasury shares), respectively		149			149
	Additional paid-in capital		240,409			240,027
	Accumulated deficit		(5,229	)		(8,386	)
	Accumulated other comprehensive income		1,613			1,511
	Treasury stock		(20,000	)		(20,000	)
Total stockholders’ equity			216,942			213,301
Total liabilities and stockholders’ equity		$	231,135		$	225,353

Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying notes.

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CIMA LABS INC.
Income Statements
(Unaudited)
(in thousands, except per share data)

			For the Three Months Ended
			March 31,
			2003		2002
Operating revenues:
		Net sales	$	10,068	$	4,238
		Product development fees and licensing		1,603		2,307
		Royalties		5,002		1,838
				16,673		8,383
Operating expenses:
		Cost of goods sold		7,768		3,285
		Research and product development		2,507		2,010
		Selling, general and administrative		2,534		1,590
				12,809		6,885
Operating income				3,864		1,498
Other income:
		Investment income		1,023		1,736
		Other income (expense)		43		3
				1,066		1,739
Income before provision for income taxes				4,930		3,237
Provision for income taxes (benefit)				1,772		(168	)
Net income			$	3,158	$	3,405
Net income per share:
	Basic		$	.22	$	.24
	Diluted		$	.22	$	.23
Weighted average shares outstanding:
	Basic			14,282		14,159
	Diluted			14,636		14,655

See accompanying notes.

4

CIMA LABS INC.
Statements of Cash Flows
(Unaudited)
(in thousands)

				For the Three Months Ended
				March 31,
				2003			2002
Operating activities:
Net income				$	3,158		$	3,405
Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			1,111			650
		Income tax benefit of stock options exercised			48			26
		Deferred income taxes			1,504			(330	)
		Gain on sale of investment securities			—			(88	)
		Changes in operating assets and liabilities:
			Accounts receivable		1,194			1,088
			Interest receivable		(18	)		439
			Inventories		(682	)		53
			Prepaid expenses and other assets		83			(399	)
			Accounts payable		3,004			(759	)
			Accrued expenses and other		(721	)		(134	)
			Deferred revenue		(142	)		(276	)
Net cash provided by operating activities					8,539			3,675
Investing activities:
	Purchases of property, plant and equipment				(7,494	)		(7,307	)
	Patents and trademarks				(31	)		(35	)
	Purchases of available-for-sale securities				(10,454	)		(9,026	)
	Proceeds from sales of available-for-sale securities				14,182			22,196
Net cash (used in) provided by investing activities					(3,797	)		5,828
Financing activities:
	Proceeds from exercises of stock options				290			119
	Purchases of treasury stock				—			(2,144	)
	Issuance of common stock related to employee stock purchase plan				44			50
Net cash provided by (used in) financing activities					334			(1,975	)
Increase in cash and cash equivalents					5,076			7,528
Cash and cash equivalents at beginning of period					26,102			1,880
Cash and cash equivalents at end of period				$	31,178		$	9,408

See accompanying notes

5

CIMA LABS INC.
Notes to Financial Statements
(Unaudited)
(in thousands, except per share data)

1.	Basis of Presentation CIMA LABS INC. (the “Company”), a Delaware corporation, develops and manufactures fast dissolve and enhanced-absorption oral drug delivery systems. The Company operates within a single business segment, the development and manufacture of fast dissolve and enhanced-absorption oral drug delivery systems. OraSolv and DuraSolv, the Company’s leading proprietary fast dissolve technologies, allow an active drug ingredient, which is frequently taste-masked, to be formulated into a new, orally disintegrating dosage form that dissolves quickly in the mouth without chewing or the need for water. The Company is also developing enhanced oral drug delivery technologies and independently developing new products based on its oral drug delivery technologies. The Company enters into collaborative agreements with pharmaceutical companies to develop products based on its oral drug delivery technologies. The Company currently manufactures six pharmaceutical brands incorporating its proprietary fast dissolve technologies. Revenues are comprised of three components: net sales of products it manufactures; product development fees and licensing revenues for development activities conducted through collaborative agreements with pharmaceutical companies; and royalties on the sales of products sold by pharmaceutical companies under license from the Company.
	The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, which are considered necessary for fair presentation, have been included. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, you should refer to the audited financial statements and accompanying notes contained in our Annual Report on Form 10-K for the year ended December 31, 2002.
2.	Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that may affect the amounts we report in our financial statements and accompanying notes. Actual results could differ from those estimates.

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3. Cash Equivalents and Investments
The Company’s investments in available-for-sale securities are carried at fair value, with unrealized gains and losses included in accumulated other comprehensive income as a separate component of stockholders’ equity. As of March 31, 2003, the amortized cost and estimated market value of available-for-sale securities, all of which have contractual maturities of four years or less, are as follows:

				Gross		Gross		Estimated
		Amortized		Unrealized		Unrealized		Market
		Cost		Gains		Losses		Value
As of March 31, 2003:
	Asset backed securities	$	34,547	$	450	$	5	$	34,992
	Corporate bonds and notes		50,588		831		22		51,397
	Non-US corporate obligations		4,213		62		—		4,275
	U.S. government securities		10,991		123		—		11,114
Totals — March 31, 2003		$	100,339	$	1,466	$	27	$	101,778
As of December 31, 2002:
	Asset backed securities	$	35,230	$	447	$	—	$	35,677
	Corporate bonds and notes		54,311		915		16		55,210
	Non-US corporate obligations		8,997		64		1		9,060
	U.S. government securities		5,530		102		—		5,632
Totals — December 31, 2002		$	104,068	$	1,528	$	17	$	105,579

4. Stock based compensation
Under the requirements of FASB Statement No 148, Accounting for Stock based Compensation — Transition and Disclosure, the following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of that statement to stock based compensation:

		Three Months Ended
		March 31, 2003		March 31, 2002
Net income, as reported		$	3,158	$	3,405
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards			843		1,890
Pro forma net income		$	2,315	$	1,515
Net income per share:
	Basic-as reported	$	.22	$	.24
	Basic-pro forma	$	.16	$	.11
	Diluted-as reported	$	.22	$	.23
	Diluted-pro forma	$	.16	$	.10

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5. Income Per Share
Income per share for the three months ended March 31, 2003 and 2002 are summarized in the following table:

			Three Months Ended
			March 31, 2003		March 31, 2002
Numerator:
	Net income		$	3,158	$	3,405
Denominator:
	Denominator for basic earnings per share — weighted average shares outstanding			14,282		14,159
		Effect of dilutive stock options		354		496
	Denominator for diluted earnings per share — weighted average shares outstanding			14,636		14,655
Basic earnings per share			$	.22	$	.24
Diluted earnings per share			$	.22	$	.23

6. Comprehensive Income
Comprehensive income consists of net income, fair value of forward contracts and net unrealized losses on available-for-sale securities.

		Three Months Ended
		March 31, 2003			March 31, 2002
Net income		$	3,158		$	3,405
	Fair value of forward contracts		173			—
	Unrealized (loss) on available- for-sale securities		(72	)		(1,027	)
Total comprehensive income		$	3,259		$	2,378

7. Inventories
Inventories are stated at the lower of cost (first in, first out) or fair market value.

	March 31, 2003		December 31, 2002
Raw materials	$	4,026	$	2,714
Work in process		190		116
Finished products		548		1,252
	$	4,764	$	4,082

8. Tax Expense
Provisions for income taxes for the three-month period ended March 31, 2003, reflect provisions for U.S. federal and state income taxes. At December 31, 2002, the Company had a valuation reserve of $6,408 resulting in a net deferred tax asset of $11,414. As of March 31, 2003, the Company had a valuation reserve of $6,208 resulting in a net deferred tax asset of $9,910.

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9.

Segment Information — Major Customers The Company operates within a single segment: the development and manufacture of fast-dissolve and enhanced-absorption oral drug delivery systems. Revenues are comprised of three components: net sales of products utilizing the Company’s proprietary fast-dissolve technologies; product development fees and licensing revenues for development activities conducted by the Company through collaborative agreements with pharmaceutical companies; and royalties on the sales of products manufactured by the Company, which are sold by pharmaceutical companies under licenses from the Company.

Revenues as a percentage of total revenues from major customers are as follows:

	Three Months Ended
	March 31, 2003				March 31, 2002
AstraZeneca	$	2,901	17	%	$	1,851	22	%
Novartis		1,246	8			1,438	17
Organon		5,614	34			2,502	30
Schwarz Pharma		1,918	12			1,532	18
Wyeth		4,576	27			—	—
Other		418	2			1,060	13
Total	$	16,673	100	%	$	8,383	100	%

Trade accounts receivable at March 31, 2003 of approximately $13,427 were comprised primarily of the following customers: Organon (36%), Wyeth (23%), AstraZeneca (19%), Schwarz (8%), and Novartis (8%).

All of the Company’s assets and operations are located in the U.S. While the Company does not directly conduct its activities outside the U.S., it considers international revenues to be those arising from shipments ultimately destined for non-U.S. end-users and revenues from royalties generated by non-U.S. sales by partners.

		Three Months Ended
		March 31, 2003		March 31, 2002
Operating revenues by source:
	U.S	$	10,774	$	6,857
	International		5,899		1,526
Total operating revenues		$	16,673	$	8,383

10. Reclassifications
Certain amounts presented in the 2002 financial statements have been reclassified in order to conform to the 2003 presentation. These reclassifications have no impact on the net income or shareholders’ equity as previously reported.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

We make many statements in this Quarterly Report on Form 10-Q under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere, that are forward-looking and are not based on historical facts. These statements relate to our future plans, objectives, expectations and intentions. We may identify these statements by the use of words such as believe, expect, will, anticipate, intend, plan and other similar expressions. These forward-looking statements involve a number of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those we discuss under the heading “Factors That Could Affect Future Results” and elsewhere in this report. These forward-looking statements speak only as of the date of this report, and we caution you not to rely on these statements without considering the risks and uncertainties associated with these statements and our business that are addressed in this report.

These forward-looking statements include statements relating to the expected growth in operating revenues for 2003; the expected increases of gross profits and gross profit margins; the expected decrease in other income; the timing for recognition of our remaining tax benefits; the timing for completion of improvements to our Brooklyn Park R&D center, including the construction and operation of a second site for manufacturing; future expense levels; the timing of availability and expected mix of products; expected demand for products using our technologies; the adequacy of our production capacity, including plans to expand our capacity; the adequacy of our cash and cash reserves; and future research and development activities and funding relating to our current or new technologies. We are not under any duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results, except as required by law.

Overview

We develop and manufacture pharmaceutical products based on our proprietary OraSolv and DuraSolv fast dissolve technologies. We currently manufacture six pharmaceutical brands utilizing our fast dissolve technologies: three prescription and three over-the-counter (“OTC”) brands. The three prescription products are AstraZeneca’s Zomig-ZMT and its equivalent for non-U.S. markets, Remeron SolTab for Organon, and NuLev for Schwarz Pharma. The OTC products are Triaminic Softchews for Novartis, Tempra FirsTabs for a Canadian affiliate of Bristol-Myers Squibb, and Alavert for Wyeth; We are also currently developing other oral drug delivery technologies for ourselves and for others. We operate within a single business segment, the development and manufacture of fast dissolve and enhanced-absorption oral drug delivery systems. Our revenues are comprised of three components, including net sales of products we manufacture for pharmaceutical companies using our proprietary fast dissolve technologies, product development fees and licensing revenues for development activities we conduct through collaborative agreements with pharmaceutical companies, and royalties on the sales of products we manufacture which are sold by pharmaceutical companies under licenses from us.

Revenues from product sales and from royalties will fluctuate from quarter to quarter and from year to year depending on, among other factors, demand by consumers for the products we produce, new product introductions, the seasonal nature of some of the products we produce to treat seasonal ailments, pharmaceutical company ordering patterns and our production schedules. Revenues from product development fees and licensing revenue will fluctuate depending on, among other factors, the number of new collaborative agreements that we enter into, the number and timing of product development milestones that we achieve under our collaborative agreements, and the level of our development activity conducted for pharmaceutical companies.

Critical Accounting Policies and Estimates

General

The following discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, income

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taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We recognize revenue in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, or SAB 101, “Revenue Recognition in Financial Statements.” SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an agreement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Revenues from our business activities are recognized from net sales of manufactured products upon shipment; from product development fees as the contracted services are rendered; from product development milestones upon completion of milestones; from up-front product development license fees as fees are recognized ratably over the expected development term of the proposed products; and from royalties on the sales of products that we manufacture, which are sold by pharmaceutical companies under license from us. The determination of SAB 101 criteria (3) and (4) for each source of revenue is based on our judgments regarding the fixed nature and collectibility of each source of revenue. Revenue recognized for any reporting period could be adversely affected should changes in conditions cause us to determine that these criteria are not met for certain future transactions.

Deferred Taxes

The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient taxable income in the United States, based on estimates and assumptions. We record a valuation allowance to reduce the carrying value of our net deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the requirements for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase net income in the period such determination is made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the net deferred tax asset would decrease net income in the period such determination is made. On a quarterly basis, we evaluate the realizability of our deferred tax assets and assess the requirements for a valuation allowance. At December 31, 2002, the Company had a valuation reserve of $6,408 resulting in a net deferred tax asset of $11,414. As of March 31, 2003, the Company had a valuation reserve of $6,208 resulting in a net deferred tax asset of $9,910.

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Results of Operations

Three Month Periods Ended March 31, 2003 and 2002

Components of revenue, expenses, and net income as a percentage of total operating revenue for the three month periods ended March 31 were as follows:

	Three Months Ended
	March 31, 2003			March 31, 2002
Net sales		60	%		50	%
Product development fees & licensing revenues		10	%		28	%
Royalty revenues		30	%		22	%
Cost of goods sold		47	%		39	%
Research & product development expenses		15	%		24	%
Selling, general & administrative expenses		15	%		19	%
Operating income		23	%		18	%
Net income*		19	%		41	%

* Net income for the three months ended March 31, 2003 reflected a tax expense provision of $1.8 million; whereas net income for the three months ended March 31, 2002 reflected a tax benefit of $168,000.

Operating Revenues. Total operating revenues for the first quarter ended March 31, 2003 were $16.7 million, an increase of $8.3 million, or 99%, over the same period in 2002. The first quarter increases in total operating revenues resulted from increases in two out of three of our revenue components: revenues from the sales of products we manufacture and royalties on the sales of products we manufacture which are sold by pharmaceutical companies under licenses from us. The third source of our revenues, product development fees and licensing revenue, declined from the first quarter of 2002.

Revenues from net sales of products we manufacture in the first quarter of 2003 were $10.1 million, an increase of $5.8 million, or 138%, over the same period of 2002. The increases were primarily due to production support for the launch of Alavert by Wyeth, higher manufacturing volumes of Remeron SolTab for Organon and Nulev for Schwarz Pharma, partially offset by lower sales of Triaminic Softchews for Novartis and Zomig-ZMT and its equivalent products for AstraZeneca. For the full year 2003, we expect revenues from net sales of products we manufacture to increase more than 70%. Sales of branded prescription products increased and represented 56% of our total product sales in the first quarter of 2003, compared with 72% the first quarter of 2002. Over-the-counter product sales increased and accounted for 44% of total product sales compared with 28% in the first three months of last year. We expect similar relative contributions of prescription and over-the-counter shipments for the full year 2003, although they may vary by quarter.

Revenues from product development fees and licensing were $1.6 million in the first quarter of 2003, a decrease of $704,000, or 31%, from the same period of 2002. This decrease resulted from a maturing of certain agreements for proposed new products, including our achievement of certain milestones under existing agreements. The timing of development and licensing fees can vary based on the nature and scope of the activities being performed. We are actively pursuing new development agreements while increasing efforts in support of our proprietary compounds. Revenues from product development fees and licensing included amortization of deferred revenue of $142,000 in the first quarter of 2003, compared to $76,000 in the same period of 2002. For 2003, we expect combined revenues attributable to product development fees and licensing revenues to range from somewhat less than to approximating full-year 2002 levels.

Revenues from royalties were $5.0 million in the first quarter of 2003, an increase of $3.2 million or 172% over the same quarter of 2002. The increase was due primarily to increased end-customer sales by Organon of Remeron SolTab, AstraZeneca of Zomig Rapimelt (the non-U.S. equivalent of Zomig-ZMT) in Europe and Zomig-ZMT in the United States, and the introduction by Wyeth of Alavert in the fourth quarter of 2002. For 2003, we expect royalties to increase by 60% to 90% from 2002 levels.

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Cost of goods sold. Cost of goods sold was $7.8 million in the first quarter of 2003 compared to $3.3 million for the same period of 2002. These increases were primarily due to additional labor and materials related to higher production volumes over the same periods in 2002. For 2003, we expect cost of goods sold to increase from 2002 levels in terms of dollar amount, but decrease as a percentage of net sales.

Gross profit on product sales was $2.3 million in the first quarter of 2003, compared to $953,000 in the same period of 2002. Gross margins on product sales were 22.8% and 22.5% of total product sales in the first quarter of 2003 and 2002, respectively. For the full year of 2003, we expect gross profits on product sales to increase from 2002 levels in terms of dollar amounts and as a percentage of product sales.

Research and product development expenses. Research and product development expenses were $2.5 million in the first quarter of 2003, an increase of $497,000, or 25%, over the same period of 2002. This increase was due primarily to additional staffing, development activity for our proprietary products, including OraVescent fentanyl, and infrastructure investments. For 2003, we expect research and product development expenses to increase by 20% to 25% from 2002 levels due to development work for our collaborative pharmaceutical company partners, as well as increased development efforts related to our proprietary products.

Selling, general and administrative expenses. Selling, general and administrative expenses were $2.5 million in the first quarter of 2003, an increase of $944,000, or 59%, over the first quarter of 2002. This increase was due primarily to costs associated with increased professional staffing. For 2003, we expect selling, general and administrative expenses to increase by more than 40% from 2002 levels due to management transition costs, costs to comply with the Sarbanes-Oxley Act, and our continued investment in people and systems to support our anticipated growth.

Other income (expense). Other income was $1.1 million in the first quarter of 2003, a decrease of $674,000 from the first three months of 2002. Other income consists primarily of investment income comprised of interest earned on securities and gains realized on the sale of securities. The decrease from 2002 levels was due primarily to lower interest rates on our investments and lower levels of cash available for investment. For 2003, we expect other income to decrease by 20% to 25% from 2002 levels due to lower interest rates and expected capital expenditures which will reduce the level of cash available for investment.

Provision for income tax benefits. For the first quarter since turning profitable in the fourth quarter of 1999, we have reported a provision for income tax expense on our income statement. The provision for income tax expense for the quarter ended March 31, 2003 was $1.8 million, compared with a tax benefit of $168,000 recognized in the first quarter of 2002. We did recognize approximately $200,000 of U.S. tax credits related to the utilization of net operating loss carryforwards from the years when we were not profitable. Without these credits, our cumulative tax expense since turning profitable would have been approximately $17.2 million, based on an effective tax rate of 40%. We expect to recognize our remaining tax benefits of approximately $1.8 million during 2003.

Liquidity and Capital Resources

We have financed our operations to date primarily through private and public sales of equity securities, other income, and from operating revenues consisting of product sales, product development fees and licensing revenues, and royalties.

Working capital decreased from $83.7 million at December 31, 2002 to $81.6 million at March 31, 2003, primarily due to an increase in accounts payable reflecting facilities expansion and higher production levels. Cash and available-for-sale securities, including both current and non-current securities, were $133.0 million at March 31, 2003, essentially unchanged compared to $131.7 million at December 31, 2002. Capital expenditures during the first quarter of 2003 totaled $7.5 million. These expenditures were essentially funded by cash generated from operating activities. We invest excess cash in interest-bearing money market accounts and investment grade securities.

During 2003, we plan to spend approximately $25 to $30 million, exclusive of potential capital expenditures to add capacity for the manufacture of products containing potent substances, to complete various improvement projects at our Eden Prairie manufacturing facility and our Brooklyn Park R&D center. These projects include: the replacement or addition of a production line in Eden Prairie for fast dissolve product requiring blister packaging in response to

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the increased demand by our pharmaceutical company partners for manufactured products; and the establishment of a second manufacturing site in our Brooklyn Park facility to provide bottling production capabilities. We expect the Brooklyn Park manufacturing site to be operational in late 2003. In addition, we expect to fund additional product development activities related to our OraVescent technology, which may include adding capacity for the manufacture of products containing potent substances, and to develop proprietary products using our OraSolv and DuraSolv technologies. We may also acquire technologies that complement our current portfolio of oral drug delivery technologies. We believe that our cash and cash equivalents and available-for-sale securities, together with expected revenues from operations, will be sufficient to meet our anticipated capital requirements for the foreseeable future. However, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise such additional funds through public or private equity financings or from other sources. We cannot be certain that additional financing will be available on terms favorable to us, or at all, or that any additional financing will not be dilutive.

Factors That Could Affect Future Results

Certain statements made in this Quarterly Report on Form 10-Q are forward-looking statements based on our current expectations, assumptions, estimates and projections about our business and our industry. These forward-looking statements involve risks and uncertainties. Our business, financial condition and results of operations could differ materially from those anticipated in these forward-looking statements as a result of certain factors, as more fully described below and elsewhere in this Form 10-Q. You should consider carefully the risks and uncertainties described below, which are not the only ones facing our company. Additional risks and uncertainties also may impair our business operations.

The Loss Of One Of Our Top Four Major Customers Could Reduce Our Revenues Significantly.
Revenues from AstraZeneca, Organon, Schwarz Pharma, and Wyeth together represented approximately 90% of our total operating revenues for the quarter ended March 31, 2003, compared to 70% for the corresponding period in 2002. The loss of any one of these customers could cause our revenues to decrease significantly, resulting in losses from our operations. If we cannot broaden our customer base, we will continue to depend on a few customers for a significant portion of our revenues. We may be unable to negotiate favorable business terms with customers that represent a significant portion of our revenues. If we cannot, our revenues and gross profits may not grow as expected and may be insufficient to allow us to achieve sustained profitability.

We Rely On Third Parties To Market, Distribute And Sell The Products Incorporating Our Drug Delivery Technologies, And Those Third Parties May Not Perform, Or The Sales Of Those Products May Be Affected By Factors Beyond The Control Of Those Third Parties.
Our pharmaceutical company partners market and sell the products we develop and manufacture. If one or more of our pharmaceutical company partners fails to pursue the marketing of our products as planned, our revenues and gross profits may not reach our expectations, or may decline. We often cannot control the timing and other aspects of the development of products incorporating our technologies because our pharmaceutical company partners may have priorities that differ from ours. Therefore, our commercialization of products under development may be delayed unexpectedly. Because we incorporate our drug delivery technologies into the oral dosage forms of products marketed and sold by our pharmaceutical company partners, we do not have a direct marketing channel to consumers for our drug delivery technologies. The marketing organizations of our pharmaceutical company partners may be unsuccessful or they may assign a low level of priority to the marketing of our products. Further, they may discontinue marketing the products that incorporate our drug delivery technologies. If marketing efforts for our products are not successful, our revenues may fail to grow as expected or may decline.

For the year ended December 31, 2002, net sales from manufacturing and royalties from our partners’ sales of our top three products accounted for approximately 60% of our operating revenues. For the three months ended March 31, 2003, net sales from manufacturing and royalties from our partners’ sales of our top four products accounted for approximately 78% of our total operating revenues. Our top three products are AstraZeneca’s Zomig-ZMT and its equivalent for markets outside the U.S., Organon’s Remeron SolTab and its equivalent for markets outside the U.S., and Wyeth’s Alavert. We cannot be certain that these products will continue to be accepted in their markets. Specifically, the following factors, among others, could affect the level of market acceptance of Remeron SolTab and its non-U.S. equivalents, Zomig-ZMT and its non-U.S. equivalents, and Alavert:

• the perception of the healthcare community of their safety and efficacy, both in an absolute sense and relative to that of competing products;

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• unfavorable publicity regarding these products or similar products;

• product price relative to other competing products or treatments;

• changes in government and third-party payor reimbursement policies and practices; and

• regulatory developments affecting the manufacture, marketing or use of these products.

If We Do Not Enter Into Additional Collaborative Agreements With Pharmaceutical Companies, We May Not Be Able To Achieve Sustained Profitability.
We primarily depend upon collaborative agreements with pharmaceutical companies to develop, test and obtain regulatory approval for, and commercialize oral dosage forms of, active pharmaceutical ingredients using our drug delivery technologies. The number of products that we successfully develop under these collaborative agreements will affect our revenues. If we do not enter into additional agreements in the future, or if our current or future agreements do not result in successful marketing of our products, our revenues and gross profits may be insufficient to allow us to achieve sustained profitability.

We face additional risks related to our collaborative agreements, including the risks that:

• any existing or future collaborative agreements may not result in additional commercial products;

• additional commercial products that we develop may not be successful;

• we may not be able to meet the milestones established in our current or future collaborative agreements;

• we may not be able to successfully develop new drug delivery technologies that will be attractive in the future to potential pharmaceutical company partners; and

• our pharmaceutical company partners may exercise their rights to terminate their collaborative agreements with us.

If We Cannot Increase Our Production Capacity, We May Be Unable To Meet Expected Demand For Our Products, And We May Lose Revenues.
We must increase our production capacity to meet expected demand for our products. We currently have two production lines for product requiring blister packaging, which collectively have an estimated annualized production capacity in excess of 500 million tablets. In 2003, we plan to add a third production line, which is expected to be completed and commissioned in the first half of 2004. We also are installing a production line for bottled product at our Brooklyn Park facility, which is expected to be completed and commissioned in the fourth quarter of 2003. We estimate that our total annualized capacity for the two production lines in Eden Prairie will increase from approximately 500 million to approximately 1.0 billion tablets if we add the new production line to our two existing production lines. The estimated total annualized capacity of the production line in Brooklyn Park will be approximately 700 million bottled tablets. If we are unable to increase our production capacity as scheduled or if our partners significantly increase their requirements for product deliveries prior to completing the scheduled increases in capacity, we may be required to allocate our production capacity until we have completed these capacity improvements. If this should happen, we may lose revenues and we may not be able to maintain our relationships with our pharmaceutical company partners. Production lines in the pharmaceutical industry generally take 16 to 24 months to complete due to the long lead times required for precision production equipment to be manufactured and installed, as well as the required testing and validation process that must be completed once the equipment is installed. We may not be able to increase our production capacity quickly enough to meet the requirements of our pharmaceutical company partners.

If We Do Not Properly Manage Our Growth, We May Be Unable To Sustain The Level Of Revenues We Have Attained Or Effectively Pursue Additional Business Opportunities.
Our operating revenues increased 99% in the first quarter of 2003, 46% in the year ended December 31, 2002, and 34% in the year ended December 31, 2001, placing significant strain on our management, administrative and operational resources. If we do not properly manage the growth we have recently experienced and expect in the future, our revenues may decline or we may be unable to pursue sources of additional revenues. To properly manage our growth, we must, among other things, implement additional (and improve existing) administrative, financial and operational systems, procedures and controls on a timely basis. We also need to expand our finance, administrative and operations staff. We may not be able to complete the improvements to our systems, procedures and controls necessary to support our future operations in a timely manner. We may not be able to hire, train, integrate, retain, motivate and manage required personnel and may not be able to successfully identify, manage and pursue existing and potential market opportunities. Improving our systems and increasing our staff will increase our operating expenses. If we fail to generate additional revenue in excess of increased operating expenses in any fiscal period we may incur losses, or our losses may increase in that period.

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Sales Of Our Pharmaceutical Company Partners’ Products May Decline As A Result Of Competition From Generic Prescription Products And Regulatory Actions That Could Switch A Prescription Product To An Over-The-Counter Product, Which May Result In A Decline In Our Revenues And Profitability.
Many of our pharmaceutical company partners face intense competition from manufacturers of generic drugs. Generic competition may reduce the demand and/or price for our partners’ products. Products that our pharmaceutical company partners produce may also be subject to regulatory actions that result in prescription products becoming available to consumers over-the-counter. Such a change could also reduce the demand and/or price for our partners’ products. Because we derive a significant portion of our revenue from manufacturing products for and receipt of royalties from our pharmaceutical company partners, a decline in the sales of products that we produce for our partners, whether as a result of the introduction of competitive generic products or other competitive factors, could have a material adverse effect on our revenues and profitability.

In January 2002, Mylan Laboratories and Teva Pharmaceutical Industries announced that they received tentative approval from the FDA to sell mirtazapine tablets, which are expected to be generic substitutes for Organon’s Remeron standard tablets. We developed and manufacture an OraSolv formulation of Remeron, Remeron SolTab, for Organon. In March 2002, Akzo Nobel NV, Organon’s parent company, reported that Organon sued seven generic pharmaceutical companies, including Teva and Mylan, for the infringement of Organon’s U.S. patent for Remeron (mirtazapine standard tablets). In May 2002, Organon announced that it sued Barr Laboratories, Inc. for infringing its U.S. patent for Remeron SolTab (mirtazapine orally disintegrating tablets). On December 18, 2002, a federal district court ruled that the generic version of mirtazapine developed by Teva did not infringe Organon’s patent covering Remeron. Teva launched its generic form of mirtazapine in the U.S. market in 2003. We expect other generic manufacturers, including Mylan Laboratories, to launch their generic versions of mirtazapine, subject to FDA approval, after Teva’s 180 day marketing exclusivity period expires. In addition, the U.S. market launch of generic orally disintegrating mirtazapine tablets developed by Barr Laboratories is expected to occur after it receives FDA approval. Although Organon has appealed this court’s ruling, it is unlikely that the appeals court will reverse or delay the trial court’s ruling. Organon’s market for Remeron SolTab may be affected negatively by the introduction of generic versions of standard or orally disintegrating mirtazapine tablets. The introduction of these generic tablets could be expected to lower Organon’s pricing for Remeron. Due to the large number of variables and high degree of uncertainty, we are unable to predict the timing of the market introduction of a generic orally disintegrating mirtazapine tablet or the effect that the introduction of generic mirtazapine may have on our business.

On January 15, 2003, KV Pharmaceutical Company announced that it will begin marketing the first product utilizing its OraQuick fast dissolve technology. Hyoscyamine Sulfate Orally Disintegrating Tablets, 0.125 mg, is a prescription anticholinergic/antispasmodic product. This product is expected to be equivalent to and substitutable for NuLev, which we developed and manufacture for Schwarz Pharma. The timing of KV Pharmaceutical’s market launch of the fast dissolve prescription anticholinergic/antispasmodic product is unknown. Due to the large number of variables, we are unable to predict the effect of such a product introduction by KV Pharmaceutical on our business. For details regarding a lawsuit between KV Pharmaceutical and CIMA, see information under the heading “Legal Proceedings” contained elsewhere in this document.

On January 27, 2003, Andrx Corporation and Perrigo Company announced that they have entered into a multi-year agreement for Andrx to supply Perrigo with Andrx’s over-the-counter fast dissolve formulation of loratadine, which is expected to be equivalent to and substitutable for Schering-Plough’s Claritin RediTabs and Wyeth’s Alavert. Andrx has received tentative FDA approval of its Abbreviated New Drug Application for a fast dissolve formulation of loratadine. We developed and manufacture Alavert for Wyeth. Perrigo is one of the largest providers of store brand over-the-counter products in the U.S. In February 2003, Wyeth received its second FDA approval, an ANDA, for a DuraSolv loratadine product, which is identical to Alavert, but was initially intended for the prescription market. This second FDA approval of a DuraSolv loratadine product may prevent Andrx from receiving final FDA approval of its competitive fast-dissolve formulation of loratadine, until a date no earlier than 180 days after Wyeth’s launch of Alavert on December 20, 2002. We do not expect Perrigo to begin marketing the fast dissolve loratadine product developed and manufactured by Andrx until Wyeth’s 180 day marketing exclusivity period expires. Due to the large number of variables, we are unable to predict the exact timing and effect of such a product introduction by the Perrigo Company on our business.

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We May Experience Significant Delays In Expected Product Releases While We And Our Pharmaceutical Company Partners Seek Regulatory Approvals For The Products We Develop And Manufacture And, If Either Of Us Are Not Successful In Obtaining The Approvals, We May Be Unable To Achieve Our Anticipated Revenues And Profits.
The federal government, principally the U.S. Food and Drug Administration, and state and local government agencies regulate all new pharmaceutical products, including our existing products and those under development. Our pharmaceutical company partners may experience significant delays in expected product releases while attempting to obtain regulatory approval for the products we develop. If they are not successful, our revenues and profitability may decline. We, and our pharmaceutical company partners, cannot control the timing of regulatory approval for the products we develop.

Applicants for FDA approval often must submit extensive clinical data and supporting information to the FDA. Varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit or prevent regulatory approval of a drug product. Changes in FDA approval policy during the development period, or changes in regulatory review for each submitted new drug application, also may cause delays or rejection of an approval. In addition, prior to obtaining FDA approval for a product, the manufacturing facility for the product must be pre-approved by the FDA. Failure by us to obtain FDA pre-approval of our manufacturing facilities could significantly delay or cause the rejection of FDA approval for products we and our pharmaceutical company partners intend to manufacture and sell. Even if the FDA approves a product, the approval may limit the uses or “indications” for which a product may be marketed, or may require further studies. The FDA also can withdraw product clearances and approvals for failure to comply with regulatory requirements or if unforeseen problems follow initial marketing.

Manufacturers of drugs also must comply with applicable good manufacturing practices requirements. If we cannot comply with applicable good manufacturing practices, we may be required to suspend the production and sale of our products, which would reduce our revenues and gross profits. We may not be able to comply with the applicable good manufacturing practices and other FDA regulatory requirements for manufacturing as we expand our manufacturing operations. We expect an FDA inspection before the end of 2003. We cannot guarantee that any future inspections will proceed without any compliance issues requiring time and resources to resolve.

We May Be Exposed To Liability Claims Associated With The Use Of Hazardous Materials And Chemicals.
Our research and development and manufacturing activities involve the controlled use of hazardous materials and chemicals. Although we believe that our safety procedures for using, storing, handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of such an accident, we could be held liable for any resulting damages, and any liability could materially adversely affect our business, financial condition and results of operations. In addition, the federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous or radioactive materials and waste products may require us to incur substantial compliance costs that could materially adversely affect our business, financial condition and results of operations.

Our Products May Contain Controlled Substance And Or Potent Substances, The Supply And Manufacture Of Which May Be Limited Or Regulated By U.S. Government Agencies.
The active ingredients in some of our current and proposed products, including OraVescent fentanyl, are controlled substances under the Controlled Substances Act of 1970 and are regulated by the U.S. Drug Enforcement Agency. These products are subject to DEA and OSHA regulations relating to manufacturing, storage, distribution and physician prescription procedure. Products containing controlled substances may generate public controversy. Opponents of these products may seek restrictions on marketing and withdrawal of any regulatory approvals. In addition, these opponents may seek to generate negative publicity in an effort to persuade the medical community to reject these products. Political pressures and adverse publicity could lead to delays in, and increased expenses for, and limit or restrict the introduction and marketing of products containing controlled substances. Furthermore, the DEA could impose significant penalties and fines against us and our pharmaceutical company partners for violating the Controlled Substances Act and DEA regulations.

Regulations under the Occupational Safety and Health Act establish certain standards related to safety in handling and manufacturing potent substances, such as fentanyl citrate. Under these regulations, we believe that our production of fentanyl citrate would require a specialized manufacturing environment that prevents fentanyl citrate from coming in contact with humans. We may develop other products that would require a specialized manufacturing environment. Currently, none of our existing production lines in Eden Prairie nor our planned production lines in Eden Prairie and Brooklyn Park are capable of manufacturing potent substances. In the event we

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pursue the development of our OraVescent fentanyl product through regulatory submission or other potential products with a comparable safety profile to fentanyl, we will be required to identify a manufacturer with appropriate resources to manufacture potent substances or to develop those capabilities internally. We are presently assessing the feasibility of contracting with third party manufacturers that have these specialized manufacturing capabilities and of developing these capabilities internally. In the event we decide to manufacture OraVescent fentanyl or other potent products in our facilities, we will be required to add potent substance manufacturing capabilities that comply with these safety regulations, which could require capital expenditures in the excess of $10 million. If we choose not to invest in potent substance manufacturing capabilities, our future revenues may not grow as fast because we will be unable to compete in certain important therapeutic markets for our technologies.

Our Commercial Products Are Subject To Continuing Regulations And We May Be Subject To Adverse Consequences If We Fail To Comply With Applicable Regulations.
Even if our products receive regulatory approval, either in the U.S. or internationally, we will continue to be subject to extensive regulatory requirements. These regulations are wide-ranging and govern, among other things:

• adverse drug experience reporting regulations;

• product promotion;

• product manufacturing, including good manufacturing practices requirements; and

• product changes or modifications.

If we fail to comply or maintain compliance with these laws and regulations, we may be fined or barred from selling our products. If the FDA determines that we are not complying with the law, it can:

• issue warning letters;

• impose fines;

• seize products or order recalls;

• issue injunctions to stop future sales of products;

• refuse to permit products to be imported into, or exported out of, the U.S.;

• totally or partially suspend our production;

• delay pending marketing applications; and

• initiate criminal prosecutions.

We Have A Single Manufacturing Facility For Product Requiring Blister Packaging And We May Lose Revenues And Be Unable To Maintain Our Relationships With Our Pharmaceutical Company Partners If We Lose Production Capacity for Blistered Product.
We manufacture all our current products on two production lines in our Eden Prairie facility. All of our commercialized products, except for Schwarz Pharma’s NuLev, are blister-packaged on one or both of our Eden Prairie production lines. If our existing production lines or facility becomes incapable of manufacturing products for any reason, we may be unable to meet production requirements, we may lose revenues and we may not be able to maintain our relationships with our pharmaceutical company partners. Without our existing production lines, we would have no other means of manufacturing products incorporating our drug delivery technologies until we were able to restore the manufacturing capability at our facility or to develop an alternative manufacturing facility. Although we carry business interruption insurance to cover lost revenues and profits in an amount we consider adequate, this insurance does not cover all possible situations. In addition, our business interruption insurance would not compensate us for the loss of opportunity and potential adverse impact on relations with our existing pharmaceutical company partners resulting from our inability to produce products for them. The production line we expect to add at our Brooklyn Park facility will be dedicated to bottled product, which is important for products currently under development, but does not reduce the risk associated with loss of capacity for product requiring blister packaging.

We Rely On Single Sources For Some Of Our Raw Materials, And We May Lose Revenues And Be Unable To Maintain Our Relationships With Our Pharmaceutical Company Partners If Those Materials Were Not Available.
We rely on single suppliers for some of our raw materials and packaging supplies. If these raw materials or packaging supplies were no longer available we may be unable to meet production requirements, we may lose revenues and we may not be able to maintain our relationships with our pharmaceutical company partners. Without adequate supplies of raw materials or packaging supplies, our manufacturing operations may be interrupted until another supplier could be identified, its products validated and trading terms with it negotiated. While we have identified alternative suppliers, we may not be able to engage them in a timely manner, or at all. Furthermore, we may not be able to negotiate favorable terms with an alternative supplier. Any disruptions in our manufacturing

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operations from the loss of a supplier could potentially damage our relations with our pharmaceutical company partners and materially adversely affect our business, financial condition, and results of operations.

If We Cannot Develop Additional Products, Our Ability To Increase Our Revenues Would Be Limited.
We intend to continue to enhance our current technologies and pursue additional proprietary drug delivery technologies. If we are unable to do so, we may be unable to achieve our objectives of revenue growth and sustained profitability. Even if enhanced or additional technologies appear promising during various stages of development, we may not be able to develop commercial applications for them because:

• the potential technologies may fail clinical studies;

• we may not find a pharmaceutical company willing to adopt the technologies;

• it may be difficult to apply the technologies on a commercial scale; or

• the technologies may be uneconomical to market.

If We Cannot Keep Pace With The Rapid Technological Change And Meet The Intense Competition In Our Industry, We May Lose Business.
Our success depends, in part, on maintaining a competitive position in the development of products and technologies in a rapidly evolving field. If we cannot maintain competitive products and technologies, our current and potential pharmaceutical company partners may choose to adopt the drug delivery technologies of our competitors. Fast dissolve tablet technologies that compete with our OraSolv and DuraSolv technologies include the Zydis technology developed by R.P. Scherer Corporation, a wholly-owned subsidiary of Cardinal Health, Inc., the WOWTab technology developed by Yamanouchi Pharma Technologies, the Flashtab technology developed by Ethypharm, the FlashDose technology developed by Fuisz Technologies Ltd., a wholly-owned subsidiary of Biovail Corporation, and the OraQuick technology developed by KV Pharmaceutical Company. SPI Pharma, Inc., a wholly-owned subsidiary of Associated British Foods plc, recently announced Pharmaburst, a specially engineered excipient system that is capable of rapid disintegration. In addition, Eurand, a private specialty pharmaceutical company, recently announced that it has licensed a marketed, fast dissolve drug delivery technology, which is expected to be fully integrated into Eurand’s business in the second half of 2003. We also compete generally with other drug delivery, biotechnology and pharmaceutical companies engaged in the development of alternative drug delivery technologies or new drug research and testing. Many of these competitors have substantially greater financial, technological, manufacturing, marketing, managerial and research and development resources and experience than we do and represent significant competition for us.

Our competitors may succeed in developing competing technologies or obtaining governmental approval for products before us. The products of our competitors may gain market acceptance more rapidly than our products. Developments by competitors may render our products, or potential products, noncompetitive or obsolete.

If We Cannot Adequately Protect Our Technology And Proprietary Information, We May Be Unable To Sustain A Competitive Advantage.
Our success depends, in part, on our ability to obtain and enforce patents for our products, processes and technologies and to preserve our trade secrets and other proprietary information. If we cannot do so, our competitors may exploit our innovations and deprive us of the ability to realize revenues and profits from our developments. We have been granted seventeen patents on our drug delivery and packaging systems in the U.S., which will expire beginning in 2010. We have over 80 applications and granted patents in the U.S. and other major countires.

Any patent applications we may have made or may make relating to our potential products, processes and technologies may not result in patents being issued. Our current patents may not be valid or enforceable. They may not protect us against competitors that challenge our patents, obtain patents that may have an adverse effect on our ability to conduct business or are able to circumvent our patents. Further, we may not have the necessary financial resources to enforce our patents.

To protect our trade secrets and proprietary technologies and processes, we rely, in part, on confidentiality agreements with our employees, consultants and advisors. These agreements may not provide adequate protection for our trade secrets and other proprietary information in the event of any unauthorized use or disclosure, or if others lawfully develop the information.

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Third Parties May Claim That Our Technologies, Or The Products In Which They Are Used, Infringe On Their Rights, And We May Incur Significant Costs Resolving These Claims.

Third parties may claim that the manufacture, use or sale of our drug delivery technologies infringe on their patent rights. If such claims are asserted, we may have to seek licenses, defend infringement actions or challenge the validity of those patents in court. If we cannot obtain required licenses, are found liable for infringement or are not able to have these patents declared invalid, we may be liable for significant monetary damages, encounter significant delays in bringing products to market or be precluded from participating in the manufacture, use or sale of products or methods of drug delivery covered by the patents of others. We may not have identified, or be able to identify in the future, U.S. and foreign patents that pose a risk of potential infringement claims.

We enter into collaborative agreements with pharmaceutical companies to apply our drug delivery technologies to drugs developed by others. Ultimately, we receive license revenues and product development fees, as well as revenues from, and royalties on, the sale of products incorporating our technology. The drugs to which our drug delivery technologies are applied are generally the property of the pharmaceutical companies. Those drugs may be the subject of patents or patent applications and other forms of protection owned by the pharmaceutical companies or third parties. If those patents or other forms of protection expire, are challenged or become ineffective, sales of the drugs by the collaborating pharmaceutical company may be restricted or may cease.

Because We Have A Limited Operating History, Potential Investors In Our Stock May Have Difficulty Evaluating Our Prospects.
We recorded the first commercial sales of products using our fast dissolve technologies in early 1997. Accordingly, we have only a limited operating history, which may make it difficult for you and other potential investors to evaluate our prospects. The difficulty investors may have in evaluating our prospects may cause volatile fluctuations, including decreases, in the market price of our common stock as investors react to information about our prospects. Since 1997, we have generated revenues from product development fees and licensing arrangements, sales of products using our fast dissolve technologies and royalties. We are currently making the transition from research and product development operations with limited production to commercial operations with expanding production capabilities in addition to research and product development activities. Our business and prospects, therefore, must be evaluated in light of the risks and uncertainties of a company with a limited operating history and, in particular, one in the pharmaceutical industry.

If We Are Not Profitable In The Future, The Value Of Our Stock May Fall.
Although we were profitable for the year ended December 31, 2002, and continued to be profitable in the first quarter of 2003, we have accumulated aggregate net losses from inception of approximately $5.2 million. If we are unable to sustain profitable operations in future periods, the market price of our stock may fall. The costs for research and product development of our drug delivery technologies and general and administrative expenses have been the principal causes of our losses. Our ability to achieve sustained profitable operations depends on a number of factors, many of which are beyond our direct control. These factors include:

• the demand for our products;

• our ability to manufacture our products efficiently and with the required quality;

• our ability to increase our manufacturing capacity;

• the level of product and price competition;

• our ability to develop additional commercial applications for our products;

• our ability to control our costs; and

• general economic conditions.

We May Require Additional Financing, Which May Not Be Available On Favorable Terms Or At All And Which May Result In Dilution Of The Equity Interest Of An Investor.
We may require additional financing to fund the development and possible acquisition of new drug delivery technologies and to increase our production capacity beyond what is currently anticipated. If we cannot obtain financing when needed, or obtain it on favorable terms, we may be required to curtail any plans to develop or acquire new drug delivery technologies or may be required to limit the expansion of our manufacturing capacity. We believe our cash and cash equivalents and expected revenues from operations will be sufficient to meet our anticipated capital requirements for the foreseeable future. However, we may elect to pursue additional financing at any time to more aggressively pursue development of new drug delivery technologies and expand manufacturing capacity beyond that currently planned.

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Other factors that will affect future capital requirements and may require us to seek additional financing include:

• the level of expenditures necessary to develop or acquire new products or technologies;

• the progress of our research and product development programs;

• the need to construct a larger than currently anticipated manufacturing facility, or additional manufacturing facilities, to meet demand for our products;

• the results of our collaborative efforts with current and potential pharmaceutical company partners; and

• the timing of, and amounts received from, future product sales, product development fees and licensing revenue and royalties.

Demand For Some Of Our Products Is Seasonal, And Our Sales And Profits May Suffer During Periods When Demand Is Light.
Certain non-prescription products that we manufacture for our pharmaceutical company partners treat seasonal ailments such as coughs, colds, and allergies. Our pharmaceutical company partners may choose not to market those products in off-seasons and our sales and profits may decline in those periods as a result. In the first quarter of 2003, operating revenues from Wyeth and Novartis, which included revenues related to Alavert, an allergy medication, and Triaminic, a seasonal cough and cold product, represented nearly 35% of our total operating revenues. We may not be successful in developing a mix of products to reduce these seasonal variations.

If The Marketing Claims Asserted About Our Products Are Not Approved, Our Revenues May Be Limited.
Once a drug product incorporating our technologies is approved by the FDA, the Division of Drug Marketing, Advertising and Communication, the FDA’s marketing surveillance department within the Center for Drug Evaluation and Research, must approve marketing claims asserted about it by our pharmaceutical company partners. If our pharmaceutical company partners fail to obtain from the Division of Drug Marketing, Advertising and Communication acceptable marketing claims for a product incorporating our drug delivery technologies, our revenues from that product may be limited. Marketing claims are the basis for a product’s labeling, advertising and promotion. The claims our pharmaceutical company partners are asserting about our drug delivery technologies, or the drug product itself, may not be approved by the Division of Drug Marketing, Advertising and Communication.

We May Face Product Liability Claims Related To Participation In Clinical Trials Or The Use Or Misuse Of Our Products.
The testing, manufacturing and marketing of products using our drug delivery technologies may expose us to potential product liability and other claims resulting from their use. If any such claims against us are successful, we may be required to make significant compensation payments. Any indemnification that we have obtained, or may obtain, from contract research organizations or pharmaceutical companies conducting human clinical trials on our behalf may not protect us from product liability claims or from the costs of related litigation. Similarly, any indemnification we have obtained, or may obtain, from pharmaceutical companies with which we are developing our drug delivery technologies may not protect us from product liability claims from the consumers of those products or from the costs of related litigation. If we are subject to a product liability claim, our product liability insurance may not reimburse us, or be sufficient to reimburse us, for any expenses or losses we may suffer. A successful product liability claim against us, if not covered by, or if in excess of, our product liability insurance, may require us to make significant compensation payments, which would be reflected as expenses on our Income Statement and reduce our earnings.

Anti-Takeover Provisions Of Our Corporate Charter Documents, Delaware Law And Our Stockholders’ Rights Plan May Affect The Price Of Our Common Stock.
Our corporate charter documents, Delaware law and our stockholders’ rights plan include provisions that may discourage or prevent parties from attempting to acquire us. These provisions may have the effect of depriving our stockholders of the opportunity to sell their stock at a price in excess of prevailing market prices in an acquisition of us by another company. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the rights, preferences and privileges of those shares without any further vote or action by our stockholders. The rights of holders of our common stock may be adversely affected by the rights of the holders of any preferred stock that may be issued in the future. Additional provisions of our certificate of incorporation and bylaws could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting common stock. These include provisions that limit the ability of stockholders to call special meetings or remove a director for cause.

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We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, either alone or together with affiliates and associates, owns (or within the past three years, did own) 15% or more of the corporation’s voting stock.

We also have a stockholders’ rights plan, commonly referred to as a poison pill, which makes it difficult, if not impossible, for a person to acquire control of us without the consent of our board of directors.

Our Stock Price Has Been Volatile And May Continue To Be Volatile.
The trading price of our common stock has been, and is likely to continue to be, highly volatile. The market value of your investment in our common stock may fall sharply at any time due to this volatility. In the year ended December 31, 2002, the closing sale price for our common stock ranged from $16.06 to $35.45. In the three months ended March 31, 2003, the closing price for our common stock ranged from $18.19 to $28.01. The market prices for securities of drug delivery, biotechnology and pharmaceutical companies historically have been highly volatile. Factors that could adversely affect our stock price include:

• fluctuations in our operating results;

• announcements of technological collaborations, innovations or new products by us or our competitors;

• governmental regulations;

• developments in patent or other proprietary rights owned by us or others;

• public concern as to the safety of drugs developed by us or others;

• the results of pre-clinical testing and clinical studies or trials by us or our competitors;

• litigation;

• decisions by our pharmaceutical company partners relating to the products incorporating our technologies;

• actions by the FDA in connection with submissions related to the products incorporating our technologies; and

• general market conditions.

Our Operating Results May Fluctuate, Causing Our Stock Price To Fall.
Fluctuations in our operating results may lead to fluctuations, including declines, in our stock price. Our operating results may fluctuate from quarter to quarter and from year to year depending on:

• demand by consumers for the products we produce;

• new product introductions;

• the seasonal nature of the products we produce to treat seasonal ailments;

• pharmaceutical company ordering patterns;

• our production schedules;

• the number of new collaborative agreements that we enter into;

• the number and timing of product development milestones that we achieve under collaborative agreements;

• the level of our development activity conducted for, and at the direction of, pharmaceutical companies under collaborative agreements; and

• the level of our spending on new drug delivery technology development and technology acquisition, and internal product development.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

The Company is subject to interest rate and foreign currency risks. Our investments in fixed-rate debt securities, which are classified as available-for-sale at March 31, 2003, have remaining maturities of 48 months or less and thus are exposed to the risk of fluctuating interest rates. Available-for-sale securities had a market value of $101.8 million at March 31, 2003, and represented more than 44% of total assets. The primary objective of our investment activities is to preserve capital. We have a contractual commitment to purchase assets for our new manufacturing line that is denominated in foreign currency, but we have entered into forward foreign exchange contracts to limit our exposure to fluctuating exchange rates. We have not used derivative financial instruments in our investment portfolio.

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We performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign exchange rates to the underlying currency exposures described above and in interest rates applicable to fixed rate investments maturing during the next twelve months that are subject to reinvestment risk. As of March 31, 2003, the analysis indicated that these hypothetical market movements would not have a material effect on our financial position, results of operations or cash flow.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal controls. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On March 17, 2003, CIMA and Schwarz Pharma filed a complaint in the United States District Court for the District of Minnesota against KV Pharmaceutical Company and its wholly-owned subsidiary Ethex Corporation. The complaint alleges that KV Pharmaceutical and Ethex are manufacturing and selling orally disintegrating hyoscyamine sulfate (0.125 mg) tablets in violation of one or more of CIMA’s patents covering its DuraSolv technology. CIMA manufactures NuLev, an orally disintegrating hyoscyamine sulfate (0.125 mg) product, for Schwarz pursuant to an exclusive license agreement. CIMA and Schwarz are seeking an injunction against further infringement of the patent and compensatory damages. KV Pharmaceutical and Ethex have filed a counterclaim against CIMA seeking a declaratory judgment that CIMA’s patent is invalid.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit	Description of Document	Method of Filing
3.1	Fifth Restated Certificate of Incorporation of CIMA, as amended	(1)
3.2	Third Restated Bylaws of CIMA	(2)
4.1	Form of Certificate for Common Stock	(3)
4.2	Amended and Restated Rights Agreement, dated as of June 26, 2001, between CIMA and Wells Fargo Bank Minnesota, N.A.	(4)
10.1	Letter Agreement, dated February 27, 2003, between CIMA and David Feste. #	(5)
10.2	Employment Agreement, dated February 19, 2003, by and between CIMA and James C. Hawley. #	(5)
10.3	Letter Agreement, dated April 4, 2003, between CIMA and John M. Siebert, Ph.D. #	Filed herewith

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Exhibit	Description of Document	Method of Filing
10.4	Employment Agreement, dated April 30, 2003 between CIMA and Steven B. Ratoff. #	Filed herewith
99.1	Certification of Chief Executive Officer and Chief Financial Officer	Filed herewith

#	Denotes management contract, compensatory plan or arrangement required to be filed as an exhibit to this Form 10-Q.
(1)	Filed as an exhibit to CIMA’s Registration Statement on Form S-8, filed June 13, 2001, File No. 333-62954, and incorporated herein by reference.
(2)	Filed as an exhibit to CIMA’s Quarterly Report on Form 10-Q for the period ended June 30, 1999, File No. 0-24424, and incorporated herein by reference.
(3)	Filed as an exhibit to CIMA’s Registration Statement on Form S-1, File No. 33-80194, and incorporated herein by reference.
(4)	Filed as an exhibit to CIMA’s Amendment No. 1 to Registration Statement on Form 8-A/A, filed July 18, 2001, File No. 0-24424, and incorporated herein by reference.
(5)	Filed as an exhibit to CIMA’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 0-24424, and incorporated herein by reference.
(b)	Reports on Form 8-K

On April 1, 2003 a copy of a press release issued on March 31, 2003 was filed on Form 8-K. The press release announced that Steven B. Ratoff had been elected Chairman of the Board and would become the Company’s interim Chief Executive Officer on May 1, 2003.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CIMA LABS INC. Registrant
Date: May 13, 2003	By /s/ James C. Hawley James C. Hawley Vice President, Chief Financial Officer and Secretary (principal financial and accounting officer, duly authorized to sign on behalf of the registrant)

CERTIFICATIONS

     I, Steven B. Ratoff, certify that:

          1. I have reviewed this quarterly report on Form 10-Q of CIMA LABS INC.;

          2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

          3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

          4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     (a) Designed such disclosure controls and procedures to ensure that material information relating to registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

     (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

     (c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

          5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

     (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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          6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003	By:	/s/ Steven B. Ratoff
		Steven B. Ratoff, interim Chief Executive Officer

     I, James C. Hawley, certify that:

          1. I have reviewed this quarterly report on Form 10-Q of CIMA LABS INC.;

          2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

          3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

          4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     (a) Designed such disclosure controls and procedures to ensure that material information relating to registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

     (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

     (c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

          5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

     (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

          6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003	By:	/s/ James C. Hawley
		James C. Hawley, Vice President, Chief Financial Officer and Secretary

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Exhibit Index

Exhibit	Description of Document	Method of Filing
3.1	Fifth Restated Certificate of Incorporation of CIMA, as amended	(1)
3.2	Third Restated Bylaws of CIMA	(2)
4.1	Form of Certificate for Common Stock	(3)
4.2	Amended and Restated Rights Agreement, dated as of June 26, 2001, between CIMA and Wells Fargo Bank Minnesota, N.A.	(4)
10.1	Letter Agreement, dated February 27, 2003, between CIMA and David Feste. #	(5)
10.2	Employment Agreement, dated February 19, 2003, by and between CIMA and James C. Hawley. #	(5)
10.3	Letter Agreement, dated April 4, 2003, between CIMA and John M. Siebert, Ph.D. #	Filed herewith
10.4	Employment Agreement, dated April 30, 2003 between CIMA and Steven B. Ratoff. #	Filed herewith
99.1	Certification of Chief Executive Officer and Chief Financial Officer	Filed herewith

#	Denotes management contract, compensatory plan or arrangement required to be filed as an exhibit to this Form 10-Q.
(1)	Filed as an exhibit to CIMA’s Registration Statement on Form S-8, filed June 13, 2001, File No. 333-62954, and incorporated herein by reference.
(2)	Filed as an exhibit to CIMA’s Quarterly Report on Form 10-Q for the period ended June 30, 1999, File No. 0-24424, and incorporated herein by reference.
(3)	Filed as an exhibit to CIMA’s Registration Statement on Form S-1, File No. 33-80194, and incorporated herein by reference.
(4)	Filed as an exhibit to CIMA’s Amendment No. 1 to Registration Statement on Form 8-A/A, filed July 18, 2001, File No. 0-24424, and incorporated herein by reference.
(5)	Filed as an exhibit to CIMA’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 0-24424, and incorporated herein by reference.

27 EX-10.3 3 c76985exv10w3.txt EX-10.3 LETTER AGREEMENT - JOHN M. SIEBERT, PH.D. [CIMA LOGO] EXHIBIT 10.3 April 4, 2003 John M. Siebert, Ph.D. 10759 Mount Curve Blvd. Eden Prairie, MN 55347 Dear John: This letter will confirm our discussions and agreements regarding the transition and termination of your employment with CIMA LABS INC. (the "Company"). 1. Employment. Your employment with the Company will end as a result of your retirement effective December 31, 2003, or such earlier date in accordance with paragraph 2 below. Your status as President and Chief Executive Officer of the Company ("CEO") will end effective April 30, 2003. You will continue to perform the responsibilities of CEO from now through April 30, 2003. While you are employed by the Company during the period from May 1, 2003 through December 31, 2003 (the "Transition Period"), you will perform such transition duties as may be requested by the Company. Such transition duties requested by the Company will not exceed eight days per month during the Transition Period and will be performed by you at times mutually agreed upon with the Company. During the Transition Period, you may provide consulting services for other business entities so long as such services are not "directly competitive" (as defined in paragraph 9 below) and do not interfere with your ability to provide services to the Company in accordance with this paragraph. 2. Termination of Employment. Between now and December 31, 2003, the Company may terminate your employment only (a) for "Cause," as defined in the Employment Agreement between you and the Company, dated as of June 30, 2000 (the "Employment Agreement"), provided, however, that a material breach by you of this Letter Agreement shall be considered a material breach of the Employment Agreement; or (b) if you become employed with any other employer. If you commence employment with any other employer, your employment with the Company will immediately end without further action by either you or the Company. 3. Compensation During Employment. While you are employed by the Company, you will continue to receive base salary at your current annual rate of $336,544.00 and those benefits as set forth in Section 3(c), (d), (e), and (f) of the Employment Agreement. Except as provided in paragraph 5(b)(iii) of this Letter Agreement below, you will not be eligible for any incentive bonus for calendar year 2003. You will not be eligible for any other compensation or benefits from the Company relating to your employment or the termination of your employment except as stated in this Letter Agreement. [CIMA LETTERHEAD] John M. Siebert, Ph.D. April 4, 2003 Page 2 4. Releases. At the same time that you sign this Letter Agreement you will sign a Release By John M. Siebert, in the form enclosed with this Letter Agreement as Exhibit A (the "First Release"). On or within 21 days after your last date of employment with, you will sign a second Release in the form enclosed with this Letter Agreement as Exhibit B (the "Second Release"), as a condition of receiving the pay and benefits set forth in paragraph 5(b) of this Letter Agreement. 5. Compensation Following Employment. a. In the event of termination by the Company for Cause, the Company shall have no further obligation to you under this Letter Agreement except to pay your base salary and benefits accrued through your last date of employment, including without limitation any earned and unused vacation time in accordance with the normal policies and practices of the Company. b. In the event of termination of your employment for any reason other than for Cause, and if you sign the Second Release on or within 21 days following your last date of employment and do not rescind the First Release or the Second Release within 15 days after signing each of them, and subject to your complying with all terms of this Letter Agreement, the Company will provide you with the following additional benefits: i. The Company will pay you, or in the event of your death, your Estate, devisees, heirs, beneficiaries, assigns or successors in interest, an amount equal to your final base salary, at the annual rate of $336,544.00, for the period from your last date of employment and continuing for twelve (12) months. Such pay will be subject to normal tax withholdings and will be paid by the Company in accordance with its regular payroll schedule. ii. If following your last date of employment you,or in the event of your death, or any of your dependents, elect to continue your group medical and dental insurance in accordance with the terms of the applicable plans and laws, the Company will continue to pay its portion of the monthly premiums for such coverage as if you were still employed by the Company, from your last date of employment through the earlier of (i) twelve (12) months following your last date of employment, (ii) the date you become eligible for other health or dental (as applicable) insurance benefits through a new employer, and (iii) the date continuation coverage is no longer available in accordance with the applicable plans or laws. Your continued coverages will be at the same level as in effect as of your last date of employment. The Company shall deduct your contributions for the monthly premiums from the pay described in paragraph 5(b)(i) above of this Letter Agreement. You agree to notify the Company in writing within three (3) days of your acceptance of any employment that provides health or dental insurance benefits. iii. The Company will pay you, or in the event of your death, your Estate, devisees, heirs, beneficiaries, assigns or successors in interest, a prorated annual bonus for calendar year 2003, in the amount of $78,461.25, less normal tax withholdings. John M. Siebert, Ph.D. April 4, 2003 Page 3 Such bonus payment will be paid at the same time as annual bonus payments are paid to other management employees of the Company for calendar year 2003, but in no event later than March 31, 2004. c. If your employment with the Company continues through December 31, 2003, you agree that all of your earned vacation time will be used and that you will not be entitled to payment for any earned vacation time upon termination of your employment. If your employment with the Company terminates before December 31, 2003 for any reason, the Company will pay you upon termination for earned and unused vacation time in accordance with the normal policies and practices of the Company. 6. Stock Options. You currently have options to purchase shares of the Common Stock of the Company in accordance with the following schedule, assuming your continued employment with the Company through December 31, 2003:

Plan Date of Grant Exercise Number of Amount Price Shares Granted Exercisable as of 12/31/03 - ---------- ------------- ---------- ---------------- ------------------- DIR 08/04/1994 $9.00 20,000 20,000 DIR 06/07/1995 $4.75 7,500 7,500 SOAP 07/01/1995 $4.00 75,000 0 SOAP 07/01/1995 $4.00 105,000 32,300 SOAP 10/29/1997 $5.875 48,937 48,937 SOAP 10/29/1997 $5.875 51,063 0 SOAP 04/24/1998 $4.375 22,857 0 SOAP 04/24/1998 $4.375 57,143 57,143 SOAP 06/01/1999 $3.375 25,000 25,000 SOAP 06/30/2000 $20.25 14,814 9,876 SOAP 06/30/2000 $20.25 85,186 56,790 2001 SIP 02/20/2003 $18.19 31,397 0

You agree and acknowledge that all of your options to purchase the Company's Common Stock are listed above and will lapse and cease to be outstanding 90 days following your last date of employment, unless previously exercised in accordance with the terms of the applicable option agreement and plan (and subject to adjustment in accordance with the applicable option agreements if your employment terminates before December 31, 2003). 7. Confidential Information. Except as permitted or directed by the Board, during the term of your employment with the Company and at any time thereafter, you will not divulge, furnish, or make accessible to anyone or use in any way (other than in the ordinary course of business of the Company) any confidential or secret knowledge of the Company which you have acquired or become acquainted with, or will acquire or become acquainted with, prior to the termination of the period of your employment by the Company, whether developed by yourself or by others, concerning any trade secrets, confidential or secret designs, processes, formulae, plans, devices, or materials (whether or not patented or patentable), directly or indirectly useful John M. Siebert, Ph.D. April 4, 2003 Page 4 in any aspect of the business of the Company, any customer or supplier list of the Company, any confidential or secret development or research work of the Company, or any other confidential information or secret aspects of the business of the Company. You acknowledge that the above-described knowledge or information constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company and its predecessors, and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company would be wrong and would cause irreparable harm to the Company. Both during and after the term of your employment with the Company, you will refrain from any acts or omissions that would reduce the value of such knowledge or information to the Company. The foregoing obligations of confidentiality, however, shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known in the form in which it was obtained from the Company, other than as a direct or indirect result of a breach by you of this Letter Agreement or of any other obligation of confidentiality to the Company. 8. Return of Proprietary Property. You agree that all property in your possession belonging to the Company, including without limitation, all documents, reports, manuals, memoranda, computer print-outs, customer lists, credit cards, keys, identification, products, access cards, and all other property relating in any way to the business of the Company are the exclusive property of the Company, even if you authored, created, or assisted in authoring or creating such property. You shall return to the Company all such documents and property immediately upon termination of employment or at such earlier time as the Company may reasonably request. 9. Restrictive Covenant. You acknowledge that the Company needs to be protected against the potential for unfair competition and impairment of the Company's goodwill by your use of the Company's training, assistance, confidential information, and trade secrets in direct competition with the Company. You therefore agree that during your employment with the Company and for a period of one (1) year thereafter, you will not operate, join, control, be employed by, or participate in ownership, management, operation, or control of, or be connected in any manner as an independent contractor, consultant, or otherwise, with any person or organization engaged in any business activity which is the same as, or directly competitive with any business of the Company or any successor of the Company as of the date of the termination of your employment with the Company within the states of the United States of America. For purposes of this paragraph, "directly competitive" means any business or technical activity that is either described in any granted patent or patent application (whether or not yet filed) owned by or licensed to the Company at any time during your employment with the Company. You agree that the provisions of this paragraph 9 shall survive the termination of your employment with the Company or the termination of this Letter Agreement, whether such termination be voluntary or involuntary, or with or without cause. John M. Siebert, Ph.D. April 4, 2003 Page 5 10. Covenant Not to Recruit. You recognize that the Company's work force constitutes an important and vital aspect of its business. You agree that during your employment with the Company and for a period of one (1) year thereafter, you will not recruit or solicit, or assist anyone else in the recruitment or solicitation of, any of the Company's then current employees to terminate their employment with the Company and to become employed by any business enterprise with which you may then be associated or connected, whether as an owner, employee, partner, agent, investor, consultant, contractor or otherwise. You expressly agree that the provisions of this paragraph 10 shall survive the termination of your employment with the Company or the termination of this Letter Agreement, whether such termination be voluntary or involuntary or with or without cause. 11. Severability. In the event any provision of this Letter Agreement shall be held illegal or invalid for any reason, said illegality or invalidity will not in any way affect the legality or validity of any other provision hereof. It is the intention of the parties hereto that the Company be given the broadest possible protection respecting its confidential information and trade secrets; and respecting competition by you following the termination of your employment with the Company. 12. Remedies. You agree that, in addition to, but not to the exclusion of any other available remedy, the Company shall have the right to enforce the provisions of paragraphs 7, 8, 9, and 10 by applying for and obtaining temporary and permanent restraining orders or injunctions from a court of competent jurisdiction without the necessity of filing a bond therefore, and the prevailing party in any such action shall be entitled to recover reasonable attorneys' fees and costs in enforcing or defending any claims regarding the provisions of paragraphs 7, 8, 9, and 10. 13. Company Obligations. The sole obligations of the Company will be its obligations as set forth in this Letter Agreement, except as otherwise provided by law. This Letter Agreement represents the entire agreement between you and the Company relating to your employment, the termination of your employment, and compensation and benefits relating thereto. This Letter Agreement supersedes all prior negotiations, discussions, communications and agreements relating to the same subject matter, including without limitation the Employment Agreement, except as specifically incorporated herein. 14. Governing Law; Venue. All matters relating to the interpretation, construction, application, validity and enforcement of this Letter Agreement shall be governed by the laws of the State of Minnesota. Any action at law, suit in equity, or judicial proceeding arising directly, indirectly, or otherwise in connection with, out of, related to or from this Letter Agreement or any provision hereof, shall be litigated only in the courts of the State of Minnesota, County of Hennepin. You hereby waive any right you may have to transfer or change the venue of any litigation brought against you by the Company. * * * * * John M. Siebert, Ph.D. April 4, 2003 Page 6 This Letter Agreement is intended to state all the terms of the conclusion of your employment by the Company. Please indicate your acceptance of all such terms by signing both copies of this Letter Agreement and the First Release, returning one copy of each to the undersigned. Sincerely, CIMA LABS INC. /s/ Steven Ratoff Steven Ratoff Chair, Board of Directors On this 4th day of April, 2003, I, John M. Siebert, hereby accept and agree to the terms of the above Letter Agreement and the First Release. I further acknowledge that I have 21 days after the last date of my employment to decide whether to sign the Second Release. I also hereby specifically confirm (a) that I am being advised by the Company to seek independent advice from legal counsel of my own selection in connection with this Letter Agreement, the First Release and the Second Release (and that I have had adequate opportunity to do so); and (b) that I have not relied to any extent on any statement or other communication from any shareholder, director, officer, employee, attorney or agent of the Company in connection herewith. /s/ John M. Siebert 4 April, 2003 - ------------------------------------ --------------- John M. Siebert, Ph.D. Dated RELEASE BY JOHN M. SIEBERT DEFINITIONS. I intend all words used in this Release to have their plain meanings in ordinary English. Specific terms that I use in this Release have the following meanings: A. I, me, and my include both me and anyone who has or obtains any legal rights or claims through me. B. CIMA means CIMA LABS INC., any company related to CIMA LABS INC. in the present or past (including without limitation, its predecessors, parents, subsidiaries, affiliates, joint venture partners, and divisions), and any successors of CIMA LABS INC. C. Company means CIMA; the present and past officers, directors, committees, shareholders, and employees of CIMA; any company providing insurance to CIMA in the present or past; the present and past fiduciaries of any employee benefit plan sponsored or maintained by CIMA (other than multiemployer plans); the attorneys for CIMA; and anyone who acted on behalf of CIMA or on instructions from CIMA. D. Letter Agreement means the Letter Agreement from CIMA dated April 4, 2003 and accepted by me, including all of the documents attached to the Letter Agreement. E. My Claims mean all of my rights that I now have to any relief of any kind from the Company, including without limitation: 1. all claims arising out of or relating to my employment with CIMA or the termination of that employment; 2. all claims arising out of or relating to the statements, actions, or omissions of the Company; 3. all claims for any alleged unlawful discrimination, harassment, retaliation or reprisal, or other alleged unlawful practices arising under any federal, state, or local statute, ordinance, or regulation, including without limitation, claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, 42 U.S.C. Section 1981, the Employee Retirement Income Security Act, the Equal Pay Act, the Worker Adjustment and Retraining Notification Act, the Minnesota Human Rights Act, the Fair Credit Reporting Act, and workers' compensation non-interference or non-retaliation statutes (such as Minn. Stat. Section 176.82); 4. all claims for alleged wrongful discharge; breach of contract; breach of implied contract; failure to keep any promise; breach of a covenant of EXHIBIT A good faith and fair dealing; breach of fiduciary duty; estoppel; my activities, if any, as a "whistleblower"; defamation; infliction of emotional distress; fraud; misrepresentation; negligence; harassment; retaliation or reprisal; constructive discharge; assault; battery; false imprisonment; invasion of privacy; interference with contractual or business relationships; any other wrongful employment practices; and violation of any other principle of common law; 5. all claims for compensation of any kind, including without limitation, bonuses, commissions, stock-based compensation or stock options, vacation pay, and expense reimbursements; 6. all claims for back pay, front pay, reinstatement, other equitable relief, compensatory damages, damages for alleged personal injury, liquidated damages, and punitive damages; and 7. all claims for attorneys' fees, costs, and interest. However, My Claims do not include any claims that the law does not allow to be waived, any claims that may arise after the date on which I sign this Release, any claims for indemnification under the charter documents of the Company or under any applicable state or federal statute, or any claims for breach of the Letter Agreement. AGREEMENT TO RELEASE MY CLAIMS. I will receive consideration from CIMA as set forth in the Letter Agreement if I sign and do not rescind this Release as provided below. I understand and acknowledge that that consideration is in addition to anything of value that I would be entitled to receive from CIMA if I did not sign this Release or if I rescinded this Release. In exchange for that consideration I give up and release all of My Claims. I will not make any demands or claims against the Company for compensation or damages relating to My Claims. The consideration that I am receiving is a fair compromise for the release of My Claims. ADDITIONAL AGREEMENTS AND UNDERSTANDINGS. Even though CIMA will provide consideration for me to settle and release My Claims, the Company does not admit that it is responsible or legally obligated to me. In fact, the Company denies that it is responsible or legally obligated to me for My Claims, denies that it engaged in any unlawful or improper conduct toward me, and denies that it treated me unfairly. ADVICE TO CONSULT WITH AN ATTORNEY. I understand and acknowledge that I am hereby being advised by the Company to consult with an attorney prior to signing this Release and I have done so. My decision whether to sign this Release is my own voluntary decision made with full knowledge that the Company has advised me to consult with an attorney. PERIOD TO CONSIDER THE RELEASE. I understand that I have 21 days from the day that I receive this Release, not counting the day upon which I receive it, to consider whether I wish to sign this Release. If I sign this Release before the end of the 21-day period, it will be my voluntary -2- decision to do so because I have decided that I do not need any additional time to decide whether to sign this Release. MY RIGHT TO RESCIND THIS RELEASE. I understand that I may rescind this Release at any time within 15 days after I sign it, not counting the day upon which I sign it. This Release will not become effective or enforceable unless and until the 15-day rescission period has expired without my rescinding it. PROCEDURE FOR ACCEPTING OR RESCINDING THE RELEASE. To accept the terms of this Release, I must deliver the Release, after I have signed and dated it, to CIMA by hand or by mail within the 21-day period that I have to consider this Release. To rescind my acceptance, I must deliver a written, signed statement that I rescind my acceptance to CIMA by hand or by mail within the 15-day rescission period. All deliveries must be made to CIMA at the following address: Ronald Gay CIMA LABS INC. 10000 Valley View Road Eden Prairie, MN 55344 If I choose to deliver my acceptance or the rescission of my acceptance by mail, it must be (1) postmarked within the period stated above; and (2) properly addressed to CIMA at the address stated above. INTERPRETATION OF THE RELEASE. This Release should be interpreted as broadly as possible to achieve my intention to resolve all of My Claims against the Company. If this Release is held by a court to be inadequate to release a particular claim encompassed within My Claims, this Release will remain in full force and effect with respect to all the rest of My Claims. MY REPRESENTATIONS. I am legally able and entitled to receive the consideration being provided to me in settlement of My Claims. I have not been involved in any personal bankruptcy or other insolvency proceedings at any time since I began my employment with CIMA. No child support orders, garnishment orders, or other orders requiring that money owed to me by CIMA be paid to any other person are now in effect. I have read this Release carefully. I understand all of its terms. In signing this Release, I have not relied on any statements or explanations made by the Company except as specifically set forth in the Letter Agreement. I am voluntarily releasing My Claims against the Company. I intend this Release and the Letter Agreement to be legally binding. Dated: ---------------------------- ----------------------------- John M. Siebert, Ph.D. -3- RELEASE BY JOHN M. SIEBERT DEFINITIONS. I intend all words used in this Release to have their plain meanings in ordinary English. Specific terms that I use in this Release have the following meanings: A. I, me, and my include both me and anyone who has or obtains any legal rights or claims through me. B. CIMA means CIMA LABS INC., any company related to CIMA LABS INC. in the present or past (including without limitation, its predecessors, parents, subsidiaries, affiliates, joint venture partners, and divisions), and any successors of CIMA LABS INC. C. Company means CIMA; the present and past officers, directors, committees, shareholders, and employees of CIMA; any company providing insurance to CIMA in the present or past; the present and past fiduciaries of any employee benefit plan sponsored or maintained by CIMA (other than multiemployer plans); the attorneys for CIMA; and anyone who acted on behalf of CIMA or on instructions from CIMA. D. Letter Agreement means the Letter Agreement from CIMA dated April 4, 2003 and accepted by me, including all of the documents attached to the Letter Agreement. E. My Claims mean all of my rights that I now have to any relief of any kind from the Company, including without limitation: 1. all claims arising out of or relating to my employment with CIMA or the termination of that employment; 2. all claims arising out of or relating to the statements, actions, or omissions of the Company; 3. all claims for any alleged unlawful discrimination, harassment, retaliation or reprisal, or other alleged unlawful practices arising under any federal, state, or local statute, ordinance, or regulation, including without limitation, claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, 42 U.S.C. Section 1981, the Employee Retirement Income Security Act, the Equal Pay Act, the Worker Adjustment and Retraining Notification Act, the Minnesota Human Rights Act, the Fair Credit Reporting Act, and workers' compensation non-interference or non-retaliation statutes (such as Minn. Stat. Section 176.82); 4. all claims for alleged wrongful discharge; breach of contract; breach of implied contract; failure to keep any promise; breach of a covenant of EXHIBIT B good faith and fair dealing; breach of fiduciary duty; estoppel; my activities, if any, as a "whistleblower"; defamation; infliction of emotional distress; fraud; misrepresentation; negligence; harassment; retaliation or reprisal; constructive discharge; assault; battery; false imprisonment; invasion of privacy; interference with contractual or business relationships; any other wrongful employment practices; and violation of any other principle of common law; 5. all claims for compensation of any kind, including without limitation, bonuses, commissions, stock-based compensation or stock options, vacation pay, and expense reimbursements; 6. all claims for back pay, front pay, reinstatement, other equitable relief, compensatory damages, damages for alleged personal injury, liquidated damages, and punitive damages; and 7. all claims for attorneys' fees, costs, and interest. However, My Claims do not include any claims that the law does not allow to be waived, any claims that may arise after the date on which I sign this Release, any claims for indemnification under the charter documents of the Company or under any applicable state or federal statute, or any claims for breach of the Letter Agreement. AGREEMENT TO RELEASE MY CLAIMS. I will receive consideration from CIMA as set forth in the Letter Agreement if I sign and do not rescind this Release as provided below. I understand and acknowledge that that consideration is in addition to anything of value that I would be entitled to receive from CIMA if I did not sign this Release or if I rescinded this Release. In exchange for that consideration I give up and release all of My Claims. I will not make any demands or claims against the Company for compensation or damages relating to My Claims. The consideration that I am receiving is a fair compromise for the release of My Claims. ADDITIONAL AGREEMENTS AND UNDERSTANDINGS. Even though CIMA will provide consideration for me to settle and release My Claims, the Company does not admit that it is responsible or legally obligated to me. In fact, the Company denies that it is responsible or legally obligated to me for My Claims, denies that it engaged in any unlawful or improper conduct toward me, and denies that it treated me unfairly. ADVICE TO CONSULT WITH AN ATTORNEY. I understand and acknowledge that I am hereby being advised by the Company to consult with an attorney prior to signing this Release and I have done so. My decision whether to sign this Release is my own voluntary decision made with full knowledge that the Company has advised me to consult with an attorney. PERIOD TO CONSIDER THE RELEASE. I understand that I have 21 days following my last day of employment with the Company to consider whether I wish to sign this Release. If I sign this -2- Release before the end of the 21-day period, it will be my voluntary decision to do so because I have decided that I do not need any additional time to decide whether to sign this Release. MY RIGHT TO RESCIND THIS RELEASE. I understand that I may rescind this Release at any time within 15 days after I sign it, not counting the day upon which I sign it. This Release will not become effective or enforceable unless and until the 15-day rescission period has expired without my rescinding it. PROCEDURE FOR ACCEPTING OR RESCINDING THE RELEASE. To accept the terms of this Release, I must deliver the Release, after I have signed and dated it, to CIMA by hand or by mail within the 21-day period that I have to consider this Release. To rescind my acceptance, I must deliver a written, signed statement that I rescind my acceptance to CIMA by hand or by mail within the 15-day rescission period. All deliveries must be made to CIMA at the following address: Ronald Gay CIMA LABS INC. 10000 Valley View Road Eden Prairie, MN 55344 If I choose to deliver my acceptance or the rescission of my acceptance by mail, it must be (1) postmarked within the period stated above; and (2) properly addressed to CIMA at the address stated above. INTERPRETATION OF THE RELEASE. This Release should be interpreted as broadly as possible to achieve my intention to resolve all of My Claims against the Company. If this Release is held by a court to be inadequate to release a particular claim encompassed within My Claims, this Release will remain in full force and effect with respect to all the rest of My Claims. MY REPRESENTATIONS. I am legally able and entitled to receive the consideration being provided to me in settlement of My Claims. I have not been involved in any personal bankruptcy or other insolvency proceedings at any time since I began my employment with CIMA. No child support orders, garnishment orders, or other orders requiring that money owed to me by CIMA be paid to any other person are now in effect. I have read this Release carefully. I understand all of its terms. In signing this Release, I have not relied on any statements or explanations made by the Company except as specifically set forth in the Letter Agreement. I am voluntarily releasing My Claims against the Company. I intend this Release and the Letter Agreement to be legally binding. Dated: ---------------------------- ----------------------------- John M. Siebert, Ph.D. -3- EX-10.4 4 c76985exv10w4.txt EX-10.4 LETTER AGREEMENT - STEVEN B. RATOFF Exhibit 10.4 CIMA LABS INC. EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into on April 30, 2003 by and between Cima Labs Inc., a Delaware corporation with its headquarters in Eden Prairie, Minnesota (the "Company"), and Steven B. Ratoff, a resident of Arizona ("Executive"). A. The Company develops and manufactures prescription and over-the-counter pharmaceutical products using fast-dissolve drug delivery technologies for sale around the world. B. Executive is an experienced business manager in the pharmaceutical industry and is Chairman of the Board of Directors of the Company. C. The Company's President and Chief Executive Officer has announced his retirement from the Company effective December 31, 2003 and from his position as President and Chief Executive Officer effective April 30, 2003. D. The Company desires for Executive to serve as interim Chief Executive Officer while it completes a search for candidates for the position, and Executive desires to serve in this capacity, subject to the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing premises and the respective agreements of the Company and Executive set forth below, the Company and Executive, intending to be legally bound, agree as follows: 1. Employment. Effective as of May 1, 2003, the Company shall employ Executive, and Executive shall accept such employment and perform services for the Company, upon the terms and conditions set forth in this Agreement. 2. Term of Employment. Unless terminated at an earlier date in accordance with Section 9 hereof, the term of Executive's employment with the Company shall be for the period commencing on May 1, 2003 and ending on October 31, 2003 (the "Term"). 3. Position and Duties. (a) Employment with the Company. During Executive's employment with the Company hereunder, Executive shall report to the Board of Directors of the Company (the "Board") and shall perform such duties and responsibilities as the Board shall assign to him from time to time consistent with his position. Executive shall be an executive officer of the Company and Executive's title shall be "Interim Chief Executive Officer". (b) Board of Directors. Executive is currently a member and Chairman of the Board. While Executive is employed hereunder, Executive shall not receive any additional compensation from the Company in connection with his service as a director or Chairman. (c) Performance of Duties and Responsibilities. Executive shall serve the Company faithfully and to the best of his ability and shall devote his full working time, attention and efforts to the business of the Company during his employment with the Company. Executive hereby represents and confirms that he is under no contractual or legal commitments that would prevent him from fulfilling his duties and responsibilities as set forth in this Agreement. During his employment with the Company, Executive may participate in charitable activities and personal investment activities to a reasonable extent, and, subject to prior Board approval, may serve on boards of directors of other companies, so long as such activities do not interfere with the performance of his duties and responsibilities hereunder. The Company acknowledges and consents to Executive's service on the board of directors of Inkine Pharmaceutical Company, Inc. (d) Location. While Executive is employed by the Company hereunder, his employment shall be based at the Company's headquarters in Eden Prairie, Minnesota. Executive shall be available at the headquarters of the Company as reasonably required to carry out his duties and responsibilities hereunder. 4. Compensation. (a) Base Salary. While Executive is employed by the Company hereunder, the Company shall pay to Executive a monthly base salary of $28,045, less deductions and withholdings, which base salary shall be paid in accordance with the Company's normal payroll policies and procedures. (b) Incentive Bonus. While Executive is employed by the Company hereunder, Executive shall be eligible for an incentive bonus award of up to 70% of Executive's base salary, based upon achievement of defined objectives, to be determined in the sole discretion of the Board. (c) Stock Options. Subject to approval by the Board and the terms of a definitive stock option agreement to be entered into by the Company and Executive, the Company shall grant Executive a stock option to purchase 35,000 shares of common stock of the Company, which option shall vest 50% upon commencement of Executive's employment hereunder and 50% on the first anniversary of the commencement of Executive's employment hereunder, provided that Executive continues as an employee, consultant or director of the Company on such anniversary date. (d) Employee Benefits. Except as specifically stated in this Agreement, while Executive is employed by the Company hereunder, Executive shall not be entitled to participate in any employee benefit plans or programs of the Company. Executive hereby waives all right and interest he may have to benefits under such plans, including without limitation all medical 2 and dental plans, life and disability insurance plans, and retirement or pension plans sponsored by the Company. (e) Expenses. While Executive is employed by the Company hereunder, the Company shall reimburse Executive for all reasonable and necessary out-of-pocket business, travel and entertainment expenses incurred by him in the performance of his duties and responsibilities hereunder, subject to the Company's normal policies and procedures for expense verification and documentation. The Company shall also provide appropriate living and travel arrangements for Executive in the Minneapolis, Minnesota metropolitan area. If any of the payments made by the Company as described in this Section 4(e) are determined to be income to Executive for federal income tax purposes, the Company shall also pay to Executive an additional amount equal to 40% of the amount determined to be income. (f) Vacation. While Executive is employed by the Company hereunder, Executive shall receive two (2) weeks paid vacation time off. Vacation time shall be taken at such times so as not to unduly disrupt the operations of the Company. 5. Confidential Information. Except as permitted by the Company's Board, during the term of Executive's employment with the Company and at all times thereafter, Executive shall not divulge, furnish or make accessible to anyone or use in any way other than in the ordinary course of the business of the Company, any confidential, proprietary or secret knowledge or information of the Company that Executive has acquired or shall acquire during his employment with the Company, whether developed by himself or by others, concerning (i) any trade secrets, (ii) any confidential, proprietary or secret designs, processes, formulae, plans, devices or material (whether or not patented or patentable) directly or indirectly useful in any aspect of the business of the Company, (iii) any customer or supplier lists of the Company, (iv) any confidential, proprietary or secret development or research work of the Company, (v) any strategic or other business, marketing or sales plans of the Company, (vi) any financial data or plans respecting the Company, or (vii) any other confidential or proprietary information or secret aspects of the business of the Company. Executive acknowledges that the above-described knowledge and information constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company, and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company would be wrongful and would cause irreparable harm to the Company. During the term of Executive's employment with the Company, Executive shall refrain from any acts or omissions that would reduce the value of such knowledge or information to the Company. The foregoing obligations of confidentiality shall not apply to any knowledge or information that (i) is now or subsequently becomes generally publicly known in the form in which it was obtained from the Company, (ii) is independently made available to Executive in good faith by a third party who has not violated a confidential relationship with the Company, or (iii) is required to be disclosed by legal process, other than as a direct or indirect result of the breach of this Agreement by Executive. 6. Ventures. If, during the term of Executive's employment with the Company, Executive is engaged in or associated with the planning or implementing of any 3 project, program or venture involving the Company and a third party or parties, all rights in such project, program or venture shall belong to the Company. Except as approved in writing by the Board, Executive shall not be entitled to any interest in any such project, program or venture or to any commission, finder's fee or other compensation in connection therewith, other than the compensation to be paid to Executive by the Company as provided herein. Executive shall have no interest, direct or indirect, in any customer or supplier that conducts business with the Company, unless such interest has been disclosed in writing to and approved by the Board before such customer or supplier seeks to do business with the Company. Ownership by Executive, as a passive investment, of less than 5.0% of the outstanding shares of capital stock of any corporation listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a breach of this Section 6. 7. Noncompetition Covenant. (a) Agreement Not to Compete. During the term of Executive's employment with the Company and for a period of twelve (12) consecutive months from the date of the termination of such employment, whether such termination is with or without Cause (as defined below), or whether such termination is at the instance of Executive or the Company, Executive shall not, directly or indirectly, throughout North America, engage in any business that the Company has engaged in during the term of Executive's employment with the Company, or any part of such business, including without limitation the design, development, manufacture, distribution, marketing or selling of pharmaceutical products using fast-dissolve drug delivery technologies, in any manner or capacity, including without limitation as a proprietor, principal, agent, partner, officer, director, stockholder, employee, member of any association, consultant or otherwise. Ownership by Executive, as a passive investment, of less than 2.5% of the outstanding shares of capital stock of any corporation listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a breach of this Section 7(a). (b) Agreement Not to Hire. During the term of Executive's employment with the Company and for a period of twelve (12) consecutive months from the date of the termination of such employment, whether such termination is with or without Cause (as defined below), or whether such termination is at the instance of Executive or the Company, Executive shall not, directly or indirectly, hire, engage or solicit any person who is then an employee of the Company or who was an employee of the Company at the time of Executive's termination of employment, in any manner or capacity, including without limitation as a proprietor, principal, agent, partner, officer, director, stockholder, employee, member of any association, consultant or otherwise. (c) Agreement Not to Solicit. During the term of Executive's employment with the Company and for a period of twelve (12) consecutive months from the date of the termination of such employment, whether such termination is with or without Cause (as defined below), or whether such termination is at the instance of Executive or the Company, Executive shall not, directly or indirectly, solicit, request, advise or induce any current or potential customer, supplier or other business contact of the Company on behalf of any entity competing with the Company or to cancel, curtail or otherwise change its relationship with the Company, in any manner or capacity, including without limitation as a proprietor, principal, agent, partner, 4 officer, director, stockholder, employee, member of any association, consultant or otherwise. A "current customer" is defined as a customer of the Company as of the Termination Date (as defined below). A "potential customer" is an entity with which the Company has had significant and substantive discussions within one year prior to, or is having significant and substantive discussions as of, the Termination Date. (d) Acknowledgment. Executive hereby acknowledges that the provisions of this Section 7 are reasonable and necessary to protect the legitimate interests of the Company and that any violation of this Section 7 by Executive shall cause substantial and irreparable harm to the Company to such an extent that monetary damages alone would be an inadequate remedy therefor. Therefore, in the event that Executive violates any provision of this Section 7, the Company shall be entitled to an injunction, in addition to all the other remedies it may have, restraining Executive from violating or continuing to violate such provision. (e) Blue Pencil Doctrine. If the duration of, the scope of or any business activity covered by any provision of this Section 7 is in excess of what is valid and enforceable under applicable law, such provision shall be construed to cover only that duration, scope or activity that is valid and enforceable. Executive hereby acknowledges that this Section 7 shall be given the construction which renders its provisions valid and enforceable to the maximum extent, not exceeding its express terms, possible under applicable law. 8. Patents, Copyrights and Related Matters. (a) Disclosure and Assignment. Executive shall immediately disclose to the Company any and all improvements, inventions, ideas, and discoveries that Executive may conceive and/or reduce to practice individually or jointly or commonly with others while he is employed with the Company with respect to (i) any methods, processes or apparatus concerned with the development, use or production of any type of products, goods or services sold or used by the Company, and (ii) any type of products, goods or services sold or used by the Company. Executive also shall immediately assign, transfer and set over to the Company his entire right, title and interest in and to any and all of such inventions as are specified in this Section 8(a), and in and to any and all applications for letters patent that may be filed on such inventions, and in and to any and all letters patent that may issue, or be issued, upon such applications. In connection therewith and for no additional compensation therefor, but at no expense to Executive, Executive shall sign any and all instruments deemed necessary by the Company for: (i) the filing and prosecution of any applications for letters patent of the United States or of any foreign country that the Company may desire to file upon such inventions as are specified in this Section 8(a); (ii) the filing and prosecution of any divisional, continuation, continuation-in-part or reissue applications that the Company may desire to file upon such applications for letters patent; and 5 (iii) the reviving, re-examining or renewing of any of such applications for letters patent. This Section 8(a) shall not apply to any invention for which no equipment, supplies, facilities, confidential, proprietary or secret knowledge or information, or other trade secret information of the Company was used and that was developed entirely on Executive's own time, and (i) that does not relate (A) directly to the business of the Company, or (B) to the Company's actual or demonstrably anticipated research or development, or (ii) that does not result from any work performed by Executive for the Company. (b) Copyrightable Material. All right, title and interest in all copyrightable material that Executive shall conceive or originate individually or jointly or commonly with others, and that arise during the term of his employment with the Company and out of the performance of his duties and responsibilities under this Agreement, shall be the property of the Company and are hereby assigned by Executive to the Company, along with ownership of any and all copyrights in the copyrightable material. Upon request and without further compensation therefor, but at no expense to Executive, Executive shall execute any and all papers and perform all other acts necessary to assist the Company to obtain and register copyrights on such materials in any and all countries. Where applicable, works of authorship created by Executive for the Company in performing his duties and responsibilities hereunder shall be considered "works made for hire," as defined in the U.S. Copyright Act. (c) Know-How and Trade Secrets. All know-how and trade secret information conceived or originated by Executive that arises during the term of his employment with the Company and out of the performance of his duties and responsibilities hereunder or any related material or information shall be the property of the Company, and all rights therein are hereby assigned by Executive to the Company. 9. Termination of Employment. (a) The Executive's employment with the Company shall terminate immediately upon: (i) Executive's receipt of written notice from the Company of the termination of his employment; (ii) Executive's abandonment of his employment or his resignation; (iii) Executive's death or Disability (as defined below); or (iv) the expiration of the Term, as specified in Section 2 hereof. (b) The date upon which Executive's termination of employment with the Company occurs shall be the "Termination Date." 6 10. Payments upon Termination of Employment. (a) If Executive's employment with the Company is terminated, before the expiration of the Term, by the Company for any reason other than for Cause (as defined below), the Company shall continue to pay to Executive his base salary from the Termination Date through the remainder of the Term. (b) If Executive's employment with the Company is terminated by reason of: (i) Executive's resignation or abandonment of his employment, (ii) termination of Executive's employment by the Company for Cause (as defined below), (iii) Executive's death or Disability, or (iv) the expiration of the Term, as specified in Section 2 hereof, the Company shall pay to Executive or his beneficiary or his estate, as the case may be, his base salary through the Termination Date. (c) "Cause" hereunder shall mean: (i) an act or acts of dishonesty undertaken by Executive and intended to result in substantial gain or personal enrichment of Executive at the expense of the Company; (ii) unlawful conduct or gross misconduct that is willful and deliberate on Executive's part and that, in either event, is materially injurious to the Company; (iii) the conviction of Executive of a felony; (iv) failure of Executive to perform his duties and responsibilities hereunder or to satisfy his obligations as an officer or employee of the Company, which failure has not been cured by Executive within 30 days after written notice thereof to Executive from the Company; or (v) material breach of any terms and conditions of this Agreement by Executive not caused by the Company. (d) "Disability" hereunder shall mean the inability of Executive to perform on a full-time basis the duties and responsibilities of his employment with the Company by reason 7 of his illness or other physical or mental impairment or condition, if such inability continues for an uninterrupted period of thirty (30) days or more during the Term. A period of inability shall be "uninterrupted" unless and until Executive returns to full-time work for a continuous period of at least fifteen (15) days. (e) In the event of termination of Executive's employment, the sole obligation of the Company shall be its obligation to make the payments called for by Section 10(a) or Section 10(b) hereof, as the case may be, and the Company shall have no other obligation to Executive or to his beneficiary or his estate, except as otherwise provided by law or under the terms of any other applicable agreement between Executive and the Company. (f) Notwithstanding the foregoing provisions of this Section 10, the Company shall not be obligated to make any payments to Executive under Section 10(a) hereof unless Executive shall have signed a release of claims in favor of the Company in a form to be prescribed by the Board, all applicable consideration periods and rescission periods provided by law shall have expired and Executive is in strict compliance with the terms of this Agreement as of the dates of the payments. Such release of claims shall not include a release by Executive of claims he may have for indemnification under the charter documents of the Company, under any insurance policy maintained by the Company, or under applicable federal, state or local indemnification laws. 11. Return of Records and Property. Upon termination of his employment with the Company, Executive shall promptly deliver to the Company any and all Company records and any and all Company property in his possession or under his control, including without limitation manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, printouts, computer disks, computer tapes, source codes, data, tables or calculations and all copies thereof, documents that in whole or in part contain any trade secrets or confidential, proprietary or other secret information of the Company and all copies thereof, and keys, access cards, access codes, passwords, credit cards, personal computers, telephones and other electronic equipment belonging to the Company; provided, however, that if Executive continues as a director of the Company following the termination of his employment hereunder, Executive may retain all property and records of the Company in his possession in connection with his position as a director. 12. Remedies. (a) Remedies. Executive acknowledges that it would be difficult to fully compensate the Company for monetary damages resulting from any breach by him of the provisions of Sections 5, 7, 8 and 11 hereof. Accordingly, in the event of any actual or threatened breach of any such provisions, the Company shall, in addition to any other remedies it may have, be entitled to injunctive and other equitable relief to enforce such provisions, and such relief may be granted without the necessity of proving actual monetary damages. (b) Arbitration. Except for disputes arising under Sections 5, 7 or 8 hereof, all disputes involving the interpretation, construction, application or alleged breach of this 8 Agreement and all disputes relating to Executive's employment with the Company or the termination of such employment shall be submitted to final and binding arbitration in Minneapolis, Minnesota. The arbitrator shall be selected and the arbitration shall be conducted pursuant to the then most recent Employment Dispute Resolution Rules of the American Arbitration Association. The decision of the arbitrator shall be final and binding, and any court of competent jurisdiction may enter judgment upon the award. All fees and expenses of the arbitrator shall be paid by the Company. The arbitrator shall have jurisdiction and authority to interpret and apply the provisions of this Agreement and relevant federal, state and local laws, rules and regulations insofar as necessary to the determination of the dispute and to remedy any breaches of the Agreement and/or violations of applicable laws, but shall not have jurisdiction or authority to alter in any way the provisions of this Agreement. The arbitrator shall have the authority to award attorneys' fees and costs to the prevailing party. The parties hereby agree that this arbitration provision shall be in lieu of any requirement that either party exhaust such party's administrative remedies under federal, state or local law. (c) Jurisdiction and Venue. Executive and the Company consent to jurisdiction of the courts of the State of Minnesota and/or the federal district courts, District of Minnesota, for the purpose of resolving all issues of law, equity, or fact arising out of or in connection with Sections 5, 7 or 8 of this Agreement. Any action involving claims of a breach of such Sections shall be brought in such courts. Each party consents to personal jurisdiction over such party in the state and/or federal courts of Minnesota and hereby waives any defense of lack of personal jurisdiction. Venue, for the purpose of all such suits, shall be in Hennepin County, State of Minnesota. 13. Miscellaneous. (a) Governing Law. All matters relating to the interpretation, construction, application, validity and enforcement of this Agreement shall be governed by the laws of the State of Minnesota without giving effect to any choice or conflict of law provision or rule, whether of the State of Minnesota or any other jurisdiction, that would cause the application of laws of any jurisdiction other than the State of Minnesota. (b) Entire Agreement. This Agreement contains the entire agreement of the parties relating to the subject matter of this Agreement and supersedes all prior agreements and understandings with respect to such subject matter, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement that are not set forth herein. (c) Amendments. No amendment or modification of this Agreement shall be deemed effective unless made in writing and signed by the parties hereto. (d) No Waiver. No term or condition of this Agreement shall be deemed to have been waived, except by a statement in writing signed by the party against whom enforcement of the waiver is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived 9 and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. (e) Assignment. This Agreement shall not be assignable, in whole or in part, by either party without the written consent of the other party, except that the Company may, without the consent of Executive, assign its rights and obligations under this Agreement to any corporation or other business entity (i) with which the Company may merge or consolidate, (ii) to which the Company may sell or transfer all or substantially all of its assets or capital stock, or (iii) of which 50% or more of the capital stock or the voting control is owned, directly or indirectly, by the Company. After any such assignment by the Company, the Company shall be discharged from all further liability hereunder and such assignee shall thereafter be deemed to be the "Company" for purposes of all terms and conditions of this Agreement, including this Section 13. (f) Counterparts. This Agreement may be executed in any number of counterparts, and such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. (g) Severability. Subject to Section 7(e) hereof, to the extent that any portion of any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted herefrom and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. (h) Captions and Headings. The captions and paragraph headings used in this Agreement are for convenience of reference only and shall not affect the construction or interpretation of this Agreement or any of the provisions hereof. IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of the date set forth in the first paragraph. CIMA LABS INC. By /s/ John F. Chappell --------------------------------- Its Director --------------------------------- /s/ Steven B. Ratoff ------------------------------------ STEVEN B. RATOFF 10 EX-99.1 5 c76985exv99w1.txt EX-99.1 CERTIFICATION OF CEO AND CFO EXHIBIT 99.1 CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned certifies that this periodic report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this periodic report fairly presents, in all material respects, the financial condition and results of operations of CIMA LABS INC. (the "Company"). A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Date: May 13, 2003 /s/ Steven B. Ratoff ------------------------------------ Steven B. Ratoff Interim Chief Executive Officer /s/ James C. Hawley ------------------------------------ James C. Hawley Vice President, Chief Financial Officer and Secretary -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.3

                                                                     [CIMA LOGO]

                                                                    EXHIBIT 10.3




                                  April 4, 2003

John M. Siebert, Ph.D.
10759 Mount Curve Blvd.
Eden Prairie, MN  55347

Dear John:

        This letter will confirm our discussions and agreements regarding the
transition and termination of your employment with CIMA LABS INC. (the
"Company").

        1. Employment. Your employment with the Company will end as a result of
your retirement effective December 31, 2003, or such earlier date in accordance
with paragraph 2 below. Your status as President and Chief Executive Officer of
the Company ("CEO") will end effective April 30, 2003. You will continue to
perform the responsibilities of CEO from now through April 30, 2003. While you
are employed by the Company during the period from May 1, 2003 through December
31, 2003 (the "Transition Period"), you will perform such transition duties as
may be requested by the Company. Such transition duties requested by the Company
will not exceed eight days per month during the Transition Period and will be
performed by you at times mutually agreed upon with the Company. During the
Transition Period, you may provide consulting services for other business
entities so long as such services are not "directly competitive" (as defined in
paragraph 9 below) and do not interfere with your ability to provide services to
the Company in accordance with this paragraph.

        2. Termination of Employment. Between now and December 31, 2003, the
Company may terminate your employment only (a) for "Cause," as defined in the
Employment Agreement between you and the Company, dated as of June 30, 2000 (the
"Employment Agreement"), provided, however, that a material breach by you of
this Letter Agreement shall be considered a material breach of the Employment
Agreement; or (b) if you become employed with any other employer. If you
commence employment with any other employer, your employment with the Company
will immediately end without further action by either you or the Company.

        3. Compensation During Employment. While you are employed by the
Company, you will continue to receive base salary at your current annual rate of
$336,544.00 and those benefits as set forth in Section 3(c), (d), (e), and (f)
of the Employment Agreement. Except as provided in paragraph 5(b)(iii) of this
Letter Agreement below, you will not be eligible for any incentive bonus for
calendar year 2003. You will not be eligible for any other compensation or
benefits from the Company relating to your employment or the termination of your
employment except as stated in this Letter Agreement.




                                                               [CIMA LETTERHEAD]


John M. Siebert, Ph.D.
April 4, 2003
Page 2



        4. Releases. At the same time that you sign this Letter Agreement you
will sign a Release By John M. Siebert, in the form enclosed with this Letter
Agreement as Exhibit A (the "First Release"). On or within 21 days after your
last date of employment with, you will sign a second Release in the form
enclosed with this Letter Agreement as Exhibit B (the "Second Release"), as a
condition of receiving the pay and benefits set forth in paragraph 5(b) of this
Letter Agreement.

        5. Compensation Following Employment.

               a. In the event of termination by the Company for Cause, the
Company shall have no further obligation to you under this Letter Agreement
except to pay your base salary and benefits accrued through your last date of
employment, including without limitation any earned and unused vacation time in
accordance with the normal policies and practices of the Company.

               b. In the event of termination of your employment for any reason
other than for Cause, and if you sign the Second Release on or within 21 days
following your last date of employment and do not rescind the First Release or
the Second Release within 15 days after signing each of them, and subject to
your complying with all terms of this Letter Agreement, the Company will provide
you with the following additional benefits:

                      i. The Company will pay you, or in the event of your
        death, your Estate, devisees, heirs, beneficiaries, assigns or
        successors in interest, an amount equal to your final base salary, at
        the annual rate of $336,544.00, for the period from your last date of
        employment and continuing for twelve (12) months. Such pay will be
        subject to normal tax withholdings and will be paid by the Company in
        accordance with its regular payroll schedule.

                      ii. If following your last date of employment you,or in
        the event of your death, or any of your dependents, elect to continue
        your group medical and dental insurance in accordance with the terms of
        the applicable plans and laws, the Company will continue to pay its
        portion of the monthly premiums for such coverage as if you were still
        employed by the Company, from your last date of employment through the
        earlier of (i) twelve (12) months following your last date of
        employment, (ii) the date you become eligible for other health or dental
        (as applicable) insurance benefits through a new employer, and (iii) the
        date continuation coverage is no longer available in accordance with the
        applicable plans or laws. Your continued coverages will be at the same
        level as in effect as of your last date of employment. The Company shall
        deduct your contributions for the monthly premiums from the pay
        described in paragraph 5(b)(i) above of this Letter Agreement. You agree
        to notify the Company in writing within three (3) days of your
        acceptance of any employment that provides health or dental insurance
        benefits.

                      iii. The Company will pay you, or in the event of your
        death, your Estate, devisees, heirs, beneficiaries, assigns or
        successors in interest, a prorated annual bonus for calendar year 2003,
        in the amount of $78,461.25, less normal tax withholdings.





John M. Siebert, Ph.D.
April 4, 2003
Page 3

        Such bonus payment will be paid at the same time as annual bonus
        payments are paid to other management employees of the Company for
        calendar year 2003, but in no event later than March 31, 2004.

               c. If your employment with the Company continues through December
31, 2003, you agree that all of your earned vacation time will be used and that
you will not be entitled to payment for any earned vacation time upon
termination of your employment. If your employment with the Company terminates
before December 31, 2003 for any reason, the Company will pay you upon
termination for earned and unused vacation time in accordance with the normal
policies and practices of the Company.

        6. Stock Options. You currently have options to purchase shares of the
Common Stock of the Company in accordance with the following schedule, assuming
your continued employment with the Company through December 31, 2003:




 Plan               Date of Grant     Exercise          Number of           Amount
                                      Price             Shares Granted      Exercisable as of
                                                                            12/31/03
- ----------          -------------    ----------        ----------------    -------------------
                                                                
DIR                 08/04/1994        $9.00               20,000             20,000
DIR                 06/07/1995        $4.75                7,500              7,500
SOAP                07/01/1995        $4.00               75,000               0
SOAP                07/01/1995        $4.00              105,000             32,300
SOAP                10/29/1997        $5.875              48,937             48,937
SOAP                10/29/1997        $5.875              51,063               0
SOAP                04/24/1998        $4.375              22,857               0
SOAP                04/24/1998        $4.375              57,143            57,143
SOAP                06/01/1999        $3.375              25,000            25,000
SOAP                06/30/2000        $20.25              14,814             9,876
SOAP                06/30/2000        $20.25              85,186            56,790
2001 SIP            02/20/2003        $18.19              31,397               0



You agree and acknowledge that all of your options to purchase the Company's
Common Stock are listed above and will lapse and cease to be outstanding 90 days
following your last date of employment, unless previously exercised in
accordance with the terms of the applicable option agreement and plan (and
subject to adjustment in accordance with the applicable option agreements if
your employment terminates before December 31, 2003).

        7. Confidential Information. Except as permitted or directed by the
Board, during the term of your employment with the Company and at any time
thereafter, you will not divulge, furnish, or make accessible to anyone or use
in any way (other than in the ordinary course of business of the Company) any
confidential or secret knowledge of the Company which you have acquired or
become acquainted with, or will acquire or become acquainted with, prior to the
termination of the period of your employment by the Company, whether developed
by yourself or by others, concerning any trade secrets, confidential or secret
designs, processes, formulae, plans, devices, or materials (whether or not
patented or patentable), directly or indirectly useful





John M. Siebert, Ph.D.
April 4, 2003
Page 4

in any aspect of the business of the Company, any customer or supplier list of
the Company, any confidential or secret development or research work of the
Company, or any other confidential information or secret aspects of the business
of the Company. You acknowledge that the above-described knowledge or
information constitutes a unique and valuable asset of the Company and
represents a substantial investment of time and expense by the Company and its
predecessors, and that any disclosure or other use of such knowledge or
information other than for the sole benefit of the Company would be wrong and
would cause irreparable harm to the Company. Both during and after the term of
your employment with the Company, you will refrain from any acts or omissions
that would reduce the value of such knowledge or information to the Company. The
foregoing obligations of confidentiality, however, shall not apply to any
knowledge or information which is now published or which subsequently becomes
generally publicly known in the form in which it was obtained from the Company,
other than as a direct or indirect result of a breach by you of this Letter
Agreement or of any other obligation of confidentiality to the Company.

        8. Return of Proprietary Property. You agree that all property in your
possession belonging to the Company, including without limitation, all
documents, reports, manuals, memoranda, computer print-outs, customer lists,
credit cards, keys, identification, products, access cards, and all other
property relating in any way to the business of the Company are the exclusive
property of the Company, even if you authored, created, or assisted in authoring
or creating such property. You shall return to the Company all such documents
and property immediately upon termination of employment or at such earlier time
as the Company may reasonably request.

        9. Restrictive Covenant. You acknowledge that the Company needs to be
protected against the potential for unfair competition and impairment of the
Company's goodwill by your use of the Company's training, assistance,
confidential information, and trade secrets in direct competition with the
Company. You therefore agree that during your employment with the Company and
for a period of one (1) year thereafter, you will not operate, join, control, be
employed by, or participate in ownership, management, operation, or control of,
or be connected in any manner as an independent contractor, consultant, or
otherwise, with any person or organization engaged in any business activity
which is the same as, or directly competitive with any business of the Company
or any successor of the Company as of the date of the termination of your
employment with the Company within the states of the United States of America.
For purposes of this paragraph, "directly competitive" means any business or
technical activity that is either described in any granted patent or patent
application (whether or not yet filed) owned by or licensed to the Company at
any time during your employment with the Company. You agree that the provisions
of this paragraph 9 shall survive the termination of your employment with the
Company or the termination of this Letter Agreement, whether such termination be
voluntary or involuntary, or with or without cause.




John M. Siebert, Ph.D.
April 4, 2003
Page 5


        10. Covenant Not to Recruit. You recognize that the Company's work force
constitutes an important and vital aspect of its business. You agree that during
your employment with the Company and for a period of one (1) year thereafter,
you will not recruit or solicit, or assist anyone else in the recruitment or
solicitation of, any of the Company's then current employees to terminate their
employment with the Company and to become employed by any business enterprise
with which you may then be associated or connected, whether as an owner,
employee, partner, agent, investor, consultant, contractor or otherwise. You
expressly agree that the provisions of this paragraph 10 shall survive the
termination of your employment with the Company or the termination of this
Letter Agreement, whether such termination be voluntary or involuntary or with
or without cause.

        11. Severability. In the event any provision of this Letter Agreement
shall be held illegal or invalid for any reason, said illegality or invalidity
will not in any way affect the legality or validity of any other provision
hereof. It is the intention of the parties hereto that the Company be given the
broadest possible protection respecting its confidential information and trade
secrets; and respecting competition by you following the termination of your
employment with the Company.

        12. Remedies. You agree that, in addition to, but not to the exclusion
of any other available remedy, the Company shall have the right to enforce the
provisions of paragraphs 7, 8, 9, and 10 by applying for and obtaining temporary
and permanent restraining orders or injunctions from a court of competent
jurisdiction without the necessity of filing a bond therefore, and the
prevailing party in any such action shall be entitled to recover reasonable
attorneys' fees and costs in enforcing or defending any claims regarding the
provisions of paragraphs 7, 8, 9, and 10.

        13. Company Obligations. The sole obligations of the Company will be its
obligations as set forth in this Letter Agreement, except as otherwise provided
by law. This Letter Agreement represents the entire agreement between you and
the Company relating to your employment, the termination of your employment, and
compensation and benefits relating thereto. This Letter Agreement supersedes all
prior negotiations, discussions, communications and agreements relating to the
same subject matter, including without limitation the Employment Agreement,
except as specifically incorporated herein.

        14. Governing Law; Venue. All matters relating to the interpretation,
construction, application, validity and enforcement of this Letter Agreement
shall be governed by the laws of the State of Minnesota. Any action at law, suit
in equity, or judicial proceeding arising directly, indirectly, or otherwise in
connection with, out of, related to or from this Letter Agreement or any
provision hereof, shall be litigated only in the courts of the State of
Minnesota, County of Hennepin. You hereby waive any right you may have to
transfer or change the venue of any litigation brought against you by the
Company.

                                    * * * * *



John M. Siebert, Ph.D.
April 4, 2003
Page 6


        This Letter Agreement is intended to state all the terms of the
conclusion of your employment by the Company. Please indicate your acceptance of
all such terms by signing both copies of this Letter Agreement and the First
Release, returning one copy of each to the undersigned.

                                            Sincerely,

                                            CIMA LABS INC.

                                            /s/  Steven Ratoff

                                            Steven Ratoff
                                            Chair, Board of Directors




On this 4th day of April, 2003, I, John M. Siebert, hereby accept and agree to
the terms of the above Letter Agreement and the First Release. I further
acknowledge that I have 21 days after the last date of my employment to decide
whether to sign the Second Release. I also hereby specifically confirm (a) that
I am being advised by the Company to seek independent advice from legal counsel
of my own selection in connection with this Letter Agreement, the First Release
and the Second Release (and that I have had adequate opportunity to do so); and
(b) that I have not relied to any extent on any statement or other communication
from any shareholder, director, officer, employee, attorney or agent of the
Company in connection herewith.


 /s/ John M. Siebert                                              4 April, 2003
- ------------------------------------                             ---------------
John M. Siebert, Ph.D.                                           Dated










                           RELEASE BY JOHN M. SIEBERT

DEFINITIONS. I intend all words used in this Release to have their plain
meanings in ordinary English. Specific terms that I use in this Release have the
following meanings:

        A.     I, me, and my include both me and anyone who has or obtains any
               legal rights or claims through me.

        B.     CIMA means CIMA LABS INC., any company related to CIMA LABS INC.
               in the present or past (including without limitation, its
               predecessors, parents, subsidiaries, affiliates, joint venture
               partners, and divisions), and any successors of CIMA LABS INC.

        C.     Company means CIMA; the present and past officers, directors,
               committees, shareholders, and employees of CIMA; any company
               providing insurance to CIMA in the present or past; the present
               and past fiduciaries of any employee benefit plan sponsored or
               maintained by CIMA (other than multiemployer plans); the
               attorneys for CIMA; and anyone who acted on behalf of CIMA or on
               instructions from CIMA.

        D.     Letter Agreement means the Letter Agreement from CIMA dated April
               4, 2003 and accepted by me, including all of the documents
               attached to the Letter Agreement.

        E.     My Claims mean all of my rights that I now have to any relief of
               any kind from the Company, including without limitation:

               1.     all claims arising out of or relating to my employment
                      with CIMA or the termination of that employment;

               2.     all claims arising out of or relating to the statements,
                      actions, or omissions of the Company;

               3.     all claims for any alleged unlawful discrimination,
                      harassment, retaliation or reprisal, or other alleged
                      unlawful practices arising under any federal, state, or
                      local statute, ordinance, or regulation, including without
                      limitation, claims under Title VII of the Civil Rights Act
                      of 1964, the Age Discrimination in Employment Act, the
                      Americans with Disabilities Act, 42 U.S.C. Section 1981,
                      the Employee Retirement Income Security Act, the Equal Pay
                      Act, the Worker Adjustment and Retraining Notification
                      Act, the Minnesota Human Rights Act, the Fair Credit
                      Reporting Act, and workers' compensation non-interference
                      or non-retaliation statutes (such as Minn. Stat. Section
                      176.82);

               4.     all claims for alleged wrongful discharge; breach of
                      contract; breach of implied contract; failure to keep any
                      promise; breach of a covenant of



                                                                       EXHIBIT A




                      good faith and fair dealing; breach of fiduciary duty;
                      estoppel; my activities, if any, as a "whistleblower";
                      defamation; infliction of emotional distress; fraud;
                      misrepresentation; negligence; harassment; retaliation or
                      reprisal; constructive discharge; assault; battery; false
                      imprisonment; invasion of privacy; interference with
                      contractual or business relationships; any other wrongful
                      employment practices; and violation of any other principle
                      of common law;

               5.     all claims for compensation of any kind, including without
                      limitation, bonuses, commissions, stock-based compensation
                      or stock options, vacation pay, and expense
                      reimbursements;

               6.     all claims for back pay, front pay, reinstatement, other
                      equitable relief, compensatory damages, damages for
                      alleged personal injury, liquidated damages, and punitive
                      damages; and

               7.     all claims for attorneys' fees, costs, and interest.

               However, My Claims do not include any claims that the law does
               not allow to be waived, any claims that may arise after the date
               on which I sign this Release, any claims for indemnification
               under the charter documents of the Company or under any
               applicable state or federal statute, or any claims for breach of
               the Letter Agreement.

AGREEMENT TO RELEASE MY CLAIMS. I will receive consideration from CIMA as set
forth in the Letter Agreement if I sign and do not rescind this Release as
provided below. I understand and acknowledge that that consideration is in
addition to anything of value that I would be entitled to receive from CIMA if I
did not sign this Release or if I rescinded this Release. In exchange for that
consideration I give up and release all of My Claims. I will not make any
demands or claims against the Company for compensation or damages relating to My
Claims. The consideration that I am receiving is a fair compromise for the
release of My Claims.

ADDITIONAL AGREEMENTS AND UNDERSTANDINGS. Even though CIMA will provide
consideration for me to settle and release My Claims, the Company does not admit
that it is responsible or legally obligated to me. In fact, the Company denies
that it is responsible or legally obligated to me for My Claims, denies that it
engaged in any unlawful or improper conduct toward me, and denies that it
treated me unfairly.

ADVICE TO CONSULT WITH AN ATTORNEY. I understand and acknowledge that I am
hereby being advised by the Company to consult with an attorney prior to signing
this Release and I have done so. My decision whether to sign this Release is my
own voluntary decision made with full knowledge that the Company has advised me
to consult with an attorney.

PERIOD TO CONSIDER THE RELEASE. I understand that I have 21 days from the day
that I receive this Release, not counting the day upon which I receive it, to
consider whether I wish to sign this Release. If I sign this Release before the
end of the 21-day period, it will be my voluntary



                                      -2-




decision to do so because I have decided that I do not need any additional time
to decide whether to sign this Release.

MY RIGHT TO RESCIND THIS RELEASE. I understand that I may rescind this Release
at any time within 15 days after I sign it, not counting the day upon which I
sign it. This Release will not become effective or enforceable unless and until
the 15-day rescission period has expired without my rescinding it.

PROCEDURE FOR ACCEPTING OR RESCINDING THE RELEASE. To accept the terms of this
Release, I must deliver the Release, after I have signed and dated it, to CIMA
by hand or by mail within the 21-day period that I have to consider this
Release. To rescind my acceptance, I must deliver a written, signed statement
that I rescind my acceptance to CIMA by hand or by mail within the 15-day
rescission period. All deliveries must be made to CIMA at the following address:

                             Ronald Gay
                             CIMA LABS INC.
                             10000 Valley View Road
                             Eden Prairie, MN  55344

If I choose to deliver my acceptance or the rescission of my acceptance by mail,
it must be (1) postmarked within the period stated above; and (2) properly
addressed to CIMA at the address stated above.

INTERPRETATION OF THE RELEASE. This Release should be interpreted as broadly as
possible to achieve my intention to resolve all of My Claims against the
Company. If this Release is held by a court to be inadequate to release a
particular claim encompassed within My Claims, this Release will remain in full
force and effect with respect to all the rest of My Claims.

MY REPRESENTATIONS. I am legally able and entitled to receive the consideration
being provided to me in settlement of My Claims. I have not been involved in any
personal bankruptcy or other insolvency proceedings at any time since I began my
employment with CIMA. No child support orders, garnishment orders, or other
orders requiring that money owed to me by CIMA be paid to any other person are
now in effect.

I have read this Release carefully. I understand all of its terms. In signing
this Release, I have not relied on any statements or explanations made by the
Company except as specifically set forth in the Letter Agreement. I am
voluntarily releasing My Claims against the Company. I intend this Release and
the Letter Agreement to be legally binding.



Dated:
        ----------------------------               -----------------------------
                                                   John M. Siebert, Ph.D.


                                      -3-





                           RELEASE BY JOHN M. SIEBERT

DEFINITIONS. I intend all words used in this Release to have their plain
meanings in ordinary English. Specific terms that I use in this Release have the
following meanings:

        A.     I, me, and my include both me and anyone who has or obtains any
               legal rights or claims through me.

        B.     CIMA means CIMA LABS INC., any company related to CIMA LABS INC.
               in the present or past (including without limitation, its
               predecessors, parents, subsidiaries, affiliates, joint venture
               partners, and divisions), and any successors of CIMA LABS INC.

        C.     Company means CIMA; the present and past officers, directors,
               committees, shareholders, and employees of CIMA; any company
               providing insurance to CIMA in the present or past; the present
               and past fiduciaries of any employee benefit plan sponsored or
               maintained by CIMA (other than multiemployer plans); the
               attorneys for CIMA; and anyone who acted on behalf of CIMA or on
               instructions from CIMA.

        D.     Letter Agreement means the Letter Agreement from CIMA dated April
               4, 2003 and accepted by me, including all of the documents
               attached to the Letter Agreement.

        E.     My Claims mean all of my rights that I now have to any relief of
               any kind from the Company, including without limitation:

               1.     all claims arising out of or relating to my employment
                      with CIMA or the termination of that employment;

               2.     all claims arising out of or relating to the statements,
                      actions, or omissions of the Company;

               3.     all claims for any alleged unlawful discrimination,
                      harassment, retaliation or reprisal, or other alleged
                      unlawful practices arising under any federal, state, or
                      local statute, ordinance, or regulation, including without
                      limitation, claims under Title VII of the Civil Rights Act
                      of 1964, the Age Discrimination in Employment Act, the
                      Americans with Disabilities Act, 42 U.S.C. Section 1981,
                      the Employee Retirement Income Security Act, the Equal Pay
                      Act, the Worker Adjustment and Retraining Notification
                      Act, the Minnesota Human Rights Act, the Fair Credit
                      Reporting Act, and workers' compensation non-interference
                      or non-retaliation statutes (such as Minn. Stat. Section
                      176.82);

               4.     all claims for alleged wrongful discharge; breach of
                      contract; breach of implied contract; failure to keep any
                      promise; breach of a covenant of





                                                                       EXHIBIT B



                      good faith and fair dealing; breach of fiduciary duty;
                      estoppel; my activities, if any, as a "whistleblower";
                      defamation; infliction of emotional distress; fraud;
                      misrepresentation; negligence; harassment; retaliation or
                      reprisal; constructive discharge; assault; battery; false
                      imprisonment; invasion of privacy; interference with
                      contractual or business relationships; any other wrongful
                      employment practices; and violation of any other principle
                      of common law;

               5.     all claims for compensation of any kind, including without
                      limitation, bonuses, commissions, stock-based compensation
                      or stock options, vacation pay, and expense
                      reimbursements;

               6.     all claims for back pay, front pay, reinstatement, other
                      equitable relief, compensatory damages, damages for
                      alleged personal injury, liquidated damages, and punitive
                      damages; and

               7.     all claims for attorneys' fees, costs, and interest.

               However, My Claims do not include any claims that the law does
               not allow to be waived, any claims that may arise after the date
               on which I sign this Release, any claims for indemnification
               under the charter documents of the Company or under any
               applicable state or federal statute, or any claims for breach of
               the Letter Agreement.

AGREEMENT TO RELEASE MY CLAIMS. I will receive consideration from CIMA as set
forth in the Letter Agreement if I sign and do not rescind this Release as
provided below. I understand and acknowledge that that consideration is in
addition to anything of value that I would be entitled to receive from CIMA if I
did not sign this Release or if I rescinded this Release. In exchange for that
consideration I give up and release all of My Claims. I will not make any
demands or claims against the Company for compensation or damages relating to My
Claims. The consideration that I am receiving is a fair compromise for the
release of My Claims.

ADDITIONAL AGREEMENTS AND UNDERSTANDINGS. Even though CIMA will provide
consideration for me to settle and release My Claims, the Company does not admit
that it is responsible or legally obligated to me. In fact, the Company denies
that it is responsible or legally obligated to me for My Claims, denies that it
engaged in any unlawful or improper conduct toward me, and denies that it
treated me unfairly.

ADVICE TO CONSULT WITH AN ATTORNEY. I understand and acknowledge that I am
hereby being advised by the Company to consult with an attorney prior to signing
this Release and I have done so. My decision whether to sign this Release is my
own voluntary decision made with full knowledge that the Company has advised me
to consult with an attorney.

PERIOD TO CONSIDER THE RELEASE. I understand that I have 21 days following my
last day of employment with the Company to consider whether I wish to sign this
Release. If I sign this




                                      -2-





Release before the end of the 21-day period, it will be my voluntary decision to
do so because I have decided that I do not need any additional time to decide
whether to sign this Release.

MY RIGHT TO RESCIND THIS RELEASE. I understand that I may rescind this Release
at any time within 15 days after I sign it, not counting the day upon which I
sign it. This Release will not become effective or enforceable unless and until
the 15-day rescission period has expired without my rescinding it.

PROCEDURE FOR ACCEPTING OR RESCINDING THE RELEASE. To accept the terms of this
Release, I must deliver the Release, after I have signed and dated it, to CIMA
by hand or by mail within the 21-day period that I have to consider this
Release. To rescind my acceptance, I must deliver a written, signed statement
that I rescind my acceptance to CIMA by hand or by mail within the 15-day
rescission period. All deliveries must be made to CIMA at the following address:

                             Ronald Gay
                             CIMA LABS INC.
                             10000 Valley View Road
                             Eden Prairie, MN  55344

If I choose to deliver my acceptance or the rescission of my acceptance by mail,
it must be (1) postmarked within the period stated above; and (2) properly
addressed to CIMA at the address stated above.

INTERPRETATION OF THE RELEASE. This Release should be interpreted as broadly as
possible to achieve my intention to resolve all of My Claims against the
Company. If this Release is held by a court to be inadequate to release a
particular claim encompassed within My Claims, this Release will remain in full
force and effect with respect to all the rest of My Claims.

MY REPRESENTATIONS. I am legally able and entitled to receive the consideration
being provided to me in settlement of My Claims. I have not been involved in any
personal bankruptcy or other insolvency proceedings at any time since I began my
employment with CIMA. No child support orders, garnishment orders, or other
orders requiring that money owed to me by CIMA be paid to any other person are
now in effect.

I have read this Release carefully. I understand all of its terms. In signing
this Release, I have not relied on any statements or explanations made by the
Company except as specifically set forth in the Letter Agreement. I am
voluntarily releasing My Claims against the Company. I intend this Release and
the Letter Agreement to be legally binding.




Dated:
        ----------------------------               -----------------------------
                                                   John M. Siebert, Ph.D.



                                      -3-

EX-10.4

                                                                    Exhibit 10.4

                                 CIMA LABS INC.
                              EMPLOYMENT AGREEMENT


               THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into on
April 30, 2003 by and between Cima Labs Inc., a Delaware corporation with its
headquarters in Eden Prairie, Minnesota (the "Company"), and Steven B. Ratoff, a
resident of Arizona ("Executive").

               A. The Company develops and manufactures prescription and
over-the-counter pharmaceutical products using fast-dissolve drug delivery
technologies for sale around the world.

               B. Executive is an experienced business manager in the
pharmaceutical industry and is Chairman of the Board of Directors of the
Company.

               C. The Company's President and Chief Executive Officer has
announced his retirement from the Company effective December 31, 2003 and from
his position as President and Chief Executive Officer effective April 30, 2003.

               D. The Company desires for Executive to serve as interim Chief
Executive Officer while it completes a search for candidates for the position,
and Executive desires to serve in this capacity, subject to the terms and
conditions set forth in this Agreement.

               NOW, THEREFORE, in consideration of the foregoing premises and
the respective agreements of the Company and Executive set forth below, the
Company and Executive, intending to be legally bound, agree as follows:

               1. Employment. Effective as of May 1, 2003, the Company shall
employ Executive, and Executive shall accept such employment and perform
services for the Company, upon the terms and conditions set forth in this
Agreement.

               2. Term of Employment. Unless terminated at an earlier date in
accordance with Section 9 hereof, the term of Executive's employment with the
Company shall be for the period commencing on May 1, 2003 and ending on October
31, 2003 (the "Term").

               3.     Position and Duties.

               (a) Employment with the Company. During Executive's employment
with the Company hereunder, Executive shall report to the Board of Directors of
the Company (the "Board") and shall perform such duties and responsibilities as
the Board shall assign to him from time to time consistent with his position.
Executive shall be an executive officer of the Company and Executive's title
shall be "Interim Chief Executive Officer".






               (b) Board of Directors. Executive is currently a member and
Chairman of the Board. While Executive is employed hereunder, Executive shall
not receive any additional compensation from the Company in connection with his
service as a director or Chairman.

               (c) Performance of Duties and Responsibilities. Executive shall
serve the Company faithfully and to the best of his ability and shall devote his
full working time, attention and efforts to the business of the Company during
his employment with the Company. Executive hereby represents and confirms that
he is under no contractual or legal commitments that would prevent him from
fulfilling his duties and responsibilities as set forth in this Agreement.
During his employment with the Company, Executive may participate in charitable
activities and personal investment activities to a reasonable extent, and,
subject to prior Board approval, may serve on boards of directors of other
companies, so long as such activities do not interfere with the performance of
his duties and responsibilities hereunder. The Company acknowledges and consents
to Executive's service on the board of directors of Inkine Pharmaceutical
Company, Inc.

               (d) Location. While Executive is employed by the Company
hereunder, his employment shall be based at the Company's headquarters in Eden
Prairie, Minnesota. Executive shall be available at the headquarters of the
Company as reasonably required to carry out his duties and responsibilities
hereunder.

               4.     Compensation.

               (a) Base Salary. While Executive is employed by the Company
hereunder, the Company shall pay to Executive a monthly base salary of $28,045,
less deductions and withholdings, which base salary shall be paid in accordance
with the Company's normal payroll policies and procedures.

               (b) Incentive Bonus. While Executive is employed by the Company
hereunder, Executive shall be eligible for an incentive bonus award of up to 70%
of Executive's base salary, based upon achievement of defined objectives, to be
determined in the sole discretion of the Board.

               (c) Stock Options. Subject to approval by the Board and the terms
of a definitive stock option agreement to be entered into by the Company and
Executive, the Company shall grant Executive a stock option to purchase 35,000
shares of common stock of the Company, which option shall vest 50% upon
commencement of Executive's employment hereunder and 50% on the first
anniversary of the commencement of Executive's employment hereunder, provided
that Executive continues as an employee, consultant or director of the Company
on such anniversary date.

               (d) Employee Benefits. Except as specifically stated in this
Agreement, while Executive is employed by the Company hereunder, Executive shall
not be entitled to participate in any employee benefit plans or programs of the
Company. Executive hereby waives all right and interest he may have to benefits
under such plans, including without limitation all medical



                                       2




and dental plans, life and disability insurance plans, and retirement or pension
plans sponsored by the Company.

               (e) Expenses. While Executive is employed by the Company
hereunder, the Company shall reimburse Executive for all reasonable and
necessary out-of-pocket business, travel and entertainment expenses incurred by
him in the performance of his duties and responsibilities hereunder, subject to
the Company's normal policies and procedures for expense verification and
documentation. The Company shall also provide appropriate living and travel
arrangements for Executive in the Minneapolis, Minnesota metropolitan area. If
any of the payments made by the Company as described in this Section 4(e) are
determined to be income to Executive for federal income tax purposes, the
Company shall also pay to Executive an additional amount equal to 40% of the
amount determined to be income.

               (f) Vacation. While Executive is employed by the Company
hereunder, Executive shall receive two (2) weeks paid vacation time off.
Vacation time shall be taken at such times so as not to unduly disrupt the
operations of the Company.

               5. Confidential Information. Except as permitted by the Company's
Board, during the term of Executive's employment with the Company and at all
times thereafter, Executive shall not divulge, furnish or make accessible to
anyone or use in any way other than in the ordinary course of the business of
the Company, any confidential, proprietary or secret knowledge or information of
the Company that Executive has acquired or shall acquire during his employment
with the Company, whether developed by himself or by others, concerning (i) any
trade secrets, (ii) any confidential, proprietary or secret designs, processes,
formulae, plans, devices or material (whether or not patented or patentable)
directly or indirectly useful in any aspect of the business of the Company,
(iii) any customer or supplier lists of the Company, (iv) any confidential,
proprietary or secret development or research work of the Company, (v) any
strategic or other business, marketing or sales plans of the Company, (vi) any
financial data or plans respecting the Company, or (vii) any other confidential
or proprietary information or secret aspects of the business of the Company.
Executive acknowledges that the above-described knowledge and information
constitutes a unique and valuable asset of the Company and represents a
substantial investment of time and expense by the Company, and that any
disclosure or other use of such knowledge or information other than for the sole
benefit of the Company would be wrongful and would cause irreparable harm to the
Company. During the term of Executive's employment with the Company, Executive
shall refrain from any acts or omissions that would reduce the value of such
knowledge or information to the Company. The foregoing obligations of
confidentiality shall not apply to any knowledge or information that (i) is now
or subsequently becomes generally publicly known in the form in which it was
obtained from the Company, (ii) is independently made available to Executive in
good faith by a third party who has not violated a confidential relationship
with the Company, or (iii) is required to be disclosed by legal process, other
than as a direct or indirect result of the breach of this Agreement by
Executive.

               6. Ventures. If, during the term of Executive's employment with
the Company, Executive is engaged in or associated with the planning or
implementing of any



                                       3




project, program or venture involving the Company and a third party or parties,
all rights in such project, program or venture shall belong to the Company.
Except as approved in writing by the Board, Executive shall not be entitled to
any interest in any such project, program or venture or to any commission,
finder's fee or other compensation in connection therewith, other than the
compensation to be paid to Executive by the Company as provided herein.
Executive shall have no interest, direct or indirect, in any customer or
supplier that conducts business with the Company, unless such interest has been
disclosed in writing to and approved by the Board before such customer or
supplier seeks to do business with the Company. Ownership by Executive, as a
passive investment, of less than 5.0% of the outstanding shares of capital stock
of any corporation listed on a national securities exchange or publicly traded
in the over-the-counter market shall not constitute a breach of this Section 6.

               7.     Noncompetition Covenant.

               (a) Agreement Not to Compete. During the term of Executive's
employment with the Company and for a period of twelve (12) consecutive months
from the date of the termination of such employment, whether such termination is
with or without Cause (as defined below), or whether such termination is at the
instance of Executive or the Company, Executive shall not, directly or
indirectly, throughout North America, engage in any business that the Company
has engaged in during the term of Executive's employment with the Company, or
any part of such business, including without limitation the design, development,
manufacture, distribution, marketing or selling of pharmaceutical products using
fast-dissolve drug delivery technologies, in any manner or capacity, including
without limitation as a proprietor, principal, agent, partner, officer,
director, stockholder, employee, member of any association, consultant or
otherwise. Ownership by Executive, as a passive investment, of less than 2.5% of
the outstanding shares of capital stock of any corporation listed on a national
securities exchange or publicly traded in the over-the-counter market shall not
constitute a breach of this Section 7(a).

               (b) Agreement Not to Hire. During the term of Executive's
employment with the Company and for a period of twelve (12) consecutive months
from the date of the termination of such employment, whether such termination is
with or without Cause (as defined below), or whether such termination is at the
instance of Executive or the Company, Executive shall not, directly or
indirectly, hire, engage or solicit any person who is then an employee of the
Company or who was an employee of the Company at the time of Executive's
termination of employment, in any manner or capacity, including without
limitation as a proprietor, principal, agent, partner, officer, director,
stockholder, employee, member of any association, consultant or otherwise.

               (c) Agreement Not to Solicit. During the term of Executive's
employment with the Company and for a period of twelve (12) consecutive months
from the date of the termination of such employment, whether such termination is
with or without Cause (as defined below), or whether such termination is at the
instance of Executive or the Company, Executive shall not, directly or
indirectly, solicit, request, advise or induce any current or potential
customer, supplier or other business contact of the Company on behalf of any
entity competing with the Company or to cancel, curtail or otherwise change its
relationship with the Company, in any manner or capacity, including without
limitation as a proprietor, principal, agent, partner,



                                       4




officer, director, stockholder, employee, member of any association, consultant
or otherwise. A "current customer" is defined as a customer of the Company as of
the Termination Date (as defined below). A "potential customer" is an entity
with which the Company has had significant and substantive discussions within
one year prior to, or is having significant and substantive discussions as of,
the Termination Date.

               (d) Acknowledgment. Executive hereby acknowledges that the
provisions of this Section 7 are reasonable and necessary to protect the
legitimate interests of the Company and that any violation of this Section 7 by
Executive shall cause substantial and irreparable harm to the Company to such an
extent that monetary damages alone would be an inadequate remedy therefor.
Therefore, in the event that Executive violates any provision of this Section 7,
the Company shall be entitled to an injunction, in addition to all the other
remedies it may have, restraining Executive from violating or continuing to
violate such provision.

               (e) Blue Pencil Doctrine. If the duration of, the scope of or any
business activity covered by any provision of this Section 7 is in excess of
what is valid and enforceable under applicable law, such provision shall be
construed to cover only that duration, scope or activity that is valid and
enforceable. Executive hereby acknowledges that this Section 7 shall be given
the construction which renders its provisions valid and enforceable to the
maximum extent, not exceeding its express terms, possible under applicable law.

               8.     Patents, Copyrights and Related Matters.

               (a) Disclosure and Assignment. Executive shall immediately
disclose to the Company any and all improvements, inventions, ideas, and
discoveries that Executive may conceive and/or reduce to practice individually
or jointly or commonly with others while he is employed with the Company with
respect to (i) any methods, processes or apparatus concerned with the
development, use or production of any type of products, goods or services sold
or used by the Company, and (ii) any type of products, goods or services sold or
used by the Company. Executive also shall immediately assign, transfer and set
over to the Company his entire right, title and interest in and to any and all
of such inventions as are specified in this Section 8(a), and in and to any and
all applications for letters patent that may be filed on such inventions, and in
and to any and all letters patent that may issue, or be issued, upon such
applications. In connection therewith and for no additional compensation
therefor, but at no expense to Executive, Executive shall sign any and all
instruments deemed necessary by the Company for:

                      (i)    the filing and prosecution of any applications for
                             letters patent of the United States or of any
                             foreign country that the Company may desire to file
                             upon such inventions as are specified in this
                             Section 8(a);

                      (ii)   the filing and prosecution of any divisional,
                             continuation, continuation-in-part or reissue
                             applications that the Company may desire to file
                             upon such applications for letters patent; and




                                       5





                      (iii)  the reviving, re-examining or renewing of any
                             of such applications for letters patent.

This Section 8(a) shall not apply to any invention for which no equipment,
supplies, facilities, confidential, proprietary or secret knowledge or
information, or other trade secret information of the Company was used and that
was developed entirely on Executive's own time, and (i) that does not relate (A)
directly to the business of the Company, or (B) to the Company's actual or
demonstrably anticipated research or development, or (ii) that does not result
from any work performed by Executive for the Company.

               (b) Copyrightable Material. All right, title and interest in all
copyrightable material that Executive shall conceive or originate individually
or jointly or commonly with others, and that arise during the term of his
employment with the Company and out of the performance of his duties and
responsibilities under this Agreement, shall be the property of the Company and
are hereby assigned by Executive to the Company, along with ownership of any and
all copyrights in the copyrightable material. Upon request and without further
compensation therefor, but at no expense to Executive, Executive shall execute
any and all papers and perform all other acts necessary to assist the Company to
obtain and register copyrights on such materials in any and all countries. Where
applicable, works of authorship created by Executive for the Company in
performing his duties and responsibilities hereunder shall be considered "works
made for hire," as defined in the U.S. Copyright Act.

               (c) Know-How and Trade Secrets. All know-how and trade secret
information conceived or originated by Executive that arises during the term of
his employment with the Company and out of the performance of his duties and
responsibilities hereunder or any related material or information shall be the
property of the Company, and all rights therein are hereby assigned by Executive
to the Company.

               9.     Termination of Employment.

               (a) The Executive's employment with the Company shall terminate
immediately upon:

                      (i)    Executive's receipt of written notice from the
                             Company of the termination of his employment;

                      (ii)   Executive's abandonment of his employment or his
                             resignation;

                      (iii)  Executive's death or Disability (as defined below);
                             or

                      (iv)   the expiration of the Term, as specified in Section
                             2 hereof.

               (b) The date upon which Executive's termination of employment
with the Company occurs shall be the "Termination Date."



                                       6






               10.    Payments upon Termination of Employment.

               (a) If Executive's employment with the Company is terminated,
before the expiration of the Term, by the Company for any reason other than for
Cause (as defined below), the Company shall continue to pay to Executive his
base salary from the Termination Date through the remainder of the Term.

               (b) If Executive's employment with the Company is terminated by
reason of:

                      (i)    Executive's resignation or abandonment of his
                             employment,

                      (ii)   termination of Executive's employment by the
                             Company for Cause (as defined below),

                      (iii)  Executive's death or Disability, or

                      (iv)   the expiration of the Term, as specified in Section
                             2 hereof,

the Company shall pay to Executive or his beneficiary or his estate, as the case
may be, his base salary through the Termination Date.

               (c)    "Cause" hereunder shall mean:

                      (i)    an act or acts of dishonesty undertaken by
                             Executive and intended to result in substantial
                             gain or personal enrichment of Executive at the
                             expense of the Company;

                      (ii)   unlawful conduct or gross misconduct that is
                             willful and deliberate on Executive's part and
                             that, in either event, is materially injurious to
                             the Company;

                      (iii)  the conviction of Executive of a felony;

                      (iv)   failure of Executive to perform his duties and
                             responsibilities hereunder or to satisfy his
                             obligations as an officer or employee of the
                             Company, which failure has not been cured by
                             Executive within 30 days after written notice
                             thereof to Executive from the Company; or

                      (v)    material breach of any terms and conditions of this
                             Agreement by Executive not caused by the Company.

               (d) "Disability" hereunder shall mean the inability of Executive
to perform on a full-time basis the duties and responsibilities of his
employment with the Company by reason



                                       7




of his illness or other physical or mental impairment or condition, if such
inability continues for an uninterrupted period of thirty (30) days or more
during the Term. A period of inability shall be "uninterrupted" unless and until
Executive returns to full-time work for a continuous period of at least fifteen
(15) days.

               (e) In the event of termination of Executive's employment, the
sole obligation of the Company shall be its obligation to make the payments
called for by Section 10(a) or Section 10(b) hereof, as the case may be, and the
Company shall have no other obligation to Executive or to his beneficiary or his
estate, except as otherwise provided by law or under the terms of any other
applicable agreement between Executive and the Company.

               (f) Notwithstanding the foregoing provisions of this Section 10,
the Company shall not be obligated to make any payments to Executive under
Section 10(a) hereof unless Executive shall have signed a release of claims in
favor of the Company in a form to be prescribed by the Board, all applicable
consideration periods and rescission periods provided by law shall have expired
and Executive is in strict compliance with the terms of this Agreement as of the
dates of the payments. Such release of claims shall not include a release by
Executive of claims he may have for indemnification under the charter documents
of the Company, under any insurance policy maintained by the Company, or under
applicable federal, state or local indemnification laws.

               11. Return of Records and Property. Upon termination of his
employment with the Company, Executive shall promptly deliver to the Company any
and all Company records and any and all Company property in his possession or
under his control, including without limitation manuals, books, blank forms,
documents, letters, memoranda, notes, notebooks, reports, printouts, computer
disks, computer tapes, source codes, data, tables or calculations and all copies
thereof, documents that in whole or in part contain any trade secrets or
confidential, proprietary or other secret information of the Company and all
copies thereof, and keys, access cards, access codes, passwords, credit cards,
personal computers, telephones and other electronic equipment belonging to the
Company; provided, however, that if Executive continues as a director of the
Company following the termination of his employment hereunder, Executive may
retain all property and records of the Company in his possession in connection
with his position as a director.

               12.    Remedies.

               (a) Remedies. Executive acknowledges that it would be difficult
to fully compensate the Company for monetary damages resulting from any breach
by him of the provisions of Sections 5, 7, 8 and 11 hereof. Accordingly, in the
event of any actual or threatened breach of any such provisions, the Company
shall, in addition to any other remedies it may have, be entitled to injunctive
and other equitable relief to enforce such provisions, and such relief may be
granted without the necessity of proving actual monetary damages.

               (b) Arbitration. Except for disputes arising under Sections 5, 7
or 8 hereof, all disputes involving the interpretation, construction,
application or alleged breach of this



                                       8




Agreement and all disputes relating to Executive's employment with the Company
or the termination of such employment shall be submitted to final and binding
arbitration in Minneapolis, Minnesota. The arbitrator shall be selected and the
arbitration shall be conducted pursuant to the then most recent Employment
Dispute Resolution Rules of the American Arbitration Association. The decision
of the arbitrator shall be final and binding, and any court of competent
jurisdiction may enter judgment upon the award. All fees and expenses of the
arbitrator shall be paid by the Company. The arbitrator shall have jurisdiction
and authority to interpret and apply the provisions of this Agreement and
relevant federal, state and local laws, rules and regulations insofar as
necessary to the determination of the dispute and to remedy any breaches of the
Agreement and/or violations of applicable laws, but shall not have jurisdiction
or authority to alter in any way the provisions of this Agreement. The
arbitrator shall have the authority to award attorneys' fees and costs to the
prevailing party. The parties hereby agree that this arbitration provision shall
be in lieu of any requirement that either party exhaust such party's
administrative remedies under federal, state or local law.

               (c) Jurisdiction and Venue. Executive and the Company consent to
jurisdiction of the courts of the State of Minnesota and/or the federal district
courts, District of Minnesota, for the purpose of resolving all issues of law,
equity, or fact arising out of or in connection with Sections 5, 7 or 8 of this
Agreement. Any action involving claims of a breach of such Sections shall be
brought in such courts. Each party consents to personal jurisdiction over such
party in the state and/or federal courts of Minnesota and hereby waives any
defense of lack of personal jurisdiction. Venue, for the purpose of all such
suits, shall be in Hennepin County, State of Minnesota.

               13.    Miscellaneous.

               (a) Governing Law. All matters relating to the interpretation,
construction, application, validity and enforcement of this Agreement shall be
governed by the laws of the State of Minnesota without giving effect to any
choice or conflict of law provision or rule, whether of the State of Minnesota
or any other jurisdiction, that would cause the application of laws of any
jurisdiction other than the State of Minnesota.

               (b) Entire Agreement. This Agreement contains the entire
agreement of the parties relating to the subject matter of this Agreement and
supersedes all prior agreements and understandings with respect to such subject
matter, and the parties hereto have made no agreements, representations or
warranties relating to the subject matter of this Agreement that are not set
forth herein.

               (c) Amendments. No amendment or modification of this Agreement
shall be deemed effective unless made in writing and signed by the parties
hereto.

               (d) No Waiver. No term or condition of this Agreement shall be
deemed to have been waived, except by a statement in writing signed by the party
against whom enforcement of the waiver is sought. Any written waiver shall not
be deemed a continuing waiver unless specifically stated, shall operate only as
to the specific term or condition waived



                                       9





and shall not constitute a waiver of such term or condition for the future or as
to any act other than that specifically waived.

               (e) Assignment. This Agreement shall not be assignable, in whole
or in part, by either party without the written consent of the other party,
except that the Company may, without the consent of Executive, assign its rights
and obligations under this Agreement to any corporation or other business entity
(i) with which the Company may merge or consolidate, (ii) to which the Company
may sell or transfer all or substantially all of its assets or capital stock, or
(iii) of which 50% or more of the capital stock or the voting control is owned,
directly or indirectly, by the Company. After any such assignment by the
Company, the Company shall be discharged from all further liability hereunder
and such assignee shall thereafter be deemed to be the "Company" for purposes of
all terms and conditions of this Agreement, including this Section 13.

               (f) Counterparts. This Agreement may be executed in any number of
counterparts, and such counterparts executed and delivered, each as an original,
shall constitute but one and the same instrument.

               (g) Severability. Subject to Section 7(e) hereof, to the extent
that any portion of any provision of this Agreement shall be invalid or
unenforceable, it shall be considered deleted herefrom and the remainder of such
provision and of this Agreement shall be unaffected and shall continue in full
force and effect.

               (h) Captions and Headings. The captions and paragraph headings
used in this Agreement are for convenience of reference only and shall not
affect the construction or interpretation of this Agreement or any of the
provisions hereof.

        IN WITNESS WHEREOF, Executive and the Company have executed this
Agreement as of the date set forth in the first paragraph.

                                            CIMA LABS INC.


                                            By    /s/ John F. Chappell
                                               ---------------------------------

                                            Its    Director
                                               ---------------------------------


                                               /s/ Steven B. Ratoff
                                            ------------------------------------
                                            STEVEN B. RATOFF



                                       10

EX-99.1

                                                                    EXHIBIT 99.1

CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the
undersigned certifies that this periodic report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that information contained in this periodic report fairly presents, in all
material respects, the financial condition and results of operations of CIMA
LABS INC. (the "Company").

A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.


Date: May 13, 2003                          /s/ Steven B. Ratoff
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                                            Steven B. Ratoff
                                            Interim Chief Executive Officer


                                            /s/ James C. Hawley
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                                            James C. Hawley
                                            Vice President, Chief Financial
                                            Officer and Secretary