<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996
--------------------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transaction Period from ______________ to _______________
Commission File Number 0-19119
------------------------------------
CEPHALON, INC.
---------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 23-2484489
- ------------------------------------------------ ------------------------
(State Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification Number)
145 Brandywine Parkway, West Chester, PA 19380
- ------------------------------------------ -----------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610) 344-0200
------------------------
Not Applicable
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report
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 (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of May 10, 1996
----- ------------------------------
Common Stock, par value $.01 24,326,241 Shares
This Report Includes a Total of 22 Pages
<PAGE>
CEPHALON, INC. and SUBSIDIARIES
INDEX
-----
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - 1
March 31, 1996 and December 31, 1995
Consolidated Statements of Operations - 2
Three months ended March 31, 1996 and 1995
Consolidated Statements of Cash Flows - 3
Three months ended March 31, 1996 and 1995
Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
<PAGE>
PART 1 - Financial Information
- ------------------------------
Item 1. Financial Statements
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------------- --------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ($5,625,000 and $6,250,000 in custodial account) (Note 2) $ 5,826,000 $ 6,565,000
Short-term investments (Note 2) 161,762,000 171,502,000
Related-party receivables (Note 5) 57,000 33,000
Other 9,353,000 10,382,000
-------------- --------------
Total current assets 176,998,000 188,482,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $10,610,000 and $9,652,000 29,447,000 30,002,000
OTHER 2,884,000 2,846,000
-------------- --------------
$ 209,329,000 $ 221,330,000
============== ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,711,000 $ 4,379,000
Accrued expenses 10,696,000 10,116,000
Current portion of long-term debt 3,931,000 3,907,000
-------------- --------------
Total current liabilities 17,338,000 18,402,000
LONG-TERM DEBT 20,674,000 21,668,000
OTHER 1,199,000 1,055,000
-------------- --------------
Total liabilities 39,211,000 41,125,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY: (Note 4)
Preferred stock, $.01 par value,
5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 40,000,000 shares authorized,
24,228,036 and 23,837,204 shares issued and outstanding 242,000 238,000
Additional paid-in capital 289,496,000 284,649,000
Accumulated deficit (119,620,000) (104,682,000)
-------------- --------------
Total stockholders' equity 170,118,000 180,205,000
-------------- --------------
$ 209,329,000 $ 221,330,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 1
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
REVENUES (Note 5):
Related party $ - $ 831,000
Other 3,728,000 1,796,000
------------ ------------
3,728,000 2,627,000
OPERATING EXPENSES (Notes 5 and 6):
Research and development 14,293,000 13,529,000
Selling, general and administrative 5,495,000 3,074,000
------------ ------------
19,788,000 16,603,000
LOSS FROM OPERATIONS (16,060,000) (13,976,000)
INTEREST:
Income 1,741,000 1,863,000
Expense (619,000) (468,000)
------------ ------------
1,122,000 1,395,000
------------ ------------
LOSS $(14,938,000) $(12,581,000)
============ ============
LOSS PER SHARE $ (0.62) $ (0.69)
============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 24,044,615 18,287,281
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 2
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------------
1996 1995
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss $ (14,938,000) $ (12,581,000)
Adjustments to reconcile loss to net cash
used for operating activities:
Depreciation and amortization 958,000 1,479,000
(Increase) decrease in operating assets:
Related-party receivable (24,000) (1,176,000)
Other current assets 752,000 148,000
Other long-term assets (38,000) 212,000
Increase (decrease) in operating liabilities:
Accounts payable (1,668,000) (1,137,000)
Accrued expenses 1,249,000 1,165,000
Other long-term liabilities 144,000 240,000
------------- -------------
Net cash used for operating activities (13,565,000) (11,650,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (512,000) (12,885,000)
Sale leaseback of property and equipment -- 237,000
Sales and maturities (purchases) of investments, net 9,740,000 6,632,000
------------- -------------
Net cash provided by (used for) investing activities 9,228,000 (6,016,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options and warrants 4,568,000 68,000
Proceeds from long-term debt -- 19,744,000
Principal payments on long-term debt (970,000) (723,000)
------------- -------------
Net cash provided by financing activities 3,598,000 19,089,000
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (739,000) 1,423,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,565,000 11,063,000
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,826,000 $ 12,486,000
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CEPHALON, INC. & SUBSIDIARIES
-----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Unaudited)
1. The Company and Summary of Significant Accounting Policies
----------------------------------------------------------
The Company
Cephalon, Inc. ("Cephalon" or the "Company") seeks to discover and
develop pharmaceutical products primarily for the treatment of neurological
disorders, such as ALS, narcolepsy, peripheral neuropathies, Alzheimer's
disease, head and spinal injury and stroke. The Company has not received
regulatory approval for the commercial sale of any of its products under
development. The Company markets and sells, to neurologists in the United
States, two proprietary drugs of Bristol-Myers Squibb ("BMS") under a co-
promotion agreement. The Company has funded its operations primarily from the
proceeds of public and private placements of its equity securities and the
receipt of payments under research and development agreements.
The Company's business of developing and marketing pharmaceutical
products is subject to a number of significant risks, including risks inherent
in research and development activities and in conducting business in a highly
regulated environment. The success of the Company depends to a large degree upon
obtaining FDA and foreign regulatory approval to market products currently under
development. There can be no assurance that any of the Company's product
candidates will be approved by any regulatory authority for marketing in any
jurisdiction.
Basis of presentation
These consolidated financial statements of Cephalon, Inc. are unaudited
and include all adjustments which, in the opinion of management, are necessary
to present fairly the financial condition and results of operations as of and
for the periods set forth in the Consolidated Balance Sheets, Consolidated
Statements of Operations and Consolidated Statements of Cash Flows. All such
adjustments are of a normal, recurring nature. The consolidated financial
statements do not include all of the information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K, filed with the Securities and Exchange Commission,
which includes financial statements as of and for the three years ended December
31, 1995. The results of the Company's operations for any interim period are not
necessarily indicative of the results of the Company's operations for any other
interim period or for a full year.
2. Cash, Cash Equivalents and Investments
--------------------------------------
Cash, cash equivalents and investments as of the indicated dates were as
follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Cash and cash equivalents.............. $ 5,826,000 $ 6,565,000
Repurchase agreements collateralized by
U.S. Treasury securities............... 11,152,000 23,126,000
U.S. Treasury bills and notes.......... 133,336,000 140,966,000
Commercial paper....................... 17,274,000 7,410,000
------------ ------------
$167,588,000 $178,067,000
============ ============
</TABLE>
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. As of the
indicated periods, the Company is in compliance with all financial covenants
required under certain of its debt and lease agreements that obligate the
Company to maintain a custodial account and certain minimum cash and investment
balances and financial ratios.
4
<PAGE>
3. Commitments and Contingencies
-----------------------------
Leases
The Company leases certain of its offices, automobiles, manufacturing
facilities and certain manufacturing equipment under operating leases. The
Company's future annual minimum payments under the facilities and equipment
leases are approximately $2,475,000 for the remainder of 1996, $3,400,000 in
each of the years 1997 to 1998, $550,000 in 1999, $425,000 in 2000 and $50,000
in 2001.
Other
The Company maintains agreements to fund research at a number of
educational and scientific institutions. These agreements are generally
renewable on an annual basis and provide the Company with the right to obtain
exclusive, royalty bearing licenses to the results of the research. The Company
is obligated under several other cancelable agreements including those entered
into for the purpose of conducting clinical trials. The Company has funding
obligations under its co-promotion agreement with BMS including an obligation of
$1,500,000 in 1996. The Company is obligated to make royalty, license fee and
milestone payments under certain of its other licensing and research and
development agreements, including in 1996, payments to Lafon of $1,633,000 to
maintain the license to modafinil.
Related party
In 1992, the Company entered into a research and development agreement
(the "Partnership Development Agreement") with Cephalon Clinical Partners, L.P.
(the "Partnership") under which the Company granted the Partnership an exclusive
license in the United States, Canada and Europe (''the Territory'') to certain
technology, principally Myotrophin, and received a non-refundable license fee of
$500,000.
The Partnership exclusively licensed the Company to manufacture and
market Myotrophin within the Territory in return for certain royalty payments
and a payment of approximately $16,000,000 (the ''Milestone Payment'') that is
to be made if Myotrophin receives regulatory approval in certain countries
within the Territory. The Company has the option to pay the Milestone Payment in
cash, common stock, or a combination thereof. The Company also entered into an
agreement with each of the Partnership's limited partners under which it
received an option (the "Purchase Option") to purchase all the limited
partnership interests in the Partnership.
If the Company elects to exercise the Purchase Option, it will be
required to make a payment of $40,275,000 in cash or, at the Company's election,
$42,369,000 in shares of the Company's common stock, valued at the market price
at the time of the exercise. If exercised, the Company would then also make
future payments to the former limited partners for eleven years at a rate of
10.1% on Myotrophin sales in the Territory (subject to certain maximums and
reducing to 5.0% after a specified return is earned by the former limited
partners).
Legal proceedings
The Company and certain of its officers have been named as defendants in
a number of civil actions filed in the U.S. District Court for the Eastern
District of Pennsylvania, which the Company will seek to have consolidated into
one action. Although the complaints differ in some respects, they allege, in
general, that the Company and the officers violated the federal securities laws
by failing to disclose material information about the methods and results of the
North American and European clinical studies of Myotrophin for use in treating
ALS. The plaintiffs seek to maintain these actions as class actions on behalf of
purchasers of the Company's common stock during specified periods between June
1995 and January 19, 1996. The plaintiffs in the actions seek unspecified
damages and other relief. The Company believes that it has meritorious defenses
to the allegations of the actions filed to date and intends to vigorously defend
the actions. The Company does not currently expect the ultimate resolution of
these actions to have a material adverse effect on the Company's financial
position .
5
<PAGE>
4. Stockholders' Equity
--------------------
At March 31, 1996, the Company had 2,864,601 stock options outstanding
at exercise prices ranging from $0.15 per share to $31.00 per share, of which
1,317,064 options were exercisable, including 450,000 options exercisable at
prices below $10.00 per share.
At March 31, 1996, warrants to purchase 3,152,285 shares of the
Company's common stock were outstanding as follows:
<TABLE>
<CAPTION>
Number of shares issuable Exercise Price
upon exercise of warrants Exercise Period per share
------------------------- ----------------------------------- --------------
<S> <C> <C>
1,965,682 September 1, 1993 - August 31, 1997 $11.32
September 1, 1997 - August 31, 1999 $13.82
411,200 September 1, 1994 - August 31, 1999 $13.70
25,403 September 1, 1993 - August 31, 1999 $11.77
750,000 February 9, 1994 - February 8, 2002 $18.50
</TABLE>
During the quarter ended March 31, 1996, 328,633 warrants and 58,744
stock options were exercised for an aggregate exercise price of $3,844,000 and
$447,000, respectively.
5. Revenues
--------
Related Party - Cephalon Clinical Partners, L.P.
Under the Partnership Development Agreement, the Company is performing
the development and clinical testing of Myotrophin within the Territory and was
reimbursed by the Partnership for 110% of the Company's incurred costs, subject
to the Partnership's available funding. Effective late in 1995, the Partnership
depleted all of its available funding and will not provide further funding of
Myotrophin development costs to the Company. The January 1994 collaboration
between the Company and Chiron is subject to the rights of the Partnership (see
Note 6).
Revenue - Other
Other revenues for the periods below consisted primarily of the revenue
recorded under the Company's collaboration agreements as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
TAP Holdings......... $1,328,000 $1,101,000
SmithKline Beecham... 706,000 693,000
Schering-Plough...... 750,000 --
Chiron (see Note 6).. 944,000 --
</TABLE>
TAP Holdings
Although the research funding under the TAP Agreement expired at the end
of 1995, the Company and TAP are actively discussing the terms of an extension
of the funding arrangement. TAP has agreed to reimburse the Company for expenses
incurred in connection with the program during the first quarter of 1996.
6
<PAGE>
6. Research and Development
------------------------
Chiron Corporation
The Company and Chiron are currently developing Myotrophin for the
treatment of ALS and certain peripheral neuropathies. Under the collaboration,
each party funded its own collaboration-related expenses through 1994. Chiron
provided the Company with a revolving credit facility (the "Note") to assist the
Company in funding its costs incurred. During the first quarter of 1995, the
Company drew down $5,274,000 against the Note. In September 1995, the Company
and Chiron adjusted their contributions to the collaboration program to result
in equal aggregate funding by each party through that date and, agreed to fund
equal amounts of Myotrophin program costs thereafter. At March 31, 1996,
$1,328,000 was receivable from Chiron for estimated first quarter 1996 costs
incurred by the Company that exceeded one-half of the quarter's total program
costs incurred.
7
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition And
---------------------------------------------------------------
Results Of Operations
---------------------
The discussion under this caption contains forward-looking statements
about the business and financial condition of Cephalon, which are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those set forth in this discussion. Factors which could affect
the business and financial condition of the Company include, but are not limited
to, the factors identified under the caption "Certain Risks Associated with
Cephalon's Business." Shareholders and potential investors are urged to consider
those factors in evaluating the forward-looking statements and other information
about the Company in this Report.
The following discussion also should be read in conjunction with the
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements on pages 1 to 7 of this Form 10-Q.
Since its inception in 1987, Cephalon has been engaged in the discovery
and development of pharmaceutical products to treat neurological disorders. The
Company has not received regulatory approval of, or any revenue from the sale of
any product developed by the Company, and has been unprofitable since inception.
As of March 31, 1996, the Company had an accumulated deficit of $119,620,000.
The Company has funded its operations primarily from the proceeds of
public and private placements of its equity securities and the receipt of
payments under research and development agreements. The Company entered into a
collaborative research agreement (the "Schering-Plough Agreement") with
Schering-Plough Corporation ("Schering-Plough" or "SP") in May 1990. In
May 1992, the Company licensed from Kyowa Hakko Kogyo Co., Ltd. ("Kyowa Hakko")
a class of small molecules that the Company refers to as tyrosine kinase ("TK")
modulators. In August 1992, the Company formed Cephalon Clinical Partners,
L.P. (the "Partnership") and entered into agreements with the Partnership
including an agreement (the "Partnership Development Agreement") for the
research and development of Myotrophin (rhIGF-1) in the United States, Canada
and Europe (the "Territory"). In January 1993, the Company entered into a
licensing agreement with Laboratoire L. Lafon ("Lafon"), in which the Company
received the exclusive rights to market and sell Provigil(TM) (modafinil) in
the United States, Mexico, the United Kingdom, Ireland and Japan. In June 1993,
the Company entered into a collaborative research, development and
commercialization agreement (the "SmithKline Beecham Agreement" or "SB") with
SmithKline Beecham. In July 1993, the Company entered into an agreement (the
"Kyowa Hakko Myotrophin Agreement") with Kyowa Hakko to develop and market
Myotrophin in Japan. In January 1994, the Company entered into a collaboration
with Chiron Corporation ("Chiron") for the development of Myotrophin and
certain other compounds in the neurology field worldwide, excluding Japan and
subject to the rights of the Partnership. In May 1994, the Company and TAP
Holdings Inc. ("TAP") entered into a research and development and license
agreement (the "TAP Agreement") to develop and commercialize specific compounds
for the treatment of prostate disease in the United States. In July 1994, the
Company and Bristol-Myers Squibb Company ("BMS") entered into a co-promotion
agreement (the "BMS Agreement") to market the BMS proprietary product, Stadol
NS(R) (butorphanol tartrate) Nasal Spray ("Stadol NS"), to neurologists in the
United States. The arrangement was expanded in February 1996 to include the
co-promotion of another BMS proprietary product, Serzone(R) (nefazodone
hydrochloride), to neurologists in the United States.
Certain Risks Associated with Cephalon's Business
The statements under this caption should be read in conjunction with
the forward-looking statements in this Report as well as statements presented
elsewhere by management of the Company and are intended to serve as cautionary
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The following information is not intended to limit in any way the
characterization of other statements or information in this Report as cautionary
statements for such purpose.
The Company's business of developing and marketing pharmaceutical
products is subject to a number of significant risks, including risks inherent
in research and development activities and in conducting business in a regulated
environment. The success of the Company depends to a large degree upon obtaining
favorable action by the U.S. Food and Drug Administration ( the "FDA") and
foreign regulatory authorities in the process of obtaining
-8-
<PAGE>
approvals to clinically test and ultimately market products currently under
development by the Company. The Company has had only limited experience in
filing and pursuing applications necessary to gain such regulatory approvals.
The Company's analysis of the results of its clinical studies is subject to
confirmation and interpretation by regulatory authorities, which may differ from
the Company's analysis. In addition, there can be no assurance that any
application by the Company to test or market a product will be reviewed in a
timely manner, will be accepted as adequate for filing, or that approval to test
or market a product will be received from the appropriate regulatory authority.
The Company is developing Myotrophin (rhIGF-1) in collaboration with
Chiron Corporation for use in the treatment of ALS and other neurological
indications. During 1995, the Company and Chiron announced that, based on their
analysis and interpretation of data from two Phase III studies of Myotrophin in
patients suffering from ALS, Myotrophin showed a beneficial effect in slowing
the progression of the disease. The first such study was conducted in North
America and the second study was conducted in Europe. In October 1995, the
Company submitted the results of the North American study to the FDA in support
of a treatment investigational new drug application ("T-IND") which, if
accepted, would permit the Company and Chiron to provide expanded access to
Myotrophin to patients suffering from ALS. While the FDA was reviewing that
application, the Company and Chiron announced certain results of the European
study, which were also supplied to the FDA. The FDA subsequently requested
additional information from the European study as part of its review of the
T-IND.
In January 1996, the Company and Chiron announced that the FDA had
raised concerns as to whether the data submitted and reviewed by the FDA to date
from the European study confirm the results from the North American study. The
Company and Chiron agreed to meet with the FDA to discuss those concerns and
further agreed not to initiate the T-IND program pending the outcome of those
discussions. In preparation for the FDA meeting, the Company prepared and
submitted additional analyses of the studies to supplement the information
previously provided to the agency. Although the results of certain of the
supplemental analyses of the European study were not statistically significant,
the results favored Myotrophin on various measures of disease severity and
disease progression. Following the meeting with the FDA, the two companies
announced that they intend to submit an NDA to market Myotrophin for the
treatment of ALS in 1996. The FDA has indicated to the two companies that an
application based upon currently completed studies will be accepted for filing,
will receive a priority review and will be presented to an FDA advisory
committee for its recommendation. The companies also recently announced that the
FDA has scheduled Myotrophin (rhIGF-1) for review by the FDA's Peripheral and
Central Nervous System Drugs Advisory Committee on June 7, 1996, prior to the
filing of the NDA. The companies plan to present at the meeting findings from
the two completed clinical studies discussed above. It is not possible
to predict whether the advisory committee will recommend favorable FDA action on
the T-IND or an NDA following its review of the Myotrophin data. Furthermore,
even if a positive recommendation emerged from the meeting, the advisory
committee's recommendation is not binding on the FDA and there can be no
assurance that the panel meeting will resolve the FDA's concerns about the
adequacy of the European study. As a result, there can be no assurance that the
FDA ultimately will approve expanded access to patients under a T-IND or
authorization to commercialize Myotrophin in the United States. If the FDA were
to require additional data to support approval of Myotrophin for
commercialization, whether through an additional study or further analysis of
the completed studies, there can be no assurance that the Company can obtain
such data at all or in a timely manner. A delay or failure to obtain FDA
approval for Myotrophin would seriously adversely affect the Company's business
and the price of its common stock. A delay in obtaining approval to market
Myotrophin would also have a negative effect on the Company, because other
products are under development for use in the ALS market. The potential
competition, as well as existing competition and potential limitations on
reimbursement, discussed below, could reduce the volume of sales or the price of
Myotrophin, resulting in lower revenues to the Company.
The data from the North American and European studies have not yet been
reviewed by any regulatory authority outside the United States. If foreign
regulatory authorities do not agree with the Company's interpretation of the
results from the two studies, one or more additional studies might be required.
There can be no assurance that any regulatory authority will accept the North
American and European studies as sufficient for marketing approval or that
Myotrophin will receive marketing approval in any jurisdiction for any
indication.
-9-
<PAGE>
Based on the Company's review to date of the safety data from the two
Phase III studies, the Company believes that Myotrophin was well-tolerated.
Generally mild injection site inflammation, changes in hair growth or texture,
sweating, mild knee pain, sinusitis and hip pain were observed in all study
groups but occurred more frequently in Myotrophin-treated patients. Because ALS
is a fatal disease, it is expected that some mortalities will occur while
conducting clinical trials in ALS patients. Mortalities have occurred during the
Company's Phase III studies of Myotrophin. During the double-blind portion of
the European study, an imbalance in death rates was observed in the drug-treated
group compared to the placebo-treated group. The Company believes those
mortalities generally are due to the normal progression of the disease or other
circumstances not attributable to Myotrophin. However, there can be no assurance
that the FDA or any other regulatory authorities will concur with the Company's
analysis of the safety data generated to date or that such authorities will
consider Myotrophin to be sufficiently safe to be marketed as a treatment for
ALS or any other indication. The Company is continuing to furnish Myotrophin to
patients who participated in the ALS studies and to patients in its Phase II
program in peripheral neuropathies. The FDA requires the Company to report all
patient mortalities and any adverse events experienced in ongoing trials. There
can be no assurance that the reporting of any such events will not result in any
subsequent FDA action adverse to the Company.
Chiron has completed a U.S. manufacturing facility to produce
recombinant proteins which it intends to use to produce Myotrophin. There can be
no assurance that Chiron will be able to produce adequate quantities of
Myotrophin in a cost-effective manner. The Company and Chiron also will be
required to demonstrate that the material produced from the Chiron facility is
equivalent to the material used in the ALS clinical trials. Although the
companies believe that the material is equivalent, if bioequivalence can not be
demonstrated to the satisfaction of regulatory authorities, regulatory approval
of Myotrophin could be delayed.
The manufacturing facilities of the Company and Chiron used to produce
Myotrophin are required to comply with all applicable FDA requirements,
including Good Manufacturing Practices, and are subject to FDA inspection to
determine compliance with those requirements. There can be no assurance that the
manufacturing facilities for Myotrophin will comply with applicable
requirements.
During the first quarter of 1996, the Company announced positive
results from two Phase III studies of Provigil(TM) (modafinil) in the treatment
of the excessive daytime sleepiness associated with narcolepsy. The results of
those clinical trials have not been reviewed by the FDA or any other regulatory
authority. There can be no assurance that the FDA or other regulatory
authorities will consider that the results generated from the Company's clinical
trials demonstrate sufficient safety and efficacy to allow the filing of an NDA
to obtain marketing approval, or that, if such application is filed that any
such approval could be obtained. In addition, Lafon's manufacturing facilities
for the active substance used in Provigil are required to comply with all
applicable FDA requirements, and are subject to an FDA inspection before an NDA
can be approved. There can be no assurance that the manufacturing facilities for
Provigil will comply with applicable requirements.
Lafon has filed for marketing approval of modafinil throughout the
European Union through the multi-state procedures promulgated by the Committee
for Proprietary Medicinal Products ("CPMP"), which includes applications in the
United Kingdom and the Republic of Ireland. As part of the CPMP review process,
Lafon has received questions from the CPMP regarding its application. There can
be no assurance that the questions can be answered to the satisfaction of the
CPMP countries, that the application will be reviewed by the CPMP in a timely
manner or that Provigil will be approved by the CPMP. Even if the CPMP approves
the application, the Company will be required to obtain the separate marketing
authorization from the applicable regulatory authorities in the United Kingdom
and the Republic of Ireland prior to marketing Provigil in those countries.
There can be no assurance that any such approvals will be obtained.
Lafon has licensed rights to modafinil to third parties in Canada as
well as certain countries in Europe, and may license other territories to other
third parties in the future. There is no contractual requirement that the
licensees and Lafon coordinate their marketing activities related to modafinil.
Furthermore, individual reimbursement policies in each country and applicable
antitrust laws prohibit the coordination of the pricing of
-10-
<PAGE>
modafinil in various jurisdictions. The marketing activities of the other
licensees therefore may affect the Company's marketing of Provigil in its
territories.
Additionally, the results of clinical studies of Myotrophin to be
conducted by the Company's licensee in Japan and the result of clinical studies
of modafinil being conducted by licensees of Lafon in other countries are
required to be reported by the Company to the FDA and other regulatory
authorities. The reporting of the results of these other studies, if negative,
could adversely affect the regulatory review of the Company's product approval
applications.
The major source of the Company's current revenue is derived from
collaborative research and development agreements that are subject to periodic
review by the respective parties and achievement of certain milestones by the
Company. Even if Myotrophin and Provigil are approved for commercialization, the
Company can not predict at this time the potential revenues to be received from
sales of Myotrophin for use in treating ALS or from sales of Provigil for use in
connection with narcolepsy. ALS and narcolepsy each qualify as orphan diseases
under the Orphan Drug Law, which generally means that the potential patient
population for each indication is limited. Furthermore, the FDA recently
approved Rilutek(R) (riluzole) for use in treating ALS, which is now being
commercialized in the United States by Rhone-Poulenc Rorer. It is not clear
whether ALS patients, given the constraints of drug reimbursement programs,
would be able to support both Rilutek and Myotrophin (as well as any other drugs
which may be approved in the future for use in treating ALS), especially if
Myotrophin has a higher price than competitive drugs. Competition for Provigil
also is likely, because narcolepsy is currently treated with several drugs, all
of which are available generically and have been available for a number of
years.
Negative results from any of its ongoing clinical trials or trials by
third parties or negative assessments from regulatory authorities or
termination of any of the Company's collaborative research agreements would
adversely affect the Company's business and the price of its common stock.
The Company's business is subject to additional significant risks,
including but not limited to the need to obtain additional funds to support its
research, development and commercialization efforts, the Company's dependence on
collaborative partners and third party suppliers and other manufacturing
uncertainties, the Company's relative inexperience in marketing and distributing
commercial products, uncertainties associated with obtaining and enforcing its
patents and uncertainties associated with the patent rights of others,
uncertainties regarding government reforms and of product pricing and
reimbursement levels, technological change and competition from companies and
institutions developing products for the same indications as the Company's
product candidates, the product liability risks associated with being the
manufacturer or seller of pharmaceutical products, and reliance by the Company
on key personnel.
Furthermore, future announcements concerning the Company's competitors
or other companies in the biopharmaceutical industry, including regulatory
delays, technological innovations or commercial products, patents, government
regulations, developments concerning proprietary rights, litigation or public
concern as to the safety or commercial value of the Company's products may have
a significant effect on the market price of the Company's common stock.
-11-
<PAGE>
Liquidity and Capital Resources
Cash, cash equivalents and investments as of the indicated dates were as
follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
$167,588,000 $178,067,000
Percentage of total assets......... 80% 80%
</TABLE>
Cash equivalents and investments consisted primarily of short to
intermediate term obligations of the United States government, repurchase
agreements collaterallized by such obligations and short term commercial paper.
Certain of the Company's debt and lease agreements contain covenants that
obligate the Company to maintain certain minimum cash and investment balances
and financial ratios, and under one of which, $5,625,000 was held in a custodial
account as of March 31, 1996.
The following is a summary of selected cash flow information for the
quarter ended March 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net cash used for operating activities.... $(13,565,000) $(11,650,000)
Net cash provided by (used for)
investing activities..................... 9,228,000 (6,016,000)
Net cash provided by financing
activities............................... 3,598,000 19,089,000
</TABLE>
Net cash used for operating activities
Operating cash inflows
A summary of the major sources of receipts reflected in net cash used
for operating activities for the quarter ended March 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
TAP Holdings............................. $1,415,000 $1,220,000
SmithKline Beecham....................... 707,000 687,000
Schering-Plough.......................... 750,000 --
Chiron Corporation....................... 2,803,000 --
</TABLE>
Pursuant to the Partnership Development Agreement, the Company's share
of the costs to develop Myotrophin within the Territory were reimbursed by the
Partnership to the extent of the Partnership's available funds. The Company did
not receive any payments from the Partnership in the first quarter of 1995
because the related first quarter cost were reimbursed in the subsequent
quarter. The Company did not receive payments from the Partnership in the first
quarter of 1996 due to the depletion of the Partnership's available funding late
in 1995.
Pursuant to the BMS Agreement, BMS makes quarterly payments to the
Company based primarily on a percentage of sales within the neurology market in
excess of a predetermined base amount. At March 31, 1996, $2,027,000 was
receivable from BMS, representing fourth quarter 1995 and first quarter 1996
payments earned under the co-promotion agreement. Activity under the BMS
Agreement was initiated in the fourth quarter of 1994. The payment related to
the fourth quarter of 1994 was received in the second quarter of 1995.
Under the terms of the 1994 TAP Agreement, the Company performs
research and preclinical development for which it is compensated quarterly by
TAP, based on a contract rate per individual assigned to the program for that
quarter and reimbursement of certain external costs, all subject to annual
budgetary maximums. The payments received from TAP in the quarters ended March
31, 1996 and 1995, represent reimbursement of fourth quarter 1995 and 1994 costs
incurred by the Company.
-12-
<PAGE>
Under the terms of the June 1993 SmithKline Beecham Agreement, the
Company performs research and preclinical development for which it is
compensated quarterly by SB, based on a contract rate per individual assigned to
the program for that quarter, and subject to annual budgetary maximums, periodic
review by SB and achievement of certain milestones by the Company. At March 31,
1996, $179,000 was receivable from SB.
Under the terms of the 1990 Schering-Plough Agreement, through May 1995,
the Company received annual milestone payments from SP, generally in the second
quarter. The agreement was renewed effective May 1995, under which the Company
performs research and development for which it is compensated quarterly by SP,
based on a contract rate per individual assigned to the program for that quarter
and certain external costs, all subject to budgetary maximums, periodic review
by SP and achievement of certain milestones by the Company.
The Company and Chiron are currently developing Myotrophin for the
treatment of ALS and certain peripheral neuropathies. Under the collaboration,
each party funded its own collaboration-related expenses through 1994. Chiron
provided the Company with a revolving credit facility (the "Note") to assist the
Company in funding its costs incurred. During the first quarter of 1995, the
Company drew down $5,274,000 against the Note. In September 1995, the Company
and Chiron adjusted their contributions to the collaboration program to result
in equal aggregate funding by each party through that date and, agreed to fund
equal amounts of Myotrophin program costs thereafter. At March 31, 1996,
$1,328,000 was receivable from Chiron for estimated first quarter 1996 costs
incurred by the Company that exceeded one-half of the quarter's total program
costs incurred.
Effective late in 1995, the Partnership depleted all of its available funds
and therefore, the Company will not receive further payments from the
Partnership for the development of Myotrophin, although expenses associated with
Myotrophin development will continue. The Company expects to receive payments
under the BMS Agreement in 1996, but does not expect receipts to be in excess of
related expenses incurred. Although the research funding under the TAP
Agreement expired at the end of 1995, the Company and TAP are actively
discussing the terms of an extension of the funding arrangement. TAP has agreed
to reimburse the Company for expenses incurred in connection with the program
during the first quarter of 1996. There can be no assurance that a mutually
satisfactory agreement will be reached by the parties to extend the funding
arrangement. The agreement with SP calls for payments in 1996 and 1997 of
$3,000,000 and $1,250,000, respectively, or $3,300,000 in 1997 if SP extends the
agreement for a third year. Payments in 1996 under the SB Agreement are
budgeted under such agreement to approximate 1995 levels. The continuation of
the research funding under the agreements with SB and SP, during 1996 and
thereafter, are subject to the achievement of certain development milestones and
periodic review by those companies. Under the collaboration with Chiron, the
Company expects receipts in 1996 to be substantially less than 1995; depending
on the development of the Myotrophin program and the relative costs incurred by
the two companies in the development and commercialization of Myotrophin, the
Company may be required to make payments to Chiron.
Operating cash outflows
Net cash used for operating activities increased in the first quarter of
1996 as compared to the same 1995 period reflecting increases in the funding of
expenses due primarily to an increase in selling, general and administrative
expenses. The increase in the funding of selling, general and administrative
expenses is due primarily to the costs associated with the Company's sales and
marketing activities in conjunction with the BMS Agreement and pre-marketing
efforts in support of the products in development, increases in other external
costs and a 25% increase in staffing levels. Additionally, funding for research
and development expenses increased in the 1996 period from the 1995 period due
to a 25% staff increase and the funding of expenses associated with the
production of clinical supplies of Myotrophin at the Company's manufacturing
facility. The increase in the funding of research and development expenses was
offset by decreases in expenses associated with clinical trials of Myotrophin
and modafinil due to the completion of the double-blind portion of these
clinical studies.
The Company expects to continue substantial spending on research and
development.
The costs to develop modafinil are expected to continue to be significant
in 1996, even as the double-blind clinical studies are concluded, due to the
cost of conducting data analyses, the expected continuation of open label
-13-
<PAGE>
extensions of those studies and preparing for the filing of an NDA.
Additionally, the Company expects to pay $1,633,000 in 1996 to Lafon to maintain
the license to modafinil. The overall funding of the modafinil program will be
assessed as the analyses of the results of the clinical trials are further
evaluated and are discussed with regulatory authorities (see "Certain Risks
Associated with Cephalon's Business").
The costs to develop Myotrophin are expected to continue to be significant
in 1996 due to the cost of conducting continuing data analyses, continuing open
label extensions of two Phase III ALS clinical studies, continuation of a
Phase II clinical program to test the potential utility of Myotrophin in the
treatment of peripheral neuropathies and preparing for the potential filing of
an NDA. The Company has decreased the level of operations required at its
Beltsville manufacturing facility as the collaboration's requirements of
Myotrophin are expected to be provided by Chiron. The Company intends to seek
third-party manufacturing contracts to partially defray the costs of operating
its Beltsville facility. There is no assurance the Company will be able to
obtain any such contract manufacturing. The Company may also seek to acquire
additional interests in the Partnership and may incur significant costs to
acquire such interests. In addition, if Myotrophin receives regulatory approval
in certain countries within the Territory, the Company will pay to the
Partnership a milestone payment of approximately $16,000,000 in cash, common
stock or a combination thereof. The amount the Company spends in 1996 on its
Myotrophin programs depends to a great degree on the results of dialogues with
regulatory authorities (see "Certain Risks Associated with Cephalon's
Business").
The Company also expects to incur significant expenses under the
collaborations with SB, TAP and SP which may exceed payments received under the
related agreements. The Company also expects to incur significant costs in its
other development programs.
The actual costs to develop Myotrophin, modafinil, and other potential
therapeutics are subject to a number of uncertainties which could greatly
influence the level and timing of development costs, including among other
items, the duration, size, and expense of the required preclinical and clinical
testing, costs of manufacturing clinical supplies, the level and timing of
patient enrollment and the expense of any filing for regulatory approval.
Pursuant to the BMS Agreement the Company is obligated to fund, in 1996,
$1,500,000 of promotional and support activities targeting neurologists.
Additionally, the Company may expand its selling, and general and administrative
activities in the United States and Europe. The Company will assess the degree
of expansion required in the selling, general and administrative area as the
Company evaluates the results and analyses of the Myotrophin and modafinil
programs. There can be no assurance that the Company will receive marketing
approval for any of its product candidates under development or that the funds
expended if the Company expands these areas, will be recovered in the future by
sales, if any, of such products (See "Certain Risks Associated with Cephalon's
Business").
Operating cash requirements
Net cash used for operating activities is expected to increase in 1996
principally due to decreases in payments the Company expects to receive under
its collaboration agreements, including the Chiron agreement and the Partnership
Development Agreement and, as further described above, operating cash outflows
are expected to increase in 1996.
-14-
<PAGE>
Net cash used for investment activities
A summary of net cash used for investment activities for the quarter ended
March 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Purchases of property and equipment............. $ (512,000) $(12,885,000)
Sale leaseback of property and equipment........ -- 237,000
Sales and maturities (purchases) of
investments, net............................... 9,740,000 6,632,000
---------- ------------
Net cash provided by (used for)
investment activities......................... $9,228,000 $ (6,016,000)
========== ============
</TABLE>
Purchases of property and equipment decreased in 1996 as compared to the
same period in 1995 since the 1995 period includes the March 1995 purchase of
the two buildings currently housing the Company's administrative offices and
research facilities in West Chester, Pennsylvania and a third adjacent 49,000
square foot building, currently occupied by a third party, for a total purchase
price of $11,000,000.
The Company may incur additional capital expenditures in 1996 as it
continues to assess its facility and equipment requirements.
Sales and maturities (purchases) of investments, net represent the
investment of cash generated primarily from the Company's financing activities,
net of cash used to fund operations and other investing activities.
Net cash provided by financing activities
A summary of cash provided by financing activities for the quarter ended
March 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Proceeds from exercise of common stock
options and warrants................... $4,568,000 $ 68,000
Principal payments on long-term debt.... (970,000) (723,000)
Proceeds from long-term debt............ -- 19,744,000
---------- -----------
Net cash provided by financing
activities............................. $3,598,000 $19,089,000
========== ===========
</TABLE>
During the first quarter of 1996, the Company received cash from the
exercise of 379,768 warrants and 36,962 stock options in the amount of
$4,453,000 and $115,000, respectively. The extent and timing of future warrant
and option exercises, if any, are primarily dependent upon the market price of
the Company's common stock and general financial market conditions, as well as
the exercise prices and expiration dates of the warrants and options.
Proceeds from long-term debt in the first quarter of 1995 include
$15,799,000 borrowed to finance the West Chester building purchase. The
building purchase was financed through the assumption of a $6,900,000 first
mortgage and from mortgage loans provided by the Commonwealth of Pennsylvania
(the "State Funding") in the amount of $11,600,000. The State Funding includes
a 2% interest rate that is subject to increase if the Company fails to hire a
specified number of new employees in Chester County, Pennsylvania by the end of
1999. A portion of the State Funding financed improvements previously made to
the buildings and the remaining $2,700,000, held in escrow, is earmarked to fund
future improvements. Of the total State Funding, $1,330,000 was received in
April 1995. The Company also drew $5,274,000 in the first quarter of 1995
against the Note provided by Chiron to fund collaboration-related expenses.
-15-
<PAGE>
Commitments and contingencies
Leases
The Company leases certain of its offices, automobiles, manufacturing
facilities and certain manufacturing equipment under operating leases. The
Company's future annual minimum payments under the facilities and equipment
leases are approximately $2,475,000 for the remainder of 1996, $3,400,000 in
each of the years 1997 to 1998, $550,000 in 1999, $425,000 in 2000 and $50,000
in 2001.
Other
The Company maintains agreements to fund research at a number of
educational and scientific institutions. These agreements are generally
renewable on an annual basis and provide the Company with the right to obtain
exclusive, royalty bearing licenses to the results of the research. The Company
is obligated under several other cancelable agreements including those entered
into for the purpose of conducting clinical trials. The Company has funding
obligations under its co-promotion agreement with BMS including an obligation of
$1,500,000 in 1996. The Company is obligated to make royalty, license fee and
milestone payments under certain of its other licensing and research and
development agreements, including in 1996, payments to Lafon of $1,633,000 to
maintain the license to modafinil.
Related party
In 1992, the Company entered into the Partnership Development Agreement
with the Partnership under which the Company granted the Partnership an
exclusive license in the Territory to certain technology, principally
Myotrophin, and received a non-refundable license fee of $500,000.
The Partnership exclusively licensed the Company to manufacture and market
Myotrophin within the Territory in return for certain royalty payments and a
payment of approximately $16,000,000 (the ''Milestone Payment'') that is to be
made if Myotrophin receives regulatory approval in certain countries within the
Territory. The Company has the option to pay the Milestone Payment in cash,
common stock, or a combination thereof. The Company also entered into an
agreement with each of the Partnership's limited partners under which it
received an option (the "Purchase Option") to purchase all the limited
partnership interests in the Partnership.
If the Company elects to exercise the Purchase Option, it will be required
to make a payment of $40,275,000 in cash or, at the Company's election,
$42,369,000 in shares of the Company's common stock, valued at the market price
at the time of the exercise. If exercised, the Company would then also make
future payments to the former limited partners for eleven years at a rate of
10.1% on Myotrophin sales in the Territory (subject to certain maximums and
reducing to 5.0% after a specified return is earned by the former limited
partners).
Legal proceedings
The Company and certain of its officers have been named as defendants in a
number of civil actions filed in the U.S. District Court for the Eastern
District of Pennsylvania, which the Company will seek to have consolidated into
one action. Although the complaints differ in some respects, they allege, in
general, that the Company and the officers violated the federal securities laws
by failing to disclose material information about the methods and results of the
North American and European clinical studies of Myotrophin for use in treating
ALS. The plaintiffs seek to maintain these actions as class actions on behalf
of purchasers of the Company's common stock during specified periods between
June 1995 and January 19, 1996. The plaintiffs in the actions seek unspecified
damages and other relief. The Company believes that it has meritorious defenses
to the allegations of the actions filed to date and intends to vigorously defend
the actions.
Funding Requirements
The Company expects that more cash will be required to fund operations in
1996 than was required in 1995. The Company also expects to use cash to fund
purchases of property and equipment and to service its long-term debt.
The Company believes that its cash and investment resources are adequate to
fund its anticipated level of cash requirements for a period in excess of one
year. However, the Company's funding requirements may change
-16-
<PAGE>
due to numerous factors including, but not limited to, the results of the
Company's ongoing clinical trials and other research and development programs,
the expansion of research and development and administrative facilities and the
ability to meet supply requirements, technological advances and competition and
regulatory requirements (see "Certain Risks Associated with Cephalon's
Business"). Additionally, the Company may seek to acquire some or all of the
partnership interests in the Partnership or may seek to acquire other entities,
additional technologies, product candidates or products.
Because of the Company's long-term capital requirements it may seek to
access the public or private markets whenever conditions are favorable by
issuing debt, common or preferred stock, warrants or other securities. The
Company may also seek additional funding through corporate collaborations and
other financing vehicles, potentially including "off-balance sheet" financing
through limited partnerships or corporations. There can be no assurance that
such funding will be available at all or on terms acceptable to the Company.
Furthermore, market reaction to the Company's financing activities may
adversely affect the price of the Company's common stock. If adequate funds are
not available, the Company may be required to significantly curtail one or more
of its research, development or strategic initiatives or obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates or
products on terms less favorable than if it developed the product on its own.
Results of Operations
This section should be read in conjunction with the more detailed
discussion under "Liquidity and Capital Resources."
A summary of revenues and expenses for the quarter ended March 31 is as
follows:
<TABLE>
<CAPTION>
% change
1996 1995 1996 vs. 1995
---- ---- -------------
<S> <C> <C> <C>
Revenues............................... $ 3,728,000 $ 2,627,000 42%
Research and development expenses...... 14,293,000 13,529,000 6
Selling, general and administrative
expenses.............................. 5,495,000 3,074,000 79
Interest income, net................... 1,122,000 1,395,000 (20)
</TABLE>
The aggregate increase in revenues in the 1996 period from the 1995 period
primarily resulted from increases in revenue recognized under the agreements
with TAP, SP and Chiron during the quarter ended March 31, 1996, which was
offset by the elimination of revenue recognized under the Partnership
Development Agreement.
In August 1995, the Partnership collected the final limited partner
subscription installment payments. The Company will not recognize revenue from
the Partnership under the Partnership Development Agreement in 1996. The
Company and Chiron are to share equally in collaboration-related costs in 1996.
The Company expects revenues under the Chiron collaboration in 1996 to be
substantially less than 1995 and, depending on the relative costs incurred by
the two companies, the Company may incur expenses from payments made to Chiron.
Under the BMS Agreement, the Company will only recognize revenue upon the
attainment of sales levels in excess of the base amount specified in the
agreement, which, if attained, is expected to occur in the later half of 1996.
Revenues to be recognized in 1996 under the agreements with TAP, SB and SP are
expected to approximate 1995 levels, however the extension of the funding
arrangement under the TAP Agreement is currently being negotiated.
The 6% increase in research and development expenses in the 1996 period as
compared to the 1995 period reflects increased expenses due to a 25% increase in
staffing levels in the period that were offset by decreases in the costs
associated with conducting clinical trials of Myotrophin and modafinil, due to
the completion of the double-blind portion of those studies.
-17-
<PAGE>
The significant increase in the selling, general and administrative area in
the 1996 period as compared to the same 1995 period is primarily attributable to
the sales and marketing activities to co-promote Stadol NS and Serzone with BMS
and other products in development, increased staffing levels and other external
expenses.
Summary of Results of Operations
The Company expects that revenues will be substantially less in 1996 than
in 1995 due primarily to the reduction in revenues from the Chiron collaboration
and the Partnership. A substantial portion of the Company's revenues are
derived from collaboration agreements with TAP, SB and SP, the continuation of
which is subject to periodic review and achievement of certain milestones. The
Company expects that it will continue to incur significant research and
development costs which may increase in 1996 and also expects its selling,
general and administrative costs to increase as it continues to fulfill its
funding commitment pursuant to the BMS Agreement and further expands its
marketing efforts. The costs to be incurred by the Company depend to a large
degree on the results of regulatory actions with respect to Myotrophin, Provigil
and other product programs. In summary, the Company expects its loss in 1996
will be larger than losses incurred in prior years.
The Company does not believe that inflation has had a material impact on
the results of its operations since inception.
Loss Per Share
Options, restricted stock grants and warrants outstanding have been
excluded from the per share calculations, because their inclusion would be
antidilutive. At March 31, 1996, the Company had approximately 2,864,601
options outstanding under its stock option plan with exercise prices ranging
from $0.15 to $31.00 per share. As further described in the Notes to the
Consolidated Financial Statements, at March 31, 1996, warrants to purchase
3,152,285 shares of common stock were exercisable with prices ranging from
$11.32 to $18.50, with various exercise periods through February 2002.
-18-
<PAGE>
PART II OTHER INFORMATION
- ------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Restated Certificate of Incorporation of the
Registrant
10.6(a) Cephalon, Inc. Stock Option Plan, as amended
10.6(b) Cephalon, Inc. Equity Compensation Plan, as
amended
(b) Reports on Form 8-K:
During the quarter ended March 31, 1996, the Registrant
filed Current Reports on Form 8-K for the following events:
(i) January 19, 1996, announcing that the U.S. Food and
Drug Administration has concerns as to whether the data submitted to date for
the T-IND from the European study support the positive results from the North
American study. Cephalon and Chiron have agreed not to initiate the T-IND early
access program pending outcome of those discussions.
(ii) February 12, 1996, Cephalon, Inc. announced the
results from the first of two Phase III clinical trials of Provigil(TM)
(modafinil) in patients with narcolepsy.
(iii) February 20, 1996, Cephalon, Inc. announced the
1995 financial results and the co-promotion of Serzone(R) (nefazodone HCL),
which is manufactured by Bristol-Myers Squibb Company .
19
<PAGE>
SIGNATURES
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.
CEPHALON, INC.
(Registrant)
May 13, 1996 By /s/ Frank Baldino, Jr., Ph.D.
---------------------------------
Frank Baldino, Jr., Ph.D.
President, Chief Executive Officer
and Director
(Principal executive officer)
By /s/ J. Kevin Buchi
-----------------------
J. Kevin Buchi
Senior Vice President, Finance and Chief
Financial Officer
(Principal financial and accounting officer)
20
<PAGE>
EXHIBIT INDEX
Exhibit
Exhibit Page No.
- ------- --------
3.1 Restated Certificate of Incorporation of the Registrant
10.6(a) Cephalon, Inc. Stock Option Plan, as amended
10.6(b) Cephalon, Inc. Equity Compensation Plan, as amended
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
CEPHALON, INC.
FIRST: The name of the corporation is Cephalon, Inc.
SECOND: The address of the registered office of the corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, City of
Wilmington, County of New Castle. The name of the registered agent of the
corporation at such address is The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporation may be
organized under the General Corporation Law of Delaware.
FOURTH: The total number of shares of stock which the corporation shall
have authority to issue is one hundred-five million (105,000,000), of which one
hundred million (100,000,000) shares are Common Stock and five million
(5,000,000) shares are Preferred Stock, and the par value of each of such shares
is one cent ($0.01), amounting in the aggregate to one million fifty thousand
dollars ($1,050,000).
DIVISION ONE--PREFERRED STOCK
PART A - GENERAL TERMS
The Board of Directors is authorized, subject to limitations prescribed by
law and the provisions of the Article FOURTH, to provide for the issuance of the
shares of Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each such series shall include,
but not limited to, determination of the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series;
<PAGE>
(c) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(e) Whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption, including the date
or date upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(f) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(g) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the corporation,
and the relative rights of priority, if any, of payment of shares of that
series;
(h) Any other relative rights, preferences and limitations of that
series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the Common Stock with respect to the same
dividend period.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of the corporation, the assets available for distribution to holders of shares
of Preferred Stock of all series shall be insufficient to pay such holders the
full preferential amount to which they are entitled, then such assets shall be
distributed ratably among the shares of all series of Preferred Stock in
accordance with the respective preferential amounts (including unpaid cumulative
dividends, if any) payable with respect thereto.
PART B - DESIGNATION, PREFERENCES, AND RIGHTS OF
THE SERIES A JUNIOR PARTICIPATING PREFERRED SHARES
The first series of the Preferred Stock authorized in this Part B consists
of one million (1,000,000) shares designated as Series A Junior Participating
Preferred Shares (the "Series A Preferred Shares").
SECTION 1. Dividends and Distributions.
---------------------------
(a) The rate of dividends payable per share of Series A Preferred
Shares on the first day of January, April, July and October in each year or
such other quarterly payment date as shall be specified by the Board of
Directors (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly
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<PAGE>
Dividend Payment Date after the first issuance of a share or fraction of a
share of the Series A Preferred Shares, shall be (rounded to the nearest
cent) equal to the greater of (i) $1.00 or (ii) subject to the provision
for adjustment hereinafter set forth, 100 times the aggregate per share
amount of all cash dividends, and 100 times the aggregate per share amount
(payable in cash, based upon the fair market value at the time the non-cash
dividend or other distribution is declared or paid as determined in good
faith by the Board of Directors) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise), declared on the Common Stock, $.01 par value, of the
corporation since the immediately preceding Quarterly Dividend Payment
Date, or, with respect to the first Quarterly Dividend Payment Date, since
the first issuance of any share or fraction of a share of the Series A
Preferred Shares. Dividends on the Series A Preferred Shares shall be paid
out of funds legally available for such purpose. In the event the
corporation shall at any time after November 12, 1993 (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding shares of Common
Stock, or (iii) combine the outstanding shares of Common Stock into a
smaller number of shares, then in each such case the amounts to which
holders of Series A Preferred Shares were entitled immediately prior to
such event under clause (ii) of the preceding sentence shall be adjusted by
multiplying each such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(b) Dividends shall begin to accrue and be cumulative on outstanding
Series A Preferred Shares from the Quarterly Dividend Payment Date next
preceding the date of issue of such Series A Preferred Shares, unless the
date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless the
date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of Series A Preferred Shares
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on
the Series A Preferred Shares in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro-rata on a share-by-share basis among all such shares at the
time outstanding.
SECTION 2. Voting Rights. In addition to any other voting rights
-------------
required by law, the holders of Series A Preferred Shares shall have the
following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth,
each Series A Preferred Share shall entitle the holder thereof to 100 votes
on all matters submitted to a vote of the stockholders of the corporation.
In the event the corporation shall at any time after the Rights Declaration
Date (i) declare any dividend on Common Stock payable in
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shares of Common Stock, (ii) subdivide the outstanding shares of Common
Stock, or (iii) combine the outstanding shares of Common Stock into a
smaller number of shares, then in each such case the number of votes per
share to which holders of Series A Preferred Shares were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(b) In the event that dividends upon the Series A Preferred Shares
shall be in arrears to an amount equal to six full quarterly dividends
thereon, the holders of such Series A Preferred Shares shall become
entitled to the extent hereinafter provided to vote noncumulatively at all
elections of directors of the corporation, and to receive notice of all
stockholders' meetings to be held for such purpose. At such meetings, to
the extent that directors are being elected, the holders of such Series A
Preferred Shares voting as a class shall be entitled solely to elect two
members of the Board of Directors of the corporation; and all other
directors of the corporation shall be elected by the other stockholders of
the corporation entitled to vote in the election of directors. Such voting
rights of the holders of such Series A Preferred Shares shall continue
until all accumulated and unpaid dividends thereon shall have been paid or
funds sufficient therefor set aside, whereupon all such voting rights of
the holders of shares of such series shall cease, subject to being again
revived from time to time upon the reoccurrence of the conditions above
described as giving rise thereto.
At any time when such right to elect directors separately as a class
shall have so vested, the corporation may, and upon the written request of
the holders of record of not less than 20% of the then outstanding total
number of shares of all the Series A Preferred Shares having the right to
elect directors in such circumstances shall, call a special meeting of
holders of such Series A Preferred Shares for the election of directors.
In the case of such a written request, such special meeting shall be held
within 90 days after the delivery of such request, and, in either case, at
the place and upon the notice provided by law and in the By-laws of the
corporation; provided, that the corporation shall not be required to call
such a special meeting if such request is received less than 120 days
before the date fixed for the next ensuing annual or special meeting of
stockholders of the corporation. Upon the mailing of the notice of such
special meeting to the holders of such Series A Preferred Shares, or, if no
such meeting be held, then upon the mailing of the notice of the next
annual or special meeting of stockholders for the election of directors,
the number of directors of the corporation shall, ipso facto, be increased
to the extent, but only to the extent, necessary to provide sufficient
vacancies to enable the holders of such Series A Preferred Shares to elect
the two directors hereinabove provided for, and all such vacancies shall be
filled only by vote of the holders of such Series A Preferred Shares as
hereinabove provided. Whenever the number of directors of the corporation
shall have been increased, the number as so increased may thereafter be
further increased or decreased in such manner as may be permitted by the
By-laws and without the vote of the holders of Series A Preferred Shares,
provided that no such action shall impair the right of
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<PAGE>
the holders of Series A Preferred Shares to elect and to be represented by
two directors as herein provided.
So long as the holders of Series A Preferred Shares are entitled
hereunder to voting rights, any vacancy in the Board of Directors caused by
the death or resignation of any director elected by the holders of Series A
Preferred Shares, shall, until the next meeting of shareholders for the
election of directors, in each case be filled by the remaining director
elected by the holders of Series A Preferred Shares having the right to
elect directors in such circumstances.
Upon termination of the voting rights of the holders of any series of
Series A Preferred Shares the terms of office of all persons who shall have
been elected directors of the corporation by vote of the holders of Series
A Preferred Shares or by a director elected by such holders shall forthwith
terminate.
(c) Except as otherwise provided herein, in the articles of the
corporation or by law, the holders of Series A Preferred Shares and the
holders of Common Stock (and the holders of shares of any other series or
class entitled to vote thereon) shall vote together as one class on all
matters submitted to a vote of stockholders of the corporation.
SECTION 3. Reacquired Shares. Any Series A Preferred Shares
-----------------
purchased or otherwise acquired by the corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
Series Preferred Stock and may be reissued as part of a new series of
Series Preferred Stock to be created by resolution or resolutions of the
Board of Directors.
SECTION 4. Liquidation, Dissolution or Winding Up. In the event of
--------------------------------------
any voluntary or involuntary liquidation, dissolution or winding up of the
corporation, the holders of Series A Preferred Shares shall be entitled to
receive the greater of (a) $9,000.00 per share, plus accrued dividends to
the date of distribution, whether or not earned or declared, or (b) an
amount per share, subject to the provision for adjustment hereinafter set
forth, equal to 100 times the aggregate amount to be distributed per share
to holders of Common Stock. In the event the corporation shall at any time
after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding shares of
Common Stock, or (iii) combine the outstanding shares of Common Stock into
a smaller number of shares, then in each such case the amount to which
holders of Series A Preferred Shares were entitled immediately prior to
such event pursuant to clause (b) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
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<PAGE>
SECTION 5. Consolidation, Merger, etc. In case the corporation shall
--------------------------
enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property, then in any such case
the Series A Preferred Shares shall at the same time be similarly exchanged
or changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or
(iii) combine the outstanding shares of Common Stock into a smaller number
of shares, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Series A
Preferred Shares shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
SECTION 6. No Redemption. The Series A Preferred Shares shall not be
-------------
redeemable.
SECTION 7. Ranking. The Series A Preferred Shares shall rank junior
-------
to all other series of the corporation's Series Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of
any such series shall provide otherwise.
SECTION 8. Fractional Shares. Series A Preferred Shares may be
-----------------
issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of
all other rights of holders of Series A Preferred Shares.
FIFTH: The Board of Directors is authorized to make, alter or repeal the
By-laws of the corporation. Election of directors need not be by ballot.
SIXTH: A Director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the Director derived any improper
personal benefit. If the Delaware General Corporation Law is hereafter amended
to authorize, with the approval of a corporation's stockholders, further
reductions in the liability of the corporation's directors for breach of
fiduciary duty, then a Director of the corporation shall not be liable for any
such breach to the fullest extent permitted by the Delaware General Corporation
Law as so amended. Any repeal or modification of the foregoing provisions of
this Article SIXTH by the stockholders of the
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<PAGE>
corporation shall not adversely affect any right or protection of a Director of
the corporation existing at the time of such repeal or modification.
-7-
<PAGE>
AS AMENDED MAY 7, 1996
CEPHALON, INC.
STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The Cephalon, Inc. Stock Option Plan ("Plan") is intended to promote the
interests of Cephalon, Inc. ("Corporation") by providing incentives to (i)
certain employees of the corporation or its Subsidiary Corporations who are
responsible for the management, growth or financial success of the Corporation
or its Subsidiary Corporations, (ii) independent contractors and consultants who
perform valuable services for the corporation or its Subsidiary Corporations,
and (iii) non-employee members of the Board of Directors of the Corporation (the
"Board"), to encourage them to acquire a proprietary interest, or increase their
proprietary interest, in the Corporation and to continue to perform services for
the Corporation or its Subsidiary Corporations. For purposes of the Plan, the
terms "Parent Corporation" and "Subsidiary Corporation" shall have the meanings
set forth in subsections (e) and (f) of Section 424 of the Internal Revenue Code
of 1986, as amended (the "Internal Revenue Code").
2. ADMINISTRATION OF THE PLAN
(a) Committee. This Plan shall be administered by a Committee (the
---------
"Committee") of the Board of Directors of the Corporation, which shall consist
of not less than two members of the Board of Directors, all of whom shall be
"disinterested persons" as defined under Rule 16b-3 under the Securities
Exchange Act of 1934 (the "Exchange Act") as in effect for the Corporation from
time to time. Members of the Committee shall serve for such term as the Board
of Directors may determine and shall be subject to removal by the Board at any
time. No person serving as a member of the Board or the Committee shall act on
any matter relating solely to such person's own interests under the Plan or any
option thereunder; however, the receipt of the options automatically awarded to
Board members, as provided in Section 3 herein, shall not disqualify such Board
members from serving on the Committee.
(b) Committee Authority. The Committee shall have full power and
-------------------
authority to (i) determine who is eligible to receive awards under the Plan,
(ii) determine which persons shall receive option grants, (iii) determine the
number of shares to be covered by each option grant, (iv) determine whether each
granted option is to be an incentive stock option ("ISO") or a non-statutory
option ("NQSO"), (v) determine the time or times at which each option is to
become exercisable, (vi) determine the exercise price for each option, (vii)
determine the maximum term for which option is to be exercisable, and (viii)
determine all other terms and conditions upon which options may be exercised.
The Committee shall have the full power and authority (subject to the provisions
of the Plan) to establish such rules and regulations as it may deem appropriate
for the proper administration of the Plan and to make such determinations under,
and issue such interpretations of, the Plan and any outstanding option as it may
deem necessary or advisable. Decisions of the Committee shall be final and
binding on all parties who have an interest in the Plan or any outstanding
option. No person acting under this subsection shall be held liable for any
action or determination made in good faith with respect to the Plan or any
option granted under the Plan.
<PAGE>
3. ELIGIBILITY FOR OPTION GRANTS
(a) General Eligibility. Key employees (whether or not they are
-------------------
officers and members of the Board) of the Corporation (or a Subsidiary
Corporation) are eligible to receive ISOs or NQSOs under the Plan. Independent
contractors and consultants and non-employee members of the Board shall be
eligible to receive NQSOs under the Plan, subject to the provisions of this
Section 3.
(b) Option Grants to Non-employee Directors. A member of the Board of
---------------------------------------
Directors of the Corporation who is not an employee of the Corporation or any of
its Subsidiary Corporations (a "Non-Employee Director") shall be entitled to
receive NQSOs in accordance with this clause (b).
(i) Initial Grant. Each Non-Employee Director shall be entitled
-------------
receive an NQSO to purchase 15,000 shares of Common Stock upon the following
terms and conditions:
(x) As to any such person who becomes a member of the
Board of Directors after January 1, 1991, the date of grant shall
be the date he or she first becomes a member of the Board;
(y) As to any such person who became a member of the Board
of Directors prior to January 1, 1991, the date of grant shall be
the date of the Corporation's 1991 annual meeting of stockholders,
subject to approval of this clause (ii) by the stockholders of the
Corporation at such meeting.
(ii) Annual Grants. On each date that the Corporation holds its
-------------
annual meeting of stockholders, commencing with the 1993 calendar year, each
Non-Employee Director in office immediately after the annual election of
directors (other than those Non-Employee Directors first elected at such
meeting) will receive a grant of an NQSO to purchase 5,000 shares of Common
Stock, provided that a Non-Employee Director will not be eligible to receive
under this Section 3(b) options to purchase 50,000 shares of Common Stock
(subject to adjustment as provided in Section 4(b) of this Plan).
(iii) Option Exercise Price. Options granted under this subsection
---------------------
(b) shall have a per share exercise price equal to the fair market value of a
share of Common Stock on the date of grant, and, except as otherwise provided in
the next sentence, such option shall become exercisable, with respect to 25% of
the shares of Common Stock underlying the option, on each anniversary following
the date of grant. Upon the death of a Non-employee Director:
(A) while he or she is a director of the Company;
(B) during the three-month period following termination of his
or her status as a director of the Company; or
(C) during the one year period following the permanent
disability of the Non-employee Director;
each Stock Option of such Non-employee Director shall automatically accelerate
and become fully exercisable as to all shares subject to such option and shall
remain exercisable until the expiration of the option term or earlier surrender
of the option. Notwithstanding any other provision of the Plan, this subsection
may not be amended more than once every six months, except for amendments
necessary to conform the Plan to changes in the provisions of or the regulations
relating to the Internal Revenue Code or the Employee Retirement Income Security
Act of 1974.
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<PAGE>
(iv) Administration. The provisions of this Section 3(b) are
--------------
intended to operate automatically and not require administration. However, to
the extent that administrative determinations are required, the provisions of
this Section 3(b) shall be made by the members of the Board who are not eligible
to receive grants under this Section 3(b), but in no event shall such
determinations affect the eligibility of optionees, the determination of the
exercise price, the timing of the grants or the number of shares subject to
options hereunder.
(v) Applicability of Plan Provisions. Except as otherwise
--------------------------------
provided in this Section 3(b), the NQSOs to Non-Employee Directors shall be
subject to the provisions of this Plan applicable to NQSOs to other persons.
(c) Prospective Employees and Consultants. Options may be granted to
-------------------------------------
a prospective key employee, independent contractor or consultant conditioned
upon, and effective not earlier than, such person becoming a key employee,
independent contractor, or consultant.
4. STOCK SUBJECT TO THE PLAN
(a) Authorization and Use. The stock issuable under the Plan shall
---------------------
consist of shares of the Corporation's authorized but unissued or reacquired
common stock ("Common Stock"). The aggregate number of shares issuable under
the Plan shall not exceed 3,500,000, subject to adjustment as provided in
subsection (b). Should an option be terminated or canceled without being
exercised, the Shares subject to the portion of the option not so exercised
shall be available for subsequent option grants under the Plan.
(b) Adjustment Provisions. If any change is made to the Common Stock
---------------------
issuable under the Plan (whether by reason of merger, consolidation,
reorganization, recapitalization, stock dividend, stock split, combination of
shares, or exchange of shares or any other change in capital structure made
without receipt of consideration), then, unless such event or change results in
the termination of all outstanding options pursuant to the provisions of Section
7, the Committee shall preserve the value of Plan awards by adjusting the
maximum number and class of shares issuable under the Plan to reflect the effect
of such event or change upon the Corporation's capital structure and by making
appropriate adjustments to the number and class of shares and the exercise price
per share of each outstanding option. The adjustments determined by the
Committee shall be final, binding and conclusive.
5. TERMS AND CONDITIONS OF OPTIONS
(a) General Requirements. Each option granted under the Plan shall be
--------------------
evidenced by a stock option agreement that complies with (or incorporates) each
of the terms and conditions of this Section and identifies such option as either
an option that is intended to comply with the requirements of Section 422 of the
Internal Revenue Code or as an option that is intended not to be an ISO.
Individuals who are not employees of the Corporation or its Subsidiaries may
only be granted NQSOs.
(b) Option Price.
------------
(1) The option price per share shall be fixed by the Committee
at the date of the option grant. In no event shall the option price per share of
an ISO be less than 100% of the fair market value of a share of Common Stock on
the date of the option grant. If the optionee is an owner of stock (as
determined under Section 424(d) of the Internal Revenue Code) that possesses
more than 10% of the total combined voting power of all classes of stock of the
Corporation or a Parent or Subsidiary Corporation ("Ten Percent Stockholder"),
the option price per share in the case of an ISO shall not be less than 110% of
the fair market value of a share of Common Stock on the date of the option
grant. The option price per share for NQSOs, except for NQSOs granted pursuant
to Section 3(b), shall be
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<PAGE>
equal to such lawful consideration as shall be determined by the Committee as of
the date of grant. In the case of a prospective key employee, independent
contractor, consultant or non-employee member of the Board, the time at which an
option is granted shall be deemed the effective date of such grant.
(2) The option price shall be paid upon exercise of the option
and, subject to the provisions of the stock option agreement that evidences the
option grant, shall be payable in one of the following alternative forms (as
determined by the Committee):
(A) Full payment in cash or cash equivalents;
(B) Full payment in shares of Common Stock held for at
least six months and having an aggregate fair market value on the date of
exercise equal to the aggregate option price; or
(C) A combination of shares of Common Stock held for at
least six months and valued at fair market value on the date of exercise and
cash, or cash equivalents, equal in the aggregate to the option price.
(3) For all valuation purposes under the Plan, the fair market
value of a share of Common Stock shall be determined in accordance with the
following provisions:
(A) If Common Stock is not at the time listed or admitted
to trading on any stock exchange but is traded in the over-the-counter market
(but not on the NASDAQ National Market System), the fair market value shall be
the mean between the reported bid price and reported asked price of one share of
Common Stock on the date in question in the over-the-counter market, as such
prices are reported by the National Association of Securities Dealers through
its NASDAQ system or any successor system. If there are no reported bid and
asked prices on the date in question, then the mean between the reported bid
price and reported asked price on the last preceding date for which such
quotations exist shall be determinative of fair market value. If Common Stock is
traded over-the-counter on the NASDAQ National Market System, the fair market
value shall be the closing selling price of one share of Common Stock on the
date in question as such price is reported by the National Association of
Securities Dealers through such system or any successor system. If there is no
reported closing selling price for Common Stock on the date in question, then
the closing selling price on the last preceding date for which such quotation
exists shall be determinative of fair market value.
(B) If Common Stock is at the time listed or admitted to
trading on any stock exchange, then the fair market value shall be the mean
between the highest and lowest quoted selling prices of one share of Common
Stock on the date in question on the stock exchange determined by the Committee
to be the primary market for Common Stock, as such prices are officially quoted
on such exchange. If there is no reported sale of Common Stock on such exchange
on the date in question, then the fair market value shall be the mean between
the highest and lowest quoted selling prices on such exchange on the last
preceding date for which such quotation exists.
(C) If Common Stock is at the time neither listed nor
admitted to trading on any stock exchange nor traded in the over-the-counter
market (or, if the Committee determines that the value as determine pursuant to
subparagraphs (A) or (B) does not reflect fair market value), then the Committee
shall determine fair market value after taking into account such factors as it
deems appropriate.
(c) Term, Transfer Restrictions and Exercise of Options. Each option
---------------------------------------------------
granted under the Plan shall be exercisable at such time or times and during
such period as determined by the Committee and set forth in the stock option
agreement or other agreement evidencing such award; provided, however, that no
option granted under the Plan shall have a term in excess of ten years from its
date of
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<PAGE>
grant, or, in the case of an ISO granted to a Ten Percent Stockholder, a term in
excess of five years from the date of grant. An option granted under the Plan to
any officer of the Corporation, any Board member, or any other person subject to
Section 16 of the Securities Exchange Act of 1934, as amended (collectively, an
"Insider") shall not be assignable or transferable other than (i) by will, (ii)
by the laws of descent and distribution, (iii) pursuant to a qualified domestic
relations order, or (iv) pursuant to the terms of the Plan. Except for
circumstances described in the preceding sentence, an option, or derivative
security granted under the Plan to an Insider shall be exercisable only by the
Insider. Options may be exercised by written notice to the Corporation (in such
terms as the Committee may specify) and upon payment of the option price as set
forth in Section 5(b).
(d) Investment Purpose. If necessary or advisable to comply with
------------------
applicable federal or state securities laws, any option granted under the Plan
may be granted on the condition that the optionee agrees that the purchase of
shares of Common Stock thereunder is for investment and not with a view to the
resale or distribution of such stock and that such shares shall be disposed of
only in accordance with such laws. As a condition to issuance of any shares
purchased upon the exercise of any option granted pursuant to the Plan, the
optionee, his executor, administrator, heir or legatee (as the case may be)
receiving such shares may be required to deliver to the Corporation an
instrument, in form and substance satisfactory to the Committee and its counsel,
implementing such agreement. Any such condition may be eliminated by the
Committee if the Committee determines it is no longer necessary or advisable.
(e) Stockholder Rights. No optionee shall have any of the rights of a
------------------
stockholder with respect to any shares covered by such option until such person
has exercised the option and been issued a stock certificate for the purchased
shares.
6. INCENTIVE STOCK OPTIONS
(a) General Conditions. The additional terms and conditions set forth
------------------
in this Section shall apply to all ISOs granted under the Plan. Options that are
specifically designated as "non-statutory" options when issued under the Plan
shall not be subject to such additional terms and conditions.
(b) Special Limitation on Incentive Stock Options. To the extent that
---------------------------------------------
the aggregate fair market value (determined as of the respective date or dates
of grant) of shares with respect to which post-1986 options that would otherwise
be ISOs are exercisable for the first time by any individual during any calendar
year under the Plan (or any other plan of the Corporation, a Parent or
Subsidiary Corporation or predecessor thereof) exceeds the sum of $100,000,
whether by reason of acceleration due to change of control or otherwise, such
options shall be treated as "non-statutory" options. Such post-1986 options
shall be taken into account in the order in which they were granted.
7. CHANGES IN CORPORATE STRUCTURE OR CONTROL
(a) Corporate Transaction. In the event of one or more of the
---------------------
following transactions ("Corporate Transaction") and subject to the further
provisions this Section 7:
(1) A consolidation or merger of the Corporation in which the
Corporation is not the continuing or surviving entity, except for a transaction,
the principal purpose of which is to change the state of the Corporation's
incorporation;
(2) the Corporation is party to a merger, consolidation or
reorganization pursuant to which more than 50% of its shares are converted into
cash or other securities;
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<PAGE>
(3) more than 50% of the assets of the Corporation are sold or
otherwise disposed of; or
(4) the Corporation dissolves or liquidates or effects a partial
liquidation involving more than 50% of its assets,
then, subject to the limitations described below, all options at the time
outstanding under the Plan and not then otherwise fully exercisable shall,
during the five (5) business day period immediately prior to the specified
effective date for the Corporate Transaction, become fully exercisable for up to
the total number of shares of Common Stock purchasable under such option and may
be exercised for all or any portion of the shares for which the option is so
accelerated.
In no event shall any such acceleration in connection with a
Corporate Transaction described in subparagraph (1) or (2) above occur if the
terms of the agreement of the Corporate Transaction require as a condition to
consummation that each such outstanding option shall either be assumed by the
successor corporation or affiliate thereof or be replaced with a comparable
option or to purchase shares of capital stock of the successor corporation or
affiliate thereof. The determination of such comparability shall be made by the
Committee, and its determination shall be final, binding and conclusive. Upon
consummation of a Corporate Transaction described in subparagraph (1) or (2),
all outstanding options and under the Plan shall, to the extent not previously
exercised or assumed by the successor corporation or its parent corporation,
terminate.
In no event shall any such acceleration occur in connection with a
Corporate Transaction described in subparagraph (3) or (4) unless the Committee,
in its discretion, determines that such acceleration is appropriate. In the
event such acceleration does occur in connection with a Corporate Transaction
described in subparagraphs (3) and (4) above, the Committee may, in its
discretion, provide that upon consummation of the Corporate Transaction all
outstanding options under the Plan shall, to the extent not previously
exercised, terminate.
(b) Change of Control. In the event of one or more of the following
-----------------
occurrences ("Change of Control"):
(1) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended from time to time (the
"Exchange Act") becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of 20% or more of the combined voting
power of the Corporation's then outstanding shares, unless, within 30 business
days after notice to the Corporation of such event, the Board (as constituted
immediately prior to such event) adopts a resolution that for purposes of the
Plan no Change of Control has occurred (which resolution may be revoked by the
Board at any time, in which case a Change of Control will be deemed to have
occurred as of the date such revocation becomes effective);
(2) During any period of two consecutive years, members who at
the beginning of such period constitute the Board cease for any reason to
constitute a majority thereof, unless the election, or nomination for election
by the Corporation's shareholders, of each director is approved by the vote of
at least two-thirds of the directors then still in office and who were directors
at the beginning of such period; or
(3) The occurrence of any other change of control of a nature
that would be required to be reported in accordance with Item 1(a) of Form 8-K
pursuant to Sections 13 or 15(d) of the Exchange Act or in the Corporation's
proxy statement in accordance with Item 5(f) of Schedule 14A of Regulation 14A
promulgated under the Exchange Act, or in any successor forms or regulations to
the same effect; unless, within 30 business days after notice to the Corporation
or such event, the Board (as
-6-
<PAGE>
constituted immediately prior to such event) adopts a resolution that for
purposes of the Plan no Change of Control has occurred (which resolution may be
revoked at any time, in which case a Change of Control will be deemed to have
occurred on the date such revocation becomes effective),
then all options at the time outstanding under the Plan and not then otherwise
fully exercisable shall become immediately exercisable as of the date of the
Change of Control, for up to the total number of shares of Common Stock
purchasable under such option and may be exercised for all or any portion of the
shares for which the option is so accelerated.
(c) Adjustment Provisions. If any change is made to the Common Stock
---------------------
issuable under the Plan by reason of a Corporate Transaction or a Change in
Control that does not result in the termination of all outstanding options
pursuant to the provisions of this Section 7, the Committee shall adjust the
maximum number and class of shares issuable under the Plan, the number and class
of shares subject to options, and the option price or exercise price, as
provided in Section 4(b).
(d) Effect of Plan Awards on Corporation. The grant of options under
------------------------------------
the Plan shall not affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
8. CANCELLATION AND NEW GRANT OF OPTIONS
The Committee shall have the authority to effect, at any time and from
time to time, with the consent of the affected optionees, the cancellation of
any or all outstanding options under the Plan and to grant in substitution
therefor new options under the Plan covering the same or different numbers of
shares of Common Stock but having an exercise price per share not less than 100%
(or not less than 110% if an optionee is a Ten Percent Stockholder) of the fair
market value of a share of Common Stock on the new grant date in the case of an
ISO, or, in the case of NQSOs, an exercise price equal to such lawful
consideration as determined by the Committee on the new grant date.
9. AMENDMENT OF THE PLAN AND OPTIONS
(a) Amendments in General. The Committee shall have complete and
----------------------
exclusive power and authority to amend the Plan and the Committee may amend or
modify outstanding options issued under the Plan in any or all respects
whatsoever not inconsistent with the terms of the Plan; provided, however, that,
except to the extent necessary to qualify options under the Plan as ISOs, no
such amendment shall adversely affect rights and obligations of an optionee with
respect to options at the time outstanding under the Plan unless such person
consents to such amendment; and provided, further, that the Committee shall not,
without the approval of the Corporation's stockholders, amend the Plan to (i)
increase the maximum number of shares issuable under the Plan (except for
permissible adjustments under Section 4(b) or subsection (b) of this Section),
(ii) materially increase the benefits accruing to optionees, or (iii) modify the
eligibility requirements for awards granted under the Plan.
(b) Increasing Number of Shares Authorized Under Plan. Options may be
--------------------------------------------------
granted under the Plan to purchase shares of Common Stock in excess of the
number of shares then available for issuance under the Plan, provided (i) an
amendment to increase the maximum number of shares issuable under the Plan is
adopted by the Committee prior to the initial grant of any such option and is
thereafter submitted to the Corporation's stockholders for approval and (ii)
each option so granted is not to become exercisable, in whole or in part, at any
time prior to obtaining such stockholder approval.
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<PAGE>
10. EFFECTIVE DATE AND TERM OF PLAN
(a) Term of Plan. The Plan shall become effective when adopted by the
-------------
Board, but no option granted under the Plan shall become exercisable unless and
until the Plan has been approved by the Corporation's stockholders. If such
stockholder approval is not obtained within 12 months after the date of the
Board's adoption of the Plan, then any options previously granted under the Plan
shall terminate and no further options shall be granted. Subject to such
limitation, options may be granted under the Plan at any time after the
effective date and before the date fixed herein for termination of the Plan.
(b) Option Term. Unless the Plan is sooner terminated in accordance
-----------
with Section 7, no option may be granted under the Plan after the earlier of (i)
the tenth anniversary of the date of its adoption by the Board or (ii) the date
on which all shares available for issuance under the Plan have been issued or
canceled pursuant to the exercise or surrender of options granted hereunder.
11. WITHHOLDING
Before the Corporation issues Common Stock to a grantee pursuant to the
exercise of a nonqualified stock option, the Corporation shall have the right to
require that the grantee make such provision, or furnish the Corporation such
authorization as may be necessary or desirable so that the Corporation may
satisfy its obligation, under applicable income tax laws, to withhold for income
or other taxes due upon or incident to such exercise. Grantees may elect
(hereinafter a "Withholding Election") with respect to the exercise of a
nonqualified stock option either (i) to have the Corporation withhold, from the
Common Stock to be issued pursuant to such exercise, such number of such shares
of Common Stock which, or (ii) to surrender to the Corporation such number of
shares of Common Stock already owned by the grantee (which may be shares of
Common Stock received upon such exercise) which, at their fair market value on
the date as of which the option exercise is taxable for federal income tax
purposes (the "Tax Date"), shall be sufficient to satisfy the Corporation's
withholding obligation with respect to the option exercise. If the fair market
value on the Tax Date of the number of shares of Common Stock required to be
withheld or surrendered pursuant to a Withholding Election exceeds the
Corporation's withholding obligation with respect to the exercise, a fractional
share of Common Stock shall not be issued for the excess, but an amount equal to
the excess shall be paid to the grantee by the Corporation in cash as soon as
reasonably practicable after the amount of such excess is determined by the
Corporation. A Withholding Election may be made applicable with respect to a
particular option exercise, to all previously granted nonqualified stock
options, and/or to all such options to be granted in the future. A Withholding
Election by a grantee who is not an Insider may be made continuing until revoked
by the grantee. For grantees who are Insiders, to the extent required by
Section 16 of the Exchange Act any such Withholding Election and any option to
which the Withholding Election applies also shall meet the following
requirements:
(1) The Withholding Election, once made, shall be
irrevocable.
(2) The Withholding Election must be made either (A)
during one of the ten-day periods beginning on the third
business day following the date of release of the Corporation's
quarterly and annual summary statements of sales and earnings
and ending on the twelfth business day following such date, or
(B) at least six months prior to the Tax Date for the option
exercise to which such Withholding Election applies.
-8-
<PAGE>
(3) An option with respect to which such a
Withholding Election is in effect shall not be exercisable
until at least six months after its date of grant except that
this limitation shall not apply if the grantee dies or is
disabled prior to the expiration of this six-month period.
(4) The Committee shall have sole discretion to
consent to or disapprove any Withholding Election made by such
grantee who is an employee, and if the Committee disapproves
such a Withholding Election, shares of Common Stock shall not
be issued to the grantee upon the exercise of an option to
which the disapproved Withholding Election applies until the
grantee shall have complied with the requirements, if any,
which the Committee may have adopted pursuant to the first
sentence of this paragraph for satisfying the withholding
obligation with respect to such exercise. The Committee by
resolution may approve in advance all Withholding Elections
made by grantees subject to Section 16(b) who are employees,
provided the resolution expressly reserves to the Committee the
right both to disapprove any such Withholding Election and to
revoke its advance approval.
(5) The notice of exercise filed by such a grantee
shall specify whether the notice also constitutes a Withholding
Election with respect to that exercise or whether a previously
filed Withholding Election applies to that exercise. In either
such case the notice also shall specify whether the grantee
intends to file an election pursuant to Section 83(b) of the
Code to have such exercise be taxable as of the date of
exercise, and if so, whether the withholding obligation will be
satisfied by withholding from the shares of Common Stock to be
issued upon the exercise, or by surrender of already-owned
shares of Common Stock. If the withholding obligation will be
satisfied from already-owned shares of Common Stock, the notice
of exercise shall be accompanied by certificates for a
sufficient number of such shares of Common Stock. If the notice
indicates that no such Section 83(b) election will be filed,
all of the shares of Common Stock for which the option is
exercised shall be issued to the grantee, and the Corporation
shall advise the grantee as of the Tax Date of the required
withholding amount so that the grantee may tender an
appropriate number of shares of Common Stock, either from those
issued upon exercise of the option or from shares of Common
Stock already owned by the grantee.
The Committee may adopt such rules, forms and procedures as it considers
necessary or desirable to implement such withholding procedures, which rules,
forms and procedures shall be binding upon all grantees, and which shall be
applied uniformly to all grantees similarly situated.
12. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option under the
Plan, and the issuance of Common Stock upon the exercise of any such option
shall be subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the
options granted under it, and the Common Stock issued pursuant to it.
-9-
<PAGE>
13. RULE 16B-3 COMPLIANCE.
(a) Additional Restrictions Under Rule 16b-3. Unless a grantee could
----------------------------------------
otherwise transfer option shares issued hereunder without incurring liability
under Section 16(b) of the Exchange Act, at least six months must elapse from
the date of grant of an option to the date of disposition of the shares issued
upon exercise of the option.
(b) Compliance with Rule 16b-3. It is the intent of the Corporation
--------------------------
that this Plan comply in all respects with applicable provisions of Rule 16b-3
under the Exchange Act in connection with any grant of options to or other
transaction by a grantee who is subject to Section 16 of the Exchange Act.
Accordingly, if any provision of this Plan or any agreement relating to an
option does not comply with the requirements of Rule 16b-3 as then applicable to
any such grantee, such provision will be construed or deemed amended to the
extent necessary to conform to such requirements with respect to such person.
In addition, the Committee shall have no authority to make any amendment,
alteration, suspension, discontinuation, or termination of the Plan or any
agreement hereunder or take other action if such authority would cause a
grantee's transactions under the Plan not to be exempt under Rule 16b-3 under
the Exchange Act.
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<PAGE>
AS AMENDED MAY 7, 1996
CEPHALON, INC.
EQUITY COMPENSATION PLAN
------------------------
The Cephalon, Inc. Equity Compensation Plan (the "Plan") is intended to
promote the interests of Cephalon, Inc. by providing incentives to (i) certain
employees of the Company or a Subsidiary Corporation (as defined below) who are
responsible for the management, growth or financial success of the Company or a
Subsidiary Corporation, (ii) independent contractors and consultants who perform
valuable services for the Company or a Subsidiary Corporation, and (iii) non-
employee members of the Board of Directors of the Company, to encourage them to
acquire a proprietary interest, or increase their proprietary interest, in the
Company and to continue to perform services for the Company or a Subsidiary
Corporation.
Definitions
-----------
For purposes of this Plan, each capitalized term not otherwise defined
herein shall have the corresponding meaning set forth below:
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Change in Control" shall mean a change in ownership or control
-----------------
of the Company effected through either of the following transactions: (i) the
direct or indirect acquisition by any person or related group of persons (other
than the Company or a person that directly or indirectly controls, is controlled
by, or is under common control with, the Company) of beneficial ownership
(within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing
more than thirty percent (30%) of the combined voting power of the Company's
outstanding securities pursuant to a tender or exchange offer made directly to
the Company's stockholders which the Board does not recommend such stockholders
to accept; or (ii) a change in the composition of the Board over a period of
twenty-four (24) months or less such that a majority of the Board members
ceases, by reason of one or more contested elections for Board membership, to be
comprised of individuals who either (a) have been Board members continuously
since the beginning of such period, or (b) have been elected or nominated for
election as Board members during such period by at least a majority of the Board
members described in clause (a) who were still in office at the time such
election or nomination was approved by the Board.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
(d) "Committee" shall mean the committee consisting of not less
---------
than two persons appointed by the Board from among its members, as more fully
described in Section 1 hereof.
(e) "Company" shall mean Cephalon, Inc. and, in the capacity of an
-------
employer or recipient of services of a Participant, its Subsidiary Corporations
or Parent Corporation.
(f) "Company Stock" shall mean the shares of common stock of the
-------------
Company.
(g) "Corporate Transaction" shall mean either of the following
---------------------
stockholder-approved transactions to which the Company is a party: (i) a merger
or consolidation in which
<PAGE>
securities possessing more than fifty percent (50%) of the combined voting power
of the Company's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to such
transaction, or (ii) the sale, transfer or other disposition of more than 75% of
the Company's assets in a single or related series of transactions.
(h) "Date of Grant" shall mean the date of the Committee action
-------------
granting a Stock Option or Restricted Stock Grant, except as provided in Section
4(b) hereof.
(i) "ERISA" shall mean the Employee Retirement Income Security Act
-----
of 1974, as amended.
(j) "Exchange Act" shall mean the Securities and Exchange of 1934,
------------
as amended.
(k) "Grantee" shall mean any Participant chosen by the Committee to
-------
receive Grants.
(l) "Grant Letter" shall mean the written letter from the Committee
------------
to a Grantee evidencing a Grant and specifying the terms and conditions of each
Grant, consistent with this Plan (which letter need not include the general
terms and conditions set forth in this Plan).
(m) "Grants" shall mean, collectively, the Incentive Stock Options,
------
Nonqualified Stock Options and Restricted Stock Grants authorized under this
Plan.
(n) "Incentive Stock Option" shall mean an incentive stock option
----------------------
within the meaning of Section 422 of the Code.
(o) "Involuntary Termination" shall mean the termination of the
-----------------------
service of any Grantee of the Company or any successor thereto which occurs by
reason of (i) such individual's involuntary dismissal or discharge by the
Company or the successor thereto for reasons other than Misconduct (as defined
below), or (ii) such individual's voluntary resignation, in either case
following: (a) a change in his or her position with the Company or the successor
thereto which materially reduces his or her level of responsibility, (b) a
reduction in his or her level of compensation (including base salary,
significant fringe benefits or any non-discretionary and objective-standard
incentive payment or bonus award) by more than ten percent (10%) in the
aggregate or (c) a relocation of such individual's place of employment by more
than fifty (50) miles, only if such change, reduction or relocation is effected
by the Company or the successor thereto without the individual's consent. For
purposes of this definition, the term "Misconduct" means the commission of any
----------
act of fraud, embezzlement or dishonesty by the Grantee, any unauthorized use or
disclosure by such individual of confidential information or trade secrets of
the Company or its successor, or any other intentional misconduct by such
individual adversely affecting the business or affairs of the Company or its
successor in a material manner. The foregoing definition shall not be deemed to
be inclusive of all the acts or omissions which the Company or its successor may
consider as grounds for the dismissal or discharge of any Grantee or its
successor.
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<PAGE>
(p) "Non-employee Director" shall mean any member of the Board who
---------------------
is not employed by the Company in any capacity.
(q) "Nonqualified Stock Option" shall mean a stock option not
-------------------------
intended to qualify as an Incentive Stock Option.
(r) "Parent Corporation" shall have the meaning specified in
------------------
Section 424(f) of the Code.
(s) "Participant(s)" shall mean any employees of the Company,
--------------
independent contractors and consultants who perform services for the Company and
members of the Board who are not employed in any capacity by the Company, in
each case to the extent designated by the Committee as eligible to participate
in the Plan.
(t) "Restricted Stock Grant" shall mean shares of Company Stock
----------------------
issued by the Committee to a Participant other than a Non-employee Director, in
accordance with Section 6 hereof.
(u) "Restriction Period" shall have the meaning specified in
------------------
Section 7(a).
(v) "Stock Options" shall mean options granted by the Committee
-------------
intended to qualify as Incentive Stock Options or Nonqualified Stock Options or
any combination of Incentive Stock Options and Nonqualified Stock Options.
(w) "Subsidiary Corporation" shall have the meaning specified in
----------------------
Section 424(f) of the Code.
(x) "Successor Grantee" shall mean the personal representative or
-----------------
other person entitled to succeed to the rights of a Grantee when the Grantee
dies.
(y) "Ten Percent Stockholder" shall mean a Grantee who is the owner
-----------------------
of stock that possesses more than 10% of the total combined voting power of all
classes of stock of the Company or a Parent or Subsidiary Corporation.
1 Administration and Committee Authority
--------------------------------------
(a) The Plan shall be administered and interpreted by the
Committee; provided, however, grant decisions made hereunder shall be made by at
least two persons, each of whom shall be both (a) "disinterested persons" as
defined under Rule 16b-3 under the Exchange Act, and (b) members of the
Committee. The Board may appoint a subcommittee for this purpose, in which case
references herein to the "Committee" shall mean the subcommittee as appropriate.
(b) The Committee shall have the sole authority to determine: (i)
the persons to whom Stock Options or Restricted Stock Grants may be granted
under the Plan, (ii) the type, size and other terms of the Stock Options or
Restricted Stock Grants to be made to each person selected, including, without
limitation, the circumstances under which Stock Options will vest and the
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<PAGE>
Restriction Period will lapse on an accelerated basis (such as upon death,
disability or a change in control of the Company), (iii) the time when the Stock
Options or Restricted Stock Grants will be granted and the duration of the
exercise period for Stock Options and the Restriction Period for Restricted
Stock Grants and (iv) any other matters arising under the Plan. Notwithstanding
the foregoing, Non-employee Directors shall be eligible to receive only
Nonqualified Stock Options pursuant to the provisions of Section 6 hereof, and
the Committee shall have no authority to exercise any discretion in connection
with such Grants. The Committee shall have full power and authority to
administer and interpret the Plan and to adopt or amend such rules, regulations,
agreements and instruments for implementing the Plan and for the conduct of its
business as it deems necessary or advisable, in its sole discretion. The
Committee's interpretations of the Plan and all determinations made by the
Committee pursuant to the powers vested in it hereunder shall be conclusive and
binding on all persons having any interests in the Plan or in any Grants
hereunder.
2. Grants
------
All Grants under the Plan shall be subject to the terms and conditions set
forth herein and to those other terms and conditions consistent with this Plan
as the Committee deems appropriate, as specified in the Grant Letter. The
Committee shall approve the form and provisions of each Grant Letter. Grants
under a particular Section of the Plan need not be uniform as among other
recipients and Grants under two or more Sections of the Plan may be combined in
one Grant Letter; provided, however, that Grants to Non-employee Directors shall
be made only in accordance with the provisions of Section 6 hereof.
3. Shares Subject to the Plan
--------------------------
(a) Subject to the adjustment specified below, the aggregate number
of shares of Company Stock that have been or may be issued under the Plan is
2,000,000 shares. During the term of the Plan the maximum aggregate number of
shares of Company Stock that shall be subject to grants of stock options under
the Plan to any single individual shall be equal to 50% of the aggregate number
of shares that have issued or are available for issuance under the Plan for all
Participants. The shares may be authorized but unissued shares or treasury
shares. If and to the extent Stock Options granted under the Plan terminate,
expire, or are cancelled without having been exercised, or if any portion of a
Restricted Stock Grant is forfeited, the shares subject to such Grant shall
again be available for purposes of the Plan.
(b) If there is any change in the number or kind of shares of
Company Stock through the declaration of a stock dividend or through a
recapitalization, stock split, or combination or exchange of such shares, or a
merger, reorganization or consolidation of the Company, reclassification or
change in par value or by reason of any other extraordinary or unusual events,
the number of shares of Company Stock available for Grants and the number of
such shares covered by outstanding Grants, and the price per share or the
applicable market value of such Grants, shall be proportionately adjusted by the
Committee to reflect any increase or decrease in the number or kind of issued
shares of Company Stock; provided, however, that any fractional shares resulting
from such adjustment shall be eliminated.
-4-
<PAGE>
4. Eligibility for Participation
-----------------------------
(a) General Eligibility. The Committee in its sole discretion shall
-------------------
select the Grantees from among the Participants and determine the number of
shares of Company Stock subject to a particular Grant; provided, however, that
Non-employee Directors may only receive Nonqualified Stock Options pursuant to
Section 6 hereof. Nothing contained in this Plan shall be construed to limit
the right of the Company to grant options or stock awards outside of the Plan,
in connection with the acquisition, by purchase, lease, merger, consolidation or
otherwise, of the business or assets of any corporation, firm or association,
including options granted to employees thereof who become employees of the
Company, or for any other proper corporate purpose whatsoever.
(b) Prospective Employees and Consultants. Stock Options and
-------------------------------------
Restricted Stock Grants may be granted to a prospective employee, independent
contractor or consultant conditioned upon, and the Date of Grant shall be, not
earlier than the date such person becomes an employee, independent contractor,
or consultant.
5. Granting of Stock Options
-------------------------
(a) Type of Option. The Committee may grant Stock Options intended
--------------
to qualify as Incentive Stock Options or Nonqualified Stock Options or any
combination of Incentive Stock Options and Nonqualified Stock Options, all in
accordance with the further terms and conditions set forth herein; provided,
however, that Non-employee Directors may only receive Nonqualified Stock Options
pursuant to Section 6 hereof.
(b) Number of Shares. Subject to the limitations set forth in
----------------
Section 3(a) and except as provided in Section 6, the Committee shall determine
the number of shares of Company Stock that will be subject to each Stock Option
granted hereunder.
(c) Option Price.
------------
(i) The option price per share shall be fixed by the
Committee at the Date of Grant. The option price of a Nonqualified Stock
Option may be greater or less than the fair market value of the underlying
shares of Common Stock on the Date of Grant. The option price per share of
an Incentive Stock Option must not be less than 100% of the fair market
value of a share of Company Stock on the Date of Grant. In the case of an
Incentive Stock Option granted to a prospective employee, independent
contractor or consultant, the option price per share shall be the fair
market value of a share of Company Stock on the date such person actually
becomes an employee, independent contractor or consultant. If the Grantee
is a Ten Percent Stockholder, the option price per share in the case of an
Incentive Stock Option shall not be less than 110% of the fair market value
of a share of Company Stock on the Date of Grant. The option price per
share for Nonqualified Stock Options, shall be equal to such lawful
consideration as shall be determined by the Committee as of the Date of
Grant, at such price per share as the Committee shall determine (which may
include a fixed or objective measurement or
-5-
<PAGE>
date of measurement in the future), except that the price for Nonqualified
Stock Options granted to Non-Employee Directors shall be determined as
provided in Section 6.
(ii) For all valuation purposes under the Plan, the "fair
market value" of a share of Company Stock shall be determined in accordance
with the following provisions:
(A) If Company Stock is not at the time listed or
admitted to trading on any stock exchange but is traded in the over-
the-counter market (but not on the NASDAQ National Market System), the
fair market value shall be the mean between the reported bid price and
reported asked price of one share of Company Stock on the date in
question in the over-the-counter market, as such prices are reported
by the National Association of Securities Dealers through its NASDAQ
system or any successor system. If there are no reported bid and asked
prices on the date in question, then the mean between the reported bid
price and reported asked price on the last preceding date for which
such quotations exist shall be determinative of fair market value. If
Company Stock is traded in the over-the-counter market on the NASDAQ
National Market System, the fair market value shall be the closing
selling price of one share of Company Stock on the date in question as
such price is reported by the National Association of Securities
Dealers through such system or any successor system. If there is no
reported closing selling price for Company Stock on the date in
question, then the closing selling price on the last preceding date
for which such quotation exists shall be determinative of fair market
value.
(B) If Company Stock is at the time listed or admitted
to trading on any stock exchange, then the fair market value shall be
the mean between the highest and lowest quoted selling prices of one
share of Company Stock on the date in question on the stock exchange
determined by the Committee to be the primary market for Company
Stock, as such prices are officially quoted on such exchange. If there
is no reported sale of Company Stock on such exchange on the date in
question, then the fair market value shall be the mean between the
highest and lowest quoted selling prices on such exchange on the last
preceding date for which such quotation exists.
(C) If Company Stock is at the time neither listed nor
admitted to trading on any stock exchange nor traded in the over-the-
counter market (or, if the Committee determines that the value as
determined pursuant to subparagraphs (A) or (B) does not reflect fair
market value), then the Committee shall determine fair market value
after taking into account such factors as it deems appropriate.
(d) Exercise Period. The Committee shall determine the option
---------------
exercise period of each Stock Option. The exercise period shall not exceed ten
years from the Date of Grant of a Stock Option; provided that if the Grantee of
an Incentive Stock Option is a Ten Percent Stockholder the exercise period shall
not exceed five years from the Date of Grant.
-6-
<PAGE>
(e) Vesting of Options. The vesting period for Stock Options shall
------------------
commence on the Date of Grant and shall end on such date or dates as may be
determined by the Committee, in its sole discretion, and specified in the Grant
Letter. The Committee may impose such additional restrictions or conditions
upon the Stock Options or the shares of Company Stock issuable upon the exercise
of the Stock Options as it shall determine and specify in the Grant Letter.
(f) Manner of Exercise. A Grantee may exercise a Stock Option by
------------------
delivering a notice of exercise to the Committee with accompanying payment of
the option price. Such notice may instruct the Company to deliver shares of
Company Stock due upon the exercise of the Stock Option to any registered broker
or dealer designated by the Company in lieu of delivery to the Grantee. Such
instructions must designate the account into which the shares are to be
deposited. The Grantee may tender this notice of exercise, which has been
properly executed by the Grantee, and the aforementioned delivery instructions
to any such designated broker.
(g) Satisfaction of Option Price. The Grantee shall pay the option
----------------------------
price in cash, by delivering shares of Company Stock already owned by the
Grantee and having a fair market value on the date of exercise equal to the
option price, or with a combination of cash and such shares. The Grantee shall
pay the option price and the amount of withholding of taxes, if any, required at
the time of exercise. Shares of Company Stock shall not be issued or
transferred upon exercise of a Stock Option until the option price and the
withholding obligation are fully paid.
(h) Limits on Incentive Stock Options. Each Grant of an Incentive
---------------------------------
Stock Option shall provide that (a) it is not transferable by the Grantee
otherwise than by will or the laws of descent and distribution and (b) if the
aggregate fair market value of the Company Stock on the Date of Grant with
respect to which Incentive Stock Options are exercisable for the first time by a
Grantee during any calendar year under the Plan and under any other stock option
plan of the Company or a Parent Corporation or Subsidiary Corporation exceeds
$100,000, then such Stock Options to the extent of such excess shall be treated
as Nonqualified Stock Options. Unless a Grantee could otherwise transfer
Company Stock issued pursuant to an Incentive Stock Option granted hereunder
without incurring liability under Section 16(b) of the Exchange Act, at least
six months must elapse from the Date of Grant of such Incentive Stock Option to
the date of disposition of the Company Stock issued upon exercise of such
option.
(i) Election to Withhold Shares. Grantees may make an election to
---------------------------
satisfy the Company income tax withholding obligation with respect to the
exercise of Stock Options by having shares withheld up to an amount that does
not exceed the Grantee's maximum marginal tax rate for federal (including FICA),
state and local tax liabilities. Such election must be in the form and manner
prescribed by the Committee. If the Grantee is a director or officer (within
the meaning of Rule 16a-1(f) promulgated under the Exchange Act), such election
must be made six months prior to the date of any exercise of a Stock Option to
be covered by the election, and may only be revoked upon prior written notice
given at least six months prior to the exercise of any Stock Option to be
affected by such revocation.
-7-
<PAGE>
6. Formula Option Grants to Non-employee Directors
-----------------------------------------------
A Non-employee Director shall be entitled to receive Nonqualified Stock
Options in accordance with this Section 6.
(a) Initial Grant. Each Non-employee Director who first becomes a
-------------
member of the Board after February 1, 1995, will receive a grant of a
Nonqualified Stock Option to purchase 15,000 shares of Company Stock immediately
upon his or her becoming a member of the Board.
(b) Annual Grants. On each date that the Company holds its annual
-------------
meeting of stockholders, commencing with the 1995 calendar year, each Non-
employee Director in office immediately after the annual election of directors
(including any directors first elected at such meeting) will receive a grant of
a Nonqualified Stock Option to purchase 10,000 shares of Company Stock, provided
--------
that a Non-employee Director will not be eligible to receive in the aggregate
under this Section 6 options to purchase in excess of 50,000 shares of Company
Stock (subject to adjustment as provided in Section 3(b) of this Plan). The
date of grant of such annual Grants shall be the date of such annual meeting of
stockholders.
(c) Option Exercise Price. Options granted under this Section 6
---------------------
shall have a per share exercise price equal to the fair market value of a share
of Company Stock on the date of grant, and such option shall become exercisable,
with respect to 25% of the shares of Company Stock underlying the option, on
each anniversary following the Date of Grant.
(d) Administration. The provisions of this Section 6 are intended
--------------
to operate automatically and not require administration. However, to the extent
that administrative determinations are required, the provisions of this Section
6 shall be made by the members of the Board who are not eligible to receive
grants under this Section 6, but in no event shall such determinations affect
the eligibility of Grantees, the determination of the exercise price, the timing
of the grants or the number of shares subject to Stock Options granted
hereunder.
(e) Acceleration.
------------
(i) Upon the occurrence of a Corporate Transaction or upon
Involuntary Termination of a director within thirty-six (36) months
following a Change in Control, each Stock Option of such director shall
automatically accelerate and become fully exercisable as to all shares
subject to such option and shall remain exercisable until the expiration of
the option term or earlier surrender of such option.
(ii) Upon the death of a Non-employee Director:
(A) while he or she is a director of the Company;
(B) during the three-month period following
termination of his or her status as a director of the Company; or
-8-
<PAGE>
(C) during the one year period following the
permanent disability of the Non-employee Director;
each Stock Option of such Non-employee Director shall automatically
accelerate and become fully exercisable as to all shares subject to such
option and shall remain exercisable until the expiration of the option term
or earlier surrender of the option.
(f) Applicability of Plan Provisions. Except as otherwise provided
--------------------------------
in this Section 6, the Nonqualified Stock Options granted to Non-employee
Directors shall be subject to the provisions of this Plan applicable to
Nonqualified Stock Options granted to other persons.
(g) Amendment. Notwithstanding any other provision of the Plan,
---------
this Section 6 may not be amended more than once every six months, except for
amendments necessary to conform the Plan to changes in the provisions of or the
regulations relating to applicable laws, including the Code or ERISA.
7. Restricted Stock Grants
-----------------------
The Committee may issue shares of Company Stock to a Participant (other
than a Non-employee Director) under a Restricted Stock Grant. The following
provisions apply to Restricted Stock Grants:
(a) General Requirements. Shares of Company Stock issued pursuant
--------------------
to a Restricted Stock Grant will be issued for such cash consideration, if any,
as the Committee shall determine. Restrictions on the transfer of shares of
Company Stock set forth in Section 7(d) shall lapse at such time or times and
under such circumstances (based on service, performance and/or such other
factors or criteria as the Committee may determine in its sole discretion) as
the Committee may specify in the Grant Letter until the restrictions have lapsed
on 100% of the shares. The period during which the Restricted Stock Grant will
remain subject to restrictions will be designated in the Grant Letter as the
"Restriction Period." The terms of the Restricted Stock Grant must be accepted
by the Grantee in writing. The provisions of Restricted Stock Grants need not be
the same with respect to each Grantee.
(b) Number of Shares. Subject to the limitations set forth in
----------------
Section 3(a), the Committee, in its sole discretion, shall determine the number
of shares of Company Stock that will be subject to each Restricted Stock Grant.
(c) Requirement of Employment or Services. If the Grantee's
-------------------------------------
employment terminates or if a Grantee who is an independent contractor or
consultant ceases to perform service for the Company during a period designated
in the Grant Letter as the Restriction Period, the Restricted Stock Grant
terminates as to all shares covered by the Grant as to which restrictions on
transfer have not lapsed, and those shares of Company Stock shall be forfeited
by the Grantee and must be immediately returned to the Company. The Committee
may, however, provide for complete or partial exceptions to this requirement as
it deems equitable at the time of the Grant or during the outstanding term of
the Grant.
-9-
<PAGE>
(d) Restrictions on Issuance and Transfer, and Legending of Stock
-------------------------------------------------------------
Certificate. During the Restriction Period, a Grantee may not sell, assign,
- -----------
transfer, pledge, or otherwise dispose of the shares of Company Stock to which
such Restriction Period applies except to a Successor Grantee under Section 8.
The Committee, at its sole discretion, may determine that the Company not issue
any shares subject to a Restricted Stock Grant or that the Company retain
possession of any shares issued pursuant to a Restricted Stock Grant, in either
case until all restrictions on such shares have lapsed. During the Restriction
Period, each certificate for a share issued or transferred under a Restricted
Stock Grant shall contain a legend giving appropriate notice of the restrictions
in the Grant. The Grantee shall be entitled to have the legend removed from the
stock certificate covering any of the shares subject to restrictions, as
applicable, when all restrictions on such shares have lapsed.
(e) Stockholder Rights. The Grantee shall not have, with respect to
------------------
shares of Company Stock issued or issuable pursuant to a Restricted Stock Grant,
the right to vote the shares or the right to receive any cash or other dividends
declared thereon until all restrictions on such shares have lapsed.
(f) Election to Withhold Shares. Grantees may make an election to
---------------------------
satisfy the Company income tax withholding obligation with respect to a
Restricted Stock Grant by having shares withheld up to an amount that does not
exceed the Grantee's maximum marginal tax rate for federal (including FICA),
state and local tax liabilities. Such election must be in the form and manner
prescribed by the Committee. If the Grantee is a director or officer (within
the meaning of Rule 16a-1(f) promulgated under the Exchange Act), such election
must be irrevocable and must be made six months prior to the date on which all
restrictions lapse with respect to such shares.
8. Transferability of Grants
-------------------------
Only a Participant or his or her authorized legal representative may
exercise rights under a Grant. Such persons may not transfer those rights
except (i) to the extent permitted under Rule 16b-3 of the Exchange Act or any
interpretations otherwise issued by the Securities Exchange Commission and the
Code, (ii) by will or by the laws of descent and distribution or, (iii) if
permitted under Rule 16b-3 of the Exchange Act and if permitted in any specific
case by the Committee in their sole discretion, pursuant to a qualified domestic
relations order as defined under the Code or Title I of ERISA or the rules
thereunder; provided, however, that an Incentive Stock Option shall only be
--------
transferable in the circumstances described in clause (ii). When a Participant
dies, the Successor Grantee may exercise such rights. A Successor Grantee must
furnish proof satisfactory to the Company of his or her right to receive the
Grant under the Participant's will or under the applicable laws of descent and
distribution.
9. Certain Corporate Transactions
------------------------------
(a) In the event of any Corporate Transaction, each Stock Option
which is at the time outstanding under this Plan and each Restricted Stock Grant
to which the restrictions have not lapsed shall automatically accelerate so that
each such Stock Option shall, immediately prior to the specified effective date
for such Corporate Transaction, become fully exercisable with respect to the
-10-
<PAGE>
total number of shares of Common Stock at the time subject to such Stock Option
and may be exercised for all or any portion of such shares as fully-vested
shares and all restrictions applicable to the shares of Common Stock subject to
such Restricted Stock Grant shall lapse. However, the vesting of an outstanding
Grant under this Plan shall not so accelerate nor shall the restrictions so
lapse if and to the extent: (i) such Grant is, in connection with such
Corporate Transaction, either to be assumed by the successor corporation or
parent thereof or to be replaced with a stock option or restricted stock grant
for shares of the capital stock of the successor corporation or parent thereof
having comparable value and terms, (ii) such Grant is to be replaced with a cash
incentive option or award of the successor corporation which preserves the Stock
Option spread or Restricted Stock Grant value existing at the time of such
Corporate Transaction and provides for subsequent payout in accordance with the
same vesting schedule applicable to such Grant, (iii) such Grant is to be
replaced by a grant under another incentive program which the Committee
determines is reasonably equivalent in value, or (iv) the acceleration of the
vesting period under such Stock Option or the lapse of restrictions with respect
to such Restricted Stock Grant is subject to other limitations imposed by the
Committee at the time of the Grant. The determination of comparability under
clauses (i), (ii) or (iii) above shall be made by the Committee, and its
determination shall be final, binding and conclusive.
(b) Upon a Grantee's cessation of service by reason of an
Involuntary Termination within thirty-six (36) months after a Corporate
Transaction in which his or her outstanding options or grants are assumed or
replaced pursuant to clause (i), (ii) or (iii) above, each such option or grant
under clause (i) shall automatically accelerate and become fully exercisable and
all restrictions applicable to such grants shall lapse, with respect to the
total number of shares of stock at the time subject to such option or grant and
the cash incentive program under clause (ii) or other incentive program under
clause (iii) shall become fully vested. In addition, upon a Grantee's cessation
of service by reason of an Involuntary Termination within 36 months after a
Change in Control, each Stock Option shall automatically accelerate and become
fully exercisable and all restrictions applicable to Restricted Stock Grants
shall lapse, with respect to the total number of shares of Company Stock at the
time subject to such Grant. The option or Stock Option as so accelerated shall
remain exercisable until the earlier of the expiration of the option term or the
-------
expiration of the one (1)-year period measured from the date of such Involuntary
Termination.
(c) Immediately following the consummation of a Corporate
Transaction, all outstanding Grants under this Plan shall terminate and cease to
remain outstanding, except to the extent assumed by the successor corporation or
its parent company.
(d) Each outstanding Grant under this Plan that is assumed in
connection with a Corporate Transaction shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply and pertain to the number
and class of securities which would have been issued to the Grantee, upon
consummation of such Corporate Transaction, had (in the case of a Stock Option)
such person exercised the Stock Option immediately prior to such Corporate
Transaction. In the case of a Stock Option, appropriate adjustments shall also
be made to the exercise price payable per share, provided the aggregate exercise
--------
price payable for such securities shall remain the same. In addition, the class
and number of shares available for issuance under the Plan on both an aggregate
and participant basis following the consummation of such Corporate Transaction
shall be appropriately adjusted.
-11-
<PAGE>
(e) The provisions of Section 9(a) shall not operate as a
limitation on the Committee's discretionary authority, exercisable either at the
time of the Grant the or at any time while the Grant remains outstanding, to
provide for the automatic acceleration of one or more outstanding Stock Options,
or the lapse of all restrictions applicable to a Restricted Stock Grant upon the
occurrence of any change in the Company' s organization, ownership or structure
not otherwise within the definition of a Corporate Transaction or a Change in
Control. The Committee also shall have full power and authority to condition any
such option acceleration, restriction lapse and the termination of any
outstanding repurchase rights upon the Grantee's cessation of service by reason
of an Involuntary Termination within a specified period following any such
event. Any Stock Options accelerated in connection with any such event shall
remain fully exercisable until the expiration or sooner termination of the
option term or the surrender of such option.
(f) The acceleration or substitution of Grants under this Section 9
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
(g) The portion of any Incentive Stock Option accelerated under
this Section 9 in connection with a Corporate Transaction or Change in Control
intended to comply with section 424 of the Code shall remain exercisable as an
incentive stock option under the Federal tax laws only to the extent the dollar
limitation specified in Section 5(h) is not exceeded. To the extent such dollar
limitation is exceeded, of such option shall be exercisable as a nonqualified
stock option under the Federal tax laws.
10. Approval of the Plan
--------------------
The Plan is subject to, and no Stock Option shall be exercisable hereunder
and no Restriction Period shall lapse with respect to Restricted Stock until
both of the following have occurred:
(a) approval of the Plan by a committee appointed by the Board
which is comprised solely of two or more directors who meet the definition of
"outside directors" under Section 162(m) of the Code (which provision currently
requires that such persons are not (i) presently employees of the Company; (ii)
former employees still receiving compensation for prior services (other than
benefits under a tax-qualified pension plan), (iii) officers of the Company at
any time, and (iv) currently receiving compensation for personal services in a
capacity other than as a member of the Board); and
(b) approval of the Plan by holders of a majority of the shares of
the stock of the Company present or represented by a proxy in a separate vote at
a duly held meeting of the stockholders of the Company within twelve months
after the date of the adoption of the Plan by the Board.
11. Amendment and Termination of the Plan
-------------------------------------
-12-
<PAGE>
(a) Amendment. The Board may amend or terminate the Plan at any
---------
time; provided, however, that any amendment that (i) materially increases the
benefits accruing to Participants under the Plan, (ii) increases the aggregate
number (or individual limit for any single optionee) of shares of Company Stock
that may be issued under the Plan (other than by operation of Section 3(b)), or
(iii) materially modifies the requirements as to eligibility for participation
in the Plan, shall be subject to approval by the holders of a majority of the
shares of stock of the Company present, or represented, and entitled to vote at
a meeting duly held in accordance with applicable laws. However, the Board
shall not amend the Plan if such amendment would cause the Plan or any Grant, or
the exercise of any right under the Plan to fail to comply with the requirements
of Rule 16b-3 under the Exchange Act, or if such amendment would cause the Plan
or the Grant or exercise of an Incentive Stock Option under the Plan to fail to
comply with the requirements of Section 422 of the Code including, without
limitation, a reduction of the option price or an extension of the period during
which an Incentive Stock Option may be exercised.
(b) Termination of Plan. The Plan shall terminate on the tenth
-------------------
anniversary of its effective date unless terminated earlier by the Board or
unless extended by the Board with the approval of the stockholders of the
Company.
(c) Termination and Amendment of Outstanding Grants. A termination
-----------------------------------------------
or amendment of the Plan that occurs after a Grant is made shall not result in
the termination or amendment of the Grant unless the Grantee consents or unless
the Committee acts under Section 19(b). The termination of the Plan shall not
impair the power and authority of the Committee with respect to an outstanding
Grant. Whether or not the Plan has terminated, an outstanding Grant may be
terminated or amended under Section 19(b) or may be amended by agreement of the
Company and the Grantee consistent with the Plan.
12. Funding of the Plan
-------------------
This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Grants under this Plan. In no event shall
interest be paid or accrued on any Grant.
13. Rights of Participants
----------------------
Nothing in this Plan shall entitle any Participant or other person to any
claim or right to be granted a Stock Option or Restricted Stock Grant under this
Plan. Neither this Plan nor any action taken hereunder shall be construed as
giving any Participant any rights to be retained in the employ of the Company.
14. Withholding of Taxes
--------------------
The Company shall have the right to require the Grantee to pay to the
Company the amount of any taxes which the Company is required to withhold in
respect of any Grant or to take whatever action it deems necessary to protect
the interests of the Company in respect of such tax liabilities, including,
without limitation, withholding a portion of the shares of Common Stock
otherwise
-13-
<PAGE>
deliverable pursuant to the Plan. The Company's obligation to issue shares of
Common Stock upon the exercise of a Stock Option or the acceptance of a
Restricted Stock Grant shall be conditioned upon the Grantee's compliance with
the requirements of this Section 14 to the satisfaction of the Committee. In
addition, the Company shall have the right to deduct from any cash payment
hereunder any federal, state or local taxes required by law to be withheld with
respect to such Grants payment.
15. Agreements with Participants
----------------------------
Each Grant made under this Plan shall be evidenced by a Grant Letter
containing such terms and conditions as the Committee shall approve.
16. Requirements for Issuance of Shares
-----------------------------------
No Company Stock shall be issued or transferred upon payment of any Grant
hereunder unless and until all legal requirements applicable to the issuance or
transfer of such Company Stock have been complied with to the satisfaction of
the Committee. The Committee shall have the right to condition any Restricted
Stock Grant or Stock Option made to any Participant hereunder on such
Participant's undertaking in writing to comply with such restrictions on his or
her subsequent disposition of such shares of Company Stock as the Committee
shall deem necessary or advisable as a result of any applicable law, regulation
or official interpretation thereof, and certificates representing such shares
may be legended to reflect any such restrictions.
17. Headings
--------
Section headings are for reference only. In the event of a conflict
between a title and the content of a Section, the content of the Section shall
control.
18. Effective Date
--------------
Subject to the approval of the Company's stockholders as provided in
Section 10 hereof, this Plan shall be effective as of February 1, 1995.
19. Miscellaneous
-------------
(a) Substitute Grants. The Committee may make a Grant to an
-----------------
employee of another corporation who becomes a Participant by reason of a
corporate merger, consolidation, acquisition of stock or property,
reorganization or liquidation involving the Company or any of its subsidiaries
in substitution for a stock option or restricted stock grant granted by such
corporation. The terms and conditions of the substitute stock grant may vary
from the terms and conditions required by the Plan. The Committee shall
prescribe the provisions of the substitute grants.
(b) Compliance with Law. The Plan, the exercise of Grants and the
-------------------
obligations of the Company to issue or transfer shares of Company Stock under
Grants shall be subject to all applicable laws and to approvals by an
governmental or regulatory agency as may be required. With respect to persons
subject to Section 16 of the Exchange Act, it is the intent of the Company that
the
-14-
<PAGE>
Plan and all transactions under the Plan comply with all applicable conditions
of Rule 16b-3 or its successors under the Exchange Act. The Committee may revoke
any Grant if it is contrary to law or modify a Grant to bring it into compliance
with any valid and mandatory government regulation. The Committee may also adopt
rules regarding the withholding of taxes on payments to Grantees. The Committee
may, in its sole discretion, agree to limit its authority under this Section.
(c) Ownership of Stock. A Grantee or Successor Grantee shall have
------------------
no rights as a stockholder with respect to any shares of Company Stock covered
by a Grant until the shares are issued to the Grantee or Successor Grantee on
the stock transfer records of the Company.
* * *
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CEPHALON
INC.'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000873364
<NAME> CEPHALON, INC.
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 5,826,000 6,565,000
<SECURITIES> 161,762,000 171,502,000
<RECEIVABLES> 57,000 33,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 176,998,000 188,482,000
<PP&E> 40,057,000 39,654,000
<DEPRECIATION> 10,610,000 9,652,000
<TOTAL-ASSETS> 209,329,000 221,330,000
<CURRENT-LIABILITIES> 17,338,000 18,402,000
<BONDS> 39,211,000 41,125,000
0 0
0 0
<COMMON> 242,000 238,000
<OTHER-SE> 169,876,000 179,967,000
<TOTAL-LIABILITY-AND-EQUITY> 209,329,000 221,330,000
<SALES> 0 0
<TOTAL-REVENUES> 5,469,000 4,490,000
<CGS> 0 0
<TOTAL-COSTS> 19,788,000 16,603,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 619,000 468,000
<INCOME-PRETAX> (14,938,000) (12,581,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (14,938,000) (12,581,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (14,938,000) (12,581,000)
<EPS-PRIMARY> (0.62) (0.69)
<EPS-DILUTED> 0 0
</TABLE>
