<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
CEPHALON, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
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<PAGE> 2
CEPHALON, INC.
145 BRANDYWINE PARKWAY
WEST CHESTER, PA 19380
------------------------
NOTICE OF 1997 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON
MAY 14, 1997
------------------------
TO THE STOCKHOLDERS OF CEPHALON, INC.:
Notice is hereby given that the annual meeting of stockholders of CEPHALON,
INC., a Delaware corporation (the "Company" or "Cephalon"), will be held at the
Sheraton Great Valley Hotel, 707 Lancaster Avenue, Frazer, Pennsylvania, 19355,
on Wednesday, May 14, 1997, at 9:30 a.m., Philadelphia time, for the following
purposes:
1. To elect seven directors;
2. To approve an amendment to the Company's Equity Compensation Plan
(the "Equity Compensation Plan") to increase the number of shares
available under the plan; and
3. To transact such other business as may properly come before the
meeting or any adjournments thereof.
Only stockholders of record as of the close of business on March 21, 1997
will be entitled to notice of the annual meeting and to vote at the annual
meeting and any adjournments thereof. A list of stockholders of the Company
entitled to vote at the meeting will be available for inspection by a
stockholder at the Company's office, for the ten days prior to the annual
meeting and during normal business hours.
By Order of the Board of Directors,
BARBARA S. SCHILBERG
Secretary
West Chester, Pennsylvania
March 26, 1997
EACH STOCKHOLDER IS URGED TO COMPLETE, SIGN AND RETURN
THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED, WHICH REQUIRES
NO POSTAGE IF MAILED IN THE UNITED STATES. IF A STOCKHOLDER
DECIDES TO ATTEND THE MEETING, HE OR SHE MAY, IF SO DESIRED,
REVOKE THE PROXY AND VOTE THE SHARES IN PERSON.
<PAGE> 3
CEPHALON, INC.
145 BRANDYWINE PARKWAY
WEST CHESTER, PA 19380
------------------------
PROXY STATEMENT
FOR
1997 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON
MAY 14, 1997
------------------------
This proxy statement is furnished in connection with the solicitation of
proxies by the board of directors of Cephalon, Inc. (the "Company" or
"Cephalon"), for use at the 1997 annual meeting of stockholders to be held at
the Sheraton Great Valley Hotel, 707 Lancaster Avenue, Frazer, Pennsylvania,
19355, on Wednesday, May 14, 1997, at 9:30 a.m., Philadelphia time, and at any
adjournments thereof. This proxy statement and the accompanying proxy card are
expected to be first distributed to stockholders on or about April 7, 1997.
The cost of solicitation of proxies will be borne by the Company. In
addition to the use of the mails, proxies may be solicited by telephone by
officers, directors and a small number of regular employees of the Company who
will not be specially compensated for such services. The Company also has
retained the services of MacKenzie Partners, Inc. as the Company's proxy
solicitation agent for the 1997 annual meeting, at a cost of approximately
$8,000, which will be borne by the Company. The Company also will request banks,
brokers and other custodians, nominees and fiduciaries to solicit proxies from
beneficial owners, where appropriate, and will reimburse such persons for
reasonable expenses incurred in that regard.
The Company's annual report to stockholders for the fiscal year ended
December 31, 1996, including financial statements, is being mailed to
stockholders with this proxy statement but does not constitute a part of this
proxy statement.
<PAGE> 4
VOTING AT THE MEETING
Holders of shares of common stock of the Company, par value $.01 per share
("Common Stock"), of record at the close of business on March 21, 1997 are
entitled to vote at the meeting and at any adjournments thereof. As of that
date, there were 24,774,051 shares of Common Stock outstanding. Each stockholder
entitled to vote shall have the right to one vote for each share outstanding in
such stockholder's name.
The Company presently has no other class of stock outstanding and entitled
to be voted at the meeting. The presence in person or by proxy of stockholders
entitled to cast a majority of all votes entitled to be cast at the meeting
constitutes a quorum. A plurality of the votes cast is required for the election
of directors. The affirmative vote of a majority of the shares represented in
person or by proxy at the meeting and entitled to vote on the subject matter is
required to approve the proposal to amend the Cephalon, Inc. Equity Compensation
Plan (the "Equity Compensation Plan") and to take action with respect to any
other matter that may properly be brought before the meeting.
Shares cannot be voted at the meeting unless the holder of record is
present in person or by proxy. The enclosed proxy card is a means by which a
stockholder may authorize the voting of his or her shares at the meeting. The
shares of Common Stock represented by each properly executed proxy card will be
voted at the meeting in accordance with each stockholder's directions.
Stockholders are urged to specify their choices by marking the appropriate boxes
on the enclosed proxy card; if no choice has been specified, the shares will be
voted as recommended by the board of directors. If any other matters are
properly presented to the meeting for action, the proxy holders will vote the
proxies (which confer discretionary authority to vote on such matters) in
accordance with their judgment.
With regard to the election of directors, votes may be cast in favor of or
withheld from any or all nominees. Votes that are withheld will be excluded
entirely from the vote and will have no effect, other than for purposes of
determining the presence of a quorum. Abstentions may be specified on the
proposal to amend the Equity Compensation Plan (but not for the election of
directors). Abstentions will be considered present and entitled to vote at the
meeting, but will not be counted as votes cast in the affirmative on a given
matter. Abstentions on the proposal to amend the Equity Compensation Plan will
have the effect of a negative vote because the proposal requires the affirmative
vote of a majority of the outstanding shares or a majority of the shares present
in person or represented by proxy at the meeting and entitled to vote.
Brokers who hold shares in street name for customers have the authority
under the rules of the various stock exchanges to vote on certain items when
they have not received instructions from beneficial owners. Where brokers are
prohibited from exercising discretionary authority for beneficial owners who
have not provided voting instructions (commonly referred to as "broker
non-votes"), those shares will not be included in the vote totals. Any broker
non-votes on the proposal to amend the Equity Compensation Plan would have no
effect on the outcome of the proposal, because this proposal requires the
affirmative vote of a majority of the shares present in person or represented by
proxy and entitled to vote, and such broker non-votes will not be considered
shares present and entitled to vote with respect to such matters under
applicable Delaware law.
Execution of the accompanying proxy will not affect a stockholder's right
to attend the meeting and vote in person. Any stockholder giving a proxy has the
right to revoke it by giving written or oral notice of revocation to the
Secretary of the Company, or by delivering a subsequently executed proxy card,
at any time before the proxy is voted.
Your vote is important. Accordingly, you are asked to complete, sign and
return the accompanying proxy card whether or not you plan to attend the
meeting. If you plan to attend the meeting to vote in person and your shares are
registered with the Company's transfer agent in the name of a broker or bank,
you must secure a proxy card from the broker or bank assigning voting rights to
you for your shares.
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PROPOSAL 1 -- ELECTION OF DIRECTORS
NOMINEES FOR ELECTION AS DIRECTORS
Seven directors are to be elected at the 1997 annual meeting. The term of
each director expires at the next annual meeting of stockholders and each person
shall hold office until the election and qualification of his respective
successor or until his earlier death, removal or resignation. The board of
directors consists of such number of directors as is fixed from time to time by
resolution adopted by the board of directors. The board of directors currently
is authorized to have seven members.
The nominees for election as directors of the Company are Drs. Baldino,
Feeney and Witzel and Messrs. Egan, Greenacre, Moley and Peacock. All nominees
are presently directors of the Company whose terms expire at the time of the
1997 annual meeting of stockholders. All nominees have consented to be named and
to serve if elected.
The seven directors are to be elected by a plurality of the votes cast.
Unless otherwise instructed by the stockholders, the persons named in the
proxies will vote the shares represented thereby for the election of all such
nominees. The board of directors believes all nominees will be able to serve as
directors; if this should not be the case, however, the proxies may be voted for
a substitute nominee to be designated by the board of directors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THE
NOMINEES.
----------------------------------
NOMINEES FOR ELECTION
----------------------------------
<TABLE>
<CAPTION>
YEAR FIRST
PRINCIPAL OCCUPATIONS DURING PAST FIVE BECAME
NAME OF DIRECTOR AGE YEARS AND CERTAIN DIRECTORSHIPS DIRECTOR
- ------------------------ --- ----------------------------------------------------- ----------
<S> <C> <C> <C>
Frank Baldino, Jr., 1987
Ph.D. ................ 43 Dr. Baldino, founder of the Company, has served as
President, Chief Executive Officer and director since
the Company's inception. Dr. Baldino holds several
adjunct academic appointments including Adjunct
Professor of Pharmacology at Temple University
Medical School, Adjunct Professor of Physiology and
Biophysics and Adjunct Professor of Neurology at
Hahnemann University. He currently serves as a
director of Viro Pharma, Inc., a biopharmaceutical
company, Integrated Systems Consulting Group, which
provides consulting services for information
processing, and Pharmacopeia, Inc., a developer of
proprietary technology platforms for pharmaceutical
companies.
William P. Egan......... 52 Since 1979, Mr. Egan has served as President of Burr, 1988
Egan, Deleage & Co., a venture capital company. Mr.
Egan is also a general partner of ALTA Communications
VI, L.P., a venture capital firm founded in 1996. He
currently serves as a director of Broderbund
Software, Inc.
Robert J. Feeney, 1988
Ph.D.................. 71 Since October 1987, Dr. Feeney has served as a
general partner of Hambrecht & Quist Life Science
Technology Fund, a life sciences venture capital fund
affiliated with Hambrecht & Quist Incorporated. For
37 years prior thereto, Dr. Feeney was employed at
Pfizer Inc. and last served as its Vice President of
Licensing and Development. Dr. Feeney currently
serves as a director of QLT PhotoTherapeutics Inc., a
Canadian biotechnology company,
</TABLE>
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<TABLE>
<CAPTION>
YEAR FIRST
PRINCIPAL OCCUPATIONS DURING PAST FIVE BECAME
NAME OF DIRECTOR AGE YEARS AND CERTAIN DIRECTORSHIPS DIRECTOR
- ------------------------ --- ----------------------------------------------------- ----------
<S> <C> <C> <C>
Martyn D. Greenacre..... 55 From 1993 to 1996, Mr. Greenacre served as President 1992
and Chief Executive Officer and as a director of
Zynaxis Inc., a biopharmaceutical company. From 1989
to 1992, Mr. Greenacre was Chairman Europe,
SmithKline Beecham Pharmaceuticals. He joined
SmithKline & French in 1973 where he held
increasingly responsible positions in commercial
operations and management. Mr. Greenacre currently
serves as a director of IBAH, Inc., which provides
clinical research and other development services to
pharmaceutical companies, Creative Biomolecules,
Inc., a biotechnology company, and Genset s.a., a
human genome sciences company.
Kevin E. Moley.......... 50 Since January 1996, Mr. Moley has been President and 1994
CEO of Integrated Medical Systems, Inc., where he has
served as a director since 1994. From February 1993
to December 1995, Mr. Moley was Senior Vice President
of PCS Health Systems, a provider of prescription
management services. From 1984 to 1993, he held
positions of increasing responsibility with the U.S.
Department of Health and Human Services. From 1975 to
1983, he held marketing, sales, and service positions
with New England Life.
Bruce A. Peacock........ 45 Mr. Peacock joined Cephalon in February 1992 and has 1994
served as Executive Vice President and Chief
Operating Officer since February 1994. Prior to
February 1994, Mr. Peacock served as Executive Vice
President, Treasurer and Chief Financial Officer of
the Company. From 1982 to January 1992, Mr. Peacock
was employed by Centocor, Inc., a biopharmaceutical
company, most recently as Senior Vice President,
Chief Financial Officer and Treasurer.
Horst Witzel, 1991
Dr.-Ing............... 69 From 1986 until his retirement in 1989, Dr. Witzel
served as the Chairman of the Board of Executive
Directors of Schering AG and, prior to 1986, was a
member of the Board of Executive Directors in charge
of Production and Technology. Dr. Witzel currently
serves as a director of The Liposome Company, Inc.
and Aastrom Biosciences, Inc., each a biotechnology
company.
</TABLE>
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
The board of directors of the Company met on five occasions in the fiscal
year ended December 31, 1996. The Bylaws of the Company provide that the board
of directors, by resolution adopted by a majority of the entire board of
directors, may designate committees, each of which shall consist of one or more
directors. The board of directors annually elects from its members the Audit
Committee and the Stock Option and Compensation Committee (the "Compensation
Committee"). Each director attended at least 75% of the aggregate of the
meetings of the board of directors held during 1996 and the committee or
committees on which he served during such period.
Audit Committee. The Audit Committee is presently composed of three
non-employee directors, Messrs. Egan, Greenacre and Moley. This committee meets
with the Company's independent public
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<PAGE> 7
accountants to review the scope and results of auditing procedures and the
Company's accounting procedures and controls. The Audit Committee also provides
general oversight with respect to the accounting principles employed in the
Company's financial reporting. The Audit Committee met once during fiscal 1996.
Stock Option and Compensation Committee. The Compensation Committee is
presently composed of two non-employee directors, Dr. Witzel and Dr. Feeney. The
Compensation Committee annually reviews the performance and total compensation
package for the Company's executive officers, including the President and Chief
Executive Officer; considers the modification of existing compensation and
employee benefit programs and the adoption of new plans; administers the terms
and provisions of the Equity Compensation Plan and the Cephalon, Inc. 401(k)
Profit Sharing Plan; and reviews the compensation and benefits of non-employee
directors. The administration of such plans includes the determination, subject
to the respective plan provisions, of the individuals eligible to receive
awards, the individuals to whom awards are granted, the nature of the awards to
be granted, the number of awards to be granted, and the exercise price, vesting
schedule, term and all other conditions and terms of the awards to be granted.
The Compensation Committee met four times during 1996.
PROPOSAL 2 -- APPROVAL OF AMENDMENT TO THE EQUITY COMPENSATION PLAN
At the meeting, there will be presented to the stockholders a proposal to
amend the Equity Compensation Plan of the Company. The Equity Compensation Plan
was adopted in 1995 and will expire by its terms in 2005.
On February 27, 1997, the board of directors adopted, subject to
stockholder approval, an amendment to the Equity Compensation Plan which would
increase the number of shares of Common Stock subject to the annual grants
awarded under the plan from 2,000,000 to 3,500,000 shares, an increase of
1,500,000.
MATERIAL FEATURES OF THE EQUITY COMPENSATION PLAN
General. The Equity Compensation Plan provides for the grant of incentive
stock options or non-qualified stock options (collectively "Stock Options") and
restricted stock awards ("Restricted Stock Grants"). The Equity Compensation
Plan currently authorizes up to 2,000,000 shares of Common Stock for issuance
pursuant to the terms of the Plan, subject to adjustment in certain
circumstances as discussed below. The stockholders are being asked to consider
and approve an amendment which would, commencing on the date of the 1997 annual
meeting, increase the number of shares of Common Stock available for options and
restricted stock grants by an additional 1,500,000 shares, for a total of
3,500,000 shares. If and to the extent options granted under the Equity
Compensation Plan terminate, expire or are cancelled without being exercised, or
if any shares of restricted stock are forfeited, the shares subject to such
option or award will become available again for purposes of the Equity
Compensation Plan. No Grantee may receive grants of Stock Options for more than
fifty percent (50%) of the aggregate number of shares of Common Stock issued or
available for issuance under the Equity Compensation Plan.
Administration of the Equity Compensation Plan. The Equity Compensation
Plan is administered and interpreted by the Compensation Committee, which
consists of not less than two persons appointed by the board of directors from
among its members, each of whom must be a "disinterested person" as defined by
Rule 16b-3 under the Securities Exchange Act of 1934, as amended. The
Compensation Committee has the sole authority to determine (i) the persons to
whom Stock Options and/or Restricted Stock Grants (collectively, "Grants") may
be granted under the Equity Compensation Plan, (ii) the type, size and other
terms and conditions of each Grant, including the circumstances under which
Stock Options will vest and the restriction period for Restricted Stock Grants
will lapse, (iii) the time when the Grants are to be made and the duration of
the exercise period for Stock Options or the restriction period for Restricted
Stock Grants and (iv) any other matters arising under the Equity Compensation
Plan.
Grants. All Grants are subject to the terms and conditions set forth in
the Equity Compensation Plan and to those other terms and conditions consistent
with the Equity Compensation Plan as the Compensation Committee deems
appropriate and as are specified in writing by the Compensation Committee to the
designated individual (the "Grant Letter"). The Compensation Committee must
approve the form and
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<PAGE> 8
provisions of each Grant Letter. Grants under the Equity Compensation Plan need
not be uniform as among other recipients of the same type of Grant.
Eligibility for Participation. The Compensation Committee is responsible
for designating employees of the Company and its subsidiaries and independent
contractors and consultants of the Company, who are eligible for Grants under
the Equity Compensation Plan. As of March 21, 1997, approximately 330 employees
were eligible for Grants under the Equity Compensation Plan; it is not possible
to specify in advance the number of independent contractors and consultants who
may be eligible for Grants. The Compensation Committee is authorized, in its
discretion, to select the persons to receive Grants (the "Grantees") from among
those eligible and to determine the number of shares of Common Stock that are
subject to each Grant.
Formula Grants to Non-employee Directors. Non-employee directors of the
Company will automatically receive, without the exercise of discretion by the
Compensation Committee, annual Grants of NQSOs (as defined below). Under the
Equity Compensation Plan, each new non-employee director will automatically
receive a Grant of an NQSO to purchase 15,000 shares of Common Stock immediately
upon his or her becoming a member of the board of directors. In addition, each
non-employee director will automatically receive, upon his or her re-election to
the board of directors, a Grant of an NQSO to purchase 10,000 shares of Common
Stock on each date that the Company holds its annual meeting. Currently, five
non-employee directors are entitled to receive such Stock Options. A
non-employee director will not be eligible to receive, under the Equity
Compensation Plan, Stock Options to purchase in excess of 50,000 shares of
Common Stock (subject to certain adjustments). Stock Options granted to
non-employee directors 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 such options
shall become exercisable with respect to 25% of the shares of Common Stock
underlying such options on each anniversary following the date of grant.
Stock Options. The Compensation Committee may grant Stock Options intended
to qualify as incentive stock options ("ISOs") within the meaning of section 422
of the Code or so-called "non-qualified stock options" that are not intended to
so qualify ("NQSOs") or any combination of ISOs or NQSOs. Non-employee directors
only receive NQSOs.
The Compensation Committee fixes the option price per share on the date of
Grant. The option price of any ISO granted under the Equity Compensation Plan
may not be less than the fair market value of the underlying shares of Common
Stock on the date of grant. The current measure of fair market value on a
particular date is the closing sale price of a share of Common Stock as reported
on the Nasdaq National Market on that date. However, if the Grantee of an ISO is
a person who holds more than 10% of the combined voting power of all classes of
outstanding stock of the Company, the option price per share of an ISO must be
at least 110% of the fair market value of a share of Common Stock on the date of
grant. To the extent that the aggregate fair market value of shares of Common
Stock, determined on the date of grant, with respect to which ISOs become
exercisable for the first time by a Grantee during any calendar year exceeds
$100,000, such ISOs must be treated as NQSOs.
The option price per share of an NQSO may be greater than or less than the
fair market value of the underlying shares of Common Stock on the date of grant.
The Compensation Committee determines the term of each Stock Option;
provided, however, that the exercise period may not exceed ten years from the
date of grant and, if the Grantee of an ISO is a person who holds more than 10%
of the combined voting power of all classes of outstanding stock of the Company,
the term may not exceed five years from the date of grant. The vesting period
for Stock Options commences on the date of grant and ends on such date as is
determined by the Compensation Committee, in its sole discretion, which is
specified in the Grant Letter. A Grantee may exercise a Stock Option by
delivering notice of exercise to the Compensation Committee with accompanying
payment of the option price. The Grantee may pay the option price in cash, by
delivering shares of Common 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 shares of Common Stock. The Grantee must pay, at the
time of exercise, the option price and the amount of any federal, state or local
withholding tax due in connection with such Stock Option exercise. Shares of
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<PAGE> 9
Common Stock are not to be issued or transferred upon exercise of the Stock
Option until the option price and the withholding obligation are fully paid.
Restricted Stock Grants. The Compensation Committee may issue shares of
Common Stock under a Restricted Stock Grant for such cash consideration, if any,
as is determined by the Compensation Committee. The number of shares of Common
Stock granted to each Grantee is determined by the Compensation Committee. The
Grant Letter may provide for a period during which the Grant will remain subject
to certain restrictions, including restrictions on transferability (the
"Restriction Period"). During the Restriction Period, a Grantee may not sell,
assign, transfer, pledge or otherwise dispose of the shares of Common Stock to
which such Restriction Period applies, except to a successor grantee in the
event of the Grantee's death. If a Grantee's employment terminates or if a
Grantee who is an independent contractor or consultant ceases to perform
services for the Company during the Restriction Period, the Restricted Stock
Grant terminates with respect to all shares of Common Stock covered by the Grant
as to which the restrictions have not lapsed, and those shares of Common Stock
shall be forfeited by the Grantee and, if issued, immediately returned to the
Company. All restrictions imposed under the Restricted Stock Grant lapse upon
the expiration of the applicable Restriction Period. In addition, the
Compensation Committee may determine as to any or all Restricted Grants that all
restrictions will lapse under such other circumstances as it deems appropriate.
A Grantee does not have the right to vote, or receive dividends in respect of,
any shares of Common Stock until the applicable Restriction Period has expired.
To ensure enforcement of the restrictions during the Restriction Period, the
Company issues the shares only when the corresponding Restriction Period has
lapsed.
Amendment and Termination of the Equity Compensation Plan. The board of
directors may amend or terminate the Equity Compensation Plan at any time;
provided, however, that any amendment that materially increases the benefits
accruing to Grantees under the Equity Compensation Plan, or increases the
aggregate number (or individual limit for any Grantee) of shares of Common Stock
that may be issued under the Equity Compensation Plan, or materially modifies
the requirements as to eligibility for participation will be subject to approval
by the stockholders of the Company. The Equity Compensation Plan will terminate
on February 1, 2005 unless terminated earlier by the board of directors or
extended by the board of directors with approval of the stockholders.
Amendment and Termination of Outstanding Grants. A termination or
amendment of the Equity Compensation Plan that occurs after a Grant is made will
not result in the termination or amendment of the Grant unless the Grantee
consents; provided, however, that the Compensation Committee may revoke any
Grant the terms of which are contrary to applicable law, or modify any Grant to
bring it into compliance with any then applicable government regulation. The
termination of the Equity Compensation Plan will not impair the power and
authority of the Compensation Committee with respect to outstanding Grants.
Adjustment Provisions. If there is any change in the number or kind of
shares of Common Stock through the declaration of stock dividends, or through a
recapitalization, stock split, or combination or exchange of such shares, or
merger, recapitalization or consolidation of the Company, reclassification or
change in the par value or by reason of any other extraordinary or unusual
event, the number of shares of Common 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, will be proportionately adjusted by the
Compensation Committee to reflect any increase or decrease in the number or kind
of issued shares of Common Stock.
Corporate Transactions/Change in Control of the Company. In the event of a
"Corporate Transaction", all outstanding Stock Options will automatically
accelerate and become immediately exercisable and all restrictions with respect
to Restricted Stock Grants will lapse unless, and only to the extent that, such
Grants are assumed or replaced by the successor corporation (or parent thereof)
with options or awards meeting certain requirements as specified in the Equity
Compensation Plan.
The Equity Compensation Plan defines "Corporate Transaction" to mean the
occurrence of either of the following stockholder-approved transactions to which
the Company is a party: (i) a merger or consolidation in which more than 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,
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<PAGE> 10
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.
If an employee ceases employment by reason of an "Involuntary Termination"
within 36 months after a Corporate Transaction in which his or her outstanding
Stock Options were assumed or replaced or Restricted Stock Grants were replaced,
such stock options (or replacement thereof) will automatically accelerate and
become exercisable and all restrictions applicable to such restricted stock
grants (or replacement thereof) shall lapse.
In the event an employee ceases employment by reason of an "Involuntary
Termination" within 36 months after a "Change in Control," each Stock Option (or
replacements thereof) will automatically accelerate and become fully exercisable
and all restrictions applicable to Restricted Stock Grants (or replacements
thereof) will lapse. "Change in Control" is generally defined in the Equity
Compensation Plan as a change in ownership or control of the Company through (i)
the acquisition of more than 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 of directors does not recommend such
stockholders accept; or (ii) a change in the composition of the board of
directors over a 24 month or shorter period such that a majority of the board of
directors members cease to continue as members subject to certain conditions
described in the Equity Compensation Plan.
The Equity Compensation Plan defines "Involuntary Termination" to 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 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, 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 10% in the aggregate or (c) a relocation of such individual's place of
employment by more than 50 miles, only if such change, reduction or relocation
is effected by the Company or the successor thereto without the individual's
consent.
With respect to non-employee directors, upon the occurrence of a Corporate
Transaction or upon Involuntary Termination of a non-employee director within 36
months following a Change in Control, each Stock Option of such non-employee
director will automatically accelerate and become fully exercisable and will
remain exercisable until the expiration of the option term or earlier surrender
of such Stock Option.
Option and Restricted Stock Grant Information. As of March 1, 1997, an
aggregate of 233,150 shares of Common Stock had been awarded subject to
Restricted Stock Grants under the Equity Compensation Plan, and options to
purchase an aggregate of 1,228,510 shares of Common Stock (net of cancellations)
had been granted as of such date under the Equity Compensation Plan, of which
1,225,510 were outstanding. In February 1995, the Compensation Committee
cancelled contingent options to purchase 453,750 shares, which were granted in
December 1994 to executive officers under the Company's 1987 Stock Option Plan,
and granted the same number under the Equity Compensation Plan. The replacement
options were granted at an exercise price of $8.25 per share, the closing price
of a share of Common Stock as reported in the Nasdaq National Market on the date
of the December 1994 grant (the closing price of a share of Common Stock as
reported in the Nasdaq National Market on the date of the February 1995 grant
was $7.75); these options have a ten-year term, commencing December 1994, and
are exercisable in cumulative 25% annual installments beginning in December
1995, with full vesting occurring by December 1998. See "Compensation of
Executive Officers and Directors."
Federal Income Tax Consequences. The federal income tax consequences of
Grants under the Equity Compensation Plan are discussed below. See "Federal
Income Tax Consequences of Grants under the Equity Compensation Plan."
8
<PAGE> 11
VOTE REQUIRED FOR APPROVAL
The proposal to amend the Equity Compensation Plan requires for its
approval the affirmative vote of a majority of the shares present in person or
represented by proxy at the meeting and entitled to vote. Any abstentions will
have the effect of votes against the proposal. Any broker non-votes will not
have any effect on the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF
PROPOSAL 2.
FEDERAL INCOME TAX CONSEQUENCES OF GRANTS
UNDER THE EQUITY COMPENSATION PLAN
There are no federal income tax consequences to grantees or to the Company
upon the grant of an NQSO. Upon the exercise of NQSOs, grantees will recognize
ordinary compensation income in an amount equal to the excess of the fair market
value of the shares of Common Stock at the time of exercise over the exercise
price of the NQSO, and the Company generally will be entitled to a corresponding
federal income tax deduction. Upon the sale of shares of Common Stock acquired
by exercise of an NQSO, a grantee will have a capital gain or loss (long-term or
short-term depending upon the length of time the shares of Common Stock were
held) in an amount equal to the difference between the amount realized upon the
sale and the grantee's adjusted tax basis in the shares of Common Stock (the
exercise price plus the amount of ordinary income recognized by the grantee at
the time of exercise of the NQSO).
A grantee of an ISO will not recognize taxable income for purposes of the
regular income tax, upon either the grant or exercise of the ISO. However, for
purposes of the alternative minimum tax imposed under the Internal Revenue Code,
in the year in which an ISO is exercised, the amount by which the fair market
value of the shares of Common Stock acquired upon exercise exceeds the stock
option price will be treated as an item of adjustment and included in the
computation of the recipient's alternative minimum taxable income in the year of
exercise. A grantee who disposes of the shares of Common Stock acquired upon
exercise of an ISO after two years from the date the ISO was granted and after
one year from the date such shares were transferred to him will recognize
long-term capital gain or loss in the amount of the difference between the
amount realized on the sale and the option price (or the grantee's other tax
basis in the shares), and the Company will not be entitled to any tax deduction
by reason of the grant or exercise of the ISO. As a general rule, if a grantee
disposes of the shares of Common Stock acquired upon exercise of an ISO before
satisfying both holding period requirements (a "disqualifying disposition"), his
or her gain recognized on such a disposition will be taxed as ordinary income to
the extent of the difference between the fair market value of such shares on the
date of exercise and the option price, and the Company will be entitled to a
deduction in that amount. The gain, if any, in excess of the amount recognized
as ordinary income on such a disqualifying disposition will be long-term or
short-term capital gain, depending upon the length of time the grantee held his
or her shares of Common Stock prior to the disposition.
A grantee normally will not recognize taxable income upon the award of a
Restricted Stock Grant, and the Company will not be entitled to a deduction,
until such Common Stock is transferable by the grantee or no longer subject to a
substantial risk of forfeiture for federal tax purposes, whichever occurs
earlier. When the Common Stock is either transferable or is no longer subject to
a substantial risk of forfeiture, the grantee will recognize ordinary
compensation income in an amount equal to the fair market value of the Common
Stock (less any amounts paid for such shares) at that time and the Company will
be entitled to a deduction in the same amount. A grantee may, however, elect to
recognize ordinary compensation income in the year the Restricted Stock Grant is
awarded in an amount equal to the fair market value of the Common Stock (less
any amounts paid for such shares) at that time, determined without regard to the
restrictions. In such event, the Company will be entitled to a deduction in the
same year, provided the Company complies with the applicable withholding
requirements for federal tax purposes. Any gain or loss recognized by the
grantee upon subsequent disposition of the Common Stock will be capital gain or
loss. If, after making the election, any Common Stock subject to a Restricted
Stock Grant is forfeited, or if the market value declines during the Restriction
Period, the grantee is not entitled to any tax deduction or tax refund.
9
<PAGE> 12
Tax Withholding. The Company has the right to require the grantee to pay
the Company the amount of any taxes which the Company is required to withhold in
respect of any grant or to take whatever action the Company deems necessary to
satisfy any federal, state and local income and employment withholding tax
obligations arising under the Equity Compensation Plan. The Company's obligation
to issue shares of Common Stock upon the exercise of an option or the acceptance
of a Restricted Stock Grant is conditioned upon the Grantee's compliance with
such withholding requirements to the satisfaction of the Compensation Committee.
Section 162(m). Under Section 162(m) of the Code, the Company may be
precluded from claiming a federal income tax deduction for total remuneration in
excess of $1,000,000 paid to the chief executive officer or to any of the other
four most highly compensated officers in any one year. Total remuneration would
include amounts received upon the exercise of options granted under the Equity
Compensation Plan and the value of shares of Common Stock received when the
shares of Restricted Stock became transferable (or such other time when income
is recognized). An exception does exist, however, for "performance-based
compensation," including amounts received upon the exercise of stock options
pursuant to a plan approved by stockholders that meets certain requirements. In
accordance with current regulations, options granted under the Equity
Compensation Plan qualify as "performance-based compensation," but Restricted
Stock Grants do not now qualify as "performance-based compensation."
10
<PAGE> 13
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table summarizes the compensation for the periods ended
December 31, 1996, 1995 and 1994 of those persons who were, at any time during
the last completed fiscal year, the Company's Chief Executive Officer and who
were, at December 31, 1996, the other five executive officers who earned the
highest compensation during the last completed fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------------
ANNUAL COMPENSATION AWARDS
-------------------------------------- -------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPEN- STOCK OPTIONS COMPEN-
NAME YEAR SALARY($) BONUS($) SATION($)(1) AWARDS($)(2) GRANTED(#) SATION($)(3)
- ----------------------------- ---- --------- -------- ------------ ------------ ---------- ------------
- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Frank Baldino Jr., Ph.D. .... 1996 $350,000 $198,000 $ 25,011 $ 443,750 50,000 $9,000
President and Chief 1995 $300,000 $180,000 $ 21,345 $2,480,000 0 $9,000
Executive Officer 1994 $268,000 $160,000 $ 725 $ 0 200,000(4) $9,000
------------------------------------------------------------------------------------
Joseph J. Day, Jr.(5)........ 1996 $180,000 $35,000 $ 31,426(5) $ 71,000 4,000 $9,000
Senior Vice President, 1995 $170,000 $41,000 $ 18,960(5) $ 0 10,000 $9,000
Business Development 1994 $ 41,610 $45,000 (5) $ 920(5) $ 0 33,750 $ 0
------------------------------------------------------------------------------------
Peter E. Grebow, Ph.D........ 1996 $190,000 $55,000 $ 9,901 $ 106,500 6,000 $9,000
Senior Vice President, 1995 $175,000 $42,000 $ 1,244 $ 0 10,500 $9,000
Drug Development 1994 $155,800 $37,000 $ 0 $ 0 25,000(4) $9,000
------------------------------------------------------------------------------------
Bruce A. Peacock............. 1996 $285,000 $107,000 $ 16,795 $ 213,000 12,000 $9,000
Executive Vice President 1995 $247,000 $87,000 $ 11,403 $1,860,000 0 $9,000
and Chief Operating Officer 1994 $220,000 $77,000 $ 298 $ 0 175,000(4,6) $9,000
------------------------------------------------------------------------------------
Barbara S. Schilberg(7)...... 1996 $210,000 $63,000 $ 10,328 $ 97,625 5,000 $9,000
Senior Vice President 1995 $195,000 $47,000 $ 28 $ 0 10,000 $9,000
and General Counsel 1994 $ 90,651 $51,000 $ 0 $ 0 65,000 $ 0
------------------------------------------------------------------------------------
Jeffry L. Vaught, Ph.D....... 1996 $190,000 $55,000 $ 10,214 $ 106,500 6,000 $9,000
Senior Vice President, 1995 $175,000 $42,000 $ 51,468(8) $ 0 10,000 $9,000
Research 1994 $150,200 $42,000 $ 203 $ 0 25,000(4) $9,000
</TABLE>
- ---------------
(1) The amounts shown for certain officers include:
(a) Automobile allowances in 1996, as follows: Dr. Baldino $14,269; Mr.
Peacock $8,319; Mr. Day $8,500; Dr. Grebow $8,500; Ms. Schilberg $8,500;
and Dr. Vaught $8,500.
(b) Financial estate planning advice in 1996, as follows: Dr. Baldino
$4,452; Mr. Peacock $4,452; Mr. Day $3,007; and Dr. Grebow $360.
(c) Supplemental long-term disability insurance in 1996, as follows: Dr.
Baldino $4,813; Mr. Day $1,154; Dr. Grebow $1,041; Mr. Peacock $3,218;
and Dr. Vaught $992.
(d) Deferred compensation accounts above the 120% applicable federal rate
are as follows: Dr. Baldino $1,477; Mr. Peacock $806; Mr. Day $1,274;
Ms. Schilberg $1,828; and Dr. Vaught $722.
(2) Dollar amount shown equals number of shares subject to each restricted stock
award, multiplied by the per share stock price on the award date. This
amount does not take into account the diminution in value attributable to
the restrictions applicable to the shares. The restricted stock awards
reported in this table were made on December 13, 1995 and December 17, 1996,
and the restrictions on such shares will lapse over four years, at the rate
of 25% per year, on each anniversary of the award. The number and dollar
value of the shares subject to the restricted stock awards held on December
31, 1996, based on a closing price of the Common Stock on December 31, 1996
of $20.50, was: Dr. Baldino 85,000 ($1,742,500); Mr. Peacock 57,000
($1,168,500); Mr. Day 4,000 ($82,000); Dr. Grebow 6,000 ($123,000); Ms.
Schilberg 5,500 ($112,750) and Dr. Vaught 6,000 ($123,000). The number and
dollar value of such shares on March 21, 1997, based on a closing price of
the Common Stock on that date of $23,375, was: Dr. Baldino 85,000
($1,986,875); Mr. Peacock 57,000 ($1,332,375); Mr. Day 4,000 ($93,500); Dr.
Grebow 6,000 ($140,250); Ms. Schilberg 5,500 ($128,563); and Dr. Vaught
6,000 ($140,250). No dividends will be paid on such shares until the
applicable restrictions have lapsed. After the lapse of the applicable
restrictions on the shares underlying these awards, dividends would be paid
at the same rate as on other shares of Common Stock. However, the Company
has never declared or paid cash dividends on the Common Stock and does not
anticipate paying any cash dividends in the foreseeable future.
(3) The amounts shown represent Company matching contributions during calendar
years 1994, 1995, and 1996 under the Cephalon, Inc. 401(k) Profit Sharing
Plan covering all of the Company's eligible employees.
(4) Consists of options (150,000 for Mr. Peacock) granted in December 1994,
which were subsequently cancelled and replaced with options granted under
the Equity Compensation Plan in February 1995. The replacement options were
granted at an exercise price of $8.25 per share, the closing price of a
share of Common Stock as reported in the Nasdaq National Market on the date
of the December 1994 grant (the closing price of a share of Common Stock as
reported in the Nasdaq National Market on the date of the February 1995
grant was $7.75 per share). The options have a ten-year term, commencing
December 1994, and are exercisable in cumulative 25% annual installments
beginning in December 1995, with full vesting occurring by December 1998.
The options are subject to acceleration in the case of a Change in Control
or a Corporate Transaction, as defined under the Equity Compensation Plan.
11
<PAGE> 14
(5) Mr. Day commenced employment with the Company in October, 1994. In 1994, Mr.
Day received a sign-on bonus of $35,000 and an annual bonus of $10,000. Mr.
Day received living and relocation expenses of $17,491 in 1996, $18,474 in
1995 and $920 in 1994.
(6) 25,000 of the indicated options were granted under the Option Plan and have
a ten-year term, are exercisable in cumulative 25% annual installments
beginning one year after the date of the grant, with full vesting occurring
on the fourth anniversary of the date of the grant. If a Change in Control
or a Corporate Transaction (as defined in the Option Plan) were to occur,
these options may become immediately exercisable.
(7) Ms. Schilberg commenced employment with the Company in June 1994. In 1994,
Ms. Schilberg received a sign-on bonus of $25,000 and an annual bonus of
$26,000.
(8) Includes $50,966 for relocation expenses reimbursed to Dr. Vaught during
1995.
The following table summarizes stock options granted during the fiscal year
ended December 31, 1996 to the persons named in the Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTION EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED(#)(1) FISCAL 1996 ($/SH) DATE 5%($) 10%($)
- -------------------------------------- ------------- ------------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Frank Baldino, Jr., Ph.D.............. 50,000 9.8% $17.75 Dec. 2006 $ 558,000 $ 1,414,500
- --------------------------------------------------------------------------
Joseph J. Day, Jr..................... 4,000 0.8% $17.75 Dec. 2006 $ 44,640 $ 113,160
- --------------------------------------------------------------------------
Peter E. Grebow, Ph.D................. 6,000 1.2% $17.75 Dec. 2006 $ 66,960 $ 169,740
- --------------------------------------------------------------------------
Bruce A. Peacock...................... 12,000 2.3% $17.75 Dec. 2006 $ 133,920 $ 339,480
- --------------------------------------------------------------------------
Barbara S. Schilberg.................. 5,000 1.0% $17.75 Dec. 2006 $ 55,800 $ 141,450
- --------------------------------------------------------------------------
Jeffry L. Vaught, Ph.D................ 6,000 1.2% $17.75 Dec. 2006 $ 66,960 $ 169,740
</TABLE>
- ---------------
(1) Consists of options granted in December 1996. These options have a ten-year
term, commencing December 1996, are exercisable in cumulative 25% annual
installments beginning in December 1997, with full vesting occurring by
December 2000. The options are subject to acceleration in the case of a
Change in Control or a Corporate Transaction, as defined under the Equity
Compensation Plan.
(2) Potential Realizable Values assume that the price of the Common Stock is
equal to the exercise price shown for each particular option on the date of
grant and appreciates at the annual rate shown (compounded annually) from
the date of grant until the end of the ten-year term of the option. These
amounts are reported net of the option exercise price, but before any taxes
associated with exercise or subsequent sale of the underlying stock. The
actual value, if any, an optionholder may realize will depend on the extent,
if any, to which the stock price exceeds the exercise price on the date the
option is exercised and also will depend on the optionholder's continued
employment by the Company throughout the vesting period. The actual value to
be realized by the optionholder may be greater or less than the values
estimated in this table.
12
<PAGE> 15
The following table summarizes option exercises during the fiscal year
ended December 31, 1996 and the value of vested and unvested options for the
persons named in the Summary Compensation Table at December 31, 1996. Year-end
values are based upon the closing market price of $20.50 per share of the
Company's Common Stock on December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED VALUE DECEMBER 31, 1996(#) AT DECEMBER 31, 1996(2)
ON REALIZED ---------------------------- ----------------------------
NAME EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------ ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frank Baldino, Jr., Ph.D. .......... 0 $0 234,000 166,000 $1,964,500 $ 1,430,500
- ----------------------------------------------------------------------------
Joseph J. Day, Jr. ................. 0 $0 19,376 28,374 $ 150,481 $ 243,457
- ----------------------------------------------------------------------------
Peter E. Grebow, Ph.D. ............. 0 $0 66,375 30,125 $ 649,938 $ 185,563
- ----------------------------------------------------------------------------
Bruce A. Peacock.................... 0 $0 229,000 105,000 $1,629,500 $ 1,022,000
- ----------------------------------------------------------------------------
Barbara S. Schilberg................ 0 $0 35,000 45,000 $ 303,125 $ 316,875
- ----------------------------------------------------------------------------
Jeffry L. Vaught, Ph.D. ............ 0 $0 69,750 30,250 $ 570,063 $ 186,938
</TABLE>
- ---------------
(1) Market value of underlying securities at exercise date, minus the exercise
price of all options.
(2) For "in-the-money" options, these amounts are the market value of underlying
securities at December 31, 1996, minus the exercise price.
The Company does not currently grant any long-term incentives other than
stock options and restricted stock to its executive officers or other employees.
The Company does not sponsor any defined benefit or actuarial plans at this
time.
COMPENSATION OF DIRECTORS
Employees of the Company who also are directors of the Company receive no
additional remuneration for their service as a director.
Non-employee directors receive a fee of $3,000 for each meeting of the
board of directors attended as well as reimbursement of their expenses incurred
to attend such meetings. In addition to the meeting fee, non-employee directors
receive an annual retainer of $12,000. Non-employee directors who are members of
a committee of the board of directors receive a $3,000 annual retainer for each
such committee membership. Under the Equity Compensation Plan, new non-employee
directors will receive on the effective date they first become a member of the
board of directors, a grant of an option to purchase 15,000 shares of the
Company's Common Stock. In addition, under the current terms of the Equity
Compensation Plan, each non-employee director will receive a grant of an option
to purchase 10,000 shares of the Company's Common Stock on the date of each
annual meeting of stockholders at which he or she is re-elected. The Equity
Compensation Plan provides that non-employee directors are not eligible to
receive in the aggregate options to purchase in excess of 50,000 shares under
such plan. All these options vest over a four-year period with an exercise price
equal to the closing market price of the Company's Common Stock on the date of
grant. With respect to non-employee directors, upon the occurrence of a
Corporate Transaction (as defined in the Equity Compensation Plan) or upon
Involuntary Termination (as defined in the Equity Compensation Plan) of a
non-employee director within 36 months following a Change in Control (as defined
in the Equity Compensation Plan), each option of such non-employee director will
automatically accelerate and become fully exercisable and will remain
exercisable until the expiration of the option term or earlier surrender of such
option. In 1996, each of the non-employee directors received an annual grant of
options, under the Equity Compensation Plan, to purchase 10,000 shares of Common
Stock at an exercise price of $30.50 per share.
13
<PAGE> 16
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee annually reviews the performance and total
compensation package for all executive officers, considers the modification of
existing compensation and employee benefit programs and the adoption of new
plans, administers the Company's 1987 Stock Option Plan and the Equity
Compensation Plan and reviews the compensation and benefits of non-employee
directors.
COMPENSATION PHILOSOPHY
The Compensation Committee believes that a well designed compensation
program should align the goals of the stockholder with the goals of the
executive and that a significant part of an executive's compensation, over the
long term, should be dependent upon the value created for the stockholder.
However, the Compensation Committee recognizes that, in the short-term, the
market price of the Company's stock will be affected by many factors, some of
which may be transient in nature and beyond the control of the Company's
executives. This is especially true in the biotechnology industry, which is
characterized by a large number of small companies, long product lead times,
highly volatile stock prices and, currently, few commercial products. In such an
environment, external events, such as negative financial and clinical reports
from other members of the biotechnology industry, can have a marked adverse
effect on the stock prices of companies within the industry, including Cephalon.
In order to attract and retain qualified executives in such an environment, the
Compensation Committee attempts to create a balanced compensation package by
combining components based upon the achievement of long-term value to
stockholders with components based upon the execution of shorter-term strategic
goals. These goals include progress in research and drug development programs,
success in financings, corporate collaborations, and the development of the
organization. The Compensation Committee expects that the achievement of these
shorter-term goals ultimately will contribute to the long-term success of the
enterprise.
OVERVIEW OF 1996
The Compensation Committee believes that the management team took positive
action in 1996 to position the Company for long-term stockholder value and
future challenges. Specifically, significant results were achieved with respect
to each of the strategic goals outlined above.
Progress in research and drug development was demonstrated by the:
- completion and analysis of the results of two successful Phase III
studies of Provigil(R) (modafinil) for the treatment of narcolepsy;
- submission of a New Drug Application (NDA) to the U.S. Food and Drug
Administration (FDA) for clearance to market PROVIGIL in the United
States;
- obtaining FDA clearance to make Myotrophin(R) (rhIGF-1) available to
patients with amyotrophic lateral sclerosis (ALS) under a Treatment
Investigational New Drug protocol;
- filing by the Company's collaborator, TAP Holdings Inc., of an
Investigational New Drug application to begin human clinical studies of
CEP-2563 for the treatment of prostate cancer; and,
- continuation of preclinical development of CEP-1347 for Alzheimer's
disease.
Corporate collaborations strengthened with these major accomplishments:
- continuation of the co-promotion of Stadol NS(R) (butorphanol tortrate)
with Bristol-Myers Squibb to neurologists;
- licensing of Serzone(R) (nefazodone HCl), a second product from
Bristol-Myers Squibb for co-promotion to neurologists; and
- continuation of research funding under collaborations with TAP Holdings
Inc. and SmithKline Beecham.
14
<PAGE> 17
The Company's financial position was strengthened by:
- entering into an agreement for a $30 million private placement of
convertible notes; and
- selling its Beltsville, Maryland pharmaceutical manufacturing facility
for approximately $25 million in a combination of cash and assumed lease
obligations.
Considerable progress in organizational development also was made to expand the
management team through the addition of experienced executives as Country
Managers in France, Benelux, and Spain, and to the European clinical and
marketing staffs.
The Compensation Committee believes that these accomplishments during 1996
justified increases to executives' base salaries as well as the grant of annual
bonuses.
Cephalon has assembled a senior team with considerable biotechnology and
pharmaceutical industry experience, and the Compensation Committee believes that
executive retention and incentive will be critical in the years ahead as the
Company seeks to move its product candidates toward commercialization. For this
reason, and after comparisons with the level of option holdings of executives at
biotechnology companies of similar size and product development stages, the
Compensation Committee felt that additional stock option grants also should be
made to the executive team in 1996.
The Compensation Committee awarded restricted stock to the President and
Chief Executive Officer, the Executive Vice President and Chief Operating
Officer, and the Senior Vice Presidents in 1996. These awards were made based on
their performance during the year, recognizing that their retention and
motivation are crucial to the long-term value of the Company.
COMPENSATION COMPONENTS
The Company competes against both biotechnology and larger pharmaceutical
companies in the market for qualified personnel. The Compensation Committee has
established three categories of compensation for executives: base salary, annual
incentive bonus and long-term incentives consisting of stock options and
restricted stock awards. Salaries for experienced executives of biotechnology
companies in the Philadelphia metropolitan area are heavily influenced by the
salaries paid by the large pharmaceutical companies which maintain executive
staffs in the region. The Company routinely competes against these companies in
trying to attract qualified candidates and has successfully induced most of its
current executives to leave such organizations. The salaries of Cephalon's
executives are set below those levels which would be achieved by executives with
similar levels of authority and experience in larger pharmaceutical companies.
To compensate for this shortfall and remain competitive in the market for
qualified executives, the Company places a correspondingly greater weight on
variable pay incentives and longer-term compensation. The Compensation Committee
believes that by putting an increased emphasis on variable pay amounts and
long-term incentives, the Company is able to attract executives who are willing
to sacrifice current earnings and the retirement benefits generally offered by
larger employers for potential long-term gains in a less stable and more risky
environment. The Compensation Committee believes that stockholders in Cephalon
share a similar risk profile.
To ensure that the elements of an executive's compensation remain
competitive with other small biotechnology companies, the Company conducts and
subscribes to a number of compensation surveys. The surveys used for these
purposes are provided by outside consultants and do not identify the names of
participating companies. Using these surveys, the Company focuses primarily on
companies of similar size and stage of development in the biotechnology
industry, with the objective of setting a base salary which is generally above
average when compared with these companies. Because the number of Cephalon
employees exceeded 300 during the year, primary comparisons were made with
companies at a similar stage of product development with between 150 and 499
employees. Many of the survey participants are included in the Index of NASDAQ
Pharmaceutical Stocks used in the Comparative Stock Performance Graph on page 20
of this proxy statement.
15
<PAGE> 18
Base Salary. Executive salaries are reviewed by the Compensation Committee
at the end of each year, with any adjustments to base salary becoming effective
on January 1 of the succeeding year. During this review the Compensation
Committee considers, in addition to the information provided by the salary
surveys, the individual executive's contribution to the Company's achievements
and changes in role and responsibility of the executive during the year. Because
the Company is experiencing rapid growth and internal change, particular care is
taken to ensure that expanded responsibilities are recognized in the calculation
of base pay. Executive salary increases in 1996 ranged from 6% to 10% of base
salary.
In December 1996, the base salary of Dr. Baldino, the Company's President
and Chief Executive Officer, was increased to $385,000 from $350,000, effective
January 1997. The Compensation Committee reviewed the results of a survey of
executive salaries of other biotechnology companies of similar size, focus, and
stage of development and established Dr. Baldino's salary within the upper half
of the range of the comparison group. The Compensation Committee made this
adjustment after reviewing the progress made by the Company during 1996, as
described in this report under the caption "Overview of 1996." The Compensation
Committee noted that Cephalon had increased both in its worldwide operations and
complexity during the year, and that the CEO's role had expanded in scope and
importance commensurately. The Compensation Committee also noted there was
considerable progress in organizational development with the strengthening of
the management team through the addition of experienced executives in the
European marketing and clinical staffs. Finally, the Compensation Committee
noted the strengthening of the Company's financial condition due to the
execution of an agreement for a $30 million private placement of convertible
notes and the sale of the Beltsville, Maryland manufacturing facility for $25
million.
Annual Incentive Bonus. Corporate and individual goals and milestones are
established at the beginning of the year, and include targets for progress in
the Company's research and drug development efforts and in entering into
corporate collaborations, financings, and organizational development. The
Compensation Committee provides bonus incentives for achievement of these goals
because it believes that attainment of these goals will ultimately lead to the
successful commercialization of the Company's product candidates and will be in
the best long-term interests of the Company's stockholders.
The granting of an annual incentive bonus is totally discretionary. The
Compensation Committee has targeted bonus amounts for 1997 to be up to 60% of
base salary for the CEO, 35% for the COO, and 30% for senior vice presidents.
The 1996 bonus target levels were 60% of base salary for the CEO, 35% for the
COO, and up to 30% for senior vice presidents. Bonus amounts for each executive
are dependent upon the level of achievement of the corporation and the
individual.
During 1996, Dr. Baldino was granted an annual incentive bonus in cash in
the amount of $198,000 representing 57% of his base salary at the time. The
Compensation Committee reviewed achievements against objectives in determining
that Dr. Baldino should be granted this bonus. Specifically, the Compensation
Committee noted the progress made by the Company as described above under the
captions "Overview of 1996" and "Compensation Components -- Base Salary."
Under the Deferred Compensation Plan for executives, individuals holding
the title of vice president or higher may defer receipt to a future year of all,
or a portion, of any annual bonus. Interest on the deferred amounts is
determined by the Compensation Committee on an annual basis. In 1996, the rate
of interest was 10% and will continue at that rate in 1997.
Long-Term Incentives. Long-term incentives have been provided by means of
periodic grants of stock options under the Option Plan and the Equity
Compensation Plan.
Stock options: The options generally have exercise prices equal to the
fair market value of the underlying shares of Common Stock on the date of
grant, vest over a four-year period and expire ten years from the date of
grant. The Compensation Committee considers stock options to be a valuable
and necessary compensation tool that aligns the long-term financial
interests of the Company's executives with the financial interests of its
stockholders. Further, the vesting provisions of the Option Plan and the
Equity Compensation Plan serve to retain qualified employees, providing
continuing benefits to the Company beyond those achieved in the year of
grant. Stock options are generally granted at the time of
16
<PAGE> 19
employment, and may be granted periodically at the discretion of the
Compensation Committee. The Compensation Committee determines the number of
options to be granted by comparison to other biotechnology companies at
similar stages of development. A survey of competitors reviewed by the
Compensation Committee consisted of publicly traded biotechnology firms.
Some but not all of these companies are included in the Index of NASDAQ
Pharmaceutical Stocks in the Comparative Stock Performance Graph. A
secondary objective is to ensure that valued executives have significant
numbers of unvested options as an incentive to continue their employment
and investment in the enterprise.
Restricted stock awards: Restricted stock awards have also been
granted periodically at the discretion of the Compensation Committee.
Restrictions on the transfer of shares granted under restricted stock
awards of Company Stock are based on service, performance and/or such other
factors or criteria as the Compensation Committee may determine in its sole
discretion. The Compensation Committee considers restricted stock awards to
be a valuable and necessary compensation tool and an important component of
the company's long-term incentives. The vesting provisions of the
restricted stock awards serve to retain qualified employees, providing
continuing benefits to the Company beyond those achieved in the year of
grant.
In December 1996, Dr. Baldino was granted a restricted stock award for
25,000 shares of Common Stock and a stock option grant of 50,000 shares.
Both the restricted stock award and the stock option grant vest over four
years, at a 25% per year rate, on the anniversary of the award. In granting
these awards, the Compensation Committee believed it important that a
continuing long-term incentive for retention of his services be provided.
The Compensation Committee also felt, based upon a review of the equity
holdings of other founders of biotechnology companies, that these grants
were warranted to remain at a comparable level. In addition, the
Compensation Committee believes that the achievement of both short and
long-term objectives over the next few years will place considerable
demands on the executive team, and that their retention and motivation are
crucial to long-term corporate value. Accordingly, a restricted stock award
for 12,000 shares of Common Stock and a stock option grant of 12,000 shares
was also granted in December 1996 to the Executive Vice President and Chief
Operating Officer. In addition, restricted stock awards for 4,000 to 6,000
shares of common stock and stock option grants of 4,000 to 6,000 shares
were also granted in December 1996 to the Senior Vice Presidents.
Other Compensation. The Compensation Committee continued the matching
contributions made by the Company under the Cephalon, Inc. 401(k) Profit Sharing
Plan covering all of the Company's eligible employees. The match consists of
$0.50 in cash and $0.50 in Common Stock for each $1.00 of employee contribution
under the plan. This matching contribution is made only on the first 6% of
employee contributions. In the absence of a defined benefit pension plan, this
arrangement allows Cephalon to remain competitive with other companies in the
biotechnology and pharmaceutical industries in providing for retirement savings.
Payments during 1996 to the Company's executives under the various programs
discussed above were made with regard to the provisions of section 162(m) of the
Code which became effective on January 1, 1994. Section 162(m) limits the
deduction that may be claimed by a "public company" for compensation paid to
certain individuals to $1 million except to the extent that any excess
compensation is "performance-based compensation." In accordance with current
regulations, the amounts received upon the exercise of stock options under
either the Option Plan or the Equity Compensation Plan will qualify as
"performance-based compensation," but the value of the shares received when the
shares of Restricted Stock become transferable will not qualify as
"performance-based compensation."
Respectfully submitted,
Stock Option and Compensation
Committee:
Robert J. Feeney, Ph.D.
Horst Witzel, Dr.-Ing.
17
<PAGE> 20
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY HOLDINGS OF CERTAIN BENEFICIAL OWNERS
The following information indicates the beneficial owners of five percent
or more of the outstanding shares of Common Stock of the Company as of December
31, 1996, and the number of shares and percentage of all outstanding shares
beneficially owned by such persons.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS(2)
- ------------------------------------------------------------- ----------------------- -----------
<S> <C> <C>
Amerindo Investment Advisors Inc.(3)......................... 2,531,000 10.3%
One Embarcadero, Suite 2300
San Francisco, CA 94111-3162
State of Wisconsin Investment Board.......................... 2,325,300 9.5%
P. O. Box 7842
Madison, WI 53707
Chiron Corporation........................................... 1,550,000 6.3%
4560 Horton Street
Emeryville, CA 94608-2916
TAP Holdings Inc............................................. 1,225,532 5.0%
Bannockburn Lake Office Plaza
2355 Waukegan Road
Deerfield, IL 60015
</TABLE>
- ---------------
(1) Except as indicated below, each beneficial owner named in this table has
sole voting and investment power with respect to all shares of Common Stock
set forth opposite its name above. The information in this table is
presented in reliance on information contained in the stock records of the
Company or disclosed by the beneficial owners in Schedules 13D and 13G
reporting as of December 31, 1996, as filed with the Securities and Exchange
Commission.
(2) The percentage for each beneficial owner is calculated based on (i) the
aggregate number of all shares reported to be beneficially owned by such
group or individual (including all shares issuable to such group or
individual upon the exercise of outstanding stock options or warrants
beneficially owned by them to the extent that such options or warrants are
exercisable within sixty days of the date as to which such information is
provided) and (ii) the aggregate number of shares of Common Stock
outstanding as of December 31, 1996 (24,618,223).
(3) Amerindo Investment Advisors Inc. ("Amerindo"), Amerindo Investment
Advisors, Inc. ("Amerindo Panama") and Alberto W. Vilar and Gary A. Tanaka
state in a Schedule 13G/A, as amended that: (i) Amerindo is registered as an
investment advisor under the Investment Advisors Act of 1940, as amended;
(ii) Messrs. Vilar and Tanaka are the only directors and shareholders of
Amerindo Panama and of Amerindo; (iii) Messrs. Vilar and Tanaka have shared
voting and dispositive power as to all of the shares reported in such
Schedule 13G/A; (iv) Amerindo has shared voting and dispositive power as to
2,323,500 of the shares reported in such Schedule 13G/A; (v) Amerindo Panama
has shared voting and dispositive power as to 207,500 of the shares reported
in such Schedule 13G/A; and (vi) each of Amerindo, Amerindo Panama and
Messrs. Vilar and Tanaka disclaims membership in a group under Rule 13d-5
and disclaim beneficial ownership as to all of the shares reported in such
Schedule 13G/A.
18
<PAGE> 21
SECURITY HOLDINGS OF EXECUTIVE OFFICERS AND DIRECTORS
The following table summarizes the beneficial ownership of the Company's
Common Stock by the Company's executive officers and directors as of March 1,
1997.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENTAGE
NAME OWNERSHIP(1)(2) OF CLASS(3)
- ---------------------------------------------------------------- ----------------- -----------
<S> <C> <C>
Frank Baldino, Jr., Ph.D.(4).................................... 495,801 2.0%
Joseph J. Day. Jr. ............................................. 19,945 *
William P. Egan(5).............................................. 77,484 *
Robert J. Feeney, Ph.D. ........................................ 34,066 *
Peter E. Grebow, Ph.D. ......................................... 77,512 *
Martyn D. Greenacre............................................. 22,500 *
Kevin E. Moley.................................................. 11,250 *
Bruce A. Peacock................................................ 258,901 1.0%
Barbara S. Schilberg............................................ 35,581 *
Jeffry L. Vaught, Ph.D. ........................................ 70,896 *
Horst Witzel, Dr.-Ing. ......................................... 22,500 *
All executive officers and directors as a group (11 persons).... 1,126,436 4.4%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as indicated below, the individual or groups named in this table have
sole voting and investment power with respect to all shares of Common Stock
indicated above.
(2) Includes shares which may be acquired upon the exercise of outstanding
options and warrants that were exercisable as of March 1, 1997 as follows:
Dr. Baldino 234,000 shares; Mr. Day 19,376 shares; Mr. Egan, Mr. Greenacre,
Dr. Feeney, and Dr. Witzel 22,500 shares each; Dr. Grebow 66,375 shares; Mr.
Moley 11,250 shares; Mr. Peacock 236,750 shares; Ms. Schilberg 35,000
shares; and Dr. Vaught 69,750 shares; and all executive officers and
directors as a group 762,501 shares.
(3) The percentage for each group or individual is based on the aggregate of the
shares outstanding as of December 31, 1996 (24,618,223) and all shares
issuable to such group or individual upon the exercise of outstanding stock
options to the extent that such options are exercisable by March 1, 1997.
(4) Includes 17,271 shares held in trusts for the benefit of Dr. Baldino's
children, with his spouse as trustee.
(5) Includes 21,661 shares of Common Stock held by a trust for the benefit of
Mr. Egan's children. Mr. Egan is not a trustee of this trust. Also includes
33,323 shares of Common Stock held by trusts of which Mr. Egan is a trustee
and over which he shares voting and investment control. Mr. Egan disclaims
beneficial ownership as to all of such shares held in trusts.
INFORMATION CONCERNING INDEPENDENT AUDITORS
Arthur Andersen LLP has served as the Company's independent public
accountants since the Company's inception in 1987, and is expected to continue
to serve in such capacity during 1997. The Company has requested that a
representative of Arthur Andersen LLP attend the 1997 annual meeting of
stockholders. Such representative will have an opportunity to make a statement,
if he or she desires, and will be available to respond to appropriate questions
from stockholders.
19
<PAGE> 22
COMPARATIVE STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total stockholder return on the
Common Stock with the cumulative total stockholder return of (i) the NASDAQ
Stock Market (U.S.) Index (the "NASDAQ Index"), and (ii) the Index of NASDAQ
Pharmaceutical Stocks (the "Pharmaceutical Index"), assuming an investment of
$100 on December 31, 1991 in each of: the Common Stock of the Company; the
stocks comprising the NASDAQ Index; and the stocks comprising the Pharmaceutical
Index.
<TABLE>
<S> <C> <C> <C>
12/31/91 100 100 100
6/30/92 60 96 73
12/31/92 82 117 83
6/30/93 89 121 63
12/31/93 119 134 74
6/30/94 65 122 53
12/30/94 60 131 56
6/30/95 135 163 70
12/29/95 296 185 102
6/28/96 144 209 88
12/31/96 149 227 102
</TABLE>
SECTION 16(A) REPORTS
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the directors and certain officers of the Company, and persons who own more than
ten percent of the Company's Common Stock, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock of the Company. Such directors, officers and more than
ten percent stockholders are required by regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations of such directors
and officers that no other reports were required, all fiscal year 1996 Section
16(a) filing requirements applicable to its directors, officers and more than
ten percent stockholders were complied with.
OTHER MATTERS
The board of directors is not aware of any matters not set forth herein
that may come before the meeting. If, however, further business properly comes
before the meeting, the persons named in the proxies will vote the shares
represented thereby in accordance with their judgment.
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Stockholders may submit proposals on matters appropriate for stockholder
action at annual meetings in accordance with regulations adopted by the
Securities and Exchange Commission. To be considered for inclusion in the proxy
statement and form of proxy card relating to the 1998 annual meeting, such
proposals must be received by the Company not later than December 8, 1997.
Proposals should be directed to the attention of the Secretary of the Company.
20
<PAGE> 23
ANNUAL REPORT ON FORM 10-K
THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH PERSON WHOSE PROXY IS BEING
SOLICITED, UPON THE WRITTEN REQUEST OF SUCH PERSON, A COPY OF THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996,
INCLUDING THE FINANCIAL STATEMENTS AND SCHEDULES THERETO, BUT EXCLUDING
EXHIBITS. REQUESTS FOR COPIES OF SUCH REPORT SHOULD BE DIRECTED TO INVESTOR
RELATIONS, CEPHALON, INC., 145 BRANDYWINE PARKWAY, WEST CHESTER, PENNSYLVANIA
19380.
By Order of the Board of Directors,
BARBARA S. SCHILBERG
Secretary
21
<PAGE> 24
CEPHALON, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS, MAY 14, 1997
The undersigned hereby appoints Frank Baldino, Jr., Ph.D. and Bruce A.
Peacock or either one of them acting singly in the absence of the other, with
full power of substitution, the proxy or proxies of the undersigned to attend
the Annual Meeting of Stockholders of Cephalon, Inc. to be held on May 14,
1997, and any adjournment thereof, to vote all shares of stock that the
undersigned would be entitled to vote if personally present in the manner
indicated below and on any other matters properly brought before the meeting or
any adjournment thereof, all as set forth in the March 26, 1997 proxy statement.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CEPHALON, INC.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE> 25
Please mark
your votes / X /
as in this
example
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF THE
NOMINEES FOR DIRECTOR AND FOR THE ADOPTION OF PROPOSAL 2
FOR WITHHOLD
all nominees for all nominees
1. Election of Directors / / / /
Nominees: Frank Baldino, Jr. Ph.D.,
William P. Egan, Robert J. Ferney, Ph.D.,
Marlyn D. Greenacre, Kevin E. Moley,
Bruce A. Peacock and Horst
Witzel, Dr.-Ing.
WITHHOLD for the following only. (Write in the name of the nominee(s) in the
space below)
_____________________________________________________________________________
2. Adoption of proposed amendment to FOR AGAINST ABSTAIN
the Equity Compensation Plan. / / / / / /
THE SHARES REPRESENTED BY THIS PROXY
WILL BE VOTED AS DIRECTED BY THE STOCK-
HOLDER, WHERE NO DIRECTION IS GIVEN WHEN
THE DULY EXECUTED PROXY IS RETURNED SUCH
SHARES WILL BE VOTED AT THE MEETING FOR
ALL NOMINEES NAMED IN PROPOSAL 1 AND FOR
ADOPTION OF PROPOSAL 2.
THE UNDERSIGNED HEREBY ACKNOWLEDGES
RECEIPT OF THE NOTICE OF ANNUAL MEETING.
PROXY STATEMENT AND ANNUAL REPORT OF
CEPHALON, INC.
I PLAN TO
ATTEND / /
MEETING
Signature(s) _________________________________________ Date ___________________
NOTE: Please sign as name appears hereon. Joint Owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
