<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, 1998
--------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from ______________ to _______________
Commission File Number 0-19119
----------------------
CEPHALON, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 23-2484489
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(State Other Jurisdiction of Incorporation (I.R.S. Employer Identification
or Organization) 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 8, 1998
---------------------------- -----------------------------
Common Stock, par value $.01 28,443,273 Shares
This Report Includes a Total of 19 Pages
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CEPHALON, INC. AND SUBSIDIARIES
-------------------------------
INDEX
-----
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - 3
March 31, 1998 and December 31, 1997
Consolidated Statements of Operations - 4
Three months ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows - 5
Three months ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ---------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 12,580,000 $ 10,271,000
Reverse repurchase agreements 18,990,000 27,414,000
Short-term investments 71,825,000 81,786,000
Other 7,535,000 7,680,000
------------- --------------
Total current assets 110,930,000 127,151,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $11,620,000 and $11,099,000 21,757,000 21,853,000
OTHER 2,073,000 2,204,000
------------- --------------
$ 134,760,000 $ 151,208,000
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,978,000 $ 2,724,000
Accrued expenses 13,628,000 16,075,000
Current portion of long-term debt 1,448,000 1,734,000
------------- --------------
Total current liabilities 18,054,000 20,533,000
LONG-TERM DEBT (Note 2) 17,972,000 27,587,000
OTHER 2,972,000 2,750,000
------------- --------------
Total liabilities 38,998,000 50,870,000
------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
28,424,743 and 27,395,254 shares issued and outstanding 284,000 274,000
Additional paid-in capital 328,523,000 318,450,000
Accumulated deficit (233,045,000) (218,386,000)
Total stockholders' equity 95,762,000 100,338,000
-------------- --------------
$ 134,760,000 $ 151,208,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
MARCH 31,
---------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
REVENUES: $3,568,000 $5,628,000
OPERATING EXPENSES:
Research and development 11,974,000 13,177,000
Selling, general and administrative 7,169,000 8,697,000
----------------- -----------------
19,143,000 21,874,000
----------------- -----------------
LOSS FROM OPERATIONS (15,575,000) (16,246,000)
----------------- -----------------
INTEREST:
Income 1,471,000 1,617,000
Expense (555,000) (501,000)
----------------- -----------------
916,000 1,116,000
----------------- -----------------
LOSS $(14,659,000) $(15,130,000)
================= =================
BASIC AND DILUTED LOSS PER SHARE (Note 1) $(0.53) $(0.61)
================= =================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 27,870,715 24,691,153
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1998 1997
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss $ (14,659,000) $ (15,130,000)
Adjustments to reconcile loss to net cash
used for operating activities:
Depreciation and amortization 521,000 641,000
Non-cash compensation expense 403,000 773,000
Other 45,000 --
(Increase) decrease in operating assets:
Accounts receivable - contract (267,000) (2,906,000)
Other current assets 238,000 (970,000)
Other long-term assets 131,000 (147,000)
Increase(decrease) in operating liabilities:
Accounts payable 294,000 1,230,000
Accrued expenses (2,557,000) (370,000)
Other long-term liabilities 222,000 217,000
------------- -------------
Net cash used for operating activities (15,629,000) (16,662,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (425,000) (599,000)
Sale leaseback of property and equipment -- 333,000
Sales and maturities of investments, net 18,385,000 16,648,000
------------- -------------
Net cash provided by investing activities 17,960,000 16,382,000
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock options and warrants 304,000 1,736,000
Principal payments on long-term debt (326,000) (4,111,000)
------------- -------------
Net cash used for financing activities (22,000) (2,375,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,309,000 (2,655,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,271,000 5,671,000
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,580,000 $ 3,016,000
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------
BUSINESS
Cephalon, Inc. ("Cephalon" or the "Company") seeks to discover, develop and
market pharmaceutical products to treat neurological disorders such as
narcolepsy, amyotrophic lateral sclerosis ("ALS"), multiple sclerosis,
peripheral neuropathies, Alzheimer's disease and stroke. 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 upon obtaining the U.S. Food and
Drug Administration ("FDA") and foreign regulatory approval to market products
under development, including MYOTROPHIN(R) (rhIGF-I) and PROVIGIL(R)
(modafinil). There can be no assurance that regulatory authorities will review
the Company's marketing applications in a timely manner or that the applications
will be approved.
BASIS OF PRESENTATION
These consolidated financial statements are unaudited and include all
adjustments which, in the opinion of management, are necessary to present fairly
the financial condition and results of operations of the Company 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 each of the three years in the
period ended December 31, 1997. 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.
BASIC AND DILUTED LOSS PER SHARE
The Company has adopted Statement of Financial Standards ("SFAS") No. 128,
"Earnings per Share," which requires dual presentation of basic and diluted
earnings per share ("EPS") for complex capital structures on the face of the
statement of operations. Basic EPS is computed by dividing net income or loss
by the weighted-average number of common shares outstanding during the period.
Diluted EPS is similar to basic EPS except that the effect of converting or
exercising all potential dilutive securities also is generally included in the
denominator. The Company's calculation of diluted EPS for each of the periods
presented does not differ from its calculation of basic EPS since the
calculation of diluted EPS excludes the effect of converting or exercising stock
options, restricted stock awards, warrants and convertible notes since, due to
the loss presented in each period, the effect would be antidilutive. At March
31, 1998, the pro forma conversion or exercise of outstanding options, warrants
and convertible notes with conversion or exercise prices at or below $14.00, the
closing market price of the Company's common stock at March 31, 1998, would
increase the number of shares of common stock outstanding by approximately 8%,
or approximately 2,271,000 shares. The pro forma conversions or exercises of all
other outstanding options, warrants and convertible notes would increase the
number of shares outstanding by an additional 15%, or approximately 4,373,000
shares.
6
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CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED)
(Unaudited)
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income or loss and its
components in financial statements. For the period presented, comprehensive loss
approximated the loss as presented in the accompanying Statements of Operations.
SEGMENT INFORMATION
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." This statement establishes
standards for reporting financial and descriptive information about an
enterprise's operating segments in its financial statements. Although this
statement need not be applied to interim financial statements in the initial
year of application, comparative information will be required for interim
periods subsequent to fiscal year ending December 31, 1998.
2. LONG-TERM DEBT
--------------
In April 1997, the Company completed a $30,000,000 private placement of senior
convertible notes (the "Notes"), which mature in October 1998 and bear interest,
payable quarterly in cash or common stock, at a rate of seven percent per annum.
During the quarter ended March 31, 1998, $9,575,000 in principal of the Notes
was converted into 1,005,000 shares of common stock, resulting in a $1,751,000
outstanding principal balance as of March 31, 1998.
3. COMMITMENTS AND CONTINGENCIES
-----------------------------
RELATED PARTY
Late in 1995, Cephalon Clinical Partners, L.P. (the "Partnership") depleted
all of its available funding and will not provide further funding of MYOTROPHIN
development costs to the Company. The amount of additional funding required for
further development will be determined by the Partnership's general partner in
advance of each quarter, and each quarter, the Company will have the right, but
not the obligation, to contribute such funds.
The Partnership has granted the Company an exclusive license (the "Interim
License") to manufacture and market MYOTROPHIN for human therapeutic use within
the United States, Canada and Europe (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 the
United States or certain other countries within the Territory. The Company has
the option to pay the Milestone Payment in cash, common stock, or a combination
thereof.
The Company has a contractual option to purchase all of the limited
partnership interests in the Partnership (the "Purchase Option") in specified
circumstances following the initiation of commercial sales, if any, of
MYOTROPHIN. To exercise the Purchase Option, Cephalon is required to make an
advance payment of $40,275,000 in cash or, at Cephalon's election, $42,369,000
in shares of the Company's common stock, valued at the market price at the time
the Purchase Option is exercised. In addition to the advance payment, the
exercise of the Purchase Option requires the Company to make future payments to
the former limited partners for a period of eleven years after exercise at a
royalty rate of 10.1% (subject to reduction under certain circumstances) of
MYOTROPHIN sales in the Territory. If the Company does not exercise the Purchase
Option prior to its expiration, the Interim License will terminate and all
development and marketing rights to MYOTROPHIN in the
7
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED)
(Unaudited)
Territory would revert to the Partnership, which may commercialize MYOTROPHIN
itself or license or assign its rights to a third party. The Company would not
receive any benefits from such commercialization.
The January 1994 collaboration between the Company and Chiron Corporation
("Chiron") is subject to the rights of the Partnership. The Company is solely
responsible for making any royalty and milestone payments owed to the
Partnership and for funding the Purchase Option, if it elects to exercise the
option.
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 have been consolidated. Several of the
plaintiffs have been designated by the Court, collectively, as the "lead
plaintiff" for purposes of the Private Securities Litigation Reform Act of 1995.
The consolidated complaint, filed in October 1996 by the lead plaintiffs,
extended and expanded the class period to include purchasers of the Company's
securities as well as options to purchase or sell those securities during the
period between June 12, 1995 and June 7, 1996. The plaintiffs allege, based in
part on statements and opinions expressed at a June 1996 meeting of an FDA
advisory committee, that earlier statements by the Company about the results of
North American and European clinical studies of MYOTROPHIN were misleading. The
plaintiffs seek unspecified damages and other relief. A judgement adverse to the
Company could, under some theories of damages, result in an assessment which
materially exceeds the coverage obtained under the Company's directors' and
officers' liability insurance policy. The Company's motion to dismiss the case
was denied, and discovery has commenced and is expected to continue through
1998. Plaintiffs have moved for certification of the class alleged in the
consolidated complaint, and initial briefs have been filed by the parties. Based
on presently available information, management believes that it has meritorious
defenses to the claims and intends to vigorously defend the action. Management
believes that it is too early in the proceedings to determine with any certainty
the outcome of this action or the potential liability of the Company, if any.
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN RISKS RELATED TO CEPHALON'S BUSINESS
The statements under this caption are intended to serve as cautionary
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and should be read in conjunction with the forward-looking statements in
this Report as well as statements presented elsewhere by management of the
Company. 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.
Need for Product Approvals
The success of Cephalon, Inc. ("Cephalon" or the "Company") depends upon
obtaining U.S. Food and Drug Administration ("FDA") and foreign regulatory
approval to market products under development, including MYOTROPHIN(R) (rhIGF-I)
and PROVIGIL(R) (modafinil). There can be no assurance that regulatory
authorities will review the Company's marketing applications in a timely manner
or that the applications will be approved. An adverse decision by a regulatory
authority could adversely influence the decision of another regulatory
authority.
Regulatory Uncertainties Related to MYOTROPHIN
On May 12, 1998, Cephalon and Chiron Corporation ("Chiron") announced that the
FDA had issued a letter stating that the companies' new drug application ("NDA")
to market MYOTROPHIN in the United States for the treatment of amyotrophic
lateral sclerosis ("ALS") was "potentially approvable." Before the NDA can be
approved, the FDA has requested the submission of additional information from
ongoing clinical studies which demonstrates that MYOTROPHIN is effective in the
treatment of ALS. There can be no assurance that any ongoing studies contain
information sufficient to demonstrate MYOTROPHIN's efficacy to the satisfaction
of the FDA, or that any such information can be obtained in a reasonable
timeframe. If the ongoing studies do not contain sufficient additional efficacy
data to satisfy the FDA's conditions, a new study would be necessary, which
would be expensive and would take several years to complete. There is no
assurance that an additional study would be cost-effective to conduct. Even if
the Company and Chiron would be willing to conduct an additional study as a pre-
approval activity, there can be no assurance that the results of a new study
would be sufficient to obtain regulatory approval.
A marketing authorization application ("MAA") is pending before the European
Medicines Evaluation Agency ("EMEA") for approval to market MYOTROPHIN in Europe
for the treatment of ALS. Cephalon and Chiron have filed a response to questions
from member states, some of which were similar to questions about efficacy and
safety previously raised by the FDA. There can be no assurance that the EMEA
will approve the application on the basis of the data contained in the MAA. An
EMEA decision is binding on all 15 member states of the European Union. If the
EMEA requires additional efficacy information, there can be no assurance that
satisfactory information can be obtained from ongoing studies or any additional
study. A new study would be expensive and take several years to complete. The
Company presently believes that it is unlikely that the conduct of an additional
study would be cost-effective solely for purposes of regulatory approval in
Europe. Even if the Company and Chiron would be willing to conduct an additional
study as a pre-approval activity, there can be no assurance that the results of
a new study would be sufficient to obtain regulatory approval.
Regulatory Uncertainties Related to PROVIGIL
The FDA has indicated that the Company's NDA seeking approval to market
PROVIGIL for the treatment of excessive daytime sleepiness associated with
narcolepsy, is approvable. In the "approvable letter," the FDA requested
clarification and/or confirmation of certain information. The Company is
preparing to submit a response to this request, and there is no assurance that
the information to be included in the response will result in approval of the
NDA. The FDA is not under any obligation to review the information in a timely
manner, and the Company cannot predict the timing of their decision; however,
the Company does not expect that a decision will be made by the FDA any earlier
than the end of 1998, and it could be later.
9
<PAGE>
On April 14, 1998, the Drug Enforcement Administration ("DEA") published a
Notice of Proposed Rulemaking to classify modafinil as a controlled substance in
Schedule IV under the Controlled Substances Act (the "CSA"). The public comment
period expired on May 14, 1998. In the proposed rule, the DEA has indicated
that the final rule will not be completed unless and until the FDA approves the
PROVIGIL NDA. Even if the FDA grants marketing authorization, the Company can
not launch PROVIGIL until the DEA's classification of modafinil is completed.
Status as a controlled substance and the restrictions imposed by the CSA may
limit physicians' willingness to prescribe the drug. The commercial impact, if
any, resulting from marketing PROVIGIL as a controlled substance can not be
predicted. Classification of modafinil as a controlled substance in the United
States may cause other regulatory authorities to impose similar controls in
other territories licensed by the Company from Lafon.
Volatility of Stock Price
The market price and trading volume of shares of the Company's common stock is
highly volatile, and is expected to continue to be volatile for the foreseeable
future. Any future negative announcements (such as adverse regulatory decisions
or decisions to delay the MYOTROPHIN or PROVIGIL marketing applications,
disputes concerning patent or proprietary rights, or operating results which
fall below the market's expectations) could produce significant declines in the
price of the Company's common stock. External events, such as favorable news
about the Company's competitors, also could negatively affect the price of the
Company's common stock.
No Assurance of Profitability from any Product
Even if MYOTROPHIN and PROVIGIL are approved for commercialization, there can
be no assurance that profitable operations can be achieved solely on sales of
those products, either individually or in combination, if at all.
The Company's profits on sales of MYOTROPHIN, if any, will be limited by the
relatively small size of the ALS market (approximately 15,000-20,000 people in
the United States) and the Company's royalty and profit-sharing arrangements,
respectively, with Cephalon Clinical Partners, L.P. (the "Partnership") and
Chiron, which reduce the Company's share of profits. Competition from
Rilutek(R) (riluzole), which is being marketed in the United States and Europe
by Rhone-Poulenc Rorer, Inc. for use in treating ALS, also could reduce the
market for MYOTROPHIN. Patients with ALS, given the constraints of drug
reimbursement programs, may not 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
Similarly, the market for use of PROVIGIL in narcolepsy patients is relatively
small (approximately 125,000 people in the United States, of which 30,000-40,000
are believed to currently seek treatment from a physician). Competition for
PROVIGIL is expected in all of the Company's licensed territories, because
narcolepsy is currently treated with several drugs, all of which have been
available for a number of years and are available in inexpensive generic forms.
Manufacturing Uncertainties
Cephalon relies on Chiron's U.S. manufacturing facility (the "Chiron
Facility") as the sole source of supply for MYOTROPHIN. Chiron has only limited
experience in producing rhIGF-I on a commercial scale, and there can be no
assurance that the transition to ongoing commercial production would be
successful.
Lafon is the sole supplier of bulk modafinil compound for the Company.
Furthermore, the Company has only one supplier who is qualified to make finished
PROVIGIL for commercial or clinical use, and one of the raw materials used as an
excipient in the finished product is obtained through a company which is
believed to be the only available source of the material.
There can be no assurance that Cephalon would be able to establish or locate
alternative, cost-effective sources of supply for materials if any of the sole
suppliers could not produce sufficient quantities of materials. Failure to
10
<PAGE>
locate alternative supplies of materials could result in significant costs and
delays to the program, damage the commercial prospects for products under
development, including MYOTROPHIN and PROVIGIL, and have a material adverse
effect on the Company.
Cephalon and its various suppliers must comply with all applicable regulatory
requirements of the FDA and foreign authorities, including current Good
Manufacturing Practice ("cGMP") regulations. The manufacturing facilities used
by the Company and its suppliers are subject to inspection by the FDA and other
regulatory authorities at any time during the conduct of clinical studies or
commercial operations, to determine compliance with cGMP requirements. The cGMP
regulations are complex, and failure to be in compliance could lead to remedial
action, civil and criminal penalties and delays in production of material.
Need for Additional Funds
The majority of the Company's current revenue is derived from collaborative
research and development agreements and co-promotion agreements that are subject
to termination by the respective third parties. There can be no assurance that
any of the Company's collaborations will continue in the future.
To meet its capital requirements, the Company will need to obtain additional
funding through debt and/or equity financings. The Company also may seek
additional funding through financing vehicles, such as "off-balance sheet"
financing with limited partnerships or corporations. There can be no assurance
that such additional funds can be obtained through these sources on terms
acceptable to the Company, if at all.
Any financings using either common stock or securities convertible into common
stock would result in the issuance of additional shares and therefore would be
dilutive to existing shareholders (i.e., the percentage ownership of the Company
by existing shareholders would be reduced). At March 31, 1998, the pro forma
conversion or exercise of outstanding options, warrants and convertible notes
with conversion or exercise prices at or below $14.00, the closing market price
of the Company's common stock at March 31, 1998, would increase the number of
shares of common stock outstanding by approximately 8%, or approximately
2,271,000 shares. The pro forma conversions or exercises of all other
outstanding options, warrants and convertible notes would increase the number of
shares outstanding by an additional 15%, or approximately 4,373,000 shares.
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 have been consolidated. Several of the
plaintiffs have been designated by the Court, collectively, as the "lead
plaintiff" for purposes of the Private Securities Litigation Reform Act of 1995.
The consolidated complaint, filed in October 1996 by the lead plaintiffs,
extended and expanded the class period to include purchasers of the Company's
securities as well as options to purchase or sell those securities during the
period between June 12, 1995 and June 7, 1996. The plaintiffs allege, based in
part on statements and opinions expressed at a June 1996 meeting of an FDA
advisory committee, that earlier statements by the Company about the results of
North American and European clinical studies of MYOTROPHIN were misleading. The
plaintiffs seek unspecified damages and other relief. A judgment adverse to the
Company could, under some theories of damages, result in an assessment which
materially exceeds the coverage obtained under the Company's directors' and
officers' liability insurance policy. The Company's motion to dismiss the case
was denied, and discovery has commenced and is expected to continue through
1998. Plaintiffs have moved for certification of the class alleged in the
consolidated complaint, and initial briefs have been filed by the parties. Based
on presently available information, management believes that it has meritorious
defenses to the claims and intends to vigorously defend the action. Management
believes that it is too early in the proceedings to determine with any certainty
the outcome of this action or the potential liability of the Company, if any.
Product Liability Risks
The administration of drugs to humans, whether in clinical trials or after
marketing clearance is obtained, can result in product liability claims even if
the Company's drugs are not actually at fault for causing an injury.
11
<PAGE>
Product liability claims can be expensive to defend and may result in large
judgments or settlements against the Company, which could have a material
adverse effect on the Company. Although the Company maintains product liability
insurance, claims could exceed the coverage obtained. Even if a claim is not
successful, the time and expense of defending such a claim may adversely
interfere with the Company's business.
No Assurance of Other Indications
The Company is evaluating the use of MYOTROPHIN and PROVIGIL for indications
other than ALS and narcolepsy, respectively. The Company is currently conducting
two studies evaluating MYOTROPHIN for other neurological indications other than
ALS. There can be no assurance that the results of any studies in other
indications will be positive or sufficient to receive regulatory approval for
such indications. The initiation of clinical studies in other indications for
MYOTROPHIN and PROVIGIL could be delayed if additional preclinical studies are
needed.
Impact of Other Studies
The results of clinical studies by third parties related to product candidates
under development by the Company, including studies of rhIGF-I being conducted
by the Company's licensee in Japan and clinical studies of modafinil being
conducted by Lafon and its licensees 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 marketing applications for the
same product candidates. Negative results from trials by third parties or
negative assessments from regulatory authorities would materially adversely
affect the Company's business and the price of its common stock.
Limited Distribution Capabilities
The Company has established a small staff to oversee product manufacturing and
distribution, marketing support service, customer service, order entry, shipping
and billing, reimbursement assistance, managed care sales support, medical
information and sales tracking related to potential commercial activities. Most
of these activities are being performed by third parties under contract with the
Company. The Company has only limited experience in managing and coordinating
the performance of these activities by the third parties.
Year 2000 Compliance
Cephalon has conducted a review of its computer systems to identify the
systems that could be affected by the year 2000 issue and is currently
implementing a plan, which includes a review of all hardware/software vendors,
as well as other Cephalon suppliers, vendors and partners. Cephalon believes
that, with minor modifications to its computer systems, the year 2000 issue will
not pose a significant operational problem. The Company is still assessing the
possible effects on its operations of the year 2000 readiness of third party
vendors; however, the potential impact and related costs, if any, are not known
at this time.
Other Risks
The Company's business is subject to additional significant risks
including, but not limited to, the Company's relative inexperience in marketing
commercial products, uncertainties associated with obtaining and enforcing its
patents, uncertainties associated with the patent rights of others,
uncertainties regarding government reforms, 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, and reliance by the Company on key personnel.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, reverse repurchase agreements and investments at March
31, 1998 and December 31, 1997 were $103,395,000 and $119,471,000, respectively,
representing 77% and 79%, respectively, of total assets. Cash equivalents,
reverse repurchase agreements and investments consisted primarily of short- to
intermediate-term obligations of the United States government, overnight reverse
repurchase agreements that are collateralized 102% by such government
obligations, and short to intermediate-term corporate obligations. Certain of
the Company's lease agreements contain covenants that obligate the Company to
maintain certain minimum cash and investment balances.
The following is a summary of selected cash flow information for the three
months ended March 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net cash used for operating activities................. $(15,629,000) $(16,662,000)
Net cash provided by investing activities.............. 17,960,000 16,382,000
Net cash used for financing activities................. (22,000) (2,375,000)
</TABLE>
Net cash used for operating activities
--Operating cash inflows
A summary of the major sources of cash receipts reflected in net cash used for
operating activities for the three months ended March 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
TAP Holdings...................... $2,465,000 $1,548,000
Chiron............................ 630,000 --
Medtronic......................... 453,000 --
Kyowa Hakko....................... 427,000 587,000
Bristol-Myers Squibb.............. -- 453,000
Other collaborations.............. -- 829,000
Interest.......................... 1,740,000 1,617,000
</TABLE>
The Company and TAP are parties to a licensing and research and development
collaboration (the "TAP Agreement") to develop and commercialize certain
compounds for the treatment of human cancers and prostate disorders in the
United States. Under the terms of the TAP Agreement, the Company performs
research and preclinical development of these compounds 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 Company and Chiron are jointly developing MYOTROPHIN for the treatment of
ALS and other neurological disorders. Under the collaboration, the costs of the
program are shared equally by the two companies with the exception of the
ongoing study of MYOTROPHIN in the treatment of multiple sclerosis, which is
currently being funded solely by the Company. The amounts received by the
Company generally represent reimbursement from Chiron for MYOTROPHIN costs
incurred by the Company in excess of the fifty percent share of program costs.
Under an April 1997 agreement with Medtronic, Inc. ("Medtronic"), the Company
is co-promoting Intrathecal Baclofen Therapy (ITB) to neurologists and
physiatrists in the United States for the treatment of intractable spasticity.
The Company receives quarterly compensation based primarily upon sales activity
and the attainment of performance targets.
13
<PAGE>
In July 1993, the Company entered into an agreement (the "Kyowa Hakko
Myotrophin Agreement") with Kyowa Hakko Kogyo Co., Ltd. ("Kyowa Hakko") to
develop and market MYOTROPHIN (rhIGF-I) in Japan. The payments received from
Kyowa Hakko primarily represent reimbursement of MYOTROPHIN (rhIGF-I) supplies
for the clinical trials conducted in Japan by Kyowa Hakko.
Under the agreements with Bristol Myers Squibb Company ("BMS"), Cephalon
markets two proprietary products, Stadol NS(R) (butorphanol tartrate) Nasal
Spray and Serzone(R) (nefazodone hydrochoride) to neurologists in the United
States. Pursuant to the agreements, BMS makes quarterly payments to the Company
if the percentage of certain prescriptions written by neurologists exceeds a
predetermined base amount. There was no payment recorded from BMS in the first
quarter of 1998 since all payments earned for 1997 co-promotion activity were
received in 1997.
Payments from other collaborations received by the Company in 1997 represent
research funding under agreements with SmithKline Beecham ("SB") and Schering-
Plough Corporation ("SP"), both of which concluded in 1997.
--Operating cash outflows
The funding of research and development decreased for the three months ended
March 31, 1998 as compared to the same 1997 period, primarily due to costs in
the first quarter of 1997 associated with certain license fees and a 17%
decrease in staffing levels from the 1997 period to 1998. The decrease was
partially offset by a purchase of bulk modafinil compound in the first quarter
of 1998. The funding of selling, general and administrative activities
decreased for the three months ended March 31, 1998 as compared to the same 1997
period, primarily due to cost reductions associated with the Company's sales and
marketing activities and decreases in administrative costs.
--Operating cash outlook
The Company expects its cash flow from operating activities to continue to be
negative until such time as product approvals, if any, are obtained and revenue
received from product sales exceeds funding of operating costs. The Company does
not expect sales of PROVIGIL in the United Kingdom to provide a significant
source of cash in 1998.
The major source of the Company's current cash inflows is derived from
collaborative research and development agreements and co-promotion agreements.
The continuation of the research funding under the agreement with TAP is subject
to periodic review by TAP and may be terminated without cause with prior notice.
The level of potential payments to be received under the Company's co-promotion
agreements is subject to a number of uncertainties related to product sales,
including competition from new and existing products and the introduction of
controlled substance classification of one of the products being co-promoted by
the Company. Potential receipts in 1998 from the Company's co-promotion
agreement with BMS is expected to decrease from 1997 levels, and there can be no
assurance that the agreement will be renewed when it expires at the end of 1998.
In future periods, receipt of payments from Chiron or payments by the Company to
Chiron will depend on the relative costs incurred in the MYOTROPHIN program by
the two companies. Future receipts from Kyowa Hakko are dependent upon shipment
of MYOTROPHIN to supply Kyowa Hakko's clinical trials in Japan.
The Company expects to continue to expend significant funds on PROVIGIL to
prepare for possible U.S. commercialization of this product, including to build
inventories, and to investigate the utility of PROVIGIL in other indications.
The Company intends to continue to provide funding for its other research and
development programs. If the FDA or EMEA were to require an additional study to
demonstrate MYOTROPHIN's efficacy, and if the Company were to decide to conduct
an additional study, a significant outlay of funds would be required.
The amount of capital needed to fund operations will depend upon many factors,
including the success of the Company's research and development programs, the
availability of capital funding, the extent of any collaborative research
arrangements, the costs and timing of seeking regulatory approvals of its
products, technological changes, competition and the success of the Company's
sales and marketing activities.
14
<PAGE>
Net cash provided by investing activities
A summary of net cash provided by investing activities for the three months
ended March 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Purchases of property and equipment........................ $ (425,000) $ (599,000)
Sale leaseback of property and equipment................... -- 333,000
Sales and maturities of investments, net................... 18,385,000 16,648,000
----------- -----------
Net cash provided by investing activities................ $17,960,000 $16,382,000
=========== ===========
</TABLE>
Sales and maturities of investments, net, represent the liquidation of
investments, the proceeds of which are used primarily to fund operations.
Net cash used for financing activities
A summary of cash used for financing activities for the three months ended
March 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Proceeds from exercises of common stock options and warrants............ $ 304,000 $ 1,736,000
Principal payments on long-term debt.................................... (326,000) (4,111,000)
--------- -----------
Net cash used for financing activities................................ $ (22,000) $(2,375,000)
========= ===========
</TABLE>
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.
In March 1997, the Company repaid in full the $3,750,000 balance due on an
unsecured bank loan.
Commitments and contingencies
--Related Party
Cephalon Clinical Partners, L.P. (the "Partnership") granted the Company an
exclusive license (the "Interim License") to manufacture and market MYOTROPHIN
within the United States, Canada and Europe (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 the United States or certain other countries within the Territory.
The Company has the option to pay the Milestone Payment in cash, common stock,
or a combination thereof.
The Company has a contractual option to purchase all of the limited
partnership interests in the Partnership (the "Purchase Option") in specified
circumstances following the initiation of commercial sales, if any, of
MYOTROPHIN. To exercise the Purchase Option, Cephalon is required to make an
advance payment of $40,275,000 in cash or, at Cephalon's election, $42,369,000
in shares of the Company's common stock, valued at the market price at the time
the Purchase Option is exercised. In addition to the advance payment, the
exercise of the Purchase Option requires the Company to make future payments to
the former limited partners for a period of eleven years after exercise at a
royalty rate of 10.1% (subject to reduction under certain circumstances) of
MYOTROPHIN sales in the Territory. If the Company does not exercise the Purchase
Option prior to its expiration date, the Interim License will terminate and all
development and marketing rights to MYOTROPHIN in the Territory would revert to
the Partnership, which may commercialize MYOTROPHIN itself or license or assign
its rights to a third party. The Company would not receive any benefits from any
such commercialization.
15
<PAGE>
The January 1994 collaboration between the Company and Chiron Corporation
("Chiron") is subject to the rights of the Partnership. The Company is solely
responsible for making any royalty and milestone payments owed to the
Partnership and for funding the Purchase Option, if it elects to exercise the
option.
--Legal Proceedings
The Company and certain of its officers have been named as defendants in a
number of civil actions, which have been consolidated, alleging that various
statements by the Company about the North American and European trial results of
MYOTROPHIN (rhIGF-I) were misleading. See "Certain Risks Related to the
Company's Business."
Funding Requirements Outlook
As described above, the Company expects to continue to use cash to fund
operations. Although the Company has the option to pay the Milestone Payment
and the Purchase Option in common stock, a significant use of funds would be
required if the Company were to decide to fund these payments in cash. The
Company may seek to acquire the assets or additional partnership interests in
the Partnership other than through exercise of the Purchase Option. If the
Company were to elect to purchase the assets or partnership interests in cash,
significant funds could be required. The Company also requires cash for the
funding of purchases of property and equipment and to service its long-term
debt. The Company expects to continue to fund operations using its current cash
balance and through the sale of investments. The Company believes that its cash
and investment balance is adequate to fund its present level of operations for a
period in excess of one year.
To finance its continuing operations and other potential significant cash
outflows, the Company will need to obtain additional funding through debt or
equity financings. The Company also may seek additional funding through other
financing vehicles, such as "off-balance sheet" financing with limited
partnerships or corporations. There can be no assurance that such additional
funds can be obtained through these sources on terms acceptable to the Company,
if at all.
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 three months ended March 31 is as
follows:
<TABLE>
<CAPTION>
% CHANGE
1998 1997 1998 VS. 1997
---- ---- -----------------
<S> <C> <C> <C>
Revenues........................................ $ 3,568,000 $ 5,628,000 (37)%
Research and development expenses............... 11,974,000 13,177,000 (9)
Selling, general and administrative expenses.... 7,169,000 8,697,000 (18)
Interest income, net............................ 916,000 1,116,000 (18)
</TABLE>
The decrease in revenues for the three months ended March 31, 1998 as compared
to the corresponding 1997 period resulted primarily from decreases in revenue
recognized in the first quarter of 1998 under the Chiron collaboration and the
termination of funding under the research and development agreements with SB and
SP. Additionally, revenues in the first quarter of 1997 include the recording of
a milestone payment from Kyowa Hakko for the filing of the MYOTROPHIN NDA in the
United States. The decrease in revenues was partially offset by an increase in
revenue recognized under the co-promotion agreements with Medtronic and
Aguettant which were initiated in 1997, and an increase in revenue recognized
under the TAP Agreement.
16
<PAGE>
Research and development expenses decreased for the three months ended March
31, 1998 as compared to the corresponding 1997 period, primarily due to a
reduction in expenditures related to clinical trials and a reduction in expenses
due to a 17% decrease in staffing levels from the 1997 period to 1998.
Additionally, research and development expenses in the first quarter of 1997
include expenditures associated with certain license fees. The decrease was
partially offset by a purchase of bulk modafinil compound in the first quarter
of 1998.
The decrease in the selling, general and administrative area for the three
months ended March 31, 1998 as compared to the corresponding 1997 period, was
primarily due to decreases in expenses associated with Company's sales and
marketing activities and decreases in administrative expenses.
Results of Operations Outlook
The Company expects to continue to incur operating losses unless and until
such time as product approvals, if any, are obtained and product sales exceed
operating expenses. The Company does not expect sales of PROVIGIL in the United
Kingdom to provide a significant source of revenue in 1998.
The major source of the Company's current revenue is derived from
collaborative research and development agreements and co-promotion agreements.
The continuation of the research funding under the agreement with TAP is subject
to periodic review by TAP and may be terminated without cause with prior notice.
The level of potential revenue to be recognized under the Company's co-promotion
agreements is subject to a number of uncertainties related to product sales,
including competition from new and existing products and the introduction of
controlled substance classification of one of the products being co-promoted by
the Company. Potential revenue to be recognized in 1998 from the Company's co-
promotion agreement with BMS is expected to decrease from 1997 levels, and there
can be no assurance that the agreement will be renewed when it expires at the
end of 1998. In future periods, revenue or expense to be recognized by the
Company under the collaboration with Chiron will depend on the relative costs
incurred in the MYOTROPHIN program by the two companies. Revenue recognized
under the supply agreement with Kyowa Hakko are dependent upon shipment of
MYOTROPHIN to supply Kyowa Hakko's clinical trials in Japan.
The Company expects that it will continue to incur significant research,
development, clinical trial, regulatory filing and other costs. In addition,
selling, general and administrative activities in the United States and Europe
may be expanded as the Company evaluates the potential for obtaining regulatory
approvals of MYOTROPHIN and PROVIGIL. The Company may also continue to incur
substantial expenses to purchase supplies of MYOTROPHIN and PROVIGIL.
The Company expects to have significant fluctuations in quarterly results
based on the level and timing of recognition of contract and co-promotion
revenues and the incurrence of expenses, and may incur quarterly operating
losses in excess of the loss recorded for the three months ended March 31, 1998.
Additionally, if the Company were to make the Milestone Payment, exercise the
Purchase Option, or purchase the assets or additional interests in the
Partnership outside of the Partnership Option, a material charge to earnings
could result, depending upon the development status of the underlying
technology.
The Company does not believe that inflation has had a material impact on the
results of its operations since inception.
17
<PAGE>
PART II - OTHER INFORMATION
- ----------------------------
Item 5. Other Information
Cephalon, Inc. announced that its UK subsidiary, Cephalon UK Ltd., had
received authorization from the Irish Medicines Board ("IMB") to market
PROVIGIL (R) (modafinil) tablets in the Republic of Ireland for the
treatment of narcolepsy. Cephalon intends to manufacture PROVIGIL tablets
in the United States and launch the drug in the Republic of Ireland upon
IMB approval of the U.S. manufacturing arrangements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--- ----------------------
27.1 Financial Data Schedule
99.1 Press Release Dated May 15, 1998
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31,
1998.
18
<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 15, 1998 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)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CEPHALON,
INC.'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000873364
<NAME> CEPHALON, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 12,580,000
<SECURITIES> 90,815,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 110,930,000
<PP&E> 33,337,000
<DEPRECIATION> 11,620,000
<TOTAL-ASSETS> 134,760,000
<CURRENT-LIABILITIES> 18,054,000
<BONDS> 17,972,000
0
0
<COMMON> 284,000
<OTHER-SE> 95,478,000
<TOTAL-LIABILITY-AND-EQUITY> 134,760,000
<SALES> 0
<TOTAL-REVENUES> 3,568,000
<CGS> 0
<TOTAL-COSTS> 19,143,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (916,000)
<INCOME-PRETAX> (14,659,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,659,000)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> (.53)
</TABLE>
<PAGE>
EXHIBIT 99.1
Contact: Sandra Menta (US) Anne Marie Rodriguez (Europe)
Cephalon, Inc. Sante Communications
610-738-6302 011-44-171-379-7377
FOR IMMEDIATE RELEASE
- ---------------------
Cephalon Receives Authorization to Market
PROVIGIL(R) (modafinil) in the Republic of Ireland
WEST CHESTER, PA -- May 15, 1998 -- Cephalon, Inc. (NASDAQ: CEPH)
announced today that its UK subsidiary, Cephalon UK Ltd., has received
authorization from the Irish Medicines Board (IMB) to market PROVIGIL(R)
(modafinil) tablets in the Republic of Ireland for the treatment of narcolepsy.
Narcolepsy is a chronic, neurological, lifelong sleep disorder that
generally begins in young adulthood. The most common symptom is excessive
daytime sleepiness, which is characterized by uncontrollable sleep attacks.
These attacks hamper a person's ability to perform basic daily activities. As a
result, narcolepsy significantly impacts a person's quality of life.
Cephalon intends to manufacture PROVIGIL tablets in the United States
and launch the drug in the Republic of Ireland upon IMB approval of the U.S.
manufacturing arrangements.
"This is the first non-amphetamine agent licensed for the treatment of
narcolepsy in Ireland," said Frank Baldino, Jr., Ph.D., Cephalon's president and
chief executive officer. "Our European sales and marketing organization look
forward to making PROVIGIL available to the neurology community in Ireland for
patients suffering from this disabling disease."
Cephalon licensed modafinil from Laboratoire L. Lafon, the French
pharmaceutical company which discovered and markets the drug in France.
Cephalon has exclusive rights to market modafinil in the United States, Japan,
the United Kingdom, Ireland, Mexico and Italy. In March 1998, Cephalon
commenced marketing of PROVIGIL in the United Kingdom. Cephalon has a marketing
application currently pending in the United States to market PROVIGIL for the
treatment of excessive daytime sleepiness associated with narcolepsy.
- continued -
<PAGE>
Cephalon Receives Authorization
to Market PROVIGIL(R) (modafinil)
in the Republic of Ireland
Page 2
Cephalon, Inc., headquartered in West Chester, PA, is an international
biopharmaceutical company that discovers, develops and markets products to treat
neurological disorders.
This news release may contain forward-looking statements that involve risks
and uncertainties. A full discussion of Cephalon's operations and financial
condition, including factors that may affect the company's business and future
prospects, is contained in documents the company files with the SEC, such as
form 10-Q and 10-K reports. These documents identify important factors that
could cause the company's actual performance to differ from current
expectations.
NOTE: Cephalon's press releases are posted on the Internet at the
company's Web site at http://www.cephalon.com. They are also available by fax
-----------------------
24 hours a day at no charge by calling PR Newswire's Company News On-Call at
800-758-5804, extension 134563.
* * * *
