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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-19119
CEPHALON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2484489
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
145 BRANDYWINE PARKWAY, 19380
WEST CHESTER, PENNSYLVANIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 344-0200
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports 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 [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant is approximately $201,828,095. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the Nasdaq National Market on February 19, 1999. For purposes of making this
calculation only, the registrant has defined affiliates as including all
directors and beneficial owners of more than ten percent of the Common Stock of
the Company.
The number of shares of the registrant's Common Stock outstanding as of
February 19, 1999 was 28,820,542.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 1999 annual
meeting of stockholders are incorporated by reference into Part III.
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TABLE OF CONTENTS
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PART I
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ITEM 1. Business................................................................................. 3
ITEM 2. Properties............................................................................... 21
ITEM 3. Legal Proceedings........................................................................ 21
ITEM 4. Submission of Matters to a Vote of Security Holders...................................... 21
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 22
ITEM 6. Selected Consolidated Financial Data..................................................... 23
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 24
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk................................ 37
ITEM 8. Financial Statements and Supplementary Data.............................................. 38
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure..... 54
PART III
ITEM 10. Directors and Executive Officers of the Registrant....................................... 54
ITEM 11. Executive Compensation................................................................... 56
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................... 56
ITEM 13. Certain Relationships and Related Transactions........................................... 56
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 57
SIGNATURES......................................................................................... 62
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PART I
ITEM 1. BUSINESS
In addition to historical facts or statements of current condition, this
report contains forward-looking statements. Forward-looking statements provide
the Company's current expectations or forecasts of future events. These may
include statements regarding anticipated scientific progress in the Company's
research programs, development of potential pharmaceutical products, prospects
for regulatory approval, manufacturing capabilities, market prospects for the
Company's products, sales and earnings projections, and other statements
regarding matters that are not historical facts. Some of these forward-looking
statements may be identified by the use of words in the statements such as
"anticipate," "estimate," "expect," "project," "intend," "plan," "believe" or
other words and terms of similar meaning. The Company's performance and
financial results could differ materially from those reflected in these forward-
looking statements due to general financial, economic, regulatory and political
conditions affecting the biotechnology and pharmaceutical industries as well as
more specific risks discussed throughout this document. Given these risks and
uncertainties, any or all of these forward-looking statements may prove to be
incorrect. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Certain Risks Related to Cephalon's Business."
Cephalon, Inc., headquartered in West Chester, PA, is an international
biopharmaceutical company dedicated to the discovery, development and marketing
of products to treat neurological disorders and cancer. Cephalon, Inc.,
together with its subsidiaries, is referred to herein as "Cephalon" or the
"Company."
In December 1998, the Company received approval from the U.S. Food and Drug
Administration ("FDA") to market PROVIGIL(R) (modafinil) Tablets [C-IV]
("PROVIGIL Tablets" or "PROVIGIL"), its first approved product in the United
States. PROVIGIL has been approved for treating excessive daytime sleepiness
associated with narcolepsy. Sales of PROVIGIL were initiated in the U.S. in
February 1999 by the Company's U.S. sales organization. Cephalon began marketing
PROVIGIL in the United Kingdom in March 1998 and the Republic of Ireland in
February 1999 through its United Kingdom-based sales organization. Additionally,
Cephalon has rights to commercialize PROVIGIL in Austria, Italy, Mexico and
Switzerland, and applications seeking marketing approval have been filed or are
being prepared in these countries. The Company also has rights to PROVIGIL in
Japan. The Company is highly dependent on the commercial success of PROVIGIL in
the United States. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Risks Related to Cephalon's
Business."
In February 1997, the Company and Chiron Corporation submitted a new drug
application to the FDA for approval to market MYOTROPHIN(R) (mecasermin)
Injection ("MYOTROPHIN Injection" or "MYOTROPHIN") in the United States for the
treatment of amyotrophic lateral sclerosis ("ALS"). In May 1998, the FDA issued
a letter stating that the new drug application was "potentially approvable,"
under certain conditions. The Company cannot predict whether these conditions
can be met to the satisfaction of the FDA, and the prospects for regulatory
approval of MYOTROPHIN continue to be very uncertain in the United States.
Because they believed the application would not be approved, in September 1998,
Cephalon and Chiron withdrew their joint marketing authorization application for
MYOTROPHIN in Europe for the treatment of ALS.
The Company has initiated clinical studies exploring the utility of
PROVIGIL in treating excessive daytime sleepiness and fatigue associated with
disorders other than narcolepsy, such as sleep apnea and multiple sclerosis. The
Company has a significant discovery research program that focuses on discovering
and developing treatments for neurological disorders such as Parkinson's
disease, Alzheimer's disease and stroke, and oncological disorders such as
prostate cancer, pancreatic cancer and a variety of other cancers. Cephalon and
TAP Holdings Inc. have formed an alliance for the development of signal
transduction modulators for the treatment of cancers and prostate disorders in
the United States. TAP is conducting Phase I clinical studies of intravenously
and orally administered compounds.
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COMMERCIAL OPERATIONS
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BACKGROUND
Under a 1993 agreement with Laboratoire L. Lafon, a French pharmaceutical
company, Cephalon obtained an exclusive license to develop, market and sell
PROVIGIL in Italy, Japan, the Republic of Ireland, Mexico, the United Kingdom
and the United States. Under a sales and marketing agreement with Merckle GmbH,
the Company obtained the exclusive right to market PROVIGIL in Austria and
Switzerland.
In the United States, the Company conducted preclinical and clinical
studies, including two Phase III clinical studies necessary to obtain FDA
approval, and filed a new drug application with the FDA in December 1996. In
December 1998, the FDA granted clearance to market PROVIGIL for excessive
daytime sleepiness associated with narcolepsy. Sales of PROVIGIL commenced in
the United States in February 1999 upon the scheduling of modafinil, the active
drug substance in PROVIGIL, in Schedule IV of the Controlled Substances Act by
the Drug Enforcement Administration. The Company's U.S. sales organization
markets PROVIGIL to sleep centers, sleep specialists and neurologists. The
Company also has a small department marketing to managed care organizations in
the United States. The U.S. sales organization is also engaged in the co-
promotion of STADOL NS(R) (butorphanol tartrate), a product of Bristol-Myers
Squibb Corporation.
Cephalon's United Kingdom-based sales organization commenced sales of
PROVIGIL tablets for use in treating narcolepsy in the United Kingdom in 1998
and in the Republic of Ireland in 1999. The Company intends to market PROVIGIL
in Austria and Switzerland upon regulatory approval. Additionally, Cephalon has
formed alliances with Dompe Biotech S.p.A. and Azwell, Inc. to develop and
market PROVIGIL in Italy and Japan, respectively, and is seeking a development
and marketing partner in Mexico. Under a sales and marketing agreement with
Laboratoire Aguettant S.A., the Company is marketing APOKINON(R) (apomorphine
hydrocloride) in France for the treatment of levadopa therapy fluctuations
common in late-stage Parkinson's disease.
Cephalon relies on third parties for the manufacture, distribution and
customer service activities related to marketing PROVIGIL and has established a
small commercial management staff to oversee these third parties. See
"Manufacturing and Product Supply."
PROVIGIL
Narcolepsy
Narcolepsy is a debilitating, lifelong disorder that often originates in
late childhood. Its most notable symptom is an uncontrollable propensity to fall
asleep during the day. There is no cure for narcolepsy, which is estimated to
affect over 125,000 people in the United States, of which 30,000-45,000 are
believed to currently seek treatment from a physician. The Company believes that
there is a proportionate incidence of narcolepsy in the other territories in
which it has obtained a license, but the relative extent of diagnosis and
treatment in those other countries varies and is not as high as it is in the
United States.
The Company conducted two Phase III, double-blind, placebo-controlled,
nine-week multicenter studies of PROVIGIL with more than 550 patients who met
the American Sleep Disorders Association criteria for narcolepsy. Subjects in
both studies were randomized to a daily dose of PROVIGIL 200 mg, PROVIGIL 400
mg, or placebo. Both studies demonstrated improvement in objective and
subjective measures of excess daytime sleepiness for both the 200 mg and 400 mg
doses compared to placebo. PROVIGIL was found to be generally well-tolerated,
with a low incidence of adverse events relative to placebo. Most adverse events
were mild to moderate; the most commonly observed were headache, infection,
nausea, nervousness, anxiety, and insomnia. No specific symptoms of withdrawal
were observed after discontinuation of PROVIGIL therapy. The FDA approved dosing
is 200 mg once daily.
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Excessive Daytime Sleepiness associated with disorders other than narcolepsy
The Company believes that a significant number of people suffer from
excessive daytime sleepiness and fatigue resulting from or associated with other
disorders. For example, patients suffering from obstructive sleep apnea may be
excessively sleepy because of disruption to their normal sleep cycle, even when
the underlying disease is treated. Sleep apnea is the most common diagnosis in
sleep centers. Patients suffering from multiple sclerosis and Parkinson's
disease, which neurologist treat, may suffer from fatigue and sleepiness caused
either by their disease or by the therapeutics currently used to treat it.
Focusing on disorders treated by sleep specialists and neurologists would allow
the Company to utilize its existing field sales force to market PROVIGIL if it
were to obtain regulatory approval for such indications. Consequently, the
Company has initiated clinical studies to explore the utility of PROVIGIL in
other disorders, including sleep apnea and multiple sclerosis.
Laboratoire L. Lafon
Under a 1993 agreement with Laboratoire L. Lafon, a French pharmaceutical
company, Cephalon obtained an exclusive license to develop, market and sell
PROVIGIL in Italy, Japan, the Republic of Ireland, Mexico, the United Kingdom
and the United States. Under the terms of the agreement, Lafon supplies bulk
modafinil compound, the active drug substance in PROVIGIL, for the Company's
commercial use at a purchase price equal to a percentage of net product sales.
In addition, the agreement requires that the Company pay trademark and license
royalties, which also are based on a percentage of net product sales.
Azwell, Inc.
In June 1998, the Company entered into an agreement with Nippon Shoji
Kaisha Ltd. ("Nippon Shoji"), a Japanese pharmaceutical company, to develop and
market PROVIGIL in Japan. Subsequently, Nippon Shoji merged with Showa
Pharmaceutical Co., Ltd. to form Azwell Inc. ("Azwell"). Azwell is responsible
for funding product development activities, including conducting the clinical
trials for narcolepsy required by Japanese regulatory authorities to be included
in an application seeking authorization to market PROVIGIL in Japan. The Company
will supply PROVIGIL to Azwell for use in Japanese clinical trials. Upon product
approval by the Japanese Ministry of Health and Welfare, Azwell will market and
sell the product in Japan. The Company will receive a percentage of net product
sales as a license royalty and in exchange for supplying bulk compound. The
agreement also provides for payments to Cephalon upon the achievement of certain
milestones. The agreement with Azwell has an initial ten-year term and the
Company may terminate the agreement if (i) Azwell fails to file an
investigational new drug application ("IND") by June 2000, or (ii) fails to file
a marketing application by end of December 2002.
Dompe Biotech S.p.A.
In June 1998, Cephalon entered into an agreement with Dompe Biotech S.p.A.
("Dompe"), an Italian pharmaceutical company, in which Cephalon granted Dompe
the right to market, sell and distribute PROVIGIL in Italy. The parties will
jointly manage regulatory matters and an application for marketing approval of
PROVIGIL has been filed with the Italian Ministry of Health. Upon product
approval in Italy, Dompe will market and sell PROVIGIL and will be obligated to
fund a minimum of promotional activities during the first two years of sales.
The Company will supply finished product to Dompe for a purchase price equal to
a percentage of net product sales. The agreement with Dompe has an initial term
of ten years and automatically renews for successive two-year periods unless
terminated by either party upon 180 days notice prior to the expiration.
Merckle GmbH
In December 1998, Cephalon entered into an agreement with Merckle GmbH
("Merckle") under which Cephalon obtained the rights to promote and market
PROVIGIL in Austria and Switzerland for the treatment of narcolepsy. Under the
agreement, Cephalon is responsible for promoting and marketing the product while
Merckle retains responsibility for all other activities. The Company will
receive quarterly compensation from Merckle based
5
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on sales levels achieved. A marketing application has been approved in Austria
and the Company expects to initiate sales activities in Austria in 1999. The
ten-year agreement with Merckle automatically renews for successive one-year
periods unless terminated by either party upon 180 days notice prior to
expiration.
OTHER COMMERCIAL COLLABORATIONS
Bristol-Myers Squibb Company
In July 1994, the Company entered into a co-promotion agreement with
Bristol-Myers Squibb Company to promote and market STADOL NS(R) (butorphanol
tartrate) to neurologists in the United States. STADOL NS is indicated for the
management of pain when the use of an opioid analgesic is appropriate. Cephalon
receives compensation from BMS equal to a percentage of total STADOL NS sales
attributed to prescriptions written by neurologists which exceeds a
predetermined base amount. This agreement expires at the end of 1999, unless
further extended by the parties.
Medtronic, Inc.
In April 1997, the Company entered into an agreement with Medtronic, Inc.
to promote and market Intrathecal Baclofen Therapy (ITB(TM)), for the treatment
of intractable spasticity, to neurologists and physiatrists in the United
States. Quarterly compensation from Medtronic is based primarily on a payment
per patient screen basis. This co-promotion agreement will terminate pursuant to
it terms as of April 29, 1999.
Laboratoire Aguettant S.A.
In December 1997, the Company entered into an agreement with Laboratoire
Aguettant S.A. to promote and market APOKINON(R) (apomorphine hydrocloride) to
neurologists in France. APOKINON, which is injected subcutaneously by a unique
metered dose injection, is indicated for the treatment of levadopa therapy
fluctuations common in late-stage Parkinson's disease. In return for marketing
rights, the Company makes annual payments to Aguettant during the first five
years of the agreement. The Company receives quarterly compensation from
Aguettant primarily based on a rate per unit of APOKINON sold. The ten-year
agreement automatically renews for successive one-year periods unless terminated
by either party upon 90 days notice prior to expiration.
RESEARCH AND DEVELOPMENT
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The Company's research and development efforts focus primarily in two
areas: neurodegenerative disorders and oncological disorders. Neurodegenerative
disorders are characterized by the death of neurons, the specialized conducting
cells of the nervous system. Oncological disorders are characterized by the
uncontrolled proliferation of cells that form tumors. The Company utilizes its
technical expertise in molecular biology, molecular pharmacology, biochemistry,
cell biology, tumor biology and chemistry to develop products in both of these
areas. The Company's research strategy has focused on understanding the cellular
mechanisms of cell survival and cell death. This understanding may allow
medicinal chemical approaches toward creating novel, small, orally active,
synthetic molecules which would facilitate the death of tumor cells leading to
new therapies in oncology or would cross the blood-brain barrier (which prevents
the free passage of many molecules between the bloodstream and the central
nervous system, "CNS") and enhance the survival of neurons, thereby intervening
in the progression of neurodegenerative disorders. Cephalon believes that its
multidisciplinary technology approach facilitates the development of a portfolio
of potential products for the treatment of neurological disorders which involve
neuronal death such as Parkinson's disease, Alzheimer's disease and stroke, and
oncological disorders such as prostate cancer, pancreatic cancer and a variety
of other cancers. The Company's research programs currently consist of four core
technology areas: neurotrophic factors, gene transcription regulators, signal
transduction modulators and protease inhibitors.
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RESEARCH AND DEVELOPMENT PROGRAMS
The following table outlines the Company's research and development
programs.
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COMPOUND INDICATION STATUS (1) COMMERCIAL RIGHTS (3)
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Neurotrophic Factors (MYOTROPHIN).. ALS NDA(2) Cephalon/Chiron/Kyowa Hakko
Gene Transcription Regulators...... Alzheimer's Disease Development Cephalon/Leo
Signal Transduction Modulators..... Alzheimer's Disease Development Cephalon/Kyowa Hakko
Parkinson's Disease Development Cephalon/Kyowa Hakko
Prostate and Phase I Cephalon/TAP/Kyowa Hakko
pancreatic cancer
Solid Tumors Research Cephalon
Protease Inhibitors................ Alzheimer's Disease Research Cephalon
Stroke Research Cephalon
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(1) "Research" includes the development of assay systems, discovery and
evaluation of prototype compounds in vitro and in animals. "Development"
includes product formulation, toxicology and additional animal testing of
a lead compound. "Phase I" clinical trials involve administration of a
product to a limited number of patients to assess safety and determine
appropriate dosage. "Phase II" clinical trials generally involve
administration of a product to a limited number of patients with a
particular disorder to determine dosage, efficacy and safety. "Phase III"
clinical trials generally examine the clinical efficacy and safety of a
product in an expanded patient population at multiple clinical sites.
"NDA" indicates that a new drug application has been filed with the FDA
in the United States for the treatment of the indication listed. See
"Government Regulation."
(2) The FDA stated the NDA was "potentially approvable" under certain
conditions. The prospects for regulatory approval in the United States
are very uncertain. Cephalon and Chiron have withdrawn the marketing
application for MYOTROPHIN in Europe. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Risks
Related to Cephalon's Business."
(3) Cephalon has entered into several collaborations under which the parties
license technology to/from each other for research and development and
marketing of the compounds. For further elaboration of commercial rights,
see "Research and Development Collaborations."
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NEUROTROPHIC FACTORS (MYOTROPHIN)
A major advance in neuroscience was the discovery of naturally-occurring
proteins, referred to as neurotrophic, trophic or growth factors, that promote
the survival of neurons. Several different neurotrophic factors have been
identified which affect the survival of different types of neurons. However,
neurotrophic factors cannot cross the blood-brain barrier. The Company's
development efforts in this area focus on using the neurotrophic factor,
MYOTROPHIN, in disorders such as amyotrophic lateral sclerosis and peripheral
neuropathies, where the projections of the damaged neurons lie or extend outside
the blood-brain barrier and are therefore accessible to trophic factors.
Amyotrophic Lateral Sclerosis
Amyotrophic lateral sclerosis ("ALS") is a fatal disorder of the nervous
system characterized by the chronic, progressive degeneration of motor neurons.
The term "amyotrophic" refers to the loss of lower motor neurons that project
from the spinal cord to the muscle, and "lateral sclerosis" refers to the loss
of upper motor neurons that project from the brain to motor neurons in the
spinal cord. Although both groups of motor neurons are affected in this disease,
it is the loss of the spinal (lower) motor neurons that leads to muscle
weakness, muscle atrophy and, eventually, to the patient's death. ALS affects
approximately 15,000-20,000 people in the United States. The Company believes
that there is a proportionate incidence of ALS in the populations of Europe and
Japan. The first symptom of ALS is muscle weakness, which progresses to muscle
atrophy and loss of muscle function. The disease usually progresses over a
three- to five-year period, with death usually resulting from loss of
respiratory muscle control rendering the patient unable to breathe.
The Company conducted clinical trials in North America and Europe. In
February 1997, the Company and Chiron Corporation submitted a new drug
application to the FDA for approval to market MYOTROPHIN in the United States
for the treatment of amyotrophic lateral sclerosis. In May 1998, the FDA issued
a letter stating that the new drug application was "potentially approvable,"
under certain conditions. The Company cannot predict whether these conditions
can be met to the satisfaction of the FDA and the prospects for regulatory
approval of MYOTROPHIN continue to be very uncertain in the United States.
Cephalon and Chiron also filed jointly for regulatory approval of MYOTROPHIN in
Europe. Because they believed the application would not be approved, in
September 1998, Cephalon and Chiron withdrew their joint marketing authorization
application for MYOTROPHIN in Europe for the treatment of ALS. A study of
MYOTROPHIN in ALS patients is being conducted by Kyowa Hakko in Japan. For a
complete discussion, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Risks Related to Cephalon's
Business."
Other indications
The Company has conducted pilot studies to explore the utility of
MYOTROPHIN in indications other than ALS, such as multiple sclerosis and
peripheral neuropathies. Any further studies to be conducted by the Company are
contingent upon the regulatory outcome of the MYOTROPHIN NDA.
GENE TRANSCRIPTION REGULATORS
The inability of systemically administered trophic factors to cross the
blood brain barrier must be overcome in order to address disorders of the
central nervous system where the neurons as well as their axonal projections lie
within the blood brain barrier. The Company is developing proprietary molecules
believed to influence gene transcription by binding to a specific receptor found
in neurons in the central nervous system. In preclinical studies, these orally
active small molecules cross the blood-brain barrier and initiate
transcriptional events at the genes responsible for the production of certain
neurotrophic factors within the CNS.
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Alzheimer's Disease
Alzheimer's disease is an intractable, chronic, and progressively
incapacitating disease characterized by the presence of core neuritic plaques,
neurofibrillary tangles and gliosis in the brain which is believed to result in
the observed death of several types of neurons. Patients affected with this
disease become severely demented. Alzheimer's disease afflicts an estimated 5%
to 10% of the population over the age of 65, or approximately four million
individuals in the United States, with more than 100,000 new cases diagnosed
each year. The age-dependent nature of the disorder suggests that an increasing
percentage of the population may be affected as the population ages.
The focus of the Company's gene transcription regulator program is to
develop molecules that would enhance the endogenous expression of neurotrophic
factors in the CNS and promote neuronal survival in regions of the brain known
to be affected by Alzheimer's disease. This program is being conducted in
collaboration with Leo Pharmaceutical Products, Ltd.
SIGNAL TRANSDUCTION MODULATORS
Survival of cells, including neurons, is regulated and influenced by
factors that promote cell survival or induce cell death. These factors exert
differential effects on the cell (promotion of survival versus induction of
death) through activation of intracellular signaling pathways. Once activated,
these pathways result in the discrete biochemical events targeted at distinct
intracellular kinases (proteins) that regulate molecular pathways of survival or
death. The Company's signal transduction modulator program focuses on
identifying small molecules that modulate these signal transduction events.
Neurology
In neurodegenerative disease, activation of death-promoting processes leads
to neuronal death. Thus, inhibition of the signaling events in death-promoting
pathways provides novel therapeutic targets for small molecules. The Company has
developed an extensive proprietary library of small molecule modulators of the
signal transduction processes which block the death process in isolated neurons
in vitro and in vivo, where damage has been induced by a variety of harmful
stimuli. The Company is pursuing the development of these small molecules for
the treatment of Alzheimer's disease, Parkinson's disease and other
neurodegenerative disorders.
Alzheimer's Disease
As previously mentioned, Alzheimer's disease is characterized by the death
of neurons in the CNS. In addition to its work focused on gene transcription
regulators, Cephalon has synthesized and identified a class of novel small
molecules which are orally active and cell- and blood-brain barrier permeable
and are inhibitors of the stress activated protein kinase pathway, which is
believed to be the signaling pathway which may be linked to the death of neurons
in this disease. One of these molecules, CEP-1347, has been shown to prevent
neuronal death in vitro and in several models of neuronal death in vivo. CEP-
1347 is currently in preclinical development for use as a potential treatment
for Alzheimer's disease. This program is being conducted under the terms of a
license agreement with Kyowa Hakko Kogyo Co., Ltd.
Parkinson's Disease
Parkinson's disease is a progressive disorder of the central nervous system
affecting over one million people in the United States. Clinically, the disease
is characterized by a decrease in spontaneous movements, gait difficulty,
postural instability, rigidity and tremor. Parkinson's disease is caused by the
degeneration of the pigmented neurons in the Substantia Nigra of the brain,
resulting in decreased dopamine availability. In preclinical models of
Parkinson's disease, CEP-1347 and other proprietary compounds have indicated
their potential utility in the treatment of this disease by demonstrating the
ability to protect the dopamine neurons in the Substantia Nigra.
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Oncology
Cancer is a disease of uncontrolled proliferation of cells. As the cells
proliferate, they aggregate into masses, demand neovascularization (the
formation of new blood vessels), invade organs, and can eventually lead to
death. In many instances, it is the growth factors that are normally involved
in maintenance of cells which become the culprits in driving their abnormal
proliferation. Many of these growth factors bind to specific receptors (or
receptor kinases) and initiate intracellular signals that direct the cell to
proliferate. Thus, inhibition of these kinases provides a unique therapeutic
strategy for treating a variety of oncological disorders. The Company has
developed small molecule inhibitors of specific kinases that have been
demonstrated in preclinical models to inhibit tumor growth. This research
provides the opportunity for selective inhibition of tumor growth without the
undesirable effects on other organ systems produced by traditional
chemotherapeutics.
Other factors become involved as the tumor cells aggregate and promote the
formation of new blood vessels which provide nutrients to the growing tumor.
This latter process is called angiogenesis. The Company has a core of
proprietary, orally active molecules targeted at preventing the development of
new blood vessels required by a cancerous tissue to grow or spread. Selective
inhibition of this new vessel formation would result in slowing tumor growth by
basically starving the tumor of necessary nutrients.
Prostate Cancer
Prostate cancer is the most common form of cancer in men, affecting
approximately one million men in the United States, and is the second leading
cause of cancer death in men. Current therapy includes surgery to remove the
cancer and treatment with anti-androgen agents such as leuprolide. If these
treatments fail and the tumor becomes androgen-refractory, there are no
effective treatments and death usually results.
The Company has identified certain molecules which modulate signal
transduction by blocking (antagonizing) the action of certain growth factors
through the trk kinase. The Company believes these inhibitors may be useful in
treating certain diseases such as prostate cancer, where tumor growth and
development may be mediated by an uncontrolled activation of the endogenous
growth factor. This approach has been demonstrated by the Company to be active
against androgen-refractory prostate cancer tumors in preclinical models.
Cephalon and TAP Holdings Inc. are parties to a licensing and research and
development collaboration to develop trk kinase inhibitors for the treatment of
human cancers and prostate disorders in the United States. In 1996, TAP
initiated a Phase I clinical study of an intravenously administered compound
which was completed in 1998. In March 1998, TAP initiated an ongoing multiple-
dose study of an orally administered compound. The objective of these multi-
center studies is to examine the drugs' pharmacokinetic and safety profiles in
patients with advanced cancer. The molecules used by TAP in these studies were
developed under the Company's agreement with Kyowa Hakko.
Solid Tumors
Angiogenesis, the natural process used by the human body to produce blood
vessels, occurs as a pathological process in the development of solid tumors
such as breast and lung cancers. The blood vessels created by this process
provide the nutrients and oxygen the tumor needs to grow and spread. The
process of angiogenesis is mediated by a number of factors including the
polypeptide vascular endothelial growth factor ("VEGF"). As a result, the
Company believes that inhibitors of the receptor kinase for VEGF has potential
utility in the treatment of solid tumors.
The Company has synthesized a number of proprietary orally active small
molecules which, in in vitro studies, are potent and selective inhibitors of the
receptor kinase for VEGF. The Company is currently evaluating these molecules
in preclinical models for their potential utility in a variety of solid tumors.
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PROTEASE INHIBITORS
A protease is a naturally-occurring enzyme that is responsible for the
processing or cleavage of a protein. Certain proteases have been implicated in
the pathogenesis of neurodegenerative disorders, either directly by causing
neuronal death or indirectly by cleaving proteins into smaller peptide
fragments. These peptide fragments may threaten the survival of neurons. The
Company has developed expertise in identifying, isolating and assaying specific
types of proteases believed to be involved in certain neurodegenerative
disorders. In addition, the Company's expertise in chemistry has enabled the
synthesis of molecules that, in preclinical studies, specifically inhibit the
action of these proteases. In the past, the Company has focused on developing
small molecule therapeutics that inhibit the actions of the protease calpain,
which is thought to play a role in causing the neuronal damage associated with
stroke and on other compounds that inhibit the protease sigma-secretase, which
plays a pivotal role in the production of the toxic beta-Amyloid protein
associated with the degeneration in Alzheimer's disease. The Company believes
that this core technology can be applied to any number of proteases and
disorders.
RESEARCH AND DEVELOPMENT COLLABORATIONS
NEUROTROPHIC FACTORS (MYOTROPHIN)
Cephalon Clinical Partners, L.P.
In August 1992, Cephalon exclusively licensed to Cephalon Clinical Partners,
L.P. (the "Partnership"), rights to MYOTROPHIN for human therapeutic use within
the United States, Canada and Europe (the "Territory"). The Company is
performing the development and clinical testing of MYOTROPHIN on behalf of the
Partnership under a research and development agreement with the Partnership.
Under the agreement, the Partnership reimbursed the Company an aggregate
$38,714,000 through 1995 for development costs incurred. Since that time, the
Company has been funding the continued development of MYOTROPHIN from its own
cash resources.
The Partnership has granted an exclusive license to the Company to manufacture
and market MYOTROPHIN for human therapeutic use within the Territory in return
for royalty payments equal to 10.1% of sales and a payment of approximately
$16,000,000 (the "Milestone Payment") that will be made if MYOTROPHIN receives
regulatory approval in the United States or certain other countries within the
Territory.
The Company has a contractual option to purchase all of the limited
partnership interests in the Partnership (the "Purchase Option"). 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 common
stock, valued at the market price at the time the Purchase Option is exercised.
The Purchase Option will become exercisable for a 45-day period commencing on
the date which is the earlier of (a) the date which is the later of (i) the last
day of the first month in which the Partnership shall have received Interim
License payments equal to fifteen percent (15%) of the limited partners' capital
contributions (excluding the Milestone Payment), and (ii) the last day of the
24th full month after the date of the Company's first commercial sale, if any,
of MYOTROPHIN within the Territory that generates a payment to the Partnership,
and (b) the last day of the 48th full month after the date of such first
commercial sale, if any, in the Territory. If the Company does not exercise the
Purchase Option, its license will terminate and all rights to manufacture or
market MYOTROPHIN in the Territory will revert to the Partnership, which may
then commercialize MYOTROPHIN itself or license or assign its rights to a third
party. The Company would not receive any benefits from such commercialization,
license or assignment of rights.
Kyowa Hakko Kogyo Co., Ltd.
In July 1993, the Company entered into an agreement with Kyowa Hakko providing
for the development of MYOTROPHIN in Japan. Kyowa Hakko is responsible for
funding product development activities, conducting clinical trials in ALS and
seeking authorization to market MYOTROPHIN in Japan. In April 1995, Kyowa Hakko
initiated a Phase III study in Japan, results of which may be available in late
1999. The Company is supplying MYOTROPHIN at its cost to Kyowa Hakko for use
in Japanese clinical trials, and will supply MYOTROPHIN for
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a percentage of any net product sales for commercial use. In addition, the
Company is to receive certain licensing, milestone and royalty payments. Under
certain circumstances, the Company has an option to co-promote MYOTROPHIN in
Japan.
The Company may terminate the agreement if (i) Kyowa Hakko fails to file for
marketing approval of MYOTROPHIN in Japan within eight years from the date of
the agreement, except where such failure is not within Kyowa Hakko's control, or
(ii) if Kyowa Hakko discontinues the development of MYOTROPHIN because of a lack
of safety or efficacy.
Chiron Corporation
Since January 1994, the Company and Chiron have collaborated in the
development of MYOTROPHIN for the treatment of ALS and certain other
neurological disorders, for commercialization in all countries of the world
other than Japan. Through June 1998, the costs of the program had generally been
shared equally by the two companies. Currently, the companies are funding their
own program expenses.
Profits, if any, and losses from the marketing of MYOTROPHIN for the treatment
of ALS and other neurological disorders in North America, the countries of the
European Community and certain other European countries ("Western Europe")
generally will be shared equally by the Company and Chiron. In addition, the
Company will receive a royalty on sales of MYOTROPHIN, if any, in Western Europe
to treat ALS. Chiron will market the products in the collaboration's territories
outside of North America and Western Europe, in return for royalties to the
collaboration, which also will be shared equally by the Company and Chiron.
Either party may terminate the collaboration if there is no reasonable basis
for developing any of the collaboration's compounds. If the Company is the non-
terminating party, it may continue to license the technology or require Chiron
to supply product on a "cost plus" basis for a certain period of time. The
agreement also is subject to termination if Cephalon does not exercise the
Purchase Option. See "Cephalon Clinical Partners, L.P."
Under the collaboration, Chiron has an option to obtain the Company's IGF-I
technology outside the neurology field for compensation to be determined if such
option is exercised.
The Company's collaboration with Chiron is subject to the rights of Cephalon
Clinical Partners, L.P., which has licensed the Company the right to develop
MYOTROPHIN in North America and Europe in return for receiving certain payments.
The Company is solely responsible for making any royalty and milestone payments
owed to the Partnership and is responsible for funding the Purchase Option if it
exercises the option. See "Cephalon Clinical Partners, L.P."
GENE TRANSCRIPTION REGULATORS
Leo Pharmaceutical Products, Ltd.
In November 1996, the Company and Leo Pharmaceutical Products, Ltd. ("Leo")
entered into an agreement to collaborate in the development of gene
transcription regulators for use in the treatment of neurological disorders.
Under this agreement, Cephalon will use its proprietary technology to evaluate
molecules synthesized by Leo. The companies intend to jointly develop selected
products and will share the cost of development. Leo is responsible for the cost
of Phase I studies, Cephalon is responsible for the cost of Phase II, and the
two companies will share equally in the cost of Phase III. Cephalon will have
the exclusive rights to market and sell these jointly developed products in the
United States and Mexico in the neurological field, and will pay Leo a
percentage of net product sales as a royalty and for the supply of product.
Cephalon will receive a royalty from Leo's net product sales of jointly
developed products in other territories.
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SIGNAL TRANSDUCTION MODULATORS
TAP Holdings Inc.
The Company and TAP Holdings Inc. are parties to a licensing and research and
development collaboration to develop and commercialize certain compounds for the
treatment of human cancers and prostate disorders in the United States. The
compounds belong to a family of inhibitors from the Company's signal
transduction modulator program.
Under the terms of the 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 research under the agreement may be extended for one-
year periods. TAP may terminate the research under the agreement upon 90 days
prior to the expiration.
TAP is responsible for conducting and funding all U.S. clinical trials and
additional activities for regulatory submissions for U.S. marketing approval.
The agreement provides for TAP to make milestone payments to Cephalon upon the
submission and approval of new drug applications, if any, that may emanate from
the collaboration and to purchase commercial supplies of product from Cephalon
at a price equal to a fixed percentage of sales plus royalties on product sales.
Kyowa Hakko Kogyo Co., Ltd.
In May 1992, the Company licensed from Kyowa Hakko Kogyo Co., Ltd. patent and
other intellectual property rights to a class of small molecules which the
Company has identified as signal transduction modulators; certain of these
molecules are being developed for use in the treatment of neurological disorders
and others are being developed for the treatment of cancer.
The Company has exclusive marketing rights in North America and Europe with
respect to certain of those compounds, which the Company is seeking to develop
for the treatment of prostate and pancreatic cancer; Kyowa Hakko retains
exclusive marketing rights to these compounds in Asia. The Company has
exclusive marketing rights in the United States with respect to all other of
these compounds, which the Company is seeking to develop for the treatment of
neurological disorders; the Company and Kyowa Hakko each hold semi-exclusive
marketing rights to these compounds throughout the rest of the world, including
Europe and Japan. The Company will pay to Kyowa Hakko a royalty on all sales of
pharmaceutical products containing the compounds. Under the terms of a related
supply agreement, Kyowa Hakko is responsible for supplying the compounds under
development. However, if Kyowa Hakko determines that it cannot or will not
manufacture and supply the compounds, it must then arrange for a third party to
manufacture and supply the compounds or allow the Company to assume
responsibility for manufacturing and supply. The license and supply agreements
will automatically terminate if the Company discontinues the development of
pharmaceutical products containing the compounds due to lack of safety or
efficacy.
PATENTS AND PROPRIETARY TECHNOLOGIES
An important part of Cephalon's product development strategy is to seek
protection for its products and technologies through the use of U.S. and foreign
patents and trademarks. As described below, Cephalon holds rights to and has
filed applications for various U.S. and foreign patents, though Cephalon cannot
be certain that any of these patent applications will issue, or if issued, that
they will not be challenged by third parties or that Cephalon will not be found
to have infringed upon the rights of others in any case.
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PROVIGIL
The particle size of the composition of modafinil as the active drug substance
in PROVIGIL is included in claims of a U.S. patent of the Company which issued
in 1997. Foreign patents claiming the particle size composition of modafinil
are pending in Cephalon's other territories. The composition-of-matter patent
claiming modafinil as the active drug substance in PROVIGIL expired in 1998 in
the Republic of Ireland, Japan, Italy and Mexico. This patent was to have
expired in 1998 in the United Kingdom and the United States; however, the
Company has applied for an extension of the patent in the those countries. In
the United States, if the Company were to secure the maximum extension permitted
under the terms of the U.S. Drug Price Competition and Patent Term Restoration
Act of 1984, as amended (the "DPC Act"), the composition of matter patent would
expire on November 18, 2001. The Company cannot be certain that it will receive
this patent extension or that it will be able to take advantage of any other
patent benefits of the DPC Act. The Company does not believe that an extension
of the modafinil composition patent is possible in any other of its licensed
territories. Also included in the license from Lafon are rights to a U.S.
patent that issued in January 1993 for the use of PROVIGIL in treating
Parkinson's disease and a U.S. patent issued in 1990 which claims the
composition of isomers of PROVIGIL. The FDA has granted orphan drug status to
PROVIGIL for use in the treatment of excessive daytime sleepiness associated
with narcolepsy, that provides for a seven-year period of marketing exclusivity
for PROVIGIL in that indication. See "Government Regulation."
MYOTROPHIN
MYOTROPHIN(R) (mecasermin) Injection is the Company's trademark for
recombinant human insulin-like growth factor-I ("rhIGF-I" or "IGF-I"). The
Company believes that the composition of rhIGF-I is in the public domain and
therefore cannot be patented under a composition-of-matter patent. However,
Cephalon owns issued U.S., European and Japanese patents which include claims
covering the use of IGF-I for the treatment of diseases caused by the death of
non-mitotic, cholinergic neurons, including motor neurons compromised in ALS.
The Company also owns U.S. patents claiming the use of IGF-I in treating certain
types of peripheral neuropathies, and the Company has filed similar applications
in Canada, Europe and Japan. Cephalon also has filed patent applications in the
United States, Canada, Europe and Japan covering the use of IGF-I in enhancing
the survival of neuronal cells. The issued patents and all patent applications
relating to IGF-I in the United States, Canada and Europe have been licensed to
Cephalon Clinical Partners, L.P.
The FDA has designated MYOTROPHIN as an orphan drug for use in the treatment
of ALS. See "Government Regulation."
Under an agreement with SIBIA Neurosciences, Inc. ("SIBIA"), the Company has
obtained a license to use certain patent rights and other technology related to
the manufacture of rhIGF-I in certain strains of yeast host cells. The issued
patent and all patent applications relating to IGF-I in the United States,
Canada and Europe have been licensed to the Partnership.
Subject to the rights of the Partnership, the Company and Chiron cross-
licensed all of their respective patents and patent applications related to IGF-
I and certain other compounds (excluding the Company's rights under the SIBIA
license, as to which Chiron has the option to sublicense) in the field of
neurological diseases and disorders, including Chiron's rights under U.S. and
foreign patents.
The Company cannot be sure that any of its patent applications for IGF-I uses
will issue, that any issued patents will be as broad in scope as such patent
applications or that the claims of any issued patent will withstand challenge.
Even in those jurisdictions where rhIGF-I (or the processes used in IGF-I
manufacturing) may be covered by the claims of a use patent, "off-label" sales
by a third party might occur, especially if another company markets rhIGF-I for
other uses at a price that is less than the price of MYOTROPHIN, thereby
potentially reducing sales of MYOTROPHIN. It is not always possible to detect
"off-label" sales and therefore enforcement of use patents can be difficult.
Furthermore, some jurisdictions outside of the United States restrict the manner
in which patents claiming uses of a product may be enforced.
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Under its collaboration with Chiron, Chiron has the primary responsibility for
manufacturing commercial supplies of MYOTROPHIN. One of Chiron's issued patents
related to certain methods for the manufacture of recombinant proteins,
including rhIGF-I, is currently the subject of an interference proceeding before
the U.S. Patent and Trademark Office ("USPTO") involving patent applications
owned by Genentech, Inc. ("Genentech"). It is not known when or how the USPTO
will ultimately conclude the interference proceeding. Another related patent
application of Chiron, which may cover the current process for manufacturing
rhIGF-I, was the subject of another interference proceeding with a Genentech
patent. Chiron prevailed in the second interference proceeding and thereafter
prevailed in a district court appeal brought by Genentech. That decision was
appealed to the U.S. Court of Appeals for the Federal Circuit ("CAFC") by
Genentech. In April, 1997, the CAFC reversed the District Court's judgment and
remanded the case back to the District Court, which issued a judgment affirming
the USPTO decision for Chiron. Genentech has the right to appeal to the CAFC.
It is not possible to predict which party will obtain an issued patent or
whether the issued claims will cover any portion of the current manufacturing
process. The Company is aware of other patents and patent applications owned by
third parties, which if issued with the claims as filed, may cover certain
aspects of the current method of manufacturing rhIGF-I. The Company and Chiron
intend to either seek licenses under any valid patents related to the
manufacturing of rhIGF-I as required or, alternatively, modify the manufacturing
process. There can be no assurance that, if required, such licenses can be
obtained at all or on acceptable terms or that a modified manufacturing process
can be implemented at all or without substantial cost or delay. If neither
approach is feasible, the Company could be subject to a claim of patent
infringement which, if successful, could prevent the Company from manufacturing
or selling MYOTROPHIN in the United States.
Even if patents issue on the pending applications owned or licensed by the
Company, there can be no assurance that applications filed by others will not
result in patents that would be infringed by the manufacture, use or sale of
MYOTROPHIN. The Company is aware of a U.S. patent recently issued to Genentech
and a granted European patent that claim the use of IGF-I in treating neuronal
damage suffered after a central nervous system insult affecting glia and/or
other non-cholinergic cells, by increasing the active concentration(s) of IGF-I
or its analogues in the CNS. The Company has filed an opposition against the
granted European patent. The Company cannot predict the outcome of this
opposition at this time. If the claims of the issued U.S. patent and the
granted European patent are not otherwise invalid or unenforceable, or if the
grant is not revoked by the European Patent Office, the Company could be
prevented from selling MYOTROPHIN in the United States and Europe for uses of
IGF-I claimed in the patents, unless it obtained a license to the patents. There
can be no assurance that a license is available at all or on acceptable terms to
the Company. The Company believes, based on a preliminary review, that the
claims of the issued United States patent and the granted European patent would
not be infringed by the use or sale of MYOTROPHIN for the treatment of ALS or
peripheral neuropathies, and that the claims directed to the treatment of
multiple sclerosis are invalid over the prior art. The Company is aware of a
published application filed under the Paris Convention Treaty, designating the
United States, that relates to the use of IGF-I in effecting a change in the
CNS. The Company believes that even if the subject matter were deemed to
overlap the subject matter of issued patents and pending patent applications
filed by the Company in the United States, based on the filing date of the third
party's application, it would not take priority over the Company's patents or
applications.
Another third party has been granted a U.S. patent claiming the use of IGF-I
to treat diabetic neuropathy. This patent could prevent the Company from
selling MYOTROPHIN in the United States for use in treating diabetic neuropathy
unless it obtained a license to the patent. That third party may also be
prosecuting a U.S. patent application that may contain a broader claim which, if
issued, could generally cover the use of rhIGF-I to treat many neurological
conditions, including ALS and peripheral neuropathies. The owner of such third-
party patent application has asserted for several years that the subject matter
claimed in its application interferes with claims of the Company's patent with
respect to the use of rhIGF- I in treating ALS. If a broad claim were to issue,
or an interference declared and the third party patent prevailed, the Company
could be prevented from selling MYOTROPHIN in the United States for use in
treating ALS and peripheral neuropathies unless it obtained a license to the
patent. There can be no assurance that any such licenses could be obtained at
all or on acceptable terms from any third parties holding a patent which covers
any of the Company's commercial activities. Furthermore, one or more claims of
the Company's existing patents could be declared invalid.
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Other
Cephalon also owns issued U.S. patents claiming compositions of inhibitors of
certain proteases, compositions and uses of certain novel classes of small
molecules for inhibition of calpain, compositions and uses of a novel class of
small molecules for inhibition of the multicatalytic protease, and compositions
and uses of a novel class of small molecules referred to as "fused
pyrrolocarbazoles." Counterparts of these patents have been filed in other
countries, as appropriate.
Through collaborative agreements with researchers at several academic
institutions, Cephalon has licenses to or the right to license, generally on an
exclusive basis, patents and patent applications issued or filed in the United
States and certain other countries arising under or related to such
collaborations. The Company also has licensed U.S. composition-of-matter and use
patents and various European patent applications for novel compositions under
its collaborative agreement with Kyowa Hakko, including compositions and uses of
certain indolocarbazoles in the treatment of pathological conditions of the
prostate (including prostate cancer) and for the treatment of neurological
disorders.
No assurance can be given that any additional patents will be issued on any of
the patent applications owned by the Company or licensed from third parties.
Furthermore, even if such patents are issued, there can be no assurance that the
validity of any issued patents will be upheld if challenged, that any issued
patents will provide protection against competitive products or otherwise be
commercially valuable, or that applications filed by others will not result in
patents that would be infringed by the manufacture, use or sale of the Company's
products. In addition, patent law relating to the scope of claims in the
biotechnology field is still evolving and the biotechnology patent rights of the
Company are subject to this additional uncertainty. There can be no assurance
that others will not independently develop similar products, duplicate any of
the Company's products, or, if patents are issued to the Company, design around
any products developed by the Company.
The products of the Company could infringe the patent rights of others. If
licenses required under any such patents or proprietary rights of third parties
are not obtained, the Company could encounter delays in product market
introductions, or could find that the development, manufacture or sale of
products requiring such licenses is foreclosed. In addition, patent litigation
is both costly and time-consuming, even if the outcome is favorable to the
Company. In the event that the Company is a defendant in such litigation, an
adverse outcome would subject the Company to significant liabilities to third
parties, require the Company to license disputed rights from third parties, or
require the Company to cease selling its products.
The Company also relies upon trade secrets and other unpatented proprietary
information in its product development activities. The Company's employees enter
into agreements providing for confidentiality and the assignment of rights to
inventions made by them while employed by the Company. The Company also has
entered into non-disclosure agreements to protect its confidential information
delivered to third parties in conjunction with possible corporate collaborations
and other purposes. There can be no assurance that these types of agreements
will effectively prevent disclosure of the Company's confidential information.
MANUFACTURING AND PRODUCT SUPPLY
The Company's ability to conduct clinical trials on a timely basis, to obtain
regulatory approvals and to commercialize its products will depend in part upon
its ability to manufacture its products, either directly or through third
parties, at a competitive cost and in accordance with applicable FDA and other
regulatory requirements, including current Good Manufacturing Practice ("cGMP")
regulations.
Cephalon has no manufacturing facilities of its own and relies on third
parties for all of its manufacturing requirements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Certain Risks
Related to Cephalon's Business."
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The Company relies on Lafon for all of its requirements of bulk modafinil
compound and upon third party manufacturers to provide final formulation,
tabletting and packaging of PROVIGIL.
Cephalon relies on Chiron for all of its manufacturing requirements for
MYOTROPHIN (including clinical and commercial supplies of MYOTROPHIN used by
Kyowa Hakko in Japan). The Company is aware of patents and patent applications
owned by third parties that may cover certain aspects of the collaboration's
method of manufacturing MYOTROPHIN. See "Patents and Proprietary Technologies."
Cephalon relies on Kyowa Hakko to supply bulk compounds for its signal
transduction modulator research program, but if Kyowa Hakko determines that it
cannot or will not manufacture and supply the compounds, it must then arrange
for a third party to manufacture and supply the compounds or allow the Company
to assume responsibility for manufacturing and supply. See "Research and
Development Collaborations--Kyowa Hakko Kogyo Co., Ltd."
Under the Company's agreement with TAP, the Company is obligated to provide
finished product for use in clinical trials and ultimately for commercial
purposes. See "Research and Development Collaborations--TAP Holdings Inc."
COMPETITION
Competition in the Company's fields of interest, from both large and small
companies, is intense and is expected to increase. Furthermore, academic
institutions, governmental agencies, and other public and private research
organizations will continue to conduct research, seek patent protection, and
establish collaborative arrangements for product development. Products developed
by any of these entities may compete directly with those developed or sold by
the Company. Many of these companies and institutions have substantially greater
capital resources, research and development staffs and facilities than the
Company, and substantially greater experience in conducting clinical trials,
obtaining regulatory approvals and manufacturing and marketing pharmaceutical
products. These entities represent significant competition for the Company. In
addition, competitors who are developing products for the treatment of
neurological or oncological disorders might succeed in developing technologies
and products that are more effective than any being developed or sold by the
Company or that would render its technology and products obsolete or
noncompetitive. Competition and innovation from these or other sources
potentially could materially adversely affect any sales of products which might
be developed or are currently being sold by the Company or make them obsolete.
Advances in current treatment methods may also adversely affect the market for
such products. The approval and introduction of therapeutic products that
compete with compounds being developed by the Company could also adversely
affect the Company's ability to attract and maintain patients in clinical
studies for the same indication or otherwise successfully complete its clinical
studies.
With respect to PROVIGIL, there are presently several products used in the
United States and the Company's other licensed territories to treat narcolepsy.
There can be no assurance that the Company will be able to demonstrate the
potential advantages of PROVIGIL to prescribing physicians and their patients on
an absolute basis and/or in comparison to other presently marketed products. In
the United States and elsewhere, PROVIGIL faces significant competition in the
marketplace since narcolepsy is currently treated with several drugs, all of
which have been available for a number of years and many of which are available
in inexpensive generic forms.
With respect to MYOTROPHIN, Rilutek(R) (riluzole) has been approved and is
being marketed by Rhone-Poulenc Rorer in the United States and certain countries
in Europe for the treatment of ALS. In addition, the Company believes that other
companies are developing other therapeutic agents for the treatment of ALS.
Because the potential patient population for ALS is limited, competition from
other products may adversely affect potential sales of MYOTROPHIN. Other
companies are developing rhIGF-I as a therapeutic product for diseases other
than ALS or peripheral neuropathy, including Chiron. If another company markets
rhIGF-I for other uses at a price lower than the price of MYOTROPHIN, potential
sales of MYOTROPHIN, if any, may be reduced. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Risks Related
to Cephalon's Business."
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Cephalon is marketing proprietary products of other pharmaceutical companies,
including STADOL NS in the United States and APOKINON in France. All of these
therapies compete directly or indirectly with other products on the market. In
addition, in all cases, new products are under development by third parties
which could compete, if approved for marketing, with the products currently
being marketed by the Company.
GOVERNMENT REGULATION
The manufacture and sale of therapeutics are subject to extensive regulation
by U.S. and foreign governmental authorities. In particular, pharmaceutical
products are subject to rigorous preclinical and clinical trials and other
approval requirements by the FDA in the United States under the U.S. Food, Drug
and Cosmetic Act and by comparable agencies in most foreign countries.
As an initial step in the FDA regulatory approval process, preclinical studies
are typically conducted in animals to identify potential safety problems. The
results of the preclinical studies are submitted to regulatory authorities as a
part of an investigational new drug application ("IND"), which is filed with
regulatory agencies prior to beginning studies in humans. For several of the
Company's drug candidates, no animal model exists which is potentially
predictive of results in humans. As a result, no in vivo indication of efficacy
would be available until these candidates progress to human clinical trials.
Clinical trials are typically conducted in three sequential phases, although
the phases may overlap. In Phase I, which frequently begins with the initial
introduction of the drug into healthy human subjects prior to introduction into
patients, the compound is tested for safety (adverse effects), dosage tolerance,
absorption, biodistribution, metabolism, excretion, clinical pharmacology and,
if possible, to gain early information on effectiveness. Phase II typically
involves studies in a small sample of the intended patient population to assess
the efficacy of the drug for a specific indication, to determine dose tolerance
and the optimal dose range as well as to gather additional information relating
to safety and potential adverse effects. Phase III trials are undertaken to
further evaluate clinical safety and efficacy in an expanded patient population,
often at multiple study sites, in order to determine the overall risk-benefit
ratio of the drug, and to provide an adequate basis for physician labeling. Each
trial is conducted in accordance with certain standards under protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. In the United States, each protocol
must be submitted to the FDA as part of the IND. Further, each clinical study
must be evaluated by an independent Institutional Review Board ("IRB") at the
institution at which the study will be conducted. The IRB considers, among other
things, ethical factors, the safety of an informed consent by human subjects and
the possible liability of the institution. Similar procedures and requirements
must be fulfilled to conduct studies in other countries.
Data from preclinical and clinical trials are submitted to the FDA in a new
drug application ("NDA") for marketing approval and to foreign health
authorities in Europe as a marketing authorization application ("MAA"). The
process of completing clinical trials for a new drug is likely to take a number
of years and require the expenditure of substantial resources. Preparing an NDA
or MAA involves considerable data collection, verification, analyses and
expense, and there can be no assurance that the FDA or any foreign health
authority will grant an approval on a timely basis, or at all. The approval
process is affected by a number of factors, primarily the risks and benefits
demonstrated in clinical trials as well as the severity of the disease and the
availability of alternative treatments. The FDA or foreign health authorities
may deny an NDA or MAA, in their sole discretion, if that authority determines
that its regulatory criteria have not been satisfied or may require additional
testing or information. Among the conditions for marketing approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to the cGMP regulations of the health
authority. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of
production, quality control and quality assurance to ensure full technical
compliance. Manufacturing establishments, both foreign and domestic, also are
subject to inspections by or under the authority of the FDA and by other
federal, state, local or foreign agencies.
Even after initial FDA or foreign health authority approval has been obtained,
further studies, including Phase IV post-marketing studies, may be required to
provide additional data on safety and will be required to gain
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approval for the use of a product as a treatment for clinical indications other
than those for which the product was initially tested. Also, the FDA or foreign
regulatory authority will require post-marketing reporting to monitor the side
effects of the drug. Results of post-marketing programs may limit or expand the
further marketing of the products. Further, if there are any modifications to
the drug, including any change in indication, manufacturing process, labeling or
manufacturing facility, an application seeking approval of such changes may be
required to be submitted to the FDA or foreign regulatory authority.
In the United States, the Orphan Drug Act provides incentives to drug
manufacturers to develop and manufacture drugs for the treatment of either (i)
rare diseases, currently defined as diseases that affect fewer than 200,000
individuals in the United States or, (ii) for a disease that affects more than
200,000 individuals in the United States, where the sponsor does not
realistically anticipate its product becoming profitable. The FDA has granted
PROVIGIL orphan drug status for use in treating narcolepsy and has designated
MYOTROPHIN as an orphan drug for use in treating ALS, because each indication
currently affects fewer than 200,000 individuals in the United States. Under the
Orphan Drug Act, a manufacturer of a designated orphan product can seek certain
tax benefits, and the holder of the first FDA approval of a designated orphan
product will be granted a seven-year period of marketing exclusivity for that
product for the orphan indication. While the marketing exclusivity of an orphan
drug would prevent other sponsors from obtaining approval of the same compound
for the same indication, it would not prevent approval of the compound for other
indications. In addition, other types of drugs may be approved for the same use.
Orphan drug designation does not confer any special or preferential treatment in
the regulatory review process. The U.S. Congress has considered, and may
consider in the future, legislation that would restrict the duration of the
market exclusivity of an orphan drug and, thus, there can be no assurance that
the benefits of the existing statute will remain in effect.
Under the terms of the U.S. Drug Price Competition and Patent Term Restoration
Act of 1984 (the "DPC Act"), a sponsor may be granted a maximum five year
extension of the term of a patent for a period of time following the initial FDA
approval of a new drug application (NDA) for a new chemical entity ("NCE"). The
statute specifically allows a patent owner to extend the term of the patent for
a period equal to one-half the period of time elapsed between the filing of an
IND and the filing of the corresponding NDA plus the complete period of time
between the filing of the NDA and FDA approval, up to a maximum of five years of
patent term extension. Any such extension, however, cannot extend the patent
term beyond a maximum term of 14 years following FDA approval. Additionally,
under this statute, five years of marketing exclusivity is granted for the first
approval of a NCE. During this period of exclusivity, a third party would be
prevented from filing an Abbreviated New Drug Application ("ANDA") or a
505(b)(2) application for a modafinil drug product equivalent or identical to
PROVIGIL. An ANDA is the application form typically used by manufacturers
seeking approval of a generic version of an approved drug. Subsequent approved
indications for the NCE are eligible, under this statute, to three years of
limited marketing exclusivity for the indication. During any three year
exclusivity period, a third party may file an ANDA or a 505(b)(2) application
seeking approval for any non-exclusive indication(s) if any five-year
exclusivity granted to the NCE has expired, but would be prohibited from
marketing a generic version of the new chemical entity for the subsequent
approved indication until the expiration of three years from marketing
authorization for such subsequent approved indication. The Company intends to
seek the benefits of this statute as applicable, but there can be no assurance
that the Company will be able to obtain any such benefits.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals vary
widely from country to country, and the time required for approval may be longer
or shorter than that required for FDA approval. Although there are procedures
for unified filings for most European countries, in general, each country at
this time also has its own additional procedures and requirements, especially
related to pricing of new pharmaceuticals. Further, the FDA regulates the export
of products produced in the U.S. and, in some circumstances, may prohibit the
export even if such products are approved for sale in other countries.
The Controlled Substances Act (the "CSA") imposes various registration,
record-keeping and reporting requirements, procurement and manufacturing quotas,
labeling and packaging requirements, security controls and a restriction on
prescription refills on certain pharmaceutical products. A principal factor in
determining the
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particular CSA requirements, if any, applicable to a product is its actual or
potential abuse profile. A pharmaceutical product may be "scheduled" as a
Schedule I, II, III, IV or V substance, with Schedule I substances considered to
present the highest risk of substance abuse and Schedule V substances the
lowest. Modafinil, the active drug substance in PROVIGIL, has been scheduled
under the CSA as a Schedule IV substance. Schedule IV substances, such as
modafinil, are allowed no more than five prescription refills during a six-month
period and are subject to special handling procedures relating to the storage,
shipment, inventory control and disposal of the product. Additionally, PROVIGIL
may be subject to various state statutes regulating controlled substances which,
in some cases, may be more restrictive than the CSA. In 1997, STADOL NS was
classified as a Schedule IV controlled substance at the request of Bristol-Myers
Squibb. In addition, a number of state regulatory agencies in the United States
have independently controlled the distribution of STADOL NS under their local
authority.
In addition to the statutes and regulations described above, the Company also
is subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state and local regulations.
SCIENTIFIC AND MEDICAL ADVISORY BOARDS
The Company maintains a Scientific Advisory Board consisting of individuals
with expertise in neuroscience and related fields. Members of the Scientific
Advisory Board advise the Company concerning long-term scientific planning,
research and development, and also periodically evaluate the Company's research
programs. The members are compensated by the Company for their services. The
current members of the Company's Scientific Advisory Board are as follows:
Stanley H. Appel, M.D.,
Baylor College of Medicine
Stanley Cohen, Ph.D.,
Vanderbilt University School of Medicine
Gordon Guroff, Ph.D.,
National Institute of Child Health and Human Development, NIH
Robert Y. Moore, M.D., Ph.D.,
University of Pittsburgh
Robert H. Roth, Ph.D.
Yale University School of Medicine
Shirley M. Tilghman, Ph.D.,
Princeton University
The Company also maintains a Medical Advisory Board consisting of individuals
with expertise in clinical development who periodically review and evaluate the
Company's clinical development plans and clinical trials. The members are
compensated by the Company for their services. The current members of the
Company's Medical Advisory Board are as follows:
Arthur K. Asbury, M.D.,
University of Pennsylvania Medical Center
Robert L. Barchi, M.D., Ph.D.,
University of Pennsylvania Medical Center
Dennis Choi, M.D., Ph.D.,
Washington University School of Medicine
Steven T. DeKosky, M.D.,
Western Psychiatric Institute and Clinic
Richard Johnson, M.D.,
Johns Hopkins Hospital
Robert Y. Moore, M.D., Ph.D.,
University of Pittsburgh
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EMPLOYEES
As of December 31, 1998, the Company had a total of 295 full-time employees,
of which 227 were employed at the Company's main facility in West Chester,
Pennsylvania, 18 were located at the Company's facilities in Europe, and
approximately 50 were engaged in sales and marketing activities throughout the
United States. The Company believes that it has been successful in attracting
skilled and experienced personnel; however, competition for such personnel is
intense. None of the Company's employees are covered by collective bargaining
agreements. Management considers relations with its employees to be good.
ITEM 2. PROPERTIES
The Company owns its administrative offices and research facilities, which
currently occupy approximately 156,000 square feet of space in West Chester,
Pennsylvania. The Company also leases approximately 4,950 square feet of office
space in Surrey, England, which serves as the Company's European headquarters.
The annual cost of the lease is approximately $193,000. The Company also leases
offices in France and Germany at an aggregate annual cost of approximately
$45,000. The Company believes that its current facilities are adequate for its
present purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company, a current director and officer, and a former officer 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
into a single class action. The plaintiff class is comprised of those persons
and entities who purchased Cephalon common stock, or traded in options to buy or
sell Cephalon common stock, during the period June 12, 1995 through and
including June 7, 1996. Plaintiffs seek to hold defendants liable for stock
trading losses that stem from alleged violations of the U.S. securities laws and
alleged common law negligent misrepresentation. More specifically, plaintiffs
have alleged that statements by the Company and the named defendants relating to
the results of certain clinical studies of MYOTROPHIN were misleading. A
judgment in this matter could materially exceed the coverage which may be
available under its directors' and officers' liability insurance. The Company is
vigorously defending this lawsuit and believes that there are valid defenses
against the claims, but the defense of the action is expensive, and the costs of
defense will reduce the available insurance coverage that might otherwise be
available to satisfy the claims. In an effort to resolve this dispute, in
January 1999, the Company engaged a mediator to initiate a non-binding mediation
process and commenced discussions with counsel for the lead plaintiffs. At this
time, the Company is not able to determine with any certainty the outcome of
this action or its potential liability.
Due to the Company's involvement in promoting STADOL NS(R) (butorphanol
tartrate) Nasal Spray, a product of Bristol-Myers Squibb, the Company is a co-
defendant in a product liability action brought against BMS. Although the
Company cannot predict with certainty the outcome of this litigation, it
believes that any expenses or damages that are incurred will be paid by BMS
under the indemnification provisions of the co-promotion agreement. As such, the
Company does not believe that these actions will have a negative effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of security holders during the fourth
quarter of fiscal 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of Cephalon, Inc. is quoted on the NASDAQ National Market
under the symbol "CEPH." The following table sets forth the range of high and
low sale prices for the Common Stock as reported on the NASDAQ National Market
for the periods indicated below.
High LOW
---- ---
1997
First Quarter...................................... 28.50 17.38
Second Quarter..................................... 21.88 11.00
Third Quarter...................................... 12.63 9.50
Fourth Quarter..................................... 13.88 9.75
1998
First Quarter...................................... 15.00 9.50
Second Quarter..................................... 16.13 6.75
Third Quarter...................................... 8.31 3.86
Fourth Quarter..................................... 10.36 4.50
1999
First Quarter (through February 19, 1999).......... 10.69 8.00
As of February 19, 1999 there were 757 holders of record and approximately
18,000 beneficial holders of the Company's Common Stock. On February 19, 1999,
the last reported sale price of the Common Stock as reported on the NASDAQ
National Market was $8.06 per share.
Cephalon has never declared or paid cash dividends on its capital stock and
does not anticipate paying any cash dividends in the foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data have been derived from the
consolidated financial statements of Cephalon, Inc. as of and for each of the
five years in the period ended December 31, 1998 which have been audited by
Arthur Andersen LLP, independent public accountants. This data should be read in
conjunction with the Company's consolidated financial statements, including
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................................ $ 15,655,000 $ 23,140,000 $ 21,366,000 $ 46,999,000 $ 21,681,000
Operating Expenses:
Research and development........................... 43,649,000 51,587,000 62,096,000 73,994,000 51,613,000
Selling, general and administrative................ 30,947,000 36,744,000 28,605,000 15,762,000 9,180,000
------------- ------------- ------------- ------------- ------------
Total operating expenses............................ 74,596,000 88,331,000 90,701,000 89,756,000 60,793,000
Interest income, net................................ 3,534,000 4,772,000 6,205,000 9,754,000 3,047,000
Gain on sale of assets.............................. -- -- 9,845,000 -- --
------------- ------------- ------------- ------------- ------------
Loss................................................ $ (55,407,000) $ (60,419,000) $ (53,285,000) $ (33,003,000) $(36,065,000)
============= ============= ============= ============= ============
Basic and diluted loss per share.................... $ (1.95) $ (2.36) $ (2.19) $ (1.63) $ (2.13)
Weighted average number of shares outstanding....... 28,413,220 25,637,508 24,319,163 20,262,071 16,928,516
<CAPTION>
As of December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and investments(1)........... $ 67,346,000 $ 119,471,000 $ 146,848,000 $ 178,067,000 $114,458,000
Total assets........................................ 94,673,000 151,208,000 177,891,000 221,330,000 140,173,000
Long-term debt...................................... 15,096,000 27,587,000 16,974,000 21,668,000 16,088,000
Accumulated deficit(2).............................. (273,793,000) (218,386,000) (157,967,000) (104,682,000) (71,679,000)
Stockholders' equity(2)............................. 57,602,000 100,338,000 137,326,000 180,205,000 112,767,000
</TABLE>
(1) Maintenance of certain cash and investment balances is required by specific
agreements.
(2) No cash dividends have been declared on the capital stock since the
inception of the Company.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN RISKS RELATED TO CEPHALON'S BUSINESS
In addition to historical facts or statements of current condition, this
report contains forward-looking statements. Forward-looking statements provide
our current expectations or forecasts of future events. These may include
statements regarding anticipated scientific progress in our research programs,
development of potential pharmaceutical products, prospects for regulatory
approval, manufacturing capabilities, market prospects for our products, sales
and earnings projections, and other statements regarding matters that are not
historical facts. Some of these forward-looking statements may be identified by
the use of words in the statements such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe" or other words and terms of similar
meaning. Our performance and financial results could differ materially from
those reflected in these forward-looking statements due to general financial,
economic, regulatory and political conditions affecting the biotechnology and
pharmaceutical industries as well as more specific risks and uncertainties such
as those set forth below. Given these risks and uncertainties, any or all of
these forward-looking statements may prove to be incorrect. Therefore, you are
cautioned not to place too much reliance on any such forward-looking statements.
Furthermore, we do not intend (and we are not obligated) to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. This discussion is permitted by the Private Securities
Litigation Reform Act of 1995.
Dependence on the Commercial Success of PROVIGIL(R) (modafinil) Tablets [C-IV]
During the next several years we will be very dependent on the commercial
success of PROVIGIL(R) (modafinil) Tablets [C-IV] ("PROVIGIL Tablets" or
"PROVIGIL"), especially in the United States. In December 1998, the FDA approved
PROVIGIL for use by those suffering from excessive daytime sleepiness associated
with narcolepsy. The market for use of PROVIGIL in narcolepsy patients is
relatively small; it is limited to approximately 125,000 persons in the United
States, of which we estimate between 30,000 and 45,000 currently are seeking
treatment from a physician. At our present level of operations, we will not be
able to attain profitability if physicians prescribe PROVIGIL only for those who
are diagnosed narcoleptics and, we may not promote PROVIGIL outside of this
approved use. We have initiated clinical studies to examine whether or not
PROVIGIL is effective and safe when used in connection with disorders other than
narcolepsy, but we do not know whether these studies will in fact demonstrate
safety and efficacy, or if they do, whether we will succeed in receiving
regulatory approval to market PROVIGIL for additional disorders. If the results
of these studies are negative, or if adverse experiences are reported in these
clinical studies or otherwise in connection with the use of PROVIGIL by
patients, this could undermine physician and patient comfort with the product
and limit the commercial success of the product. Even if the results of these
studies are positive, the impact on PROVIGIL may be negligible until we are able
to obtain FDA approval to expand the authorized use of PROVIGIL to include
treatment for conditions other than excessive daytime sleepiness associated with
narcolepsy. FDA regulations restrict our ability to communicate the results of
additional clinical studies to patients and physicians without first obtaining
from the FDA approval to expand the authorized uses for this product. As a
result, it may be several years, if ever, before we have sales revenue from
PROVIGIL beyond that attributable to prescriptions for diagnosed narcoleptics.
In addition, the following factors could limit the rate and level of market
acceptance of PROVIGIL:
. the effectiveness of our sales and marketing efforts relative to those
of our competitors;
. the availability and level of reimbursement for PROVIGIL by third-party
payors, including the Federal, state and foreign government agencies;
. the occurrence of any side effects or adverse reactions (or unfavorable
publicity relating thereto) stemming from the use of PROVIGIL;
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We have described these and other factors in more detail below:
. Effectiveness of our Marketing and Selling Efforts
We must effectively market and sell PROVIGIL in the United States. In
the United States and elsewhere, PROVIGIL faces significant competition in
the marketplace since narcolepsy is currently treated with several drugs,
all of which have been available for a number of years and many of which
are available in inexpensive generic forms. Thus, we will need to
demonstrate to physicians and third party payors, that the cost of PROVIGIL
is reasonable and appropriate in light of the safety and efficacy of the
product, and the related health care benefits to the patient.
During the past few years, we have developed a specialty sales
organization focused on marketing, promoting and detailing the products of
other companies to neurologists. However, we have no experience in
marketing, selling or distributing our own products in the United States,
and we lack the more substantial experience held by major pharmaceutical
companies in developing, training and managing a sales organization over an
extended period of time. More recently, we have established a managed care
sales force to market our products to health maintenance organizations,
prescription benefit management firms, and other third party payors; we
also lack substantial experience in this area and we cannot be certain that
we will be successful in our efforts to market our products to these
groups.
. Uncertainty Associated with Third Party Payor Reimbursement Levels
The continuing efforts of government and third party payors to contain
or reduce the costs of health care through various means may affect our
sales. In certain foreign markets, pricing or profitability of
pharmaceutical products is subject to governmental control. In the United
States, there have been, and we expect there will continue to be, various
Federal and state proposals to implement similar government controls. The
adoption by Federal or state governments of any such proposals could limit
the commercial success of PROVIGIL. In addition, in both the United States
and elsewhere, sales of pharmaceutical products are dependent in part on
the availability of reimbursement to the consumer from third party payors,
such as government and private insurance plans. Third party payors are
increasingly challenging the prices charged for products, and are limiting
reimbursement levels offered to consumers for such products. To the extent
that third party payors direct such efforts toward PROVIGIL, the commercial
success of the product could be impaired.
. Uncertainty as to the Occurrence of Unexpected Adverse Events
The usage of PROVIGIL has been limited to date to clinical trial
patients under controlled conditions and under the care of expert
physicians. We cannot predict whether the commercial use of PROVIGIL will
produce undesirable or unintended side effects that have not been
demonstrated in our clinical trials.
. No Assurance of Market Exclusivity for PROVIGIL
We hold exclusive license rights to a composition-of-matter patent
covering modafinil as the active drug substance in PROVIGIL; this patent
was to have expired in 1998 in the United States but we have applied for a
patent extension that, if granted, would run through November 18, 2001. In
addition, we own a U.S. patent covering the particle size of modafinil
which issued in 1997. However, we may not succeed in obtaining any
extension for the composition-of-matter patent and we cannot guarantee that
any of our patents will be found to be valid if their validity is
challenged by a third party, or that these patents (or any other patent
owned or licensed by us) would prevent a potential competitor from
developing competing products or product formulations that avoid
infringement.
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The FDA has granted orphan drug status to PROVIGIL for its use in the
treatment of excessive daytime sleepiness associated with narcolepsy, which
allows us a seven-year period of marketing exclusivity for the product in
that indication. While the marketing exclusivity provided by the orphan
drug law should prevent other sponsors from obtaining approval of the same
compound for the same indication (unless the other sponsor can demonstrate
clinical superiority), it would not prevent approval of the compound for
other indications that otherwise are non-exclusive, nor approval of other
kinds of compounds for the same indication.
. Manufacturing and Distribution Uncertainties Associated with PROVIGIL
We depend upon Laboratoire L. Lafon as our sole supplier of bulk
modafinil compound, the active drug substance contained in PROVIGIL.
Moreover, we depend upon a single manufacturer that is qualified to
manufacture finished PROVIGIL for commercial purposes, and a non-active
ingredient used in the manufacture of PROVIGIL is no longer available. We
maintain an inventory of modafinil compound to protect against supply
disruptions and, at anticipated levels of demand, we also have several
years supply of the ingredient that is no longer available. We are
preparing a new formulation of PROVIGIL that would not include the now
unavailable ingredient, and could enable us to qualify additional tablet
manufacturers with regulatory authorities. However, the introduction of
any such new formulation requires that we establish that the new
formulation is bioequivalent to the current one, and also requires
regulatory approval. If we are unable to develop and obtain approval for a
new formulation, or if demand for the product were to greatly exceed
expectations, we could face supply disruptions that would result in
significant costs and delays, undermine goodwill established with
physicians and patients, and damage commercial prospects for PROVIGIL.
We must comply with all applicable regulatory requirements of the FDA
and foreign authorities, including current Good Manufacturing Practice
regulations ("cGMP"). The facilities used to manufacture, store and
distribute our products are subject to inspection by the FDA and other
regulatory authorities at any time to determine compliance with cGMP and
other regulatory 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.
We rely on several third parties in the United States to formulate,
tablet, package, distribute, provide customer service activities and accept
and process returns. Although we employ a small number of persons to
coordinate and manage the activities undertaken by these third parties, we
have relatively limited experience in this regard. Any disruption in these
activities could impede our ability to sell PROVIGIL and reduce sales
revenue.
Risk Associated with Revenue-Sharing Notes
In February 1999, we completed the sale of $30,000,000 of revenue-sharing
notes due February 2002 (the "Notes"). The Notes are secured by our licenses,
patents and FDA rights relating to PROVIGIL (collectively, the "Pledged
Assets"). The Notes contain a number of covenants including a requirement to
maintain cash and cash equivalent balances of $40,000,000 through December 31,
1999 and $30,000,000 during the remainder of the term of the Notes. If we fail
to maintain such cash balances or violate the other covenants, the holders of
the Notes can declare a default and increase the royalty percentage to 25% of
U.S. PROVIGIL sales and, if the default is not cured within one year, can
accelerate the due date of the Notes and foreclose on the Pledged Assets. The
holders of the Notes can also foreclose on the Pledged Assets if we fail to pay
principal and interest when due.
Need for Additional Funds
Since our inception we have had negative cash flow from operations. As of
December 31, 1998, we had sufficient cash resources to fund our operations at
their current level for at least twelve months. However, beyond 1999, we will
need to raise substantial additional funds to continue our operations at their
current level, continue to meet our minimum cash balance requirements during the
period prior to the repayment of the Notes and pay the Notes at maturity. We
expect that it will be at least several years, if ever, before our level of
commercial sales and other revenue will
26
<PAGE>
provide enough funds to generate positive cash flow from operations. Therefore,
if we cannot raise additional funds, we will have to reduce our present level of
spending which may involve curtailing or restructuring our operations, including
the sale of certain assets of the company. Even after taking these steps, we
would not be able to eliminate all of our existing fixed costs, such as
occupancy expenses and debt service.
Most of the funds we have raised to date have been through the sale of
equity in the company; our ability to raise money through the sale of additional
equity in the company, as well as the price at which such equity may be sold,
are difficult to predict. If we issue common stock or securities convertible
into common stock in order to raise such funds, the existing shareholders'
percentage ownership of Cephalon necessarily would be reduced.
Volatility of Stock Price
The market price and trading volume of shares of our common stock is
volatile, and we expect it to continue to be volatile for the foreseeable
future. Negative announcements (such as adverse regulatory decisions, disputes
concerning patent or other proprietary rights, or operating results that fall
below the market's expectations) could trigger significant declines in the price
of our common stock. In addition, news concerning certain external events, such
as that concerning our competitors or changes in government regulations that may
impact the biotechnology or pharmaceutical industries, also could affect the
price of our common stock.
Potential for Product Liability
The administration of drugs to humans, whether in clinical trials or
commercially, can result in product liability claims even if our drugs or a
collaborator's drugs are not actually at fault for causing an injury.
Furthermore, our products may cause, or may appear to have caused, adverse side
effects or potentially dangerous drug interactions that we may not learn about
or understand fully until the drug is actually manufactured and sold for some
time. Product liability claims can be expensive to defend and may result in
large judgments or settlements against us, which could have a negative effect on
our financial performance. We maintain product liability insurance at a
relatively limited level, and as such, claims could exceed our coverage.
Furthermore, we cannot be certain that we will always be able to purchase
sufficient insurance at an affordable price. Even if a product liability claim
is not successful, the adverse publicity and time and expense of defending such
a claim may interfere with our business.
Legal Proceedings
Cephalon, a current director and officer, and a former officer, have been
named as defendants in a number of civil actions filed in the U.S. District
Court for the Eastern District of Pennsylvania, all of which have been
consolidated into a single class action. The plaintiff class is comprised of
those persons and entities who purchased Cephalon common stock, or traded in
options to buy or sell Cephalon common stock, during the period June 12, 1995
through and including June 7, 1996. Plaintiffs seek to hold defendants liable
for stock trading losses that stem from alleged violations of the U.S.
securities laws and alleged common law negligent misrepresentation. More
specifically, plaintiffs have alleged that statements made by Cephalon and the
named defendants relating to the results of certain clinical studies of
MYOTROPHIN were misleading. A judgment in this matter could materially exceed
the coverage that may be available under our directors' and officers' liability
insurance. We are vigorously defending this lawsuit and believe that there are
valid defenses against the claims, but the defense of the action is expensive,
and the costs of defense will reduce the amount of insurance coverage that might
otherwise be available to satisfy the claims. In an effort to resolve this
dispute, in January 1999, we engaged a mediator to initiate a non-binding
mediation process and commenced discussions with counsels for the lead
plaintiffs. However, at this time we are not able to determine with any
certainty the results of these discussions, the outcome of this action or our
potential liability.
27
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Due to our involvement in promoting STADOL NS(R) (butorphanol tartrate)
Nasal Spray, a product of Bristol-Myers Squibb, we are a co-defendant in a
product liability action brought against BMS. Although we cannot predict with
certainty the outcome of this litigation, we believe that any expenses or
damages that we may incur will be paid by BMS under the indemnification
provisions of our co-promotion agreement. As such, we do not believe that these
actions will have a negative effect on our financial condition or results of
operations.
Risks Inherent in Research and Development of Pharmaceutical Products
We are highly focused on the research and development of potential
pharmaceutical products. Research and development of potential pharmaceutical
products is a very risky and speculative activity that is extremely time
consuming and expensive. These activities include engaging in discovery
research and process development, conducting preclinical and clinical studies,
and seeking regulatory approval in the United States and abroad. In all of
these areas, we have relatively limited resources and compete against major
multinational pharmaceutical companies. Moreover, even if we undertake these
activities in an effective and efficient manner, regulatory approval for the
sale of new pharmaceutical products remains unlikely since, in our industry, the
majority of compounds fail to enter clinical studies and the majority of
therapeutic candidates entering clinical studies fail to be commercialized.
Uncertain Ability to Protect Patents and Other Proprietary Technology and
Information
Our ability to compete effectively depends, in part, on our ability to
protect our proprietary technology, both in the United States and abroad. As
such, we place considerable importance on obtaining patent and trade secret
protection for new technologies, products and processes.
We intend to file applications for patents covering the composition of
matter or uses of our drug candidates or our proprietary processes. We also rely
on trade secrets, know-how and continuing technological advancements to support
our competitive position. Although we have entered into confidentiality and
invention rights agreements with our employees, consultants, advisors and
collaborators, we cannot be sure that such agreements will be honored or that we
will be able to effectively protect our rights to our unpatented trade secrets
and know-how. Moreover, we cannot be sure that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets and know-how. In addition, many of
our scientific and management personnel have been recruited from other
biotechnology and pharmaceutical companies where they were conducting research
in areas similar to those that we now pursue. As a result, we could be subject
to allegations of trade secret violations and similar claims.
In addition, we could incur substantial costs in defending any patent
infringement suits or in asserting any patent rights, including those licensed
to us by third parties, and in defending suits against us or our employees
relating to ownership of or rights to intellectual property. Such disputes
could substantially delay our drug development or commercialization. The U.S.
Patent and Trademark Office ("PTO") or a private party could institute an
interference proceeding involving us in connection with one or more of our
patents or patent applications. Such proceedings could result in an adverse
decision as to priority of invention, in which case we would not be entitled to
a patent on the invention at issue in the interference proceeding. The PTO or a
private party could also institute reexamination proceedings involving us in
connection with one or more of our patents, and such proceedings could result in
an adverse decision as to the validity or scope of the patents. See "Business--
Patents and Proprietary Technologies."
Dependence on Key Executives and Scientists
The nature of our business is such that we are highly dependent upon our
ability to attract and retain qualified scientific, technical and managerial
personnel. There is intense competition for qualified personnel in the
pharmaceutical and biotechnology industries, and we cannot be sure that we will
be able to continue to attract and retain qualified personnel necessary for the
development and management of our business. Our research and development
programs and our business might be harmed by the loss of the services of
existing personnel, as well
28
<PAGE>
as the failure to recruit additional key scientific, technical and managerial
personnel in a timely manner. Much of the know-how we have developed resides in
our scientific and technical personnel and is not readily transferable to other
personnel. We do not maintain "key man" life insurance on any of our employees.
Uncertainties Related to MYOTROPHIN(R) (mecasermin) Injection
Cephalon and Chiron have withdrawn the joint marketing authorization
application for MYOTROPHIN(R) (mecasermin) Injection ("MYOTROPHIN Injection" or
"MYOTROPHIN") in Europe for the treatment of ALS. We made this decision because
of comments we received from the reviewer concerning the results of our two
pivotal ALS studies. These comments led us to believe that our application
would not be approved. The withdrawal of our marketing authorization
application for MYOTROPHIN in Europe may negatively affect the FDA approval
process for MYOTROPHIN in the United States.
In May 1998, the FDA issued a letter stating that the new drug application
submitted jointly by Cephalon and Chiron Corporation to market MYOTROPHIN in the
United States for the treatment of amyotrophic lateral sclerosis (ALS) was
"potentially approvable," contingent, however, upon the submission of additional
information from ongoing clinical studies that demonstrates to the satisfaction
of the FDA that MYOTROPHIN is effective in the treatment of ALS. Cephalon and
Chiron have had discussions with the FDA regarding safety and efficacy data and
have submitted information from the ongoing treatment investigational new drug
program ("T-IND"). The T-IND is a compassionate use program that is neither
placebo-controlled nor blinded, and therefore is not designed to produce
evidence of efficacy. No additional data will be submitted to the FDA at this
time. The study of MYOTROPHIN in ALS patients being conducted by Kyowa Hakko in
Japan is not under our control. Results from that study may be available in
late 1999 but may not satisfy the FDA's request for additional information. The
prospects for regulatory approval of MYOTROPHIN continue to be very uncertain in
the United States. We will continue to evaluate the prospects of receiving
regulatory approval and, based on communications with the FDA, may determine to
withdraw the new drug application.
If the information that has been submitted to the FDA to date does not
prove to be sufficient for approval, a new study would be necessary, which would
be expensive and would take years to complete. We are not sure whether the
potential profits from sales of MYOTROPHIN would make an additional study cost-
effective to conduct. Even if an additional study were conducted, the results of
a new study may not be sufficient to obtain regulatory approval.
Dependence on Corporate Collaborators
Because we have limited resources, we have entered into a number of
agreements with other pharmaceutical companies to support our efforts to develop
and market potential products. These agreements may call for our partner to
control:
. the supply of bulk or formulated drugs for commercial use or for use in
clinical trials;
. the design and execution of clinical studies;
. the process of obtaining regulatory approval to market the product; and
. the marketing and selling of any approved product.
In each of these areas, our research and commercial interests may not be
supported fully since our program may well compete for time, attention and
resources with the internal programs of our corporate collaborators. As such,
we cannot be sure that our corporate collaborators will share our perspectives
on the relative importance of our program, that they will commit sufficient
resources to our program to move it forward effectively, or that the program
will advance as rapidly as it might if we had retained complete control of all
research, development, regulatory and commercialization decisions. For example,
we rely on several of these collaborators for the production of compounds and
the manufacture and supply of pharmaceutical products. If we learn from any of
them that they will not, or cannot, continue to produce and supply compounds or
products under the terms of our agreement(s), we would attempt to identify and
obtain a commitment from another manufacturer. We cannot be certain that we
would be able to locate an appropriate manufacturer or that a new manufacturer
will be able to
29
<PAGE>
manufacture such compounds or products in sufficient quantities, at reasonable
prices, and in accordance with cGMP requirements established by the FDA and
other regulatory authorities.
Other Risks
We face other risks and uncertainties in our business that are characteristic
of a company operating in the biotechnology and pharmaceutical industries,
including intense competition and the failure to keep pace with rapid
technological developments; environmental risks associated with the materials
used in research and development activities; and the failure of third-party
vendors and suppliers to be Year 2000 compliant in a timely manner.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, reverse repurchase agreements and investments at
December 31, 1998 were $67,346,000, representing 71% of total assets, and at
December 31, 1997 were $119,471,000, representing 79% of total assets. Cash
equivalents, reverse repurchase agreements and investments consisted primarily
of short to intermediate-term corporate obligations, overnight investments that
are backed by collateral in the form of government securities with a value equal
to at least 102% of such investments and short to intermediate-term obligations
of the United States government.
The following is a summary of selected cash flow information for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net cash used for operating activities................ $(50,198,000) $(54,677,000) $(53,215,000)
Net cash provided by investing activities............. 45,253,000 31,154,000 45,886,000
Net cash (used for) provided by financing activities.. (1,351,000) 28,123,000 6,435,000
</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 each of the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
TAP Holdings................... $8,059,000 $6,957,000 $5,889,000
Bristol-Myers Squibb........... 2,005,000 4,682,000 4,879,000
Chiron......................... 1,962,000 5,242,000 4,100,000
Medtronic...................... 1,922,000 553,000 --
Kyowa Hakko.................... 902,000 2,210,000 1,700,000
SmithKline Beecham............. -- 3,083,000 2,856,000
Schering-Plough................ -- 88,000 3,000,000
Interest....................... 4,734,000 8,260,000 8,489,000
</TABLE>
We have a licensing and research and development collaboration with TAP
Holdings Inc. to develop and commercialize certain compounds for the treatment
of human cancers and prostate disorders in the United States. Under the terms of
the agreement, we perform research and preclinical development of these
compounds for which we are 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. At December
31, 1998, $2,178,000 was receivable from TAP.
We market STADOL NS(R) (butorphanol tartrate) Nasal Spray, a Bristol-Myers
Squibb proprietary product, to neurologists in the United States. Pursuant to
the agreement, we receive quarterly payments equal to a percentage of total
STADOL NS sales attributed to prescriptions written by neurologists which
exceeds a predetermined base
30
<PAGE>
amount. The decrease in amounts received from BMS in the twelve months ended
December 31, 1998 is due to a reduction in the total amount of STADOL NS sales
from the comparable 1997 period. Additionally, the 1997 period reflects four
quarterly BMS payments while the corresponding 1998 period includes only three
payments. At December 31, 1998, $630,000 was receivable from BMS.
Cephalon has been developing MYOTROPHIN in collaboration with Chiron
Corporation for the treatment of ALS and other neurological disorders. Under
the collaboration, the costs of the program through June 30, 1998 had generally
been shared equally by the two companies. The amounts we received generally
represent reimbursement from Chiron for MYOTROPHIN program costs incurred in
excess of our fifty percent share of program costs. Receipt of cash from Chiron
in the twelve months ended December 31, 1998 has decreased from prior year's
levels due to an overall reduction in our expenditures associated with the
MYOTROPHIN program and because as of June 30, 1998, each party has agreed to
fund their own MYOTROPHIN expenditures.
Under an April 1997 agreement with Medtronic, Inc., we are co-promoting
Intrathecal Baclofen Therapy (ITB(TM)) to neurologists and physiatrists in the
United States for the treatment of intractable spasticity. Compensation is
earned primarily on a payment per patient screen basis with the amount per
patient screen increasing if annual volume targets are achieved. The increase in
cash receipts from 1997 to 1998 is due to an increase in the number of patient
screens performed. At December 31, 1998, $470,000 was receivable from Medtronic.
The agreement with Medtronic will terminate pursuant to its terms as of April
29, 1999.
In May 1992, we entered into an agreement with Kyowa Hakko Kogyo Co., Ltd.
under which Kyowa Hakko is to provide us with bulk supplies of the substance
K252a and certain of its derivatives for manufacture into certain of our
neurology and oncology compounds. In July 1993, we entered into an agreement
with Kyowa Hakko to develop and market MYOTROPHIN in Japan. The payments
received from Kyowa Hakko primarily represent reimbursement of MYOTROPHIN
supplies for clinical trials conducted by Kyowa Hakko in Japan and reimbursement
of certain expenditures related to the K252a program. Also included in the
payments received from Kyowa Hakko in 1997 is a non-recurring $900,000 milestone
payment that was paid upon our filing of the MYOTROPHIN NDA in the United
States. At December 31, 1998, $266,000 was receivable from Kyowa Hakko.
Our research agreements with SmithKline Beecham and Schering-Plough concluded
in 1997.
The decrease in interest received in 1998 compared to 1997 and 1996 was
primarily due to lower investment balances.
--Operating Cash Outflows
A summary of the cash outflows reflected in net cash used for operating
activities for the year ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C>
$(71,261,000) $(85,790,000) $(83,098,000)
</TABLE>
Cash used in the selling, general and administrative area decreased in 1998
as compared to the corresponding 1997 period because of reductions in
expenditures associated with the MYOTROPHIN program and decreases in external
administrative expenses. Research and development funding decreased in 1998 as
compared to 1997 primarily because of a decrease in staffing levels, license
fees, expenditures associated with the MYOTROPHIN program and other research
activities. These reductions offset increased expenditures associated with the
PROVIGIL program.
Cash used for selling, general and administrative activities increased in
1997 as compared to 1996 due to increased funding of sales and marketing
activities, including increases in pre-marketing efforts to support products in
development. The funding of research and development decreased in 1997 as
compared to 1996
31
<PAGE>
primarily due to the reduction in clinical trial expenses, including cost
reductions due to the November 1996 sale of our Beltsville, Maryland pilot-scale
manufacturing facility and the completion of certain clinical studies. The
decrease was partially offset by the cost in 1997 of purchasing bulk modafinil
compound.
--Cash and Funding Requirements Outlook
We believe that our cash and investment balance as of December 31, 1998 was
adequate to fund the then-current level of operations for at least twelve
months. We expect cash flow from operating activities to continue to be negative
for the next several years. The major source of our cash inflows in 1998 was
derived from our collaborative research and development agreement with TAP and
from co-promotion agreements. The continuation of funding under the agreement
with TAP is subject to the achievement of certain development milestones and
periodic review by TAP and may be terminated without cause with prior notice. As
of June 30, 1998, Cephalon and Chiron have agreed to fund their own ongoing
MYOTROPHIN expenditures. We will not receive any future payments from Chiron
for reimbursement of the Company's MYOTROPHIN program costs. Future receipts
from Kyowa Hakko are dependent upon shipment of MYOTROPHIN to supply Kyowa
Hakko's clinical trials in Japan. Additional receipts from Kyowa Hakko may be
received for reimbursement of certain expenditures associated with the K252a
program. The levels of potential payments to be received under our co-promotion
agreements with BMS and Medtronic are subject to a number of uncertainties
related to product sales, including competition from new and existing products.
The agreement with BMS has been extended through December 31, 1999. The
agreement with Medtronic will terminate pursuant to its terms as of April 29,
1999.
Although we initiated sales of PROVIGIL in the United States in February
1999, we expect it will be at least several years, if ever, before sales from
PROVIGIL will provide enough funds to generate cash inflows in excess of the
present level of cash outflows from operations. In addition to the uncertainty
surrounding the degree of market acceptance for a recently introduced product,
factors such as competition, the effectiveness of our sales and marketing
efforts and the ability to demonstrate the utility of PROVIGIL in disorders
other than narcolepsy will all have an impact on PROVIGIL sales that are not
predictable at this point in time.
The Company expects its cash requirements for PROVIGIL to increase
significantly for the next several years due to efforts associated with the
commercial launch of PROVIGIL in the United States, including building PROVIGIL
inventory and conducting clinical studies of PROVIGIL in disorders other than
narcolepsy. Additionally, we expect to continue to expend substantial funds on
research and development activities for our other products in development. We
intend to seek sources of funding for these research programs through
collaborative arrangements with third parties. If additional funds are
unavailable, we may have to reduce our present level of spend which may involve
curtailing or restructuring some of our programs.
We will require substantial additional funds to continue our operations at
their current level. We will need to obtain additional funding through debt
and/or equity financings, collaborative arrangements or through other financing
vehicles. The amount of capital needed to fund operations will depend upon many
factors, including the scope of our research and development programs and the
extent of any funding under collaborative research arrangements, the cost of
conducting clinical studies, the cost of defending and enforcing patent claims
and other legal proceedings, and the level of sales of PROVIGIL in the United
States. We can not be sure that additional funds can be obtained on acceptable
terms, if at all. If additional funds cannot be obtained, we will have to reduce
our present level of spending which may involve curtailing or restructuring
operations, including the sale of certain assets of the company. Even with such
curtailment, we would not be able to eliminate fixed costs, such as occupancy
expenses and debt service.
32
<PAGE>
Net Cash Provided by Investing Activities
A summary of net cash provided by investing activities for each of the years
ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Purchases of property and equipment............. $ (576,000) $ (823,000) $(2,058,000)
Sale leaseback of property and equipment........ -- -- 427,000
Proceeds from sale of assets.................... -- -- 17,192,000
Sales and maturities of investments, net........ 45,829,000 31,977,000 30,325,000
----------- ----------- -----------
Net cash provided by investing activities.... $45,253,000 $31,154,000 $45,886,000
=========== =========== ===========
</TABLE>
In November 1996, we sold the assets of our Beltsville, Maryland pilot-scale
manufacturing facility for a total purchase price of $24,864,000. In the
transaction, we received $17,192,000 in cash, and transferred $7,712,000 of
equipment lease obligations to the purchaser.
Sales and maturities of investments, net, represent the liquidation of
investments.
Net Cash (Used for) Provided by Financing Activities
A summary of net cash (used for) provided by financing activities for each of
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Proceeds from exercises of common stock options and warrants.... $ 410,000 $ 3,458,000 $ 8,516,000
Proceeds from issuance of long-term debt........................ -- 30,000,000 1,838,000
Principal payments on long-term debt ........................... (1,761,000) (5,335,000) (3,919,000)
----------- ----------- -----------
Net cash (used for) provided by financing activities.......... $(1,351,000) $28,123,000 $ 6,435,000
=========== =========== ===========
</TABLE>
The extent and timing of future warrant and option exercises, if any, are
primarily dependent upon the market price of Cephalon's common stock and general
financial market conditions, as well as the exercise prices and expiration dates
of the warrants and options.
Proceeds from the issuance of long-term debt in the year ended December 31,
1997 consists of a $30,000,000 private placement of senior convertible notes. As
of December 31, 1998, the principal on the notes had been fully converted into
3,148,000 shares of Cephalon's common stock. Proceeds from the issuance of long-
term debt in 1996 represent additional borrowings provided by the Commonwealth
of Pennsylvania in connection with the 1995 West Chester building purchase.
For all periods presented, principal payments on long-term debt include
payments on mortgage loans and payments on capital lease obligations.
Additionally, we paid $2,500,000 in 1996 on an unsecured bank loan and, in March
1997, repaid in full the $3,750,000 balance due on that same unsecured bank
loan.
Commitments and Contingencies
--Related Party
Cephalon Clinical Partners, L.P. (the "Partnership") granted Cephalon an
exclusive license (the "Interim License") to manufacture and market MYOTROPHIN
within the United States, Canada and Europe (the "Territory") in return for
royalty payments equal to 10.1% of MYOTROPHIN sales 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. We have the option to pay the Milestone Payment
in cash, common stock, or a combination thereof.
33
<PAGE>
We have 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, we are required to make an advance payment of $40,275,000
in cash or, at our election, $42,369,000 in shares of Cephalon'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 us
to make royalty 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 we do 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. We would not receive
any benefits from any such commercialization, license or assignment of rights.
Late in 1995, the Partnership depleted all of its available funding and has
not provided further funding of MYOTROPHIN development costs. The amount of
additional funding required for further development is determined by the
Partnership's general partner in advance of each quarter, and each quarter, we
have the right, but not the obligation, to contribute such funds. If we decide
to discontinue funding of the MYOTROPHIN program, the Purchase Option and
Interim License will terminate and commercialization rights to MYOTROPHIN will
revert back to the Partnership, as described in the preceding paragraph.
The January 1994 collaboration between Cephalon and Chiron is subject to the
rights of the Partnership. We are solely responsible for making any royalty and
milestone payments owed to the Partnership and for funding any exercises of the
Purchase Option.
The general partner of the Partnership is a wholly-owned subsidiary of
Cephalon, which owns 1% of the Partnership.
--Shareholder Litigation
Cephalon, a current director and officer, and a former officer have been
named as defendants in a number of civil actions, which have been consolidated
into a single class action, alleging that statements made about the results of
certain clinical studies of MYOTROPHIN were misleading. Due to our involvement
in promoting STADOL NS, a product of Bristol-Myers Squibb, we are a co-defendant
in a recent product liability action brought against BMS. See "Certain Risks
Related to Cephalon's Business."
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 each of the years ended December 31 is
as follows:
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 VS. 1997 VS.
1998 1997 1996 1997 1996
---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C>
Revenues....................................... $15,655,000 $23,140,000 $21,366,000 (32)% 8%
Research and development expenses.............. 43,649,000 51,587,000 62,096,000 (15) (17)
Selling, general and administrative expenses... 30,947,000 36,744,000 28,605,000 (16) 28
Interest income, net........................... 3,534,000 4,772,000 6,205,000 (26) (23)
Gain on sale of assets......................... -- -- 9,845,000 -- (100)
</TABLE>
34
<PAGE>
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenues decreased in 1998 as compared to 1997 due primarily to the cessation
of both the Schering-Plough and Smith-Kline Beecham research and development
collaborations and because of a decrease in revenues recognized from Chiron and
Kyowa Hakko as a result of the decreased expenditures associated with the
MYOTROPHIN program. These decreases were partially offset by revenue from
initial sales of PROVIGIL in the United Kingdom although such sales were not
material.
Research and development expenses decreased in 1998 as compared to 1997
primarily because of a decrease in staffing levels, license fees, expenditures
associated with the MYOTROPHIN program and other research activities. These
reductions were partially offset by increased clinical research expenditures
associated with the PROVIGIL program.
The decrease in the selling, general and administrative area for 1998 as
compared to the corresponding 1997 period was due primarily to reductions in
expenses associated with the MYOTROPHIN program and expenses related to a
certain co-promotion agreement.
Net interest income decreased in 1998 due primarily to lower investment
balances throughout the year as compared to the corresponding 1997 period.
Year ended December 31, 1997 compared to year ended December 31, 1996
The increase in revenues for 1997 as compared to 1996 resulted primarily from
increases in revenue recognized under the Chiron collaboration, the Kyowa Hakko
MYOTROPHIN agreement and the TAP agreement, and revenue recognized from the
initiation of a co-promotion agreement with Medtronic. The increases in revenues
were partially offset by a decrease in revenue in 1997 from Schering-Plough due
to the conclusion of its funding of a research program.
Research and development expenses decreased in 1997 as compared to 1996
primarily due to the reduction in clinical trial expenses, including cost
reductions due to the November 1996 sale of our Beltsville, Maryland pilot-scale
manufacturing facility and the completion of certain clinical studies. The
decrease was partially offset by an increase in expenditures due to the purchase
of bulk modafinil compound, the active drug substance in PROVIGIL Tablets, an
increase in expenditures in our research programs and certain license fees
payable in accordance with third-party agreements.
The increase in selling, general and administrative expenses in 1997 as
compared to 1996 was primarily due to increases in expenses incurred in our U.S.
and European sales and marketing organizations including increases in pre-
marketing efforts in support of the products in development and expenses
associated with a co-promotion agreement.
The decrease in net interest income in 1997 as compared to 1996 was primarily
due to an increase in interest expense associated with senior convertible notes.
In 1996, we realized a $9,845,000 gain in connection with the sale of assets
at our Beltsville, Maryland pilot-scale manufacturing facility.
Results of Operations Outlook
We initiated sales of PROVIGIL for narcolepsy in the U.S. in February 1999.
We expect that sales of PROVIGIL may be limited since we can only market the
product to treat excessive daytime sleepiness associated with narcolepsy. As a
result, we expect to continue to incur operating losses for at least several
years. We may never be able to achieve profitability solely through sales of
PROVIGIL even if we obtain approval to market the product to treat other
disorders. We do not expect sales of PROVIGIL in the United Kingdom to provide a
significant source of revenue for at least several years.
35
<PAGE>
The major source of our current revenue is derived from collaborative
research and development agreements and co-promotion agreements. The
continuation of any of these agreements is subject to the achievement of certain
milestones and to periodic review by the parties involved. Additionally, all
agreements have termination clauses allowing either party to end the funding
under those agreements. Without these sources of revenue, operating losses would
increase.
In the next several years, we expect our expenditures associated with
PROVIGIL to increase including expenses related to marketing and selling a
commercial product and expenses incurred in conducting clinical studies of
PROVIGIL in disorders other than narcolepsy. Additionally, we expect to continue
to incur substantial expenses on research and development activities for our
other products in development. We intend to seek sources of funding for these
programs through collaborative arrangements with third parties.
We do not believe that inflation has had a material impact on the results of
its operations since inception.
SUBSEQUENT EVENT
On February 25, 1999, we completed a debt offering totaling $30,000,000,
raised through the private sale of revenue-sharing notes (the "Notes"). The
Notes are repayable in cash in February 2002. The Notes are secured by our U.S.
rights to PROVIGIL (the "Pledged Assets") and bear an annual interest rate of
11%. Investors in the Notes also will receive a royalty of 6% on U.S. sales of
PROVIGIL for up to five years. We have the right to redeem the Notes at a
premium prior to maturity, which would reduce the royalty period to four years
and may extend the maturity and the royalty by one year under certain
circumstances. The Notes contain a number of covenants including a requirement
to maintain a minimum level of cash and investments equal to $40,000,000 during
1999 and $30,000,000 thereafter as long as the principal remains outstanding. If
we fail to maintain such cash balances or violate the other covenants, the
holders of the Notes can declare a default and increase the royalty percentage
to 25% of U.S. PROVIGIL sales and, if the default is not cured within one year,
can accelerate the due date of the Notes and foreclose on the Pledged Assets.
The holders of the Notes can also foreclose on the Pledged Assets if we fail to
pay principal and interest when due. The Notes are not convertible into common
stock.
The offering also includes the issuance of five-year warrants to purchase
1,920,000 shares of Cephalon common stock with an exercise price of $10.08. The
investors will forfeit 480,000 warrants if specified PROVIGIL sales levels are
achieved. In addition, we may redeem up to 720,000 of the remaining warrants
after three years if the market value of Cephalon common stock exceeds certain
thresholds.
IMPACT OF YEAR 2000
The "Year 2000 Issue" is typically the result of software and firmware being
written using two digits rather than four to define the applicable year. If our
software and firmware with date-sensitive functions are not Year 2000 compliant,
these systems may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, interruptions in
research and development operations or the inability to engage in normal
business activities.
We have developed a multi-step Year 2000 readiness plan for its internal
systems. The plan includes development of corporate awareness, assessment of
internal systems, project planning, project implementation (including
remediation, upgrading and replacement where necessary), validation testing and
contingency planning.
We are currently conducting a review of our information technology systems to
identify the systems that could be adversely affected by the Year 2000 problem.
We believe that, with minor modifications and testing of our systems, the Year
2000 issue will not pose a significant operational problem. We are using our
internal resources to reprogram or replace and test our software for Year 2000
modifications. If we are unable to make the required modifications to existing
software or convert to new software in a timely manner, the Year 2000 Issue
could have an impact on operations, although we do not believe this impact will
be material.
36
<PAGE>
We have initiated formal communication with significant suppliers and third
party vendors to determine the extent to which operations are vulnerable to
those third parties' failure to remediate their own Year 2000 hardware and
software issues. Our primary focus to date has been on research and development
activities that do not rely heavily on third-party systems. However, third
parties perform certain activities related to commercialization of our products,
including product manufacturing and distribution, order entry, shipping and
billing, and sales tracking. We have asked our suppliers and vendors to inform
us of the status of the Year 2000 compliance of their products and we are aware
that certain of our suppliers and vendors are not currently Year 2000 compliant.
These parties have communicated to us that they are taking appropriate
remediation steps, and we intend to monitor their progress. We will continue to
seek information from non-responsive suppliers and vendors and we plan to
contact additional suppliers. In addition, in all new contract negotiations, we
are asking suppliers to warrant that products sold or licensed to us are Year
2000 compliant. In the event that any of our significant suppliers are unable
to become Year 2000 compliant, our business or operations could be adversely
affected. We cannot be sure that the systems of other companies on which we rely
will be compliant on or before January 1, 2000 and will not have an adverse
effect on our operations.
We do not expect the total cost associated with required modifications to
become Year 2000 compliant to be material. We are funding the minimal
expenditures of the Year 2000 project through existing cash on hand. We
anticipate completing the critical Year 2000 issues by the first half of 1999,
which is prior to any anticipated impact on our operating systems, and expect
the Year 2000 project to continue beyond January 1, 2000 with respect to
resolution of non-critical issues.
We have not yet fully developed a comprehensive contingency plan addressing
situations that may result if we are unable to achieve Year 2000 readiness of
our critical operations. We can not be sure that we will be able to develop a
contingency plan that will adequately address issues that may arise in the year
2000. Finally, the Company we are also vulnerable to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions.
The costs of the project and the completion date of the Year 2000
modifications are based on our best estimates. These estimates were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. We can not be sure that these estimates will be achieved and actual
results could differ materially from those anticipated.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not hold any investments in market risk sensitive instruments.
Accordingly, we believe that we are not subject to any material risks arising
from changes in interest rates, foreign currency exchange rates, commodity
prices, equity prices or other market changes that affect market risk sensitive
instruments.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cephalon, Inc.:
We have audited the accompanying consolidated balance sheets of Cephalon,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cephalon, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pennsylvania
February 25, 1999
38
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $3,975,000 $10,271,000
Reverse repurchase agreements (Note 2) 3,509,000 27,414,000
Short-term investments (Note 2) 59,862,000 81,786,000
Accounts receivable - contract 3,887,000 5,039,000
Other 1,361,000 2,641,000
-------------- --------------
Total current assets 72,594,000 127,151,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $13,439,000 and $11,099,000 (Note 3) 20,505,000 21,853,000
OTHER 1,574,000 2,204,000
-------------- --------------
$94,673,000 $151,208,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,558,000 $2,724,000
Accrued expenses (Note 4) 13,298,000 16,075,000
Current portion of long-term debt (Note 5) 1,624,000 1,734,000
-------------- --------------
Total current liabilities 18,480,000 20,533,000
LONG-TERM DEBT (Note 5) 15,096,000 27,587,000
OTHER (Note 6) 3,495,000 2,750,000
-------------- --------------
Total liabilities 37,071,000 50,870,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY: (Note 8)
Preferred stock, $.01 par value,
5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
28,802,323 and 27,395,254 shares issued and outstanding 288,000 274,000
Additional paid-in capital 331,673,000 318,753,000
Treasury stock (487,000) (259,000)
Accumulated deficit (273,793,000) (218,386,000)
Cumulative translation adjustment (79,000) (44,000)
-------------- --------------
Total stockholders' equity 57,602,000 100,338,000
-------------- --------------
$94,673,000 $151,208,000
============== ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
39
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES: (Note 9) $15,655,000 $23,140,000 $21,366,000
OPERATING EXPENSES:
Research and development 43,649,000 51,587,000 62,096,000
Selling, general and administrative 30,947,000 36,744,000 28,605,000
-------------- -------------- --------------
74,596,000 88,331,000 90,701,000
-------------- -------------- --------------
LOSS FROM OPERATIONS (58,941,000) (65,191,000) (69,335,000)
INTEREST:
Income 5,408,000 7,973,000 8,491,000
Expense (Note 5) (1,874,000) (3,201,000) (2,286,000)
-------------- -------------- --------------
3,534,000 4,772,000 6,205,000
-------------- -------------- --------------
GAIN ON SALE OF ASSETS -- -- 9,845,000
-------------- -------------- --------------
LOSS (Note 10) $(55,407,000) $(60,419,000) $(53,285,000)
============= ============= =============
BASIC AND DILUTED LOSS PER SHARE (Note 1) $(1.95) $(2.36) $(2.19)
============= ============= =============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 28,413,220 25,637,508 24,319,163
============= ============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
40
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Total Other
Comprehensive Accumulated Comprehensive Common
Loss Total Deficit Income/(Loss) Stock
--------------- -------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 180,205,000 $ (104,682,000) $ 14,000 $ 238,000
Loss $(53,285,000) (53,285,000) (53,285,000)
Foreign currency (57,000)
translation --------------
Other comprehensive loss (57,000) (57,000) (57,000)
--------------
Comprehensive loss $(53,342,000)
==============
Stock options and warrants exercised 8,152,000 -- 8,000
Restricted stock award plan 2,073,000 -- --
Employee benefit plan 529,000 -- --
Treasury stock acquired (291,000) -- --
--------------- ---------------- ----------- -------------
BALANCE, DECEMBER 31, 1996 $ 137,326,000 $ (157,967,000) $ (43,000) $ 246,000
Loss $(60,419,000) (60,419,000) (60,419,000)
Foreign currency (1,000)
translation --------------
Other comprehensive loss (1,000) (1,000) (1,000)
--------------
Comprehensive loss $(60,420,000)
==============
Stock options and warrants exercised 4,023,000 -- 3,000
Restricted stock award plan 1,164,000 -- 1,000
Employee benefit plan 605,000 -- --
Conversion of convertible debentures 17,695,000 -- 20,000
Issuance of warrants in connection 400,000 -- --
with convertible debentures transactions
Expired call option (1,973,000) -- 5,000
Treasury stock acquired (455,000) -- --
Treasury stock retirement 1,973,000 -- (1,000)
--------------- ----------------- ----------- -------------
BALANCE, DECEMBER 31, 1997 $ 100,338,000 $ (218,386,000) $ (44,000) $ 274,000
Loss $(55,407,000) (55,407,000) (55,407,000)
Foreign currency (35,000)
translation ---------------
Other comprehensive loss (35,000) (35,000) (35,000)
---------------
Comprehensive loss $(55,442,000)
===============
Stock options and warrants exercised 216,000 -- --
Restricted stock award plan 1,500,000 -- 1,000
Employee benefit plan 583,000 -- 1,000
Conversion of convertible debentures 10,635,000 -- 12,000
Treasury stock acquired (228,000) -- --
---------------- --------------- ----------- -------------
BALANCE, DECEMBER 31, 1998 $57,602,000 $(273,793,000) ($79,000) $288,000
================ =============== =========== =============
Additional
Paid-in Treasury
Capital Stock
------------ ------------
<S> <C> <C>
BALANCE, JANUARY 1, 1996 $286,122,000 $ (1,487,000)
Loss
Foreign currency
translation
Other comprehensive loss
Comprehensive loss
Stock options and warrants exercised 8,144,000 --
Restricted stock award plan 2,073,000 --
Employee benefit plan 529,000 --
Treasury stock acquired -- (291,000)
------------ ------------
BALANCE, DECEMBER 31, 1996 $296,868,000 $ (1,778,000)
Loss
Foreign currency
translation
Other comprehensive loss
Comprehensive loss
Stock options and warrants exercised 4,020,000 --
Restricted stock award plan 1,163,000 --
Employee benefit plan 605,000 --
Conversion of convertible debentures 17,675,000 --
Issuance of warrants in connection 400,000
with convertible debentures transactions
Expired call option (1,978,000) --
Treasury stock acquired -- 455,000
Treasury stock retirement -- 1,974,000
------------ ------------
BALANCE, DECEMBER 31, 1997 $318,753,000 $ (259,000)
Loss
Foreign currency
translation
Other comprehensive loss
Comprehensive loss
Stock options and warrants exercised 216,000 --
Restricted stock award plan 1,499,000 --
Employee benefit plan 582,000 --
Conversion of convertible debentures 10,623,000 --
Treasury stock acquired -- (228,000)
------------ ------------
BALANCE, DECEMBER 31, 1998 $331,673,000 $ (487,000)
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
41
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996
------------------------ -------------------- --------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss $(55,407,000) $(60,419,000) $(53,285,000)
Adjustments to reconcile loss to net cash
used for operating activities:
Depreciation and amortization 2,340,000 2,247,000 4,198,000
Gain on sale of assets -- -- (9,845,000)
Non-cash compensation expense 1,854,000 1,811,000 2,602,000
Other 47,000 157,000 --
(Increase) decrease in operating assets:
Accounts receivable - contract 1,152,000 247,000 (2,262,000)
Other current assets 1,157,000 (186,000) 4,102,000
Other long-term assets (109,000) (1,656,000) 121,000
Increase (decrease) in operating liabilities:
Accounts payable 874,000 1,086,000 (2,741,000)
Accrued liabilities (2,851,000) 1,289,000 2,947,000
Other long-term liabilities 745,000 747,000 948,000
------------------- -------------------- --------------------
Net cash used for operating activities (50,198,000) (54,677,000) (53,215,000)
------------------- -------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (576,000) (823,000) (2,058,000)
Sale leaseback of property and equipment -- -- 427,000
Proceeds from sale of assets -- -- 17,192,000
Sales and maturities of investments, net 45,829,000 31,977,000 30,325,000
------------------- -------------------- --------------------
Net cash provided by investing activities 45,253,000 31,154,000 45,886,000
------------------- -------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock
options and warrants 410,000 3,458,000 8,516,000
Proceeds from issuance of long-term debt -- 30,000,000 1,838,000
Principal payments on long-term debt (1,761,000) (5,335,000) (3,919,000)
------------------- -------------------- --------------------
Net cash (used for) provided by
financing activities (1,351,000) 28,123,000 6,435,000
------------------- -------------------- --------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,296,000) 4,600,000 (894,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,271,000 5,671,000 6,565,000
------------------- -------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $3,975,000 $10,271,000 $5,671,000
=================== ==================== ====================
The accompanying notes are an integral part of these financial statements.
</TABLE>
42
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Cephalon, Inc., headquartered in West Chester, PA, is an international
biopharmaceutical company dedicated to the discovery, development and marketing
of products to treat neurological disorders and cancer. The Company has had
negative cash flow from operations since inception and has funded its operations
primarily from the proceeds of public and private placements of its equity
securities. The Company has only recently initiated sales of its first approved
product, PROVIGIL(R) (modafinil) Tablets [C-IV] ("PROVIGIL Tablets" or
"PROVIGIL"), in the United States for use by those suffering from excessive
daytime sleepiness associated with narcolepsy.
The Company's business is subject to a number of significant risks,
including the risks inherent in pharmaceutical research and development
activities. The Company is highly dependent upon the successful
commercialization of PROVIGIL and there is no assurance that the Company will
achieve profitability solely on sales of PROVIGIL in the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the results of operations of
the Company and its wholly owned subsidiaries. Intercompany transactions have
been eliminated.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FIXED ASSETS AND DEPRECIATION
Buildings, property and equipment are stated at cost and depreciated using
the straight-line method over the estimated lives of the assets, which range
from three to forty years. Property and equipment under capital leases are
depreciated or amortized over the shorter of the lease term or the expected
useful life of the assets. The Company's assets are reviewed and adjusted for
impairment whenever events or circumstances have occured that indicate that the
remaining useful lives of the assets should be revised or that the remaining
balance of such assets may not be recoverable based upon expectations of future
undiscounted cash flows. No such adjustments were required as of December 31,
1998. Expenditures for maintenance and repairs are charged to expense as
incurred, while major renewals and betterments are capitalized.
REVENUE RECOGNITION
On contracts in which the Company receives payments based upon the level of
its related research and development expenses, revenues are recognized as the
related expenses are incurred. On contracts which provide for the receipt of
milestone payments, revenues are recognized when the payor confirms that the
milestone has been achieved. On contracts which provide for payments based upon
pre-determined rates for personnel working on the contract and reimbursement of
third-party expenses, revenues are recognized as the work is performed and the
third-party expenses are incurred. Payments received that relate to future
performance are deferred and recognized as revenue over the specified future
performance periods. Under the Company's co-promotion agreements, revenue is
recognized upon the achievement of the stipulated sales activity and performance
43
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
targets. Under agreements to supply product for clinical trials, the Company
recognizes revenue upon shipment. (See Note 9).
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash, cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued expenses are considered to approximate
their respective fair values. None of the Company's debt instruments that are
outstanding as of December 31, 1998 have readily ascertainable market values;
however, the carrying values are considered to approximate their respective fair
values.
LOSS PER SHARE
Statement of Financial Standards No. 128 "Earning per Share" requires dual
presentation of basic and diluted earnings per share ("EPS") for complex capital
structures on the face of the income statement. Basic EPS is computed by
dividing net income 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 included
in the denominator. For the years ended December 31, 1998, 1997 and 1996, the
Company's calculation of diluted EPS excludes stock options, restricted stock
awards, warrants and the conversion of convertible notes since their inclusion
would be antidilutive.
2. CASH, CASH EQUIVALENTS AND INVESTMENTS
At December 31, cash, cash equivalents and investments consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash and cash equivalents.......................... $ 3,975,000 $ 10,271,000
Reverse repurchase agreements collateralized by
U.S. Treasury securities......................... 3,509,000 27,414,000
Short-term investments
U.S. government obligations...................... 49,830,000 76,789,000
Commercial paper................................. 10,032,000 --
Other corporate obligations...................... -- 4,997,000
----------- ------------
59,862,000 81,786,000
$67,346,000 $119,471,000
=========== ============
</TABLE>
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. The Company's
short-term investments consisted primarily of short to intermediate-term
corporate obligations, overnight investments that are backed by collateral in
the form of government securities with a value equal to at least 102% of such
investments and short to intermediate-term obligations of the United States
government. These securities are held in a trust account with a commercial bank
on behalf of the Company. The Company believes that the quantity and quality of
the collateral are sufficient to secure its investment in these instruments. All
of the Company's investments in debt securities at December 31, 1998 mature in
1999.
44
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company considers its investments as being
"available for sale." The Company classifies these investments as short-term and
records them at fair market value. The unrealized gains and losses in each of
the three years ended December 31, 1998 were immaterial.
Certain of the Company's lease agreements contain covenants that obligate
the Company to maintain certain minimum cash and investment balances (see Note
5).
3. PROPERTY AND EQUIPMENT:
At December 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and buildings...................................... $ 20,046,000 $ 19,629,000
Laboratory and office equipment......................... 13,898,000 13,323,000
------------ ------------
33,944,000 32,952,000
Less allowances for depreciation and amortization....... (13,439,000) (11,099,000)
------------ ------------
Property and equipment, net............................. $ 20,505,000 $ 21,853,000
============ ============
</TABLE>
4. ACCRUED EXPENSES
At December 31, accrued expenses consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accrued compensation and benefits.................... $ 876,000 $ 964,000
Accrued professional and consulting fees............. 2,556,000 1,258,000
Accrued clinical trial fees and related expenses..... 2,177,000 2,320,000
Accrued license fees and royalties................... 2,096,000 2,627,000
Accrued co-promotion expenses........................ 118,000 2,491,000
Accrued litigation-related costs..................... 4,838,000 4,896,000
Other accrued expenses............................... 637,000 1,519,000
----------- -----------
$13,298,000 $16,075,000
=========== ===========
</TABLE>
5. LONG-TERM DEBT
At December 31, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Capital lease obligations...... $ 1,335,000 $ 1,682,000
Mortgage loans................. 15,385,000 16,313,000
Senior convertible notes....... -- 11,326,000
----------- -----------
16,720,000 29,321,000
Less current portion........... (1,624,000) (1,734,000)
----------- -----------
Long-term debt................. $15,096,000 $27,587,000
=========== ===========
</TABLE>
Aggregate maturities of long-term debt for the next five years are as
follows: 1999--$1,624,000; 2000--$1,642,000; 2001--$1,374,000; 2002--$1,212,000;
2003--$1,258,000; 2004 and thereafter--$9,610,000. The current portion of long-
term debt consists of payments due on the capital lease obligations and mortgage
loans. The Company paid interest related to debt instruments of $1,170,000,
$2,242,000, and $1,388,000 in 1998, 1997 and 1996, respectively.
45
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SENIOR CONVERTIBLE NOTES
In April 1997, the Company completed a $30,000,000 private placement of
senior convertible notes. As of December 31, 1997, $18,674,000 in principal of
the notes had been converted into 1,938,000 shares of common stock. As of
December 31, 1998, the remaining balance of $11,326,000 in principal of the
notes was converted into 1,210,000 shares of common stock.
CAPITAL LEASE OBLIGATIONS
The Company currently leases laboratory, production and computer equipment
with a cost of $3,352,000 under lease agreements. Under the terms of the
agreements, the Company must maintain a minimum balance in unrestricted cash and
investments of $30,000,000 or deliver to the lessor an irrevocable letter of
credit in the amount of the then outstanding balance due on all equipment leased
under the agreements. At December 31, 1998, the balance due under the lease
agreements was $1,335,000. Both agreements provide the Company with an option to
purchase the leased equipment.
MORTGAGE LOANS
In March 1995, the Company purchased the buildings housing its
administrative offices and research facilities in West Chester, Pennsylvania for
$11,000,000. The Company financed the purchase through the assumption of an
existing $6,900,000 first mortgage and from $11,600,000 in mortgage loans
provided by the Commonwealth of Pennsylvania (the "State Funding"), a portion of
which was used to finance building improvements and $2,700,000 was held in
escrow to fund future improvements. At December 31, 1998, the remaining escrow
balance, including earned interest, was $1,404,000. The first mortgage has a 15-
year term with an annual interest rate of 95/8%. The State Funding has a 15-year
term with an annual interest rate of 2%. The 2% interest rate is subject to
increase to prime plus 2% if the Company fails to hire a specified number of new
employees in Chester County, Pennsylvania by the end of 1999. The Company is
presently paying interest at the 2% rate and is accruing interest at the higher
rate. The mortgage loans require annual aggregate principal and interest
payments of $1,800,000. The mortgage loans are secured by the buildings and
fixtures therein and a portion of the State Funding is also secured by all
Company equipment located in Pennsylvania that is otherwise unsecured.
6. OTHER LIABILITIES
At December 31, other liabilities consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accrued long-term interest..... $3,210,000 $2,372,000
Deferred compensation.......... 285,000 378,000
---------- ----------
$3,495,000 $2,750,000
========== ==========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain of its offices and automobiles under operating
leases. The Company does not consider its future annual minimum payments under
these leases to be material. In November 1996, the remaining operating lease
obligations of the Company's former manufacturing facility were transferred to
the purchaser of the
46
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
facility. Lease expense under all operating leases totaled $866,000, $725,000,
and $3,423,000 in 1998, 1997, and 1996, respectively.
RELATED PARTY
In August 1992, Cephalon exclusively licensed to Cephalon Clinical
Partners, L.P. (the "Partnership") rights to manufacture and market
MYOTROPHIN(R) (mecasermin) Injection ("MYOTROPHIN Injection" or "MYOTROPHIN")
for human therapeutic use within the United States, Canada and Europe (the
"Territory") Through a concurrent offering of 900 limited partnership interests,
the Partnership raised approximately $38,714,000 in net proceeds. In August
1995, the Company purchased 67 limited partnership interests and recorded the
acquisition cost as in-process research and development expense in accordance
with SFAS No. 2 "Accounting for Research and Development Costs." A total of 27
1/2 limited partnership interests were canceled following default on payments
due to the Partnership. There are currently 805 1/2 limited partnership
interests held by third parties.
The Company is performing the development and clinical testing of
MYOTROPHIN on behalf of the Partnership and the Company's costs incurred to
develop MYOTROPHIN in the Territory were reimbursed by the Partnership to the
extent of its available funds and subject each year to the Partnership
Development Agreement budget for that year. Late in 1995, the Partnership
depleted all of its available funding and will not provide further funding of
MYOTROPHIN development costs to the Company. The 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.
In exchange for the exclusive license to MYOTROPHIN, Cephalon is obligated
to make royalty payments equal to 10.1% of MYOTROPHIN sales 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"). 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. The Purchase Option will become exercisable for a 45-day
period commencing on the date which is the earlier of (a) the date which is the
later of (i) the last day of the first month in which the Partnership shall have
received Interim License payments equal to fifteen percent (15%) of the limited
partners' capital contributions (excluding the Milestone Payment), and (ii) the
last day of the 24th full month after the date of the Company's first commercial
sale, if any, of MYOTROPHIN within the Territory that generates a payment to the
Partnership, and (b) the last day of the 48th full month after the date of such
first commercial sale, if any, in the Territory. 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% (reducing to 5.0% after a specified return
is earned by the former limited partners) of MYOTROPHIN sales in the Territory,
provided that royalties on MYOTROPHIN sales in Europe will only be paid to the
extent necessary to meet specified sales targets. 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, license or assignment of
rights.
The current general partner of the Partnership is a wholly-owned subsidiary
of the Company, which owns 1% of the Partnership. The board of directors of the
Partnership is 50% controlled by a third-party investor. The
47
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
general partner cannot adversely modify the economic terms of the Partnership
without a vote of the limited partners. The general partner may be removed at
any time by a vote of the limited partners. The obligations of the general
partner include enforcing agreements entered into by the Partnership,
prosecuting and defending the intellectual property owned by the Partnership and
entering into loan agreements and other transactions on behalf of the
Partnership. No such borrowings, commitments, or obligations are outstanding.
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 is responsible for funding the Purchase Option if it exercises
the option.
LEGAL PROCEEDINGS
The Company, a current director and officer, and a former officer 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
into a single class action. The plaintiff class is comprised of those persons
and entities who purchased Cephalon common stock, or traded in options to buy or
sell Cephalon common stock, during the period June 12, 1995 through and
including June 7, 1996. Plaintiffs seek to hold defendants liable for stock
trading losses that stem from alleged violations of the U.S. securities laws and
alleged common law negligent misrepresentation. More specifically, plaintiffs
have alleged that statements by the Company and the named defendants relating to
the results of certain clinical studies of MYOTROPHIN were misleading. A
judgment in this matter could materially exceed the coverage which may be
available under its directors' and officers' liability insurance. The Company is
vigorously defending this lawsuit and believes that there are valid defenses
against the claims, but the defense of the action is expensive, and the costs of
defense will reduce the available insurance coverage that might otherwise be
available to satisfy the claims. In an effort to resolve this dispute, in
January 1999 the Company engaged a mediator to initiate a non-binding mediation
process and commenced discussions with counsel for the lead plaintiffs. At this
time, the Company is not able to determine with any certainty the outcome of
this action or its potential liability.
Due to the Company's involvement in promoting STADOL NS(R) (butorphanol
tartrate) Nasal Spray, a product of Bristol-Myers Squibb, the Company is a co-
defendant in a product liability action brought against BMS. Although the
Company cannot predict with certainty the outcome of this litigation, it
believes that any expenses or damages that are incurred will be paid by BMS
under the indemnification provisions of the co-promotion agreement. As such, the
Company does not believe that these actions will have a negative effect on the
Company's financial condition or results of operations.
8. STOCKHOLDERS' EQUITY
EQUITY COMPENSATION PLANS
The Company has established the Stock Option Plan and the Equity
Compensation Plan for its employees, directors and certain other individuals.
All grants and terms are authorized by the Compensation Committee of the
Company's Board of Directors. The Company may grant either non-qualified or
incentive stock options under both plans, and may also grant restricted stock
awards under the Equity Compensation Plan. The options and restricted stock
awards generally become exercisable or vested ratably over four years from the
grant date and the options must be exercised within ten years of the grant date.
48
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following tables summarize the aggregate option activity under both plans:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1, 3,518,258 $13.96 3,181,020 $14.07 2,942,697 $17.72
Granted 1,009,000 8.18 873,520 12.94 583,835 19.27
Exercised (57,379) 10.21 (223,493) 8.27 (140,574) 7.83
Canceled (435,580) 16.20 (312,789) 19.16 (204,938) 19.83
--------- ------ --------- ------ --------- ------
Outstanding, December 31, 4,034,299 $12.42 3,518,258 $13.96 3,181,020 $14.07
========= ====== ========= ====== ========= ======
Exercisable at end of year 2,279,718 $13.31 1,961,945 $12.93 1,722,378 $11.88
Weighted average fair value of $ 4.75 $ 7.67 $11.48
options granted during the year
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICE OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
- ----------------------- ------- ---------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ .30 - $ 9.00 1,651,060 7.9 years $ 7.49 722,825 $ 7.12
$ 9.01 - $14.00 1,167,761 6.8 $11.24 645,904 $11.31
$14.01 - $31.00 1,215,478 6.0 $20.26 910,989 $19.64
--------- ---------
4,034,299 7.0 $12.42 2,279,718 $13.31
========= =========
</TABLE>
At December 31, 1998, 569,012 shares were available for future grants under
the plans.
During 1998, 1997 and 1996, the Company received proceeds of $410,000,
$2,205,000 and $1,127,000, respectively, from the exercise of stock options.
The following table summarizes restricted stock award activity for the
years ended December 31:
<TABLE>
<CAPTION>
RESTRICTED STOCK AWARDS
---------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Outstanding, January 1, 237,825 190,700 140,000
Granted 142,450 113,450 85,700
Vested (77,100) (54,325) (35,000)
Canceled (9,400) (12,000) --
---------- ---------- ----------
Outstanding, December 31, 283,775 237,825 190,700
Compensation expense recognized $1,494,000 $1,679,000 $2,073,000
</TABLE>
49
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Effective in 1996, Cephalon adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation." As permitted under SFAS 123, the Company applies
APB No. 25 and related interpretations. All options granted under the plans to
date have been with exercise prices equal to the fair market value of the stock
on the date of grant. Accordingly, under APB No. 25, no compensation expense for
employees has been recognized for its stock-based compensation plans other than
for its restricted stock awards.
If the Company had elected to recognize compensation cost based on the fair
value of the options as prescribed by SFAS 123, pro forma loss and loss per
share amounts would have been reflected as set forth below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
As reported
Loss $(55,407,000) $(60,419,000) $(53,285,000)
Basic and diluted loss per share $ (1.95) $ (2.36) $ (2.19)
Pro forma
Loss $(60,659,000) $(62,315,000) $(58,885,000)
Basic and diluted loss per share $ (2.13) $ (2.43) $ (2.42)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts since SFAS 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
The fair value of the options granted during 1998, 1997 and 1996 were
estimated on the date of grant using the Black-Scholes option-pricing model
based on the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate 5.23% 6.35% 6.11%
Expected life 6 years 6 years 6 years
Expected volatility 56% 56% 56%
Expected dividend yield 0% 0% 0%
</TABLE>
QUALIFIED SAVINGS AND INVESTMENT PLAN
The Company has a profit sharing plan pursuant to section 401(k) of the
Internal Revenue Code, whereby eligible employees may contribute up to 15% of
their annual salary to the plan, subject to statutory maximums. The plan
provides for discretionary matching contributions by the Company in cash or a
combination of cash and shares of the Company's common stock. For the years
1998, 1997 and 1996, the Company contribution was 100% of the first 6% of
employee salaries contributed in the ratio of 50% cash and 50% Company stock.
The Company contributed $1,155,000, $1,090,000, and $1,106,000 in cash and
common stock to the plan for the years 1998, 1997, and 1996, respectively.
WARRANTS AND OTHER OPTIONS
In April 1997, the Company issued warrants to purchase 84,000 shares of the
Company's common stock at an exercise price of $24.77 per share to the placement
agent in connection with the private placement of the Company's senior
convertible notes (see Note 5).
In February 1994, the Company issued to Chiron a warrant to purchase
750,000 shares of common stock with an exercise price of $18.50 per share.
50
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In August 1992, the Company and Cephalon Clinical Partners, L.P. completed
a private placement of 900 units. Each unit consists of a limited partnership
interest in the Partnership and warrants to purchase 4,500 shares of the
Company's common stock, resulting in the aggregate issuance of warrants to
purchase 4,050,000 shares of common stock. In connection with the offering,
including the sale of a Class B limited partnership interest, the Company issued
warrants to purchase an additional 144,000 shares of common stock.
At December 31, 1998, warrants to purchase shares of the Company's common
stock were outstanding as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
ISSUABLE UPON EXERCISE EXERCISE PRICE
OF WARRANTS EXPIRATION DATE PER SHARE
----------- --------------- ---------
<S> <C> <C> <C>
1,661,277 August 31, 1999 $ 13.82
352,900 August 31, 1999 $ 13.70
17,963 August 31, 1999 $ 11.77
750,000 February 8, 2002 $ 18.50
84,000 April 7, 2000 $ 24.77
---------
2,886,140
=========
</TABLE>
During 1998, no warrants were exercised. In 1997, 102,004 warrants were
exercised for an aggregate exercise price of $1,183,000.
In exchange for 490,000 shares of common stock, in May 1997, the Company
acquired options from Swiss Bank Corporation ("SBC") to purchase 2,500,000
shares of the Company's common stock. The options expired unexercised. The
transaction related to the options was recorded in stockholders' equity.
PREFERRED SHARE PURCHASE RIGHTS
In November 1993, the Board of Directors of the Company declared a dividend
distribution of one right ("Right") for each outstanding share of common stock.
In addition, a Right attaches to and trades with each new issue of the Company's
common stock. Each Right entitles each registered holder, upon the occurrence of
certain events, to purchase from the Company a unit consisting of one one-
hundredth of a share (a "Unit") of the Series A Junior Participating Preferred
Stock of the Company (the "Preferred Shares"), or a combination of securities
and assets of equivalent value, at a purchase price of $90.00 per Unit, subject
to adjustment.
9. REVENUES
At December 31, revenues consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Commercial collaborations.................... $5,598,000 $ 5,228,000 $ 4,305,000
Research and development collaborations....... 9,085,000 17,912,000 17,061,000
Other......................................... 972,000 -- --
</TABLE>
COMMERCIAL COLLABORATIONS
Cephalon has entered into several agreements under which its sales
organization markets the proprietary products of third parties. The Company
focuses their sales efforts on neurologists and other neurological specialists.
Under these agreements, the Company receives payments generally for achievement
of the stipulated sales activity and performance targets, and may also be
responsible for payment of fees to the third party
51
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
collaborator and funding promotional activities. In the United States, Cephalon
is promoting and marketing STADOL NS(R) (butorphanol tartrate) for Bristol-Myers
Squibb Company. In France, Cephalon is promoting and marketing APOKINON(R)
(apomorphine hydrochloride) for Laboratoire Aguettant S.A. The agreement with
Medtronic Inc. to co-promote Intrathecal Baclofen Thererapy (ITB(TM)) will
terminate pursuant to its terms as of April 29, 1999.
RESEARCH AND DEVELOPMENT COLLABORATIONS
The Company has entered into several collaborative research and development
agreements under which the Company is reimbursed generally for its research
efforts, product supply, development milestones and license fees. Under these
agreements, the Company may also be responsible for the payment of milestone and
license fee payments to its collaborators.
Under a collaborative agreement with TAP, the Company performs research and
development for which it is compensated quarterly by TAP for both internal and
external expenses. Under collaborative agreements with Kyowa Hakko, the Company
is reimbursed for its cost to supply MYOTROPHIN in Japanese clinical trials, the
achievement of certain milestones and certain expenditures related to the
Company's K252a research and development program.
10. INCOME TAXES
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $174,000,000, that will begin to
expire in 2003. The net operating loss carryforwards differ from the accumulated
deficit principally due to differences in the recognition of certain research
and development expenses for financial and federal income tax reporting.
The amount of net operating loss carryforwards which can be utilized in any
one period will be limited by federal income tax regulations since a cumulative
change in ownership of more than 50% occurred within a three year period. The
Company does not believe that such limitation will have a material adverse
impact on the utilization of its carryforwards.
Significant components of the Company's deferred tax assets for federal and
state income taxes as of December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net operating loss carryforwards ..................... $ 59,240,000 $ 54,051,000
Capitalized research and development expenditures .... 32,357,000 16,478,000
Other--net ........................................... 9,300,000 6,657,000
------------- ------------
Total deferred tax assets ............................ 100,897,000 77,186,000
Valuation allowance for deferred tax assets .......... (100,897,000) (77,186,000)
------------- ------------
Net deferred tax assets .............................. $ -- $ --
============= ============
</TABLE>
A valuation allowance was established for 100% of the deferred tax assets
as realization of the tax benefits is not assured.
11. SUBSEQUENT EVENT
On February 25, 1999, the Company completed a debt offering totaling
$30,000,000, raised through the private sale of revenue-sharing notes (the
"Notes"). The notes are repayable by the Company in cash in February 2002. The
Notes are secured by the Company's U.S. rights to PROVIGIL (the "Pledged
Assets") and bear an annual interest rate of 11%. Investors in the
52
<PAGE>
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Notes also will receive a royalty of 6% on U.S. sales of PROVIGIL for up to five
years. The Company has the right to redeem the Notes at a premium prior to
maturity, which would reduce the royalty period to four years and may extend the
maturity and the royalty by one year under certain circumstances. The Notes
contain a number of covenants including a requirement to maintain a minimum
level of cash and investments equal to $40,000,000 during 1999 and $30,000,000
thereafter as long as the principal remains outstanding. If the Company fails to
maintain such cash balances or violates the other covenants, the holders of the
Notes can declare a default and increase the royalty percentage to 25% of U.S.
PROVIGIL sales and, if the default is not cured within one year, can accelerate
the due date of the Notes and foreclose on the Pledged Assets. The holders of
the Notes can also foreclose on the Pledged Assets if the Company fails to pay
principal and interest when due. The Notes are not convertible into common
stock.
The offering also includes the issuance of five-year warrants to purchase
1,920,000 shares of the Company's common stock with an exercise price of $10.08.
The investors will forfeit 480,000 warrants if specified PROVIGIL sales levels
are achieved. In addition, the Company may redeem up to 720,000 of the remaining
warrants after three years if the market value of the Company's common stock
exceeds certain thresholds.
53
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions held by the directors and executive officers
of the Company are as follows:
<TABLE>
<CAPTION>
NAME Age POSITION
- ---- --- --------
<S> <C> <C>
Frank Baldino, Jr., Ph.D...... 45 Director, President and Chief Executive Officer and
founder of the Company
Bruce A. Peacock.............. 47 Director, Executive Vice President, Chief Operating
Officer and Treasurer
William P. Egan(1)............ 54 Director
Robert J. Feeney, Ph.D.(2).... 73 Director
Martyn D. Greenacre(1)........ 57 Director
Kevin E. Moley(1)............. 52 Director
Horst Witzel, Dr.-Ing.(2)..... 71 Director
Jeffry L. Vaught, Ph.D........ 48 President, Research and Development
J. Kevin Buchi................ 43 Senior Vice President, Finance and Chief Financial Officer
Peter E. Grebow, Ph.D......... 52 Senior Vice President, Worldwide Business Development
Earl W. Henry, M.D............ 51 Senior Vice President, Worldwide Clinical Research and
Regulatory Affairs
John E. Osborn................ 41 Senior Vice President, General Counsel and Secretary
</TABLE>
(1) Members of the Audit Committee of the Board of Directors.
(2) Members of the Stock Option and Compensation Committee of the Board of
Directors.
All directors hold office until the next annual meeting of the stockholders
of the Company and until their successors are elected and qualified or until
their earlier resignation or removal.
All executive officers are elected annually by the Board of Directors to
serve in their respective capacities until their successors are elected and
qualified or until their earlier resignation or removal.
Dr. Baldino, the founder of the Company, has served as President, Chief
Executive Officer and a director since its inception. Dr. Baldino received his
Ph.D. degree from Temple University and holds several adjunct academic
appointments. Dr. Baldino currently serves as a director of ViroPharma, Inc., a
biopharmaceutical company, First Consulting Group, Inc., which provides
consulting services for information processing, and Pharmacopeia, Inc., a
developer of proprietary technology platforms for pharmaceutical companies.
54
<PAGE>
Mr. Peacock has served as a director, Executive Vice President and Chief
Operating Officer since February 1994. For the previous two years, Mr. Peacock
served as Executive Vice President and Chief Financial Officer and Treasurer 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. Mr. Peacock holds a B.A. degree from Villanova
University and is a Certified Public Accountant.
Mr. Egan was elected to the Board of Directors in 1988. Since 1979, Mr.
Egan has served as President of Burr, Egan, Deleage & Co., a venture capital
company. He also is a general partner of ALTA Communications VI, L.P., and ALTA
Communications VII, L.P., both venture capital firms.
Dr. Feeney was elected to the Board of Directors in 1988. 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., a pharmaceutical company, 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.
Mr. Greenacre was appointed to the Board of Directors in October 1992. Mr.
Greenacre has been President, Chief Executive Officer and Director of Delsys
Pharmaceutical Corp. since June 1997. From 1993 to 1996, Mr. Greenacre served
with Zynaxis Inc., a biopharmaceutical company, as President, Chief Executive
Officer and a director. From 1989 to 1992, Mr. Greenacre served as Chairman
Europe, SmithKline Beecham Pharmaceuticals. He joined SmithKline & French, the
predecessor to SmithKline Beecham, in 1973 where he held positions of increasing
responsibility in commercial operations and management. Mr. Greenacre currently
serves as a director of Creative Biomolecules, Inc., a biotechnology company,
and Genset s.a., a human genome sciences company.
Mr. Moley was appointed to the Board of Directors in 1994. Mr. Moley has
been Chairman of the Board of Patient Care Dynamics since November 1998. From
January 1996 to February 1998, Mr. Moley was President and CEO of Integrated
Medical Systems, where he had 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 1989 to 1992 Mr.
Moley served in the Bush administration as an Assistant Secretary of the U.S.
Department of Health and Human Services ("HHS"), and in 1992 and 1993 as the
Deputy Secretary of HHS. Mr. Moley also serves as a director of Merge
Technologies, Inc., a medical imaging software company, and Pfymatrix, Inc., a
physician practice management company.
Dr. Witzel was appointed to the Board of Directors in January 1991. From
1986 until his retirement in 1989, Dr. Witzel served as the Chairman of the
Board of Executive Directors of Schering AG, a German pharmaceutical company
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., a biotechnology company.
Dr. Vaught has headed the Company's research operations since joining the
Company in August 1991 and currently serves as Senior Vice President and
President, Research and Development. Prior to joining the Company, Dr. Vaught
served as CNS Research Assistant Director for the R.W.J. Pharmaceutical Research
Institute, a subsidiary of the pharmaceutical and consumer products company
Johnson & Johnson, and CNS Therapeutic Team Leader for Johnson & Johnson sector
management from 1990 to 1991. Dr. Vaught received his Ph.D. degree from the
University of Minnesota.
Mr. Buchi joined the Company as Controller in March 1991 and held several
financial positions with the Company prior to being appointed Senior Vice
President, Finance and Chief Financial Officer in April 1996. Between 1985 and
1991, Mr. Buchi served in a number of financial positions with E.I. duPont de
Nemours and Company. Mr. Buchi received his M.M. degree from the J.L. Kellogg
Graduate School of Management, Northwestern University in 1982 and is a
Certified Public Accountant.
Dr. Grebow joined the Company in January 1991 and was Senior Vice
President, Drug Development prior to his current position as Senior Vice
President, Worldwide Business Development. From 1988 to 1990, Dr. Grebow
55
<PAGE>
served as Vice President of Drug Development for Rorer Central Research, a
division of Rhone-Poulenc Rorer Pharmaceuticals Inc., a pharmaceutical company.
Dr. Grebow received his Ph.D. degree in Chemistry from the University of
California, Santa Barbara.
Dr. Henry joined the Company in August 1997 as Vice President, Clinical
Operations, and was appointed Senior Vice President, Worldwide Clinical Research
and Regulatory Affairs in October 1998. Prior to Cephalon, Dr. Henry served as
Vice President, Clinical Research for Guilford Pharmaceuticals. From 1992 to
1995, he was Executive Director, Clinical Research at Sandoz, Inc. and spent
five years at Pfizer Central Research. Dr. Henry received his doctor of medicine
degree from the University of Chicago and completed his clinical training in
neurology and neuropathology at Harvard Medical School, where he held a faculty
appointment.
Mr. Osborn joined the Company in March 1997 and has served as Senior Vice
President, General Counsel and Secretary of the Company since January 1999. He
was appointed Senior Vice President of the Company in September 1998, and prior
to that served as Vice President, Legal Affairs. From 1992 to March 1997, Mr.
Osborn was employed by The DuPont Merck Pharmaceutical Company, most recently as
Vice President, Associate General Counsel and Assistant Secretary. From 1989 to
1992, he served as special assistant to the legal adviser at the U.S. Department
of State. Prior to that, he was associated with the law firms of Hale and Dorr,
Boston and Dechert Price & Rhoads, Philadelphia. Mr. Osborn received his law
degree from the University of Virginia and also holds a masters degree in
international studies from The Johns Hopkins University.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
information under the caption "Compensation of Executive Officers and Directors"
in the Company's definitive proxy statement for the 1999 annual meeting of
stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" in the Company's definitive proxy statement for the 1999 annual
meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
in the Company's definitive proxy statement for the 1999 annual meeting of
stockholders.
56
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following is a list of the consolidated financial statements of the
Company and its subsidiaries and supplementary data included in this report
under Item 8:
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
SCHEDULES
All schedules are omitted because they are not applicable or are not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
Reports on Form 8-K
During the fiscal quarter ended December 31, 1998, the Company filed a
Current Report on Form 8-K on December 28, 1998 announcing approval from the
U.S. Food and Drug Administration to market PROVIGIL(R) (modafinil) Tablets for
the treatment of excessive daytime sleepiness associated with narcolepsy.
EXHIBITS
The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parenthesis.
<TABLE>
<CAPTION>
EXHIBIT
NO.
--
<S> <C>
3.1 Restated Certificate of Incorporation, as amended. (Exhibit 3.1)(19)
3.2 Bylaws of the Registrant, as amended. (Exhibit 3.1)(19)
4.1 Specimen copy of stock certificate for shares of Common Stock of the Registrant (Exhibit
4.1)(10).
4.2 Amended and Restated Rights Agreement, dated as of January 1, 1999, between Cephalon, Inc. and
StockTrans, Inc. as Rights Agent (Exhibit 1) (22).
*4.3(a) Form of Notc Purchase Agreement dated as of February 24, 1999 by and
between Cephalon and Investor.
*4.3(b) Form of Revenue Sharing Senior Secured Note due 2002 dated March
1, 1999. (21)
*4.3(c) Form of Class A Warrant.
*4.3(d) Form of Class B Warrant.
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
--
<S> <C>
*4.3(e) Security Agreement dated March 1, 1999 between Cephalon, Inc. and Delta Opportunity Fund,
Ltd., as collateral agent.
*4.3(f) Patent and Trademark Agreement dated March 1,1999 between Cephalon, Inc. and Delta
Opportunity Fund, Ltd., as collateral agent.
10.1 Letter agreement dated March 22, 1995, between Cephalon, Inc. and the Salk Institute for
Biotechnology Industrial Associates, Inc. (Exhibit 99.1)(15).
10.2 Deliberately omitted.
10.3 Stock Purchase Agreement dated July 28, 1995, between Cephalon, Inc. and Kyowa Hakko
Kogyo Co., Ltd. (Exhibit 99.3)(16).
10.4(a) License Agreement, dated May 15, 1992, between Cephalon, Inc. and Kyowa Hakko Kogyo Co.,
Ltd. (Exhibit 10.6)(4)(20).
10.4(b) Letter agreement dated March 6, 1995 amending License Agreement between Cephalon, Inc. and
Kyowa Hakko Kogyo Co., Ltd. (Exhibit 10.4(6))(14)(20).
10.5(a) Supply Agreement, dated January 20, 1993, between Cephalon, Inc. and Laboratoire L. Lafon
(Exhibit 10.1)(7)(20).
10.5(b) License Agreement, dated January 20, 1993, between Cephalon, Inc. and Laboratoire L. Lafon
(Exhibit 10.2)(7)(20).
10.5(c) Trademark Agreement, dated January 20, 1993, between Cephalon, Inc. and Genelco S.A.
(Exhibit 10.3)(7)(20).
10.5(d) Amendment to License Agreement and Supply Agreement, dated July 21, 1993, between
Cephalon, Inc. and Laboratoire L. Lafon (Exhibit 10.1)(10)(11).
10.5(e) Amendment to Trademark Agreement, dated July 21, 1993, between Cephalon, Inc. and
Genelco S.A. (Exhibit 10.2)(11)(20).
10.5(f) Amendment No. 3 to License Agreement dated June 8, 1995, between Cephalon, Inc. and
Laboratoire L. Lafon (Exhibit 99.2)(15).
10.5(g) Amendment No. 4 to License Agreement and Supply Agreement dated August 23, 1995,
between Cephalon, Inc. and Laboratoire L. Lafon (Exhibit 10.5(g))(17)(20).
*10.5(h) Amendment No. 5 to License Agreement and Supply Agreement dated January 21, 1998 between
Cephalon, Inc. and Laboratoire L. Lafon. (21)
*10.5(i) Amendment No. 6 to License Agreement and Supply Agreement dated February 2, 1998 between
Cephalon, Inc. and Laboratoire L. Lafon. (21)
*10.5(j) Amendment No. 3 to Trademark Agreement dated January 21, 1998 between Cephalon, Inc. and Genelco
S.A. (21)
*10.5(k) Amendment No. 4 to Trademark Agreement dated February 9, 1998 between Cephalon, Inc. and Genelco
S.A. (21)
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
No.
--
<S> <C>
+10.6(a) Cephalon, Inc. Amended and Restated 1987 Stock Option Plan (Exhibit 10.7)(4).
+10.6(b) Cephalon, Inc. Equity Compensation Plan (Exhibit 10.6(b))(17).
+10.6(c) Cephalon, Inc. Non-Qualified Deferred Compensation Plan (Exhibit 10.6(c))(10).
10.7 Form of Note Purchase Agreement, dated as of January 15, 1997, between Cephalon, Inc. and
the several purchasers of Cephalon's Senior Convertible Notes, without exhibits (10.1)(18).
10.8(a) Amended and Restated Agreement of Limited Partnership, dated as of June 22, 1992, by and
among Cephalon Development Corporation, as general partner, and each of the limited partners
of Cephalon Clinical Partners, L.P. (Exhibit 10.1)(6).
10.8(b) Amended and Restated Product Development Agreement, dated as of August 11, 1992, by and
between the Registrant and Cephalon Clinical Partners, L.P. (Exhibit 10.2)(6)(20).
10.8(c) Purchase Agreement, dated as of August 11, 1992, by and between the Registrant and each of
the limited partners of Cephalon Clinical Partners, L.P. (Exhibit 10.3)(6)(20).
10.8(d) Form of Series A Warrant to purchasers of Units including a limited partnership interest in
Cephalon Clinical Partners, L.P. (Exhibit 10.4)(6).
10.8(e) Form of Series B Warrant to purchasers of Units including a limited partnership interest in
Cephalon Clinical Partners, L.P. (Exhibit 10.5)(6).
10.8(f) Incentive Warrant to purchase 115,050 shares of Common Stock of the Registrant issued to
PaineWebber Incorporated (Exhibit 10.6)(6).
10.8(g) Fund Warrant to purchase 19,950 shares of Common Stock of the Registrant issued to
PaineWebber R&D Partners III, L.P. (Exhibit 10.7)(6).
10.8(h) Pledge Agreement, dated as of August 11, 1992, by and between Cephalon Clinical Partners, L.P.
and the Registrant (Exhibit 10.8)(6).
10.8(i) Promissory Note, dated as of August 11, 1992, issued by Cephalon Clinical Partners, L.P. to the
Registrant (Exhibit 10.9)(6).
10.8(j) Form of Promissory Note, issued by each of the limited partners of Cephalon Clinical Partners,
L.P. to Cephalon Clinical Partners, L.P. (Exhibit 10.10)(6).
10.9 Supply, Distribution and License Agreement, dated as of July 27, 1993, by and between Kyowa
Hakko Kogyo Co., Ltd. and Cephalon, Inc. (Exhibit 10.3)(11)(20).
10.10(a) Agreement between Cephalon, Inc. and Chiron Corporation dated as of January 7, 1994
(Exhibit 10.1)(12)(20).
10.10(b) Letter agreement dated January 13, 1995 amending Agreement between Cephalon, Inc. and
Chiron Corporation (Exhibit 10.12(b))(14).
10.10(c) Letter agreement dated May 23, 1995 amending Agreement between Cephalon, Inc. and Chiron
Corporation (17)(20).
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No.
--
<S> <C>
10.11(a) Agreement between Cephalon, Inc. and TAP Holdings Inc. (formerly TAP Pharmaceuticals
Inc.) dated as of May 17, 1994 (Exhibit 99.2)(13)(20).
10.11(b) Amendment dated June 28, 1996 amending Agreement between Cephalon, Inc. and TAP
Holdings Inc. (Exhibit 10.13(b))(19)(21)
*10.12 Toll Manufacturing and Packaging Agreement dated February 24, 1998 between Cephalon, Inc. and
Circa Pharmaceuticals, Inc. (21)
*21 Subsidiaries of Cephalon, Inc.
*23.1 Consent of Arthur Andersen LLP.
*24 Power of Attorney (included on the signature page to this Form 10-K Report).
*27 Financial Data Schedule
</TABLE>
* Filed herewith.
+ Compensation plans and arrangements for executives and others.
(1 ) Filed as an Exhibit to the Registration Statement on Form S-1 filed on
March 15, 1991.
(2) Filed as an Exhibit to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1 (Registration No. 33-39413) filed on April 19, 1991.
(3) Filed as an Exhibit to Pre-Effective Amendment No. 2 to the Registration
Statement on Form S-1 (Registration No. 33-39413) filed on April 22, 1991.
(4) Filed as an Exhibit to the Transition Report on Form 10-K for transition
period from January 1, 1991 to December 31, 1991, as amended by Amendment
No. 1 filed on September 4, 1992 on Form 8.
(5) Filed as an Exhibit to the Company's Current Report on Form 8-K filed on
December 31, 1992.
(6) Filed as an Exhibit to the Registration Statement on Form S-3 (Registration
No. 33-56816) filed on January 7, 1993.
(7) Filed as an Exhibit to the Registration Statement on Form S-3 (Registration
No. 33-58006) filed on February 8, 1993.
(8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.
(9) Filed as an Exhibit to the Company's Current Report on Form 8-K dated June
8, 1993.
(10) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
(11) Filed as an Exhibit to the Registration Statement on Form S-3 (Registration
No. 33-73896) filed on January 10, 1994.
(12) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
January 10, 1994.
(13) Filed as an Exhibit to the Company's Current Report on Form 8-K dated May
17, 1994.
(14) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
(15) Filed as an Exhibit to the Registration Statement on Amendment No. 1 to
Form S-3 (Registration No. 33-93964) filed on June 30, 1995.
(16) Filed as an Exhibit to the Registration Statement on Amendment No. 2 to
Form S-3 (Registration No. 33-93964) filed on July 31, 1995.
(17) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
(18) Filed as an Exhibit to the Registration Statement on Form S-3 (Registration
No. 333-20321) filed on January 24, 1997.
(19) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
(20) Portions of the Exhibit have been omitted and have been filed separately
pursuant to an application for confidential treatment granted by the
Securities and Exchange Commission.
(21) Portions of the Exhibit have been omitted and have been filed separately
pursuant to an application for confidential treatment filed with the
Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
(22) Filed as an Exhibit to the Company's Form 8-A/A (12G) filed on January 20,
1999.
60
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
Date: March 4, 1999 Cephalon, Inc.
By: /s/ Frank Baldino, Jr., Ph.D.
---------------------------------------
Frank Baldino, Jr., Ph.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Frank Baldino,
Jr. or Bruce A. Peacock, and each of them acting alone, his true and lawful
attorney-in-fact, with full power of substitution, to execute and cause to be
filed with the Securities and Exchange Commission any or all amendments to this
report.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ Frank Baldino, Jr., Ph.D. President, Chief Executive Officer March 4, 1999
------------------------------ and Director
Frank Baldino, Jr., Ph.D. (Principal executive officer)
By: /s/ Bruce A. Peacock Executive Vice President, March 4, 1999
------------------------------
Bruce A. Peacock Chief Operating Officer and Director
By: /s/ J. Kevin Buchi Sr. Vice President, Finance March 4, 1999
------------------------------
J. Kevin Buchi and Chief Financial Officer
(Principal financial and accounting officer)
By: /s/ William P. Egan Director March 4, 1999
------------------------------
William P. Egan
By: /s/ Robert J. Feeney, Ph.D. Director March 4, 1999
------------------------------
Robert J. Feeney, Ph.D.
By: /s/ Martyn D. Greenacre Director March 4, 1999
------------------------------
Martyn D. Greenacre
By: /s/ Kevin E. Moley Director March 4, 1999
-------------------------------
Kevin E. Moley
By: /s/ Horst Witzel, Dr.-Ing. Director March 4, 1999
------------------------------
Horst Witzel, Dr.-Ing
</TABLE>
61
<PAGE>
EXHIBIT 4.3A
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NOTE PURCHASE AGREEMENT
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DATED AS OF FEBRUARY 24, 1999
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BY AND BETWEEN
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CEPHALON, INC.
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AND
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[NAME OF INVESTOR]
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<PAGE>
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DIAZ & ALTSCHUL CAPITAL, LLC
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<PAGE>
CEPHALON, INC.
NOTE PURCHASE AGREEMENT
11% REVENUE SHARING SENIOR SECURED NOTES DUE 2002
AND
COMMON STOCK PURCHASE WARRANTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. DEFINITIONS
1
2. PURCHASE AND SALE; PURCHASE PRICE 6
(a) Purchase 6
(b) Form of Payment 7
(c) Closing 7
3. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF
THE BUYER
(a) Purchase for Investment 7
(b) Accredited Investor 7
(c) Reoffers and Resales 7
(d) Company Reliance 7
(e) Information Provided 8
(f) Absence of Approvals 8
(g) Note Purchase Agreement 8
</TABLE>
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<PAGE>
(h) Buyer Status 8
4. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF
THE COMPANY 8
(a) Organization and Authority 8
(b) Qualifications 9
(c) Capitalization 9
(d) Concerning the Shares and the Common Stock 10
(e) Corporate Authorization 10
(f) Non-contravention 10
(g) Approvals, Filings, Etc 11
(h) Information Provided 11
(i) Conduct of Business 11
(j) SEC Filings 11
(k) Absence of Certain Proceedings 12
(l) Financial Statements; Liabilities 12
(m) Material Losses 12
(n) Absence of Certain Changes 12
(o) Intellectual Property 12
(p) Internal Accounting Controls 13
(q) Compliance with Law 13
(r) Properties 13
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<PAGE>
(s) Labor Relations 13
(t) Insurance 13
(u) Tax Matters 13
(v) Investment Company 14
(w) Absence of Brokers, Finders, Etc. 14
(x) No Solicitation 14
(y) ERISA Compliance 14
(z) Concerning the Collateral 14
5. CERTAIN COVENANTS 14
(a) Transfer Restrictions 14
(b) Restrictive Legends 14
(c) Nasdaq Listing; Reporting Status 16
(d) Form D 16
(e) State Securities Laws 16
(f) Limitation on Certain Actions 16
(g) Security Agreement; Financing Statements, Etc. 16
(h) Use of Proceeds 17
(i) Best Efforts 17
(j) Debt Obligation 17
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL 17
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<PAGE>
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE 17
8. REGISTRATION RIGHTS 18
(a) Mandatory Registration 18
(b) Obligations of the Company 19
(c) Obligations of the Buyer and other Investors 22
(d) Rule 144 24
9. INDEMNIFICATION AND CONTRIBUTION 24
(a) Indemnification 24
(b) Contribution 25
(c) Other Rights 26
10. MISCELLANEOUS 26
(a) Governing Law 26
(b) Headings 26
(c) Severability 26
(d) Notices 26
(e) Counterparts 26
(f) Entire Agreement; Benefit 26
(g) Waiver 27
(h) Amendment 27
(i) Further Assurances 27
-7-
<PAGE>
(j) Assignment of Certain Rights and Obligations 27
(k) Expenses 27
(l) Termination 28
(m) Survival 28
(n) Public Statements, Press Releases, Etc. 28
(o) Construction 29
SCHEDULES
- ---------
Schedule 4(a) Certain Equity Investments
Schedule 4(c) Certain Antidilution Adjustments
Schedule 4(r) Certain Mortgages, Liens, Security Interests, Encumbrances, Etc.
ANNEXES
- -------
ANNEX I Form of 11% Revenue Sharing Senior Secured Note due 2002
ANNEX II Form of Common Stock Purchase Warrant, Class A
ANNEX III Form of Common Stock Purchase Warrant, Class B
ANNEX IV Form of Security Agreement
ANNEX V Form of Patent and Trademark Security Agreement
ANNEX VI Form of Opinion of Morgan, Lewis & Bockius, LLP to Be Delivered
on the Closing Date ANNEX VII Form of Opinion of Law Offices of
Brian W Pusch to Be Delivered on the Closing Date
ANNEX VIII Form of Instruction to the Company's Transfer Agent ANNEX IX
Form of Opinion of Morgan, Lewis & Bockius, LLP to Be Delivered
in Connection with Effectiveness of each Registration Statement
ANNEX X Form of Opinion of the Company's General Counsel to Be
Delivered in Connection with Effectiveness of each Registration
Statement
ANNEX XI Form of Investor Questionnaire
-8-
<PAGE>
NOTE PURCHASE AGREEMENT
THIS NOTE PURCHASE AGREEMENT, dated as of February 24, 1999
(this "Agreement"), by and between CEPHALON, INC., a Delaware corporation (the
"Company"), with headquarters located at 145 Brandywine Parkway, West Chester,
Pennsylvania 19380, and [NAME OF BUYER], a ____________________ (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Buyer wishes to purchase from the Company and the
Company wishes to sell to the Buyer, upon the terms and subject to the
conditions of this Agreement, a promissory note of the Company having the
principal amount set forth on the signature page of this Agreement and in
connection with which the Company shall issue to the Buyer warrants to purchase
shares of Common Stock (such capitalized term and all other capitalized terms
used in this Agreement having the meanings provided in Section 1);
WHEREAS, on or before the Closing Date the Company and the
Collateral Agent shall execute and deliver, one to the other, a Security
Agreement, in the form referred to herein, which provides, among other things,
for the grant to the Collateral Agent for the ratable benefit of the holders
from time to time of the Note and the Other Notes of a first priority security
interest in certain collateral, upon the terms and with the effect as provided
therein; and
WHEREAS, on or before the Closing Date, the Company and the
Collateral Agent shall execute and deliver, one to the other, a Patent and
Trademark Security Agreement, in the form referred to herein, which provides,
among other things, for the grant to the Collateral Agent for the ratable
benefit of the holders from time to time of the Note and the Other Notes of a
first priority perfected security interest in certain collateral upon the terms
and with the effect as provided therein;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. DEFINITIONS.
(a) As used in this Agreement, the terms "Agreement", "Buyer"
and "Company" shall have the respective meanings assigned to such terms in the
introductory paragraph of this Agreement.
(b) All the agreements or instruments herein defined shall
mean such agreements or instruments as the same may from time to time be
supplemented or amended or the terms thereof waived or modified to the extent
permitted by, and in accordance with, the terms
-9-
<PAGE>
thereof and of this Agreement.
(c) The following terms shall have the following meanings
(such meanings to be equally applicable to both the singular and plural forms of
the terms defined):
"Affiliate" means, with respect to any Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by or is under common control with the subject Person.
For purposes of this definition, "control" (including, with correlative meaning,
the terms "controlled by" and "under common control with"), as used with respect
to any Person, shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.
"Blackout Period" means the period of up to 15 consecutive
Trading Days after the date the Company notifies the Investors that they are
required, pursuant to Section 8(c)(4), to suspend offers and sales of
Registrable Securities pursuant to a Registration Statement as a result of an
event or circumstance described in Section 8(b)(5)(A) relating to or affecting
such Registration Statement, during which period, by reason of Section
8(b)(5)(B), the Company is not required to amend such Registration Statement or
supplement the related Prospectus.
"Business Day" means any day other than a Saturday, Sunday or
a day on which commercial banks in The City of New York are authorized or
required by law or executive order to remain closed.
"Claims" means any losses, claims, damages, liabilities or
expenses (joint or several), incurred by a Person to or in respect of any other
Person who is not a party to this Agreement.
"Class A Warrants" means Common Stock Purchase Warrants, Class
A in the form attached hereto as ANNEX II initially entitling the holder to
purchase the number of shares of Common Stock (and related Preferred Share
Purchase Rights) determined in accordance with Section 2(a).
"Class B Warrants" means Common Stock Purchase Warrants, Class
B in the form attached hereto as ANNEX III initially entitling the holder to
purchase the number of shares of Common Stock (and related Preferred Share
Purchase Rights) determined in accordance with Section 2(a).
"Closing Date" means 10:00 a.m., New York City time, on
February 26, 1999 or such other mutually agreed to time.
"Code" means the Internal Revenue Code of 1986, as amended,
and the regulations
-10-
<PAGE>
thereunder and published interpretations thereof.
"Collateral" shall have the meanings provided in any of the
Security Agreement and the Patent and Trademark Security Agreement.
"Collateral Agent" means Delta Opportunity Fund, Ltd., as
collateral agent pursuant to the Security Agreement and the Patent and Trademark
Security Agreement, and from time to time its duly appointed and acting
successor or successors.
"Common Stock" means the Common Stock, par value $.01 per
share, of the Company.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the regulations thereunder and published interpretations
thereof.
"Event of Default" shall have the meaning provided in the
Note.
"Indemnified Party" means the Company, each of its directors,
each of its officers who signs the Registration Statement, each Person, if any,
who controls the Company within the meaning of the 1933 Act or the 1934 Act, any
underwriter and any other stockholder selling securities pursuant to the
Registration Statement or any of its directors or officers or any Person who
controls such stockholder or underwriter within the meaning of the 1933 Act or
the 1934 Act.
"Indemnified Person" means the Buyer and each other Investor
who owns or holds any Securities and each Investor who sells Registrable
Securities in the manner permitted under this Agreement, the directors, if any,
of the Buyer and any such Investor, the officers, if any, of the Buyer and any
such Investor, each Person, if any, who controls the Buyer or any such Investor
within the meaning of the 1933 Act or the 1934 Act, any underwriter (as defined
in the 1933 Act) acting on behalf of an Investor who participates in the
offering of Registrable Securities of such Investor in accordance with the plan
of distribution contained in the Prospectus, the directors, if any, of such
underwriter and the officers, if any, of such underwriter, and each Person, if
any, who controls any such underwriter within the meaning of the 1933 Act or the
1934 Act.
"Inspector" means any attorney, accountant or other agent
retained by an Investor for the purposes provided in Section 8(b)(9).
"Interest Shares" means the shares of Common Stock and the
related Preferred Share Purchase Rights issuable in payment of interest on the
Note.
"Investor" means the Buyer and any transferee or assignee who
agrees to become bound by the provisions of Sections 5(a), 5(b), 8, 9, and 10 of
this Agreement.
-11-
<PAGE>
"Lafon" means Laboratoire L. Lafon, a French corporation.
"Lafon Agreements" means (1) the License Agreement, dated
January 20, 1993, by and between Lafon and the Company, as amended, (2) the
Trademark Agreement, dated January 20, 1993, by and between Genelco S.A. and the
Company, as amended, and (3) the Supply Agreement, dated January 20, 1993,
between the Company and Lafon, as amended.
"Margin Stock" shall have the meaning provided in Regulation U
of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221).
"Nasdaq" means the Nasdaq National Market.
"NASD" means the National Association of Securities Dealers,
Inc.
"1997 10-K" means the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
"1934 Act" means the Securities Exchange Act of 1934, as
amended.
"1933 Act" means the Securities Act of 1933, as amended.
"Non-Responsive Investor" means an Investor who does not
provide the Requested Information to the Company at least one Business Day prior
to the filing of the Purchase Share Registration Statement.
"Note" means the 11% Revenue Sharing Senior Secured Note due
2002 of the Company in the form attached hereto as ANNEX I.
"Optional Redemption Price" shall have the meaning to be
provided or provided in the Note.
"Other Note Purchase Agreements" means the several Note
Purchase Agreements relating to the Other Notes.
"Other Notes" shall have the meaning to be provided or
provided in the Note.
"Patent and Trademark Security Agreement" means the Patent and
Trademark Security Agreement by and between the Company and the Collateral
Agent, in the form attached hereto as ANNEX V.
"Payment Share Registration Statement" means a registration
statement on Form
-12-
<PAGE>
S-3 (or the comparable form at the time of filing with the SEC) of the Company
under the 1933 Act relating to the Payment Shares and which names the Investors
as selling stockholders.
"Payment Shares" means the shares of Common Stock and the
related Preferred Share Purchase Rights issuable in partial payment of principal
or the Optional Redemption Price of the Note.
"Person" means any natural person, corporation, partnership,
limited liability company, trust, incorporated organization, unincorporated
association or similar entity or any government, governmental agency or
political subdivision.
"Placement Agent" means Diaz & Altschul Capital, LLC.
"Preferred Share Purchase Rights" means the Preferred Share
Purchase Rights issued or issuable pursuant to the Rights Agreement (or any
similar rights issued by the Company with respect to the Common Stock after the
date of this Agreement).
"Products" means all pharmaceutical compositions containing
modafinil or any compound based on or derived therefrom as an active ingredient,
whether alone or in combination with any other substance, which are developed,
marketed or sold by the Company or any Subsidiary or Affiliate of the Company,
including, without limitation, that pharmaceutical composition marketed by the
Company on the Closing Date under the name Provigil(R).
"Prospectus" means the prospectus forming part of the
Registration Statement at the time the Registration Statement is declared
effective and any amendment or supplement thereto (including any information or
documents incorporated therein by reference).
"PTO" means the United States Patent and Trademark Office.
"Purchase Price" means the purchase price for the Note set
forth on the signature page of this Agreement.
"Questionnaire" means the Prospective Purchaser Questionnaire
completed by the Buyer.
"Record" means all pertinent financial and other records,
pertinent corporate documents and properties of the Company subject to
inspection for the purposes provided in Section 8(b)(9).
"register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the 1933 Act and pursuant to Rule 415, and the
declaration or ordering of effectiveness of such Registration Statement by the
-13-
<PAGE>
SEC.
"Registrable Securities" means the Shares and any stock or
other securities into which or for which the Common Stock may hereafter be
changed, converted or exchanged by the Company or its successor, as the case may
be, and any other securities issued to holders of such Common Stock (or such
shares into which or for which such Shares are so changed, converted or
exchanged) upon any reclassification, share combination, share subdivision,
share dividend, merger, consolidation or similar transaction or event.
"Registration Period" means:
(1) with respect to the Warrant Share Registration
Statement, the period from the SEC Effective Date for the Warrant Share
Registration Statement to the earlier of (A) the date which is two
years after the end of the Exercise Period (as defined in the Warrants)
(or, if (x) the Warrants shall have been exercised in full for shares
of Common Stock or (y) the Warrants shall no longer remain outstanding,
such date after which each Investor may sell all of its Registrable
Securities relating to the Warrants or that are Interest Shares without
registration under the 1933 Act pursuant to Rule 144, free of any
limitation on the volume of such securities which may be sold in any
period) and (B) the date on which the Investors no longer own any
Registrable Securities relating to the Warrants or that are Interest
Shares; and
(2) with respect to the Payment Share Registration
Statement, the period from the SEC Effective Date for the Payment Share
Registration Statement to the earlier of (A) the date which is two
years after the Payment Shares are issued and (B) the date on which the
Investors no longer own any Registrable Securities that are Payment
Shares or derive from Payment Shares.
"Registration Statement" means the Payment Share Registration
Statement or the Warrant Share Registration Statement, or either of them.
"Regulation D" means Regulation D under the 1933 Act.
"Repurchase Event" shall have the meaning provided in the
Note.
"Required Information" means, with respect to each Investor,
all information regarding such Investor, the Registrable Securities held by such
Investor or which such Investor has the right to acquire and the intended method
of disposition of the Registrable Securities held by such Investor or which such
Investor has the right to acquire as shall be required by the 1933 Act to effect
the registration of the resale by such Investor of such Registrable Securities.
"Rights Agreement" means the Rights Agreement, dated as of
January 1, 1999, by
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and between the Company and Stocktrans, Inc., as Rights Agent.
"Rule 415" means Rule 415 under the 1933 Act or any successor
rule providing for offering securities on a delayed or continuous basis.
"Rule 144" means Rule 144 promulgated under the 1933 Act or
any other similar rule or regulation of the SEC that may at any time provide a
"safe harbor" exemption from registration under the 1933 Act so as to permit a
holder to sell securities of the Company to the public without registration
under the 1933 Act.
"SEC" means the Securities and Exchange Commission.
"SEC Effective Date" means with respect to any Registration
Statement the date such Registration Statement is declared effective by the SEC.
"SEC Filing Date" means with respect to any Registration
Statement the date such Registration Statement is first filed with the SEC
pursuant to Section 8.
"SEC Reports" means (1) the 1997 10-K, (2) the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, (3) the
Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998,
June 30, 1998 and September 30, 1998, and (4) the Company's Current Reports on
Form 8-K, dated September 15, 1998 and December 28, 1998, in each case as filed
with the SEC and including the information and documents (other than exhibits)
incorporated therein by reference.
"Securities" means, collectively, the Note, the Shares and the
Warrants.
"Security Agreement" means the Security Agreement by and
between the Company and the Collateral Agent, in the form attached hereto as
ANNEX IV.
"September 10-Q" means the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.
"Shares" means the Payment Shares, the Interest Shares and the
Warrant Shares.
"Subsidiary" means any corporation or other entity of which a
majority of the capital stock or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions are at the time directly or indirectly owned by the
Company.
"Territory" means the United States, its territories and
possessions.
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"Trading Day" means at any time a day on which any of a
national securities exchange, Nasdaq or such other securities market as at such
time constitutes the principal securities market for the Common Stock is open
for general trading of securities.
"Trading Price" shall have the meaning provided in the Note.
"Transaction Documents" means, collectively, this Agreement,
the Securities, the Security Agreement, the Patent and Trademark Security
Agreement and the other agreements, instruments and documents contemplated
hereby and thereby.
"Transfer Agent" means Stocktrans, Inc., as transfer agent and
registrar for the Common Stock, or its successor.
"Violation" means
(i) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any post-effective
amendment thereof or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading,
(ii) any untrue statement or alleged untrue statement of a
material fact contained in any Prospectus (as amended or supplemented, if the
Company files any amendment thereof or supplement thereto with the SEC) or the
omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading,
(iii) any violation or alleged violation by the Company of the
1933 Act, the 1934 Act, any state securities law or any rule or regulation under
the 1933 Act, the 1934 Act or any state securities law, or
(iv) any breach or alleged breach by any Person other than
the Buyer of any representation, warranty, covenant, agreement or other term of
any of the Transaction Documents.
"Warrants" means the Class A Warrants and the Class B
Warrants.
"Warrant Share Registration Statement" means a registration
statement on Form S-3 of the Company under the 1933 Act relating to the Warrant
Shares which names the Investors as selling stockholders.
"Warrant Shares" means the shares of Common Stock and the
related Preferred Share Purchase Rights issuable upon exercise of the Warrants.
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2. PURCHASE AND SALE; PURCHASE PRICE.
(A) PURCHASE. Upon the terms and subject to the conditions of
this Agreement, the Buyer hereby agrees to purchase from the Company, and the
Company hereby agrees to sell to the Buyer, on the Closing Date, the Note in the
principal amount set forth on the signature page of this Agreement and having
the terms and conditions as set forth in the form of the Note attached hereto as
ANNEX I for the Purchase Price. In connection with the purchase of the Note by
the Buyer, the Company shall issue to the Buyer at the closing on the Closing
Date (x) Class A Warrants initially entitling the holder to purchase 48 shares
of Common Stock for each $1,000 principal amount of the Note and (y) Class B
Warrants initially entitling the holder to purchase 16 shares of Common Stock
for each $1,000 principal amount of the Note.
(B) FORM OF PAYMENT. Payment by the Buyer of the Purchase
Price to the Company on the Closing Date shall be made by wire transfer of funds
to:
First Union National Bank
5th & Market Streets
Philadelphia, Pennsylvania 19101
ABA# 031000503
For credit to account# 200200254913
For credit to the account of Cephalon, Inc.
(C) CLOSING. The issuance and sale of the Note and the
issuance of the Warrants shall occur on the Closing Date at the Law Offices of
Brian W Pusch, Penthouse Suite, 29 West 57th Street, New York, New York. At the
closing, upon the terms and subject to the conditions of this Agreement, the
Company shall issue and deliver to the Buyer the Note and the Warrants against
payment by the Buyer to the Company of an amount equal to the Purchase Price,
and the Buyer shall pay to the Company an amount equal to the Purchase Price
against delivery of the Note and the Warrants to the Buyer.
3. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE
BUYER.
The Buyer represents and warrants to, and covenants and agrees
with, the Company as follows:
(A) PURCHASE FOR INVESTMENT. The Buyer is purchasing the Note
and acquiring the Warrants for its own account for investment and not with a
view towards the public sale or distribution thereof within the meaning of the
1933 Act; and the Buyer will acquire any Shares issued to the Buyer prior to the
SEC Effective Date of a Registration Statement covering the resale of such
Shares by the Buyer for its own account for investment and not with a view
towards the
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public sale or distribution thereof within the meaning of the 1933 Act prior to
the SEC Effective Date;
(B) ACCREDITED INVESTOR. The Buyer is an "accredited
investor" as that term is defined in Rule 501 of Regulation D under the 1933 Act
by reason of Rule 501(a)(3) thereof;
(C) REOFFERS AND RESALES. The Buyer will not, directly or
indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit
any offers to buy, purchase or otherwise acquire or take a pledge of) any of the
Securities unless registered under the 1933 Act, pursuant to an exemption from
registration under the 1933 Act or in a transaction not requiring registration
under the 1933 Act;
(D) COMPANY RELIANCE. The Buyer understands that (1) the Note
is being offered and sold and the Warrants are being issued to the Buyer, (2)
the Shares are being offered to the Buyer, (3) the Interest Shares, if any, will
be issued to the Buyer, (4) the Payment Shares, if any, will be issued to the
Buyer, and (5) upon exercise of the Warrants, the Warrant Shares will be sold to
the Buyer, in each such case in reliance on one or more exemptions from the
registration requirements of the 1933 Act, including, without limitation,
Regulation D, and exemptions from state securities laws and that the Company is
relying upon the truth and accuracy of, and the Buyer's compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
the Buyer set forth herein and in the Questionnaire, a true and accurate copy of
which has been delivered by the Buyer to the Company, in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire or
receive an offer to acquire the Securities; and the information with respect to
the Buyer set forth in the Questionnaire is accurate and complete in all
material respects;
(E) INFORMATION PROVIDED. The Buyer and its advisors, if any,
have requested, received and considered all information relating to the
business, properties, operations, condition (financial or other), results of
operations or prospects of the Company and information relating to the offer and
sale of the Note and the offer of the Interest Shares and the Payment Shares
deemed relevant by them (assuming the accuracy and completeness of the SEC
Reports and of the Company's responses to the Buyer's requests); the Buyer and
its advisors, if any, have been afforded the opportunity to ask questions of the
Company concerning the terms of the offering of the Securities and the business,
properties, operations, condition (financial or other), results of operations
and prospects of the Company and its Subsidiaries and have received satisfactory
answers to any such inquiries; without limiting the generality of the foregoing,
the Buyer has had the opportunity to obtain and to review the SEC Reports; in
connection with its decision to purchase the Note and to acquire the Warrants,
the Buyer has relied solely upon the SEC Reports, the representations,
warranties, covenants and agreements of the Company set forth in this Agreement
and to be contained in the other Transaction Documents, as well as any
investigation of the Company completed by the Buyer or its advisors; the Buyer
understands that its investment in the Securities involves a high degree of
risk; and the Buyer understands that the offering of the Note is being made to
the Buyer as part of an offering without any minimum or maximum amount of the
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offering (subject, however, to the right of the Company at any time prior to
execution and delivery of this Agreement by the Company, in its sole discretion,
to accept or reject an offer by the Buyer to purchase the Note and to acquire
the Warrants);
(F) ABSENCE OF APPROVALS. The Buyer understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities;
(G) NOTE PURCHASE AGREEMENT. The Buyer has all requisite power
and authority, corporate or otherwise, to execute, deliver and perform its
obligations under this Agreement and the other agreements executed by the Buyer
in connection herewith and to consummate the transactions contemplated hereby
and thereby; and this Agreement has been duly and validly authorized, duly
executed and delivered by the Buyer and, assuming due execution and delivery by
the Company, is a valid and binding agreement of the Buyer enforceable in
accordance with its terms, except as the enforceability hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws now or hereafter in effect relating to or affecting
creditors' rights generally and general principles of equity, regardless of
whether enforcement is considered in a proceeding in equity or at law; and
(H) BUYER STATUS. The Buyer is not a "broker" or "dealer" as
those terms are defined in the 1934 Act which is required to be registered with
the SEC pursuant to Section 15 of the 1934 Act.
4. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE
COMPANY.
The Company represents and warrants to, and covenants and
agrees with, the Buyer as follows:
(A) ORGANIZATION AND AUTHORITY. The Company and each of the
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, and (i) each
of the Company and the Subsidiaries has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as described in the SEC Reports and as currently conducted, and (ii) the Company
has all requisite corporate power and authority to execute, deliver and perform
its obligations under this Agreement and the other Transaction Documents to be
executed and delivered by the Company in connection herewith, and to consummate
the transactions contemplated hereby and thereby; and the Company does not have
any equity investment in any other Person other than (x) the Subsidiaries listed
in Exhibit 21 to the 1997 10-K, (y) as set forth on SCHEDULE 4(A) and (z)
Subsidiaries which do not, individually or in the aggregate, have any material
revenue, assets or liabilities.
(B) QUALIFICATIONS. The Company and each of the Subsidiaries
are duly
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qualified to do business as foreign corporations and are in good standing in all
jurisdictions where such qualification is necessary and where failure so to
qualify could have a material adverse effect on the business, properties,
operations, condition (financial or other), results of operations or prospects
of the Company and the Subsidiaries, taken as a whole.
(C) CAPITALIZATION. (1) The authorized capital stock of the
Company consists of (A) 100,000,000 shares of Common Stock, of which 28,820,542
shares were outstanding at the close of business on February 19, 1999 and (B)
5,000,000 shares of Preferred Stock, $.01 par value, of which 1,000,000 shares
have been designated Series A Junior Participating Preferred Stock, and none of
which is outstanding; from February 19, 1999 to the Closing Date there will be
(x) no material increase in the number of shares of Common Stock outstanding
(except for shares issued upon exercise of options and warrants outstanding on
the date hereof or options or similar rights granted subsequent to the date of
this Agreement pursuant to the Company's stock option plans in effect on the
date of this Agreement) and (y) no issuance of securities convertible into,
exchangeable for, or otherwise entitling the holder to acquire, shares of Common
Stock (except for securities issued pursuant to the Other Note Purchase
Agreements and Preferred Share Purchase Rights issued in connection with shares
Common Stock issued in accordance with the immediately preceding clause (x)).
The 1997 10-K discloses as of December 31, 1997 all outstanding options or
warrants for the purchase of, or rights to purchase or subscribe for, or
securities convertible into, exchangeable for, or otherwise entitling the holder
to acquire, Common Stock or other capital stock of the Company, or any contracts
or commitments to issue or sell Common Stock or other capital stock of the
Company or any such options, warrants, rights or other securities; and from such
date to the date hereof there has been, and to the Closing Date there will be,
no material change in the amount or terms of any of the foregoing except for the
grant or exercise of options to purchase shares of Common Stock pursuant to the
Company's stock option plans in effect on the date of this Agreement.
(2) The Company has duly reserved from its authorized and
unissued shares of Common Stock the full number of shares required for (A) all
options, warrants, convertible securities, exchangeable securities, and other
rights to acquire shares of Common Stock which are outstanding and (B) all
shares of Common Stock and options and other rights to acquire shares of Common
Stock which may be issued or granted under the stock option and similar plans
which have been adopted by the Company or any Subsidiary; and, immediately
following the Closing Date, after giving effect to any antidilution or similar
adjustment arising by reason of issuance of the Note, the Other Notes, the
Warrants and the warrants issuable to the purchasers of the Other Notes, the
total number of shares of Common Stock reserved and required to be reserved from
the authorized and unissued shares of Common Stock for purposes of all such
options, warrants, convertible securities, other rights, and stock option and
similar plans (excluding the Note, the Other Notes, the Warrants and the
warrants issuable to the purchasers of the Other Notes) will be 7,844,603. Each
outstanding class or series of securities of the Company for which any such
antidilution adjustment will occur is identified on SCHEDULE 4(C) attached
hereto, together with the amount of such antidilution adjustment for each such
class or series. The o utstanding shares of Common Stock of the Company and
outstanding options, warrants, rights, and other securities
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<PAGE>
entitling the holders to purchase or otherwise acquire Common Stock have been
duly and validly authorized and issued. None of the outstanding shares of Common
Stock or options, warrants, rights, or other such securities has been issued in
violation of the preemptive rights of any securityholder of the Company. The
offers and sales of the outstanding shares of Common Stock of the Company and
options, warrants, rights, and other securities were at all relevant times
either registered under the 1933 Act and applicable state securities laws or
exempt from such requirements. No holder of any of the Company's securities has
any rights, "demand," "piggy-back" or otherwise, to have such securities
registered by reason of the intention to file, filing or effectiveness of the
Registration Statement.
(D) CONCERNING THE SHARES AND THE COMMON STOCK. The Shares
have been duly authorized and the Payment Shares, when issued in payment of a
portion of the Company's obligation to repay principal of the Note or the
Optional Redemption Price, the Interest Shares, when issued in payment of
interest on the Note, and the Warrant Shares, when issued upon exercise of the
Warrants, will be duly and validly issued, fully paid and non-assessable and
will not subject the holder thereof to personal liability by reason of being
such holder. There are no preemptive or similar rights of any stockholder of the
Company or any other Person to acquire any of the Shares or the Warrants. The
Company has duly reserved 1,920,000 shares of Common Stock as the Warrant Shares
and for issuance upon exercise of the warrants issuable to the purchasers of the
Other Notes, and such shares shall remain so reserved, and the Company shall
from time to time reserve such additional shares of Common Stock as shall be
required to be reserved pursuant to the Warrants, so long as the Warrants are
outstanding. The Common Stock is listed for trading on Nasdaq and (1) the
Company and the Common Stock meet the criteria for continued listing and trading
on Nasdaq; (2) the Company has not been notified since January 1, 1996 by the
NASD or the Nasdaq Stock Market of any failure or potential failure to meet the
criteria for continued listing and trading on Nasdaq and (3) no suspension of
trading in the Common Stock is in effect. The Company knows of no reason that
the Shares will be ineligible for listing on Nasdaq.
(E) CORPORATE AUTHORIZATION. This Agreement and the other
Transaction Documents to which the Company is or will be a party have been duly
and validly authorized by the Company; this Agreement has been duly executed and
delivered by the Company and, assuming due execution and delivery by the Buyer,
this Agreement is, and the Note, and the Warrants will be, when executed and
delivered by the Company, valid and binding obligations of the Company
enforceable in accordance with their respective terms, except as the
enforceability hereof or thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to or affecting creditors' rights generally and general principles of
equity, regardless of whether enforcement is considered in a proceeding in
equity or at law.
(F) NON-CONTRAVENTION. The execution and delivery of the
Transaction Documents by the Company and the consummation by the Company of the
issuance of the Securities as contemplated by this Agreement and consummation by
the Company of the other
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transactions contemplated by the Transaction Documents do not and will not, with
or without the giving of notice or the lapse of time, or both, (i) result in any
violation of any term or provision of the certificate of incorporation or bylaws
of the Company or any Subsidiary, (ii) conflict with or result in a breach by
the Company or any Subsidiary of any of the terms or provisions of, or
constitute a default under, or result in the modification of, or result in the
creation or imposition of any lien, security interest, charge or encumbrance
(other than pursuant to the Security Agreement and the Patent and Trademark
Security Agreement) upon any of the properties or assets of the Company or any
Subsidiary pursuant to, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary or any of their respective properties or
assets are bound or affected, in any such case which (x) relates to or affects
the Collateral or (y) would be reasonably likely to have a material adverse
effect on the business, properties, operations, condition (financial or other),
results of operations or prospects of the Company and the Subsidiaries, taken as
a whole, or the validity or enforceability of, or the ability of the Company to
perform its obligations under, the Transaction Documents, (iii) conflict with or
result in a breach by the Company or any Subsidiary of the terms or provisions
of, or constitute a default under, or result in the modification of, or entitle
any party other than the Company to terminate, or require any consent or
approval of any such party with respect to, any of the Lafon Agreements, (iv)
violate or contravene any applicable law, rule or regulation or any applicable
decree, judgment or order of any court, United States federal or state
regulatory body, administrative agency or other governmental body having
jurisdiction over the Company or any Subsidiary or any of their respective
properties or assets, in any such case which (x) relates to or affects the
Collateral or (y) would be reasonably likely to have a material adverse effect
on the business, properties, operations, condition (financial or other), results
of operations or prospects of the Company and the Subsidiaries, taken as a
whole, or the validity or enforceability of, or the ability of the Company to
perform its obligations under, the Transaction Documents, or (v) have any
material adverse effect on any permit, certification, registration, approval,
consent, license or franchise necessary for the Company or any Subsidiary to own
or lease and operate any of its properties and to conduct any of its business or
the ability of the Company or any Subsidiary to make use thereof.
(G) APPROVALS, FILINGS, ETC. No authorization, approval or
consent of, or filing with, any court, governmental body, regulatory agency,
self-regulatory organization, or stock exchange or market or the stockholders of
the Company is required to be obtained or made by the Company or any Subsidiary
for (x) the execution, delivery and performance by the Company of the
Transaction Documents, (y) the issuance and sale of the Securities as
contemplated by this Agreement and the terms of the Note and the Warrants and
(z) the performance by the Company of its obligations under the Transaction
Documents, other than (1) listing of the Shares on Nasdaq, (2) registration of
the resale of the Shares under the 1933 Act as contemplated by Section 8, (3) as
may be required under applicable state securities or "blue sky" laws, (4) filing
of one or more Forms D with respect to the Securities as required under
Regulation D, (5) filing by the Company of financing statements under the
provisions of applicable state Uniform Commercial Codes, and (6) filing of the
Patent and Trademark Security Agreement with the PTO.
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(H) INFORMATION PROVIDED. The SEC Reports, the Transaction Documents
and the instruments delivered by the Company to the Buyer in connection with the
closing on the Closing Date do not and will not on the date of execution and
delivery of this Agreement, the date of delivery thereof to the Buyer and on the
Closing Date contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading, it being
understood that for purposes of this Section 4(h), any statement contained in
such information shall be deemed to be modified or superseded for purposes of
this Section 4(h) to the extent that a statement in any document included in
such information which was prepared and furnished to the Buyer on a later date
or filed with the SEC on a later date modifies or replaces such statement,
whether or not such later prepared or filed statement so states.
(I) CONDUCT OF BUSINESS. Except as set forth in the SEC Reports,
since September 30, 1998, neither the Company nor any Subsidiary has (i)
incurred any material obligation or liability (absolute or contingent) other
than in the ordinary course of business; (ii) canceled, without payment in full,
any material notes, loans or other obligations receivable or other debts or
claims held by it other than in the ordinary course of business; (iii) sold,
assigned, transferred, abandoned, mortgaged, pledged or subjected to lien any of
its material properties, tangible or intangible, or rights under any material
contract, permit, license, franchise or other agreement; (iv) conducted its
business in a manner materially different from its business as conducted on such
date; (v) declared, made or paid or set aside for payment any cash or non-cash
distribution on any shares of its capital stock; or (vi) consummated, or entered
into any agreement with respect to, any transaction or event which would
constitute a Repurchase Event. Except as disclosed in the SEC Reports, the
Company and each Subsidiary owns, possesses or has obtained all governmental,
administrative and third party licenses, permits, certificates, registrations,
approvals, consents and other authorizations necessary to own or lease (as the
case may be) and operate its properties, whether tangible or intangible, and to
conduct its business or operations as currently conducted, except such licenses,
permits, certificates, registrations, approvals, consents and authorizations the
failure of which to obtain would not have a material adverse effect on the
business, properties, operations, condition (financial or other), results of
operations or prospects of the Company and the Subsidiaries, taken as a whole.
(J) SEC FILINGS. The Company has timely filed all reports required to
be filed under the 1934 Act and any other material reports or documents required
to be filed with the SEC since January 1, 1997. All of such reports and
documents complied, when filed, in all material respects, with all applicable
requirements of the 1933 Act and the 1934 Act. The Company meets the
requirements for the use of Form S-3 for the registration of the resale of the
Shares by the Buyer and any other Investor. The Company has not filed any
reports with the SEC under the 1934 Act since December 31, 1997 other than the
SEC Reports.
(K) ABSENCE OF CERTAIN PROCEEDINGS. Except as disclosed in the SEC
Reports, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board or body or governmental agency pending or, to the
knowledge of the Company or any Subsidiary,
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threatened against or affecting the Company or any Subsidiary, in any such case
wherein an unfavorable decision, ruling or finding is reasonably likely and
would reasonably be expected to have a material adverse effect on the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company and the Subsidiaries, taken as a whole, or the
transactions contemplated by the Transaction Documents or which could adversely
affect the validity or enforceability of, or the authority or ability of the
Company to perform its obligations under, the Transaction Documents; the Company
does not have pending before the SEC any request for confidential treatment of
information and, to the best of the Company's knowledge, no such request will be
made by the Company prior to the SEC Effective Date for the Warrant Share
Registration Statement; and to the best of the Company's knowledge there is not
pending or contemplated any, and there has been no, investigation by the SEC
involving the Company or any current or former director or officer of the
Company.
(L) FINANCIAL STATEMENTS; LIABILITIES. The financial statements
included in the September 10-Q present fairly the financial position, results of
operations and cash flows of the Company and the Subsidiaries, at the dates and
for the periods covered thereby, have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
periods covered thereby and on a basis consistent with the audited financial
statements appearing in the 1997 Form 10-K, and include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows of the Company and
the Subsidiaries at the dates and for the periods covered thereby. Except as and
to the extent disclosed, reflected or reserved against in the financial
statements of the Company and the notes thereto included in the SEC Reports,
neither the Company nor any Subsidiary has any liability, debt or obligation,
whether accrued, absolute, contingent or otherwise, and whether due or to become
due which, individually or in the aggregate, are material to the Company and the
Subsidiaries, taken as a whole. Subsequent to September 30, 1998, neither the
Company nor any Subsidiary has incurred any liability, debt or obligation of any
nature whatsoever which, individually or in the aggregate are material to the
Company and the Subsidiaries, taken as a whole, other than those incurred in the
ordinary course of their respective businesses.
(M) MATERIAL LOSSES. Since September 30, 1998, neither the Company
nor any Subsidiary has sustained any loss or interference with its business or
properties from fire, flood, hurricane, accident or other calamity, whether or
not covered by insurance, or from any labor dispute or court or governmental
action, order or decree, which loss or interference could be material to the
business, properties, operations, condition (financial or other), results of
operations or prospects of the Company and the Subsidiaries, taken as a whole.
(N) ABSENCE OF CERTAIN CHANGES. Since September 30, 1998, there has
been no material adverse change and no material adverse development in the
business, properties, operations, condition (financial or other), results of
operations or prospects of the Company and the Subsidiaries, taken as a whole,
except as disclosed in the SEC Reports and except for operating losses incurred
since such date at a rate consistent with the rate thereof during the nine
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months ended September 30, 1998.
(O) INTELLECTUAL PROPERTY. Except as disclosed in the SEC Reports,
each of the Company and each Subsidiary owns, or possesses adequate rights to
use, all patents, patent rights, inventions, trade secrets, know-how,
proprietary techniques, including processes and substances, trademarks, service
marks, trade names and copyrights described or referred to in the SEC Reports or
owned or used by it or which are necessary for the conduct of its business as it
is presently conducted or proposed to be conducted, except for where the failure
to own or possess adequate rights to use such patents, patent rights,
inventions, trade secrets, service marks, trade names and copyrights would not
have a material adverse effect on (x) the business, properties, operations,
condition (financial or other), results of operations or prospects of the
Company and the Subsidiaries, taken as a whole, or (y) the Company's ability to
manufacture, market and sell the Products. Except as disclosed in the SEC
Reports, neither the Company nor any Subsidiary has received any notice of
infringement of or conflict with asserted rights of others with respect to, any
patents, patent rights, inventions, trade secrets, know-how, proprietary
techniques, including processes and substances, trademarks, service marks, trade
names or copyrights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could have a material adverse effect on
the business, properties, operations, condition (financial or other), results of
operations or prospects of the Company and the Subsidiaries, taken as a whole.
(P) INTERNAL ACCOUNTING CONTROLS. The Company maintains a system of
internal accounting controls for the Company and the Subsidiaries which meets
the requirements of Section 13(b)(2) of the 1934 Act in all material respects.
(Q) COMPLIANCE WITH LAW. Neither the Company nor any Subsidiary is in
violation of or has any liability under any statute, law, rule, regulation,
ordinance, decision or order of any governmental agency or body or any court,
domestic or foreign, including, without limitation, those relating to the use,
operation, handling, transportation, disposal or release of hazardous or toxic
substances or wastes or relating to the protection or restoration of the
environment or human exposure to hazardous or toxic substances or wastes, except
where such violation or liability would not individually or in the aggregate
have a material adverse effect on the business, properties, operations,
condition (financial or other), results of operations or prospects of the
Company and the Subsidiaries, taken as a whole; and neither the Company nor any
Subsidiary is aware of any pending investigation which would reasonably be
expected to lead to such a claim.
(R) PROPERTIES. Each of the Company and the Subsidiaries has good
title to all property, real and personal (tangible and intangible), and other
assets owned by it, free and clear of all security interests, charges,
mortgages, liens or other encumbrances, except such as are described in the SEC
Reports or such as do not materially interfere with the use of such property
made, or proposed to be made, by the Company or any Subsidiary. The leases,
licenses or other contracts or instruments under which the Company and each
Subsidiary leases, holds or is entitled to use any property, real or personal,
which individually or in the aggregate are material to the Company and the
Subsidiaries, taken as a whole, are valid, subsisting and enforceable with only
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such exceptions as do not materially interfere with the use of such property
made, or proposed to be made, by the Company or such Subsidiary or have expired
or terminated in accordance with their terms or have been superseded by other
classes, contracts or agreements. Neither the Company nor any Subsidiary has
received notice of any material violation of any applicable law, ordinance,
regulation, order or requirement relating to its owned or leased properties.
Neither the Company nor any Subsidiary has any mortgage, lien, pledge, security
interest or other charge or encumbrance on any of its assets or properties
except as listed in SCHEDULE 4(R) attached hereto.
(S) LABOR RELATIONS. No material labor problem exists or, to the
knowledge of the Company or any Subsidiary, is imminent with respect to any of
the employees of the Company or any Subsidiary.
(T) INSURANCE. The Company and the Subsidiaries maintain insurance
against loss or damage by fire or other casualty and such other insurance,
including but not limited to, product liability insurance, in such amounts and
covering such risks as the Company believes are commercially reasonable.
(U) TAX MATTERS. Each of the Company and the Subsidiaries has filed
all federal, state and local income and franchise tax returns required to be
filed and has paid all material taxes shown by such returns to be due, and no
tax deficiency has been determined adversely to the Company or any Subsidiary
which has had (nor does the Company or any Subsidiary have any knowledge of any
tax deficiency which, if determined adversely to the Company or any Subsidiary,
might have) a material adverse effect on the business, properties, operations,
condition (financial or other), results of operations, or prospects of the
Company and the Subsidiaries, taken as a whole.
(V) INVESTMENT COMPANY. Neither the Company nor any Subsidiary is an
"investment company" within the meaning of such term under the Investment
Company Act of 1940, as amended, and the rules and regulations of the SEC
thereunder.
(W) ABSENCE OF BROKERS, FINDERS, ETC. No broker, finder or similar
Person other than the Placement Agent is entitled to any commission, fee or
other compensation by reason of action taken by or on behalf of the Company in
connection with the transactions contemplated by this Agreement, and the Company
shall pay, and indemnify and hold harmless the Buyer from, any claim made
against the Buyer by any Person for any such commission, fee or other
compensation.
(X) NO SOLICITATION. No form of general solicitation or general
advertising was used by the Company or, to the best of its knowledge, any other
Person acting on behalf of the Company, in respect of the Securities or in
connection with the offer and sale of the Securities. Neither the Company nor,
to its knowledge, any Person acting on behalf of the Company has, either
directly or indirectly, sold or offered for sale to any Person any of the
Securities (other than
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the Placement Agent) or, within the six months prior to the date hereof, any
other similar security of the Company except as contemplated by this Agreement
and the Other Note Purchase Agreements; and neither the Company nor any Person
authorized to act on its behalf will sell or offer for sale any promissory
notes, warrants, shares of Common Stock or other securities to, or solicit any
offers to buy any such security from, any Person so as thereby to cause the
issuance or sale of any of the Securities to be in violation of any of the
provisions of Section 5 of the 1933 Act.
(Y) ERISA COMPLIANCE. Each of the Company and the Subsidiaries is in
compliance in all material respects with all presently applicable provisions of
ERISA; no "reportable event" (as defined in ERISA) has occurred with respect to
any "pension plan" (as defined in ERISA) for which the Company or any Subsidiary
would have any liability; neither the Company nor any Subsidiary has incurred or
expects to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Code; and each "pension plan" for which the Company or any
Subsidiary would have any liability that is intended to be qualified under
Section 401(a) of the Code is so qualified in all material respects and nothing
has occurred, whether by action or by failure to act, which would cause the loss
of such qualification.
(Z) CONCERNING THE COLLATERAL. Upon execution and delivery of the
Security Agreement and the Patent and Trademark Security Agreement by the
Company and the Collateral Agent and completion of the filings referred to in
Schedule I to ANNEX VI attached hereto, the Collateral Agent will have a
perfected first priority security interest and will have all of the rights
currently held by the Company to manufacture, market, use and sell the Products
in the Territory, and to obtain supplies of modafinil, including, without
limitation, requisite rights under the Company's licenses, patents, patent
applications, manufacturing and supply agreements and requisite governmental
authorizations, approvals, permits and licenses.
5. CERTAIN COVENANTS.
(A) TRANSFER RESTRICTIONS. The Buyer acknowledges and agrees that (1)
the Note and the Warrants have not been and are not being registered under the
provisions of the 1933 Act or any state securities laws and, except as provided
in Section 8, the Shares have not been and are not being registered under the
1933 Act or any state securities laws, and that the Note and the Warrants may
not be transferred unless the Buyer shall have delivered to the Company an
opinion of counsel, reasonably satisfactory in form, scope and substance to the
Company, to the effect that the Note or the Warrants to be transferred may be
transferred without such registration; (2) no sale, assignment or other transfer
of the Note or the Warrants or any interest therein may be made except in
accordance with the terms hereof and thereof; (3) the Shares may not be resold
by the Buyer unless the resale has been registered under the 1933 Act or is made
pursuant to an applicable exemption from such registration and the Company shall
have received the opinion of counsel provided for in the final sentence of this
Section 5(a); (4) any sale of Shares under a Registration Statement shall be
made only in compliance with the terms of this
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Section 5(a) and Section 8 (including, without limitation, Section 8(c)(5)); (5)
any sale of the Securities made in reliance on Rule 144 may be made only in
accordance with the terms of Rule 144 and further, if the exemption provided by
Rule 144 is not available, any resale of the Securities under circumstances in
which the seller, or the Person through whom the sale is made, may be deemed to
be an underwriter, as that term is used in the 1933 Act, may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder; and (6) the Company is under no obligation to register the
Securities (other than registration of the resale of the Shares in accordance
with Section 8) under the 1933 Act or, except as provided in Section 5(d) and
Section 8, to comply with the terms and conditions of any exemption thereunder.
The Buyer may not transfer the Shares in a transaction which does not constitute
a transfer thereof pursuant to the applicable Registration Statement in
accordance with the plan of distribution set forth therein or in any supplement
to the related Prospectus unless the Buyer shall have delivered to the Company
an opinion of counsel, reasonably satisfactory in form, scope and substance to
the Company, that such Shares may be so transferred without registration under
the 1933 Act.
(B) RESTRICTIVE LEGENDS. (1) The Buyer acknowledges and agrees that
the Note shall bear a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of the Note):
This Note has not been registered under the Securities Act of 1933, as
amended (the "1933 Act"), or any state securities laws. The issuance to the
holder of this Note of the shares of Common Stock issuable in payment of a
portion of this Note and in payment of interest on this Note are not
covered by a registration statement under the 1933 Act or registration
under state securities laws. This Note has been acquired, and such shares
must be acquired, for investment only and may not be sold, transferred or
assigned in the absence of registration of the resale thereof under the
1933 Act or an opinion of counsel reasonably satisfactory in form, scope
and substance to the Company that such registration is not required.
(2) The Buyer further acknowledges and agrees that the Warrants shall
bear a restrictive legend in substantially the following form (and a stop-
transfer order may be placed against transfer of the Warrants):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "1933 Act"). The
securities have been acquired for investment and may not be resold,
transferred or assigned in the absence of an effective registration
statement for the securities under the 1933 Act or an opinion of counsel
that registration is not required under the 1933 Act.
(3) The Buyer further acknowledges and agrees that until such time as
the Warrant Shares have been registered for resale under the 1933 Act as
contemplated by Section 8, the certificates for the Shares, may bear a
restrictive legend in substantially the following form
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(and a stop-transfer order may be placed against transfer of the certificates
for the Shares):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "1933 Act"). The
securities have been acquired for investment and may not be resold,
transferred or assigned in the absence of an effective registration
statement for the securities under the 1933 Act or an opinion of counsel
that registration is not required under the 1933 Act.
(4) Once the Registration Statement required to be filed by the
Company pursuant to Section 8 relating to the Warrant Shares has been declared
effective, thereafter (1) upon request of the Buyer the Company will substitute
certificates without restrictive legend for certificates for any Warrant Shares
issued prior to the SEC Effective Date which bear such restrictive legend and
remove any stop-transfer restriction relating thereto promptly, but in no event
later than three days after surrender of such certificates by the Buyer and (2)
the Company shall not place any restrictive legend on certificates for any
Warrant Shares issued upon exercise of the Warrants or impose any stop-transfer
restriction thereon.
(C) NASDAQ LISTING; REPORTING STATUS. Prior to the Closing Date, the
Company will file with Nasdaq an application or other document required by
Nasdaq for the listing of the Warrant Shares with Nasdaq and shall provide
evidence of such filing to the Buyer. So long as the Buyer beneficially owns any
portion of the Note or the Warrants or any Shares, the Company will use its best
efforts to maintain the listing of the Common Stock on Nasdaq or a registered
national securities exchange. The Company shall use its best efforts to obtain
the listing, subject to official notice of issuance, of the Warrant Shares on
the Nasdaq prior to the Closing Date. During the Registration Period, the
Company shall timely file all reports required to be filed with the SEC pursuant
to Section 13 or 15(d) of the 1934 Act, and the Company shall not terminate its
status as an issuer required to file reports under the 1934 Act even if the 1934
Act or the rules and regulations thereunder would permit such termination.
(D) FORM D. The Company agrees to file one or more Forms D with
respect to the Securities as required under Regulation D to claim the exemption
provided by Rule 506 of Regulation D and to provide a copy thereof to the Buyer
promptly after such filing.
(E) STATE SECURITIES LAWS. On or before the Closing Date, the Company
shall take such action as shall be necessary to qualify, or to obtain an
exemption for, the Note for sale to the Buyer pursuant to this Agreement, the
Warrants for issuance to the Buyer pursuant to this Agreement and the Warrant
Shares for sale upon exercise of the Warrants under such of the securities laws
of jurisdictions in the United States as shall be applicable to the sale of the
Note to the Buyer pursuant to this Agreement and issuance of the Warrant Shares
upon exercise of the Warrants. Notwithstanding the foregoing obligations of the
Company in this Section 5(e), the Company shall not be required (1) to qualify
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this Section 5(e), (2) to subject itself to general taxation in
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any such jurisdiction, (3) to file a general consent to service of process in
any such jurisdiction, (4) to provide any undertakings that cause more than
nominal expense or burden to the Company or (5) to make any change in its
charter or by-laws which the Company determines to be contrary to the best
interests of the Company and its stockholders. The Company shall furnish the
Buyer with copies of all filings, applications, orders and grants or
confirmations of exemptions relating to such securities laws on or before the
Closing Date.
(F) LIMITATION ON CERTAIN ACTIONS. From the date of execution and
delivery of this Agreement by the parties hereto to the date of issuance of the
Note, the Company (1) shall comply with Article III of the Note as if the Note
were outstanding, (2) shall not take any action which, if the Note were
outstanding, (A) would constitute an Event of Default or, with the giving of
notice or the passage of time or both, would constitute an Event of Default or
(B) would constitute a Repurchase Event or, with the giving of notice or the
passage of time or both, would constitute a Repurchase Event.
(G) SECURITY AGREEMENT; FINANCING STATEMENTS, ETC. The Company agrees
to execute and deliver to the Collateral Agent on or before the Closing Date the
Security Agreement in the form attached hereto as ANNEX IV and the Patent and
Trademark Security Agreement in the form attached hereto as ANNEX V. The Company
shall prepare and on or before the Closing Date file (x) with the appropriate
officials, Uniform Commercial Code financing statements on Form UCC-1 relating
to the Collateral in which the Company is granting a security interest to the
Collateral Agent for the benefit of the holder of the Note pursuant to the
Security Agreement, and (y) with the PTO copies of the Patent and Trademark
Security Agreement. Prior to the Closing Date, the Company shall provide to the
Buyer evidence of such filings and customary search reports of the relevant
Uniform Commercial Code filing offices and the PTO.
(H) USE OF PROCEEDS. The Company represents and agrees that: (1) it
does not own or have any present intention of acquiring any "margin stock" as
defined in Regulation U (12 CFR Part 221) of the Board of Governors of the
Federal Reserve System ("margin stock"); (2) the proceeds of sale of the Note
will be used for general working capital purposes and in the operation of the
Company's business; (3) none of such proceeds will be used, directly or
indirectly (A) to make any loan to or investment in any other Person or (B) for
the purpose, whether immediate, incidental or ultimate, of purchasing or
carrying any margin stock or for the purpose of maintaining, reducing or
retiring any indebtedness which was originally incurred to purchase or carry any
stock that is currently a margin stock or for any other purpose which might
constitute the transactions contemplated by this Agreement a "purpose credit"
within the meaning of such Regulation U; and (4) neither the Company nor any
agent acting on its behalf has taken or will take any action which might cause
this Agreement or the transactions contemplated hereby to violate Regulation T,
Regulation U or any other regulation of the Board of Governors of the Federal
Reserve System or to violate the 1934 Act, in each case as in effect now or as
the same may hereafter be in effect.
(I) BEST EFFORTS. Each of the parties shall use its best efforts
timely to satisfy each of the conditions to the other party's obligations to
sell and purchase the Note set forth in
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Section 6 or 7, as the case may be, of this Agreement on or before the Closing
Date.
(J) DEBT OBLIGATION. So long as any portion of the Note is
outstanding, the Company shall cause its books and records to reflect the Note
as a debt of the Company in its unpaid principal amount, shall cause its
financial statements to reflect the Note as a debt of the Company in such amount
as shall be the greatest amount permitted in accordance with generally accepted
accounting principles and, whenever appropriate, as a valid senior, secured debt
obligation of the Company for money borrowed.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the Note
and issue the Warrants to the Buyer pursuant to this Agreement is conditioned
upon satisfaction of the following conditions precedent on or before the Closing
Date (any or all of which may be waived by the Company in its sole discretion):
(a) On the Closing Date, no legal action, suit or proceeding shall be
pending or threatened which seeks to restrain or prohibit the transactions
contemplated by this Agreement; and
(b) The representations and warranties of the Buyer contained in this
Agreement and in the Questionnaire shall have been true and correct on the date
of this Agreement and on the Closing Date as if made on the Closing Date and on
or before the Closing Date the Buyer shall have performed all covenants and
agreements of the Buyer required to be performed by the Buyer on or before the
Closing Date.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Note and acquire the Warrants is conditioned upon satisfaction of the following
conditions precedent on or before the Closing Date (any or all of which may be
waived by the Buyer in its sole discretion):
(a) The Collateral Agent shall have executed and delivered to the
Company the Security Agreement and the Patent and Trademark Security Agreement
and copies thereof duly executed and delivered by the Company, shall have been
furnished to the Buyer;
(b) On the Closing Date, no legal action, suit or proceeding shall be
pending or threatened which seeks to restrain or prohibit the transactions
contemplated by this Agreement;
(c) The representations and warranties of the Company contained in
this Agreement shall have been true and correct on the date of this Agreement
and, except for the approvals and filings referred to in clauses (3) (to the
extent action is required by applicable law
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to be taken on or prior to the Closing Date), (5) and (6) of Section 4(g), which
shall have been obtained or made, shall be true and correct on the Closing Date
as if made on and as of the Closing Date, the representations and warranties of
the Company contained in the Transaction Documents other than this Agreement
shall have been true and correct on the Closing Date as if made on and as of the
Closing Date, and on or before the Closing Date the Company shall have performed
all covenants and agreements of the Company contained herein or in any of the
other Transaction Documents required to be performed by the Company on or before
the Closing Date;
(d) No event which, if the Note were outstanding, (1) would
constitute an Event of Default or which, with the giving of notice or the
passage of time, or both, would constitute an Event of Default shall have
occurred and be continuing or (2) would constitute a Repurchase Event or which,
with the giving of notice or the passage of time, or both, would constitute a
Repurchase Event shall have occurred and be continuing;
(e) The Company shall have delivered to the Buyer a certificate,
dated the Closing Date, duly executed by its Chief Executive Officer or Chief
Financial Officer to the effect set forth in subparagraphs (b), (c), and (d) of
this Section 7;
(f) The Company shall have delivered to the Buyer a certificate,
dated the Closing Date, of the Secretary of the Company certifying (1) the
Certificate of Incorporation and By-Laws of the Company as in effect on the
Closing Date, (2) all resolutions of the Board of Directors (and committees
thereof) of the Company relating to this Agreement and the Transaction Documents
and the transactions contemplated hereby and thereby and (3) such other matters
as reasonably requested by the Buyer;
(g) On the Closing Date, the Buyer shall have received an opinion of
Morgan, Lewis & Bockius, LLP, counsel for the Company, dated the Closing Date,
addressed to the Buyer, in form, scope and substance reasonably satisfactory to
the Buyer, substantially in the form of ANNEX VI attached hereto;
(h) On the Closing Date, the Buyer shall have received an opinion of
the Law Offices of Brian W Pusch, dated the Closing Date, addressed to the Buyer
substantially in the form of ANNEX VII attached hereto; and
(i) On the Closing Date, (i) trading in securities on the New York
Stock Exchange, Inc., the American Stock Exchange, Inc. or Nasdaq shall not have
been suspended or materially limited and (ii) a general moratorium on commercial
banking activities in the State of New York or the Commonwealth of Pennsylvania
shall not have been declared by either federal or state authorities.
8. REGISTRATION RIGHTS.
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(A) MANDATORY REGISTRATION. (1) The Company shall prepare and as
expeditiously as possible, but in no event later than the date which is 45 days
after the Closing Date, file with the SEC the Warrant Share Registration
Statement covering as Registrable Securities the resale by the Buyer of a number
of shares of Common Stock equal to (A) the Warrant Shares issuable to the Buyer
and (B) such additional number of shares of Common Stock as the Company shall in
its discretion determine to register in connection with the issuance of the
Interest Shares.
(2) If, in accordance with the terms of the Note, the Company elects
to issue Payment Shares in partial payment of the principal amount of the Note
or in partial payment of the Optional Redemption Price and any Investor who
holds the Note, or any portion thereof, consents to such election, then the
Company shall prepare, and on or prior to the date which is 15 days after the
Company so elects, file with the SEC a Payment Share Registration Statement
covering the resale by each Investor who so consents to such election of a
number of shares of Common Stock equal to the number of Payment Shares to be
issued to such Investor in connection therewith.
(3) From the date the Company files a Payment Share Registration
Statement with the SEC to the SEC Effective Date for such Payment Share
Registration Statement and, if during any time subsequent to the SEC Effective
Date for any Registration Statement, any Registration Statement for any reason
is not available for use by any Investor for the resale of any Registrable
Securities when such Registration Statement is required to be so available for
use, the Company shall not file any other registration statement or any
amendment thereto with the SEC under the 1933 Act or request the acceleration of
the effectiveness of any other registration statement previously filed with the
SEC, other than (A) any registration statement on Form S-8 and (B) any
registration statement or amendment which the Company is required to file or as
to which the Company is required to request acceleration pursuant to any
obligation in effect on the date of execution and delivery of this Agreement.
(B) OBLIGATIONS OF THE COMPANY. In connection with the registration
of the Registrable Securities, the Company shall:
(1) use its best efforts to cause each Registration Statement
referred to in Section 8(a) to become effective as promptly as possible after
the date it is required to be filed with the SEC, and keep such Registration
Statement effective pursuant to Rule 415 at all times during the Registration
Period. The Company shall submit to the SEC, within three Business Days after
the Company learns that no review of a particular Registration Statement will be
made by the staff of the SEC or that the staff of the SEC has no further
comments on such Registration Statement, as the case may be, a request for
acceleration of effectiveness of such Registration Statement to a time and date
not later than 48 hours after the submission of such request. The Company shall
notify the Investors of the effectiveness of each Registration Statement on the
SEC Effective Date for such Registration Statement. The Company represents and
warrants to the Investors that (a) each Registration Statement (including any
amendments or supplements thereto and prospectuses contained therein), at the
time it is first filed with the SEC, at the time it is ordered effective by the
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SEC and at all times during which it is required to be effective hereunder (and
each such amendment and supplement at the time it is filed with the SEC and at
all times during which it is available for use in connection with the offer and
sale of the Registrable Securities) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (b) each Prospectus,
at the time the related Registration Statement is declared effective by the SEC
and at all times that such Prospectus is required by this Agreement to be
available for use by any Investor, shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading;
(2) prepare and file with the SEC such amendments (including post-
effective amendments) and supplements to each Registration Statement and
Prospectus as may be necessary to keep such Registration Statement effective,
and such Prospectus current, at all times during the Registration Period (other
than during any Blackout Period during which the provisions of Section
8(b)(5)(B) are applicable), and, during the Registration Period, comply with the
provisions of the 1933 Act applicable to the Company in order to permit the
disposition by the Investors of all Registrable Securities covered by such
Registration Statement;
(3) furnish to Delta Opportunity Fund, Ltd., as representative for
Investors whose Registrable Securities are included in any Registration
Statement, and a single firm of counsel selected by all such Investors (1)
promptly after the same is prepared and publicly distributed, filed with the SEC
or received by the Company, five copies of such Registration Statement and any
amendment thereto, each related Prospectus and each amendment or supplement
thereto, (2) one copy of each letter written by or on behalf of the Company to
the SEC or the staff of the SEC and each item of correspondence from the SEC or
the staff of the SEC relating to such Registration Statement (other than any
portion of any such letter or item which contains information for which the
Company has sought confidential treatment), each of which the Company hereby
determines to be confidential information and which each Investor hereby agrees
to keep confidential as a confidential Record in accordance with Section
8(b)(9), and (3) such number of copies of each Prospectus and all amendments and
supplements thereto and such other documents, as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor;
(4) subject to Section 8(b)(5), use its best efforts (i) to register
and qualify the Registrable Securities covered by each Registration Statement
under the securities or blue sky laws of such jurisdictions as any Investor who
holds any Registrable Securities reasonably requests, (ii) to prepare and to
file in those jurisdictions such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof at all times during the
Registration Period and (iii) to take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale by the Investors in
such jurisdictions; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto (I) to do business in any
jurisdiction where
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it would not otherwise be required to qualify but for this Section 8(b)(4), (II)
to subject itself to general taxation in any such jurisdiction, (III) to file a
general consent to service of process in any such jurisdiction, (IV) to provide
any undertakings that cause more than nominal expense or burden to the Company
or (V) to make any change in its charter or by-laws which the Company determines
to be contrary to the best interests of the Company and its stockholders;
(5) (A) as promptly as practicable after becoming aware of such
event or circumstance, notify each Investor of the occurrence of any event or
circumstance of which the Company has knowledge (x) as a result of which the
Prospectus relating to any Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading or (y)
which requires the Company to amend or supplement any Registration Statement due
to the receipt from an Investor or any other selling stockholder named in the
related Prospectus of new or additional information about such Investor or
selling stockholder or its intended plan of distribution of its Registrable
Securities or other securities covered by such Registration Statement, and use
its best efforts promptly to prepare a supplement or amendment to such
Registration Statement and the related Prospectus to correct such untrue
statement or omission or to add any new or additional information, and deliver a
number of copies of such supplement or amendment to each Investor as such
Investor may reasonably request;
(B) notwithstanding Section 8(b)(5)(A) above, if at any time the
Company notifies the Investors as contemplated by Section 8(b)(5)(A) the Company
also notifies the Investors that the event giving rise to such notice relates to
a development involving the Company which occurred subsequent to the later of
(x) the SEC Effective Date for the particular Registration Statement and (y) the
latest date prior to such notice on which the Company has amended or
supplemented such Registration Statement, then the Company shall not be required
to use best efforts to make such amendment during a Blackout Period; provided,
however, that in any period of 365 consecutive days the Company shall not be
entitled to avail itself of its rights under this Section 8(b)(5)(B) with
respect to more than (i) two Blackout Periods; and provided further, however,
that no Blackout Period may commence sooner than 90 days after the end of
another Blackout Period; and provided, further, however, that if the Company
issues Payment Shares to any Investor, no portion of any Blackout Period shall
occur during the period of 30 days commencing on the date such Payment Shares
are required by the terms of the Note to be delivered by the Company to such
Investor.
(6) as promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being offered or sold of
the issuance by the SEC of any stop order or other suspension of effectiveness
of the Registration Statement relating thereto at the earliest possible time;
(7) permit the Investors who hold Registrable Securities being
included in a particular Registration Statement (or their designee) and a single
firm of counsel designated as
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selling stockholders' counsel by the Investors who hold a majority in interest
of the Registrable Securities being offered for sale in such Registration
Statement (and identified in writing to the Company by such Investors prior to
the Closing Date, subject to change by notice to the Company from Investors who
hold a majority in interest of the Registrable Securities being offered for
sale) at such Investors' sole expense to review and have a reasonable
opportunity to comment on such Registration Statement and all amendments and
supplements thereto at least two Business Days (or such shorter period as may
reasonably be specified by the Company) prior to their filing with the SEC;
provided, however, that the Investors shall coordinate the exercise of their
rights under this Section 8(b)(7) through Delta Opportunity Fund, Ltd.
(8) make generally available to its security holders as soon as
practical, but not later than 90 days after the close of the period covered
thereby, an earning statement (in form complying with the provisions of Rule 158
under the 1933 Act) covering a 12-month period beginning not later than the
first day of the Company's fiscal quarter next following the effective date of
each Registration Statement;
(9) make available for inspection by any Investor and any Inspector
retained by any such Investor, at such Investor's sole expense, all Records as
shall be reasonably necessary to enable such Investor to exercise its due
diligence responsibility and cause the Company's and the Subsidiaries' officers,
directors and employees to supply all information which such Investor or such
Inspector may reasonably request for purposes of such due diligence; provided,
however, that such Investor shall hold in confidence and shall not make any
disclosure of any Record or other information which the Company determines in
good faith to be confidential, and of which determination such Investor is so
notified, unless (i) the disclosure of such Record is necessary to avoid or
correct a misstatement or omission in any Registration Statement and a
reasonable time prior to such disclosure the Investor shall have informed the
Company of the need to so correct such misstatement or omission and the Company
shall have failed to correct such misstatement or omission, (ii) the release of
such Record is ordered pursuant to a subpoena or other order from a court or
government body of competent jurisdiction or (iii) the information in such
Record has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential information in such Records to any Inspector until
and unless such Inspector shall have entered into a confidentiality agreement
with the Company with respect thereto, substantially in the form of this Section
8(b)(9), which agreement shall permit such Inspector to disclose Records to the
Investor who has retained such Inspector. Each Investor agrees that it shall,
upon learning that disclosure of such Records is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to the Company and allow the Company, at the Company's expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential. The Company shall hold in confidence
and shall not make any disclosure of information concerning an Investor provided
to the Company pursuant to this Agreement unless (i) the disclosure of such
information is necessary to comply with federal or state securities laws, (ii)
the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is
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ordered pursuant to a subpoena or other order from a court or governmental body
of competent jurisdiction, or (iv) such information has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company agrees that it shall, upon learning that disclosure
of such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to such Investor and allow such Investor, at such Investor's expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, such information;
(10) use its best efforts to cause all the Registrable Securities
covered by the Registration Statement as of each SEC Effective Date to be listed
on Nasdaq (in the case of the Payment Shares, prior to the issuance thereof) or
such other principal securities market on which securities of the same class or
series issued by the Company are then listed or traded;
(11) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities at all times;
(12) cooperate with the Investors who hold Registrable Securities
being offered to facilitate the timely preparation and delivery of certificates
(not bearing any restrictive legends) representing Registrable Securities to be
offered pursuant to the applicable Registration Statement and enable such
certificates to be in such denominations or amounts as the Investors may
reasonably request and registered in such names as the Investors may request;
and, not later than the applicable SEC Effective Date, the Company shall (i) in
the case of the Warrant Share Registration Statement, deliver to the Transfer
Agent (with copies to the Investors whose Registrable Securities are included in
such Registration Statement) an instruction substantially in the form attached
hereto as ANNEX VIII and (ii) cause legal counsel selected by the Company to
deliver to the Investors whose Registrable Securities are included in such
Registration Statement and to the Transfer Agent opinions of counsel, in the
forms attached hereto as ANNEX IX and ANNEX X;
(13) during the Registration Period, the Company shall not bid for or
purchase any Common Stock or any right to purchase Common Stock or attempt to
induce any Person to purchase any such security or right if such bid, purchase
or attempt would in any way limit the right of the Investors to sell Registrable
Securities by reason of the limitations set forth in Regulation M under the 1934
Act; and
(14) take all other reasonable actions necessary to expedite and
facilitate disposition by the Investors of the Registrable Securities pursuant
to the Registration Statement relating thereto.
(C) OBLIGATIONS OF THE BUYER AND OTHER INVESTORS. In connection with
the registration of the Registrable Securities, the Investors shall have the
following obligations:
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(1) It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company the Required Information and shall execute such documents
in connection with such registration as the Company may reasonably request.
Prior to the execution and delivery of this Agreement, the Buyer shall complete
and deliver to the Company an Investor Questionnaire in the form attached hereto
as ANNEX XI, which shall be deemed to provide all Required Information for
purposes of the preparation and filing of the Warrant Share Registration
Statement. At least ten Business Days prior to the first anticipated filing date
of a Payment Share Registration Statement, the Company shall notify each
Investor of the Required Information for inclusion of such Investor's
Registrable Securities in such Registration Statement. If at least four Business
Days prior to the SEC Filing Date for such Payment Share Registration Statement
the Company has not received the Required Information from an Investor, the
Company shall so notify such Investor at least three Business Days prior to the
SEC Filing Date for such Payment Share Registration Statement and if at least
one Business Day prior to the SEC Filing Date for such Payment Share
Registration Statement the Company still has not received the Required
Information from such Investor, then the Company may file such Registration
Statement without including Registrable Securities of such Non-Responsive
Investor; provided, however, that nothing herein shall constitute a waiver of
the requirements of Section 1.4 of the Note;
(2) Each Investor by such Investor's acceptance of the
Registrable Securities agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing hereunder
of the Registration Statement relating thereto, unless such Investor has
notified the Company in writing of such Investor's election to exclude all of
such Investor's Registrable Securities from such Registration Statement;
(3) Each Investor agrees that it will not effect any
disposition of the Registrable Securities except as contemplated in the
Registration Statement relating thereto or as otherwise is in compliance with
the registration requirements of applicable securities laws and that it will
promptly notify the Company of any material changes in the information set forth
in any Registration Statement regarding such Investor or its plan of
distribution; and each Investor agrees (a) to notify the Company in writing in
the event that such Investor enters into any material agreement with a broker or
a dealer for the sale of the Registrable Securities through a block trade,
special offering, exchange distribution or a purchase by a broker or dealer and
(b) in connection with such agreement, to provide to the Company in writing the
information necessary to prepare any supplemental prospectus pursuant to Rule
424(c) under the 1933 Act which is required with respect to such transaction;
(4) Each Investor acknowledges that there may occasionally be
times as specified in Section 8(b)(5) or 8(b)(6) when the Company must suspend
the use of the Prospectus until such time as an amendment to a particular
Registration Statement has been filed by the Company and declared effective by
the SEC, the Company has prepared a supplement to the Prospectus relating to
such Registration Statement or the Company has filed an appropriate report
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with the SEC pursuant to the 1934 Act. Each Investor hereby covenants that it
will not sell any Registrable Securities pursuant to the Prospectus relating
thereto during the period commencing at the time at which the Company gives such
Investor notice of the suspension of the use of such Prospectus in accordance
with Section 8(b)(5) or 8(b)(6) and ending at the time the Company gives such
Investor notice that such Investor may thereafter effect sales pursuant to such
Prospectus, or until the Company delivers to such Investor an amended or
supplemented Prospectus; and
(5) In connection with any sale of Registrable Securities
which is made by an Investor pursuant to the Registration Statement relating
thereto (A) if such sale is made through such Investor's broker, such Investor
shall instruct such broker to deliver the applicable Prospectus to the purchaser
(or the broker therefor) in connection with such sale and shall supply copies of
such Prospectus to such broker; (B) if such sale is made in a transaction
directly with a purchaser and not through the facilities of any securities
exchange or market, such Investor shall deliver, or cause to be delivered, the
applicable Prospectus to such purchaser; and (C) if such sale is made by any
means other than those described in the immediately preceding clauses (A) and
(B), such Investor shall otherwise use its reasonable best efforts to comply
with the prospectus delivery requirements of the 1933 Act applicable to such
sale.
(D) RULE 144. With a view to making available to the Investors
the benefits of Rule 144, the Company agrees:
(1) so long as any Investor owns Registrable Securities,
promptly upon request, to furnish to such Investor such information as may be
necessary and otherwise reasonably to cooperate with such Investor to permit
such Investor to sell Registrable Securities pursuant to Rule 144 without
registration; and
(2) if at any time the Company is not required to file reports
with the SEC pursuant to Sections 13 or 15(d) of the 1934 Act, to use its best
efforts to, upon the request of an Investor, to make publicly available other
information so long as is necessary to permit publication by brokers and dealers
of quotations for the Common Stock and sales of the Registrable Securities in
accordance with Rule 15c2-11 under the 1934 Act.
9. INDEMNIFICATION AND CONTRIBUTION.
(A) INDEMNIFICATION. (1) To the extent not prohibited by
applicable law, the Company will indemnify and hold harmless each Indemnified
Person against any Claims to which any of them may become subject under the 1933
Act, the 1934 Act or otherwise, insofar as such Claims (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon any Violation or any of the transactions contemplated by this
Agreement. Subject to the restrictions set forth in Section 9(a)(3) with respect
to the number of legal counsel, the Company shall reimburse the Investors and
each such controlling Person, promptly as such expenses are incurred and are due
and payable, for any documented reasonable legal fees or
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other documented and reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 9(a)(1) shall not apply to: (I) a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
relating to an Indemnified Person furnished in writing to the Company by such
Indemnified Person or an underwriter for such Indemnified Person expressly for
use in connection with the preparation of any Registration Statement or any such
amendment thereof or supplement thereto; (II) any Claim arising out of or based
on any statement or omission in any Prospectus, which statement or omission was
corrected in any subsequent Prospectus that was delivered to the Indemnified
Person prior to the pertinent sale or sales of Registrable Securities by such
Indemnified Person; and (III) amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnified Person and shall survive the transfer of
the Registrable Securities by the Investors.
(2) In connection with each Registration Statement, each
Investor agrees to indemnify and hold harmless, to the same extent and in the
same manner set forth in Section 9(a)(1), each Indemnified Party against any
Claim to which any of them may become subject, under the 1933 Act, the 1934 Act
or otherwise, insofar as such Claim arises out of or is based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Investor expressly for use in connection with
such Registration Statement or any amendment thereof or supplement thereto; and
such Investor will reimburse any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 9(a)(2) shall
not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of such Investor; provided, further,
however, that the Investor shall be liable under this Section 9(a)(2) for only
that amount of all Claims in the aggregate as does not exceed the amount by
which the proceeds to such Investor as a result of the sale of Registrable
Securities pursuant to such Registration Statement exceeds the amount paid by
such Investor for such Registrable Securities. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
such Indemnified Party and shall survive the transfer of the Registrable
Securities by the Investors. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 9(a)(2) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in such preliminary prospectus was corrected on a timely basis in the related
Prospectus, as then amended or supplemented.
(3) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 9(a) of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 9(a), deliver to the indemnifying party a
notice of the commencement thereof and the indemnifying party shall have the
right to participate in, and,
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to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume control of the defense thereof
with counsel reasonably satisfactory to the Indemnified Person or the
Indemnified Party, as the case may be; provided, however, that an Indemnified
Person or Indemnified Party shall have the right to retain its own counsel with
the fees and expenses to be paid by the indemnifying party, if, in the
reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding, in which case the
indemnifying party shall not be responsible for more than one such separate
counsel, and one local counsel in each jurisdiction in which an Action is
pending, for all Indemnified Persons or Indemnified Parties, as the case may be.
The failure to deliver notice to the indemnifying party within a reasonable time
of the commencement of any such action shall not relieve such indemnifying party
of any liability to the Indemnified Person or Indemnified Party under this
Section 9(a), except to the extent that the indemnifying party is prejudiced in
its ability to defend such action. The indemnification required by this Section
9(a) shall be made by periodic payments of the amount thereof during the course
of the investigation or defense, as such expense, loss, damage or liability is
incurred and is due and payable.
(B) CONTRIBUTION. To the extent any indemnification by an
indemnifying party as set forth in Section 9(a) above is applicable by its terms
but is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 9(a) to the fullest extent permitted by law. In determining
the amount of contribution to which the respective parties are entitled, there
shall be considered the relative fault of each party, the parties' relative
knowledge of and access to information concerning the matter with respect to
which the claim was asserted, the opportunity to correct and prevent any
statement or omission and any other equitable considerations appropriate under
the circumstances; provided, however, that (a) no contribution shall be made
under circumstances where the maker would not have been liable for
indemnification under the fault standards set forth in Section 9(a), (b) no
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any other Person
who was not guilty of such fraudulent misrepresentation and (c) the aggregate
contribution by any seller of Registrable Securities shall be limited to the
amount by which the proceeds received by such seller from the sale of such
Registrable Securities exceeds the amount paid by such Investor for such
Registrable Securities.
(C) OTHER RIGHTS. The indemnification and contribution
provided in this Section shall be in addition to any other rights and remedies
available at law or in equity.
10. MISCELLANEOUS.
(A) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
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(B) HEADINGS. The headings, captions and footers of this
Agreement are for convenience of reference and shall not form part of, or affect
the interpretation of, this Agreement.
(C) SEVERABILITY. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction.
(D) NOTICES. Any notices required or permitted to be given
under the terms of this Agreement shall be in writing and shall be sent by mail,
personal delivery, telephone line facsimile transmission or courier and shall be
effective five days after being placed in the mail, if mailed, or upon receipt,
if delivered personally, by telephone line facsimile transmission or by courier,
in each case addressed to a party at such party's address (or telephone line
facsimile transmission number) shown in the introductory paragraph or on the
signature page of this Agreement or such other address (or telephone line
facsimile transmission number) as a party shall have provided by notice to the
other party in accordance with this provision. In the case of any notice to the
Company, such notice shall be addressed to the Company at its address shown in
the introductory paragraph of this Agreement, Attention: Vice President, Chief
Financial Officer (telephone line facsimile number (610) 344-7563), and a copy
shall also be given to: Morgan, Lewis & Bockius, LLP, 2000 One Logan Square,
Philadelphia, Pennsylvania 19103, Attention: David R. King, Esq. (telephone line
facsimile transmission number (215) 963-5299), and in the case of any notice to
the Buyer, a copy shall be given to: Law Offices of Brian W Pusch, Penthouse
Suite, 29 West 57th Street, New York, New York 10019 (telephone line facsimile
transmission number (212) 980-7055), in each case with a copy to: Diaz &
Altschul Capital, LLC, 745 Fifth Avenue, Suite 3001, New York, New York 10022
(telephone line facsimile transmission number (212) 751-5757).
(E) COUNTERPARTS. This Agreement may be executed in
counterparts and by the parties hereto on separate counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
and the same instrument. A telephone line facsimile transmission of this
Agreement bearing a signature on behalf of a party hereto shall be legal and
binding on such party. Although this Agreement is dated as of the date first set
forth above, the actual date of execution and delivery of this Agreement by each
party is the date set forth below such party's signature on the signature page
hereof. Any reference in this Agreement or in any of the documents executed and
delivered by the parties hereto in connection herewith to (1) the date of
execution and delivery of this Agreement by the Buyer shall be deemed a
reference to the date set forth below the Buyer's signature on the signature
page hereof, (2) the date of execution and delivery of this Agreement by the
Company shall be deemed a reference to the date set forth below the Company's
signature on the signature page hereof and (3) the date of execution and
delivery of this Agreement, or the date of execution and delivery of this
Agreement by the Buyer and the Company, shall be deemed a reference to the later
of the dates set forth below the signatures of the parties on the signature page
hereof.
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(F) ENTIRE AGREEMENT; BENEFIT. This Agreement, including the
Annexes, constitutes the entire agreement between the parties hereto with
respect to the subject matter hereof. There are no restrictions, promises,
warranties, or undertakings, other than those set forth or referred to herein.
This Agreement, including the Annexes, supersedes all prior agreements and
understandings, whether written or oral, between the parties hereto with respect
to the subject matter hereof. This Agreement and the terms and provisions hereof
are for the sole benefit of only the Company, the Buyer and their respective
successors and permitted assigns.
(G) WAIVER. Failure of any party to exercise any right or
remedy under this Agreement or otherwise, or delay by a party in exercising such
right or remedy, or any course of dealing between the parties, shall not operate
as a waiver thereof or an amendment hereof, nor shall any single or partial
exercise of any such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or further exercise
thereof or exercise of any other right or power.
(H) AMENDMENT. (1) No amendment, modification, waiver,
discharge or termination of any provision of this Agreement on or prior to the
Closing Date nor consent to any departure by the Buyer or the Company therefrom
on or prior to the Closing Date shall in any event be effective unless the same
shall be in writing and signed by the party to be charged with enforcement, and
in any such case shall be effective only in the specific instance and for the
purpose for which given.
(2) No amendment, modification, waiver, discharge or
termination of any provision of this Agreement after the Closing Date nor
consent to any departure by the Company therefrom after the Closing Date shall
in any event be effective unless the same shall be in writing and signed (x) by
the Company if the Company is to be charged with enforcement or (y) by the
Majority Holders, if the Buyer is to be charged with enforcement, and in any
such case shall be effective only in the specific instance and for the purpose
for which given.
(3) No course of dealing between the parties hereto shall
operate as an amendment of this Agreement.
(I) FURTHER ASSURANCES. Each party to this Agreement will
perform any and all acts and execute any and all documents as may be necessary
and proper under the circumstances in order to accomplish the intents and
purposes of this Agreement and to carry out its provisions.
(J) ASSIGNMENT OF CERTAIN RIGHTS AND OBLIGATIONS. The rights
of an Investor under Sections 5, 8, 9, and 10 of this Agreement shall be
automatically assigned by such Investor to any transferee of all or any portion
of such Investor's Registrable Securities (or all or any portion of the Note or
the Warrants) only if: (1) such Investor agrees in writing with such transferee
to
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assign such rights, and a copy of such agreement is furnished to the Company
within a reasonable time after such assignment, (2) the Company is, within a
reasonable time after such transfer, furnished with notice of (A) the name and
address of such transferee and (B) the securities with respect to which such
rights and obligations are being transferred, (3) immediately following such
transfer or assignment the further disposition of Registrable Securities by the
transferee or assignee is restricted under the 1933 Act and applicable state
securities laws, and (4) at or before the time the Company received the notice
contemplated by clause (2) of this sentence the transferee agrees in writing
with the Company to be bound by all of the provisions contained in Sections
5(a), 5(b), 8, 9, and 10 hereof. Upon any such transfer, the Company shall be
obligated to such transferee to perform all of its covenants under Sections 5,
8, 9, and 10 of this Agreement as if such transferee were the Buyer. In
connection with any such transfer the Company shall, at its sole cost and
expense, promptly after such transfer take such actions as shall be reasonably
acceptable to the transferring Investor and such transferee to assure that each
Registration Statement and related Prospectus for which the transferring
Investor is a selling stockholder are available for use by such transferee for
sales of the Registrable Securities in respect of which such rights and
obligations have been so transferred. Transfer of the Note shall be limited as
provided therein and transfer of the Warrants shall be limited as provided
therein.
(K) EXPENSES. If the closing under this Agreement shall have
occurred, all reasonable expenses incurred in connection with registrations,
filings or qualifications pursuant to Sections 5(d), 5(e), 5(g) and 8 of this
Agreement shall be paid by the Company, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees and
the fees and disbursements of counsel for the Company and the Investors but
excluding (a) fees and expenses of investment bankers retained by any Investor
and (b) brokerage commissions incurred by any Investor. The Company shall pay on
demand all expenses incurred by the Buyer after the Closing Date, including
reasonable attorneys' fees and expenses, as a consequence of, or in connection
with (1) the negotiation, preparation or execution of any amendment,
modification or waiver of any of the Transaction Documents, (2) any default or
breach of any of the Company's obligations set forth in any of the Transaction
Documents, and (3) the enforcement or restructuring of any right of, including
the collection of any payments due, the Buyer under any of the Transaction
Documents, including any action or proceeding relating to such enforcement or
any order, injunction or other process seeking to restrain the Company from
paying any amount due the Buyer. Except as otherwise provided in this Section
10(k), each of the Company and the Buyer shall bear its own expenses in
connection with this Agreement and the transactions contemplated hereby. Nothing
herein shall limit the rights of the Placement Agent under its Engagement
Agreement with the Company.
(L) TERMINATION. (1) The Buyer shall have the right to
terminate this Agreement by giving notice to the Company at any time at or prior
to the Closing Date if:
(A) the Company shall have failed, refused, or been unable at
or prior to the date of such termination of this Agreement to perform
any of its obligations hereunder required to be performed prior to the
time of such termination;
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(B) any condition to the Buyer's obligations hereunder is not
fulfilled at or prior to the time such condition is required to be
satisfied; or
(C) the closing shall not have occurred on a Closing Date on
or before March 15, 1999, other than solely by reason of a breach of
this Agreement by the Buyer.
Any such termination shall be effective upon the giving of notice thereof by the
Buyer. Upon such termination, the Buyer shall have no further obligation to the
Company hereunder and the Company shall remain liable for any breach of this
Agreement or the other documents contemplated hereby which occurred on or prior
to the date of such termination.
(2) The Company shall have the right to terminate this
Agreement by giving notice to the Buyer at any time at or prior to the Closing
Date if the closing shall not have occurred on a Closing Date on or before March
15, 1999, other than solely by reason of a breach of this Agreement by the
Company, so long as the Company is not in breach of this Agreement at the time
it gives such notice. Any such termination shall be effective upon the giving of
notice thereof by the Company. Upon such termination, neither the Company nor
the Buyer shall have any further obligation to one another hereunder.
(M) SURVIVAL. The respective representations, warranties,
covenants and agreements of the Company and the Buyer contained in this
Agreement and the documents delivered in connection with this Agreement shall
survive the execution and delivery of this Agreement and the closing hereunder
and delivery of and payment for the Note and issuance of the Warrants, and shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of the Buyer or any Person controlling or acting on behalf
of the Buyer or by the Company or any Person controlling or acting on behalf of
the Company for a period ending on the later of (x) the date which is six years
after the Closing Date and (y) the date which is two years after the Company
shall have paid in full all amounts due from the Company under the Transaction
Documents and performed in full all of its obligations under the Transaction
Documents.
(N) PUBLIC STATEMENTS, PRESS RELEASES, ETC. The Company and
the Buyer shall have the right to approve before issuance any press releases or
any other public statements with respect to the transactions contemplated
hereby; provided, however, that the Company shall be entitled, without the prior
approval of the Buyer, to make any press release or other public disclosure
(other than in the Company's periodic and other reports filed with the SEC under
the 1934 Act) with respect to such transactions as is required by applicable law
or applicable requirements of any stock market on which securities of the
Company are listed for trading (although the Buyer shall be consulted by the
Company in connection with any such press release or other public disclosure
prior to its release and shall be provided with a copy thereof).
(O) CONSTRUCTION. The language used in this Agreement will be
deemed to be
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the language chosen by the parties to express their mutual intent, and no rules
of strict construction will be applied against any party.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective officers or other
representatives thereunto duly authorized on the respective dates set forth
below their signatures hereto.
Principal Amount: $
Purchase Price: $
CEPHALON, INC.
By: ___________________________________
Name:
Title:
Date:
[NAME OF BUYER]
By: ___________________________________
Name:
Title:
Date:
Address:
Facsimile No.:
-47-
<PAGE>
SCHEDULE 4(A)
-------------
CERTAIN EQUITY INVESTMENTS
--------------------------
The Company has a $500,000 investment in the Series B
Preferred Stock of Eukarion, Inc., a Delaware corporation.
4(a)-49
<PAGE>
SCHEDULE 4(C)
-------------
CERTAIN ANTIDILUTION ADJUSTMENTS
--------------------------------
None
4(c)-50
<PAGE>
SCHEDULE 4(R)
-------------
MORTGAGES, LIENS, SECURITY
INTERESTS, ENCUMBRANCES, ETC.
-----------------------------
1. The $10,000,000 Sunnyday Loan from the Commonwealth of
Pennsylvania and the $2,000,000 Pennsylvania Industrial Development Authority
loan created a lien on all buildings and equipment of Cephalon, Inc. located in
Pennsylvania. In addition, Variable Annuity Life Insurance Company holds a first
mortgage on all of the buildings located in Pennsylvania.
2. GE Capital holds liens for various leased equipment of
Cephalon, Inc.
3. Additionally, Siemens Rolm holds liens for various leased
equipment of Cephalon, Inc.
4. Additionally, a Letter of Credit was issued by First Union
in the face amount of $2,000,000 to secure the obligations under the $2,000,000
Pennsylvania Industrial Development Authority loan. The reimbursement of the
obligations under the Letter is secured by treasury securities of First Union.
4(r)-51
<PAGE>
EXHIBIT 4.3(B)
ANNEX I
TO
NOTE PURCHASE
AGREEMENT
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "1933 ACT"). THE ISSUANCE TO THE HOLDER OF THE SHARES OF COMMON STOCK
ISSUABLE IN PARTIAL PAYMENT OF PRINCIPAL OR THE REDEMPTION PRICE OF THIS NOTE
AND IN PAYMENT OF INTEREST ON THIS NOTE ARE NOT COVERED BY A REGISTRATION
STATEMENT UNDER THE 1933 ACT. PURSUANT TO THE NOTE PURCHASE AGREEMENT, THIS
NOTE HAS BEEN ACQUIRED, AND SUCH SHARES MUST BE ACQUIRED, FOR INVESTMENT ONLY
AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION OF
THE RESALE THEREOF UNDER THE 1933 ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY IN FORM, SCOPE AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED.
CEPHALON, INC.
11% REVENUE SHARING SENIOR SECURED NOTE DUE 2002
No. ____ $________
New York, New York
March 1, 1999
FOR VALUE RECEIVED, CEPHALON, INC., a Delaware corporation
(hereinafter called the "Company"), hereby promises to pay to [NAME], [ADDRESS],
or registered assigns (the "Holder"), or order, the sum of ______________
Dollars ($________________), on the Maturity Date, and to pay interest on the
unpaid principal balance hereof at the Applicable Rate from the date hereof,
until the same becomes due and payable, whether at maturity or upon acceleration
or by repurchase in accordance with the terms hereof or otherwise. Any amount,
including, without limitation, principal of or interest on this Note or the
Optional Redemption Price, the Repurchase Price or the Registration Repurchase
Price, that is payable under this Note that is not paid when due shall bear
interest at the Default Rate from the due date thereof until the same is paid
("Default Interest"). Regular interest shall be payable in arrears on each
Interest Payment Date, commencing on June 1, 1999, on the principal amount
outstanding on such date. Regular interest on this Note shall be computed on
the basis of a 360-day year of 12 30-day months and actual days elapsed. No
regular interest shall be payable on an Interest Payment Date on any portion of
the principal amount of this Note which shall have been redeemed prior to such
Interest Payment Date so long as the Company shall have complied in full with
its obligations with respect to such redemption.
All payments of principal of and premium, if any, interest, and other
amounts on this Note shall be made in lawful money of the United States of
America, or, at the option of the
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<PAGE>
Company and subject to the provisions of this Note, interest payable on the
Interest Payment Dates may be paid in whole or in part in fully paid and
nonassessable shares of Common Stock or, in accordance with Section 1.4, the
Company is entitled under certain circumstances to pay a portion of the
principal of this Note in shares of Common Stock. All cash payments shall be
made by wire transfer of immediately available funds to such account as the
Holder may from time to time designate by written notice in accordance with the
provisions of this Note. Whenever any amount expressed to be due by the terms of
this Note is due on any day which is not a Business Day, the same shall instead
be due on the next succeeding day which is a Business Day and, in the case of
any Interest Payment Date which is not the date on which this Note is paid in
full, the extension of the due date thereof shall not be taken into account for
purposes of determining the amount of interest due on such date. Certain
capitalized terms used in this Note are defined in Article VIII.
The obligations of the Company under this Note shall rank in right of
payment on a parity with all other unsubordinated obligations of the Company for
indebtedness for borrowed money or the purchase price of property. This Note is
issued pursuant to the Note Purchase Agreement and the Holder of this Note and
this Note are subject to the terms and entitled to the benefits of the Note
Purchase Agreement. This Note is entitled to the benefits of the Security
Agreement and the Patent and Trademark Security Agreement.
The following terms shall apply to this Note:
ARTICLE I
CERTAIN PAYMENTS IN COMMON STOCK;
OPTIONAL REDEMPTION
1.1 ISSUANCE OF COMMON STOCK IN LIEU OF CASH INTEREST. (a) If the
-------------------------------------------------
Company exercises its option to make a payment of interest on this Note wholly
or partly in Common Stock (herein sometimes called the "Share Interest Payment
Option"), the issuance of Interest Payment Shares upon such exercise of the
Share Interest Payment Option shall have been authorized by the Board of
Directors of the Company.
(b) The Company shall not be permitted to exercise the Share Interest
Payment Option with respect to any payment of interest on this Note if:
(i) the number of shares of Common Stock authorized, unissued and
unreserved for all purposes, or held in the Company's treasury, is
insufficient to pay the portion of such interest to be paid in Common
Stock;
(ii) the issuance or delivery of Interest Payment Shares or the public
resale of such Interest Payment Shares by the Holder would require
registration or filing with or
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<PAGE>
approval of any governmental authority under any law or regulation, and
such registration, filing or approval has not been effected or obtained or
is not in effect or on such Interest Payment Date or the date the Company
delivers the Interest Payment Shares to the Holder the Interest Share
Registration Statement is unavailable for use by the Holder for the resale
of the Interest Payment Shares;
(iii) the outstanding shares of Common Stock are neither (A) listed or
admitted for trading on a national securities exchange nor (B) quoted on
Nasdaq; or the Interest Payment Shares shall not at the time of issuance
have been authorized for listing, upon official notice of issuance, on the
principal securities exchange on which the Common Stock is then listed and
traded;
(iv) the Interest Share Price for the Interest Payment Shares is less
than the par value of the Common Stock; or
(v) an Event of Default has occurred and is continuing on the date
the Company makes such election or on the applicable Interest Payment Date.
(c) The Company may exercise its right to elect the Share Interest
Payment Option with respect to any Interest Payment Date only by giving notice
of such election to the Holder not less than 24 or more than 28 Trading Days
prior to such Interest Payment Date, which notice shall state the percentage of
the interest payable on such Interest Payment Date which is to be paid in
Interest Payment Shares. The Company shall have the right to elect the Share
Interest Payment Option with respect to this Note only if the Company also
elects the similar option which it has with respect to the Other Notes for the
interest due thereon on the date which is such Interest Payment Date and in each
such case pro rata among this Note and the Other Notes, based on the amounts of
interest due on such date hereon and thereon. If the Company elects the Share
Interest Payment Option with respect to a particular Interest Payment Date, the
Company shall issue to the Holder in respect of such Interest Payment Date the
aggregate number of whole shares of Common Stock determined by dividing the per
share Interest Share Price of the Common Stock on the applicable Interest
Payment Date into an amount equal to 102% of the total amount of lawful money of
the United States of America which the Holder would receive if the aggregate
amount of interest on this Note which is being paid in Common Stock were being
paid in such lawful money. If the Company elects the Share Interest Payment
Option with respect to an Interest Payment Date, the Interest Payment Shares for
such Interest Payment Date shall become issuable on such Interest Payment Date
and the Company shall deliver, or cause to be delivered, the appropriate number
of shares of Common Stock to the Holder within three Trading Days after the
applicable Interest Payment Date. If in any case the Company shall fail to
deliver or cause to be delivered such number of shares of Common Stock to the
Holder within such period of three Trading Days, then in addition to any other
liabilities the Company may have hereunder and under applicable law (1) the
Company shall pay or reimburse the Holder on demand for all out-of-pocket
expenses, including, without limitation, reasonable fees and expenses of legal
counsel, incurred by the Holder as a result of such failure, (2) if as a result
of such failure the Holder shall suffer any direct damages or liabilities from
such
-3-
<PAGE>
failure (including, without limitation, margin interest and the cost of covering
a purchase (whether by the Holder or the Holder's securities broker) or
borrowing of shares of Common Stock by the Holder for purposes of settling any
trade involving a sale of shares of Common Stock made by the Holder during the
period beginning on the date the Company notified the Holder of the Company's
election of the Share Interest Payment Option and ending on the date the Company
delivers or causes to be delivered to the Holder the shares of Common Stock
issuable in respect thereof), then the Company shall upon demand of the Holder
pay to the Holder an amount equal to the actual direct, out-of-pocket damages
and liabilities suffered by the Holder by reason thereof which the Holder
documents to the reasonable satisfaction of the Company, and (3) the Holder may
by written notice (which may be given by mail, courier, personal service or
telephone line facsimile transmission) or oral notice (promptly confirmed in
writing), given at any time prior to delivery to the Holder of the shares of
Common Stock issuable in connection with such exercise of the Share Interest
Payment Option, require payment in cash of the interest in respect of which the
Company exercised the Share Interest Payment Option, in which case the amount of
such interest shall be immediately due and payable, with Default Interest
thereon from the applicable Interest Payment Date until paid in full and the
Company shall not be obligated or entitled to issue such Interest Payment Shares
in respect of such Interest Payment Date. Notwithstanding the foregoing the
Company shall not be liable to the Holder under clause (2) of the immediately
preceding sentence to the extent the failure of the Company to deliver or to
cause to be delivered such shares of Common Stock results from fire, flood,
storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving
facilities of a common carrier, acts of God, or any similar event outside the
control of the Company (it being understood that the action or failure to act of
the Transfer Agent shall not be deemed an event outside the control of the
Company except to the extent resulting from fire, flood, storm, earthquake,
shipwreck, strike, war, acts of terrorism, crash involving facilities of a
common carrier, acts of God, the bankruptcy, liquidation or reorganization of
the Transfer Agent under any bankruptcy, insolvency or other similar law or any
similar event outside the control of the Transfer Agent). The Holder shall
notify the Company in writing (or by telephone conversation, confirmed in
writing) as promptly as practicable following the third Trading Day after such
Interest Payment Date if the Holder becomes aware that shares of Common Stock so
issuable have not been received as provided herein. If the Company shall have
exercised the Share Interest Payment Option with respect to a particular
Interest Payment Date and either (1) the Company shall notify the Holder on or
after such Interest Payment Date that the Interest Payment Shares might not be
delivered within three Trading Days after such Interest Payment Date or (2) the
Holder learns after the date which is three Trading Days after such Interest
Payment Date that the Holder has not received such Interest Payment Shares,
then, without releasing the Company of its obligations with respect thereto,
from and after the next succeeding Trading Day the Holder shall make reasonable
efforts not to sell shares of Common Stock in anticipation of receipt of such
Interest Payment Shares in a manner which is likely to increase materially the
liability of the Company under clause (2) of the second preceding sentence. No
fractional shares of Common Stock shall be issued in payment of interest on this
Note. In lieu thereof, the Company may, at its option, issue a number of shares
of Common Stock which reflects a rounding up to the next whole number or may pay
lawful money of the United States of America in lieu of issuance of such
fractional share.
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<PAGE>
(d) If the Company elects the Share Interest Payment Option with
respect to a payment of interest on this Note with respect to a particular
Interest Payment Date, the Company shall deliver to the Holder, on or prior to
the date on which Interest Payment Shares for such payment of interest on this
Note are to be received by the Holder, a Company Certificate setting forth (i)
the total amount of the cash interest payment to which the Holder is entitled,
(ii) the portion of such interest payment being made in Interest Payment Shares
and the amount which is 102% thereof, (iii) the number of Interest Payment
Shares allocable to such payment, as calculated pursuant to this Section 1.1,
(iv) any rounding adjustment to such number or any payment necessary to be made
pursuant to Section 1.1(c), (v) a brief statement of the facts requiring such
adjustment, and (vi) a brief statement that none of the conditions set forth in
Section 1.1(b) has occurred and is existing and that all of the requirements of
this Section 1.1 have been met. The Interest Payment Shares shall be duly
issued in the name of the Holder or its nominee. Such Company Certificate shall
be conclusive evidence of the correctness of the calculation of the number of
Interest Payment Shares allocable to the payments to which such Company
Certificate relates and of any adjustments to such number made pursuant to this
Section 1.1 in the absence of manifest error. On or before the pertinent
payment date, the Company shall issue, or cause the transfer agent for the
Common Stock to prepare and issue, the Interest Payment Shares in the name of
the Holder or its nominee before being so delivered by the Company on the
payment date.
(e) The Interest Payment Shares, when issued pursuant to and in
compliance with this Section 1.1, shall be, and for all purposes shall be deemed
to be, validly issued, fully paid and nonassessable shares of Common Stock; the
issuance and delivery thereof is in all respects hereby authorized; and the
issuance thereof, together with lawful money of the United States of America, if
any, paid in lieu of fractional shares of Common Stock, will be, and for all
purposes shall be deemed to be, in full discharge and satisfaction of the
Company's obligation to pay the interest on this Note to which such Interest
Payment Shares relate.
1.2 OPTIONAL REDEMPTION. (a) At any time during the Optional
-------------------
Redemption Period, the Company shall have the right to redeem at any one time
all or from time to time any part of the outstanding principal amount of this
Note at the Optional Redemption Price pursuant to this Section 1.2 on any
Optional Redemption Date, so long as (x) on the date an Optional Redemption
Notice is given and at all times to and including the applicable Optional
Redemption Date, no Event of Default and no event which, with notice or passage
of time, or both, would become an Event of Default has occurred and is
continuing (unless the requirements of this clause (x) will be satisfied
immediately after the applicable Optional Redemption Date and the Company shall
furnish to the Holder Company Certificates to such effect on the date the
applicable Optional Redemption Notice is given to the Holder and on the
applicable Optional Redemption Date), (y) on the date an Optional Redemption
Notice is given and at all times to and including the applicable Optional
Redemption Date no Repurchase Event or Registration Repurchase Event has
occurred with respect to which the Holder has the right to exercise repurchase
rights pursuant to Sections 5.1 and 5.2 or Section 5.3 or with respect to which
the Holder has exercised such repurchase rights and the Repurchase Price or the
Registration Repurchase Price, as the case may be, has not been paid to the
Holder and no event which, with notice or passage of time, or both, would become
a
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<PAGE>
Repurchase Event has occurred and is continuing, and (z) on the date an Optional
Redemption Notice is given, the Company has funds available to pay the Optional
Redemption Price. In order to exercise its right of redemption under this
Section 1.2, the Company shall give an Optional Redemption Notice to the Holder
not less than 20 days or more than 30 days prior to the Optional Redemption Date
stating that: (1) the Company is exercising its right to redeem a specified
portion of this Note in accordance with this Section 1.2, (2) the principal
amount of this Note to be redeemed, (3) the Optional Redemption Price and (4)
the Optional Redemption Date. On the applicable Optional Redemption Date (or
such later date as the Holder surrenders this Note to the Company) the Company
shall pay to or upon the order of the Holder, by wire transfer of immediately
available funds to such account as shall be specified for such purpose by the
Holder at least one Business Day prior to the Optional Redemption Date, an
amount equal to the Optional Redemption Price of the portion (which may be all)
of this Note to be redeemed.
(b) The Company shall not be entitled to give an Optional Redemption
Notice or to redeem any portion of this Note with respect to which the Company
has given the Holder notice pursuant to Section 1.4 that the Company is
exercising the Share Principal Payment Option and to which exercise the Holder
has consented.
(c) Any redemption of this Note pursuant to this Section 1.2 shall be
made at the same time as a redemption by the Company of a pro rata portion
(based on the outstanding principal amounts) of the Other Notes and in each such
case the aggregate principal amount of this Note and the Other Notes to be so
redeemed shall be at least $5,000,000.00 or such lesser aggregate principal
amount of this Note and the Other Notes as shall remain outstanding at the time
an Optional Redemption Notice is given. The Company shall not redeem any of the
Other Notes pursuant to the provisions thereof similar to this Section 1.2 or
repurchase or otherwise acquire any of the Other Notes (other than a mandatory
redemption pursuant to provisions of the Other Notes comparable to Article V)
unless the Company offers simultaneously to redeem, repurchase or otherwise
acquire a pro rata portion (based on outstanding principal amount) of this Note
for cash at the same unit price as the Other Note or Other Notes.
1.3 NO PREPAYMENT. Except as specifically provided in Sections 1.2
-------------
and 6.2, this Note may not be prepaid, redeemed or repurchased at the option of
the Company prior to the Maturity Date. The Company shall not repurchase or
otherwise acquire any of the Other Notes unless the Company offers
simultaneously to redeem, repurchase or otherwise acquire a pro rata portion of
this Note for cash at the same price per unit of outstanding principal amount as
the Other Note or Other Notes. Nothing in this Section 1.3 shall limit the
Company's rights under Article VII.
1.4 ISSUANCE OF COMMON STOCK IN LIEU OF CASH PAYMENT OF PRINCIPAL OR
----------------------------------------------------------------
REDEMPTION PREMIUM. (a) The Company shall have the right to elect to pay (1) a
- ------------------
portion of the principal amount of this Note on the Maturity Date or (2) a
portion of the Optional Redemption Price payable upon a redemption of this Note
in accordance with Section 1.2, in either such case in shares of Common Stock,
if the Holder consents to such election (herein sometimes called the "Share
Principal Payment Option"). If the Company elects the Share Principal Payment
Option, the
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<PAGE>
issuance of Principal Payment Shares upon the exercise of the Share Principal
Payment Option shall have been authorized by the Board of Directors of the
Company. Such election, once made, shall be irrevocable.
(b) The Company shall not be entitled to exercise the Share
Principal Payment Option with respect to payment of a portion of this principal
Note if:
(i) the number of shares of Common Stock authorized, unissued, and
unreserved for all purposes, or held in the Company's treasury, is
insufficient to pay the portion of such principal to be paid in Common
Stock;
(ii) the issuance or delivery of Principal Payment Shares or the
public resale of such Principal Payment Shares by the Holder would require
registration or filing with or approval of any governmental authority under
any law or regulation, and such registration, filing or approval has not
been effected or obtained or is not in effect or on the Maturity Date the
Payment Share Registration Statement is unavailable for use by the Holder
for the resale of the Principal Payment Shares;
(iii) the outstanding shares of Common Stock are neither (A) listed
or admitted to trading on a national securities exchange nor (B) quoted on
Nasdaq; or the Principal Payment Shares shall not at the time of issuance
have been authorized for listing, upon official notice of issuance, on the
principal securities exchange on which the Common Stock is then listed and
traded;
(iv) the Payment Share Price for the Principal Payment Shares is less
than the par value of the Common Stock; or
(v) an Event of Default has occurred and is continuing on the date
the Company makes such election or on the Maturity Date.
(c) The Company may exercise its right to elect the Share Principal
Payment Option only by giving notice of such election to the Holder at least 100
Trading Days prior to the Maturity Date or the applicable Optional Redemption
Date, as the case may be. The Company shall have the right to elect the Share
Principal Payment Option with respect to a portion of the principal amount of
this Note that is due on the Maturity Date that is equal to not more than 50
percent of the original principal amount of this Note (or, if less than 50
percent of the original principal amount of this Note is outstanding, up to the
outstanding principal amount of this Note). The Company shall have the right to
elect the Share Principal Payment Option with respect to a portion of the
Optional Redemption Price equal to not more than 20 percent of the principal
amount of this Note to be redeemed on any Optional Redemption Date. In each
such case, the Company shall have the right to elect the Share Principal Payment
Option with respect to this Note only if:
-7-
<PAGE>
(i) the Company also elects the similar option which it has with
respect to the Other Notes for the principal thereof due on the date which
is the Maturity Date or a portion of the redemption price thereof which is
payable on the applicable Optional Redemption Date, as the case may be, and
in each such case pro rata among this Note and the Other Notes, based on
the outstanding principal amounts hereof and thereof; and
(ii) the Holder in its sole discretion consents to such election with
respect to this Note by notice to the Company within ten Trading Days after
the Company makes such election.
If the Company elects the Share Principal Payment Option and the Holder so
consents, the Company shall issue and deliver, or cause to be delivered to the
Holder on or before the Maturity Date or the applicable Optional Redemption
Date, as the case may be, the aggregate number of whole shares of Common Stock
determined by dividing the per share Payment Share Price on the Maturity Date or
the applicable Optional Redemption Date, as the case may be, into an amount
equal to 105% of the total amount of lawful money of the United States of
America which the Holder would receive if the aggregate amount of principal of
this Note or the portion of the Optional Redemption Price of this Note, as the
case may be, which is being paid in Common Stock were being paid in such lawful
money. If the Company shall fail to deliver or cause to be delivered such
number of shares of Common Stock to the Holder on or prior to the Maturity Date,
or the applicable Optional Redemption Date, as the case may be, then in addition
to any other liabilities the Company may have hereunder and under applicable law
(1) the Company shall pay or reimburse the Holder on demand for all out-of-
pocket expenses, including, without limitation, reasonable fees and expenses of
legal counsel, incurred by the Holder as a result of such failure, (2) if as a
result of such failure the Holder shall suffer any direct damages or liabilities
from such failure (including, without limitation, margin interest and the cost
of covering a purchase (whether by the Holder or the Holder's securities broker)
or borrowing of shares of Common Stock by the Holder for purposes of settling
any trade involving a sale of shares of Common Stock made by the Holder during
the period beginning on the date the Company notified the Holder of the
Company's election of the Share Principal Payment Option and ending on the
Maturity Date or the applicable Optional Redemption Date, as the case may be),
then the Company shall upon demand of the Holder pay to the Holder an amount
equal to the actual direct, out-of-pocket damages and liabilities suffered by
the Holder by reason thereof which the Holder documents to the reasonable
satisfaction of the Company, and (3) the Holder may by written notice (which may
be given by mail, courier, personal service or telephone line facsimile
transmission) or oral notice (promptly confirmed in writing), given at any time
prior to delivery to the Holder of the shares of Common Stock issuable in
connection with such exercise of the Share Principal Payment Option, require
payment in cash of the portion of the principal amount of this Note in respect
of which the Company exercised the Share Principal Payment Option, in which case
the amount of such principal shall be immediately due and payable, with Default
Interest thereon from the Maturity Date or the applicable Optional Redemption
Date, as the case may be, until paid in full and the Company shall not be
obligated or entitled to issue such Principal Payment Shares in respect of such
payment of principal or the Optional Redemption Date, as the case may be.
Notwithstanding the foregoing the Company shall not be liable to the
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<PAGE>
Holder under clause (2) of the immediately preceding sentence to the extent the
failure of the Company to deliver or to cause to be delivered such shares of
Common Stock results from fire, flood, storm, earthquake, shipwreck, strike,
war, acts of terrorism, crash involving facilities of a common carrier, acts of
God, or any similar event outside the control of the Company (it being
understood that the action or failure to act of the Transfer Agent shall not be
deemed an event outside the control of the Company except to the extent
resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts of
terrorism, crash involving facilities of a common carrier, acts of God, the
bankruptcy, liquidation or reorganization of the Transfer Agent under any
bankruptcy, insolvency or other similar law or any similar event outside the
control of the Transfer Agent). The Holder shall notify the Company in writing
(or by telephone conversation, confirmed in writing) as promptly as practicable
following the Maturity Date or the applicable Optional Redemption Date, as the
case may be, if the Holder becomes aware that shares of Common Stock so issuable
have not been received as provided herein. If the Company shall have exercised
the Share Principal Payment Option with respect to a particular payment and
either (1) the Company shall notify the Holder that such Principal Payment
Shares might not be delivered when due or (2) the Holder learns after the date
on which such Principal Payment Shares are due to be delivered to such Holder
that the Holder has not received such Principal Payment Shares, then, without
releasing the Company of its obligations with respect thereto (x) from and after
the next succeeding Trading Day the Holder shall make reasonable efforts not to
sell shares of Common Stock in anticipation of receipt of such Principal Payment
Shares is a manner which is likely to increase materially the liability of the
Company under clause (2) of the second preceding sentence and (y) if the Company
so requests, the Holder will advise the Company of the Holder's open trading
position in the Common Stock with respect to which the Holder expects receipt of
such Principal Payment Shares and will take such action as may be directed by
the Company to close such open trading position (subject to prevailing market
conditions) so long as the Company pays in advance, or makes provision for such
payment which is satisfactory to the Holder in its sole discretion, of all
amounts required by the Holder to assure that the Holder will not suffer any
economic or trading loss by reason of taking such action. No fractional shares
of Common Stock shall be issued in payment of principal or any portion of the
Optional Redemption Price of this Note. In lieu thereof, the Company may, at its
option, issue a number of shares of Common Stock which reflects a rounding up to
the next whole number or may pay lawful money of the United States of America in
lieu of issuance of such fractional share.
(d) (1) If the Company shall be entitled to issue Principal Payment
Shares on the Maturity Date, the Company shall deliver to the Holder, on or
prior to the Maturity Date:
(A) a Company Certificate setting forth (i) the total amount of
principal to which the Holder is entitled, (ii) the portion of the
principal of this Note being paid in Principal Payment Shares and the
amount which is 105% thereof, (iii) the number of Principal Payment Shares
allocable to the payment of such amount, as calculated pursuant to this
Section 1.4, (iv) any rounding adjustment to such number or any payment
necessary to be made pursuant to Section 1.1(c), (v) a brief statement of
the facts requiring such adjustment, and (vi) a brief statement that none
of the conditions set forth in Section 1.4(b) has occurred and is existing
and that all of the requirements of this Section 1.4 have been met; and
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<PAGE>
(B) an opinion of counsel selected by the Company and reasonably
acceptable to the Majority Holders to the effect set forth in EXHIBIT B.
(2) If the Company shall be entitled to issue Principal Payment
Shares in partial payment of the Optional Redemption Price, the Company shall
deliver to the Holder, on or prior to the applicable Optional Redemption Date:
(A) a Company Certificate setting forth (i) the total amount of
principal being redeemed on such Optional Redemption Date, (ii) the portion
of the premium on such principal amount of this Note being paid in
Principal Payment Shares and the amount which is 105% thereof, (iii) the
number of Principal Payment Shares allocable to the payment of such amount,
as calculated pursuant to this Section 1.4, (iv) any rounding adjustment to
such number or any payment necessary to be made pursuant to Section 1.1(c),
(v) a brief statement of the facts requiring such adjustment, and (vi) a
brief statement that none of the conditions set forth in Section 1.4(b) has
occurred and is existing and that all of the requirements of this Section
1.4 have been met; and
(B) an opinion of counsel selected by the Company and reasonably
acceptable to the Majority Holders to the effect set forth in EXHIBIT B.
(3) The Principal Payment Shares shall be duly issued in the name of
the Holder or its nominee. Such Company Certificate shall be conclusive
evidence of the correctness of the calculation of the number of Principal
Payment Shares and of any adjustments to such number made pursuant to this
Section 1.4 in the absence of manifest error. On or before the Maturity Date or
the applicable Optional Redemption Date, as the case may be, the Company shall
issue, or cause the Transfer Agent for the Common Stock to prepare and issue,
the Principal Payment Shares in the name of the Holder or its nominee before
being so delivered by the Company on the Maturity Date or the applicable
Optional Redemption Date, as the case may be.
(f) The Principal Payment Shares, when issued pursuant to and in
compliance with this Section 1.4, shall be, and for all purposes shall be deemed
to be, validly issued, fully paid and nonassessable shares of Common Stock; the
issuance and delivery thereof is in all respects hereby authorized; and the
issuance thereof, together with lawful money of the United States of America, if
any, paid in lieu of fractional shares of Common Stock, will be, and for all
purposes shall be deemed to be, in full discharge and satisfaction of the
Company's obligation to pay the portion of the principal amount of this Note to
which such Principal Payment Shares relate or the portion of the Optional
Redemption Price of this Note to which such Principal Payment Shares relate, as
the case may be.
(g) Notwithstanding any other provision hereof, if the Aggregate
Share Payment Amount exceeds the Share Payment Threshold, then the Holder shall
have the right, exercisable
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<PAGE>
by notice given to the Company on or before the Business Day immediately
preceding the Maturity Date, to receive payment in cash rather than Principal
Payment Shares on the Maturity Date of all or any portion of the Holder's pro
rata (based on the portion of the principal amount of this Note and the Other
Notes which the Company has elected to pay in shares of Common Stock and as to
which the holders have consented) portion of such excess.
ARTICLE II
ADDITIONAL INTEREST
2.1 RIGHT TO ADDITIONAL INTEREST. In addition to all other amounts
----------------------------
provided in this Note and the Other Notes to be paid by the Company, the Holder
and the registered holders of the Other Notes shall be entitled to payments
based on a portion of the Net Revenues of the Products and the Competitive
Products in the Territory during the Payment Period. The amount of such
payments based on a portion of such Net Revenues of the Products and the
Competitive Products during any Determination Period shall be the product
obtained by multiplying (x) an amount equal to the Net Revenues from the
Products and the Competitive Products in the Territory during such Determination
Period times (y) the Payment Percentage in effect during such Determination
Period, with each change therein during such Determination Period being given
effect (such product, the "Noteholder Payment Amount"). Based on the U.S.
federal income tax laws in effect on the Issuance Date, the Company intends to
treat the Noteholder Payment Amounts as additional interest on this Note for
U.S. federal income tax purposes. The Company shall remain obligated to make
payments to the Holder pursuant to this Article II notwithstanding the payment
or redemption of all or any portion of this Note.
2.2 CALCULATION OF NET REVENUES. The Company shall maintain in
---------------------------
reasonable and adequate detail records of all components of and adjustments made
in determining Net Revenues of the Products and the Competitive Products in the
Territory during each Determination Period. Within 45 days after the end of
each Determination Period, the Company shall (a) furnish to the Holder a Company
Certificate setting forth (x) in reasonable detail for each Product or
Competitive Product for which there were sales in the Territory during such
Determination Period the amounts of (1) gross sales (excluding sales to
Affiliates), (2) prompt payment and other discounts, (3) transportation and
related insurance charges, (4) returns, bad debt and other allowances, (5) taxes
deducted from gross sales in determining Net Revenues, (6) distributors',
consignees' and wholesalers' fees and commissions, and (7) Net Revenues, in each
such case of the preceding clauses (1) through (7) for such Determination
Period, (y) the percentage and the amount, in currency of the United States of
America, of such Net Revenues to be paid to the Holder and the holders of the
Other Notes pursuant to Article II hereof and thereof, identifying each such
Person, and (z) a statement that the information set forth in such Company
Certificate is true and correct and (b) pay to the Holder an amount equal to the
portion of the Noteholder Payment Amount for such Determination Period to which
the Holder is entitled.
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<PAGE>
2.3 ALLOCATION OF NOTEHOLDER PAYMENT AMOUNT. The Noteholder Payment
---------------------------------------
Amount for any Determination Period shall be allocated among the Persons
(including the Holder) who were registered holders of this Note and the Other
Notes at any time during such Determination Period pro rata based on the
principal amounts held by each and the portion of such Determination Period
during which such registered holders held this Note and the Other Notes.
2.4 RECORDS, INSPECTION, ETC. The Holder shall have the right,
------------------------
exercisable from time to time, to examine, or to have its representatives
examine, the relevant books of account and records of the Company, its
Subsidiaries and their respective Affiliates upon reasonable prior notice and
during normal business hours, to confirm the accuracy of the statements and
information provided to the Holder pursuant to this Article II and the amounts
of the payments required to be made by the Company to the Holder pursuant to
this Article II. The Holder shall have the right from time to time to retain a
firm of independent public accountants to examine the books of account and
records of the Company and its Subsidiaries for any one or more Determination
Periods for purposes of confirming the accuracy of such statements, information
and amounts. The cost of such accountants shall be paid by the Holder unless
(i) the amount of the Noteholder Payment Amount as determined by such
accountants for any Determination Period was more than $25,000 greater than the
amount thereof set forth in the Company Certificate furnished to the Holder for
such Determination Period pursuant to Section 2.2 or (ii) the Company shall have
failed to furnish a Company Certificate for such Determination Period to the
Holder pursuant to Section 2.2 on or before the due date for such Company
Certificate. The Company shall not be obligated to maintain the books and
records referred to in this section for more than three years after the end of
the Payment Period.
2.5 CERTAIN TRANSFERS OF PRODUCT OR PRODUCT RIGHTS. The Company
----------------------------------------------
shall not sell, assign, transfer or convey (including, without limitation, by
means of a license) any Product or Competitive Product as an entirety or
substantially as an entirety (except to the extent unrelated to sales and
marketing of the Products and Competitive Products in the Territory), or any of
its rights relating to any Product or Competitive Product in the Territory
unless (1) such transfer is expressly made subject to the lien, security
interest and other rights of the Holder and the holders of the Other Notes under
the Transaction Documents, (2) such transferee shall execute and deliver such
documents and instruments as shall be reasonably satisfactory to the Majority
Holders to give effect to the preceding clause (1), and (3) such transferee
shall by written instrument reasonably satisfactory to the Majority Holders
expressly assume, jointly and severally with the Company, all obligations for
the due and punctual payment and performance of all of the Company's obligations
under this Article II and under the Security Agreement and Patent and Trademark
Security Agreement; provided, however, that the provisions of this clause (3)
only shall be inapplicable to any license or sublicense by the Company of its
rights with respect to a Product or Competitive Product with respect to the
Territory to a Person in connection with a co-marketing arrangement between the
Company and such Person, so long as all revenues from sales of such Product or
Competitive Product by such Person are included in the computation of Net
Revenues for purposes of determining the Noteholder Payment Amount, whether or
not such revenues are received by the
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<PAGE>
Company or reflected in the Company's books, records or financial statements.
2.6 NO REDEMPTION. The obligations of the Company under this Article
-------------
II shall not be extinguished or eliminated by any redemption of this Note
pursuant to Section 1.2, any acceleration or payment of this Note upon the
occurrence of an Event of Default, any exercise by the Holder of repurchase
rights under Article V or any prepayment of this Note in accordance with Section
6.2.
ARTICLE III
CERTAIN COVENANTS
So long as the Company shall have any obligation under this Note,
unless otherwise consented to in advance by the Majority Holders:
3.1 LIMITATIONS ON CERTAIN INDEBTEDNESS. The Company will not
-----------------------------------
itself, and will not permit any Subsidiary to, create, assume, incur or in any
manner become liable in respect of, including, without limitation, by reason of
any business combination transaction (all of which are referred to herein as
"incurring"), any Indebtedness other than Permitted Indebtedness.
3.2 MAINTENANCE OF CASH, CASH EQUIVALENT AND ELIGIBLE INVESTMENT
------------------------------------------------------------
BALANCES. The Company shall maintain Cash, Cash Equivalent and Eligible
- --------
Investment Balances during the following periods at least equal to the amounts
set forth below:
Period Amount
------ ------
Issuance Date through December 31,1999
$40 million
January 1, 2000 and thereafter
30 million
The Company's Cash, Cash Equivalent and Eligible Investment Balances shall be
determined as of the end of each calendar quarter. Within fifteen days after
the end of each calendar quarter, the Company shall furnish to the Holder a
Company Certificate setting forth the amount of the Company's Cash, Cash
Equivalent and Eligible Investment Balances as of the end of such calendar
quarter. If at the end of any calendar quarter the Company shall have less than
the required amount of Cash, Cash Equivalents and Eligible Investment Balances,
then the Company shall not be deemed to be in violation of this Section 3.2
unless such insufficiency exists on the date which is 30 days after the end of
such calendar quarter, so long as during such 30-day period the Company is
making bona fide efforts to cure such insufficiency.
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<PAGE>
3.3 PAYMENT OF OBLIGATIONS. The Company will pay and discharge, and
----------------------
will cause each Significant Subsidiary to pay and discharge, all their
respective material obligations and liabilities, including, without limitation,
tax liabilities, except where the same may be contested in good faith by
appropriate proceedings.
3.4 MAINTENANCE OF PROPERTY; INSURANCE. (a) The Company will keep,
----------------------------------
and will cause each Significant Subsidiary to keep, all property useful and
necessary in its business in good working order and condition, ordinary wear and
tear excepted.
(b) The Company will maintain, and will cause each Significant
Subsidiary to maintain, with financially sound and responsible insurance
companies, insurance, including, without limitation, products liability
insurance relating to the Product, in at least such amounts and against such
risks as is reasonably adequate for the conduct of their respective businesses
and the value of their respective properties.
3.5 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Company
------------------------------------------------
will continue, and will cause each Significant Subsidiary to continue, to engage
in business of the same general type as now conducted by the Company, and will
preserve, renew and keep in full force and effect, and will cause each
Significant Subsidiary to preserve, renew and keep in full force and effect
their respective corporate existence and their respective rights, privileges and
franchises necessary or desirable in the normal conduct of business and except
for any Subsidiary which is not involved in the manufacture, sale or marketing
in the Territory of Products or Competitive Products and which the Board of
Directors determines it is no longer in the Company's interest to own or operate
and, if being sold, is being sold for a fair consideration.
3.6 COMPLIANCE WITH LAWS. The Company will comply, and will cause
--------------------
each Significant Subsidiary to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, decisions, orders and
requirements of governmental authorities and courts (including, without
limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate proceedings or (ii) where non-compliance
therewith could not reasonably be expected to have a material adverse effect on
the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company and the Subsidiaries, taken as a whole.
3.7 INVESTMENT COMPANY ACT. The Company will not be or become an
----------------------
open-end investment trust, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act of 1940, as amended.
3.8 LIMITATIONS ON ASSET SALES, LIQUIDATIONS, ETC.; CERTAIN MATTERS.
---------------------------------------------------------------
The Company shall not
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<PAGE>
(a) sell, convey or otherwise dispose of all or substantially all of
the assets of the Company as an entirety or substantially as an entirety in a
single transaction or in a series of related transactions; or
(b) liquidate, dissolve or otherwise wind up the affairs of the
Company.
3.9 LIMITATIONS ON LIENS. The Company will not itself, and will not
--------------------
permit any Subsidiary to, create, assume or suffer to exist any mortgage, lien,
pledge, security interest or other charge or encumbrance (including, without
limitation, the lien or retained security title of a conditional vendor), all of
which are referred to below as "liens", upon all or any part of its property of
any character, whether owned at the date hereof or thereafter acquired, except:
(a) liens upon any property of any Subsidiary or Subsidiaries as
security for indebtedness owing to the Company;
(b) purchase money liens upon any property acquired by the Company or
any Subsidiary, or liens existing on such property at the time of acquisition;
provided that (i) no such lien shall extend to or cover any other property of
the Company or any Subsidiary, (ii) the principal amount of indebtedness secured
by each such lien on any such property shall not exceed the cost (including such
principal amount of the indebtedness secured thereby) to the Company or the
Subsidiary of the property subject thereto, and (iii) the aggregate principal
amount of all indebtedness of the Company and all Subsidiaries secured by all
liens described in this subsection (b) and any extensions, renewals or
replacements thereof, at any one time outstanding, shall not exceed $10 million
for the Company and the Subsidiaries; and the extending, renewing or replacing
of any lien permitted by this subsection (b) or of the indebtedness secured
thereby; provided, however, that in any such case the lien by which any lien is
extended, renewed or replaced shall not extend to or cover any other property of
the Company or any Subsidiary and the principal amount of such indebtedness
extended, renewed or replaced shall not be increased;
(c) liens securing this Note and the Other Notes ratably;
(d) liens for taxes or assessments or governmental charges or levies
on its property if such taxes or assessments or charges or levies shall not at
the time be due and payable or if the amount, applicability, or validity of any
such tax, assessment, charge or levy shall currently be contested in good faith
by appropriate proceedings or necessary preliminary steps are being taken to
contest, compromise or settle the amount thereof or to determine the
applicability or validity thereof and if the Company or such Subsidiary, as the
case may be, shall have set aside on its books reserves (segregated to the
extent required by sound accounting practice) deemed by it adequate with respect
thereto; deposits or pledges to secure payment of worker's compensation,
unemployment insurance, old age pensions or other social security; deposits or
pledges to secure performance of bids, tenders, contracts (other than contracts
for the payment of money borrowed or credit extended), leases, public or
statutory obligations, surety or appeal bonds, or other deposits
-15-
<PAGE>
or pledges for purposes of like general nature in the ordinary course of
business; mechanics', carriers', workers', repairmen's or other like liens
arising in the ordinary course of business securing obligations which are not
overdue for a period of 60 days, or which are in good faith being contested or
litigated, or deposits to obtain the release of such liens; liens created by or
resulting from any litigation or legal proceedings or proceedings being
contested in good faith by appropriate proceedings, provided any execution
levied thereon shall be stayed; leases made, or existing on property acquired,
in the ordinary course of business; landlords' liens under leases to which the
Company or any Subsidiary is a party; and zoning restrictions, easements,
licenses or restrictions on the use of real property or minor irregularities in
title thereto; provided that all such liens described in this subsection (d) do
not, in the aggregate, materially impair the use of such property in the
operations of the business of the Company or any Subsidiary or the value of such
property for the purpose of such business; and
(e) liens existing on the Issuance Date and listed in Schedule 4(r)
to the Note Purchase Agreement.
3.10 PRODUCTS AND COMPETITIVE PRODUCTS MARKETING. Until the end of
-------------------------------------------
the Payment Period, the Company shall use all commercially reasonable efforts to
market the Products and the Competitive Products in the Territory directly or
through reliable third parties.
3.11 MANUFACTURE AND SALE OF THE PRODUCTS AND THE COMPETITIVE
--------------------------------------------------------
PRODUCTS. Until the end of the Payment Period, the Company shall use all
commercially reasonable efforts (a) to manufacture the Products and the
Competitive Products in accordance with GMP in sufficient quantities to meet the
demand therefor, either directly or through third party manufacturing and supply
arrangements, and (b) to sell the Products and the Competitive Products in the
Territory.
3.12 CERTAIN OBLIGATIONS. (a) The Company shall not amend, modify or
-------------------
waive any provision of any of the Lafon Agreements as they relate to the
Territory in a manner which would adversely affect the Collateral Agent's lien
on and Security Interest in the Collateral.
(b) The Company shall perform and comply in all material respects
with the Lafon Agreements; and shall perform and comply in all material respects
with any other agreement relating to any of the Products or the Competitive
Products, the failure to comply with which could have a material adverse effect
on the Net Revenues from the Products and the Competitive Products or adversely
affect the Collateral Agent's lien on and security interest in the Collateral.
3.13 NOTICE OF DEFAULTS. The Company shall notify the Holder
------------------
promptly, but in any event not later than five days after the Company becomes
aware of the fact, of any failure by the Company to comply with this Article
III.
3.14 CERTAIN EVENTS OF DEFAULT. If an Event of Default specified in
-------------------------
clause (c), (e), or (f) of Section 4.1 shall occur and be continuing, then, at
the request of the Majority Holders, the
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<PAGE>
Company shall use all commercially reasonable efforts (a) to sell, license or
otherwise dispose of the Products and the Competitive Products and the Company's
interests therein as they relate to the Territory, subject to the terms and
requirements of the Security Agreement and the Patent and Trademark Security
Agreement, for a cash consideration at least equal to the fair market value
thereof or (b) to complete one or more financing transactions to provide cash to
the Company to enable it to repay or redeem this Note and the Other Notes in
accordance with their terms on the earliest date on which the Company is
permitted to do so and, if such Event of Default involves a violation by the
Company of Section 3.2, to cure such violation.
ARTICLE IV
EVENTS OF DEFAULT
4.1 If any of the following events of default (each, an "Event of
Default") shall occur:
(A) FAILURE TO PAY PRINCIPAL, INTEREST, ETC. The Company fails (1) to
---------------------------------------
pay the principal, the Optional Redemption Price, the Repurchase Price or
the Registration Repurchase Price hereof when due, whether at maturity,
upon acceleration or otherwise, as applicable, (2) to pay or perform the
obligations of the Company under Article II (other than Section 2.4) or (3)
to pay any installment of interest hereon when due and, in the case of this
clause (3) of this Section 4.1(a) only, such failure continues for a period
of five Business Days after the due date thereof; or
(B) BREACH OF CERTAIN COVENANTS. The Company fails to comply with
---------------------------
Section 3.1, 3.10, 3.11, 3.12, 3.13, or 3.14; or
(C) BREACH OF OTHER COVENANTS. The Company fails to comply with
-------------------------
Section 3.2 or fails to comply in any material respect with any other
provision of Article III of this Note (other than Section 3.1, 3.10, 3.11,
3.12, 3.13, or 3.14) or breaches any other material covenant or other
material term or condition of this Note or any of the other Transaction
Documents (other than as specifically provided in clauses (a), (b), (i),
and (j) of this Section 4.1), and such breach continues for a period of
five days after written notice thereof to the Company from the Holder; or
(D) BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation or
----------------------------------------
warranty of the Company made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Transaction Documents) shall be false
or misleading in any material respect when made; or
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<PAGE>
(E) CERTAIN VOLUNTARY PROCEEDINGS. The Company or any Subsidiary
-----------------------------
shall commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under
any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its property, or
shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other proceeding
commenced against it, or shall make a general assignment for the benefit of
creditors, or shall fail generally to pay its debts as they become due or
shall admit in writing its inability generally to pay its debts as they
become due; or
(F) CERTAIN INVOLUNTARY PROCEEDINGS. An involuntary case or other
-------------------------------
proceeding shall be commenced against the Company or any Subsidiary seeking
liquidation, reorganization or other relief with respect to it or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of its
property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 60 consecutive days; or
(G) JUDGMENTS. Any court of competent jurisdiction shall enter one or
---------
more final judgments against the Company or any Subsidiary or any of their
respective properties or other assets in an aggregate amount in excess of
the Judgment Default Threshold, which is not vacated, bonded, stayed,
discharged, satisfied or waived for a period of 30 consecutive days; or
(H) DEFAULT UNDER OTHER AGREEMENTS. (a) The Company or any Subsidiary
------------------------------
shall (i) default in any payment with respect to any Indebtedness for
borrowed money (other than this Note) which Indebtedness has an outstanding
principal amount in excess of the Cross-Default Threshold, beyond the
period of grace, if any, provided in the instrument or agreement under
which such Indebtedness was created or (ii) default in the observance or
performance of any agreement, covenant or condition relating to any such
Indebtedness or contained in any instrument or agreement evidencing,
securing or relating thereto, or any other event shall occur or condition
exist, the effect of which default or other event or condition is to cause,
or to permit the holder or holders of such Indebtedness (or a trustee or
agent on behalf of such holder or holders) to cause, any such Indebtedness
to become due prior to its stated maturity and such default or event shall
continue beyond the period of grace, if any, provided in the instrument or
agreement under which such Indebtedness was created (after giving effect to
any consent or waiver obtained and then in effect thereunder); or (b) any
Indebtedness of the Company or any Subsidiary which has an outstanding
principal amount in excess of the Cross-Default Threshold shall, in
accordance with its terms, be declared to be due and payable, or required
to be prepaid other than by a regularly scheduled or required payment prior
to the stated maturity thereof; or
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<PAGE>
(I) SECURITY AGREEMENT AND PATENT AND TRADEMARK SECURITY AGREEMENT,
---------------------------------------------------------------
ETC. The occurrence of any "Event of Default" as defined in the Security
---
Agreement or the Patent and Trademark Security Agreement;
(J) CESSATION OF MANUFACTURE, SALES OR MARKETING. None of the Company
--------------------------------------------
or any of its Affiliates shall (directly or through reliable third parties)
be manufacturing, selling or marketing the Products in the Territory;
then,
(1) upon the occurrence and during the continuation of any Event of
Default specified in clause (a), (b), (d), (i), or (j) of this Section 4.1,
at the option of the Holder, and upon the occurrence of any Event of
Default specified in clause (e) or (f) of this Section 4.1: (X) the
Company shall, pay to the Holder an amount equal to the outstanding
principal amount of this Note plus accrued and unpaid interest on such
principal amount to the date of payment plus accrued and unpaid Default
Interest, if any, thereon at the rate provided in this Note to the date of
payment, (V) all other amounts payable hereunder or under any of the other
Transaction Documents shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived,
together with all costs, including, without limitation, reasonable legal
fees and expenses, of collection, (Y) the Collateral Agent shall be
entitled to exercise all rights and remedies under the Security Agreement
and the Patent and Trademark Security Agreement, and (Z) the Holder shall
be entitled to exercise all other rights and remedies available at law or
in equity; and
(2) upon the occurrence and during the continuation of any Event of
Default specified in clause (c), (g) or (h) of this Section 4.1: (A) if
any Event of Default continues during the period of 365 consecutive days
following the occurrence of such Event of Default, then thereafter so long
as any Event of Default is continuing (i) at the option of the Holder the
Company shall pay to the Holder an amount equal to the outstanding
principal amount of this Note plus accrued and unpaid interest on such
principal amount to the date of payment plus accrued and unpaid Default
Interest, if any, thereon at the rate provided in this Note to the date of
payment, (ii) all other amounts payable hereunder shall immediately become
due and payable, all without demand, presentment or notice, all of which
hereby are expressly waived, together with all costs, including, without
limitation, reasonable legal fees and expenses, of collection and (and) the
Collateral Agent shall be entitled to exercise all rights and remedies
under the Security Agreement, the Patent and Trademark Security Agreement,
and (B) the Holder shall be entitled to exercise all rights and remedies
available at law or in equity other than those set forth in the immediately
preceding clause (A).
ARTICLE V
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<PAGE>
REPURCHASE UPON A REPURCHASE EVENT
OR REGISTRATION REPURCHASE EVENT
5.1 REPURCHASE RIGHT UPON REPURCHASE EVENT. If a Repurchase Event
--------------------------------------
occurs, in addition to any other right of the Holder, the Holder shall have the
right, at the Holder's option, to require the Company to repurchase all of this
Note, or any portion hereof on the repurchase date that is five Business Days
after the date of the Holder Notice delivered with respect to such Repurchase
Event. The Holder shall have the right to require the Company to repurchase all
or any such portion of this Note if a Repurchase Event occurs at any time while
any portion of the principal amount of this Note is outstanding at a price equal
to the Repurchase Price.
5.2 NOTICES; METHOD OF EXERCISING REPURCHASE RIGHTS, ETC. (a) On or
----------------------------------------------------
before the fifth Business Day after the occurrence of a Repurchase Event, the
Company shall give to the Holder a Company Notice of the occurrence of the
Repurchase Event and of the repurchase right set forth herein arising as a
result thereof. Such Company Notice shall set forth:
(i) the date by which the repurchase right must be exercised, and
(ii) a description of the procedure (set forth in this Section 5.2)
which the Holder must follow to exercise the repurchase right.
No failure of the Company to give a Company Notice or defect therein shall limit
the Holder's right to exercise the repurchase right or affect the validity of
the proceedings for the repurchase of this Note or portion hereof.
(b) To exercise the repurchase right, the Holder shall deliver to the
Company on or before the 30th day after a Company Notice (or if no such Company
Notice has been given, within 40 days after the Holder first learns of the
Repurchase Event) (i) a Holder Notice setting forth the name of the Holder and
the principal amount of this Note to be repurchased, and (ii) this Note, duly
endorsed for transfer to the Company of the portion of the outstanding principal
amount of this Note to be repurchased. A Holder Notice may be revoked by the
Holder at any time prior to the time the Company pays the applicable Repurchase
Price to the Holder.
(c) If the Holder shall have given a Holder Notice, then on the date
which is five Business Days after the date such Holder Notice is given (or such
later date as the Holder surrenders this Note) the Company shall make payment in
immediately available funds of the applicable Repurchase Price to such account
as specified by the Holder in writing to the Company at least one Business Day
prior to the applicable repurchase date.
5.3 REPURCHASE RIGHT UPON REGISTRATION REPURCHASE EVENT. If a
---------------------------------------------------
Registration Repurchase Event occurs, in addition to any other right of the
Holder, the Holder shall have the right, at the Holder's option, to require the
Company to repurchase all of this Note, or from time to
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<PAGE>
time any portion hereof, by making payment of the Registration Repurchase Price
to the Holder in immediately available funds to such account as specified by the
Holder by notice to the Company at least one Business Day prior to the
applicable repurchase date, on the repurchase date that is five Business Days
after the date a Holder Registration Repurchase Notice is given by the Holder
(or such later date as the Holder surrenders this Note to the Company). The
Holder shall exercise its right to require repurchase pursuant to this Section
5.3 by giving a Holder Registration Repurchase Notice as follows: (i) if the
Registration Repurchase Event occurs by reason of the Company's failure to
timely file the Registration Statement with the SEC, at any time prior to the
earlier of (x) the date which is 31 days after such event and (y) the date the
Company files the Registration Statement with the SEC or (ii) if the
Registration Repurchase Event occurs by reason of the non-occurrence of the SEC
Effective Date within 90 days after the Issuance Date, at any time prior to the
SEC Effective Date. If the Holder shall have given a Holder Registration
Repurchase Notice, the Company shall repurchase this Note or the portion of this
Note as stated in such Holder Registration Repurchase Notice at a purchase price
equal to the Registration Repurchase Price. A Holder Registration Repurchase
Notice may be revoked by the Holder at any time prior to the time the Company
pays the applicable Registration Repurchase Price.
5.4 OTHER. A Holder Notice or a Holder Registration Repurchase
-----
Notice given by the Holder shall be deemed for all purposes to be in proper form
unless the Company notifies the Holder within three Business Days after such
Holder Notice or Holder Registration Repurchase Notice has been given (which
notice shall specify all defects in such Holder Notice or Holder Registration
Repurchase Notice), and any Holder Notice or Holder Registration Repurchase
Notice containing any such defect shall nonetheless be effective on the date
given if the Holder promptly undertakes to correct all such defects. No such
claim of defect shall limit or delay performance of the Company's obligation to
repurchase any portion of this Note, the repurchase of which is not in dispute.
ARTICLE VI
EXTENSION OF MATURITY DATE
6.1 RIGHT TO EXTEND MATURITY DATE. The Company shall have the right,
-----------------------------
exercisable by notice given to the Holder on a date not earlier than 90 or later
than 30 days prior to the Original Maturity Date, which notice shall refer to
this Section 6.1, to extend the Maturity Date to the Extended Maturity Date so
long as the following conditions precedent are satisfied on the date the Company
gives such notice to the Holder:
(a) no Event of Default and no event which, with notice or passage of
time, or both, would become an Event of Default, shall have occurred and be
continuing;
(b) no Repurchase Event or Registration Repurchase Event shall have
occurred
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with respect to which the Holder has the right to exercise repurchase
rights under Sections 5.1 and 5.2 or Section 5.3 or with respect to which
the Holder has exercised such repurchase rights and the Repurchase Price or
the Registration Repurchase Price, as the case may be, has not been paid to
the Holder and no event which, with notice or passage of time, or both,
would become a Repurchase Event shall have occurred and be continuing;
(c) Net Revenues from the Products and the Competitive Products in
the Territory during the then most recent full calendar quarter preceding
the date on which the Company gives such notice to the Holder shall have
been at least 75% of the Target Revenues for the Products and the
Competitive Products in the Territory for such calendar quarter;
(d) the Company's Cash, Cash Equivalent and Eligible Investment
Balances shall be greater than the sum of (1) an amount equal to 125% of
the aggregate outstanding principal amount of this Note and the Other Notes
at the close of business on the Business Day prior to the date on which the
Company gives such notice to the Holder plus (2) an amount equal to 400% of
the cash used in operations by the Company and the Subsidiaries during the
then most recently completed fiscal quarter, as shown in the Company's
consolidated statement of cash flows, prepared in accordance with Generally
Accepted Accounting Principles on a basis consistent with the Company's
then most recently prepared audited annual financial statements;
(e) the Company shall be operating under a current business plan
approved by the Company's Board of Directors which shows that from the date
such notice is given to the Holder to the Extended Maturity Date the
Company's Cash, Cash Equivalent and Eligible Investment Balances will not
be less than 125% of the aggregate outstanding principal amount of this
Note and the Other Notes on the date such notice is given to the Holder;
(f) the Company shall have given notice to the holders of all of the
Other Notes to extend the maturity date thereof to the Extended Maturity
Date; and
(g) the Company shall have furnished to the Holder a Company
Certificate setting forth in reasonable detail confirmation of the
satisfaction of the conditions in the preceding clauses (a) through (f).
6.2 ALTERNATIVE RIGHT TO EXTEND MATURITY DATE. If the Company is
-----------------------------------------
unable to satisfy any one or more of the requirements of clause (c), (d) or (e)
of Section 6.1, the Company shall have the right, exercisable by notice given to
the Holder not earlier than 90 or later than 30 days prior to the Original
Maturity Date, which notice shall refer to this Section 6.2, to extend the
Maturity Date to the Extended Maturity Date so long as (x) the conditions
precedent specified in clauses (a) (other than an Event of Default solely by
reason of the Company's violation of Section 3.2), (b) and (f) of Section 6.1
are satisfied on the date the Company gives such notice to the Holder
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<PAGE>
and (y) Net Revenues of the Product and the portion of the Net Revenues of the
Competitive Products included in the determination of the Noteholder Payment
Amount in the Territory during the then most recent full fiscal quarter
preceding the date on which the Company gives such notice to the Holder shall
have been at least $3,750,000. If the Company gives such notice, then from and
after the Original Maturity Date (1) the Applicable Rate shall be increased from
11% per annum to 14% per annum, (2) the Default Rate shall be increased from 21%
per annum to 26% per annum and (3) the Payment Percentage shall be increased to
25 percent and, so long as no Event of Default has occurred and is continuing,
the portion of the Noteholder Payment Amount paid to the Holder for any period
during which such higher Payment Percentage shall be in effect which is in
excess of the portion of the Noteholder Payment Amount which would have been
paid to the Holder if the Payment Percentage during such period were 9.0 percent
shall be paid to and applied by the Holder to the outstanding principal amount
of this Note.
ARTICLE VII
SATISFACTION AND DISCHARGE OF CERTAIN PROVISIONS
7.1. DISCHARGE OF CERTAIN PROVISIONS. If
-------------------------------
(i) the Company shall have deposited with the Collateral Agent, in
trust, funds or Government Obligations, the principal of and interest on
which when due will, together with any funds set aside at the same time and
without the necessity for investment or reinvestment of such funds or for
further investment or reinvestment of the principal amount of or interest
on such Government Obligations, provide funds sufficient to pay at maturity
or upon redemption all of this Note and the Other Notes, including
principal and interest due or to become due to the Maturity Date or earlier
redemption;
(ii) in the case of this Note and the Other Notes which the Company
may elect to redeem pursuant to Section 1.2 and the comparable provisions
of the Other Notes, in whole or in part, prior to their maturity, all
action other than the giving of notice of redemption necessary to redeem
such of this Note and the Other Notes as of the specified redemption date
or dates for this Note and such Other Notes shall have been taken and
arrangements reasonably satisfactory to the Majority Holders shall have
been made for the giving of notice of such redemption;
(iii) notice of such deposit shall have been given to the Holder and
the Holders of the Other Notes as to which such deposit is applicable,
within ten days after the date of such deposit;
(iv) no Event of Default or event which with notice or passage of
time, or both, would become an Event of Default under Section 4.1(e) or
4.1(f) has occurred and is
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continuing; and
(v) no Event of Default or event which with notice or passage of
time, or both would become an Event of Default (other than as specifically
provided in the immediately preceding clause (iv)) has occurred and is
continuing (unless the requirements of this clause (v) will be satisfied
immediately after the 92-day period hereinbelow specified and the Company
shall furnish to the Holder Company Certificates to such effect on the date
of such deposit and on such 92nd day);
and the Company shall also pay or cause to be paid all other sums payable
hereunder by the Company, then on the date which is 92 days after the date of
such deposit by the Company with the Collateral Agent, so long as during such
92-day period no Event of Default or event which with notice or passage of time,
or both, would become an Event of Default under Section 4.1(e) or 4.1(f) has
occurred (x) this Note shall cease to be of further effect (except as provided
herein), (y) the Company shall be entitled to release of Collateral (other than
the funds and Government Obligations so deposited and any interest or income
thereon or any proceeds thereof) as provided in the Pledge Agreement and (z) the
Holder, on demand of the Company accompanied by a Company Certificate and an
opinion of counsel and at the cost and expense of the Company, shall execute
proper instruments acknowledging the satisfaction and discharge of this Note to
the extent set forth herein.
So long as this Note shall remain outstanding after such discharge,
this Note shall continue in effect following the discharge provided for above
solely with respect to rights of registration of transfer, exchange or
replacement of outstanding Notes, rights to receive payment of the principal
hereof and interest hereon in accordance with the terms of this Note from such
deposited funds or the proceeds of or interest on such deposited Government
Obligations, the rights under Article II and the rights under Sections 3.10 and
3.11; provided, however, that, following such discharge, no claim for payment of
principal of or interest on this Note shall be made against the Company. Upon
such discharge, any Event of Default which occurred prior to such discharge
solely by reason of one or more provisions of this Note with which the Company
thereafter is no longer obligated to comply, then such Event of Default shall no
longer exist.
7.2. DEPOSITED MONEYS AND GOVERNMENT OBLIGATIONS TO BE HELD IN
---------------------------------------------------------
ACCORDANCE WITH SECURITY AGREEMENT. All funds and Government Obligations
- ----------------------------------
deposited with the Collateral Agent pursuant to Section 7.1 shall be held in
trust and subject to and in accordance with the terms of the Security Agreement
and such funds and interest on such Government Obligations shall be applied by
it to the payment of the Notes in accordance with the Security Agreement.
7.3. REINSTATEMENT. If (i) the Collateral Agent is unable to apply
-------------
any funds in accordance with Section 7.2 and the Security Agreement by reason of
any order or judgment of any court or governmental authority enjoining,
restraining or otherwise prohibiting such application and (ii) the Majority
Holders so specify by this notice to the Company, the Company's obligations
under this Note shall be revived and reinstated as though no deposit had
occurred pursuant to Section 7.1
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until such time as the Collateral Agent is permitted to apply all such funds in
accordance with Section 7.2 and the Security Agreement.
ARTICLE VIII
DEFINITIONS
8.1 CERTAIN DEFINED TERMS. (a) All the agreements or instruments
---------------------
herein defined shall mean such agreements or instruments as the same may from
time to time be supplemented or amended or the terms thereof waived or modified
to the extent permitted by, and in accordance with, the terms thereof and of
this Note.
(b) The following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"Aggregate Share Payment Amount" means the sum of (1) the principal
amount of this Note as to which the Company has elected the Share Principal
Payment Option and to which the Holder has consented plus (2) the aggregate
principal amount of the Other Notes as to which the Company has elected to make
payment in shares of Common Stock pursuant to provisions comparable to Section
1.4 and to which the respective holders of the Other Notes have consented in
accordance with the terms of the Other Notes.
"Applicable Rate" means 11 percent per annum except that, if the
Company exercises its right to extend the Original Maturity Date to the Extended
Maturity Date pursuant to Section 6.2, then from and after the Original Maturity
Date such rate shall be increased to 14 percent per annum (or in either such
case such lesser rate as shall be the highest rate permitted by applicable law).
"Assignment Agreement" shall have the meaning provided in the Note
Purchase Agreement.
"Business Day" means any day other than a Saturday, Sunday or a day on
which commercial banks in The City of New York are authorized or required by law
or executive order to remain closed.
"Cash, Cash Equivalent and Eligible Investment Balances" of any Person
on any date shall be determined from such Person's books maintained in
accordance with Generally Accepted Accounting Principles, and means, without
duplication, the sum of (1) the cash accrued by such Person and its subsidiaries
on a consolidated basis on such date and available for use by such Person and
its subsidiaries on such date, (2) all assets which would, on a consolidated
balance sheet of such Person and its subsidiaries prepared as of such date in
accordance with
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<PAGE>
Generally Accepted Accounting Principles, be classified as cash equivalents and
(3) all Eligible Marketable Securities which are assets which would, on a
consolidated balance sheet of such Person and its subsidiaries prepared as of
such date in accordance with Generally Accepted Accounting Principles, be
classified as marketable securities.
"Collateral Agent" means Delta Opportunity Fund, Ltd., as collateral
agent under the Security Agreement and the Patent and Trademark Security
Agreement, or its successors.
"Common Stock" means the Common Stock, par value $.01 per share, or
any shares of capital stock of the Company into which such shares shall be
changed or reclassified after the Issuance Date.
"Company" shall have the meaning provided in the first paragraph of
this Note.
"Company Certificate" means a certificate of the Company signed by an
Officer.
"Company Notice" means a Company Notice in the form attached hereto as
EXHIBIT C.
"Competitive Product" means a product, method or system, other than
the Product, that (x) has received regulatory approval for use, or has received
regulatory approval for any substantially similar use, in a human therapeutic
indication as any Product, or (y) is so used for human therapeutic indication of
excessive sleep disorder or excessive daytime sleep disorder but shall not
include any product, method or system that an Affiliate of the Company was
testing in preclinical or clinical trials or for which regulatory approval was
received, prior to becoming an Affiliate of the Company.
"Cross-Default Threshold" means as of any date an amount equal to the
greater of
(1) an amount equal to the product obtained by multiplying (a) the
amount, if any, by which the Company's Cash, Cash Equivalent and Eligible
Investment Balances on such date exceed the aggregate outstanding principal
amount of this Note and the Other Notes on such date times (b) 50 percent;
and
(2) $1,000,000 for any single Indebtedness of the type referred to in
Section 4.7 and $2,000,000 in the aggregate for the Company and the
Subsidiaries for all Indebtedness referred to in Section 4.1(h).
"Default Interest" shall have the meaning provided in the first
paragraph of this Note.
"Default Rate" means 21 percent per annum except that, if the Company
exercises its right to extend the Original Maturity Date to the Extended
Maturity Date pursuant to Section 6.2,
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<PAGE>
then from and after the Original Maturity Date such rate shall be increased to
26 percent per annum (or in either case such lesser rate equal to the highest
rate permitted by applicable law).
"Determination Period" means each calendar quarter, except that the
first Determination Period shall begin on the Issuance Date and end on March 31,
1999 and the final Determination Period shall end on the last day of the Payment
Period.
"Eligible Bank" means a corporation organized or existing under the
laws of the United States or any other state, having combined capital and
surplus of at least $100 million and subject to supervision by federal or state
authority and which has a branch located in New York, New York.
"Eligible Marketable Securities" of the Company as of any date means
marketable securities which would be reflected on a consolidated balance sheet
of the Company and its subsidiaries prepared as of such date in accordance with
Generally Accepted Accounting Principles and which are debt obligations within
the Company's investment policies set forth on Exhibit M to the Company's Senior
Convertible Notes due April 7, 1998.
"Event of Default" shall have the meaning provided in Section 4.1.
"Extended Maturity Date" means March 1, 2003.
"Fundamental Change" means
(a) Any consolidation or merger of the Company or any Subsidiary with
or into another entity (other than a merger or consolidation of a
Subsidiary into the Company or a wholly-owned Subsidiary) where the
stockholders of the Company immediately prior to such transaction do not
collectively own at least 51% of the outstanding voting securities of the
surviving corporation of such consolidation or merger immediately following
such transaction; or the sale of all or substantially all of the assets of
the Company and the Subsidiaries in a safe transaction or a series of
related transactions; or
(b) The occurrence of any transaction or event in connection with
which all or substantially all the Common Stock shall be exchanged for,
converted into, acquired for or constitute the right to receive
consideration (whether by means of an exchange offer, liquidation, tender
offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) which is not all or substantially all common
stock which is (or will, upon consummation of or immediately following such
transaction or event, will be) listed on a national securities exchange or
approved for quotation on Nasdaq or any similar United States system of
automated dissemination of transaction reporting of securities prices; or
(c) The acquisition by a Person or entity or group of Persons or
entities acting
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<PAGE>
in concert as a partnership, limited partnership, syndicate or group, as a
result of a tender or exchange offer, open market purchases, privately
negotiated purchases or otherwise, of beneficial ownership of securities of
the Company representing 50% or more of the combined voting power of the
outstanding voting securities of the Company ordinarily (and apart from
rights accruing in special circumstances) having the right to vote in the
election of directors.
"Generally Accepted Accounting Principles" for any Person means the
generally accepted accounting principles and practices applied by such Person
from time to time in the preparation of its audited financial statements.
"GMP" means the Good Manufacturing Practices established from time to
time by the United States Food and Drug Administration.
"Government Obligations" means direct obligations of, or obligations
the timely payment of the principal of and the interest on which are
unconditionally guaranteed by, the United States of America and which are not,
by their terms, callable.
"Holder" shall have the meaning provided in the first paragraph of
this Note.
"Holder Notice" means a Holder Notice in the form attached hereto as
EXHIBIT D.
"Holder Registration Repurchase Notice" means a Holder Registration
Repurchase Notice in the form attached hereto as EXHIBIT E.
"Indebtedness" as used in reference to any Person means all
indebtedness of such Person for borrowed money, the deferred purchase price of
property, goods and services and obligations under leases which are required to
be capitalized in accordance with Generally Accepted Accounting Principles and
shall include all such indebtedness guaranteed in any manner by such Person or
in effect guaranteed by such Person through a contingent agreement to purchase
and all indebtedness for the payment or purchase of which such Person has
contingently agreed to advance or supply funds and all indebtedness secured by
mortgage or other lien upon property owned by such Person, although such Person
has not assumed or become liable for the payment of such indebtedness, and, for
all purposes hereof, such indebtedness shall be treated as though it has been
assumed by such Person.
"Interest Payment Dates" means each March 1, June 1, September 1 and
December 1 and the Maturity Date.
"Interest Payment Shares" means the shares of Common Stock and the
related Preferred Share Purchase Rights issuable in payment of interest on this
Note in accordance with Section 1.1.
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<PAGE>
"Interest Share Price" for any Interest Payment Date means the
arithmetic average of the Market Price of the Common Stock for all of the
Trading Days during [
] *
"Interest Share Registration Statement" means the registration
statement filed by the Company with the SEC under the 1933 Act pursuant to
Section 8(a)(1) of the Note Purchase Agreement.
"Issuance Date" means March 1, 1999.
"Judgment Default Threshold" means as of any date of determination an
amount equal to the greater of
(1) an amount equal to the product obtained by multiplying (a) the
amount, if any, by which the Company's Cash, Cash Equivalent and Eligible
Investment Balances on such date exceed the aggregate outstanding principal
amount of this Note and the Other Notes on such date times (b) 50 percent;
and
(2) $1,000,000.
"Lafon" means Laboratoire L. Lafon, a French corporation.
"Lafon Agreements" means (1) the License Agreement, dated January 20,
1993, by and between Lafon and the Company, as amended, (2) the Trademark
Agreement, dated January 20, 1993, by and between Genelco S.A. and the Company,
as amended, and (3) the Supply Agreement, dated January 20, 1993, between the
Company and Lafon, as amended.
"Majority Holders" means at any time such of the holders of this Note
and the Other Notes which hold Notes and Other Notes which, based on the
outstanding principal amounts thereof, represent a majority of the aggregate
outstanding principal amount of this Note and the Other Notes.
"Market Price" of any security on any date shall mean the closing bid
price of such security on such date on Nasdaq or such other securities exchange
or other market on which such security is listed for trading on such date which
constitutes the principal securities market for such security, as reported by
Bloomberg, L.P.
"Maturity Date" means at any time the Original Maturity Date or the
Extended Maturity Date, as in effect at such time.
* THE CONFIDENTIAL MATERIAL CONTAINED HEREIN HAS BEEN OMITTTED AND FILED
SEPARATELY WITH THE COMMISSION
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"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"Net Revenues" means, with respect to sales for any period and with
respect to any item, the amount thereof accrued by the Company for financial
reporting purposes, determined under the Generally Accepted Accounting
Principles used in the preparation of the Company's then most recently published
audited financial statements, from sales of Products or Competitive Products (as
and to the extent applicable) by the Company, any Affiliate of the Company or
any licensee or sublicensee of the Company or any Affiliate of the Company, but
excluding sales to any Affiliate, licensee or sublicensee of the Company or any
Affiliate of the Company; provided, however, that if for any period the
aggregate Net Revenues for the Products and the Competitive Products (before
application of this proviso) would exceed the Target Revenues for such period,
then in determining Net Revenues for such period there shall be excluded the
portion thereof, if any, arising from Competitive Products equal to the lesser
of (x) the amount thereof for such period arising from Competitive Products and
(y) the portion of the aggregate Net Revenues for the Products and the
Competitive Products for such period (before application of this proviso) which
shall be in excess of the Target Revenues for such period. In determining such
amount, the amounts received from such sales shall be reduced by related prompt
payment and other trade discounts, transportation and related insurance charges,
returns, bad debt and other allowances, taxes (except income and franchise
taxes) and distributors', consignees' and wholesalers' fees and commissions.
The terms "licensee" and "sublicensee" shall mean any Person licensed or
sublicensed by the Company or any Affiliate of the Company, including, without
limitation, pursuant to any marketing, co-marketing or co-detailing agreement
(or similar arrangement that is the functional equivalent of a license), but
excluding customary distribution, wholesaling and consignment arrangements. For
the purposes of this definition, distribution, wholesaling or consignment
arrangements shall be limited to arrangements where the distributor, wholesaler
or consignee is not obligated, in addition to selling a Product or Competitive
Product, to undertake any significant promotional or similar marketing efforts
directed at a Product or Competitive Product. In computing the portion of Net
Revenues from Products which contain modafinil or any compound based on or
derived therefrom as an active ingredient in combination with any other
substance as an active ingredient which substance is also sold by the Company or
any of its Affiliates not in combination with modafinil or any such compound
based or derived therefrom, the portion of Net Revenues from such combination
product included in Net Revenues for any period shall be a portion of the total
Net Revenues for such combination product for such period which portion shall be
determined as the product obtained by multiplying (x) an amount equal to the Net
Revenues for such period from sales of such combination product times (y) a
fraction (i) the numerator of which shall be the unit price at which the Company
or an Affiliate sells products containing modafinil or such compound based on or
derived therefrom and (ii) the denominator of which shall be the sum of (A) the
amount referred to in the immediately preceding clause (i) plus (B) the unit
price at which the Company or an Affiliate sells the products containing such
other substance; provided, however, that in no event shall such combination
product be sold at a unit price less than the amount referred to in the
immediately preceding clause (i). In calculating Net Revenues, any particular
unit of a
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<PAGE>
Product or Competitive Product shall be taken into account only once.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"1933 Act" means the Securities Act of 1933, as amended.
"Note" means this instrument as originally executed, or if later
amended or supplemented in accordance with its terms, then as so amended or
supplemented.
"Noteholder Payment Amount" shall have the meaning provided in Section
2.1.
"Note Purchase Agreement" means the Note Purchase Agreement, dated as
of February 24, 1999, by and between the Company and the original Holder of this
Note.
"Officer" means the Chairman of the Board, the Chief Executive
Officer, the President or the Chief Financial Officer of the Company.
"Optional Redemption Date" means each Business Day on which this Note
is to be redeemed in whole or in part pursuant to Section 1.2.
"Optional Redemption Notice" means an Optional Redemption Notice in
the form attached hereto as EXHIBIT A.
"Optional Redemption Period" means the period which commences on March
1, 2001 and ends on the Original Maturity Date.
"Optional Redemption Price" means an amount in cash equal to the sum
of (1) 120% of the outstanding principal amount of this Note specified in an
Optional Redemption Notice as being redeemed by the Company plus (2) accrued and
unpaid interest on such principal amount to the applicable Optional Redemption
Date plus (3) accrued and unpaid Default Interest, if any, on the amount
referred to in the immediately preceding clause (2) at the rate provided in this
Note to the Optional Redemption Date.
"Original Maturity Date" means March 1, 2002.
"Other Note Purchase Agreements" means the several Note Purchase
Agreements, dated as of February 24, 1999, by and between the Company and the
respective original holders of the Other Notes.
"Other Notes" means the several 11% Senior Secured Notes due 2002
issued by the Company pursuant to the Other Note Purchase Agreements.
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<PAGE>
"Patent and Trademark Security Agreement" means the Patent and
Trademark Security Agreement, dated as of March 1, 1999, by and between the
Company and the Collateral Agent.
"Payment Percentage" means six percent; provided, however, that if an
Event of Default shall have occurred, then the Payment Percentage shall be
increased to 25 percent during the period from the date of such Event of Default
until the earlier of (x) the date no Event of Default is continuing and (y) the
date the Company pays the redemption price in full for a redemption of this Note
and the Other Notes pursuant to Section 1.2 and the comparable provisions of the
Other Notes; provided further, however, that if the Company extends the Original
Maturity Date to the Extended Maturity Date pursuant to Section 6.2, then the
Payment Percentage shall be increased as provided in Section 6.2; and provided
further, however, that, unless a Fundamental Change shall have occurred, if the
Company redeems all or any portion of this Note pursuant to Section 1.2 and the
Other Notes pursuant to the comparable provisions thereof, then the Payment
Percentage (as in effect immediately prior to such redemption) which shall be
applicable during the last 12 months of the Payment Period shall be reduced for
each such redemption by an amount determined as
RPP = PP x PR x D
-- ---
PO 365
where
RPP = amount of reduction in the Payment Percentage (as in effect
immediately prior to such redemption) by reason of such
redemption
PP = Payment Percentage which would be in effect without regard to
any reduction thereof at any time pursuant to this formula.
PR = the aggregate principal amount of this Note and the Other
Notes redeemed in such redemption
PO = the original aggregate principal amount of this Note and the
Other Notes
D = the number of calendar days during the period commencing on
and including the date the Company pays the full redemption
price of this Note and the Other Notes which is in connection
with such redemption and ending on and excluding the date
which is the third anniversary of the Issuance Date
"Payment Period" means the period which commences on the Issuance
Date and ends on the fifth anniversary of the Issuance Date; provided, however,
that if in accordance with Article VI the Company elects to extend the Maturity
Date to the Extended Maturity Date, effective
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on the date the Company gives notice of such extension to the Holder and the
holders of the Other Notes, the Payment Period shall be extended by one year
from the date the Payment Period would have ended as in effect immediately prior
to such extension of the Maturity Date.
"Payment Share Price" means the arithmetic average of the Market Price
of the Common Stock for all of the Trading Days during [
]. *
"Payment Share Registration Statement" means the Registration
Statement required to be filed by the Company with the SEC pursuant to Section
8(a)(2) of the Note Purchase Agreement if the Company elects to make the Share
Principal Payment Option and the Holder consents to such election.
"Permitted Indebtedness" means
(1) Indebtedness outstanding on the Issuance Date; and
(2) Indebtedness incurred after the Issuance Date which is unsecured
and on a parity with or subordinated to this Note and the Other Notes.
"Person" means any natural person, corporation, partnership, limited
liability company, trust, incorporated organization, unincorporated association
or similar entity or any government, governmental agency or political
subdivision.
"Preferred Share Purchase Rights" means the Preferred Share Purchase
Rights issued or issuable pursuant to the Rights Agreement (or any similar
rights issued by the Company with respect to the Common Stock after the date of
this Agreement).
"Principal Payment Shares" means the shares of Common Stock and the
related Preferred Share Purchase Rights issuable in payment of a portion of the
principal amount of the Note in accordance with Section 1.4.
"Products" means all pharmaceutical compositions containing modafinil
or any compound based on or derived therefrom as an active ingredient, whether
alone or in combination with any other substance, which are developed, marketed
or sold by the Company or any Subsidiary or Affiliate of the Company, including,
without limitation, that pharmaceutical composition marketed by the Company on
the Issuance Date under the name Provigil(R).
"Registration Repurchase Event" means the occurrence of either of the
following events:
* THE CONFIDENTIAL MATERIAL CONTAINED HEREIN HAS BEEN OMITTTED AND FILED
SEPARATELY WITH THE COMMISSION
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(a) the Company fails to file the Registration Statement within the
45-day period provided in Section 8(a)(1) of the Note Purchase Agreement;
or
(b) the SEC Effective Date shall not have occurred on or before the
date which is 90 days after the Issuance Date.
"Registration Repurchase Price" means an amount in cash equal to the
sum of (1) 100% of the principal amount of this Note to be repurchased, plus (2)
accrued and unpaid interest on such principal amount to the date of such
repurchase, plus (3) accrued and unpaid Default Interest, if any, thereon at the
rate provided in this Note to the date of repurchase in accordance with Article
V.
"Registration Statement" means the Registration Statement required to
be filed by the Company with the SEC pursuant to Section 8(a)(1) of the Note
Purchase Agreement.
"Repurchase Event" means the occurrence of any one or more of the
following events:
(a) Any Fundamental Change; or
(b) The occurrence of any Event of Default specified in Article IV of
this Note; provided, however, that in the case of only an Event of Default
specified in clause (c), (g) or (h) of Section 4.1, such Event of Default
shall become a Repurchase Event only on and after the date which is 365
days after the occurrence of such Event of Default if any Event of Default
is continuing at such time.
"Repurchase Price" means with respect to any repurchase pursuant to
Sections 5.1 and 5.2 an amount in cash equal to the sum of (1) 101% of the
outstanding principal amount of this Note plus (2) accrued and unpaid interest
on such principal amount to the date of such repurchase plus (3) accrued and
unpaid Default Interest, if any, thereon at the rate provided in this Note to
the date of such repurchase.
"Rights Agreement" means the Amended and Restated Rights Agreement,
dated as of January 1, 1999, by and between the Company and Stocktrans, Inc., as
Rights Agent.
"SEC" means the Securities and Exchange Commission.
"SEC Effective Date" means the date the Registration Statement is
first declared effective by the SEC.
"Security Agreement" means the Security Agreement, dated as of March
1, 1999, by and between the Company and the Collateral Agent.
-34-
<PAGE>
"Share Interest Payment Option" shall have the meaning provided in
Section 1.1(a).
"Share Payment Threshold" means the product obtained by multiplying
(x) the volume-weighted average Trading Price (as reported by Bloomberg, L.P. in
its AQR function, or if such source or function ceases to be available, a
comparable source and function selected by the Majority Holders and acceptable
to the Company in its reasonable judgment) for all of the Trading Days during
the 90 consecutive Trading Days ending on (and including) the Trading Day that
is three Trading Days prior to the Maturity Date, times (y) the aggregate number
of shares of Common Stock traded during such 90 consecutive Trading Days, as
reported by Bloomberg, L.P. (or if such source ceases to be available, a
comparable source selected by the Majority Holders and acceptable to the Company
in its reasonable judgment), times (z) 0.05.
"Share Principal Payment Option" shall have the meaning provided in
Section 1.4(a).
"Significant Subsidiary" shall have the meaning provided in Regulation
S-X of the SEC, except that a Subsidiary shall not be a Significant Subsidiary
only if such Subsidiary, when consolidated for financial reporting purposes with
all other Subsidiaries which are not Significant Subsidiaries, would not
constitute a Significant Subsidiary.
"Subsidiary" means any corporation or other entity of which a majority
of the capital stock or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other Persons performing
similar functions are at the time directly or indirectly owned by the Company.
"Target Revenues" means for any period the amount set forth for such
period in EXHIBIT F attached hereto.
"Territory" means the United States, its territories and possessions.
"Trading Day" means a day on which either the national securities
exchange or Nasdaq which then constitutes the principal securities market for
the Common Stock is open for general trading of securities.
"Trading Price" for any trade of the Common Stock on any date means
the lowest sale price (regular way) for one share of Common Stock on such date
in such trade, on the first applicable among the following: (a) the national
securities exchange on which the Common Stock is listed which constitutes the
principal securities market for the Common Stock, (b) Nasdaq, (c) the Nasdaq
SmallCap Market or (d) such other market as at the time constitutes the
principal trading market for the Common Stock, in any such case as reported by
Bloomberg, L.P. (subject to equitable adjustment from time to time on terms
reasonably acceptable to the Majority Holders for (i) stock splits, (ii) stock
dividends, (iii) combinations, (iv) capital reorganizations, (v) issuance to all
-35-
<PAGE>
holders of Common Stock of rights or warrants to purchase Common Stock at a
price per share less than the Trading Price which would otherwise be applicable,
(vi) the distribution by the Company to all holders of Common Stock of evidences
of indebtedness of the Company or cash (other than regular quarterly cash
dividends), (vii) Tender Offers by the Company or any subsidiary of the Company
or other repurchases of Common Stock in one or more transactions which,
individually or in the aggregate, result in the purchase of more than 10% of the
Common Stock outstanding and (viii) similar events, in each such case relating
to the Common Stock and which occur on or after the Issuance Date).
"Transaction Documents" means this Note, the Note Purchase Agreement,
the Security Agreement, the Patent and Trademark Security Agreement, and the
Warrants.
"Transfer Agent" means Stocktrans, Inc., or its successor as transfer
agent and registrar for the Common Stock.
"Warrants" means Common Stock Purchase Warrants of the Company issued
to the original Holder of this Note pursuant to the Note Purchase Agreement.
ARTICLE IX
MISCELLANEOUS
9.1 FAILURE OR INDULGENCY NOT WAIVER. No failure or delay on the
--------------------------------
part of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privileges. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
9.2 NOTICES. Except as otherwise specifically provided herein, any
-------
notice herein required or permitted to be given shall be in writing and may be
personally served, sent by telephone line facsimile transmission or delivered by
courier or sent by United States mail and shall be deemed to have been given
upon receipt if personally served, sent by telephone line facsimile transmission
or sent by courier or three days after being deposited in the facilities of the
United States Postal Service, certified, with postage pre-paid and properly
addressed, if sent by mail. For the purposes hereof, the address and facsimile
line transmission number of the Holder shall be as furnished by the Holder for
such purpose and shown on the records of the Company; and the address of the
Company shall be 145 Brandywine Parkway, West Chester, Pennsylvania 19380,
Attention: Chief Financial Officer (telephone line facsimile transmission
number (610) 344-7563). The Holder or the Company may change its address for
notice by service of written notice to the other as herein provided.
-36-
<PAGE>
9.3 AMENDMENT, WAIVER, ETC. Neither this Note or any Other Note nor
----------------------
any terms hereof or thereof may be changed, waived, discharged or terminated
unless such change, waiver, discharge or termination is in writing signed by the
Company and the Majority Holders, provided that no such change, waiver,
discharge or termination shall, without the consent of the Holder and the
holders of the Other Notes affected thereby (i) extend the scheduled final
maturity of this Note or any Other Note, or reduce the rate or extend the time
of payment of interest (other than as a result of waiving the applicability of
any post-default increase in interest rates) hereon or thereon or reduce the
principal amount hereof or thereof or the Optional Redemption Price, the
Repurchase Price or the Registration Repurchase Price, (ii) release the
collateral or reduce the amount of collateral required to be deposited or
maintained by the Company pursuant to the Security Agreement or the Patent and
Trademark Security Agreement, except as expressly provided in the respective
agreement, (iii) amend, modify or waive any provision of Article II, (iv) amend,
modify or waive any provision of this Section 9.3, (v) reduce any percentage
specified in, or otherwise modify, the definition of Majority Holders or (vi)
except as provided in this Note, change the method of calculating the Payment
Share Price, the Interest Share Price or the Optional Redemption Price in a
manner adverse to the Holder.
9.4 ASSIGNABILITY. This Note shall be binding upon the Company and
-------------
its successors, and shall inure to the benefit of and be binding upon the Holder
and its successors and permitted assigns. The Company may not assign its rights
or obligations under this Note.
9.5 CERTAIN EXPENSES. The Company shall pay on demand all expenses
----------------
incurred by the Holder, including reasonable attorneys' fees and expenses, as a
consequence of, or in connection with (x) any amendment or waiver of this Note
or any other Transaction Document, (y) any default or breach of any of the
Company's obligations set forth in the Transaction Documents and (z) the
enforcement or restructuring of any right of, including the collection of any
payments due, the Holder under the Transaction Documents, including any action
or proceeding relating to such enforcement or any order, injunction or other
process seeking to restrain the Company from paying any amount due the Holder.
9.6 GOVERNING LAW. This Note shall be governed by the internal laws
-------------
of the State of New York, without regard to the principles of conflict of laws.
9.7 TRANSFER OF NOTE AND NOTEHOLDER PAYMENT AMOUNT. This Note has
----------------------------------------------
not been and is not being registered under the provisions of the 1933 Act or any
state securities laws and this Note may not be transferred unless the Holder
shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that
this Note may be sold or transferred without registration under the 1933 Act.
Prior to any such transfer, such transferee shall have represented in writing to
the Company that such transferee has requested and received from the Company all
information relating to the business, properties, operations, condition
(financial or other), results of operations or prospects of the Company and the
Subsidiaries deemed relevant by such transferee; that such transferee has been
afforded the opportunity to ask questions of the Company concerning the
foregoing and has had the opportunity
-37-
<PAGE>
to obtain and review the reports and other information concerning the Company
which at the time of such transfer have been filed by the Company with the SEC
pursuant to the 1934 Act. If such transfer is intended to assign the rights and
obligations under 5(a), 5(b), 8, 9 and 10 of the Note Purchase Agreement, such
transfer shall otherwise be made in compliance with Article V of the Note
Purchase Agreement. The Holder may not transfer a portion of this Note to any
Person if such transfer would result in an increase in the aggregate number of
registered holders of this Note and the Other Notes of more than one such holder
without the prior written consent of the Company, which consent will not be
unreasonably withheld. Any instrument issued upon any such transfer of a portion
of this Note which results in such increase of one holder shall bear a legend
that the holder thereof shall not be entitled to transfer such instrument in a
manner which would further increase the aggregate number of registered holders
of this Note and the Other Notes without the prior written consent of the
Company, which consent shall not be unreasonably withheld. The Holder shall have
the right to transfer all or any part of its rights under Article II of this
Note separate from its rights under the other provisions of this Note only with
the prior written consent of the Company, which consent will not be unreasonably
withheld.
9.8 ENFORCEABLE OBLIGATION. The Company represents and warrants that
-----------------------
at the time of the original issuance of this Note it received the full purchase
price payable pursuant to the Note Purchase Agreement in an amount at least
equal to the original principal amount of this Note, and that this Note is an
enforceable obligation of the Company which is not subject to any offset,
reduction, counterclaim or disallowance of any sort.
9.9 NOTE REGISTER; REPLACEMENT OF NOTES. The Company shall maintain
-----------------------------------
a register showing the names, addresses and telephone line facsimile numbers of
the Holder and the registered holders of the Other Notes. The Company shall
also maintain a facility for the registration of transfers of this Note and the
Other Notes and at which this Note and the Other Notes may be surrendered for
split up into instruments of smaller denominations or for combination into
instruments of larger denominations. Upon receipt by the Company of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Note and (a) in the case of loss, theft or
destruction, of indemnity from the Holder reasonably satisfactory in form to the
Company (and without the requirement to post any bond or other security) or (b)
in the case of mutilation, upon surrender and cancellation of this Note, the
Company will execute and deliver to the Holder a new Note of like tenor without
charge to the Holder.
9.10 PAYMENT OF NOTE ON REDEMPTION OR REPURCHASE; DEPOSIT OF
-------------------------------------------------------
REDEMPTION PRICE OR REPURCHASE PRICE, ETC. (a) If this Note or any portion of
- -----------------------------------------
this Note is to be redeemed as provided in Section 1.2 or repurchased as
provided in Sections 5.1 and 5.2 or Section 5.3 and any notice required in
connection therewith shall have been given as provided therein and the Company
shall have otherwise complied with the requirements of this Note with respect
thereto, then this Note or the portion of this Note to be so redeemed or
repurchased and with respect to which any such notice has been given shall
become due and payable on the date stated in such notice at the applicable
Optional Redemption Price, Repurchase Price or Registration Repurchase Price.
On and after the Optional Redemption Date or repurchase date so stated in such
notice, provided that the
-38-
<PAGE>
Company shall have deposited with an Eligible Bank on or prior to such Optional
Redemption Date or repurchase date, an amount sufficient to pay the applicable
Optional Redemption Price, Repurchase Price or Registration Repurchase Price,
interest on this Note or the portion of this Note to be so redeemed or
repurchased shall cease to accrue, and this Note or such portion hereof shall be
deemed not to be outstanding and shall not be entitled to any benefit with
respect to principal of or interest on the portion to be so redeemed or
repurchased except to receive payment of the applicable Optional Redemption
Price, Repurchase Price or Registration Repurchase Price. On presentation and
surrender of this Note or such portion hereof, this Note or the specified
portion hereof shall be paid and redeemed or repurchased at the applicable
Optional Redemption Price, Repurchase Price or Registration Repurchase Price. If
a portion of this Note is to be redeemed or repurchased, upon surrender of this
Note to the Company in accordance with the terms hereof, the Company shall
execute and deliver to the Holder without service charge, a new Note or Notes,
having the same date hereof and containing identical terms and conditions, in
such denomination or denominations as requested by the Holder in aggregate
principal amount equal to, and in exchange for, the unredeemed or unrepurchased
portion of the principal amount of this Note so surrendered.
(b) Upon the payment in full of all amounts payable by the Company
under this Note and the Other Notes (other than amounts payable pursuant to
Article II hereof and thereof which are not yet due) or the deposit thereof as
provided in Section 9.10(a) and the like provisions of the Other Notes,
thereafter the obligations of the Company under this Note shall be as set forth
in Article II, Sections 3.10, 3.11, this Article IX, and, in the case of such
deposit, to pay the Optional Redemption Price, Repurchase Price or Registration
Repurchase Price, as the case may be, from the funds so deposited. Upon such
payment or deposit, any Event of Default which occurred prior to such payment or
deposit by reason of one or more provisions of this Note with which the Company
thereafter is no longer obligated to comply, then such Event of Default shall no
longer exist.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-39-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed in
its name by its duly authorized officer as of the day and in the year first
above written.
CEPHALON, INC.
By:
Name:
Title:
-40-
<PAGE>
EXHIBIT A
---------
OPTIONAL REDEMPTION NOTICE
(SECTION 1.2 OF 11% REVENUE SHARING SENIOR SECURED NOTE DUE 2002)
TO: ___________________________
(Name of Holder)
(1) Pursuant to the terms of the 11% Revenue Sharing Senior Secured
Note due 2002 (the "Note"), Cephalon, Inc., a Delaware corporation (the
"Company"), hereby notifies the above-named Holder that the Company is
exercising its right to redeem the Note in accordance with Section 1.2 of the
Note as set forth below:
(i) The principal amount of the Note to be redeemed is
$_____________.
(ii) The Optional Redemption Price is $_______________.
(iii) The Optional Redemption Date is ______________.
(2) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Note.
Date _________________________ CEPHALON, INC.
By:
Title:
A-41
<PAGE>
EXHIBIT B
---------
FORM OF OPINION OF COUNSEL TO BE
DELIVERED IN CONNECTION WITH ISSUANCE
OF PRINCIPAL PAYMENT SHARES
[Letterhead of Counsel]
_______________, 200_____
To The Holders Listed on Schedule A hereto
Re: Cephalon, Inc.
--------------
Ladies and Gentlemen:
We have acted as counsel to Cephalon, Inc., a Delaware corporation (the
"Company"), in connection with the issuance by the Company of
____________________________ Principal Payment Shares in accordance with the
terms of the Company's 11% Revenue Sharing Senior Secured Notes due 2002 in the
original aggregate principal amount of $30,000,000 (the "Notes"), which Notes
were issued pursuant to the several Note Purchase Agreements, dated as of
February __, 1999 (the "Note Purchase Agreements"), by and between the Company
and the Buyers parties thereto (the "Buyers"). All capitalized terms used
herein without definition are used herein with the respective meanings ascribed
to them in the Notes or, if not defined in the Notes, in the Note Purchase
Agreements. This opinion is being delivered to you pursuant to Section
1.4(d)[(1)(B) OR (2)(B)] of the Notes. In connection with this opinion letter,
we have relied upon the representations and warranties of the Company set forth
in the Note Purchase Agreements and the Notes (the "Principal Documents").
As to various questions of fact material to our opinion, we have also relied
upon certificates of officers and representatives of the Company and upon
certificates of public officials. We have made no independent review or
investigation of any nature as to such representations and warranties, the
matters set forth in the certificates or the assumptions set forth below upon
which we are relying, and no inference of any knowledge on the part of this Firm
as to these legal or factual matters should be drawn from our representation of
the Company in connection with the Principal Documents or otherwise.
We have also assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity with originals of all
documents submitted to us as copies. We have also assumed that the Principal
Documents have each been duly authorized,
B-42
<PAGE>
executed and delivered by all parties thereto other than the Company and that
all such other parties have full power, authority and legal right to execute,
deliver and perform their obligations under the Principal Documents, and that
such Principal Documents are valid, binding and enforceable in accordance with
their respective terms against such other parties.
Based on the foregoing, and subject to the qualifications and limitations set
forth below, we are of the opinion that the Principal Payment Shares are duly
authorized and will be, upon issuance and delivery in accordance with the terms
of the Notes, validly issued, fully paid and nonassessable. Upon issuance, each
Principal Payment Share will have attached thereto a Preferred Share Purchase
Right pursuant to the terms of the Company's Rights Plan if and as then in
effect. We express no opinion as to the validity of the Rights Plan or the
Preferred Share Purchase Rights. None of the Principal Payment Shares are
subject to preemptive rights pursuant to the Certificate of Incorporation or the
Delaware General Corporation Law (the "DGCL") or, to our knowledge, other
similar rights of the stockholders of the Company.
The foregoing opinions and comments are subject to the following additional
qualifications:
(a) Wherever we have stated herein that we have assumed a matter, it
is intended to indicate that we have assumed such matter without making any
independent legal or factual review or investigation of any nature to determine
the accuracy of such assumption, and without expressing any opinion or
conclusion of any kind concerning the matter, and no inference as to our
knowledge of any legal or factual matters bearing on the accuracy of any such
assumption should be drawn from the fact of our current or prior representation
of the Company.
(b) We express no opinion with respect to the laws of any jurisdiction
other than the federal laws of the United States of America, the laws of the
Commonwealth of Pennsylvania and the State of New York and the DGCL. We express
no opinion with respect to any federal or state laws relating to tax and
antitrust matters. We express no opinion as to compliance with applicable anti-
fraud statutes, rules or regulations of any applicable jurisdiction governing
the issuance of securities.
(c) The opinions expressed above are subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
(including without limitation preference rules) affecting the rights of
creditors generally and to general principles of equity (regardless of whether
considered in a proceeding in equity or at law).
(d) [IF OPINION GIVEN PURSUANT TO SECTION 1.4(D)(2)(B) OF NOTE: For
purposes of this opinion, we have assumed that the formulas contained in the
Notes to calculate the Optional Redemption Price represent stipulated damages
that are not plainly disproportionate to the possible loss to the holders of the
Notes and, therefore, are not "penalties" as a matter of law. We express no
opinion as to whether the issuance of the Principal Payment Shares may be
determined to be interest payable with respect to the Notes, or as to the effect
of any laws of any
B-43
<PAGE>
jurisdiction restricting the interest that may be charged upon debt obligations,
and our opinion set forth above assumes that such laws do not adversely affect
any determination that the Principal Payment Shares are fully paid and non-
assessable.]
(e) The foregoing opinion and comments are as of the date hereof, and
we assume no obligation to update or supplement them to reflect any facts or
circumstances which may hereafter come to our attention or any changes in laws
which may hereafter occur.
This opinion letter is solely for the benefit of the Holders for use in
connection with the transactions contemplated by the Notes and may not be relied
upon by any other person or for any other purpose without our express written
consent.
Very truly yours,
B-44
<PAGE>
Schedule A
Holders of Notes
----------------
B-45
<PAGE>
EXHIBIT C
---------
COMPANY NOTICE
(SECTION 5.2(A) OF 11% REVENUE SHARING SENIOR SECURED NOTE DUE 2002)
TO: ___________________________
(Name of Holder)
(1) A Repurchase Event described in the 11% Revenue Sharing Senior
Secured Note due 2002 (the "Note") of Cephalon, Inc., a Delaware corporation
(the "Company"), occurred on ____________________, ______. As a result of such
Repurchase Event, the Holder is entitled to exercise its repurchase rights
pursuant to Section 5.2 of the Note.
(2) The Holder's repurchase right must be exercised on or before
______________, _______.
(3) At or before the date set forth in the preceding paragraph (2),
the Holder must:
(a) deliver to the Company a Holder Notice, in the form attached
as EXHIBIT D to the Note; and
(b) the Note, duly endorsed for transfer to the Company of the
portion of the principal amount to be repurchased.
(4) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Note.
Date _________________________ CEPHALON, INC.
By:
Title:
C-46
<PAGE>
EXHIBIT D
---------
HOLDER NOTICE
(SECTION 5.2(B) OF 11% REVENUE SHARING SENIOR SECURED NOTE DUE 2002)
TO: CEPHALON, INC.
(1) Pursuant to the terms of the 11% Revenue Sharing Senior Secured
Note due 2002 (the "Note"), the undersigned Holder hereby elects to exercise its
right to require repurchase by the Company pursuant to Sections 5.2(a) and
5.2(b) of $_________________________ of the Note, equal to the sum of
$____________________ principal amount of the Note, $____________________ of
accrued and unpaid interest on such principal amount and $____________________
of Default Interest on such interest at the Repurchase Price provided in the
Note.
(2) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Note.
Date: NAME OF HOLDER:
By
Signature of Registered Holder
(Must be signed exactly as name
appears in the Note.)
D-47
<PAGE>
EXHIBIT E
---------
HOLDER REGISTRATION REPURCHASE NOTICE
(SECTION 5.3 OF 11% REVENUE SHARING SENIOR SECURED NOTE DUE 2002)
TO: CEPHALON, INC.
(1) Pursuant to the terms of the 11% Revenue Sharing Senior Secured
Note due 2002 (the "Note"), the undersigned Holder hereby elects to exercise its
right to require repurchase by the Company pursuant to Section 5.3 of
$____________________ of the Note, equal to the sum of $____________________
principal amount of the Note, $____________________ of accrued and unpaid
interest on such principal amount and $____________________ of Default Interest
on such interest at the Registration Repurchase Price provided in the Note.
(2) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Note.
Date: NAME OF HOLDER:
By _________________________________
Signature of Registered Holder
(Must be signed exactly as name
appears in the Note.)
E-48
<PAGE>
EXHIBIT F
---------
TARGET REVENUES
Period 3 Months 12 Months
Ended Ended Ended
----- ----------- -----------
[
] *
* THE CONFIDENTIAL MATERIAL CONTAINED HEREIN HAS BEEN OMITTTED AND FILED
SEPARATELY WITH THE COMMISSION
F-49
<PAGE>
EXHIBIT 4.3(C)
ANNEX II
TO
NOTE PURCHASE
AGREEMENT
NEITHER THIS WARRANT NOR ISSUANCE OF THE SECURITIES ISSUABLE UPON THE EXERCISE
HEREOF TO THE HOLDER HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED OR REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. NEITHER THIS
WARRANT NOR SUCH SECURITIES MAY BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED
OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES
ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND THE APPLICABLE
RULES AND REGULATIONS THEREUNDER.
THIS WARRANT MAY NOT BE TRANSFERRED, DIVIDED, COMBINED OR EXCHANGED, EXCEPT AS
DESCRIBED IN SECTION 5 HEREIN.
CEPHALON, INC.
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
--------------------------------------------------
Name of Registered Holder: _________________________
No. ____ ___________ Shares of Common Stock
For good and valuable consideration the receipt of which is hereby
acknowledged, Cephalon, Inc., a Delaware corporation (the "Company"), hereby
grants the rights herein specified and certifies that ____________________ (the
"Initial Holder") (or any registered assignee of the Initial Holder) (each of
the Initial Holder and any such registered assignee being hereinafter referred
to as the "Holder"), is entitled, subject to the conditions and upon the terms
of this Warrant, to purchase from the Company, at any time or from time to time
during the Exercise Period (as defined in Section 1 hereof), the number of
shares of Common Stock (as defined in Section 1 hereof) set forth above at the
Exercise Price (as defined in Section 1 hereof). The number of shares of Common
Stock to be received upon the exercise of this Warrant and the Exercise Price
are subject to adjustment from time to time as hereinafter set forth.
Section 1. Certain Definitions. Terms defined in the preceding paragraph
-------------------
and elsewhere in this Warrant have the respective meanings provided for therein.
The following additional terms, as used herein, have the following respective
meanings:
-1-
<PAGE>
"Act" means the Securities Act of 1933, as amended.
"Applicable Portion" means the lesser of (x) the unexercised portion of
this Warrant that is outstanding on the applicable date of redemption pursuant
to Section 9 and (y) the portion of this Warrant which entitles the Holder to
purchase a number of shares of Common Stock (or other securities deliverable
hereunder) equal to twenty-five percent (25%) of the aggregate number of Warrant
Shares subject to this Warrant, determined without regard to any prior exercise
hereof; provided, however, that if in connection with a redemption of this
-------- -------
Warrant the Average Market Price shall be greater than two hundred fifty percent
(250%) of the Exercise Price as in effect during the period of twenty (20)
consecutive Trading Days during which the Average Market Price is determined,
then the Applicable Portion determined pursuant to this clause (y) shall be the
portion of this Warrant which entitles the Holder to purchase a number of shares
of Common Stock (or other securities deliverable hereunder) equal to fifty
percent (50%) of the aggregate number of Warrant Shares subject to this Warrant,
determined without regard to any prior exercise hereof less the portion, if any,
of this Warrant which has previously been called for redemption in accordance
with Section 9.
"Average Market Price" means the arithmetic average of the Closing Price
during any period of twenty (20) consecutive Trading Days during the ninety-day
period which commences on the date which is 1,000 days after the Issuance Date
and ends on and includes the date which is 1,089 days after the Issuance Date.
"Class A Warrants" means this Warrant and the Other Warrants of like tenor
issued by the Company in connection with the issuance of the Notes.
"Class B Warrants" means the Class B Common Stock Purchase Warrants issued
by the Company in connection with the issuance of the Notes.
"Closing Price" means on any date the last reported sale price (regular
way), or if there are no sales of Common Stock on such date, the closing bid
price, per share of the Common Stock on the principal national securities
exchange on which the Common Stock is listed or admitted to trading or, if not
listed or traded on any such exchange, on the Nasdaq National Market, or if not
listed or traded on any such exchange or system, the average of the bid and
asked price per share on the Nasdaq Stock Market in each such case, as reported
by such exchange or market or, if such quotations are not available, the fair
market value as reasonably determined by the Board of Directors of the Company
or any committee of such Board.
"Common Stock" means the Company's Common Stock, $.01 par value, and the
related Preferred Share Purchase Rights as authorized on the date hereof, and
any other securities into which or for which the Common Stock or such Preferred
Share Purchase Rights may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise or any
similar rights distributed by the Company to the holders of the Common Stock.
"Early Redemption Option" means the right of the Company to redeem the
Notes Pursuant to Section 1.2 thereof.
-2-
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Period" means the period beginning on the date hereof, and ending
on March 1, 2004.
"Exercise Price" means $10.08 subject to change or adjustment pursuant to
Section 8 hereof.
"Issuance Date" means March 1, 1999.
"Nasdaq" means the Nasdaq Stock Market.
"Nasdaq National Market" means the Nasdaq National Market of Nasdaq.
"Notes" means the 11% Revenue Sharing Senior Secured Notes of the Company.
"Other Securities" means any stock (other than Common Stock) and other
securities of the Company or any other person (corporate or otherwise) which the
Holder of this Warrant at any time shall be entitled to receive, or shall have
received, on the exercise of this Warrant, in lieu of or in addition to the
Warrant Shares, or which at any time shall be issuable or shall have been issued
in exchange for or in replacement of the Warrant Shares or Other Securities
pursuant to Section 8.
"Other Warrants" means the other Class A Warrants for the Purchase of
Shares of Common Stock issued by the Company in connection with the issuance of
the Notes.
"Permitted Transfer" means (a) any transfer, assignment or succession by
operation of law or pursuant to any court order issued by a court of competent
jurisdiction, (b) any transfer to an immediate family member, (c) any transfer
through probate or through intestate succession, (d) in the case of a transfer
by a corporation, partnership, or trust, any transfer to any person that,
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the transferor, (e) any
distribution by a retirement plan to any participant in the plan (f) any
transfer or assignment by the Initial Holder to its employee, or (g) any
transfer or assignment to a person who is an "accredited investor," as defined
in Regulation D under the Securities Act.
"Redemption Date" has the meaning provided in Section 9(b).
"Redemption Price" has the meaning provided in Section 9(a).
"Redemption Target Price" means an amount equal to two hundred percent
(200%) of the Exercise Price as in effect during the period of twenty (20)
consecutive Trading Days during which the Average Market Price is determined.
-3-
<PAGE>
"Reorganization Event" means the occurrence of any one or more of the
following events:
(i) any consolidation, merger or similar transaction of the Company or
any Subsidiary with or into another entity (other than a merger or consolidation
or similar transaction of a Subsidiary into the Company or a wholly-owned
Subsidiary) where the stockholders of the Company immediately prior to such
transaction do not collectively own at least 51% of the outstanding voting
securities of the surviving corporation of such consolidation or merger
immediately following such transaction; or the sale of all or substantially all
of the assets of the Company and the Subsidiaries in a sale transaction or a
series of related transactions; or
(ii) the occurrence of any transaction or event in connection with which
all or substantially all the Common Stock shall be exchanged for, converted
into, acquired for or constitute the right to receive consideration (whether by
means of an exchange offer, liquidation, tender offer, consolidation, merger,
share exchange, combination, reclassification, recapitalization, or otherwise)
which is not all or substantially all common stock which is (or will, upon
consummation of or immediately following such transaction or event, be) listed
on a national securities exchange or approved for quotation on Nasdaq or any
similar United States system of automated dissemination of transaction reporting
of securities prices; or
(iii) the acquisition by a person or entity or group of persons or entities
acting in concert as a partnership, limited partnership, syndicate or group, as
a result of a tender or exchange offer, open market purchases, privately
negotiated purchases or otherwise, of beneficial ownership of securities of the
Company representing 50% or more of the combined voting power of the outstanding
voting securities of the Company ordinarily (and apart from rights accruing in
special circumstances) having the right to vote in the election of directors.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Exchange Act of 1934, as amended.
"Subsidiary" means any corporation or other entity of which a majority of
the capital stock or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by the Company.
"Trading Day" means a day on which either the national securities exchange
or the Nasdaq National Market which then constitutes the principal securities
market for the Common Stock (or other securities deliverable hereunder) is open
for general trading of securities.
"Warrant" means this Warrant and any Warrant or Warrants which may be
issued pursuant to Section 4 or 5 hereof in substitution or exchange for or upon
transfer of this Warrant, any Warrant which may be issued pursuant to Section 2
hereof upon partial exercise of this Warrant and any Warrant which may be issued
pursuant to Section 6 hereof upon the loss, theft, destruction or mutilation of
this Warrant.
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<PAGE>
"Warrant Register" means the register maintained at the principal office of
the Company, or at the office of its agent, in which the name of the Holder of
this Warrant shall be registered.
"Warrant Shares" means the shares of Common Stock, as adjusted from time to
time in accordance with Section 8 hereof, deliverable upon exercise of this
Warrant.
Section 2. Exercise of Warrant. This Warrant may be exercised, in whole
-------------------
or in part, at any time or from time to time during the Exercise Period, by
presentation and surrender hereof to the Company at its principal office at the
address set forth on the signature page hereof (or at such other address of the
Company or any agent appointed by the Company to act hereunder as the Company or
such agent may hereafter designate in writing to the Holder), with the purchase
form attached hereto as ANNEX I (the "Purchase Form") duly executed and
accompanied by cash or a certified or official bank check drawn to the order of
"CEPHALON, INC." (or its successor in interest, if any) in the amount of the
Exercise Price, multiplied by the number of Warrant Shares specified in such
Purchase Form. If this Warrant should be exercised in part only, the Company or
its agent shall, upon surrender of this Warrant, execute and deliver a Warrant
evidencing the right of the Holder thereof to purchase the balance of the
Warrant Shares purchasable hereunder. Upon receipt by the Company during the
Exercise Period of this Warrant and such Purchase Form in proper form for
exercise, together with proper payment of the Exercise Price at its principal
office, or by its agent at its office, the Holder shall be deemed to be the
holder of record of the number of Warrant Shares specified in such Purchase
Form; provided, however, that if the date of such receipt by the Company or its
-------- -------
agent is a date on which the stock transfer books of the Company are closed,
such person shall be deemed to have become the record holder of such Warrant
Shares on the next business day on which the stock transfer books of the Company
are open. The Company shall pay any and all documentary, stamp or similar issue
or transfer taxes payable in respect of the issue or delivery of such Warrant
Shares. Any Warrant issued upon partial exercise of this Warrant pursuant to
this Section 2 shall be dated the date of this Warrant.
Section 3. Reservation of Shares. The Company agrees that at all times it
---------------------
will keep reserved solely for issuance and delivery pursuant to this Warrant the
number of shares of its Common Stock (or other securities) that are or would be
issuable from time to time upon exercise of this Warrant. All such shares shall
be duly authorized and, when issued upon such exercise, shall be validly issued,
fully paid and nonassessable, free and clear of all liens, security interests,
charges and other encumbrances or restrictions on sale and free of all
preemptive rights. Before taking any action that would cause an adjustment
pursuant to Section 8 hereof reducing the Exercise Price below the then par
value (if any) of the Warrant Shares issuable upon exercise of this Warrant, the
Company will take any corporate action that may, in the opinion of its counsel,
be necessary in order that the Company may validly and legally issue fully paid
and nonassessable Warrant Shares at the Exercise Price as so adjusted.
Section 4. Transfer in Compliance with Applicable Securities Laws.
------------------------------------------------------
(a) Neither this Warrant nor any of the Warrant Shares, nor any
interest in either, may be sold, assigned, pledged, hypothecated, encumbered or
in any other manner
-5-
<PAGE>
transferred or disposed of, in whole or in part, except in accordance with
Section 5 hereof and in compliance with applicable United States federal and
state securities laws and the terms and conditions hereof. Except as provided in
subsection (b) of this Section 4, each Warrant shall bear the following legend:
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED OR
REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. NEITHER THIS WARRANT
NOR SUCH SECURITIES MAY BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE
SECURITIES ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND
THE APPLICABLE RULES AND REGULATIONS THEREUNDER.
(b) If (i) the Warrant Shares have been registered under the
Act and registered or qualified under applicable state securities or Blue Sky
laws or (ii) the Holder has received an opinion of counsel reasonably
satisfactory to the Company that the Warrant Shares may be freely transferred
without registration under the Act or registration or qualification under
applicable state securities or Blue Sky laws, the Holder may require the Company
to issue, in substitution for a Warrant with the foregoing legend, a Warrant
with the following legend:
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED OR REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. THIS
WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE
SECURITIES ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND
THE APPLICABLE RULES AND REGULATIONS THEREUNDER.
(c) The Holder may require the Company to issue a Warrant
without either of the foregoing legends in substitution for a Warrant bearing
one of such legends if either (i) this Warrant and the Warrant Shares issuable
upon the exercise hereof have been registered under the Act and registered or
qualified under applicable state securities laws or (ii) the Holder has received
an opinion of counsel reasonably satisfactory to the Company that this Warrant
and the Warrant Shares may be freely transferred without registration under the
Act or registration or qualification under applicable state securities laws. The
provisions of this Section 4 shall be binding on all subsequent holders of this
Warrant.
Section 5. Exchange, Transfer or Assignment of Warrant.
-------------------------------------------
(a) This Warrant may be, at the option of the Holder, upon
presentation and surrender hereof to the Company at its principal office or to
the Company's agent at its office, (i) exchanged for other Warrants of different
denominations, registered in the name of the Holder, entitling the Holder to
purchase in the aggregate the same number of Warrant Shares at the Exercise
Price or, (ii) if delivered together with a written notice signed by the Holder
specifying the
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<PAGE>
denominations in which new Warrants are to be issued, divided or combined with
other Warrants registered in the name of the Holder that carry the same rights.
(b) If the Holder has received an opinion of counsel
satisfactory to the Company that this Warrant may be sold or transferred without
registration under the Act, as contemplated by Section 4 hereof, (x) this
Warrant may be transferred and assigned, subject to subparagraph (y) of this
Section 5(b), at the option of the Holder, upon surrender of this Warrant to the
Company at its principal office or to the Company's agent at its office, with
the warrant assignment form attached hereto as ANNEX II (the "Warrant Assignment
Form") duly executed and accompanied by funds sufficient to pay any transfer
tax, except that (y) no transfer or assignment of this Warrant may be made
unless (i) such transfer or assignment is a Permitted Transfer or (ii) the
Company consents in writing to such transfer or assignment, which consent may be
withheld in its absolute discretion. The Company shall execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees named in such
Warrant Assignment Form.
(c) Any transfer or exchange of this Warrant shall be without
charge to the Holder and any Warrant or Warrants issued pursuant to this Section
5 shall be dated the date hereof.
(d) The Holder shall not be entitled to transfer a portion of
this Warrant with respect to the purchase of a number of Warrant Shares that is
less than 10,000 without the prior written consent of the Company.
(e) In order to give effect to Section 9, if this Warrant shall
be exercised in part, then (1) any Warrant issued to the Holder to evidence the
unexercised portion of this Warrant shall bear a notation of the original number
of Warrant Shares subject to this Warrant and (2) in connection with any split-
up of this Warrant into two or more instruments, each such instrument shall bear
a notation of a portion of the original number of Warrant Shares subject to this
Warrant, determined by pro rata allocation thereto of the aggregate original
such amount based on the portion of the unexercised amount of this Warrant
(determined immediately prior to such split-up) evidenced by such instrument.
Section 6. Lost, Mutilated or Missing Warrant. Upon receipt by the
----------------------------------
Company or its agent of evidence satisfactory to it of the loss, theft or
destruction of this Warrant, and of satisfactory indemnification, and upon
surrender and cancellation of this Warrant if mutilated, the Company or its
agent shall execute and deliver a Warrant of like tenor and date in exchange for
this Warrant.
Section 7. Rights of the Holder. The Holder shall not, by virtue hereof,
--------------------
be entitled to any rights of a shareholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
Section 8. Anti-dilution. (a) If the Company shall fix or have fixed a
-------------
record date at any time after the date hereof and before the expiration of the
Exercise Period for:
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<PAGE>
(i) The declaration of a dividend or distribution on the
Common Stock (or other securities deliverable hereunder) payable in shares
of capital stock (whether shares of Common Stock or of capital stock of any
other class), (A) the subdivision of shares of the Common Stock into a
greater number of shares, (B) the combination of the Common Stock into a
smaller number of shares or (C) the issuance of any shares of its capital
stock by reclassification of the Common Stock in connection with a
consolidation or merger with a subsidiary of the Company in which the
Company is the continuing corporation, then, in any such event, upon
exercise of this Warrant the Holder shall be entitled to receive the
aggregate number and kind of shares which, if the Warrant had been
exercised immediately prior to such record date, the Holder would have been
entitled to receive by virtue of such dividend, distribution, subdivision,
combination or reclassification, and the Exercise Price shall be
appropriately adjusted. Such adjustment shall be made successively whenever
any event listed above shall occur.
(ii) Issuance at Less than Current Market Price. The issuance
------------------------------------------
of rights, options or warrants to all holders of Common Stock (or other
securities deliverable hereunder) entitling them to subscribe for or
purchase Common Stock (or other securities deliverable hereunder) at a
price per share or having a conversion or exercise price per share
(including the amount paid, if any, for such rights, options or warrants)
less than the Closing Price on such record date (excluding rights or
warrants that are not immediately exercisable and for which provision is
made for the Holder to receive comparable rights or warrants upon
exercise), then the number of Warrant Shares to be received hereunder after
such record date shall be determined by multiplying the number of shares
receivable hereunder immediately prior to such record date by a fraction,
the denominator of which shall be the number of shares of Common Stock (or
other securities deliverable hereunder) outstanding on such record date
plus the number of shares of Common Stock (or other securities deliverable
hereunder) that the aggregate offering price of the total number of shares
so offered for subscription or purchase would purchase at such Closing
Price, and the numerator of which shall be the number of shares of Common
Stock (or other securities deliverable hereunder) outstanding on such
record date plus the number of additional shares of Common Stock (or other
securities deliverable hereunder) offered for subscription or purchase, and
the Exercise Price shall be appropriately adjusted so that the aggregate
purchase price of the Warrant Shares to be received hereunder after such
record date is equal to the aggregate purchase price of the Warrant Shares
receivable hereunder immediately prior to such record date. Shares of
Common Stock owned by or held for the account of the Company or any
subsidiary of the Company on such record date shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall
become effective immediately after such record date. Such adjustment shall
be made successively whenever any such event shall occur. If such rights,
options or warrants are not so issued, the number of Warrant Shares
receivable hereunder shall again be adjusted to be the number that would
have been in effect had such record date not been fixed. On the expiration
of such rights, options or warrants the number of Warrant Shares receivable
hereunder shall be readjusted to be the number that would have obtained had
the adjustment made upon the issuance of such rights, options or warrants
been made upon the basis of the issuance of only the number of shares of
Common Stock (or other securities deliverable hereunder) actually issued
upon the exercise of such rights, options
-8-
<PAGE>
or warrants, provided, however, that if the Holder of this Warrant shall
-------- -------
have exercised this Warrant prior to any such readjustment, the number of
Warrant Shares that have been delivered or the number of Warrant Shares to
be delivered shall not be subject to any readjustment. In any case in which
this subsection (ii) shall require that an adjustment in the number of
shares receivable hereunder or the Exercise Price be made effective as of a
record date for a specified event, the Company may elect to defer until the
occurrence of such event issuing to the Holder of any Warrant exercised
after such record date the number of Warrant Shares, if any, issuable upon
such exercise over and above the number of Warrant Shares, if any, issuable
upon such exercise on the basis of the Exercise Price in effect prior to
such adjustment; provided, however, that the Company shall deliver to such
-------- -------
Holder a due bill or other appropriate instrument evidencing such Holder's
right to receive such additional Warrant Shares upon the occurrence of the
event requiring such adjustments.
(iii) Distribution of Subscription Rights, Warrants, Evidences
--------------------------------------------------------
of Indebtedness or Assets. The making of a distribution to all holders of
-------------------------
Common Stock (or other securities deliverable hereunder) (including any
such distribution to be made in connection with a consolidation or merger
in which the Company is to be the continuing corporation) of (A) any shares
of capital stock of the Company (other than Common Stock), (B) subscription
rights or warrants (excluding those for which adjustment is provided in
subsection 8(a)(ii) above and excluding those that are not immediately
exercisable and for which provision is made for the Holder to receive
comparable subscription rights or warrants upon exercise) or (C) evidences
of its indebtedness or assets (excluding (x) dividends paid in or
distributions of the Company's capital stock for which the number of
Warrant Shares receivable hereunder shall have been adjusted pursuant to
paragraph 8(a)(i) and (y) cash dividends or distributions payable out of
earnings or surplus not in excess of 10% of the average Closing Price for
the thirty trading days prior to the fifth day before the date of
declaration multiplied by the number of outstanding shares of Common Stock)
(any of the foregoing being hereinafter in this paragraph (iii) called the
"Securities"), then in each such case (unless the Company elects to reserve
shares or other units of such Securities for distribution to each Holder
upon exercise of this Warrant so that, in addition to the shares of Common
Stock (or other securities deliverable hereunder) to which each Holder is
entitled, each Holder will receive upon such exercise the amount and kind
of such Securities which such Holder would have received if the Holder had,
immediately prior to the record date for the distribution of the
Securities, exercised the Warrant) the number of Warrant Shares receivable
hereunder after such record date shall be determined by multiplying the
number of Warrant Shares receivable hereunder immediately prior to such
record date by a fraction, the denominator of which shall be the Closing
Price on the Trading Day immediately prior to the first Trading Day on
which the Common Stock (or other securities deliverable hereunder) trades
without the right to receive such Securities, less the fair market value
(as determined in the reasonable judgment of the Board of Directors of the
Company and described in a statement mailed to the Holder) of the portion
of the assets or evidences of indebtedness so to be distributed to a holder
of one share of the Common Stock or of such subscription rights or warrants
applicable to one share of the Common Stock, and the numerator of which
shall be the Closing Price of the Common Stock on such Trading Day; and the
Exercise Price shall be appropriately adjusted so that
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<PAGE>
the aggregate purchase price of the Warrant Shares to be received hereunder
after such record date is equal to the aggregate purchase price of the
Warrant Shares receivable hereunder immediately prior to such record date.
Such adjustment shall become effective immediately after such record date
and shall be made successively whenever such a record date is fixed. If
such distribution is not so made, the number of Warrant Shares receivable
hereunder shall be readjusted to be the number that was in effect
immediately prior to such record date. In the event that the Holder
exercises this Warrant after an adjustment is made under this paragraph
(iii) and prior to a readjustment under this paragraph (iii), the number of
Warrant Shares that have been delivered or the number of Warrant Shares to
be delivered shall not be subject to any readjustment. In any case in which
this paragraph (iii) shall require that an adjustment in the number of
Warrant Shares receivable hereunder or the Exercise Price be made effective
as of a record date for a specified event, the Company may elect to defer
until the occurrence of such event issuing to the Holder of any Warrant
exercised after such record date the number of Warrant Shares, if any,
issuable upon such exercise over and above the number of Warrant Shares, if
any, issuable upon such exercise on the basis of the Exercise Price in
effect prior to such adjustment; provided, however, that the Company shall
-------- -------
deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional Warrant Shares
upon the occurrence of the event requiring such adjustments.
(b) Reorganization Event. In case of any Reorganization Event the
--------------------
Company shall, as a condition precedent to the consummation of the transaction
constituting, or announced as, such Reorganization Event, cause effective
provisions to be made so that the Holder shall have the right immediately
thereafter, by exercising this Warrant, to receive the aggregate amount and kind
of shares of stock and other securities and property that were receivable upon
such Reorganization Event by a holder of the number of shares of Common Stock
that would have been received immediately prior to such Reorganization Event
upon exercise of this Warrant. Any such provision shall include provision for
adjustments in respect of such shares of stock and other securities and property
that shall be as nearly equivalent as may be practicable to the adjustments
provided for in Section 8(a). The foregoing provisions of this Section 8(b)
shall similarly apply to successive Reorganization Events.
(c) Fractional Shares. No fractional shares of Common Stock (or
-----------------
other securities deliverable hereunder) or scrip shall be issued to any Holder
in connection with the exercise of this Warrant. Instead of any fractional share
of Common Stock (or other securities deliverable hereunder) that would otherwise
be issuable to such Holder, the Company shall pay to such Holder a cash
adjustment in respect of such fractional interest in an amount equal to such
fractional interest multiplied by the Closing Price per share of Common Stock
(or other securities deliverable hereunder) on the date of such exercise.
(d) Carryover. Notwithstanding any other provision of this
---------
Section 8, no adjustment shall be made to the number of shares of Common Stock
(or other securities deliverable hereunder) to be delivered to each Holder (or
to the Exercise Price) if such adjustment would represent less than one percent
of the number of shares to be so delivered, but any such adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which, together with any adjustments so carried forward,
shall amount to
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<PAGE>
one percent or more of the number of shares to be so delivered.
(e) Notices of Certain Events. If at any time after the date
-------------------------
hereof and before the expiration of the Exercise Period:
(i) the Company authorizes the issuance to all holders of
its Common Stock of (A) rights or warrants to subscribe for or purchase shares
of its Common Stock or (B) any other subscription rights or warrants;
(ii) the Company authorizes the distribution to all holders
of its Common Stock of evidences of its indebtedness or assets (other than cash
dividends or distributions excluded from the operation of paragraph 8(a)(iii));
(iii) there shall be any capital reorganization of the
Company or reclassification of the Common Stock (other than a change in par
value of the Common Stock or an increase in the authorized capital stock of the
Company not involving the issuance of any shares thereof) or any consolidation
or merger to which the Company is a party (other than a consolidation or merger
with a subsidiary in which the Company is the continuing corporation and that
does not result in any reclassification or change in the Common Stock
outstanding) or a conveyance or transfer of all or substantially all of the
properties and assets of the Company:
(iv) there shall be any voluntary or involuntary
dissolution, liquidation or winding-up of the Company; or
(v) there shall be any other event that would result in an
adjustment pursuant to this Section 8 in the Exercise Price or the number of
Warrant Shares that may be purchased upon the exercise hereof;
the Company will cause to be mailed to the Holder, at least twenty (20) days (or
ten (10) days in any case specified in the clauses (i) or (ii) above) before the
applicable record or effective date hereinafter specified, or as soon as
practicable after the occurrence of an event specified in clause (v) if such
event was beyond the control of the Company and the Company did not have
knowledge of such event at least ten (10) days before such date, a notice
stating (A) the date as of which the holders of Common Stock of record entitled
to receive any such rights, warrants or distributions is to be determined, or
(B) the date on which any such reorganization, reclassification, consolidation,
merger, conveyance, transfer, dissolution, liquidation or winding-up is expected
to become effective, and the date as of which it is expected that holders of
Common Stock of record will be entitled to exchange their shares of Common Stock
for securities or other property, if any, deliverable upon such reorganization,
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding-up.
(f) Failure to Give Notice. The failure to give the notice
----------------------
required by Section 8(e) hereof or any defect therein shall not affect the
legality or validity of any distribution right, warrant, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding-up or the vote upon
any such action.
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<PAGE>
Section 9. Redemption of Warrant. (a) Provided that the Company has not
---------------------
previously elected to exercise its Early Redemption Option to retire all or any
part of the Notes, at any time on or after the date which is 1,000 days after
the Issuance Date, the Company shall have the right, but not the obligation, on
not less than forty-five (45) and not more than sixty (60) days prior notice, to
redeem the Applicable Portion of this Warrant, at a redemption price of $0.01
per share of Common Stock (or unit of other securities deliverable hereunder)
issuable upon exercise of the portion of this Warrant so redeemed (the
"Redemption Price"), if the Average Market Price of one share of Common Stock
(or unit of other securities deliverable hereunder) receivable upon exercise of
this Warrant shall exceed the Redemption Target Price. Any notice of redemption
shall be given within twenty (20) days after the last Trading Day in the period
of twenty (20) consecutive Trading Days which gave rise to the right of the
Company to redeem this Warrant. If this Warrant is called for redemption, the
Company shall simultaneously call for redemption a portion of the Other Warrants
in accordance with their terms that are similar to this Section 9.
(b) If the requirements set forth in Section 9(a) are met, and
the Company wishes to exercise its right so to redeem the Applicable Portion of
this Warrant, the Company shall give a notice of redemption to the Holder not
later than the 45th day prior to the date fixed for redemption (the "Redemption
Date").
(c) The notice of redemption shall specify (i) the portion of
this Warrant to be redeemed, (ii) the aggregate Redemption Price for the
Applicable Portion of this Warrant to be redeemed, (iii) the date fixed for
redemption, (iv) the place where this Warrant shall be delivered and the
Redemption Price paid, and (v) that the right to exercise the Applicable Portion
of this Warrant that is being redeemed shall terminate at 5:00 p.m., New York
City time, on the Trading Day immediately preceding the Redemption Date unless
otherwise agreed by the Company.
(d) If the Company shall have exercised its right to redeem
the Applicable Portion of this Warrant, any right to exercise such Applicable
Portion of this Warrant shall terminate at 5:00 p.m., New York City time, on the
Trading Day immediately preceding the Redemption Date unless otherwise agreed by
the Company. On and after the Redemption Date, unless otherwise agreed by the
Company, the Holder shall have no further rights with respect to the Applicable
Portion being so redeemed except to receive, upon surrender of this Warrant, the
Redemption Price.
(e) From and after the Redemption Date, the Company shall, at
the place specified in the notice of redemption, upon presentation and surrender
to the Company by or on behalf of the Holder, deliver or cause to be delivered
to or upon the written order of the Holder a sum in cash equal to the aggregate
Redemption Price of the Applicable Portion of this Warrant being so redeemed.
From and after the Redemption Date and upon the deposit or setting aside by the
Company of a sum sufficient to redeem such Applicable Portion of this Warrant,
such Applicable Portion of this Warrant shall expire and become void and all
rights hereunder, except the right to receive payment of the Redemption Price,
shall cease.
(f) If the Company shall have exercised its right to redeem a
portion of
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<PAGE>
this Note and, during any period of twenty (20) consecutive Trading Days during
which the Average Market Price may be determined pursuant to this Warrant, the
Average Market Price of one share of Common Stock (or unit of other securities
deliverable hereunder) receivable upon exercise of this Warrant shall exceed an
amount equal to two hundred fifty percent (250%) of the Exercise Price, then the
Company shall have the right to exercise its right of redemption on a second
occasion. Such redemption shall otherwise be made in accordance with this
Section 9.
Section 10. Officers' Certificate. Whenever the number of Warrant Shares
---------------------
that may be purchased on exercise of this Warrant or the Exercise Price is
adjusted as required by the provisions of Section 8 hereof, the Company will
forthwith file in the custody of its Secretary or an Assistant Secretary at its
principal office and at the office of its agent an officers' certificate showing
the adjusted number of Warrant Shares that may be purchased at the Exercise
Price on exercise of this Warrant and the adjusted Exercise Price determined as
herein provided, setting forth in reasonable detail the facts requiring such
adjustment and the manner of computing such adjustment. Each such officers'
certificate shall be signed by the President, Chief Financial Officer or
Treasurer of the Company and by the Secretary or an Assistant Secretary of the
Company. Each such officers' certificate shall be made available at all
reasonable times for inspection by the Holder. The Company shall, forthwith
after each such adjustment, cause such certificate to be mailed to the Holder.
Section 11. Availability of Information. In addition to the requirements
---------------------------
of Section 5(h), the Company shall comply with all applicable public information
reporting requirements of the SEC and applicable state securities laws to which
it may from time to time be subject. The Company will also cooperate with each
Holder of any Warrants and each holder of any Warrant Shares in supplying such
information concerning the Company as may be necessary for such Holder or holder
to complete and file any information reporting forms currently or hereafter
required by the SEC as a condition to the availability of an exemption from the
Act for the sales of any Warrants or Warrant Shares.
Section 12. Warrant Register. The Company will register this Warrant in
----------------
the Warrant Register in the name of the record holder to whom it has been
distributed or assigned in accordance with the terms hereof. The Company may
deem and treat the registered Holder of this Warrant as the absolute owner
hereof (notwithstanding any notation of ownership or other writing hereon made
by anyone) for the purpose of any exercise hereof or any distribution to the
Holder and for all other purposes, and the Company shall not be affected by any
notice to the contrary.
Section 13. Successors. All of the provisions of this Warrant by or for
----------
the benefit of the Company or the Holder shall bind and inure to the benefit of
their respective successors and assigns.
Section 14. Headings. The headings of sections of this Warrant have been
--------
inserted for convenience of reference only, are not to be considered a part
hereof and shall in no way modify or restrict any of the terms or provisions
hereof.
Section 15. Amendments. This Warrant may be amended by the affirmative
----------
vote of
-13-
<PAGE>
Holders holding Warrants to purchase not less than two-thirds of the Warrant
Shares purchasable pursuant to all of the then outstanding Warrants; provided,
--------
that, except as expressly provided herein, this Warrant may not be amended,
without the consent of the Holder, to change (i) any price at which this Warrant
may be exercised, (ii) the period during which this Warrant may be exercised,
(iii) the number or type of securities to be issued upon the exercise hereof or
(iv) the provisions of this Section 15.
Section 16. Notices. Unless otherwise provided in this Warrant, any
-------
notice or other communication required or permitted to be made or given to any
party hereto pursuant to this Warrant shall be in writing and shall be deemed
made or given if delivered by hand, on the date of such delivery to such party,
or, if mailed, on the fifth day after the date of mailing, if sent to such party
by certified or registered mail, postage prepaid, addressed to it (in the case
of a Holder) at its address in the Warrant Register or (in the case of the
Company) at its address set forth below, or to such other address as is
designated by written notice, similarly given to each party hereto.
Section 17. Governing Law. This Warrant shall be deemed to be a contract
-------------
made under the laws of the State of New York and for all purposes shall be
construed in accordance with the laws of said State as applied to the contracts
made and to be performed in New York between New York residents.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-14-
<PAGE>
IN WITNESS WHEREOF, the Company has duly caused this Warrant to be
signed and attested by its duly authorized officer and to be dated as of
__________, 1999.
CEPHALON, INC.
By:
Name:
Title:
Address:
145 Brandywine Parkway
West Chester, Pennsylvania 19380
Attention: Senior Vice President and
Chief Financial Officer
-15-
<PAGE>
ANNEX I
TO WARRANT
PURCHASE FORM
-------------
TO CEPHALON, INC.:
The undersigned, ________________________, hereby irrevocably elects
to exercise the within Warrant to purchase ___________________________ shares of
Common Stock of Cephalon, Inc., a Delaware corporation, and hereby makes payment
of $_____________________ in payment of the exercise price thereof.
Dated: ____________________________
_____________________________
[SIGNED]
_____________________________
[STREET ADDRESS]
_____________________________
[CITY AND STATE]
I-16
<PAGE>
ANNEX II
TO WARRANT
WARRANT ASSIGNMENT FORM
-----------------------
TO CEPHALON, INC.:
FOR VALUE RECEIVED, the undersigned,
__________________________________________________, ("Assignor"), hereby sells,
assigns and transfers unto
Name: ________________________________________ ("Assignee")
(Please type or print in block letters.)
Address: _____________________________________
Social Security or Taxpayer I.D. No.: _______________________
Assignor's right to purchase up to _________________ shares of Common Stock of
Cephalon, Inc., a Delaware corporation, represented by this Warrant and does
hereby irrevocably constitute and appoint the Company and any of its officers,
secretary or assistant secretaries, as its officers, secretary or assistant
secretaries, as attorneys-in-fact to transfer the same on the books of the
Company, with full power of substitution in the premises.
Date: __________________________
Print Name:
II-17
<PAGE>
EXHIBIT 4.3(D)
ANNEX III
TO
NOTE PURCHASE
AGREEMENT
NEITHER THIS WARRANT NOR ISSUANCE OF THE SECURITIES ISSUABLE UPON THE EXERCISE
HEREOF TO THE HOLDER HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED OR REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. NEITHER THIS
WARRANT NOR SUCH SECURITIES MAY BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED
OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES
ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND THE APPLICABLE
RULES AND REGULATIONS THEREUNDER.
THIS WARRANT MAY NOT BE TRANSFERRED, DIVIDED, COMBINED OR EXCHANGED, EXCEPT AS
DESCRIBED IN SECTION 5 HEREIN.
CEPHALON, INC.
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
--------------------------------------------------
Name of Registered Holder: _________________________
No. ____ ___________ Shares of Common Stock
For good and valuable consideration the receipt of which is hereby
acknowledged, Cephalon, Inc., a Delaware corporation (the "Company"), hereby
grants the rights herein specified and certifies that ____________________ (the
"Initial Holder") (or any registered assignee of the Initial Holder) (each of
the Initial Holder and any such registered assignee being hereinafter referred
to as the "Holder"), is entitled, subject to the conditions and upon the terms
of this Warrant, to purchase from the Company, at any time or from time to time
during the Exercise Period (as defined in Section 1 hereof), the number of
shares of Common Stock (as defined in Section 1 hereof) set forth above at the
Exercise Price (as defined in Section 1 hereof). The number of shares of Common
Stock to be received upon the exercise of this Warrant and the Exercise Price
are subject to adjustment from time to time as hereinafter set forth.
Section 1. Certain Definitions. Terms defined in the preceding paragraph
-------------------
and elsewhere in this Warrant have the respective meanings provided for therein.
The following additional terms, as used herein, have the following respective
meanings:
-1-
<PAGE>
"Acceleration Date" means the earlier of the date on which a Reorganization
Event occurs or the date on which the Company shall agree to effect a
Reorganization Event, provided, that if approval of the stockholders of the
--------
Company is required in connection with such Reorganization Event, the
Acceleration Date means the date of such approval.
"Act" means the Securities Act of 1933, as amended.
"Applicable Portion" means the portion of this Warrant which entitles the
Holder to purchase a number of shares of Common Stock (or other securities
deliverable hereunder) equal to the product of (i) the aggregate number of
Warrant Shares subject to this Warrant immediately prior to such redemption
times (ii) the quotient of (a) the amount of Net Revenues for the period from
the Issuance Date to the third anniversary of the Issuance Date minus an amount
equal to fifty percent (50%) of the Target Revenues for such period, divided by
(b) an amount equal to fifty percent (50%) of the Target Revenues for the period
from the Issuance Date to the third anniversary of the Issuance Date; provided,
--------
however, that in no event shall such quotient be greater than one or less than
- -------
zero.
"Average Market Price" means the arithmetic average of the Closing Price
during any period of twenty (20) consecutive Trading Days during the ninety-day
period which commences on the date which is 1,000 days after the Issuance Date
and ends on and includes the date which is 1,089 days after the Issuance Date.
"Class A Warrants" means the Class A Common Stock Purchase Warrants issued
by the Company in connection with the issuance of the Notes.
"Class B Warrants" means this Warrant and the Other Warrants of like tenor
issued by the Company in connection with the issuance of the Notes.
"Closing Price" means on any date the last reported sale price (regular
way), or if there are no sales of Common Stock on such date, the closing bid
price, per share of the Common Stock on the principal national securities
exchange on which the Common Stock is listed or admitted to trading or, if not
listed or traded on any such exchange, on the Nasdaq National Market, or if not
listed or traded on any such exchange or system, the average of the bid and
asked price per share on the Nasdaq Stock Market in each such case, as reported
by such exchange or market or, if such quotations are not available, the fair
market value as reasonably determined by the Board of Directors of the Company
or any committee of such Board.
"Common Stock" means the Company's Common Stock, $.01 par value, and the
related Preferred Share Purchase Rights as authorized on the date hereof, and
any other securities into which or for which the Common Stock or such Preferred
Share Purchase Rights may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise or any
similar rights distributed by the Company to the holders of the Common Stock.
"Early Redemption Option" means the right of the Company to redeem the
Notes Pursuant to Section 1.2 thereof.
-2-
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Period" means the period beginning on March 1, 2002 (or such
earlier date determined in accordance with Section 8(b)(ii)) and ending on March
1, 2004.
"Exercise Price" means $10.08 subject to change or adjustment pursuant to
Section 8 hereof.
"Issuance Date" means March 1, 1999.
"Nasdaq" means the Nasdaq Stock Market.
"Nasdaq National Market" means the Nasdaq National Market of Nasdaq.
"Net Revenues" has the meaning provided in the Notes.
"Notes" means the 11% Revenue Sharing Senior Secured Notes of the Company.
"Other Securities" means any stock (other than Common Stock) and other
securities of the Company or any other person (corporate or otherwise) which the
Holder of this Warrant at any time shall be entitled to receive, or shall have
received, on the exercise of this Warrant, in lieu of or in addition to the
Warrant Shares, or which at any time shall be issuable or shall have been issued
in exchange for or in replacement of the Warrant Shares or Other Securities
pursuant to Section 8.
"Other Warrants" means the other Class B Warrants for the Purchase of
Shares of Common Stock issued by the Company in connection with the issuance of
the Notes.
"Permitted Transfer" means (a) any transfer, assignment or succession by
operation of law or pursuant to any court order issued by a court of competent
jurisdiction, (b) any transfer to an immediate family member, (c) any transfer
through probate or through intestate succession, (d) in the case of a transfer
by a corporation, partnership, or trust, any transfer to any person that,
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the transferor, (e) any
distribution by a retirement plan to any participant in the plan (f) any
transfer or assignment by the Initial Holder to its employee, or (g) any
transfer or assignment to a person who is an "accredited investor," as defined
in Regulation D under the Securities Act.
"Redemption Date" has the meaning provided in Section 9(b).
"Redemption Price" has the meaning provided in Section 9(a).
"Redemption Target Price" means an amount equal to two hundred percent
(200%) of the
-3-
<PAGE>
Exercise Price as in effect during the period of twenty (20) consecutive Trading
Days during which the Average Market Price is determined.
"Reorganization Event" means the occurrence of any one or more of the
following events:
(i) any consolidation, merger or similar transaction of the Company or
any Subsidiary with or into another entity (other than a merger or consolidation
or similar transaction of a Subsidiary into the Company or a wholly-owned
Subsidiary) where the stockholders of the Company immediately prior to such
transaction do not collectively own at least 51% of the outstanding voting
securities of the surviving corporation of such consolidation or merger
immediately following such transaction; or the sale of all or substantially all
of the assets of the Company and the Subsidiaries in a sale transaction or a
series of related transactions; or
(ii) the occurrence of any transaction or event in connection with which
all or substantially all the Common Stock shall be exchanged for, converted
into, acquired for or constitute the right to receive consideration (whether by
means of an exchange offer, liquidation, tender offer, consolidation, merger,
share exchange, combination, reclassification, recapitalization, or otherwise)
which is not all or substantially all common stock which is (or will, upon
consummation of or immediately following such transaction or event, be) listed
on a national securities exchange or approved for quotation on Nasdaq or any
similar United States system of automated dissemination of transaction reporting
of securities prices; or
(iii) the acquisition by a person or entity or group of persons or entities
acting in concert as a partnership, limited partnership, syndicate or group, as
a result of a tender or exchange offer, open market purchases, privately
negotiated purchases or otherwise, of beneficial ownership of securities of the
Company representing 50% or more of the combined voting power of the outstanding
voting securities of the Company ordinarily (and apart from rights accruing in
special circumstances) having the right to vote in the election of directors.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Exchange Act of 1934, as amended.
"Subsidiary" means any corporation or other entity of which a majority of
the capital stock or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by the Company.
"Target Revenues" has the meaning provided in the Notes.
"Trading Day" means a day on which either the national securities exchange
or the Nasdaq National Market which then constitutes the principal securities
market for the Common Stock (or other securities deliverable hereunder) is open
for general trading of securities.
"Warrant" means this Warrant and any Warrant or Warrants which may be
issued pursuant
-4-
<PAGE>
to Section 4 or 5 hereof in substitution or exchange for or upon transfer of
this Warrant, any Warrant which may be issued pursuant to Section 2 hereof upon
partial exercise of this Warrant and any Warrant which may be issued pursuant to
Section 6 hereof upon the loss, theft, destruction or mutilation of this
Warrant.
"Warrant Register" means the register maintained at the principal office of
the Company, or at the office of its agent, in which the name of the Holder of
this Warrant shall be registered.
"Warrant Shares" means the shares of Common Stock, as adjusted from time to
time in accordance with Section 8 hereof, deliverable upon exercise of this
Warrant.
Section 2. Exercise of Warrant. This Warrant may be exercised, in whole
-------------------
or in part, at any time or from time to time during the Exercise Period, by
presentation and surrender hereof to the Company at its principal office at the
address set forth on the signature page hereof (or at such other address of the
Company or any agent appointed by the Company to act hereunder as the Company or
such agent may hereafter designate in writing to the Holder), with the purchase
form attached hereto as ANNEX I (the "Purchase Form") duly executed and
accompanied by cash or a certified or official bank check drawn to the order of
"CEPHALON, INC." (or its successor in interest, if any) in the amount of the
Exercise Price, multiplied by the number of Warrant Shares specified in such
Purchase Form. If this Warrant should be exercised in part only, the Company or
its agent shall, upon surrender of this Warrant, execute and deliver a Warrant
evidencing the right of the Holder thereof to purchase the balance of the
Warrant Shares purchasable hereunder. Upon receipt by the Company during the
Exercise Period of this Warrant and such Purchase Form in proper form for
exercise, together with proper payment of the Exercise Price at its principal
office, or by its agent at its office, the Holder shall be deemed to be the
holder of record of the number of Warrant Shares specified in such Purchase
Form; provided, however, that if the date of such receipt by the Company or its
-------- -------
agent is a date on which the stock transfer books of the Company are closed,
such person shall be deemed to have become the record holder of such Warrant
Shares on the next business day on which the stock transfer books of the Company
are open. The Company shall pay any and all documentary, stamp or similar issue
or transfer taxes payable in respect of the issue or delivery of such Warrant
Shares. Any Warrant issued upon partial exercise of this Warrant pursuant to
this Section 2 shall be dated the date of this Warrant.
Section 3. Reservation of Shares. The Company agrees that at all times it
---------------------
will keep reserved solely for issuance and delivery pursuant to this Warrant the
number of shares of its Common Stock (or other securities) that are or would be
issuable from time to time upon exercise of this Warrant. All such shares shall
be duly authorized and, when issued upon such exercise, shall be validly issued,
fully paid and nonassessable, free and clear of all liens, security interests,
charges and other encumbrances or restrictions on sale and free of all
preemptive rights. Before taking any action that would cause an adjustment
pursuant to Section 8 hereof reducing the Exercise Price below the then par
value (if any) of the Warrant Shares issuable upon exercise of this Warrant, the
Company will take any corporate action that may, in the opinion of its counsel,
be necessary in order that the Company may validly and legally issue fully paid
and nonassessable Warrant Shares at the Exercise Price as so adjusted.
-5-
<PAGE>
Section 4. Transfer in Compliance with Applicable Securities Laws.
------------------------------------------------------
(a) Neither this Warrant nor any of the Warrant Shares, nor any
interest in either, may be sold, assigned, pledged, hypothecated, encumbered or
in any other manner transferred or disposed of, in whole or in part, except in
accordance with Section 5 hereof and in compliance with applicable United States
federal and state securities laws and the terms and conditions hereof. Except
as provided in subsection (b) of this Section 4, each Warrant shall bear the
following legend:
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED OR
REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. NEITHER THIS WARRANT
NOR SUCH SECURITIES MAY BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE
SECURITIES ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND
THE APPLICABLE RULES AND REGULATIONS THEREUNDER.
(b) If (i) the Warrant Shares have been registered under the
Act and registered or qualified under applicable state securities or Blue Sky
laws or (ii) the Holder has received an opinion of counsel reasonably
satisfactory to the Company that the Warrant Shares may be freely transferred
without registration under the Act or registration or qualification under
applicable state securities or Blue Sky laws, the Holder may require the Company
to issue, in substitution for a Warrant with the foregoing legend, a Warrant
with the following legend:
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED OR REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. THIS
WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE
SECURITIES ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND
THE APPLICABLE RULES AND REGULATIONS THEREUNDER.
(c) The Holder may require the Company to issue a Warrant
without either of the foregoing legends in substitution for a Warrant bearing
one of such legends if either (i) this Warrant and the Warrant Shares issuable
upon the exercise hereof have been registered under the Act and registered or
qualified under applicable state securities laws or (ii) the Holder has received
an opinion of counsel reasonably satisfactory to the Company that this Warrant
and the Warrant Shares may be freely transferred without registration under the
Act or registration or qualification under applicable state securities laws. The
provisions of this Section 4 shall be binding on all subsequent holders of this
Warrant.
Section 5. Exchange, Transfer or Assignment of Warrant.
-------------------------------------------
-6-
<PAGE>
(a) This Warrant may be, at the option of the Holder, upon
presentation and surrender hereof to the Company at its principal office or to
the Company's agent at its office, (i) exchanged for other Warrants of different
denominations, registered in the name of the Holder, entitling the Holder to
purchase in the aggregate the same number of Warrant Shares at the Exercise
Price or, (ii) if delivered together with a written notice signed by the Holder
specifying the denominations in which new Warrants are to be issued, divided or
combined with other Warrants registered in the name of the Holder that carry the
same rights.
(b) If the Holder has received an opinion of counsel
satisfactory to the Company that this Warrant may be sold or transferred without
registration under the Act, as contemplated by Section 4 hereof, (x) this
Warrant may be transferred and assigned, subject to subparagraph (y) of this
Section 5(b), at the option of the Holder, upon surrender of this Warrant to the
Company at its principal office or to the Company's agent at its office, with
the warrant assignment form attached hereto as ANNEX II (the "Warrant Assignment
Form") duly executed and accompanied by funds sufficient to pay any transfer
tax, except that (y) no transfer or assignment of this Warrant may be made
unless (i) such transfer or assignment is a Permitted Transfer or (ii) the
Company consents in writing to such transfer or assignment, which consent may be
withheld in its absolute discretion. The Company shall execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees named in such
Warrant Assignment Form.
(c) Any transfer or exchange of this Warrant shall be without
charge to the Holder and any Warrant or Warrants issued pursuant to this Section
5 shall be dated the date hereof.
(d) The Holder shall not be entitled to transfer a portion of
this Warrant with respect to the purchase of a number of Warrant Shares that is
less than 10,000 without the prior written consent of the Company.
(e) In order to give effect to Section 9, if this Warrant shall
be exercised in part, then (1) any Warrant issued to the Holder to evidence the
unexercised portion of this Warrant shall bear a notation of the original number
of Warrant Shares subject to this Warrant and (2) in connection with any split-
up of this Warrant into two or more instruments, each such instrument shall bear
a notation of a portion of the original number of Warrant Shares subject to this
Warrant, determined by pro rata allocation thereto of the aggregate original
such amount based on the portion of the unexercised amount of this Warrant
(determined immediately prior to such split-up) evidenced by such instrument.
Section 6. Lost, Mutilated or Missing Warrant. Upon receipt by the
----------------------------------
Company or its agent of evidence satisfactory to it of the loss, theft or
destruction of this Warrant, and of satisfactory indemnification, and upon
surrender and cancellation of this Warrant if mutilated, the Company or its
agent shall execute and deliver a Warrant of like tenor and date in exchange for
this Warrant.
Section 7. Rights of the Holder. The Holder shall not, by virtue hereof,
--------------------
be entitled to any rights of a shareholder in the Company, either at law or in
equity, and the rights of the Holder
-7-
<PAGE>
are limited to those expressed in this Warrant.
Section 8. Anti-dilution. (a) If the Company shall fix or have fixed a
-------------
record date at any time after the date hereof and before the expiration of the
Exercise Period for:
(i) The declaration of a dividend or distribution on the
Common Stock (or other securities deliverable hereunder) payable in shares
of capital stock (whether shares of Common Stock or of capital stock of any
other class), (A) the subdivision of shares of the Common Stock into a
greater number of shares, (B) the combination of the Common Stock into a
smaller number of shares or (C) the issuance of any shares of its capital
stock by reclassification of the Common Stock in connection with a
consolidation or merger with a subsidiary of the Company in which the
Company is the continuing corporation, then, in any such event, upon
exercise of this Warrant the Holder shall be entitled to receive the
aggregate number and kind of shares which, if the Warrant had been
exercised immediately prior to such record date, the Holder would have been
entitled to receive by virtue of such dividend, distribution, subdivision,
combination or reclassification, and the Exercise Price shall be
appropriately adjusted. Such adjustment shall be made successively whenever
any event listed above shall occur.
(ii) Issuance at Less than Current Market Price. The issuance
------------------------------------------
of rights, options or warrants to all holders of Common Stock (or other
securities deliverable hereunder) entitling them to subscribe for or
purchase Common Stock (or other securities deliverable hereunder) at a
price per share or having a conversion or exercise price per share
(including the amount paid, if any, for such rights, options or warrants)
less than the Closing Price on such record date (excluding rights or
warrants that are not immediately exercisable and for which provision is
made for the Holder to receive comparable rights or warrants upon
exercise), then the number of Warrant Shares to be received hereunder after
such record date shall be determined by multiplying the number of shares
receivable hereunder immediately prior to such record date by a fraction,
the denominator of which shall be the number of shares of Common Stock (or
other securities deliverable hereunder) outstanding on such record date
plus the number of shares of Common Stock (or other securities deliverable
hereunder) that the aggregate offering price of the total number of shares
so offered for subscription or purchase would purchase at such Closing
Price, and the numerator of which shall be the number of shares of Common
Stock (or other securities deliverable hereunder) outstanding on such
record date plus the number of additional shares of Common Stock (or other
securities deliverable hereunder) offered for subscription or purchase, and
the Exercise Price shall be appropriately adjusted so that the aggregate
purchase price of the Warrant Shares to be received hereunder after such
record date is equal to the aggregate purchase price of the Warrant Shares
receivable hereunder immediately prior to such record date. Shares of
Common Stock owned by or held for the account of the Company or any
subsidiary of the Company on such record date shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall
become effective immediately after such record date. Such adjustment shall
be made successively whenever any such event shall occur. If such rights,
options or warrants are not so issued, the number of Warrant Shares
receivable hereunder shall again be adjusted to be the number that would
have been in effect had such record date not been fixed. On
-8-
<PAGE>
the expiration of such rights, options or warrants the number of Warrant
Shares receivable hereunder shall be readjusted to be the number that would
have obtained had the adjustment made upon the issuance of such rights,
options or warrants been made upon the basis of the issuance of only the
number of shares of Common Stock (or other securities deliverable
hereunder) actually issued upon the exercise of such rights, options or
warrants, provided, however, that if the Holder of this Warrant shall have
-------- -------
exercised this Warrant prior to any such readjustment, the number of
Warrant Shares that have been delivered or the number of Warrant Shares to
be delivered shall not be subject to any readjustment. In any case in which
this subsection (ii) shall require that an adjustment in the number of
shares receivable hereunder or the Exercise Price be made effective as of a
record date for a specified event, the Company may elect to defer until the
occurrence of such event issuing to the Holder of any Warrant exercised
after such record date the number of Warrant Shares, if any, issuable upon
such exercise over and above the number of Warrant Shares, if any, issuable
upon such exercise on the basis of the Exercise Price in effect prior to
such adjustment; provided, however, that the Company shall deliver to such
-------- -------
Holder a due bill or other appropriate instrument evidencing such Holder's
right to receive such additional Warrant Shares upon the occurrence of the
event requiring such adjustments.
(iii) Distribution of Subscription Rights, Warrants,
----------------------------------------------
Evidences of Indebtedness or Assets. The making of a distribution to all
-----------------------------------
holders of Common Stock (or other securities deliverable hereunder)
(including any such distribution to be made in connection with a
consolidation or merger in which the Company is to be the continuing
corporation) of (A) any shares of capital stock of the Company (other than
Common Stock), (B) subscription rights or warrants (excluding those for
which adjustment is provided in subsection 8(a)(ii) above and excluding
those that are not immediately exercisable and for which provision is made
for the Holder to receive comparable subscription rights or warrants upon
exercise) or (C) evidences of its indebtedness or assets (excluding (x)
dividends paid in or distributions of the Company's capital stock for which
the number of Warrant Shares receivable hereunder shall have been adjusted
pursuant to paragraph 8(a)(i) and (y) cash dividends or distributions
payable out of earnings or surplus not in excess of 10% of the average
Closing Price for the thirty trading days prior to the fifth day before the
date of declaration multiplied by the number of outstanding shares of
Common Stock) (any of the foregoing being hereinafter in this paragraph
(iii) called the "Securities"), then in each such case (unless the Company
elects to reserve shares or other units of such Securities for distribution
to each Holder upon exercise of this Warrant so that, in addition to the
shares of Common Stock (or other securities deliverable hereunder) to which
each Holder is entitled, each Holder will receive upon such exercise the
amount and kind of such Securities which such Holder would have received if
the Holder had, immediately prior to the record date for the distribution
of the Securities, exercised the Warrant) the number of Warrant Shares
receivable hereunder after such record date shall be determined by
multiplying the number of Warrant Shares receivable hereunder immediately
prior to such record date by a fraction, the denominator of which shall be
the Closing Price on the Trading Day immediately prior to the first Trading
Day on which the Common Stock (or other securities deliverable hereunder)
trades without the right to receive such Securities, less the fair market
value (as determined in the reasonable judgment of the Board of
-9-
<PAGE>
Directors of the Company and described in a statement mailed to the Holder)
of the portion of the assets or evidences of indebtedness so to be
distributed to a holder of one share of the Common Stock or of such
subscription rights or warrants applicable to one share of the Common
Stock, and the numerator of which shall be the Closing Price of the Common
Stock on such Trading Day; and the Exercise Price shall be appropriately
adjusted so that the aggregate purchase price of the Warrant Shares to be
received hereunder after such record date is equal to the aggregate
purchase price of the Warrant Shares receivable hereunder immediately prior
to such record date. Such adjustment shall become effective immediately
after such record date and shall be made successively whenever such a
record date is fixed. If such distribution is not so made, the number of
Warrant Shares receivable hereunder shall be readjusted to be the number
that was in effect immediately prior to such record date. In the event that
the Holder exercises this Warrant after an adjustment is made under this
paragraph (iii) and prior to a readjustment under this paragraph (iii), the
number of Warrant Shares that have been delivered or the number of Warrant
Shares to be delivered shall not be subject to any readjustment. In any
case in which this paragraph (iii) shall require that an adjustment in the
number of Warrant Shares receivable hereunder or the Exercise Price be made
effective as of a record date for a specified event, the Company may elect
to defer until the occurrence of such event issuing to the Holder of any
Warrant exercised after such record date the number of Warrant Shares, if
any, issuable upon such exercise over and above the number of Warrant
Shares, if any, issuable upon such exercise on the basis of the Exercise
Price in effect prior to such adjustment; provided, however, that the
-------- -------
Company shall deliver to such Holder a due bill or other appropriate
instrument evidencing such Holder's right to receive such additional
Warrant Shares upon the occurrence of the event requiring such adjustments.
(b) Reorganization Event.
--------------------
(i) In case of any Reorganization Event the Company shall,
as a condition precedent to the consummation of the transaction constituting, or
announced as, such Reorganization Event, cause effective provisions to be made
so that the Holder shall have the right immediately thereafter, by exercising
this Warrant, to receive the aggregate amount and kind of shares of stock and
other securities and property that were receivable upon such Reorganization
Event by a holder of the number of shares of Common Stock that would have been
received immediately prior to such Reorganization Event upon exercise of this
Warrant. Any such provision shall include provision for adjustments in respect
of such shares of stock and other securities and property that shall be as
nearly equivalent as may be practicable to the adjustments provided for in
Section 8(a). The foregoing provisions of this Section 8(b) shall similarly
apply to successive Reorganization Events.
(ii) If a Reorganization Event occurs or the Company agrees
to effect a Reorganization Event, then the Exercise Period shall commence on the
applicable Acceleration Date. The Company shall, at least twenty (20) days
before the Acceleration Date relating to any Reorganization Event (or if such
Reorganization Event was beyond the control of the Company, and the Company did
not have knowledge twenty (20) days before such Acceleration Date, as soon as
practicable thereafter), cause to be mailed to the Holder a notice describing in
reasonable detail such Reorganization Event and informing the Holder of the date
that
-10-
<PAGE>
the Exercise Period will (or did) commence and that the Holder may exercise this
Warrant at any time during the Exercise Period.
(c) Fractional Shares. No fractional shares of Common Stock (or
-----------------
other securities deliverable hereunder) or scrip shall be issued to any Holder
in connection with the exercise of this Warrant. Instead of any fractional share
of Common Stock (or other securities deliverable hereunder) that would otherwise
be issuable to such Holder, the Company shall pay to such Holder a cash
adjustment in respect of such fractional interest in an amount equal to such
fractional interest multiplied by the Closing Price per share of Common Stock
(or other securities deliverable hereunder) on the date of such exercise.
(d) Carryover. Notwithstanding any other provision of this
---------
Section 8, no adjustment shall be made to the number of shares of Common Stock
(or other securities deliverable hereunder) to be delivered to each Holder (or
to the Exercise Price) if such adjustment would represent less than one percent
of the number of shares to be so delivered, but any such adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which, together with any adjustments so carried forward,
shall amount to one percent or more of the number of shares to be so delivered.
(e) Notices of Certain Events. If at any time after the date
-------------------------
hereof and before the expiration of the Exercise Period:
(i) the Company authorizes the issuance to all holders of
its Common Stock of (A) rights or warrants to subscribe for or purchase shares
of its Common Stock or (B) any other subscription rights or warrants;
(ii) the Company authorizes the distribution to all holders
of its Common Stock of evidences of its indebtedness or assets (other than cash
dividends or distributions excluded from the operation of paragraph 8(a)(iii));
(iii) there shall be any capital reorganization of the
Company or reclassification of the Common Stock (other than a change in par
value of the Common Stock or an increase in the authorized capital stock of the
Company not involving the issuance of any shares thereof) or any consolidation
or merger to which the Company is a party (other than a consolidation or merger
with a subsidiary in which the Company is the continuing corporation and that
does not result in any reclassification or change in the Common Stock
outstanding) or a conveyance or transfer of all or substantially all of the
properties and assets of the Company:
(iv) there shall be any voluntary or involuntary
dissolution, liquidation or winding-up of the Company; or
(v) there shall be any other event that would result in an
adjustment pursuant to this Section 8 in the Exercise Price or the number of
Warrant Shares that may be purchased upon the exercise hereof;
-11-
<PAGE>
the Company will cause to be mailed to the Holder, at least twenty (20) days (or
ten (10) days in any case specified in the clauses (i) or (ii) above) before the
applicable record or effective date hereinafter specified, or as soon as
practicable after the occurrence of an event specified in clause (v) if such
event was beyond the control of the Company and the Company did not have
knowledge of such event at least ten (10) days before such date, a notice
stating (A) the date as of which the holders of Common Stock of record entitled
to receive any such rights, warrants or distributions is to be determined, or
(B) the date on which any such reorganization, reclassification, consolidation,
merger, conveyance, transfer, dissolution, liquidation or winding-up is expected
to become effective, and the date as of which it is expected that holders of
Common Stock of record will be entitled to exchange their shares of Common Stock
for securities or other property, if any, deliverable upon such reorganization,
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding-up.
(f) Failure to Give Notice. The failure to give the notice
----------------------
required by Section 8(e) hereof or any defect therein shall not affect the
legality or validity of any distribution right, warrant, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding-up or the vote upon
any such action.
Section 9. Redemption of Warrant. (a) On the date which is 45 days after
---------------------
the third anniversary of the Issuance Date, the Company shall have the right,
but not the obligation, on not less than forty-five (45) and not more than sixty
(60) days prior notice, to redeem the Applicable Portion, if any, of this
Warrant, at a redemption price of $0.01 per share of Common Stock (or unit of
other securities deliverable hereunder) issuable upon exercise of the portion of
this Warrant so redeemed (the "Redemption Price"). If this Warrant is called
for redemption, the Company shall simultaneously call for redemption a portion
of the Other Warrants in accordance with their terms that are similar to this
Section 9.
(b) If the Company wishes to exercise its right so to redeem
the Applicable Portion of this Warrant, the Company shall give a notice of
redemption to the Holder not later than the 45th day prior to the date fixed for
redemption (the "Redemption Date").
(c) The notice of redemption shall specify (i) the portion of
this Warrant to be redeemed, (ii) the aggregate Redemption Price for the
Applicable Portion of this Warrant to be redeemed, (iii) the date fixed for
redemption, (iv) the place where this Warrant shall be delivered and the
Redemption Price paid, and (v) that the right to exercise the Applicable Portion
of this Warrant that is being redeemed shall terminate at 5:00 p.m., New York
City time, on the Trading Day immediately preceding the Redemption Date unless
otherwise agreed by the Company.
(d) If the Company shall have exercised its right to redeem
the Applicable Portion of this Warrant, any right to exercise such Applicable
Portion of this Warrant shall terminate at 5:00 p.m., New York City time, on the
Trading Day immediately preceding the Redemption Date unless otherwise agreed by
the Company. On and after the Redemption Date, unless otherwise agreed by the
Company, the Holder shall have no further rights with respect to the Applicable
Portion being redeemed except to receive, upon surrender of this Warrant, the
Redemption Price.
-12-
<PAGE>
(e) From and after the Redemption Date, the Company shall,
at the place specified in the notice of redemption, upon presentation and
surrender to the Company by or on behalf of the Holder, deliver or cause to be
delivered to or upon the written order of the Holder a sum in cash equal to the
aggregate Redemption Price of the Applicable Portion of this Warrant being so
redeemed. From and after the Redemption Date and upon the deposit or setting
aside by the Company of a sum sufficient to redeem the Applicable Portion of
this Warrant, the Applicable Portion of this Warrant shall expire and become
void and all rights hereunder, except the right to receive payment of the
Redemption Price, shall cease.
Section 10. Officers' Certificate. Whenever the number of Warrant
---------------------
Shares that may be purchased on exercise of this Warrant or the Exercise Price
is adjusted as required by the provisions of Section 8 hereof, the Company will
forthwith file in the custody of its Secretary or an Assistant Secretary at its
principal office and at the office of its agent an officers' certificate showing
the adjusted number of Warrant Shares that may be purchased at the Exercise
Price on exercise of this Warrant and the adjusted Exercise Price determined as
herein provided, setting forth in reasonable detail the facts requiring such
adjustment and the manner of computing such adjustment. Each such officers'
certificate shall be signed by the President, Chief Financial Officer or
Treasurer of the Company and by the Secretary or an Assistant Secretary of the
Company. Each such officers' certificate shall be made available at all
reasonable times for inspection by the Holder. The Company shall, forthwith
after each such adjustment, cause such certificate to be mailed to the Holder.
Section 11. Availability of Information. In addition to the
---------------------------
requirements of Section 5(h), the Company shall comply with all applicable
public information reporting requirements of the SEC and applicable state
securities laws to which it may from time to time be subject. The Company will
also cooperate with each Holder of any Warrants and each holder of any Warrant
Shares in supplying such information concerning the Company as may be necessary
for such Holder or holder to complete and file any information reporting forms
currently or hereafter required by the SEC as a condition to the availability of
an exemption from the Act for the sales of any Warrants or Warrant Shares.
Section 12. Warrant Register. The Company will register this Warrant in
----------------
the Warrant Register in the name of the record holder to whom it has been
distributed or assigned in accordance with the terms hereof. The Company may
deem and treat the registered Holder of this Warrant as the absolute owner
hereof (notwithstanding any notation of ownership or other writing hereon made
by anyone) for the purpose of any exercise hereof or any distribution to the
Holder and for all other purposes, and the Company shall not be affected by any
notice to the contrary.
Section 13. Successors. All of the provisions of this Warrant by or for
----------
the benefit of the Company or the Holder shall bind and inure to the benefit of
their respective successors and assigns.
Section 14. Headings. The headings of sections of this Warrant have
--------
been inserted for convenience of reference only, are not to be considered a part
hereof and shall in no way modify or restrict any of the terms or provisions
hereof.
-13-
<PAGE>
Section 15. Amendments. This Warrant may be amended by the affirmative
----------
vote of Holders holding Warrants to purchase not less than two-thirds of the
Warrant Shares purchasable pursuant to all of the then outstanding Warrants;
provided, that, except as expressly provided herein, this Warrant may not be
- --------
amended, without the consent of the Holder, to change (i) any price at which
this Warrant may be exercised, (ii) the period during which this Warrant may be
exercised, (iii) the number or type of securities to be issued upon the exercise
hereof or (iv) the provisions of this Section 15.
Section 16. Notices. Unless otherwise provided in this Warrant, any
-------
notice or other communication required or permitted to be made or given to any
party hereto pursuant to this Warrant shall be in writing and shall be deemed
made or given if delivered by hand, on the date of such delivery to such party,
or, if mailed, on the fifth day after the date of mailing, if sent to such party
by certified or registered mail, postage prepaid, addressed to it (in the case
of a Holder) at its address in the Warrant Register or (in the case of the
Company) at its address set forth below, or to such other address as is
designated by written notice, similarly given to each party hereto.
Section 17. Governing Law. This Warrant shall be deemed to be a
-------------
contract made under the laws of the State of New York and for all purposes shall
be construed in accordance with the laws of said State as applied to the
contracts made and to be performed in New York between New York residents.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-14-
<PAGE>
IN WITNESS WHEREOF, the Company has duly caused this Warrant to be
signed and attested by its duly authorized officer and to be dated as of
__________, 1999.
CEPHALON, INC.
By:
Name:
Title:
Address:
145 Brandywine Parkway
West Chester, Pennsylvania 19380
Attention: Senior Vice President and
Chief Financial Officer
-15-
<PAGE>
ANNEX I
TO WARRANT
PURCHASE FORM
-------------
TO CEPHALON, INC.:
The undersigned, ________________________, hereby irrevocably elects
to exercise the within Warrant to purchase ___________________________ shares of
Common Stock of Cephalon, Inc., a Delaware corporation, and hereby makes payment
of $_____________________ in payment of the exercise price thereof.
Dated: _________________
_____________________________
[SIGNED]
_____________________________
[STREET ADDRESS]
_____________________________
[CITY AND STATE]
I-16
<PAGE>
ANNEX II
TO WARRANT
WARRANT ASSIGNMENT FORM
-----------------------
TO CEPHALON, INC.:
FOR VALUE RECEIVED, the undersigned, ________________________________,
("Assignor"), hereby sells, assigns and transfers unto
Name: __________________________________________ ("Assignee")
(Please type or print in block letters.)
Address: ______________________________________
Social Security or Taxpayer I.D. No.: ___________________________
Assignor's right to purchase up to _________________ shares of Common Stock of
Cephalon, Inc., a Delaware corporation, represented by this Warrant and does
hereby irrevocably constitute and appoint the Company and any of its officers,
secretary or assistant secretaries, as its officers, secretary or assistant
secretaries, as attorneys-in-fact to transfer the same on the books of the
Company, with full power of substitution in the premises.
Date: __________________
Print Name:
II-17
<PAGE>
EXHIBIT 4.3(E)
ANNEX IV
TO
NOTE PURCHASE
AGREEMENT
SECURITY AGREEMENT
This SECURITY AGREEMENT, dated as of the 1st day of March, 1999, made
by Cephalon, Inc., a Delaware corporation ("Grantor"), to Delta Opportunity
Fund, Ltd., as collateral agent (in such capacity, the "Collateral Agent") on
behalf of the Holders.
W I T N E S S E T H:
-------------------
WHEREAS, Grantor and the Buyers are parties to certain Note Purchase
Agreements, dated as of February 24, 1999 (as from time to time amended or
supplemented, the "Note Purchase Agreements"), pursuant to which, among other
things, the Buyers have agreed to purchase $30,000,000 aggregate principal
amount of 11% Revenue Sharing Senior Secured Notes due 2002 (the "Notes");
WHEREAS, Grantor has agreed to grant to Collateral Agent a security
interest in certain of its property and assets relating to the Pharmaceutical
Compositions to secure the performance of the obligations of Grantor under the
Notes and the Note Purchase Agreements;
WHEREAS, it is a condition precedent to the several obligations of the
Buyers to purchase their respective Notes that the Grantor shall have executed
and delivered this Security Agreement to the Collateral Agent for the ratable
benefit of the Holders; and
WHEREAS, the Grantor is contemporaneously entering into a Patent and
Trademark Security Agreement with the Collateral Agent for the ratable benefit
of the Holders;
NOW, THEREFORE, in consideration of the premises and to induce the
Buyers to purchase their respective Notes, the Grantor hereby agrees with the
Collateral Agent, for the ratable benefit of the Holders, as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
-------------
used herein which are defined in the Notes are so used as so defined, and the
meanings assigned to terms defined herein or in the Notes shall be equally
applicable to both the singular and plural forms of such terms. In addition, the
terms set forth below have the following meanings:
"Accounts" means all rights to payment for goods sold or leased or for
services
-1-
<PAGE>
rendered, whether or not such rights have been earned by performance.
"Buyer" means any of the several buyers party to a Note Purchase
Agreement.
"Chattel Paper" shall have the meaning assigned to such term under the
Code.
"Code" means the Uniform Commercial Code as from time to time in
effect in the Commonwealth of Pennsylvania.
"Compound" shall mean modafinil and/or any other similar compound,
isomer or salt thereof.
"Contracts" shall have the meaning assigned to such term under the
Code.
"Documents" shall have the meaning assigned to such term under the
Code.
"Event of Default" means:
(1) the failure by the Grantor to perform in any material respect any
obligation of the Grantor under this Security Agreement as and when
required by this Security Agreement; or
(2) any representation or warranty made by the Grantor pursuant to
this Security Agreement shall have been untrue in any material respect when
made;
(3) the failure by the Grantor to perform in any material respect any
obligation of the Grantor under the Patent and Trademark Security Agreement
as and when required by the required by the Patent and Trademark Security
Agreement;
(4) any representation or warranty made by the Grantor pursuant to
the Patent and Trademark Security Agreement shall have been untrue in any
material respect when made; or
(5) any Event of Default, as that term is defined in any of the
Notes.
"General Intangibles" shall have the meaning assigned to such term
under the Code.
"Holder" means any Buyer or any holder from time to time of any Note.
"Inventory" shall have the meaning assigned to such term under the
Code, and in any event, including all inventory, merchandise, goods and
other personal property that
-2-
<PAGE>
are held by or on behalf of a Person for sale or lease or to be furnished
under a contract of service or which give rise to any Account, including
returned goods.
"Investment Property" shall have the meaning assigned to such term
under the Code.
"Lafon" shall mean Laboratoire L. Lafon.
"Lafon Agreements" shall mean collectively, the License Agreement, the
Supply Agreement and the Trademark Agreement.
"License Agreement" shall mean the License Agreement entered into by
Grantor and Lafon on January 20, 1993, as amended.
"Lien" shall mean any lien, mortgage, security interest, chattel
mortgage, pledge or other encumbrance (statutory or otherwise) of any kind
securing satisfaction or performance of an obligation, including any
agreement to give any of the foregoing, any conditional sales or other
title retention agreement, any lease in the nature thereof, and the filing
of or the agreement to give any financing statement under the Code of any
jurisdiction or similar evidence of any encumbrance, whether within or
outside the United States.
"New Drug Application Rights" shall mean all rights of Grantor
presently existing or hereafter arising with respect to all new drug
applications (as they may be amended) filed with the U.S. Food and Drug
Administration relating to the marketing, distribution, promotion and sale
of the Pharmaceutical Compositions in the Territory.
"Obligations" shall mean:
(1) the full and prompt payment when due of all obligations and
liabilities to the Holders, whether now existing or hereafter arising,
under the Notes, this Agreement or the other Transaction Documents and the
due performance and compliance with the terms of the Notes and the other
Transaction Documents;
(2) any and all sums advanced by the Collateral Agent or any Holder
in order to preserve the Collateral or to preserve the Collateral Agent's
security interest in the Collateral; and
(3) in the event of any proceeding for the collection or enforcement
of any obligations or liabilities of the Grantor referred to in the
immediately preceding clauses (1) through (2) in accordance with the terms
of the Notes and this Agreement, the reasonable expenses of re-taking,
holding, preparing for sale, selling or otherwise
-3-
<PAGE>
disposing of or realizing on the Collateral, or of any other exercise by
the Collateral Agent of its rights hereunder, together with reasonable
attorneys' fees and court costs.
"Orphan Drug Act Rights" shall mean all rights of Grantor presently
existing or hereafter arising under the Orphan Drug Act relating to the
marketing exclusivity of the Pharmaceutical Compositions in the Territory.
"Patent and Trademark Security Agreement" shall mean that certain
Patent and Trademark Security Agreement dated March 1, 1999 between the
Grantor and the Collateral Agent.
"Pharmaceutical Compositions" shall mean all pharmaceutical
compositions containing the Compound.
"Proceeds" shall have the meaning assigned to such term under the Code.
"Proprietary Information" means information generally unavailable to
the public that has been created, discovered, developed or otherwise become
known to Grantor or in which property rights have been assigned or
otherwise conveyed to Grantor, which information has economic value or
potential economic value to the marketing, sale and distribution of the
Pharmaceutical Compositions in the United States, its territories and
possessions. Proprietary Information shall include, but not be limited to,
trade secrets, processes, formulas, writings data, know-how, negative know-
how, improvements, discoveries, developments, designs, inventions,
techniques, technical data, customer and supplier lists, financial
information, business plans or projections and modifications or
enhancements to any of the above. Proprietary Information shall include all
information existing on the date hereof and all information developed or
acquired hereafter.
"Security Agreement" means this Security Agreement, as amended,
supplemented or otherwise modified from time to time.
"Supply Agreement" shall mean the Supply Agreement entered into
between Grantor and Lafon on January 20, 1993, as amended.
"Territory" shall mean the United States of America, its territories
and possessions.
"Trademark Agreement" shall mean the Trademark Agreement entered into
between Grantor and Genelco S.A. on January 20, 1993, as amended.
2. Grant of Security Interest. As collateral security for the prompt
--------------------------
and complete payment and performance when due of the Obligations, the Grantor
hereby grants to the
-4-
<PAGE>
Collateral Agent, for the ratable benefit of the Holders, a continuing first
priority security interest in all of the following property now owned or at any
time hereafter acquired by the Grantor or in which the Grantor now has or at any
time in the future may acquire right, title or interest (collectively, the
"Collateral"):
(i) the License Agreement, and the right to use and rely upon
the inventions and other intellectual property conveyed thereunder, to
the extent and only to the extent that the License Agreement
authorizes the use and sale of the Compound to make, have made, use
and sell the Pharmaceutical Compositions in the Territory;
(ii) the Supply Agreement to the extent and only to the extent
necessary to provide suitable quantities of the Compound to make, have
made, use or sell the Pharmaceutical Compositions in the Territory;
(iii) the rights of Grantor under the Trademark Agreement, in
and to the use of the trademark "Provigil" as a trademark for the
Pharmaceutical Compositions in the Territory; together with any good
will of the business associated with the use of such trademark in the
Territory;
(iv) all Proprietary Information possessed by Cephalon, whether
existing on the date hereof or developed or acquired hereafter, to the
extent and only to the extent necessary to practice the technology
subject to the security interest granted hereby;
(v) the Orphan Drug Act Rights;
(vi) the New Drug Application Rights;
(vii) Contracts, Documents and General Intangibles developed or
acquired by Cephalon, whether now existing or hereafter arising, to
the extent and only to the extent necessary to use or sell Compound
for the purpose of manufacturing, marketing, selling or distributing
the Pharmaceutical Compositions in the Territory;
(viii) all insurance policies to the extent and only to the
extent they relate to items (i) through (viii) above;
(ix) all books, ledgers, books of account, records, writings,
databases, information and other property relating to, used or useful
in connection with, evidencing, embodying, incorporating, or referring
to any of the foregoing; and
-5-
<PAGE>
(x) to the extent not otherwise included, all Proceeds,
products, rents, issues, profits and returns of and from any and all
of the foregoing, which Proceeds may be in the form of Accounts,
Chattel Paper, Inventory or otherwise.
3. Rights of Collateral Agent; Limitations on Collateral Agent's
-------------------------------------------------------------
Obligations.
- -----------
(a) Grantor Remains Liable under Accounts and Contracts.
---------------------------------------------------
Anything herein to the contrary notwithstanding, the Grantor shall remain liable
under each of the Accounts and Contracts that constitute part of the Collateral
to observe and perform all the conditions and obligations to be observed and
performed by it thereunder, all in accordance with the terms of any agreement
giving rise to each such Account and in accordance with and pursuant to the
terms and provisions of each such Contract. The Collateral Agent shall not have
any obligation or liability under any Account that constitutes part of the
Collateral (or any agreement giving rise thereto) or under any Contract that
constitutes part of the Collateral by reason of or arising out of this Security
Agreement or the receipt by the Collateral Agent of any payment relating to such
Account or Contract pursuant hereto, nor shall the Collateral Agent be obligated
in any manner to perform any of the obligations of the Grantor under or pursuant
to any such Account (or any agreement giving rise thereto) or under or pursuant
to any such Contract, to make any payment, to make any inquiry as to the nature
or the sufficiency of any payment received by it or as to the sufficiency of any
performance by any party under any such Account (or any agreement giving rise
thereto) or under any such Contract, to present or file any claim, to take any
action to enforce any performance or to collect the payment of any amounts which
may have been assigned to it or to which it may be entitled at any time or
times.
(b) Notice to Account Debtors and Contracting Parties. Upon the
-------------------------------------------------
request of the Collateral Agent at any time that an Event of Default has
occurred and is continuing, but in the case of Events of Default that are solely
ones covered by the final clause (2) of Section 4.01 of any Note, only after the
expiration of the 365-day period specified in such clause (2), the Grantor shall
notify account debtors on the Accounts that constitutes part of the Collateral
and parties to the Contracts that constitutes part of the Collateral that such
Accounts and such Contracts have been assigned to the Collateral Agent for the
ratable benefit of the Holders and that payments in respect thereof shall be
made directly to the Collateral Agent or as the Collateral Agent shall direct.
(c) Verification and Analysis of Accounts. If an Event of
-------------------------------------
Default has occurred and is continuing, but in the case of Events of Default
that are solely ones covered by the final clause (2) of Section 4.01 of any
Note, only after the expiration of the 365-day period specified in such clause
(2), the Collateral Agent shall have the right in its own name or in the name of
others to communicate with account debtors on the Accounts that constitute part
of the Collateral and parties to the Contracts that constitute part of the
Collateral to verify with them to its satisfaction the existence, amount and
terms of any such Accounts or Contracts and to make test verifications of such
Accounts in any manner and through any medium that it reasonably
-6-
<PAGE>
considers advisable, and the Grantor shall furnish all such assistance and
information as the Collateral Agent may require in connection therewith. At any
time and from time to time, upon the Collateral Agent's reasonable request and
at the expense of the Grantor, the Grantor shall cause independent public
accountants or others satisfactory to the Collateral Agent to furnish to the
Collateral Agent reports showing reconciliations, aging and test verifications
of, and trial balances for, such Accounts.
4. Representations and Warranties. The Grantor hereby represents and
------------------------------
warrants that:
(a) Title; No Other Liens. Except for the Lien granted to the
---------------------
Collateral Agent for the ratable benefit of the Holders pursuant to this
Security Agreement and the Lien granted to the Collateral Agent for the ratable
benefit of the Holders pursuant to the terms of the Patent and Trademark
Security Agreement, the Grantor owns each item of the Collateral free and clear
of any and all Liens or claims of others except as permitted by Section 3.9 of
the Notes. No security agreement, financing statement or other public notice
with respect to all or any part of the Collateral is on file or of record in any
public office, except such as may have been filed in favor of the Collateral
Agent, for the ratable benefit of the Holders, pursuant to this Security
Agreement.
(b) Perfected First Priority Liens. The Liens granted pursuant
------------------------------
to this Security Agreement will constitute upon the completion of all the
filings or notices listed in Schedule I hereto, perfected Liens on all
Collateral, which are prior to all other Liens on such Collateral and which are
enforceable as such against all creditors of the Grantor.
(c) Accounts. No amount payable to the Grantor under or in
--------
connection with any Account that constitutes part of the Collateral is evidenced
by any Instrument (other than checks in the ordinary course of business) or
Chattel Paper which has not been delivered to the Collateral Agent. The place
where the Grantor keeps its records concerning the Accounts that constitute part
of the Collateral is set forth on Schedule II hereto.
(d) Consents. No consent (other than consents that have been
--------
obtained) of any party (other than the Grantor) to any Contract that constitutes
part of the Collateral is required, or purports to be required, in connection
with the execution, delivery and performance of this Security Agreement.
(e) Inventory. The Inventory that constitute part of the
---------
Collateral are, as of the Closing Date, kept at the locations listed on Schedule
III hereto and have not been kept at any other location within the five-month
period ending on the Closing Date.
(f) Chief Executive Office. The Grantor's chief executive office
----------------------
and chief place of business is located at 145 Brandywine Parkway, West Chester,
Pennsylvania 19380.
-7-
<PAGE>
(g) Power and Authority. The Grantor has full power, authority
-------------------
and legal right to enter into this Security Agreement and to grant the
Collateral Agent the Lien on the Collateral pursuant to this Security Agreement.
(h) Binding Obligation. This Agreement has been duly executed
------------------
and delivered by the Grantor and constitutes a legal, valid and binding
obligation of the Grantor enforceable in accordance with its terms.
(i) Non-Contravention. The execution, delivery and performance
-----------------
of this Security Agreement will not violate any provision of any applicable law
or regulation or of any order, judgment, writ, award or decree of any court,
arbitrator or governmental authority, domestic or foreign, or of any securities
issued by the Grantor, or of any mortgage, indenture, lease, contract or other
agreement, instrument or undertaking to which the Grantor is a party or which
purports to be binding upon the Grantor or upon any of its assets and will not
result in the creation or imposition of any Lien on any of the assets of the
Grantor except as contemplated by this Security Agreement.
(j) Consents. No consent, filing, approval, registration,
--------
recording, registration or other action is required (x) for the grant by the
Grantor of the Lien on the Collateral pursuant to this Security Agreement or for
the execution, delivery or performance of this Security Agreement by the
Grantor, or (y) to perfect the Lien purported to be created by this Agreement,
in each case except as contemplated by Section 4(b) above, except with respect
to Sections 2(v) and (vi) above.
5. Covenants. The Grantor covenants and agrees with the Collateral
---------
Agent that from and after the date of this Security Agreement until the payment
or performance in full by the Grantor of all of its obligations under this
Security Agreement, the Guaranty and the Patent and Trademark Security
Agreement:
(a) Further Documentation; Pledge of Instruments and Chattel
--------------------------------------------------------
Paper. At any time and from time to time, upon the written request of the
- -----
Collateral Agent, and at the sole expense of the Grantor, the Grantor will
promptly and duly execute and deliver such further instruments and documents and
take such further action as the Collateral Agent may reasonably request for the
purpose of obtaining or preserving the full benefits of this Security Agreement
and of the rights and powers herein granted, including, without limitation, (i)
the filing of any financing or continuation statements under the Code in effect
in any such jurisdiction with respect to the Liens created hereby and (ii)
providing to the Grantor such documents or instruments as shall be necessary or
desirable for the transfer of New Drug Application Rights to the Collateral
Agent or its designee, subject, in the case of documents or instruments provided
under this clause (ii), to the limitations upon the use or exercise thereof
contained in Section 5(j) below. The Grantor also hereby authorizes the
Collateral Agent to file any such financing or continuation
-8-
<PAGE>
statement without the signature of the Grantor to the extent permitted by
applicable law. A carbon, photographic or other reproduction of this Security
Agreement shall be sufficient as a financing statement for filing in any
jurisdiction. If any amount payable under or in connection with any of the
Collateral shall be or become evidenced by any Instrument or Chattel Paper, such
Instrument or Chattel Paper shall be immediately delivered to the Collateral
Agent, duly endorsed in a manner satisfactory to the Collateral Agent, to be
held as Collateral pursuant to this Security Agreement.
(b) Indemnification. The Grantor agrees to pay, and to save the
---------------
Collateral Agent and each Holder harmless from, any and all liabilities, costs
and expenses (including, without limitation, legal fees and expenses) (i) with
respect to, or resulting from, any delay in paying, any and all excise, sales or
other taxes which may be payable or determined to be payable with respect to any
of the Collateral, (ii) with respect to, or resulting from, any delay by Grantor
in complying with any law or regulation applicable to any of the Collateral or
(iii) in connection with this Security Agreement or any action taken by the
Collateral Agent or any Holder in exercising its rights hereunder. In any suit,
proceeding or action brought by the Collateral Agent or any Holder under any
Account or Contract that constitutes part of the Collateral for any sum owing
thereunder, or to enforce any provisions of any such Account or Contract, the
Grantor will save, indemnify and keep the Collateral Agent and each Holder
harmless from and against all expense, loss or damage suffered by reason of any
defense, setoff, counterclaim, recoupment or reduction or liability whatsoever
of the account debtor or obligor thereunder, arising out of a breach by the
Grantor of any obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing to or in favor of such account
debtor or obligor or its successors from the Grantor.
(c) Maintenance of Records. The Grantor will keep and maintain
----------------------
at its own cost and expense satisfactory and complete records of the Collateral,
including, without limitation, a record of all payments received and all credits
granted with respect to the Accounts that constitute part of the Collateral. For
the further security of the Holders, the Grantor hereby grants to the Collateral
Agent, for the ratable benefit of the Holders, a security interest in all of the
Grantor's books and records pertaining to the Collateral, and the Grantor shall
turn over any such books and records for inspection at the office of the Grantor
to the Collateral Agent or to its representatives during normal business hours
at the request of the Collateral Agent.
(d) Limitation on Liens on Collateral. The Grantor (x) will not
---------------------------------
create, incur or permit to exist, will defend the Collateral against, and will
take such other action as is necessary to remove, any Lien or claim on or to the
Collateral, other than the Liens created hereby and as permitted by Section 3.9
of the Note, and (y) will defend the right, title and interest of the Collateral
Agent in and to any of the Collateral against the claims and demands of all
persons whomsoever.
(e) Limitations on Dispositions of Collateral. The Grantor will
-----------------------------------------
not sell,
-9-
<PAGE>
transfer, lease or otherwise dispose of any of the Collateral, or attempt, offer
or contract to do so except for sales of Inventory and the collection and use of
cash proceeds in the ordinary course of its business.
(f) Limitations on Performance of Contracts and Agreements
------------------------------------------------------
Giving Rise to Accounts. The Grantor will not (i) fail to exercise promptly and
- -----------------------
diligently each and every material right or fail to perform each material
obligation which it may have under each Contract that constitutes part of the
Collateral and each agreement giving rise to an Account that constitutes part of
the Collateral (other than any right of termination) except where the Grantor
determines in its reasonable business judgment that the failure to exercise such
right or perform such obligation is in the best interest of the Grantor and
consistent with the protection and preservation of the rights and interests of
the Collateral Agent in the Collateral or (ii) fail to deliver to the Collateral
Agent, upon request, a copy of each material demand, notice or document received
by it relating in any way to any Contract that constitutes part of the
Collateral or any agreement giving rise to an Account that constitutes part of
the Collateral. The Grantor will not amend or modify the terms of, or waive any
rights under, any Contracts, including the Lafon Agreements, in a manner having
a material adverse effect on the value of such Contracts to the manufacturing,
marketing, sale or distribution of the Pharmaceutical Compositions in the
Territory.
(g) Further Identification of Collateral. The Grantor will
------------------------------------
furnish to the Collateral Agent from time to time, upon the request of the
Collateral Agent, statements and schedules further identifying and describing
the Collateral and such other reports in connection with the Collateral as the
Collateral Agent may reasonably request, all in reasonable detail.
(h) Notices. The Grantor will advise the Collateral Agent
-------
promptly, in reasonable detail, at its address in accordance with Section 16,
(i) of any Lien (other than Liens permitted hereunder) on, or claim asserted
against, any of the Collateral and (ii) of the occurrence of any other event
which could reasonably be expected to have a material adverse effect on the
value of any material portion of the Collateral or on the Liens created
hereunder.
(i) Changes in Locations, Name, Etc. The Grantor will not (i)
-------------------------------
change the location of its chief executive office/chief place of business from
that specified in Section 4(f) or remove its books and records from the location
specified in Section 4(c) or (ii) change its name, identity or corporate
structure to such an extent that any financing statement filed by the Collateral
Agent in connection with this Security Agreement would become misleading, unless
it shall have given the Collateral Agent at least 30 days prior written notice
thereof and, prior to such action or event, shall have taken appropriate action
to preserve and protect the Collateral Agent's security interest under this
Security Agreement.
(j) Transfer of New Drug Application Rights. The Grantor has
---------------------------------------
provided to the Collateral Agent a letter, addressed to the U.S. Food and Drug
Administration (the "FDA"), in the form of Exhibit A hereto, executed by the
Grantor but undated, providing the
-10-
<PAGE>
FDA notice of the transfer of the new drug application of the Grantor with
respect to modafinil (the "NDA Transfer Letter"). During any period in which an
Event of Default is continuing, but in the case of Events of Default that are
solely ones covered by the final clause (2) of Section 4.01 of any Note, only
after the expiration of the 365-day period specified in such clause (2), the
Collateral Agent may complete the NDA Transfer Letter by indicating the name of
the transferee and dating the NDA Transfer Letter and may forward the NDA
Transfer Letter to the FDA.
(k) Subsidiaries. This Agreement is entered into on behalf of
------------
and for the benefit of the Grantor and its subsidiaries and other entities
controlled by the Grantor which have rights in the Collateral. The security
interest granted by the Grantor hereunder is intended to include all rights of
the Grantor in and to the Collateral, including any rights of its subsidiaries
and such other entities in and to such Collateral, and the Grantor will not
permit such subsidiaries and entities to exercise any of their rights with
respect to the Collateral.
6. Collateral Agent's Appointment as Attorney-in-Fact.
--------------------------------------------------
(a) Powers. The Grantor hereby irrevocably constitutes and
------
appoints the Collateral Agent and any officer or agent thereof, with full power
of substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of the Grantor and in the name of the
Grantor or in its own name, from time to time in the Collateral Agent's
discretion, during any period in which an Event of Default is continuing, but in
the case of Events of Default that are solely ones covered by the final clause
(2) of Section 4.01 of any Note, only after the expiration of the 365-day period
specified in such clause (2), for the purpose of carrying out the terms of this
Security Agreement, to take any and all appropriate action and to execute any
and all documents and instruments which may be necessary or desirable to
accomplish the purposes of this Security Agreement, and, without limiting the
generality of the foregoing, the Grantor hereby gives the Collateral Agent the
power and right, on behalf of the Grantor, without notice to or assent by the
Grantor, except any notice required by law, to do the following:
(i) to take possession of and endorse and collect any
checks, drafts, notes, acceptances or other instruments for the payment of
moneys due under or with respect to any Collateral and to file any claim or
to take any other action or proceeding in any court of law or equity or
otherwise deemed appropriate by the Collateral Agent for the purpose of
collecting any and all such moneys due under or with respect to any such
Collateral whenever payable, in each case in the name of the Grantor or its
own name, or otherwise;
(ii) to pay or discharge taxes and liens levied or placed on
or threatened against the Collateral and to pay all or any part of the
premiums therefor and the costs thereof; and
-11-
<PAGE>
(iii) (A) to direct any party liable for any payment under
any of the Collateral to make payment of any and all moneys due or to
become due thereunder directly to the Collateral Agent or as the Collateral
Agent shall direct; (B) to ask or demand for, collect, receive payment of
and receipt for, any and all moneys, claims and other amounts due or to
become due at any time in respect of or arising out of any Collateral; (C)
to sign and endorse any invoices, freight or express bills, bills of
lading, storage or warehouse receipts, drafts against debtors, assignments,
verifications, notices and other documents in connection with any of the
Collateral; (D) to commence and prosecute any suits, actions or proceedings
at law or in equity in any court of competent jurisdiction to collect the
Collateral or any thereof and to enforce any other right in respect of any
Collateral; (E) to defend any suit, action or proceeding brought against
the Grantor with respect to any Collateral; (F) to settle, compromise or
adjust any suit, action or proceeding described in clause (E) above and, in
connection therewith, to give such discharges or releases as the Collateral
Agent may deem appropriate; and (G) generally, to sell, transfer, pledge
and make any agreement with respect to or otherwise deal with any of the
Collateral as fully and completely as though the Collateral Agent were the
absolute owner thereof for all purposes, and to do, at the Collateral
Agent's option and the Grantor's expense, at any time, or from time to
time, all acts and things which the Collateral Agent deems necessary to
protect, preserve or realize upon the Collateral and the Collateral Agent's
Liens thereon and to effect the intent of this Security Agreement, all as
fully and effectively as the Grantor might do.
The Grantor hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable until the Grantor shall have paid and
performed in full all of its obligations under this Security Agreement, the
Notes and the Patent and Trademark Security Agreement.
(b) Other Powers. The Grantor also authorizes the Collateral
------------
Agent, from time to time during any period in which an Event of Default is
continuing, but in the case of Events of Default that are solely ones covered by
the final clause (2) of Section 4.01 of any Note, only after the expiration of
the 365-day period specified in such clause (2), to execute, in connection with
the sale provided for herein, any endorsements, assignments or other instruments
of conveyance or transfer with respect to the Collateral.
(c) No Duty on Collateral Agent's Part. The powers conferred on
----------------------------------
the Collateral Agent hereunder are solely to protect the Collateral Agent's
interests in the Collateral and shall not impose any duty upon the Collateral
Agent to exercise any such powers. The Collateral Agent shall be accountable
only for amounts that it actually receives as a result of the exercise of such
powers, and neither it nor any of its officers, directors, employees or agents
shall be responsible to the Grantor for any act or failure to act hereunder,
except for their own gross negligence or willful misconduct.
-12-
<PAGE>
7. Performance by Collateral Agent of Grantor's Obligations. If the
--------------------------------------------------------
Grantor fails to perform or comply with any of its agreements contained herein
and the Collateral Agent, as provided for by the terms of this Security
Agreement and following reasonable notice to the Grantor, shall itself perform
or comply, or otherwise cause performance or compliance, with such agreement,
the expenses of the Collateral Agent incurred in connection with such
performance or compliance shall be payable by the Grantor to the Collateral
Agent on demand and shall constitute Obligations secured hereby.
8. Remedies. If an Event of Default has occurred and is continuing,
--------
but in the case of Events of Default that are solely ones covered by the final
clause (2) of Section 4.01 of any Note, only after the expiration of the 365-day
period specified in such clause (2), the Collateral Agent may exercise, in
addition to all other rights and remedies granted to it in this Security
Agreement and in any other instrument or agreement securing, evidencing or
relating to the Obligations, all rights and remedies of a secured party under
the Code. Without limiting the generality of the foregoing, if an Event of
Default has occurred and is continuing, but in the case of Events of Default
that are solely ones covered by the final clause (2) of Section 4.01 of any
Note, only after the expiration of the 365-day period specified in such clause
(2), the Collateral Agent, without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below or expressly provided for) to or upon the
Grantor or any other Person (all and each of which demands, defenses,
advertisements and notices are, to the extent permitted by applicable law,
hereby waived), may in such circumstances forthwith collect, receive,
appropriate and realize upon the Collateral, or any part thereof, and/or may
forthwith sell, license, assign, give option or options to purchase, or
otherwise dispose of and deliver the Collateral or any part thereof (or contract
to do any of the foregoing), at public or private sale or sales, at any
exchange, broker's board or office of the Collateral Agent or elsewhere upon
such terms and conditions as it may deem advisable and at such prices as it may
deem best, for cash or on credit or for future delivery without assumption of
any credit risk. The Collateral Agent shall have the right upon any such public
sale or sales, and, to the extent permitted by law, upon any such private sale
or sales, to purchase the whole or any part of the Collateral so sold, free of
any right or equity of redemption in the Grantor, which right or equity is
hereby waived, to the extent permitted by applicable law, or released.
The Grantor further agrees that, if an Event of Default has occurred and is
continuing, but in the case of Events of Default that are solely ones covered by
the final clause (2) of Section 4.01 of any Note, only after the expiration of
the 365-day period specified in such clause (2), at the Collateral Agent's
request Collateral, to assemble the Collateral and make it available to the
Collateral Agent at places which the Collateral Agent shall reasonably select,
whether at the Grantor's premises or elsewhere. The Collateral Agent shall apply
the net proceeds of any such collection, recovery, receipt, appropriation,
realization or sale, after deducting all reasonable costs and expenses of every
kind incurred therein or incidental to the care or safekeeping of any of the
Collateral or in any way relating to the Collateral or the rights of the
Collateral Agent hereunder, including, without limitation, reasonable attorneys'
fees and disbursements, to the payment in
-13-
<PAGE>
whole or in part of the Obligations, in such order as the Collateral Agent may
elect, and only after such application and after the payment by the Collateral
Agent of any other amount required by any provision of law, need the Collateral
Agent account for the surplus, if any, to the Grantor. To the extent permitted
by applicable law, the Grantor waives all claims, damages and demands it may
acquire against the Collateral Agent arising out of the exercise by it of any
rights hereunder, provided, that nothing contained in this Section shall relieve
--------
the Collateral Agent from liability arising solely from its gross negligence or
willful misconduct. If any notice of a proposed sale or other disposition of
Collateral shall be required by law, such notice shall be deemed reasonable and
proper if given at least ten (10) days before such sale or other disposition.
The Grantor shall remain liable for any deficiency if the proceeds of any sale
or other disposition of the Collateral are insufficient to pay the Obligations
and the fees and disbursements of any attorneys employed by the Collateral Agent
to collect such deficiency.
9. Limitation on Duties Regarding Preservation of Collateral. The
---------------------------------------------------------
Collateral Agent's sole duty with respect to the custody, safekeeping and
physical preservation of the Collateral in its possession, under Section 9-207
of the Code or otherwise, shall be to deal with it in the same manner as the
Collateral Agent deals with similar property for its own account. Neither the
Collateral Agent nor any of its directors, officers, employees or agents shall
be liable for failure to demand, collect or realize upon all or any part of the
Collateral or for any delay in doing so or shall be under any obligation to sell
or otherwise dispose of any Collateral upon the request of the Grantor or
otherwise.
10. Powers Coupled with an Interest. All authorizations and agencies
-------------------------------
herein contained with respect to the Collateral are irrevocable and powers
coupled with an interest until Grantor has paid and performed in full all of its
obligations under this Security Agreement, the Guaranty and the Patent and
Trademark Security Agreement.
11. Severability. Any provision of this Security Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
12. Paragraph Headings. The paragraph headings used in this Security
------------------
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
13. No Waiver; Cumulative Remedies. The Collateral Agent shall not by
------------------------------
any act, delay, indulgence, omission or otherwise be deemed to have waived any
right or remedy hereunder or to have acquiesced in any Event of Default or in
any breach of any of the terms and conditions hereof. No failure to exercise,
nor any delay in exercising, on the part of the Collateral Agent, any right,
power or privilege hereunder shall operate as a waiver thereof. No
-14-
<PAGE>
single or partial exercise of any right, power or privilege hereunder shall
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by the Collateral Agent of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Collateral Agent would otherwise have on any future
occasion. The rights and remedies herein and in the Guaranty and the Notes
provided are cumulative, may be exercised singly or concurrently and are not
exclusive of any rights or remedies provided by law or in equity or by statute.
14. Waivers and Amendments; Successors and Assigns. None of
----------------------------------------------
the terms or provisions of this Security Agreement may be waived, amended,
supplemented or otherwise modified except by a written instrument executed by
the party to be charged with enforcement; provided, however, that any provision
-------- -------
of this Security Agreement may be waived, amended, supplemented or otherwise
modified by the Collateral Agent only with the prior written approval of the
Majority Holders. This Security Agreement shall be binding upon the successors
and permitted assigns of the Grantor and shall inure to the benefit of the
Collateral Agent and its successors and assigns. The Grantor may not assign its
rights or obligations under this Agreement without the prior written consent of
the Collateral Agent.
15. Termination of Security Interest; Release of Collateral.
-------------------------------------------------------
(a) Upon the payment and performance in full by the
Grantor of its obligations under the Notes, this Agreement and the Patent and
Trademark Security Agreement, the security interest granted in the Collateral
pursuant to this Agreement (the "Security Interest") shall terminate and all
rights to the Collateral shall revert to the Grantor. At any time and from time
to time prior to such termination of the Security Interest, the Collateral Agent
shall release any of the Collateral only with the prior written consent of the
Majority Holders.
(b) Upon any such termination of the Security Interest,
the Collateral Agent will, at the expense of the Grantor, execute and deliver to
the Grantor such documents and take such other actions as the Grantor shall
reasonably request to evidence the termination of the Security Interest and
deliver to the Grantor all Collateral so released then in its possession.
16. Notices. Any notices required or permitted to be given
-------
under the terms of this Agreement shall be in writing and shall be sent by mail,
personal delivery, telephone line facsimile transmission or courier and shall be
effective five days after being placed in the mail, if mailed, or upon receipt,
if delivered personally, by telephone line facsimile transmission or by courier,
in each case addressed to a party at such party's address (or telephone line
facsimile transmission number) shown below or such other address (or telephone
line facsimile transmission number) as a party shall have provided by notice to
the other party in accordance with this provision. In the case of any notice to
the Grantor, such notice shall be addressed to the Grantor at 145 Brandywine
Parkway, West Chester, Pennsylvania 19380, Attention: Chief Financial Officer
(telephone line facsimile transmission number (610) 344-7563), and a copy shall
also be
-15-
<PAGE>
given to: Morgan, Lewis & Bockius, LLP, 2000 One Logan Square, Philadelphia,
Pennsylvania 19103, Attention: David R. King, Esq. (telephone line facsimile
transmission number (215) 963-5299), and in the case of any notice to the
Collateral Agent, such notice shall be addressed to the Collateral Agent c/o
International Fund Administration, Inc., 48 Par la Ville Road, Suite 464,
Hamilton HM11, Bermuda, Attention: Mr. Keith Bish (telephone line facsimile
number (441) 295-9637), and a copy shall also be given to: Diaz & Altshcul
Advisors, LLC, 745 Fifth Avenue, Suite 1710, New York, New York 10151 (telephone
line facsimile number (212) 751-5757), and Law Offices of Brian W Pusch,
Penthouse Suite, 29 West 57th Street, New York, New York 10019 (telephone line
facsimile transmission number (212) 980-7055).
17. Concerning Collateral Agent. The Grantor acknowledges that
---------------------------
the rights and responsibilities of the Collateral Agent under this Security
Agreement with respect to any action taken by the Collateral Agent or the
exercise or nonexercise by the Collateral Agent of any option, right, request,
judgment or other right or remedy provided for herein or resulting or arising
out of this Security Agreement shall, as between the Collateral Agent and the
Holders, be governed by Schedule IV hereto and by such other agreements with
respect thereto as may exist from time to time among them, but, as between the
Collateral Agent and the Grantor, except as expressly provided in Sections 14
and 15, the Collateral Agent shall be conclusively presumed to be acting as
agent for the Holders with full and valid authority so to act or refrain from
acting, and the Grantor shall not be under any obligation to make any inquiry
respecting such authority. The Collateral Agent hereby waives for the benefit of
the Holders any claim, right or lien of the Collateral Agent against the
Collateral arising under applicable law or arising from any business or
transaction between the Collateral Agent and the Grantor other than pursuant to
this Security Agreement or any of the other Transaction Documents.
18. Integration. This Security Agreement represents the
-----------
agreement of the Grantor and the Collateral Agent with respect to the subject
matter hereof, and there are no promises, undertakings, representations or
warranties by the Collateral Agent relative to subject matter hereof not
expressly set forth or referred to herein.
19. Governing Law. This Security Agreement and the rights and
-------------
obligations of the Grantor under this Security Agreement shall be governed by,
and construed and interpreted in accordance with, the law of the State of New
York, except to the extent that under the New York Uniform Commercial Code the
laws of another jurisdiction govern matters of perfection and the effect of
perfection or non-perfection of any security interest granted hereunder.
-16-
<PAGE>
IN WITNESS WHEREOF, the Grantor has caused this Security
Agreement to be duly executed and delivered as of the date first above written.
CEPHALON, INC.
By:
Name:
Title:
ACKNOWLEDGED AND AGREED:
DELTA OPPORTUNITY FUND, LTD.
By:
Name:
Title:
-17-
<PAGE>
SCHEDULE I
Filings Required to Perfect Security Interest
---------------------------------------------
I-18
<PAGE>
SCHEDULE II
Location of Records Concerning Accounts
---------------------------------------
II-19
<PAGE>
SCHEDULE III
Inventory
---------
III-20
<PAGE>
SCHEDULE IV
The Collateral Agent
--------------------
1. Appointment. The Holders (all capitalized terms used in
this Schedule IV and not otherwise defined shall have the respective meanings
provided in the Security Agreement to which this Schedule IV is attached (the
"Security Agreement")), by their acceptance of the benefits of the Security
Agreement, hereby irrevocably designate Delta Opportunity Fund, Ltd., as
Collateral Agent to act as specified herein and in the Security Agreement. Each
Buyer hereby irrevocably authorizes, and each other Holder of any Note by the
acceptance of such Note shall be deemed irrevocably to authorize, the Collateral
Agent to take such action on its behalf under the provisions of the Security
Agreement and any other instruments and agreements referred to herein or therein
and to exercise such powers and to perform such duties hereunder and thereunder
as are specifically delegated to or required of the Collateral Agent by the
terms hereof and thereof and such other powers as are reasonably incidental
thereto. The Collateral Agent may perform any of its duties hereunder by or
through its agents or employees.
2. Nature of Duties. The Collateral Agent shall have no
duties or responsibilities except those expressly set forth in the Security
Agreement. Neither the Collateral Agent nor any of its officers, directors,
employees or agents shall be liable for any action taken or omitted by it as
such under the Security Agreement or hereunder or in connection herewith or
therewith, unless caused by its or their gross negligence or willful misconduct.
The duties of the Collateral Agent shall be mechanical and administrative in
nature; the Collateral Agent shall not have by reason of the Security Agreement
or any other Transaction Document a fiduciary relationship in respect of any
Holder; and nothing in the Security Agreement, expressed or implied, is intended
to or shall be so construed as to impose upon the Collateral Agent any
obligations in respect of the Security Agreement except as expressly set forth
herein.
The Collateral Agent shall not be liable for any act it may do
or omit to do while acting in good faith and in the exercise of its own best
judgment. Any act done or omitted by the Collateral Agent on the advice of its
own attorneys shall be deemed conclusively to have been done or omitted in good
faith. The Collateral Agent shall have the right at any time to consult with
counsel on any question arising under this Security Agreement. The Collateral
Agent shall incur no liability for any delay reasonably required to obtain the
advice of counsel.
3. Lack of Reliance on the Collateral Agent. Independently
and without reliance upon the Collateral Agent, each Holder, to the extent it
deems appropriate, has made and shall continue to make (i) its own independent
investigation of the financial condition and affairs of the Grantor and its
subsidiaries in connection with the making and the continuance of the
Obligations and the taking or not taking of any action in connection therewith,
and (ii) its own appraisal of the creditworthiness of the Grantor and its
subsidiaries, and the Collateral Agent shall have no duty or responsibility,
either initially or on a continuing basis, to provide any Holder with any credit
or other information with respect thereto, whether coming into its possession
before
IV-21
<PAGE>
any Obligation arises or the purchase of any Note, or at any time or times
thereafter. The Collateral Agent shall not be responsible to any Holder for any
recitals, statements, information, representations or warranties herein or in
any document, certificate or other writing delivered in connection herewith or
for the execution, effectiveness, genuineness, validity, enforceability,
perfection, collectibility, priority or sufficiency of the Security Agreement or
the financial condition of the Grantor or be required to make any inquiry
concerning either the performance or observance of any of the terms, provisions
or conditions of the Security Agreement, or the financial condition of the
Grantor, or the existence or possible existence of any Event of Default.
4. Certain Rights of the Collateral Agent. No Holder shall
have the right to cause the Collateral Agent to take any action with respect to
the Collateral, with only the Majority Holders having the right to direct the
Collateral Agent to take any such action. If the Collateral Agent shall request
instructions from the Majority Holders with respect to any act or action
(including failure to act) in connection with the Security Agreement, the
Collateral Agent shall be entitled to refrain from such act or taking such
action unless and until it shall have received instructions from the Majority
Holders, and to the extent requested, appropriate indemnification in respect of
actions to be taken by the Collateral Agent; and the Collateral Agent shall not
incur liability to any person by reason of so refraining. Without limiting the
foregoing, no Holder shall have any right of action whatsoever against the
Collateral Agent as a result of the Collateral Agent acting or refraining from
acting hereunder in accordance with the instructions of the Majority Holders or
as otherwise specifically provided in the Security Agreement.
5. Reliance. The Collateral Agent shall be entitled to rely,
and shall be fully protected in relying, upon any note, writing, resolution,
notice, statement, certificate, telex, teletype or telecopier message,
cablegram, radiogram, order or other document or telephone message signed, sent
or made by the proper person or entity, and, with respect to all legal matters
pertaining to the Security Agreement and its duties thereunder, upon advice of
counsel selected by it.
6. Indemnification. To the extent the Collateral Agent is not
reimbursed and indemnified by the Grantor and/or its subsidiaries, the Holders
will reimburse and indemnify the Collateral Agent, in proportion to their
respective principal amounts of Obligations, for and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by or asserted against the Collateral Agent in performing
its duties hereunder or under the Security Agreement, or in any way relating to
or arising out of the Security Agreement except for those determined by a final
judgment (not subject to further appeal) of a court of competent jurisdiction to
have resulted solely from the Collateral Agent's own negligence or willful
misconduct.
7. The Collateral Agent in its Individual Capacity. The
Collateral Agent and its affiliates may lend money to, purchase, sell and trade
in securities of and generally engage in
IV-22
<PAGE>
any kind of business with the Grantor or any affiliate or subsidiary of the
Grantor as if it were not performing the duties specified herein, and may accept
fees and other consideration from the Grantor for services to the Grantor in
connection with the Transaction Documents and otherwise without having to
account for the same to the Holders; provided, however, that the Collateral
Agent on behalf of itself and such affiliates, hereby waives any claim, right or
lien against the Collateral in any way arising from or relating to any such
loan, securities transaction or business with the Grantor.
8. Holders. The Collateral Agent may deem and treat the
holder of record of any Note as the owner thereof for all purposes hereof unless
and until a written notice of the assignment or transfer thereof, as the case
may be, shall have been filed with the Collateral Agent. Any request, authority
or consent of any person or entity who, at the time of making such request or
giving such authority or consent, is the holder of record of any Note shall be
conclusive and binding on any subsequent holder, transferee or assignee, as the
case may be, of such Note or of any Note(s) issued in exchange therefor.
9. Resignation by the Collateral Agent. (a) The Collateral
Agent may resign from the performance of all its functions and duties under the
Security Agreement at any time by giving 60 Business Days' prior written notice
(as provided in the Security Agreement) to the Grantor and the Holders. Such
resignation shall take effect upon the appointment of a successor Collateral
Agent pursuant to clauses (b) and (c) below.
(b) Upon any such notice of resignation, the Majority Holders
shall appoint a successor Collateral Agent hereunder.
(c) If a successor Collateral Agent shall not have been so
appointed within said 60 Business Day period, the Collateral Agent shall then
appoint a successor Collateral Agent who shall serve as Collateral Agent
hereunder or thereunder until such time, if any, as the Majority Holders appoint
a successor Collateral Agent as provided above. If a successor Collateral Agent
has not been appointed within such 60-day period, the Collateral Agent may
petition any court of competent jurisdiction or may interplead the Grantor and
Holders in a proceeding for the appointment of a successor Collateral Agent, and
all fees, including but not limited to extraordinary fees associated with the
filing of interpleader, and expenses associated therewith shall be payable by
the Grantor.
(d) The fees of any successor Collateral Agent for its
services as such shall be payable by the Grantor.
IV-23
<PAGE>
EXHIBIT A
(Cephalon Letterhead)
-------------------
(date)
----
Food and Drug Administration
1390 Piccard Drive
Rockville, MD 20850
Re: Transfer of Ownership
New Drug Application NDA NDA 20-717
-----------------------------------
To Whom It May Concern:
We are hereby informing you, in accordance with Section 505 of the Federal Food,
Drug and Cosmetic Act (the "Act"), that as of , _________, ___________(the
"Transferee"), is the new official owner and responsible party for the following
New Drug Application (NDA) which, prior to ______________was officially owned
and held by Cephalon, Inc.:
NDA NDA 20-717 (________________) and all supplements and pending
supplements thereto (see attached list).
---
In accordance with 21 C.F.R. 314.81, the Transferee has received from Cephalon,
Inc. a complete copy of the above-referenced NDA and all of its supplements,
pending supplements, amendments, and reports thereto.
Should any questions arise in connection with the above, please do not hesitate
to contact me.
Sincerely,
CEPHALON, INC.
IV-A-24
<PAGE>
By: ________________
Title: ________________
IV-A-25
<PAGE>
ATTACHMENT TO CEPHALON, INC.
OWNERSHIP TRANSFER OF NDA
As of March 1, 1999, there are currently no supplements or pending supplements
to NDA 20-717.
IV-A-26
<PAGE>
EXHIBIT 4.3(f)
ANNEX V
TO
NOTE PURCHASE
AGREEMENT
PATENT AND TRADEMARK SECURITY AGREEMENT
This PATENT AND TRADEMARK SECURITY AGREEMENT dated as of the 1st day of
March 1999, made by Cephalon Inc., a Delaware corporation, ("Grantor") to Delta
Opportunity Fund, Ltd., as collateral agent (in such capacity, the "Collateral
Agent") on behalf of the Holders.
WITNESSETH
WHEREAS, Grantor and the Buyers are parties to certain Note Purchase
Agreements, dated as of February 24, 1999 (as from time to time amended or
supplemented, the "Note Purchase Agreements"), pursuant to which, among other
things, the Buyers have agreed to purchase $30,000,000 aggregate principal
amount of 11% Revenue Sharing Senior Secured Notes due 2002 (the "Notes");
WHEREAS, it is a condition precedent to the several obligations of the
Buyers to purchase their respective Notes that the Grantor shall have executed
and delivered this Patent and Trademark Security Agreement to the Collateral
Agent for the ratable benefit of the Holders;
WHEREAS, Grantor has certain right, title and interest in certain U.S.
patents and patent applications and U.S. trademarks;
WHEREAS, Grantor wishes to grant to Collateral Agent a security
interest in all of its property and assets to secure the performance of its
obligations under the Notes;
WHEREAS, the Grantor is contemporaneously entering into a Security
Agreement with the Collateral Agent for the ratable benefit of the Holders;
NOW, THEREFORE, in consideration of the premises and to induce the
Buyers to purchase their respective Notes, the Grantor hereby agrees with the
Collateral Agent, for the ratable benefit of the Holders, as follows:
TERMS
1. Defined Terms. Unless otherwise defined herein, capitalized terms
-------------
used herein
-1-
<PAGE>
which are defined in the Notes are so used as so defined, and the meanings
assigned to terms defined herein or in the Notes shall be equally applicable to
both the singular and plural forms of such terms and shall have the following
meanings:
"Buyer" means any one of the several buyers party to a Note Purchase
-----
Agreement.
"Code" means the Uniform Commercial Code as from time to time in effect
----
in the Commonwealth of Pennsylvania.
"Collateral" shall have the meaning assigned to it in Section 2 of this
----------
Patent and Trademark Security Agreement.
"Event of Default" means:
----------------
(1) the failure by the Grantor to perform in any material respect any
obligation of the Grantor under this Patent and Trademark Security Agreement as
and when required by this Patent and Trademark Security Agreement; or
(2) any representation and warranty made by the Grantor pursuant to
this Patent and Trademark Security Agreement shall have been untrue in any
material respect when made;
(3) the failure by the Grantor to perform in any material respect any
obligation of the Grantor under the Security Agreement as and when required by
the Security Agreement;
(4) any representation and warranty made by the Grantor pursuant to the
Security Agreement shall have been untrue in any material respect when made; or
(5) any Event of Default, as that term is defined in any of the Notes.
"General Intangibles" shall have the meaning ascribed to it in the
-------------------
Uniform Commercial Code in effect in the Commonwealth of Pennsylvania on the
date hereof.
"Holder" means any Buyer or any holder from time to time of any Note.
------
"Lien" shall mean any lien, mortgage, security interest, chattel
----
mortgage, pledge or other encumbrance (statutory or otherwise) of any kind
securing satisfaction or performance of an obligation, including any agreement
to give any of the foregoing, any conditional sales or other title retention
agreement, any lease in the nature thereof, and the filing of or the agreement
to give any financing statement under the Code of any jurisdiction or similar
evidence of any encumbrance, whether within or outside the United States.
"Obligations" shall mean:
-----------
-2-
<PAGE>
(1) the full and prompt payment when due of all obligations
and liabilities to the Holders, whether now existing or hereafter arising, under
the Notes, this Agreement or the other Transaction Documents and the due
performance and compliance with the terms of the Notes and the other Transaction
Documents;
(2) any and all sums advanced by the Collateral Agent or any
Holder in order to preserve the Collateral or to preserve the Collateral Agent's
security interest in the Collateral; and
(3) in the event of any proceeding for the collection or
enforcement of any obligations or liabilities of the Grantor referred to in the
immediately preceding clauses (1) through (2) in accordance with the terms of
the Notes and this Agreement, the reasonable expenses of re-taking, holding,
preparing for sale, selling or otherwise disposing of or realizing on the
Collateral, or of any other exercise by the Collateral Agent of its rights
hereunder, together with reasonable attorneys' fees and court costs.
"Patent and Trademark Security Agreement" means this Patent and
---------------------------------------
Trademark Security Agreement, as amended, supplemented or otherwise modified
from time to time.
"Patent Licenses" means the license agreements, as amended, identified
---------------
in Exhibit A hereto as it may be amended, supplemented or otherwise modified
from time to time.
"Patent(s)" means all U.S. patents and patent applications, including
---------
any and all extensions, reissues, substitutes, continuations,
continuations-in-part, patents of addition, and renewals thereof, and patents
issuing therefrom, as necessary to use and sell modafinil to make, have made,
use or sell pharmaceutical compositions containing modafinil (the
"Pharmaceutical Compositions") in the United States, its territories and
possessions, and conveyed by a Patent License as such Patent License may be
amended, supplemented or otherwise modified from time to time. The term shall
also include U.S. Patent 5,618,845 entitled "Acetamide Derivative Having Defined
Particle Size," specifically identified in Exhibit B hereto, including any and
all extensions, reissues, substitutes, continuations, continuations in part,
patents of addition, and renewals thereof.
"Proceeds" shall have the meaning ascribed to it in the Uniform
--------
Commercial Code in effect in the Commonwealth of Pennsylvania on the date
hereof.
"Security Agreement" means that certain Security Agreement, dated as of
------------------
March 1, 1999, between the Grantor and the Collateral Agent.
"Trademark License" means the license agreement, as amended, identified
-----------------
in Exhibit C hereto as it may be amended, supplemented or otherwise modified
from time to time.
-3-
<PAGE>
"Trademarks" means (a) all U.S. trademarks, trade names, corporate
----------
names, company names, business names, fictitious business names, trade styles,
service marks, logos and other source or business identifiers of the Grantor
adopted for use in conjunction with the sale of Phamaceutical Compositions, now
existing in the United States or hereinafter adopted or acquired, whether
currently in use or not, and the goodwill associated therewith, all
registrations and recordings thereof, and all applications in connection
therewith, including, without limitation, that identified in Exhibit C hereto as
being conveyed under the Trademark License as it may be amended, supplemented or
otherwise modified from time to time, and (b) all renewals thereof.
2. Grant of Security Interest. As collateral security for the prompt
--------------------------
and complete payment and performance when due of the Obligations, the Grantor
hereby grants to the Collateral Agent, for the ratable benefit of the Holders, a
continuing first priority security interest in all of the following property now
owned or at any time hereafter acquired by the Grantor or in which the Grantor
now has or at any time in the future may acquire right, title or interest
(collectively, the "Collateral"):
All General Intangibles and Proceeds arising from all Patents, all
Patents Licenses, all Trademarks and all Trademark Licenses; all Patents; all
Patent Licenses; all Trademarks; all Trademark Licenses; to the extent not
otherwise included, all proceeds and products of any and all of the foregoing.
3. Representations and Warranties. The Grantor hereby represents and
------------------------------
warrants that:
(a) Title; No Other Liens. Except for the Lien granted to the
---------------------
Collateral Agent for the ratable benefit of the Holders pursuant to this Patent
and Trademark Security Agreement and the Lien granted to the Collateral Agent
for the ratable benefit of the Holders pursuant to the terms of the Security
Agreement, the Grantor owns each item of the Collateral free and clear of any
and all Liens or claims of others except as permitted by Section 3.9 of the
Notes. No security agreement, financing statement or other public notice with
respect to all or any part of the Collateral is on file or of record in any
public office, except such as may have been filed in favor of the Collateral
Agent, for the ratable benefit of the Holders, pursuant to this Patent and
Trademark Security Agreement or the Security Agreement.
(b) Perfected First Priority Liens. The Liens granted pursuant to this
------------------------------
Patent and Trademark Security Agreement will constitute upon the completion of
all the filings or notices listed in Exhibit D hereto, which Exhibit includes
---------
all UCC-1 financing statements to be filed pursuant to the terms of the Security
Agreement and all requisite filings to be made with the U.S. Patent and
Trademark Office in the form substantially similar to that of Exhibit F and
---------
Exhibit G, perfected Liens on all Collateral, which are prior to all other Liens
- ---------
on such Collateral and which are enforceable as such against all creditors of
the Grantor.
-4-
<PAGE>
(c) Consents. No consent (other than consents that have been obtained)
--------
of any party (other than the Grantor) to any Contract that constitutes part of
the Collateral is required, or purports to be required, in connection with the
execution, delivery and performance of this Patent and Trademark Security
Agreement.
(d) Chief Executive Office. The Grantor's chief executive office and
----------------------
chief place of business is located at 145 Brandywine Parkway, West Chester,
Pennsylvania 19380.
(e) Authority. The Grantor has full power, authority and legal right to
---------
enter into this Patent and Trademark Security Agreement and to grant the
Collateral Agent the Lien on the Collateral pursuant to this Patent and
Trademark Security Agreement.
(f) Due Execution and Delivery. This Patent and Trademark Security
--------------------------
Agreement has been duly executed and delivered by the Grantor and constitutes a
legal, valid and binding obligation of the Grantor enforceable in accordance
with its terms.
(g) No Violation. The execution, delivery and performance of this
------------
Patent and Trademark Security Agreement will not violate any provision of any
applicable law or regulation or of any order, judgment, writ, award or decree of
any court, arbitrator or governmental authority, domestic or foreign, or of any
securities issued by the Grantor, or of any mortgage, indenture, lease, contract
or other agreement, instrument or undertaking to which the Grantor is a party or
which purports to be binding upon the Grantor or upon any of its assets and will
not result in the creation or imposition of any Lien on any of the assets of the
Grantor except as contemplated by this Patent and Trademark Security Agreement.
(h) No Consent or Approval. No consent, filing, approval,
----------------------
registration, recording, registration or other action is required (x) for the
grant by the Grantor of the Lien on the Collateral pursuant to this Patent and
Trademark Security Agreement or for the execution, delivery or performance of
this Patent and Trademark Security Agreement by the Grantor, or (y) to perfect
the Lien purported to be created by this Agreement, in each case except as
contemplated by Section 3(b) above.
4. Covenants. The Grantor covenants and agrees with the Collateral
---------
Agent that from and after the date of this Patent and Trademark Security
Agreement until the payment or performance in full by the Grantor of all of its
obligations under the Transaction Documents:
(a) Further Documentation. At any time and from time to time, upon the
---------------------
written request of the Collateral Agent, and at the sole expense of the Grantor,
the Grantor will promptly and duly execute and deliver such further instruments
and documents and take such further action as the Collateral Agent may request
for the purpose of obtaining or preserving the full benefits of this Patent and
Trademark Security Agreement and of the rights and powers herein granted,
including, without limitation, the filing of any financing or continuation
statements under the Code in effect in any such jurisdiction with respect to the
Liens created hereby. The Grantor also
-5-
<PAGE>
hereby authorizes the Collateral Agent to file any such financing or
continuation statement without the signature of the Grantor to the extent
permitted by applicable law. A carbon, photographic or other reproduction of
this Patent and Trademark Security Agreement shall be sufficient as a financing
statement for filing in any jurisdiction.
(b) Indemnification. The Grantor agrees to pay, and to save the
---------------
Collateral Agent and each Holder harmless from, any and all liabilities, costs
and expenses (including, without limitation, legal fees and expenses) (i) with
respect to, or resulting from, any delay in paying, any and all excise, sales or
other taxes which may be payable or determined to be payable with respect to any
of the Collateral, (ii) with respect to, or resulting from, any delay by Grantor
in complying with any law or regulation applicable to any of the Collateral or
(iii) in connection with this Patent and Trademark Security Agreement or any
action taken by the Collateral Agent or any Holder in exercising its rights
hereunder.
(c) Maintenance of Records. The Grantor will keep and maintain at its
----------------------
own cost and expense satisfactory and complete records of the Collateral. For
the further security of the Holders, the Grantor hereby grants to the Collateral
Agent, for the ratable benefit of the Holders, a security interest in all of the
Grantor's books and records pertaining to the Collateral, and the Grantor shall
turn over any such books and records for inspection at the office of the Grantor
to the Collateral Agent or to its representatives during normal business hours
at the request of the Collateral Agent.
(d) Limitation on Liens on Collateral. The Grantor (x) will not create,
---------------------------------
incur or permit to exist, will defend the Collateral against, and will take such
other action as is necessary to remove, any Lien or claim on or to the
Collateral, other than the Liens created hereby or as permitted by Section 3.9
of the Notes, and (y) will defend the right, title and interest of the
Collateral Agent in and to any of the Collateral against the claims and demands
of all persons whomsoever.
(e) Limitations on Dispositions of Collateral. The Grantor will not
-----------------------------------------
sell, transfer, assign, or sublicense any of the Collateral, or attempt, offer
or contract to do so including, but not limited to, marketing and promotion
thereof, or otherwise agreed to by the parties in writing.
(f) Limitations on Modifications, Waivers, Extensions of Trademark
--------------------------------------------------------------
Licenses. Except in the ordinary course of business, the Grantor will not (i)
- --------
amend, modify, terminate or waive any provision of the Trademark License with
respect to the Trademark in any manner which could reasonably be expected to
materially adversely affect the value of such Trademark License as Collateral,
(ii) fail to exercise promptly and diligently each and every material right
which it may have under each Trademark License with respect to any Trademarks.
Additionally, the Grantor will deliver to the Collateral Agent a copy of each
material demand, notice or document received by it relating in any way to such
Trademark License.
-6-
<PAGE>
(g) Further Identification of Collateral. The Grantor will furnish to
------------------------------------
the Collateral Agent from time to time, upon the request of the Collateral
Agent, statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as the
Collateral Agent may reasonably request, all in reasonable detail.
(h) Notices. The Grantor will advise the Collateral Agent promptly, in
-------
reasonable detail, at its address set forth in accordance with Section 15, (i)
of any Lien on, or claim asserted against, any of the Collateral, other than as
created hereby or as permitted hereby, and (ii) of the occurrence of any other
event which could reasonably be expected to have a material adverse effect on
the Liens created hereunder.
(i) Patents.
-------
(i) The Grantor will notify the Collateral Agent immediately
if it knows, of has reason to know, that any application relating to
any Patent may become abandoned or of any adverse determination or
development (including, without limitation, the institution of, or any
such determination or development in, any proceeding in the United
States Patent and Trademark Office or any court or tribunal in any
country) regarding the Grantor's ownership of any Patent.
(ii) The Grantor will, with respect to any Patent that the
Grantor obtains after the Issuance Date or any Patent License that the
Grantor acquires after the Issuance Date, promptly (i) take all actions
necessary so that the Collateral Agent shall obtain a perfected
security interest in such Patent or Patent License and (ii) provide to
the Collateral Agent a revised Exhibit A and Exhibit B, listing all
--------- ---------
Patents and all Patent Licenses in which Grantor has an interest.
(iii) Upon request of the Collateral Agent, the Grantor shall
execute and deliver any and all agreements, instruments, documents, and
papers as the Collateral Agent may request to evidence the Collateral
Agent's security interest in such Patents or Patent Licenses, and the
Grantor hereby constitutes the Collateral Agent its attorney-in-fact to
execute and file all such writings for the foregoing purposes, all acts
of such attorney being hereby ratified and confirmed; such power being
coupled with an interest is irrevocable until the Grantor shall have
paid and performed in full all of its obligations under this Patent and
Trademark Security Agreement and the Security Agreement.
(iv) Subject to the terms of the Patent License, if applicable,
the Grantor will take all reasonable and necessary steps, including,
without limitation, in any proceeding before the United States Patent
and Trademark Office, to maintain and pursue each Patent including,
without limitation, payment of maintenance fees.
-7-
<PAGE>
(v) Subject to the terms of the Patent License, if applicable,
in the event that any Patent included in the Collateral is infringed by
a third party, the Grantor shall promptly notify the Collateral Agent
after it learns thereof and shall, if appropriate, sue for
infringement, seeking injunctive relief where appropriate and to
recover any and all damages for such infringement, or take such other
actions as the Grantor shall reasonably deem appropriate under the
circumstances to protect such Patent.
(j) Trademarks.
----------
(i) The Grantor (either itself or through licensees) will,
with respect to each Trademark identified in Exhibit C hereto as it may
---------
be amended, supplemented or otherwise modified from time to time, (i)
continue to use or have used such Trademark to the extent necessary to
maintain such Trademark in full force free from any claim of
abandonment for non-use, (ii) maintain as in the past the quality of
products and services offered under such Trademark, (iii) employ such
Trademark with the appropriate notice of registration, (iv) not adopt
or use any mark which is confusingly similar or a colorable imitation
of such Trademark unless the Collateral Agent, for the ratable benefit
of the Holders, shall obtain a first priority perfected security
interest in the Company's interest in such mark pursuant to this Patent
and Trademark Security Agreement, and (v) not (and not permit any
licensee or sublicensee thereof to) do any act or knowingly omit to do
any act whereby any such Trademark may become invalidated.
(ii) The Grantor will promptly notify the Collateral Agent if
any application or registration relating to any Trademark may become
abandoned, canceled or dedicated, or of any adverse determination or
development (including, without limitation, the institution of, or any
such determination or development in, any proceeding in the United
States Patent and Trademark Office or any court or tribunal in any
country) regarding the Grantor's ownership interest in such Trademark
or its right to register the same or to keep and maintain the same.
(iii) The Grantor will, with respect to any Trademark that the
Grantor registers after the Closing Date or any Trademark License that
the Grantor acquires after the Closing Date, promptly (i) take all
actions necessary so that the Collateral Agent, for the ratable benefit
of the Holders, shall obtain a perfected security interest in such
Trademark or Trademark License and (ii) provide to the Collateral Agent
a revised listing of all registered Trademarks and all Trademark
Licenses in which the Grantor has an interest.
(iv) Upon request of the Collateral Agent, the Grantor shall
execute and deliver any and all agreements, instruments, documents, and
papers as the Collateral Agent may request to evidence the Collateral
Agent's security interest in any Trademark and the goodwill and general
intangibles of the Grantor relating thereto or represented thereby, and
the Grantor hereby constitutes the Collateral Agent its
attorney-in-fact to execute and
-8-
<PAGE>
file all such writings for the foregoing purposes, all acts of such
attorney being hereby ratified and confirmed; such power being coupled
with an interest is irrevocable until the Grantor shall have paid and
performed in full all of its obligations under the Transaction
Documents.
(v) Subject to the terms of the Trademark License, the Grantor
will take all reasonable and necessary steps, including, without
limitation, in any proceeding before the United States Patent and
Trademark Office to maintain and pursue each application (and to obtain
the relevant registration) and to maintain the registration of the
Trademarks, including, without limitation, filing of applications for
renewal, affidavits of use and affidavits of incontestability.
(vi) Subject to the terms of the Trademark License, in the
event that any Trademark included in the Collateral is infringed,
misappropriated or diluted by a third party, the Grantor shall notify
the Collateral Agent and shall, if appropriate, sue for infringement,
misappropriation or dilution, seeking injunctive relief where
appropriate and to recover any and all damages for such infringement,
misappropriation or dilution, or take such other action as the Grantor
reasonably deems appropriate under the circumstances to protect such
Trademark.
(k) License Agreements. The Grantor shall comply with its obligations
------------------
under each of its Patent Licenses and Trademark Licenses.
(l) Changes in Locations, Name, Etc. The Grantor will not (i) change
-------------------------------
the location of its chief executive office/chief place of business from that
specified in Section 3(d) or (ii) change its name, identity or corporate
structure to such an extent that any statement filed by the Collateral Agent
with the Patent and Trademark Office in connection with this Patent and
Trademark Security Agreement would become misleading, unless it shall have given
the Collateral Agent at least 30 days prior written notice thereof and, prior to
such action or event, shall have taken appropriate action to preserve and
protect the Collateral Agent's security interest under this Patent and Trademark
Security Agreement.
5. Collateral Agent's Appointment as Attorney-in-Fact.
--------------------------------------------------
(a) Powers. The Grantor hereby irrevocably constitutes and appoints the
------
Collateral Agent and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of the Grantor and in the name of the
Grantor or in its own name, from time to time in the Collateral Agent's
discretion, during any period in which an Event of Default is continuing, for
the purpose of carrying out the terms of this Patent and Trademark Security
Agreement, to take any and all appropriate action and to execute any and all
documents and instruments which may be necessary or desirable to accomplish the
purposes of this Patent and Trademark Security Agreement, and,
-9-
<PAGE>
without limiting the generality of the foregoing, the Grantor hereby gives the
Collateral Agent the power and right, on behalf of the Grantor, without notice
to or assent by the Grantor, except any notice required by law, to do the
following:
(i) to take possession of and endorse and collect any checks,
drafts, notes, acceptances or other instruments for the payment of
moneys due under or with respect to any Collateral and to file any
claim or to take any other action or proceeding in any court of law or
equity or otherwise deemed appropriate by the Collateral Agent for the
purpose of collecting any and all such moneys due under or with respect
to any such Collateral whenever payable, in each case in the name of
the Grantor or its own name, or otherwise;
(ii) to pay or discharge taxes and Liens levied or placed on
or threatened against the Collateral and to pay all or any part of the
premiums therefor and the costs thereof; and
(iii) (A) to direct any party liable for any payment under any
of the Collateral to make payment of any and all moneys due or to
become due thereunder directly to the Collateral Agent or as the
Collateral Agent shall direct; (B) to ask or demand for, collect,
receive payment of and receipt for, any and all moneys, claims and
other amounts due or to become due at any time in respect of or arising
out of any Collateral; (C) to sign and endorse any invoices, freight or
express bills, bills of lading, storage or warehouse receipts, drafts
against debtors, assignments, verifications, notices and other
documents in connection with any of the Collateral; (D) to commence and
prosecute any suits, actions or proceedings at law or in equity in any
court of competent jurisdiction to collect the Collateral or any
thereof and to enforce any other right in respect of any Collateral;
(E) to defend any suit, action or proceeding brought against the
Grantor with respect to any Collateral; (F) to settle, compromise or
adjust any suit, action or proceeding described in clause (E) above
and, in connection therewith, to give such discharges or releases as
the Collateral Agent may deem appropriate; (G) to assign (along with
the goodwill of the business pertaining thereto) any Patent or
Trademark in the U.S. for such term or terms, on such conditions, and
in such manner, as the Collateral Agent shall in its sole discretion
determine; and (H) generally, to sell, transfer, pledge and make any
agreement with respect to or otherwise deal with any of the Collateral
as fully and completely as though the Collateral Agent were the
absolute owner thereof for all purposes, and to do, at the Collateral
Agent's option and the Grantor's expense, at any time, or from time to
time, all acts and things which the Collateral Agent deems necessary to
protect, preserve or realize upon the Collateral and the Collateral
Agent's Liens thereon and to effect the intent of this Patent and
Trademark Security Agreement, all as fully and effectively as the
Grantor might do.
The Grantor hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevo cable until
-10-
<PAGE>
the Grantor shall have paid and performed in full all of its obligations under
this Patent and Trademark Security Agreement, the Note and the Security
Agreement.
(b) Other Powers. The Grantor also authorizes the Collateral Agent, at
------------
any time and from time to time, to execute, in connection with the sale provided
for herein, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral.
(c) No Duty on Collateral Agent's Part. The powers conferred on the
----------------------------------
Collateral Agent hereunder are solely to protect the Collateral Agent's
interests in the Collateral and shall not impose any duty upon the Collateral
Agent to exercise any such powers. The Collateral Agent shall be accountable
only for amounts that it actually receives as a result of the exercise of such
powers, and neither it nor any of its officers, directors, employees or agents
shall be responsible to the Grantor for any act or failure to act hereunder,
except for their own gross negligence or willful misconduct.
6. Performance by Collateral Agent of Grantor's Obligations. If the
--------------------------------------------------------
Grantor fails to perform or comply with any of its agreements contained herein
and the Collateral Agent, as provided for by the terms of this Patent and
Trademark Security Agreement and following reasonable notice to the Grantor,
shall itself perform or comply, or otherwise cause performance or compliance,
with such agreement, the expenses of the Collateral Agent incurred in connection
with such performance or compliance shall be payable by the Grantor to the
Collateral Agent on demand and shall constitute Obligations secured hereby.
7. Remedies. If Event of Default has occurred and is continuing, the
--------
Collateral Agent may exercise, in addition to all other rights and remedies
granted to them in this Patent and Trademark Security Agreement and in any other
instrument or agreement securing, evidencing or relating to the Obligations, all
rights and remedies of a secured party under the Code. Without limiting the
generality of the foregoing, if an Event of Default has occurred and is
continuing, the Collateral Agent, without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below or expressly provided for) to or upon the
Grantor or any other Person (all and each of which demands, defenses,
advertisements and notices are, to the extent permitted by applicable law,
hereby waived), may in such circumstances forthwith collect, receive,
appropriate and realize upon the Collateral, or any part thereof, and/or may
forthwith sell, license, assign, give option or options to purchase, or
otherwise dispose of and deliver the Collateral or any part thereof (or contract
to do any of the foregoing), at public or private sale or sales, at any
exchange, broker's board or office of the Collateral Agent or elsewhere upon
such terms and conditions as it may deem advisable and at such prices as it may
deem best, for cash or on credit or for future delivery without assumption of
any credit risk. The Collateral Agent shall have the right upon any such public
sale or sales, and, to the extent permitted by law, upon any such private sale
or sales, to purchase the whole or any part of the Collateral so sold, free of
any right or equity of redemption in the Grantor, which right or equity is
hereby waived, to the extent permitted by applicable law,
-11-
<PAGE>
or released.
The Grantor further agrees, if an Event of Default has occurred and is
continuing, and at the Collateral Agent's request, to assemble the Collateral
and make it available to the Collateral Agent at places which the Collateral
Agent shall reasonably select, whether at the Grantor's premises or elsewhere.
The Collateral Agent shall apply the net proceeds of any such collection,
recovery, receipt, appropriation, realization or sale, after deducting all
reasonable costs and expenses of every kind incurred therein or incidental to
the care or safekeeping of any of the Collateral or in any way relating to the
Collateral or the rights of the Collateral Agent hereunder, including, without
limitation, reasonable attorneys' fees and disbursements, to the payment in
whole or in part of the Obligations, in such order as the Collateral Agent may
elect, and only after such application and after the payment by the Collateral
Agent of any other amount required by any provision of law, need the Collateral
Agent account for the surplus, if any, to the Grantor. To the extent permitted
by applicable law, the Grantor waives all claims, damages and demands it may
acquire against the Collateral Agent arising out of the exercise by it of any
rights hereunder, provided, that nothing contained in this Section shall relieve
the Collateral Agent from liability arising solely from its gross negligence or
willful misconduct. If any notice of a proposed sale or other disposition of
Collateral shall be required by law, such notice shall be deemed reasonable and
proper if given at least ten (10) days before such sale or other disposition.
The Grantor shall remain liable for any deficiency if the proceeds of any sale
or other disposition of the Collateral are insufficient to pay the Obligations
and the fees and disbursements of any attorneys employed by the Collateral Agent
to collect such deficiency.
8. Limitation on Duties Regarding Preservation of Collateral. The
---------------------------------------------------------
Collateral Agent's sole duty with respect to the custody, safekeeping and
physical preservation of the Collateral in its possession, under Section 9-207
of the Code or otherwise, shall be to deal with it in the same manner as the
Collateral Agent deals with similar property for its own account. Neither the
Collateral Agent nor any of its directors, officers, employees or agents shall
be liable for failure to demand, collect or realize upon all or any part of the
Collateral or for any delay in doing so or shall be under any obligation to sell
or otherwise dispose of any Collateral upon the request of the Grantor or
otherwise.
9. Powers Coupled with an Interest. All authorizations and agencies
-------------------------------
herein contained with respect to the Collateral are irrevocable and powers
coupled with an interest until Grantor has paid and performed in full all of its
obligations under the Transaction Documents.
10. Severability. Any provision of this Patent and Trademark Security
------------
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
-12-
<PAGE>
11. Paragraph Headings. The paragraph headings used in this Patent and
------------------
Trademark Security Agreement are for convenience of reference only and are not
to affect the construction hereof or be taken into consideration in the
interpretation hereof.
12. No Waiver; Cumulative Remedies. The Collateral Agent shall not by
------------------------------
any act, delay, indulgence, omission or otherwise be deemed to have waived any
right or remedy hereunder or to have acquiesced in any Event of Default or in
any breach of any of the terms and conditions hereof. No failure to exercise,
nor any delay in exercising, on the part of the Collateral Agent, any right,
power or privilege hereunder shall operate as a waiver thereof. No single or
partial exercise of any right, power or privilege hereunder shall preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. A waiver by the Collateral Agent of any right or remedy hereunder on
any one occasion shall not be construed as a bar to any right or remedy which
the Collateral Agent would otherwise have on any future occasion. The rights and
remedies herein and in the Notes provided are cumulative, may be exercised
singly or concurrently and are not exclusive of any rights or remedies provided
by law or in equity or by statute.
13. Waivers and Amendments; Successors and Assigns. None of the terms
----------------------------------------------
or provisions of this Patent and Trademark Security Agreement may be waived,
amended, supplemented or otherwise modified except by a written instrument
executed by the party to be charged with enforcement; provided, however, that
any provision of this Patent and Trademark Security Agreement may be waived,
amended, supplemented or otherwise modified by the Collateral Agent only with
the prior written approval of the Majority Holders. This Patent and Trademark
Security Agreement shall be binding upon the successors and assigns of the
Grantor and shall inure to the benefit of the Collateral Agent and its
successors and assigns. The Grantor may not assign its rights or obligations
under this Agreement without the prior written consent of the Collateral Agent.
14. Termination of Security Interest; Release of Collateral. (a) Upon
-------------------------------------------------------
the payment and performance in full by the Grantor of its obligations under the
Transaction Documents, the security interest granted in the Collateral pursuant
to this Agreement (the "Security Interest") shall terminate and all rights to
the Collateral shall revert to the Grantor. At any time and from time to time
prior to such termination of the Security Interest, the Collateral Agent shall
release any of the Collateral with the prior written consent of the Majority
Holders.
(b) Upon any such termination of the Security Interest, the Collateral
Agent will, at the expense of the Grantor, execute and deliver to the Grantor
such documents and take such other actions as the Grantor shall reasonably
request to evidence the termination of the Security Interest and deliver to the
Grantor all Collateral so released then in its possession.
15. Notices. Any notices required or permitted to be given under the
-------
terms of this Agreement shall be in writing and shall be sent by mail, personal
delivery, telephone line
-13-
<PAGE>
facsimile transmission or courier and shall be effective five days after being
placed in the mail, if mailed, or upon receipt, if delivered personally, by
telephone line facsimile transmission or by courier, in each case addressed to a
party at such party's address (or telephone line facsimile transmission number)
shown below or such other address (or telephone line facsimile transmission
number) as a party shall have provided by notice to the other party in
accordance with this provision. In the case of any notice to the Grantor, such
notice shall be addressed to the Grantor at, 145 Brandywine Parkway, West
Chester, Pennsylvania 19380, President (telephone line facsimile transmission
number (510) 344-7563), and a copy shall also be given to: Morgan, Lewis &
Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania 19103, Attention:
David R. King, Esq. (telephone line facsimile transmission number (215) 963-
5299), and in the case of any notice to the Collateral Agent, such notice shall
be addressed to the Collateral Agent at, Delta Opportunity Fund c/o
International Fund Administration, Inc., 48 Par la Ville Road, Suite 464,
Hamilton HM11 Bermuda, Attention: Mr. Keith Bish (telephone line facsimile
transmission number (441) 295-9637), and copies shall also be given to: Diaz &
Altshul Advisors, LLC, 745 Fifth Avenue, Suite 1710, New York, New York 10151
(telephone line facsimile transmission number (212)751-5757) and Law Offices of
Brian W. Pusch, Penthouse Suite, 29 West 57th Street, New York, New York 10019
(telephone line facsimile transmission number (212) 980-7055).
16. Concerning Collateral Agent. The Grantor acknowledges that the
---------------------------
rights and responsibilities of the Collateral Agent under this Patent and
Trademark Security Agreement with respect to any action taken by the Collateral
Agent or the exercise or nonexercise by the Collateral Agent of any option,
right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Patent and Trademark Security Agreement shall,
as between the Collateral Agent and the Holders, be governed by Exhibit E hereto
---------
and by such other agreements with respect thereto as may exist from time to time
among them, but, as between the Collateral Agent and the Grantor, except as
expressly provided in Sections 12 and 13, the Collateral Agent shall be
conclusively presumed to be acting as agent for the Investors with full and
valid authority so to act or refrain from acting, and the Grantor shall not be
under any obligation to make any inquiry respecting such authority. The
Collateral Agent hereby waives for the benefit of the Holders any claim, right
or Lien of the Collateral Agent against the Collateral arising under applicable
law or arising from any business or transaction between the Collateral Agent and
the Grantor other than pursuant to this Patent and Trademark Security Agreement
or any of the other Transaction Documents.
17. Integration. This Patent and Trademark Security Agreement
-----------
represents the agreement of the Grantor and the Collateral Agent with respect to
the subject matter hereof, and there are no promises, undertakings,
representations or warranties by the Collateral Agent relative to subject matter
hereof not expressly set forth or referred to herein.
18. Governing Law. This Patent and Trademark Security Agreement and the
-------------
rights and obligations of the Grantor under this Patent and Trademark Security
Agreement shall be
-14-
<PAGE>
governed by, and construed and interpreted in accordance with, the law of the
State of New York, except to the extent that under the New York Uniform
Commercial Code the laws of another jurisdiction govern matters of perfection
and the effect of perfection or non-perfection of any security interest granted
hereunder.
-15-
<PAGE>
IN WITNESS WHEREOF, the Grantor has caused this Patent and
Trademark Security Agreement to be duly executed and delivered as of the date
first above written.
CEPHALON, INC.
By:______________________
Name:
Title:
ACKNOWLEDGED AND AGREED:
DELTA OPPORTUNITY FUND, LTD.
By: ______________________
-16-
<PAGE>
STATE OF _____________ )
) ss.
COUNTY OF ____________ )
On this ___ day of February 1999, before me personally
appeared J. Kevin Buchi proved to me on the basis of satisfactory evidence to be
the person who executed the above Patent and Trademark Security Agreement as
Senior Vice President, Finance and Chief Financial Officer on behalf of
Cephalon, Inc., and acknowledged to me that the corporation executed it.
WITNESS my hand and official seal.
_______________________
NOTARY PUBLIC
STATE OF _____________ )
) ss.
COUNTY OF ___________ )
On this _____ day of February 1999, before me personally
appeared ________________ proved to me on the basis of satisfactory evidence to
be the person who executed the above Patent and Trademark Security Agreement as
_____________________ on behalf of Delta Opportunity Fund, Ltd., and
acknowledged to me that the corporation executed it.
WITNESS my hand and official seal.
______________________
NOTARY PUBLIC
-17-
<PAGE>
EXHIBIT A : PATENT LICENSE AGREEMENT
- --------- ------------------------
1. The License Agreement entered into by and between Laboratoire L. Lafon and
Cephalon, Inc. dated as of 20 January 1993, as amended. Rights were transferred
to certain patents and patent applications, including but not limited to, the
following:
ISSUED U.S. PATENTS
-------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PATENT NO. TITLE ASSIGNEE ISSUE DATE
---------- ----- -------- ----------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
US 4,177,290 "Acetamide Derivatives" Laboratoire 12/4/79
L.Lafon
- -------------------------------------------------------------------------------------------------------------------
US 4,927,855 "Levorotatory Isomer of Benzyhydrylsulfinyl Laboratoire 5/22/90
Derivatives" L.Lafon
- -------------------------------------------------------------------------------------------------------------------
US 5,180,745 "Method for Providing a Neuroprotective Effect" Laboratoire 1/19/93
L.Lafon
- -------------------------------------------------------------------------------------------------------------------
US unknown "Extrusion and Freeze-Drying Method for Preparing Laboratoire Allowed
Particles Containing an Active Ingredient" L.Lafon
- -------------------------------------------------------------------------------------------------------------------
US 5,391,576 "Method for Treating and Protecting the Cerebral Laboratoire 2/21/95
Tissue Against Repercussions of Cerebral Ischaemia L.Lafon
and Cerebral Infarctions"
- -------------------------------------------------------------------------------------------------------------------
US 5,401,776 "Use of Modafinil for the Treatment of Urinary and Laboratoire 3/28/95
Fecal Incontinence" L.Lafon
- -------------------------------------------------------------------------------------------------------------------
US 5,612,379 "Modafinil for the Treatment of Sleep Apneas and Laboratoire 4/18/97
Ventilatory Disorders of Central Origin" L.Lafon
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
A-18
<PAGE>
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
US 5,719,168 "Acetamide Derivatives and Their Use as Feeding Laboratoire L. 2/17/98
Behavior Modifiers" Lafon
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
A-19
<PAGE>
EXHIBIT B: CEPHALON PATENT
--------------------------
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
US 5,618,845 "Acetamide Derivative Having Defined Particle Size" Cephalon, Inc. 4/8/97
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
B-20
<PAGE>
EXHIBIT C: TRADEMARK AGREEMENT
------------------------------
1. The License Agreement entered into by and between Genelco S.A. and
Cephalon, Inc. dated as of 20 January 1993, as amended. Rights were transferred
to a certain trademarks, including:
<TABLE>
<CAPTION>
TRADEMARK U.S. REGISTRATION NUMBER REGISTRANT
- --------- ------------------------ ----------
<S> <C> <C>
PROVIGIL 2,000,231 Genelco, S.A.
</TABLE>
C-21
<PAGE>
EXHIBIT D: FILINGS REQUIRED TO PERFECT SECURITY INTEREST
--------------------------------------------------------
1. Filing with the Patent and Trademark Office
2. Filing of UCC-1 Financing Statement with the Commonwealth of Pennsylvania
3. Filing of UCC-1 Financing Statement with the Prothonotary of Chester
County, Pennsylvania
4. Filing of UCC-1 Financing Statement with the Commonwealth of Pennsylvania
5. Filing of UCC-1 Financing Statement with New Castle County, Delaware
D-22
<PAGE>
EXHIBIT E: THE COLLATERAL AGENT
-------------------------------
1. Appointment. The Holders (all capitalized terms used in this
Exhibit C and not otherwise defined shall have the respective meanings provided
in the Patent and Trademark Security Agreement to which this Exhibit C is
attached (the "Patent and Trademark Security Agreement")), by their acceptance
of the benefits of the Patent and Trademark Security Agreement, hereby
irrevocably designate Delta Opportunity Fund, Ltd., as Collateral Agent to act
as specified herein and in the Patent and Trademark Security Agreement. Each
Buyer hereby irrevocably authorizes, and each other Holder of any Note by the
acceptance of such Note shall be deemed irrevocably to authorize, the Collateral
Agent to take such action on its behalf under the provisions of the Patent and
Trademark Security Agreement and any other instruments and agreements referred
to herein or therein and to exercise such powers and to perform such duties
hereunder and thereunder as are specifically delegated to or required of the
Collateral Agent by the terms hereof and thereof and such other powers as are
reasonably incidental thereto. The Collateral Agent may perform any of its
duties hereunder by or through its agents or employees.
2. Nature of Duties. The Collateral Agent shall have no duties or
responsibilities except those expressly set forth in the Patent and Trademark
Security Agreement. Neither the Collateral Agent nor any of its officers,
directors, employees or agents shall be liable for any action taken or omitted
by it as such under the Patent and Trademark Security Agreement or hereunder or
in connection herewith or therewith, unless caused by its or their gross
negligence or willful misconduct. The duties of the Collateral Agent shall be
mechanical and administrative in nature; the Collateral Agent shall not have by
reason of the Patent and Trademark Security Agreement or any other Transaction
Document a fiduciary relationship in respect of any Holder; and nothing in the
Patent and Trademark Security Agreement, expressed or implied, is intended to or
shall be so construed as to impose upon the Collateral Agent any obligations in
respect of the Patent and Trademark Security Agreement except as expressly set
forth herein.
The Collateral Agent shall not be liable for any act it may do or omit
to do while acting in good faith and in the exercise of its own best judgment.
Any act done or omitted by the Collateral Agent on the advice of its own
attorneys shall be deemed conclusively to have been done or omitted in good
faith. The Collateral Agent shall have the right at any time to consult with
counsel on any question arising under this Patent and Trademark Security
Agreement. The Collateral Agent shall incur no liability for any delay
reasonably required to obtain the advice of counsel.
3. Lack of Reliance on the Collateral Agent. Independently and
without reliance upon the Collateral Agent, each Holder, to the extent it deems
appropriate, has made and
E-23
<PAGE>
shall continue to make (i) its own independent investigation of the financial
condition and affairs of the Grantor and its subsidiaries in connection with the
making and the continuance of the Obligations and the taking or not taking of
any action in connection therewith, and (ii) its own appraisal of the
creditworthiness of the Grantor and its subsidiaries, and the Collateral Agent
shall have no duty or responsibility, either initially or on a continuing basis,
to provide any Holder with any credit or other information with respect thereto,
whether coming into its possession before any Obligation arises or the purchase
of any Note, or at any time or times thereafter. The Collateral Agent shall not
be responsible to any Holder for any recitals, statements, information,
representations or warranties herein or in any document, certificate or other
writing delivered in connection herewith or for the execution, effectiveness,
genuineness, validity, enforceability, perfection, collectibility, priority or
sufficiency of the Patent and Trademark Security Agreement or the financial
condition of the Grantor or be required to make any inquiry concerning either
the performance or observance of any of the terms, provisions or conditions of
the Patent and Trademark Security Agreement, or the financial condition of the
Grantor, or the existence or possible existence of any Event of Default.
4. Certain Rights of the Collateral Agent. No Holder shall have the
right to cause the Collateral Agent to take any action with respect to the
Collateral, with only the Majority Holders having the right to direct the
Collateral Agent to take any such action. If the Collateral Agent shall request
instructions from the Majority Holders with respect to any act or action
(including failure to act) in connection with the Patent and Trademark Security
Agreement, the Collateral Agent shall be entitled to refrain from such act or
taking such action unless and until it shall have received instructions from the
Majority Holders, and to the extent requested, appropriate indemnification in
respect of actions to be taken by the Collateral Agent; and the Collateral Agent
shall not incur liability to any person by reason of so refraining. Without
limiting the foregoing, no Holder shall have any right of action whatsoever
against the Collateral Agent as a result of the Collateral Agent acting or
refraining from acting hereunder in accordance with the instructions of the
Majority Holders or as otherwise specifically provided in the Patent and
Trademark Security Agreement.
5. Reliance. The Collateral Agent shall be entitled to rely, and
shall be fully protected in relying, upon any note, writing, resolution, notice,
statement, certificate, telex, teletype or telecopier message, cablegram,
radiogram, order or other document or telephone message signed, sent or made by
the proper person or entity, and, with respect to all legal matters pertaining
to the Patent and Trademark Security Agreement and its duties thereunder, upon
advice of counsel selected by it.
6. Indemnification. To the extent the Collateral Agent is not
reimbursed and indemnified by the Grantor and/or its subsidiaries, the Holders
will reimburse and indemnify the Collateral Agent, in proportion to their
respective principal amounts of Obligations, for and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever which may be
imposed on,
E-24
<PAGE>
incurred by or asserted against the Collateral Agent in performing its duties
hereunder or under the Patent and Trademark Security Agreement, or in any way
relating to or arising out of the Patent and Trademark Security Agreement except
for those determined by a final judgment (not subject to further appeal) of a
court of competent jurisdiction to have resulted solely from the Collateral
Agent's own negligence or willful misconduct.
7. The Collateral Agent in its Individual Capacity. The Collateral
Agent and its affiliates may lend money to, purchase, sell and trade in
securities of and generally engage in any kind of business with the Grantor or
any affiliate or subsidiary of the Grantor as if it were not performing the
duties specified herein, and may accept fees and other consideration from the
Grantor for services to the Grantor in connection with the Transaction Documents
and otherwise without having to account for the same to the Holders; provided,
however, that the Collateral Agent on behalf of itself and such affiliates,
hereby waives any claim, right or Lien against the Collateral in any way arising
from or relating to any such loan, securities transaction or business with the
Grantor.
8. Holders. The Collateral Agent may deem and treat the holder of
record of any Note as the owner thereof for all purposes hereof unless and until
a written notice of the assignment or transfer thereof, as the case may be,
shall have been filed with the Collateral Agent. Any request, authority or
consent of any person or entity who, at the time of making such request or
giving such authority or consent, is the holder of record of any Note shall be
conclusive and binding on any subsequent holder, transferee or assignee, as the
case may be, of such Note or of any Note(s) issued in exchange therefor.
9. Resignation by the Collateral Agent. (a) The Collateral Agent may
resign from the performance of all its functions and duties under the Patent and
Trademark Security Agreement at any time by giving 60 Business Days' prior
written notice (as provided in the Patent and Trademark Security Agreement) to
the Grantor and the Holders. Such resignation shall take effect upon the
appointment of a successor Collateral Agent pursuant to clauses (b) and (c)
below.
(b) Upon any such notice of resignation, the Majority Holders shall
appoint a successor Collateral Agent hereunder.
(c) If a successor Collateral Agent shall not have been so appointed
within said 60 Business Day period, the Collateral Agent shall then appoint a
successor Collateral Agent who shall serve as Collateral Agent hereunder or
thereunder until such time, if any, as the Majority Holders appoint a successor
Collateral Agent as provided above. If a successor Collateral Agent has not been
appointed within such 60-day period, the Collateral Agent may petition any court
of competent jurisdiction or may interplead the Grantor and Holders in a
proceeding for the appointment of a successor Collateral Agent, and all fees,
including but not limited to extraordinary fees associated with the filing of
interpleader, and expenses associated therewith shall be payable by the Grantor.
E-25
<PAGE>
(d) The fees of any successor Collateral Agent for its services as
such shall be payable by the Grantor.
E-26
<PAGE>
EXHIBIT F
FORM OF PATENT SECURITY AGREEMENT
This PATENT SECURITY AGREEMENT dated this _____ day of February 1999, made by
Cephalon Inc., a Delaware corporation, ("Grantor") to Delta Opportunity Fund,
Ltd., as collateral agent (in such capacity, the "Collateral Agent") on behalf
of the Holders.
BACKGROUND
WHEREAS, Grantor has acquired certain right, title and interest in
certain U.S. patents and patent applications (identified in Exhibit A hereto);
WHEREAS, Grantor and the Buyers are parties to certain Note Purchase
Agreements, dated as of February ___, 1999 (as from time to time amended or
supplemented, the "Note Purchase Agreements"), pursuant to which, among other
things, the Buyers have agreed to purchase $30,000,000 aggregate principal
amount of 11% Revenue Sharing Senior Secured Notes due 2002 (the "Notes");
WHEREAS, it is a condition precedent to the several obligations of the
Buyers to purchase their respective Notes that the Grantor shall have executed
and delivered a Patent and Trademark Security Agreement to the Collateral Agent
for the ratable benefit of the Holders;
WHEREAS, Grantor wishes to grant to Collateral Agent a security
interest in all of its property and assets to secure the performance of its
obligations under the Notes;
WHEREAS, the Grantor is contemporaneously entering into a Security
Agreement and a Patent and Trademark Security Agreement with the Collateral
Agent for the ratable benefit of the Holders; and
WHEREAS, Grantor and Collateral Agent by this instrument seek to
confirm and make a record of the grant of a security interest in the Patents.
F-27
<PAGE>
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Grantor does hereby acknowledge that
it has granted to Collateral Agent a security interest in all of Grantor's
right, title and interest in, to, and under the Patents. Grantor also
acknowledges and confirms that the rights and remedies of Collateral Agent with
respect to the security interests in the Patents granted hereby are more fully
set forth in the Patent and Trademark Security Agreement and the Security
Agreement, the terms and provisions of which are incorporated herein by
reference.
CEPHALON DELTA OPPORTUNITY FUND, LTD.
By:________________________ By:___________________________
Name: Name
Title: Title:
F-28
<PAGE>
STATE OF ____________________)
) SS:
COUNTY OF ___________________)
Subscribed and sworn to this ____ day of _______________, 1999.
________________________________
Notary Public
My Commission Expires: ___________
F-29
<PAGE>
EXHIBIT A
ISSUED U.S. PATENTS
-------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
PATENT NO. TITLE ASSIGNEE ISSUE DATE
---------- ----- -------- ----------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
US 4,177,290 "Acetamide Derivatives" Lafon 12/4/79
Laboratories
- ------------------------------------------------------------------------------------------------------------
US 4,927,855 "Levorotatory Isomer of Lafon 5/22/90
Benzyhydrylsulfinyl Derivatives" Laboratories
- ------------------------------------------------------------------------------------------------------------
US 5,180,745 "Method for Providing a Neuroprotective Lafon 1/19/93
Effect" Laboratories
- ------------------------------------------------------------------------------------------------------------
US unknown "Extrusion and Freeze-Drying Method for Lafon Allowed
Preparing Particles Containing an Active Laboratories
Ingredient"
- ------------------------------------------------------------------------------------------------------------
US 5,391,576 "Method for Treating and Protecting the Lafon 2/21/95
Cerebral Tissue Against Repercussions of Laboratories
Cerebral Ischaemia and Cerebral Infarctions"
- ------------------------------------------------------------------------------------------------------------
US 5,401,776 "Use of Modafinil for the Treatment of Lafon 3/28/95
Urinary and Fecal Incontinence" Laboratories
- ------------------------------------------------------------------------------------------------------------
US 5,612,379 "Modafinil for the Treatment of Sleep Lafon 4/18/97
Apneas and Ventilatory Disorders of Laboratories
Central Origin"
- ------------------------------------------------------------------------------------------------------------
US 5,719,168 "Acetamide Derivatives and Their Use as Lafon 2/17/98
Feeding Behaviour Modifiers" Laboratories
- ------------------------------------------------------------------------------------------------------------
</TABLE>
F-30
<PAGE>
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
US 5,618,845 "Acetamide Derivative Having Defined Cephalon, Inc. 4/8/97
Particle Size"
- ------------------------------------------------------------------------------------------------------------
</TABLE>
F-31
<PAGE>
EXHIBIT G
FORM OF TRADEMARK SECURITY AGREEMENT
This TRADEMARK SECURITY AGREEMENT dated this ___ day of February 1999,
made by Cephalon Inc., a Delaware corporation, ("Grantor") to Delta Opportunity
Fund, Ltd., as collateral agent (in such capacity, the "Collateral Agent") on
behalf of the Holders.
BACKGROUND
WHEREAS, Grantor has acquired an interest in a certain trademark (the
"Trademark") (identified in Exhibit A hereto);
WHEREAS, Grantor and the Buyers are parties to certain Note Purchase
Agreements, dated as of February 25, 1999 (as from time to time amended or
supplemented, the "Note Purchase Agreements"), pursuant to which, among other
things, the Buyers have agreed to purchase $30,000,000 aggregate principal
amount of 11% Revenue Sharing Senior Secured Notes due 2002 (the "Notes");
WHEREAS, it is a condition precedent to the several obligations of the
Buyers to purchase their respective Notes that the Grantor shall have executed
and delivered a Patent and Trademark Security Agreement to the Collateral Agent
for the ratable benefit of the Holders;
WHEREAS, Grantor wishes to grant to Collateral Agent a security
interest in all of its property and assets to secure the performance of its
obligations under the Transaction Documents;
WHEREAS, the Grantor is contemporaneously entering into a Security
Agreement and a Patent and Trademark Security Agreement with the Collateral
Agent for the ratable benefit of the Holders;
WHEREAS, Grantor and Collateral Agent by this instrument seek to
confirm and make a record of the grant of a security interest its interest in
the Trademark.
G-32
<PAGE>
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Grantor does hereby acknowledge that
it has granted to Collateral Agent a security interest in all of Grantor's
interests the Trademark. Grantor also acknowledges and confirms that the rights
and remedies of Collateral Agent with respect to the security interests in the
Trademark granted hereby are more fully set forth in the Patent and Trademark
Security Agreement, the terms and provisions of which are incorporated herein by
reference.
CEPHALON, INC. DELTA OPPORTUNITY FUND, LTD.
By:____________________________ By:___________________________
Name: Name:
Title: Title:
G-33
<PAGE>
STATE OF ____________________)
) SS:
COUNTY OF ___________________)
Subscribed and sworn to this ____ day of _______________, 1999.
__________________________________
Notary Public
My Commission Expires: __________
G-34
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
TRADEMARK U.S. REGISTRATION NUMBER REGISTRANT
- --------- ------------------------ ----------
<S> <C> <C>
PROVIGIL 2,000,231 Genelco, S.A.
</TABLE>
G-35
<PAGE>
Exhibit 10.5(h)
[LOGO OF CEPHALON APPEARS HERE]
January 21, 1998
Laboratoire L. Lafon
39, rue Francois ler
75008 Paris
FRANCE
Re Amendment No. 5 to License Agreement and Supply Agreement
Gentlemen:
This letter shall serve as an amendment to (i) that certain License
Agreement dated as of January 20, 1993, as amended (the "License Agreement"),
between Cephalon, Inc. (hereinafter "Cephalon") and Laboratoire L. Lafon
(hereinafter "Lafon"); and (ii) that certain Supply Agreement (the "Supply
Agreement") dated as of January 20, 1993, as amended, between Cephalon and
Lafon. Unless otherwise defined herein, all capitalized terms shall have the
meanings ascribed to them in the License Agreement and the Supply Agreement.
1. Under the terms of the License Agreement, Lafon granted Cephalon a
license, with the right to sublicense to a Japanese company, to develop and
commercialize in Japan products containing the drug substance "modafinil" (the
"Compound"). Under the terms of the Supply Agreement, Lafon agreed to supply the
Compound to Cephalon or to its sublicensee in Japan. Cephalon hereby provides
notice that it has agreed to such a sublicense arrangement with Nippon Shoji
Kaisha., Ltd. ("Nippon Shoji"), and in connection with such arrangement,
Cephalon and Lafon hereby agree to the following:
a. Under the terms of a sublicense, product development and compound
supply agreement, Cephalon will grant Nippon Shoji the right to make tablets,
use and sell the Product in Japan, and will agree to supply Nippon Shoji with
Compound, as well as provide Nippon Shoji with access to certain pre-clinical
and clinical data concerning the Product. In consideration of this grant of
rights and supply of Compound, Nippon Shoji will pay Cephalon an amount equal to
[*] percent ([*]) of Net Sales of Product in Japan (as well as an additional
[*] percent ([*]) in connection with the use of a trademark which Cephalon will
remit on its behalf directly to the trademark owner). As provided in amendment
number four to the License Agreement and the Supply Agreement dated August 23,
1995, Lafon and Cephalon hereby agree to further amend the aforementioned
License Agreement and Supply Agreement insofar as the
* THE CONFIDENTIAL MATERIAL CONTAINED HEREIN
HAS BEEN OMITTED AND HAS BEEN FILED
SEPARATELY WITH THE COMMISSION.
<PAGE>
royalty rate applicable under Article V(2) of the License Agreement for the
grant of rights in Japan, and the price to be paid to Lafon by Cephalon under
Article 3(b) of the Supply Agreement for the supply of Compound for use in
Japan, shall be an amount equal to [*] percent [*]of Net Sales of Product in
Japan by Nippon Shoji.
b. With reference to Article 8 of the Supply Agreement concerning
the right of rejection of Compound, the parties agree that with respect to
Compound shipped to Japan, Cephalon shall not be deemed to be in receipt of
Compound until the date on which Nippon Shoji has released said Compound into
its inventory, and Cephalon shall have thirty (30) days from such date to notify
Lafon of its intent to reject.
2. With reference to Article 3 of the Supply Agreement, the parties
confirm their understanding with respect to the calculation of compensation to
Lafon for the supply of Compound, as follows:
a. Lafon will supply Compound to Cephalon free of charge for the
following purposes: (i) to conduct pre-clinical and clinical studies in
countries in the Territory prior to the date of initial marketing approval in
such country, and to conduct such studies subsequent to the date of such initial
marketing approval in any given country in the Territory if required by the
respective regulatory authorities or if intended for purposes of obtaining new
or expanded indications for the Product in such country; (ii) to manufacture
Product samples to be distributed by Cephalon prior to the third anniversary
date of commercial launch of the Product in the United States (with such amount
of Compound not to exceed 120 kilograms during any twelve-month period, unless
otherwise mutually agreed); and (iii) to develop a Product formulation that
does not contain Compressil(R).
b. The initial provisional price for Compound ordered by Cephalon
shall be set at an amount equal to US$[*] per kilogram (except for quantities of
Compound to be used for those non-commercial purposes specified in subparagraph
(a) above, as to which no provisional price or compensation shall be due Lafon).
The parties acknowledge that this initial provisional price is based upon the
current selling price charged by Lafon for sale of the Product in France; the
parties further acknowledge that the selling price to be charged by Cephalon for
sale of the Product in the United States may well be lower than such amount, and
accordingly, the parties agree to reduce this initial provisional price to
properly reflect the actual U.S. selling price promptly after such U.S. selling
price is established by Cephalon. Following this adjustment in the provisional
price, and as provided in the Supply Agreement, the parties will adjust the
provisional price annually (or more often, if necessary) so that said
provisional price will reflect accurately the selling price for Product in the
Territory.
c. Within two months after the end of each calendar year, Cephalon
and Lafon will reconcile the provisional price paid by Cephalon for all Compound
delivered during such preceding calendar year with the amount of compensation
due Lafon under the Supply Agreement. Except for (i) those quantities specified
in clause (a) above;
* THE CONFIDENTIAL MATERIAL CONTAINED
HEREIN HAS BEEN OMITTED AND HAS
BEEN FILED SEPARATELY WITH THE
COMMISSION.
<PAGE>
and (ii) a quantity in an amount equal to three percent (3%) of all Compound
delivered in such preceding calendar year (in order to properly reflect the
ordinary and customary yield loss in preparing the finished Product), Cephalon
will pay Lafon for all kilograms of Compound delivered an amount per kilogram
equal to the percentage of Net Sales specified in the Supply Agreement (e.g.,
11% for Compound sold in the United States), multiplied by the average Net Sales
Price per kilogram of Compound sold during the immediately preceding year in the
corresponding country within the Territory.
3. Cephalon and Lafon further confirm their understanding as to the
calculation of "Net Sales," as defined in Article I of the License Agreement, as
follows:
a. With respect to calculations to be made under the terms of the
License Agreement and the Supply Agreement, Cephalon may deduct from its gross
sales proceeds in the Territory the amount of any governmental rebates and
allowances (including Medicaid rebates), and the amount of any wholesaler
credits or chargebacks, as well as those deductions otherwise specified in such
definition.
b. With respect to calculations to be made under the terms of the
License Agreement (but not the Supply Agreement), Cephalon may further deduct
from its gross sales proceeds in the Territory the amount of any uncollected
accounts or receivables.
Please indicate your consent to the sublicense arrangement described
above, and your agreement with the other terms, conditions and clarifications
set forth above, by signing this letter in the space provided below, and return
an executed copy to us at your earliest convenience.
CEPHALON, INC.
By /s/ Frank Baldino
----------------------------
Frank Baldino
AGREED, ACKNOWLEDGED AND ACCEPTED:
LABORATOIRE L. LAFON
By: /s/ F.C. Lafon
-----------------------------
F.C. Lafon
<PAGE>
Exhibit 10.5(i)
[LOGO OF CEPHALON APPEARS HERE]
February 2, 1998
Laboratoire L. Lafon
19 Avenue du Professeur-Cadiot
94701 Maisons Alfort
France
RE: Amendment No. 6 to License Agreement and Supply Agreement
---------------------------------------------------------
Gentlemen:
This letter agreement shall serve as an amendment to (a) the License
Agreement dated January 20, 1993, as previously amended ("License Agreement")
between Cephalon, Inc. ("Cephalon") and Laboratoire L. Lafon ("Lafon"), and (b)
the Supply Agreement dated January 20, 1993, as previously amended (the "Supply
Agreement") between Cephalon and Lafon. All capitalized terms not otherwise
defined herein shall be used as defined in the License Agreement.
1. The term "Territory," for all purposes under the License Agreement and
the Supply Agreement, is hereby expanded to include the Republics of Italy and
San Marino (collectively, the "Italian Territory").
2. Appendix A to the License Agreement is hereby amended to add all
patents and patent applications related to the composition, manufacture or use
of modafinil, as filed or registered in the Italian Territory as of the date
hereof, including, without limitation, the following:
European Patent 91 401 563.1
European Patent 92 403 381.4
3. In consideration of the expansion of the Territory, Cephalon shall pay
to Lafon, in addition to the license fees and royalties to be paid by Cephalon
for other licensed territories pursuant to Section 1 of Article V of the License
Agreement and previous letter agreements, the following license fees totaling
[*] US Dollars (USD[*]):
a. [*] US Dollars (USD [*]), payable upon Lafon's signature of this
letter agreement;
* THE CONFIDENTIAL MATERIAL CONTAINED
HEREIN HAS BEEN OMITTED AND HAS BEEN
FILED SEPARATELY WITH THE COMMISSION.
<PAGE>
Laboratoire L. Lafon
February 2, 1998
Page -2-
b. [*] US Dollars (USD [*]), payable upon the initial regulatory
approval of a Licensed Product by the Italian Ministry of Health.
4. Sections 3.b and 3.c of the License Agreement shall not apply to the
Italian Territory. Instead, the following provisions shall apply to product
registration activities in the Italian Territory:
3.b. It is agreed that all product registrations (and applications)
within the Italian Territory are to be in CEPHALON's name (or the
name of a CEPHALON Affiliate or sublicensee). LAFON shall take
such actions as may be required to identify CEPHALON (or its
Affiliate or sublicensee) as the applicant and the holder of the
product license within the Italian Territory, and, upon request,
shall sign any instruments required by applicable law to confirm
Cephalon's authorization under this Agreement to apply for any
other authorizations required to market the Licensed Product in
the Italian Territory, and/or join in any such application by
Cephalon, if required. CEPHALON and/or its sublicensee shall have
the right to meet with the appropriate regulatory authorities
(including pricing and reimbursement authorities), but shall keep
LAFON informed of all such meetings and, upon request, shall
provide LAFON with copies of all relevant correspondence with
such authorities.
3.c. CEPHALON shall conduct, at its own expense, all necessary trials
for purposes of obtaining regulatory approvals of the Licensed
Product in the Italian Territory.
3.d. LAFON will furnish CEPHALON, upon request, copies of
correspondence and communications whether occurring prior to the
date hereof or hereafter between LAFON and the Italian regulatory
authorities related to applications for marketing approval for
the Licensed Product in the Italian Territory.
5. Section l.b. of Article V of the License Agreement is hereby amended
and restated in its entirety as follows:
"In addition, CEPHALON shall pay to LAFON a royalty on Net Sales of
Licensed Products by CEPHALON and/or its sublicensees, calculated at the
rate of [*] per cent ([*]) during the first [*] from the date of first
commercial sale of the first Licensed Product in each country within the
Territory, and [*] per cent ([*]) thereafter in such country."
*THE CONFIDENTIAL MATERIAL CONTAINED HEREIN
HAS BEEN OMITTED AND HAS BEEN FILED
SEPARATELY WITH THE COMMISSION.
<PAGE>
Laboratoire L. Lafon
February 2, 1998
Page -3-
6. Lafon and Cephalon shall cooperate to take all actions that are
reasonably available under applicable laws to extend the term of each of the
Patents in the Italian Territory including, without limitation, applying for a
"Supplementary Protection Certificate" pursuant to Council Regulation (EEC) No.
1768/92 of 18 June, 1992 of The Council of the European Communities. The out-of-
pocket costs and expenses associated with such actions shall be shared equally
by the parties.
7. Each of Cephalon and Lafon hereby restates its respective
representations and warranties made in the License Agreement and the Supply
Agreement, as each such agreement has been amended pursuant to this letter
agreement. Lafon confirms that it is free to enter into this letter agreement,
without obligation to any third party. Cephalon shall not be responsible to any
third party asserting a claim through Lafon with respect to the development,
manufacture or sale of Licensed Product for the Italian Territory.
8. Except as specifically supplemented by this letter agreement, all
provisions of each of the License Agreement and the Supply Agreement (in each
case, as amended prior to the date hereof) are confirmed to be and shall remain
in full force and effect.
If the foregoing is acceptable, please indicate your agreement in the space
provided below.
CEPHALON, INC
By: /s/ Bruce A. Peacock
----------------------------
Bruce A. Peacock,
Executive Vice President
and Chief Operating Officer
Accepted and agreed to this
10th of February, 1998.
LABORATOIRE L. LAFON
By: /s/ F.C. Lafon
-------------------------
F.C. Lafon
Chief Executive Officer
<PAGE>
Exhibit 10.5(j)
[LETTERHEAD OF CEPHALON, INC. APPEARS HERE]
January 21, 1998
Genelco S.A.
8 Route de Beaumont
1701 Fribourg
Switzerland
Re: Amendment No. 3 to Trademark License Agreement
Gentlemen:
This letter shall serve as an amendment to that certain Trademark Agreement
dated as of January 20, 1993, as amended (the "Trademark Agreement"), between
Cephalon, Inc. (hereinafter "Cephalon") and Genelco S.A. (hereinafter
"Genelco"). Unless otherwise defined herein, all capitalized terms shall have
the meanings ascribed to them in the Trademark Agreement.
Under the terms of the Trademark Agreement, Genelco granted Cephalon a
license, with the right to sublicense to a Japanese company, to use a trademark
in connection with the commercialization in Japan of products containing the
drug substance "modafinil" (the "Compound"). As required under the terms of the
Trademark Agreement, Nippon Shoji will select a trademark for the Product to be
used in Japan, and will allow said trademark to be registered in the name of
Genelco S.A. In accordance with the terms of the Trademark Agreement, and on
behalf of Nippon Shoji, Cephalon shall pay Genelco S.A. an amount equal to [*]
percent ([*]) of Net Sales of Product in Japan by Nippon Shoji, subject to the
withholding of any tax as required under law.
* THE CONFIDENTIAL MATERIAL CONTAINED HEREIN HAS
BEEN OMITTED AND HAS BEEN FILED SEPARATELY
WITH THE COMMISSION.
<PAGE>
Please indicate your consent to the arrangement described above, and your
agreement with the other terms, conditions and clarifications set forth above,
by signing this letter in the space provided below, and return an executed copy
to us at your earliest convenience.
CEPHALON, INC.
By: /s/ Frank Baldino
------------------------------
Frank Baldino
GENELCO S.A.
By: /s/ [SIGNATURE ILLEGIBLE]
------------------------------
<PAGE>
Exhibit 10.5(k)
February 9, 1998
Genelco S.A.
8 Route de Beaumont
1701 Fribourg
Switzerland
Re: Amendment No. 4 to Trademark Agreement
--------------------------------------
Gentlemen:
This letter agreement shall serve as an amendment to the Trademark
Agreement dated January 20, 1993, as amended prior to the date hereof (the
"Trademark Agreement") between Cephalon, Inc. ("Cephalon") and Genelco S.A.
("Genelco"). All capitalized terms not otherwise defined herein shall be used as
defined in the Trademark Agreement.
1. The term "Territory," for all purposes under the Trademark Agreement
is hereby expanded to include the Republics of Italy and San Marino
(collectively, "Italy").
2. All trademark applications and registered trademarks related to
Licensed Products and/or the Compound, including the mark "Provigil",
that are or will be filed in the Territory are hereby licensed to
Cephalon under the Trademark Agreement.
3. For and in consideration of the expansion of the Territory to include
Italy under this Amendment No. 4 (and in addition to any compensation
payable under the Trademark Agreement with respect to other countries
in the Territory), Cephalon will pay to Genelco, pursuant to Article
III(1) of the Trademark Agreement, a royalty with respect to Net Sales
of a Licensed Product in Italy that will be calculated at the rate of
[*] of such Net Sales.
4. Each of Cephalon and Genelco hereby restates its respective
representations and warranties made in the Trademark Agreement, as
amended pursuant to this letter agreement.
5. Except as modified by this letter agreement, all provisions of the
Trademark Agreement are confirmed to be and shall remain in full force
and effect.
* THE CONFIDENTIAL MATERIAL CONTAINED HEREIN
HAS BEEN OMITTED AND HAS BEEN FILED
SEPARATELY WITH THE COMMISSION.
<PAGE>
Genelco S.A.
Amendment No. 4
February 9, 1998
Page 2
If the foregoing is acceptable, please indicate your agreement in the space
provided below.
CEPHALON, INC.
By: /s/ Frank Baldino
-------------------------------------
Frank Baldino, Jr., Ph.D.
President and Chief Executive Officer
Accepted and agreed to this
23/rd/ day of February, 1998.
GENELCO S.A.
By: /s/ [SIGNATURE ILLEGIBLE]
-------------------------------
<PAGE>
Exhibit 10.12
TOLL MANUFACTURING AND PACKAGING AGREEMENT
This Toll Manufacturing and Packaging Agreement is made as of this 24/th/
day of February, 1998, by and between Cephalon, Inc., 145 Brandywine Parkway,
West Chester, PA 19380-4245 ("CEPHALON") and Circa Pharmaceuticals, Inc., 33
Ralph Avenue, P.O. Box 30, Copiague, NY 11726-0030 ("CIRCA"').
WHEREAS, CEPHALON holds certain rights to manufacture, market and sell in
the United States, Mexico, Japan, the United Kingdom and Ireland, the
pharmaceutical product modafinil;
WHEREAS, CEPHALON possesses certain know how and other confidential and
proprietary information relating to the process of manufacturing and packaging
modafinil in finished dosage form;
WHEREAS, CEPHALON previously has engaged CIRCA to perform certain
manufacturing and consulting activities relating to the supply of modafinil, and
now wishes to engage CIRCA on a long-term basis to formulate and package
modafinil tablets in dosage form for subsequent sale by CEPHALON in the United
States, Mexico, Japan, the United Kingdom and Ireland, and for certain clinical
and other purposes; and
WHEREAS, CIRCA has suitable facilities and equipment and sufficient
qualified personnel at its plant in Copiague, New York to formulate and package
commercial quantities of modafinil in dosage form, and is willing to provide
such services on the terms and conditions set forth below.
NOW, THEREFORE, the parties hereto agree as follows:
I. DEFINITIONS
As Used in this Agreement:
1.1 "Active Drug Substance" means the compound modafinil having those
specifications as set forth on Schedule A hereto.
1.2 "Adverse Experience" or "AE" shall mean any unfavorable and unintended
change in the structure (signs), function (symptoms), or chemistry (laboratory
data) of the body temporally associated with any use of a Product or of a
derivative thereof, whether or not the adverse experience is considered to be
related to the use of the Product, including but not limited to any of the
following: an unexpected side effect, injury, toxicity or sensitivity reaction,
which may include an experience of unexpected incidence and severity; an adverse
experience occurring in the course of the use of a drug product in professional
practice; an adverse experience occurring in clinical studies; an adverse
experience occurring from drug overdose; whether accidental or intentional; an
adverse experience occurring from drug abuse; an adverse experience occurring
from drug withdrawal; and any significant failure of expected pharmacological
action.
-1-
<PAGE>
1.3 "Affiliate" means any corporation or other business entity which,
directly or indirectly, is controlled by, controls, or is under common control
with CEPHALON or CIRCA. For this purpose, "control" shall be deemed to mean
ownership of fifty percent (50%) or more of the stock or other equity of such
entity.
1.4 "Confidential Information" means any confidential or proprietary
information relating to the manufacture and packaging of the Product.
1.5 "Product" means modafinil in final packaged dosage forms meeting the
Product specifications established in Schedule B hereto.
1.6 "Starting Material" means certain interactive raw material (including
without limitation, compressil) necessary to formulate and package the Product
to be acquired directly CIRCA, as set forth in Schedule A hereto.
1.7 "Trademark" or "Trademarks" shall mean Provigil(R), as well as any
other trademark owned or used by CEPHALON in connection with the Product and
listed on Schedule A hereto.
II. APPOINTMENT AND TERM
2.1 Appointment. CEPHALON hereby appoints CIRCA, and CIRCA hereby
------------
accepts appointment, as a toll manufacturer to formulate and package the
Product.
2.2 Manufacturing and Packaging Services. During the term of this
-------------------------------------
Agreement, CIRCA shall formulate Product, which shall include the validation of
commercial batches of the Product in accordance with the procedures established
in Schedule D hereto, and the preparation of the Product for commercial sale to
customers by CEPHALON. In addition, Circa shall label and package Product in
accordance with instructions provided by CEPHALON. CEPHALON will supply masters
for labels, package inserts and packaging. The content of the labels, package
inserts and packaging shall be the sole and exclusive responsibility of
CEPHALON. CIRCA will procure, test, inspect and approve all labels, package
inserts and packaging used for this Product. CIRCA will submit all new labels,
package inserts and packaging used for Product to CEPHALON for approval prior to
use.
2.3 Specific Duties. In addition to its general obligations relating to
----------------
formulating and packaging, CIRCA shall perform the following services:
(i) receiving and storing all Active Drug Substance;
(ii) placing orders for, acquiring and storing all Starting Material
and packaging components;
-2-
<PAGE>
(iii) quality control and testing of all Active Drug Substance,
Starting Material in process materials, bulk tablets, finished
dosage Product and packaging components, in order to assure
compliance with all applicable standards and specifications;
(iv) managing clearance of customs for all Starting Materials and
packaging components, as necessary;
(v) conducting stability testing of Product in accordance with the
procedures established in Schedule D hereto; and
(vi) performing such other services as agreed upon in writing by the
parties.
2.4 Term. Unless terminated in accordance with the provisions of Article
----
XX, this Agreement will remain in effect for a period of three (3) years from
the date hereof (the "Initial Term"), and shall automatically be renewed for
consecutive terms of one year.
III. PRODUCT QUANTITY, QUALITY AND MANUFACTURING PROCESSES
3.1 Quantity. CIRCA will manufacture, package and supply to CEPHALON all
--------
quantities of Product ordered by CEPHALON or an Affiliate thereof for
subsequent sale by CEPHALON or an Affiliate or agent thereof in the United
States, Mexico, Japan, the United Kingdom or Ireland, and for certain clinical
or other purposes as may be determined by CEPHALON. The parties acknowledge
that, during the pendency of this Agreement, CIRCA shall serve as the
manufacturer of a majority of Product produced for sale by CEPHALON in such
geographic ares, provided however, that CEPHALON shall have no obligation to
place any orders for any minimum quantities of Product, and provided further,
that CEPHALON may in its sole discretion engage a second toll manufacturer and
packager to produce Product for sale in such areas.
3.2 Quality. All Product manufactured by CIRCA for CEPHALON under this
-------
Agreement will meet the Product specifications established in Schedule B hereto
(the Specifications"), as well as the quality assurance standards established in
Schedule C hereto (the "Technical Agreement"). Such Specifications, as well as
the terms and conditions of the Technical Agreement, will be provided by
CEPHALON, agreed upon by CIRCA, and are subject to modification from time to
time by mutual agreement of the parties.
3.3 Manufacturing Processes. Circa has furnished CEPHALON with a copy of
-----------------------
its production procedures and has identified to CEPHALON the equipment to be
used to produce the Product, all as set forth in Schedule C hereto. CIRCA agrees
that it will not modify these procedures, nor modify any method of formulation,
packaging, labeling or testing the Product (including analytical procedures,
components, process, Specifications, controls, storage, stability protocols),
without notifying CEPHALON or obtaining CEPHALON's prior written consent as
-3-
<PAGE>
required in Schedule C hereto. Costs incurred by CIRCA as a result of any such
changes or modifications requested by the FDA or by CEPHALON and relating solely
to the production of the Product will be borne by CEPHALON; costs for other
changes will be borne by CIRCA.
IV. TOLLING FEES
For each unit of Product made and supplied to CEPHALON under this Agreement
(provided it meets the quality requirements established herein) CEPHALON will
pay CIRCA a tolling fee in accordance with the terms established in Schedule E
hereto.
V. CONFIDENTIAL INFORMATION AND KNOW-HOW
5.1 The parties acknowledge that CEPHALON has provided Confidential
Information to CIRCA in connection with the formulation and packaging of the
Product, and further acknowledge that all such Confidential Information (as well
as any additional Confidential information provided to CIRCA by CEPHALON
hereunder) shall be subject to the provisions of the Article V. Any and all
information, knowledge, technology, and trade secrets relating to the Product or
the production, packaging, labeling or testing thereof, including any of the
foregoing that is obtained or developed by CIRCA in the performance of this
Agreement (herein the "Know-How") shall be held in confidence by CIRCA, and
CIRCA shall not use such Know-How for itself or for any third party nor disclose
the same to any third party except as provided below.
5.2 CIRCA will disclose to CEPHALON all Confidential Information and Know-
How developed by or for CIRCA during the term of this Agreement, promptly as it
is developed. CIRCA agrees and acknowledges that any Confidential Information
and Know-How, whether developed by CEPHALON, by CIRCA, or by CEPHALON and CIRCA
in collaboration hereunder, shall be the property of CEPHALON, and the CIRCA
shall have no rights or claims to any such Know-How except insofar as it shall
have access to and use of such Know-How to fulfill its obligations hereunder. If
any such Know-How is considered to be a patentable invention, CEPHALON shall be
responsible for the preparation, filing, prosecution and maintenance of all
patent applications and patents covering such invention as provided below.
5.3 All Know-How or other Confidential Information, disclosed or confirmed
in writing and designated as confidential by CEPHALON, shall be held in
confidence by CIRCA, shall not be used by CIRCA for any purpose except as
provided hereunder and shall not be disclosed to third parties except for
disclosure to its Affiliates or governmental authorities, or except as otherwise
necessary to carry out CIRCA's obligations under this Agreement. If CIRCA finds
it necessary to disclose such Confidential Information or Know-How to a third
party, CIRCA will not do so without first obtaining the written consent of
CEPHALON and entering into an agreement with the third party which binds the
third party to the same obligations of restricted use and disclosure as are
undertaken by CIRCA in this Agreement.
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5.4 CIRCA shall keep all such Know-How and Confidential Information in a
special file which shall be solely under the direction and control of CIRCA's
senior management. CIRCA shall not distribute any such Know-How or Confidential
Information except to its employees who have a need to know in connection with
the performance of their duties in satisfying the obligations of CIRCA
hereunder. Any CIRCA employee who receives such Know-How or Confidential
Information shall be advised as to the confidential nature thereof and the
prohibitions contained herein. CIRCA will use its best efforts to keep a record
of those individuals who have received copies of the Know-How and Confidential
Information or any portions thereof, and all copies of any portions thereof will
be identified by CIRCA as confidential. Upon termination of this Agreement, and
upon the request of CEPHALON, CIRCA shall return or destroy all such Know-How
and Confidential Information and any copies thereof in its possession.
5.5 Termination of this Agreement shall not operate to extinguish CIRCA's
obligation to treat Know-How and Confidential Information as provided herein,
and the same shall continue in effect in accordance with the Article for ten
(10) years with respect to such Confidential Information, and until such
Know-How is otherwise disclosed, as the case may be.
5.6 Nothing contained herein shall be deemed to grant to CIRCA, either
expressed or implied, a license or other right or interest in the Know-How or in
any patent, trademark or other similar property of CEPHALON other than as
expressly provided hereunder.
5.7 CIRCA shall not use the name of CEPHALON, or disclose the existence of
this Agreement for any marketing, advertising or promotional purpose, without
CEPHALON's prior written consent.
5.8 If CEPHALON learns of any confidential or proprietary information of
CIRCA that does not relate to the manufacture or packaging of the Product, then
the provisions of this Article V shall apply to govern CEPHALON with respect to
the treatment of such information.
VI. COMPONENT SUPPLY
6.1 Active Drug Substance. CEPHALON will provide free of charge, and
---------------------
deliver to CIRCA at its designated production facility not less than thirty
(30) days in advance of the date of production of Product, appropriate
quantities of Active Drug Substance which meets the specifications established
in Schedule A. Following such delivery, CIRCA shall assume full responsibility
for the safekeeping and safe handling, and shall bear all risk of loss, of all
such Active Drug Substance that is in its possession. Legal title to all Active
Drug Substance will remain with CEPHALON, provided however, that CIRCA shall
reimburse CEPHALON for the replacement cost of any Active Drug Substance that is
lost, contaminated, or destroyed while in the possession of CIRCA. CIRCA will
use its best efforts to obtain maximum yield of Product from the Active Drug
Substance provided by CEPHALON in connection with the formulation and packaging
services provided hereunder. The parties anticipate that the combined yield loss
suffered in the course of formulating and packaging the Product in any given lot
shall not exceed
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five percent (5%). Notwithstanding the above, if the yield loss over any given
twelve month period during the term hereof exceeds five percent (5%), then CIRCA
will reimburse CEPHALON for its costs for that amount of Active Drug Substance
lost that exceeds the aforementioned five percent (5%) maximum threshold.
Notwithstanding the above, the parties agree to calculate the actual yield loss
after production by CIRCA of the first ten (10) batches of Product, and to
negotiate in good faith to adjust the aforementioned yield loss threshold if the
actual yield loss proves to be substantially more than or less than five percent
(5%).
6.2 Starting Material. CIRCA will obtain at its expense Starting Material
-----------------
which meets the specifications established in Scheduled A. CIRCA assumes full
responsibility and liability for the storage and handling of all Starting
Material.
6.3 Packaging Components. Product will be labeled and packaged in
--------------------
accordance with instructions provided by CEPHALON. CIRCA will provide to
CEPHALON master samples of all labels, package inserts and packaging prior to
use and CEPHALON thereafter promptly will approve said master samples. Upon
approval by CEPHALON, CIRCA will procure, test, inspect and approve all labels,
package inserts and packaging used in connection with the Products.
VII. FORECASTS AND ORDERS
7.1 Orders. CEPHALON will submit firm written purchase orders to CIRCA
------
not less than ninety (90) days in advance of the required date of shipment.
CEPHALON must deliver all Active Drug Substance necessary to formulate Product
for any given shipment to CIRCA not less than ninety (90) days in advance of
said date of shipment.
7.2 Forecasts and Forecast Changes. CEPHALON will provide CIRCA with an
------------------------------
initial volume forecast setting forth CEPHALON's anticipated quantity
requirements for the forthcoming twelve (12) months on or about the Effective
Date, and with rolling, updated volume forecasts on a quarterly basis
thereafter. Forecasts provided by CEPHALON to CIRCA hereunder are for planning
purposes only. CEPHALON can increase or decrease its firm order quantities with
CIRCA's prior agreement and CIRCA can adjust its shipping quantities with
CEPHALON'S prior agreeement. Both parties shall accommodate reasonable change
requests from the other.
VIII. SHIPMENT AND PAYMENT
8.1 CIRCA's Responsibilities. CIRCA will properly prepare the Product so
------------------------
that it may be lawfully and safely shipped to warehouse locations in the United
States, Mexico, Japan, the United Kingdom and Ireland as designated by CEPHALON.
CIRCA will prepare and execute all necessary shipping documents. CEPHALON will
choose the carrier by indicating same on its purchase order provided to CIRCA.
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8.2 Terms of Shipment. CIRCA will ship Product ex factory to CEPHALON's
-----------------
warehouse or other designated sites. All transport costs and risk of loss during
shipment will be borne by CEPHALON.
8.3 Terms of Payment. CEPHALON will pay CIRCA the toll fee within thirty
----------------
(30) days after the date on which CEPHALON receives said invoice from CIRCA,
together with copies of all documentation required for Product release as
provided in Schedule C hereto.
XI. INSPECTION AND ANALYSIS
9.1 Inspection by CIRCA. CIRCA will analyze each Product lot for
-------------------
compliance with the Specifications established in Schedule B. CIRCA will send to
CEPHALON a certificate of analysis and a certificate of release (together with
any other documentation required under procedures established in Schedule C
hereto) prior to, or together with, each shipment of Product. In this regard,
CIRCA agrees to retain all records and documents necessary to fulfill the
requirements established by all applicable regulatory agencies. The parties
acknowledge that, subject to the terms set forth in Schedule C hereof, under the
laws and regulations of the United Kingdom and Ireland, CEPHALON or its
authorized agent shall serve as the designated "Qualified Person" under the laws
and regulation for the European Union for purposes of releasing the Product into
the market.
9.2 Inspection by CEPHALON. CEPHALON or its authorized representative will
----------------------
inspect all shipments upon their receipt and will report any reasonably
discernible defects in the Product to CIRCA within sixty (60) days of its
receipt of the Product and related records. Any defects not reasonable
discernible will be reported to CIRCA by CEPHALON within thirty (30) days of
CEPHALON's discovery of same.
9.3 Non-Conforming Product. If CEPHALON notifies CIRCA in writing that any
----------------------
Product lot does not meet Product Specifications established in Schedule B or
in the Technical Agreement set forth in Schedule C as determined by CEPHALON's
testing and inspection of the Product, then solely at its option CEPHALON may
either (i) demand that CIRCA remanufacture or repackage (as appropriate) said
Product at no charge to CEPHALON and pay all round-trip shipping charges to and
from the destination of the original shipment, or (ii) be relieved of any
obligation to pay CIRCA the toll fees otherwise payable for the manufacture of
said Product, and CIRCA shall reimburse CEPHALON for the costs incurred by
CEPHALON in properly disposing of the Product. In any event, CIRCA shall not be
liable for reimbursing CEPHALON its cost of Active Drug Substance used in
formulating such non-conforming Product, provided however, that nothing herein
shall be construed to limit CIRCA's obligations established in Section 6.1
hereof.
9.4 Independent Testing. If CEPHALON notifies CIRCA that any Product does
-------------------
not meet applicable Specifications or quality assurance guidelines, and CIRCA
does not agree with CEPHALON'S position, the parties will attempt to reach a
mutually acceptable resolution of the dispute. If they are unable to do so after
a reasonable period of time (such period not to exceed three months from the
date of original notification), the matter will be submitted to an
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independent testing laboratory acceptable to both parties. Both parties will
accept the judgement of the independent laboratory. The cost of such testing
will be borne by the party whose position is determined to have been in error.
If the Product is determined by said independent laboratory to have been
conforming, then the provisions of Section 9.3 hereof shall not apply, and
CEPHALON shall not be relieved of its obligations to pay CIRCA for the
production of such Product.
X. REPRESENTATIONS AND WARRANTIES
10.1 General. CIRCA represents and warrants to CEPHALON that (i) it has
-------
and will maintain throughout the pendency of this Agreement, the expertise, with
respect to personnel and equipment, to fulfill the obligations established
hereunder, and has obtained all requisite licenses, authorizations and approvals
required by federal, state or local government authorities to manufacture the
Product; (ii) the production facility, equipment and personnel to be employed to
formulate and package the Product will be qualified to manufacture GMP grade
product at the time each such batch of Product is produced, and that the
production facility to be employed is in compliance with all applicable laws and
regulations, provided however, that CEPHALON acknowledges that CIRCA shall not
be required to establish or to maintain a dedicated production facility solely
on the basis of this representation; (iii) there are no pending or uncorrected
citations or adverse conditions noted in any inspection of the production
facility to be employed which would cause the Product to be misbranded or
adulterated within the meaning of the federal Food, Drug and Cosmetic Act, as
amended; (iv) it has provided to CEPHALON all FDA inspection reports and FORM
483s received by CIRCA in the last two (2) years, and that the documents
provided are true and complete copies thereof (except as noted); (v) the
execution, delivery and performance of this Agreement by CIRCA does not conflict
with, or constitute a breach of any order, judgement, agreement, or instrument
to which CIRCA is a party; (vi) the execution, delivery and performance of this
Agreement by CIRCA does not require the consent of any person or the
authorization of (by notice or otherwise) any governmental or regulatory
authority (other than those relating to the granting of approval to
commercialize the Product); and (vii) CIRCA has not been debarred by the United
States Food & Drug Administration ("FDA") under the General Drug Enforcement Act
of 1992 (or by any analogous agency or under any analogous law or regulation),
and neither it nor any of its officers or directors has ever been convicted of a
felony under the laws of the United States or of the Territory for conduct
relating to the development or approval of a drug product or relating to the
marketing or sale of a drug product, and further that no individual or firm
debarred by any governmental authority will participate in the performance,
supervision, management or review of the production of Product supplied to
CEPHALON under this Agreement.
10.2 Manufacturing Warranty. CIRCA warrants that all products supplied to
----------------------
CEPHALON will be manufactured in accordance with current good manufacturing
practices as specified by the applicable laws and regulations of the United
States, Mexico, Japan, the European Union, the United Kingdom and of Ireland (as
may be applicable), at the time of manufacture. A statement to this effect shall
be printed on CIRCA'S certificate of analysis for each batch of Product
delivered. Moreover, CIRCA will provide to CEPHALON concurrent with each invoice
the applicable batch records and test results establishing such compliance, as
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provided in Schedule C hereto.
10.3 Product Warranty. CIRCA hereby warrants that all Product delivered to
----------------
CEPHALON (i) will not be adulterated, misbranded, or otherwise prohibited within
the meaning of any European Union, national, state or local law or regulation,
(ii) will be free from defects in materials (so long as such materials are
within the control of CIRCA during the manufacturing process) and manufacture,
(iii) will conform to the specification set forth in the applicable Product
registration on file with the FDA, the Japanese Ministry of Health and Welfare,
the European Medicines Evaluative Agency, any other authority, and (iv) will
conform to Specifications as established in Schedule B hereto.
10.4 Environmental Warranty. CIRCA warrants that all waste generated in
----------------------
operations under this Agreement will be stored, transported and disposed of in a
safe and environmentally sound manner consistent with all federal, state and
local laws and regulations. CIRCA further warrants that it will conduct its
business so as to comply with the terms and conditions of all air pollution
control permits, sanitary sewer discharge permits, and authorizations required
by applicable federal, state and local laws, rules and regulations relating to
the protection of the environment. CIRCA will not undertake any production or
development activities for itself or on behalf of a third party which, together
with the emissions from activities under this Agreement, would cause air
emissions from isopropyl alcohol or any other substance to exceed any applicable
legal limits.
10.5 Technology Warranty. CEPHALON hereby represents and warrants to CIRCA
-------------------
that the technology established in the Specifications, or as otherwise disclosed
hereunder (collectively, the "Technology") is, to the best knowledge of
CEPHALON, sufficient to enable CIRCA to manufacture and package the Product as
contemplated hereunder. Except as otherwise disclosed to CIRCA, CEPHALON owns
all right, title and interest to said Technology, free and clear of any adverse
ownership claims Except as otherwise disclosed to CIRCA, CEPHALON has not
received any notice that any portion of the Technology infringes upon the
patent, trade secret or other intellectual property rights or interests of any
third party and, to the best knowledge of CEPHALON, there has been no such
infringement.
XI. QUALITY CONTROL, RECORDS AND INSPECTIONS
11.1 Product and Component Samples. CIRCA will maintain a sample of each
-----------------------------
chemical component (including Active Drug Substance) as required by applicable
regulatory standards or as otherwise mutually agreed by CEPHALON and CIRCA.
CIRCA will be responsible for maintaining retention samples of the Product as
may be required by applicable regulatory standards.
11.2 Validation. CIRCA will validate all process, methods, equipment
----------
utilities, facilities and computers used in the formulation, packaging, storage,
testing and release of Product in conformance with the provisions of Schedule D
hereto, and all applicable laws and regulations. CEPHALON will have the right to
review the results of said validation upon request.
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11.3 Quality Compliance. CIRCA will provide CEPHALON with timely
------------------
notification of all significant deviations, notes to file, and other
deficiencies that may impact the quality of the Product, as well as all FDA
reports regarding testing, manufacture, packaging, or labeling of the Product or
the production facility.
11.4 Manufacturing Records. CIRCA will maintain complete and accurate
---------------------
records relating to the Product and the manufacture, packaging, labeling and
testing thereof for the period required by applicable Regulatory Standards, and
CIRCA shall provide copies thereof to CEPHALON upon CEPHALON's request. The
records shall be subject to audit and inspection under this Article XI.
11.5 Batch Records. CIRCA will supply for each batch of Product, including
-------------
each pilot batch, complete batch production and control records. Records which
include the information relating to the manufacturing, packaging and quality
operation for each lot of Product will be prepared by CIRCA at the time such
operations occur. The records will include, without limitation, mixing and
filling records; container and component traceability records; equipment usage
records; in-process and final laboratory testing results; in-process and final
Product physical inspection results; yield reconciliation for bulk and finished
Product; labeling and packaging records; and records relating to deviations from
approved procedure, as well as CIRCA's investigation and corrective actions.
Copies of batch records will be forwarded to CEPHALON prior to or along with
shipment of each Product lot.
11.6 Records Retention. CIRCA will retain records and documents for
-----------------
periods meeting all applicable regulations of the FDA and other applicable
regulatory agencies.
11.7 Regulatory Inspections. CIRCA will promptly inform CEPHALON of any
----------------------
contact, inspection or audit by any governmental agency, related to or affecting
the Product. CIRCA will promptly provide CEPHALON with copies of any
government-issued inspection observation reports (including without limitation
FDA Form 483s) and agency correspondence, that may affect the Product. CIRCA and
CEPHALON will cooperate in resolving any concerns with any governmental agency.
CIRCA will also inform CEPHALON of any action taken by any governmental agency
against CIRCA or any of its officers and employees, within 24 hours after the
action is taken.
11.8 CEPHALON Inspections. CEPAHLON or its authorized representative will
--------------------
have the right during normal business hours, at reasonable intervals and on
reasonable prior notice, to inspect CIRCA's facilities used in the
manufacturing, packaging, storage, testing, shipping or receiving of Product and
Product components. Such inspections may include GMP inspections and system
audits. Representatives of CEPHALON (and its designated Affiliate) will have
access during audits to all documents, records, reports, data, procedures,
facilities, regulatory submissions, and all other information required to be
maintained by applicable government regulations. CIRCA shall take appropriate
actions to adopt reasonable suggestions of CEPHALON to correct any deficiencies
identified by such inspection or audit. In addition, CEPHALON shall have the
right to observe from time to time the manufacture, packaging and quality
control testing of the Product by CIRCA, including without limitation, the right
to
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arrange, at its cost and expense, to have a CEPHALON employee or other
representative located on the premises of CIRCA's production facility to
participate in the monitoring of Product production, testing, packaging and
labeling under this Agreement. No testing of the Product by CEPHALON and no
inspection or audit by CEPHALON of the CIRCA production facility under this
Agreement shall operate as a waiver of or otherwise diminish CIRCA's
responsibility to ensure Product quality under this Agreement.
XII. COMPLAINTS, ADVERSE EXPERIENCES AND RECALLS
12.1 Product Complaints and AE's. CEPHALON will correspond with
----------------------------
complainants as to any complaints associated with Product, whether received
during or after the term hereof. CIRCA will assist CEPHALON in investigating
Product complaints by analyzing Product, manufacturing processes and components
to determine the nature and cause of an alleged Product manufacturing defect or
alleged Product failure. CIRCA will also assist CEPHALON in the investigation of
any Adverse Experience (AE) reported to either party when such AEs are believed
to be attributable to the Product. If CEPHALON determines that any reasonable
pyhsical, chemical, biological or other evaluation should be conducted in
relation to an AE or Product compliant, CIRCA will conduct the evaluation and
provide CEPHALON with a written report of such evaluation within thirty (30)
days from receipt of CEPHALON's written request for same, together with samples
of the Product from the relevant lot. CIRCA will notify CEPHALON within 24 hours
of any Product that fails to meet the Specifications set forth in Schedule B
hereto.
12.2 AE Reports. CEPHALON or its Affiliates will file any AE Reports
-----------
required under United States or foreign laws and regulations for the Product.
CIRCA will notify CEPHALON by facsimile transmission of all Product complaints
and AEs received within two (2) days of its receipt thereof. All such notices
shall be sent to the attention of the Director, Medical Affairs at CEPHALON,
facsimile number (610) 738-6313.
12.3 Recall Action. If CEPHALON should elect or be required to initiate a
--------------
Product recall, withdrawal or field correction because of (i) supply by CIRCA of
Product that does not conform to the Specifications and warranties established
by this Agreement or (ii) the negligent or intentional wrongful act or omission
of CIRCA, CEPHALON will notify CIRCA and provide a copy of its recall
letter prior to initiation of the recall. CIRCA will assist CEPHALON (and its
designated Affiliate) in any investigation to determine the cause and extent of
the problem. All regulatory authority contacts and coordination of any recall
activities will be initiated by CEPHALON.
12.4 Recall Expenses. If any Product is recalled as a result of (i)
----------------
supply by CIRCA of Product that does not conform to the warranties in this
Agreement or (ii) the negligent or intentional wrongful act or omission of
CIRCA, then CIRCA will bear all costs and expenses of such recall. Recalls for
any other reason will be at CEPHALON's expense. If each Party contributes to
the cause for a recall, the cost will be shared in proportion to each Party's
contribution.
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12.5 Recall Records. CIRCA will maintain complete and accurate records
---------------
for such periods as may be required by applicable law or regulation, but not
less than three (3) years following the applicable date of expiration of a given
Product lot, or all Product supplied under this Agreement.
XIII. EQUIPMENT
Notwithstanding anything to the contrary herein, the parties acknowledge
that CEPHALON will reimburse CIRCA for its out-of-pocket expenses incurred in
connection with the purchase of certain tablet tooling equipment required for
the manufacture, packaging and labeling of the Product (the "Equipment"),
including without limitation punches and dies for tablet presses, and special
change parts for bottle handling. The parties shall agree in writing on the
specifications and costs of any such Equipment and related materials prior to
such purchase. CIRCA agrees to use said Equipment solely in connection with the
performance of its duties and obligations established hereunder. CIRCA shall
maintain all such Equipment in good working order. CEPHALON will be responsible
for the cost of purchasing replacement Equipment at the end of its useful life,
provided however that CIRCA will be responsible for any such costs stemming from
damage or premature or undue wear and tear to the Equipment based upon neglect
for misuse by CIRCA. CEPHALON shall retain title to such Equipment, which will
be returned by CIRCA at the request of CEPHALON following termination of this
Agreement.
XIV. INSURANCE
During the term hereof, CIRCA shall maintain product liability/completed
operations insurance for and providing coverage of not less than TEN MILLION AND
00/100 DOLLARS ($10,000,000.00) per occurrence and in the aggregate providing a
defense for and insuring CIRCA against all costs, fees, judgments, and
liabilities arising out of or alleged to rise out of its obligations and
representations and warranties under this Agreement. In addition, CIRCA will
maintain at all times sufficient property casualty insurance to cover the total
quantity of Active Drug Substance and Product on hand at its full cost of
replacement. CIRCA will provide to CEPHALON, upon request, evidence of such
insurance overages. CIRCA further agrees to cause such policies to name CEPHALON
as an additional insured at no cost to CEPHALON.
XV. TRADEMARKS
15.1 CIRCA shall have the non-exclusive right to use the Trademarks in
packaging the Product in connection with fulfilling its obligations hereunder.
The rights granted CIRCA hereunder to use the Trademarks shall in no way affect
CEPHALON's ownership of such Trademarks. No other right, title or interest in
the Trademarks is established hereby, and nothing herein shall be construed to
grant any right or license to CIRCA to use the CEPHALON trademark or the name
CEPHALON, other than as specifically set forth herein.
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15.2 CIRCA shall not make any use or take any action with respect to the
Trademarks to prejudice or infringe CEPHALON's rights thereto including the use
of any confusingly similar trademark and shall forthwith, upon objection by
CEPHALON, desist from any use thereof or action therewith which is in violation
of this Agreement.
15.3 CIRCA will only market the Product using the relevant Trademarks as
listed in Schedule A during the term of this Agreement. Upon termination of
this Agreement, CIRCA will cease all use of the Trademarks and cancel any
license to such Trademarks granted hereunder.
15.4 CIRCA will use the Trademarks in strict accordance with the
instructions given by CEPHALON, and shall refrain from making any changes in
connection therewith without first obtaining CEPHALON's written consent. CIRCA
further agrees that at all times the Trademarks shall be used in accordance with
good trademark practice, including notation of the fact that they are trademarks
and use of the appropriate notice of registration. CEPHALON reserves the right
to unilaterally determine the adequacy of the use and protection given the
Trademarks by CIRCA as set forth herein.
15.5 CIRCA shall notify CEPHALON, in writing, of any conflicting use of
and applications or registrations for, any of the Trademarks, or any acts of
infringements, or acts of unfair competition involving the Trademark, promptly
after such matters are brought to its attention or its has knowledge thereof.
CIRCA further agrees to assist CEPHALON, at CEPHALON's expense, in registering
or perfecting CEPHALON's rights to the Trademarks in the Territory.
15.6 In the event of any claim or litigation by a third party against
CIRCA alleging that any of the Trademarks initiates or infringes a trademark of
such third party or is invalid, CIRCA shall promptly give notice of such claims
or litigation to CEPHALON and CEPHALON shall assume responsibility for and
control of the handling, defense or settlement thereof. CIRCA shall cooperation
fully with CEPHALON during the pendency of any such claim or litigation.
CEPHALON shall keep CIRCA notified of the current status of any trademark claim,
litigation or infringement of any of the Trademarks and shall permit CIRCA to
assume the handling, defense or settlement thereof if CEPHALON declines to do
so. CEPHALON may at any time modify adopt or withdraw from use of any Trademark
without any liability to CIRCA.
XVI. INVENTIONS
Any inventions or discoveries made by CIRCA in the performance of this
Agreement that relate to the Product (including any new use or change in the
method of producing, testing or storing the Product) shall be owned by CEPHALON.
Any other invention or discovery made by CIRCA in the performance of this
Agreement shall be owned by CIRCA, but CEPHALON shall have a nonexclusive,
perpetual, nontransferable, paid-up license to use any such invention to make or
have made the Product. Each party shall execute such instruments as shall be
required to evidence or effectuate the other party's ownership of any such
inventions, and shall cooperate upon reasonable request (and at the expense of
the requesting party) in the prosecution of patents
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and other intellectual property rights related to any such invention.
XVII. INDEMNIFICATION
17.1 By CIRCA. CIRCA will indemnify and hold CEPHALON harmless from
---------
any and all liability, damage, loss, cost, or expense (including reasonable
attorneys' fees) which arise from (i) CIRCA'S breach of any of the
covenants, warranties, and representations contained herein, or (ii) CIRCA's
negligence or other wrongful conduct as determined by a court of competent
jurisdiction.
17.2 By CHEPHALON. CEPHALON will indemnify and hold CIRCA harmless
-------------
from any and all liability, damage, loss, cost, or expense (including reasonable
attorneys' fees) which arise from (i) CEPHALON'S breach of any of the covenants,
warranties, and representations contained herein, or (ii) CEPHALON's negligence
or other wrongful conduct as determined by a court of competent jurisdiction, or
(iii) a claim that the manufacture of the Product by CIRCA in accordance with
this Agreement infringes a patent registered in the United States, or any other
jurisdiction.
17.3 By Each Party. In the event that negligence or willful
--------------
misconduct of both CIRCA and CEPHALON contribute to any such loss, damage,
claim, injury, cost or expense, CIRCA and CEPHALON will each indemnify and hold
harmless the other with respect to that portion of the loss, damage, claim,
injury, cost or expense attributable to its negligence or willful misconduct.
17.4 Procedures. In the event that one party receives notice of a
-----------
claim, lawsuit, or liability for which it is entitled to indemnification by the
other party, the party receiving notice shall give prompt notification to the
indemnifying party. The party being indemnified shall cooperate fully with the
indemnifying party throughout the pendency of the claim, lawsuit or liability,
and the indemnifying party shall have complete control over the conduct and
disposition of the claim, lawsuit, or liability including the retention of legal
counsel engaged to handle such matter. The indemnifying party hereunder will be
liable for any costs associated with the settlement of any claim or action
brought against it or other party unless it has received prior notice of the
settlement negotiations and has agreed to the settlement.
XVIII. FURTHER ENGAGEMENTS
If CEPHALON develops a revised formulation of the Product, or otherwise
desires to engage CIRCA to formulate or package pharmaceutical products other
than the Product, then the parties will negotiate in good faith to reach
agreement on mutually acceptable terms and conditions under which this Agreement
shall be expanded to cover such additional engagement(s).
-14-
<PAGE>
XIX. TERMINATION
19.1 Without Cause. CEPHALON may terminate this Agreement, effective on
--------------
the third anniversary of the date hereof or on subsequent anniversary date(s),
if applicable, by giving three (3) months written notice to CIRCA.
19.2 Breach. If either party hereto commits a material breach of any of
-------
its obligations hereunder, the non-breaching party may, at its option, terminate
this Agreement by giving the other party at least sixty (60) days prior written
notice of its intent to terminate this Agreement, which notice shall specify the
breach and the termination date, unless the breaching party cures said breach
prior to the specified termination date (or prior to the expiration of a longer
period as may be reasonably necessary to cure such breach, provided that the
breaching party is making diligent efforts to cure such breach, and provided
further that such longer period shall not in any event exceed one hundred twenty
(120) days from the date of notice.)
19.3 Insolvency. Either party may terminate this Agreement immediately in
-----------
its entirety if the other Party files a petition of bankruptcy, is adjudged
bankrupt, takes advantage of any insolvency act, or executes a bill of sale,
deed of trust, or assignment for the benefit of creditors.
19.4 Survival. The rights and obligations contained in sections covering
---------
representations and warranties, indemnification and confidentiality will survive
termination of this Agreement, as will any rights to payment or other rights or
obligations that have accrued under this Agreement prior to termination.
Termination will not affect the liability of either party by reason of any act,
default, or occurrence prior to said termination.
19.5 Transfer. If either party terminates this Agreement, CIRCA will upon
---------
request provide reasonable assistance in transferring production of Product to a
facility owned by CEPHALON or a third party selected by CEPHALON.
19.6 Return of Product and Components. Upon termination under this
--------------------------------
Article, CIRCA shall return promptly to CEPHALON all Product, Active Drug
Substance, and packaging components in its possession on the effective date of
termination.
XX. ALTERNATE DISPUTE RESOLUTION
Any dispute concerning or arising out of this Agreement or concerning the
existence or validity hereof, shall be determined by the following procedure.
20.1 Both parties understand and appreciate that their long term mutual
interest will be best served by affecting a rapid and fair resolution of any
claims or disputes which may arise out of services performed under this contract
or from any dispute concerning contract terms. Therefore, both parties agree to
use their best efforts to resolve all such disputes as rapidly as possible on a
fair and equitable basis. Toward this end, both parties agree to develop and
follow a process for presenting, rapidly assessing, and settling claims on a
fair and equitable basis.
-15-
<PAGE>
20.2 If any dispute or claim arising under this contract cannot be
readily resolved by the parties pursuant to the process described in Section
21.1, the parties agree to refer the matter to a panel consisting of one (1)
senior executive employed by each party who is not directly involved in the
claim or dispute for review and resolution. A copy of the contract terms, agreed
upon facts (and areas of disagreement), and concise summary of the basis for
each side's contentions will be provided to both such senior executives who
shall review the same, confer, and attempt to reach a mutual resolution of the
issue.
20.3 If the matter has not been resolved utilizing the process set forth
in this Article XXI, and the parties are unwilling to accept the non-binding
decision of the panel, either or both parties may elect to pursue resolution
through litigation, or other legal remedies available to the parties.
XXI. MISCELLANEOUS
21.1 Headings. The headings and captions used herein are for the
--------
convenience of the parties only and are not to be construed to define, limit or
affect the construction or interpretation hereof.
21.2 Severability. In the event that any provision of this Agreement is
------------
found to be invalid or unenforceable, then the offending provision shall not
render any other provision of this Agreement invalid or unenforceable, and all
other provisions shall remain in full force and effect and shall be
enforceable, unless the provisions which have been found to be invalid or
unenforceable shall substantially affect the remaining rights or obligations
granted or undertaken by either party.
21.3 Entire Agreement. This Agreement, including all those Schedules
----------------
appended hereto, contains the entire agreement of the Parties regarding the
subject matter hereof and supersedes all prior agreements, understandings or
conditions (whether oral or written) regarding the same, including without
limitation that certain Manufacturing Agreement between the parties dated as of
November 14, 1994 (except for those provisions thereof that were designated by
the parties to survive termination of said Manufacturing Agreement). Further,
this Agreement may not be changed, modified, amended or supplemented except by
written instrument signed by both parties.
21.4 Assignability. This Agreement and the rights hereunder may not be
-------------
assigned or transferred by either party without the prior written consent of the
other party (other than for rights to payment), provided however, that either
party may assign this Agreement to an Affiliate, and provided further that in
the event of a merger, acquisition or sale of substantially all of the assets of
CEPHALON, the rights and obligations of CEPHALON under this Agreement may be
assigned to the survivor or purchaser in that transaction. In the event that
this Agreement is assigned, it shall be binding upon and inure to the benefit of
the parties and their respective successors and assigns.
-16-
<PAGE>
21.5 Further Assurances. Each party hereto agrees to execute, acknowledge
------------------
and deliver such further instruments, and to take such other actions, as may be
necessary or appropriate in order to carry out the purposes and intent of this
Agreement.
21.6 Waiver. The waiver by either party of a breach of any provisions
------
contained herein shall be effective only if made in writing and shall in no way
be construed as a waiver of any succeeding breach of such provision or waiver of
the provision of itself.
21.7 Force Majeure. A party shall not be liable for nonperformance or
-------------
delay in performance (other than of obligations regarding any payments or of
confidentiality) caused by any event reasonably beyond the control of such party
including, without limitation, wars, hostilities, revolutions, riots, civil
disturbances, national emergencies, strikes, lockouts, unavailability of
supplies, epidemics, fires, floods, earthquakes, other forces of nature,
explosions, embargoes, or any other Acts of God, or any laws, proclamations,
regulations, ordinances, or other acts or orders of any court, government or
governmental agency. Any occurrence of Force Majeure shall be reported promptly
to the other party. A party whose performance has been excused will perform such
obligations as soon as is reasonably practicable after the termination or
cessation of such event or circumstance.
21.8 Remedies. CIRCA agrees and acknowledges that its failure to produce
--------
Product, its disclosure of Confidential Information, or the breach of any other
provision set forth in this Agreement may cause irreparable harm to CEPHALON,
and therefore that any such breach or threatened breach will entitle CEPHALON to
injunctive relief, in addition to any other legal remedies available to
CEPHALON in a court of competent jurisdiction.
21.9 Governing Law. This Agreement shall in all respects be construed and
-------------
enforced in accordance with the laws of the State of Delaware.
21.10 Independent Contractors. The parties are independent contractors
-----------------------
under this Agreement. Nothing contained in this Agreement is to be construed so
as to constitute CEPHALON and CIRCA as partners, agents or employees of the
other, including with respect to this Agreement. Neither party hereto shall have
any express or implied right or authority to assume or create any obligations on
behalf of, or in the name of, the other party or to bind the other party to any
contract, agreement or undertaking with any third party unless expressly so
authorized in writing by the other party.
21.11 Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be considered and shall have the force and
effect of an original.
21.12 Notices. Except as set forth in Section 12.2 above, or as otherwise
-------
stated herein, all notices, consents or approvals required by this Agreement
shall be in writing and sent by certified or registered air mail, postage
prepaid or by facsimile or cable (confirmed by such certified or registered
mail) to the parties at the following addresses or such other addresses as may
be designated in writing by the respective parties. Notices shall be deemed
effective on the date of mailing.
-17-
<PAGE>
Director, Technical Operations
Cephalon, Inc.
145 Brandywine Parkway
West Chester, PA 19380-4245
Facsimile: (610) 344-7563
General Manager
Circa Pharmaceuticals, Inc.
33 Ralph Avenue
P.O. Box 30
Copiague, New York 11726-0030
Facsimile: (516) 842-8630
IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to
be executed as of the date first above written.
CEPHALON, INC.
By: /s/ Bruce A. Peacock
------------------------------------
Bruce A. Peacock
CIRCA PHARMACEUTICALS, INC.
By: /s/ Stan J. Martinez
------------------------------------
-18-
<PAGE>
SCHEDULE A
----------
ACTIVE DRUG SUBSTANCE AND STARTING MATERIAL SPECIFICATIONS; TRADEMARKS
----------------------------------------------------------------------
The parties have agreed upon all those applicable specifications for the
Active Drug Substance and Starting Materials as set forth in the following
documents. Any modifications to any such specifications shall be agreed upon by
the parties.
DCRA # DOCUMENT # TITLE
- ------ ---------- -----
893 PKG/CAPLINER Packaging Component - Cap Liner (PE)
892 PKG/DESS Packaging Component - Desiccant Canister
891 PKG/HDPE Packaging Component - HDPE Container
894 PKG/RAYON Packaging Component - Rayon Coil
865 RM/CRMLNA Raw Material - Croscarmellose Sodium, NF
864 RM/CRN STR Raw Material - Corn Starch
[*]
867 RM/LACHY Raw Material - Lactose Monohydrate, NF
929 RM/MAGSIL Raw Material - Magnesium Silicate [*]
869 RM/MAGSTR Raw Material - Magnesium Stearate, NF
873 RM/MODAF Raw Material - Modafinil
870 RM/PVP Raw Material - Povidone, USP
907 RM/PWATER Raw Material - Purified Water, USP
872 RM/TALC Raw Material - Talc, USP
875 STD/MODAF Requalification of Standard - Modafinil
876 VQ/MODAF Vendor Qualification - Modafinil
* THE CONFIDENTIAL MATERIAL CONTAINED HEREIN HAS
BEEN OMITTED AND HAS BEEN FILED SEPARATELY
WITH THE COMMISSION.
-19-
<PAGE>
Int. Cl.: 42
Prior U.S. Cls.: 100 and 101
Reg. No. 1,983,615
United States Patent and Trademark Office Registered July 2, 1996
- -----------------------------------------------------------------------
SERVICE MARK
PRINCIPAL REGISTER
[LOGO]
CEPHALON, INC. (DELAWARE CORPORATION)
145 BRANDYWINE PARKWAY
WEST CHESTER, PA 19380
FOR: BIOFILARMACEUTICAL RESEARCH AND DEVELOPMENT SERVICES, NAMELY DEVELOPING
FOR OTHERS DIAGNOSTIC AND THERAPEUTIC AGENTS FOR DISEASES OF ANIMALS AND HUMANS,
IN CLASS 42 (U.S. CLS. 100 AND 101).
FIRST USE 6-0-1988: IN COMMERCE 6-0-1988
THE STIPPLING IN THE DRAWING IS FOR SHADING PURPOSES ONLY.
THE MARK IS A STYLIZED LETTER "C" DESIGN
SER. NO. 74-622-072, FILED 1-17-1995
DAVID H. STINE, EXAMINING ATTORNEY
Provigil(R)
Cephalon(R)
-20-
<PAGE>
SCHEDULE B
----------
PRODUCT SPECIFICATIONS
----------------------
The parties have agreed upon all those applicable specifications for the
Product as set forth in the following documents. Any modifications to any such
specifications shall be agreed upon by the parties.
DCRA # DOCUMENT # TITLE
- ------ ---------- -----
877 BL/MODAF Master Blend - Modafinil Tablets
878 FP/100MODAF Finished Product - Modafinil 100 mg Tablets
890 FP/100MODAFEUR Finished Product Modafinil 100 mg Tablets (European)
[*]
881 FP/200MODAF Finished Product - Modafinil 200 mg Tablets
[*]
875 STD/MODAF Requalification of Standard - Modafinil
* THE CONFIDENTIAL MATERIAL CONTAINED HEREIN HAS
BEEN OMITTED AND HAS BEEN FILED SEPARATELY
WITH THE COMMISSION.
-21-
<PAGE>
SCHEDULE C
----------
TECHNICAL AGREEMENT
-------------------
-22-
<PAGE>
[LOGO OF CIRCA PHARMACEUTICALS, INC.]
CEPHALON - CIRCA TECHNICAL AGREEMENT
FOR THE COMMERCIAL MANUFACTURING AND TESTING
OF PROVIGIL(R) DRUG PRODUCT
I. PURPOSE AND SCOPE
This is the Quality Assurance policy between Cephalon and Circa. This agreement
specifies the QA responsibilities and requirements of each party for the
commercial manufacturing and testing of Provigil(R) Drug Product. This policy
also specifies the Provigil related requirements for record keeping, quality
reporting, and change control.
II. DEPARTMENTS AFFECTED
Quality Assurance - Cephalon Quality Assurance - Circa
Commerical Operations - Cephalon Quality Control - Circa
Regulatory Affairs - Cephalon Manufacturing Operations - Circa
Regulatory Affairs - Circa
III. RESPONSIBILITY
It is the responsibility of the Quality Assurance management at Cephalon and
Circa, in cooperation with Manufacturing Operations, Quality Control and
Regulatory Affairs, to assure compliance with this agreement.
IV. RESPONSIBILITIES AND REQUIREMENTS - CIRCA
A. Circa Responsibilities
. Manufacture and test Provigil Drug Product in accordance with cGMP and the
approved Provigil marketing applications.
. Perform a Quality review of every lot of Provigil drug product and
subsequently release or reject the lot in accordance with cGMP.
. All initial and stability testing of both active and inactive components and
finished dosage forms are performed in-house by the staff of the Circa
Quality Control Department in accordance with approved specifications and
procedures (as listed in this agreement) and/or the approved Provigil
marketing applications and protocols for Provigil drug product.
<PAGE>
[LOGO OF CIRCA APPEARS HERE]
. Quality Control Raw Material Report for release of each lot of modafinil
drug substance tested and released for use in the manufacturing of Provigil
drug product.
. Quality Control Release Report for each lot of Provigil Master Blend used
in the manufacturing of Provigil drug product.
. Quality Control Release Report for each lot of Provigil Compression Process
used in the manufacture of Provigil drug product.
. Certificate of Release (to Cephalon) for each labeled and packaged lot of
Provigil final drug product.
. All investigations, incident reports, anomaly reports, associated with the
manufacturing and testing of every lot of Provigil.
The following documents shall be provided to Cephalon on a schedule mutually
agreed to by Circa and Cephalon or on an as need basis:
. Stability Reports
. Product Quality Review Reports (Summarized annually as the "Annual Product
Review)"
- Summary Report - Product complaints
- Summary Report - Incident reports and anomaly explanation reports
- Summary Report - Production deviations
- Summary Report - Out-of-specification results
- Summary Report - QA product disposition
- Summary Report - In-process and finished product data trends
- Summary Report - Retain sample evaluation
V. RESPONSIBILITIES AND REQUIREMENTS - CEPHALON
A. RESPONSIBILITIES
. Cephalon's QA shall review the Provigil summary lot file documentation
prior to market distribution. Documentation of the sponsor review and
disposition will be provided to Circa prior to the shipment of the lot to
the designated distributor.
<PAGE>
[LOGO OF CIRCA APPEARS HERE]
. To assure that all raw materials and packaging components are tested and
released, as per the most current Specifications and Procedures (as listed
in this agreement), and/or the approved Provigil marketing applications and
Standard Operating Procedures, prior to usage in the manufacturing of
Provigil drug product.
. The manufacturing and packaging is to be executed under the most current
Master Batch and Packaging Records (as listed in this agreement), that are
controlled through Circa's internal change control procedure.
. Compile and report the following Provigil specific information necessary
for the periodic product quality assessment:
- Investigations;
- Deviations;
- List of Provigil Lots Released;
- List of Provigil Lots Rejected;
- Product Complaints; and
- Product Stability
- In-Process and Finished Product Data Trends
- Retain Sample Evaluation
B. Change Control - Circa
Circa shall not implement, modify or delete any specification, process, or
procedure directly related to the manufacture or testing of Provigil Drug
Product, or change the equipment used, or change the vendors, without notifying
Cephalon or without prior written approval from Cephalon.
The following require joint Cephalon - Circa approval prior to implementation,
-------------------------
modification or deletion:
. Master Batch Formula: Master Blend
. Master Batch Formula: 100 mg Compression Process
. Master Batch Formula: 200 mg Compression Process
. Modafinil Raw Material Specification and Procedure: RM/MODAF
. In-Process Specification and Procedure: BL/MODAF
. Finish Product Specification and Procedure, Provigil Tablets, 100 mg FP/100
MODAF
. Finished Product Specification and Procedure, Provigil Tablets, 200 mg
FP/200 MODAF
. Stability Specification and Procedure, Provigil Tablets, 100 mg STAB/100
MODAF
. Stability Specification and Procedure, Provigil Tablets, 200 mg STAB/200
MODAF
. Raw Material Specification and Procedure for Magnesium Silicate [*]
RM/MAGSIL
. Master Packaging Record: Provigil Tablets, 100 mg Capsule Shaped
* THE CONFIDENTIAL MATERIAL CONTAINED HEREIN HAS
BEEN OMITTED AND HAS BEEN FILED SEPARATELY
WITH THE COMMISSION.
<PAGE>
[LOGO OF CIRCA APPEARS HERE]
. Master Packaging Record: Provigil Tablets, 200 mg
. Other procedures, processes, and documentation exclusive to Provigil
manufacturing and testing operations...for example:
- Provigil Process Validation
- Provigil Cleaning Validation
The following require Cephalon notification prior to implementation,
---------------------
modification or deletion:
. "Spec & Pros" specific (but not exclusive) to the manufacturing and testing
operations of Provigil Drug Product.
. Raw Material Specifications and Procedure for the following:
Purified Water, USP: RM/Water <USP>
[*]
Providone K90D, USP: RM/PVP
Lactose Monohydrate, NF: RM/LACHY
Corn Starch, NF: RM/CRNSTR
Croscarmellose Sodium NF: RM/CRMLNA
Talc USP: RM/TALC
Magnesium Stearate, NF: RM/MAGSTR
. Other procedures, processes, and documentation specific to Provigil or the
Cephalon sponsored drug product applications...for example:
- Addition or deletion of a Circa qualified outside testing
laboratory
- Circa's facilities and equipment specific in the manufacturing
and testing of Provigil, including but not limited to:
[*]
C. SUMMARY DOCUMENTATION AND REPORTS - CIRCA
Circa shall provide Cephalon with documentation specific to the manufacturing
testing and quality review of Provigil drug product as indicated below. Upon
request, Circa shall provide any and all Provigil specific manufacturing,
testing, QA and distribution documentation (Lot File documentation).
At a minimum, a copy of the following documents shall be provided to Cephalon
prior to the initial shipment of each lot of Provigil final product:
* THE CONFIDENTIAL MATERIAL CONTAINED HEREIN HAS
BEEN OMITTED AND HAS BEEN FILED SEPARATELY
WITH THE COMMISSION.
<PAGE>
[LOGO OF CIRCA APPEARS HERE]
Cephalon's Professional Services will receive and report adverse drug
experiences (ADEs). All spontaneous reports of adverse events received by Circa
or Cephalon will be directed to Cephalon as follows:
Cephalon, Inc.
Professional Services Representative
145 Brandywine Parkway
West Chester, PA 19380-4245
Telephone: 1-800-896-5855 Fax: 610-738-6313
. Cephalon's Professional Services will receive product quality complaints.
All product complaints received by Circa or Cephalon will be directed to
Cephalon's Professional Services as specified above. Cephalon will forward
all product quality complaints to Circa and processed in accordance with
Circa's drug quality complaint procedure.
. Cephalon's Quality Assurance is ultimately responsible for all Provigil
recall activities.
. Cephalon's will periodically monitor and audit Circa's manufacturing and
testing operations for compliance to the Provigil NDA and for compliance to
cGMP.
B. DOCUMENTATION AND REPORTS
. A copy of the Cephalon QA Provigil final product disposition will be sent
to Circa to effect the shipment of same lot to the designated distributor
(CORD).
. Cephalon will report all Provigil product quality complaints to Circa
within 10 working days of receipt.
/s/ Robert Urban 9/17/97
---------------------------------------------- ---------
Cephalon, Inc. Manufacturing Operations Date
/s/ Doug Claney 9/17/97
---------------------------------------------- ---------
Cephalon, Inc. Quality Assurance Date
/s/ [SIGNATURE ILLEGIBLE] 9/16/97
---------------------------------------------- ---------
Circa Pharmaceuticals, Inc. Regulatory Affairs Date
/s/ [SIGNATURE ILLEGIBLE] 9/16/97
---------------------------------------------- ---------
Circa Pharmaceuticals, Inc Quality Assurance Date
<PAGE>
SCHEDULE D
----------
PRODUCT VALIDATION AND STABILITY TESTING PROCEDURES
---------------------------------------------------
The parties have agreed upon all those applicable specifications for Product
validation and stability testing as set forth in the following documents. Any
modifications to any such specifications shall be agreed upon by the parties.
DCRA # DOCUMENT # TITLE
- ------ ---------- -----
874 RD/RA/MODAF Residual Active Assay - Modafinil Cleaning
Validation
880 STAB/100MODAF Stability - Modafinil 100 mg Tablets
889 STAB/100MODAFEU Stability - Modafinil 100 mg Tablets (European)
883 STAB/200MODAF Stability - Modafinil 200 mg Tablets
875 STD/MODAF Requalification of Standard - Modafinil
PV-001-10047 Process Validation Protocol - Master Blend for
Modafinil 100 mg & 200 mg Tablets
PV-002-11047 Process Validation Protocol - Compression Process
for Modafinil 100 mg Tablets
PV-003-11047 Process Validation Protocol - Compression Process
for Modafinil 200 mg Tablets
PV-004-06057 Process Validation Protocol - Packaging Process for
Modafinil 100 mg & 200 mg Tablets
CV-003-21047 Cleaning Validation Protocol - Modafinil 200 mg
Tablets
-23-
<PAGE>
SCHEDULE E
----------
TOLLING FEES
------------
CEPHALON shall pay CIRCA the following amounts in consideration of the
formulation and packaging services rendered hereunder:
BATCH PRICING COST/BATCH
------------- ----------
. A single lot per P.O. and delivery Date:
Provigil(R) 100 mg packed in 100 counts [*]
Provigil(R) 100 mg packed in 12 counts
Provigil(R) 200 mg packed in 100 counts
Provigil(R) 200 mg packed in 6 counts
. 3 or more of the same batch on a single P.O. with the same
delivery date:
Provigil(R) 100 mg packed in 100 counts [*]
Provigil(R) 100 mg packed in 12 counts
Provigil(R) 200 mg packed in 100 counts
Provigil(R) 200 mg packed in 6 counts
VOLUME DISCOUNTS:
- ----------------
A volume discount will be applied when a determined quantity of batches has been
purchased in a 12-month period starting with the anniversary date of the first
commercial batch. The determined quantities for the volume discounts are as
follows:
. [*] Batches: A [*] credit will be applied toward the next P.O.
for commercial batches.
. [*] Batches: A [*] credit will be applied toward the next P.O.
for commercial batches.
Beginning on the first anniversary of the effective date of this
Agreement and on each anniversary thereafter, the above tolling fees shall be
increased or decreased (as the case may be) by the percentage change from the
immediately proceeding anniversary date in the Producer Price Index (PPI) for
finished pharmaceutical preparations, ethical, as published by the Bureau of
Labor Statistics of the U.S. Department of Labor for the region in which the
production facility is located.
* THE CONFIDENTIAL MATERIAL CONTAINED HEREIN HAS
BEEN OMITTED AND HAS BEEN FILED SEPARATELY
WITH THE COMMISSION.
-24-
<PAGE>
Page 1 of 2
BUREAU OF LABOR STATISTICS DATA [LOGO]
DATA EXTRACTED ON: FEBRUARY 27, 1998 (11:28 AM)
PRODUCER PRICE INDEX-COMMODITIES
SERIES CATALOG:
Series ID: wpu06.35
Not Seasonally Adjusted
Group: Chemicals and allied products
Item: Preparations, ethical (prescription)
Base Date: 8200
DATA:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC ANN
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 162.6 163.4 166.0 167.1 168.2 167.5 168.9 169.8 172.0 172.6 175.1 174.5 169.0
- ---------------------------------------------------------------------------------------------------------------------------------
1989 177.4 177.6 180.3 182.1 182.1 183.4 184.6 187.4 187.7 189.0 190.0 191.1 184.4
- ---------------------------------------------------------------------------------------------------------------------------------
1990 193.1 196.4 197.4 199.5 201.2 199.4 201.0 202.4 202.4 204.4 205.4 206.5 200.8
- ---------------------------------------------------------------------------------------------------------------------------------
1991 208.7 211.5 212.1 216.6 216.7 216.8 219.4 220.8 219.5 223.2 222.5 222.6 217.5
- ---------------------------------------------------------------------------------------------------------------------------------
1992 225.2 227.5 228.5 230.5 230.8 231.3 232.3 234.4 233.2 235.0 234.4 236.9 231.7
- ---------------------------------------------------------------------------------------------------------------------------------
1993 237.2 239.7 240.0 242.1 241.5 241.7 242.8 244.2 243.5 244.9 244.0 244.5 242.2
- ---------------------------------------------------------------------------------------------------------------------------------
1994 247.9 248.5 248.6 249.2 250.7 250.3 249.2 250.2 250.7 250.3 251.9 252.0 250.0
- ---------------------------------------------------------------------------------------------------------------------------------
1995 251.3 253.6 253.3 256.2 255.9 255.4 256.8 257.1 258.8 261.3 261.6 262.6 257.0
- ---------------------------------------------------------------------------------------------------------------------------------
1996 262.3 262.2 263.1 263.4 265.6 266.3 267.1 266.9 266.5 266.6 266.6 267.9 265.4
- ---------------------------------------------------------------------------------------------------------------------------------
1997 270.2 271.0 271.9 271.6 272.7 273.2 273.4 273.5 273.9 275.4(P) 276.4(P) 276.9(P) 273.3(P)
- ---------------------------------------------------------------------------------------------------------------------------------
1998 279.4(P)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
P: Preliminary. All indexes are subject to revision four months after original
publication.
[GRAPH APPEARS HERE] DATA HOME PAGE
--------------
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF CEPHALON, INC.
<TABLE>
<CAPTION>
Place of PERCENTAGE
NAME Incorporation Ownership
- -------------------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
Cephalon Development Corporation.................................... Delaware 100%
Cephalon Investments, Inc........................................... Delaware 100%
Cephalon Technology, Inc............................................ Delaware 100%
Cephalon International Holdings, Inc................................ Delaware 100%
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-43716, No. 33-71920, No. 33-85776, No. 33-
69096, No. 33-74320, No. 333-02888 and No. 333-20321.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
March 2, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CEPHALON,
INC'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000873364
<NAME> CEPHALON, INC
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,975,000
<SECURITIES> 63,371,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 72,594,000
<PP&E> 33,944,000
<DEPRECIATION> 13,439,000
<TOTAL-ASSETS> 94,673,000
<CURRENT-LIABILITIES> 18,480,000
<BONDS> 15,096,000
0
0
<COMMON> 288,000
<OTHER-SE> 57,314,000
<TOTAL-LIABILITY-AND-EQUITY> 94,673,000
<SALES> 0
<TOTAL-REVENUES> 15,655,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 43,649,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,874,000
<INCOME-PRETAX> (55,407,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,407,000)
<EPS-PRIMARY> (1.95)
<EPS-DILUTED> (1.95)
</TABLE>
