<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1999
REGISTRATION NO. 333-88985
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CEPHALON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2834 23-2484489
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION NO.)
</TABLE>
145 BRANDYWINE PARKWAY
WEST CHESTER, PA 19380
(610) 344-0200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN E. OSBORN, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
CEPHALON, INC.
145 BRANDYWINE PARKWAY
WEST CHESTER, PA 19380
(610) 344-0200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES OF ALL COMMUNICATIONS TO:
DAVID R. KING, ESQ.
MORGAN, LEWIS & BOCKIUS LLP
1701 MARKET STREET
PHILADELPHIA, PA 19103
(215) 963-5000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
PROSPECTUS
CEPHALON, INC.
2,500,000 SHARES OF $3.625 CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
$125,000,000 7.25% CONVERTIBLE SUBORDINATED DEBENTURES
6,975,447 SHARES OF COMMON STOCK
------------------------
Under this prospectus, the selling stockholders named in this prospectus or
in prospectus supplements may offer and sell the preferred stock, the debentures
issued upon the exchange of the preferred stock and the common stock issued upon
conversion of the preferred stock or the debentures. We will not receive any of
the proceeds of sales by the selling stockholders.
The preferred stock was initially issued at a price of $50 per share. Our
common stock is quoted on the Nasdaq National Market under the symbol "CEPH." On
December 17, 1999 the last reported closing price of our common stock was $28.50
per share.
YOU SHOULD READ THIS PROSPECTUS CAREFULLY BEFORE YOU INVEST. SEE RISK
FACTORS BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION OF THE MATERIAL
RISKS INVOLVED IN INVESTING IN THE SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS DECEMBER , 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Use of Proceeds............................................. 16
Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends................................................. 16
Dividend Policy............................................. 16
Description of Preferred Stock.............................. 17
Description of Debentures................................... 29
Certain Federal Income Tax Consequences..................... 35
Selling Stockholders........................................ 44
Plan of Distribution for the Resale of the Securities....... 46
About this Prospectus....................................... 47
Where You Can Find More Information......................... 47
Forward-Looking Statements.................................. 48
Legal Opinion............................................... 48
Experts..................................................... 48
</TABLE>
i
<PAGE> 4
PROSPECTUS SUMMARY
Because this is a summary, it does not contain all of the details that may
be important to you. You should read this entire prospectus carefully before you
invest.
CEPHALON
Cephalon, Inc. is a biopharmaceutical company dedicated to the discovery,
development and marketing of products to treat neurological disorders and
cancer.
In December 1998, we received approval from the United States Food and Drug
Administration to market PROVIGIL(R), generically called modafinil, Tablets
[C-IV] for treating excessive daytime sleepiness associated with narcolepsy.
PROVIGIL is Cephalon's first approved product in the United States. We initiated
sales of PROVIGIL in the United States in February 1999 with a field sales force
of 45 representatives calling on neurologists and sleep specialists. In June
1999, we entered into a collaboration agreement with Abbott Laboratories, Inc.
to market and further develop GABITRIL(R), generically called tiagabine
hydrochloride, which is a treatment for epilepsy. In connection with this
collaboration, we have recently doubled the size of our United States sales
force to 90 representatives.
We began marketing PROVIGIL in the United Kingdom in March 1998 and in the
Republic of Ireland in February 1999 through our United Kingdom-based sales
organization. We recently initiated promotion of PROVIGIL in Austria.
Additionally, we have rights to commercialize PROVIGIL in Italy and Switzerland,
and applications seeking marketing approval have been filed in those countries.
We also have commercial rights to PROVIGIL in Mexico and we are collaborating
with a corporate partner in Japan to commercialize PROVIGIL in that country.
We have initiated clinical studies exploring the utility of PROVIGIL in
treating excessive daytime sleepiness and fatigue associated with disorders
other than narcolepsy, such as obstructive sleep apnea and multiple sclerosis.
If these studies show that PROVIGIL is useful in treating patients with these
disorders, we intend to perform the additional clinical studies that are
necessary to apply for regulatory approval to market PROVIGIL for these
indications. We also intend to conduct exploratory studies for PROVIGIL in a
number of different disorders, such as depression and attention deficit and
hyperactivity disorder. Our future success is highly dependent on the commercial
success of PROVIGIL in the United States. The "Risk Factors" section on page 7
of this prospectus contains more information about our dependence on PROVIGIL.
We have significant research programs that focus on discovering and
developing treatments for neurological disorders such as Parkinson's disease,
Alzheimer's disease and stroke, and cancers, including prostate and pancreatic
cancers, among others.
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. We
utilize our technical expertise in molecular biology, molecular pharmacology,
biochemistry, cell biology, tumor biology and chemistry to develop products in
both of these areas. Our primary research strategy has focused on understanding
the signaling mechanisms within the cell that lead to cell survival and cell
death. This understanding may allow medicinal chemical approaches toward
creating novel, small, orally active, synthetic molecules, so called signal
transduction modulators, which enhance the survival of neurons or which lead to
the death of cancerous cells.
We have formed alliances with TAP Holdings, Inc. for the development of
signal transduction modulators to treat cancers, including prostate and
pancreatic cancers, and H. Lundbeck A/S for the development of signal
transduction modulators to treat neurodegenerative disorders, including
Parkinson's and Alzheimer's disease. TAP is currently conducting Phase I
clinical studies with two molecules, one of
1
<PAGE> 5
which is administered orally and one of which is administered intravenously.
Cephalon and Lundbeck have recently initiated a Phase I clinical study with an
orally administered molecule.
In February 1997, Cephalon and Chiron Corporation submitted a new drug
application to the FDA for approval to market MYOTROPHIN(R) for the treatment of
amyotrophic lateral sclerosis, which is still pending. A similar application in
Europe has been withdrawn. Cephalon cannot predict whether the FDA's conditions
for approval can be met, and the prospects for regulatory approval of MYOTROPHIN
remain highly uncertain.
Cephalon, Inc., headquartered in West Chester, PA, currently markets
pharmaceutical products in five countries, including PROVIGIL and GABITRIL in
the United States.
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<PAGE> 6
SECURITIES TO BE OFFERED
This prospectus relates to the offer and sale by the selling stockholders
of the following securities:
- 2,500,000 Shares of $3.625 Convertible Exchangeable Preferred Stock
- $125,000,000 7.25% Convertible Subordinated Debentures
- 6,975,447 Shares of Common Stock.
We issued and sold the preferred stock in August 1999 to the initial
purchasers in transactions that were exempt from the registration requirements
imposed by the Securities Act of 1933, as amended. The initial purchasers
reasonably believed that the persons to whom they resold the preferred stock
were "qualified institutional buyers" or QIBs, as defined in Rule 144A under the
Securities Act. Prior to the date of this prospectus, the preferred stock was
eligible for trading on the Private Offerings, Resale and Trading through
Automated Linkages, or PORTAL Market. The preferred stock resold under this
prospectus are no longer eligible for trading on the PORTAL Market.
The following table outlines the key features of the securities:
Securities Offered............ 2,500,000 shares of $3.625 convertible
exchangeable preferred stock, par value $0.01
per share.
Dividends..................... Dividends will be cumulative from the date of
original issue at the annual rate of $3.625 per
share of preferred stock, payable quarterly on
the fifteenth day of February, May, August and
November, commencing November 15, 1999. Any
dividends must be declared by our Board of
Directors and must come from funds which are
legally available for dividend payments.
Conversion Rights............. Unless we redeem or exchange the preferred
stock, the preferred stock can be converted at
your option at any time into shares of common
stock at an initial conversion price of $17.92
(equivalent to a conversion rate of
approximately 2.79 shares of common stock for
each share of preferred stock). The initial
conversion price with respect to the preferred
stock is subject to adjustment in certain
events, including a non-stock fundamental
change or a common stock fundamental change,
which are explained in more detail on page 20
under "Description of Preferred
Stock -- Conversion Rights -- Conversion Price
Adjustment -- Merger, Consolidation or Sale of
Assets."
Liquidation Preference........ $50 per share of preferred stock, plus accrued
and unpaid dividends.
Optional Redemption........... On or after August 17, 2001, we may redeem the
preferred stock, in whole or in part, at our
option, at the following redemption prices
together with accrued dividends:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C> <C>
2001.............................. $52.900
2002.............................. 52.538
2003.............................. 52.175
2004.............................. 51.822
2005.............................. 51.450
2006.............................. 51.088
2007.............................. 50.725
</TABLE>
3
<PAGE> 7
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C> <C>
2008.............................. 50.363
Thereafter........................ 50.000
</TABLE>
See "Description of Preferred Stock -- Optional
Redemption."
Voting Rights................. Except as provided by law and in other limited
situations described in this prospectus, you
will not be entitled to any voting rights.
However, you will, among other things, be
entitled to vote as a separate class to elect
two directors if we have not paid the
equivalent of six or more quarterly dividends,
whether or not consecutive. These voting rights
will continue until we pay the full accrued but
unpaid dividends on the preferred stock.
Exchange Provisions........... At our option, we may exchange the preferred
stock in whole, but not in part, on any
dividend payment date beginning on August 15,
2000 for our 7.25% convertible subordinated
debentures. If we elect to exchange the
preferred stock for debentures, the exchange
rate will be $50 principal amount of debentures
for each share of preferred stock. The
debentures, if issued, will mature ten years
after the exchange date.
Debentures.................... The debentures, if issued, will have the
following terms:
Interest Rate............ The debentures will have an interest rate of
7.25% per year. Interest will be payable on
February 15 and August 15 of each year,
beginning on the first interest payment date
after the exchange date.
Redemption............... On or after August 17, 2001 we may redeem the
debentures at the redemption prices listed in
this prospectus, plus accrued interest.
Maturity................. The debentures will mature ten years after the
exchange date.
Conversion............... The debentures may be converted at any time
prior to maturity into common stock at the same
conversion price applicable to the preferred
stock.
Subordination............ The debentures will be subordinated to all of
our senior indebtedness. Neither we nor our
subsidiaries are limited or prohibited by the
indenture from issuing debt.
Use of Proceeds............... See "Use of Proceeds."
Transfer Restrictions......... The preferred stock, the debentures issuable
upon exchange of the preferred stock and the
common stock issuable upon conversion of the
preferred stock and the debentures have not
been registered under the Securities Act. The
preferred stock is being offered and sold only
by "qualified institutional buyers," as defined
in Rule 144A under the Securities Act. The
preferred stock may not be offered or sold
within the United States or to or for the
account or benefit of United States persons
except pursuant to an exemption from, in a
transaction not subject to or in compliance
with the registration requirements of the
Securities Act.
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<PAGE> 8
Registration Rights........... We have filed with the Securities and Exchange
Commission a shelf registration statement, of
which this prospectus forms a part, with
respect to:
- the resale of the preferred stock;
- the debentures issuable upon exchange
of the preferred stock; and
- the common stock issuable upon
conversion of the preferred stock and
the debentures.
We have agreed to keep the shelf registration
statement effective until two years from the
latest date of initial issuance of the
preferred stock. We will be required to pay
liquidated damages to the holders of the
preferred stock, the debentures issuable upon
exchange of the preferred stock or the common
stock issuable upon conversion of the preferred
stock and the debentures, as the case may be,
under certain circumstances if we are not in
compliance with our registration obligations.
Trading....................... The preferred stock sold in the initial private
placement currently trades in The Portal
Market. However, preferred stock sold pursuant
to this prospectus will no longer be eligible
to trade in The Portal Market. Our common stock
is traded on the Nasdaq National Market under
the symbol "CEPH."
Risk Factors.................. An investment in the preferred stock involves a
high degree of risk. See "Risk Factors" on
pages 7 through 15 for a discussion of certain
factors that should be considered in evaluating
an investment in the preferred stock.
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<PAGE> 9
FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this prospectus contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Such statements may
include words such as "anticipate," "estimate, "expect," "project," "intend,"
"plan," "believe" and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. In particular,
these include statements relating to present or anticipated scientific progress,
development of potential pharmaceutical products, timing of clinical trials,
future revenues and expenses, capital expenditures, funding requirements,
research and development expenditures, future financing and collaborations,
personnel, manufacturing requirements and capabilities, the impact of Year 2000,
and other statements regarding matters that are not historical facts or
statements of current condition.
Any or all of our forward-looking statements in this prospectus may turn
out to be wrong. They can be affected by inaccurate assumptions we might make or
by known or unknown risks and uncertainties. Many factors mentioned in our
discussion in this prospectus will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. Actual future
results may vary materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any additional disclosures we make in our
10-Q, 8-K and 10-K reports to the SEC. Also note that we provide a cautionary
discussion of risks and uncertainties relevant to our business under "Risk
Factors" on page 7 of this prospectus. These are factors that we think could
cause our actual results to differ materially from expected results. Other
factors besides those listed here could also adversely affect us. This
discussion is provided as permitted by the Private Securities Litigation Reform
Act of 1995.
6
<PAGE> 10
RISK FACTORS
You should carefully consider the following risk factors and the other
information presented in this prospectus before deciding to invest in the shares
of preferred stock.
DURING THE NEXT SEVERAL YEARS WE WILL BE VERY DEPENDENT ON THE COMMERCIAL
SUCCESS OF PROVIGIL, AND WE MAY BE UNABLE TO ATTAIN PROFITABILITY ON SALES OF
PROVIGIL.
In December 1998, the FDA approved PROVIGIL for use by those suffering from
excessive daytime sleepiness associated with narcolepsy. At our present level of
operations, we may not be able to attain profitability if physicians prescribe
PROVIGIL only for those who are diagnosed narcoleptics. Under current FDA
regulations, we are limited in our ability to promote PROVIGIL outside this
approved use. 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. We have initiated clinical studies to examine
whether or not PROVIGIL is effective and safe when used to treat 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, could limit the commercial success of the product and could even
impact the acceptance of PROVIGIL in the narcolepsy market. Even if the results
of these studies are positive, the impact on sales of PROVIGIL may be negligible
unless we are able to obtain FDA approval to expand the authorized use of
PROVIGIL. FDA regulations restrict our ability to communicate the results of
additional clinical studies to patients and physicians without first obtaining
approval from the FDA to expand the authorized uses for this product. As a
result, it may be several years before we have significant 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 federal, state and foreign government agencies; and
- the occurrence of any side effects, adverse reactions or misuse (or
unfavorable publicity relating thereto) stemming from the use of
PROVIGIL.
We have described these and other factors in more detail below.
Our lack of experience selling pharmaceuticals, together with significant
competition, may impact our ability to 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, the price of
competing products and the related health care benefits to the patient.
As PROVIGIL is used commercially, unintended side effects, adverse reactions or
incidents of misuse may appear that could result in additional regulatory
controls and reduce sales of PROVIGIL.
Until recently, the use of PROVIGIL has been limited to clinical trial
patients under controlled conditions and under the care of expert physicians. We
cannot predict whether the widespread commercial use of PROVIGIL will produce
undesirable or unintended side effects that have not been evident in our
clinical trials to date. As PROVIGIL becomes more widely utilized by significant
numbers of patients who
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<PAGE> 11
could take multiple medications, adverse drug interactions could occur that are
difficult to predict. Additionally, incidents of product misuse may occur. These
events, among others, could result in additional regulatory controls, including
withdrawal of the product from the market.
The efforts of government entities and third party payors to contain or reduce
the costs of health care may adversely affect our sales and limit the
commercial success of PROVIGIL.
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 commercial success of
PROVIGIL could be limited if federal or state governments adopt any such
proposals. In addition, in both the United States and elsewhere, sales of
pharmaceutical products depend in part on the availability of reimbursement to
the consumer from third party payors, such as government and private insurance
plans. Third party payors increasingly challenge the prices charged for
products, and limit reimbursement levels offered to consumers for such products.
If third party payors focus their cost control efforts on PROVIGIL, this could
impair the commercial success of the product.
We may not be able to maintain market exclusivity for PROVIGIL, and therefore
potential competitors may develop competing products, which could result in a
decrease in sales and market share, could cause us to reduce prices to compete
successfully, and could prevent PROVIGIL from being a commercial success.
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
United States 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. See "Business -- Patents and Proprietary Technologies."
In the United States, the Orphan Drug Act provides incentives to drug
manufacturers to develop and manufacture drugs for the treatment of rare
disorders. The FDA has granted orphan drug status to PROVIGIL for its use in the
treatment of excessive daytime sleepiness associated with narcolepsy. The grant
of orphan drug status to PROVIGIL 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 or we are unable to provide or obtain
adequate supplies of PROVIGIL), 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.
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<PAGE> 12
Manufacturing, supply and distribution problems could create supply disruptions
that would damage commercial prospects for 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. We maintain an inventory of modafinil compound to
protect against supply disruptions.
Additionally, a non-active ingredient used in PROVIGIL is no longer
manufactured or commercially available. At anticipated levels of demand, we have
over a year's supply of this ingredient. We have prepared a new formulation of
PROVIGIL that does 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 show that
the new formulation is bioequivalent to the current one, and also requires
regulatory approval. If we are unable to obtain approval for a new formulation,
or if demand for the product were to 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,
or cGMP. The facilities used to manufacture, store and distribute our products
are subject to inspection by regulatory authorities at any time to determine
compliance with regulations. 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 could reduce sales revenue.
OUR SALES OF PROVIGIL AND FINANCIAL RESULTS WILL FLUCTUATE AND THESE
FLUCTUATIONS MAY ADVERSELY AFFECT OUR STOCK PRICE.
A number of the analysts and investors who follow our stock have developed
models to attempt to forecast future PROVIGIL sales and have established
expectations based upon those models. Forecasting revenue is difficult,
especially when there is little commercial history and when market acceptance of
the product is uncertain. Forecasting is further complicated by the difficulties
in estimating stocking levels at pharmaceutical wholesalers and at retail
pharmacies and in estimating potential product returns. As a result it is likely
that there will be significant fluctuations in quarterly revenues, which may not
meet with market expectations and which may adversely affect our stock price.
Other factors which may cause our quarterly financial results to fluctuate
include the cost of PROVIGIL sales, achievement and timing of research and
development milestones, contract and co-promotion revenues, cost and timing of
clinical trials, marketing and other expenses and manufacturing or supply
disruption.
WE ANTICIPATE WE WILL INCUR CONTINUED LOSSES.
To date, we have not been profitable. At September 30, 1999, our
accumulated deficit was approximately $320 million. Our losses have resulted
principally from costs incurred in research and development, including clinical
trials, and from selling, general and administrative costs associated with our
operations. We expect to continue to incur significant losses until such time as
product revenue from PROVIGIL or other products and product candidates exceed
the expenses of operating our business.
We cannot be sure that we will ever achieve product revenues from PROVIGIL
or from any of our other product candidates sufficient for us to obtain
profitability. We cannot be sure that we or our collaborators will obtain
required regulatory approvals, or successfully develop, commercialize,
manufacture and market any product candidates.
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<PAGE> 13
THE RESULTS AND TIMING OF FUTURE CLINICAL TRIALS CANNOT BE PREDICTED AND FUTURE
SETBACKS MAY MATERIALLY AFFECT OUR BUSINESS.
We or our collaborators must demonstrate through preclinical testing and
clinical trials that the product candidate is safe and efficacious. The results
from preclinical testing and early clinical trials may not be predictive of
results obtained in subsequent clinical trials, and we cannot be sure that we or
our collaborators' clinical trials will demonstrate the safety and efficacy
necessary to obtain regulatory approval for any product candidates.
A number of companies in the biotechnology and pharmaceutical industries
have suffered significant setbacks in advanced clinical trials, even after
obtaining promising results in earlier trials. In addition, certain clinical
trials are conducted with patients having the most advanced stages of disease.
During the course of treatment, these patients often die or suffer other adverse
medical effects for reasons that may not be related to the pharmaceutical agent
being tested. Such events can hurt the statistical analysis of clinical trial
results.
The completion of clinical trials of our product candidates may be delayed
by many factors. One such factor is the rate of enrollment of patients. Neither
we nor our collaborators can control the rate at which patients present
themselves for enrollment, and we cannot be sure that the rate of patient
enrollment will be consistent with our expectations or be sufficient to enable
clinical trials of our product candidates to be completed in a timely manner.
Any significant delays in, or termination of, clinical trials of our product
candidates may have a material adverse effect on our business.
We cannot be sure that we or our collaborators will be permitted by
regulatory authorities to undertake additional clinical trials for any of our
product candidates, or that if such trials are conducted, any of our product
candidates will prove to be safe and efficacious or will receive regulatory
approvals. Any delays in or termination of our or our collaborator's clinical
trial efforts may have a material adverse effect on our business.
OUR RESEARCH AND DEVELOPMENT ACTIVITIES MAY NOT RESULT IN ANY ADDITIONAL
PHARMACEUTICAL PRODUCTS, WHICH MAY ADVERSELY AFFECT OUR BUSINESS.
We are highly focused on the research and development of potential
pharmaceutical products. 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 highly uncertain 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.
OUR RESEARCH AND DEVELOPMENT AND MARKETING EFFORTS ARE HIGHLY DEPENDENT ON
CORPORATE COLLABORATORS WHO MAY NOT DEVOTE SUFFICIENT TIME, RESOURCES AND
ATTENTION TO OUR PROGRAMS, WHICH MAY ADVERSELY IMPACT OUR EFFORTS TO DEVELOP AND
MARKET POTENTIAL PRODUCTS.
Because we have limited resources, we have entered into a number of
agreements with other pharmaceutical companies. 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 partners may not support fully our research and
commercial interests 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
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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. One of them, Kyowa Hakko, has
informed us that they will not be able to meet our increased requirements of the
compound used in our signal transduction modulator program beyond the year 2000.
We have identified an alternate manufacturer and Kyowa Hakko is working with us
to transfer technology to them. We cannot be certain that this new manufacturer
will be able to 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.
WE EXPERIENCE INTENSE COMPETITION IN OUR FIELDS OF INTEREST, WHICH MAY ADVERSELY
AFFECT OUR BUSINESS.
Large and small companies, 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 we develop or sell. Many of these companies and institutions
have substantially greater capital resources, research and development staffs
and facilities than us, and substantially greater experience in conducting
clinical trials, obtaining regulatory approvals and manufacturing and marketing
pharmaceutical products. These entities represent significant competition for
us. 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 that we develop or sell or that
would render our technology and products obsolete or noncompetitive. Competition
and innovation from these or other sources potentially could materially
adversely affect any sales of products that might be developed or are currently
being sold by us or make them obsolete. Advances in current treatment methods
may also adversely affect the market for such products.
WE MAY NOT BE ABLE TO OBTAIN ADEQUATE PATENT PROTECTION EITHER IN THE UNITED
STATES OR ABROAD, WHICH COULD IMPACT OUR ABILITY TO COMPETE EFFECTIVELY.
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 other 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 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.
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<PAGE> 15
WE ARE INVOLVED IN A NUMBER OF LEGAL PROCEEDINGS THAT, IF ADVERSELY ADJUDICATED
OR SETTLED, COULD MATERIALLY IMPACT OUR FINANCIAL CONDITION.
Cephalon, a current director and officer, and a former officer, were named
as defendants in a class action filed in the U.S. District Court for the Eastern
District of Pennsylvania. Plaintiffs sought to hold defendants liable for stock
trading losses stemming from allegations that statements made about the results
of certain clinical studies of MYOTROPHIN were misleading. On July 30, 1999, the
Court entered an order approving the settlement of this action and dismissing
all claims against the defendants in consideration of payment by Cephalon to the
plaintiffs of $17,000,000 inclusive of attorneys fees and expenses. This order
became final on August 30, 1999. Of the settlement amount, $7,500,000 was paid
by our directors' and officers' liability insurance carriers; the remaining
$9,500,000 was paid by Cephalon.
A further complaint has been filed with the Court alleging that Cephalon is
liable under common law for misrepresentations concerning the results of the
MYOTROPHIN clinical trials, and that Cephalon and certain of its current and
former officers and directors are liable for the actions of persons who
allegedly traded in Cephalon common stock on the basis of material inside
information. We believe that we have valid defenses to all claims raised in this
action and we have filed a motion to dismiss these claims which is pending with
the Court. Moreover, even if there is a judgment against us, it will not have a
material adverse effect on our financial condition or results of operations.
Due to our involvement in co-promoting STADOL NS, a product of
Bristol-Myers, we are co-defendant in a product liability action brought against
Bristol-Myers. 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 Bristol-Myers under the indemnification provisions of our co-promotion
agreement. As such, we do not believe that this action will have a material
effect on our financial condition or results of operations.
We received in November 1999, and are responding to, a federal grand jury
subpoena in connection with an investigation under the supervision of the Office
of Consumer Litigation of the U.S. Department of Justice. The grand jury also
issued subpoenas to certain of our former and current employees. We believe that
the investigation relates to the release during the period 1994-1996 of some
lots of Myotrophin used in clinical trials and related reports filed with the
U.S. Food and Drug Administration. We have not been identified by the Department
of Justice as being a target of the investigation and we are cooperating with
the inquiry. We cannot predict the outcome of the investigation.
WE FACE SIGNIFICANT PRODUCT LIABILITY RISKS, WHICH MAY HAVE A NEGATIVE EFFECT ON
OUR FINANCIAL PERFORMANCE.
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.
WE MAY NEVER OBTAIN APPROVAL TO MARKET MYOTROPHIN, IT MAY NOT BE COST-EFFECTIVE
TO PURSUE MYOTROPHIN FOR OTHER INDICATIONS, AND THEREFORE WE MAY NEVER DERIVE
REVENUE FROM MYOTROPHIN.
Cephalon and Chiron have withdrawn the joint marketing authorization
application for MYOTROPHIN in Europe for the treatment of ALS. We made this
decision because of comments we received from the European reviewer of the
application concerning the results of our two pivotal ALS studies. These
comments led us to believe that the reviewer would not approve our application.
The withdrawal of our marketing authorization application for MYOTROPHIN in
Europe may negatively affect the FDA approval process for MYOTROPHIN in the
United States.
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In May 1998, the FDA issued a letter stating that the NDA application
submitted jointly by Cephalon and Chiron to market MYOTROPHIN in the United
States for the treatment of 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. The T-IND program is a
compassionate use program that is neither placebo-controlled nor blinded, and
therefore is not designed to produce evidence of efficacy. We are not planning
to submit additional data 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 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. If
MYOTROPHIN were not approved for ALS, we are not sure it would be cost-effective
to pursue MYOTROPHIN for any other indication.
THE VALUE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY DUE TO THE VOLATILITY
OF ITS MARKET PRICE AND TRADING VOLUME AND EXERCISE OF OUTSTANDING WARRANTS,
WHICH MAY IMPACT YOUR DECISION TO BUY, SELL OR CONVERT YOUR PREFERRED STOCK TO
COMMON STOCK.
The market price and trading volume of shares of our common stock are
volatile, and we expect it to continue to be volatile for the foreseeable
future. For example, during the previous 52 weeks, our common stock traded at a
high price of $28.50 and a low price of $7.25. 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. Such
fluctuations with respect to our common stock may, in turn, have an adverse
effect on the market price of the preferred stock.
OUR DEPENDENCE ON KEY EXECUTIVES AND SCIENTISTS COULD IMPACT THE DEVELOPMENT AND
MANAGEMENT OF OUR BUSINESS.
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 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.
WE MAY BE REQUIRED TO INCUR SIGNIFICANT COSTS TO COMPLY WITH ENVIRONMENTAL LAWS
AND REGULATIONS AND OUR COMPLIANCE MAY LIMIT ANY FUTURE PROFITABILITY.
Our research and development activities involve the controlled use of
hazardous, infectious and radioactive materials that could be hazardous to human
health, safety or the environment. We store these materials and various wastes
resulting from their use at our facility pending ultimate use and disposal. We
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<PAGE> 17
are subject to a variety of federal, state and local laws and regulations
governing the use, generation, manufacture, storage, handling and disposal of
these materials and wastes resulting from their use, and we may be required to
incur significant costs to comply with both existing and future environmental
laws and regulations.
We believe that although our safety procedures for handling and disposing
of these materials comply with federal, state and local laws and regulations,
the risk of accidental injury or contamination from these materials cannot be
entirely eliminated. In the event of an accident, we could be held liable for
any resulting damages.
IF WE ARE UNABLE TO MAINTAIN CERTAIN CASH BALANCES UNDER THE TERMS OF OUR
REVENUE SHARING NOTES, HOLDERS OF OUR REVENUE SHARING NOTES HAVE THE RIGHT TO AN
INCREASED ROYALTY PERCENTAGE, WHICH WILL INCREASE OUR ROYALTY EXPENSE, AND MAY
HAVE THE RIGHT TO ACCELERATE THE NOTES AND FORECLOSE ON THE SECURITY, WHICH WILL
RESULT IN THE LOSS OF OUR RIGHTS TO PROVIGIL.
The notes contain a number of covenants, including a requirement to
maintain cash, cash equivalent and short-term investment balances of $40,000,000
through December 31, 1999 and $30,000,000 through February 2002 or as long as
the principal remains outstanding. This requirement to maintain cash and cash
equivalent balances may limit our flexibility to use our cash resources for
other corporate purposes. The notes are secured by our licenses, patents and FDA
rights relating to PROVIGIL. The notes also require us to pay a royalty of 6% on
net United States PROVIGIL sales for 5 years, which we may reduce to 4 years
under certain circumstances. If we fail to maintain the required cash balances,
the holders of the notes can declare a default and increase the royalty
percentage to 25% of net United States PROVIGIL sales and, if the default is not
cured within one year, can accelerate the due date of the notes and foreclose on
the security. The holders of the notes can also foreclose on the security if we
fail to pay principal and interest when due or violate certain other covenants.
THE YEAR 2000 ISSUE MAY CAUSE COMPLIANCE FAILURE AND SERVICE INTERRUPTIONS IN
OUR BUSINESS OR OPERATIONS IF CERTAIN OF OUR SUPPLIERS OR VENDORS ARE UNABLE TO
BECOME YEAR 2000 COMPLIANT WHICH MAY CAUSE US TO INCUR ADDITIONAL EXPENSE.
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.
We have completed minor modifications to our computer systems and at this
time we do not expect the Year 2000 Issue to pose a significant internal
operational problem. However, 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 have initiated formal
communication with significant suppliers and third party vendors to determine
the extent to which our operations are vulnerable to those third parties'
failure to remediate their own Year 2000 hardware and software issues.
Significant suppliers or third party vendors that are unable to become Year 2000
compliant could adversely affect our business or operations. 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. 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.
ANTI-TAKEOVER PROVISIONS MAY DETER A THIRD PARTY FROM ACQUIRING CEPHALON,
LIMITING OUR STOCKHOLDERS' ABILITY TO PROFIT FROM SUCH A TRANSACTION.
Our Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock, $0.01 par value, of which 1,000,000 have been reserved for
issuance in connection with our stockholder rights plan, and to determine the
price, rights, preferences and privileges of those shares without any further
vote or action by our stockholders. The preferred stock covered by this
prospectus was established pursuant to these provisions. While we have no
present intention to issue additional shares of preferred stock, such
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<PAGE> 18
issuance, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock.
In addition, we are subject to the anti-takeover provisions of Section 203
of the Delaware Corporation Law, which prohibits us from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person becomes an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 could have the effect of delaying or preventing a
change of control of Cephalon. We also have adopted a "poison pill" rights plan
that will dilute the stock ownership of an acquiror of our stock upon the
occurrence of certain events. Section 203, the rights plan, and the provisions
of our certificate of incorporation, our bylaws and Delaware corporate law, may
have the effect of deterring hostile takeovers or delaying or preventing changes
in control of our management, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices.
THE LIMITED MARKET FOR PREFERRED STOCK AND DEBENTURES MAY LIMIT INVESTORS'
ABILITY TO SELL THEIR HOLDINGS.
The preferred stock is a new issue of securities for which there is
currently no public market. We cannot be sure that a liquid trading market in
the preferred stock will develop. We are not obligated to list the preferred
stock or the debentures on the Nasdaq National Market System or on a national
securities exchange and we do not intend to do so. We cannot be sure that a
market in the preferred stock or debentures will develop.
YOU SHOULD NOT EXPECT TO RECEIVE DIVIDENDS ON OUR COMMON STOCK.
We have not paid cash dividends on our common stock and we do not expect to
do so in the foreseeable future.
WE MAY NOT BE ABLE TO PAY DIVIDENDS AND OTHER DISTRIBUTIONS ON PREFERRED STOCK,
WHICH COULD IMPAIR THE VALUE OF YOUR INVESTMENT.
Under Delaware law, dividends or distributions to stockholders may be made
only from the surplus of a company, or, in certain situations, from the net
profits for the current fiscal year or the fiscal year before which the dividend
or distribution is declared. Our ability to pay dividends in the future will
depend upon our financial results, liquidity and financial condition. We have no
history of generating positive cash flow or profits to make periodic dividend
payments, and we cannot be sure that we will have the surplus or profit
necessary to pay any dividends. We cannot be sure that we will be able to pay
the quarterly installments of the cumulative annual dividend on the preferred
stock or make any other distributions.
THE TAX CONSEQUENCES OF EXCHANGING PREFERRED STOCK FOR DEBENTURES MAY RESULT IN
TAX LIABILITIES TO INVESTORS.
An exchange of preferred stock for debentures will be a taxable event for
federal income tax purposes which may result in tax liability to the holder
without any corresponding receipt of cash by the holder.
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USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the securities
covered by this prospectus.
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
Because of our historic losses, we have experienced a deficiency of
earnings available to cover fixed charges throughout our existence. We did not
declare or pay any dividends on the preferred stock during any of the fiscal
years in the five year period ended December 31, 1999. For these reasons, we
have not provided a ratio of earning to fixed charges and preferred stock
dividends.
We have computed the deficiency of earnings available to cover fixed
charges by adding loss from continuing operations before income taxes minus
fixed charges. Fixed charges consist of interest on all indebtedness and
amortization of discount on all indebtedness.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------- SEPTEMBER 30,
1998 1997 1996 1995 1994 1999
-------- -------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Deficiency of earnings available
to cover fixed charges........ ($53,533) ($57,218) ($50,999) ($29,891) ($34,639) ($39,051)
======== ======== ======== ======== ======== ========
</TABLE>
DIVIDEND POLICY
We have not paid any dividends on our common stock since our inception and
we do not anticipate paying any dividends on our common stock in the foreseeable
future.
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DESCRIPTION OF PREFERRED STOCK
The following is a summary of some, but not all, of the terms of the
preferred stock. You should refer to the actual terms of the preferred stock and
the Certificate of Designations filed with the Secretary of State of the State
of Delaware and filed as an exhibit to this registration statement. As used in
this description, the words "we," "us" or "our" do not include any current or
future subsidiary of Cephalon.
GENERAL
Our board of directors has the authority, without stockholder approval, to
issue up to 5,000,000 shares of preferred stock in one or more series and to
determine the rights, privileges and limitations of the preferred stock. Of
these 5,000,000 shares of preferred stock:
- 2,500,000 shares are the $3.625 Convertible Exchangeable Preferred Stock
that we issued in our August 1999 private placement; and
- 1,000,000 shares have been reserved for issuance in connection with our
stockholder rights plan.
Different series of preferred stock may have different rights, privileges and
limitations.
In the description, we refer to our $3.625 Convertible Exchangeable
Preferred stock as the "preferred stock." The shares of preferred stock are duly
and validly issued, fully paid and nonassessable. You will not have any
preemptive rights if we issue other series of preferred stock. The preferred
stock is not subject to any sinking fund. We have no obligation to redeem or
retire the preferred stock. The preferred stock has a perpetual maturity,
subject to your right to convert the preferred stock and our right to exchange
or redeem the preferred stock. Any preferred stock converted, exchanged or
redeemed or acquired by us will, upon cancellation, have the status of
authorized but unissued shares of preferred stock. We will be able to reissue
these cancelled shares of preferred stock.
DIVIDENDS
When and if declared by our board of directors out of the legally available
funds, you will be entitled to receive cash dividends at an annual rate of
$3.625 per share of preferred stock. Dividends will be payable quarterly on
February 15, May 15, August 15 and November 15, beginning November 15, 1999. In
the case of any accrued but unpaid dividends, we will pay dividends at
additional times and for interim periods, if any, as determined by our board of
directors. Dividends on the preferred stock will be cumulative from the issue
date. Dividends will be payable to holders of record as they appear on our stock
books not more than 60 days nor less than 10 days preceding the payment dates,
as fixed by our board of directors. If the preferred stock is called for
redemption on a redemption date between the dividend record date and the
dividend payment date and you do not convert the preferred stock (as described
below), you shall receive the dividend payment together with all other accrued
and unpaid dividends on the redemption date instead of receiving the dividend on
the dividend date. Dividends payable on the preferred stock for any period
greater or less than a full dividend period will be computed on the basis of a
360-day year consisting of twelve 30-day months. Accrued but unpaid dividends
will not bear interest.
If we do not pay or set aside dividends in full on the preferred stock and
any other preferred stock ranking on the same basis as to dividends, all
dividends declared upon shares of the preferred stock and any other preferred
stock will be declared on a pro rata basis. For these purposes, "pro rata" means
that the amount of dividends declared per share on the preferred stock and any
other preferred stock bear to each other will be the same ratio that accrued and
unpaid dividends per share on the shares of the preferred stock and such other
preferred stock bear to each other. Except as described above, we will not be
able to redeem, purchase or otherwise acquire any of our stock ranking on the
same basis as the
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preferred stock as to dividends or liquidation preferences unless we have paid
or set aside full cumulative dividends, if any, accrued on all outstanding
shares of preferred stock.
Unless we have paid or set aside full cumulative dividends, if any, accrued
on all outstanding shares of preferred stock and any other of our preferred
stock ranking on the same basis as to dividends:
- we may not declare or pay or set aside dividends on common stock or any
other stock ranking junior to the preferred stock as to dividends or
liquidation preferences, excluding dividends or distributions of shares,
options, warrants or rights to purchase common stock or other stock
ranking junior to the preferred stock as to dividends; or
- we will not be able to redeem, purchase or otherwise acquire any of our
other stock ranking junior to the preferred stock as to dividends or
liquidation preferences.
Under Delaware law, we may only make dividends or distributions to our
stockholders from:
- our surplus; or
- the net profits for the current fiscal year or the fiscal year before
which the dividend or distribution is declared under certain
circumstances.
Our ability to pay dividends and make any other distributions in the future will
depend upon our financial results, liquidity and financial condition.
CONVERSION RIGHTS
General
You may convert the preferred stock at any time into a number of shares of
common stock determined by dividing the $50 liquidation preference by the
conversion price of $17.92, subject to adjustment as described below. This
conversion price is equivalent to a conversion rate of approximately 2.79 shares
of common stock for each share of preferred stock. We will not make any
adjustment for accrued or unpaid dividends or for common stock dividends upon
conversion. We will not issue fractional shares of common stock upon conversion.
However, we will instead pay cash for each fractional share based upon the
market price of the common stock on the last business day prior to the
conversion date. If we call the preferred stock for redemption, your right to
convert the preferred stock will expire at the close of business on the next
business day preceding the date fixed for redemption, unless we fail to pay the
redemption price.
In order to convert your shares of preferred stock, you must either:
- deliver your preferred stock certificate at the transfer agent office and
a duly signed and completed notice of conversion, or
- if the preferred stock is held in global form, according to the
procedures set forth below under "Form, Denomination and Registration."
The conversion date will be the date you deliver your preferred stock
certificate and the duly signed and completed notice of conversion to the
transfer agent. You will not be required to pay any taxes or duties on
conversion, but will be required to pay any tax or duty payable as a result of
the common stock upon conversion being issued other than in your name. We will
not issue common stock certificates unless all taxes and duties, if any, have
been paid by the holder.
Conversion Price Adjustment -- General
The conversion price of $17.92 will be adjusted if:
(1) we dividend or distribute common stock on shares of our common
stock;
(2) we subdivide or combine our common stock;
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(3) we issue to all holders of common stock certain rights or warrants
to purchase our common stock at less than 95% of the lesser of:
- the closing sale price on the issue date of these securities; or
- the average of the closing prices of our common stock for the ten
trading day period ending on the issue date of these securities;
(4) we dividend or distribute to all holders of our common stock
shares of our capital stock or evidences of indebtedness or assets,
excluding:
- those rights, warrants, dividends or distributions referred to in
(1) or (3), or
- dividends and distributions paid exclusively in cash;
(5) we make a dividend or distribution consisting exclusively of cash
to all holders of common stock if the aggregate amount of these
distributions that, combined together with (A) all other all-cash
distributions made within the preceding 12 months for which we made no
adjustment plus (B) any cash and the fair market value of other
consideration payable in any tender offers by us or any of our subsidiaries
for common stock concluded within the preceding 12 months for which we made
no adjustment, exceeds 10% of our market capitalization;
(6) we purchase common stock pursuant to a tender offer made by us or
any of our subsidiaries to the extent that involves an aggregate
consideration that, together with (A) any cash and the fair market value of
any other consideration payable in any other tender offer by us or any of
our subsidiaries for common stock expiring within the preceding 12 months
plus (B) the aggregate amount of the all-cash distributions referred to in
(5) above to all holders of common stock within the preceding 12 months
exceeds 10% of our market capitalization on the expiration of the tender
offer;
(7) payment on a tender offer or exchange offer by a person other than
us or any of our subsidiaries if, as of the closing of the offer, the board
of directors is not recommending rejection of the offer; and
(8) we issue common stock or securities convertible or exchangeable
for common stock at a price or conversion price or exchange price per share
that is less than 95% of the lesser of (A) the closing sale price on the
issue date of the securities or (B) the average of the closing prices of
the common stock for the ten trading day period immediately prior to the
date of issuance of the securities, but excluding issuances:
- pursuant to any plan for our employees, directors or consultants;
- to acquire a business in an arm's-length transaction between us and
an unaffiliated third party;
- in a public offering pursuant to a firm commitment underwriting;
- sales at the market pursuant to a continuous offering stock
program;
- pursuant to the exercise of warrants, rights or options, or upon
conversion of convertible securities, at a fair value and with an
exercise price or conversion price at least equal to the lesser of
(A) the closing sale price on the issue date of the securities or
(B) the average of the closing prices of the common stock for the
ten trading day period immediately prior to the issue date of the
securities at the time of issuance of the warrant, right, option or
convertible security; and
- pursuant to a dividend reinvestment plan or other plan for the
reinvestment of dividends or interest provided that such common
stock is issued at a price at least equal to 95% of the lesser of
(A) the closing sale price on the issue date of the securities or
(B) the
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average of the closing prices for the ten trading day period
immediately prior to the issue date of the securities.
Instead of making adjustments under (5) above, we may provide that upon
conversion holders will receive, in addition to the common stock issuable upon
conversion, the amount of the distribution referred to in (5) above. We will
only make the adjustment referred to in (7) above if the tender or exchange
offer increases a person's ownership to more than 25% of our outstanding common
stock, and only if the payment per share of common stock exceeds the current
market price of our common stock. We will not make the adjustment referred to in
(7) above if the offering documents disclose our plan to engage in any
consolidation, merger, or transfer of all or substantially all of our properties
to any other U.S. corporation, so long as each share of preferred stock will:
- remain outstanding,
- will be unaffected, or
- will be converted into or exchanged for preferred stock having rights,
preferences and limitations substantially similar, but no less
favorable, to the preferred stock.
For purposes of the above adjustments, "market capitalization" means the product
of the lesser of:
- the closing sale price on the issue date of the securities, or
- the average of the closing prices of the common stock for the ten
trading day period immediately prior to the issue date of the
securities,
multiplied by number of shares of common stock outstanding on the record date
for such distribution.
We may reduce the conversion price of the preferred stock if our board of
directors determines that this decrease would be in the best interests of
Cephalon. Any reduction in the conversion price shall be effective for any
period of at least 20 days. We are required to give 15 days prior notice of any
reduction. We may, at our option, reduce the conversion price if our board of
directors deems it advisable to avoid or diminish any income tax to holders of
common stock resulting from any dividend or distribution of stock or rights to
acquire stock or from any event treated as such for income tax purposes. See
"Certain Federal Income Tax Consequences."
No adjustment will be made in the conversion price unless the adjustment
would require a change of at least 1% in the conversion price. However, any
adjustment less than 1% will be carried forward and taken into account in any
subsequent adjustment. We will not adjust the conversion price for the issuance
of common stock or any securities convertible into or exchangeable for common
stock or carrying the right to purchase any common stock or convertible or
exchangeable securities except as stated above.
Conversion Price Adjustment -- Merger, Consolidation or Sale of Assets
If we are involved in a transaction in which shares of our common stock are
converted into the right to receive other securities, cash or other property, or
a sale or transfer of all or substantially all of our assets under which the
holders of our common stock shall be entitled to receive other securities, cash
or other property, then appropriate provision shall be made so that your
preferred stock will convert into:
(1) if the transaction is a common stock fundamental change (as
defined below), common stock of the kind received by holders of common
stock as a result of common stock fundamental change in accordance with (1)
below under "-- Fundamental Change Conversion Price Adjustments", and
(2) if the transaction is not a common stock fundamental change, and
subject to funds being legally available at conversion, the kind and amount
of the securities, cash or other property that would have been receivable
upon the recapitalization, reclassification, consolidation, merger, sale,
transfer or share exchange by a holder of the number of shares of common
stock issuable upon conversion of the preferred stock immediately prior to
the recapitalization, reclassification, consolidation, merger, sale,
transfer or share exchange, after giving effect to any adjustment in the
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<PAGE> 24
conversion price in accordance with (2) below under "-- Fundamental Change
Conversion Price Adjustments."
The company formed by the consolidation, merger, asset acquisition or share
acquisition shall provide for this right in its organizational document. This
organizational document shall also provide for adjustments so that the
organizational document shall be as nearly practicably equivalent to adjustments
in this section for events occurring after the effective date of the
organizational document.
The following types of transactions, among others, would be covered by this
adjustment:
(1) we recapitalize or reclassify our common stock, except for:
- a change in par value,
- a change from par value to no par value,
- a change from no par value to par value, or
- a subdivision or combination of our common stock,
(2) we consolidate or merge into any other person, or any merger of
another person into us, except for a merger that does not result in a
reclassification, conversion, exchange or cancellation of common stock.
(3) we sell, transfer or lease all or substantially all of our assets
and holders of our common stock become entitled to receive other
securities, cash or other property, or
(4) we undertake any compulsory share exchange.
Fundamental Change Conversion Price Adjustments. If a fundamental change
occurs, the conversion price will be adjusted as follows:
(1) in the case of a common stock fundamental change, the conversion
price shall be the conversion price after giving effect to any other prior
adjustments effected pursuant to the preceding paragraphs, multiplied by a
fraction, the numerator of which is the purchaser stock price and the
denominator of which is the applicable price. However, in the event of a
common stock fundamental change in which:
(A) 100% of the value of the consideration received by a holder of
our common stock is common stock of the successor, acquiror or other
third party, and cash, if any, paid with respect to any fractional
interests in such common stock resulting from such common stock
fundamental change, and
(B) all of our common stock shall have been exchanged for,
converted into or acquired for, common stock of the successor, acquiror
or other third party, and any cash with respect to fractional interests,
the conversion price shall be the conversion price in effect immediately
prior to such common stock fundamental change multiplied by a fraction, the
numerator of which is one (1) and the denominator of which is the number of
shares of common stock of the successor, acquiror or other third party
received by a holder of one share of our common stock as a result of the
common stock fundamental change; and
(2) in the case of a non-stock fundamental change, the conversion
price shall be the lower of:
(A) the conversion price after giving effect to any other prior
adjustments effected pursuant to the preceding paragraphs, and
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<PAGE> 25
(B) the product of:
(1) the applicable price, and
(2) a fraction, the numerator of which is $50 and the
denominator of which is (x) the amount of the redemption price for
one share of preferred stock if the redemption date were the date of
the non-stock fundamental change, or the date of the period beginning
on the issue date of the preferred stock and through August 15, 2000
or the twelve-month period commencing August 15, 2000, the product of
107.25% and 106.53%, respectively, times $50 plus (y) any
then-accrued and unpaid distributions on one share of preferred
stock.
You may receive significantly different consideration upon conversion
depending upon whether a fundamental change is a non-stock fundamental change or
a common stock fundamental change. In the event of a non-stock fundamental
change, your preferred stock will convert into stock and other securities or
property or assets, including cash, determined by the number of shares of common
stock receivable upon conversion at the conversion price as adjusted in
accordance with (2) above. In the event of a common stock fundamental change,
under certain circumstances you will receive different consideration depending
on whether you convert your preferred stock on or after the common stock
fundamental change. For example, you will receive common stock if you convert
your preferred stock following a common stock fundamental change in which less
than 100% of the value of the consideration received by a holder of common stock
is common stock of the successor, acquirer or other third party. However, if you
had converted your preferred stock prior to the common stock fundamental change,
you would have received consideration in the form of such common stock as well
as any other securities or assets, including cash, issuable upon conversion of
such preferred stock immediately prior to the common stock fundamental change.
Definitions for the Fundamental Change Adjustment Provision.
"applicable price" means:
- in a non-stock fundamental change in which the holders of common
stock receive only cash, the amount of cash received by a holder of
one share of common stock, and
- in the event of any other fundamental change, the average of the
daily closing price for one share of common stock during the 10
trading days immediately prior to the record date for the
determination of the holders of common stock entitled to receive
cash, securities, property or other assets in connection with the
fundamental change or, if there is no such record date, prior to
the date upon which the holders of common stock shall have the
right to receive such cash, securities, property or other assets.
"common stock fundamental change" means any fundamental change in
which more than 50% of the value, as determined in good faith by our board
of directors, of the consideration received by holders of our common stock
consists of common stock that, for the 10 trading days immediately prior to
such fundamental change, has been admitted for listing or admitted for
listing subject to notice of issuance on a national securities exchange or
quoted on Nasdaq National Market, except that a fundamental change shall
not be a common stock fundamental change unless either:
- we continue to exist after the occurrence of the fundamental change
and the outstanding preferred stock continues to exist as
outstanding preferred stock, or
- not later than the occurrence of the fundamental change, the
outstanding preferred stock is converted into or exchanged for
shares of convertible preferred stock, which convertible preferred
stock has rights, preferences and limitations substantially
similar, but no less favorable, to those of the preferred stock.
"fundamental change" means the occurrence of any transaction or event
or series of transactions or events pursuant to which all or substantially
all of our common stock shall be exchanged for, converted into, acquired
for or shall constitute solely the right to receive cash, securities,
property or
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other assets, whether by means of an exchange offer, liquidation, tender
offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise. However, for purposes of adjustment of the
conversion price, in the case of any series of transactions or events, the
fundamental change shall be deemed to have occurred when substantially all
of the common stock shall have been exchanged for, converted into or
acquired for, or shall constitute solely the right to receive, such cash,
securities, property or other assets, but the adjustment shall be based
upon the consideration that the holders of our common stock received in the
transaction or event as a result of which more than 50% of our common stock
shall have been exchanged for, converted into or acquired for, or shall
constitute solely the right to receive, such cash, securities, property or
other assets.
"non-stock fundamental change" means any fundamental change other than
a common stock fundamental change.
"purchaser stock price" means the average of the daily closing price
for one share of the common stock received by holders of the common stock
in the common stock fundamental change during the 10 trading days
immediately prior to the date fixed for the determination of the holders of
the common stock entitled to receive such common stock or, if there is no
such date, prior to the date upon which the holders of the common stock
shall have the right to receive such common stock.
LIQUIDATION RIGHTS
In the event of our liquidation, you shall receive a liquidation preference
of $50 per share and all accrued and unpaid dividends through the distribution
date. For purposes of this section, the term "liquidation" refers to either a
liquidation, dissolution or winding up of Cephalon. Holders of any class or
series of preferred stock ranking on the same basis as your preferred stock as
to liquidation shall also be entitled to receive the full respective liquidation
preferences and any accrued and unpaid dividends through the distribution date.
Only after the preferred stock holders have received their liquidation
preference and any accrued and unpaid dividends will we distribute assets to
common stock holders or any of our other stock ranking junior to the shares of
preferred stock upon liquidation. If upon liquidation we do not have enough
assets to pay in full the amounts due on the preferred stock and any other
preferred stock ranking on the same basis with your preferred stock as to
liquidation, you and the holders of such other preferred stock will share
ratably in any such distributions of our assets:
- first in proportion to the liquidation preferences until the preferences
are paid in full, and
- then in proportion to the amounts of accrued but unpaid dividends.
After we pay any liquidation preference and accrued dividends, you will not be
entitled to participate any further in the distribution of our assets. The
following events will not be deemed to be a liquidation of Cephalon:
(1) The sale of all or substantially all of the assets, or
(2) our merger or consolidation into or with any other corporation,
our liquidation, dissolution, winding up or reorganization immediately
followed by a reincorporation of another corporation.
OPTIONAL REDEMPTION
On or after August 17, 2001 we may redeem the preferred stock, out of
legally available funds, in whole or in part, at our option, at the redemption
prices listed below. The redemption price is as follows
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<PAGE> 27
for the period beginning August 15 of the following years, beginning August 17,
2001 and ending on August 14, 2002 in the case of the first period:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2001.............................................. $52.900
2002.............................................. 52.538
2003.............................................. 52.175
2004.............................................. 51.822
2005.............................................. 51.450
2006.............................................. 51.088
2007.............................................. 50.725
2008.............................................. 50.363
</TABLE>
and $50.00 at August 15, 2009 and thereafter. In each case we will pay accrued
and unpaid dividends to, but excluding, the redemption date. We are required to
give notice of redemption not more than 60 and not less than 20 days before the
redemption date.
If we redeem less than all of the shares of preferred stock, we shall
select the shares to be redeemed by lot or pro rata or in some other equitable
manner in our sole discretion. Dividends shall cease to accrue on the preferred
stock to be redeemed on or after the redemption date so long as we have paid or
provided for payment for the redemption price and any accrued and unpaid
dividends to, but excluding, the redemption date. Thereafter, the preferred
stock to be redeemed will not be outstanding and your rights as a holder of such
shares shall cease, except your right to receive the redemption price and
accrued and unpaid dividends, without interest, upon surrender of the preferred
stock certificates.
EXCHANGE PROVISIONS
We may exchange the preferred stock in whole, but not in part, for
debentures on any dividend payment date on or after August 15, 2000 at the rate
of $50 principal amount of debentures for each outstanding share of preferred
stock. Debentures will be issuable in denominations of $1,000 and integral
multiples of $1,000. See "Description of Debentures." If the exchange results in
an amount of debentures that is not an integral multiple of $1,000, we will pay
in cash an amount in excess of the closest integral multiple of $1,000. We will
mail written notice of our intention to exchange the preferred stock to each
record holder not less than 30 nor more than 60 days prior to the exchange date.
We refer to the date fixed for exchange of the preferred stock for
debentures as the "exchange date." On the exchange date, your rights as a
stockholder of Cephalon shall cease. Your shares of preferred stock will no
longer be outstanding, and will only represent the right to receive the
debentures and any accrued and unpaid dividends, without interest. We may not
exercise our option to exchange the preferred stock for the debentures if:
- full cumulative dividends on the preferred stock to the exchange date
have not been paid or set aside for payment, or
- an event of default under the indenture has occurred and is continuing.
The exchange of preferred stock for debentures will be a taxable event, since
holders will be exchanging their preferred stock for debt and we will not make
any related cash payment to the holder. See "Certain Federal Income Tax
Consequences."
VOTING RIGHTS
You will have no voting rights except as described below or as required by
law. Each outstanding share of preferred stock will be entitled to one vote.
Shares held by us or any or our affiliates will not have any voting rights.
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If we have not paid dividends on the preferred stock or on any outstanding
shares of preferred stock ranking on the same basis as to dividends with the
preferred stock in an aggregate amount equal to at least six quarterly dividends
whether or not consecutive, our board of directors will be increased by two. So
long as dividends remain due and unpaid, holders of the preferred stock voting
separately as a class with holders of preferred stock ranking on the same basis
as to dividends having like voting rights will be entitled to elect two
additional directors at any meeting of stockholders at which directors are to be
elected. These voting rights will terminate when we have declared and either
paid or set aside for payment accrued and unpaid dividends. The terms of office
of all directors so elected will terminate immediately upon the termination of
these voting rights.
In addition, without the vote or consent of as least the majority of
holders of preferred stock, we may not:
- adversely change the rights, preferences and limitations of the
preferred stock by modifying our restated certificate of incorporation
or bylaws, or
- authorize, issue, reclassify, increase the authorized amount, or
authorize or issue any convertible obligation or security or right to
purchase any class of stock that ranks senior to or on the same basis
with the preferred stock as to dividends or distributions of assets
upon liquidation, dissolution or winding up of the stock.
Without the vote or consent of the holders of at least a majority of the
preferred stock we may not:
- enter into a share exchange that affects the preferred stock,
- consolidate with or merge into another entity, or
- permit another entity to consolidate with or merge into us,
unless the preferred stock remains outstanding and unaffected or is converted
into or exchanged for convertible preferred stock of the surviving entity having
rights, preferences and limitations substantially similar, but no less
favorable, to the preferred stock, except for changes that do not affect the
holders of the preferred stock adversely.
In determining a majority under these voting provisions, holders of
preferred stock will vote together with holders of any other preferred stock
that rank on parity as to dividends and that have like voting rights.
REGISTRATION RIGHTS
We entered into a registration rights agreement in connection with our
initial issuance of preferred stock. We are filing this registration statement
pursuant to our obligations under this registration rights agreement. Under the
registration rights agreement, we are required to:
- file, at our expense, with the Commission as promptly as practicable,
a shelf registration statement covering resales of transfer restricted
securities,
- use all reasonable efforts to cause such registration statement to
become effective as promptly as is practicable,
- use all reasonable efforts to keep the registration statement
effective until the earlier of two years after the latest date of
initial issuance or until the shelf registration statement is no
longer required to transfer any transfer restricted securities.
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<PAGE> 29
When we use the term "transfer restricted securities" in this section we
mean the preferred stock, any debenture issued upon exchange of the preferred
stock, and any common stock issued upon conversion of the preferred stock and
the debentures until the earlier of the following events:
- the date on which the preferred stock, debentures or common stock has
been effectively registered under the Securities Act of 1933 and
disposed of in accordance with the shelf registration statement, or
- the date on which the preferred stock, debentures or common stock is
distributed to the public pursuant to Rule 144 under the Securities
Act of 1933 or is salable pursuant to Rule 144(k) under the Securities
Act of 1933, or
- the date on which the preferred stock, debentures or common stock
ceases to be outstanding.
We will be required to pay liquidated damages if one of the following
"registration defaults" occurs:
- we do not file the shelf registration statement within 60 days after
the closing date of the initial private placement of the preferred
stock,
- the SEC has not declared the shelf registration statement effective
within 180 days after the closing date, or
- the shelf registration statement is declared effective but later
ceases to be effective or usable for a period of time more than 90
days in the aggregate in any period of 365 consecutive days.
If a registration default occurs, we will pay liquidated damages to each
holder of preferred stock, debentures or common stock issued upon conversion
that are transfer restricted securities during the first 90-day period
immediately following the occurrence of the registration default in an amount
equal to an additional one-quarter of one percent (0.25%) per year of the
liquidation amount or principal amount or on an equivalent basis per share for
the common stock. Liquidated damages will increase to one-half of one percent
(0.50%) per year of the liquidation amount or principal amount or an equivalent
amount per week per share for the common stock, in each case, that are transfer
restricted securities for each subsequent 90-day period until the registration
default is cured up to a maximum amount of liquidated damages of 1.25% per year.
Liquidated damages will cease to accrue following the cure of any registration
default. All accrued liquidated damages shall be paid to the holders of
preferred stock on the relevant dividend payment dates. All accrued liquidated
damages shall be paid to holders of debentures and any common stock issued upon
conversion on the relevant interest payment dates. We may suspend the use of the
shelf registration statement in certain circumstances described in the
registration rights agreement if we notify holders of the transfer restricted
securities. However, you will have the right to receive liquidated damages if
the aggregate number of days of suspensions in any year exceeds the periods
described above.
We will provide to each registered holder copies of such prospectus, notify
the holders when the shelf registration statement has become effective and take
certain other actions as are required to permit unrestricted resales of the
transfer restricted securities. We will agree to give notice to all holders of
the filing and effectiveness of the shelf registration statement.
You will need to complete a questionnaire prior to any intended
distribution of transfer restricted securities pursuant to the shelf
registration statement. You may request a copy of this questionnaire from
Cephalon. You are required to complete and deliver the questionnaire prior to
the effectiveness of the shelf registration statement so that you may be named
as selling stockholders in the related prospectus at the time of effectiveness.
Upon receipt of such a completed questionnaire and any other information we may
reasonably request, after effectiveness we will, as promptly as practicable but
in any event within five business days of such receipt, file such amendments to
the shelf registration statements or supplements to the related prospectus as
are necessary to permit a holder to deliver such prospectus to purchasers of
transfer restricted securities, subject to our right to suspend the use of the
prospectus. We will pay liquidated damages if we fail to timely make such filing
or, if such filing is a post-effective amendment of the shelf registration
statement required to be declared effective under the Securities Act of 1933, if
such amendment is not declared effective within 45 days of the filing. If you do
not complete and deliver a
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<PAGE> 30
questionnaire or provide us with other information we may request, you will not
be named as a selling stockholder in the prospectus and will not be permitted to
sell any transfer restricted securities pursuant to the shelf registration
statement. A holder who sells the transfer restricted securities pursuant to the
shelf registration statement will be required to deliver a prospectus to
purchasers and will be bound by the provisions of the registration rights
agreement.
GLOBAL PREFERRED STOCK
Preferred stock sold pursuant to this registration statement will be
evidenced by a global certificate which will be deposited with, or on behalf of,
DTC and registered in the name of Cede & Co. as DTC's nominee. Except as set
forth below, the global certificate may be transferred, in whole or in part,
only to another nominee of DTC or to a successor of DTC or its nominee.
Purchasers may hold their interests in the global certificate directly
through DTC or indirectly through organizations which are participants in DTC.
Transfers between participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in clearing house funds. The laws
of some states require that certain persons take physical delivery of securities
in definitive form. Consequently, the ability to transfer beneficial interests
in the global certificate to such persons may be limited.
Purchasers may beneficially own interests in the global certificate held by
DTC only through participants, or certain banks, brokers, dealers, trust
companies and other parties that clear through or maintain a custodial
relationship, with a Participant, either directly or indirectly through indirect
participants. So long as Cede & Co., as the nominee of DTC, is the registered
owner of the global certificate, Cede & Co. for all purposes will be considered
the sole holder of the global certificate. Except as provided below, owners of
beneficial interests in the global certificate will not be entitled to have
certificates registered in their names, will not receive or be entitled to
receive physical delivery of certificates in definitive form, and will not be
considered the holders.
Payment of dividends on and the redemption price of the global certificate
will be made to Cede & Co. by wire transfer of immediately available funds.
Neither we, the trustee nor any paying agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the global certificate or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
We have been informed by DTC that, with respect to any payment of dividends
on or the redemption price of the global certificate, DTC's practice is to
credit participants' accounts on the payment date with payments in amounts
proportionate to their respective beneficial interests in the preferred stock
represented by the global certificate as shown on the records of DTC, unless DTC
has reason to believe that it will not receive payment on such payment date.
Payments by participants to owners of beneficial interests in preferred stock
represented by the global certificate held through such participants will be the
responsibility of such participants, as is now the case with securities held for
the accounts of customers registered in "street name."
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and certain banks, the ability of a person
having a beneficial interest in preferred stock represented by the global
certificate to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interest, may be affected by the lack of a physical certificate evidencing such
interest.
Neither we, the transfer agent, registrar, paying agent nor conversion
agent will have any responsibility for the performance by DTC or its
participants or indirect participants under the rules and procedures governing
their operations. DTC has advised us that it will take any action permitted to
be taken by a holder of preferred stock only at the direction of one or more
participants to whose account with DTC interests in the global certificate are
credited and only in respect of the amount of shares of the preferred stock
represented by the global certificate as to which the participant has given this
direction.
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<PAGE> 31
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes to accounts of its participants, thereby
eliminating the need for physical movement of certificates. participants include
securities brokers and dealers, banks, trust companies and clearing
corporations. Certain participants together with other entities own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with, a participant, either directly or indirectly.
If DTC is at any time unwilling or unable to continue as depositary and a
successor depositary is not appointed by us within 90 days, we will cause
preferred stock to be issued in definitive form in exchange for the global
certificate.
TRANSFER AGENT AND REGISTRAR
StockTrans, Inc. will act as transfer agent and registrar for the preferred
stock.
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<PAGE> 32
DESCRIPTION OF DEBENTURES
If we elect to issue debentures in exchange for the preferred stock, we
will issue the debentures under an indenture between us and State Street Bank
and Trust Company, as trustee. The following summarizes some, but not all, of
the provisions of the indenture and the debentures. You should refer to the
actual terms of the indenture and the debentures for the definitive terms and
conditions that have been filed as an exhibit to this registration statement. As
used in this description, the words "we," "us" or "our" do not include any
current or future subsidiary of Cephalon.
If we elect to issue debentures for preferred stock, we will issue the
debentures at a rate of $50 principal amount of debentures for each share of
preferred stock that we exchange. The debentures will be general, unsecured,
subordinated obligations of Cephalon. The debentures will be limited to an
aggregate principal amount equal to the aggregate liquidation value of the
outstanding preferred stock, excluding accrued and unpaid dividends payable upon
liquidation. The debentures will mature ten years after the exchange date,
unless earlier converted by a holder or redeemed at our option.
The debentures will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000. You
will not be required to pay a service charge for registration of transfer or
exchange of the debentures. We may, however, require you to pay any tax or other
governmental charge payable in the transaction.
We will maintain an office in New York, New York where payments will be
made on the debentures and where transfer of debentures will be registrable.
Initially, this office will be an office or agency of the trustee in New York,
New York.
The debentures will be issued in the same form as the preferred stock for
which debentures were exchanged. Any global certificates will be replaced with
one or more global debentures as described above under "Description of Preferred
Stock -- Form, Denomination and Registration." Debentures may be issued in
certificated form in exchange for a global debenture under limited specified
circumstances.
We are not restricted from paying dividends or repurchasing securities
under the indenture. We are not subject to any financial covenants under the
indenture.
INTEREST
The debentures will bear interest at the rate of 7.25% per year. Interest
will be paid on February 15 and August 15 each year to the record holder on the
preceding February 1 and August 1. Interest will be computed on the basis of a
360-day year consisting of twelve 30-day months. We may, at our option, pay
interest in the debentures by check mailed to the holders. However, holders of
more than $2,000,000 in principal amount of debentures will be paid by wire
transfer in immediately available funds at the holder's election.
CONVERSION RIGHTS
Holders may convert their debentures at any time prior to maturity, subject
to prior redemption, at a conversion price of $17.92, subject to adjustment as
described below. Except as described in this section, the conversion provisions
of the debentures will be identical to the conversion provisions of the
preferred stock. See "Description of Preferred Stock -- Conversion Rights." If
you convert your debentures after a record date and prior to the next interest
payment date, you will have to pay us interest unless the debentures have been
called for redemption. We are not required to issue fractional shares of common
stock upon conversion of debentures. Instead, we will pay a cash adjustment
based upon the market price of the common stock on the last business day prior
to the date of conversion. If the debentures are called for redemption, your
conversion rights will expire at the close of business on the business day
preceding the redemption date, unless we default in the payment of the
redemption price.
In order to convert your debentures, you must deliver the debenture at the
specified office of a conversion agent, along with a duly signed and completed
notice of conversion and any interest that may
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be required as described in the preceding paragraph. The conversion date shall
be the date on which you deliver the debenture, the duly signed and completed
notice of conversion and any required interest payments as described in the
preceding paragraph.
You will not be required to pay any taxes or duties payable for the issue
or delivery of common stock on conversion. You will, however, be required to pay
any tax or duty payable as a result of the issuance of common stock upon
conversion in a name other than your name. We will not issue or deliver common
stock unless all taxes and duties, if any, have been paid by the holder.
SUBORDINATION
The debentures are subordinated to the prior payment in full of all senior
indebtedness as provided in the indenture. Upon any distribution of our assets
upon our dissolution, winding up, liquidation or reorganization, the payments on
the debentures will be subordinated to the prior payment in full of all senior
indebtedness. However, holders of debentures may receive securities that are
subordinated at least to the same extent as the debentures are subordinated to
senior indebtedness and any securities issued in exchange for senior
indebtedness under the indenture.
If the debentures are accelerated as a result of an event of default,
holders of all senior indebtedness will be entitled to payment in full in cash
before the holders of the debentures will be entitled to receive any payment on
the debentures. We are required to promptly notify holders of senior
indebtedness if payment of the debentures is accelerated because of an event of
default.
We may not make any payment on the debentures if:
- a default in the payment of senior indebtedness occurs and is
continuing beyond any period of grace, or
- any other default occurs and is continuing under any designated senior
indebtedness that permits holders of designated senior indebtedness to
accelerate its maturity, and the trustee receives a notice known as a
payment blockage notice from us or any other person permitted to give
such notice under the indenture.
We may resume making payments on the debentures:
- in the case of a payment default, upon the date on which such default
is cured or waived or ceases to exist, and
- in case of any other default, the earlier of the date on which such
other default is cured or waived or ceases to exist or 179 days after
receipt of the payment blockage notice, unless the maturity of any
senior indebtedness is accelerated.
No new period of payment blockage arising due to a default other than a
payment default may be commenced unless:
- 365 days have elapsed since the effectiveness of the immediately prior
payment blockage notice, and
- all scheduled payments on the debentures have been paid in full in
cash.
No default other than a payment default that existed or was continuing on the
date of delivery of any payment blockage notice to the trustee shall be the
basis for a subsequent payment blockage notice.
By reason of the subordination provisions, in the event of our bankruptcy,
dissolution or reorganization, holders of senior indebtedness may receive more,
and holders of the debentures may receive less, than our other creditors. These
subordination provisions will not prevent the occurrence of any event of default
under the indenture.
"senior indebtedness" means the principal, premium, if any, and interest on
any indebtedness of Cephalon, including bankruptcy interest or any other payment
on indebtedness, whether outstanding on the
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date of the indenture or thereafter created, incurred, assumed, guaranteed or in
effect guaranteed by us including all deferrals or renewals or amendments or
modifications. However, senior indebtedness does not include:
- indebtedness evidenced by the debentures,
- any liability for federal, state, local or other taxes owed or owing
by us,
- our indebtedness to any of our subsidiaries,
- any of our trade payables incurred in the ordinary course of business,
and
- any indebtedness that expressly provides that the indebtedness shall
not be senior in right of payment to, or is on the same basis with, or
is subordinated or junior to, the debentures.
"indebtedness" means:
(1) all obligations:
- for borrowed money,
- evidenced by a note, debenture, bond or other written instrument,
- under a lease required to be capitalized on the balance sheet of
the lessee under generally accepted accounting principles,
- under any lease or related document, including a purchase
agreement, that provides that we are contractually obligated to
purchase or cause a third party to purchase and thereby guarantee a
minimum residual value of the lease property to the lessor and our
obligations under this lease or related document to purchase or to
cause a third party to purchase such leased property,
- letters of credit, bank guarantees or bankers' acceptances,
including reimbursement obligations,
- indebtedness secured by a mortgage, pledge, lien, encumbrance,
charge or adverse claim affecting title in an encumbrance to which
the property or assets of the person are subject,
- the balance of deferred and unpaid purchase price of any property
or assets,
- under interest rate or currency swap agreements, cap, floor and
collar agreements, spot and forward contracts and similar
agreements and arrangements;
(2) any obligation of others of the type described in the preceding
(1) or under (3) below assumed by or guaranteed or in effect guaranteed
through an agreement to purchase; and
(3) any deferrals, renewals or amendments or modifications of (1) and
(2) above.
"designated senior indebtedness" means any particular senior indebtedness
that expressly provides that such senior indebtedness shall be designated senior
indebtedness for purposes of the indenture.
If the trustee or any holder of debentures receives any payment or
distribution of our assets of any kind in contravention of the indenture, then
this payment or distribution will be held by the recipient in trust for the
benefit of the holders of senior indebtedness and will be immediately paid over
or delivered to the holders of senior indebtedness or their representatives.
As of June 30, 1999, we had approximately $40.4 million of indebtedness
outstanding. Neither we not our subsidiaries are limited or prohibited from
incurring additional debt.
OPTIONAL REDEMPTION
On or after August 17, 2001, we may redeem the debentures, in whole or in
part, at our option, at the redemption prices listed below. The redemption
prices, expressed as a percentage of the principal amount,
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<PAGE> 35
are as follows for the 12-month periods beginning August 15 of the following
years, beginning August 17, 2001 and ending on August 14, 2002 in the case of
the first period.
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2001.............................................. 105.80%
2002.............................................. 105.08
2003.............................................. 104.35
2004.............................................. 103.64
2005.............................................. 102.90
2006.............................................. 102.18
2007.............................................. 101.45
2008.............................................. 100.73
</TABLE>
and 100% at August 15, 2009 and thereafter. In each case we will pay accrued
interest to, but excluding, the redemption date. If the redemption date is an
interest payment date, we will pay interest to the record holders as of the
relevant record date. We are required to give notice not more than 60 and not
less than 20 days before the redemption date.
If fewer than all the debentures are to be redeemed, the trustee will
select the debentures to be redeemed in principal amounts of $1,000 or multiples
of 1,000 by lot or, in its discretion, on a pro rata basis. If any debenture is
partially redeemed, we will issue a new debenture in principal amount equal to
the unredeemed principal portion. If a portion of a holder's debentures is
selected for partial redemption and the holder converts the debentures, the
converted portion shall be deemed to be taken from the portion selected for
redemption.
No sinking fund is provided for the debentures, which means that we are not
required under the indenture to redeem or retire the debentures periodically.
EVENTS OF DEFAULT AND REMEDIES
The following events are "events of default" under the indenture:
- we fail to pay the principal or premium, if any, on the debentures,
whether or not prohibited by the subordination provisions of the
indenture;
- we fail to pay interest on the debentures when due and this failure
continues for 30 days, whether or not prohibited by the subordination
provisions of the indenture;
- we fail to perform any covenant in the indenture and this failure
continues for 45 days after notice is given in accordance with the
indenture;
- we fail to pay at maturity, including any applicable grace period, in an
amount of indebtedness in excess of $5,000,000 and this failure continues
for 30 days after notice given in accordance with the indenture;
- a default by us on any indebtedness that results in the acceleration of
indebtedness in an amount in excess of $5,000,000, without the
indebtedness being discharged or the acceleration being rescinded or
annulled for 30 days after notice given in accordance with the indenture;
or
- events involving our bankruptcy, insolvency or reorganization.
The trustee is required to give notice to holders of all uncured defaults
known to the trustee within 90 days after the occurrence of the default.
However, the trustee may withhold this notice if it determines in good faith
that it is in the best interest of the holders, except notice of:
- a default in the payment of the principal or premium, if any, or interest
on the debentures, or
- a default in the payment of any redemption obligation.
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If an event of default has occurred and is continuing, the trustee or the
holders of not less than 25% in aggregate principal amount of outstanding
debentures may declare the principal and premium, if any, on the debentures and
accrued interest on the debentures to be immediately due and payable. However,
if we cure all defaults, except payment defaults on the debentures as a result
of the acceleration, and we meet certain conditions, this acceleration
declaration may be canceled and past defaults may be waived by the holders of a
majority in principal amount of outstanding debentures. If an event of default
resulting from events of bankruptcy, insolvency or reorganization were to occur,
all unpaid principal and accrued interest on outstanding debentures will become
due and payable immediately without any declaration or other act on the part of
the trustee or any holders of debentures, subject to certain limitations.
Holders of a majority in principal amount of the outstanding debentures
may, subject to certain limitations, direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee. The trustee shall be entitled to
receive from holders reasonable security or indemnity against any costs,
expenses and liabilities incurred by the trustee. Before you may institute a
proceeding which respect to the indenture, each of the following must occur:
- you must have given the trustee written notice of a continuing event
of default;
- the holders of at least 25% of the aggregate principal amount of all
outstanding debentures must make a written request of the trustee to
take action because of the default;
- holders must have offered reasonable indemnification to the trustee
against the cost, expenses and liabilities of taking action; and
- the trustee must not have taken action for 60 days after the receipt
of such notice and offer of indemnification.
These limitations do not apply to a suit for the enforcement of payment of
the principal of or any premium or interest on a debenture or the right to
convert the debenture in accordance with the indenture.
Generally, the holders of not less than a majority of the aggregate
principal amount of outstanding debentures may waive any default or event of
default, except if:
- we fail to pay principal, premium or interest on any debenture when
due;
- we fail to convert any debenture into common stock; or
- we fail to comply with any of the provisions of the indenture that
would require the consent of the holder of each outstanding debenture
affected.
We will send the trustee annually a statement as to whether we are in
default and the nature of any default under the indenture.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
We may not consolidate with or merge with or into another person or sell,
lease, convey or transfer all or substantially all of its assets a consolidated
basis, whether in a single or series of related transactions, to another person
or group of affiliated persons, unless:
- either (A) we are the surviving entity or (B) the resulting entity is
a U.S. corporation and expressly assumes in writing all of our
obligations under the debentures and the indenture;
- no default or event of default exists or shall occur immediately after
giving effect to the transaction; and
- other specified conditions are satisfied.
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MODIFICATIONS OF THE INDENTURE
The consent of the holders of a majority in principal amount of outstanding
debentures at the time is required to modify or amend the indenture or any
supplemental indenture. However, a modification or amendment would require the
consent of the holder of each outstanding debenture affected if it would:
- extend the fixed maturity of any debenture;
- reduce the rate or extend the time for payment of interest on any
debenture;
- reduce the principal amount or any premium of any debenture;
- reduce any amount payable upon redemption of any debenture;
- impair or adversely affect a holder's right to institute suit for the
payment on any debenture;
- change the currency in which the debentures are payable;
- impair or adversely change the right to convert the debentures;
- adversely modify the subordination provisions of the debentures; or
- reduce the percentage required to consent to modifications and
amendments.
TAXATION OF DEBENTURES
You should read "Certain Federal Income Tax Consequences" for a discussion
of the federal tax considerations which may apply to you as a debenture holder.
GOVERNING LAW
The indenture and the debentures will be governed by the laws of the State
of New York.
CONCERNING THE TRUSTEE
We have accepted the trustee as the initial paying agent, conversion agent,
registrar and custodian for the debentures. We may maintain deposit accounts and
conduct other banking transactions with the trustee or its affiliates in the
ordinary course of business. In addition, the trustee and its affiliates may in
the future provide banking and other services to us in the ordinary course of
their business. If there is an event of default under the indenture, the trustee
will:
- exercise the rights and powers given to the trustee under the indenture
and
- use the same degree and care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of the
person's own affairs.
If the trustee becomes one of our creditors, the indenture and the Trust
Indenture Act of 1939 may limit the trustee from obtaining payment of claims in
certain cases or realizing on certain property received by the trustee.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the material federal income tax consequences of
acquiring and owning the preferred stock and the debentures is based on the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations,
court decisions, and Internal Revenue Service ("IRS") rulings now in effect, all
of which are subject to change. Prospective purchasers should particularly note
that any such change could have retroactive application to the preferred stock
and debentures acquired through this offering. In particular, prospective
purchasers of the preferred stock should be aware that the tax consequences
summarized below do not reflect any changes to existing law contained in H.R.
2488, the "Taxpayer Refund and Relief Act of 1999," passed by the United States
Senate and House of Representatives on August 5, 1999, which if enacted into law
in its current form, could impact the tax consequences of acquiring, holding and
disposing of the preferred stock, the debentures, and the common stock.
This summary assumes that the preferred stock is acquired at its original
offering at its original issue price and that the preferred stock and the
debentures are held as capital assets, within the meaning of section 1221 of the
Code, and does not address all of the tax consequences that may be relevant to
particular shareholders in light of their personal circumstances, or to certain
types of shareholders (such as certain financial institutions, dealers in
securities or commodities, insurance companies, regulated investment companies,
personal holding companies, corporations subject to the alternative minimum tax,
tax-exempt organizations or persons who hold the preferred stock or debentures
as positions in a "straddle" or as part of a "hedging", "conversion" or
"constructive sale" transaction for United States federal income tax purposes).
Also not addressed are the consequences under estate, state, local and foreign
tax laws or the tax consequences to subsequent holders of the preferred stock
and debentures. Prospective purchasers are advised to consult their own tax
advisors regarding the tax consequences of acquiring, holding, or disposing of
the preferred stock or debentures in light of their own investment
circumstances.
CHARACTERIZATION OF PREFERRED STOCK AND DEBENTURES
Under section 385(c) of the Code, our characterization of the preferred
stock as "stock" is binding upon us and all holders of the preferred stock,
other than holders who disclose on their tax returns that they are treating the
preferred stock in a manner inconsistent with such characterization. Although
our characterization of the preferred stock is not binding upon the IRS or any
court, this summary assumes that the preferred stock will be treated in a manner
consistent with our characterization. Holders should be aware that if the
preferred stock is treated as debt for federal income tax purposes, the tax
consequences of acquiring, holding and disposing of the preferred stock will
differ materially from the tax consequences described in this prospectus. The
following discussion assumes that the debentures will be treated as debt for
federal income tax purposes.
DISTRIBUTIONS ON PREFERRED STOCK
Distributions with respect to the preferred stock will constitute
dividends, taxable at ordinary income tax rates, to the extent that we have
current or accumulated earnings and profits for federal income tax purposes.
Dividends paid to corporations will generally be eligible for the
dividends-received deduction under section 243 of the Code, subject to the
limitations contained in sections 246 and 246A of the Code.
In general, the dividends-received deduction is available only if the stock
in respect of which a dividend is paid has been held for at least 46 days during
the 90-day period beginning on the date which is 45 days before the date on
which the stock becomes ex-dividend (the "Ex-dividend Date"), or at least 91
days during the 180-day period beginning on the date which is 90 days before the
Ex-dividend Date in the case of a dividend paid with respect to preferred stock
and which is attributable to a period or periods aggregating more than 366 days.
A taxpayer's holding period for these purposes is reduced by periods during
which the taxpayer's risk of loss with respect to the stock is considered
diminished by reason of the existence of options, contracts to sell or other
similar transactions. It is possible that the IRS may contend that days during
which our redemption right is outstanding or, alternatively, is "in the money"
are not
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included in an investor's holding period for these purposes. The
dividends-received deduction will not be available to the extent that the
taxpayer is under an obligation to make related payments with respect to
positions in substantially similar or related property. The dividends-received
deduction is limited to specified percentages of the holder's taxable income and
may be reduced or eliminated if the holder has indebtedness "directly
attributable to [its] investment" in the stock. Prospective corporate purchasers
of preferred stock should consult their own tax advisors to determine whether
these limitations might apply to them. In particular, prospective corporate
purchasers of the preferred stock should carefully consider the provisions
contained in the Clinton Administration's Fiscal Year 2000 budget proposal (the
"Proposal"), which may reduce or eliminate entirely the amount of the
dividends-received deduction. It is impossible to predict whether the provisions
contained in the Proposal will be enacted into law in their current form, or the
effective date of such provisions. Prospective corporate purchasers should be
aware, however, that many of the provisions contained in the Proposal have
retroactive effective dates.
If distributions with respect to the shares of preferred stock exceed our
current and accumulated earnings and profits, the excess will be applied against
and reduce the holder's tax basis in the preferred stock. Any amount in excess
of the amount of the dividend and the amount applied against basis will be
treated as capital gain.
EXTRAORDINARY DIVIDENDS
If a corporate holder of preferred stock receives an "extraordinary
dividend" from Cephalon with respect to stock which it has not held for more
than two years before the dividend announcement date, the basis of the preferred
stock will be reduced (but not below zero) by the portion of the dividend which
is not taxable because of the dividends-received deduction. If, because of the
limitation on reducing basis below zero, any amount of the non-taxable portion
of an extraordinary dividend has not been applied to reduce basis, such amount
will be treated as gain from the sale or exchange of stock in the taxable year
in which the extraordinary dividend is received. An "extraordinary dividend" on
the preferred stock would include a dividend that (i) equals or exceeds 5% of
the holder's adjusted tax basis in the stock, treating all dividends having
ex-dividend dates within an 85-day period as one dividend, or (ii) exceeds 20%
of the holder's adjusted tax basis in the stock, treating all dividends having
ex-dividend dates within a 365-day period as one dividend. A holder may elect to
use the fair market value of the stock rather than its adjusted basis for
purposes of applying the 5% or 20% limitation if the holder is able to establish
such fair market value to the satisfaction of the IRS.
Special rules apply with respect to "qualified preferred dividends." A
qualified preferred dividend is any fixed dividend payable with respect to
preferred stock which (i) provides for fixed preferred dividends payable no less
often than annually and (ii) is not in arrears as to dividends when acquired,
provided the actual rate of return, as determined under section 1059(e)(3) of
the Code, on such stock does not exceed 15%. Where a qualified preferred
dividend exceeds the 5% or 20% limitation described above, the extraordinary
dividend rules will not apply if the taxpayer holds the stock for more than five
years. If the taxpayer disposes of the stock before it has been held for more
than five years, the aggregate reduction in basis will not exceed the excess of
the qualified preferred dividends paid on such stock during the period held by
the taxpayer over the qualified preferred dividends that would have been paid
during such period on the basis of the stated rate of return as determined under
section 1059(e)(3) of the Code. The length of time that a taxpayer is deemed to
have held stock for this purpose is determined under principles similar to those
applicable for purposes of the dividends-received deduction discussed above.
REDEMPTION PREMIUM
If (a) preferred stock is, like the preferred stock, redeemable only at the
issuer's option, (b) the facts and circumstances on the issue date indicate that
redemption is more likely than not to occur, and (c) the redemption price of the
preferred stock as of the most likely redemption date exceeds the issue price
(so that there is a "redemption premium"), then the redemption premium may be
taxable as a dividend to the extent of the issuing corporation's current or
accumulated earnings and profits over the period from issuance to the most
likely redemption date. If a redemption premium is subject to the foregoing
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treatment, a holder of the preferred stock would take the amount of the premium
into income under an economic accrual method similar to the method described
under "Original Issue Discount and Premiums on Debentures" below. Under
applicable Treasury regulations, a redemption premium is not subject to the
foregoing treatment if it will be paid "as a result of changes in economic or
market conditions over which neither the issuer nor the holder has legal or
practical control" and is "solely in the nature of a penalty for premature
redemption." The regulations also provide a "safe harbor," pursuant to which a
redemption will not be treated as likely to occur, as to a given holder, if: (x)
the issuer and the holder are not "related" under certain tests prescribed by
the Code, (y) the issuer is not effectively required or compelled by any plan,
arrangement, or agreement to redeem the stock, and (z) redemption would not
reduce the yield of the stock. Because the foregoing tests are based upon an
evaluation of all facts and circumstances surrounding the issuance and
redemption of preferred stock, the conclusion cannot be entirely certain;
however, it is Cephalon's belief that no part of the premium payable upon
redemption of the preferred stock will be treated as a constructive dividend to
the holders of the preferred stock. It is also possible that upon an actual
redemption, the redemption premium would, together with the other redemption
proceeds, be treated as a dividend for federal income tax purposes. See
"Redemption for Cash," below.
REDEMPTION FOR CASH
A redemption of shares of preferred stock by Cephalon for cash will be
treated as a distribution taxable as a dividend (and, possibly, an
"extraordinary dividend" -- see above) to redeeming shareholders to the extent
of Cephalon's current or accumulated earnings and profits unless the redemption:
- results in a "complete termination" of the shareholder's interest in
Cephalon (within the meaning of section 302(b)(3) of the Code);
- is "substantially disproportionate" (within the meaning of section
302(b)(2)) with respect to the holder; or
- is "not essentially equivalent to a dividend" (within the meaning of
section 302(b)(1)).
Based upon published IRS rulings, the redemption of a stockholder's
preferred stock for cash will be treated as "not essentially equivalent to a
dividend" if, taking into account the constructive ownership rules, (1) the
shareholder does not own shares of any other class in the Company, either
directly or by attribution, and (2) there is a meaningful reduction in the
holder's proportionate interest in Cephalon. In determining whether any of these
tests has been met, shares considered to be owned by the holder by reason of the
constructive ownership rules set forth in section 318 of the Code, as well as
shares actually owned, will be taken into account. If any of the foregoing tests
is met, the redemption of shares of preferred stock for cash will result in
taxable gain or loss equal to the difference between the amount of cash received
(except cash attributable to accrued, unpaid, declared dividends, which will be
taxable as a dividend described above), and the holder's tax basis in the
redeemed shares. Any such gain or loss will be capital gain or loss and will be
long-term capital gain or loss, taxable (in the case of individuals) at a
maximum rate of 20%, if the holding period exceeds one year. It is possible that
the IRS may contend that the holding period of preferred stock does not begin so
long as Cephalon's redemption right is outstanding.
EXCHANGE FOR DEBENTURES
An exchange of shares of preferred stock for debentures would also be
subject to the rules of section 302 of the Code described above. Since a holder
of debentures will be treated under the constructive ownership rules as owning
the common stock into which the debentures are convertible, the exchange would
not by itself satisfy the "complete termination" tests or the "substantially
disproportionate" test described above. The "not essentially equivalent to a
dividend" test could be met only if the exchange were regarded as resulting in a
meaningful reduction in the holder's proportionate interest in Cephalon. If none
of these tests is met, the fair market value of the debentures received upon the
exchange will be taxable as a dividend (and, in the case of a corporate holder,
as an "extraordinary dividend" -- see above) to the extent of Cephalon's current
or accumulated earnings and profits and then would be treated as a
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<PAGE> 41
return of capital to the extent of the holder's tax basis in the preferred
stock. If the fair market value of the debentures exceeds the amounts treated as
a dividend and as a return of capital, any such excess would be treated as
capital gain.
In the event that receipt of the debentures is taxable as a dividend, the
basis of the debentures will be equal to their fair market value as of the date
of the exchange. If the holder retains any stock in Cephalon, the remaining tax
basis in the preferred stock will be transferred to such retained stock. If the
holder retains no stock in Cephalon, it is unclear whether the remaining tax
basis in the preferred stock would be transferred to the debentures or would be
lost. For purposes of determining the recognition of gain under the
extraordinary dividend basis reduction rules described above, only the basis of
the shares of preferred stock exchanged for the debentures may be taken into
account.
Prospective purchasers should consult their own tax advisors regarding
satisfaction of the section 302 tests in their particular circumstances,
including the possibility that a sale of a part of the holder's preferred stock
or the debentures received might be regarded as reducing the holder's interest
in Cephalon, thereby satisfying one of the tests of section 302(b); in such a
case, the shareholder would recognize capital gain or loss on the exchange. For
purposes of determining gain or loss, the amount realized by a shareholder would
be the issue price of the debentures received (see "Original Issue Discount and
Premium on Debentures"). Any such gain or loss will be capital gain or loss and
will be long-term capital gain or loss, taxable (in the case of individuals) at
a maximum rate of 20%, if the holding period exceeds one year. It is possible
that the IRS may contend that the holding period of preferred stock does not
begin so long as Cephalon's redemption right is outstanding. The installment
method will not be available for reporting such gain in the event that the
preferred stock, the debentures, or the common stock into which the debentures
are convertible are traded or readily tradable on an established securities
market.
ORIGINAL ISSUE DISCOUNT AND PREMIUM ON DEBENTURES
Stated interest on the debentures will be includable in income in
accordance with the holder's method of accounting. There is also a risk that the
debentures will be treated as having original issue discount taxable as interest
income as discussed below.
If the preferred stock is exchanged for debentures at a time when the
stated redemption price at maturity of the debentures exceeds their issue price
by an amount equal to or greater than one-fourth of one percent of the stated
redemption price at maturity multiplied by the number of complete years to
maturity, the debentures will be treated as having original issue discount equal
to the entire amount of such excess.
If the exchange of the preferred stock for debentures satisfies the section
302 tests, different rules apply for determining the issue price of the
debentures depending upon whether the preferred stock or the debentures are or
will be traded on an established securities market. In the event the debentures
are listed on an exchange or are otherwise considered to be traded on an
established securities market under Treasury regulations issued under section
1273 of the Code at any time during the 60-day period ending 30 days after the
date of the exchange, the issue price of the debentures will be their fair
market value as determined as of the date of the exchange. If the debentures are
not listed on an exchange or otherwise considered to be traded on an established
securities market within such time period, but the preferred stock is so listed
or traded, the issue price of the debentures will be the fair market value of
the preferred stock as of the date of the exchange. In the event that neither
the preferred stock nor the debentures are listed on an exchange or otherwise
considered to be traded on an established securities market within the requisite
time period, the issue price of the debentures will be their stated principal
amount, assuming that the debentures bear "adequate stated interest" within the
meaning of section 1274 of the Code. If the debentures do not bear adequate
stated interest, the issue price will be equal to their "imputed principal
amount" as determined under section 1274 of the Code.
A holder of a debenture would generally be required to include in gross
income (irrespective of the holder's method of accounting) a portion of the
original issue discount for each year during which it holds the debenture even
though the cash to which such income is attributable would not be received until
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<PAGE> 42
maturity or redemption of the debenture. The amount of any original issue
discount included in income for each year would be calculated under a constant
yield to maturity formula that would result in the allocation of less original
issue discount to the early years of the term of the debenture and more original
issue discount to later years.
If the preferred stock is exchanged for debentures whose issue price
exceeds the amount payable at maturity (or earlier call date, if appropriate),
such excess (excluding the amount thereof attributable to the conversion
feature) will be deductible by the holder of the debentures as amortizable bond
premium over the term of the debentures (taking into account earlier call dates,
as appropriate), under a yield to maturity formula, if an election by the
taxpayer under section 171 of the Code is in effect or is made. Such election
would apply to all obligations owned or subsequently acquired by the taxpayer
during or after the taxable year in which the election is made. The amortizable
bond premium will be treated as an offset to stated interest on the debentures
to the extent thereof and any excess will be allowable as a deduction subject to
the following limitation. The amount of any amortized bond premium deduction
will be limited to the excess of the holder's interest income inclusions on the
debenture in prior accrual periods over bond premium deductions allowed the
holder in such prior periods, and any amount in excess of such limitation will
be carried forward as additional bond premium in the next accrual period.
If the exchange of the preferred stock for debentures does not satisfy the
section 302 tests, the issue price of a debenture will be determined based on
whether the preferred stock or the debentures are or will be traded on an
established securities market as described in the third preceding paragraph
above. In the event that the basis of a debenture (its fair market value as of
the exchange) is less than its stated redemption price at maturity, it would
appear that a holder will recognize capital gain upon satisfaction of the
debenture at maturity. In the event that the basis of a debenture exceeds the
amounts payable at maturity, a holder should be able to elect to amortize bond
premium under the rules discussed above.
REDEMPTION OR SALE OF DEBENTURES
Generally a redemption or sale of the debentures will result in taxable
gain or loss equal to the difference between the amount of cash and fair market
value of other property received and the holder's tax basis in the debentures.
To the extent that the amount received is attributable to accrued interest,
however, that amount will be taxed as ordinary income. The tax basis of a holder
who received the debentures in exchange for shares of preferred stock will
generally be equal to the fair market value of the debentures at the time of
exchange plus any original issue discount included in the holder's income or
minus any premium previously allowed as an offset to interest income on the
debentures. Such gain or loss will be capital gain or loss, taxable (in the case
of individuals) at a maximum rate of 20% and will be long-term gain or loss if
the holding period for the debentures exceeds one year.
If the debentures are issued with original issue discount and Cephalon were
found to have had an intention at the time the debentures were issued to call
them before maturity, any gain realized on a sale, exchange or redemption of
debentures prior to the maturity would be considered ordinary income to the
extent of any unamortized original issue discount for the period remaining to
the stated maturity of the debentures. Cephalon cannot predict whether it would
have an intention, when and if the debentures are issued, to call the debentures
before their maturity.
CONVERSION OF PREFERRED STOCK OR DEBENTURES INTO COMMON STOCK
No gain or loss will generally be recognized upon conversion of shares of
preferred stock or debentures into shares of common stock. Gain or loss will be
recognized to the extent of the difference between the cash paid in lieu of
fractional shares of common stock and the basis of the preferred stock or
debentures allocable to such fractional shares, and ordinary income will be
recognized to the extent of the shares of common stock attributable to accrued
interest. Additionally, if the conversion takes place when there is a dividend
arrearage on the preferred stock and the fair market value of the common stock
exceeds the issue price of the preferred stock, a portion of the common stock
received might be treated as a dividend distribution, taxable as ordinary
income. Assuming the conversion is not treated as resulting in
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<PAGE> 43
the payment of a dividend, the tax basis of the common stock received upon
conversion will be equal to the tax basis of the shares of preferred stock or
the debentures converted (less the amount of basis allocable to any fractional
share of common stock for which cash is received), and the holding period of the
common stock will include the holding period of the shares of preferred stock or
the debentures converted. The tax basis of any common stock treated as a
dividend will be equal to its fair market value on the date of the distribution.
ADJUSTMENT OF CONVERSION PRICE
Holders of preferred stock or debentures may be deemed to have received
constructive distributions where the conversion ratio is adjusted to reflect
property distributions with respect to common stock into which such preferred
stock or debentures are convertible. Adjustments to the conversion price made
pursuant to a bona fide reasonable adjustment formula which has the effect of
preventing the dilution of the interest of the holders of the preferred stock or
debentures, however, will generally not be considered to result in a
constructive distribution of stock. Certain of the possible adjustments provided
in the preferred stock and the debentures may not qualify as being pursuant to a
bona fide reasonable adjustment formula. If such adjustments were made, the
holders of preferred stock or debentures might be deemed to have received
constructive distributions taxable as dividends.
BACKUP WITHHOLDING
Under the backup withholding provisions of the Code and applicable Treasury
regulations, a holder of preferred stock, debentures or common stock may be
subject to backup withholding at the rate of 31% with respect to dividends or
interest paid on, original issue discount accrued with respect to, or the
proceeds of a sale, exchange or redemption of preferred stock, debentures or
common stock, unless (a) such holder is a corporation or comes within certain
other exempt categories and when required demonstrates this fact or (b) provides
a taxpayer identification number, certifies as to no loss of exemption from
backup withholding and otherwise complies with applicable requirements of the
backup withholding rules. The amount of any backup withholding from a payment to
a holder will be allowed as a credit against the holder's federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the IRS.
SPECIAL TAX RULES APPLICABLE TO FOREIGN HOLDERS
For purposes of the following discussion, a "Foreign Holder" is any holder
who is not (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States, any State or any political subdivision thereof, (iii) an estate
the income of which is subject to United States federal income taxation
regardless of source, or (iv) a trust (A) over the administration of which a
court within the United States is able to exercise primary supervision and (B)
all substantial decisions of which one or more United States persons have the
authority to control.
Income received by a Foreign Holder in the form of dividends on preferred
stock or common stock (including amounts distributed on or prior to December 31,
2000, that exceed current and accumulated earnings and profits of Cephalon) or
interest and original issue discount on the debentures will be subject to a
United States federal withholding tax at a 30% rate upon the actual payment of
the dividends, interest or original issue discount except as described below and
except where an applicable tax treaty provides for the reduction or elimination
of such withholding tax. Cephalon and its paying agents may elect with respect
to distributions to Foreign Holders on preferred stock or common stock made
after December 31, 2000, to withhold only against the portion of such
distribution that is reasonably estimated to be made from the current or
accumulated earnings and profits of Cephalon. A Foreign Holder generally will be
taxable in the same manner as a United States corporation or resident with
respect to dividend, interest or original issue discount income if such income
is effectively connected with the conduct of a trade or business in the United
States. Such effectively connected income received by a Foreign Holder that is a
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<PAGE> 44
corporation may in certain circumstances be subject to an additional "branch
profits tax" at a 30% rate, or if applicable, a lower treaty rate.
Dividends paid to Foreign Holders outside the United States that are
subject to the withholding tax described above will generally be exempt from
United States backup withholding tax and United States information reporting
requirements, other than reporting of dividend payments for purposes of the
withholding tax noted above. The payor of the dividends on or prior to December
31, 2000, may generally rely on a payee's address outside the United States in
determining that the regular withholding tax discussed above applies and
consequently that the backup withholding provisions do not apply.
The payor of dividends after December 31, 2000, may generally presume that
a holder is a Foreign Holder only if it can reliably associate the dividend
payment with a beneficial owner certificate (Form W-8) furnished by the person
whose name is on the certificate or attached to a valid foreign intermediary,
flow-through entity or United States branch withholding certificate. In general,
a Foreign Holder need not furnish a United States taxpayer identification number
to Cephalon or its paying agent unless the Foreign Holder intends to claim the
benefit of a lower treaty rate. In the event that the preferred stock or the
common stock, respectively, is "actively traded" within the meaning of section
1092(d) of the Code and the Treasury regulations thereunder, a Foreign Holder
need not furnish a United States taxpayer identification number to Cephalon or
its paying agent in order to claim the benefit of a lower treaty rate for any
dividends paid thereon. Cephalon cannot anticipate, however, whether the
preferred stock or the common stock will be actively traded at the time any
distribution is made.
Payments of interest and original issue discount on the debentures received
by a Foreign Holder on or prior to December 31, 2000, will not be subject to
United States federal withholding tax provided that (a) the Foreign Holder does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of Cephalon entitled to vote, (b) the holder is
not a controlled foreign corporation that is related to Cephalon through stock
ownership, and (c) either (1) the beneficial owner of the debenture, under
penalties of perjury, provides the Company or its agent with its name and
address and certifies that it is not a United States person or (2) a securities
clearing organization, bank or other financial institution that holds customer's
securities in the ordinary course of its trade or business (a "Financial
Institution") certifies to Cephalon or its agent, under penalties of perjury,
that such a statement has been received from the beneficial owner by its or
another financial institution and furnishes to Cephalon or its agent a copy
thereof. Backup withholding and information reporting also generally will not
apply to payments of interest and original discount on or prior to December 31,
2000, if the certification described above is received, provided the payor does
not have actual knowledge that the holder is a United States person.
Payments of interest and original issue discount received by a Foreign
Holder after December 31, 2000, will not be subject to United States federal
withholding tax (or to backup withholding and information reporting) provided
that requirements (a) and (b) of the preceding paragraph are satisfied and, in
general, either (1) Cephalon or its paying agent can reliably associate the
payment with documentation upon which it can rely to treat the payment as made
to a foreign beneficial owner under Treasury regulations issued under section
1441 of the Code; (2) Cephalon or its paying agent can reliably associate the
payment with a withholding certificate from a person claiming to be a
withholding foreign partnership and the foreign partnership can reliably
associate the payment with documentation upon which it can rely to treat the
payment as made to a foreign beneficial owner in accordance with such Treasury
regulations; (3) Cephalon or its paying agent can reliably associate the payment
with a withholding certificate from a person representing to be a "qualified
intermediary" that has assumed primary withholding responsibility under such
Treasury regulations and the qualified intermediary can reliably associate the
payment with documentation upon which it can rely to treat the payment as made
to a foreign beneficial owner in accordance with its agreement with the IRS; or
(4) Cephalon or its paying agent receives a statement, under penalties of
perjury from an authorized representative of a Financial Institution stating
that the Financial Institution has received from the beneficial owner a
withholding certificate described in such Treasury regulations or that it has
received from another Financial Institution a similar statement that it, or
another Financial Institution acting on behalf of the beneficial owner, has
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<PAGE> 45
received such a withholding certificate from the beneficial owner. In general,
it will not be necessary for a Foreign Holder to obtain or furnish a United
States taxpayer identification number to Cephalon or its paying agent in order
to claim any of the foregoing exemptions from United States withholding tax on
payments of interest and original issue discount.
Provided that Cephalon is not, and has not been, a "United States real
property holding corporation" within the meaning of section 897(c) of the Code,
a Foreign Holder generally will not be subject to United States federal income
or withholding tax on gain realized on the sale or exchange of preferred stock,
common stock, or debentures unless (i) the holder is an individual who is
present in the United States for 183 days or more during the taxable year and as
to whom such gain is from United States sources or (ii) the gain is effectively
connected with a United States trade or business of the holder. Upon a
redemption of the preferred stock for cash or an exchange of preferred stock for
debentures, Cephalon may be required to withhold tax on the entire amount of the
proceeds at a 30% rate or lower treaty rate applicable to dividends unless a
Foreign Holder is able to demonstrate to the satisfaction of Cephalon that such
redemption or exchange satisfies the section 302 tests discussed above with
respect to such Foreign Holder (see "Redemption for Cash" and "Exchange for
Debentures"). In the case of an exchange of preferred stock for debentures, this
would result in a Foreign Holder receiving a reduced principal amount of
debentures.
The payment of the proceeds of the sale of preferred stock, common stock or
debentures to or through the United States office of a broker will be subject to
information reporting and possible backup withholding at a rate of 31% unless
the owner certifies its non-United States status under penalties of perjury or
otherwise establishes an exemption in accordance with applicable Treasury
regulations. The payment of the proceeds of the sale of preferred stock, common
stock or debentures to or through the foreign office of a broker generally will
not be subject to this backup withholding tax. In the case of the payment of
proceeds from the disposition of preferred stock. common stock or debentures
through a foreign office of a broker that is a United States person or a "United
States related person," the applicable Treasury regulations require information
reporting on the payment unless the broker has documentary evidence in its files
that the owner is a non-United States person and the broker has no actual
knowledge to the contrary. For this purpose, a "United States related person" is
(i) a "controlled foreign corporation" for United States federal income tax
purposes, (ii) a foreign person 50% or more of whose gross income from all
sources for a specified period is derived from activities that are effectively
connected with the conduct of a United States trade or business or (iii) with
respect to sales effected after December 31, 2000, a foreign partnership that,
at any time during its taxable year, is 50% or more owned by United States
persons or is engaged in the conduct of a United States trade or business. Any
amounts withheld under the backup withholding rules from a payment to a Foreign
Holder will be allowed as a refund or a credit against such Foreign Holder's
United States federal income tax, provided that the required information is
furnished to the IRS.
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<PAGE> 46
DESCRIPTION OF CAPITAL STOCK
The majority of the authorized capital stock of Cephalon consists of
100,000,000 shares of common stock, par value $0.01 per share. Holders of shares
of our common stock are entitled to one vote per share on all matters to be
voted upon by the stockholders are not entitled to cumulate votes for the
election of directors. Holders of shares of common stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of Cephalon, the holders of shares of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to the distribution rights of shares of preferred stock,
if any, then outstanding. Shares of common stock have no preemptive, conversion
or other subscription rights and there are no redemption or sinking fund
provisions applicable to the common stock.
As permitted by the Delaware General Corporation Law, Cephalon's restated
certificate of incorporation provides that our directors shall not be personally
liable to Cephalon or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Cephalon or its stockholders, (ii) for acts of
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under section 174 of the Delaware General Corporation
Law, relating to prohibited dividends or distributions or the repurchase or
redemption of stock, or (iv) for any transaction from which the director derives
an improper personal benefit.
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<PAGE> 47
SELLING STOCKHOLDERS
We originally issued the preferred stock in transactions exempt from the
registration requirements of the Securities Act to persons that the initial
purchasers believed to be QIBs. As used in this prospectus, the term selling
stockholders includes their transferees, pledgees, donees and their successors.
The selling stockholders may from time to time offer and sell pursuant to this
prospectus any or all of the preferred stock, the debentures, if issued in
exchange for the preferred stock, and the shares of common stock initially
issued or issuable upon conversion of the preferred stock or the debentures, if
issued.
The following table sets forth information regarding (1) the beneficial
ownership of our preferred stock, and the maximum number of preferred stock that
each may offer, (2) the principal amount of debentures that each selling
stockholder would beneficially own if the debentures were exchanged for the
preferred stock, and (3) the number of shares of common stock that each selling
stockholder may sell under this prospectus. Because the selling stockholders may
offer all or a portion of the preferred stock, the debentures, if issued, and
the common stock, if converted, under this prospectus, we cannot estimate the
amount of shares of preferred stock, the debentures, if issued or the common
stock that the selling stockholders will hold upon termination of any sale. The
following table is based upon information furnished to us by the selling
stockholders.
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL AMOUNT NUMBER OF
SHARES OF PERCENT OF OF DEBENTURES COMMON SHARES
PREFERRED STOCK OUTSTANDING BENEFICIALLY ISSUED UPON
BENEFICIALLY PREFERRED OWNED THAT CONVERSION THAT
NAME OF SELLING STOCKHOLDER OWNED(1) STOCK MAY BE SOLD MAY BE SOLD
- --------------------------- --------------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C>
Deutsche Bank Securities, Inc...................... 126,300 5.1% $ 6,315,000 352,377
State of Oregon Equity............................. 120,000 4.8% $ 6,000,000 334,800
Triton Capital Investments, LTD.................... 112,500 4.5% $ 5,625,000 313,875
SoundShore Holdings Ltd............................ 109,100 4.4% $ 5,455,000 304,389
New York Life Insurance Company.................... 105,000 4.2% $ 5,250,000 292,950
Paloma Strategies Securities Limited............... 75,000 3.0% $ 3,750,000 209,250
Highbridge International LLC....................... 72,500 2.9% $ 3,625,000 202,275
JMG Convertible Investments, L.P. ................. 67,500 2.7% $ 3,375,000 188,325
BNP Arbitrage SNC.................................. 61,000 2.4% $ 3,050,000 170,190
Pilgrim Convertible Fund........................... 56,900 2.3% $ 2,845,000 158,751
Arkansas Teachers Retirements System............... 52,000 2.1% $ 2,600,000 145,080
Tribeca Investments, LLC........................... 50,000 2.0% $ 2,500,000 139,500
Alta Partners Holdings, LDC........................ 50,000 2.0% $ 2,500,000 139,500
Kellner, DiLeo & Co., L.P. ........................ 50,000 2.0% $ 2,500,000 139,500
NMS Services, Inc. ................................ 47,500 1.9% $ 2,375,000 132,525
San Diego County Convertible....................... 46,750 1.9% $ 2,337,500 130,433
SoundShore Opportunity Holding Fund Ltd............ 45,000 1.8% $ 2,250,000 125,550
Fidelity Financial Trust: Fidelity Convertible
Securities Fund.................................. 40,000 1.6% $ 2,000,000 111,600
MainStay Convertible Fund.......................... 37,000 1.5% $ 1,850,000 103,230
New York Life Insurance Annuity Corporation........ 35,000 1.4% $ 1,750,000 97,650
TQA Master Fund, Ltd. ............................. 32,500 1.3% $ 1,625,000 90,675
RCG Multi-Strategy Account, L.P. .................. 30,000 1.2% $ 1,500,000 83,700
Paloma Securities LLC.............................. 27,500 1.1% $ 1,375,000 76,725
Fidelity Commonwealth Trust: Fidelity Mid-Cap Stock
Fund............................................. 27,300 1.1% $ 1,365,000 76,167
Bank of America Pension Plan....................... 25,000 1.0% $ 1,250,000 69,750
Delaware Pers...................................... 24,000 1.0% $ 1,200,000 66,960
Michaelangelo, L.P. ............................... 24,000 1.0% $ 1,200,000 66,960
Ramius, L.P. ...................................... 24,000 1.0% $ 1,200,000 66,960
TQA Master Plus Fund, Ltd. ........................ 22,500 0.9% $ 1,125,000 62,775
Morgan Stanley Dean Witter Convertible Securities
Trust............................................ 20,000 0.8% $ 1,000,000 55,800
SoundShore Strategic Holding Fund Ltd.............. 20,000 0.8% $ 1,000,000 55,800
Wake Forest University............................. 17,800 0.7% $ 890,000 49,662
San Diego City Retirement.......................... 16,700 0.7% $ 835,000 46,593
Angelo, Gordon & Co., L.P. ........................ 12,000 0.5% $ 600,000 33,480
Raphael, L.P. ..................................... 12,000 0.5% $ 600,000 33,480
RCG Baldwin, L.P. ................................. 12,000 0.5% $ 600,000 33,480
Nicholas-Applegate Convertible Fund................ 10,625 0.4% $ 531,250 29,644
Zeneca Holdings Trust.............................. 10,550 0.4% $ 527,500 29,435
</TABLE>
44
<PAGE> 48
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL AMOUNT NUMBER OF
SHARES OF PERCENT OF OF DEBENTURES COMMON SHARES
PREFERRED STOCK OUTSTANDING BENEFICIALLY ISSUED UPON
BENEFICIALLY PREFERRED OWNED THAT CONVERSION THAT
NAME OF SELLING STOCKHOLDER OWNED(1) STOCK MAY BE SOLD MAY BE SOLD
- --------------------------- --------------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C>
ICI American Holdings Trust........................ 10,550 0.4% $ 527,500 29,435
Fidelity Adviser Series I: Fidelity Advisor Mid Cap
Fund............................................. 9,900 0.4% $ 495,000 27,621
Engineers Joint Pension Fund....................... 7,100 0.3% $ 355,000 19,809
Triarc Companies Inc. ............................. 6,000 0.2% $ 300,000 16,740
Nalco Chemical Company............................. 5,400 0.2% $ 270,000 15,066
LDG Limited........................................ 5,000 0.2% $ 250,000 13,950
Physician's Life................................... 4,700 0.2% $ 235,000 13,113
Baptist Health of South Florida.................... 3,500 0.1% $ 175,000 9,765
Boston Museum of Fine Art.......................... 2,700 0.1% $ 135,000 7,533
Variable Insurance Products Fund III: Mid Cap
Portfolio........................................ 20 0.0% $ 1,000 56
All other holders.................................. 650,105 26.0% $ 32,505,250 1,813,793
--------- ----- ------------ ---------
Total......................................... 2,500,000 100% $125,000,000 6,975,444
</TABLE>
- ------------
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities.
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<PAGE> 49
PLAN OF DISTRIBUTION FOR THE RESALE OF THE SECURITIES
A selling stockholder may from time to time, in one or more transactions,
sell all or a portion of the securities on the Nasdaq National Market, in
negotiated transactions, in underwritten transactions or otherwise, at prices
then prevailing or related to the then current market price or at negotiated
prices. The offering price of the securities from time to time will be
determined by a selling stockholder, and with respect to the common stock, at
the time of such determination, may be higher or lower than the market price of
our common stock on the Nasdaq National Market. The securities may be sold
directly or through broker-dealers acting as principal or agent. The methods by
which the securities may be sold include:
- a block trade in which the broker-dealer so engaged will attempt to sell
the securities as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by such
broker-dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
- privately negotiated transactions.
In effecting sales, brokers or dealers engaged by a selling stockholder or
may arrange for other brokers or dealers to participate. These brokers or
dealers may receive commissions or discounts from a selling stockholder as
applicable, in amounts to be negotiated immediately prior to the sale. A selling
stockholder and any underwriters, dealers or agents participating in the
distribution of the shares may be deemed to be "underwriters" within the meaning
of the Securities Act, and any profit on the sale of the securities by a selling
stockholder and any commissions received by any broker-dealers may be deemed to
be underwriting commissions under the Securities Act. In addition, any
securities covered by this prospectus that qualify for sale pursuant to Rule 144
might be sold under Rule 144 rather than pursuant to this prospectus.
Additionally, in connection with the sale of the securities, a selling
stockholder may enter into hedging transactions with broker-dealers and the
broker-dealers may engage in short sales of the securities in the course of
hedging the positions they assume with the selling stockholder. A selling
stockholder may also enter into option or other transactions with broker-dealers
that involve the delivery of the shares to the broker-dealers, who may then
resell or otherwise transfer the shares. A selling stockholder may also loan or
pledge the shares to a broker-dealer and the broker-dealer may sell the
securities so loaned or upon a default may sell or otherwise transfer the
pledged securities.
When a selling stockholder elects to make a particular offer of securities,
we will distribute a prospectus supplement, if required, that will identify any
underwriters, dealers or agents and any discounts, commissions and other terms
constituting compensation from a selling stockholder, as applicable, and any
other required information.
In order to comply with the securities laws of certain states, if
applicable, the securities may be sold only through registered or licensed
brokers or dealers. In addition, in certain states, the securities may not be
sold unless they have been registered or qualified for sale in such state or an
exemption from such registration or qualification requirement is available and
is complied with.
We also have agreed to indemnify the selling stockholders in certain
circumstances, against certain liabilities arising under the Securities Act.
Each selling stockholder has agreed to indemnify us and our directors and
officers who sign the registration statement against certain liabilities,
including liabilities arising under the Securities Act.
We have agreed to pay all costs and expenses relating to the registration
of the shares (other than fees and expenses, if any, of counsel or other
advisors to the selling stockholders). Any commissions, discounts or other fees
payable to broker-dealers in connection with any sale of the securities will be
borne by the selling stockholder selling such shares.
All references to selling stockholders in this Section shall also be deemed
to include any transferees, assignees and pledgees of the selling stockholders.
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<PAGE> 50
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of common stock.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information we file at the SEC's public
reference rooms located at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL
60661 and 7 World Trade Center, Suite 1300, New York, NY 10048. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our
SEC filings are also available to the public from commercial document retrieval
services and at the web site maintained by the SEC at "http://www.sec.gov."
We have filed a Registration Statement on Form S-3, of which this
prospectus forms a part, to register the resale of the securities with the SEC.
As allowed by SEC rules, this prospectus does not contain all the information
you can find in the Registration Statement or the exhibits to the Registration
Statement.
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by information in this prospectus. This prospectus
incorporates by reference the documents set forth below that we have previously
filed with the SEC. These documents contain important information about us, our
business and our finances.
The documents that we are incorporating by reference are:
- Our Annual Report on Form 10-K for the year ended December 31, 1998, as
amended;
- Our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999;
- Our Current Reports on Form 8-K filed with the SEC on March 1, 1999, June
14, 1999, July 19, 1999, August 3, 1999, August 18, 1999, September 28,
1999, and December 14, 1999;
- The description of our common stock that is contained in our Form 8-A
Registration Statement filed with the SEC on March 15, 1991, including
any amendments or reports filed for the purpose of updating such
description; and
- The description of our stockholder rights plan that is contained in our
Form 8-A Registration Statement filed with the SEC on January 20, 1999,
including any amendments or reports filed for the purpose of updating
such description.
Any documents which we file pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this prospectus but before the end of any
offering of securities made under this prospectus will also be considered to be
incorporated by reference.
If you request, either orally or in writing, we will provide you with a
copy of any or all documents which are incorporated by reference. We will
provide such documents to you free of charge, but will not include any exhibits,
unless those exhibits are incorporated by reference into the document. You
should address written requests for documents to John E. Osborn, Senior Vice
President and General Counsel, Cephalon, Inc., 145 Brandywine Parkway, West
Chester, PA 19380, (610) 344-0200.
47
<PAGE> 51
FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this prospectus contains some
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. Such
statements may include words such as "anticipate", "estimate", "expect",
"project", "intend", "plan", "believe" and other words and terms of similar
meaning in connection with any discussion of future operating or financial
performance. In particular, these include statements relating to present or
anticipated scientific progress, development of potential pharmaceutical
products, future revenues, capital expenditures, research and development
expenditures, future financing and collaborations, personnel, manufacturing
requirements and capabilities, and other statements regarding matters that are
not historical facts or statements of current condition.
Any or all of our forward-looking statements in this prospectus may turn
out to be wrong. They can be affected by inaccurate assumptions we might make or
by known or unknown risks and uncertainties. Many factors mentioned in our
discussion in this prospectus will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. Actual future
results may vary materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make in our
10-Q, 8-K and 10-K reports to the SEC. Also note that we provide a cautionary
discussion of risks and uncertainties relevant to our business under "Risk
Factors" on page 5 of this prospectus. These are factors that we think could
cause our actual results to differ materially from expected results. Other
factors besides those listed here could also adversely affect us. This
discussion is provided as permitted by the Private Securities Litigation Reform
Act of 1995.
LEGAL OPINION
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, will pass on the
validity of the shares.
EXPERTS
The financial statements incorporated by reference in this prospectus and
elsewhere in this registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are incorporated by reference herein in reliance upon the authority
of said firm as experts in giving said reports.
48
<PAGE> 52
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CEPHALON, INC.
2,500,000 SHARES OF $3.625 CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
$125,000,000 7.25% CONVERTIBLE SUBORDINATED DEBENTURES
6,975,447 SHARES OF COMMON STOCK
------------------------
PROSPECTUS
------------------------
December , 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 53
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table shows the estimated expenses of the issuance and
distribution of the securities offered hereby.
<TABLE>
<S> <C>
Commission fee.............................................. $ 36,875.00
Nasdaq listing fee.......................................... 17,500.00
Legal fees, accounting fees and expenses.................... 50,000.00
-----------
Total.................................................. $104,375.00
===========
</TABLE>
All of the amounts shown are estimates except for the fees payable to the
Securities and Exchange Commission and the National Association of Securities
Dealers.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. Article
9 of the Company's ByLaws provides for the indemnification of directors,
officers, employees and agents of the Company to the maximum extent permitted by
the Delaware General Corporation Law. Section 145 empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director, officer or agent of the corporation or another enterprise
if serving at the request of the corporation. Depending on the character of the
proceeding, a corporation may indemnify against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding if the person
indemnified acted in good faith and in respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. In the
case of an action by or in the right of the corporation, no indemnification may
be made with respect to any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the Court of Chancery or the court in which such action or suit was brought
shall determine that despite the adjudication of liability such person is fairly
and reasonably entitled to indemnity for such expenses which the court shall
deem proper. Section 145 further provides that to the extent a director,
officer, employee or agent of a corporation has been successful in the defense
of any action, suit or proceeding referred to above or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
The Company's Bylaws permit it to purchase insurance on behalf of such
person against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the Company
would have the power to indemnify him against such liability under the foregoing
provision of the Bylaws.
II-1
<PAGE> 54
ITEM 16. LIST OF EXHIBITS
The exhibits filed as part of this registration statement are as follows:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
4.1* Specimen of Preferred Stock Certificate of Cephalon, Inc.
4.2* Certificate of the Powers, Designations, Preferences and
Rights of the $3.625 Convertible Exchangeable Preferred
Stock filed August 17, 1999.
4.3* Indenture, dated as of August 18, 1999, between Cephalon,
Inc. and State Street Bank and Trust Company, as Trustee.
5.1* Opinion of Morgan, Lewis & Bockius LLP regarding legality of
securities being registered.
12 ** Statement Re Computation of Earnings to Fixed Charges and
Preferred Stock Dividends.
23.1* Consent of Morgan, Lewis & Bockius LLP (included in its
opinion filed as Exhibit 5.1 hereto).
23.2** Consent of Arthur Andersen LLP
24.1* Powers of Attorney (included on signature page).
25 * Form T-1, Statement of Eligibility and Qualification of
State Street Bank and Trust Company.
</TABLE>
- ------------
* Previously filed as an exhibit to the Registration Statement on Form S-3
filed October 14, 1999 with the Commission and amended hereby.
** Filed herewith.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to its Restated Certificates of Incorporation, its By-laws,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against a public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
II-2
<PAGE> 55
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
Provided, however, that paragraph (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE> 56
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in West Chester, Pennsylvania, on this
17th day of December, 1999.
CEPHALON, INC.
By: /s/ FRANK BALDINO, JR., PH.D.
------------------------------------
Frank Baldino, Jr., Ph.D.
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
By: /s/ FRANK BALDINO, JR., PH.D. President, Chief Executive December 17, 1999
- ---------------------------------------------- Officer and Director
Frank Baldino, Jr., Ph.D. (Principal executive
officer)
By: * Director December 17, 1999
- ----------------------------------------------
William P. Egan
By: * Director December 17, 1999
- ----------------------------------------------
Robert J. Feeney, Ph.D.
By: * Director December 17, 1999
- ----------------------------------------------
Martyn D. Greenacre
By: * Director December 17, 1999
- ----------------------------------------------
Kevin E. Moley
By: * Director December 17, 1999
- ----------------------------------------------
Horst Witzel, Dr.-Ing
By: * Director December 17, 1999
- ----------------------------------------------
David R. King
By: * Senior Vice President, December 17, 1999
- ---------------------------------------------- Finance and Chief
J. Kevin Buchi Financial Officer
(Principal financial and
accounting officer)
* By Frank Baldino, Jr, as attorney-in-fact
</TABLE>
II-4
<PAGE> 57
CEPHALON, INC.
REGISTRATION STATEMENT ON FORM S-3
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DOCUMENT NUMBER
- ------- -------- ------
<C> <S> <C>
12 * Statement Re Computation of Earnings to Fixed Charges and
Preferred Stock Dividends...................................
23.2* Consent of Arthur Andersen LLP..............................
</TABLE>
- ------------
* Filed herewith
II-5
<PAGE> 1
EXHIBIT 12
CEPHALON, INC.
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Fixed charges and preferred stock
dividends:
Interest expense ....................... $ 1,426 $ 3,112 $ 2,286 $ 3,201 $ 1,874 $ 5,803
Preferred stock dividends .............. -- -- -- -- -- 1,107
-------- -------- -------- -------- -------- --------
Total fixed charges and preferred
stock dividends ........................ $ 1,426 $ 3,112 $ 2,286 $ 3,201 $ 1,874 $ 6,910
======== ======== ======== ======== ======== ========
Net loss ............................... (36,065) (33,003) (53,285) (60,419) (55,407) (45,961)
Fixed charges and preferred stock
dividends .............................. 1,426 3,112 2,286 3,201 1,874 6,910
-------- -------- -------- -------- -------- --------
Deficiency of earnings to cover fixed
charges and preferred stock dividends .. ($34,639) ($29,891) ($50,999) ($57,218) ($53,533) ($39,051)
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges and
preferred stock dividends (1)........... -- -- -- -- -- --
</TABLE>
(1) For the fiscal years ended December 31, 1994, 1995, 1996, 1997 and 1998
and for the nine months ended September 30, 1999, earnings were
insufficient to cover fixed charges. There were no preferred stock
dividends declared or paid by the Company during any of the fiscal
years in the five year period ended December 31, 1998. For these
reasons, no ratios are provided.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 25, 1999
included in Cephalon, Inc.'s Form 10-K for the year ended December 31, 1998 and
to all references to our Firm included in this registration statement.
/s/ Arthur Andersen LLP
Philadelphia, PA
December 20, 1999
