-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EUvI9nv/sevZhQ/CvFDGEl4YxORfFlaf1ol5OFZIJaj4u+Eiu0wRt7lCVyOszBf1 anHggYL5tiVma6VnIWRc4w== 0001036050-99-001487.txt : 19990720 0001036050-99-001487.hdr.sgml : 19990720 ACCESSION NUMBER: 0001036050-99-001487 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990719 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CEPHALON INC CENTRAL INDEX KEY: 0000873364 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 232484489 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-19119 FILM NUMBER: 99666604 BUSINESS ADDRESS: STREET 1: 145 BRANDYWINE PKWY CITY: WEST CHESTER STATE: PA ZIP: 19380 BUSINESS PHONE: 2153440200 MAIL ADDRESS: STREET 1: 145 BRANDYWINE PARKWAY CITY: WEST CHESTER STATE: PA ZIP: 19380 10-K405/A 1 AMENDMENT #2 TO CEPHALON 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (Amendment No. 2) (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-19119 CEPHALON, INC. (Exact name of registrant as specified in its charter) DELAWARE 23-2484489 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 145 BRANDYWINE PARKWAY, 19380 WEST CHESTER, PENNSYLVANIA (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (610) 344-0200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X]. No [_]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant is approximately $201,828,095. Such aggregate market value was computed by reference to the closing price of the Common Stock as reported on the Nasdaq National Market on February 19, 1999. For purposes of making this calculation only, the registrant has defined affiliates as including all directors and beneficial owners of more than ten percent of the Common Stock of the Company. The number of shares of the registrant's Common Stock outstanding as of February 19, 1999 was 28,820,542. The purpose of Amendment No. 2 is to refile Exhibits 4.3(a), 4.3(b), 4.3(c), and 4.3(d). Portions of Exhibit 4.3(b) have been omitted and have been filed separately with the Securities and Exchange Commission pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Act of 1934, as amended. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS The Information required by this item was previously filed. SCHEDULES All schedules are omitted because they are not applicable or are not required, or because the required information is included in the consolidated financial statements or notes thereto. Reports on Form 8-K During the fiscal quarter ended December 31, 1998, the Company filed a Current Report on Form 8-K on December 28, 1998 announcing approval from the U.S. Food and Drug Administration to market PROVIGIL(R) (modafinil) Tablets for the treatment of excessive daytime sleepiness associated with narcolepsy. EXHIBITS The following is a list of exhibits filed as part of this annual report on Form 10-K. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parenthesis.
EXHIBIT NO. -- 3.1 Restated Certificate of Incorporation, as amended. (Exhibit 3.1)(19) 3.2 Bylaws of the Registrant, as amended. (Exhibit 3.1)(19) 4.1 Specimen copy of stock certificate for shares of Common Stock of the Registrant (Exhibit 4.1)(10). 4.2 Amended and Restated Rights Agreement, dated as of January 1, 1999, between Cephalon, Inc. and StockTrans, Inc. as Rights Agent (Exhibit 1) (22). *4.3(a) Form of Note Purchase Agreement dated as of February 24, 1999 by and between Cephalon and Investor. *4.3(b) Form of Revenue Sharing Senior Secured Note due 2002 dated March 1, 1999. (21) *4.3(c) Form of Class A Warrant. *4.3(d) Form of Class B Warrant. **4.3(e) Security Agreement dated March 1, 1999 between Cephalon, Inc. and Delta Opportunity Fund, Ltd., as collateral agent. **4.3(f) Patent and Trademark Agreement dated March 1,1999 between Cephalon, Inc. and Delta Opportunity Fund, Ltd., as collateral agent.
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EXHIBIT NO. -- 10.1 Letter agreement dated March 22, 1995, between Cephalon, Inc. and the Salk Institute for Biotechnology Industrial Associates, Inc. (Exhibit 99.1)(15). 10.2 Deliberately omitted. 10.3 Stock Purchase Agreement dated July 28, 1995, between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd. (Exhibit 99.3)(16). 10.4(a) License Agreement, dated May 15, 1992, between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd. (Exhibit 10.6)(4)(20). 10.4(b) Letter agreement dated March 6, 1995 amending License Agreement between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd. (Exhibit 10.4(6))(14)(20). 10.5(a) Supply Agreement, dated January 20, 1993, between Cephalon, Inc. and Laboratoire L. Lafon (Exhibit 10.1)(7)(20). 10.5(b) License Agreement, dated January 20, 1993, between Cephalon, Inc. and Laboratoire L. Lafon (Exhibit 10.2)(7)(20). 10.5(c) Trademark Agreement, dated January 20, 1993, between Cephalon, Inc. and Genelco S.A. (Exhibit 10.3)(7)(20). 10.5(d) Amendment to License Agreement and Supply Agreement, dated July 21, 1993, between Cephalon, Inc. and Laboratoire L. Lafon (Exhibit 10.1)(10)(11). 10.5(e) Amendment to Trademark Agreement, dated July 21, 1993, between Cephalon, Inc. and Genelco S.A. (Exhibit 10.2)(11)(20). 10.5(f) Amendment No. 3 to License Agreement dated June 8, 1995, between Cephalon, Inc. and Laboratoire L. Lafon (Exhibit 99.2)(15). 10.5(g) Amendment No. 4 to License Agreement and Supply Agreement dated August 23, 1995, between Cephalon, Inc. and Laboratoire L. Lafon (Exhibit 10.5(g))(17)(20). **10.5(h) Amendment No. 5 to License Agreement and Supply Agreement dated January 21, 1998 between Cephalon, Inc. and Laboratoire L. Lafon. (21) **10.5(i) Amendment No. 6 to License Agreement and Supply Agreement dated February 2, 1998 between Cephalon, Inc. and Laboratoire L. Lafon. (21) **10.5(j) Amendment No. 3 to Trademark Agreement dated January 21, 1998 between Cephalon, Inc. and Genelco S.A. (21) **10.5(k) Amendment No. 4 to Trademark Agreement dated February 9, 1998 between Cephalon, Inc. and Genelco S.A. (21) +10.6(a) Cephalon, Inc. Amended and Restated 1987 Stock Option Plan (Exhibit 10.7)(4). +10.6(b) Cephalon, Inc. Equity Compensation Plan (Exhibit 10.6(b))(17). +10.6(c) Cephalon, Inc. Non-Qualified Deferred Compensation Plan (Exhibit 10.6(c))(10). 10.7 Form of Note Purchase Agreement, dated as of January 15, 1997, between Cephalon, Inc. and the several purchasers of Cephalon's Senior Convertible Notes, without exhibits (10.1)(18). 10.8(a) Amended and Restated Agreement of Limited Partnership, dated as of June 22, 1992, by and among Cephalon Development Corporation, as general partner, and each of the limited partners of Cephalon Clinical Partners, L.P. (Exhibit 10.1)(6). 10.8(b) Amended and Restated Product Development Agreement, dated as of August 11, 1992, by and between the Registrant and Cephalon Clinical Partners, L.P. (Exhibit 10.2)(6)(20). 10.8(c) Purchase Agreement, dated as of August 11, 1992, by and between the Registrant and each of the limited partners of Cephalon Clinical Partners, L.P. (Exhibit 10.3)(6)(20). 10.8(d) Form of Series A Warrant to purchasers of Units including a limited partnership interest in Cephalon Clinical Partners, L.P. (Exhibit 10.4)(6).
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EXHIBIT No. -- 10.8(e) Form of Series B Warrant to purchasers of Units including a limited partnership interest in Cephalon Clinical Partners, L.P. (Exhibit 10.5)(6). 10.8(f) Incentive Warrant to purchase 115,050 shares of Common Stock of the Registrant issued to PaineWebber Incorporated (Exhibit 10.6)(6). 10.8(g) Fund Warrant to purchase 19,950 shares of Common Stock of the Registrant issued to PaineWebber R&D Partners III, L.P. (Exhibit 10.7)(6). 10.8(h) Pledge Agreement, dated as of August 11, 1992, by and between Cephalon Clinical Partners, L.P. and the Registrant (Exhibit 10.8)(6). 10.8(i) Promissory Note, dated as of August 11, 1992, issued by Cephalon Clinical Partners, L.P. to the Registrant (Exhibit 10.9)(6). 10.8(j) Form of Promissory Note, issued by each of the limited partners of Cephalon Clinical Partners, L.P. to Cephalon Clinical Partners, L.P. (Exhibit 10.10)(6). 10.9 Supply, Distribution and License Agreement, dated as of July 27, 1993, by and between Kyowa Hakko Kogyo Co., Ltd. and Cephalon, Inc. (Exhibit 10.3)(11)(20). 10.10(a) Agreement between Cephalon, Inc. and Chiron Corporation dated as of January 7, 1994 (Exhibit 10.1)(12)(20). 10.10(b) Letter agreement dated January 13, 1995 amending Agreement between Cephalon, Inc. and Chiron Corporation (Exhibit 10.12(b))(14)(20). 10.10(c) Letter agreement dated May 23, 1995 amending Agreement between Cephalon, Inc. and Chiron Corporation (Exhibit 10.12(c))(17)(20). 10.11(a) Agreement between Cephalon, Inc. and TAP Holdings Inc. (formerly TAP Pharmaceuticals Inc.) dated as of May 17, 1994 (Exhibit 99.2)(13)(20). 10.11(b) Amendment dated June 28, 1996 amending Agreement between Cephalon, Inc. and TAP Holdings Inc. (Exhibit 10.13(b))(19)(21) **10.12 Toll Manufacturing and Packaging Agreement dated February 24, 1998 between Cephalon, Inc. and Circa Pharmaceuticals, Inc. (21) **21 Subsidiaries of Cephalon, Inc. **23.1 Consent of Arthur Andersen LLP. **24 Power of Attorney (included on the signature page to this Form 10-K Report). **27 Financial Data Schedule
* Filed herewith. ** Previously filed + Compensation plans and arrangements for executives and others. (1 ) Filed as an Exhibit to the Registration Statement on Form S-1 filed on March 15, 1991. (2) Filed as an Exhibit to Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 33-39413) filed on April 19, 1991. (3) Filed as an Exhibit to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 33-39413) filed on April 22, 1991. (4) Filed as an Exhibit to the Transition Report on Form 10-K for transition period from January 1, 1991 to December 31, 1991, as amended by Amendment No. 1 filed on September 4, 1992 on Form 8. (5) Filed as an Exhibit to the Company's Current Report on Form 8-K filed on December 31, 1992. (6) Filed as an Exhibit to the Registration Statement on Form S-3 (Registration No. 33-56816) filed on January 7, 1993. (7) Filed as an Exhibit to the Registration Statement on Form S-3 (Registration No. 33-58006) filed on February 8, 1993. (8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 4 (9) Filed as an Exhibit to the Company's Current Report on Form 8-K dated June 8, 1993. (10) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (11) Filed as an Exhibit to the Registration Statement on Form S-3 (Registration No. 33-73896) filed on January 10, 1994. (12) Filed as an Exhibit to the Company's Current Report on Form 8-K dated January 10, 1994. (13) Filed as an Exhibit to the Company's Current Report on Form 8-K dated May 17, 1994. (14) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (15) Filed as an Exhibit to the Registration Statement on Amendment No. 1 to Form S-3 (Registration No. 33-93964) filed on June 30, 1995. (16) Filed as an Exhibit to the Registration Statement on Amendment No. 2 to Form S-3 (Registration No. 33-93964) filed on July 31, 1995. (17) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (18) Filed as an Exhibit to the Registration Statement on Form S-3 (Registration No. 333-20321) filed on January 24, 1997. (19) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (20) Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment granted by the Securities and Exchange Commission. (21) Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (22) Filed as an Exhibit to the Company's Form 8-A/A (12G) filed on January 20, 1999. 5 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Date: July 19, 1999 Cephalon, Inc. By: /s/ Frank Baldino, Jr., Ph.D. --------------------------------------- Frank Baldino, Jr., Ph.D. President and Chief Executive Officer Exhibit Index The Exhibits that have been filed herewith this Form 10-K/A are summarized as follows:
Exhibit No. Description - ---------- ----------- 4.3(a) Form of Note Purchase Agreement dated as of February 24, 1999 by and between Cephalon and Investor. *4.3(b) Form of Revenue Sharing Senior Secured Note due 2002 dated March 1, 1999. 4.3(c) Form of Class A Warrant 4.3(d) Form of Class B Warrant *Portions of this Exhibit have been omitted and have been filed separately with the Securities and Exchange Commission pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended
EX-4.3.(A) 2 FORM OF NOTE PURCHASE AGREEMENT DATED 2/24/99 EXHIBIT 4.3a NOTE PURCHASE AGREEMENTS DATED FEBRUARY 24, 1999 BETWEEN CEPHALON, INC. AND THE FOLLOWING INVESTORS
Investors - --------- Delta Opportunity Fund, Ltd. Delta Opportunity Fund (Institutional), LLC DLJ Capital Corp. DLJ ESC II, L.P. The Kaufmann Fund, Inc. Sprout Capital VIII, L.P. Sprout Growth II, L.P. Sprout Venture Capital, L.P.
================================================================================ ================================================================================ ================================================================================ ================================================================================ ================================================================================ NOTE PURCHASE AGREEMENT ================================================================================ ================================================================================ ================================================================================ ================================================================================ DATED AS OF FEBRUARY 24, 1999 ================================================================================ ================================================================================ ================================================================================ ================================================================================ BY AND BETWEEN ================================================================================ ================================================================================ ================================================================================ ================================================================================ CEPHALON, INC. ================================================================================ ================================================================================ ================================================================================ ================================================================================ AND ================================================================================ ================================================================================ ================================================================================ ================================================================================ [NAME OF INVESTOR] ================================================================================ ================================================================================ ================================================================================ ================================================================================ ================================================================================ ================================================================================ DIAZ & ALTSCHUL CAPITAL, LLC ================================================================================ ================================================================================ ================================================================================ CEPHALON, INC. NOTE PURCHASE AGREEMENT 11% REVENUE SHARING SENIOR SECURED NOTES DUE 2002 AND COMMON STOCK PURCHASE WARRANTS TABLE OF CONTENTS
PAGE ---- 1. DEFINITIONS 1 2. PURCHASE AND SALE; PURCHASE PRICE 6 (a) Purchase 6 (b) Form of Payment 7 (c) Closing 7 3. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE BUYER (a) Purchase for Investment 7 (b) Accredited Investor 7 (c) Reoffers and Resales 7 (d) Company Reliance 7 (e) Information Provided 8 (f) Absence of Approvals 8 (g) Note Purchase Agreement 8
-4- (h) Buyer Status 8 4. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE COMPANY 8 (a) Organization and Authority 8 (b) Qualifications 9 (c) Capitalization 9 (d) Concerning the Shares and the Common Stock 10 (e) Corporate Authorization 10 (f) Non-contravention 10 (g) Approvals, Filings, Etc 11 (h) Information Provided 11 (i) Conduct of Business 11 (j) SEC Filings 11 (k) Absence of Certain Proceedings 12 (l) Financial Statements; Liabilities 12 (m) Material Losses 12 (n) Absence of Certain Changes 12 (o) Intellectual Property 12 (p) Internal Accounting Controls 13 (q) Compliance with Law 13 (r) Properties 13 -5- (s) Labor Relations 13 (t) Insurance 13 (u) Tax Matters 13 (v) Investment Company 14 (w) Absence of Brokers, Finders, Etc. 14 (x) No Solicitation 14 (y) ERISA Compliance 14 (z) Concerning the Collateral 14 5. CERTAIN COVENANTS 14 (a) Transfer Restrictions 14 (b) Restrictive Legends 14 (c) Nasdaq Listing; Reporting Status 16 (d) Form D 16 (e) State Securities Laws 16 (f) Limitation on Certain Actions 16 (g) Security Agreement; Financing Statements, Etc. 16 (h) Use of Proceeds 17 (i) Best Efforts 17 (j) Debt Obligation 17 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL 17 -6- 7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE 17 8. REGISTRATION RIGHTS 18 (a) Mandatory Registration 18 (b) Obligations of the Company 19 (c) Obligations of the Buyer and other Investors 22 (d) Rule 144 24 9. INDEMNIFICATION AND CONTRIBUTION 24 (a) Indemnification 24 (b) Contribution 25 (c) Other Rights 26 10. MISCELLANEOUS 26 (a) Governing Law 26 (b) Headings 26 (c) Severability 26 (d) Notices 26 (e) Counterparts 26 (f) Entire Agreement; Benefit 26 (g) Waiver 27 (h) Amendment 27 (i) Further Assurances 27 -7- (j) Assignment of Certain Rights and Obligations 27 (k) Expenses 27 (l) Termination 28 (m) Survival 28 (n) Public Statements, Press Releases, Etc. 28 (o) Construction 29 SCHEDULES - --------- Schedule 4(a) Certain Equity Investments Schedule 4(c) Certain Antidilution Adjustments Schedule 4(r) Certain Mortgages, Liens, Security Interests, Encumbrances, Etc. ANNEXES - ------- ANNEX I Form of 11% Revenue Sharing Senior Secured Note due 2002 ANNEX II Form of Common Stock Purchase Warrant, Class A ANNEX III Form of Common Stock Purchase Warrant, Class B ANNEX IV Form of Security Agreement ANNEX V Form of Patent and Trademark Security Agreement ANNEX VI Form of Opinion of Morgan, Lewis & Bockius, LLP to Be Delivered on the Closing Date ANNEX VII Form of Opinion of Law Offices of Brian W Pusch to Be Delivered on the Closing Date ANNEX VIII Form of Instruction to the Company's Transfer Agent ANNEX IX Form of Opinion of Morgan, Lewis & Bockius, LLP to Be Delivered in Connection with Effectiveness of each Registration Statement ANNEX X Form of Opinion of the Company's General Counsel to Be Delivered in Connection with Effectiveness of each Registration Statement ANNEX XI Form of Investor Questionnaire -8- NOTE PURCHASE AGREEMENT THIS NOTE PURCHASE AGREEMENT, dated as of February 24, 1999 (this "Agreement"), by and between CEPHALON, INC., a Delaware corporation (the "Company"), with headquarters located at 145 Brandywine Parkway, West Chester, Pennsylvania 19380, and [NAME OF BUYER], a ____________________ (the "Buyer"). W I T N E S S E T H: WHEREAS, the Buyer wishes to purchase from the Company and the Company wishes to sell to the Buyer, upon the terms and subject to the conditions of this Agreement, a promissory note of the Company having the principal amount set forth on the signature page of this Agreement and in connection with which the Company shall issue to the Buyer warrants to purchase shares of Common Stock (such capitalized term and all other capitalized terms used in this Agreement having the meanings provided in Section 1); WHEREAS, on or before the Closing Date the Company and the Collateral Agent shall execute and deliver, one to the other, a Security Agreement, in the form referred to herein, which provides, among other things, for the grant to the Collateral Agent for the ratable benefit of the holders from time to time of the Note and the Other Notes of a first priority security interest in certain collateral, upon the terms and with the effect as provided therein; and WHEREAS, on or before the Closing Date, the Company and the Collateral Agent shall execute and deliver, one to the other, a Patent and Trademark Security Agreement, in the form referred to herein, which provides, among other things, for the grant to the Collateral Agent for the ratable benefit of the holders from time to time of the Note and the Other Notes of a first priority perfected security interest in certain collateral upon the terms and with the effect as provided therein; NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. DEFINITIONS. (a) As used in this Agreement, the terms "Agreement", "Buyer" and "Company" shall have the respective meanings assigned to such terms in the introductory paragraph of this Agreement. (b) All the agreements or instruments herein defined shall mean such agreements or instruments as the same may from time to time be supplemented or amended or the terms thereof waived or modified to the extent permitted by, and in accordance with, the terms -9- thereof and of this Agreement. (c) The following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the subject Person. For purposes of this definition, "control" (including, with correlative meaning, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Blackout Period" means the period of up to 15 consecutive Trading Days after the date the Company notifies the Investors that they are required, pursuant to Section 8(c)(4), to suspend offers and sales of Registrable Securities pursuant to a Registration Statement as a result of an event or circumstance described in Section 8(b)(5)(A) relating to or affecting such Registration Statement, during which period, by reason of Section 8(b)(5)(B), the Company is not required to amend such Registration Statement or supplement the related Prospectus. "Business Day" means any day other than a Saturday, Sunday or a day on which commercial banks in The City of New York are authorized or required by law or executive order to remain closed. "Claims" means any losses, claims, damages, liabilities or expenses (joint or several), incurred by a Person to or in respect of any other Person who is not a party to this Agreement. "Class A Warrants" means Common Stock Purchase Warrants, Class A in the form attached hereto as ANNEX II initially entitling the holder to purchase the number of shares of Common Stock (and related Preferred Share Purchase Rights) determined in accordance with Section 2(a). "Class B Warrants" means Common Stock Purchase Warrants, Class B in the form attached hereto as ANNEX III initially entitling the holder to purchase the number of shares of Common Stock (and related Preferred Share Purchase Rights) determined in accordance with Section 2(a). "Closing Date" means 10:00 a.m., New York City time, on February 26, 1999 or such other mutually agreed to time. "Code" means the Internal Revenue Code of 1986, as amended, and the regulations -10- thereunder and published interpretations thereof. "Collateral" shall have the meanings provided in any of the Security Agreement and the Patent and Trademark Security Agreement. "Collateral Agent" means Delta Opportunity Fund, Ltd., as collateral agent pursuant to the Security Agreement and the Patent and Trademark Security Agreement, and from time to time its duly appointed and acting successor or successors. "Common Stock" means the Common Stock, par value $.01 per share, of the Company. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder and published interpretations thereof. "Event of Default" shall have the meaning provided in the Note. "Indemnified Party" means the Company, each of its directors, each of its officers who signs the Registration Statement, each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act, any underwriter and any other stockholder selling securities pursuant to the Registration Statement or any of its directors or officers or any Person who controls such stockholder or underwriter within the meaning of the 1933 Act or the 1934 Act. "Indemnified Person" means the Buyer and each other Investor who owns or holds any Securities and each Investor who sells Registrable Securities in the manner permitted under this Agreement, the directors, if any, of the Buyer and any such Investor, the officers, if any, of the Buyer and any such Investor, each Person, if any, who controls the Buyer or any such Investor within the meaning of the 1933 Act or the 1934 Act, any underwriter (as defined in the 1933 Act) acting on behalf of an Investor who participates in the offering of Registrable Securities of such Investor in accordance with the plan of distribution contained in the Prospectus, the directors, if any, of such underwriter and the officers, if any, of such underwriter, and each Person, if any, who controls any such underwriter within the meaning of the 1933 Act or the 1934 Act. "Inspector" means any attorney, accountant or other agent retained by an Investor for the purposes provided in Section 8(b)(9). "Interest Shares" means the shares of Common Stock and the related Preferred Share Purchase Rights issuable in payment of interest on the Note. "Investor" means the Buyer and any transferee or assignee who agrees to become bound by the provisions of Sections 5(a), 5(b), 8, 9, and 10 of this Agreement. -11- "Lafon" means Laboratoire L. Lafon, a French corporation. "Lafon Agreements" means (1) the License Agreement, dated January 20, 1993, by and between Lafon and the Company, as amended, (2) the Trademark Agreement, dated January 20, 1993, by and between Genelco S.A. and the Company, as amended, and (3) the Supply Agreement, dated January 20, 1993, between the Company and Lafon, as amended. "Margin Stock" shall have the meaning provided in Regulation U of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221). "Nasdaq" means the Nasdaq National Market. "NASD" means the National Association of Securities Dealers, Inc. "1997 10-K" means the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. "1934 Act" means the Securities Exchange Act of 1934, as amended. "1933 Act" means the Securities Act of 1933, as amended. "Non-Responsive Investor" means an Investor who does not provide the Requested Information to the Company at least one Business Day prior to the filing of the Purchase Share Registration Statement. "Note" means the 11% Revenue Sharing Senior Secured Note due 2002 of the Company in the form attached hereto as ANNEX I. "Optional Redemption Price" shall have the meaning to be provided or provided in the Note. "Other Note Purchase Agreements" means the several Note Purchase Agreements relating to the Other Notes. "Other Notes" shall have the meaning to be provided or provided in the Note. "Patent and Trademark Security Agreement" means the Patent and Trademark Security Agreement by and between the Company and the Collateral Agent, in the form attached hereto as ANNEX V. "Payment Share Registration Statement" means a registration statement on Form -12- S-3 (or the comparable form at the time of filing with the SEC) of the Company under the 1933 Act relating to the Payment Shares and which names the Investors as selling stockholders. "Payment Shares" means the shares of Common Stock and the related Preferred Share Purchase Rights issuable in partial payment of principal or the Optional Redemption Price of the Note. "Person" means any natural person, corporation, partnership, limited liability company, trust, incorporated organization, unincorporated association or similar entity or any government, governmental agency or political subdivision. "Placement Agent" means Diaz & Altschul Capital, LLC. "Preferred Share Purchase Rights" means the Preferred Share Purchase Rights issued or issuable pursuant to the Rights Agreement (or any similar rights issued by the Company with respect to the Common Stock after the date of this Agreement). "Products" means all pharmaceutical compositions containing modafinil or any compound based on or derived therefrom as an active ingredient, whether alone or in combination with any other substance, which are developed, marketed or sold by the Company or any Subsidiary or Affiliate of the Company, including, without limitation, that pharmaceutical composition marketed by the Company on the Closing Date under the name Provigil(R). "Prospectus" means the prospectus forming part of the Registration Statement at the time the Registration Statement is declared effective and any amendment or supplement thereto (including any information or documents incorporated therein by reference). "PTO" means the United States Patent and Trademark Office. "Purchase Price" means the purchase price for the Note set forth on the signature page of this Agreement. "Questionnaire" means the Prospective Purchaser Questionnaire completed by the Buyer. "Record" means all pertinent financial and other records, pertinent corporate documents and properties of the Company subject to inspection for the purposes provided in Section 8(b)(9). "register," "registered," and "registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the 1933 Act and pursuant to Rule 415, and the declaration or ordering of effectiveness of such Registration Statement by the -13- SEC. "Registrable Securities" means the Shares and any stock or other securities into which or for which the Common Stock may hereafter be changed, converted or exchanged by the Company or its successor, as the case may be, and any other securities issued to holders of such Common Stock (or such shares into which or for which such Shares are so changed, converted or exchanged) upon any reclassification, share combination, share subdivision, share dividend, merger, consolidation or similar transaction or event. "Registration Period" means: (1) with respect to the Warrant Share Registration Statement, the period from the SEC Effective Date for the Warrant Share Registration Statement to the earlier of (A) the date which is two years after the end of the Exercise Period (as defined in the Warrants) (or, if (x) the Warrants shall have been exercised in full for shares of Common Stock or (y) the Warrants shall no longer remain outstanding, such date after which each Investor may sell all of its Registrable Securities relating to the Warrants or that are Interest Shares without registration under the 1933 Act pursuant to Rule 144, free of any limitation on the volume of such securities which may be sold in any period) and (B) the date on which the Investors no longer own any Registrable Securities relating to the Warrants or that are Interest Shares; and (2) with respect to the Payment Share Registration Statement, the period from the SEC Effective Date for the Payment Share Registration Statement to the earlier of (A) the date which is two years after the Payment Shares are issued and (B) the date on which the Investors no longer own any Registrable Securities that are Payment Shares or derive from Payment Shares. "Registration Statement" means the Payment Share Registration Statement or the Warrant Share Registration Statement, or either of them. "Regulation D" means Regulation D under the 1933 Act. "Repurchase Event" shall have the meaning provided in the Note. "Required Information" means, with respect to each Investor, all information regarding such Investor, the Registrable Securities held by such Investor or which such Investor has the right to acquire and the intended method of disposition of the Registrable Securities held by such Investor or which such Investor has the right to acquire as shall be required by the 1933 Act to effect the registration of the resale by such Investor of such Registrable Securities. "Rights Agreement" means the Rights Agreement, dated as of January 1, 1999, by -14- and between the Company and Stocktrans, Inc., as Rights Agent. "Rule 415" means Rule 415 under the 1933 Act or any successor rule providing for offering securities on a delayed or continuous basis. "Rule 144" means Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time provide a "safe harbor" exemption from registration under the 1933 Act so as to permit a holder to sell securities of the Company to the public without registration under the 1933 Act. "SEC" means the Securities and Exchange Commission. "SEC Effective Date" means with respect to any Registration Statement the date such Registration Statement is declared effective by the SEC. "SEC Filing Date" means with respect to any Registration Statement the date such Registration Statement is first filed with the SEC pursuant to Section 8. "SEC Reports" means (1) the 1997 10-K, (2) the Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, (3) the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998, June 30, 1998 and September 30, 1998, and (4) the Company's Current Reports on Form 8-K, dated September 15, 1998 and December 28, 1998, in each case as filed with the SEC and including the information and documents (other than exhibits) incorporated therein by reference. "Securities" means, collectively, the Note, the Shares and the Warrants. "Security Agreement" means the Security Agreement by and between the Company and the Collateral Agent, in the form attached hereto as ANNEX IV. "September 10-Q" means the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. "Shares" means the Payment Shares, the Interest Shares and the Warrant Shares. "Subsidiary" means any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company. "Territory" means the United States, its territories and possessions. -15- "Trading Day" means at any time a day on which any of a national securities exchange, Nasdaq or such other securities market as at such time constitutes the principal securities market for the Common Stock is open for general trading of securities. "Trading Price" shall have the meaning provided in the Note. "Transaction Documents" means, collectively, this Agreement, the Securities, the Security Agreement, the Patent and Trademark Security Agreement and the other agreements, instruments and documents contemplated hereby and thereby. "Transfer Agent" means Stocktrans, Inc., as transfer agent and registrar for the Common Stock, or its successor. "Violation" means (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation under the 1933 Act, the 1934 Act or any state securities law, or (iv) any breach or alleged breach by any Person other than the Buyer of any representation, warranty, covenant, agreement or other term of any of the Transaction Documents. "Warrants" means the Class A Warrants and the Class B Warrants. "Warrant Share Registration Statement" means a registration statement on Form S-3 of the Company under the 1933 Act relating to the Warrant Shares which names the Investors as selling stockholders. "Warrant Shares" means the shares of Common Stock and the related Preferred Share Purchase Rights issuable upon exercise of the Warrants. -16- 2. PURCHASE AND SALE; PURCHASE PRICE. (A) PURCHASE. Upon the terms and subject to the conditions of this Agreement, the Buyer hereby agrees to purchase from the Company, and the Company hereby agrees to sell to the Buyer, on the Closing Date, the Note in the principal amount set forth on the signature page of this Agreement and having the terms and conditions as set forth in the form of the Note attached hereto as ANNEX I for the Purchase Price. In connection with the purchase of the Note by the Buyer, the Company shall issue to the Buyer at the closing on the Closing Date (x) Class A Warrants initially entitling the holder to purchase 48 shares of Common Stock for each $1,000 principal amount of the Note and (y) Class B Warrants initially entitling the holder to purchase 16 shares of Common Stock for each $1,000 principal amount of the Note. (B) FORM OF PAYMENT. Payment by the Buyer of the Purchase Price to the Company on the Closing Date shall be made by wire transfer of funds to: First Union National Bank 5th & Market Streets Philadelphia, Pennsylvania 19101 ABA# 031000503 For credit to account# 200200254913 For credit to the account of Cephalon, Inc. (C) CLOSING. The issuance and sale of the Note and the issuance of the Warrants shall occur on the Closing Date at the Law Offices of Brian W Pusch, Penthouse Suite, 29 West 57th Street, New York, New York. At the closing, upon the terms and subject to the conditions of this Agreement, the Company shall issue and deliver to the Buyer the Note and the Warrants against payment by the Buyer to the Company of an amount equal to the Purchase Price, and the Buyer shall pay to the Company an amount equal to the Purchase Price against delivery of the Note and the Warrants to the Buyer. 3. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE BUYER. The Buyer represents and warrants to, and covenants and agrees with, the Company as follows: (A) PURCHASE FOR INVESTMENT. The Buyer is purchasing the Note and acquiring the Warrants for its own account for investment and not with a view towards the public sale or distribution thereof within the meaning of the 1933 Act; and the Buyer will acquire any Shares issued to the Buyer prior to the SEC Effective Date of a Registration Statement covering the resale of such Shares by the Buyer for its own account for investment and not with a view towards the -17- public sale or distribution thereof within the meaning of the 1933 Act prior to the SEC Effective Date; (B) ACCREDITED INVESTOR. The Buyer is an "accredited investor" as that term is defined in Rule 501 of Regulation D under the 1933 Act by reason of Rule 501(a)(3) thereof; (C) REOFFERS AND RESALES. The Buyer will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Securities unless registered under the 1933 Act, pursuant to an exemption from registration under the 1933 Act or in a transaction not requiring registration under the 1933 Act; (D) COMPANY RELIANCE. The Buyer understands that (1) the Note is being offered and sold and the Warrants are being issued to the Buyer, (2) the Shares are being offered to the Buyer, (3) the Interest Shares, if any, will be issued to the Buyer, (4) the Payment Shares, if any, will be issued to the Buyer, and (5) upon exercise of the Warrants, the Warrant Shares will be sold to the Buyer, in each such case in reliance on one or more exemptions from the registration requirements of the 1933 Act, including, without limitation, Regulation D, and exemptions from state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein and in the Questionnaire, a true and accurate copy of which has been delivered by the Buyer to the Company, in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire or receive an offer to acquire the Securities; and the information with respect to the Buyer set forth in the Questionnaire is accurate and complete in all material respects; (E) INFORMATION PROVIDED. The Buyer and its advisors, if any, have requested, received and considered all information relating to the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and information relating to the offer and sale of the Note and the offer of the Interest Shares and the Payment Shares deemed relevant by them (assuming the accuracy and completeness of the SEC Reports and of the Company's responses to the Buyer's requests); the Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company concerning the terms of the offering of the Securities and the business, properties, operations, condition (financial or other), results of operations and prospects of the Company and its Subsidiaries and have received satisfactory answers to any such inquiries; without limiting the generality of the foregoing, the Buyer has had the opportunity to obtain and to review the SEC Reports; in connection with its decision to purchase the Note and to acquire the Warrants, the Buyer has relied solely upon the SEC Reports, the representations, warranties, covenants and agreements of the Company set forth in this Agreement and to be contained in the other Transaction Documents, as well as any investigation of the Company completed by the Buyer or its advisors; the Buyer understands that its investment in the Securities involves a high degree of risk; and the Buyer understands that the offering of the Note is being made to the Buyer as part of an offering without any minimum or maximum amount of the -18- offering (subject, however, to the right of the Company at any time prior to execution and delivery of this Agreement by the Company, in its sole discretion, to accept or reject an offer by the Buyer to purchase the Note and to acquire the Warrants); (F) ABSENCE OF APPROVALS. The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities; (G) NOTE PURCHASE AGREEMENT. The Buyer has all requisite power and authority, corporate or otherwise, to execute, deliver and perform its obligations under this Agreement and the other agreements executed by the Buyer in connection herewith and to consummate the transactions contemplated hereby and thereby; and this Agreement has been duly and validly authorized, duly executed and delivered by the Buyer and, assuming due execution and delivery by the Company, is a valid and binding agreement of the Buyer enforceable in accordance with its terms, except as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and general principles of equity, regardless of whether enforcement is considered in a proceeding in equity or at law; and (H) BUYER STATUS. The Buyer is not a "broker" or "dealer" as those terms are defined in the 1934 Act which is required to be registered with the SEC pursuant to Section 15 of the 1934 Act. 4. REPRESENTATIONS, WARRANTIES, COVENANTS, ETC. OF THE COMPANY. The Company represents and warrants to, and covenants and agrees with, the Buyer as follows: (A) ORGANIZATION AND AUTHORITY. The Company and each of the Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and (i) each of the Company and the Subsidiaries has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as described in the SEC Reports and as currently conducted, and (ii) the Company has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and the other Transaction Documents to be executed and delivered by the Company in connection herewith, and to consummate the transactions contemplated hereby and thereby; and the Company does not have any equity investment in any other Person other than (x) the Subsidiaries listed in Exhibit 21 to the 1997 10-K, (y) as set forth on SCHEDULE 4(A) and (z) Subsidiaries which do not, individually or in the aggregate, have any material revenue, assets or liabilities. (B) QUALIFICATIONS. The Company and each of the Subsidiaries are duly -19- qualified to do business as foreign corporations and are in good standing in all jurisdictions where such qualification is necessary and where failure so to qualify could have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (C) CAPITALIZATION. (1) The authorized capital stock of the Company consists of (A) 100,000,000 shares of Common Stock, of which 28,820,542 shares were outstanding at the close of business on February 19, 1999 and (B) 5,000,000 shares of Preferred Stock, $.01 par value, of which 1,000,000 shares have been designated Series A Junior Participating Preferred Stock, and none of which is outstanding; from February 19, 1999 to the Closing Date there will be (x) no material increase in the number of shares of Common Stock outstanding (except for shares issued upon exercise of options and warrants outstanding on the date hereof or options or similar rights granted subsequent to the date of this Agreement pursuant to the Company's stock option plans in effect on the date of this Agreement) and (y) no issuance of securities convertible into, exchangeable for, or otherwise entitling the holder to acquire, shares of Common Stock (except for securities issued pursuant to the Other Note Purchase Agreements and Preferred Share Purchase Rights issued in connection with shares Common Stock issued in accordance with the immediately preceding clause (x)). The 1997 10-K discloses as of December 31, 1997 all outstanding options or warrants for the purchase of, or rights to purchase or subscribe for, or securities convertible into, exchangeable for, or otherwise entitling the holder to acquire, Common Stock or other capital stock of the Company, or any contracts or commitments to issue or sell Common Stock or other capital stock of the Company or any such options, warrants, rights or other securities; and from such date to the date hereof there has been, and to the Closing Date there will be, no material change in the amount or terms of any of the foregoing except for the grant or exercise of options to purchase shares of Common Stock pursuant to the Company's stock option plans in effect on the date of this Agreement. (2) The Company has duly reserved from its authorized and unissued shares of Common Stock the full number of shares required for (A) all options, warrants, convertible securities, exchangeable securities, and other rights to acquire shares of Common Stock which are outstanding and (B) all shares of Common Stock and options and other rights to acquire shares of Common Stock which may be issued or granted under the stock option and similar plans which have been adopted by the Company or any Subsidiary; and, immediately following the Closing Date, after giving effect to any antidilution or similar adjustment arising by reason of issuance of the Note, the Other Notes, the Warrants and the warrants issuable to the purchasers of the Other Notes, the total number of shares of Common Stock reserved and required to be reserved from the authorized and unissued shares of Common Stock for purposes of all such options, warrants, convertible securities, other rights, and stock option and similar plans (excluding the Note, the Other Notes, the Warrants and the warrants issuable to the purchasers of the Other Notes) will be 7,844,603. Each outstanding class or series of securities of the Company for which any such antidilution adjustment will occur is identified on SCHEDULE 4(C) attached hereto, together with the amount of such antidilution adjustment for each such class or series. The o utstanding shares of Common Stock of the Company and outstanding options, warrants, rights, and other securities -20- entitling the holders to purchase or otherwise acquire Common Stock have been duly and validly authorized and issued. None of the outstanding shares of Common Stock or options, warrants, rights, or other such securities has been issued in violation of the preemptive rights of any securityholder of the Company. The offers and sales of the outstanding shares of Common Stock of the Company and options, warrants, rights, and other securities were at all relevant times either registered under the 1933 Act and applicable state securities laws or exempt from such requirements. No holder of any of the Company's securities has any rights, "demand," "piggy-back" or otherwise, to have such securities registered by reason of the intention to file, filing or effectiveness of the Registration Statement. (D) CONCERNING THE SHARES AND THE COMMON STOCK. The Shares have been duly authorized and the Payment Shares, when issued in payment of a portion of the Company's obligation to repay principal of the Note or the Optional Redemption Price, the Interest Shares, when issued in payment of interest on the Note, and the Warrant Shares, when issued upon exercise of the Warrants, will be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder. There are no preemptive or similar rights of any stockholder of the Company or any other Person to acquire any of the Shares or the Warrants. The Company has duly reserved 1,920,000 shares of Common Stock as the Warrant Shares and for issuance upon exercise of the warrants issuable to the purchasers of the Other Notes, and such shares shall remain so reserved, and the Company shall from time to time reserve such additional shares of Common Stock as shall be required to be reserved pursuant to the Warrants, so long as the Warrants are outstanding. The Common Stock is listed for trading on Nasdaq and (1) the Company and the Common Stock meet the criteria for continued listing and trading on Nasdaq; (2) the Company has not been notified since January 1, 1996 by the NASD or the Nasdaq Stock Market of any failure or potential failure to meet the criteria for continued listing and trading on Nasdaq and (3) no suspension of trading in the Common Stock is in effect. The Company knows of no reason that the Shares will be ineligible for listing on Nasdaq. (E) CORPORATE AUTHORIZATION. This Agreement and the other Transaction Documents to which the Company is or will be a party have been duly and validly authorized by the Company; this Agreement has been duly executed and delivered by the Company and, assuming due execution and delivery by the Buyer, this Agreement is, and the Note, and the Warrants will be, when executed and delivered by the Company, valid and binding obligations of the Company enforceable in accordance with their respective terms, except as the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and general principles of equity, regardless of whether enforcement is considered in a proceeding in equity or at law. (F) NON-CONTRAVENTION. The execution and delivery of the Transaction Documents by the Company and the consummation by the Company of the issuance of the Securities as contemplated by this Agreement and consummation by the Company of the other -21- transactions contemplated by the Transaction Documents do not and will not, with or without the giving of notice or the lapse of time, or both, (i) result in any violation of any term or provision of the certificate of incorporation or bylaws of the Company or any Subsidiary, (ii) conflict with or result in a breach by the Company or any Subsidiary of any of the terms or provisions of, or constitute a default under, or result in the modification of, or result in the creation or imposition of any lien, security interest, charge or encumbrance (other than pursuant to the Security Agreement and the Patent and Trademark Security Agreement) upon any of the properties or assets of the Company or any Subsidiary pursuant to, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of their respective properties or assets are bound or affected, in any such case which (x) relates to or affects the Collateral or (y) would be reasonably likely to have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole, or the validity or enforceability of, or the ability of the Company to perform its obligations under, the Transaction Documents, (iii) conflict with or result in a breach by the Company or any Subsidiary of the terms or provisions of, or constitute a default under, or result in the modification of, or entitle any party other than the Company to terminate, or require any consent or approval of any such party with respect to, any of the Lafon Agreements, (iv) violate or contravene any applicable law, rule or regulation or any applicable decree, judgment or order of any court, United States federal or state regulatory body, administrative agency or other governmental body having jurisdiction over the Company or any Subsidiary or any of their respective properties or assets, in any such case which (x) relates to or affects the Collateral or (y) would be reasonably likely to have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole, or the validity or enforceability of, or the ability of the Company to perform its obligations under, the Transaction Documents, or (v) have any material adverse effect on any permit, certification, registration, approval, consent, license or franchise necessary for the Company or any Subsidiary to own or lease and operate any of its properties and to conduct any of its business or the ability of the Company or any Subsidiary to make use thereof. (G) APPROVALS, FILINGS, ETC. No authorization, approval or consent of, or filing with, any court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market or the stockholders of the Company is required to be obtained or made by the Company or any Subsidiary for (x) the execution, delivery and performance by the Company of the Transaction Documents, (y) the issuance and sale of the Securities as contemplated by this Agreement and the terms of the Note and the Warrants and (z) the performance by the Company of its obligations under the Transaction Documents, other than (1) listing of the Shares on Nasdaq, (2) registration of the resale of the Shares under the 1933 Act as contemplated by Section 8, (3) as may be required under applicable state securities or "blue sky" laws, (4) filing of one or more Forms D with respect to the Securities as required under Regulation D, (5) filing by the Company of financing statements under the provisions of applicable state Uniform Commercial Codes, and (6) filing of the Patent and Trademark Security Agreement with the PTO. -22- (H) INFORMATION PROVIDED. The SEC Reports, the Transaction Documents and the instruments delivered by the Company to the Buyer in connection with the closing on the Closing Date do not and will not on the date of execution and delivery of this Agreement, the date of delivery thereof to the Buyer and on the Closing Date contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading, it being understood that for purposes of this Section 4(h), any statement contained in such information shall be deemed to be modified or superseded for purposes of this Section 4(h) to the extent that a statement in any document included in such information which was prepared and furnished to the Buyer on a later date or filed with the SEC on a later date modifies or replaces such statement, whether or not such later prepared or filed statement so states. (I) CONDUCT OF BUSINESS. Except as set forth in the SEC Reports, since September 30, 1998, neither the Company nor any Subsidiary has (i) incurred any material obligation or liability (absolute or contingent) other than in the ordinary course of business; (ii) canceled, without payment in full, any material notes, loans or other obligations receivable or other debts or claims held by it other than in the ordinary course of business; (iii) sold, assigned, transferred, abandoned, mortgaged, pledged or subjected to lien any of its material properties, tangible or intangible, or rights under any material contract, permit, license, franchise or other agreement; (iv) conducted its business in a manner materially different from its business as conducted on such date; (v) declared, made or paid or set aside for payment any cash or non-cash distribution on any shares of its capital stock; or (vi) consummated, or entered into any agreement with respect to, any transaction or event which would constitute a Repurchase Event. Except as disclosed in the SEC Reports, the Company and each Subsidiary owns, possesses or has obtained all governmental, administrative and third party licenses, permits, certificates, registrations, approvals, consents and other authorizations necessary to own or lease (as the case may be) and operate its properties, whether tangible or intangible, and to conduct its business or operations as currently conducted, except such licenses, permits, certificates, registrations, approvals, consents and authorizations the failure of which to obtain would not have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (J) SEC FILINGS. The Company has timely filed all reports required to be filed under the 1934 Act and any other material reports or documents required to be filed with the SEC since January 1, 1997. All of such reports and documents complied, when filed, in all material respects, with all applicable requirements of the 1933 Act and the 1934 Act. The Company meets the requirements for the use of Form S-3 for the registration of the resale of the Shares by the Buyer and any other Investor. The Company has not filed any reports with the SEC under the 1934 Act since December 31, 1997 other than the SEC Reports. (K) ABSENCE OF CERTAIN PROCEEDINGS. Except as disclosed in the SEC Reports, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body or governmental agency pending or, to the knowledge of the Company or any Subsidiary, -23- threatened against or affecting the Company or any Subsidiary, in any such case wherein an unfavorable decision, ruling or finding is reasonably likely and would reasonably be expected to have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole, or the transactions contemplated by the Transaction Documents or which could adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, the Transaction Documents; the Company does not have pending before the SEC any request for confidential treatment of information and, to the best of the Company's knowledge, no such request will be made by the Company prior to the SEC Effective Date for the Warrant Share Registration Statement; and to the best of the Company's knowledge there is not pending or contemplated any, and there has been no, investigation by the SEC involving the Company or any current or former director or officer of the Company. (L) FINANCIAL STATEMENTS; LIABILITIES. The financial statements included in the September 10-Q present fairly the financial position, results of operations and cash flows of the Company and the Subsidiaries, at the dates and for the periods covered thereby, have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods covered thereby and on a basis consistent with the audited financial statements appearing in the 1997 Form 10-K, and include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company and the Subsidiaries at the dates and for the periods covered thereby. Except as and to the extent disclosed, reflected or reserved against in the financial statements of the Company and the notes thereto included in the SEC Reports, neither the Company nor any Subsidiary has any liability, debt or obligation, whether accrued, absolute, contingent or otherwise, and whether due or to become due which, individually or in the aggregate, are material to the Company and the Subsidiaries, taken as a whole. Subsequent to September 30, 1998, neither the Company nor any Subsidiary has incurred any liability, debt or obligation of any nature whatsoever which, individually or in the aggregate are material to the Company and the Subsidiaries, taken as a whole, other than those incurred in the ordinary course of their respective businesses. (M) MATERIAL LOSSES. Since September 30, 1998, neither the Company nor any Subsidiary has sustained any loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, which loss or interference could be material to the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (N) ABSENCE OF CERTAIN CHANGES. Since September 30, 1998, there has been no material adverse change and no material adverse development in the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole, except as disclosed in the SEC Reports and except for operating losses incurred since such date at a rate consistent with the rate thereof during the nine -24- months ended September 30, 1998. (O) INTELLECTUAL PROPERTY. Except as disclosed in the SEC Reports, each of the Company and each Subsidiary owns, or possesses adequate rights to use, all patents, patent rights, inventions, trade secrets, know-how, proprietary techniques, including processes and substances, trademarks, service marks, trade names and copyrights described or referred to in the SEC Reports or owned or used by it or which are necessary for the conduct of its business as it is presently conducted or proposed to be conducted, except for where the failure to own or possess adequate rights to use such patents, patent rights, inventions, trade secrets, service marks, trade names and copyrights would not have a material adverse effect on (x) the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole, or (y) the Company's ability to manufacture, market and sell the Products. Except as disclosed in the SEC Reports, neither the Company nor any Subsidiary has received any notice of infringement of or conflict with asserted rights of others with respect to, any patents, patent rights, inventions, trade secrets, know-how, proprietary techniques, including processes and substances, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole. (P) INTERNAL ACCOUNTING CONTROLS. The Company maintains a system of internal accounting controls for the Company and the Subsidiaries which meets the requirements of Section 13(b)(2) of the 1934 Act in all material respects. (Q) COMPLIANCE WITH LAW. Neither the Company nor any Subsidiary is in violation of or has any liability under any statute, law, rule, regulation, ordinance, decision or order of any governmental agency or body or any court, domestic or foreign, including, without limitation, those relating to the use, operation, handling, transportation, disposal or release of hazardous or toxic substances or wastes or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances or wastes, except where such violation or liability would not individually or in the aggregate have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries, taken as a whole; and neither the Company nor any Subsidiary is aware of any pending investigation which would reasonably be expected to lead to such a claim. (R) PROPERTIES. Each of the Company and the Subsidiaries has good title to all property, real and personal (tangible and intangible), and other assets owned by it, free and clear of all security interests, charges, mortgages, liens or other encumbrances, except such as are described in the SEC Reports or such as do not materially interfere with the use of such property made, or proposed to be made, by the Company or any Subsidiary. The leases, licenses or other contracts or instruments under which the Company and each Subsidiary leases, holds or is entitled to use any property, real or personal, which individually or in the aggregate are material to the Company and the Subsidiaries, taken as a whole, are valid, subsisting and enforceable with only -25- such exceptions as do not materially interfere with the use of such property made, or proposed to be made, by the Company or such Subsidiary or have expired or terminated in accordance with their terms or have been superseded by other classes, contracts or agreements. Neither the Company nor any Subsidiary has received notice of any material violation of any applicable law, ordinance, regulation, order or requirement relating to its owned or leased properties. Neither the Company nor any Subsidiary has any mortgage, lien, pledge, security interest or other charge or encumbrance on any of its assets or properties except as listed in SCHEDULE 4(R) attached hereto. (S) LABOR RELATIONS. No material labor problem exists or, to the knowledge of the Company or any Subsidiary, is imminent with respect to any of the employees of the Company or any Subsidiary. (T) INSURANCE. The Company and the Subsidiaries maintain insurance against loss or damage by fire or other casualty and such other insurance, including but not limited to, product liability insurance, in such amounts and covering such risks as the Company believes are commercially reasonable. (U) TAX MATTERS. Each of the Company and the Subsidiaries has filed all federal, state and local income and franchise tax returns required to be filed and has paid all material taxes shown by such returns to be due, and no tax deficiency has been determined adversely to the Company or any Subsidiary which has had (nor does the Company or any Subsidiary have any knowledge of any tax deficiency which, if determined adversely to the Company or any Subsidiary, might have) a material adverse effect on the business, properties, operations, condition (financial or other), results of operations, or prospects of the Company and the Subsidiaries, taken as a whole. (V) INVESTMENT COMPANY. Neither the Company nor any Subsidiary is an "investment company" within the meaning of such term under the Investment Company Act of 1940, as amended, and the rules and regulations of the SEC thereunder. (W) ABSENCE OF BROKERS, FINDERS, ETC. No broker, finder or similar Person other than the Placement Agent is entitled to any commission, fee or other compensation by reason of action taken by or on behalf of the Company in connection with the transactions contemplated by this Agreement, and the Company shall pay, and indemnify and hold harmless the Buyer from, any claim made against the Buyer by any Person for any such commission, fee or other compensation. (X) NO SOLICITATION. No form of general solicitation or general advertising was used by the Company or, to the best of its knowledge, any other Person acting on behalf of the Company, in respect of the Securities or in connection with the offer and sale of the Securities. Neither the Company nor, to its knowledge, any Person acting on behalf of the Company has, either directly or indirectly, sold or offered for sale to any Person any of the Securities (other than -26- the Placement Agent) or, within the six months prior to the date hereof, any other similar security of the Company except as contemplated by this Agreement and the Other Note Purchase Agreements; and neither the Company nor any Person authorized to act on its behalf will sell or offer for sale any promissory notes, warrants, shares of Common Stock or other securities to, or solicit any offers to buy any such security from, any Person so as thereby to cause the issuance or sale of any of the Securities to be in violation of any of the provisions of Section 5 of the 1933 Act. (Y) ERISA COMPLIANCE. Each of the Company and the Subsidiaries is in compliance in all material respects with all presently applicable provisions of ERISA; no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company or any Subsidiary would have any liability; neither the Company nor any Subsidiary has incurred or expects to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Code; and each "pension plan" for which the Company or any Subsidiary would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (Z) CONCERNING THE COLLATERAL. Upon execution and delivery of the Security Agreement and the Patent and Trademark Security Agreement by the Company and the Collateral Agent and completion of the filings referred to in Schedule I to ANNEX VI attached hereto, the Collateral Agent will have a perfected first priority security interest and will have all of the rights currently held by the Company to manufacture, market, use and sell the Products in the Territory, and to obtain supplies of modafinil, including, without limitation, requisite rights under the Company's licenses, patents, patent applications, manufacturing and supply agreements and requisite governmental authorizations, approvals, permits and licenses. 5. CERTAIN COVENANTS. (A) TRANSFER RESTRICTIONS. The Buyer acknowledges and agrees that (1) the Note and the Warrants have not been and are not being registered under the provisions of the 1933 Act or any state securities laws and, except as provided in Section 8, the Shares have not been and are not being registered under the 1933 Act or any state securities laws, and that the Note and the Warrants may not be transferred unless the Buyer shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that the Note or the Warrants to be transferred may be transferred without such registration; (2) no sale, assignment or other transfer of the Note or the Warrants or any interest therein may be made except in accordance with the terms hereof and thereof; (3) the Shares may not be resold by the Buyer unless the resale has been registered under the 1933 Act or is made pursuant to an applicable exemption from such registration and the Company shall have received the opinion of counsel provided for in the final sentence of this Section 5(a); (4) any sale of Shares under a Registration Statement shall be made only in compliance with the terms of this -27- Section 5(a) and Section 8 (including, without limitation, Section 8(c)(5)); (5) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if the exemption provided by Rule 144 is not available, any resale of the Securities under circumstances in which the seller, or the Person through whom the sale is made, may be deemed to be an underwriter, as that term is used in the 1933 Act, may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (6) the Company is under no obligation to register the Securities (other than registration of the resale of the Shares in accordance with Section 8) under the 1933 Act or, except as provided in Section 5(d) and Section 8, to comply with the terms and conditions of any exemption thereunder. The Buyer may not transfer the Shares in a transaction which does not constitute a transfer thereof pursuant to the applicable Registration Statement in accordance with the plan of distribution set forth therein or in any supplement to the related Prospectus unless the Buyer shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, that such Shares may be so transferred without registration under the 1933 Act. (B) RESTRICTIVE LEGENDS. (1) The Buyer acknowledges and agrees that the Note shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the Note): This Note has not been registered under the Securities Act of 1933, as amended (the "1933 Act"), or any state securities laws. The issuance to the holder of this Note of the shares of Common Stock issuable in payment of a portion of this Note and in payment of interest on this Note are not covered by a registration statement under the 1933 Act or registration under state securities laws. This Note has been acquired, and such shares must be acquired, for investment only and may not be sold, transferred or assigned in the absence of registration of the resale thereof under the 1933 Act or an opinion of counsel reasonably satisfactory in form, scope and substance to the Company that such registration is not required. (2) The Buyer further acknowledges and agrees that the Warrants shall bear a restrictive legend in substantially the following form (and a stop- transfer order may be placed against transfer of the Warrants): The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "1933 Act"). The securities have been acquired for investment and may not be resold, transferred or assigned in the absence of an effective registration statement for the securities under the 1933 Act or an opinion of counsel that registration is not required under the 1933 Act. (3) The Buyer further acknowledges and agrees that until such time as the Warrant Shares have been registered for resale under the 1933 Act as contemplated by Section 8, the certificates for the Shares, may bear a restrictive legend in substantially the following form -28- (and a stop-transfer order may be placed against transfer of the certificates for the Shares): The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "1933 Act"). The securities have been acquired for investment and may not be resold, transferred or assigned in the absence of an effective registration statement for the securities under the 1933 Act or an opinion of counsel that registration is not required under the 1933 Act. (4) Once the Registration Statement required to be filed by the Company pursuant to Section 8 relating to the Warrant Shares has been declared effective, thereafter (1) upon request of the Buyer the Company will substitute certificates without restrictive legend for certificates for any Warrant Shares issued prior to the SEC Effective Date which bear such restrictive legend and remove any stop-transfer restriction relating thereto promptly, but in no event later than three days after surrender of such certificates by the Buyer and (2) the Company shall not place any restrictive legend on certificates for any Warrant Shares issued upon exercise of the Warrants or impose any stop-transfer restriction thereon. (C) NASDAQ LISTING; REPORTING STATUS. Prior to the Closing Date, the Company will file with Nasdaq an application or other document required by Nasdaq for the listing of the Warrant Shares with Nasdaq and shall provide evidence of such filing to the Buyer. So long as the Buyer beneficially owns any portion of the Note or the Warrants or any Shares, the Company will use its best efforts to maintain the listing of the Common Stock on Nasdaq or a registered national securities exchange. The Company shall use its best efforts to obtain the listing, subject to official notice of issuance, of the Warrant Shares on the Nasdaq prior to the Closing Date. During the Registration Period, the Company shall timely file all reports required to be filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination. (D) FORM D. The Company agrees to file one or more Forms D with respect to the Securities as required under Regulation D to claim the exemption provided by Rule 506 of Regulation D and to provide a copy thereof to the Buyer promptly after such filing. (E) STATE SECURITIES LAWS. On or before the Closing Date, the Company shall take such action as shall be necessary to qualify, or to obtain an exemption for, the Note for sale to the Buyer pursuant to this Agreement, the Warrants for issuance to the Buyer pursuant to this Agreement and the Warrant Shares for sale upon exercise of the Warrants under such of the securities laws of jurisdictions in the United States as shall be applicable to the sale of the Note to the Buyer pursuant to this Agreement and issuance of the Warrant Shares upon exercise of the Warrants. Notwithstanding the foregoing obligations of the Company in this Section 5(e), the Company shall not be required (1) to qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 5(e), (2) to subject itself to general taxation in -29- any such jurisdiction, (3) to file a general consent to service of process in any such jurisdiction, (4) to provide any undertakings that cause more than nominal expense or burden to the Company or (5) to make any change in its charter or by-laws which the Company determines to be contrary to the best interests of the Company and its stockholders. The Company shall furnish the Buyer with copies of all filings, applications, orders and grants or confirmations of exemptions relating to such securities laws on or before the Closing Date. (F) LIMITATION ON CERTAIN ACTIONS. From the date of execution and delivery of this Agreement by the parties hereto to the date of issuance of the Note, the Company (1) shall comply with Article III of the Note as if the Note were outstanding, (2) shall not take any action which, if the Note were outstanding, (A) would constitute an Event of Default or, with the giving of notice or the passage of time or both, would constitute an Event of Default or (B) would constitute a Repurchase Event or, with the giving of notice or the passage of time or both, would constitute a Repurchase Event. (G) SECURITY AGREEMENT; FINANCING STATEMENTS, ETC. The Company agrees to execute and deliver to the Collateral Agent on or before the Closing Date the Security Agreement in the form attached hereto as ANNEX IV and the Patent and Trademark Security Agreement in the form attached hereto as ANNEX V. The Company shall prepare and on or before the Closing Date file (x) with the appropriate officials, Uniform Commercial Code financing statements on Form UCC-1 relating to the Collateral in which the Company is granting a security interest to the Collateral Agent for the benefit of the holder of the Note pursuant to the Security Agreement, and (y) with the PTO copies of the Patent and Trademark Security Agreement. Prior to the Closing Date, the Company shall provide to the Buyer evidence of such filings and customary search reports of the relevant Uniform Commercial Code filing offices and the PTO. (H) USE OF PROCEEDS. The Company represents and agrees that: (1) it does not own or have any present intention of acquiring any "margin stock" as defined in Regulation U (12 CFR Part 221) of the Board of Governors of the Federal Reserve System ("margin stock"); (2) the proceeds of sale of the Note will be used for general working capital purposes and in the operation of the Company's business; (3) none of such proceeds will be used, directly or indirectly (A) to make any loan to or investment in any other Person or (B) for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any margin stock or for the purpose of maintaining, reducing or retiring any indebtedness which was originally incurred to purchase or carry any stock that is currently a margin stock or for any other purpose which might constitute the transactions contemplated by this Agreement a "purpose credit" within the meaning of such Regulation U; and (4) neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the transactions contemplated hereby to violate Regulation T, Regulation U or any other regulation of the Board of Governors of the Federal Reserve System or to violate the 1934 Act, in each case as in effect now or as the same may hereafter be in effect. (I) BEST EFFORTS. Each of the parties shall use its best efforts timely to satisfy each of the conditions to the other party's obligations to sell and purchase the Note set forth in -30- Section 6 or 7, as the case may be, of this Agreement on or before the Closing Date. (J) DEBT OBLIGATION. So long as any portion of the Note is outstanding, the Company shall cause its books and records to reflect the Note as a debt of the Company in its unpaid principal amount, shall cause its financial statements to reflect the Note as a debt of the Company in such amount as shall be the greatest amount permitted in accordance with generally accepted accounting principles and, whenever appropriate, as a valid senior, secured debt obligation of the Company for money borrowed. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The Buyer understands that the Company's obligation to sell the Note and issue the Warrants to the Buyer pursuant to this Agreement is conditioned upon satisfaction of the following conditions precedent on or before the Closing Date (any or all of which may be waived by the Company in its sole discretion): (a) On the Closing Date, no legal action, suit or proceeding shall be pending or threatened which seeks to restrain or prohibit the transactions contemplated by this Agreement; and (b) The representations and warranties of the Buyer contained in this Agreement and in the Questionnaire shall have been true and correct on the date of this Agreement and on the Closing Date as if made on the Closing Date and on or before the Closing Date the Buyer shall have performed all covenants and agreements of the Buyer required to be performed by the Buyer on or before the Closing Date. 7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE. The Company understands that the Buyer's obligation to purchase the Note and acquire the Warrants is conditioned upon satisfaction of the following conditions precedent on or before the Closing Date (any or all of which may be waived by the Buyer in its sole discretion): (a) The Collateral Agent shall have executed and delivered to the Company the Security Agreement and the Patent and Trademark Security Agreement and copies thereof duly executed and delivered by the Company, shall have been furnished to the Buyer; (b) On the Closing Date, no legal action, suit or proceeding shall be pending or threatened which seeks to restrain or prohibit the transactions contemplated by this Agreement; (c) The representations and warranties of the Company contained in this Agreement shall have been true and correct on the date of this Agreement and, except for the approvals and filings referred to in clauses (3) (to the extent action is required by applicable law -31- to be taken on or prior to the Closing Date), (5) and (6) of Section 4(g), which shall have been obtained or made, shall be true and correct on the Closing Date as if made on and as of the Closing Date, the representations and warranties of the Company contained in the Transaction Documents other than this Agreement shall have been true and correct on the Closing Date as if made on and as of the Closing Date, and on or before the Closing Date the Company shall have performed all covenants and agreements of the Company contained herein or in any of the other Transaction Documents required to be performed by the Company on or before the Closing Date; (d) No event which, if the Note were outstanding, (1) would constitute an Event of Default or which, with the giving of notice or the passage of time, or both, would constitute an Event of Default shall have occurred and be continuing or (2) would constitute a Repurchase Event or which, with the giving of notice or the passage of time, or both, would constitute a Repurchase Event shall have occurred and be continuing; (e) The Company shall have delivered to the Buyer a certificate, dated the Closing Date, duly executed by its Chief Executive Officer or Chief Financial Officer to the effect set forth in subparagraphs (b), (c), and (d) of this Section 7; (f) The Company shall have delivered to the Buyer a certificate, dated the Closing Date, of the Secretary of the Company certifying (1) the Certificate of Incorporation and By-Laws of the Company as in effect on the Closing Date, (2) all resolutions of the Board of Directors (and committees thereof) of the Company relating to this Agreement and the Transaction Documents and the transactions contemplated hereby and thereby and (3) such other matters as reasonably requested by the Buyer; (g) On the Closing Date, the Buyer shall have received an opinion of Morgan, Lewis & Bockius, LLP, counsel for the Company, dated the Closing Date, addressed to the Buyer, in form, scope and substance reasonably satisfactory to the Buyer, substantially in the form of ANNEX VI attached hereto; (h) On the Closing Date, the Buyer shall have received an opinion of the Law Offices of Brian W Pusch, dated the Closing Date, addressed to the Buyer substantially in the form of ANNEX VII attached hereto; and (i) On the Closing Date, (i) trading in securities on the New York Stock Exchange, Inc., the American Stock Exchange, Inc. or Nasdaq shall not have been suspended or materially limited and (ii) a general moratorium on commercial banking activities in the State of New York or the Commonwealth of Pennsylvania shall not have been declared by either federal or state authorities. 8. REGISTRATION RIGHTS. -32- (A) MANDATORY REGISTRATION. (1) The Company shall prepare and as expeditiously as possible, but in no event later than the date which is 45 days after the Closing Date, file with the SEC the Warrant Share Registration Statement covering as Registrable Securities the resale by the Buyer of a number of shares of Common Stock equal to (A) the Warrant Shares issuable to the Buyer and (B) such additional number of shares of Common Stock as the Company shall in its discretion determine to register in connection with the issuance of the Interest Shares. (2) If, in accordance with the terms of the Note, the Company elects to issue Payment Shares in partial payment of the principal amount of the Note or in partial payment of the Optional Redemption Price and any Investor who holds the Note, or any portion thereof, consents to such election, then the Company shall prepare, and on or prior to the date which is 15 days after the Company so elects, file with the SEC a Payment Share Registration Statement covering the resale by each Investor who so consents to such election of a number of shares of Common Stock equal to the number of Payment Shares to be issued to such Investor in connection therewith. (3) From the date the Company files a Payment Share Registration Statement with the SEC to the SEC Effective Date for such Payment Share Registration Statement and, if during any time subsequent to the SEC Effective Date for any Registration Statement, any Registration Statement for any reason is not available for use by any Investor for the resale of any Registrable Securities when such Registration Statement is required to be so available for use, the Company shall not file any other registration statement or any amendment thereto with the SEC under the 1933 Act or request the acceleration of the effectiveness of any other registration statement previously filed with the SEC, other than (A) any registration statement on Form S-8 and (B) any registration statement or amendment which the Company is required to file or as to which the Company is required to request acceleration pursuant to any obligation in effect on the date of execution and delivery of this Agreement. (B) OBLIGATIONS OF THE COMPANY. In connection with the registration of the Registrable Securities, the Company shall: (1) use its best efforts to cause each Registration Statement referred to in Section 8(a) to become effective as promptly as possible after the date it is required to be filed with the SEC, and keep such Registration Statement effective pursuant to Rule 415 at all times during the Registration Period. The Company shall submit to the SEC, within three Business Days after the Company learns that no review of a particular Registration Statement will be made by the staff of the SEC or that the staff of the SEC has no further comments on such Registration Statement, as the case may be, a request for acceleration of effectiveness of such Registration Statement to a time and date not later than 48 hours after the submission of such request. The Company shall notify the Investors of the effectiveness of each Registration Statement on the SEC Effective Date for such Registration Statement. The Company represents and warrants to the Investors that (a) each Registration Statement (including any amendments or supplements thereto and prospectuses contained therein), at the time it is first filed with the SEC, at the time it is ordered effective by the -33- SEC and at all times during which it is required to be effective hereunder (and each such amendment and supplement at the time it is filed with the SEC and at all times during which it is available for use in connection with the offer and sale of the Registrable Securities) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (b) each Prospectus, at the time the related Registration Statement is declared effective by the SEC and at all times that such Prospectus is required by this Agreement to be available for use by any Investor, shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; (2) prepare and file with the SEC such amendments (including post- effective amendments) and supplements to each Registration Statement and Prospectus as may be necessary to keep such Registration Statement effective, and such Prospectus current, at all times during the Registration Period (other than during any Blackout Period during which the provisions of Section 8(b)(5)(B) are applicable), and, during the Registration Period, comply with the provisions of the 1933 Act applicable to the Company in order to permit the disposition by the Investors of all Registrable Securities covered by such Registration Statement; (3) furnish to Delta Opportunity Fund, Ltd., as representative for Investors whose Registrable Securities are included in any Registration Statement, and a single firm of counsel selected by all such Investors (1) promptly after the same is prepared and publicly distributed, filed with the SEC or received by the Company, five copies of such Registration Statement and any amendment thereto, each related Prospectus and each amendment or supplement thereto, (2) one copy of each letter written by or on behalf of the Company to the SEC or the staff of the SEC and each item of correspondence from the SEC or the staff of the SEC relating to such Registration Statement (other than any portion of any such letter or item which contains information for which the Company has sought confidential treatment), each of which the Company hereby determines to be confidential information and which each Investor hereby agrees to keep confidential as a confidential Record in accordance with Section 8(b)(9), and (3) such number of copies of each Prospectus and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (4) subject to Section 8(b)(5), use its best efforts (i) to register and qualify the Registrable Securities covered by each Registration Statement under the securities or blue sky laws of such jurisdictions as any Investor who holds any Registrable Securities reasonably requests, (ii) to prepare and to file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof at all times during the Registration Period and (iii) to take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale by the Investors in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto (I) to do business in any jurisdiction where -34- it would not otherwise be required to qualify but for this Section 8(b)(4), (II) to subject itself to general taxation in any such jurisdiction, (III) to file a general consent to service of process in any such jurisdiction, (IV) to provide any undertakings that cause more than nominal expense or burden to the Company or (V) to make any change in its charter or by-laws which the Company determines to be contrary to the best interests of the Company and its stockholders; (5) (A) as promptly as practicable after becoming aware of such event or circumstance, notify each Investor of the occurrence of any event or circumstance of which the Company has knowledge (x) as a result of which the Prospectus relating to any Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or (y) which requires the Company to amend or supplement any Registration Statement due to the receipt from an Investor or any other selling stockholder named in the related Prospectus of new or additional information about such Investor or selling stockholder or its intended plan of distribution of its Registrable Securities or other securities covered by such Registration Statement, and use its best efforts promptly to prepare a supplement or amendment to such Registration Statement and the related Prospectus to correct such untrue statement or omission or to add any new or additional information, and deliver a number of copies of such supplement or amendment to each Investor as such Investor may reasonably request; (B) notwithstanding Section 8(b)(5)(A) above, if at any time the Company notifies the Investors as contemplated by Section 8(b)(5)(A) the Company also notifies the Investors that the event giving rise to such notice relates to a development involving the Company which occurred subsequent to the later of (x) the SEC Effective Date for the particular Registration Statement and (y) the latest date prior to such notice on which the Company has amended or supplemented such Registration Statement, then the Company shall not be required to use best efforts to make such amendment during a Blackout Period; provided, however, that in any period of 365 consecutive days the Company shall not be entitled to avail itself of its rights under this Section 8(b)(5)(B) with respect to more than (i) two Blackout Periods; and provided further, however, that no Blackout Period may commence sooner than 90 days after the end of another Blackout Period; and provided, further, however, that if the Company issues Payment Shares to any Investor, no portion of any Blackout Period shall occur during the period of 30 days commencing on the date such Payment Shares are required by the terms of the Note to be delivered by the Company to such Investor. (6) as promptly as practicable after becoming aware of such event, notify each Investor who holds Registrable Securities being offered or sold of the issuance by the SEC of any stop order or other suspension of effectiveness of the Registration Statement relating thereto at the earliest possible time; (7) permit the Investors who hold Registrable Securities being included in a particular Registration Statement (or their designee) and a single firm of counsel designated as -35- selling stockholders' counsel by the Investors who hold a majority in interest of the Registrable Securities being offered for sale in such Registration Statement (and identified in writing to the Company by such Investors prior to the Closing Date, subject to change by notice to the Company from Investors who hold a majority in interest of the Registrable Securities being offered for sale) at such Investors' sole expense to review and have a reasonable opportunity to comment on such Registration Statement and all amendments and supplements thereto at least two Business Days (or such shorter period as may reasonably be specified by the Company) prior to their filing with the SEC; provided, however, that the Investors shall coordinate the exercise of their rights under this Section 8(b)(7) through Delta Opportunity Fund, Ltd. (8) make generally available to its security holders as soon as practical, but not later than 90 days after the close of the period covered thereby, an earning statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a 12-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of each Registration Statement; (9) make available for inspection by any Investor and any Inspector retained by any such Investor, at such Investor's sole expense, all Records as shall be reasonably necessary to enable such Investor to exercise its due diligence responsibility and cause the Company's and the Subsidiaries' officers, directors and employees to supply all information which such Investor or such Inspector may reasonably request for purposes of such due diligence; provided, however, that such Investor shall hold in confidence and shall not make any disclosure of any Record or other information which the Company determines in good faith to be confidential, and of which determination such Investor is so notified, unless (i) the disclosure of such Record is necessary to avoid or correct a misstatement or omission in any Registration Statement and a reasonable time prior to such disclosure the Investor shall have informed the Company of the need to so correct such misstatement or omission and the Company shall have failed to correct such misstatement or omission, (ii) the release of such Record is ordered pursuant to a subpoena or other order from a court or government body of competent jurisdiction or (iii) the information in such Record has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company shall not be required to disclose any confidential information in such Records to any Inspector until and unless such Inspector shall have entered into a confidentiality agreement with the Company with respect thereto, substantially in the form of this Section 8(b)(9), which agreement shall permit such Inspector to disclose Records to the Investor who has retained such Inspector. Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. The Company shall hold in confidence and shall not make any disclosure of information concerning an Investor provided to the Company pursuant to this Agreement unless (i) the disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is -36- ordered pursuant to a subpoena or other order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to such Investor and allow such Investor, at such Investor's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information; (10) use its best efforts to cause all the Registrable Securities covered by the Registration Statement as of each SEC Effective Date to be listed on Nasdaq (in the case of the Payment Shares, prior to the issuance thereof) or such other principal securities market on which securities of the same class or series issued by the Company are then listed or traded; (11) provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities at all times; (12) cooperate with the Investors who hold Registrable Securities being offered to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registrable Securities to be offered pursuant to the applicable Registration Statement and enable such certificates to be in such denominations or amounts as the Investors may reasonably request and registered in such names as the Investors may request; and, not later than the applicable SEC Effective Date, the Company shall (i) in the case of the Warrant Share Registration Statement, deliver to the Transfer Agent (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an instruction substantially in the form attached hereto as ANNEX VIII and (ii) cause legal counsel selected by the Company to deliver to the Investors whose Registrable Securities are included in such Registration Statement and to the Transfer Agent opinions of counsel, in the forms attached hereto as ANNEX IX and ANNEX X; (13) during the Registration Period, the Company shall not bid for or purchase any Common Stock or any right to purchase Common Stock or attempt to induce any Person to purchase any such security or right if such bid, purchase or attempt would in any way limit the right of the Investors to sell Registrable Securities by reason of the limitations set forth in Regulation M under the 1934 Act; and (14) take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of the Registrable Securities pursuant to the Registration Statement relating thereto. (C) OBLIGATIONS OF THE BUYER AND OTHER INVESTORS. In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: -37- (1) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company the Required Information and shall execute such documents in connection with such registration as the Company may reasonably request. Prior to the execution and delivery of this Agreement, the Buyer shall complete and deliver to the Company an Investor Questionnaire in the form attached hereto as ANNEX XI, which shall be deemed to provide all Required Information for purposes of the preparation and filing of the Warrant Share Registration Statement. At least ten Business Days prior to the first anticipated filing date of a Payment Share Registration Statement, the Company shall notify each Investor of the Required Information for inclusion of such Investor's Registrable Securities in such Registration Statement. If at least four Business Days prior to the SEC Filing Date for such Payment Share Registration Statement the Company has not received the Required Information from an Investor, the Company shall so notify such Investor at least three Business Days prior to the SEC Filing Date for such Payment Share Registration Statement and if at least one Business Day prior to the SEC Filing Date for such Payment Share Registration Statement the Company still has not received the Required Information from such Investor, then the Company may file such Registration Statement without including Registrable Securities of such Non-Responsive Investor; provided, however, that nothing herein shall constitute a waiver of the requirements of Section 1.4 of the Note; (2) Each Investor by such Investor's acceptance of the Registrable Securities agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing hereunder of the Registration Statement relating thereto, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from such Registration Statement; (3) Each Investor agrees that it will not effect any disposition of the Registrable Securities except as contemplated in the Registration Statement relating thereto or as otherwise is in compliance with the registration requirements of applicable securities laws and that it will promptly notify the Company of any material changes in the information set forth in any Registration Statement regarding such Investor or its plan of distribution; and each Investor agrees (a) to notify the Company in writing in the event that such Investor enters into any material agreement with a broker or a dealer for the sale of the Registrable Securities through a block trade, special offering, exchange distribution or a purchase by a broker or dealer and (b) in connection with such agreement, to provide to the Company in writing the information necessary to prepare any supplemental prospectus pursuant to Rule 424(c) under the 1933 Act which is required with respect to such transaction; (4) Each Investor acknowledges that there may occasionally be times as specified in Section 8(b)(5) or 8(b)(6) when the Company must suspend the use of the Prospectus until such time as an amendment to a particular Registration Statement has been filed by the Company and declared effective by the SEC, the Company has prepared a supplement to the Prospectus relating to such Registration Statement or the Company has filed an appropriate report -38- with the SEC pursuant to the 1934 Act. Each Investor hereby covenants that it will not sell any Registrable Securities pursuant to the Prospectus relating thereto during the period commencing at the time at which the Company gives such Investor notice of the suspension of the use of such Prospectus in accordance with Section 8(b)(5) or 8(b)(6) and ending at the time the Company gives such Investor notice that such Investor may thereafter effect sales pursuant to such Prospectus, or until the Company delivers to such Investor an amended or supplemented Prospectus; and (5) In connection with any sale of Registrable Securities which is made by an Investor pursuant to the Registration Statement relating thereto (A) if such sale is made through such Investor's broker, such Investor shall instruct such broker to deliver the applicable Prospectus to the purchaser (or the broker therefor) in connection with such sale and shall supply copies of such Prospectus to such broker; (B) if such sale is made in a transaction directly with a purchaser and not through the facilities of any securities exchange or market, such Investor shall deliver, or cause to be delivered, the applicable Prospectus to such purchaser; and (C) if such sale is made by any means other than those described in the immediately preceding clauses (A) and (B), such Investor shall otherwise use its reasonable best efforts to comply with the prospectus delivery requirements of the 1933 Act applicable to such sale. (D) RULE 144. With a view to making available to the Investors the benefits of Rule 144, the Company agrees: (1) so long as any Investor owns Registrable Securities, promptly upon request, to furnish to such Investor such information as may be necessary and otherwise reasonably to cooperate with such Investor to permit such Investor to sell Registrable Securities pursuant to Rule 144 without registration; and (2) if at any time the Company is not required to file reports with the SEC pursuant to Sections 13 or 15(d) of the 1934 Act, to use its best efforts to, upon the request of an Investor, to make publicly available other information so long as is necessary to permit publication by brokers and dealers of quotations for the Common Stock and sales of the Registrable Securities in accordance with Rule 15c2-11 under the 1934 Act. 9. INDEMNIFICATION AND CONTRIBUTION. (A) INDEMNIFICATION. (1) To the extent not prohibited by applicable law, the Company will indemnify and hold harmless each Indemnified Person against any Claims to which any of them may become subject under the 1933 Act, the 1934 Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any Violation or any of the transactions contemplated by this Agreement. Subject to the restrictions set forth in Section 9(a)(3) with respect to the number of legal counsel, the Company shall reimburse the Investors and each such controlling Person, promptly as such expenses are incurred and are due and payable, for any documented reasonable legal fees or -39- other documented and reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 9(a)(1) shall not apply to: (I) a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information relating to an Indemnified Person furnished in writing to the Company by such Indemnified Person or an underwriter for such Indemnified Person expressly for use in connection with the preparation of any Registration Statement or any such amendment thereof or supplement thereto; (II) any Claim arising out of or based on any statement or omission in any Prospectus, which statement or omission was corrected in any subsequent Prospectus that was delivered to the Indemnified Person prior to the pertinent sale or sales of Registrable Securities by such Indemnified Person; and (III) amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors. (2) In connection with each Registration Statement, each Investor agrees to indemnify and hold harmless, to the same extent and in the same manner set forth in Section 9(a)(1), each Indemnified Party against any Claim to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim arises out of or is based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement or any amendment thereof or supplement thereto; and such Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 9(a)(2) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor; provided, further, however, that the Investor shall be liable under this Section 9(a)(2) for only that amount of all Claims in the aggregate as does not exceed the amount by which the proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement exceeds the amount paid by such Investor for such Registrable Securities. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 9(a)(2) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in such preliminary prospectus was corrected on a timely basis in the related Prospectus, as then amended or supplemented. (3) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 9(a) of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 9(a), deliver to the indemnifying party a notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, -40- to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel reasonably satisfactory to the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding, in which case the indemnifying party shall not be responsible for more than one such separate counsel, and one local counsel in each jurisdiction in which an Action is pending, for all Indemnified Persons or Indemnified Parties, as the case may be. The failure to deliver notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 9(a), except to the extent that the indemnifying party is prejudiced in its ability to defend such action. The indemnification required by this Section 9(a) shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. (B) CONTRIBUTION. To the extent any indemnification by an indemnifying party as set forth in Section 9(a) above is applicable by its terms but is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 9(a) to the fullest extent permitted by law. In determining the amount of contribution to which the respective parties are entitled, there shall be considered the relative fault of each party, the parties' relative knowledge of and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any statement or omission and any other equitable considerations appropriate under the circumstances; provided, however, that (a) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 9(a), (b) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any other Person who was not guilty of such fraudulent misrepresentation and (c) the aggregate contribution by any seller of Registrable Securities shall be limited to the amount by which the proceeds received by such seller from the sale of such Registrable Securities exceeds the amount paid by such Investor for such Registrable Securities. (C) OTHER RIGHTS. The indemnification and contribution provided in this Section shall be in addition to any other rights and remedies available at law or in equity. 10. MISCELLANEOUS. (A) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. -41- (B) HEADINGS. The headings, captions and footers of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. (C) SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. (D) NOTICES. Any notices required or permitted to be given under the terms of this Agreement shall be in writing and shall be sent by mail, personal delivery, telephone line facsimile transmission or courier and shall be effective five days after being placed in the mail, if mailed, or upon receipt, if delivered personally, by telephone line facsimile transmission or by courier, in each case addressed to a party at such party's address (or telephone line facsimile transmission number) shown in the introductory paragraph or on the signature page of this Agreement or such other address (or telephone line facsimile transmission number) as a party shall have provided by notice to the other party in accordance with this provision. In the case of any notice to the Company, such notice shall be addressed to the Company at its address shown in the introductory paragraph of this Agreement, Attention: Vice President, Chief Financial Officer (telephone line facsimile number (610) 344-7563), and a copy shall also be given to: Morgan, Lewis & Bockius, LLP, 2000 One Logan Square, Philadelphia, Pennsylvania 19103, Attention: David R. King, Esq. (telephone line facsimile transmission number (215) 963-5299), and in the case of any notice to the Buyer, a copy shall be given to: Law Offices of Brian W Pusch, Penthouse Suite, 29 West 57th Street, New York, New York 10019 (telephone line facsimile transmission number (212) 980-7055), in each case with a copy to: Diaz & Altschul Capital, LLC, 745 Fifth Avenue, Suite 3001, New York, New York 10022 (telephone line facsimile transmission number (212) 751-5757). (E) COUNTERPARTS. This Agreement may be executed in counterparts and by the parties hereto on separate counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. A telephone line facsimile transmission of this Agreement bearing a signature on behalf of a party hereto shall be legal and binding on such party. Although this Agreement is dated as of the date first set forth above, the actual date of execution and delivery of this Agreement by each party is the date set forth below such party's signature on the signature page hereof. Any reference in this Agreement or in any of the documents executed and delivered by the parties hereto in connection herewith to (1) the date of execution and delivery of this Agreement by the Buyer shall be deemed a reference to the date set forth below the Buyer's signature on the signature page hereof, (2) the date of execution and delivery of this Agreement by the Company shall be deemed a reference to the date set forth below the Company's signature on the signature page hereof and (3) the date of execution and delivery of this Agreement, or the date of execution and delivery of this Agreement by the Buyer and the Company, shall be deemed a reference to the later of the dates set forth below the signatures of the parties on the signature page hereof. -42- (F) ENTIRE AGREEMENT; BENEFIT. This Agreement, including the Annexes, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties, or undertakings, other than those set forth or referred to herein. This Agreement, including the Annexes, supersedes all prior agreements and understandings, whether written or oral, between the parties hereto with respect to the subject matter hereof. This Agreement and the terms and provisions hereof are for the sole benefit of only the Company, the Buyer and their respective successors and permitted assigns. (G) WAIVER. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, or any course of dealing between the parties, shall not operate as a waiver thereof or an amendment hereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or exercise of any other right or power. (H) AMENDMENT. (1) No amendment, modification, waiver, discharge or termination of any provision of this Agreement on or prior to the Closing Date nor consent to any departure by the Buyer or the Company therefrom on or prior to the Closing Date shall in any event be effective unless the same shall be in writing and signed by the party to be charged with enforcement, and in any such case shall be effective only in the specific instance and for the purpose for which given. (2) No amendment, modification, waiver, discharge or termination of any provision of this Agreement after the Closing Date nor consent to any departure by the Company therefrom after the Closing Date shall in any event be effective unless the same shall be in writing and signed (x) by the Company if the Company is to be charged with enforcement or (y) by the Majority Holders, if the Buyer is to be charged with enforcement, and in any such case shall be effective only in the specific instance and for the purpose for which given. (3) No course of dealing between the parties hereto shall operate as an amendment of this Agreement. (I) FURTHER ASSURANCES. Each party to this Agreement will perform any and all acts and execute any and all documents as may be necessary and proper under the circumstances in order to accomplish the intents and purposes of this Agreement and to carry out its provisions. (J) ASSIGNMENT OF CERTAIN RIGHTS AND OBLIGATIONS. The rights of an Investor under Sections 5, 8, 9, and 10 of this Agreement shall be automatically assigned by such Investor to any transferee of all or any portion of such Investor's Registrable Securities (or all or any portion of the Note or the Warrants) only if: (1) such Investor agrees in writing with such transferee to -43- assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (2) the Company is, within a reasonable time after such transfer, furnished with notice of (A) the name and address of such transferee and (B) the securities with respect to which such rights and obligations are being transferred, (3) immediately following such transfer or assignment the further disposition of Registrable Securities by the transferee or assignee is restricted under the 1933 Act and applicable state securities laws, and (4) at or before the time the Company received the notice contemplated by clause (2) of this sentence the transferee agrees in writing with the Company to be bound by all of the provisions contained in Sections 5(a), 5(b), 8, 9, and 10 hereof. Upon any such transfer, the Company shall be obligated to such transferee to perform all of its covenants under Sections 5, 8, 9, and 10 of this Agreement as if such transferee were the Buyer. In connection with any such transfer the Company shall, at its sole cost and expense, promptly after such transfer take such actions as shall be reasonably acceptable to the transferring Investor and such transferee to assure that each Registration Statement and related Prospectus for which the transferring Investor is a selling stockholder are available for use by such transferee for sales of the Registrable Securities in respect of which such rights and obligations have been so transferred. Transfer of the Note shall be limited as provided therein and transfer of the Warrants shall be limited as provided therein. (K) EXPENSES. If the closing under this Agreement shall have occurred, all reasonable expenses incurred in connection with registrations, filings or qualifications pursuant to Sections 5(d), 5(e), 5(g) and 8 of this Agreement shall be paid by the Company, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees and the fees and disbursements of counsel for the Company and the Investors but excluding (a) fees and expenses of investment bankers retained by any Investor and (b) brokerage commissions incurred by any Investor. The Company shall pay on demand all expenses incurred by the Buyer after the Closing Date, including reasonable attorneys' fees and expenses, as a consequence of, or in connection with (1) the negotiation, preparation or execution of any amendment, modification or waiver of any of the Transaction Documents, (2) any default or breach of any of the Company's obligations set forth in any of the Transaction Documents, and (3) the enforcement or restructuring of any right of, including the collection of any payments due, the Buyer under any of the Transaction Documents, including any action or proceeding relating to such enforcement or any order, injunction or other process seeking to restrain the Company from paying any amount due the Buyer. Except as otherwise provided in this Section 10(k), each of the Company and the Buyer shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby. Nothing herein shall limit the rights of the Placement Agent under its Engagement Agreement with the Company. (L) TERMINATION. (1) The Buyer shall have the right to terminate this Agreement by giving notice to the Company at any time at or prior to the Closing Date if: (A) the Company shall have failed, refused, or been unable at or prior to the date of such termination of this Agreement to perform any of its obligations hereunder required to be performed prior to the time of such termination; -44- (B) any condition to the Buyer's obligations hereunder is not fulfilled at or prior to the time such condition is required to be satisfied; or (C) the closing shall not have occurred on a Closing Date on or before March 15, 1999, other than solely by reason of a breach of this Agreement by the Buyer. Any such termination shall be effective upon the giving of notice thereof by the Buyer. Upon such termination, the Buyer shall have no further obligation to the Company hereunder and the Company shall remain liable for any breach of this Agreement or the other documents contemplated hereby which occurred on or prior to the date of such termination. (2) The Company shall have the right to terminate this Agreement by giving notice to the Buyer at any time at or prior to the Closing Date if the closing shall not have occurred on a Closing Date on or before March 15, 1999, other than solely by reason of a breach of this Agreement by the Company, so long as the Company is not in breach of this Agreement at the time it gives such notice. Any such termination shall be effective upon the giving of notice thereof by the Company. Upon such termination, neither the Company nor the Buyer shall have any further obligation to one another hereunder. (M) SURVIVAL. The respective representations, warranties, covenants and agreements of the Company and the Buyer contained in this Agreement and the documents delivered in connection with this Agreement shall survive the execution and delivery of this Agreement and the closing hereunder and delivery of and payment for the Note and issuance of the Warrants, and shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Buyer or any Person controlling or acting on behalf of the Buyer or by the Company or any Person controlling or acting on behalf of the Company for a period ending on the later of (x) the date which is six years after the Closing Date and (y) the date which is two years after the Company shall have paid in full all amounts due from the Company under the Transaction Documents and performed in full all of its obligations under the Transaction Documents. (N) PUBLIC STATEMENTS, PRESS RELEASES, ETC. The Company and the Buyer shall have the right to approve before issuance any press releases or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of the Buyer, to make any press release or other public disclosure (other than in the Company's periodic and other reports filed with the SEC under the 1934 Act) with respect to such transactions as is required by applicable law or applicable requirements of any stock market on which securities of the Company are listed for trading (although the Buyer shall be consulted by the Company in connection with any such press release or other public disclosure prior to its release and shall be provided with a copy thereof). (O) CONSTRUCTION. The language used in this Agreement will be deemed to be -45- the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -46- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers or other representatives thereunto duly authorized on the respective dates set forth below their signatures hereto. Principal Amount: $ Purchase Price: $ CEPHALON, INC. By: ___________________________________ Name: Title: Date: [NAME OF BUYER] By: ___________________________________ Name: Title: Date: Address: Facsimile No.: -47- SCHEDULE 4(A) ------------- CERTAIN EQUITY INVESTMENTS -------------------------- The Company has a $500,000 investment in the Series B Preferred Stock of Eukarion, Inc., a Delaware corporation. 4(a)-49 SCHEDULE 4(C) ------------- CERTAIN ANTIDILUTION ADJUSTMENTS -------------------------------- None 4(c)-50 SCHEDULE 4(R) ------------- MORTGAGES, LIENS, SECURITY INTERESTS, ENCUMBRANCES, ETC. ----------------------------- 1. The $10,000,000 Sunnyday Loan from the Commonwealth of Pennsylvania and the $2,000,000 Pennsylvania Industrial Development Authority loan created a lien on all buildings and equipment of Cephalon, Inc. located in Pennsylvania. In addition, Variable Annuity Life Insurance Company holds a first mortgage on all of the buildings located in Pennsylvania. 2. GE Capital holds liens for various leased equipment of Cephalon, Inc. 3. Additionally, Siemens Rolm holds liens for various leased equipment of Cephalon, Inc. 4. Additionally, a Letter of Credit was issued by First Union in the face amount of $2,000,000 to secure the obligations under the $2,000,000 Pennsylvania Industrial Development Authority loan. The reimbursement of the obligations under the Letter is secured by treasury securities of First Union. 4(r)-51 EX-4.3.(B) 3 FORM OF REVENUE SHARING SENIOR SECURED NOTE EXHIBIT 4.3(B)* AMOUNT OF 11% REVENUE SHARING SENIOR SECURED NOTES DUE 2002
Registered Holder Amount of Note - ----------------- -------------- Delta Opportunity Fund, Ltd. $7,250,000 Delta Opportunity (Institutional), LLC $2,750,000 DLJ Capital Corp. $44,342 DLJ ESC II, L.P. $446,701 The Kaufmann Fund, Inc. $10,000,000 Sprout Capital VIII, L.P. $5,114,415 Sprout Growth II, L.P. $4,087,677 Sprout Venture Capital, L.P. $306,865
ANNEX I TO NOTE PURCHASE AGREEMENT THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THE ISSUANCE TO THE HOLDER OF THE SHARES OF COMMON STOCK ISSUABLE IN PARTIAL PAYMENT OF PRINCIPAL OR THE REDEMPTION PRICE OF THIS NOTE AND IN PAYMENT OF INTEREST ON THIS NOTE ARE NOT COVERED BY A REGISTRATION STATEMENT UNDER THE 1933 ACT. PURSUANT TO THE NOTE PURCHASE AGREEMENT, THIS NOTE HAS BEEN ACQUIRED, AND SUCH SHARES MUST BE ACQUIRED, FOR INVESTMENT ONLY AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION OF THE RESALE THEREOF UNDER THE 1933 ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY IN FORM, SCOPE AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. CEPHALON, INC. 11% REVENUE SHARING SENIOR SECURED NOTE DUE 2002 No. ____ $________ New York, New York March 1, 1999 FOR VALUE RECEIVED, CEPHALON, INC., a Delaware corporation (hereinafter called the "Company"), hereby promises to pay to [NAME], [ADDRESS], or registered assigns (the "Holder"), or order, the sum of ______________ Dollars ($________________), on the Maturity Date, and to pay interest on the unpaid principal balance hereof at the Applicable Rate from the date hereof, until the same becomes due and payable, whether at maturity or upon acceleration or by repurchase in accordance with the terms hereof or otherwise. Any amount, including, without limitation, principal of or interest on this Note or the Optional Redemption Price, the Repurchase Price or the Registration Repurchase Price, that is payable under this Note that is not paid when due shall bear interest at the Default Rate from the due date thereof until the same is paid ("Default Interest"). Regular interest shall be payable in arrears on each Interest Payment Date, commencing on June 1, 1999, on the principal amount outstanding on such date. Regular interest on this Note shall be computed on the basis of a 360-day year of 12 30-day months and actual days elapsed. No regular interest shall be payable on an Interest Payment Date on any portion of the principal amount of this Note which shall have been redeemed prior to such Interest Payment Date so long as the Company shall have complied in full with its obligations with respect to such redemption. All payments of principal of and premium, if any, interest, and other amounts on this Note shall be made in lawful money of the United States of America, or, at the option of the * Certain portions of this exhibit have been omitted based upon a request for confidential treatment that has been filed with the Commission. The omitted portions have been filed separately with the Commission. -1- Company and subject to the provisions of this Note, interest payable on the Interest Payment Dates may be paid in whole or in part in fully paid and nonassessable shares of Common Stock or, in accordance with Section 1.4, the Company is entitled under certain circumstances to pay a portion of the principal of this Note in shares of Common Stock. All cash payments shall be made by wire transfer of immediately available funds to such account as the Holder may from time to time designate by written notice in accordance with the provisions of this Note. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a Business Day, the same shall instead be due on the next succeeding day which is a Business Day and, in the case of any Interest Payment Date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of interest due on such date. Certain capitalized terms used in this Note are defined in Article VIII. The obligations of the Company under this Note shall rank in right of payment on a parity with all other unsubordinated obligations of the Company for indebtedness for borrowed money or the purchase price of property. This Note is issued pursuant to the Note Purchase Agreement and the Holder of this Note and this Note are subject to the terms and entitled to the benefits of the Note Purchase Agreement. This Note is entitled to the benefits of the Security Agreement and the Patent and Trademark Security Agreement. The following terms shall apply to this Note: ARTICLE I CERTAIN PAYMENTS IN COMMON STOCK; OPTIONAL REDEMPTION 1.1 ISSUANCE OF COMMON STOCK IN LIEU OF CASH INTEREST. (a) If the ------------------------------------------------- Company exercises its option to make a payment of interest on this Note wholly or partly in Common Stock (herein sometimes called the "Share Interest Payment Option"), the issuance of Interest Payment Shares upon such exercise of the Share Interest Payment Option shall have been authorized by the Board of Directors of the Company. (b) The Company shall not be permitted to exercise the Share Interest Payment Option with respect to any payment of interest on this Note if: (i) the number of shares of Common Stock authorized, unissued and unreserved for all purposes, or held in the Company's treasury, is insufficient to pay the portion of such interest to be paid in Common Stock; (ii) the issuance or delivery of Interest Payment Shares or the public resale of such Interest Payment Shares by the Holder would require registration or filing with or -2- approval of any governmental authority under any law or regulation, and such registration, filing or approval has not been effected or obtained or is not in effect or on such Interest Payment Date or the date the Company delivers the Interest Payment Shares to the Holder the Interest Share Registration Statement is unavailable for use by the Holder for the resale of the Interest Payment Shares; (iii) the outstanding shares of Common Stock are neither (A) listed or admitted for trading on a national securities exchange nor (B) quoted on Nasdaq; or the Interest Payment Shares shall not at the time of issuance have been authorized for listing, upon official notice of issuance, on the principal securities exchange on which the Common Stock is then listed and traded; (iv) the Interest Share Price for the Interest Payment Shares is less than the par value of the Common Stock; or (v) an Event of Default has occurred and is continuing on the date the Company makes such election or on the applicable Interest Payment Date. (c) The Company may exercise its right to elect the Share Interest Payment Option with respect to any Interest Payment Date only by giving notice of such election to the Holder not less than 24 or more than 28 Trading Days prior to such Interest Payment Date, which notice shall state the percentage of the interest payable on such Interest Payment Date which is to be paid in Interest Payment Shares. The Company shall have the right to elect the Share Interest Payment Option with respect to this Note only if the Company also elects the similar option which it has with respect to the Other Notes for the interest due thereon on the date which is such Interest Payment Date and in each such case pro rata among this Note and the Other Notes, based on the amounts of interest due on such date hereon and thereon. If the Company elects the Share Interest Payment Option with respect to a particular Interest Payment Date, the Company shall issue to the Holder in respect of such Interest Payment Date the aggregate number of whole shares of Common Stock determined by dividing the per share Interest Share Price of the Common Stock on the applicable Interest Payment Date into an amount equal to 102% of the total amount of lawful money of the United States of America which the Holder would receive if the aggregate amount of interest on this Note which is being paid in Common Stock were being paid in such lawful money. If the Company elects the Share Interest Payment Option with respect to an Interest Payment Date, the Interest Payment Shares for such Interest Payment Date shall become issuable on such Interest Payment Date and the Company shall deliver, or cause to be delivered, the appropriate number of shares of Common Stock to the Holder within three Trading Days after the applicable Interest Payment Date. If in any case the Company shall fail to deliver or cause to be delivered such number of shares of Common Stock to the Holder within such period of three Trading Days, then in addition to any other liabilities the Company may have hereunder and under applicable law (1) the Company shall pay or reimburse the Holder on demand for all out-of-pocket expenses, including, without limitation, reasonable fees and expenses of legal counsel, incurred by the Holder as a result of such failure, (2) if as a result of such failure the Holder shall suffer any direct damages or liabilities from such -3- failure (including, without limitation, margin interest and the cost of covering a purchase (whether by the Holder or the Holder's securities broker) or borrowing of shares of Common Stock by the Holder for purposes of settling any trade involving a sale of shares of Common Stock made by the Holder during the period beginning on the date the Company notified the Holder of the Company's election of the Share Interest Payment Option and ending on the date the Company delivers or causes to be delivered to the Holder the shares of Common Stock issuable in respect thereof), then the Company shall upon demand of the Holder pay to the Holder an amount equal to the actual direct, out-of-pocket damages and liabilities suffered by the Holder by reason thereof which the Holder documents to the reasonable satisfaction of the Company, and (3) the Holder may by written notice (which may be given by mail, courier, personal service or telephone line facsimile transmission) or oral notice (promptly confirmed in writing), given at any time prior to delivery to the Holder of the shares of Common Stock issuable in connection with such exercise of the Share Interest Payment Option, require payment in cash of the interest in respect of which the Company exercised the Share Interest Payment Option, in which case the amount of such interest shall be immediately due and payable, with Default Interest thereon from the applicable Interest Payment Date until paid in full and the Company shall not be obligated or entitled to issue such Interest Payment Shares in respect of such Interest Payment Date. Notwithstanding the foregoing the Company shall not be liable to the Holder under clause (2) of the immediately preceding sentence to the extent the failure of the Company to deliver or to cause to be delivered such shares of Common Stock results from fire, flood, storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving facilities of a common carrier, acts of God, or any similar event outside the control of the Company (it being understood that the action or failure to act of the Transfer Agent shall not be deemed an event outside the control of the Company except to the extent resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving facilities of a common carrier, acts of God, the bankruptcy, liquidation or reorganization of the Transfer Agent under any bankruptcy, insolvency or other similar law or any similar event outside the control of the Transfer Agent). The Holder shall notify the Company in writing (or by telephone conversation, confirmed in writing) as promptly as practicable following the third Trading Day after such Interest Payment Date if the Holder becomes aware that shares of Common Stock so issuable have not been received as provided herein. If the Company shall have exercised the Share Interest Payment Option with respect to a particular Interest Payment Date and either (1) the Company shall notify the Holder on or after such Interest Payment Date that the Interest Payment Shares might not be delivered within three Trading Days after such Interest Payment Date or (2) the Holder learns after the date which is three Trading Days after such Interest Payment Date that the Holder has not received such Interest Payment Shares, then, without releasing the Company of its obligations with respect thereto, from and after the next succeeding Trading Day the Holder shall make reasonable efforts not to sell shares of Common Stock in anticipation of receipt of such Interest Payment Shares in a manner which is likely to increase materially the liability of the Company under clause (2) of the second preceding sentence. No fractional shares of Common Stock shall be issued in payment of interest on this Note. In lieu thereof, the Company may, at its option, issue a number of shares of Common Stock which reflects a rounding up to the next whole number or may pay lawful money of the United States of America in lieu of issuance of such fractional share. -4- (d) If the Company elects the Share Interest Payment Option with respect to a payment of interest on this Note with respect to a particular Interest Payment Date, the Company shall deliver to the Holder, on or prior to the date on which Interest Payment Shares for such payment of interest on this Note are to be received by the Holder, a Company Certificate setting forth (i) the total amount of the cash interest payment to which the Holder is entitled, (ii) the portion of such interest payment being made in Interest Payment Shares and the amount which is 102% thereof, (iii) the number of Interest Payment Shares allocable to such payment, as calculated pursuant to this Section 1.1, (iv) any rounding adjustment to such number or any payment necessary to be made pursuant to Section 1.1(c), (v) a brief statement of the facts requiring such adjustment, and (vi) a brief statement that none of the conditions set forth in Section 1.1(b) has occurred and is existing and that all of the requirements of this Section 1.1 have been met. The Interest Payment Shares shall be duly issued in the name of the Holder or its nominee. Such Company Certificate shall be conclusive evidence of the correctness of the calculation of the number of Interest Payment Shares allocable to the payments to which such Company Certificate relates and of any adjustments to such number made pursuant to this Section 1.1 in the absence of manifest error. On or before the pertinent payment date, the Company shall issue, or cause the transfer agent for the Common Stock to prepare and issue, the Interest Payment Shares in the name of the Holder or its nominee before being so delivered by the Company on the payment date. (e) The Interest Payment Shares, when issued pursuant to and in compliance with this Section 1.1, shall be, and for all purposes shall be deemed to be, validly issued, fully paid and nonassessable shares of Common Stock; the issuance and delivery thereof is in all respects hereby authorized; and the issuance thereof, together with lawful money of the United States of America, if any, paid in lieu of fractional shares of Common Stock, will be, and for all purposes shall be deemed to be, in full discharge and satisfaction of the Company's obligation to pay the interest on this Note to which such Interest Payment Shares relate. 1.2 OPTIONAL REDEMPTION. (a) At any time during the Optional ------------------- Redemption Period, the Company shall have the right to redeem at any one time all or from time to time any part of the outstanding principal amount of this Note at the Optional Redemption Price pursuant to this Section 1.2 on any Optional Redemption Date, so long as (x) on the date an Optional Redemption Notice is given and at all times to and including the applicable Optional Redemption Date, no Event of Default and no event which, with notice or passage of time, or both, would become an Event of Default has occurred and is continuing (unless the requirements of this clause (x) will be satisfied immediately after the applicable Optional Redemption Date and the Company shall furnish to the Holder Company Certificates to such effect on the date the applicable Optional Redemption Notice is given to the Holder and on the applicable Optional Redemption Date), (y) on the date an Optional Redemption Notice is given and at all times to and including the applicable Optional Redemption Date no Repurchase Event or Registration Repurchase Event has occurred with respect to which the Holder has the right to exercise repurchase rights pursuant to Sections 5.1 and 5.2 or Section 5.3 or with respect to which the Holder has exercised such repurchase rights and the Repurchase Price or the Registration Repurchase Price, as the case may be, has not been paid to the Holder and no event which, with notice or passage of time, or both, would become a -5- Repurchase Event has occurred and is continuing, and (z) on the date an Optional Redemption Notice is given, the Company has funds available to pay the Optional Redemption Price. In order to exercise its right of redemption under this Section 1.2, the Company shall give an Optional Redemption Notice to the Holder not less than 20 days or more than 30 days prior to the Optional Redemption Date stating that: (1) the Company is exercising its right to redeem a specified portion of this Note in accordance with this Section 1.2, (2) the principal amount of this Note to be redeemed, (3) the Optional Redemption Price and (4) the Optional Redemption Date. On the applicable Optional Redemption Date (or such later date as the Holder surrenders this Note to the Company) the Company shall pay to or upon the order of the Holder, by wire transfer of immediately available funds to such account as shall be specified for such purpose by the Holder at least one Business Day prior to the Optional Redemption Date, an amount equal to the Optional Redemption Price of the portion (which may be all) of this Note to be redeemed. (b) The Company shall not be entitled to give an Optional Redemption Notice or to redeem any portion of this Note with respect to which the Company has given the Holder notice pursuant to Section 1.4 that the Company is exercising the Share Principal Payment Option and to which exercise the Holder has consented. (c) Any redemption of this Note pursuant to this Section 1.2 shall be made at the same time as a redemption by the Company of a pro rata portion (based on the outstanding principal amounts) of the Other Notes and in each such case the aggregate principal amount of this Note and the Other Notes to be so redeemed shall be at least $5,000,000.00 or such lesser aggregate principal amount of this Note and the Other Notes as shall remain outstanding at the time an Optional Redemption Notice is given. The Company shall not redeem any of the Other Notes pursuant to the provisions thereof similar to this Section 1.2 or repurchase or otherwise acquire any of the Other Notes (other than a mandatory redemption pursuant to provisions of the Other Notes comparable to Article V) unless the Company offers simultaneously to redeem, repurchase or otherwise acquire a pro rata portion (based on outstanding principal amount) of this Note for cash at the same unit price as the Other Note or Other Notes. 1.3 NO PREPAYMENT. Except as specifically provided in Sections 1.2 ------------- and 6.2, this Note may not be prepaid, redeemed or repurchased at the option of the Company prior to the Maturity Date. The Company shall not repurchase or otherwise acquire any of the Other Notes unless the Company offers simultaneously to redeem, repurchase or otherwise acquire a pro rata portion of this Note for cash at the same price per unit of outstanding principal amount as the Other Note or Other Notes. Nothing in this Section 1.3 shall limit the Company's rights under Article VII. 1.4 ISSUANCE OF COMMON STOCK IN LIEU OF CASH PAYMENT OF PRINCIPAL OR ---------------------------------------------------------------- REDEMPTION PREMIUM. (a) The Company shall have the right to elect to pay (1) a - ------------------ portion of the principal amount of this Note on the Maturity Date or (2) a portion of the Optional Redemption Price payable upon a redemption of this Note in accordance with Section 1.2, in either such case in shares of Common Stock, if the Holder consents to such election (herein sometimes called the "Share Principal Payment Option"). If the Company elects the Share Principal Payment Option, the -6- issuance of Principal Payment Shares upon the exercise of the Share Principal Payment Option shall have been authorized by the Board of Directors of the Company. Such election, once made, shall be irrevocable. (b) The Company shall not be entitled to exercise the Share Principal Payment Option with respect to payment of a portion of this principal Note if: (i) the number of shares of Common Stock authorized, unissued, and unreserved for all purposes, or held in the Company's treasury, is insufficient to pay the portion of such principal to be paid in Common Stock; (ii) the issuance or delivery of Principal Payment Shares or the public resale of such Principal Payment Shares by the Holder would require registration or filing with or approval of any governmental authority under any law or regulation, and such registration, filing or approval has not been effected or obtained or is not in effect or on the Maturity Date the Payment Share Registration Statement is unavailable for use by the Holder for the resale of the Principal Payment Shares; (iii) the outstanding shares of Common Stock are neither (A) listed or admitted to trading on a national securities exchange nor (B) quoted on Nasdaq; or the Principal Payment Shares shall not at the time of issuance have been authorized for listing, upon official notice of issuance, on the principal securities exchange on which the Common Stock is then listed and traded; (iv) the Payment Share Price for the Principal Payment Shares is less than the par value of the Common Stock; or (v) an Event of Default has occurred and is continuing on the date the Company makes such election or on the Maturity Date. (c) The Company may exercise its right to elect the Share Principal Payment Option only by giving notice of such election to the Holder at least 100 Trading Days prior to the Maturity Date or the applicable Optional Redemption Date, as the case may be. The Company shall have the right to elect the Share Principal Payment Option with respect to a portion of the principal amount of this Note that is due on the Maturity Date that is equal to not more than 50 percent of the original principal amount of this Note (or, if less than 50 percent of the original principal amount of this Note is outstanding, up to the outstanding principal amount of this Note). The Company shall have the right to elect the Share Principal Payment Option with respect to a portion of the Optional Redemption Price equal to not more than 20 percent of the principal amount of this Note to be redeemed on any Optional Redemption Date. In each such case, the Company shall have the right to elect the Share Principal Payment Option with respect to this Note only if: -7- (i) the Company also elects the similar option which it has with respect to the Other Notes for the principal thereof due on the date which is the Maturity Date or a portion of the redemption price thereof which is payable on the applicable Optional Redemption Date, as the case may be, and in each such case pro rata among this Note and the Other Notes, based on the outstanding principal amounts hereof and thereof; and (ii) the Holder in its sole discretion consents to such election with respect to this Note by notice to the Company within ten Trading Days after the Company makes such election. If the Company elects the Share Principal Payment Option and the Holder so consents, the Company shall issue and deliver, or cause to be delivered to the Holder on or before the Maturity Date or the applicable Optional Redemption Date, as the case may be, the aggregate number of whole shares of Common Stock determined by dividing the per share Payment Share Price on the Maturity Date or the applicable Optional Redemption Date, as the case may be, into an amount equal to 105% of the total amount of lawful money of the United States of America which the Holder would receive if the aggregate amount of principal of this Note or the portion of the Optional Redemption Price of this Note, as the case may be, which is being paid in Common Stock were being paid in such lawful money. If the Company shall fail to deliver or cause to be delivered such number of shares of Common Stock to the Holder on or prior to the Maturity Date, or the applicable Optional Redemption Date, as the case may be, then in addition to any other liabilities the Company may have hereunder and under applicable law (1) the Company shall pay or reimburse the Holder on demand for all out-of- pocket expenses, including, without limitation, reasonable fees and expenses of legal counsel, incurred by the Holder as a result of such failure, (2) if as a result of such failure the Holder shall suffer any direct damages or liabilities from such failure (including, without limitation, margin interest and the cost of covering a purchase (whether by the Holder or the Holder's securities broker) or borrowing of shares of Common Stock by the Holder for purposes of settling any trade involving a sale of shares of Common Stock made by the Holder during the period beginning on the date the Company notified the Holder of the Company's election of the Share Principal Payment Option and ending on the Maturity Date or the applicable Optional Redemption Date, as the case may be), then the Company shall upon demand of the Holder pay to the Holder an amount equal to the actual direct, out-of-pocket damages and liabilities suffered by the Holder by reason thereof which the Holder documents to the reasonable satisfaction of the Company, and (3) the Holder may by written notice (which may be given by mail, courier, personal service or telephone line facsimile transmission) or oral notice (promptly confirmed in writing), given at any time prior to delivery to the Holder of the shares of Common Stock issuable in connection with such exercise of the Share Principal Payment Option, require payment in cash of the portion of the principal amount of this Note in respect of which the Company exercised the Share Principal Payment Option, in which case the amount of such principal shall be immediately due and payable, with Default Interest thereon from the Maturity Date or the applicable Optional Redemption Date, as the case may be, until paid in full and the Company shall not be obligated or entitled to issue such Principal Payment Shares in respect of such payment of principal or the Optional Redemption Date, as the case may be. Notwithstanding the foregoing the Company shall not be liable to the -8- Holder under clause (2) of the immediately preceding sentence to the extent the failure of the Company to deliver or to cause to be delivered such shares of Common Stock results from fire, flood, storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving facilities of a common carrier, acts of God, or any similar event outside the control of the Company (it being understood that the action or failure to act of the Transfer Agent shall not be deemed an event outside the control of the Company except to the extent resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving facilities of a common carrier, acts of God, the bankruptcy, liquidation or reorganization of the Transfer Agent under any bankruptcy, insolvency or other similar law or any similar event outside the control of the Transfer Agent). The Holder shall notify the Company in writing (or by telephone conversation, confirmed in writing) as promptly as practicable following the Maturity Date or the applicable Optional Redemption Date, as the case may be, if the Holder becomes aware that shares of Common Stock so issuable have not been received as provided herein. If the Company shall have exercised the Share Principal Payment Option with respect to a particular payment and either (1) the Company shall notify the Holder that such Principal Payment Shares might not be delivered when due or (2) the Holder learns after the date on which such Principal Payment Shares are due to be delivered to such Holder that the Holder has not received such Principal Payment Shares, then, without releasing the Company of its obligations with respect thereto (x) from and after the next succeeding Trading Day the Holder shall make reasonable efforts not to sell shares of Common Stock in anticipation of receipt of such Principal Payment Shares is a manner which is likely to increase materially the liability of the Company under clause (2) of the second preceding sentence and (y) if the Company so requests, the Holder will advise the Company of the Holder's open trading position in the Common Stock with respect to which the Holder expects receipt of such Principal Payment Shares and will take such action as may be directed by the Company to close such open trading position (subject to prevailing market conditions) so long as the Company pays in advance, or makes provision for such payment which is satisfactory to the Holder in its sole discretion, of all amounts required by the Holder to assure that the Holder will not suffer any economic or trading loss by reason of taking such action. No fractional shares of Common Stock shall be issued in payment of principal or any portion of the Optional Redemption Price of this Note. In lieu thereof, the Company may, at its option, issue a number of shares of Common Stock which reflects a rounding up to the next whole number or may pay lawful money of the United States of America in lieu of issuance of such fractional share. (d) (1) If the Company shall be entitled to issue Principal Payment Shares on the Maturity Date, the Company shall deliver to the Holder, on or prior to the Maturity Date: (A) a Company Certificate setting forth (i) the total amount of principal to which the Holder is entitled, (ii) the portion of the principal of this Note being paid in Principal Payment Shares and the amount which is 105% thereof, (iii) the number of Principal Payment Shares allocable to the payment of such amount, as calculated pursuant to this Section 1.4, (iv) any rounding adjustment to such number or any payment necessary to be made pursuant to Section 1.1(c), (v) a brief statement of the facts requiring such adjustment, and (vi) a brief statement that none of the conditions set forth in Section 1.4(b) has occurred and is existing and that all of the requirements of this Section 1.4 have been met; and -9- (B) an opinion of counsel selected by the Company and reasonably acceptable to the Majority Holders to the effect set forth in EXHIBIT B. (2) If the Company shall be entitled to issue Principal Payment Shares in partial payment of the Optional Redemption Price, the Company shall deliver to the Holder, on or prior to the applicable Optional Redemption Date: (A) a Company Certificate setting forth (i) the total amount of principal being redeemed on such Optional Redemption Date, (ii) the portion of the premium on such principal amount of this Note being paid in Principal Payment Shares and the amount which is 105% thereof, (iii) the number of Principal Payment Shares allocable to the payment of such amount, as calculated pursuant to this Section 1.4, (iv) any rounding adjustment to such number or any payment necessary to be made pursuant to Section 1.1(c), (v) a brief statement of the facts requiring such adjustment, and (vi) a brief statement that none of the conditions set forth in Section 1.4(b) has occurred and is existing and that all of the requirements of this Section 1.4 have been met; and (B) an opinion of counsel selected by the Company and reasonably acceptable to the Majority Holders to the effect set forth in EXHIBIT B. (3) The Principal Payment Shares shall be duly issued in the name of the Holder or its nominee. Such Company Certificate shall be conclusive evidence of the correctness of the calculation of the number of Principal Payment Shares and of any adjustments to such number made pursuant to this Section 1.4 in the absence of manifest error. On or before the Maturity Date or the applicable Optional Redemption Date, as the case may be, the Company shall issue, or cause the Transfer Agent for the Common Stock to prepare and issue, the Principal Payment Shares in the name of the Holder or its nominee before being so delivered by the Company on the Maturity Date or the applicable Optional Redemption Date, as the case may be. (f) The Principal Payment Shares, when issued pursuant to and in compliance with this Section 1.4, shall be, and for all purposes shall be deemed to be, validly issued, fully paid and nonassessable shares of Common Stock; the issuance and delivery thereof is in all respects hereby authorized; and the issuance thereof, together with lawful money of the United States of America, if any, paid in lieu of fractional shares of Common Stock, will be, and for all purposes shall be deemed to be, in full discharge and satisfaction of the Company's obligation to pay the portion of the principal amount of this Note to which such Principal Payment Shares relate or the portion of the Optional Redemption Price of this Note to which such Principal Payment Shares relate, as the case may be. (g) Notwithstanding any other provision hereof, if the Aggregate Share Payment Amount exceeds the Share Payment Threshold, then the Holder shall have the right, exercisable -10- by notice given to the Company on or before the Business Day immediately preceding the Maturity Date, to receive payment in cash rather than Principal Payment Shares on the Maturity Date of all or any portion of the Holder's pro rata (based on the portion of the principal amount of this Note and the Other Notes which the Company has elected to pay in shares of Common Stock and as to which the holders have consented) portion of such excess. ARTICLE II ADDITIONAL INTEREST 2.1 RIGHT TO ADDITIONAL INTEREST. In addition to all other amounts ---------------------------- provided in this Note and the Other Notes to be paid by the Company, the Holder and the registered holders of the Other Notes shall be entitled to payments based on a portion of the Net Revenues of the Products and the Competitive Products in the Territory during the Payment Period. The amount of such payments based on a portion of such Net Revenues of the Products and the Competitive Products during any Determination Period shall be the product obtained by multiplying (x) an amount equal to the Net Revenues from the Products and the Competitive Products in the Territory during such Determination Period times (y) the Payment Percentage in effect during such Determination Period, with each change therein during such Determination Period being given effect (such product, the "Noteholder Payment Amount"). Based on the U.S. federal income tax laws in effect on the Issuance Date, the Company intends to treat the Noteholder Payment Amounts as additional interest on this Note for U.S. federal income tax purposes. The Company shall remain obligated to make payments to the Holder pursuant to this Article II notwithstanding the payment or redemption of all or any portion of this Note. 2.2 CALCULATION OF NET REVENUES. The Company shall maintain in --------------------------- reasonable and adequate detail records of all components of and adjustments made in determining Net Revenues of the Products and the Competitive Products in the Territory during each Determination Period. Within 45 days after the end of each Determination Period, the Company shall (a) furnish to the Holder a Company Certificate setting forth (x) in reasonable detail for each Product or Competitive Product for which there were sales in the Territory during such Determination Period the amounts of (1) gross sales (excluding sales to Affiliates), (2) prompt payment and other discounts, (3) transportation and related insurance charges, (4) returns, bad debt and other allowances, (5) taxes deducted from gross sales in determining Net Revenues, (6) distributors', consignees' and wholesalers' fees and commissions, and (7) Net Revenues, in each such case of the preceding clauses (1) through (7) for such Determination Period, (y) the percentage and the amount, in currency of the United States of America, of such Net Revenues to be paid to the Holder and the holders of the Other Notes pursuant to Article II hereof and thereof, identifying each such Person, and (z) a statement that the information set forth in such Company Certificate is true and correct and (b) pay to the Holder an amount equal to the portion of the Noteholder Payment Amount for such Determination Period to which the Holder is entitled. -11- 2.3 ALLOCATION OF NOTEHOLDER PAYMENT AMOUNT. The Noteholder Payment --------------------------------------- Amount for any Determination Period shall be allocated among the Persons (including the Holder) who were registered holders of this Note and the Other Notes at any time during such Determination Period pro rata based on the principal amounts held by each and the portion of such Determination Period during which such registered holders held this Note and the Other Notes. 2.4 RECORDS, INSPECTION, ETC. The Holder shall have the right, ------------------------ exercisable from time to time, to examine, or to have its representatives examine, the relevant books of account and records of the Company, its Subsidiaries and their respective Affiliates upon reasonable prior notice and during normal business hours, to confirm the accuracy of the statements and information provided to the Holder pursuant to this Article II and the amounts of the payments required to be made by the Company to the Holder pursuant to this Article II. The Holder shall have the right from time to time to retain a firm of independent public accountants to examine the books of account and records of the Company and its Subsidiaries for any one or more Determination Periods for purposes of confirming the accuracy of such statements, information and amounts. The cost of such accountants shall be paid by the Holder unless (i) the amount of the Noteholder Payment Amount as determined by such accountants for any Determination Period was more than $25,000 greater than the amount thereof set forth in the Company Certificate furnished to the Holder for such Determination Period pursuant to Section 2.2 or (ii) the Company shall have failed to furnish a Company Certificate for such Determination Period to the Holder pursuant to Section 2.2 on or before the due date for such Company Certificate. The Company shall not be obligated to maintain the books and records referred to in this section for more than three years after the end of the Payment Period. 2.5 CERTAIN TRANSFERS OF PRODUCT OR PRODUCT RIGHTS. The Company ---------------------------------------------- shall not sell, assign, transfer or convey (including, without limitation, by means of a license) any Product or Competitive Product as an entirety or substantially as an entirety (except to the extent unrelated to sales and marketing of the Products and Competitive Products in the Territory), or any of its rights relating to any Product or Competitive Product in the Territory unless (1) such transfer is expressly made subject to the lien, security interest and other rights of the Holder and the holders of the Other Notes under the Transaction Documents, (2) such transferee shall execute and deliver such documents and instruments as shall be reasonably satisfactory to the Majority Holders to give effect to the preceding clause (1), and (3) such transferee shall by written instrument reasonably satisfactory to the Majority Holders expressly assume, jointly and severally with the Company, all obligations for the due and punctual payment and performance of all of the Company's obligations under this Article II and under the Security Agreement and Patent and Trademark Security Agreement; provided, however, that the provisions of this clause (3) only shall be inapplicable to any license or sublicense by the Company of its rights with respect to a Product or Competitive Product with respect to the Territory to a Person in connection with a co-marketing arrangement between the Company and such Person, so long as all revenues from sales of such Product or Competitive Product by such Person are included in the computation of Net Revenues for purposes of determining the Noteholder Payment Amount, whether or not such revenues are received by the -12- Company or reflected in the Company's books, records or financial statements. 2.6 NO REDEMPTION. The obligations of the Company under this Article ------------- II shall not be extinguished or eliminated by any redemption of this Note pursuant to Section 1.2, any acceleration or payment of this Note upon the occurrence of an Event of Default, any exercise by the Holder of repurchase rights under Article V or any prepayment of this Note in accordance with Section 6.2. ARTICLE III CERTAIN COVENANTS So long as the Company shall have any obligation under this Note, unless otherwise consented to in advance by the Majority Holders: 3.1 LIMITATIONS ON CERTAIN INDEBTEDNESS. The Company will not ----------------------------------- itself, and will not permit any Subsidiary to, create, assume, incur or in any manner become liable in respect of, including, without limitation, by reason of any business combination transaction (all of which are referred to herein as "incurring"), any Indebtedness other than Permitted Indebtedness. 3.2 MAINTENANCE OF CASH, CASH EQUIVALENT AND ELIGIBLE INVESTMENT ------------------------------------------------------------ BALANCES. The Company shall maintain Cash, Cash Equivalent and Eligible - -------- Investment Balances during the following periods at least equal to the amounts set forth below: Period Amount ------ ------ Issuance Date through December 31,1999 $40 million January 1, 2000 and thereafter 30 million The Company's Cash, Cash Equivalent and Eligible Investment Balances shall be determined as of the end of each calendar quarter. Within fifteen days after the end of each calendar quarter, the Company shall furnish to the Holder a Company Certificate setting forth the amount of the Company's Cash, Cash Equivalent and Eligible Investment Balances as of the end of such calendar quarter. If at the end of any calendar quarter the Company shall have less than the required amount of Cash, Cash Equivalents and Eligible Investment Balances, then the Company shall not be deemed to be in violation of this Section 3.2 unless such insufficiency exists on the date which is 30 days after the end of such calendar quarter, so long as during such 30-day period the Company is making bona fide efforts to cure such insufficiency. -13- 3.3 PAYMENT OF OBLIGATIONS. The Company will pay and discharge, and ---------------------- will cause each Significant Subsidiary to pay and discharge, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings. 3.4 MAINTENANCE OF PROPERTY; INSURANCE. (a) The Company will keep, ---------------------------------- and will cause each Significant Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Company will maintain, and will cause each Significant Subsidiary to maintain, with financially sound and responsible insurance companies, insurance, including, without limitation, products liability insurance relating to the Product, in at least such amounts and against such risks as is reasonably adequate for the conduct of their respective businesses and the value of their respective properties. 3.5 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Company ------------------------------------------------ will continue, and will cause each Significant Subsidiary to continue, to engage in business of the same general type as now conducted by the Company, and will preserve, renew and keep in full force and effect, and will cause each Significant Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business and except for any Subsidiary which is not involved in the manufacture, sale or marketing in the Territory of Products or Competitive Products and which the Board of Directors determines it is no longer in the Company's interest to own or operate and, if being sold, is being sold for a fair consideration. 3.6 COMPLIANCE WITH LAWS. The Company will comply, and will cause -------------------- each Significant Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, decisions, orders and requirements of governmental authorities and courts (including, without limitation, environmental laws) except (i) where compliance therewith is contested in good faith by appropriate proceedings or (ii) where non-compliance therewith could not reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company and the Subsidiaries, taken as a whole. 3.7 INVESTMENT COMPANY ACT. The Company will not be or become an ---------------------- open-end investment trust, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended. 3.8 LIMITATIONS ON ASSET SALES, LIQUIDATIONS, ETC.; CERTAIN MATTERS. --------------------------------------------------------------- The Company shall not -14- (a) sell, convey or otherwise dispose of all or substantially all of the assets of the Company as an entirety or substantially as an entirety in a single transaction or in a series of related transactions; or (b) liquidate, dissolve or otherwise wind up the affairs of the Company. 3.9 LIMITATIONS ON LIENS. The Company will not itself, and will not -------------------- permit any Subsidiary to, create, assume or suffer to exist any mortgage, lien, pledge, security interest or other charge or encumbrance (including, without limitation, the lien or retained security title of a conditional vendor), all of which are referred to below as "liens", upon all or any part of its property of any character, whether owned at the date hereof or thereafter acquired, except: (a) liens upon any property of any Subsidiary or Subsidiaries as security for indebtedness owing to the Company; (b) purchase money liens upon any property acquired by the Company or any Subsidiary, or liens existing on such property at the time of acquisition; provided that (i) no such lien shall extend to or cover any other property of the Company or any Subsidiary, (ii) the principal amount of indebtedness secured by each such lien on any such property shall not exceed the cost (including such principal amount of the indebtedness secured thereby) to the Company or the Subsidiary of the property subject thereto, and (iii) the aggregate principal amount of all indebtedness of the Company and all Subsidiaries secured by all liens described in this subsection (b) and any extensions, renewals or replacements thereof, at any one time outstanding, shall not exceed $10 million for the Company and the Subsidiaries; and the extending, renewing or replacing of any lien permitted by this subsection (b) or of the indebtedness secured thereby; provided, however, that in any such case the lien by which any lien is extended, renewed or replaced shall not extend to or cover any other property of the Company or any Subsidiary and the principal amount of such indebtedness extended, renewed or replaced shall not be increased; (c) liens securing this Note and the Other Notes ratably; (d) liens for taxes or assessments or governmental charges or levies on its property if such taxes or assessments or charges or levies shall not at the time be due and payable or if the amount, applicability, or validity of any such tax, assessment, charge or levy shall currently be contested in good faith by appropriate proceedings or necessary preliminary steps are being taken to contest, compromise or settle the amount thereof or to determine the applicability or validity thereof and if the Company or such Subsidiary, as the case may be, shall have set aside on its books reserves (segregated to the extent required by sound accounting practice) deemed by it adequate with respect thereto; deposits or pledges to secure payment of worker's compensation, unemployment insurance, old age pensions or other social security; deposits or pledges to secure performance of bids, tenders, contracts (other than contracts for the payment of money borrowed or credit extended), leases, public or statutory obligations, surety or appeal bonds, or other deposits -15- or pledges for purposes of like general nature in the ordinary course of business; mechanics', carriers', workers', repairmen's or other like liens arising in the ordinary course of business securing obligations which are not overdue for a period of 60 days, or which are in good faith being contested or litigated, or deposits to obtain the release of such liens; liens created by or resulting from any litigation or legal proceedings or proceedings being contested in good faith by appropriate proceedings, provided any execution levied thereon shall be stayed; leases made, or existing on property acquired, in the ordinary course of business; landlords' liens under leases to which the Company or any Subsidiary is a party; and zoning restrictions, easements, licenses or restrictions on the use of real property or minor irregularities in title thereto; provided that all such liens described in this subsection (d) do not, in the aggregate, materially impair the use of such property in the operations of the business of the Company or any Subsidiary or the value of such property for the purpose of such business; and (e) liens existing on the Issuance Date and listed in Schedule 4(r) to the Note Purchase Agreement. 3.10 PRODUCTS AND COMPETITIVE PRODUCTS MARKETING. Until the end of ------------------------------------------- the Payment Period, the Company shall use all commercially reasonable efforts to market the Products and the Competitive Products in the Territory directly or through reliable third parties. 3.11 MANUFACTURE AND SALE OF THE PRODUCTS AND THE COMPETITIVE -------------------------------------------------------- PRODUCTS. Until the end of the Payment Period, the Company shall use all commercially reasonable efforts (a) to manufacture the Products and the Competitive Products in accordance with GMP in sufficient quantities to meet the demand therefor, either directly or through third party manufacturing and supply arrangements, and (b) to sell the Products and the Competitive Products in the Territory. 3.12 CERTAIN OBLIGATIONS. (a) The Company shall not amend, modify or ------------------- waive any provision of any of the Lafon Agreements as they relate to the Territory in a manner which would adversely affect the Collateral Agent's lien on and Security Interest in the Collateral. (b) The Company shall perform and comply in all material respects with the Lafon Agreements; and shall perform and comply in all material respects with any other agreement relating to any of the Products or the Competitive Products, the failure to comply with which could have a material adverse effect on the Net Revenues from the Products and the Competitive Products or adversely affect the Collateral Agent's lien on and security interest in the Collateral. 3.13 NOTICE OF DEFAULTS. The Company shall notify the Holder ------------------ promptly, but in any event not later than five days after the Company becomes aware of the fact, of any failure by the Company to comply with this Article III. 3.14 CERTAIN EVENTS OF DEFAULT. If an Event of Default specified in ------------------------- clause (c), (e), or (f) of Section 4.1 shall occur and be continuing, then, at the request of the Majority Holders, the -16- Company shall use all commercially reasonable efforts (a) to sell, license or otherwise dispose of the Products and the Competitive Products and the Company's interests therein as they relate to the Territory, subject to the terms and requirements of the Security Agreement and the Patent and Trademark Security Agreement, for a cash consideration at least equal to the fair market value thereof or (b) to complete one or more financing transactions to provide cash to the Company to enable it to repay or redeem this Note and the Other Notes in accordance with their terms on the earliest date on which the Company is permitted to do so and, if such Event of Default involves a violation by the Company of Section 3.2, to cure such violation. ARTICLE IV EVENTS OF DEFAULT 4.1 If any of the following events of default (each, an "Event of Default") shall occur: (A) FAILURE TO PAY PRINCIPAL, INTEREST, ETC. The Company fails (1) to --------------------------------------- pay the principal, the Optional Redemption Price, the Repurchase Price or the Registration Repurchase Price hereof when due, whether at maturity, upon acceleration or otherwise, as applicable, (2) to pay or perform the obligations of the Company under Article II (other than Section 2.4) or (3) to pay any installment of interest hereon when due and, in the case of this clause (3) of this Section 4.1(a) only, such failure continues for a period of five Business Days after the due date thereof; or (B) BREACH OF CERTAIN COVENANTS. The Company fails to comply with --------------------------- Section 3.1, 3.10, 3.11, 3.12, 3.13, or 3.14; or (C) BREACH OF OTHER COVENANTS. The Company fails to comply with ------------------------- Section 3.2 or fails to comply in any material respect with any other provision of Article III of this Note (other than Section 3.1, 3.10, 3.11, 3.12, 3.13, or 3.14) or breaches any other material covenant or other material term or condition of this Note or any of the other Transaction Documents (other than as specifically provided in clauses (a), (b), (i), and (j) of this Section 4.1), and such breach continues for a period of five days after written notice thereof to the Company from the Holder; or (D) BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation or ---------------------------------------- warranty of the Company made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Transaction Documents) shall be false or misleading in any material respect when made; or -17- (E) CERTAIN VOLUNTARY PROCEEDINGS. The Company or any Subsidiary ----------------------------- shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due or shall admit in writing its inability generally to pay its debts as they become due; or (F) CERTAIN INVOLUNTARY PROCEEDINGS. An involuntary case or other ------------------------------- proceeding shall be commenced against the Company or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 consecutive days; or (G) JUDGMENTS. Any court of competent jurisdiction shall enter one or --------- more final judgments against the Company or any Subsidiary or any of their respective properties or other assets in an aggregate amount in excess of the Judgment Default Threshold, which is not vacated, bonded, stayed, discharged, satisfied or waived for a period of 30 consecutive days; or (H) DEFAULT UNDER OTHER AGREEMENTS. (a) The Company or any Subsidiary ------------------------------ shall (i) default in any payment with respect to any Indebtedness for borrowed money (other than this Note) which Indebtedness has an outstanding principal amount in excess of the Cross-Default Threshold, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created or (ii) default in the observance or performance of any agreement, covenant or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, any such Indebtedness to become due prior to its stated maturity and such default or event shall continue beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created (after giving effect to any consent or waiver obtained and then in effect thereunder); or (b) any Indebtedness of the Company or any Subsidiary which has an outstanding principal amount in excess of the Cross-Default Threshold shall, in accordance with its terms, be declared to be due and payable, or required to be prepaid other than by a regularly scheduled or required payment prior to the stated maturity thereof; or -18- (I) SECURITY AGREEMENT AND PATENT AND TRADEMARK SECURITY AGREEMENT, --------------------------------------------------------------- ETC. The occurrence of any "Event of Default" as defined in the Security --- Agreement or the Patent and Trademark Security Agreement; (J) CESSATION OF MANUFACTURE, SALES OR MARKETING. None of the Company -------------------------------------------- or any of its Affiliates shall (directly or through reliable third parties) be manufacturing, selling or marketing the Products in the Territory; then, (1) upon the occurrence and during the continuation of any Event of Default specified in clause (a), (b), (d), (i), or (j) of this Section 4.1, at the option of the Holder, and upon the occurrence of any Event of Default specified in clause (e) or (f) of this Section 4.1: (X) the Company shall, pay to the Holder an amount equal to the outstanding principal amount of this Note plus accrued and unpaid interest on such principal amount to the date of payment plus accrued and unpaid Default Interest, if any, thereon at the rate provided in this Note to the date of payment, (V) all other amounts payable hereunder or under any of the other Transaction Documents shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, reasonable legal fees and expenses, of collection, (Y) the Collateral Agent shall be entitled to exercise all rights and remedies under the Security Agreement and the Patent and Trademark Security Agreement, and (Z) the Holder shall be entitled to exercise all other rights and remedies available at law or in equity; and (2) upon the occurrence and during the continuation of any Event of Default specified in clause (c), (g) or (h) of this Section 4.1: (A) if any Event of Default continues during the period of 365 consecutive days following the occurrence of such Event of Default, then thereafter so long as any Event of Default is continuing (i) at the option of the Holder the Company shall pay to the Holder an amount equal to the outstanding principal amount of this Note plus accrued and unpaid interest on such principal amount to the date of payment plus accrued and unpaid Default Interest, if any, thereon at the rate provided in this Note to the date of payment, (ii) all other amounts payable hereunder shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, reasonable legal fees and expenses, of collection and (and) the Collateral Agent shall be entitled to exercise all rights and remedies under the Security Agreement, the Patent and Trademark Security Agreement, and (B) the Holder shall be entitled to exercise all rights and remedies available at law or in equity other than those set forth in the immediately preceding clause (A). ARTICLE V -19- REPURCHASE UPON A REPURCHASE EVENT OR REGISTRATION REPURCHASE EVENT 5.1 REPURCHASE RIGHT UPON REPURCHASE EVENT. If a Repurchase Event -------------------------------------- occurs, in addition to any other right of the Holder, the Holder shall have the right, at the Holder's option, to require the Company to repurchase all of this Note, or any portion hereof on the repurchase date that is five Business Days after the date of the Holder Notice delivered with respect to such Repurchase Event. The Holder shall have the right to require the Company to repurchase all or any such portion of this Note if a Repurchase Event occurs at any time while any portion of the principal amount of this Note is outstanding at a price equal to the Repurchase Price. 5.2 NOTICES; METHOD OF EXERCISING REPURCHASE RIGHTS, ETC. (a) On or ---------------------------------------------------- before the fifth Business Day after the occurrence of a Repurchase Event, the Company shall give to the Holder a Company Notice of the occurrence of the Repurchase Event and of the repurchase right set forth herein arising as a result thereof. Such Company Notice shall set forth: (i) the date by which the repurchase right must be exercised, and (ii) a description of the procedure (set forth in this Section 5.2) which the Holder must follow to exercise the repurchase right. No failure of the Company to give a Company Notice or defect therein shall limit the Holder's right to exercise the repurchase right or affect the validity of the proceedings for the repurchase of this Note or portion hereof. (b) To exercise the repurchase right, the Holder shall deliver to the Company on or before the 30th day after a Company Notice (or if no such Company Notice has been given, within 40 days after the Holder first learns of the Repurchase Event) (i) a Holder Notice setting forth the name of the Holder and the principal amount of this Note to be repurchased, and (ii) this Note, duly endorsed for transfer to the Company of the portion of the outstanding principal amount of this Note to be repurchased. A Holder Notice may be revoked by the Holder at any time prior to the time the Company pays the applicable Repurchase Price to the Holder. (c) If the Holder shall have given a Holder Notice, then on the date which is five Business Days after the date such Holder Notice is given (or such later date as the Holder surrenders this Note) the Company shall make payment in immediately available funds of the applicable Repurchase Price to such account as specified by the Holder in writing to the Company at least one Business Day prior to the applicable repurchase date. 5.3 REPURCHASE RIGHT UPON REGISTRATION REPURCHASE EVENT. If a --------------------------------------------------- Registration Repurchase Event occurs, in addition to any other right of the Holder, the Holder shall have the right, at the Holder's option, to require the Company to repurchase all of this Note, or from time to -20- time any portion hereof, by making payment of the Registration Repurchase Price to the Holder in immediately available funds to such account as specified by the Holder by notice to the Company at least one Business Day prior to the applicable repurchase date, on the repurchase date that is five Business Days after the date a Holder Registration Repurchase Notice is given by the Holder (or such later date as the Holder surrenders this Note to the Company). The Holder shall exercise its right to require repurchase pursuant to this Section 5.3 by giving a Holder Registration Repurchase Notice as follows: (i) if the Registration Repurchase Event occurs by reason of the Company's failure to timely file the Registration Statement with the SEC, at any time prior to the earlier of (x) the date which is 31 days after such event and (y) the date the Company files the Registration Statement with the SEC or (ii) if the Registration Repurchase Event occurs by reason of the non-occurrence of the SEC Effective Date within 90 days after the Issuance Date, at any time prior to the SEC Effective Date. If the Holder shall have given a Holder Registration Repurchase Notice, the Company shall repurchase this Note or the portion of this Note as stated in such Holder Registration Repurchase Notice at a purchase price equal to the Registration Repurchase Price. A Holder Registration Repurchase Notice may be revoked by the Holder at any time prior to the time the Company pays the applicable Registration Repurchase Price. 5.4 OTHER. A Holder Notice or a Holder Registration Repurchase ----- Notice given by the Holder shall be deemed for all purposes to be in proper form unless the Company notifies the Holder within three Business Days after such Holder Notice or Holder Registration Repurchase Notice has been given (which notice shall specify all defects in such Holder Notice or Holder Registration Repurchase Notice), and any Holder Notice or Holder Registration Repurchase Notice containing any such defect shall nonetheless be effective on the date given if the Holder promptly undertakes to correct all such defects. No such claim of defect shall limit or delay performance of the Company's obligation to repurchase any portion of this Note, the repurchase of which is not in dispute. ARTICLE VI EXTENSION OF MATURITY DATE 6.1 RIGHT TO EXTEND MATURITY DATE. The Company shall have the right, ----------------------------- exercisable by notice given to the Holder on a date not earlier than 90 or later than 30 days prior to the Original Maturity Date, which notice shall refer to this Section 6.1, to extend the Maturity Date to the Extended Maturity Date so long as the following conditions precedent are satisfied on the date the Company gives such notice to the Holder: (a) no Event of Default and no event which, with notice or passage of time, or both, would become an Event of Default, shall have occurred and be continuing; (b) no Repurchase Event or Registration Repurchase Event shall have occurred -21- with respect to which the Holder has the right to exercise repurchase rights under Sections 5.1 and 5.2 or Section 5.3 or with respect to which the Holder has exercised such repurchase rights and the Repurchase Price or the Registration Repurchase Price, as the case may be, has not been paid to the Holder and no event which, with notice or passage of time, or both, would become a Repurchase Event shall have occurred and be continuing; (c) Net Revenues from the Products and the Competitive Products in the Territory during the then most recent full calendar quarter preceding the date on which the Company gives such notice to the Holder shall have been at least 75% of the Target Revenues for the Products and the Competitive Products in the Territory for such calendar quarter; (d) the Company's Cash, Cash Equivalent and Eligible Investment Balances shall be greater than the sum of (1) an amount equal to 125% of the aggregate outstanding principal amount of this Note and the Other Notes at the close of business on the Business Day prior to the date on which the Company gives such notice to the Holder plus (2) an amount equal to 400% of the cash used in operations by the Company and the Subsidiaries during the then most recently completed fiscal quarter, as shown in the Company's consolidated statement of cash flows, prepared in accordance with Generally Accepted Accounting Principles on a basis consistent with the Company's then most recently prepared audited annual financial statements; (e) the Company shall be operating under a current business plan approved by the Company's Board of Directors which shows that from the date such notice is given to the Holder to the Extended Maturity Date the Company's Cash, Cash Equivalent and Eligible Investment Balances will not be less than 125% of the aggregate outstanding principal amount of this Note and the Other Notes on the date such notice is given to the Holder; (f) the Company shall have given notice to the holders of all of the Other Notes to extend the maturity date thereof to the Extended Maturity Date; and (g) the Company shall have furnished to the Holder a Company Certificate setting forth in reasonable detail confirmation of the satisfaction of the conditions in the preceding clauses (a) through (f). 6.2 ALTERNATIVE RIGHT TO EXTEND MATURITY DATE. If the Company is ----------------------------------------- unable to satisfy any one or more of the requirements of clause (c), (d) or (e) of Section 6.1, the Company shall have the right, exercisable by notice given to the Holder not earlier than 90 or later than 30 days prior to the Original Maturity Date, which notice shall refer to this Section 6.2, to extend the Maturity Date to the Extended Maturity Date so long as (x) the conditions precedent specified in clauses (a) (other than an Event of Default solely by reason of the Company's violation of Section 3.2), (b) and (f) of Section 6.1 are satisfied on the date the Company gives such notice to the Holder -22- and (y) Net Revenues of the Product and the portion of the Net Revenues of the Competitive Products included in the determination of the Noteholder Payment Amount in the Territory during the then most recent full fiscal quarter preceding the date on which the Company gives such notice to the Holder shall have been at least $3,750,000. If the Company gives such notice, then from and after the Original Maturity Date (1) the Applicable Rate shall be increased from 11% per annum to 14% per annum, (2) the Default Rate shall be increased from 21% per annum to 26% per annum and (3) the Payment Percentage shall be increased to 25 percent and, so long as no Event of Default has occurred and is continuing, the portion of the Noteholder Payment Amount paid to the Holder for any period during which such higher Payment Percentage shall be in effect which is in excess of the portion of the Noteholder Payment Amount which would have been paid to the Holder if the Payment Percentage during such period were 9.0 percent shall be paid to and applied by the Holder to the outstanding principal amount of this Note. ARTICLE VII SATISFACTION AND DISCHARGE OF CERTAIN PROVISIONS 7.1. DISCHARGE OF CERTAIN PROVISIONS. If ------------------------------- (i) the Company shall have deposited with the Collateral Agent, in trust, funds or Government Obligations, the principal of and interest on which when due will, together with any funds set aside at the same time and without the necessity for investment or reinvestment of such funds or for further investment or reinvestment of the principal amount of or interest on such Government Obligations, provide funds sufficient to pay at maturity or upon redemption all of this Note and the Other Notes, including principal and interest due or to become due to the Maturity Date or earlier redemption; (ii) in the case of this Note and the Other Notes which the Company may elect to redeem pursuant to Section 1.2 and the comparable provisions of the Other Notes, in whole or in part, prior to their maturity, all action other than the giving of notice of redemption necessary to redeem such of this Note and the Other Notes as of the specified redemption date or dates for this Note and such Other Notes shall have been taken and arrangements reasonably satisfactory to the Majority Holders shall have been made for the giving of notice of such redemption; (iii) notice of such deposit shall have been given to the Holder and the Holders of the Other Notes as to which such deposit is applicable, within ten days after the date of such deposit; (iv) no Event of Default or event which with notice or passage of time, or both, would become an Event of Default under Section 4.1(e) or 4.1(f) has occurred and is -23- continuing; and (v) no Event of Default or event which with notice or passage of time, or both would become an Event of Default (other than as specifically provided in the immediately preceding clause (iv)) has occurred and is continuing (unless the requirements of this clause (v) will be satisfied immediately after the 92-day period hereinbelow specified and the Company shall furnish to the Holder Company Certificates to such effect on the date of such deposit and on such 92nd day); and the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then on the date which is 92 days after the date of such deposit by the Company with the Collateral Agent, so long as during such 92-day period no Event of Default or event which with notice or passage of time, or both, would become an Event of Default under Section 4.1(e) or 4.1(f) has occurred (x) this Note shall cease to be of further effect (except as provided herein), (y) the Company shall be entitled to release of Collateral (other than the funds and Government Obligations so deposited and any interest or income thereon or any proceeds thereof) as provided in the Pledge Agreement and (z) the Holder, on demand of the Company accompanied by a Company Certificate and an opinion of counsel and at the cost and expense of the Company, shall execute proper instruments acknowledging the satisfaction and discharge of this Note to the extent set forth herein. So long as this Note shall remain outstanding after such discharge, this Note shall continue in effect following the discharge provided for above solely with respect to rights of registration of transfer, exchange or replacement of outstanding Notes, rights to receive payment of the principal hereof and interest hereon in accordance with the terms of this Note from such deposited funds or the proceeds of or interest on such deposited Government Obligations, the rights under Article II and the rights under Sections 3.10 and 3.11; provided, however, that, following such discharge, no claim for payment of principal of or interest on this Note shall be made against the Company. Upon such discharge, any Event of Default which occurred prior to such discharge solely by reason of one or more provisions of this Note with which the Company thereafter is no longer obligated to comply, then such Event of Default shall no longer exist. 7.2. DEPOSITED MONEYS AND GOVERNMENT OBLIGATIONS TO BE HELD IN --------------------------------------------------------- ACCORDANCE WITH SECURITY AGREEMENT. All funds and Government Obligations - ---------------------------------- deposited with the Collateral Agent pursuant to Section 7.1 shall be held in trust and subject to and in accordance with the terms of the Security Agreement and such funds and interest on such Government Obligations shall be applied by it to the payment of the Notes in accordance with the Security Agreement. 7.3. REINSTATEMENT. If (i) the Collateral Agent is unable to apply ------------- any funds in accordance with Section 7.2 and the Security Agreement by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application and (ii) the Majority Holders so specify by this notice to the Company, the Company's obligations under this Note shall be revived and reinstated as though no deposit had occurred pursuant to Section 7.1 -24- until such time as the Collateral Agent is permitted to apply all such funds in accordance with Section 7.2 and the Security Agreement. ARTICLE VIII DEFINITIONS 8.1 CERTAIN DEFINED TERMS. (a) All the agreements or instruments --------------------- herein defined shall mean such agreements or instruments as the same may from time to time be supplemented or amended or the terms thereof waived or modified to the extent permitted by, and in accordance with, the terms thereof and of this Note. (b) The following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Aggregate Share Payment Amount" means the sum of (1) the principal amount of this Note as to which the Company has elected the Share Principal Payment Option and to which the Holder has consented plus (2) the aggregate principal amount of the Other Notes as to which the Company has elected to make payment in shares of Common Stock pursuant to provisions comparable to Section 1.4 and to which the respective holders of the Other Notes have consented in accordance with the terms of the Other Notes. "Applicable Rate" means 11 percent per annum except that, if the Company exercises its right to extend the Original Maturity Date to the Extended Maturity Date pursuant to Section 6.2, then from and after the Original Maturity Date such rate shall be increased to 14 percent per annum (or in either such case such lesser rate as shall be the highest rate permitted by applicable law). "Assignment Agreement" shall have the meaning provided in the Note Purchase Agreement. "Business Day" means any day other than a Saturday, Sunday or a day on which commercial banks in The City of New York are authorized or required by law or executive order to remain closed. "Cash, Cash Equivalent and Eligible Investment Balances" of any Person on any date shall be determined from such Person's books maintained in accordance with Generally Accepted Accounting Principles, and means, without duplication, the sum of (1) the cash accrued by such Person and its subsidiaries on a consolidated basis on such date and available for use by such Person and its subsidiaries on such date, (2) all assets which would, on a consolidated balance sheet of such Person and its subsidiaries prepared as of such date in accordance with -25- Generally Accepted Accounting Principles, be classified as cash equivalents and (3) all Eligible Marketable Securities which are assets which would, on a consolidated balance sheet of such Person and its subsidiaries prepared as of such date in accordance with Generally Accepted Accounting Principles, be classified as marketable securities. "Collateral Agent" means Delta Opportunity Fund, Ltd., as collateral agent under the Security Agreement and the Patent and Trademark Security Agreement, or its successors. "Common Stock" means the Common Stock, par value $.01 per share, or any shares of capital stock of the Company into which such shares shall be changed or reclassified after the Issuance Date. "Company" shall have the meaning provided in the first paragraph of this Note. "Company Certificate" means a certificate of the Company signed by an Officer. "Company Notice" means a Company Notice in the form attached hereto as EXHIBIT C. "Competitive Product" means a product, method or system, other than the Product, that (x) has received regulatory approval for use, or has received regulatory approval for any substantially similar use, in a human therapeutic indication as any Product, or (y) is so used for human therapeutic indication of excessive sleep disorder or excessive daytime sleep disorder but shall not include any product, method or system that an Affiliate of the Company was testing in preclinical or clinical trials or for which regulatory approval was received, prior to becoming an Affiliate of the Company. "Cross-Default Threshold" means as of any date an amount equal to the greater of (1) an amount equal to the product obtained by multiplying (a) the amount, if any, by which the Company's Cash, Cash Equivalent and Eligible Investment Balances on such date exceed the aggregate outstanding principal amount of this Note and the Other Notes on such date times (b) 50 percent; and (2) $1,000,000 for any single Indebtedness of the type referred to in Section 4.7 and $2,000,000 in the aggregate for the Company and the Subsidiaries for all Indebtedness referred to in Section 4.1(h). "Default Interest" shall have the meaning provided in the first paragraph of this Note. "Default Rate" means 21 percent per annum except that, if the Company exercises its right to extend the Original Maturity Date to the Extended Maturity Date pursuant to Section 6.2, -26- then from and after the Original Maturity Date such rate shall be increased to 26 percent per annum (or in either case such lesser rate equal to the highest rate permitted by applicable law). "Determination Period" means each calendar quarter, except that the first Determination Period shall begin on the Issuance Date and end on March 31, 1999 and the final Determination Period shall end on the last day of the Payment Period. "Eligible Bank" means a corporation organized or existing under the laws of the United States or any other state, having combined capital and surplus of at least $100 million and subject to supervision by federal or state authority and which has a branch located in New York, New York. "Eligible Marketable Securities" of the Company as of any date means marketable securities which would be reflected on a consolidated balance sheet of the Company and its subsidiaries prepared as of such date in accordance with Generally Accepted Accounting Principles and which are debt obligations within the Company's investment policies set forth on Exhibit M to the Company's Senior Convertible Notes due April 7, 1998. "Event of Default" shall have the meaning provided in Section 4.1. "Extended Maturity Date" means March 1, 2003. "Fundamental Change" means (a) Any consolidation or merger of the Company or any Subsidiary with or into another entity (other than a merger or consolidation of a Subsidiary into the Company or a wholly-owned Subsidiary) where the stockholders of the Company immediately prior to such transaction do not collectively own at least 51% of the outstanding voting securities of the surviving corporation of such consolidation or merger immediately following such transaction; or the sale of all or substantially all of the assets of the Company and the Subsidiaries in a safe transaction or a series of related transactions; or (b) The occurrence of any transaction or event in connection with which all or substantially all the Common Stock shall be exchanged for, converted into, acquired for or constitute the right to receive consideration (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) which is not all or substantially all common stock which is (or will, upon consummation of or immediately following such transaction or event, will be) listed on a national securities exchange or approved for quotation on Nasdaq or any similar United States system of automated dissemination of transaction reporting of securities prices; or (c) The acquisition by a Person or entity or group of Persons or entities acting -27- in concert as a partnership, limited partnership, syndicate or group, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, of beneficial ownership of securities of the Company representing 50% or more of the combined voting power of the outstanding voting securities of the Company ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors. "Generally Accepted Accounting Principles" for any Person means the generally accepted accounting principles and practices applied by such Person from time to time in the preparation of its audited financial statements. "GMP" means the Good Manufacturing Practices established from time to time by the United States Food and Drug Administration. "Government Obligations" means direct obligations of, or obligations the timely payment of the principal of and the interest on which are unconditionally guaranteed by, the United States of America and which are not, by their terms, callable. "Holder" shall have the meaning provided in the first paragraph of this Note. "Holder Notice" means a Holder Notice in the form attached hereto as EXHIBIT D. "Holder Registration Repurchase Notice" means a Holder Registration Repurchase Notice in the form attached hereto as EXHIBIT E. "Indebtedness" as used in reference to any Person means all indebtedness of such Person for borrowed money, the deferred purchase price of property, goods and services and obligations under leases which are required to be capitalized in accordance with Generally Accepted Accounting Principles and shall include all such indebtedness guaranteed in any manner by such Person or in effect guaranteed by such Person through a contingent agreement to purchase and all indebtedness for the payment or purchase of which such Person has contingently agreed to advance or supply funds and all indebtedness secured by mortgage or other lien upon property owned by such Person, although such Person has not assumed or become liable for the payment of such indebtedness, and, for all purposes hereof, such indebtedness shall be treated as though it has been assumed by such Person. "Interest Payment Dates" means each March 1, June 1, September 1 and December 1 and the Maturity Date. "Interest Payment Shares" means the shares of Common Stock and the related Preferred Share Purchase Rights issuable in payment of interest on this Note in accordance with Section 1.1. -28- "Interest Share Price" for any Interest Payment Date means the arithmetic average of the Market Price of the Common Stock for all of the Trading Days during the 20 consecutive Trading Days beginning on the third Trading Day following the date on which the Company notifies the Holder in accordance with Section 1.1(c) of the exercise of its election of the Interest Share Payment Option with respect to such Interest Payment Date. "Interest Share Registration Statement" means the registration statement filed by the Company with the SEC under the 1933 Act pursuant to Section 8 (a) (1) of the Note Purchase Agreement. "Issuance Date" means March 1, 1999. "Judgment Default Threshold" means as of any date of determination an amount equal to the greater of (1) an amount equal to the product obtained by multiplying (a) the amount, if any, by which the Company's Cash, Cash Equivalent and Eligible Investment Balances on such date exceed the aggregate outstanding principal amount of this Note and the Other Notes on such date times (b) 50 percent; and (2) $1,000,000. "Lafon" means Laboratoire L. Lafon, a French corporation. "Lafon Agreements" means (1) the License Agreement, dated January 20, 1993, by and between Lafon and the Company, as amended, (2) the Trademark Agreement, dated January 20, 1993, by and between Genelco S.A. and the Company, as amended, and (3) the Supply Agreement, dated January 20, 1993, between the Company and Lafon, as amended. "Majority Holders" means at any time such of the holders of this Note and the Other Notes which hold Notes and Other Notes which, based on the outstanding principal amounts thereof, represent a majority of the aggregate outstanding principal amount of this Note and the Other Notes. "Market Price" of any security on any date shall mean the closing bid price of such security on such date on Nasdaq or such other securities exchange or other market on which such security is listed for trading on such date which constitutes the principal securities market for such security, as reported by Bloomberg, L.P. "Maturity Date" means at any time the Original Maturity Date or the Extended Maturity Date, as in effect at such time. -29- "Nasdaq" means the Nasdaq National Market. "Nasdaq SmallCap" means the Nasdaq SmallCap Market. "Net Revenues" means, with respect to sales for any period and with respect to any item, the amount thereof accrued by the Company for financial reporting purposes, determined under the Generally Accepted Accounting Principles used in the preparation of the Company's then most recently published audited financial statements, from sales of Products or Competitive Products (as and to the extent applicable) by the Company, any Affiliate of the Company or any licensee or sublicensee of the Company or any Affiliate of the Company, but excluding sales to any Affiliate, licensee or sublicensee of the Company or any Affiliate of the Company; provided, however, that if for any period the aggregate Net Revenues for the Products and the Competitive Products (before application of this proviso) would exceed the Target Revenues for such period, then in determining Net Revenues for such period there shall be excluded the portion thereof, if any, arising from Competitive Products equal to the lesser of (x) the amount thereof for such period arising from Competitive Products and (y) the portion of the aggregate Net Revenues for the Products and the Competitive Products for such period (before application of this proviso) which shall be in excess of the Target Revenues for such period. In determining such amount, the amounts received from such sales shall be reduced by related prompt payment and other trade discounts, transportation and related insurance charges, returns, bad debt and other allowances, taxes (except income and franchise taxes) and distributors', consignees' and wholesalers' fees and commissions. The terms "licensee" and "sublicensee" shall mean any Person licensed or sublicensed by the Company or any Affiliate of the Company, including, without limitation, pursuant to any marketing, co-marketing or co-detailing agreement (or similar arrangement that is the functional equivalent of a license), but excluding customary distribution, wholesaling and consignment arrangements. For the purposes of this definition, distribution, wholesaling or consignment arrangements shall be limited to arrangements where the distributor, wholesaler or consignee is not obligated, in addition to selling a Product or Competitive Product, to undertake any significant promotional or similar marketing efforts directed at a Product or Competitive Product. In computing the portion of Net Revenues from Products which contain modafinil or any compound based on or derived therefrom as an active ingredient in combination with any other substance as an active ingredient which substance is also sold by the Company or any of its Affiliates not in combination with modafinil or any such compound based or derived therefrom, the portion of Net Revenues from such combination product included in Net Revenues for any period shall be a portion of the total Net Revenues for such combination product for such period which portion shall be determined as the product obtained by multiplying (x) an amount equal to the Net Revenues for such period from sales of such combination product times (y) a fraction (i) the numerator of which shall be the unit price at which the Company or an Affiliate sells products containing modafinil or such compound based on or derived therefrom and (ii) the denominator of which shall be the sum of (A) the amount referred to in the immediately preceding clause (i) plus (B) the unit price at which the Company or an Affiliate sells the products containing such other substance; provided, however, that in no event shall such combination product be sold at a unit price less than the amount referred to in the immediately preceding clause (i). In calculating Net Revenues, any particular unit of a -30- Product or Competitive Product shall be taken into account only once. "1934 Act" means the Securities Exchange Act of 1934, as amended. "1933 Act" means the Securities Act of 1933, as amended. "Note" means this instrument as originally executed, or if later amended or supplemented in accordance with its terms, then as so amended or supplemented. "Noteholder Payment Amount" shall have the meaning provided in Section 2.1. "Note Purchase Agreement" means the Note Purchase Agreement, dated as of February 24, 1999, by and between the Company and the original Holder of this Note. "Officer" means the Chairman of the Board, the Chief Executive Officer, the President or the Chief Financial Officer of the Company. "Optional Redemption Date" means each Business Day on which this Note is to be redeemed in whole or in part pursuant to Section 1.2. "Optional Redemption Notice" means an Optional Redemption Notice in the form attached hereto as EXHIBIT A. "Optional Redemption Period" means the period which commences on March 1, 2001 and ends on the Original Maturity Date. "Optional Redemption Price" means an amount in cash equal to the sum of (1) 120% of the outstanding principal amount of this Note specified in an Optional Redemption Notice as being redeemed by the Company plus (2) accrued and unpaid interest on such principal amount to the applicable Optional Redemption Date plus (3) accrued and unpaid Default Interest, if any, on the amount referred to in the immediately preceding clause (2) at the rate provided in this Note to the Optional Redemption Date. "Original Maturity Date" means March 1, 2002. "Other Note Purchase Agreements" means the several Note Purchase Agreements, dated as of February 24, 1999, by and between the Company and the respective original holders of the Other Notes. "Other Notes" means the several 11% Senior Secured Notes due 2002 issued by the Company pursuant to the Other Note Purchase Agreements. -31- "Patent and Trademark Security Agreement" means the Patent and Trademark Security Agreement, dated as of March 1, 1999, by and between the Company and the Collateral Agent. "Payment Percentage" means six percent; provided, however, that if an Event of Default shall have occurred, then the Payment Percentage shall be increased to 25 percent during the period from the date of such Event of Default until the earlier of (x) the date no Event of Default is continuing and (y) the date the Company pays the redemption price in full for a redemption of this Note and the Other Notes pursuant to Section 1.2 and the comparable provisions of the Other Notes; provided further, however, that if the Company extends the Original Maturity Date to the Extended Maturity Date pursuant to Section 6.2, then the Payment Percentage shall be increased as provided in Section 6.2; and provided further, however, that, unless a Fundamental Change shall have occurred, if the Company redeems all or any portion of this Note pursuant to Section 1.2 and the Other Notes pursuant to the comparable provisions thereof, then the Payment Percentage (as in effect immediately prior to such redemption) which shall be applicable during the last 12 months of the Payment Period shall be reduced for each such redemption by an amount determined as RPP = PP x PR x D -- --- PO 365 where RPP = amount of reduction in the Payment Percentage (as in effect immediately prior to such redemption) by reason of such redemption PP = Payment Percentage which would be in effect without regard to any reduction thereof at any time pursuant to this formula. PR = the aggregate principal amount of this Note and the Other Notes redeemed in such redemption PO = the original aggregate principal amount of this Note and the Other Notes D = the number of calendar days during the period commencing on and including the date the Company pays the full redemption price of this Note and the Other Notes which is in connection with such redemption and ending on and excluding the date which is the third anniversary of the Issuance Date "Payment Period" means the period which commences on the Issuance Date and ends on the fifth anniversary of the Issuance Date; provided, however, that if in accordance with Article VI the Company elects to extend the Maturity Date to the Extended Maturity Date, effective -32- on the date the Company gives notice of such extension to the Holder and the holders of the Other Notes, the Payment Period shall be extended by one year from the date the Payment Period would have ended as in effect immediately prior to such extension of the Maturity Date. "Payment Share Price" means the arithmetic average of the Market Price of the Common Stock for all of the Trading Days during the 90 consecutive Trading Days ending on (and including) the Trading Day which is three Trading Days prior to the Maturity Date or the applicable Optional Redemption Date, as the case may be. "Payment Share Registration Statement" means the Registration Statement required to be filed by the Company with the SEC pursuant to Section 8(a)(2) of the Note Purchase Agreement if the Company elects to make the Share Principal Payment Option and the Holder consents to such election. "Permitted Indebtedness" means (1) Indebtedness outstanding on the Issuance Date; and (2) Indebtedness incurred after the Issuance Date which is unsecured and on a parity with or subordinated to this Note and the Other Notes. "Person" means any natural person, corporation, partnership, limited liability company, trust, incorporated organization, unincorporated association or similar entity or any government, governmental agency or political subdivision. "Preferred Share Purchase Rights" means the Preferred Share Purchase Rights issued or issuable pursuant to the Rights Agreement (or any similar rights issued by the Company with respect to the Common Stock after the date of this Agreement). "Principal Payment Shares" means the shares of Common Stock and the related Preferred Share Purchase Rights issuable in payment of a portion of the principal amount of the Note in accordance with Section 1.4. "Products" means all pharmaceutical compositions containing modafinil or any compound based on or derived therefrom as an active ingredient, whether alone or in combination with any other substance, which are developed, marketed or sold by the Company or any Subsidiary or Affiliate of the Company, including, without limitation, that pharmaceutical composition marketed by the Company on the Issuance Date under the name Provigil(R). "Registration Repurchase Event" means the occurrence of either of the following events: -33- (a) the Company fails to file the Registration Statement within the 45-day period provided in Section 8(a)(1) of the Note Purchase Agreement; or (b) the SEC Effective Date shall not have occurred on or before the date which is 90 days after the Issuance Date. "Registration Repurchase Price" means an amount in cash equal to the sum of (1) 100% of the principal amount of this Note to be repurchased, plus (2) accrued and unpaid interest on such principal amount to the date of such repurchase, plus (3) accrued and unpaid Default Interest, if any, thereon at the rate provided in this Note to the date of repurchase in accordance with Article V. "Registration Statement" means the Registration Statement required to be filed by the Company with the SEC pursuant to Section 8(a)(1) of the Note Purchase Agreement. "Repurchase Event" means the occurrence of any one or more of the following events: (a) Any Fundamental Change; or (b) The occurrence of any Event of Default specified in Article IV of this Note; provided, however, that in the case of only an Event of Default specified in clause (c), (g) or (h) of Section 4.1, such Event of Default shall become a Repurchase Event only on and after the date which is 365 days after the occurrence of such Event of Default if any Event of Default is continuing at such time. "Repurchase Price" means with respect to any repurchase pursuant to Sections 5.1 and 5.2 an amount in cash equal to the sum of (1) 101% of the outstanding principal amount of this Note plus (2) accrued and unpaid interest on such principal amount to the date of such repurchase plus (3) accrued and unpaid Default Interest, if any, thereon at the rate provided in this Note to the date of such repurchase. "Rights Agreement" means the Amended and Restated Rights Agreement, dated as of January 1, 1999, by and between the Company and Stocktrans, Inc., as Rights Agent. "SEC" means the Securities and Exchange Commission. "SEC Effective Date" means the date the Registration Statement is first declared effective by the SEC. "Security Agreement" means the Security Agreement, dated as of March 1, 1999, by and between the Company and the Collateral Agent. -34- "Share Interest Payment Option" shall have the meaning provided in Section 1.1(a). "Share Payment Threshold" means the product obtained by multiplying (x) the volume-weighted average Trading Price (as reported by Bloomberg, L.P. in its AQR function, or if such source or function ceases to be available, a comparable source and function selected by the Majority Holders and acceptable to the Company in its reasonable judgment) for all of the Trading Days during the 90 consecutive Trading Days ending on (and including) the Trading Day that is three Trading Days prior to the Maturity Date, times (y) the aggregate number of shares of Common Stock traded during such 90 consecutive Trading Days, as reported by Bloomberg, L.P. (or if such source ceases to be available, a comparable source selected by the Majority Holders and acceptable to the Company in its reasonable judgment), times (z) 0.05. "Share Principal Payment Option" shall have the meaning provided in Section 1.4(a). "Significant Subsidiary" shall have the meaning provided in Regulation S-X of the SEC, except that a Subsidiary shall not be a Significant Subsidiary only if such Subsidiary, when consolidated for financial reporting purposes with all other Subsidiaries which are not Significant Subsidiaries, would not constitute a Significant Subsidiary. "Subsidiary" means any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions are at the time directly or indirectly owned by the Company. "Target Revenues" means for any period the amount set forth for such period in EXHIBIT F attached hereto. "Territory" means the United States, its territories and possessions. "Trading Day" means a day on which either the national securities exchange or Nasdaq which then constitutes the principal securities market for the Common Stock is open for general trading of securities. "Trading Price" for any trade of the Common Stock on any date means the lowest sale price (regular way) for one share of Common Stock on such date in such trade, on the first applicable among the following: (a) the national securities exchange on which the Common Stock is listed which constitutes the principal securities market for the Common Stock, (b) Nasdaq, (c) the Nasdaq SmallCap Market or (d) such other market as at the time constitutes the principal trading market for the Common Stock, in any such case as reported by Bloomberg, L.P. (subject to equitable adjustment from time to time on terms reasonably acceptable to the Majority Holders for (i) stock splits, (ii) stock dividends, (iii) combinations, (iv) capital reorganizations, (v) issuance to all -35- holders of Common Stock of rights or warrants to purchase Common Stock at a price per share less than the Trading Price which would otherwise be applicable, (vi) the distribution by the Company to all holders of Common Stock of evidences of indebtedness of the Company or cash (other than regular quarterly cash dividends), (vii) Tender Offers by the Company or any subsidiary of the Company or other repurchases of Common Stock in one or more transactions which, individually or in the aggregate, result in the purchase of more than 10% of the Common Stock outstanding and (viii) similar events, in each such case relating to the Common Stock and which occur on or after the Issuance Date). "Transaction Documents" means this Note, the Note Purchase Agreement, the Security Agreement, the Patent and Trademark Security Agreement, and the Warrants. "Transfer Agent" means Stocktrans, Inc., or its successor as transfer agent and registrar for the Common Stock. "Warrants" means Common Stock Purchase Warrants of the Company issued to the original Holder of this Note pursuant to the Note Purchase Agreement. ARTICLE IX MISCELLANEOUS 9.1 FAILURE OR INDULGENCY NOT WAIVER. No failure or delay on the -------------------------------- part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 9.2 NOTICES. Except as otherwise specifically provided herein, any ------- notice herein required or permitted to be given shall be in writing and may be personally served, sent by telephone line facsimile transmission or delivered by courier or sent by United States mail and shall be deemed to have been given upon receipt if personally served, sent by telephone line facsimile transmission or sent by courier or three days after being deposited in the facilities of the United States Postal Service, certified, with postage pre-paid and properly addressed, if sent by mail. For the purposes hereof, the address and facsimile line transmission number of the Holder shall be as furnished by the Holder for such purpose and shown on the records of the Company; and the address of the Company shall be 145 Brandywine Parkway, West Chester, Pennsylvania 19380, Attention: Chief Financial Officer (telephone line facsimile transmission number (610) 344-7563). The Holder or the Company may change its address for notice by service of written notice to the other as herein provided. -36- 9.3 AMENDMENT, WAIVER, ETC. Neither this Note or any Other Note nor ---------------------- any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the Company and the Majority Holders, provided that no such change, waiver, discharge or termination shall, without the consent of the Holder and the holders of the Other Notes affected thereby (i) extend the scheduled final maturity of this Note or any Other Note, or reduce the rate or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) hereon or thereon or reduce the principal amount hereof or thereof or the Optional Redemption Price, the Repurchase Price or the Registration Repurchase Price, (ii) release the collateral or reduce the amount of collateral required to be deposited or maintained by the Company pursuant to the Security Agreement or the Patent and Trademark Security Agreement, except as expressly provided in the respective agreement, (iii) amend, modify or waive any provision of Article II, (iv) amend, modify or waive any provision of this Section 9.3, (v) reduce any percentage specified in, or otherwise modify, the definition of Majority Holders or (vi) except as provided in this Note, change the method of calculating the Payment Share Price, the Interest Share Price or the Optional Redemption Price in a manner adverse to the Holder. 9.4 ASSIGNABILITY. This Note shall be binding upon the Company and ------------- its successors, and shall inure to the benefit of and be binding upon the Holder and its successors and permitted assigns. The Company may not assign its rights or obligations under this Note. 9.5 CERTAIN EXPENSES. The Company shall pay on demand all expenses ---------------- incurred by the Holder, including reasonable attorneys' fees and expenses, as a consequence of, or in connection with (x) any amendment or waiver of this Note or any other Transaction Document, (y) any default or breach of any of the Company's obligations set forth in the Transaction Documents and (z) the enforcement or restructuring of any right of, including the collection of any payments due, the Holder under the Transaction Documents, including any action or proceeding relating to such enforcement or any order, injunction or other process seeking to restrain the Company from paying any amount due the Holder. 9.6 GOVERNING LAW. This Note shall be governed by the internal laws ------------- of the State of New York, without regard to the principles of conflict of laws. 9.7 TRANSFER OF NOTE AND NOTEHOLDER PAYMENT AMOUNT. This Note has ---------------------------------------------- not been and is not being registered under the provisions of the 1933 Act or any state securities laws and this Note may not be transferred unless the Holder shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that this Note may be sold or transferred without registration under the 1933 Act. Prior to any such transfer, such transferee shall have represented in writing to the Company that such transferee has requested and received from the Company all information relating to the business, properties, operations, condition (financial or other), results of operations or prospects of the Company and the Subsidiaries deemed relevant by such transferee; that such transferee has been afforded the opportunity to ask questions of the Company concerning the foregoing and has had the opportunity -37- to obtain and review the reports and other information concerning the Company which at the time of such transfer have been filed by the Company with the SEC pursuant to the 1934 Act. If such transfer is intended to assign the rights and obligations under 5(a), 5(b), 8, 9 and 10 of the Note Purchase Agreement, such transfer shall otherwise be made in compliance with Article V of the Note Purchase Agreement. The Holder may not transfer a portion of this Note to any Person if such transfer would result in an increase in the aggregate number of registered holders of this Note and the Other Notes of more than one such holder without the prior written consent of the Company, which consent will not be unreasonably withheld. Any instrument issued upon any such transfer of a portion of this Note which results in such increase of one holder shall bear a legend that the holder thereof shall not be entitled to transfer such instrument in a manner which would further increase the aggregate number of registered holders of this Note and the Other Notes without the prior written consent of the Company, which consent shall not be unreasonably withheld. The Holder shall have the right to transfer all or any part of its rights under Article II of this Note separate from its rights under the other provisions of this Note only with the prior written consent of the Company, which consent will not be unreasonably withheld. 9.8 ENFORCEABLE OBLIGATION. The Company represents and warrants that ----------------------- at the time of the original issuance of this Note it received the full purchase price payable pursuant to the Note Purchase Agreement in an amount at least equal to the original principal amount of this Note, and that this Note is an enforceable obligation of the Company which is not subject to any offset, reduction, counterclaim or disallowance of any sort. 9.9 NOTE REGISTER; REPLACEMENT OF NOTES. The Company shall maintain ----------------------------------- a register showing the names, addresses and telephone line facsimile numbers of the Holder and the registered holders of the Other Notes. The Company shall also maintain a facility for the registration of transfers of this Note and the Other Notes and at which this Note and the Other Notes may be surrendered for split up into instruments of smaller denominations or for combination into instruments of larger denominations. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Note and (a) in the case of loss, theft or destruction, of indemnity from the Holder reasonably satisfactory in form to the Company (and without the requirement to post any bond or other security) or (b) in the case of mutilation, upon surrender and cancellation of this Note, the Company will execute and deliver to the Holder a new Note of like tenor without charge to the Holder. 9.10 PAYMENT OF NOTE ON REDEMPTION OR REPURCHASE; DEPOSIT OF ------------------------------------------------------- REDEMPTION PRICE OR REPURCHASE PRICE, ETC. (a) If this Note or any portion of - ----------------------------------------- this Note is to be redeemed as provided in Section 1.2 or repurchased as provided in Sections 5.1 and 5.2 or Section 5.3 and any notice required in connection therewith shall have been given as provided therein and the Company shall have otherwise complied with the requirements of this Note with respect thereto, then this Note or the portion of this Note to be so redeemed or repurchased and with respect to which any such notice has been given shall become due and payable on the date stated in such notice at the applicable Optional Redemption Price, Repurchase Price or Registration Repurchase Price. On and after the Optional Redemption Date or repurchase date so stated in such notice, provided that the -38- Company shall have deposited with an Eligible Bank on or prior to such Optional Redemption Date or repurchase date, an amount sufficient to pay the applicable Optional Redemption Price, Repurchase Price or Registration Repurchase Price, interest on this Note or the portion of this Note to be so redeemed or repurchased shall cease to accrue, and this Note or such portion hereof shall be deemed not to be outstanding and shall not be entitled to any benefit with respect to principal of or interest on the portion to be so redeemed or repurchased except to receive payment of the applicable Optional Redemption Price, Repurchase Price or Registration Repurchase Price. On presentation and surrender of this Note or such portion hereof, this Note or the specified portion hereof shall be paid and redeemed or repurchased at the applicable Optional Redemption Price, Repurchase Price or Registration Repurchase Price. If a portion of this Note is to be redeemed or repurchased, upon surrender of this Note to the Company in accordance with the terms hereof, the Company shall execute and deliver to the Holder without service charge, a new Note or Notes, having the same date hereof and containing identical terms and conditions, in such denomination or denominations as requested by the Holder in aggregate principal amount equal to, and in exchange for, the unredeemed or unrepurchased portion of the principal amount of this Note so surrendered. (b) Upon the payment in full of all amounts payable by the Company under this Note and the Other Notes (other than amounts payable pursuant to Article II hereof and thereof which are not yet due) or the deposit thereof as provided in Section 9.10(a) and the like provisions of the Other Notes, thereafter the obligations of the Company under this Note shall be as set forth in Article II, Sections 3.10, 3.11, this Article IX, and, in the case of such deposit, to pay the Optional Redemption Price, Repurchase Price or Registration Repurchase Price, as the case may be, from the funds so deposited. Upon such payment or deposit, any Event of Default which occurred prior to such payment or deposit by reason of one or more provisions of this Note with which the Company thereafter is no longer obligated to comply, then such Event of Default shall no longer exist. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -39- IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name by its duly authorized officer as of the day and in the year first above written. CEPHALON, INC. By: Name: Title: -40- EXHIBIT A --------- OPTIONAL REDEMPTION NOTICE (SECTION 1.2 OF 11% REVENUE SHARING SENIOR SECURED NOTE DUE 2002) TO: ___________________________ (Name of Holder) (1) Pursuant to the terms of the 11% Revenue Sharing Senior Secured Note due 2002 (the "Note"), Cephalon, Inc., a Delaware corporation (the "Company"), hereby notifies the above-named Holder that the Company is exercising its right to redeem the Note in accordance with Section 1.2 of the Note as set forth below: (i) The principal amount of the Note to be redeemed is $_____________. (ii) The Optional Redemption Price is $_______________. (iii) The Optional Redemption Date is ______________. (2) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note. Date _________________________ CEPHALON, INC. By: Title: A-41 EXHIBIT B --------- FORM OF OPINION OF COUNSEL TO BE DELIVERED IN CONNECTION WITH ISSUANCE OF PRINCIPAL PAYMENT SHARES [Letterhead of Counsel] _______________, 200_____ To The Holders Listed on Schedule A hereto Re: Cephalon, Inc. -------------- Ladies and Gentlemen: We have acted as counsel to Cephalon, Inc., a Delaware corporation (the "Company"), in connection with the issuance by the Company of ____________________________ Principal Payment Shares in accordance with the terms of the Company's 11% Revenue Sharing Senior Secured Notes due 2002 in the original aggregate principal amount of $30,000,000 (the "Notes"), which Notes were issued pursuant to the several Note Purchase Agreements, dated as of February __, 1999 (the "Note Purchase Agreements"), by and between the Company and the Buyers parties thereto (the "Buyers"). All capitalized terms used herein without definition are used herein with the respective meanings ascribed to them in the Notes or, if not defined in the Notes, in the Note Purchase Agreements. This opinion is being delivered to you pursuant to Section 1.4(d)[(1)(B) OR (2)(B)] of the Notes. In connection with this opinion letter, we have relied upon the representations and warranties of the Company set forth in the Note Purchase Agreements and the Notes (the "Principal Documents"). As to various questions of fact material to our opinion, we have also relied upon certificates of officers and representatives of the Company and upon certificates of public officials. We have made no independent review or investigation of any nature as to such representations and warranties, the matters set forth in the certificates or the assumptions set forth below upon which we are relying, and no inference of any knowledge on the part of this Firm as to these legal or factual matters should be drawn from our representation of the Company in connection with the Principal Documents or otherwise. We have also assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with originals of all documents submitted to us as copies. We have also assumed that the Principal Documents have each been duly authorized, B-42 executed and delivered by all parties thereto other than the Company and that all such other parties have full power, authority and legal right to execute, deliver and perform their obligations under the Principal Documents, and that such Principal Documents are valid, binding and enforceable in accordance with their respective terms against such other parties. Based on the foregoing, and subject to the qualifications and limitations set forth below, we are of the opinion that the Principal Payment Shares are duly authorized and will be, upon issuance and delivery in accordance with the terms of the Notes, validly issued, fully paid and nonassessable. Upon issuance, each Principal Payment Share will have attached thereto a Preferred Share Purchase Right pursuant to the terms of the Company's Rights Plan if and as then in effect. We express no opinion as to the validity of the Rights Plan or the Preferred Share Purchase Rights. None of the Principal Payment Shares are subject to preemptive rights pursuant to the Certificate of Incorporation or the Delaware General Corporation Law (the "DGCL") or, to our knowledge, other similar rights of the stockholders of the Company. The foregoing opinions and comments are subject to the following additional qualifications: (a) Wherever we have stated herein that we have assumed a matter, it is intended to indicate that we have assumed such matter without making any independent legal or factual review or investigation of any nature to determine the accuracy of such assumption, and without expressing any opinion or conclusion of any kind concerning the matter, and no inference as to our knowledge of any legal or factual matters bearing on the accuracy of any such assumption should be drawn from the fact of our current or prior representation of the Company. (b) We express no opinion with respect to the laws of any jurisdiction other than the federal laws of the United States of America, the laws of the Commonwealth of Pennsylvania and the State of New York and the DGCL. We express no opinion with respect to any federal or state laws relating to tax and antitrust matters. We express no opinion as to compliance with applicable anti- fraud statutes, rules or regulations of any applicable jurisdiction governing the issuance of securities. (c) The opinions expressed above are subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws (including without limitation preference rules) affecting the rights of creditors generally and to general principles of equity (regardless of whether considered in a proceeding in equity or at law). (d) [IF OPINION GIVEN PURSUANT TO SECTION 1.4(D)(2)(B) OF NOTE: For purposes of this opinion, we have assumed that the formulas contained in the Notes to calculate the Optional Redemption Price represent stipulated damages that are not plainly disproportionate to the possible loss to the holders of the Notes and, therefore, are not "penalties" as a matter of law. We express no opinion as to whether the issuance of the Principal Payment Shares may be determined to be interest payable with respect to the Notes, or as to the effect of any laws of any B-43 jurisdiction restricting the interest that may be charged upon debt obligations, and our opinion set forth above assumes that such laws do not adversely affect any determination that the Principal Payment Shares are fully paid and non- assessable.] (e) The foregoing opinion and comments are as of the date hereof, and we assume no obligation to update or supplement them to reflect any facts or circumstances which may hereafter come to our attention or any changes in laws which may hereafter occur. This opinion letter is solely for the benefit of the Holders for use in connection with the transactions contemplated by the Notes and may not be relied upon by any other person or for any other purpose without our express written consent. Very truly yours, B-44 Schedule A Holders of Notes ---------------- B-45 EXHIBIT C --------- COMPANY NOTICE (SECTION 5.2(A) OF 11% REVENUE SHARING SENIOR SECURED NOTE DUE 2002) TO: ___________________________ (Name of Holder) (1) A Repurchase Event described in the 11% Revenue Sharing Senior Secured Note due 2002 (the "Note") of Cephalon, Inc., a Delaware corporation (the "Company"), occurred on ____________________, ______. As a result of such Repurchase Event, the Holder is entitled to exercise its repurchase rights pursuant to Section 5.2 of the Note. (2) The Holder's repurchase right must be exercised on or before ______________, _______. (3) At or before the date set forth in the preceding paragraph (2), the Holder must: (a) deliver to the Company a Holder Notice, in the form attached as EXHIBIT D to the Note; and (b) the Note, duly endorsed for transfer to the Company of the portion of the principal amount to be repurchased. (4) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note. Date _________________________ CEPHALON, INC. By: Title: C-46 EXHIBIT D --------- HOLDER NOTICE (SECTION 5.2(B) OF 11% REVENUE SHARING SENIOR SECURED NOTE DUE 2002) TO: CEPHALON, INC. (1) Pursuant to the terms of the 11% Revenue Sharing Senior Secured Note due 2002 (the "Note"), the undersigned Holder hereby elects to exercise its right to require repurchase by the Company pursuant to Sections 5.2(a) and 5.2(b) of $_________________________ of the Note, equal to the sum of $____________________ principal amount of the Note, $____________________ of accrued and unpaid interest on such principal amount and $____________________ of Default Interest on such interest at the Repurchase Price provided in the Note. (2) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note. Date: NAME OF HOLDER: By Signature of Registered Holder (Must be signed exactly as name appears in the Note.) D-47 EXHIBIT E --------- HOLDER REGISTRATION REPURCHASE NOTICE (SECTION 5.3 OF 11% REVENUE SHARING SENIOR SECURED NOTE DUE 2002) TO: CEPHALON, INC. (1) Pursuant to the terms of the 11% Revenue Sharing Senior Secured Note due 2002 (the "Note"), the undersigned Holder hereby elects to exercise its right to require repurchase by the Company pursuant to Section 5.3 of $____________________ of the Note, equal to the sum of $____________________ principal amount of the Note, $____________________ of accrued and unpaid interest on such principal amount and $____________________ of Default Interest on such interest at the Registration Repurchase Price provided in the Note. (2) Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note. Date: NAME OF HOLDER: By _________________________________ Signature of Registered Holder (Must be signed exactly as name appears in the Note.) E-48 EXHIBIT F --------- TARGET REVENUES Period 3 Months 12 Months Ended Ended Ended ----- ----------- ----------- [ ] * * THE CONFIDENTIAL MATERIAL CONTAINED HEREIN HAS BEEN OMITTTED AND FILED SEPARATELY WITH THE COMMISSION F-49 EX-4.3.(C) 4 FORM OF CLASS A WARRANT EXHIBIT 4.3(C) HOLDERS OF SERIES A WARRANTS DATED MARCH 1, 1999
Registered Holder Number of Shares of - ----------------- Common Stock ------------ Delta Opportunity Fund, Ltd. 348,000 Delta Opportunity Fund (Institutional), LLC 32,000 DLJ Capital Corp. 2,128 DLJ ESC II, L.P. 21,442 The Kaufmann Fund, Inc. 480,000 Sprout Capital VIII, L.P. 245,492 Sprout Growth II, L.P. 196,208 Sprout Venture Capital, L.P. 14,730
ANNEX II TO NOTE PURCHASE AGREEMENT NEITHER THIS WARRANT NOR ISSUANCE OF THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF TO THE HOLDER HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED OR REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR SUCH SECURITIES MAY BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND THE APPLICABLE RULES AND REGULATIONS THEREUNDER. THIS WARRANT MAY NOT BE TRANSFERRED, DIVIDED, COMBINED OR EXCHANGED, EXCEPT AS DESCRIBED IN SECTION 5 HEREIN. CEPHALON, INC. WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK -------------------------------------------------- Name of Registered Holder: _________________________ No. ____ ___________ Shares of Common Stock For good and valuable consideration the receipt of which is hereby acknowledged, Cephalon, Inc., a Delaware corporation (the "Company"), hereby grants the rights herein specified and certifies that ____________________ (the "Initial Holder") (or any registered assignee of the Initial Holder) (each of the Initial Holder and any such registered assignee being hereinafter referred to as the "Holder"), is entitled, subject to the conditions and upon the terms of this Warrant, to purchase from the Company, at any time or from time to time during the Exercise Period (as defined in Section 1 hereof), the number of shares of Common Stock (as defined in Section 1 hereof) set forth above at the Exercise Price (as defined in Section 1 hereof). The number of shares of Common Stock to be received upon the exercise of this Warrant and the Exercise Price are subject to adjustment from time to time as hereinafter set forth. Section 1. Certain Definitions. Terms defined in the preceding paragraph ------------------- and elsewhere in this Warrant have the respective meanings provided for therein. The following additional terms, as used herein, have the following respective meanings: -1- "Act" means the Securities Act of 1933, as amended. "Applicable Portion" means the lesser of (x) the unexercised portion of this Warrant that is outstanding on the applicable date of redemption pursuant to Section 9 and (y) the portion of this Warrant which entitles the Holder to purchase a number of shares of Common Stock (or other securities deliverable hereunder) equal to twenty-five percent (25%) of the aggregate number of Warrant Shares subject to this Warrant, determined without regard to any prior exercise hereof; provided, however, that if in connection with a redemption of this -------- ------- Warrant the Average Market Price shall be greater than two hundred fifty percent (250%) of the Exercise Price as in effect during the period of twenty (20) consecutive Trading Days during which the Average Market Price is determined, then the Applicable Portion determined pursuant to this clause (y) shall be the portion of this Warrant which entitles the Holder to purchase a number of shares of Common Stock (or other securities deliverable hereunder) equal to fifty percent (50%) of the aggregate number of Warrant Shares subject to this Warrant, determined without regard to any prior exercise hereof less the portion, if any, of this Warrant which has previously been called for redemption in accordance with Section 9. "Average Market Price" means the arithmetic average of the Closing Price during any period of twenty (20) consecutive Trading Days during the ninety-day period which commences on the date which is 1,000 days after the Issuance Date and ends on and includes the date which is 1,089 days after the Issuance Date. "Class A Warrants" means this Warrant and the Other Warrants of like tenor issued by the Company in connection with the issuance of the Notes. "Class B Warrants" means the Class B Common Stock Purchase Warrants issued by the Company in connection with the issuance of the Notes. "Closing Price" means on any date the last reported sale price (regular way), or if there are no sales of Common Stock on such date, the closing bid price, per share of the Common Stock on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or traded on any such exchange, on the Nasdaq National Market, or if not listed or traded on any such exchange or system, the average of the bid and asked price per share on the Nasdaq Stock Market in each such case, as reported by such exchange or market or, if such quotations are not available, the fair market value as reasonably determined by the Board of Directors of the Company or any committee of such Board. "Common Stock" means the Company's Common Stock, $.01 par value, and the related Preferred Share Purchase Rights as authorized on the date hereof, and any other securities into which or for which the Common Stock or such Preferred Share Purchase Rights may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise or any similar rights distributed by the Company to the holders of the Common Stock. "Early Redemption Option" means the right of the Company to redeem the Notes Pursuant to Section 1.2 thereof. -2- "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exercise Period" means the period beginning on the date hereof, and ending on March 1, 2004. "Exercise Price" means $10.08 subject to change or adjustment pursuant to Section 8 hereof. "Issuance Date" means March 1, 1999. "Nasdaq" means the Nasdaq Stock Market. "Nasdaq National Market" means the Nasdaq National Market of Nasdaq. "Notes" means the 11% Revenue Sharing Senior Secured Notes of the Company. "Other Securities" means any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the Holder of this Warrant at any time shall be entitled to receive, or shall have received, on the exercise of this Warrant, in lieu of or in addition to the Warrant Shares, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of the Warrant Shares or Other Securities pursuant to Section 8. "Other Warrants" means the other Class A Warrants for the Purchase of Shares of Common Stock issued by the Company in connection with the issuance of the Notes. "Permitted Transfer" means (a) any transfer, assignment or succession by operation of law or pursuant to any court order issued by a court of competent jurisdiction, (b) any transfer to an immediate family member, (c) any transfer through probate or through intestate succession, (d) in the case of a transfer by a corporation, partnership, or trust, any transfer to any person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the transferor, (e) any distribution by a retirement plan to any participant in the plan (f) any transfer or assignment by the Initial Holder to its employee, or (g) any transfer or assignment to a person who is an "accredited investor," as defined in Regulation D under the Securities Act. "Redemption Date" has the meaning provided in Section 9(b). "Redemption Price" has the meaning provided in Section 9(a). "Redemption Target Price" means an amount equal to two hundred percent (200%) of the Exercise Price as in effect during the period of twenty (20) consecutive Trading Days during which the Average Market Price is determined. -3- "Reorganization Event" means the occurrence of any one or more of the following events: (i) any consolidation, merger or similar transaction of the Company or any Subsidiary with or into another entity (other than a merger or consolidation or similar transaction of a Subsidiary into the Company or a wholly-owned Subsidiary) where the stockholders of the Company immediately prior to such transaction do not collectively own at least 51% of the outstanding voting securities of the surviving corporation of such consolidation or merger immediately following such transaction; or the sale of all or substantially all of the assets of the Company and the Subsidiaries in a sale transaction or a series of related transactions; or (ii) the occurrence of any transaction or event in connection with which all or substantially all the Common Stock shall be exchanged for, converted into, acquired for or constitute the right to receive consideration (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, share exchange, combination, reclassification, recapitalization, or otherwise) which is not all or substantially all common stock which is (or will, upon consummation of or immediately following such transaction or event, be) listed on a national securities exchange or approved for quotation on Nasdaq or any similar United States system of automated dissemination of transaction reporting of securities prices; or (iii) the acquisition by a person or entity or group of persons or entities acting in concert as a partnership, limited partnership, syndicate or group, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, of beneficial ownership of securities of the Company representing 50% or more of the combined voting power of the outstanding voting securities of the Company ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Exchange Act of 1934, as amended. "Subsidiary" means any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company. "Trading Day" means a day on which either the national securities exchange or the Nasdaq National Market which then constitutes the principal securities market for the Common Stock (or other securities deliverable hereunder) is open for general trading of securities. "Warrant" means this Warrant and any Warrant or Warrants which may be issued pursuant to Section 4 or 5 hereof in substitution or exchange for or upon transfer of this Warrant, any Warrant which may be issued pursuant to Section 2 hereof upon partial exercise of this Warrant and any Warrant which may be issued pursuant to Section 6 hereof upon the loss, theft, destruction or mutilation of this Warrant. -4- "Warrant Register" means the register maintained at the principal office of the Company, or at the office of its agent, in which the name of the Holder of this Warrant shall be registered. "Warrant Shares" means the shares of Common Stock, as adjusted from time to time in accordance with Section 8 hereof, deliverable upon exercise of this Warrant. Section 2. Exercise of Warrant. This Warrant may be exercised, in whole ------------------- or in part, at any time or from time to time during the Exercise Period, by presentation and surrender hereof to the Company at its principal office at the address set forth on the signature page hereof (or at such other address of the Company or any agent appointed by the Company to act hereunder as the Company or such agent may hereafter designate in writing to the Holder), with the purchase form attached hereto as ANNEX I (the "Purchase Form") duly executed and accompanied by cash or a certified or official bank check drawn to the order of "CEPHALON, INC." (or its successor in interest, if any) in the amount of the Exercise Price, multiplied by the number of Warrant Shares specified in such Purchase Form. If this Warrant should be exercised in part only, the Company or its agent shall, upon surrender of this Warrant, execute and deliver a Warrant evidencing the right of the Holder thereof to purchase the balance of the Warrant Shares purchasable hereunder. Upon receipt by the Company during the Exercise Period of this Warrant and such Purchase Form in proper form for exercise, together with proper payment of the Exercise Price at its principal office, or by its agent at its office, the Holder shall be deemed to be the holder of record of the number of Warrant Shares specified in such Purchase Form; provided, however, that if the date of such receipt by the Company or its -------- ------- agent is a date on which the stock transfer books of the Company are closed, such person shall be deemed to have become the record holder of such Warrant Shares on the next business day on which the stock transfer books of the Company are open. The Company shall pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of such Warrant Shares. Any Warrant issued upon partial exercise of this Warrant pursuant to this Section 2 shall be dated the date of this Warrant. Section 3. Reservation of Shares. The Company agrees that at all times it --------------------- will keep reserved solely for issuance and delivery pursuant to this Warrant the number of shares of its Common Stock (or other securities) that are or would be issuable from time to time upon exercise of this Warrant. All such shares shall be duly authorized and, when issued upon such exercise, shall be validly issued, fully paid and nonassessable, free and clear of all liens, security interests, charges and other encumbrances or restrictions on sale and free of all preemptive rights. Before taking any action that would cause an adjustment pursuant to Section 8 hereof reducing the Exercise Price below the then par value (if any) of the Warrant Shares issuable upon exercise of this Warrant, the Company will take any corporate action that may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. Section 4. Transfer in Compliance with Applicable Securities Laws. ------------------------------------------------------ (a) Neither this Warrant nor any of the Warrant Shares, nor any interest in either, may be sold, assigned, pledged, hypothecated, encumbered or in any other manner -5- transferred or disposed of, in whole or in part, except in accordance with Section 5 hereof and in compliance with applicable United States federal and state securities laws and the terms and conditions hereof. Except as provided in subsection (b) of this Section 4, each Warrant shall bear the following legend: NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED OR REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR SUCH SECURITIES MAY BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND THE APPLICABLE RULES AND REGULATIONS THEREUNDER. (b) If (i) the Warrant Shares have been registered under the Act and registered or qualified under applicable state securities or Blue Sky laws or (ii) the Holder has received an opinion of counsel reasonably satisfactory to the Company that the Warrant Shares may be freely transferred without registration under the Act or registration or qualification under applicable state securities or Blue Sky laws, the Holder may require the Company to issue, in substitution for a Warrant with the foregoing legend, a Warrant with the following legend: THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED OR REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND THE APPLICABLE RULES AND REGULATIONS THEREUNDER. (c) The Holder may require the Company to issue a Warrant without either of the foregoing legends in substitution for a Warrant bearing one of such legends if either (i) this Warrant and the Warrant Shares issuable upon the exercise hereof have been registered under the Act and registered or qualified under applicable state securities laws or (ii) the Holder has received an opinion of counsel reasonably satisfactory to the Company that this Warrant and the Warrant Shares may be freely transferred without registration under the Act or registration or qualification under applicable state securities laws. The provisions of this Section 4 shall be binding on all subsequent holders of this Warrant. Section 5. Exchange, Transfer or Assignment of Warrant. ------------------------------------------- (a) This Warrant may be, at the option of the Holder, upon presentation and surrender hereof to the Company at its principal office or to the Company's agent at its office, (i) exchanged for other Warrants of different denominations, registered in the name of the Holder, entitling the Holder to purchase in the aggregate the same number of Warrant Shares at the Exercise Price or, (ii) if delivered together with a written notice signed by the Holder specifying the -6- denominations in which new Warrants are to be issued, divided or combined with other Warrants registered in the name of the Holder that carry the same rights. (b) If the Holder has received an opinion of counsel satisfactory to the Company that this Warrant may be sold or transferred without registration under the Act, as contemplated by Section 4 hereof, (x) this Warrant may be transferred and assigned, subject to subparagraph (y) of this Section 5(b), at the option of the Holder, upon surrender of this Warrant to the Company at its principal office or to the Company's agent at its office, with the warrant assignment form attached hereto as ANNEX II (the "Warrant Assignment Form") duly executed and accompanied by funds sufficient to pay any transfer tax, except that (y) no transfer or assignment of this Warrant may be made unless (i) such transfer or assignment is a Permitted Transfer or (ii) the Company consents in writing to such transfer or assignment, which consent may be withheld in its absolute discretion. The Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees named in such Warrant Assignment Form. (c) Any transfer or exchange of this Warrant shall be without charge to the Holder and any Warrant or Warrants issued pursuant to this Section 5 shall be dated the date hereof. (d) The Holder shall not be entitled to transfer a portion of this Warrant with respect to the purchase of a number of Warrant Shares that is less than 10,000 without the prior written consent of the Company. (e) In order to give effect to Section 9, if this Warrant shall be exercised in part, then (1) any Warrant issued to the Holder to evidence the unexercised portion of this Warrant shall bear a notation of the original number of Warrant Shares subject to this Warrant and (2) in connection with any split- up of this Warrant into two or more instruments, each such instrument shall bear a notation of a portion of the original number of Warrant Shares subject to this Warrant, determined by pro rata allocation thereto of the aggregate original such amount based on the portion of the unexercised amount of this Warrant (determined immediately prior to such split-up) evidenced by such instrument. Section 6. Lost, Mutilated or Missing Warrant. Upon receipt by the ---------------------------------- Company or its agent of evidence satisfactory to it of the loss, theft or destruction of this Warrant, and of satisfactory indemnification, and upon surrender and cancellation of this Warrant if mutilated, the Company or its agent shall execute and deliver a Warrant of like tenor and date in exchange for this Warrant. Section 7. Rights of the Holder. The Holder shall not, by virtue hereof, -------------------- be entitled to any rights of a shareholder in the Company, either at law or in equity, and the rights of the Holder are limited to those expressed in this Warrant. Section 8. Anti-dilution. (a) If the Company shall fix or have fixed a ------------- record date at any time after the date hereof and before the expiration of the Exercise Period for: -7- (i) The declaration of a dividend or distribution on the Common Stock (or other securities deliverable hereunder) payable in shares of capital stock (whether shares of Common Stock or of capital stock of any other class), (A) the subdivision of shares of the Common Stock into a greater number of shares, (B) the combination of the Common Stock into a smaller number of shares or (C) the issuance of any shares of its capital stock by reclassification of the Common Stock in connection with a consolidation or merger with a subsidiary of the Company in which the Company is the continuing corporation, then, in any such event, upon exercise of this Warrant the Holder shall be entitled to receive the aggregate number and kind of shares which, if the Warrant had been exercised immediately prior to such record date, the Holder would have been entitled to receive by virtue of such dividend, distribution, subdivision, combination or reclassification, and the Exercise Price shall be appropriately adjusted. Such adjustment shall be made successively whenever any event listed above shall occur. (ii) Issuance at Less than Current Market Price. The issuance ------------------------------------------ of rights, options or warrants to all holders of Common Stock (or other securities deliverable hereunder) entitling them to subscribe for or purchase Common Stock (or other securities deliverable hereunder) at a price per share or having a conversion or exercise price per share (including the amount paid, if any, for such rights, options or warrants) less than the Closing Price on such record date (excluding rights or warrants that are not immediately exercisable and for which provision is made for the Holder to receive comparable rights or warrants upon exercise), then the number of Warrant Shares to be received hereunder after such record date shall be determined by multiplying the number of shares receivable hereunder immediately prior to such record date by a fraction, the denominator of which shall be the number of shares of Common Stock (or other securities deliverable hereunder) outstanding on such record date plus the number of shares of Common Stock (or other securities deliverable hereunder) that the aggregate offering price of the total number of shares so offered for subscription or purchase would purchase at such Closing Price, and the numerator of which shall be the number of shares of Common Stock (or other securities deliverable hereunder) outstanding on such record date plus the number of additional shares of Common Stock (or other securities deliverable hereunder) offered for subscription or purchase, and the Exercise Price shall be appropriately adjusted so that the aggregate purchase price of the Warrant Shares to be received hereunder after such record date is equal to the aggregate purchase price of the Warrant Shares receivable hereunder immediately prior to such record date. Shares of Common Stock owned by or held for the account of the Company or any subsidiary of the Company on such record date shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall become effective immediately after such record date. Such adjustment shall be made successively whenever any such event shall occur. If such rights, options or warrants are not so issued, the number of Warrant Shares receivable hereunder shall again be adjusted to be the number that would have been in effect had such record date not been fixed. On the expiration of such rights, options or warrants the number of Warrant Shares receivable hereunder shall be readjusted to be the number that would have obtained had the adjustment made upon the issuance of such rights, options or warrants been made upon the basis of the issuance of only the number of shares of Common Stock (or other securities deliverable hereunder) actually issued upon the exercise of such rights, options -8- or warrants, provided, however, that if the Holder of this Warrant shall -------- ------- have exercised this Warrant prior to any such readjustment, the number of Warrant Shares that have been delivered or the number of Warrant Shares to be delivered shall not be subject to any readjustment. In any case in which this subsection (ii) shall require that an adjustment in the number of shares receivable hereunder or the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event issuing to the Holder of any Warrant exercised after such record date the number of Warrant Shares, if any, issuable upon such exercise over and above the number of Warrant Shares, if any, issuable upon such exercise on the basis of the Exercise Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such -------- ------- Holder a due bill or other appropriate instrument evidencing such Holder's right to receive such additional Warrant Shares upon the occurrence of the event requiring such adjustments. (iii) Distribution of Subscription Rights, Warrants, Evidences -------------------------------------------------------- of Indebtedness or Assets. The making of a distribution to all holders of ------------------------- Common Stock (or other securities deliverable hereunder) (including any such distribution to be made in connection with a consolidation or merger in which the Company is to be the continuing corporation) of (A) any shares of capital stock of the Company (other than Common Stock), (B) subscription rights or warrants (excluding those for which adjustment is provided in subsection 8(a)(ii) above and excluding those that are not immediately exercisable and for which provision is made for the Holder to receive comparable subscription rights or warrants upon exercise) or (C) evidences of its indebtedness or assets (excluding (x) dividends paid in or distributions of the Company's capital stock for which the number of Warrant Shares receivable hereunder shall have been adjusted pursuant to paragraph 8(a)(i) and (y) cash dividends or distributions payable out of earnings or surplus not in excess of 10% of the average Closing Price for the thirty trading days prior to the fifth day before the date of declaration multiplied by the number of outstanding shares of Common Stock) (any of the foregoing being hereinafter in this paragraph (iii) called the "Securities"), then in each such case (unless the Company elects to reserve shares or other units of such Securities for distribution to each Holder upon exercise of this Warrant so that, in addition to the shares of Common Stock (or other securities deliverable hereunder) to which each Holder is entitled, each Holder will receive upon such exercise the amount and kind of such Securities which such Holder would have received if the Holder had, immediately prior to the record date for the distribution of the Securities, exercised the Warrant) the number of Warrant Shares receivable hereunder after such record date shall be determined by multiplying the number of Warrant Shares receivable hereunder immediately prior to such record date by a fraction, the denominator of which shall be the Closing Price on the Trading Day immediately prior to the first Trading Day on which the Common Stock (or other securities deliverable hereunder) trades without the right to receive such Securities, less the fair market value (as determined in the reasonable judgment of the Board of Directors of the Company and described in a statement mailed to the Holder) of the portion of the assets or evidences of indebtedness so to be distributed to a holder of one share of the Common Stock or of such subscription rights or warrants applicable to one share of the Common Stock, and the numerator of which shall be the Closing Price of the Common Stock on such Trading Day; and the Exercise Price shall be appropriately adjusted so that -9- the aggregate purchase price of the Warrant Shares to be received hereunder after such record date is equal to the aggregate purchase price of the Warrant Shares receivable hereunder immediately prior to such record date. Such adjustment shall become effective immediately after such record date and shall be made successively whenever such a record date is fixed. If such distribution is not so made, the number of Warrant Shares receivable hereunder shall be readjusted to be the number that was in effect immediately prior to such record date. In the event that the Holder exercises this Warrant after an adjustment is made under this paragraph (iii) and prior to a readjustment under this paragraph (iii), the number of Warrant Shares that have been delivered or the number of Warrant Shares to be delivered shall not be subject to any readjustment. In any case in which this paragraph (iii) shall require that an adjustment in the number of Warrant Shares receivable hereunder or the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event issuing to the Holder of any Warrant exercised after such record date the number of Warrant Shares, if any, issuable upon such exercise over and above the number of Warrant Shares, if any, issuable upon such exercise on the basis of the Exercise Price in effect prior to such adjustment; provided, however, that the Company shall -------- ------- deliver to such Holder a due bill or other appropriate instrument evidencing such Holder's right to receive such additional Warrant Shares upon the occurrence of the event requiring such adjustments. (b) Reorganization Event. In case of any Reorganization Event the -------------------- Company shall, as a condition precedent to the consummation of the transaction constituting, or announced as, such Reorganization Event, cause effective provisions to be made so that the Holder shall have the right immediately thereafter, by exercising this Warrant, to receive the aggregate amount and kind of shares of stock and other securities and property that were receivable upon such Reorganization Event by a holder of the number of shares of Common Stock that would have been received immediately prior to such Reorganization Event upon exercise of this Warrant. Any such provision shall include provision for adjustments in respect of such shares of stock and other securities and property that shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 8(a). The foregoing provisions of this Section 8(b) shall similarly apply to successive Reorganization Events. (c) Fractional Shares. No fractional shares of Common Stock (or ----------------- other securities deliverable hereunder) or scrip shall be issued to any Holder in connection with the exercise of this Warrant. Instead of any fractional share of Common Stock (or other securities deliverable hereunder) that would otherwise be issuable to such Holder, the Company shall pay to such Holder a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Closing Price per share of Common Stock (or other securities deliverable hereunder) on the date of such exercise. (d) Carryover. Notwithstanding any other provision of this --------- Section 8, no adjustment shall be made to the number of shares of Common Stock (or other securities deliverable hereunder) to be delivered to each Holder (or to the Exercise Price) if such adjustment would represent less than one percent of the number of shares to be so delivered, but any such adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to -10- one percent or more of the number of shares to be so delivered. (e) Notices of Certain Events. If at any time after the date ------------------------- hereof and before the expiration of the Exercise Period: (i) the Company authorizes the issuance to all holders of its Common Stock of (A) rights or warrants to subscribe for or purchase shares of its Common Stock or (B) any other subscription rights or warrants; (ii) the Company authorizes the distribution to all holders of its Common Stock of evidences of its indebtedness or assets (other than cash dividends or distributions excluded from the operation of paragraph 8(a)(iii)); (iii) there shall be any capital reorganization of the Company or reclassification of the Common Stock (other than a change in par value of the Common Stock or an increase in the authorized capital stock of the Company not involving the issuance of any shares thereof) or any consolidation or merger to which the Company is a party (other than a consolidation or merger with a subsidiary in which the Company is the continuing corporation and that does not result in any reclassification or change in the Common Stock outstanding) or a conveyance or transfer of all or substantially all of the properties and assets of the Company: (iv) there shall be any voluntary or involuntary dissolution, liquidation or winding-up of the Company; or (v) there shall be any other event that would result in an adjustment pursuant to this Section 8 in the Exercise Price or the number of Warrant Shares that may be purchased upon the exercise hereof; the Company will cause to be mailed to the Holder, at least twenty (20) days (or ten (10) days in any case specified in the clauses (i) or (ii) above) before the applicable record or effective date hereinafter specified, or as soon as practicable after the occurrence of an event specified in clause (v) if such event was beyond the control of the Company and the Company did not have knowledge of such event at least ten (10) days before such date, a notice stating (A) the date as of which the holders of Common Stock of record entitled to receive any such rights, warrants or distributions is to be determined, or (B) the date on which any such reorganization, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record will be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up. (f) Failure to Give Notice. The failure to give the notice ---------------------- required by Section 8(e) hereof or any defect therein shall not affect the legality or validity of any distribution right, warrant, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up or the vote upon any such action. -11- Section 9. Redemption of Warrant. (a) Provided that the Company has not --------------------- previously elected to exercise its Early Redemption Option to retire all or any part of the Notes, at any time on or after the date which is 1,000 days after the Issuance Date, the Company shall have the right, but not the obligation, on not less than forty-five (45) and not more than sixty (60) days prior notice, to redeem the Applicable Portion of this Warrant, at a redemption price of $0.01 per share of Common Stock (or unit of other securities deliverable hereunder) issuable upon exercise of the portion of this Warrant so redeemed (the "Redemption Price"), if the Average Market Price of one share of Common Stock (or unit of other securities deliverable hereunder) receivable upon exercise of this Warrant shall exceed the Redemption Target Price. Any notice of redemption shall be given within twenty (20) days after the last Trading Day in the period of twenty (20) consecutive Trading Days which gave rise to the right of the Company to redeem this Warrant. If this Warrant is called for redemption, the Company shall simultaneously call for redemption a portion of the Other Warrants in accordance with their terms that are similar to this Section 9. (b) If the requirements set forth in Section 9(a) are met, and the Company wishes to exercise its right so to redeem the Applicable Portion of this Warrant, the Company shall give a notice of redemption to the Holder not later than the 45th day prior to the date fixed for redemption (the "Redemption Date"). (c) The notice of redemption shall specify (i) the portion of this Warrant to be redeemed, (ii) the aggregate Redemption Price for the Applicable Portion of this Warrant to be redeemed, (iii) the date fixed for redemption, (iv) the place where this Warrant shall be delivered and the Redemption Price paid, and (v) that the right to exercise the Applicable Portion of this Warrant that is being redeemed shall terminate at 5:00 p.m., New York City time, on the Trading Day immediately preceding the Redemption Date unless otherwise agreed by the Company. (d) If the Company shall have exercised its right to redeem the Applicable Portion of this Warrant, any right to exercise such Applicable Portion of this Warrant shall terminate at 5:00 p.m., New York City time, on the Trading Day immediately preceding the Redemption Date unless otherwise agreed by the Company. On and after the Redemption Date, unless otherwise agreed by the Company, the Holder shall have no further rights with respect to the Applicable Portion being so redeemed except to receive, upon surrender of this Warrant, the Redemption Price. (e) From and after the Redemption Date, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Holder, deliver or cause to be delivered to or upon the written order of the Holder a sum in cash equal to the aggregate Redemption Price of the Applicable Portion of this Warrant being so redeemed. From and after the Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem such Applicable Portion of this Warrant, such Applicable Portion of this Warrant shall expire and become void and all rights hereunder, except the right to receive payment of the Redemption Price, shall cease. (f) If the Company shall have exercised its right to redeem a portion of -12- this Note and, during any period of twenty (20) consecutive Trading Days during which the Average Market Price may be determined pursuant to this Warrant, the Average Market Price of one share of Common Stock (or unit of other securities deliverable hereunder) receivable upon exercise of this Warrant shall exceed an amount equal to two hundred fifty percent (250%) of the Exercise Price, then the Company shall have the right to exercise its right of redemption on a second occasion. Such redemption shall otherwise be made in accordance with this Section 9. Section 10. Officers' Certificate. Whenever the number of Warrant Shares --------------------- that may be purchased on exercise of this Warrant or the Exercise Price is adjusted as required by the provisions of Section 8 hereof, the Company will forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office and at the office of its agent an officers' certificate showing the adjusted number of Warrant Shares that may be purchased at the Exercise Price on exercise of this Warrant and the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment and the manner of computing such adjustment. Each such officers' certificate shall be signed by the President, Chief Financial Officer or Treasurer of the Company and by the Secretary or an Assistant Secretary of the Company. Each such officers' certificate shall be made available at all reasonable times for inspection by the Holder. The Company shall, forthwith after each such adjustment, cause such certificate to be mailed to the Holder. Section 11. Availability of Information. In addition to the requirements --------------------------- of Section 5(h), the Company shall comply with all applicable public information reporting requirements of the SEC and applicable state securities laws to which it may from time to time be subject. The Company will also cooperate with each Holder of any Warrants and each holder of any Warrant Shares in supplying such information concerning the Company as may be necessary for such Holder or holder to complete and file any information reporting forms currently or hereafter required by the SEC as a condition to the availability of an exemption from the Act for the sales of any Warrants or Warrant Shares. Section 12. Warrant Register. The Company will register this Warrant in ---------------- the Warrant Register in the name of the record holder to whom it has been distributed or assigned in accordance with the terms hereof. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof (notwithstanding any notation of ownership or other writing hereon made by anyone) for the purpose of any exercise hereof or any distribution to the Holder and for all other purposes, and the Company shall not be affected by any notice to the contrary. Section 13. Successors. All of the provisions of this Warrant by or for ---------- the benefit of the Company or the Holder shall bind and inure to the benefit of their respective successors and assigns. Section 14. Headings. The headings of sections of this Warrant have been -------- inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. Section 15. Amendments. This Warrant may be amended by the affirmative ---------- vote of -13- Holders holding Warrants to purchase not less than two-thirds of the Warrant Shares purchasable pursuant to all of the then outstanding Warrants; provided, -------- that, except as expressly provided herein, this Warrant may not be amended, without the consent of the Holder, to change (i) any price at which this Warrant may be exercised, (ii) the period during which this Warrant may be exercised, (iii) the number or type of securities to be issued upon the exercise hereof or (iv) the provisions of this Section 15. Section 16. Notices. Unless otherwise provided in this Warrant, any ------- notice or other communication required or permitted to be made or given to any party hereto pursuant to this Warrant shall be in writing and shall be deemed made or given if delivered by hand, on the date of such delivery to such party, or, if mailed, on the fifth day after the date of mailing, if sent to such party by certified or registered mail, postage prepaid, addressed to it (in the case of a Holder) at its address in the Warrant Register or (in the case of the Company) at its address set forth below, or to such other address as is designated by written notice, similarly given to each party hereto. Section 17. Governing Law. This Warrant shall be deemed to be a contract ------------- made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State as applied to the contracts made and to be performed in New York between New York residents. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -14- IN WITNESS WHEREOF, the Company has duly caused this Warrant to be signed and attested by its duly authorized officer and to be dated as of __________, 1999. CEPHALON, INC. By: Name: Title: Address: 145 Brandywine Parkway West Chester, Pennsylvania 19380 Attention: Senior Vice President and Chief Financial Officer -15- ANNEX I TO WARRANT PURCHASE FORM ------------- TO CEPHALON, INC.: The undersigned, ________________________, hereby irrevocably elects to exercise the within Warrant to purchase ___________________________ shares of Common Stock of Cephalon, Inc., a Delaware corporation, and hereby makes payment of $_____________________ in payment of the exercise price thereof. Dated: ____________________________ _____________________________ [SIGNED] _____________________________ [STREET ADDRESS] _____________________________ [CITY AND STATE] I-16 ANNEX II TO WARRANT WARRANT ASSIGNMENT FORM ----------------------- TO CEPHALON, INC.: FOR VALUE RECEIVED, the undersigned, __________________________________________________, ("Assignor"), hereby sells, assigns and transfers unto Name: ________________________________________ ("Assignee") (Please type or print in block letters.) Address: _____________________________________ Social Security or Taxpayer I.D. No.: _______________________ Assignor's right to purchase up to _________________ shares of Common Stock of Cephalon, Inc., a Delaware corporation, represented by this Warrant and does hereby irrevocably constitute and appoint the Company and any of its officers, secretary or assistant secretaries, as its officers, secretary or assistant secretaries, as attorneys-in-fact to transfer the same on the books of the Company, with full power of substitution in the premises. Date: __________________________ Print Name: II-17 EX-4.3.(D) 5 FORM OF CLASS B WARRANT EXHIBIT 4.3(D) HOLDERS OF SERIES B WARRANTS DATED MARCH 1, 1999
Registered Holder Number of Shares of - ----------------- Common Stock ------------ Delta Opportunity Fund, Ltd. 116,000 Delta Opportunity Fund (Institutional), LLC 44,000 DLJ Capital Corp. 709 DLJ ESC II, L.P. 7,147 The Kaufmann Fund, Inc. 160,000 Sprout Capital VIII, L.P. 81,831 Sprout Growth II, L.P. 85,403 Sprout Venture Capital, L.P. 4,910
ANNEX II TO NOTE PURCHASE AGREEMENT NEITHER THIS WARRANT NOR ISSUANCE OF THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF TO THE HOLDER HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED OR REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR SUCH SECURITIES MAY BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND THE APPLICABLE RULES AND REGULATIONS THEREUNDER. THIS WARRANT MAY NOT BE TRANSFERRED, DIVIDED, COMBINED OR EXCHANGED, EXCEPT AS DESCRIBED IN SECTION 5 HEREIN. CEPHALON, INC. WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK -------------------------------------------------- Name of Registered Holder: _________________________ No. ____ ___________ Shares of Common Stock For good and valuable consideration the receipt of which is hereby acknowledged, Cephalon, Inc., a Delaware corporation (the "Company"), hereby grants the rights herein specified and certifies that ____________________ (the "Initial Holder") (or any registered assignee of the Initial Holder) (each of the Initial Holder and any such registered assignee being hereinafter referred to as the "Holder"), is entitled, subject to the conditions and upon the terms of this Warrant, to purchase from the Company, at any time or from time to time during the Exercise Period (as defined in Section 1 hereof), the number of shares of Common Stock (as defined in Section 1 hereof) set forth above at the Exercise Price (as defined in Section 1 hereof). The number of shares of Common Stock to be received upon the exercise of this Warrant and the Exercise Price are subject to adjustment from time to time as hereinafter set forth. Section 1. Certain Definitions. Terms defined in the preceding paragraph ------------------- and elsewhere in this Warrant have the respective meanings provided for therein. The following additional terms, as used herein, have the following respective meanings: -1- ANNEX III TO NOTE PURCHASE AGREEMENT NEITHER THIS WARRANT NOR ISSUANCE OF THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF TO THE HOLDER HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED OR REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR SUCH SECURITIES MAY BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND THE APPLICABLE RULES AND REGULATIONS THEREUNDER. THIS WARRANT MAY NOT BE TRANSFERRED, DIVIDED, COMBINED OR EXCHANGED, EXCEPT AS DESCRIBED IN SECTION 5 HEREIN. CEPHALON, INC. WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK -------------------------------------------------- Name of Registered Holder: _________________________ No. ____ ___________ Shares of Common Stock For good and valuable consideration the receipt of which is hereby acknowledged, Cephalon, Inc., a Delaware corporation (the "Company"), hereby grants the rights herein specified and certifies that ____________________ (the "Initial Holder") (or any registered assignee of the Initial Holder) (each of the Initial Holder and any such registered assignee being hereinafter referred to as the "Holder"), is entitled, subject to the conditions and upon the terms of this Warrant, to purchase from the Company, at any time or from time to time during the Exercise Period (as defined in Section 1 hereof), the number of shares of Common Stock (as defined in Section 1 hereof) set forth above at the Exercise Price (as defined in Section 1 hereof). The number of shares of Common Stock to be received upon the exercise of this Warrant and the Exercise Price are subject to adjustment from time to time as hereinafter set forth. Section 1. Certain Definitions. Terms defined in the preceding paragraph ------------------- and elsewhere in this Warrant have the respective meanings provided for therein. The following additional terms, as used herein, have the following respective meanings: -1- "Acceleration Date" means the earlier of the date on which a Reorganization Event occurs or the date on which the Company shall agree to effect a Reorganization Event, provided, that if approval of the stockholders of the -------- Company is required in connection with such Reorganization Event, the Acceleration Date means the date of such approval. "Act" means the Securities Act of 1933, as amended. "Applicable Portion" means the portion of this Warrant which entitles the Holder to purchase a number of shares of Common Stock (or other securities deliverable hereunder) equal to the product of (i) the aggregate number of Warrant Shares subject to this Warrant immediately prior to such redemption times (ii) the quotient of (a) the amount of Net Revenues for the period from the Issuance Date to the third anniversary of the Issuance Date minus an amount equal to fifty percent (50%) of the Target Revenues for such period, divided by (b) an amount equal to fifty percent (50%) of the Target Revenues for the period from the Issuance Date to the third anniversary of the Issuance Date; provided, -------- however, that in no event shall such quotient be greater than one or less than - ------- zero. "Average Market Price" means the arithmetic average of the Closing Price during any period of twenty (20) consecutive Trading Days during the ninety-day period which commences on the date which is 1,000 days after the Issuance Date and ends on and includes the date which is 1,089 days after the Issuance Date. "Class A Warrants" means the Class A Common Stock Purchase Warrants issued by the Company in connection with the issuance of the Notes. "Class B Warrants" means this Warrant and the Other Warrants of like tenor issued by the Company in connection with the issuance of the Notes. "Closing Price" means on any date the last reported sale price (regular way), or if there are no sales of Common Stock on such date, the closing bid price, per share of the Common Stock on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or traded on any such exchange, on the Nasdaq National Market, or if not listed or traded on any such exchange or system, the average of the bid and asked price per share on the Nasdaq Stock Market in each such case, as reported by such exchange or market or, if such quotations are not available, the fair market value as reasonably determined by the Board of Directors of the Company or any committee of such Board. "Common Stock" means the Company's Common Stock, $.01 par value, and the related Preferred Share Purchase Rights as authorized on the date hereof, and any other securities into which or for which the Common Stock or such Preferred Share Purchase Rights may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise or any similar rights distributed by the Company to the holders of the Common Stock. "Early Redemption Option" means the right of the Company to redeem the Notes Pursuant to Section 1.2 thereof. -2- "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exercise Period" means the period beginning on March 1, 2002 (or such earlier date determined in accordance with Section 8(b)(ii)) and ending on March 1, 2004. "Exercise Price" means $10.08 subject to change or adjustment pursuant to Section 8 hereof. "Issuance Date" means March 1, 1999. "Nasdaq" means the Nasdaq Stock Market. "Nasdaq National Market" means the Nasdaq National Market of Nasdaq. "Net Revenues" has the meaning provided in the Notes. "Notes" means the 11% Revenue Sharing Senior Secured Notes of the Company. "Other Securities" means any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the Holder of this Warrant at any time shall be entitled to receive, or shall have received, on the exercise of this Warrant, in lieu of or in addition to the Warrant Shares, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of the Warrant Shares or Other Securities pursuant to Section 8. "Other Warrants" means the other Class B Warrants for the Purchase of Shares of Common Stock issued by the Company in connection with the issuance of the Notes. "Permitted Transfer" means (a) any transfer, assignment or succession by operation of law or pursuant to any court order issued by a court of competent jurisdiction, (b) any transfer to an immediate family member, (c) any transfer through probate or through intestate succession, (d) in the case of a transfer by a corporation, partnership, or trust, any transfer to any person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the transferor, (e) any distribution by a retirement plan to any participant in the plan (f) any transfer or assignment by the Initial Holder to its employee, or (g) any transfer or assignment to a person who is an "accredited investor," as defined in Regulation D under the Securities Act. "Redemption Date" has the meaning provided in Section 9(b). "Redemption Price" has the meaning provided in Section 9(a). "Redemption Target Price" means an amount equal to two hundred percent (200%) of the -3- Exercise Price as in effect during the period of twenty (20) consecutive Trading Days during which the Average Market Price is determined. "Reorganization Event" means the occurrence of any one or more of the following events: (i) any consolidation, merger or similar transaction of the Company or any Subsidiary with or into another entity (other than a merger or consolidation or similar transaction of a Subsidiary into the Company or a wholly-owned Subsidiary) where the stockholders of the Company immediately prior to such transaction do not collectively own at least 51% of the outstanding voting securities of the surviving corporation of such consolidation or merger immediately following such transaction; or the sale of all or substantially all of the assets of the Company and the Subsidiaries in a sale transaction or a series of related transactions; or (ii) the occurrence of any transaction or event in connection with which all or substantially all the Common Stock shall be exchanged for, converted into, acquired for or constitute the right to receive consideration (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, share exchange, combination, reclassification, recapitalization, or otherwise) which is not all or substantially all common stock which is (or will, upon consummation of or immediately following such transaction or event, be) listed on a national securities exchange or approved for quotation on Nasdaq or any similar United States system of automated dissemination of transaction reporting of securities prices; or (iii) the acquisition by a person or entity or group of persons or entities acting in concert as a partnership, limited partnership, syndicate or group, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, of beneficial ownership of securities of the Company representing 50% or more of the combined voting power of the outstanding voting securities of the Company ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Exchange Act of 1934, as amended. "Subsidiary" means any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company. "Target Revenues" has the meaning provided in the Notes. "Trading Day" means a day on which either the national securities exchange or the Nasdaq National Market which then constitutes the principal securities market for the Common Stock (or other securities deliverable hereunder) is open for general trading of securities. "Warrant" means this Warrant and any Warrant or Warrants which may be issued pursuant -4- to Section 4 or 5 hereof in substitution or exchange for or upon transfer of this Warrant, any Warrant which may be issued pursuant to Section 2 hereof upon partial exercise of this Warrant and any Warrant which may be issued pursuant to Section 6 hereof upon the loss, theft, destruction or mutilation of this Warrant. "Warrant Register" means the register maintained at the principal office of the Company, or at the office of its agent, in which the name of the Holder of this Warrant shall be registered. "Warrant Shares" means the shares of Common Stock, as adjusted from time to time in accordance with Section 8 hereof, deliverable upon exercise of this Warrant. Section 2. Exercise of Warrant. This Warrant may be exercised, in whole ------------------- or in part, at any time or from time to time during the Exercise Period, by presentation and surrender hereof to the Company at its principal office at the address set forth on the signature page hereof (or at such other address of the Company or any agent appointed by the Company to act hereunder as the Company or such agent may hereafter designate in writing to the Holder), with the purchase form attached hereto as ANNEX I (the "Purchase Form") duly executed and accompanied by cash or a certified or official bank check drawn to the order of "CEPHALON, INC." (or its successor in interest, if any) in the amount of the Exercise Price, multiplied by the number of Warrant Shares specified in such Purchase Form. If this Warrant should be exercised in part only, the Company or its agent shall, upon surrender of this Warrant, execute and deliver a Warrant evidencing the right of the Holder thereof to purchase the balance of the Warrant Shares purchasable hereunder. Upon receipt by the Company during the Exercise Period of this Warrant and such Purchase Form in proper form for exercise, together with proper payment of the Exercise Price at its principal office, or by its agent at its office, the Holder shall be deemed to be the holder of record of the number of Warrant Shares specified in such Purchase Form; provided, however, that if the date of such receipt by the Company or its -------- ------- agent is a date on which the stock transfer books of the Company are closed, such person shall be deemed to have become the record holder of such Warrant Shares on the next business day on which the stock transfer books of the Company are open. The Company shall pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of such Warrant Shares. Any Warrant issued upon partial exercise of this Warrant pursuant to this Section 2 shall be dated the date of this Warrant. Section 3. Reservation of Shares. The Company agrees that at all times it --------------------- will keep reserved solely for issuance and delivery pursuant to this Warrant the number of shares of its Common Stock (or other securities) that are or would be issuable from time to time upon exercise of this Warrant. All such shares shall be duly authorized and, when issued upon such exercise, shall be validly issued, fully paid and nonassessable, free and clear of all liens, security interests, charges and other encumbrances or restrictions on sale and free of all preemptive rights. Before taking any action that would cause an adjustment pursuant to Section 8 hereof reducing the Exercise Price below the then par value (if any) of the Warrant Shares issuable upon exercise of this Warrant, the Company will take any corporate action that may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. -5- Section 4. Transfer in Compliance with Applicable Securities Laws. ------------------------------------------------------ (a) Neither this Warrant nor any of the Warrant Shares, nor any interest in either, may be sold, assigned, pledged, hypothecated, encumbered or in any other manner transferred or disposed of, in whole or in part, except in accordance with Section 5 hereof and in compliance with applicable United States federal and state securities laws and the terms and conditions hereof. Except as provided in subsection (b) of this Section 4, each Warrant shall bear the following legend: NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED OR REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR SUCH SECURITIES MAY BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND THE APPLICABLE RULES AND REGULATIONS THEREUNDER. (b) If (i) the Warrant Shares have been registered under the Act and registered or qualified under applicable state securities or Blue Sky laws or (ii) the Holder has received an opinion of counsel reasonably satisfactory to the Company that the Warrant Shares may be freely transferred without registration under the Act or registration or qualification under applicable state securities or Blue Sky laws, the Holder may require the Company to issue, in substitution for a Warrant with the foregoing legend, a Warrant with the following legend: THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED OR REGISTERED UNDER STATE SECURITIES OR BLUE SKY LAWS. THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND THE APPLICABLE RULES AND REGULATIONS THEREUNDER. (c) The Holder may require the Company to issue a Warrant without either of the foregoing legends in substitution for a Warrant bearing one of such legends if either (i) this Warrant and the Warrant Shares issuable upon the exercise hereof have been registered under the Act and registered or qualified under applicable state securities laws or (ii) the Holder has received an opinion of counsel reasonably satisfactory to the Company that this Warrant and the Warrant Shares may be freely transferred without registration under the Act or registration or qualification under applicable state securities laws. The provisions of this Section 4 shall be binding on all subsequent holders of this Warrant. Section 5. Exchange, Transfer or Assignment of Warrant. ------------------------------------------- -6- (a) This Warrant may be, at the option of the Holder, upon presentation and surrender hereof to the Company at its principal office or to the Company's agent at its office, (i) exchanged for other Warrants of different denominations, registered in the name of the Holder, entitling the Holder to purchase in the aggregate the same number of Warrant Shares at the Exercise Price or, (ii) if delivered together with a written notice signed by the Holder specifying the denominations in which new Warrants are to be issued, divided or combined with other Warrants registered in the name of the Holder that carry the same rights. (b) If the Holder has received an opinion of counsel satisfactory to the Company that this Warrant may be sold or transferred without registration under the Act, as contemplated by Section 4 hereof, (x) this Warrant may be transferred and assigned, subject to subparagraph (y) of this Section 5(b), at the option of the Holder, upon surrender of this Warrant to the Company at its principal office or to the Company's agent at its office, with the warrant assignment form attached hereto as ANNEX II (the "Warrant Assignment Form") duly executed and accompanied by funds sufficient to pay any transfer tax, except that (y) no transfer or assignment of this Warrant may be made unless (i) such transfer or assignment is a Permitted Transfer or (ii) the Company consents in writing to such transfer or assignment, which consent may be withheld in its absolute discretion. The Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees named in such Warrant Assignment Form. (c) Any transfer or exchange of this Warrant shall be without charge to the Holder and any Warrant or Warrants issued pursuant to this Section 5 shall be dated the date hereof. (d) The Holder shall not be entitled to transfer a portion of this Warrant with respect to the purchase of a number of Warrant Shares that is less than 10,000 without the prior written consent of the Company. (e) In order to give effect to Section 9, if this Warrant shall be exercised in part, then (1) any Warrant issued to the Holder to evidence the unexercised portion of this Warrant shall bear a notation of the original number of Warrant Shares subject to this Warrant and (2) in connection with any split- up of this Warrant into two or more instruments, each such instrument shall bear a notation of a portion of the original number of Warrant Shares subject to this Warrant, determined by pro rata allocation thereto of the aggregate original such amount based on the portion of the unexercised amount of this Warrant (determined immediately prior to such split-up) evidenced by such instrument. Section 6. Lost, Mutilated or Missing Warrant. Upon receipt by the ---------------------------------- Company or its agent of evidence satisfactory to it of the loss, theft or destruction of this Warrant, and of satisfactory indemnification, and upon surrender and cancellation of this Warrant if mutilated, the Company or its agent shall execute and deliver a Warrant of like tenor and date in exchange for this Warrant. Section 7. Rights of the Holder. The Holder shall not, by virtue hereof, -------------------- be entitled to any rights of a shareholder in the Company, either at law or in equity, and the rights of the Holder -7- are limited to those expressed in this Warrant. Section 8. Anti-dilution. (a) If the Company shall fix or have fixed a ------------- record date at any time after the date hereof and before the expiration of the Exercise Period for: (i) The declaration of a dividend or distribution on the Common Stock (or other securities deliverable hereunder) payable in shares of capital stock (whether shares of Common Stock or of capital stock of any other class), (A) the subdivision of shares of the Common Stock into a greater number of shares, (B) the combination of the Common Stock into a smaller number of shares or (C) the issuance of any shares of its capital stock by reclassification of the Common Stock in connection with a consolidation or merger with a subsidiary of the Company in which the Company is the continuing corporation, then, in any such event, upon exercise of this Warrant the Holder shall be entitled to receive the aggregate number and kind of shares which, if the Warrant had been exercised immediately prior to such record date, the Holder would have been entitled to receive by virtue of such dividend, distribution, subdivision, combination or reclassification, and the Exercise Price shall be appropriately adjusted. Such adjustment shall be made successively whenever any event listed above shall occur. (ii) Issuance at Less than Current Market Price. The issuance ------------------------------------------ of rights, options or warrants to all holders of Common Stock (or other securities deliverable hereunder) entitling them to subscribe for or purchase Common Stock (or other securities deliverable hereunder) at a price per share or having a conversion or exercise price per share (including the amount paid, if any, for such rights, options or warrants) less than the Closing Price on such record date (excluding rights or warrants that are not immediately exercisable and for which provision is made for the Holder to receive comparable rights or warrants upon exercise), then the number of Warrant Shares to be received hereunder after such record date shall be determined by multiplying the number of shares receivable hereunder immediately prior to such record date by a fraction, the denominator of which shall be the number of shares of Common Stock (or other securities deliverable hereunder) outstanding on such record date plus the number of shares of Common Stock (or other securities deliverable hereunder) that the aggregate offering price of the total number of shares so offered for subscription or purchase would purchase at such Closing Price, and the numerator of which shall be the number of shares of Common Stock (or other securities deliverable hereunder) outstanding on such record date plus the number of additional shares of Common Stock (or other securities deliverable hereunder) offered for subscription or purchase, and the Exercise Price shall be appropriately adjusted so that the aggregate purchase price of the Warrant Shares to be received hereunder after such record date is equal to the aggregate purchase price of the Warrant Shares receivable hereunder immediately prior to such record date. Shares of Common Stock owned by or held for the account of the Company or any subsidiary of the Company on such record date shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall become effective immediately after such record date. Such adjustment shall be made successively whenever any such event shall occur. If such rights, options or warrants are not so issued, the number of Warrant Shares receivable hereunder shall again be adjusted to be the number that would have been in effect had such record date not been fixed. On -8- the expiration of such rights, options or warrants the number of Warrant Shares receivable hereunder shall be readjusted to be the number that would have obtained had the adjustment made upon the issuance of such rights, options or warrants been made upon the basis of the issuance of only the number of shares of Common Stock (or other securities deliverable hereunder) actually issued upon the exercise of such rights, options or warrants, provided, however, that if the Holder of this Warrant shall have -------- ------- exercised this Warrant prior to any such readjustment, the number of Warrant Shares that have been delivered or the number of Warrant Shares to be delivered shall not be subject to any readjustment. In any case in which this subsection (ii) shall require that an adjustment in the number of shares receivable hereunder or the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event issuing to the Holder of any Warrant exercised after such record date the number of Warrant Shares, if any, issuable upon such exercise over and above the number of Warrant Shares, if any, issuable upon such exercise on the basis of the Exercise Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such -------- ------- Holder a due bill or other appropriate instrument evidencing such Holder's right to receive such additional Warrant Shares upon the occurrence of the event requiring such adjustments. (iii) Distribution of Subscription Rights, Warrants, ---------------------------------------------- Evidences of Indebtedness or Assets. The making of a distribution to all ----------------------------------- holders of Common Stock (or other securities deliverable hereunder) (including any such distribution to be made in connection with a consolidation or merger in which the Company is to be the continuing corporation) of (A) any shares of capital stock of the Company (other than Common Stock), (B) subscription rights or warrants (excluding those for which adjustment is provided in subsection 8(a)(ii) above and excluding those that are not immediately exercisable and for which provision is made for the Holder to receive comparable subscription rights or warrants upon exercise) or (C) evidences of its indebtedness or assets (excluding (x) dividends paid in or distributions of the Company's capital stock for which the number of Warrant Shares receivable hereunder shall have been adjusted pursuant to paragraph 8(a)(i) and (y) cash dividends or distributions payable out of earnings or surplus not in excess of 10% of the average Closing Price for the thirty trading days prior to the fifth day before the date of declaration multiplied by the number of outstanding shares of Common Stock) (any of the foregoing being hereinafter in this paragraph (iii) called the "Securities"), then in each such case (unless the Company elects to reserve shares or other units of such Securities for distribution to each Holder upon exercise of this Warrant so that, in addition to the shares of Common Stock (or other securities deliverable hereunder) to which each Holder is entitled, each Holder will receive upon such exercise the amount and kind of such Securities which such Holder would have received if the Holder had, immediately prior to the record date for the distribution of the Securities, exercised the Warrant) the number of Warrant Shares receivable hereunder after such record date shall be determined by multiplying the number of Warrant Shares receivable hereunder immediately prior to such record date by a fraction, the denominator of which shall be the Closing Price on the Trading Day immediately prior to the first Trading Day on which the Common Stock (or other securities deliverable hereunder) trades without the right to receive such Securities, less the fair market value (as determined in the reasonable judgment of the Board of -9- Directors of the Company and described in a statement mailed to the Holder) of the portion of the assets or evidences of indebtedness so to be distributed to a holder of one share of the Common Stock or of such subscription rights or warrants applicable to one share of the Common Stock, and the numerator of which shall be the Closing Price of the Common Stock on such Trading Day; and the Exercise Price shall be appropriately adjusted so that the aggregate purchase price of the Warrant Shares to be received hereunder after such record date is equal to the aggregate purchase price of the Warrant Shares receivable hereunder immediately prior to such record date. Such adjustment shall become effective immediately after such record date and shall be made successively whenever such a record date is fixed. If such distribution is not so made, the number of Warrant Shares receivable hereunder shall be readjusted to be the number that was in effect immediately prior to such record date. In the event that the Holder exercises this Warrant after an adjustment is made under this paragraph (iii) and prior to a readjustment under this paragraph (iii), the number of Warrant Shares that have been delivered or the number of Warrant Shares to be delivered shall not be subject to any readjustment. In any case in which this paragraph (iii) shall require that an adjustment in the number of Warrant Shares receivable hereunder or the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event issuing to the Holder of any Warrant exercised after such record date the number of Warrant Shares, if any, issuable upon such exercise over and above the number of Warrant Shares, if any, issuable upon such exercise on the basis of the Exercise Price in effect prior to such adjustment; provided, however, that the -------- ------- Company shall deliver to such Holder a due bill or other appropriate instrument evidencing such Holder's right to receive such additional Warrant Shares upon the occurrence of the event requiring such adjustments. (b) Reorganization Event. -------------------- (i) In case of any Reorganization Event the Company shall, as a condition precedent to the consummation of the transaction constituting, or announced as, such Reorganization Event, cause effective provisions to be made so that the Holder shall have the right immediately thereafter, by exercising this Warrant, to receive the aggregate amount and kind of shares of stock and other securities and property that were receivable upon such Reorganization Event by a holder of the number of shares of Common Stock that would have been received immediately prior to such Reorganization Event upon exercise of this Warrant. Any such provision shall include provision for adjustments in respect of such shares of stock and other securities and property that shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 8(a). The foregoing provisions of this Section 8(b) shall similarly apply to successive Reorganization Events. (ii) If a Reorganization Event occurs or the Company agrees to effect a Reorganization Event, then the Exercise Period shall commence on the applicable Acceleration Date. The Company shall, at least twenty (20) days before the Acceleration Date relating to any Reorganization Event (or if such Reorganization Event was beyond the control of the Company, and the Company did not have knowledge twenty (20) days before such Acceleration Date, as soon as practicable thereafter), cause to be mailed to the Holder a notice describing in reasonable detail such Reorganization Event and informing the Holder of the date that -10- the Exercise Period will (or did) commence and that the Holder may exercise this Warrant at any time during the Exercise Period. (c) Fractional Shares. No fractional shares of Common Stock (or ----------------- other securities deliverable hereunder) or scrip shall be issued to any Holder in connection with the exercise of this Warrant. Instead of any fractional share of Common Stock (or other securities deliverable hereunder) that would otherwise be issuable to such Holder, the Company shall pay to such Holder a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Closing Price per share of Common Stock (or other securities deliverable hereunder) on the date of such exercise. (d) Carryover. Notwithstanding any other provision of this --------- Section 8, no adjustment shall be made to the number of shares of Common Stock (or other securities deliverable hereunder) to be delivered to each Holder (or to the Exercise Price) if such adjustment would represent less than one percent of the number of shares to be so delivered, but any such adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to one percent or more of the number of shares to be so delivered. (e) Notices of Certain Events. If at any time after the date ------------------------- hereof and before the expiration of the Exercise Period: (i) the Company authorizes the issuance to all holders of its Common Stock of (A) rights or warrants to subscribe for or purchase shares of its Common Stock or (B) any other subscription rights or warrants; (ii) the Company authorizes the distribution to all holders of its Common Stock of evidences of its indebtedness or assets (other than cash dividends or distributions excluded from the operation of paragraph 8(a)(iii)); (iii) there shall be any capital reorganization of the Company or reclassification of the Common Stock (other than a change in par value of the Common Stock or an increase in the authorized capital stock of the Company not involving the issuance of any shares thereof) or any consolidation or merger to which the Company is a party (other than a consolidation or merger with a subsidiary in which the Company is the continuing corporation and that does not result in any reclassification or change in the Common Stock outstanding) or a conveyance or transfer of all or substantially all of the properties and assets of the Company: (iv) there shall be any voluntary or involuntary dissolution, liquidation or winding-up of the Company; or (v) there shall be any other event that would result in an adjustment pursuant to this Section 8 in the Exercise Price or the number of Warrant Shares that may be purchased upon the exercise hereof; -11- the Company will cause to be mailed to the Holder, at least twenty (20) days (or ten (10) days in any case specified in the clauses (i) or (ii) above) before the applicable record or effective date hereinafter specified, or as soon as practicable after the occurrence of an event specified in clause (v) if such event was beyond the control of the Company and the Company did not have knowledge of such event at least ten (10) days before such date, a notice stating (A) the date as of which the holders of Common Stock of record entitled to receive any such rights, warrants or distributions is to be determined, or (B) the date on which any such reorganization, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record will be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up. (f) Failure to Give Notice. The failure to give the notice ---------------------- required by Section 8(e) hereof or any defect therein shall not affect the legality or validity of any distribution right, warrant, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up or the vote upon any such action. Section 9. Redemption of Warrant. (a) On the date which is 45 days after --------------------- the third anniversary of the Issuance Date, the Company shall have the right, but not the obligation, on not less than forty-five (45) and not more than sixty (60) days prior notice, to redeem the Applicable Portion, if any, of this Warrant, at a redemption price of $0.01 per share of Common Stock (or unit of other securities deliverable hereunder) issuable upon exercise of the portion of this Warrant so redeemed (the "Redemption Price"). If this Warrant is called for redemption, the Company shall simultaneously call for redemption a portion of the Other Warrants in accordance with their terms that are similar to this Section 9. (b) If the Company wishes to exercise its right so to redeem the Applicable Portion of this Warrant, the Company shall give a notice of redemption to the Holder not later than the 45th day prior to the date fixed for redemption (the "Redemption Date"). (c) The notice of redemption shall specify (i) the portion of this Warrant to be redeemed, (ii) the aggregate Redemption Price for the Applicable Portion of this Warrant to be redeemed, (iii) the date fixed for redemption, (iv) the place where this Warrant shall be delivered and the Redemption Price paid, and (v) that the right to exercise the Applicable Portion of this Warrant that is being redeemed shall terminate at 5:00 p.m., New York City time, on the Trading Day immediately preceding the Redemption Date unless otherwise agreed by the Company. (d) If the Company shall have exercised its right to redeem the Applicable Portion of this Warrant, any right to exercise such Applicable Portion of this Warrant shall terminate at 5:00 p.m., New York City time, on the Trading Day immediately preceding the Redemption Date unless otherwise agreed by the Company. On and after the Redemption Date, unless otherwise agreed by the Company, the Holder shall have no further rights with respect to the Applicable Portion being redeemed except to receive, upon surrender of this Warrant, the Redemption Price. -12- (e) From and after the Redemption Date, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Holder, deliver or cause to be delivered to or upon the written order of the Holder a sum in cash equal to the aggregate Redemption Price of the Applicable Portion of this Warrant being so redeemed. From and after the Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem the Applicable Portion of this Warrant, the Applicable Portion of this Warrant shall expire and become void and all rights hereunder, except the right to receive payment of the Redemption Price, shall cease. Section 10. Officers' Certificate. Whenever the number of Warrant --------------------- Shares that may be purchased on exercise of this Warrant or the Exercise Price is adjusted as required by the provisions of Section 8 hereof, the Company will forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office and at the office of its agent an officers' certificate showing the adjusted number of Warrant Shares that may be purchased at the Exercise Price on exercise of this Warrant and the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment and the manner of computing such adjustment. Each such officers' certificate shall be signed by the President, Chief Financial Officer or Treasurer of the Company and by the Secretary or an Assistant Secretary of the Company. Each such officers' certificate shall be made available at all reasonable times for inspection by the Holder. The Company shall, forthwith after each such adjustment, cause such certificate to be mailed to the Holder. Section 11. Availability of Information. In addition to the --------------------------- requirements of Section 5(h), the Company shall comply with all applicable public information reporting requirements of the SEC and applicable state securities laws to which it may from time to time be subject. The Company will also cooperate with each Holder of any Warrants and each holder of any Warrant Shares in supplying such information concerning the Company as may be necessary for such Holder or holder to complete and file any information reporting forms currently or hereafter required by the SEC as a condition to the availability of an exemption from the Act for the sales of any Warrants or Warrant Shares. Section 12. Warrant Register. The Company will register this Warrant in ---------------- the Warrant Register in the name of the record holder to whom it has been distributed or assigned in accordance with the terms hereof. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof (notwithstanding any notation of ownership or other writing hereon made by anyone) for the purpose of any exercise hereof or any distribution to the Holder and for all other purposes, and the Company shall not be affected by any notice to the contrary. Section 13. Successors. All of the provisions of this Warrant by or for ---------- the benefit of the Company or the Holder shall bind and inure to the benefit of their respective successors and assigns. Section 14. Headings. The headings of sections of this Warrant have -------- been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. -13- Section 15. Amendments. This Warrant may be amended by the affirmative ---------- vote of Holders holding Warrants to purchase not less than two-thirds of the Warrant Shares purchasable pursuant to all of the then outstanding Warrants; provided, that, except as expressly provided herein, this Warrant may not be - -------- amended, without the consent of the Holder, to change (i) any price at which this Warrant may be exercised, (ii) the period during which this Warrant may be exercised, (iii) the number or type of securities to be issued upon the exercise hereof or (iv) the provisions of this Section 15. Section 16. Notices. Unless otherwise provided in this Warrant, any ------- notice or other communication required or permitted to be made or given to any party hereto pursuant to this Warrant shall be in writing and shall be deemed made or given if delivered by hand, on the date of such delivery to such party, or, if mailed, on the fifth day after the date of mailing, if sent to such party by certified or registered mail, postage prepaid, addressed to it (in the case of a Holder) at its address in the Warrant Register or (in the case of the Company) at its address set forth below, or to such other address as is designated by written notice, similarly given to each party hereto. Section 17. Governing Law. This Warrant shall be deemed to be a ------------- contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State as applied to the contracts made and to be performed in New York between New York residents. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -14- IN WITNESS WHEREOF, the Company has duly caused this Warrant to be signed and attested by its duly authorized officer and to be dated as of __________, 1999. CEPHALON, INC. By: Name: Title: Address: 145 Brandywine Parkway West Chester, Pennsylvania 19380 Attention: Senior Vice President and Chief Financial Officer -15- ANNEX I TO WARRANT PURCHASE FORM ------------- TO CEPHALON, INC.: The undersigned, ________________________, hereby irrevocably elects to exercise the within Warrant to purchase ___________________________ shares of Common Stock of Cephalon, Inc., a Delaware corporation, and hereby makes payment of $_____________________ in payment of the exercise price thereof. Dated: _________________ _____________________________ [SIGNED] _____________________________ [STREET ADDRESS] _____________________________ [CITY AND STATE] I-16 ANNEX II TO WARRANT WARRANT ASSIGNMENT FORM ----------------------- TO CEPHALON, INC.: FOR VALUE RECEIVED, the undersigned, ________________________________, ("Assignor"), hereby sells, assigns and transfers unto Name: __________________________________________ ("Assignee") (Please type or print in block letters.) Address: ______________________________________ Social Security or Taxpayer I.D. No.: ___________________________ Assignor's right to purchase up to _________________ shares of Common Stock of Cephalon, Inc., a Delaware corporation, represented by this Warrant and does hereby irrevocably constitute and appoint the Company and any of its officers, secretary or assistant secretaries, as its officers, secretary or assistant secretaries, as attorneys-in-fact to transfer the same on the books of the Company, with full power of substitution in the premises. Date: __________________ Print Name: II-17 -----END PRIVACY-ENHANCED MESSAGE-----