<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1998
REGISTRATION STATEMENT NO. 333-59857
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DEY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2834 94-2463696
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
2751 NAPA VALLEY CORPORATE DRIVE, NAPA, CALIFORNIA 94558, (877) 666-1534
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHARLES A. RICE
PAMELA R. MARRS
DEY, INC.
2751 NAPA VALLEY CORPORATE DRIVE
NAPA, CALIFORNIA 94558
(877) 666-1534
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
with copies to:
<TABLE>
<S> <C>
EDWIN S. MATTHEWS, JR., ESQ. ROBERT M. CHILSTROM, ESQ.
JEFFREY E. COHEN, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
COUDERT BROTHERS 919 THIRD AVENUE
1114 AVENUE OF THE AMERICAS NEW YORK, NY 10022
NEW YORK, NY 11036 (212) 735-3000
(212) 626-4400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
------------------------
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
------------------------
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM OFFERING PROPOSED AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock............................ 16,215,000 $16.00 $259,440,000 $8,685
</TABLE>
(1) Includes up to 2,115,000 shares of Common Stock which the Underwriters may
require the Company to sell solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of registration
fee pursuant to Rule 457(a) of the Securities Act of 1933, as amended.
(3) $67,850 previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 1998
PROSPECTUS
[LOGO] 14,100,000 SHARES
DEY, INC.
COMMON STOCK
All of the 14,100,000 shares of Common Stock offered hereby are being sold
by Dey, Inc. ("Dey" or the "Company"). As a result of such sale, after this
offering (the "Offering"), Lipha Americas, Inc., which currently owns 100% of
the outstanding shares of the Company's Common Stock, will own approximately 84%
of the outstanding shares of Common Stock. Lipha Americas, Inc. is a
wholly-owned subsidiary of Merck-Lipha S.A., which is a 99.53% owned French
subsidiary of Merck KGaA, Darmstadt, Germany. Prior to the Offering, there has
been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $12.00 and
$16.00 per share. See "Underwriting" for information relating to determination
of the initial public offering price. The Company has applied for listing on the
New York Stock Exchange (the "NYSE") of its Common Stock under the symbol "DYY."
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN MATERIAL
RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[CAPTION]
<TABLE>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................... $ $ $
Total(3).................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses of the Company estimated at $1,675,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 2,115,000 additional shares of Common Stock, on the same terms and
conditions as set forth above, to cover over-allotments, if any. If all such
shares are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be $
and the total Proceeds to Company will be $ . See "Underwriting."
------------------------
The shares of Common Stock are offered subject to prior sale, when, as and
if delivered and accepted by the Underwriters and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
said offer and to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made on or about , 1998, at the
offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST
J.P. MORGAN & CO.
LEHMAN BROTHERS
The date of this Prospectus is , 1998.
<PAGE>
[PHOTOGRAPHS - Series of pictures showing families, couples and children
interspersed with pictures of, clockwise from top, one unit dose vial of
albuterol sulfate inhalation solution, one multi-dose bottle of albuterol
sulfate inhalation solution concentrate, one unit dose vial of cromolyn sodium
inhalation solution and one canister of albuterol inhalation aerosol and one
shelf carton and representative vials of ipratropium bromide inhalation
solution.]
2
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENTS, STABILIZING BIDS AND SHORT COVERING TRANSACTIONS AND
THE IMPLEMENTATION OF PENALTY BIDS. SEE "UNDERWRITING."
------------------------
All information contained in the "Prospectus Summary" and in "Business"
concerning the definition and size of the various U.S. product markets in which
Dey participates is based on figures published for 1997 by IMS Health
Incorporated ("IMS"), a company primarily engaged in providing market research
services. IMS is considered to be a leading provider of sales data for
pharmaceutical products in the United States. Data audited and reported by IMS
does not include sales to all markets in which Dey competes; most notably, with
respect to Dey's products, IMS does not audit and report sales to the home
health care market and the mail order market. Prospective investors are,
accordingly, urged to review such market data reported by IMS with caution, and
should recognize that the market share of any particular product marketed by Dey
may be overstated or understated when comparing such product's actual sales
solely with the market data reported by IMS. Information contained herein in
"Business" concerning the incidence of certain respiratory diseases among the
overall U.S. population is based on a variety of published sources; the Company
believes such information is widely accepted among specialists in the treatment
of such diseases and is reliable.
------------------------
Unless otherwise referred to or the context otherwise requires, references
to the "Company" or "Dey" shall mean Dey, Inc. and its subsidiaries, "Merck
KGaA" shall mean Merck KGaA, of Darmstadt, Germany, a Kommanditgesellschaft auf
Aktien (not affiliated with Merck & Co., Inc., Whitehouse Station, New Jersey,
U.S.A.), "Lipha Americas" shall mean Lipha Americas, Inc., "Merck-Lipha" shall
mean Merck-Lipha S.A. (see "Principal Stockholders") and "Lipha" shall mean
Lipha S.A.
------------------------
Dey-Pak(Registered), EasiVent(Trademark), Mucosil(Trademark),
Accuvent(Trademark) and DuoNeb(Trademark) are trademarks of Dey. With respect to
the products sold by Dey under license, EpiPen(Registered) and
Astech(Registered) are registered trademarks of EM Industries, Inc., a
wholly-owned subsidiary of Merck KGaA; ACE(Registered) is a registered trademark
of Diemolding Corporation; and Curosurf(Registered) is a registered trademark of
Chiesi Farmaceutici, S.p.A.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus, including the information under "Risk
Factors." Except as otherwise noted, all information in this Prospectus
(i) assumes the filing by the Company of a Restated Certificate of
Incorporation, pursuant to which the Company is authorized to issue up to
140,000,000 shares of Common Stock, par value $.01 per share, and 10,000,000
shares of Preferred Stock, par value $1.00 per share, (ii) is adjusted to give
effect to a 72,885 for 1 split of the Common Stock and (iii) assumes no exercise
of the Underwriters' over-allotment option. This Prospectus may contain, in
addition to historical information, forward-looking statements that involve
risks and uncertainties. The Company's actual results and the timing of certain
events could differ materially from those discussed in such forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed under "Risk Factors," as well as those discussed elsewhere in
this Prospectus. See "Special Note Regarding Forward-Looking Statements."
THE COMPANY
Dey is a specialty pharmaceutical company focused on the development,
manufacturing and marketing of prescription drug products for the treatment of
respiratory diseases (such as chronic obstructive pulmonary disease ("COPD") and
asthma) and respiratory-related allergies (such as anaphylaxis and rhinitis).
Dey is particularly strong in the development and high-volume manufacture of
sterile, unit dose inhalation solution products. The U.S. market in 1997 for
inhalation therapy prescription pharmaceutical products was estimated by IMS to
have been approximately $3.4 billion, consisting of nebulizer inhalation
solutions ($0.4 billion), metered dose inhalers ($1.7 billion), intranasal
products ($0.9 billion) and other inhalation therapy products ($0.4 billion).
Dey had net sales of $220 million in 1997.
Dey is one of the largest U.S. manufacturers of sterile, unit dose
inhalation solution products for the treatment of respiratory diseases. Unit
dose solution products, because they are pre-measured, are convenient to use and
reduce the risk of dosage error, medication waste and cross-contamination. Dey's
sterile, unit dose inhalation solution products include albuterol sulfate and
cromolyn sodium for the treatment of asthma and ipratropium bromide for the
treatment of COPD. Dey also markets sterile sodium chloride solution products,
under the brand name Dey-Pak(Registered), used for diluting concentrated
inhalation solutions and in tracheal care for patients who require periodic
tracheal suctioning and cleaning. Dey also has the exclusive right to market
EpiPen(Registered) brand autoinjectors, which permit patients to self-administer
epinephrine for severe anaphylactic reactions. EpiPen(Registered) is currently
the only epinephrine autoinjector on the U.S. market.
Dey is pursuing new product development through a combination of internal
research and development, sponsored research and development and acquiring or
licensing products developed by others. Dey currently has pending three New Drug
Applications ("NDAs") and two Abbreviated New Drug Applications ("ANDAs") before
the U.S. Food and Drug Administration (the "FDA"). These include two NDAs for
sterile, unit dose inhalation solution products for the treatment of asthma and
COPD, one NDA for a patented product for the treatment of infant respiratory
distress syndrome ("IRDS") and two ANDAs for mechanical pump nasal spray
products for the treatment of allergic rhinitis. Dey is also developing a
proprietary inhalation delivery system for dry powders; pivotal studies on the
first of a series of products using this delivery system are scheduled to begin
in late 1998 or early 1999.
Dey has its own comprehensive U.S. marketing and distribution network,
which markets Dey's products to large institutional purchasers, wholesalers,
group purchasing organizations, chain pharmacies, health maintenance
organizations ("HMOs") and home health care organizations, as well as directly
to physicians, including allergists, pulmonologists and pediatricians. Dey
currently employs approximately 100 people in marketing and sales, and expects
that number to increase significantly as new products are launched. Dey
distributes its products throughout the United States from two locations: its
manufacturing and distribution facility in Napa, California and its distribution
center in Allen, Texas.
The key elements of Dey's strategy are as follows: (i) to focus on products
for the treatment of respiratory diseases; (ii) to enhance its leadership
position in the market for sterile, unit dose inhalation solution products;
(iii) to develop additional and novel drug delivery technologies for use in the
treatment of respiratory diseases; (iv) to aggressively expand its product line
through the development, in-licensing and acquisition of new products; and
(v) to leverage its existing strengths in the marketing, distribution and sale
of products for respiratory diseases.
Dey was formed in 1977 and initially established a successful business
manufacturing and marketing sterile, unit dose bronchodilators for inhalation,
packaged in plastic vials, and unit dose sodium chloride solutions. In 1988, Dey
was acquired by a subsidiary of Lipha, which is headquartered in Lyon, France.
In 1991, E. Merck, a German partnership that now controls Merck KGaA (see
"Principal Stockholders"), acquired a majority interest in Lipha and
subsequently increased its interest (through Merck KGaA) to essentially all of
the shares of Lipha.
The Company's principal executive offices are located at 2751 Napa Valley
Corporate Drive, Napa, California 94558, and its telephone number is (877)
666-1534.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby............... 14,100,000 shares (1)
Common Stock to be outstanding after the
Offering................................ 86,985,000 shares (1)(2)
Use of proceeds........................... The Company intends to use the net proceeds of the Offering to repay
indebtedness of the Company to its indirect parent, Merck KGaA. See
"Use of Proceeds," "Principal Stockholders" and "Certain
Transactions."
New York Stock Exchange symbol............ DYY
</TABLE>
- ------------------------
(1) Does not include up to 2,115,000 shares of Common Stock that may be sold by
the Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Does not include 900,000 shares of Common Stock reserved for issuance upon
exercise of stock options that may be granted under an incentive plan
expected to be adopted by the Company prior to the Offering. See
"Management--Employee Plans."
5
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
(In millions, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net sales............... $ 90.1 $116.3 $136.7 $166.5 $219.8 $103.9 $135.7
Cost of sales........... 23.3 30.9 39.0 64.3 77.2 30.8 48.8
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit............ 66.8 85.4 97.7 102.2 142.6 73.1 86.9
Operating expenses...... 16.0 23.3 32.4 42.9 53.1 21.5 32.6
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations.. 50.8 62.1 65.3 59.3 89.5 51.6 54.3
Interest and other
income, net........... 2.5 (9.3) 0.7 1.5 1.7 0.6 1.1
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before taxes..... 53.3 52.8 66.0 60.8 91.2 52.2 55.4
Income taxes............ (24.2) (21.8) (27.1) (25.0) (37.2) (21.2) (21.3)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income.............. $ 29.1 $ 31.0 $ 38.9 $ 35.8 $ 54.0 $ 31.0 $ 34.1
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income per share
(basic)............... $ 0.40 $ 0.43 $ 0.53 $ 0.49 $ 0.74 $ 0.42 $ 0.47
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average common
shares outstanding.... 72,885,000 72,885,000 72,885,000 72,885,000 72,885,000 72,885,000 72,885,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma net income per
share (basic)........... $ 0.61 $ 0.38
----------- -----------
----------- -----------
Pro forma weighted average
common shares used to
compute pro forma net
income per share........ 89,100,000 89,100,000
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(1)(2)
------- -------------- -----------------
(In millions)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 17.2 $ 17.2 $ 17.2
Working capital (deficit)........................................... 25.3 (199.7) 0.3
Total assets........................................................ 194.8 194.8 194.8
Total debt (due to affiliates)...................................... 22.0 22.0 38.1
Total stockholders' equity (deficit)................................ 114.8 (110.2) 73.7
</TABLE>
- ------------------------
(1) After giving effect to a dividend to Lipha Americas declared subsequent to
June 30, 1998, in the amount of $225,000,000. See "Certain Transactions."
(2) Adjusted to give effect to the borrowing of $200,000,000 from Merck KGaA to
partially fund payment of the dividend referred to in note (1) above, the
sale by the Company of the 14,100,000 shares of Common Stock offered hereby
at an assumed public offering price of $14.00 per share (the mid-point of
the price range) and, after deduction of underwriting discounts and
commissions and estimated expenses of the Offering, and the application of
the net proceeds of the Offering to the repayment of indebtedness of the
Company to Merck KGaA in connection with the borrowing referred to above.
See "Use of Proceeds" and "Certain Transactions."
6
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully the following factors in addition to the other information set forth
in this Prospectus.
PROCEEDS OF THE OFFERING WILL BENEFIT PARENT
On July 21, 1998, the Company declared a dividend, payable on August 14,
1998, to its direct parent, Lipha Americas, of $225,000,000. On August 14, 1998,
the Company borrowed $200,000,000 under a revolving credit facility with its
ultimate parent, Merck KGaA (which prior to the Offering owns 99.53% of the
outstanding shares of Common Stock of the Company (see "Principal
Shareholders")) and applied such funds toward payment of the special dividend.
The balance of the special dividend was funded from the Company's available
cash. One of the business purposes of the Offering is to enable the Company to
repay indebtedness owed by the Company to Merck KGaA under the revolving credit
facility. Accordingly, all or substantially all of the proceeds of the Offering
will be paid directly to Merck KGaA, and will not be retained by the Company.
See "Use of Proceeds" and "Certain Transactions."
DEPENDENCE ON SALES OF KEY PRODUCTS
During 1997, the Company derived approximately 75% of its revenues from
sales of three sterile, unit dose inhalation solution products, albuterol
sulfate (38%), ipratropium bromide (23%) and cromolyn sodium (14%) (the "Key
Products"). See "Business--Dey's Current Products." Accordingly, any factor
adversely affecting the sale of any of the Key Products would have a material
adverse effect on the Company's business, financial condition and results of
operations. Each of the Key Products is a generic version of a prescription drug
with respect to which patent protection has lapsed. The Company does not have
exclusive rights to market any of such products. Each of the Key Products could
be rendered obsolete or uneconomical or could otherwise be adversely affected by
numerous factors, including the development of new competitive pharmaceuticals
to treat the conditions addressed by the Key Products, technological advances,
manufacturing or supply interruptions, marketing or pricing actions by one or
more of the Company's competitors, changes in the prescribing practices of
physicians, changes in third party reimbursement practices, product liability
claims, product recalls or other factors.
UNCERTAINTY OF NEW PRODUCT DEVELOPMENT AND APPROVALS
Dey's future results of operations will depend, to a significant extent,
upon its ability to successfully develop and obtain regulatory approvals for new
products. See "Business--Products in Development." There can be no assurance
that the Company will successfully develop and obtain approvals for any new
products. The failure of Dey to develop and obtain approvals for new products on
a timely basis, or to market such products on a commercially viable basis, would
have a material adverse effect on its business, financial condition and results
of operations.
The Company has a variety of products under development, on its own and
through third parties under contract, including reformulations of existing
products, products intended to augment existing product lines and other new
products. Prior to marketing, all of the Company's products under development
must undergo rigorous testing, followed by the filing by the Company of an
Abbreviated New Drug Application ("ANDA") or a New Drug Application ("NDA") with
the FDA and extensive review by the FDA (see "Business--Government Regulation").
In order to file an NDA, which is required for new dosages of existing products,
for new delivery systems for existing products and for new products, the FDA
requires extensive preclinical and clinical testing for safety and efficacy. In
order to file an ANDA, which can be filed for generic versions of brand name
prescription drugs that are no longer covered by patents or whose marketing
exclusivity has expired, the Company must present scientific data demonstrating
that the generic drug formulation is bioequivalent(1) to a previously approved
branded drug. In both cases, the FDA has the authority to determine what testing
procedures are
- ------------------
(1) "Bioequivalent" is a term used by the FDA to signify that, based upon
scientific evidence, two pharmaceutical products are therapeutically
interchangeable or substitutable. A product which is bioequivalent to
another product is of the same dosage form and strength and meets the same
standards for quality and purity.
7
<PAGE>
appropriate for a particular product and, in some instances, has not published
or otherwise identified guidelines as to the appropriate procedures. The
required product testing can take a number of years and require the expenditure
of substantial resources, and there can be no assurance that such testing of any
product under development will result in a commercially viable product. The
results of initial trials are not necessarily predictive of the results of later
trials, and in many cases products suffer significant setbacks in later trials,
despite promising earlier results. Further, the Company may decide to modify a
product in testing, which could materially extend the test period and increase
the development costs of the product in question. There can be no assurance that
even after such time and expenditures, regulatory approval by the FDA will be
obtained for any products developed by the Company. In addition, delays or
rejections may be encountered based upon changes in FDA policy during the period
of product development and FDA review. Any regulatory approval may impose
limitations on the use for the product. Further, even if such regulatory
approval is obtained, a marketed product, its manufacturer and its manufacturing
facilities are subject to continual review and periodic inspections, and
subsequent discovery of previously unknown problems with a product, manufacturer
or facility may result in restrictions on such product or manufacturer,
including withdrawal of the product from the market. In addition, the regulatory
requirements applicable to any product may be modified, perhaps extensively, in
the future.
The Company regularly reevaluates its product development efforts. On the
basis of these reevaluations, the Company has in the past, and may in the
future, abandon development or commercialization efforts for particular
products. There can be no assurance that the Company, following any such
reevaluation, will continue its effort to develop any product or technology.
COMPETITION IN THE PHARMACEUTICAL INDUSTRY; UNCERTAINTY OF MARKET ACCEPTANCE;
RAPIDITY OF TECHNOLOGICAL CHANGE
The manufacture and sale of pharmaceutical products is highly competitive.
Many of Dey's competitors are large, well-known pharmaceutical, chemical and
health care companies which have greater financial, sales, marketing, regulatory
and scientific resources than Dey. Additionally, many of the Company's current
and potential competitors have strong research and development capabilities that
may allow such competitors to develop new or improved products that may compete
with Dey's current and future products.
The generic drug industry is intensely competitive, and Dey's competitors
include many large brand name and generic companies, including companies which,
compared to Dey, sell a high percentage of generic products manufactured by
third parties. Because generic drugs do not have patent protection or any other
market exclusivity, competitors of the Company may introduce competing generic
products, which may be sold at lower prices or with more aggressive marketing.
Conversely, as Dey continues to introduce branded drugs into its product
portfolio, it will face competition from manufacturers of generic drugs which
may claim to offer equivalent therapeutic benefits at a lower price. The
aggressive pricing activities of the Company's generic competitors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dey's success in commercializing any product will depend on the acceptance
of such product by physicians and patients. Unanticipated side effects, product
liability claims or product recalls or, more generally, unfavorable publicity
concerning any of the Company's products or those of its competitors in the same
therapeutic field could have an adverse effect on its ability to maintain or
obtain regulatory approvals, to achieve acceptance by prescribing physicians,
managed care providers or patients, and to commercialize its products, any of
which could have a material adverse effect on Dey's business, financial
condition and results of operations.
The pharmaceutical industry is characterized by rapid technological change.
The Company's products, branded or generic, could be rendered obsolete or
uneconomical by the development of new pharmaceuticals or devices to treat the
conditions addressed by its products or as a result of either technological
advances affecting the cost of production or marketing or pricing action by one
or more of its competitors. In addition, the development of any new product by
the Company could affect the demand for the current products of the Company if
such new product has the same or similar indications as one or more of the
Company's current products.
See "Business--Competition."
8
<PAGE>
RISK OF PRODUCT LIABILITY AND PRODUCT RECALLS
The development, manufacture, sale and use of the Company's products
involve an inherent risk of product liability claims. Product liability
insurance for this type of risk is expensive and difficult to obtain in the
United States. The Company currently maintains product liability insurance and
also participates in larger umbrella group insurance policies arranged by Lipha
which provide umbrella coverage for Lipha and its affiliates on a joint basis.
There can be no assurance, however, that such insurance will be adequate to
protect the Company against any liabilities it might incur in connection with
its business (or that claims against affiliates will not materially limit the
Company's coverage under umbrella policies arranged by Lipha), or that the
Company will continue to be able to obtain insurance on satisfactory terms or in
adequate amounts. Any product liability claims asserted against the Company
could result in the Company incurring significant expenses in defending against
any such claims and, if any such claims were validated, the Company may not have
sufficient resources or insurance coverage to satisfy the claims. See
"Business--Litigation." More generally, any product liability claims against the
Company or against any of its competitors in the same therapeutic field, if
perceived to be valid, could have a material adverse effect on the Company's
business, financial condition or results of operations.
Product recalls may be issued at the discretion of the Company, its
suppliers, the FDA, the Federal Trade Commission or other government agencies
having regulatory authority for product sales and may occur due to disputed
labeling claims, manufacturing issues, quality defects or other reasons. In the
past year the Company has assisted Meridian Medical Technologies, Inc.
("Meridian"), the owner and manufacturer of the line of epinephrine autoinjector
products marketed by the Company, in two separate product recall actions. In
October 1997, Meridian and Dey agreed to voluntarily withdraw from the market
all batches of EpiEZPen(Registered)and EpiEZPen(Registered) Jr. These products,
activated by depressing a button on the autoinjector, were found to have a
defect which resulted in premature discharge of the solution contents. In May
1998, Meridian and Dey agreed to voluntarily recall certain production batches
of EpiPen(Registered) and EpiPen(Registered) Jr., pressure-activated
autoinjectors, due to a potential for subpotency. Meridian has advised the
Company that the manufacturing process for these products has been modified, and
products to replace the recalled units are now available. In both of these
recalls, Meridian is required to compensate Dey for costs associated with
replacement products and administrative costs, but not for lost profits. Any
adverse reaction arising (or alleged to have arisen) in connection with products
subject to these or any other recalls could give rise to product liability
claims and the risks attendant thereto described in the preceding paragraph.
UNCERTAINTY OF ENFORCEABILITY OF PATENTS, PROPRIETARY RIGHTS AND TRADEMARKS
The Company relies, and anticipates that it will rely in the future, on
patent protection for certain products the Company currently markets or may seek
to market in the future. There can be no assurance that any patent issued to, or
licensed by, the Company will provide protection that has commercial
significance. There can be no assurance that challenges will not be initiated
against the validity or enforceability of any such patent or, if initiated, that
such challenges will not be successful. The cost of litigation, and the
commitment of management's time to uphold the validity and prevent infringement
of patents, can be substantial. Moreover, there can be no assurance that the
products and technologies the Company currently markets, or may seek to market
in the future, will not infringe patents or other rights owned by others. In the
event of an adverse outcome of any dispute with respect to patent or other
rights, the Company may be required to license such disputed rights or to cease
using such disputed rights. There can be no assurance that a license would be
available on terms acceptable to the Company, or at all. The invalidation,
circumvention or unenforceability of any of the patents upon which the Company
relies or may rely in the future, or the infringement or alleged infringement by
such patents of the intellectual property rights of third parties, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company relies, and expects to continue to rely, upon unpatented
proprietary know-how and trade secrets in the development and manufacture of
many of its principal products. The Company's policy is to require its key
scientific and management personnel to enter into confidentiality agreements
with the Company. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets or unpatented
proprietary know-how in the event of any unauthorized use or disclosure of such
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know-how. In addition, there can be no assurance that others will not obtain
access to or independently develop similar or equivalent trade secrets or
know-how.
The Company believes that trademark protection is an important factor in
establishing product recognition. The inability of the Company to protect its
trademarks from infringement and the resulting impairment to any goodwill which
may have developed in such trademarks, or the Company's inability to use one or
more of its trademarks because of successful third-party claims, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
See "Business--Intellectual Property."
THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES
The Company's ability to market its new and existing products is dependent
in part on the extent to which appropriate reimbursement for the products and
related treatment are obtained from health care payors, including government
authorities, private health insurers and other organizations, such as HMOs and
managed care organizations. Third-party payors are increasingly challenging
pricing of pharmaceutical products and/or seeking pharmacoeconomic data to
justify formulary acceptance and reimbursement practices. The growth of
organizations such as HMOs and managed care organizations and legislative
proposals to reform health care and government insurance programs could
significantly influence the purchase of pharmaceutical products, resulting in
lower prices and/or a reduction in demand for Dey's products. Such cost
containment measures and health care reform could affect Dey's ability to sell
its products and may have a material adverse effect on Dey's business, financial
condition and results of operations.
Significant uncertainty exists regarding the reimbursement status of
pharmaceutical products. There can be no assurance that reimbursement will be
available for any of the Company's products, that any reimbursement granted will
be maintained or that limits on reimbursement available from third-party payors
will not reduce the demand for, or negatively affect the price of, the Company's
products. The unavailability or inadequacy of third-party reimbursement for its
products would have a material adverse effect on Dey's business, financial
condition and results of operations.
The Company is unable to predict whether additional legislation or
regulation or amendments to existing legislation or regulation affecting the
health care industry or third-party coverage and reimbursement will be enacted
in the future, or what effect such legislation or regulation would have on its
business.
Many of the Company's current products are generic versions of existing
prescription drugs. These products are subject to intense competition,
particularly with respect to market prices and especially where multiple
competitors offer the same or similar products. Over recent years, Dey has been
successful in maintaining and even augmenting its overall gross margin through
the timely introduction of newer products which have higher margins relative to
its older products. The Company is now developing and seeking FDA approval for
branded products which, if successfully introduced, are anticipated to yield
even higher margins. There can be no assurance that, in the future, the
introduction of new products will offset any decline in margins of more mature
products, in which case overall gross margins may decline. Any such decline in
overall gross margins could have a material adverse effect on the Company's
business, financial condition and results of operations.
INVESTIGATION OF REPORTING OF WHOLESALE ACQUISITION COSTS
A number of pharmaceutical companies, including the Company, received
federal subpoenas in October 1997 from the Office of Inspector General, U.S.
Department of Health and Human Services in connection with an ongoing
investigation of the reporting by such companies of "wholesale acquisition cost"
data. Six states use such data to determine the rate at which they reimburse
pharmacies for pharmaceuticals dispensed under Medicaid programs. The Company
understands that the government is investigating to determine whether
reimbursement to pharmacies and other health care providers was higher than
required and that reporting of data with respect to albuterol products is one of
the specific areas being investigated by the government. The Company understands
that it is one of several pharmaceutical companies manufacturing albuterol which
are being investigated. The Company is complying with the subpoena. The Company
does not at this point know what further action the government will take in this
matter.
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FLUCTUATIONS IN QUARTERLY EARNINGS
The Company may experience periodic fluctuations in quarterly earnings as a
result of a variety of factors, including, but not limited to, the timing of the
introduction of new products, the number and timing of introductions of
competing products, pricing strategies adopted by the Company or by its
competitors, the seasonal severity of respiratory diseases, which generally are
more pervasive during the first and fourth quarters of the calendar year, the
timing and amount of spending on research and development, the timing and extent
of the ongoing expansion of the Company's sales forces, product recalls,
litigation and costs relating to the integration of acquisitions.
The Company's results of operations on a quarterly financial basis may
fluctuate, perhaps significantly, as a result of the above or other factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNCERTAINTY WITH RESPECT TO PRODUCT AND TECHNOLOGY LICENSING AND ACQUISITIONS
Certain of Dey's products and technologies under development have been
licensed from third parties. The failure of the Company to meet its obligations
under one or more of these agreements could result in the termination of the
Company's rights under such agreements. Further, there can be no assurance Dey
will be able to continue to identify and negotiate attractive licensing
arrangements with third parties.
Dey may also pursue acquisitions of products or companies that could
complement or expand its business. However, there can be no assurance that Dey
will be able to identify appropriate acquisition candidates in the future. If an
acquisition candidate is identified, there can be no assurance that the Company
will be able to successfully negotiate the terms of any such acquisition,
finance such acquisition or integrate such acquisition into its existing
business and product lines. Furthermore, the negotiation of potential
acquisitions could cause diversion of management's time and resources, and
require significant resources to consummate. If Dey consummates one or more
significant acquisitions through the issuance of shares of Common Stock, Dey's
stockholders could suffer significant dilution of their ownership interests in
Dey.
RELIANCE ON THIRD PARTIES AND MAJOR CUSTOMERS
The Company relies on third parties for the manufacture of certain of its
products, for the supply of raw materials, for shipping and for contract
research activities.
The Company relies on third parties to manufacture some of its products,
including its albuterol sulfate MDI aerosol and inhalation solution concentrate
products, Dey-Pak(Registered) sodium chloride solutions and Mucosil(Trademark)
acetylcysteine solutions. The Company's contracts with such third party
manufacturers are typically short term contracts subject to renewal. In
addition, certain products sold by the Company under license, notably the
EpiPen(Registered) product line (which is licensed from an affiliated company,
see "Certain Transactions"), are manufactured by third party manufacturers. All
third party manufacturers currently used by the Company manufacture products in
finished dosage form and must comply with current Good Manufacturing Practices.
With respect to Dey's products in development, Albuterol Mini-Dose(Trademark)
will be manufactured by a third party under the technical direction of the
Company and Curosurf(Registered) will be manufactured for the Company by its
licensor, Chiesi Farmaceutici, S.p.A. There can be no assurance that third party
manufacturers will be able to provide the Company with adequate supplies of
products in a timely fashion, which could result in the Company's inability to
fill orders from customers and the loss of sales and income. The Company also
faces the risk that, in the event of, inter alia, the insolvency, bankruptcy or
other serious commercial difficulties of any third party manufacturer, the
destruction in whole or in part of any such third party manufacturer's
facilities, the failure of any third party manufacturer's facilities to meet
applicable regulatory standards or the expiration of the term of any third party
manufacturing agreement and the inability of the Company to renew or extend such
agreement with the third party manufacturer, the Company may not be able to
obtain an alternative manufacturing source from other third parties or develop
internal manufacturing capabilities on commercially viable terms, if at all. In
such circumstances, the Company may be unable to continue to market such
products as planned and could be required to abandon or divest itself of a
product line on terms which would materially adversely affect the Company's
business, financial condition and results of operations.
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Certain of the raw materials used in the manufacture of the Company's
products are subject to FDA approval. The Company currently obtains certain raw
materials for its manufacturing operations, such as albuterol sulfate,
ipratropium bromide, cromolyn sodium and low density polyethylene resin, from
single sources, each of which is an FDA-approved supplier. The Company does not
currently have alternate FDA-approved sources for such raw materials. The
Company actively manages inventory levels for such materials and is engaged in
the evaluation of second source suppliers of selected materials. Although the
Company has not experienced any material interruption of supply to date, failure
of an FDA-approved single-source supplier to deliver sufficient quantities of
such raw materials on a timely basis or the failure of the FDA to approve
second-source suppliers in a timely fashion could materially and adversely
affect the Company's business, financial condition and results of operations.
Dey plans to rely entirely on arrangements with independent shipping
companies for the delivery of raw materials from suppliers and for the delivery
of its products to its distribution facility in Allen, Texas and to
distributors. The termination of the Company's arrangements with one or more of
these independent shipping companies, or the failure or inability of one or more
of these independent shipping companies to deliver raw materials from suppliers
or products to distributors could have a material adverse effect on Dey's
business, financial condition or results of operations. For instance, an
employee work stoppage or slow-down at one or more of these independent shipping
companies could materially impair that shipping company's ability to perform the
services required by the Company. There can be no assurance that the services of
any of these independent shipping companies will continue to be available to Dey
on terms as favorable as those currently available or that these companies will
choose to, or be able to, perform shipping services for Dey.
Dey currently utilizes, and plans for the foreseeable future to continue to
utilize, contract research companies for a variety of services in connection
with developing and gaining FDA approval for its new products. These services
may include, but are not limited to, the design of clinical protocols,
identification of clinical investigators to coordinate and monitor clinical
trials, compilation and review of clinical study reports and preparation of
clinical data for submission to the FDA. There can be no assurance that the
services of any of these companies will continue to be available to Dey or will
be made available to Dey on terms which are as favorable as those currently
available. The inability of the Company to continue to contract out such
services on commercially reasonable terms could materially adversely affect the
Company's business, financial condition and results of operations.
The Company markets its products through a variety of distribution channels
common to the industry. Due to consolidation in recent years, a few large
distributors now control a significant share of this market. In 1997, McKesson,
Bergen Brunswig and Cardinal Health, which are the leading pharmaceutical
wholesalers in the United States, accounted for approximately 12%, 12% and 11%,
respectively, of the Company's net sales. Further consolidation among, or any
financial difficulties of, these large distributors could, among other things,
result in the combination or elimination of warehouses which could result in
product returns to the Company, cause a reduction in inventory levels or
otherwise reduce purchases of the Company's products. Any such consolidation of,
or financial difficulties of, the Company's major distributors could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Marketing and Sales."
RISKS OF BUSINESS INTERRUPTION
The Company relies on its own manufacturing capabilities in Napa,
California for the majority of its current and future products. This single
manufacturing site is subject to potential atmospheric and geologic
catastrophes, including earthquakes, as well as fires, explosions, floods, or
other catastrophes which could cause significant interruptions in the Company's
ability to produce and market products manufactured at such site. The Company
has business interruption insurance for this type of risk and other business
interruption events; however, there is no assurance that such insurance will be
sufficient to prevent the Company from incurring significant expenses in dealing
with such an event or that such an event will not have a material adverse effect
on the Company's business, financial condition or results of operations.
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RISK OF ACCIDENTAL CONTAMINATION OR INJURY FROM CERTAIN WASTE PRODUCTS
Certain of the Company's research and development activities involve the
use of a variety of chemicals which are subject to federal, state and local laws
and regulations governing the use, storage, handling and proper disposal of
certain waste products. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by federal, state and local laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any liability could exceed the resources of the
Company.
UNCERTAINTY OF MANAGING GROWTH; UNCERTAINTY OF FUTURE CAPITAL NEEDS AND
ADDITIONAL FUNDING
The Company has recently experienced a period of significant expansion of
its operations that has placed a significant strain upon its management, systems
and resources. The Company's business strategy includes the development of new
products and the potential acquisitions of products and businesses. The
development of new products will require the commitment of substantial
additional resources and management time and attention to conduct research,
preclinical and clinical trials, to augment quality control, regulatory and
administrative capabilities, to increase manufacturing capacity and to manage an
increasing number of employees. Failure to manage growth effectively would have
a material adverse effect on the Company's business, financial condition and
results of operations.
The future capital requirements of the Company will depend on many factors,
including the pace and magnitude of its research and development programs for
new products, the time and costs involved in obtaining regulatory approvals and
the cost of augmenting manufacturing capacity and the Company's sales force. The
Company believes that its available cash, cash generated from operations and, as
necessary, borrowings under its credit facility with Merck KGaA (see "Certain
Transactions"), will be adequate to satisfy its anticipated working capital and
other capital requirements for the foreseeable future. Should the Company
require additional funding, there can be no assurance that additional financing
will be available on acceptable terms or at all. Any inability to obtain
additional financing, if required, would have a material adverse effect on the
Company's business, financial conditions and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"; "Business--Strategy"; and "Business--Products in Development."
DEPENDENCE ON KEY PERSONNEL
The Company's continued success depends, in part, upon retaining key
management and technical personnel, as well as the Company's ability to continue
to attract and retain additional highly qualified personnel. The Company faces
intense competition for personnel from other companies, government entities and
other organizations. Although the Company intends to enter into Employment
Agreements with certain of its key employees, there can be no assurance that Dey
will be successful in retaining its current personnel, nor can there by any
assurance that Dey will be successful in hiring or retaining qualified personnel
in the future. The loss of key personnel, or the inability to attract and retain
highly qualified employees in the future, could have a material adverse effect
on Dey's business, financial condition and results of operations. See
"Management."
CONTROL BY AND RELATIONSHIP WITH MERCK KGAA AND MERCK-LIPHA
Upon completion of the Offering, Merck KGaA will control approximately 84%
of the outstanding Common Stock of the Company (or approximately 82% if the
Underwriters' over-allotment option is exercised in full). Merck KGaA's control
will be through its subsidiaries, including Merck-Lipha. As a result, Merck KGaA
will have sufficient voting power to elect the entire Board of Directors of the
Company, control the direction and policies of the Company (including
acquisitions, mergers and consolidations) and prevent or cause a change in
control of the Company. The continuing beneficial ownership by Merck KGaA and
Merck-Lipha of the Company's Common Stock, or the service of certain persons as
directors of both the Company and Merck KGaA, Merck-Lipha, Lipha or Lipha
Americas, could create conflicts of interest with respect to decisions that
could have different implications for the Company and Merck KGaA and such other
companies, including potential acquisitions of businesses, the development and
marketing of products, the issuance by the Company of additional securities
(thereby diluting Merck KGaA's and Merck-Lipha's beneficial ownership of the
Company's
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capital stock), the election of new or additional directors, the payment of
dividends by the Company and other matters. Under Delaware corporate law,
officers and directors of the Company owe fiduciary duties to the Company and
its stockholders. However, the Company has not instituted any formal plan or
arrangement to address potential conflicts of interest that may arise among the
Company, Merck KGaA and their affiliates. See "Principal Stockholders."
The Company is party to various agreements with Merck KGaA and its
subsidiaries (including Lipha) that were entered into prior to the Offering.
While these agreements were not negotiated on an arm's length basis, the Company
believes that these agreements are no less favorable to the Company than would
be the case if the Company had been dealing with such other party at arm's
length. See "Certain Transactions."
ABSENCE OF PRIOR PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Although application has been made for listing the Common Stock on the
NYSE, there can be no assurance that an active trading market will develop or be
sustained after the Offering or that purchasers of Common Stock will be able to
resell their Common Stock at prices equal to or greater than the initial public
offering price. The initial public offering price will be determined by
negotiations among the Company and the Underwriters and may not be indicative of
the prices that may prevail in the public market. Furthermore, the market price
of the Common Stock may be volatile. Factors such as announcements of
fluctuations in the Company's or its competitors' operating results, changes in
government regulations or health care policies and market conditions in general
could have a significant impact on the future price of the Common Stock. In
particular, with the current uncertainty about health care policy, reimbursement
and coverage in the United States, there has recently been significant
volatility in the market price and trading volume of securities of
pharmaceutical and other health care companies unrelated to the performance of
such companies. See "Underwriting."
MARKET RISKS OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
Offering could adversely affect the prevailing market price of the Common Stock.
Of the 86,985,000 shares of Common Stock outstanding upon completion of the
Offering (not including up to 2,115,000 shares of Common Stock that may be sold
by the Company pursuant to the Underwriters' over-allotment option), the
14,100,000 shares offered hereby (16,215,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction under the Securities Act of 1933, as amended (the "Securities Act"),
except for such shares which may be acquired by an "affiliate" of the Company.
The remaining 72,885,000 issued and outstanding shares will be beneficially
owned by Merck KGaA. The Company and Merck KGaA have agreed that the Company
will not, and Merck KGaA will cause Lipha Americas not to, directly or
indirectly, issue, sell, offer or agree to sell, grant any option for the sale
of, pledge or otherwise dispose of or encumber and, in the case of Lipha
Americas, otherwise create a put equivalent position in any shares of Common
Stock (or any securities convertible into or exercisable or exchangeable for
shares of Common Stock) for a period of 180 days from the date of this
Prospectus without the prior written consent of Bear, Stearns & Co. Inc. No
prediction can be made as to the effect, if any, future sales of Common Stock or
the availability of such shares for future sale, will have on the market price
of the Common Stock prevailing from time to time. Nevertheless, sales of
substantial amounts of such shares in the public market, or the perception that
such sales may occur, could adversely affect the then prevailing market prices
for the Common Stock and could impair the Company's future ability to raise
capital through an offering of its equity securities. See "Shares Eligible for
Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the shares offered hereby will experience an immediate and
substantial dilution in net tangible book value of $13.74 per share ($13.43 per
share assuming the Underwriters' over-allotment option is exercised in full).
See "Dilution."
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YEAR 2000 COMPLIANCE
The Company is conducting a comprehensive review of its internal computer
systems to ensure these systems are adequately able to address the issues
expected to arise in connection with the Year 2000. These issues include the
possibility that software which does not have the capacity to recognize four
digits in a date field may no longer function properly when use of such a date
becomes necessary. In addition, the Company plans to review the status of its
customers and suppliers with regard to this issue and assess the potential
impact of non-compliance by such parties on the Company's operations.
The Company has developed a phased program to address Year 2000 issues. The
first phase consists of identifying necessary changes to application software.
The Company utilizes an integrated MRP system for the majority of its
manufacturing and financial systems and has received the Year 2000 compliant
version of the software from the vendor. Testing and implementation of the
upgraded software is expected to be completed by the end of 1998.
The second phase consists of determining whether Company systems not
addressed in the first phase, including non-IT ("information technology")
systems, are Year 2000 compliant. The second phase is expected to be completed
by the first quarter of 1999 for critical systems and the second quarter of 1999
for non-critical systems.
The third phase consists of determining the extent to which the Company
may be impacted by third parties' systems, which may not be Year 2000-compliant.
The Year 2000 computer issue creates risk for the Company from third parties
with whom the Company deals on financial transactions worldwide. While the
Company expects to complete efforts to seek reassurance from its suppliers,
service providers and customers by the second quarter of 1999, there can be no
assurance that the systems of other companies that the Company deals with or
upon which the Company's systems rely will be made Year 2000 compliant on a
timely basis, or that any such failure to convert by another company could not
have an adverse effect on the Company.
Based on current estimates, management expects the total incremental cost
to remediate non-compliant systems will be less than $1 million (approximately
$300,000 of which has been incurred to date). This estimate may change
materially as the Company continues to review and audit the result of its work.
The Company has not yet developed any formal contingency plans for
addressing any problems which may result if the work performed in phase one and
phase two do not successfully resolve all issues by the Year 2000, or if the
Company encounters material problems as a result of the failure of third parties
to become Year 2000 compliant on a timely basis. The Company intends to develop
preliminary plans for these areas by the first quarter of 1999, but any such
plan will need to be revised as additional information becomes available.
Failure on the part of the Company to complete any necessary remediation by
the Year 2000 may have a material adverse impact on the operations of the
Company. Failure of third parties, such as customers, suppliers and service
providers, to remediate Year 2000 problems would also have a material adverse
impact on the operations of the Company.
CERTAIN ANTI-TAKEOVER EFFECTS OF CHARTER AND BY-LAW PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
By-laws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Certain of these provisions allow the Company to issue preferred
stock without any vote or further action by the stockholders, limit the ability
of stockholders to call a special meeting of stockholders, require advance
notice for director nominations by stockholders and submission of other
proposals for consideration at stockholder meetings and provide for a staggered
Board of Directors. Certain provisions of Delaware law, including Section 203 of
the Delaware General Corporation Law (the "DGCL"), which limits business
combinations of the Company with interested stockholders, could have similar
effects. Also, the Company's Certificate of Incorporation provides that the
Company may not issue more than an aggregate of 90,000,000 shares of Common
Stock without first receiving the consent in writing of any person who, directly
or indirectly, owns over fifty percent of the Company's outstanding Common
Stock. The possible issuance of preferred stock, the limits placed on the
ability of stockholders to call a meeting at which directors could be replaced,
the advance notice requirements for director nominations and stockholder
proposals, the length of time required to replace sufficient members of a
staggered Board of Directors to take control of the Company and the
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provisions of Delaware law and the limitations on issuing further shares of
Common Stock could have the effect of delaying, deferring or preventing a change
in control of the Company, including, without limitation, discouraging a proxy
contest or making more difficult the acquisition of a substantial block of the
Company's Common Stock. See "--Control by and Relationship with Merck KGaA and
Merck-Lipha."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
A substantial number of statements contained in this Prospectus, including
without limitation, statements containing the words "believes," "anticipates,"
"expects," and "intends" and words of similar import, may constitute
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Dey, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, those discussed under the captions "Risk Factors," "Business,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Prospectus Summary," as well as elsewhere in this Prospectus.
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company are estimated to be $183.9 million ($211.7 million if the
Underwriters' over-allotment option is exercised in full) assuming a public
offering price of $14.00 per share (the mid-point of the price range) and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company.
The Company expects to use the net proceeds to repay indebtedness of the
Company, currently in the amount of approximately $200,000,000, borrowed under
a revolving credit facility with Merck KGaA. Following the repayment of the
aforementioned indebtedness to Merck KGaA, to the extent there is any amount
remaining from the net proceeds from the Offering, the Company expects to use
such remaining net proceeds for general corporate purposes, including capital
expenditures and working capital. See "Risk Factors--Proceeds of the Offering
Will Benefit Parent" and "Certain Transactions."
DIVIDEND POLICY
The Company does not anticipate paying dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of the Company's
Board of Directors after taking into account various factors, including the
Company's financial condition, operating results, current and anticipated cash
needs and plans for expansion. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
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CAPITALIZATION
The following table sets forth as of June 30, 1998 (i) the actual
capitalization of the Company, and (ii) such capitalization pro forma as
adjusted, after giving effect to (A) all dividends to Lipha Americas declared
subsequent to June 30, 1998, in the aggregate amount of $225,000,000, (B) the
borrowing of $200,000,000 from Merck KGaA to partially fund payment of the
aforementioned dividend and (C) the sale by the Company of the 14,100,000 shares
of Common Stock offered hereby at an assumed public offering price of $14.00 per
share (the mid-point of the price range) and, after deduction of underwriting
discounts and commissions and estimated expenses of the Offering, the
application of the net proceeds of the Offering to the repayment of a portion of
the indebtedness of the Company to Merck KGaA. See "Use of Proceeds" and
"Certain Transactions." This information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------
PRO FORMA
AS
ACTUAL ADJUSTED
------ ----------
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents................................................................... $ 17.2 $ 17.2
------ ------
------ ------
Long-term debt:
Long-term related party debt(1)........................................................... $ 22.0 $ 22.0
Payable to Merck KGaA(2).................................................................. -- 16.1
------ ------
22.0 38.1
------ ------
Stockholders' equity:
Preferred Stock $1.00 par value; 10,000,000 shares authorized; none issued and
outstanding, actual and pro forma as adjusted..........................................
Common Stock, $.01 par value; 140,000,000 shares authorized, 72,885,000 shares issued and
outstanding, actual; 86,985,000
shares issued and outstanding, pro forma as adjusted................................... 0.7 0.9
Additional paid-in capital................................................................ 57.1 72.8
Retained earnings......................................................................... 57.0 --
------ ------
Total stockholders' equity............................................................. $114.8 $ 73.7
------ ------
Total capitalization................................................................. $136.8 $111.8
------ ------
------ ------
</TABLE>
- ------------------
(1) Note, dated July 31, 1997, issued to Lipha Americas in the amount of
$22,000,000. See "Certain Transactions."
(2) This amount represents the borrowing of $200,000,000 from Merck KGaA under
the revolving credit facility less the estimated net proceeds from the
Offering (based on an assumed public offering price of $14.00 per share,
the mid-point of the price range) of $183,900,000.
18
<PAGE>
DILUTION
After giving effect to dividends to Lipha Americas declared by the Company
subsequent to June 30, 1998, the pro forma net tangible book value (deficit) of
the Company at June 30, 1998 was ($160,997,000), or ($2.21) per share. Pro forma
net tangible book value (deficit) per share represents the amount of total
tangible assets of the Company less total liabilities divided by the number of
shares of Common Stock outstanding at June 30, 1998. After giving effect to the
sale by the Company of the 14,100,000 shares of Common Stock offered hereby at
an assumed public offering price of $14.00 per share (the mid-point of the price
range), less estimated offering expenses and underwriting discounts and
commissions, the pro forma net tangible book value of the Common Stock as of
June 30, 1998 would have been approximately $22.9 million or $0.26 per share of
Common Stock. This represents an immediate increase in pro forma net tangible
book value per share of $2.47 to existing holders and an immediate dilution in
pro forma net tangible book value of $13.74 per share to new investors
purchasing shares in the Offering.
The following table illustrates the per share dilution as of June 30, 1998:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.................................................. $ $14.00
Pro forma net tangible book value (deficit) per share as of June 30, 1998.............. (2.21)
Increase in pro forma net tangible book value per share attributable to new investors.. 2.47
------
Pro forma net tangible book value per share after the Offering........................... 0.26
------
Dilution per share to new investors(1)................................................... $13.74
------
------
</TABLE>
The following table summarizes, as of June 30, 1998, the number of shares
of Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by the existing stockholders and by new investors
purchasing shares in the Offering (after giving effect to the 72,885 for 1 stock
split and before deduction of underwriting discounts and commissions and
estimated expenses of the Offering):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 72,885,000 83.8% $ 57,823,000 22.7% $ 0.79
New investors................ 14,100,000 16.2% $197,400,000 77.3% $ 14.00
------------ ----- ------------ -----
Total........................ 86,985,000(2) 100.0% $255,223,000 100.0%
------------ ----- ------------ -----
------------ ----- ------------ -----
</TABLE>
- ------------------
(1) If the Underwriters' over-allotment option is exercised in full, dilution
per share to new investors would be $13.43.
(2) Excludes 900,000 shares of Common Stock reserved for issuance of options
which may be granted under the Company's 1998 Incentive Plan. See
"Management."
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below with respect to
the consolidated statement of income data, other data, and consolidated balance
sheet data for, and as of the end of, each of the years in the three-year period
ended December 31, 1997 are derived from the consolidated financial statements
of Dey, Inc. and subsidiaries, which financial statements have been audited by
KPMG Peat Marwick LLP, independent certified public accountants. The
consolidated financial statements as of December 31, 1996 and 1997 and for each
of the years in the three-year period ended December 31, 1997, and the report
thereon, are included elsewhere in the Prospectus. The selected consolidated
financial data presented below with respect to the consolidated statement of
income data, other data, and consolidated balance sheet data for, and as of the
end of, each of the years in the two-year period ended December 31, 1994 are
derived from the Company's unaudited consolidated financial statements. The
selected consolidated statement of income data, and other data, presented below
for the six-month periods ended June 30, 1997 and 1998, and the consolidated
balance sheet data as of June 30, 1998 are derived from the unaudited
consolidated financial statements of Dey, Inc. and subsidiaries included
elsewhere in this Prospectus, which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the financial position and results of operations for the
periods presented. The operating results for the six months ended June 30, 1998
are not necessarily indicative of the results that may be expected for the full
fiscal year ending December 31, 1998 or for any subsequent period. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and related notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- ------
1993 1994 1995 1996 1997 1997
------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales..................................... $ 90.1 $116.3 $136.7 $166.5 $219.8 $103.9
Cost of sales................................. 23.3 30.9 39.0 64.3 77.2 30.8
------ ------ ------ ------ ------ ------
Gross profit.................................. 66.8 85.4 97.7 102.2 142.6 73.1
Selling, marketing and distribution........... 7.7 9.5 11.4 14.0 21.7 8.1
General and administrative expenses........... 5.9 6.6 8.5 9.6 11.3 4.9
Research and development...................... 2.4 7.2 12.5 19.3 20.1 8.5
------ ------ ------ ------ ------ ------
Income from operations........................ 50.8 62.1 65.3 59.3 89.5 51.6
Interest and other income, net................ 2.5 (9.3) 0.7 1.5 1.7 0.6
------ ------ ------ ------ ------ ------
Income before taxes........................... 53.3 52.8 66.0 60.8 91.2 52.2
Income taxes.................................. (24.2) (21.8) (27.1) (25.0) (37.2) (21.2)
------ ------ ------ ------ ------ ------
Net Income.................................... $ 29.1 $ 31.0 $ 38.9 $ 35.8 $ 54.0 $ 31.0
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Net income per share (basic).................. $ 0.40 $ 0.43 $ 0.53 $ 0.49 $ 0.74 $ 0.42
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Weighted average common shares outstanding.... 72,885,000 72,885,000 72,885,000 72,885,000 72,885,000 72,885,000
--------- ---------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ---------- ----------
Pro forma net income per share (basic)........ $ 0.61
------
------
Pro forma weighted average common shares used
to compute pro forma net income per share... 89,100,000
----------
----------
OTHER DATA:
Cash dividends per share...................... $ 0.13 $ 0.40 $ 0.43 $ 0.53 $ 0.34 $ 0.17
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
<CAPTION>
SIX
MONTHS
ENDED
JUNE 30,
----------
1998
------
<S> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales..................................... $135.7
Cost of sales................................. 48.8
------
Gross profit.................................. 86.9
Selling, marketing and distribution........... 13.7
General and administrative expenses........... 12.5
Research and development...................... 6.4
------
Income from operations........................ 54.3
Interest and other income, net................ 1.1
------
Income before taxes........................... 55.4
Income taxes.................................. (21.3)
------
Net Income.................................... $ 34.1
------
------
Net income per share (basic).................. $ 0.47
------
------
Weighted average common shares outstanding.... 72,885,000
----------
----------
Pro forma net income per share (basic)........ $ 0.38
------
------
Pro forma weighted average common shares used
to compute pro forma net income per share... 89,100,000
----------
----------
OTHER DATA:
Cash dividends per share...................... $ 0.59
------
------
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1998
AT DECEMBER 31, -----------------------
---------------------------------------------
1993 1994 1995 1996 1997 ACTUAL PRO FORMA(1)
----- ------ ------ ------ ------ ------- ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $25.4 $ 3.3 $ 5.3 $ 5.7 $ 18.6 $ 17.2 $ 17.2
Working capital (deficit).................. 32.8 27.8 31.3 17.3 38.7 25.3 (199.7)
Total assets............................... 98.0 125.9 142.7 144.9 189.0 194.8 194.8
Total debt (due to affiliates)............. -- 22.0 22.0 22.0 22.0 22.0 22.0
Total liabilities.......................... 9.9 35.7 44.6 49.9 65.0 80.0 305.0
Total stockholders' equity (deficit)....... 88.1 90.2 98.1 95.0 124.0 114.8 (110.2)
<CAPTION>
AT JUNE 30, 1998
-------------------
PRO FORMA
AS ADJUSTED(1)(2)
-------------------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 17.2
Working capital (deficit).................. 0.3
Total assets............................... 194.8
Total debt (due to affiliates)............. 38.1
Total liabilities.......................... 121.1
Total stockholders' equity (deficit)....... 73.7
</TABLE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
(1) After giving effect to a dividend to Lipha Americas declared subsequent to June 30, 1998, in the amount of $225,000,000.
See "Certain Transactions."
(2) Adjusted to give effect to the borrowing of $200,000,000 from Merck KGaA to partially fund payment of the dividend
referred to in note (1) above, the sale by the Company of the 14,100,000 shares of Common Stock offered hereby at an
assumed public offering price of $14.00 per share (the mid-point of the price range) and, after deduction of underwriting
discounts and commissions and estimated expenses of the Offering, and the application of the net proceeds of the Offering
to the repayment of indebtedness of the Company to Merck KGaA in connection with the borrowing referred to above.
See "Use of Proceeds" and "Certain Transactions."
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's results of
operations and financial condition should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto contained
elsewhere in this Prospectus. The following discussion may contain certain
statements of a forward-looking nature relating to future events or the future
financial performance of the Company. Prospective investors are cautioned that
such statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. See "Special Note Regarding Forward-Looking Statements."
OVERVIEW
Dey is a specialty pharmaceutical company focused on the development,
manufacturing and marketing of prescription drug products for the treatment of
respiratory diseases (such as COPD and asthma) and respiratory-related allergies
(such as anaphylaxis and rhinitis). Dey is particularly strong in the
development and high-volume manufacture of sterile, unit dose inhalation
solution products.
During the period from 1992 to 1997, the Company experienced significant
growth, with net sales increasing from $50 million in 1992 to $220 million in
1997. The increase in net sales was primarily due to the introduction of three
sterile, unit dose inhalation solution products: albuterol sulfate in 1992,
cromolyn sodium in 1994, and ipratropium bromide in 1997. In addition, Dey has
maintained annual gross margins of between 61.4% and 74.2% through the
introduction of new products and by capturing large market shares during such
period.
The Company's resources are now directed toward branded and patented
products. This strategy requires a significant investment in research and
development. The Company has invested heavily in research and development
projects, including 1997 research and development spending of $20 million; the
Company plans to continue to invest significant amounts in research and
development. The Company has also begun to enhance its sales and marketing
infrastructure to support this strategy. In July 1997, a new clinical sales
force was established in connection with the acquisition of the exclusive
marketing rights for EpiPen(Registered) brand products. At the current time,
this sales force is dedicated primarily to the sale of EpiPen(Registered) brand
products, but the Company plans to expand this group to support new branded and
patented products.
The Company's net sales and net income may vary significantly from period
to period, as well as in comparison to corresponding prior periods, as a result
of a variety of factors, including but not limited to, the timing of
introduction of new products, the number and timing of introductions of
competing products, pricing strategies adopted by the Company or its
competitors, the seasonal severity of respiratory diseases (which generally are
more pervasive during the first and fourth quarters of the calendar year), the
timing and amount of spending on research and development, the timing and extent
of the ongoing expansion of the Company's sales forces, product recalls,
litigation and costs relating to the integration of acquisitions.
21
<PAGE>
The following table sets forth, for the periods represented, the percentage
of net sales and percentage changes by certain line items in the Company's
Consolidated Statement of Income:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------------------------
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales.............................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................................... 28.5 38.6 35.1 29.7 35.9
----- ----- ----- ----- -----
Gross profit........................................................... 71.5 61.4 64.9 70.3 64.1
Selling, marketing and distribution.................................... 8.3 8.4 9.9 7.7 10.2
General and administrative expenses.................................... 6.3 5.8 5.1 4.8 9.2
Research and development............................................... 9.2 11.6 9.1 8.2 4.7
----- ----- ----- ----- -----
Income from operations................................................. 47.7 35.6 40.8 49.6 40.0
Interest and other income, net......................................... 0.5 0.9 0.7 0.6 0.8
----- ----- ----- ----- -----
Income before taxes.................................................... 48.2 36.5 41.5 50.2 40.8
Income taxes........................................................... (19.8) (15.0) (16.9) (20.4) (15.7)
----- ----- ----- ----- -----
Net income............................................................. 28.4% 21.5% 24.6% 29.8% 25.1%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
The following table summarizes the Company's quarterly operating results
for 1996 and 1997 and for the first two quarters of 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $45.4 $44.0 $37.1 $40.0 $ 52.3 $ 51.6 $57.6
Cost of sales........ 16.4 15.1 15.5 17.3 16.0 14.8 22.2
----- ----- ----- ------- ------- ------- -------
Gross profit......... 29.0 28.9 21.6 22.7 36.3 36.8 35.4
Selling, marketing and
distributon......... 3.6 4.0 2.5 3.9 3.9 4.2 5.8
General &
administrative
expenses............ 2.2 2.3 2.7 2.4 2.4 2.5 2.7
Research and
development......... 2.2 5.1 4.2 7.8 3.5 5.0 3.6
----- ----- ----- ------- ------- ------- -------
Income from
operations.......... 21.0 17.5 12.2 8.6 26.5 25.1 23.3
Interest and other
income, net......... 0.3 0.3 0.2 0.7 0.3 0.3 0.6
----- ----- ----- ------- ------- ------- -------
Income before taxes.. 21.3 17.8 12.4 9.3 26.8 25.4 23.9
Income taxes......... (8.7) (7.3) (5.1) (3.9) (10.9) (10.3) (9.7)
----- ----- ----- ------- ------- ------- -------
Net Income........... $12.6 $10.5 $ 7.3 $ 5.4 $ 15.9 $ 15.1 $14.2
----- ----- ----- ------- ------- ------- -------
----- ----- ----- ------- ------- ------- -------
Net income per share
(basic)............. $0.17 $0.14 $0.10 $0.07 $ 0.22 $ 0.20 $0.19
----- ----- ----- ------- ------- ------- -------
----- ----- ----- ------- ------- ------- -------
Weighted average
common shares
outstanding......... 72,885,000 72,885,000 72,885,000 72,885,000 72,885,000 72,885,000 72,885,000
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
DEC. 31, MARCH 31, JUNE 30,
1997 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales............ $58.3 $ 71.1 $ 64.6
Cost of sales........ 24.1 25.6 23.2
----- ------- -------
Gross profit......... 34.2 45.5 41.4
Selling, marketing and
distributon......... 7.9 6.9 6.8
General &
administrative
expenses............ 3.6 3.0 9.5
Research and
development......... 8.0 2.5 3.9
----- ------- -------
Income from
operations.......... 14.7 33.1 21.2
Interest and other
income, net......... 0.5 0.4 0.7
----- ------- -------
Income before taxes.. 15.2 33.5 21.9
Income taxes......... (6.3) (13.6) (7.7)
----- ------- -------
Net Income........... $ 8.9 $ 19.9 $ 14.2
----- ------- -------
----- ------- -------
Net income per share
(basic)............. $0.12 $ 0.27 $ 0.20
----- ------- -------
----- ------- -------
Weighted average
common shares
outstanding......... 72,885,000 72,885,000 72,885,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
22
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net sales increased by 30.6%, from $103.9 million in first six months of
1997 to $135.7 million in the first six months of 1998. The increase resulted
primarily from an increase in sales of ipratropium bromide inhalation solution,
which totaled $49.4 million during the first six months of 1998, compared to
$22.1 million during the first six months of 1997 when the product was
originally introduced. The first six months of 1998 also include $10.4 million
in net sales of EpiPen and other new products which were not introduced into the
Company's product line until July 1997.
Gross profit increased by 18.9%, from $73.1 million to $86.9 million. Gross
profit as a percentage of net sales decreased from 70.3% to 64.1%. The decline
in gross profit percentage was the net effect of the following factors. Several
of the Company's unit dose inhalation solution products experienced a decline in
gross profit margins, primarily due to decreases in average selling prices; in
general, the gross product margins of generic drug products decline as they
become mature and as new competitors enter the market, except to the extent any
such declines are offset in whole or in part by the introduction of new products
with higher margins. Most significantly, the average selling price of albuterol
sulfate inhalation solution declined 10.9%, the average selling price of
cromolyn sodium inhalation solution declined 14.1%, and the average selling
price of ipratropium bromide inhalation solution declined 20.5%. In addition,
third party manufactured products with lower gross profit margins than
self-manufactured products were added to the Company's product mix in the second
half of 1997; in general, products self-manufactured by Dey have generated
significantly higher gross profit margins compared with products manufactured by
others for Dey. Third party manufactured products accounted for 16.3% and
19.2% of total Company sales in the six months ended June 30, 1997 and 1998,
respectively. Partially offsetting these factors were increased net sales of
ipratropium bromide inhalation solution, a new product which had a
relatively high gross profit margin. Ipratropium bromide inhalation solution
accounted for 21.2% and 36.4% of total Company sales in the six months ended
June 30, 1997 and 1998, respectively.
Selling, marketing and distribution expenses increased by 71.3%, from
$8.1 million to $13.7 million. As a percentage of net sales, selling, marketing
and distribution expenses increased from 7.7% to 10.2%. This increase was
primarily due to an expanded sales force and related advertising expenses
incurred to introduce new products such as EpiPen(Registered) and tablets for
the treatment of hypothyroidism.
Effective September 1, 1998 the Company transferred its hypothyroid product
business to a newly-formed subsidiary of Lipha Americas. Sales and related costs
of such business, subsequent to August 31, 1998, will not be reflected in the
results of operations of the Company. For the six months ended June 30,
1998, the hypothyroid product line generated net sales of $0.5 million (0.4% of
the Company's total sales) and a net loss of $1.5 million. The assets and
certain liabilities related to the hypothyroid business were transferred at the
book value thereof at August 31, 1998, which was approximately zero.
General and administrative expenses increased by 152.9%, from $4.9 million
to $12.5 million. Expenses of $6.0 million were accrued in the first six months
of 1998 relating to the recall of EpiPen(Registered) products and the
investigation of the reporting of wholesale acquisition costs. See "Risk Factors
- -- Risk of Product Liability and Product Recall" and "Risk Factors --
Investigation of Reporting of Wholesale Acquisition Costs." Excluding these
accruals, general and administrative expenses increased by 31.6%, from $4.9
million to $6.5 million, and as a percentage of net sales, were 4.8% for each of
the six months ended June 30, 1997 and 1998.
Research and development expenses decreased by 25.2%, from $8.5 million to
$6.4 million. The net decrease was a result of one NDA development project
moving out of the costly clinical trial phase of development in early 1998 and a
reduction in spending under a co-development agreement with Genpharm, a Canadian
affiliate. The Company anticipates increased levels of research and development
spending in future quarters in order to support planned product development
projects.
Income from operations increased by 5.2%, from $51.6 million, to
$54.3 million, as a result of the above factors.
Income taxes increased by 0.5%, from $21.2 million to $21.3 million. The
effective tax rate was 40.7% and 38.5% for the six months ended June 30, 1997
and 1998, respectively.
23
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Net sales increased by 32.0%, from $166.5 million to $219.8 million. The
increase resulted primarily from the introduction of ipratropium bromide
inhalation solution in 1997, which generated $50.7 million in net sales, and the
acquisition of exclusive marketing rights for EpiPen(Registered) products, which
produced $19.2 million in net sales during 1997. This increase was partially
offset by a $15.1 million decrease in net sales of cromolyn sodium inhalation
solution due to a declining market and increased price competition.
Gross profit increased by 39.5%, from $102.2 million to $142.6 million.
Gross profit as a percentage of net sales increased from 61.4% to 64.9% due to
the introduction of ipratropium bromide inhalation solution and due to an
improved gross profit margin on albuterol MDI. Ipratropium bromide inhalation
solution, which was introduced in early 1997, contributed $45.2 million in gross
profit. The gross profit percentage on albuterol MDI improved from a negative
gross margin in 1996 to a 23.0% gross margin profit in 1997. The 1996 negative
gross margin on albuterol MDI was attributable to relatively high purchase
prices from the manufacturer and competitive pricing pressures in the market.
Selling, marketing and distribution expenses increased by 54.6%, from
$14.0 million to $21.7 million. This increase was primarily attributable to
increased personnel and advertising costs associated with the addition of new
products. Advertising expenses and additional sales force required to market
EpiPen(Registered)and other new products in 1997 totaled approximately
$1.9 million. The Company's line of hypothyroid products gave rise to additional
selling, marketing and distribution expenses totaling $1.8 million with minimal
related revenues.
General and administrative expenses increased by 18.1%, from $9.6 million
to $11.3 million, due primarily to increased costs related to the continued
growth of the Company. As a percentage of net sales, general and administrative
expenses decreased from 5.8% to 5.1%.
Research and development expenses increased by 4.1%, from $19.3 million to
$20.1 million. As a percentage of net sales, research and development decreased
from 11.6% to 9.1%.
Income from operations increased by 50.9%, from $59.3 million to $89.5
million, as a result of the above factors.
Income taxes increased by 48.6%, from $25.0 million to $37.2 million. The
effective tax rate was 41.1% and 40.8% for 1996 and 1997, respectively.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Net sales increased by 21.8%, from $136.7 million to $166.5 million. The
increase resulted primarily from $14.0 million in net sales due to the
introduction of albuterol MDI, a $9.8 million increase in net sales of cromolyn
sodium inhalation solution and a $5.0 million increase in albuterol sulfate
inhalation solution net sales.
Gross profit increased by 4.6%, from $97.7 million to $102.2 million. Gross
profit as a percentage of net sales decreased from 71.5% to 61.4%. The decrease
in gross profit percentage resulted primarily from a loss on albuterol MDI
products introduced in 1996, partially offset by a high gross margin on cromolyn
sodium inhalation solution. The 1996 negative gross margin on albuterol MDI was
attributable to relatively high purchase prices from the manufacturer and
competitive pricing pressures in the market. Due to the losses incurred in 1996,
the Company renegotiated the supply agreements on terms more favorable to the
Company. Excluding albuterol MDI products, the 1996 gross profit percentage
would have been 69.3%, compared to 71.5% in 1995.
Selling, marketing and distribution expenses increased by 23.5%, from
$11.4 million to $14.0 million. As a percentage of net sales, selling, marketing
and distribution expenses were 8.4% and 8.3% in 1996 and 1995, respectively.
General and administrative expenses increased by 12.0%, from $8.5 million
to $9.6 million, resulting primarily from increased costs related to the
continued growth of the Company. As a percentage of net sales, general and
administrative expenses decreased from 6.3% to 5.8%.
Research and development expenses increased by 53.7%, from $12.5 million to
$19.3 million. This increase was primarily attributable to increased spending on
clinical trials.
Income from operations decreased by 9.0%, from $65.3 million to $59.3
million, as a result of the above factors.
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Income taxes decreased by 7.6%, from $27.1 million to $25.0 million. The
effective tax rate was 41.0% and 41.1% for 1995 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's working capital totaled $25.3 million,
compared to $38.7 million, $17.3 million and $31.3 million at December 31, 1997,
1996 and 1995, respectively. Cash and cash equivalents were $17.2 million at
June 30, 1998, compared to $18.6 million, $5.7 million and $5.3 million at
December 31, 1997, 1996 and 1995, respectively.
The Company's primary source of cash has been from operating activities.
Net cash provided by operating activities during the six months ended June 30,
1998 totaled $38.5 million, consisting primarily of net income of
$34.1 million. Net cash provided by operating activities during 1997 was
$56.0 million compared to $51.3 million and $48.4 million in 1996 and 1995,
respectively. The increase in cash provided by operating activities in 1997 was
primarily the result of a significant increase in net income offset somewhat by
increases in receivables and inventory levels.
During the six month period ended June 30, 1998, research and development
expenses totaled $6.4 million, compared to $8.5 million during the six month
period ended June 30, 1997. During 1997, research and development expenses
totaled $20.1 million, compared to $19.3 million and $12.5 million in 1996 and
1995, respectively. The Company plans to spend substantial amounts of capital
over the next several years to continue the research and development of
pharmaceutical products.
The Company's primary uses of cash from operations to date have been for
the payment of dividends and the funding of expansion of manufacturing and other
facilities.
During the six month period ended June 30, 1998, the Company declared cash
dividends to Lipha Americas, the Company's sole stockholder, totaling
$43.3 million, of which $38.3 million were paid during such period. During 1997,
1996 and 1995, the Company paid cash dividends to Lipha Americas totaling $25.0
million, $38.9 million and $31.0 million, respectively. On June 26, 1998, the
Company declared a dividend of $24.45 million to Lipha Americas, of which
$24.43 million was paid on June 30, 1998. On June 30, 1998, the Company declared
a dividend of $4.9 million to Lipha Americas, which was paid on August 14, 1998,
and on July 21, 1998, the Company declared a dividend of $225 million to Lipha
Americas, which was paid on August 14, 1998. Payment of $200 million of the July
21, 1998 dividend was funded by the Company borrowing $200 million under a
revolving credit agreement with Merck KGaA. It is the Company's intention to use
all or substantially all of the proceeds of the Offering to repay such
indebtedness to Merck KGaA. The Company does not anticipate declaring additional
dividends in the foreseeable future. See "Risk Factors--Proceeds of the Offering
Will Benefit Parent," "Dividend Policy," "Use of Proceeds" and "Certain
Transactions."
The Company invested $8.7 million in property, plant and equipment during
the six month period ended June 30, 1998, compared to $16.1 million,
$18.0 million and $10.4 million in 1997, 1996 and 1995, respectively. The
Company's future capital expenditure plans include investing approximately
$78.3 million during the period 1998 through 2001 to expand its manufacturing
facilities and technologies.
The Company expects that its available cash, cash generated from operations
and, as necessary, borrowing under its credit facility with its parent, Merck
KGaA (see "Certain Transactions"), will be adequate to satisfy its anticipated
working capital and other capital requirements through the foreseeable future.
However, in the event the Company's capital and other expenditures exceed
internally generated funds, it may be necessary to raise funds through
additional external or related party borrowings or the issuance of debt or
additional equity securities. There can be no assurance, in such case, that
adequate funds, whether through the financial markets or from other sources,
will be available on terms acceptable to the Company or at all.
NEW ACCOUNTING STANDARD
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133), which is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 133
establishes accounting and reporting standards for derivatives instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Earlier application of all provisions of this
Statement is encouraged,
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but it is permitted only as of the beginning of any fiscal quarter that begins
after issuance of this Statement. The Company anticipates that adoption of this
Statement will not be material to the consolidated financial statements.
YEAR 2000 COMPLIANCE
The Company is conducting a comprehensive review of its internal computer
systems to ensure these systems are adequately able to address the issues
expected to arise in connection with the Year 2000. These issues include the
possibility that software which does not have the capacity to recognize four
digits in a date field may no longer function properly when use of that date
becomes necessary. In addition, the Company plans to review the status of its
customers and suppliers with regard to this issue and assess the potential
impact of non-compliance by such parties on the Company's operations.
The Company has developed a phased program to address Year 2000 issues. The
first phase consists of identifying necessary changes to application software.
The Company utilizes an integrated MRP system for the majority of its
manufacturing and financial systems and has received the Year 2000 compliant
version of the software from the vendor. Testing and implementation of the
upgraded software is expected to be completed by the end of 1998.
The second phase consists of determining whether Company systems not
addressed in the first phase, including non-IT ("information technology")
systems, are Year 2000 compliant. The second phase is expected to be completed
by the first quarter of 1999 for critical systems and the second quarter of 1999
for non-critical systems.
The third phase consists of determining the extent to which the Company
may be impacted by third parties' systems, which may not be Year 2000-compliant.
The Year 2000 computer issue creates risk for the Company from third parties
with whom the Company deals on financial transactions worldwide. While the
Company expects to complete efforts to seek reassurance from its suppliers,
service providers and customers by the second quarter of 1999, there can be no
assurance that the systems of other companies that the Company deals with or
upon which the Company's systems rely will be made Year 2000 compliant on a
timely basis, or that any such failure to convert by another company could not
have an adverse effect on the Company.
Based on current estimates, management expects the total incremental cost
to remediate non-compliant systems will be less than $1 million (approximately
$300,000 of which has been incurred to date). This estimate may change
materially as the Company continues to review and audit the result of its work.
The Company has not yet developed any formal contingency plans for
addressing any problems which may result if the work performed in phase one and
phase two do not successfully resolve all issues by the Year 2000, or if the
Company encounters material problems as a result of the failure of third parties
to become Year 2000 compliant on a timely basis. The Company intends to develop
preliminary plans for these areas by the first quarter of 1999, but any such
plan will need to be revised as additional information becomes available.
Failure on the part of the Company to complete any necessary remediation by
the Year 2000 may have a material adverse impact on the operations of the
Company. Failure of third parties, such as customers, suppliers and service
providers, to remediate Year 2000 problems in their IT and non-IT systems would
also have a material adverse impact on the operations of the Company.
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<PAGE>
BUSINESS
OVERVIEW
Dey is a specialty pharmaceutical company focused on the development,
manufacturing and marketing of prescription drug products for the treatment of
respiratory diseases (such as COPD and asthma) and respiratory-related allergies
(such as anaphylaxis and rhinitis). Dey is particularly strong in the
development and high-volume manufacture of sterile, unit dose inhalation
solution products. The U.S. market in 1997 for inhalation therapy prescription
pharmaceutical products was estimated by IMS to have been approximately
$3.4 billion, consisting of nebulizer inhalation solutions ($0.4 billion),
metered dose inhalers ($1.7 billion), intranasal products ($0.9 billion) and
other inhalation therapy products ($0.4 billion). Dey had net sales of
$220 million in 1997.
Dey is one of the largest U.S. manufacturers of sterile, unit dose
inhalation solution products for the treatment of respiratory diseases. Unit
dose solution products, because they are pre-measured, are convenient to use and
reduce the risk of dosage error, medication waste and cross-contamination. Dey's
sterile, unit dose inhalation solution products include albuterol sulfate and
cromolyn sodium for the treatment of asthma and ipratropium bromide for the
treatment of COPD. Dey also markets sterile sodium chloride solution products,
under the brand name Dey-Pak(Registered), used for diluting concentrated
inhalation solutions and in tracheal care for patients who require periodic
tracheal suctioning and cleaning. Dey also has the exclusive right to market
EpiPen(Registered) brand autoinjectors, which permit patients to self-administer
epinephrine for severe anaphylactic reactions. EpiPen(Registered) is currently
the only epinephrine autoinjector on the U.S. market.
Dey is pursuing new product development through a combination of its own
research and development, sponsored research and development and acquiring or
licensing of products developed by others. Dey currently has pending three NDAs
and two ANDAs before the FDA. These include two NDAs for sterile, unit dose
inhalation solution products for the treatment of asthma and COPD, one NDA for a
patented product for the treatment of IRDS and two ANDAs for mechanical pump
nasal spray products for the treatment of allergic rhinitis. Dey is also
developing a proprietary inhalation delivery system for dry powders; pivotal
studies on the first of a series of products using this delivery system are
scheduled to begin in late 1998 or early 1999.
Dey has its own comprehensive U.S. marketing and distribution network,
which markets Dey's products to large institutional purchasers, wholesalers,
group purchasing organizations, chain pharmacies, HMOs and home health care
organizations, as well as directly to physicians, including allergists,
pulmonologists and pediatricians. Dey currently employs approximately
100 people in marketing and sales, and expects that number to increase
significantly as new products are launched. Dey distributes its products
throughout the United States from two locations: its manufacturing and
distribution facility in Napa, California and its distribution center in Allen,
Texas.
INDUSTRY
Dey focuses on the segments of the pharmaceutical industry relating to
respiratory diseases, such as COPD, asthma, IRDS and cystic fibrosis, and
respiratory-related allergies, such as anaphylactic reactions and rhinitis. See
the tables under the headings "Dey's Current Products" and "Products in
Development" for, respectively, a listing of products currently sold by Dey and
of products Dey currently has in development which have or will have as their
principal indicated use (i.e., the labelled use of the product as approved by
the FDA) the treatment of such diseases.
Respiratory Diseases
Chronic Obstructive Pulmonary Disease. Chronic bronchitis and emphysema
constitute the majority of COPD cases. The primary risk factor for the
development of COPD is cigarette smoking. In COPD, airflow limitation is chronic
due to the irreversible nature of the damage caused by the disease. COPD affects
about 5% of the U.S. population (12-15 million people) and is the fourth leading
cause of death in the United States. The number of COPD cases is expected to
increase through the end of the century as the population ages and as the number
of smokers increases in the critical ages associated with COPD (65-84 years).
Ipratropium bromide is increasingly the preferred first line method of treatment
for COPD and has replaced albuterol sulfate as the preferred treatment in recent
years. However, there are numerous new products in development for the treatment
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<PAGE>
of COPD, including new chemical entities, new corticosteroid compounds,
long-acting bronchodilators and biotechnology products. Dey is developing a
combination product for the treatment of COPD.
Asthma. Asthma is a chronic inflammatory disorder of the airways. Airway
inflammation contributes to airway hyperresponsiveness, airflow limitation,
respiratory symptoms and disease chronicity. Asthma affects nearly 15 million
people in the United States, including almost 5 million patients under 18 years
of age. The prevalence and severity of asthma have increased over the past two
decades, and the disease was responsible for more than 5,500 deaths in the
United States in 1996. The goals of asthma therapy are directed toward achieving
normal pulmonary function and preventing exacerbations. Currently, the leading
pharmaceutical therapies for asthma in the United States are short-acting
bronchodilators (principally albuterol sulfate) for relief of acute symptoms,
inhaled anti-inflammatory agents including corticosteroids, and long-acting
bronchodilators such as salmeterol. Leukotriene antagonist compounds have been
introduced recently in the U.S., but at the present time these do not replace
the need for short-acting bronchodilators or corticosteroids. It is too soon to
predict what part these newer compounds will play in the overall asthma market.
A structurally modified chemical form of albuterol sulfate may be available on
the U.S. market soon and reportedly may give rise to reduced side effects as
compared to the existing albuterol sulfate compound. Dey is seeking to expand
its coverage of the asthma market by developing new formulations of the
bronchodilator albuterol sulfate and of corticosteroids, as well as novel
delivery systems for a variety of drug products.
Infant Respiratory Distress Syndrome. IRDS results from a deficiency in
pulmonary surfactant and is a major cause of acute morbidity and mortality in
infants born at less than 30 weeks gestation. IRDS may also cause long term
respiratory and neurological problems. It affects about 50,000 premature infants
born in the United States each year. Treatment consists of supplemental oxygen,
mechanical ventilation and replacement of lung surfactant. Lung surfactants are
expected to remain the preferred treatment for IRDS in infants. The majority of
lung surfactants currently used in the United States are bovine-derived, while
in Europe the porcine-derived surfactant, Curosurf(Registered), is the market
leader. Dey has the exclusive marketing rights for Curosurf(Registered) in the
United States and Canada.
Cystic Fibrosis. Cystic fibrosis is an obstructive airway disorder that
affected approximately 30,000 people in the United States in 1997, with
approximately 1,000 new cases diagnosed each year. Current treatment is aimed at
symptom management, including reducing airway obstruction and inflammation,
controlling airway infection and improving nutritional status. Medications for
cystic fibrosis includes mucolytics (including acetylcysteine solutions marketed
by the Company) and antibiotics. There are also numerous new products in
development by other pharmaceutical companies to treat cystic fibrosis. Among
these are gene therapy treatments which are believed to be several years away
from approval.
Respiratory Allergies
Anaphylaxis. Anaphylaxis is an acute, systemic allergic reaction with a
variety of manifestations, from a mild reaction which affects only the skin, to
the most severe reaction, affecting many organ systems in the body. A full
anaphylactic attack is a medical emergency and is potentially life-threatening.
During an anaphylactic attack, the immune system mounts a series of chemical
reactions leading to symptoms such as swelling, particularly in the throat and
airways, as well as a sudden drop in blood pressure. Medications are the primary
cause of anaphylactic reactions, with more than 2,000 deaths each year in the
United States attributed to such reactions. Other common triggers of anaphylaxis
include insect stings, latex allergy and food allergies. It is estimated that up
to 4% of the U.S. population suffer from insect sting anaphylaxis, up to 6% of
the U.S. population are latex sensitive and up to 1.5% of U.S. adults and 5% of
U.S. children under 3 years of age experience food-related anaphylaxis.
Injectable epinephrine is recognized as the first line treatment for
anaphylaxis. Patients at risk are recommended to carry epinephrine on their
person, for use immediately to reverse symptoms when an attack occurs. The
EpiPen(Registered) line of products, which are marketed exclusively by the
Company and its licensees, are the only epinephrine products currently on the
U.S. market available in autoinjector form. Epinephrine is also available in the
United States in pre-filled syringes and in multi-dose vials. Unlike
autoinjectors, pre-filled syringes must be self-administered by inserting the
exposed needle of the syringe and depressing the syringe to deliver the
medication. Autoinjectors automatically deliver medication when the patient
places the autoinjector against his or her body and applies pressure to the
injector.
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Based on data published by IMS, in 1997 epinephrine autoinjectors had
approximately an 80.2% share of the U.S. market for epinephrine sales.
Allergic Rhinitis. Allergic rhinitis can be perennial (caused by dust,
mold or animal allergens) or seasonal (caused by pollen). Exposure to allergens
(seasonal or perennial) causes the release of histamines and other chemical
mediators, which in turn causes rhinitis, the inflammation of the mucous
membrane lining the nasal passages. The resulting inflammation causes
congestion, a runny nose, sneezing and itching. In 1994, there were 26.1 million
cases of hay fever or allergic rhinitis reported. Pharmaceutical treatments for
allergic rhinitis include antihistamines, nasally-administered corticosteroids
and non-steroidal anti-inflammatory agents. Numerous new products have been
launched over recent years including combinations of oral antihistamines and
decongestants, new longer-acting corticosteroids and other products. In
addition, over-the-counter non-prescription products are widely used to treat
this disease. The Company does not currently market any products to treat
rhinitis. However, Dey is developing several products for use with its
mechanical pump delivery system, including novel formulations of corticosteroids
to treat the underlying inflammation.
Inhalation Drugs and Delivery Systems
In respiratory therapy for lung and airway diseases, drugs are administered
through inhalation, orally in capsule, tablet or liquid form or through
intravenous injection. The primary method of delivering pharmaceuticals to
patients with lung or airway diseases is through inhalation. The advantages of
inhalation therapy include delivery of the medication directly to the desired
site and a rapid onset of effect. The U.S. retail market for inhalation
pharmaceuticals used in the treatment of respiratory diseases was estimated by
IMS to be approximately $2.8 billion in 1997. The U.S. hospital market for such
inhalation pharmaceuticals was estimated by IMS to be approximately
$612 million during such period.
There are four distinct categories of inhalation delivery systems
available:
Metered dose inhalers ("MDIs"), which consist of pressurized canisters
containing drug and propellant, represent the most common method of delivering
inhaled medications due to convenience. MDIs rely on pressurized gas which
aerosolizes a drug through a metering valve which dispenses a specified amount
of drug. MDIs are small, portable and convenient and can be breath-activated.
However, the pressurized gas propellant used in most MDIs relies on the use of
chlorofluorocarbons ("CFCs"). The use of CFCs is expected to be substantially
phased out in the United States and prohibited as a propellent worldwide in the
coming years under international agreements that address concerns about ozone
destructive characteristics of CFC propellants. Accordingly, new propellants are
being developed as substitutes for CFCs. In 1997, the total U.S. market for
pharmaceuticals delivered by MDIs was estimated by IMS to be approximately
$1.7 billion.
Nebulization devices (using unit dose and multi-dose inhalation solutions)
are used to deliver aerosolized medication by compressing air to make vapor or
mist. Inhalation pharmaceuticals for nebulizers are packaged either in
multi-dose containers, from which each dose must be measured by bulb dropper and
transferred to the nebulizer, or unit doses, in which each dose is separately
packaged and can be poured directly into the nebulizer. Unit doses are
consistently accurate and more convenient than the multi-dose measuring process.
Nebulizers are popular with patients who have difficulty using MDIs because of
the coordination required to inhale and activate the MDI simultaneously. In
1997, the total U.S. market for pharmaceuticals delivered using nebulizers was
estimated by IMS to be approximately $400 million, with multi-dose solutions
accounting for approximately $52 million and unit dose solutions accounting for
approximately $348 million.
Dry powder inhalers ("DPIs") are the newest inhalation delivery systems and
are being developed as alternatives to MDIs. DPIs deliver inhalation
pharmaceuticals in dry powder form and do not use environmentally harmful
propellants. In 1997, the total U.S. market for inhalation pharmaceuticals
delivered using DPIs was estimated by IMS to be approximately $9.0 million. This
delivery system is expected to grow in popularity, as an efficacious and cost
effective alternative to MDIs, as more DPI devices are approved by the FDA.
Intranasal delivery systems are used to treat allergic rhinitis which is
primarily treated by delivering nasal corticosteroids, through either
pressurized or mechanical pump nasal sprays or by taking oral antihistamines and
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decongestant drugs. In 1997, the total U.S. market for nasal sprays was
estimated by IMS to be approximately $885 million.
Other Trends in Respiratory Care
Current trends in the segments of the respiratory disease markets in which
Dey competes include the following two FDA proposals. In 1997, the FDA proposed
that all inhalation solutions marketed in the United States be sterile, as
opposed to preserved. Preserved solutions contain an anti-microbial agent,
usually benzalkonium chloride, to prevent microbial contamination over the shelf
life of the solution, whereas sterile solutions are manufactured and sealed
under sterile conditions and do not require a preservative. The markets for
Dey's sterile, unit dose inhalation solutions could expand if such proposal
becomes law. Also in 1997, the FDA proposed eliminating CFC propellants in MDIs
and nasal sprays. Companies are developing various products, including DPIs, to
replace CFC propelled MDIs and companies are increasingly developing nasal spray
products that utilize mechanical pump nasal spray delivery technology.
STRATEGY
Dey's objective is to be a specialty pharmaceutical company focused on
respiratory diseases. The key elements of Dey's strategy to achieve this
objective are as follows:
o Focus on products for respiratory diseases. The Company intends to
continue its focus on developing, manufacturing and marketing
prescription drugs for the treatment of respiratory diseases and
allergies and the marketing of associated medical devices. The Company
believes that this area of the pharmaceutical market constitutes an
attractive and growing niche market. Through continued specialization
and by continuing to refine its capabilities in research, development,
manufacturing and marketing, the Company believes it can enhance its
already strong market position.
o Enhance leadership of sterile, unit dose market. The Company believes
it is one of the leading U.S. manufacturers of sterile, unit dose
inhalation products, which it manufactures at its facility in Napa,
California using advanced aseptic form-fill-seal technology. The Company
believes that sterile, unit dose inhalation products, because of their
attractiveness in hospitals and other settings as a result of their
decreased risk of contamination and dosage errors, will continue to have
a prominent role in the specialty market for respiratory prescription
drugs. The Company believes that each of its Key Products, all of which
are sterile, unit dose products, occupies first, second or third market
share position in the U.S. Dey is actively engaged in developing new
sterile, unit dose inhalation products.
o Develop additional and novel drug delivery technologies for use in the
treatment of respiratory diseases. Following its success in respiratory
care products based on sterile, unit dose technology, Dey has developed,
and is continuing to invest significantly in, mechanical pump nasal
spray and dry powder inhaler technologies as delivery systems for
respiratory care drugs. Nasal spray technology capitalizes on the
Company's strengths in the development of liquid and suspension
formulations and provides a logical extension to its respiratory care
product line. Dey believes that dry powder inhaler delivery systems will
potentially replace a substantial portion of the market for MDI aerosols
for existing as well as new compounds. Dey is currently developing a dry
powder inhaler delivery system for use with a series of important
respiratory drugs.
o Aggressively expand product line. The Company intends to develop,
in-license and acquire new products that treat respiratory diseases,
represent unique market opportunities, offer some form of market
protection (including patent rights, marketing exclusivity or orphan
drug designation) and/or complement Dey's existing product lines.
o Leverage existing strengths in respiratory marketing, distribution and
sales. The Company has a comprehensive distribution and marketing
network in its niche market. The Company intends to capitalize on its
strong reputation with hospitals, physicians, pharmacists and
distributors to expand its customer base and to introduce new products.
Dey currently employs approximately 100 people in marketing and sales
and expects that number to increase significantly as new products are
launched.
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DEY'S CURRENT PRODUCTS
All information set forth below concerning the definition and size of the
various U.S. product markets in which Dey participates is based on figures
published by IMS for 1997. Data audited and reported by IMS does not include
sales to all markets in which Dey competes; most notably, with respect to Dey's
products, IMS does not audit and report sales to the home health care market and
the mail order market. Prospective investors are, accordingly, urged to review
such market data reported by IMS with caution, and should recognize that the
market share of any particular product marketed by Dey may be overstated or
understated when comparing such product's actual sales solely with the market
data reported by IMS.
The table below provides information on significant products currently
marketed by Dey:
<TABLE>
<CAPTION>
1997 NET SALES
PRODUCT DOSAGE FORM PRINCIPAL INDICATIONS (IN MILLIONS)
- -------------------- ----------------------------------------- ---------------------- --------------
<S> <C> <C> <C>
Albuterol sulfate Unit dose inhalation solution Asthma $ 82.7
CFC propelled inhalation aerosol Asthma $ 12.7
Inhalation solution concentrate Asthma $ 7.0
Ipratropium bromide Unit dose inhalation solution COPD $ 50.7(1)
Cromolyn sodium Unit dose inhalation solution Asthma $ 30.8
EpiPen(Registered) Autoinjector Anaphylaxis $ 19.2(2)
brand epinephrine
Dey-Pak(Registered) Unit dose inhalation solutions Nebulization diluents $ 8.3
sodium chloride
Acetylcysteine Vial solution Cystic fibrosis $ 4.3
(Mucosil(Trademark))
Metaproterenol Unit dose inhalation solution Asthma $ 2.6
sulfate
</TABLE>
- ------------------
(1) 1997 net sales represents sales commencing in January 1997 when the product
was introduced by Dey.
(2) 1997 net sales represents sales commencing in July 1997 when Dey acquired
the exclusive right to market this product.
Albuterol Sulfate. This product is a beta-adrenergic bronchodilator
indicated for relief of bronchospasm in patients with asthma. It is classified
as a quick-relief rescue medication. It works on the sympathetic pathway and
stimulates adrenergic receptors which result in relaxation of bronchial smooth
muscle. In 1997, the total U.S. market for all forms of albuterol sulfate
inhalation products to treat respiratory diseases was estimated by IMS to be
$549.7 million. Dey markets three separate albuterol sulfate products:
o Sterile, unit dose inhalation solution. The FDA approved Dey's ANDA for
this product in 1992. IMS reported that the U.S. albuterol sulfate unit
dose market was approximately $119.2 million in 1997.
o MDI aerosol. This product is an MDI form of albuterol that uses CFC
propellant and is manufactured for the Company by Glaxo Wellcome, the
manufacturer of the brand version of the product. IMS reported that the
U.S. albuterol sulfate MDI market was approximately $381.2 million in
1997.
o Inhalation solution concentrate. This product is a multi-dose
concentrate form of albuterol. It is also manufactured for the Company
by Glaxo Wellcome. IMS reported that the U.S. market for albuterol
sulfate inhalation solution concentrate was approximately $49.3 million
in 1997.
Ipratropium bromide sterile, unit dose inhalation solution. This product
is an anticholinergic bronchodilator indicated as maintenance treatment for
bronchospasm associated with COPD. It works on the parasympathetic pathway and
blocks the bronchoconstrictive effects of acetylcholine primarily in the large
airways. Ipratropium is used as first-line therapy in COPD and is often
co-prescribed with albuterol because the combined therapy produces greater
improvements in lung function than either ipratropium or albuterol alone.
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This product is manufactured by Dey using aseptic form-fill-seal technology.
Dey's ANDA for this product was approved by the FDA in early 1997. IMS reported
that the U.S. ipratropium unit dose market was approximately $129.2 million in
1997.
Cromolyn sodium sterile, unit dose inhalation solution. This product is a
nonsteroidal, inhaled anti-inflammatory agent. It is a prophylactic agent
indicated for the management of bronchial asthma and exercise-induced
bronchospasm. Cromolyn is considered first line therapy in mild persistent
asthma and is frequently prescribed for children. The FDA approved Dey's ANDA
for this product in 1994. IMS reported that the U.S. cromolyn sodium unit dose
market was approximately $69.2 million in 1997.
EpiPen(Registered) brand epinephrine autoinjectors. In July 1997, Dey
acquired the exclusive rights to market the EpiPen(Registered) brand of products
from EM Industries, Inc. (a wholly-owned subsidiary of Merck KGaA). See "Certain
Transactions." The EpiPen(Registered) and EpiPen(Registered) Jr. brands of
epinephrine autoinjector, for self-administration of epinephrine in the event of
an anaphylactic reaction, are manufactured for the Company by Meridian. These
are currently the only epinephrine autoinjectors in the U.S. market, and
EpiPen(Registered) Jr. is the only epinephrine product in the United States
specifically for use by pediatric patients. Their automatic function is of great
importance during an anaphylactic attack, making them, the Company believes, the
leading products in the category. IMS reports the total U.S. market for
self-administered epinephrine injectors in 1997 to be approximately
$41.2 million. See "Risk Factors--Potential Product Liability; Risk of Product
Recall" and "--Competition."
Sodium chloride sterile, unit dose solutions. Marketed under the brand
name Dey-Pak(Registered), Dey's sterile sodium chloride solutions are available
in a wide variety of concentrations and sizes, providing clinicians with
treatment flexibility. Sterile, unit dose sodium chloride solutions are used for
diluting concentrated inhalation solutions in nebulization therapy and in
tracheal care for patients who need periodic tracheal suctioning and cleaning.
Dey currently manufactures 3% and 10% sodium chloride solutions and the
remaining line of Dey-Pak(Registered) products of 0.9% and 0.45% sodium chloride
solutions and sterile water are manufactured for Dey by Automatic Liquid
Packaging, Inc. IMS reported that the total U.S. market for unit dose sodium
chloride inhalation solutions was approximately $7.1 million in 1997.
Mucosil(Trademark) acetylcysteine solutions. This product is a mucolytic
agent indicated to break down, and facilitate elimination of, mucous in patients
with chronic bronchopulmonary disease, pulmonary complication or cystic
fibrosis. It is also indicated for use as an antidote to acetaminophen
poisoning. The FDA approved Dey's initial ANDA for this product in 1985.
Mucosil(Trademark) is manufactured by Bayer for Dey and is marketed in 4ml, 10ml
and 30ml bottles in 10% and 20% concentrations and in 100ml bottles in 20%
concentration only. IMS reported that the U.S. acetylcysteine solutions market
was approximately $12.8 million in 1997.
Metaproterenol sulfate sterile, unit dose inhalation solution. This
product is a bronchodilator for use in bronchial asthma and for reversible
bronchospasm which may occur in association with bronchitis and asthma. This
product is similar to albuterol sulfate but has declined in use due to
replacement by newer products. IMS reported that the U.S. market for
metraproterenol sulfate inhalation solution was approximately $6.9 million in
1997.
Other products. Dey's other products, which complement its respiratory
product line, but contributed less than 0.6% to the Company's 1997 net sales,
include the following: the Astech(Registered) Peak Flow Meter, for which Dey
acquired the exclusive rights to market in July 1997 and which is used by asthma
patients to monitor lung function as part of an overall asthma management plan;
the ACE(Registered) Holding Chamber, a device for use with MDIs, permitting
better patient compliance when using pressurized MDI canisters for drug
delivery; and the EasiVent(Trademark) Holding Chamber introduced by Dey in May
1998 as an alternative to the ACE(Registered) Holding Chamber in the
non-hospital market.
PRODUCTS IN DEVELOPMENT
The Company's approach to product development has permitted it to grow
rapidly while self-funding its research and development expenses through cash
generated from operations. The Company now has in development a variety of
products which require regulatory approval through different pathways,
including: (i) generic products which do not require bioequivalency testing in
connection with seeking approval from the FDA through the ANDA process; (ii)
generic products which do require bioequivalency testing in connection with
seeking approval from the FDA through the ANDA process; (iii) products
consisting of new dosages, new
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formulations or combinations of currently marketed pharmaceutical ingredients,
which must be approved by the FDA through the NDA process but which may not
require certain preclinical data because the effects of the active ingredients
are well known and documented; and (iv) products which consist of new
formulations and/or new chemical entities which have never before been marketed,
which must be approved by the FDA through the NDA process.
The Company is currently developing products in three dosage forms:
Sterile, unit dose inhalation products. Utilizing its core technology, the
Company has four sterile, unit dose inhalation solution products in various
stages of development. One of these products is subject to the ANDA approval
process. The remaining three products are subject to the NDA approval process.
Two of these NDA submissions were filed with the FDA in 1998. The other NDA
product in development utilizes patented formulations from LDS Technologies,
Inc., licensed exclusively to Dey.
Mechanical pump nasal sprays. The Company has five products in development
using mechanical pump nasal spray technology. Four products are subject to the
ANDA process, two of which are the subject of ANDAs filed with the FDA and two
of which are in development. One product will be subject to the NDA process and
uses the patented formulations of LDS Technologies, Inc., licensed exclusively
to Dey.
Dry powder inhalers. The Company is developing a series of products using
a proprietary dry powder inhaler delivery system being licensed from its
affiliate, Lipha. The first proposed product, albuterol sulfate, is scheduled to
begin pivotal clinical trials late in 1998 or early 1999. All DPI products will
be subject to the NDA approval process.
Dey conducts its own formulation and product development work on new
products and may also fund such work by others on its behalf. All animal and
human studies are performed through other entities under contract with Dey. The
Company's research and development costs have increased from approximately
$2 million in 1992 to approximately $20 million in 1997, including amounts paid
to other entities for clinical and developmental contract research, outside
services and testing, and consulting services. The Company's research and
development costs paid to outside entities were $10.7 million, $16.5 million and
$16.5 million in 1995, 1996 and 1997, respectively. The Company believes that
the amount it spends on research and development will continue to grow
significantly over the next several years.
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The table below lists and describes material products Dey currently has in
development and the status of each such product:
<TABLE>
<CAPTION>
PRODUCT DOSAGE FORM PRINCIPAL INDICATIONS STATUS
- ------------------------ ------------------- --------------------- ---------------------------------
<S> <C> <C> <C>
Accuvent(Trademark) Sterile, unit dose Pediatric Asthma NDA filed
inhalation
solutions
DuoNeb(Trademark) Sterile, unit dose COPD NDA filed
inhalation solution
Albuterol Mini- Sterile, unit dose Asthma Formulation development
Dose(Trademark) inhalation solution
LDS Technologies, Inc. Sterile, unit dose Asthma and COPD Pre-clinical
Product No.1 inhalation solution
Corticosteroid Nasal spray Rhinitis ANDA filed
suspension No.1
Nasal solution No.1 Nasal spray Rhinitis ANDA filed
Nasal solution No.2 Nasal spray Rhinitis ANDA being prepared for late 1998
filing
Corticosteroid Nasal spray Rhinitis Pre-clinical
suspension No.2
Corticosteroid solution, Nasal spray Rhinitis Pre-clinical
LDS formulation
Albuterol sulfate Dry powder inhaler Asthma Phase III clinical trial
scheduled to begin late
1998/early 1999
Corticosteroid No.1 Dry powder inhaler Asthma Pre-clinical
Combination Dry powder inhaler Asthma and COPD Pre-clinical
Curosurf(Registered) Sterile vial IRDS NDA filed
</TABLE>
Sterile, unit dose inhalation solution products
Using its expertise in sterile, unit dose solutions, Dey is developing
novel and proprietary formulations of certain products that will be manufactured
using aseptic form-fill-seal manufacturing technology. Pending completion of
development and NDA approval from the FDA, these products will be marketed by
Dey as branded drugs. Dey believes that the market for pharmaceuticals in
sterile, unit dose inhalation solution products could increase if FDA proposals
for such products to be sterile, as opposed to preserved, become law.
o Accuvent(Trademark). These products are new dosages of albuterol sulfate
solution indicated for the prevention and relief of bronchospasms in patients
with asthma and acute attacks of bronchial spasm in pediatric patients aged
two and above. Three clinical studies have been conducted with respect to
these products, including a pivotal study in over 300 pediatric patients. Dey
filed an NDA for these products with the FDA in 1998.
o DuoNeb(Trademark). This product is a combination sterile, unit dose solution
of albuterol sulfate and ipratropium bromide in premixed form. It is
indicated for the prevention and relief of bronchospasm in patients with COPD
who require more than one bronchodilator. Two clinical studies have been
conducted in relation to this product, including a pivotal study in over 800
patients. Dey filed an NDA for this product with the FDA in 1998.
o Albuterol Mini-Dose(Trademark). Dey is developing a new dosage of albuterol
sulfate inhalation solution as an extension of the Company's existing
albuterol sulfate product line. This product is a beta-adrenergic
bronchodilator indicated for relief of bronchospasm in patients with asthma.
It is classified as a quick-relief rescue medication. It works on the
sympathetic pathway and stimulates adrenergic receptors which result in
relaxation of bronchial smooth muscle. The product will be manufactured by a
third party under the technical direction of Dey. Dey anticipates that it
will file an ANDA for this product in 1999.
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o New products using formulations from LDS Technologies, Inc. In 1997, Dey
entered into an exclusive license agreement with LDS Technologies, Inc.
("LDS"), the owner of certain patents for formulation technology for
difficult-to-solubilize drugs. Dey is currently developing a number of
sterile, unit dose inhalation solutions and one nasal spray using this
technology. The principal indications for these products will be the
treatment of asthma, COPD and rhinitis. Under the terms of the license
agreement, Dey will have worldwide rights to manufacture and market any such
products developed by Dey and also to sublicense third parties to manufacture
and market such products outside the United States. Dey expects that
extensive animal toxicology studies, human dose response studies and large
safety and efficacy studies will be required prior to any NDA submissions to
the FDA.
Nasal spray products
As part of its respiratory strategy, the Company has recognized and
targeted a niche market for mechanical pump nasal spray products for the
treatment of rhinitis in allergy patients. Although many existing nasal spray
products on the market are not protected by patents, there are presently no
competitive generic equivalents being marketed. Dey now has the technology to
manufacture nasal sprays in suspension and solution formulations and currently
has several nasal spray products in development, including the following:
o Corticosteroid suspension No. 1. This product contains a
corticosteroid, which is an anti-inflammatory indicated for the
treatment of seasonal, perennial and allergic rhinitis and is a generic
version of a branded nasal spray currently on the U.S. market. Dey filed
an ANDA, including bioequivalency studies, for this product with the FDA
in 1996; however, the FDA has yet to produce guidelines on what
requirements must be met to determine bioequivalency for corticosteroid
nasal sprays for the treatment of rhinitis.
o Nasal solution No. 1. This product is an anti-inflammatory indicated
for the treatment of seasonal, perennial and allergic rhinitis and is a
generic version of a currently marketed product. Dey filed an ANDA for
this product with the FDA in 1996. As a nasal spray solution,
bioequivalency studies will not be required for Dey to obtain FDA
approval for this product pursuant to its ANDA.
o Nasal solution No. 2. This product is indicated to treat rhinitis and
is a generic version of a currently marketed product. Dey anticipates
that it will file an ANDA for this product with the FDA in late 1998. As
a nasal spray solution, bioequivalency studies will not be required for
Dey to obtain FDA approval for this product pursuant to its ANDA.
o Corticosteroid suspension No. 2. This product contains a corticosteroid
which is an anti-inflammatory agent indicated for the treatment of
seasonal, perennial and allergic rhinitis and is a generic version of a
currently marketed product. Dey is currently developing the formulation
of this product in preparation for bioequivalency studies.
o Corticosteroid solution, LDS formulation. This product is a solution of
an existing corticosteroid being developed using the formulations
licensed from LDS. The product is indicated for the treatment of
seasonal, perennial and allergic rhinitis. Dey has not yet filed an IND
application to begin clinical trials for this product. This product will
be the subject of an NDA because the formulation has not been marketed
previously.
Dry powder inhaler products
Dey believes that MDIs that rely on CFC propellants will be phased out in
the United States, and worldwide, because of the international agreements
concerning the elimination of CFC propellants. Accordingly, the Company has
elected not to develop drugs delivered by CFC propelled MDIs and instead has
focused on the development of DPI technology, which the Company believes will
capture a significant portion of the market for respiratory drugs administered
by inhalation.
In conjunction with Lipha, the Company is engaged in a development project
for a DPI to deliver drugs to the bronchial tubes and lungs (the "Dey/Lipha
DPI"). Lipha owns the patent rights on which the Dey/Lipha DPI is based; Dey and
Lipha are currently negotiating a license agreement whereby Dey would have an
exclusive license from Lipha to use such patent rights in North America to
develop and market respiratory and broncho-pulmonary prescription drugs for
humans. Dey would also have the right to sublicense its rights under the
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<PAGE>
exclusive license. Two U.S. patents have been registered and two additional
patent applications have been filed in the United States relating to the
Dey/Lipha DPI. Patent applications have also been filed in Canada. It is
contemplated that additional patent applications may be filed.
The Dey/Lipha DPI consists of a patented drug-carrier with multiple,
pre-measured individual doses, hermetically sealed and protected from the
environment. This device opens each individual dose compartment and delivers the
dose through inspiratory force created by the patient (breath-actuated on
demand). The Company expects the Dey/Lipha DPI to be compatible with nearly all
current bronchodilators, corticosteroids and non-steroidal anti-inflammatories
used in respiratory therapy. Dey believes that the Dey/Lipha DPI will have
certain advantages over MDIs and other DPIs currently being marketed or that are
under development, including the following:
o Convenience of operation. The Dey/Lipha DPI is designed to deliver
drugs to the bronchial tubes and lungs without the need for patient
coordination between inhalation and activation of the drug delivery
device. In contrast, MDIs require patient coordination to simultaneously
activate the MDI and inhale.
o Accurate and consistent dosing. The Dey/Lipha DPI is designed to
deliver accurate and consistent drug doses over a wide range of
inspiratory flow rates.
o Familiarity of design. The Dey/Lipha DPI is similar to the size and
shape of traditional MDIs for familiarity to patients, physicians and
pharmacists.
o Dose-counting. The Dey/Lipha DPI has an integral dose-counting
mechanism which displays the quantity of remaining doses in the unit and
indicates to the patients when it is time to get their prescriptions
refilled.
o Disposability. The Dey/Lipha DPI is disposable, which eliminates the
time and risk associated with maintenance, reloading and cleaning to
avoid contamination and any build-up of medication.
Dey plans to develop a number of drug products for use in the Dey/Lipha DPI
that the Company intends to manufacture at its facility in Napa, California and
market itself or with others. These new products under development include the
following:
o Albuterol sulfate. This is a product for relief of bronchoconstriction
associated with asthma. The Company contemplates that numerous clinical
studies for this product, including dose-ranging studies in adults and
in children as well as safety and efficacy studies in adults and
children, will be required for FDA approval of this product via the NDA
process. Phase III clinical studies are scheduled to begin in late 1998
or early 1999.
o Corticosteroids (multiple products). As first-line therapy in asthma,
these products would treat asthma with an anti-inflammatory agent
delivered using the Dey/Lipha DPI. FDA guidelines will require a
clinical study program over a 52-week period for each of these products.
o Combination products. The Company believes combination therapy will
play an important role in the future treatment of asthma, COPD and other
respiratory diseases and has dedicated a portion of its development
program to selected combination formulations. The Company has one such
product in the formulation stage. However, because of the complexities
associated with clinical studies of combination products, it is expected
the filing of an NDA for a first product developed by Dey would not
occur for at least several years.
Other
Curosurf(Registered). In 1994, Dey obtained an exclusive license to market
Curosurf(Registered) in the United States and Canada from Chiesi Farmaceutici,
S.p.A. ("Chiesi"), of Parma, Italy. Curosurf(Registered) is a porcine-derived
lung surfactant and is the leading lung surfactant on the European market
indicated for the prevention and cure of IRDS. Under the terms of the license
agreement, Dey submitted an NDA for Curosurf(Registered) to the FDA in 1996.
Curosurf(Registered) will be manufactured for Dey by Chiesi at its facility in
Italy. On September 3, 1998, the FDA issued an "approvable letter" to Dey with
respect to Curosurf(Registered). Receipt of an approvable letter represents a
stage prior to actual approval of an NDA, where the basic clinical data
submitted in support of the NDA has been reviewed and accepted by the FDA, but
certain final matters with respect to the NDA remain to be resolved.
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<PAGE>
MARKETING AND SALES
The Company believes that its marketing and sales capabilities are among
its core competencies. Dey markets its products by emphasizing the advantages of
its unit dose and other products over competitive products. These product
features are communicated through advertising and promotion and through its
support of consumer advocacy groups. The Company believes that its marketing
expertise and the personal relationships of its sales force in the respiratory
marketplace are essential to the Company's business. By marketing a range of
respiratory care products to its audience, Dey has established its identity as a
specialty respiratory company.
The Company's track record of successes has demonstrated that it can sell
its products across a broad range of distribution channels. Dey currently
employs 13 people in marketing and 92 in sales and expects this number to
increase to over 250 in total marketing and sales staff in the next several
years. It is anticipated that most of the planned growth in marketing and sales
staff will come in the clinical specialty sales group, which the Company intends
to expand to over 130 field representatives as new branded products are approved
by the FDA. Substantially all of the Company's sales are in the United States.
Dey's specialty sales organization is structured to maximize coverage at
all levels of its target audience in the distribution and physician marketplace.
The Company focuses its marketing efforts on three target markets:
institutional/retail, managed care and clinical sales. The Company believes it
has developed a competitive advantage by focusing sales coverage at multiple
levels in the U.S. distribution chain as well as targeting specialty prescribers
such as allergists, pediatricians and pulmonologists. Following is a brief
description of each of Dey's three selling groups:
Institutional/Retail Sales Group
Dey's institutional/retail sales group has 46 representatives marketing its
respiratory products to hospital, retail and long term care accounts through
direct contact and telephone account sales. This group markets Dey's products to
respiratory, pharmacy and emergency room departments of the hospital market and
small regional buying groups in the retail market.
There are approximately 5,400 hospitals in the United States, nearly all of
which are regularly contacted by Dey's sales force. The Company believes that it
has secured a strong position in the institutional market by sales to many of
these hospitals and by having been awarded contracts with substantially all
major hospital group purchasing organizations. Dey products purchased in
accordance with such contracts are purchased either directly from Dey or from
wholesalers. This position in turn materially assists the Company in its
relationships with hospital pharmacists and respiratory therapists.
Managed Care Sales Group
Dey has dedicated six specialists to service its products directly to the
larger managed care organizations and HMOs throughout the United States. The
Company believes it is focusing on those accounts which represent the majority
of the potential for its current products. In addition, this group is
responsible for coverage of larger national chain pharmacies, home health care
and wholesaler accounts such as Walgreens, CVS, McKesson, Rite-Aid and Apria.
Dey has built strong name recognition through this distribution system
because of its success with respiratory drugs and sodium chloride solutions. The
Company believes that this strong name recognition will enhance Dey's ability to
market its new products successfully in the future through the same network.
Clinical Specialty Sales Group
Dey's clinical specialty sales group, which currently consists of 32 sales
persons, was started in July 1997 when Dey acquired the rights to market the
EpiPen(Registered), Astech(Registered) peak flow meter and
ACE(Registered)/EasiVent(Trademark) holding chamber line of products. The
clinical specialty sales group is trained to promote the EpiPen(Registered),
Astech(Registered) peak flow meter and ACE(Registered)/EasiVent(Trademark)
holding chamber line of products to a physician base that includes allergists,
pulmonologists and pediatricians. The Company believes these relatively small
groups of physicians write a significant portion of respiratory prescriptions
for its current product line. The Company believes that marketing directly to
physicians creates prescriptions for Dey's products throughout its distribution
network.
The clinical specialty sales group has an established reputation with
allergists, and Dey believes it has built strong name recognition with its
EpiPen(Registered) product line. The Company believes that this reputation,
together with
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the expansion of this selling force to pulmonologists and pediatricians in
anticipation of future new product approvals, will enhance Dey's ability to
market new products in the future. It is anticipated that this sales group will
be the platform sales force for new products in development which are going
through or will go through the NDA approval process. The Company anticipates
that this sales group will be increased to at least 130 positions over the next
several years.
MANUFACTURING
Manufacturing by Dey
The Company's principal manufacturing facility is located in Napa,
California, where in 1997 it manufactured approximately 76% (in dollar volume)
of the products that it marketed. See "--Properties." The Napa facility is
constructed on a 25 acre site owned by Dey and is registered with and licensed
by various regulatory authorities and complies with current Good Manufacturing
Practices ("cGMP") requirements prescribed by the FDA. The Napa facility
includes highly automated state-of-the-art equipment for manufacturing of
sterile pharmaceutical products, as well as associated laboratory testing
equipment and systems. The Company operates its manufacturing facility 24 hours
a day, 7 days a week.
Dey believes it is a high-quality, low-cost provider of sterile, unit dose
inhalation solutions. The manufacture of high volumes of any sterile
pharmaceutical product requires state-of-the-art facility, equipment and testing
controls as well as expertise. Many of Dey's employees have extensive experience
in a variety of pharmaceutical companies and manufacturing applications for
sterile products. The Company believes that its Quality Control, Quality
Assurance and Regulatory Affairs systems are among the best in the industry for
the control and compliance of all operations with applicable compendia,
regulatory guidelines and the laws governing prescription drug development,
manufacture and marketing.
Company-wide training and re-training programs are designed to ensure
compliance with procedures and regulations with particular emphasis on cGMP, FDA
guidelines, Occupational Safety and Health Act ("OSHA") and internal Company
policies.
Manufacturing by third parties
The Company relies on third parties to manufacture some of its products,
including its albuterol sulfate MDI aerosol and inhalation solution concentrate
products, Dey-Pak(Registered) sodium chloride solutions and Mucosil(Trademark)
acetylcysteine solutions. The Company's contracts with such third party
manufacturers are typically short term contracts subject to renewal. In
addition, certain products sold by the Company under license, notably the
EpiPen(Registered) product line (which is licensed from an affiliated company,
see "Certain Transactions"), are manufactured by third party manufacturers. All
third party manufacturers currently used by the Company manufacture products in
finished dosage form and must comply with cGMP. With respect to Dey's products
in development, Albuterol Mini-Dose(Trademark) will be manufactured by a third
party under the technical direction of the Company and
Curosurf(Registered) will be manufactured for the Company by its licensor,
Chiesi.
Supplies of raw materials for manufacturing
The Company currently obtains certain raw materials for its manufacturing
operations, such as albuterol sulfate, ipratropium bromide, cromolyn sodium and
low density polyethylene resin, from single sources, each of which is an
FDA-approved supplier. The Company does not currently have alternate
FDA-approved sources for such raw materials. The Company actively manages
inventory levels for such materials and is engaged in the evaluation of second
source suppliers of selected materials.
GOVERNMENT REGULATION
The FDA regulates the development, testing, formulation, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, marketing,
advertising and promotion of the Company's products. Product development and
approval within this regulatory framework takes a number of years and involves
the expenditure of substantial resources.
To obtain NDA approval for a drug, the FDA requires each of the following
steps and possibly others to be conducted: (i) preclinical testing (laboratory
and possibly animal tests), (ii) the submission to the FDA of an Investigational
New Drug ("IND") Application, which must become effective before human clinical
trials may
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<PAGE>
commence, (iii) adequate and well-controlled human clinical trials to
establish safety and efficacy, (iv) the submission to the FDA of an NDA and
(v) FDA approval of the NDA prior to any commercial sale or shipment.
Preclinical testing includes laboratory evaluation of product chemistry and
animal studies, if appropriate, to assess the safety and stability of the
product and its formulation. The results of the preclinical tests are submitted
to the FDA as part of an IND Application and, unless the FDA objects, the IND
Application will become effective 30 days following its receipt by the FDA, and
the product is then permitted to be tested in humans.
Clinical trials involve the administration of the pharmaceutical product to
healthy volunteers or to patients identified as having the condition for which
the pharmaceutical agent is being tested. The pharmaceutical product is
administered under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with Good Clinical Practice and
protocols previously submitted to the FDA (as part of the IND Application) that
detail the objectives of the study, the parameters used to monitor safety and
the efficacy criteria evaluated. Each clinical study is conducted under the
auspices of an independent Institutional Review Board ("IRB") at the institution
at which the study is conducted. The IRB considers, among other things, the
design of the study, ethical factors, the safety of the human subjects and the
possible liability risk for the institution.
Clinical trials for new products are typically conducted in three
sequential phases that may overlap. In Phase I, the initial introduction of the
pharmaceutical into healthy human volunteers, the emphasis is on testing for
safety (adverse effects), dosage tolerance, metabolism, distribution, excretion
and clinical pharmacology. Phase II involves studies in a limited patient
population to determine the initial efficacy of the pharmaceutical for specific
targeted indications, to determine dosage tolerance and optimal dosage and to
identify possible adverse side effect and safety risks. Once a compound is found
to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to more fully evaluate clinical
outcomes. The FDA reviews both the clinical plans and the results of the trials
and may require the study to be discontinued at any time if there are
significant safety issues.
The results of the preclinical and clinical trials and all manufacturing,
chemistry, quality control and test methods data are submitted to the FDA in the
form of an NDA for marketing approval. FDA approval can take several months to
several years, or approval may be denied. The approval process can be affected
by a number of factors, including the severity of the side effects and the risks
and benefits demonstrated in clinical trials. Additional animal studies or
clinical trials may be requested during the FDA review process and may delay
marketing approval. After FDA approval for the initial indication, further
clinical trials are necessary to gain approval for the use of the product for
any additional indications. The FDA may also require post-marketing testing and
surveillance to monitor for adverse effects, which can involve significant
additional expense.
ANDA approval is required for most drug products that are duplicates or
generic versions of "original" drug products that have already been the subject
of FDA review and approval. The applicant is generally required to demonstrate
that its version is properly manufactured and labeled, is bioequivalent to the
original product and is stable after manufacture. ANDA approvals typically take
up to two years to obtain from the date of the initial application, although the
time required varies greatly depending upon the particular drug product and
dosage form involved. Furthermore, there can be no assurance that the FDA will
approve a particular ANDA at all, or that the FDA will agree that an ANDA is a
suitable vehicle through which to secure approval rather than an NDA, which
requires the conduct of lengthy clinical trials prior to submission.
Bioequivalence studies may be waived by the FDA for drug product solutions.
After the active ingredient is dissolved in water, the rate of absorption or
uptake of such active ingredient in the human body remains predictable, provided
the strength and purity of the active ingredient are identical. Accordingly, in
practice, the FDA waives bioequivalence testing of solutions of prescription
drugs.
The FDA may confer periods of marketing exclusivity for existing drugs in
new dosage forms or having new indications for use if supported by acceptable
clinical data generated by a sponsor of an NDA. Such exclusivity would apply for
three years from the date of FDA approval and market launch. Also, the Orphan
Drug Act provides for a market exclusivity period of five years after approval,
provided select criteria are met qualifying a product for orphan drug status.
In the case of medical devices, often all that is required by the FDA to
approve a medical device is that a notification submission be filed prior to
marketing, demonstrating that the device is substantially equivalent to other
products already on the market. In other cases, involving more complex medical
devices of a type with which the Company is not currently involved, a premarket
approval application for a particular medical device,
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<PAGE>
demonstrating that it is both safe and effective for its intended uses, would
have to be reviewed and approved by the FDA prior to marketing. Typically,
products which do not require premarket approval take at least 60 days to
receive FDA review and marketing clearance.
In addition to obtaining FDA approval for each product, each domestic drug
and device manufacturing facility must be registered with and approved by the
FDA. Dey's manufacturing facilities are subject to biennial (or more frequent)
inspections by the FDA and inspections by other jurisdictions and must comply
with cGMP for both drugs and devices. To supply products for use in the United
States, foreign manufacturing establishments must comply with cGMP, and other
requirements, and are subject to periodic inspection by the FDA or by regulatory
authorities in such countries under reciprocal agreements with the FDA. The
Company has no foreign manufacturing facilities, but it does rely on foreign
manufacturers for the supply of certain products.
For both currently marketed and future products, failure to comply with
applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well as
possible civil and criminal sanctions. In addition, changes in regulations could
have a material adverse effect on the Company. See "Risk Factors--Uncertainty of
New Product Development and Approvals."
In addition to regulations enforced by the FDA, the manufacturing and
marketing of the Company's products are also subject to regulation under OSHA,
the Environmental Protection Act and other federal, state and local regulations.
COMPETITION
The pharmaceutical market is highly competitive, and the Company is
required to compete with a number of substantially larger companies that have
greater financial, sales, marketing, regulatory and scientific resources. The
Company believes that the principal factors on which it competes are marketing
ability, product development capability, product quality, product manufacturing,
price and customer service. However, there can be no assurance that new product
developments by others will not render the Company's products uncompetitive or
obsolete. Certain hospitals, pharmacies and other groups seeking to control
costs through the formation of purchasing cooperatives have entered or may enter
into multi-year agreements with a single manufacturer. There can be no assurance
that the Company can successfully bid to become such a single source
manufacturer or can continue to offer its products at prices attractive to these
important customers. In addition, competitors may be able to complete the
regulatory processes for new products sooner than, and may begin to market their
products in advance of, the Company. There can be no assurance that the Company
will be able to develop successfully and introduce new products in order to
maintain its competitive position. Third party payors, in order to reduce costs,
also exert pressure on the pharmaceutical suppliers to lower prices. While Dey's
existing products, which are principally generic drugs, and as such are priced
as less expensive alternatives to the branded drugs with which they compete, may
benefit from such policies, Dey's branded products will face increased
competition for formulary preference and approval from third party payors.
Pharmocoeconomic and patient benefits will be important in formulary acceptance
of Dey's new branded products, and there can be no assurance that Dey's new
products will be accepted by third party payors.
In the U.S. inhalation solution product markets for the treatment of
respiratory disease, the Company directly competes with several other companies
which are currently engaged in developing, marketing and selling inhalation
solution products. For example, in the U.S. albuterol sulfate solutions market,
the Company's principal competitors are Glaxo Wellcome with its
Ventolin(Registered) brand solutions and Schering-Plough with its
Proventil(Registered) brand solutions and the generic versions thereof marketed
by Schering-Plough's Warrick division; in the U.S. ipratropium bromide
inhalation solution market, the Company's principal competitor is
Boehringer Ingelheim with its Atrovent(Registered) brand solution and the
generic version thereof marketed by Boehringer Ingelheim's Roxane division; in
the U.S. cromolyn sodium inhalation solution market, the Company's principal
competitor is Rhone-Poulenc Rorer with its Intal(Registered) brand solution and
the generic version thereof marketed by Rhone-Poulenc Rorer's Arcola division;
in the U.S. market for sterile sodium chloride solutions, the Company's
principal competitor is Automatic Liquid Packaging, Inc.; in the U.S. market for
acetylcysteine solutions, the Company's principal competitor is Bristol-Myers
Squibb with its Mucomyst(Registered) brand solutions and the generic versions
thereof marketed by Bristol-Myers Squibb's Apothecon division; and in the U.S.
market for metaproterenol sulfate inhalation solutions, the Company's principal
competitor is Boehringer Ingelheim with its Alupent(Registered) brand solutions
and the generic versions thereof marketed by Boehringer Ingelheim's Roxane
division.
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In the market for anaphylactic reaction products, the Company's principal
competitor is Bayer. However, Bayer's competitive product is a pre-filled
syringe containing epinephrine, while Dey's EpiPen(Registered) brand products
are the only epinephrine autoinjectors currently on the U.S. market. The Company
is aware of other companies that are developing epinephrine autoinjectors, which
may be future competitors to Dey's products if they receive FDA approval.
Dey is aware of other companies in the United States which are attempting
to develop generic versions of mechanical pump nasal spray products. Currently
there are no such generic products marketed for the treatment of rhinitis. Dey
believes its products may be among the first such generic products approved for
the U.S. market. The major branded products available in the United States
include the following: Glaxo Wellcome's Beconase(Registered) AQ
(beclomethasone); Schering-Plough's Vancenase(Registered) AQ 84 mcg
(beclomethasone double-strength); Glaxo Wellcome's Flonase(Registered)
(fluticasone); Rhone-Poulenc-Rorer's Nasacort(Registered) AQ (triamcinolone);
and Boehringer Ingelheim's Atrovent(Registered) (ipratropium).
The Company is aware of at least 10 companies worldwide currently involved
in the development, marketing or sales of DPIs for the treatment of respiratory
diseases. There are two types of DPIs currently in commercial use worldwide,
individual dose DPIs and multiple dose DPIs. In the United States, individual
dose DPIs currently marketed include the Spinhaler(Registered) (marketed by
Rhone-Poulenc-Rorer). The Turbuhaler(Registered), a multiple dose DPI marketed
in the United States and worldwide by Astra, is considered the current industry
standard. Dey anticipates that the Dey/Lipha DPI will be highly competitive with
the DPIs on the market now as well as those it is aware of in development.
LITIGATION
A complaint was filed on August 18, 1998 with the Circuit Court of Cook
County, Illinois, against Dey, Meridian and Walgreen Co., as co-defendants,
alleging negligence, breach of warranty and strict liability claims in
connection with the death of an individual allegedly resulting from the use of
an ineffective EpiPen(Registered) product in March 1998. The Company is
currently investigating the allegations made in the complaint, but has
insufficient details at this time to determine if it has any liability in
respect of this matter and, if so, in what amount.
The Company is not a party to any other material litigation.
EMPLOYEES
As of June 30, 1998, the Company employed 684 persons, of whom 18 were in
research and development; 105 in sales and marketing (excluding 22 people
involved in the sale and marketing of the Company's hypothyroid product line,
which the Company transferred to an affiliate as of September 1, 1998); 439 in
manufacturing; 44 in distribution; and 56 in general and administrative
positions. The Company considers its employee relations to be good.
PROPERTIES
The principal corporate office and manufacturing facilities of the Company
are in Napa, California. These facilities currently include a total of
approximately 267,900 square feet. In 1997, the Company initiated construction
of an additional 68,800 square feet of manufacturing and laboratory space which
will be dedicated to products employing mechanical pump nasal sprays and the
Dey/Lipha DPI. This expansion, which is scheduled for completion early in 1999,
will increase the total size of the Napa facility to approximately
336,700 square feet. Upon completion of this expansion, the total facility will
comprise approximately 103,600 square feet of office space, 125,400 square feet
of manufacturing space, 16,300 square feet of laboratory space and 91,400 square
feet of warehouse space. These facilities are owned by the Company. See
"--Manufacturing."
The Company has a distribution facility in Allen, Texas. This facility has
109,800 square feet of warehouse space and 14,200 square feet of office space.
This facility is leased under an agreement expiring in 2003 with provisions for
renewals.
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INTELLECTUAL PROPERTY
The Company does not hold patents or patent applications with respect to
the products it currently manufactures, including its sterile, unit dose
inhalation solution products.
With respect to products in development, Dey has licenses from Chiesi in
relation to Curosurf(Registered) (the "Chiesi License") and from LDS in relation
to certain patents for formulations held by LDS (the "LDS License"). Under the
Chiesi License, Dey has an exclusive, non-transferable license to sell
Curosurf(Registered) in the United States and Canada utilizing certain patents,
trademarks and know-how of Chiesi. The Chiesi License continues in effect in
each country for the greater of (i) the life of the patents in force in the
respective country or (ii) ten years starting from the date of the first
commercial sale of the product in such country, and is extendable for additional
periods. In return for the Chiesi License, the Company has paid a license fee,
will pay for clinical studies and will pay a royalty on net sales to Chiesi.
Under the LDS License, Dey has an exclusive license to develop, make and sell
difficult to solubilize products for respiratory diseases worldwide utilizing
certain patents and certain other intellectual property rights of LDS. The LDS
License continues in effect, on a country by country basis, until the later of
(i) expiration of the last to expire patents covered by the license or (ii) ten
years after the first commercial sale of a product covered by such patent or
intellectual property rights in a country following receipt of all required
government approvals. In return for the LDS License, Dey will make certain
milestone payments to LDS during development, will fund development in its
entirety (including clinical studies) and will pay royalties to LDS when
products are marketed. See "Business--Products in Development."
The Company does not rely on trademarks for the sale of its generic
products. The branded products sold by Dey are sold under a variety of
trademarks. While the Company believes that it has valid proprietary interests
in all currently used trademarks, only Dey-Pak(Registered) is registered with
the United States government as a trademark in the name of the Company. However,
Dey has filed applications with the United States government to register the
trademarks EasiVent(Trademark), Accuvent(Trademark) and DuoNeb(Trademark). Under
an exclusive license granted to the Company by EM Industries, Inc., Dey has the
worldwide right to market and sell the EpiPen line of products until 2010 using
the trademark EpiPen(Registered). The Company also uses the trademarks
Astech(Registered) and ACE(Registered), and will use the trademark
Curosurf(Registered), under license.
The Company also relies upon trade secrets, unpatented proprietary know-how
and continuing technological innovation to develop its competitive position. The
Company enters into confidentiality agreements with certain of its employees
pursuant to which such employees agree to assign to the Company any inventions
relating to the Company's business made by them while in the Company's employ.
See "Risk Factors--Uncertainty of Enforceability of Patents, Proprietary Rights
and Trademarks."
COMPANY STRUCTURE
Dey, Inc. has two subsidiaries that were formed in 1993. Dey Limited
Partner, Inc. is a Delaware corporation and is wholly-owned by Dey, Inc. Dey,
L.P. is a Delaware limited partnership in which Dey, Inc. is the general partner
with a 1% partnership interest and Dey Limited Partner, Inc. is a limited
partner with a 99% partnership interest. All of Dey's business is conducted, and
all of Dey's assets are held, by Dey, L.P.
COMPANY HISTORY
In 1977, Dey Laboratories, Inc. was incorporated as a California
corporation and established a successful business manufacturing and marketing
sterile, unit dose bronchodilators for inhalation, packaged in plastic vials,
and unit dose sodium chloride solution.
In 1988, Dey Laboratories, Inc. was acquired by Lipha Pharmaceuticals,
Inc., a Delaware corporation incorporated in 1987 and an indirect wholly owned
subsidiary of Lipha. In 1988, Dey Laboratories, Inc. and Lipha Pharmaceuticals,
Inc. were merged with the surviving entity being Lipha Pharmaceuticals, Inc.,
whose name was changed to Dey Laboratories, Inc. In 1991, E. Merck, a German
partnership that now controls Merck KGaA (see "Principal Shareholders"),
acquired a majority interest in Lipha and subsequently increased its interest
(through Merck KGaA) to essentially all of the shares of Lipha. In June 1998,
the name of Dey Laboratories, Inc. was changed to Dey, Inc.
In 1998, Lipha transferred all of its shares in Lipha Americas to
Merck-Lipha, a 99.53% owned subsidiary of Merck KGaA.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
July 15, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- ----- ------------------------------------------------------------------
<S> <C> <C>
Charles A. Rice............ 47 Director, President and Chief Executive Officer
Pamela R. Marrs............ 44 Director, Executive Vice President and Chief Financial Officer
Robert F. Mozak............ 57 Executive Vice President, Sales and Marketing
Gary L. Michaud............ 50 Executive Vice President of Operations
Bernhard Scheuble.......... 44 Director
Jean-Noel Treilles......... 53 Director
Peter A. Wriede............ 54 Director
</TABLE>
Charles A. Rice has been a director of the Company since January 1990 and
has been President and Chief Executive Officer of Dey since August 1992. Prior
to that, he served as Chief Operating Officer of Dey from 1991 to 1992, as Vice
President of Operations from 1988 to 1991 and as Vice President of Quality
Assurance from 1987 to 1988. Prior to joining Dey, Mr. Rice worked for
Kendal-McGaw (formerly American-McGaw) in a variety of corporate and local
quality assurance and quality control positions.
Pamela R. Marrs has been a director of the Company since July 1998 and has
been Executive Vice President and Chief Financial Officer since February 1997.
Prior to that, she was Vice President of Finance and Chief Financial Officer
from 1989 to 1997. Prior to joining Dey, Ms. Marrs worked for Ernst & Young as a
Senior Manager.
Robert F. Mozak has been Executive Vice President, Sales and Marketing
since February 1997. Prior to that, he served as Vice President, Sales and
Marketing of Dey from 1989 to 1996. Prior to joining Dey, from 1971 to 1989,
Mr. Mozak worked for 3M Company and held various executive positions, including
Director, Group Business Development (Healthcare Group), General Business Unit
Manager (Personal Care Products Division) and Director, Sales and Marketing
(Personal Care Products Division).
Gary L. Michaud has been Executive Vice President of Operations since July
1998. Prior to that, he was Vice President of Operations of Dey from 1993 to
1997, Director of Manufacturing from 1991 to 1993 and Director of Engineering
from 1988 to 1991. Prior to joining Dey, Mr. Michaud worked for Baxter in a
variety of engineering positions.
Prof. Dr. Bernhard Scheuble has been a director of Dey since July 1998.
Prof. Dr. Scheuble is President and Chief Executive Officer of the
Pharmaceutical Division of Merck KGaA and a General Partner and Member of the
Executive Board of Merck KGaA and E. Merck. Prior to that, he was Deputy Member
of the Executive Board of Merck KGaA in 1997, Senior Vice President and Head of
the Ethical Pharmaceutical Division from 1996 to 1997, Vice President, Pharma
International Business from 1995 to 1996 and General Manager, Liquid Crystals
Unit, from 1993 to 1994. Prof. Dr. Scheuble is a member of the Board of
Directors of Pharmaceutical Resources, Inc., an affiliate of Merck KGaA.
Jean-Noel Treilles has been a director of the Company since June 1991. Mr.
Treilles has been Chairman, President and CEO of Merck-Lipha S.A. and of Lipha
S.A. (formerly Laboratoires Albert Rolland), both French pharmaceutical
companies, since 1993. He has been a Director of Lipha Americas since 1991 and
Chairman and CEO of Lipha Americas since 1993.
Dr. Peter A. Wriede has been a director of the Company since July 1998. He
is presently President and CEO of EM Industries, Inc., an affiliate of Merck
KGaA, as well as the Regional Manager, North America for Merck KGaA. From 1994
to 1998 Dr. Wriede held the position of Divisional Director and Vice President
for Merck KGaA in charge of the worldwide pigments and cosmetics division and,
from 1987 to 1994, he was Group Vice President in charge of the specialty
chemicals division of EM Industries, Inc.
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<PAGE>
BOARD COMMITTEES
The Board of Directors has two standing committees, a Compensation
Committee and an Audit Committee, each of which was formed in .
Audit Committee. The Audit Committee will meet with the Company's
independent public accountants to discuss the scope and results of their
examination of the books and records of the Company. It will also meet with the
independent public accountants to discuss the adequacy of the Company's
accounting and control systems. The Committee will review the audit schedule and
consider any issues raised by any member of the Committee, the independent
public accountants, the internal audit staff, the legal staff or management.
Each year it will recommend to the full Board of Directors the name of an
accounting firm to audit the financial statements of the Company. The Audit
Committee consists of Messrs. (Chairman), and .
Compensation Committee. The Compensation Committee will establish overall
employee compensation policies and recommend major compensation programs to the
Board. The committee will also administer the Company's incentive plan (see
"Employee Plans") and will review and approve compensation of directors and
corporate officers, including bonus compensation and stock option and other
stock awards. The Compensation Committee consists of Messrs. ,
and .
DIRECTOR COMPENSATION
Outside directors will receive a meeting fee of $3,000 for each meeting of
the Board attended and a meeting fee of $1,000 for each meeting attended as a
member of a Board committee at a time other than at a regular Board meeting.
EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate cash compensation paid to the
Company's chief executive officer and the four other most highly compensated
executive officers (the "Named Officers") by the Company or its subsidiaries
during 1997:
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
--------------------------------------------
ANNUAL COMPENSATION PAYOUTS
------------------------------------------------ (PAYMENT OF
NAME AND OTHER ANNUAL VESTED PRIOR ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS) ($) AWARDS($) COMPENSATION($)
- --------------------------- ---- --------- -------- --------------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles Rice
President and CEO........ 1997 244,583 165,632 10,250(2) -- -- 127
Alan Kaplan
Vice President of
Research and
Development(1)........... 1997 188,102 91,000 202,732(3) -- -- 245
Robert Mozak
Executive Vice President,
Sales and Marketing...... 1997 174,316 91,000 10,250(2) -- -- 224
Pamela Marrs
Executive Vice President
and CFO.................. 1997 163,750 91,000 10,250(2) -- -- 47
Gary Michaud
Vice President of
Operations............... 1997 149,460 91,000 10,250(2) -- -- 72
</TABLE>
(Footnotes on next page)
44
<PAGE>
(Footnotes from previous page)
- ------------------
(1) Dr. Kaplan resigned in February 1998. Since resigning, Dr. Kaplan has served
as a consultant to Dey in a research and development capacity.
(2) Represents car allowance.
(3) Represents $10,250 car allowance and $192,482 in relocation compensation.
EMPLOYEE PLANS
Lipha Americas Employees' Retirement Plan. The Lipha Americas Employees'
Retirement Plan (the "Retirement Plan") is a defined benefit plan for the
benefit of eligible employees, including employees of the Company. A
participant's normal retirement benefit is equal to 32% of the participant's
average pay up to the participant's covered compensation level plus 45% of such
pay above the participant's covered compensation level, provided the participant
has completed 20 years of service upon reaching his or her normal retirement
date. The Retirement Plan defines normal retirement date as the later of age 65
or 5 years of participation. A participant may receive an actuarially reduced
benefit once he or she attains age 55 and has completed 10 years of service. If
a participant retires after his or her normal retirement date, his or her
benefit is computed under the Retirement Plan's pension formula based on the
participant's covered compensation, average pay and service as determined on the
participant's actual retirement date. The Retirement Plan provides that a
participant is not vested prior to his or her completion of 3 years of service,
at which time the benefit becomes 20% vested. The participant continues to vest
at a rate of 20% per year, becoming fully vested after the seventh year of
service. If a participant is discharged or resigns before qualifying for
retirement or disability benefits, he or she will be entitled to a vested
benefit equal to a percentage of his or her accrued pension benefit, payable as
of the first day of the month following his or her normal retirement date,
provided he or she has completed 3 full years of service. Benefits may also be
payable upon the death of a participant who has earned a vested percentage of
his or her accrued pension. Amounts contributed under the Retirement Plan are
invested and distributed by the plan's trustee, currently State Street Bank and
Trust Company. The normal form of distribution for a single participant under
the Retirement Plan is a pension payable for life. In the event of the
participant's death before he or she receives 120 monthly payments, the same
income will be payable to the participant's beneficiary for the balance of the
120 month period. If the participant is married and has a spouse living when he
or she retires, the participant's retirement income will automatically be
adjusted and paid under the joint and 50% survivor option with the participant's
spouse as the beneficiary, although a participant may also elect the joint and
100% survivor option. A participant may also elect to waive the payment of
retirement income to his or her spouse under the joint and survivor options by
naming a beneficiary other than his or her spouse or by electing one of the
alternative optional forms of payment available under the Retirement Plan. The
Company made a contribution to the Retirement Plan in 1997 in the amount of
$549,000.
Lipha Americas Savings and Investment Plan. The Lipha Americas Savings and
Investment Plan (the "401(k) Plan") is a defined contribution plan maintained by
Lipha Pharmaceuticals, Inc. for the benefit of its eligible employees and the
employees of its affiliates, including the Company. Employees eligible to
participate may elect to contribute, on a before-tax basis, an amount not to
exceed 10% of their compensation, up to statutorily prescribed limits, to the
401(k) Plan as a savings contribution. The Company currently matches 50% of the
pre-tax contributions made by a participant, up to 6% of the participant's
compensation. The Company's contribution to the 401(k) Plan for the 1997 year
was $300,000. A participant's interest in his or her pre-tax contributions,
after-tax contributions and rollover contributions to the 401(k) Plan are 100%
vested when contributed to the plan. A participant's interest in the Company's
matching contributions generally vests at the rate of 25% per year commencing
after the participant's completion of one year of service with the Company or
with certain affiliates of the Company.
1998 Incentive Plan. The Company will adopt, effective as of the date of
the Offering and subject to the approval of shareholders of the Company, the
Dey, Inc. 1998 Incentive Plan (the "Incentive Plan") for the benefit of eligible
employees of the Company and its subsidiaries. Employees (including officers
and, if not members of the Compensation Committee appointed to administer the
Incentive Plan, directors) of the Company and its subsidiaries will be selected
to participate in the Incentive Plan by the Compensation Committee of the
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<PAGE>
Board of Directors of the Company. Under the Incentive Plan, participants may be
awarded stock options, stock appreciation rights, restricted shares, stock units
and performance awards payable in cash or property.
Subject to the terms of the Incentive Plan, the Compensation Committee has
the sole discretion to administer the plan, including the discretion to make
awards, and to determine the number of shares to be covered by an option, stock
appreciation right, restricted shares or restricted stock unit awards, the
exercise price with respect to options, the length of the restricted period with
respect to restricted shares, the performance goals to be achieved with respect
to performance awards and the form of payment thereof, vesting requirements and
other terms and conditions of the awards. The Incentive Plan provides that the
aggregate number of shares of the Company's Common Stock which will be available
under the Incentive Plan for award to participants will be 900,000. The number
of shares with respect to which awards may be granted to any participant during
any calendar year under the plan may not exceed shares. The maximum
number of shares available for restricted stock awards under the plan is
. In the event of any approved transaction, board change or control
purchase (each as defined in the plan), all outstanding awards held by
participants will vest fully, become immediately exercisable or payable or have
all restrictions removed, as applicable.
The Compensation Committee is expected to grant, effective as of the date
of the Offering and with an exercise price equal to the initial public offering
price, option awards under the Incentive Plan to , with respect to
shares, to , with respect to shares, and to
, with respect to shares each, for a total option award to
executives with respect to shares. In addition, the
Compensation Committee is expected to grant, effective as of the date of the
Offering and with an exercise price equal to the initial public offering price,
option awards to managers with respect to approximately shares.
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<PAGE>
CERTAIN TRANSACTIONS
FINANCIAL TRANSACTIONS WITH AFFILIATES
On August 13, 1998, the Company and Merck KGaA entered into a revolving
credit facility of up to $220 million over a three year period (the "Merck KGaA
Credit Facility"). For this Facility, the Company paid Merck KGaA an
establishment fee of $100,000 and will pay a commitment fee of 0.08% per annum
on the undrawn balance. Amounts drawn on the Facility bear interest payable
quarterly in arrears at an interest rate of LIBOR plus 1% and are repayable
three years from the date of establishment of the Facility.
On June 26, 1998, the Company declared a dividend of $24,450,000 to Lipha
Americas and paid $24,426,544 of such amount to Lipha Americas on June 30, 1998.
On June 30, 1998, the Company declared a dividend of $4,900,000 to Lipha
Americas, which was paid on August 14, 1998. On July 21, 1998, the Company
declared a dividend of $225,000,000 to Lipha Americas, which was paid on
August 14, 1998. The Company borrowed $200,000,000 under the Merck KGaA Credit
Facility in order partially to fund the unpaid amount of the aforesaid
dividends. The Company intends to apply the proceeds of the Offering to pay
indebtedness of the Company under the Merck KGaA Credit Facility. See "Use of
Proceeds."
On June 24, 1998, the Company advanced Lipha Americas $1,200,000, which
advance bore interest at the applicable federal short-term rate provided by the
Internal Revenue Code for loans between related taxpayers. On June 30, 1998 this
interest rate was 5.46%. This advance was repaid on August 31, 1998.
On December 17, 1997, the Company advanced Lipha Pharmaceuticals, Inc. (an
affiliate of Lipha Americas) $750,000, which advance bore interest at the
applicable federal rate. This advance was repaid on July 22, 1998.
On May 22, 1997, the Company issued an unconditional guaranty of the
performance of obligations of Allergy Free, L.P. (an affiliate of Lipha
Americas) under a lease for 40,982 square feet of office and manufacturing space
in Houston, Texas occupied by Allergy Free, L.P. The total rental obligation of
Allergy Free, L.P. under such lease is $984,000. The lease expires on June 30,
2002.
On July 2, 1996, the Company advanced Allergy Free, L.P. $7,000,000, which
advance bore interest at 5.88%. The advance was repaid on March 27, 1998. From
June 1997 through February 1998, the Company advanced working capital loans to
Allergy Free, L.P. totaling $1,550,000, which loans bore interest at the
applicable federal rate. These loans were repaid on March 27, 1998.
On April 13, 1995, the Company advanced EM Industries, Inc. (an affiliate
of Merck KGaA) $18,000,000, which advance bears interest at the applicable
federal rate. EM Industries repaid $13,000,000 of the amount during 1996,
leaving a remaining balance of $5,000,000, which the Company expects to be
repaid by September 30, 1998.
On July 26, 1994, Lipha Americas, the Company's sole stockholder, loaned
$22,000,000 to the Company. This loan is evidenced by a Note dated July 31, 1997
which is due and payable on July 31, 1999 and bears interest payable quarterly
in arrears at the applicable federal rate.
OTHER AGREEMENTS WITH AFFILIATES
Prior to the consummation of the Offering, the Company intends to enter
into a license agreement with Lipha to obtain the exclusive right and license to
manufacture and sell the Dey/Lipha DPI, under Lipha's patent rights, in North
America. The Company will pay Lipha $5,000,000 upon execution of such agreement
and undertake to pay Lipha a royalty of up to 3% on net sales until the
expiration of Lipha's patent rights. See "Business--Products in Development."
The Company is currently, and after the Offering will be (so long as Lipha
Americas beneficially owns at least 80% of the total voting power and value of
the Company's outstanding Common Stock), included in Lipha Americas's
consolidated group for federal income tax purposes. Prior to the consummation of
the Offering, the Company intends to enter into a tax sharing agreement with
Lipha Americas which, among other things, would require the Company to bear the
federal, state, local and foreign income, franchise and similar taxes which
would be payable, subject to certain adjustments, by the Company were it not
affiliated with Lipha Americas. As the parent company of its consolidated group,
Lipha Americas will have the exclusive authority to make most federal
47
<PAGE>
income tax elections and tax filings for, and deal with tax controversies
concerning, all members of its consolidated group, including the Company.
Moreover, each member of a consolidated group is jointly and severally liable to
the Internal Revenue Service for the consolidated group's federal income tax
liability (for any period such member was a member of such group).
The Company pays certain management fees to Lipha. Such fees totaled
$286,000 in 1995, $271,000 in 1996 and $173,000 in 1997. Prior to consummation
of the Offering, the Company intends to enter into a Management Services
Agreement with each of Lipha Americas, Allergy Free, L.P. and EM Pharma, Inc.,
pursuant to which the Company would provide certain accounting and
administrative services to such companies for a quarterly fee. All such
Management Services Agreements would be terminable by the Company on thirty
days' notice.
The Company transferred the assets and certain liabilities of its
hypothyroid business to EM Pharma, Inc. (an affiliate of Lipha Americas in
process of formation) effective September 1, 1998, for consideration equal to
the book value thereof at August 31, 1998, which was approximately zero.
As of July 1, 1997, the Company licensed from EM Industries, Inc. all of
EM Industries, Inc.'s rights to distribute worldwide the EpiPen(Registered)
autoinjector, the Astech(Registered) Peak Flow Meter and the ACE(Registered)
Holding Chamber. The Company's rights to distribute the EpiPen(Registered)
autoinjector terminate on December 31, 2010. In consideration thereof, the
Company has agreed to pay EM Industries a royalty at the rate of 16.5% on net
sales of EpiPen(Registered), up to $31.5 million in any calendar year. The
Company has also agreed to pay a royalty of 7% of net sales of the
Astech(Registered) Peak Flow Meter. See "Business--Dey's Current Products" and
"Business--Products in Development."
On December 19, 1995, the Company entered an agreement with Genpharm Inc.
and Alphapharm Parties Ltd. (affiliates of the Company) to co-develop a number
of pharmaceutical products which were to be marketed in the United States by the
Company. This agreement was terminated effective July 23, 1998.
The Company currently participates in two group insurance programs with
other companies in the Merck KGaA group. The Company's properties are insured
against certain risks of property damage and business interruption under such
programs, for which the Company paid $242,000 in 1997. Risks of product
liability are covered under an umbrella policy arranged by Lipha, for which the
Company paid $446,000 in 1997. See "Risk Factors -- Risk of Product Liability
and Product Recalls."
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<PAGE>
PRINCIPAL STOCKHOLDERS
Prior to the Offering, all 72,885,000 outstanding shares of Common Stock of
the Company will be owned by Lipha Americas. After the Offering, Lipha Americas
will continue to own such 72,885,000 shares of the Common Stock of the Company,
or approximately 84% of the Common Stock outstanding (or approximately 82% of
the Common Stock outstanding, if the Underwriters' over-allotment option is
exercised in full).
Lipha Americas is a wholly-owned subsidiary of Merck-Lipha which, in turn,
is a 99.53%-owned subsidiary of Merck KGaA. Merck KGaA is a publicly traded
German pharmaceuticals, laboratory supplies and chemicals company. Merck KGaA is
controlled by E. Merck, a German partnership, which holds approximately 74% of
the shares of Merck KGaA. The remaining 26% interest in Merck KGaA is held by
public shareholders. E. Merck is a German offene Handelsgesellschaft, a general
partnership, with eight offene Gesellschafter ("general partners") and
approximately 100 stille Gesellschafter ("silent partners"). The general
partners of E. Merck constitute seven of the eight members of the Executive
Board of E. Merck. No general or silent partner of E. Merck holds 5% or more
equity interest in E. Merck.
The Company and Merck KGaA have agreed that the Company will not, and
Merck KGaA will cause Lipha Americas not to, directly or indirectly, issue,
sell, offer or agree to sell, grant any option for the sale of, pledge or
otherwise dispose of or encumber and, in the case of Lipha Americas, otherwise
create a put equivalent position in any shares of Common Stock (or any
securities convertible into or exercisable or exchangeable for shares of Common
Stock) for a period of 180 days from the date of this Prospectus without the
prior written consent of Bear, Stearns & Co. Inc. See "Underwriting."
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Pursuant to the Company's Certificate of Incorporation, the Company's
authorized capital stock consists of 140,000,000 shares of Common Stock, par
value $.01 per share, and 10,000,000 shares of preferred stock, par value $1.00
per share (the "Preferred Stock"), of which 72,885,000 shares of Common Stock
and no shares of Preferred Stock were outstanding immediately prior to the
Offering. Upon completion of the Offering, there will be 86,985,000 shares of
Common Stock outstanding (89,100,000 shares if the Underwriters' over-allotment
option is exercised in full). The Company's Certificate of Incorporation
provides that the Company may not issue more than an aggregate of 90,000,000
shares of Common Stock (including, without limitation, any shares of Common
Stock reserved and/or in respect of options, warrants or other rights or in
respect of any securities convertible into or exchangeable for Common Stock)
without first receiving the consent in writing of any person who, directly
and/or through any direct or indirect over fifty percent-owned subsidiary, owns
over fifty percent of the Company's outstanding Common Stock.
The Certificate of Incorporation and By-laws contain certain provisions
that are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of delaying,
deferring or preventing a future takeover or change in control of the Company.
The following summary of certain provisions of the Company's capital stock
describes provisions of, but does not purport to be complete and is subject to,
and qualified in its entirety by, the Certificate of Incorporation and the
By-laws of the Company that are included as exhibits to the Registration
Statement of which this Prospectus forms a part and by the provisions of
applicable law.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held on
all matters on which holders of Common Stock are entitled to vote and, except as
otherwise required by law and except for any voting rights applicable to any
outstanding series of Preferred Stock, the holders of Common Stock possess all
voting power held by stockholders of the Company. All holders of shares of
Common Stock, subject to any preferences that may be applicable to any
outstanding series of Preferred Stock, are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
the Company, holders of shares of Common Stock would be entitled to share
ratably in the Company's assets remaining after the payment of liabilities and
the satisfaction of any liquidation preference granted the holders of any
outstanding shares of Preferred Stock. Holders of shares of Common Stock have no
preemptive or other subscription rights. In addition, there are no cumulative
voting rights with respect to the election of directors. The rights, preferences
and privileges of the holders of shares of Common Stock are subject to, and may
be adversely affected by, the rights of the holders of shares of any series of
Preferred Stock which the Company may designate in the future.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by law, without stockholder approval, from time to time to issue up to an
aggregate of 10,000,000 shares of Preferred Stock in one or more series, each of
such series to have such terms, rights and preferences, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as may be determined by the Board of Directors. Issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible financing, acquisitions and other corporate purposes, could decrease
the amount of earnings and assets available for distribution to holders of
Common Stock (whether by way of dividend, liquidation or otherwise) or adversely
effect the rights and powers, including voting rights, of holders of Common
Stock. Issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, a majority of the outstanding voting stock of the Company
and, as a result, the issuance of Preferred Stock could discourage bids for the
Common Stock at a premium over the market price therefor. Additionally, the
issuance of Preferred Stock may have the effect of decreasing the market price
of the Common Stock. The Board of Directors has no present plans to issue any
shares of Preferred Stock. The Board of Directors will make any determination to
issue shares of Preferred Stock based on its judgment as to the best interests
of the Company and its stockholders.
50
<PAGE>
CERTAIN CHARTER, BY-LAW AND DELAWARE LAW PROVISIONS
Certain provisions of the DGCL and the Company's Certificate of
Incorporation and By-laws, summarized below, may be considered to have an
anti-takeover effect and may delay, deter or prevent a tender offer, proxy
contest or other transaction that some, or a majority, of the Company's
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
Number of Directors; Staggered Board. The Certificate of Incorporation
provides that there be between five and twelve directors, the exact number of
directors to be determined from time to time by the Board of Directors. The
Certificate of Incorporation and By-laws divide the Board of Directors into
three classes, as nearly equal in number as possible, serving staggered terms.
Approximately one-third of the Board will be elected each year. Any vacancy on
the Board of Directors, including those created by an increase in the size of
the Board, may be filled by the vote of a majority of the directors in office,
even if less than a quorum. Any director elected to fill a vacancy will hold
office for a term coincident with the term of the class to which he or she was
elected which will not necessarily be the next annual stockholders' meeting. The
provision of the Certificate of Incorporation providing for a staggered Board
could prevent a party who acquires control of a majority of the outstanding
voting stock from obtaining control of the Board of Directors until the fourth
annual stockholders meeting following the date the acquiror obtains the
controlling stock interest. This provision could have the effect of discouraging
a potential acquiror from making a tender offer or otherwise attempting to
obtain control of the Company and could increase the likelihood that incumbent
directors will retain their positions.
Special Stockholder Meetings. The Certificate of Incorporation and By-laws
provide, subject to the rights of holders of any class or series of stock having
a preference as to dividends or upon liquidation, that special meetings of
stockholders may be called by the Board of Directors, the Chairman or the
President. Thus, stockholders, in their capacity as such, are not entitled to
call a special meeting of stockholders.
Indemnification. The Certificate of Incorporation provides that the
Company will indemnify, to the full extent authorized or permitted by the DGCL,
any person made, or threatened to be made, a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director or
officer of the Company or by reason of the fact that such director or officer,
at the request of the Company, is or was serving any other corporation,
partnership, joint venture, trust or other enterprise as a director, officer,
employee or agent.
Limitation of Liability. The Certificate of Incorporation provides that no
director of the Company will be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty by such a
director, as a director, other than for: (i) any breach of the director's duty
of loyalty to the Company or its stockholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) authorization of illegal dividends or (iv) any transaction from which
such director derived an improper personal benefit.
Delaware Anti-Takeover Law. The Company is subject to Section 203 of the
DGCL which, subject to certain exceptions, prohibits a publicly held Delaware
corporation from engaging in a broad range of "business combinations" with any
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) for a period of three years from the
date of the transaction in which the person became an interested stockholder,
unless: (i) prior to such date, the Board of Directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
by persons who are directors and also officers and by employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or subsequent to such date, the business combination is
approved by the Board of Directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is American
Stock Transfer & Trust Company. Its telephone number is (212) 936-5100.
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 86,985,000 shares of
Common Stock outstanding. Of these shares, the 14,100,000 shares sold in the
Offering (16,215,000 shares, if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction under the
Securities Act, except for any such shares which may be acquired by an
"affiliate" of the Company as that term is defined in Rule 144 under the
Securities Act. Persons who may be deemed to be affiliates generally include
individuals or entities that control, are controlled by, or are under common
control with, the Company and may include directors and executive officers of
the Company. Shares purchased by affiliates of the Company may generally be sold
in compliance with the resale limitations of Rule 144.
The 72,885,000 shares of Common Stock which continue to be held by Lipha
Americas upon completion of the Offering, will be "restricted securities" within
the meaning of Rule 144 and may not be sold in the absence of registration under
the Securities Act or unless an exemption from registration is available,
including the exemptions contained in Rule 144 under the Securities Act.
In general, under Rule 144, persons such as Lipha Americas who hold
restricted securities and who have beneficially owned restricted securities for
at least one year would be entitled to sell within any three-month period a
number of restricted securities that does not exceed the greater of 1% of the
then outstanding shares of Common Stock or the average weekly trading volume on
the NYSE during the four calendar weeks preceding such sale, provided that the
seller files a Form 144 with respect to such sale, that certain public
information concerning the Company is available and that the seller complies
with certain requirements concerning the manner of sale. A person who is deemed
to be an affiliate of the Company, including members of the Board of Directors
and executive officers of the Company, would also need to comply with the
restrictions and requirements of Rule 144, other than the one-year holding
period requirement, in order to sell shares of Common Stock that are not
restricted securities, unless such sale is registered under the Securities Act.
Prior to consummation of the Offering, there has been no public market for
the Common Stock, and no prediction can be made as to the effect, if any, that
future sales of shares of Common Stock, or the availability of such shares for
future sale, will have on the market price of the Common Stock prevailing from
time to time. Nevertheless, sales of substantial amounts of such shares in the
public market, or the perception that such sales may occur, could adversely
affect the then-prevailing market prices for the Common Stock.
52
<PAGE>
UNDERWRITING
The Underwriters named below, represented by Bear, Stearns & Co. Inc.,
Hambrecht & Quist LLC, J.P. Morgan Securities Inc. and Lehman Brothers Inc. (the
"Representatives"), have severally agreed, subject to the terms and conditions
set forth in the Underwriting Agreement (the "Underwriting Agreement") by and
among the Company, Merck KGaA and the Underwriters, to purchase from the Company
the aggregate number of shares of Common Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------------------------------------------------------------------- ----------
<S> <C>
Bear, Stearns & Co. Inc.............................................................................
Hambrecht & Quist LLC...............................................................................
J.P. Morgan Securities Inc..........................................................................
Lehman Brothers Inc.................................................................................
----------
Total.......................................................................................... 14,100,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to approval of
certain legal matters by counsel and to certain other conditions precedent. If
any of the shares of Common Stock are purchased by the Underwriters pursuant to
the Underwriting Agreement, all such shares of Common Stock (other than shares
of Common Stock covered by the over-allotment option described below) must be so
purchased.
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow selected dealers a
concession of not more than $ per share, and the Underwriters may allow, and
such dealers may reallow, a concession of not more than $ per share to certain
other dealers. After the initial public offering, the offering price and other
selling terms may be changed by the Representatives. The Common Stock is offered
subject to receipt and acceptance by the Underwriters, and to certain other
conditions, including the right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 2,115,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 14,100,000 shares to be purchased by
the Underwriters. To the extent that the Underwriters exercise such option, each
of the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with the initial public offering.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
The Representatives have advised the Company that the Underwriters do not
expect to confirm sales to any accounts over which they exercise discretionary
authority.
The Company and Merck KGaA have agreed that the Company will not, and Merck
KGaA will cause Lipha Americas not to, directly or indirectly, issue, sell,
offer or agree to sell, grant any option for the sale of, pledge or otherwise
dispose of or encumber and, in the case of Lipha Americas, otherwise create a
put equivalent position in any shares of Common Stock (or any securities
convertible into or exercisable or exchangeable for shares of Common Stock) for
a period of 180 days from the date of this Prospectus without the prior written
consent of Bear, Stearns & Co. Inc.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be negotiated between the Company and the Representatives. Among the
factors to be considered in determining the initial public offering price of the
Common Stock will be prevailing market and economic conditions, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant.
53
<PAGE>
In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock during and after the Offering. Specifically, the Underwriters may
over-allot or otherwise create a short position in the Common Stock for their
own account by selling more shares of Common Stock than have been sold to them
by the Company. The Underwriters may elect to cover any such short position by
purchasing shares of Common Stock in the open market or by exercising the
over-allotment option granted to the Underwriters. In addition, the Underwriters
may stabilize or maintain the price of the Common Stock by bidding for or
purchasing shares of Common Stock in the open market and may impose penalty
bids, under which selling concessions allowed to syndicate members or other
broker-dealers participating in the Offering are reclaimed if shares of Common
Stock previously distributed in the Offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may be
to stabilize or maintain the market price at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the Common Stock to the extent that it discourages resales
thereof. No representation is made as to the magnitude or effect of any such
stabilization or other transactions. Such transactions may be effected on the
NYSE or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Coudert Brothers, New York, New York. Certain legal matters relating
to the offering will be passed upon for the Underwriters by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Dey, Inc. and
subsidiaries as of December 31, 1996 and 1997, and for each of the years in the
three-year period ended December 31, 1997, have been included herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (File
No. 333-59857) under the Securities Act, with respect to the Common Stock
offered hereby. This Prospectus, which is part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules filed therewith. For further information with
respect to the Company and the Common Stock offered hereby, reference is hereby
made to the Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus regarding the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. The Registration Statement, including the exhibits
and schedules thereto, may be inspected without charge at the principal office
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center,
Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and copies of all or any part
thereof may be obtained at prescribed rates from the Commission's Public
Reference Section at such addresses. Also, the Commission maintains a World Wide
Web site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
As a result of the Offering, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). So long as the Company is subject to the periodic
reporting requirements of the Exchange Act, it will continue to furnish the
reports and other information required thereby to the Commission. The Company
intends to furnish holders of the Common Stock with annual reports containing,
among other information, audited financial statements certified by an
independent public accounting firm. The Company also intends to furnish such
other reports from time to time as it may determine or as may be required by
law.
54
<PAGE>
DEY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Income.......................................................................... F-4
Consolidated Statements of Stockholder's Equity (Deficit).................................................. F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
When the filing of the Restated Certificate of Incorporation and the stock
split referred to in Note 11 of the Notes to Consolidated Financial Statements
have been consummated, we will be in a position to render the following report,
assuming that no other events will have occurred which would affect the
consolidated financial statements.
KPMG PEAT MARWICK LLP
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dey, Inc.:
We have audited the accompanying consolidated balance sheets of Dey, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of income, stockholder's equity (deficit) and cash flows for each of
the years in the three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dey,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
San Francisco, California
January 16, 1998, except as to Note 11,
which is as of , 1998
F-2
<PAGE>
DEY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1998
-------------------- --------------------------
1996 1997 HISTORICAL PRO FORMA
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 5,728 $ 18,615 $ 17,215 $ 17,215
Accounts receivable, less allowances for doubtful accounts of
$1,100, $983 and $1,101 for 1996, 1997 and 1998,
respectively.............................................. 9,497 17,354 20,405 20,405
Inventories.................................................. 10,680 21,445 15,737 15,737
Prepaids and other assets.................................... 1,058 701 4,082 4,082
Related party notes receivable and advances.................. 12,000 14,000 6,950 6,950
Related party receivables.................................... 27 402 682 682
Deferred income taxes........................................ 4,760 7,318 16,416 16,416
-------- -------- --------- ---------
Total current assets........................................... 43,750 79,835 81,487 81,487
Property, plant and equipment, net............................. 47,746 57,441 62,529 62,529
Goodwill, net.................................................. 53,396 51,678 50,819 50,819
-------- -------- --------- ---------
Total assets................................................... $144,892 $188,954 $ 194,835 $ 194,835
-------- -------- --------- ---------
-------- -------- --------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................. $ 1,327 $ 834 $ 3,463 $ 3,463
Accrued liabilities.......................................... 11,594 17,633 18,927 18,927
Accrued Medicaid rebate...................................... 2,001 3,759 4,187 4,187
Accrued liabilities to related parties....................... 1,982 3,703 4,415 4,415
Income taxes payable......................................... 9,582 15,166 20,238 20,238
Dividends payable............................................ -- -- 4,923 229,923
-------- -------- --------- ---------
Total current liabilities...................................... 26,486 41,095 56,153 281,153
Deferred income taxes.......................................... 1,440 1,871 1,860 1,860
Long-term related party debt................................... 22,000 22,000 22,000 22,000
-------- -------- --------- ---------
Total liabilities.............................................. 49,926 64,966 80,013 305,013
-------- -------- --------- ---------
Commitments and contingencies
Stockholder's Equity (Deficit):
Preferred Stock, $1 par value; 10,000,000 shares authorized;
none issued and outstanding for 1996, 1997 and 1998,
respectively..............................................
Common stock, $0.01 par value; 140,000,000 shares authorized;
72,885,000 issued and outstanding for 1996, 1997 and 1998,
respectively.............................................. 729 729 729 729
Additional (negative) paid-in capital........................ 57,094 57,094 57,094 (110,907)
Retained earnings............................................ 37,143 66,165 56,999 --
-------- -------- --------- ---------
Total stockholder's equity (deficit)........................... 94,966 123,988 114,822 (110,178)
-------- -------- --------- ---------
Total liabilities and stockholder's equity (deficit)........... $144,892 $188,954 $ 194,835 $ 194,835
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DEY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................ $136,685 $166,461 $219,810 $103,924 $135,675
Cost of sales:...........................
--related parties...................... 431 2,887 146 1,610
--other................................ 38,999 63,824 74,317 30,679 47,135
-------- -------- -------- -------- --------
38,999 64,255 77,204 30,825 48,745
-------- -------- -------- -------- --------
Gross profit........................ 97,686 102,206 142,606 73,099 86,930
Selling, marketing and distribution:.....
--related parties...................... 255 304 499 160 265
--other................................ 11,111 13,728 21,199 7,881 13,506
-------- -------- -------- -------- --------
11,366 14,032 21,698 8,041 13,771
General and administrative expenses:.....
--related parties...................... 348 355 409 41 281
--other................................ 8,201 9,218 10,898 4,903 12,224
-------- -------- -------- -------- --------
8,549 9,573 11,307 4,944 12,505
Research and development:................
--related parties...................... 2,538 1,766 4,051 1,016 0
--other................................ 9,997 17,500 16,005 7,511 6,381
-------- -------- -------- -------- --------
12,535 19,266 20,056 8,527 6,381
-------- -------- -------- -------- --------
Income from operations.............. 65,236 59,335 89,545 51,587 54,273
Interest expense related parties......... (1,371) (1,237) (1,267) (639) (597)
Interest income related parties.......... 863 940 754 366 280
Interest income other.................... 649 578 1,403 428 999
Other income, net........................ 543 1,164 747 416 439
-------- -------- -------- -------- --------
Income before taxes................. 65,920 60,780 91,182 52,158 55,394
Income taxes............................. (27,055) (24,999) (37,160) (21,206) (21,310)
-------- -------- -------- -------- --------
Net income.......................... $ 38,865 $ 35,781 $ 54,022 $ 30,952 $ 34,084
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income per share (basic)............. $ 0.53 $ 0.49 $ 0.74 $ 0.42 $ 0.47
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common shares
outstanding............................ 72,885,000 72,885,000 72,885,000 72,885,000 72,885,000
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Pro forma net income per share (basic)
(unaudited)............................ $ 0.61 $ 0.38
---------- ----------
---------- ----------
Pro forma weighted average common shares
outstanding (unaudited)................ 89,100,000 89,100,000
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DEY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK (NEGATIVE) STOCKHOLDER'S
-------------------- PAID-IN RETAINED EQUITY
SHARES AMOUNT CAPITAL EARNINGS (DEFICIT)
---------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1994................... 72,885,000 $729 $ 57,094 $ 32,362 $ 90,185
Net income...................................... -- -- -- 38,865 38,865
Dividends paid (0.43 per share)................. -- -- -- (31,000) (31,000)
---------- ---- ---------- -------- ---------
Balance as of December 31, 1995................... 72,885,000 729 57,094 40,227 98,050
Net income...................................... -- -- -- 35,781 35,781
Dividends paid (0.53 per share)................. -- -- -- (38,865) (38,865)
---------- ---- ---------- -------- ---------
Balance as of December 31, 1996................... 72,885,000 729 57,094 37,143 94,966
Net income...................................... -- -- -- 54,022 54,022
Dividends paid (0.34 per share)................. -- -- -- (25,000) (25,000)
---------- ---- ---------- -------- ---------
Balance as of December 31, 1997................... 72,885,000 729 57,094 66,165 123,988
Net income (unaudited).......................... -- -- -- 34,084 34,084
Dividends declared (0.59 per share)
(unaudited) ................................. -- -- -- (43,250) (43,250)
---------- ---- ---------- -------- ---------
Balance as of June 30, 1998 (unaudited)........... 72,885,000 $729 $ 57,094 $ 56,999 $ 114,822
---------- ---- ---------- -------- ---------
---------- ---- ---------- -------- ---------
Pro forma balance as of June 30, 1998
(unaudited)..................................... 72,885,000 $729 $ (110,907) $ -- $(110,178)
---------- ---- ---------- -------- ---------
---------- ---- ---------- -------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DEY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 38,865 $ 35,781 $ 54,022 $ 30,952 $ 34,084
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 6,011 6,512 8,111 3,988 4,401
Provision for excess and obsolete inventory....... 7 678 (599) (64) 1,750
Loss on sale of property, plant and equipment..... 47 25 6 -- 22
Deferred income taxes............................. (1,203) (436) (2,127) -- (9,109)
Changes in operating assets and liabilities:
Accounts receivable............................... (2,458) 4,858 (7,857) (876) (3,051)
Inventories....................................... (872) (3,540) (10,166) (4,481) 3,958
Prepaids and other assets......................... (209) 51 357 (586) (3,381)
Accounts payable.................................. 105 174 (493) 2,282 2,629
Accrued liabilities............................... 923 5,136 7,797 (3,391) 1,722
Related party receivables......................... (782) 2,561 (375) (815) (280)
Accrued liabilities to related parties............ 4,277 (3,645) 1,721 (702) 712
Income taxes payable.............................. 3,659 3,126 5,584 6,289 5,072
-------- -------- -------- -------- --------
Net cash provided by operating activities.............. 48,370 51,281 55,981 32,596 38,529
-------- -------- -------- -------- --------
Cash flows from investing activities:
Proceeds from related party notes receivable
and advances...................................... 46,200 14,525 1,000 1,000 9,000
Issuance of related party notes receivable
and advances...................................... (51,200) (8,525) (3,000) (1,250) (1,950)
Purchase of property, plant and equipment............ (10,362) (18,013) (16,095) (3,771) (8,659)
Proceeds from sale of property, plant equipment...... 4 23 1 -- 7
-------- -------- -------- -------- --------
Net cash used in investing activities.................. (15,358) (11,990) (18,094) (4,021) (1,602)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Dividends paid....................................... (31,000) (38,865) (25,000) (12,500) (38,327)
-------- -------- -------- -------- --------
Net cash used in financing activities.................. (31,000) (38,865) (25,000) (12,500) (38,327)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents... 2,012 426 12,887 16,075 (1,400)
Cash and cash equivalents at beginning of the period... 3,290 5,302 5,728 5,728 18,615
-------- -------- -------- -------- --------
Cash and cash equivalents at end of the period......... $ 5,302 $ 5,728 $ 18,615 $ 21,803 $ 17,215
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Supplemental cash flow disclosures:
Cash paid during the year for:
Interest paid to related parties.................. $ 1,371 $ 1,237 $ 1,267 $ 639 $ 597
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income taxes...................................... $ 24,600 $ 22,309 $ 33,703 $ 14,917 $ 25,347
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXCEPT AS TO NOTE 11, INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND AS OF
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
NOTE 1. BUSINESS AND COMPANY STRUCTURE
Dey, Inc. (the Company) is a Delaware corporation which manufactures and
markets pharmaceutical products through Dey, L.P. primarily in the U.S.
Dey, Inc. is a wholly-owned subsidiary of Lipha Americas, Inc. (Lipha
Americas), which is a wholly-owned subsidiary of Merck-Lipha S.A., a French
corporation. Merck-Lipha S.A. is a 99.53% owned subsidiary of Merck KGaA (Merck
KGaA) of Germany.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company was acquired by Lipha Pharmaceuticals, Inc. in 1988. Ownership
of the Company was transferred to Lipha Americas in 1990. The accompanying
consolidated financial statements reflect the "push-down" of Lipha
Pharmaceuticals, Inc.'s cost to acquire the Company in 1988, to the Company's
consolidated financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Dey, Inc., its wholly-owned subsidiary Dey Limited Partner, Inc., and a
partnership, Dey, L.P. Dey, Inc. has a 1% general partnership interest, and Dey
Limited Partner, Inc., has a 99% limited partnership interest, in Dey, L.P. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents. Cash
equivalents consist primarily of commercial paper and are held to maturity.
Inventories
Inventories are recorded at the lower of cost or market using the first-in,
first-out method. Costs include material, labor, and applicable factory
overhead. Provision for potentially obsolete or slow moving inventory is made
based upon management's analysis of inventory levels and forecasted sales.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated
using the straight-line method over the respective estimated useful lives of the
assets, which range from three to thirty years. Leasehold improvements are
amortized over the shorter of the respective lease terms or the respective
estimated useful lives of the assets.
Long-Lived Assets
The Company accounts for long-lived assets under SFAS No. 121, Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
In accordance with this standard, long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future net
undiscounted cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment loss to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
F-7
<PAGE>
DEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXCEPT AS TO NOTE 11, INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND AS OF AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Goodwill
The Company was acquired in January 1988. Goodwill represents the excess of
the purchase price over the fair value of the identifiable assets and
liabilities of the Company at the date of acquisition. Goodwill is being
amortized over 40 years.
Fair Value of Instruments
In management's opinion, financial assets and liabilities have carrying
values which approximate fair values due to their short-term nature and variable
interest rates.
Concentration of Market, Credit and Suppliers Risk
The Company has three product lines that accounted for 60%, 26% and 0% of
net sales in 1995, 53%, 28% and 0% of net sales in 1996, 38%, 14% and 23% of net
sales in 1997, respectively.
The Company sells its products to a diverse group of pharmaceutical
distributors and retailers across broad geographic areas. Accounts receivable
from customers are uncollateralized. One of the Company's customers accounted
for 11% and 13% of net sales for the years ended December 31, 1995 and 1996,
respectively. The Company's top three customers accounted for 12%, 12% and 11%,
respectively, of net sales for the year ended December 31, 1997. The Company's
top two customers accounted for an aggregate of 24% and 25% of accounts
receivable as of December 31, 1996 and 1997.
Certain of the raw materials used in the manufacture of the Company's
products are subject to FDA approval. The Company currently purchases some of
these raw materials from single-source FDA-approved suppliers. Any additional
supply sources for these materials must be approved by the FDA before the
materials can be used by the Company.
Concentration of credit risk principally consists of cash and cash
equivalents and accounts receivable. The Company performs ongoing credit
evaluations of its customers and maintains allowances for potential
uncollectible accounts.
Income Taxes
The Company is included in the consolidated federal income tax return of
Lipha Americas. Income taxes in the Company's financial statements have been
determined on a separate-return basis.
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are
recognized for tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each
balance sheet date based on enacted tax laws and statutory tax rates expected to
apply in the periods in which the differences are expected to affect taxable
income.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes sales upon shipment of products to its customers.
Allowances for estimated discounts, chargebacks, customer rebates, and returns
are recognized in the same period as the related sales. Accounts receivable are
presented net of such allowances, which totaled $11,412,000, $15,059,000 and
$16,909,000 at December 31, 1996 and 1997 and June 30, 1998, respectively.
Accruals for estimated Medicaid
F-8
<PAGE>
DEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXCEPT AS TO NOTE 11, INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND AS OF AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
rebates, which represent payments due to states based on distribution of the
Company's products to beneficiaries of the various state Medicaid programs, also
are recognized in the same period as the related sales.
New Accounting Standard
In June, 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133) which is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 133
establishes accounting and reporting standards for derivatives instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Earlier application of all provisions of this
Statement is encouraged, but it is permitted only as of the beginning of any
fiscal quarter that begins after issuance of this Statement. The Company
anticipates that adoption of this Statement will not be material to the
consolidated financial statements.
Unaudited Interim Consolidated Financial Information
The unaudited interim consolidated financial information as of June 30,
1998 and for the six months ended June 30, 1997 and 1998 has been prepared on
the same basis as the audited consolidated financial statements and the
requirements of Regulation S-X. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
accruals with the exception of the accrual recognized for the six months ended
June 30, 1998 referred to in Note 10) necessary for a fair presentation of this
interim information. Operating results for the six months ended June 30, 1998
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1998.
Unaudited Pro Forma Consolidated Financial Data
On July 21, 1998, the Company declared a $225,000,000 dividend to Lipha
Americas, which was paid on August 14, 1998. The Company partially funded the
payment of the aforementioned dividend by utilizing a revolving credit facility
provided by Merck KGaA (See Note 12).
The information presented in the unaudited pro forma consolidated balance
sheet as of June 30, 1998 was prepared as if the aforementioned dividend had
been declared as of June 30, 1998.
The amount reported in the unaudited pro forma consolidated balance sheet
and statement of stockholder's equity (deficit) of negative paid-in capital of
$110,907,000 is the excess of the aforementioned $225,000,000 dividend over the
additional paid-in capital and retained earnings as of June 30, 1998 which
totaled $114,093,000.
The pro forma net income per share amounts are calculated by dividing the
historical net income amounts by the sum of (1) the historical weighted average
common shares outstanding during the periods presented and (2) 16,215,000 common
shares to be registered in connection with the Company's initial public
offering, including 2,115,000 shares which the underwriters may require the
Company to sell solely to cover over-allotments, if any. The assumed net
proceeds from the sale by the Company of 16,215,000 common shares at an assumed
public offering price of $14.00 per share (the mid-point of the price range),
after deduction of estimated underwriting discounts and commissions and expenses
of the offering, are estimated to be $211,700,000. Accordingly, the pro forma
net income per share amounts include the total amount of the common shares to be
registered because the assumed net proceeds from the offering are less than the
amount of the $225,000,000 dividend referred to above.
F-9
<PAGE>
DEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXCEPT AS TO NOTE 11, INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND AS OF AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
NOTE 3. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1996 1997 1998
------- ------- ---------
<S> <C> <C> <C>
Raw materials......................................................... $ 4,132 $ 4,219 $ 2,815
Work in process....................................................... 1,065 2,290 1,549
Finished goods........................................................ 5,483 14,936 11,373
------- ------- -------
$10,680 $21,445 $15,737
------- ------- -------
------- ------- -------
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1996 1997 1998
------- ------- ---------
<S> <C> <C> <C>
Land.................................................................. $ 3,309 $ 3,309 $ 3,309
Equipment and machinery............................................... 42,075 48,511 54,877
Buildings and improvements............................................ 17,946 18,805 23,850
Equipment deposits, construction in progress.......................... 6,060 14,308 11,096
------- ------- -------
69,390 84,933 93,132
Less accumulated depreciation......................................... (21,644) (27,492) (30,603)
------- ------- -------
$47,746 $57,441 $62,529
------- ------- -------
------- ------- -------
</TABLE>
NOTE 5. INTANGIBLE ASSETS, NET
Intangible assets, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1996 1997 1998
------- ------- ---------
<S> <C> <C> <C>
Goodwill.............................................................. $66,185 $66,185 $66,185
Less accumulated amortization......................................... (12,789) (14,507) (15,366)
------- ------- -------
$53,396 $51,678 $50,819
------- ------- -------
------- ------- -------
</TABLE>
NOTE 6. RELATED PARTY TRANSACTIONS
Related party notes receivable and advances of $12,000,000, $14,000,000 and
$6,950,000 at December 31, 1996 and 1997 and June 30, 1998, respectively,
represents amounts due from affiliated companies. Related party receivables of
$27,000, $402,000 and $682,000, at December 31, 1996 and 1997 and June 30, 1998,
respectively, represents amounts due from affiliated companies for accrued
interest on the aforementioned note receivables and costs incurred on behalf of
other affiliates. The amounts are due on demand.
With the exception of a $7,000,000 related party note receivable, all loans
bear interest at the monthly applicable federal rate, which was 5.60%, 5.54% and
5.44% for the month ended December 31, 1996, 1997 and June 30, 1998,
respectively. The $7,000,000 related note party receivable is at a fixed rate of
5.88% for the years ended December 31, 1996 and 1997. This note was repaid on
March 27, 1998.
The long-term related party debt of $22,000,000 at December 31, 1996, 1997
and June 30, 1998, respectively, represents a note payable to an affiliated
company, due on July 31, 1999, and bearing interest at the quarterly applicable
federal rate, which was 5.63%, 5.56% and 5.46% for the quarters ended December
1996, 1997 and June 30, 1998, respectively.
The Company's operating expenses include charges from affiliates for
expenses incurred on behalf of the Company. These expenses were $3,141,000,
$2,425,000 and $4,959,000 for the years ended December 31, 1995,
F-10
<PAGE>
DEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXCEPT AS TO NOTE 11, INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND AS OF AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
NOTE 6. RELATED PARTY TRANSACTIONS--(CONTINUED)
1996 and 1997, respectively. Approximately $2,500,000, $1,800,000 and $4,100,000
of those expenses in 1995, 1996 and 1997, respectively, related to clinical
trial services performed in exchange for certain marketing rights in the U.S. of
any approved products developed pursuant to an agreement which the Company
entered into with Genpharm, Inc. and Alphapharm Parties Limited (the Genpharm
Agreement), affiliated companies, in 1995. The accrued liabilities to related
parties of $1,982,000 and $3,703,000 at December 31, 1996 and 1997,
respectively, primarily related to the aforementioned expenses. The accrued
liabilities to related parties of $4,415,000 at June 30, 1998 primarily relates
to licensing fees and amounts related to taxes due to affiliates.
The Company's cost of sales include licensing fees due to an affiliate.
Effective July 1, 1997, the Company agreed to pay a royalty on a licensed
product of 16.5% of annual net sales up to $15.75 million for 1997 and up to
$31.5 million for 1998 through 2010. In the event the Company does not achieve
certain minimum net sales or gross margins on the licensed product, both parties
agree to negotiate in good faith to determine a new royalty percentage which
should be applicable. Minimum net sales and gross margins were achieved in 1997.
Total licensing fees relating to this agreement were $-0-, $-0- and $2,600,000
for the years ended December 31, 1995, 1996, and 1997, respectively.
NOTE 7. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1995, 1996
and 1997, consisted of (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---------------------------- ---------------------------- ----------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal............... $22,990 $ (1,071) $21,919 $20,466 $ (208) $20,258 $32,020 $ (1,907) $30,113
State................. 5,268 (132) 5,136 4,969 (228) 4,741 7,267 (220) 7,047
------- -------- ------- ------- -------- ------- ------- -------- -------
$28,258 $ (1,203) $27,055 $25,435 $ (436) $24,999 $39,287 $ (2,127) $37,160
------- -------- ------- ------- -------- ------- ------- -------- -------
------- -------- ------- ------- -------- ------- ------- -------- -------
</TABLE>
The total income tax expense differed from the amount computed by applying
the federal statutory income tax rate of 35% to income before taxes as a result
of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Computed tax expense at federal statutory rate of 35%.................. $23,072 $21,273 $31,914
State taxes............................................................ 3,338 3,081 4,581
Amortization of goodwill and other permanent differences............... 645 645 665
------- ------- -------
$27,055 $24,999 $37,160
------- ------- -------
------- ------- -------
</TABLE>
F-11
<PAGE>
DEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXCEPT AS TO NOTE 11, INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND AS OF AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
NOTE 7. INCOME TAXES--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts and chargebacks........................................... $ 2,823 $ 4,380
Inventories, principally due to reserves and additional costs
capitalized for tax purposes....................................... 389 172
Other accrued liabilities............................................. 1,548 2,766
------- -------
Total gross deferred tax assets.................................... 4,760 7,318
Deferred tax liabilities:
Property, plant and equipment......................................... (1,440) (1,871)
------- -------
Total gross deferred tax liabilities............................... (1,440) (1,871)
------- -------
Net deferred tax asset............................................. $ 3,320 $ 5,447
------- -------
------- -------
</TABLE>
NOTE 8. LEASES
As part of its operations, the Company enters into various leasing
arrangements. The Company currently leases two facilities under noncancellable
operating leases.
Aggregate rent expense was $247,000, $196,000 and $212,000 for the years
ending 1995, 1996 and 1997, respectively.
The future minimum payments with an initial term in excess of one year, for
the years ending December 31 are as follows:
<TABLE>
<CAPTION>
MINIMUM
RENTALS
----------
<S> <C>
1998........................................................ $ 495,000
1999........................................................ 723,000
2000........................................................ 695,000
2001........................................................ 685,000
2002........................................................ 685,000
Thereafter.................................................. 1,763,000
----------
$5,046,000
----------
----------
</TABLE>
NOTE 9. EMPLOYEE BENEFIT PLANS
The Lipha Americas Employees' Retirement Plan is a defined benefit pension
plan for the benefit of eligible employees of Lipha Americas and its affiliates,
including the Company, who meet age and service requirements. Benefits are
generally based on average salary and years of service. Lipha Americas funds its
pension plans in accordance with federal laws and regulations. Plan assets are
invested primarily in cash and cash equivalents, government securities, stocks
and bonds.
The Company recognizes as net pension expense, its allocated total
contributions for the period. With respect to this plan, the Company funded and
recorded expenses of $365,000, $410,000 and $549,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
F-12
<PAGE>
DEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXCEPT AS TO NOTE 11, INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND AS OF AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
NOTE 9. EMPLOYEE BENEFIT PLANS--(CONTINUED)
In addition, the Company sponsors a contributory 401(k) savings and
investment plan in which employees meeting the minimum service requirements are
eligible to participate. Participants may contribute up to 10% of their basic
pay annually. Through September 1997, the Company contributed an amount of
33-1/3% of the participants' contribution up to 6% of the participants' base
annual pay. The Company contribution increased to 50% of the participants'
contribution up to 6% of the participants' base annual pay as of October 1,
1997. The Company's contribution to the plan was $119,000, $156,000 and $300,000
for the years ending December 31, 1995, 1996 and 1997, respectively.
NOTE 10. COMMITMENTS AND CONTINGENCIES
In December 1996, the Company entered into a ten year agreement with a
pharmaceutical company whereby the Company was granted exclusive selling,
marketing, and distribution rights for a product in the United States, excluding
Puerto Rico and the Virgin Islands (the Territory). Under the terms of the
agreement, the Company is required to make minimum payments of forty percent
(40%) of the contribution margin resulting from sales of the Product within the
Territory. For purposes of this contract, contribution margin is defined as
sales less cost of sales, marketing, selling, distribution, clinical testing and
administrative expenses. Pursuant to the agreement, the Company made an initial
payment of $500,000 in 1996 and made a minimum payment of $500,000 in 1997 and
is required to make an additional $1,000,000 minimum payment each subsequent
calendar year during the term of the agreement. The agreement may be terminated
by the Company if for three consecutive calendar years, the annual contribution
margin is lower than $1,000,000.
On May 22, 1997 the Company issued an unconditional guaranty of the
performance of obligations of Allergy Free L.P., an affiliated company, under a
lease of office and manufacturing space in Houston, Texas
occupied by Allergy Free, L.P. The total rental obligation of Allergy Free, L.P.
under such lease is $984,000. The lease expires on June 30, 2002.
Commitments for the expansion of the Napa facilities and purchase of
capital equipment over the next year are approximately $4,800,000 and $6,200,000
as of December 31, 1997 and June 30, 1998.
A number of pharmaceutical companies, including the Company, received
federal subpoenas in October 1997 from the Office of Inspector General, U.S.
Department of Health and Human Services in connection with an ongoing
investigation of the reporting by such companies of "wholesale acquisition cost"
data. Six states use such data to determine the rate at which they reimburse
pharmacies for pharmaceuticals dispensed under Medicaid programs. The Company
understands that the government is investigating to determine whether
reimbursement to pharmacies and other health care providers was higher than
required and that reporting of data with respect to albuterol products is one of
the specific areas being investigated by the government. The Company understands
that it is one of several pharmaceutical companies manufacturing albuterol which
are being investigated. The Company is complying with the subpoena. The Company
does not at this point know what further action the government will take in this
matter. During the six-month period ended June 30, 1998, the Company has accrued
for the estimated costs related to this matter which was charged to general and
administrative expenses.
NOTE 11. RESTATED CERTIFICATE OF INCORPORATION AND STOCK SPLIT
On , 1998, the Company filed a Restated Certificate
of Incorporation, pursuant to which the Company is authorized to issue up to
140,000,000 shares of Common Stock, par value $.01 per share, and 10,000,000
shares of Preferred Stock, par value $1.00 per share and effected a 72,885 for 1
split of the Common Stock. All common share and per share amounts in the
accompanying consolidated financial statements have been retroactively adjusted
to reflect the aforementioned amendments and stock split.
F-13
<PAGE>
DEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXCEPT AS TO NOTE 11, INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND AS OF AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
NOTE 12. SUBSEQUENT EVENTS (UNAUDITED)
Initial Public Offering
On July 23, 1998, the Company's Board of Directors authorized the filing of
a registration statement with the Securities and Exchange Commission to register
for sale shares of common stock in a proposed initial firm commitment
underwritten public offering of approximately 18% of the total outstanding
shares of the Company's common stock.
Dividends
On July 21, 1998, the Company declared a $225,000,000 dividend to Lipha
Americas which was paid on August 14, 1998.
Financing
On August 13, 1998, the Company and Merck KGaA entered into an agreement,
where Merck KGaA will provide the Company with a revolving credit facility of up
to $220,000,000 over a three year period. For this facility, the Company paid
Merck KGaA an establishment fee of $100,000 and will pay a commitment fee of
0.08% per annum on the undrawn balance. Amounts drawn on the facility bear
interest payable quarterly in arrears at LIBOR plus 1% and are repayable three
years from the date of establishment of the facility.
On August 14, 1998, the Company borrowed $200,000,000 under this facility
to partially fund the $225,000,000 dividend to Lipha Americas.
1998 Incentive Plan
The Company plans to adopt the 1998 Incentive Plan for the benefit of
eligible employees of the Company and its subsidiaries. Under the Incentive
Plan, participants may be awarded stock options, stock appreciation rights,
restricted shares, stock units and performance awards payable in cash or
property. The aggregate number of common shares available for award to
participants is estimated to be 900,000.
Genpharm Agreement
The Genpharm Agreement referred to in Note 6 has been terminated effective
July 23, 1998. As a result of the termination of this agreement, the Company is
no longer required to fund research and development related to this agreement
and no longer has rights to the products included in the agreement.
Litigation
A complaint was filed on August 18, 1998 with the Circuit Court of Cook
County, Illinois, against Dey, Meridian Technologies, Inc. and Walgreen Co., as
co-defendants, alleging negligence, breach of warranty and strict liability
claims in connection with the death of an individual allegedly resulting from
the use of an ineffective EpiPen(Registered) product in March 1998. The Company
is currently investigating the allegations made in the complaint, but has
insufficient details at this time to determine if it has any liability in
respect of this matter and, if so, in what amount.
Licensing agreement with a related party
The Company intends to enter into a license agreement with Lipha S.A.
(Lipha) to obtain the exclusive right and license to manufacture and sell the
Dey/Lipha dry powder inhaler, under Lipha's patent rights, in North America.
The Company will pay Lipha $5,000,000 upon execution of such agreement and
undertake to pay Lipha a royalty of up to 3% on net sales until the expiration
of Lipha's patent rights.
F-14
<PAGE>
[PHOTOGRAPH -- Child inhaling from prototype unit of dry powder inhaler
being developed by the Company.]
Photo of child using prototype of the Dey/Lipha DPI, currently under
development.
<PAGE>
===============================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................. 4
Risk Factors....................................... 7
Special Note Regarding Forward-Looking
Statements........................................ 16
Use of Proceeds.................................... 17
Dividend Policy.................................... 17
Capitalization..................................... 18
Dilution........................................... 19
Selected Consolidated Financial Data............... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 21
Business........................................... 27
Management......................................... 43
Certain Transactions............................... 47
Principal Stockholders............................. 49
Description of Capital Stock....................... 50
Shares Eligible for Future Sale.................... 52
Underwriting....................................... 53
Legal Matters...................................... 54
Experts............................................ 54
Additional Information............................. 54
Index to Consolidated Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
14,100,000 SHARES
DEY, INC.
COMMON STOCK
----------------------
PROSPECTUS
----------------------
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST
J.P. MORGAN & CO.
LEHMAN BROTHERS
, 1998
===============================================================================
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates.
<TABLE>
<S> <C>
SEC registration fee...................................................................... $ 76,535
NASD filing fee........................................................................... 26,444
New York Stock Exchange listing fee....................................................... 383,000
Blue Sky fees and expenses................................................................ 15,000
Printing and engraving expenses........................................................... 300,000
Legal fees and expenses................................................................... 500,000
Accounting fees and expenses.............................................................. 300,000
Miscellaneous expenses.................................................................... 74,021
----------
TOTAL................................................................................ $1,675,000
----------
----------
</TABLE>
All of such expenses are to be borne by the Company.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL authorizes, inter alia, a corporation generally to
indemnify any person ("indemnitee") who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation in a similar
position with another corporation or entity, against expenses (including
attorney's fees), judgements, fines and amounts paid in settlement, actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. With respect to actions or suits by or in the right of the
corporation, however, an indemnitee who acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation is generally limited to attorneys' fees and other expenses, and no
indemnification shall be made if such person is adjudged liable to the
corporation unless and only to the extent that a court of competent jurisdiction
determines that indemnification is appropriate. Section 145 further provides
that any indemnification shall be made by the corporation only as authorized in
each specific case upon a determination by the (i) stockholders, (ii) board of
directors by a majority voted of a quorum consisting of directors who were not
parties to such action, suit or proceeding or (iii) independent counsel if a
quorum of disinterested directors so directs, that indemnification of the
indemnitee is proper because he has met the applicable standard of conduct.
Section 145 provides that indemnification pursuant to its provisions is not
exclusive of other rights of indemnification to which a person may be entitled
under any by-law, agreement, vote of stockholders or disinterested directors or
otherwise.
The Certificate of Incorporation provides that the registrant will
indemnify, to the full extent authorized or permitted by law, any person made,
or threatened to be made, a party or witness to any action, suit or proceeding,
whether civil or criminal or otherwise, by reason of the fact that he or she is
or was a director or officer of the registrant or by reason of the fact that
such director or officer, at the request of the registrant, is or was serving
any other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, in any capacity.
The Certificate of Incorporation also provides that no director of the
registrant will be personally liable to the registrant or its stockholders for
monetary damages for any breach of fiduciary duty by such a director as a
director other than for: (i) any breach of the director's duty of loyalty to the
registrant or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
II-1
<PAGE>
authorization of illegal dividends or (iv) any transaction from which such
director derived an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant has not issued any securities within the past three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Underwriting Agreement*
3.1 -- Amended and Restated Certificate of Incorporation of the Company*
3.2 -- Amended and Restated By-laws of the Company*
4.1 -- Note dated July 31, 1997, issued by the Company to Lipha Americas, Inc.*
4.2 -- Facility Agreement dated as of August 13, 1998 between the Company and Merck KGaA as Lender**
5.1 -- Opinion of Coudert Brothers*
10.1 -- Master Agreement between EM Industries, Incorporated and Dey Laboratories, L.P., dated as of May 26,
1998***
10.2 -- License Agreement dated , 1998 between Dey Laboratories, L.P. and Lipha S.A.*
10.3 -- Tax Sharing Agreement dated , 1998 between the Company and Lipha Americas, Inc.*
10.4 -- Management Services Agreement dated , 1998 between the Company and Lipha Americas, Inc.*
10.5 -- Management Services Agreement dated , 1998 between the Company and Allergy Free L.P.*
10.6 -- Management Services Agreement dated , 1998 between the Company and EM Pharma, Inc.*
10.7 -- Lease between Dey Laboratories, L.P. and EBP 2, Ltd.*
10.8 -- Acquisition Agreement dated , 1998 between Dey, L.P. and EM Pharma, Inc.*
10.9 -- Dey, Inc. 1998 Incentive Plan*
21.1 -- Subsidiaries of the Company****
23.1 -- Consent of Coudert Brothers (filed as Exhibit 5.1 hereto)*
23.2 -- Report on Schedule and Consent of KPMG Peat Marwick LLP, Independent Auditors**
24.1 -- Power of Attorney*
27.1 -- Financial Data Schedule**
</TABLE>
- ------------------
* To be filed by amendment
** Filed herewith
*** Previously filed. Confidential material omitted and filed separately with
the Commission pursuant to the Company's Application Requesting
Confidential Treatment under Rule 406 under the Securities Act.
**** Previously filed.
(b) Financial Statements and Schedules.
Schedule II Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such
II-2
<PAGE>
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance of Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
DEY, INC.
SCHEDULE II-VALUATION & QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND CHARGED TO END OF
DESCRIPTION PERIOD EXPENSES NET SALES DEDUCTIONS PERIOD
- ----------------------------------------------- ------------ ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year Ended 1995:
Allowance for Doubtful Accounts.............. $ 458 $182 $ 0 $ (108) $ 532
Allowance for Chargebacks, Rebates Returns
and Discounts............................. $ 3,463 $200 $ 37,638 $(37,286) $ 4,015
-------- ---- -------- -------- -------
Year Ended 1996:
Allowance for Doubtful Accounts.............. $ 532 $635 $ 0 $ (67) $ 1,100
Allowance for Chargebacks, Rebates Returns
and Discounts............................. $ 4,015 $(28) $ 55,224 $(47,799) $11,412
-------- ---- -------- -------- -------
Year Ended 1997:
Allowance for Doubtful Accounts.............. $ 1,100 $300 $ 0 $ (417) $ 983
Allowance for Chargebacks, Rebates Returns
and Discounts............................. $ 11,412 $489 $ 62,452 $(59,294) $15,059
-------- ---- -------- -------- -------
</TABLE>
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NAPA, STATE
OF CALIFORNIA, ON SEPTEMBER 10, 1998.
DEY, INC.
By: /s/ CHARLES A. RICE
-------------------------------------------
Charles A. Rice
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
SIGNATURES TITLE DATE
- ----------------------------------------- ----------------------------------------------- ------------------
/s/ CHARLES A. RICE President, Chief Executive Officer and Director Sept. 10, 1998
- ---------------------------------------- (Principal Executive Officer)
Charles A. Rice
* Executive Vice President, Chief Financial Sept. 10, 1998
- ---------------------------------------- Officer and Director (Principal Financial and
Pamela R. Marrs Accounting Officer)
* Director Sept. 10, 1998
- ----------------------------------------
Bernhard Scheuble
* Director Sept. 10, 1998
- ----------------------------------------
Jean-Noel Treilles
* Director Sept. 10, 1998
- ----------------------------------------
Peter A. Wriede
</TABLE>
* By /S/ CHARLES A. RICE
- ----------------------------------------
Charles A. Rice
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
1.1 -- Underwriting Agreement*
3.1 -- Amended and Restated Certificate of Incorporation of the Company*
3.2 -- Amended and Restated By-laws of the Company*
4.1 -- Note dated July 31, 1997, issued by the Company to Lipha Americas, Inc.*
4.2 -- Facility Agreement dated as of August 13, 1998 between the Company and Merck KGaA as
Lender**
5.1 -- Opinion of Coudert Brothers*
10.1 -- Master Agreement between EM Industries, Incorporated and Dey Laboratories, L.P., dated
as of May 26, 1998***
10.2 -- License Agreement dated , 1998 between Dey Laboratories, L.P. and Lipha S.A.*
10.3 -- Tax Sharing Agreement dated , 1998 between the Company and Lipha Americas,
Inc.*
10.4 -- Management Services Agreement dated , 1998 between the Company and Lipha
Americas, Inc.*
10.5 -- Management Services Agreement dated , 1998 between the Company and Allergy
Free L.P.*
10.6 -- Management Services Agreement dated , 1998 between the Company and
EM Pharma, Inc.*
10.7 -- Lease between Dey Laboratories, L.P. and EBP 2, Ltd.*
10.8 -- Acquisition Agreement dated , 1998 between Dey, L.P. and EM Pharma, Inc.*
10.9 -- Dey, Inc. 1998 Incentive Plan*
21.1 -- Subsidiaries of the Company****
23.1 -- Consent of Coudert Brothers (filed as Exhibit 5.1 hereto)*
23.2 -- Report on Schedule and Consent of KPMG Peat Marwick LLP, Independent Auditors**
24.1 -- Power of Attorney*
27.1 -- Financial Data Schedule**
</TABLE>
- ------------------
* To be filed by amendment
** Filed herewith
*** Previously filed. Confidential material omitted and filed separately with
the Commission pursuant to the Company's Application Requesting
Confidential Treatment under Rule 406 under the Securities Act.
**** Previously filed.
<PAGE>
$220,000,000
FACILITY AGREEMENT
dated as of
August 13, 1998
between
Dey, Inc.
as Borrower
and
Merck KGaA
as Lender
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 DEFINITIONS...................................................... 1
SECTION 1.1 Definitions.......................................... 1
SECTION 1.2 Accounting Terms and Determinations.................. 7
ARTICLE 2 THE FACILITY..................................................... 7
SECTION 2.1 Commitment to Lend................................... 7
SECTION 2.2 Notice of Borrowing.................................. 7
SECTION 2.3 Funding of Loans..................................... 7
SECTION 2.4 Notes................................................ 8
SECTION 2.5 Maturity of Loans.................................... 8
SECTION 2.6 Interest on the Loans................................ 8
SECTION 2.7 Fees................................................. 10
SECTION 2.8 Optional Termination or Reduction of Commitment...... 10
SECTION 2.9 Mandatory Termination of Commitment.................. 10
SECTION 2.10 Optional Prepayments................................. 10
SECTION 2.11 General Provisions as to Payments.................... 10
SECTION 2.12 Funding Losses....................................... 11
SECTION 2.13 Computation of Interest.............................. 11
ARTICLE 3 CONDITIONS....................................................... 12
SECTION 3.1 Closing.............................................. 12
SECTION 3.2 Borrowings........................................... 13
ARTICLE 4 REPRESENTATIONS AND WARRANTIES................................... 13
SECTION 4.1 Corporate Existence and Power........................ 13
SECTION 4.2 Corporate and Governmental Authorization;
No Contravention................................... 13
SECTION 4.3 Binding Effect....................................... 13
SECTION 4.4 Litigation........................................... 14
SECTION 4.5 Regulatory Restrictions on Borrowing................. 14
SECTION 4.6 Financial Condition; No Material Adverse Change...... 14
SECTION 4.7 No Default........................................... 14
SECTION 4.8 Compliance with Laws and Agreements.................. 14
SECTION 4.9 Taxes................................................ 14
SECTION 4.10 ERISA................................................ 15
SECTION 4.11 Full Disclosure...................................... 15
ARTICLE 5 COVENANTS........................................................ 15
SECTION 5.1 Information.......................................... 15
SECTION 5.2 GAAP................................................. 16
SECTION 5.3 Compliance with Laws................................. 16
SECTION 5.4 Books and Records.................................... 16
SECTION 5.5 Negative Pledge...................................... 16
SECTION 5.6 Ranking of Loans..................................... 18
SECTION 5.7 Provision of Notice.................................. 18
(i)
<PAGE>
SECTION 5.8 Existence of the Borrower............................ 19
SECTION 5.9 Further Assurances................................... 19
ARTICLE 6 DEFAULT.......................................................... 19
SECTION 6.1 Events of Default.................................... 19
SECTION 6.2 Notice of Default.................................... 21
ARTICLE 7 CHANGE IN CIRCUMSTANCES.......................................... 22
SECTION 7.1 Illegality........................................... 22
SECTION 7.2 Increased Cost and Reduced Return.................... 22
SECTION 7.3 Taxes................................................ 23
ARTICLE 8 MISCELLANEOUS.................................................... 24
SECTION 8.1 Notices.............................................. 24
SECTION 8.2 Exercise of Rights................................... 25
SECTION 8.3 Expenses............................................. 25
SECTION 8.4 Right of Setoff...................................... 25
SECTION 8.5 Amendments and Waivers............................... 25
SECTION 8.6 Severability......................................... 25
SECTION 8.7 Time of the Essence.................................. 25
SECTION 8.8 Successors and Assigns............................... 26
SECTION 8.9 Governing Law; Submission to Jurisdiction............ 26
SECTION 8.10 Counterparts; Integration; Effectiveness............. 27
SECTION 8.11 WAIVER OF JURY TRIAL................................. 27
SECTION 8.12 Confidentiality...................................... 27
SECTION 8.13 Certificates......................................... 28
EXHIBIT A - Form of Notice of Borrowing
EXHIBIT B - Form of Note
EXHIBIT C - Form of Opinion of Coudert Brothers,
New York counsel to the Borrower
(ii)
<PAGE>
THIS FACILITY AGREEMENT dated as of August 13, 1998 between DEY,
INC., a Delaware corporation (the "Borrower") and MERCK KGaA, a
Kommanditgesellschaft auf Aktien organized under the laws of Germany (the
"Lender") sets forth the binding agreement of the parties hereto.
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1 Definitions. The following terms, as used herein, have
the following meanings:
"Adjusted London Interbank Offered Rate" has the meaning set forth in
Section 2.6(a).
"Affiliate" means (i) any Person that directly, or indirectly through
one or more intermediaries, controls, with respect to any specified Person,
the specified Person (a "Controlling Person") or (ii) any Person which is
controlled by or is under common control with a Controlling Person. As used
herein, the term "control" means possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
"Asset" means, in respect of any Person, all or any part of its
business, property, assets, revenues (including any right to receive revenues)
and uncalled capital, wherever situated.
"Assignee" has the meaning set forth in Section 8.8(c).
"Borrower" means Dey, Inc. and its successors.
"Borrowing" means each advance of all or a portion of a Loan by the
Lender to the Borrower pursuant to the terms hereof.
"Business Day" means any day that is not a Saturday, Sunday or other
day on which commercial banks in California and New York are authorized or
required by law to close and, for purposes of Section 2.6 and the
determinations made pursuant thereto, that is a day on which banks are open
for dealings in Dollar deposits in the London Interbank Market.
"Closing Date" means the date on or after the Effective Date on which
the Lender shall have received (or waived in writing the receipt of any of)
the documents specified in or pursuant to Section 3.1.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
<PAGE>
"Commitment" means (i) with respect to the Lender, the obligation of
the Lender to make Loans to the Borrower in an aggregate principal amount up
to $220,000,000 or (ii) with respect to any Assignee, the amount of the
Lender's Commitment assigned to such Assignee pursuant to Section 8.8, in each
case as such amount may be reduced from time to time pursuant to Section 2.10.
"Commitment Fee" has the meaning set forth in Section 2.7(a).
"Consolidated Controlled Person" means at any date any Controlled
Person or other entity the accounts of which would be consolidated with those
of its Parent in its Parent's consolidated financial statements if such
statements were prepared as of such date in accordance with applicable
generally accepted accounting principles.
"Controlled Person" means a Person which, directly or indirectly, is
subject to the power of another Person to direct or cause the direction of the
management or policies of such first-mentioned Person, whether by ownership,
contract or otherwise; unless otherwise specified, "Controlled Person" means a
Controlled Person of the Borrower.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business, (iv) all obligations of such Person as lessee which are
capitalized in accordance with generally accepted accounting principles, (v)
all non-contingent obligations of such Person to reimburse any bank or other
Person in respect of amounts paid under a letter of credit or similar
instrument, and (vi) all Debt secured by a Lien on any Asset of such Person,
whether or not such Debt is otherwise an obligation of such Person.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured to the satisfaction of the Lender or waived in writing by the
Lender, become an Event of Default.
"Dey Group" means the Borrower and its Consolidated Controlled Persons.
"Dollars" or "$" mean the lawful currency of the United States of
America.
"Effective Date" means the date this Agreement becomes effective in
accordance with Section 8.10.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) that, together with the Borrower, is treated as a single
employer under Section 414(b) or (c) of the
2
<PAGE>
Code or, solely for purposes of Section 302 of ERISA and Section 412 of the
Code, is treated as a single employer under Section 414 of the Code.
"ERISA Event" means (a) any "reportable event", as defined in Section
4043 of ERISA or the regulations issued thereunder with respect to a Plan
(other than an event for which the 30-day notice period is waived); (b) the
existence with respect to any Plan of an "accumulated funding deficiency" (as
defined in Section 412 of the Code or Section 302 of ERISA), whether or not
waived; (c) the filing pursuant to Section 412(d) of the Code or Section
303(d) of ERISA of an application for a waiver of the minimum funding standard
with respect to any Plan; (d) the incurrence by the Borrower or any of its
ERISA Affiliates of any liability under Title IV of ERISA with respect to the
termination of any Plan; (e) the receipt by the Borrower or any ERISA
Affiliate from the PBGC or a plan administrator of any notice relating to an
intention to terminate any Plan or Plans or to appoint a trustee to administer
any Plan; (f) the incurrence by the Borrower or any of its ERISA Affiliates of
any liability with respect to the withdrawal or partial withdrawal from any
Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA
Affiliate of any notice, or the receipt by any Multiemployer Plan from the
Borrower or any ERISA Affiliate of any notice, concerning the imposition of
Withdrawal Liability or a determination that a Multiemployer Plan is, or is
expected to be, insolvent or in reorganization, within the meaning of Title IV
of ERISA.
"Establishment Fee" has the meaning set forth in Section 2.7(b).
"Euro-Dollar Reserve Percentage" has the meaning set forth in Section
2.6(a).
"Event of Default" has the meaning set forth in Section 6.1.
"GAAP" means generally accepted accounting principles in the United
States of America.
"Governmental Authority" means the government of any nation or any
political subdivision thereof, whether state or local, and any agency,
authority, instrumentality, regulatory body, court, central bank or other
entity exercising executive, legislative, judicial, taxing, regulatory or
administrative powers or functions of or pertaining to government.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of)
such Debt (whether arising by virtue of partnership arrangements, by agreement
to keep-well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement conditions or otherwise) or
(ii) entered into for the purpose of assuring in any other manner the holder
of such Debt of the payment thereof or to protect such holder against loss in
respect thereof (in whole or in part), provided that the term Guarantee shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
3
<PAGE>
"Interest Period" means with respect to each Loan, the period
commencing on the date of Borrowing specified in the applicable Notice of
Borrowing and ending one, two or three months thereafter, as the Borrower may
elect in the applicable notice or for such other period as may be agreed
between the Borrower and the Lender; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Business Day shall, subject to clause (c) below, be
extended to the next succeeding Business Day unless such Business Day
falls in another calendar month, in which case such Interest Period
shall end on the next preceding Business Day;
(b) any Interest Period which begins on the last Business
Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of
such Interest Period) shall, subject to clause (c) below, end on the
last Business Day of a calendar month; and
(c) any Interest Period which would otherwise end after the
Maturity Date shall end on the Maturity Date.
"Lending Office" means, as to the Lender, its office located at its
address set forth herein or such other office as the Lender may hereafter
designate as its Lending Office by notice to the Borrower.
"Lien" means, with respect to any Asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such Asset. For the purposes of this Agreement, the
Borrower or any Controlled Person shall be deemed to own subject to a Lien any
Asset which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such Asset.
"Loan" means (i) each advance by the Lender of all or a portion of
its Commitment to the Borrower pursuant to the terms hereof or (ii) an overdue
amount which was a Loan immediately before it became overdue.
"London Banking Day" means any day on which commercial banks are open
for business (including dealings in foreign exchange and foreign currency
deposits) in London.
"London Interbank Offered Rate" has the meaning set forth in Section
2.6(a).
"Material Adverse Effect" means, with respect to any Person, a
material adverse effect on (a) the ability of such Person to perform any of
its obligations hereunder, or (b) the business, assets, operations or
condition, financial or otherwise, of such Person and its Controlled Persons
taken as a whole; unless otherwise specified, "Material Adverse Effect" means
a Material Adverse Effect with respect to the Borrower.
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"Material Debt" means Debt (other than Indebtedness hereunder and
other than Non-Recourse Indebtedness) of the Borrower and/or one or more of
its Controlled Persons, arising in one or more related or unrelated
transactions, in an aggregate principal or face amount exceeding $10,000,000.
"Material Controlled Person" means any Controlled Person which meets
any of the following conditions: (i) the Parent's or its other Controlled
Persons' investments in and advances to such Controlled Person exceed 10% of
the total assets of the Parent and its Controlled Persons consolidated as of
the end of the most recently completed fiscal year of the Parent, or (ii) the
Parent's and its other Controlled Persons' proportionate share of the total
assets (after intercompany eliminations) of the Controlled Person exceeds 10%
of the total assets of the Parent and its Controlled Persons consolidated as
of the end of the most recently completed fiscal year of the Parent or (iii)
the Parent's and its other Controlled Persons' equity interest in the income
from continued operations before income taxes, extraordinary items and any
cumulative effect for a change in accounting principles of the Controlled
Person exceeds 10% of such income of the Parent and its Controlled Persons
consolidated for the most recently completed fiscal year of the Parent; unless
otherwise specified, "Material Controlled Person" means a Material Controlled
Person of the Borrower.
"Maturity Date" means the date which is 3 years from the Effective
Date, or, if such day is not a Business Day, the next preceding Business Day.
"Non-Recourse Indebtedness" means, in respect of a debtor, any Debt
incurred to finance the ownership, acquisition, construction, creation,
development and/or operation of an Asset (the "Relevant Asset") in respect of
which the Person or Persons to whom such Debt is or may be owed by the debtor
have no recourse whatsoever for the repayment of or payment of any sum
relating to such Debt other than:
(a) recourse to such debtor for amounts limited to the
income, cash flow or other Assets deriving solely from the Relevant
Asset; and/or
(b) recourse to such debtor for the purpose only of enabling
amounts to be claimed in respect of such Debt in an enforcement of
any encumbrances given by such debtor over the Relevant Asset or the
income, cash flow or other Assets deriving solely therefrom to secure
such Debt or any recourse referred to in (c) below, provided that (i)
the extent of such recourse to such debtor is limited solely to the
amount of any recoveries made on any such enforcement; and (ii)
(other than in circumstances where the only Assets of the debtor (a
"Relevant Debtor") is the Relevant Asset and/or the income, cash flow
or other Assets deriving solely therefrom) such Person or Persons are
not entitled, by virtue of any right or claim arising out of or in
connection with such Debt, to commence proceedings for the winding up
or dissolution of the debtor or to appoint or procure the appointment
of any receiver, trustee or similar Person or officer in respect of
the debtor or any of its Assets (save for the Assets the subject of
such encumbrance); and/or
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(c) recourse to such debtor generally where the debtor is a
Relevant Debtor; and/or
(d) recourse to another Person (a "Third Party Security
Provider") (whether or not a member of the Dey Group) who has given
security to the Person or Persons to whom such Debt is or may be owed
by such debtor to assure the payment or repayment of that Debt and
the Assets secured by that security consist solely of (i) shares or
other equity securities issued by the Relevant Debtor and/or (ii)
Debt owed by the debtor to that Third Party Security Provider in
connection with the provision of loans, Guarantees or other financial
accommodation by that Third Party Security Provider, to, or for the
benefit of, the debtor, and the recourse to the Third Party Security
Provider does not exceed that which would be permitted under
paragraphs (a) and (b) above were the debtor referred to in those
paragraphs the Third Party Security Provider.
"Notes" means each promissory note of the Borrower, substantially in
the form of Exhibit B hereto, evidencing the obligation of the Borrower to
repay the Loan.
"Notice of Borrowing" is defined in Section 2.2.
"Parent" means, with respect to any specified Person, any Controlling
Person with respect to such specified Person.
"Participant" has the meaning set forth in Section 8.8(b).
"Person" means an individual, a corporation, a limited liability
company, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
"Revolving Credit Period" means the period from and including the
Closing Date to but not including the Maturity Date.
"Subordinated Debt" means the aggregate of all Debt of the Borrower
to any Person which is subordinated to other Debt.
"Swap Contract" means any agreement or arrangement designed to
provide protection against fluctuations in interest or currency exchange rates
or commodity prices.
"Taxes" and "Other Taxes" have the meanings set forth in Section 7.3;
unless otherwise specified, "Taxes" and "Other Taxes" mean Taxes and Other
Taxes of the Borrower.
"United States" means the United States of America, including its
states and the District of Columbia, and its territories and possessions.
"Utilization Margin" means one percent (1%) per annum.
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SECTION 1.2 Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial
statements required to be delivered hereunder shall be prepared in accordance
with applicable generally accepted accounting principles as in effect from
time to time, applied on a consistent basis (except for changes concurred in
by the Borrower's independent public accountants); provided that, if the
Borrower notifies the Lender that the Borrower wishes to amend any covenant in
Article 5 to eliminate the effect of any change in generally accepted
accounting principles on the operation of such covenant (or if the Lender
notifies the Borrower that it wishes to amend Article 5 for such purpose),
then the Borrower's compliance with such covenant shall be determined on the
basis of generally accepted accounting principles in effect immediately before
the relevant change in generally accepted accounting principles became
effective, until either such notice is withdrawn or such covenant is amended
in a manner satisfactory to the Borrower and the Lender.
ARTICLE 2
THE FACILITY
SECTION 2.1 Commitment to Lend; Facility Purpose. (a) During the
Revolving Credit Period, the Lender agrees, on the terms and conditions set
forth in this Agreement, to make Loans to the Borrower, in one or more
Borrowings, pursuant to this Section from time to time in amounts such that
the aggregate principal amount of the Loans at any one time outstanding shall
not exceed the amount of the Commitment. Each Borrowing under this Section
shall be in an aggregate principal amount of $5,000,000 or any larger multiple
of $1,000,000 (except that any such Borrowing may be in the aggregate amount
of the unused Commitment). Within the foregoing limits, the Borrower may
borrow under this Section, prepay Loans to the extent permitted by Section
2.10 and reborrow Loans at any time during the Revolving Credit Period.
(b) The proceeds of the Loans shall be applied by the Borrower for
the development and expansion of the business of the Dey Group, to meet current
obligations and for the Borrower's general working capital purposes.
SECTION 2.2 Notice of Borrowing. For each Borrowing hereunder, the
Borrower shall give the Lender a Notice of Borrowing substantially in the form
of Exhibit A hereto and setting forth the information specified therein not
later than 11:00 A.M. (Darmstadt, Germany time) on the third Business Day
before each such Borrowing.
SECTION 2.3 Funding of Loans. (a) Upon receipt of a Notice of
Borrowing, such Notice of Borrowing shall not thereafter be revocable by the
Borrower.
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(b) Not later than 10:00 A.M. (New York time) on the date of each
Borrowing, the Lender shall make available the Borrowing, in Federal or other
funds immediately available in New York, N.Y. in accordance with the
instructions set forth in the Notice of Borrowing for such Borrowing.
SECTION 2.4 Notes. The Lender may request that Loans made by it be
evidenced by a Note, which shall be substantially in the form of Exhibit B. In
such event, the Borrower shall prepare, execute and deliver to the Lender a
Note payable to the order of the Lender (or, if requested by the Lender, to
the Lender and its registered assigns). Thereafter, the Loans evidenced by
such Note and interest thereon shall at all times (including after assignment
pursuant to Section 8.8) be represented by one or more Notes in such form
payable to the order of the payee named therein (or, if such Note is a
registered note, to such payee and its registered assigns).
SECTION 2.5 Maturity of Loans. Each Loan shall mature, and the
principal amount thereof shall be due and payable, on the Maturity Date.
SECTION 2.6 Interest on the Loans. (a) Each Loan shall bear interest
on the outstanding principal amount thereof, for each day during each Interest
Period applicable thereto, at a rate per annum equal to the sum of the
Utilization Margin plus the Adjusted London Interbank Offered Rate applicable
to such Interest Period. Such interest shall be payable for each Interest
Period on the last day thereof.
The "Adjusted London Interbank Offered Rate" applicable to any
Interest Period means a rate per annum equal to the quotient obtained (rounded
upward, if necessary, to the nearest 1/100th of 1%) by dividing (i) the
applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar
Reserve Percentage.
The "London Interbank Offered Rate" applicable to any Interest Period
means:
(i) the arithmetic mean (rounded upwards, if necessary, to
the nearest 1/100th of 1%) of the offered quotations (expressed as a
rate per annum) for Dollar deposits for the relevant Interest Period
as at 11:00 A.M., London time, on the day two London Banking Days
prior to the first day of such Interest Period as set forth on the
Reuters information display page entitled "LIBO" (or such other page
as may replace the LIBO page on that system for the purpose of
displaying London interbank offered rates) (the "Reuters Screen")
available to subscribers of the Reuters electronic display terminal,
provided that two or more such offered quotations are available on
the Reuters Screen; or
(ii) if fewer than two such offered quotations are available
on the Reuters Screen, or if the Reuters Screen is unavailable, the
arithmetic mean (rounded upwards, if necessary, to the nearest
1/100th of 1%) of the respective rates notified to the Lender by at
least three money center banks in the London interbank market as the
rate at which
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it is offered Dollar deposits and in an amount equal or comparable to
the Loan and for the Interest Period at or about 11:00 A.M., London
time, on the day two London Banking Days prior to the first day of
such Interest Period.
The "Euro-Dollar Reserve Percentage" means for any day that
percentage (expressed as a decimal) which is in effect on such day, as
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for determining the maximum reserve requirement for a member bank
of the Federal Reserve System in New York City with deposits exceeding one
billion dollars in respect of "Eurocurrency liabilities" (or in respect of any
other category of liabilities which includes deposits by reference to which
the interest rate on Loans is determined or any category of extensions of
credit or other assets which includes loans by a non-United States office of
the Lender to United States residents). The Adjusted London Interbank Offered
Rate shall be adjusted automatically on and as of the effective date of any
change in the Euro-Dollar Reserve Percentage.
(b) Any overdue principal of or interest or any other amount
on any Loans or any other amount payable by the Borrower under this Agreement
which is not paid when due shall bear interest, payable on demand, for each
day until paid at a rate per annum equal to the higher of (i) the sum of 2%
plus the Utilization Margin for such day plus the quotient obtained (rounded
upward, if necessary, to the nearest 1/100th of 1%) by dividing (x) the
arithmetic mean (rounded upwards, if necessary, to the nearest 1/100th of 1%)
of the offered quotations (expressed as a rate per annum) at which one day
(or, if such amount remains unpaid for more than three Business Days, then for
such other period of time not longer than three months as the Lender may
select) deposits in Dollars are quoted, as set forth as at 11:00 A.M. on the
date such rate is to be determined by the Lender as set forth on the Reuters
Screen, provided that two or more quotations are available on the Reuters
Screen, or if fewer than two such offered quotations are available on the
Reuters Screen, or if the Reuters Screen is unavailable, the arithmetic mean
(rounded upwards, if necessary, to the nearest 1/100th of 1%) of the
respective rates notified to the Lender by at least three money center banks
in the London interbank market as the rate at which it is offered dollar
deposits and in an amount equal or comparable to such Loans at or about 11:00
A.M., London time, on the day such rate is determined by the Lender by (y)
1.00 minus the Euro-Dollar Reserve Percentage and (ii) the sum of 2% plus the
Utilization Margin plus the Adjusted London Interbank Offered Rate applicable
to such Loans at the date such payment was due. Interest accruing under this
Section 2.6(b) shall be computed on the basis of a year of 360 days and actual
days elapsed and shall be payable from time to time upon demand of the Lender
or the Lender entitled thereto.
(c) The Lender shall determine each interest rate applicable
to the Loans hereunder. The interest rate applicable in respect of an Interest
Period shall be determined on or about 11:00 A.M. (London time) two London
Banking Days prior to the first day of such Interest Period; provided,
however, that, with respect to any determination of interest due on any
overdue amount for which payment is past due for three Business Days or less,
as provided in section 2.6(b) the interest rate shall be determined on each
day that such amount remains past due.
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SECTION 2.7 Fees. (a) The Borrower agrees to pay to the Lender a
commitment fee (the "Commitment Fee"), which shall accrue at the rate of eight
one-hundredths of one percent (0.08%) per annum on the daily amount of the
unused Commitment of the Lender during the period from and including the
Effective Date, to but excluding the date on which such Commitment terminates.
Accrued Commitment Fees shall be payable in arrears on the last day of March,
June, September and December of each year and on the date on which the
Commitments terminate, commencing on the first such date to occur after the
Effective Date. The Commitment Fee shall be computed on the basis of a year of
360 days and shall be payable for the actual number of days elapsed (including
the first day but excluding the last day).
(b) The Borrower agrees to pay to the Lender an
establishment fee ("Establishment Fee") of $100,000 on the Effective Date.
(c) All fees payable hereunder shall be paid on the dates
due, in immediately available funds, to the Lender. Fees paid shall not be
refundable under any circumstances.
SECTION 2.8 Optional Termination or Reduction of Commitment. During
the Revolving Credit Period, the Borrower may, upon at least thirty days'
notice to the Lender, (i) terminate the Commitment at any time, if no Loans
are outstanding at such time or (ii) ratably reduce from time to time, by an
aggregate amount of $5,000,000 or a larger multiple of $1,000,000, the
aggregate amount of the Commitment in excess of the aggregate outstanding
principal amount of the Loans.
SECTION 2.9 Mandatory Termination of Commitment. The Commitment shall
terminate on the Maturity Date and any Loans then outstanding (together with
accrued interest thereon) shall be due and payable on such date.
SECTION 2.10 Optional Prepayments. (a) The Borrower may upon at least
thirty days' notice to the Lender, prepay any Loans on the last day of any
Interest Period applicable thereto, in whole at any time, or from time to time
in part in amounts aggregating $5,000,000 or any larger multiple of
$1,000,000, by paying the principal amount to be prepaid together with accrued
interest thereon to the date of prepayment.
(b) Upon receipt of a notice of prepayment pursuant to this
Section such notice shall not thereafter be revocable by the Borrower and the
amount of principal to be prepaid as specified in such notice shall become due
and payable on the date specified for such prepayment.
SECTION 2.11 General Provisions as to Payments. (a) The Borrower
shall make each payment of principal of, and interest on, the Loans and of
fees hereunder, not later than 12:00 Noon (New York time) on the date when
due, in Federal or other funds immediately available in New York, N.Y., to the
account of the Lender most recently designated by it for such purpose by
notice to the Borrower. Whenever any payment of principal of, or interest on,
the Loans or of fees or other amounts shall be due on a day which is not a
Business Day, the date for payment thereof shall be extended to the next
succeeding Business Day unless such
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Business Day falls in another calendar month, in which case the date for
payment thereof shall be the next preceding Business Day. If the date for any
payment of principal is extended, by operation of law or otherwise, interest
thereon shall be payable for such extended time.
(b) The Borrower shall make all payments of principal,
interest, fees and any other amount due to the Lender under this Agreement in
Dollars in immediately available funds on the date such amounts are due.
(c) The tender or payment of any amount payable under this
Agreement (whether or not by recovery under a judgment) in any currency other
than Dollars shall not novate, discharge or satisfy the obligation of the
Borrower to pay in Dollars all amounts payable under this Agreement except to
the extent the Lender actually receives Dollars in its account in Darmstadt,
Germany.
(d) If a currency other than Dollars is tendered or paid (or
recovered under any judgment) and the amount the Lender receives in Darmstadt,
Germany, acting in a commercially reasonable manner in purchasing Dollars with
the amount of the other currency actually received at a rate of exchange that
includes any premiums and costs of exchange payable in connection with such
purchase, falls short of the full amount of Dollars owed to the Lender, then
the Borrower shall continue to owe the Lender the amount of shortfall
(regardless of any judgment for any other amounts due under this Agreement).
To the extent permitted by applicable law, this indemnity constitutes a
separate and independent obligation from the other obligations in this
Agreement, will be enforceable as a separate and independent cause of action,
will apply notwithstanding any indulgence granted by the Lender and will not
be affected by judgment being obtained or claim or proof being made for any
other sums payable in respect of this Agreement.
SECTION 2.12 Funding Losses. If the Borrower makes any payment of
principal with respect to any Loan on any day other than the last day of an
Interest Period applicable thereto, or if the Borrower fails to borrow, prepay
or continue any Loans after notice has been given to the Lender in accordance
with Section 2.3(a) or 2.10(b), the Borrower shall reimburse the Lender within
15 days after demand for any resulting loss or expense incurred by it,
including (without limitation) any loss incurred in obtaining, liquidating or
employing deposits from third parties but excluding loss of margin for the
period after any such payment or failure to borrow, prepay or continue,
provided that the Lender shall have delivered to the Borrower a certificate as
to the amount of such loss or expense, setting forth the calculation thereof
in reasonable detail, which certificate shall be conclusive in the absence of
manifest error.
SECTION 2.13 Computation of Interest. Interest hereunder shall be
computed on the basis of a year of 360 days and paid for the actual number of
days elapsed (including the first day but excluding the last day).
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ARTICLE 3
CONDITIONS
SECTION 3.1 Closing. The closing hereunder shall occur on or after
the Effective Date and upon receipt by the Lender of the following documents,
each dated the Closing Date unless otherwise indicated:
(a) a duly executed Note for the account of the Lender dated
on or before the Closing Date complying with the provisions of
Section 2.4;
(b) an opinion of Coudert Brothers, New York counsel for the
Borrower, substantially in the form of Exhibit C hereto;
(c) a certificate of the Secretary or Assistant Secretary of
the Borrower certifying (i) that attached thereto is a true and
complete copy of the certificate of incorporation and by-laws of the
Borrower, as in effect on the Closing Date and at all times since a
date prior to the date of the resolutions described in clause (ii)
below, (ii) that attached thereto is a true and complete copy of an
extract from the minutes of the Board of Directors of the Borrower
containing resolutions duly adopted by the Board of Directors of such
company authorizing the execution, delivery and performance of this
Agreement and the Borrowings hereunder, and any related documents,
and that such resolutions have not been modified, rescinded or
amended and are in full force and effect, (iii) where applicable,
that attached thereto is a true and complete copy of such other
authorizations necessary to enable the Borrower to execute, deliver
and perform its obligations under this Agreement and the Borrowings
hereunder, (iv) that attached thereto is a long-form certificate of
good standing with respect to the Borrower issued by the Secretary of
State of Delaware and dated not more than three Business Days prior
to the Closing Date and (v) as to the incumbency and specimen
signature of each officer or attorney executing this Agreement, the
Notes and the other documents delivered in connection herewith;
(d) evidence satisfactory to the Lender of the payment by
the Borrower of all fees payable to the Lender hereunder on or before
the Closing Date;
(e) a counterpart of this Agreement executed on behalf of
each party hereto or written evidence satisfactory to the Lender that
such party has executed a counterpart of this Agreement; and
(f) such other documents or information reasonably required
by the Lender and specified to the Borrower with reasonable notice
prior to the Closing Date.
The Lender shall promptly notify the Borrower of the Closing Date, and such
notice shall be conclusive and binding on all parties hereto.
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SECTION 3.2 Borrowings. The obligation of the Lender to make a Loan
on the occasion of any Borrowing is subject to the satisfaction of the
following conditions:
(a) receipt by the Lender of a Notice of Borrowing as
required by Section 2.2;
(b) the fact that, immediately after such Borrowing, the
aggregate outstanding principal amount of the Loans will not exceed
the aggregate amount of the Commitment;
(c) the fact that, immediately before and after such
Borrowing, no Default shall have occurred and be continuing; and
(d) the fact that the representations and warranties of the
Borrower contained in this Agreement shall be true on and as of the
date of such Borrowing.
Each Borrowing hereunder shall be deemed to be a representation and
warranty by the Borrower on the date of such Borrowing as to (i) the facts
specified in clause (b) of this Section, (ii) the facts specified in clause
(c) of this Section, in respect of itself, and (iii) the facts specified in
clause (d) of this Section.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants with respect to itself to and
for the Lender that:
SECTION 4.1 Corporate Existence and Power. The Borrower is a
corporation duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, and has all powers and all
material governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted.
SECTION 4.2 Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by the Borrower of this
Agreement, the Borrowings and the Notes are within the corporate powers of the
Borrower, have been duly authorized by all necessary corporate action, require
no action by or in respect of, or filing with, any governmental body, agency
or official of competent jurisdiction and do not contravene, or constitute a
default under, any provision of applicable law or regulation or of the
certificate of incorporation or by-laws of the Borrower, or of any agreement,
judgment, injunction, order, decree or (to an extent or in a manner which has
had or would be likely to have a Material Adverse Effect on the Borrower)
other instrument binding upon the Borrower or result in the creation or
imposition of any Lien on any of its assets.
SECTION 4.3 Binding Effect. This Agreement constitutes a valid and
binding agreement of the Borrower and each Note, when executed and delivered
in accordance with this
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Agreement, will constitute a valid and binding obligation of the Borrower, in
each case enforceable in accordance with its terms, subject in each case to
limitations arising by reason of the application of equitable principles and
laws regarding bankruptcy, insolvency, moratorium, receivership and the
enforcement of creditors' rights generally.
SECTION 4.4 Litigation. There is no action, suit or proceeding
pending or, to the knowledge of the Borrower, threatened before any court or
arbitrator or any governmental body, agency or official against the Borrower
or any of its Controlled Persons which, if adversely determined, would be
likely to have a Material Adverse Effect on the Borrower.
SECTION 4.5 Regulatory Restrictions on Borrowing. The Borrower is not
an "investment company" within the meaning of the Investment Company Act of
1940, as amended, or a "holding company" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
SECTION 4.6 Financial Condition; No Material Adverse Change.
(a) The Borrower has heretofore furnished to the Lender its balance
sheet and statements of income, stockholders equity and cash flows as of and
for the fiscal year ended December 31, 1997 , reported on by KPMG Peat Marwick
LLP, independent public accountants (the "Audited Financial Statements"). The
Audited Financial Statements present fairly, in all material respects, the
financial position and results of operations and cash flows of the Borrower
and its consolidated Controlled Persons as of such dates and for such periods
in accordance with GAAP.
(b) Since the date of the Audited Financial Statements, there has
been no material adverse change in the business, assets, operations or
condition, financial or otherwise, of the Borrower and its Controlled Persons,
taken as a whole.
SECTION 4.7 No Default. No Default has occurred and is continuing or
would result from the execution of this Agreement, the Notes or the
performance of the transactions contemplated hereby and thereby.
SECTION 4.8 Compliance with Laws and Agreements. Each of the Borrower
and its Controlled Persons is in compliance with all laws, regulations and
orders of any Governmental Authority applicable to it or its property and all
indentures, agreements and other instruments binding upon it or its property,
except where the failure to do so, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect.
SECTION 4.9 Taxes. Each of the Borrower and its Controlled Persons
has timely filed or caused to be filed all tax returns and reports required to
have been filed and has paid or caused to be paid all Taxes required to have
been paid by it, except (a) taxes that are being contested in good faith by
appropriate proceedings and for which the Borrower or such
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Controlled Person, as applicable, has set aside on its books adequate reserves
or (b) to the extent that the failure to do so could not reasonably be
expected to result in a Material Adverse Effect.
SECTION 4.10 ERISA. No ERISA Event has occurred or is reasonably
expected to occur that, when taken together with all other such ERISA Events
for which liability is reasonably expected to occur, could reasonably be
expected to result in a Material Adverse Effect.
SECTION 4.11 Full Disclosure. All written information heretofore
furnished by the Borrower to the Lender for purposes of or in connection with
this Agreement or any transaction contemplated hereby does not at the time
given, and all such information hereafter furnished by the Borrower to the
Lender will not at the time given, contain any untrue statement of material
fact or omit to state any material fact necessary in order to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading in all material respects.
ARTICLE 5
COVENANTS
The Borrower agrees for itself that, so long as the Lender has any
Commitment hereunder or any amount payable hereunder or under any Note remains
unpaid:
SECTION 5.1 Information. The Borrower will deliver to the Lender:
(a) as soon as available after the end of each of its fiscal
years (beginning with the fiscal year ending December 31, 1998),
audited consolidated balance sheets or accounts, respectively, of it
and its Consolidated Controlled Persons as of the end of such fiscal
year and its related consolidated statement of earnings and cash
flows for such fiscal year;
(b) as soon as available after the end of each of the first
six months of its fiscal years (beginning with the fiscal year ending
December 31, 1998), unaudited consolidated financial statements of it
and its Consolidated Controlled Persons for such six month period and
for the portion of its fiscal year ending at the end of such six
month period; and
(c) simultaneously with the delivery of each set of
financial statements referred to in clauses (a) and (b) above, a
certificate of any of the chief financial officer, the chief
accounting officer or the treasurer of the Borrower (i) stating that
a review of the activities of the Borrower and its Controlled Persons
during the period covered by such financial statements has been made
under his supervision to determine whether the Borrower has fulfilled
all of its obligations under this Agreement, and (ii) stating, to the
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best of his knowledge, whether there exists on the date of such
certificate any Default and, if any Default then exists, setting
forth the details thereof and the action which the Borrower is taking
or proposes to take with respect thereto.
SECTION 5.2 GAAP. The Borrower will ensure that all financial
statements to be delivered by it in accordance with Section 5.1 of this
Agreement are prepared in conformity with, and include such financial
information as are required by, GAAP.
SECTION 5.3 Compliance with Laws. The Borrower will comply, and cause
each of its Controlled Persons to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, and requirements of
governmental authorities, except where the necessity of compliance therewith
is contested in good faith by appropriate proceedings, or where non-compliance
does not have a Material Adverse Effect.
SECTION 5.4 Books and Records. The Borrower will keep, and will cause
each of its Controlled Persons to keep, proper books of record and account in
which full, true and correct entries shall be made of all material dealings
and transactions in relation to its business and activities.
SECTION 5.5 Negative Pledge. The Borrower will not, and the Borrower
will ensure that each other member of the Dey Group will not, create or have
outstanding any Lien on or over their respective Assets, except for:
(a) a Lien over (i) an Asset of a Person which becomes a
member of the Dey Group after the date of this Agreement, being a
Lien which is in existence at the time the Person becomes a member of
the Dey Group (and which was not created in contemplation of that
Person becoming a member of the Dey Group), or (ii) an Asset acquired
by a member of the Dey Group after the date of this Agreement, being
a Lien which is in existence at the time the Asset is acquired (and
which was not created in contemplation of the Asset being acquired);
(b) a Lien granted by a member of the Dey Group in
replacement of an existing Lien granted by a member of the Dey Group
so long as the existing Lien was granted in compliance with this
Agreement and so long as the replacement Lien is limited to
substantially the same assets as the existing Lien that it is
replacing;
(c) a Lien over an Asset of a member of the Dey Group which
(i) is created by operation of law and which arises in the ordinary
course of business where there is no default with respect to the
obligations secured by the Lien, including without limitation (A) a
Lien in favor of any governmental agency of competent jurisdiction
for unpaid Taxes or Other Taxes; (B) a possessory lien for the unpaid
balance of moneys owing in the ordinary course of business for work,
repairs, warehousing, storage, delivery or other services; (ii)
arises in respect of a judgment where the judgment is being, or will
within a reasonable time after the judgment be, appealed or otherwise
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contested in good faith or paid in full; (iii) consists of easement,
right of way, encroachment, reservation, restriction or condition on
any real property interest where such a Lien does not materially
interfere with or impair the operation or use of the property
affected; or (iv) consists of minor defects or irregularities in the
title to any real property interest which does not materially
interfere with or impair the operation or use of such property;
(d) a Lien (i) which arises in respect of an Asset acquired
by a member of the Dey Group in the ordinary course of business in
favor of the seller by operation of law or by virtue of the retention
or reservation of title over, that Asset in favor of the seller until
payment of the purchase price for that Asset; or (ii) given over an
Asset acquired by a member of the Dey Group in the ordinary course of
business for a period not exceeding 180 days to secure the purchase
price of, or financial accommodation obtained for, the purchase of
that Asset;
(e) Liens (other than any Lien imposed by ERISA) consisting
of pledges or deposits required in the ordinary course of business in
connection with workers' compensation, unemployment insurance and
other social security legislation;
(f) Liens on the property of a member of the Dey Group
securing (i) the non-delinquent performance of bids, trade contracts
(other than for borrowed money), leases, statutory obligations, (ii)
contingent obligations on surety, and appeal bonds, and (iii) other
non-delinquent obligations of a like nature; in each case, incurred
in the ordinary course of business, provided all such Liens in the
aggregate would not (even if enforced) cause a Material Adverse
Effect;
(g) Liens arising solely by virtue of any statutory or
common law provision relating to banker's liens, rights of set-off or
similar rights and remedies as to deposit accounts or other funds
maintained with a creditor depository institution; provided that (i)
such deposit account is not a dedicated cash collateral account and
is not subject to restrictions against access by the Borrower in
excess of those set forth by regulations promulgated by the Board of
Governors of the Federal Reserve System, and (ii) such deposit
account is not intended by the Borrower or any Controlled Person to
provide collateral to the depository institution;
(h) Liens consisting of pledges of cash collateral or
government securities to secure obligations under Swap Contracts
entered into in the ordinary course of business as bona fide hedging
transactions, provided that (i) the counterparty to such Swap
Contract is under a similar requirement to deliver similar collateral
from time to time to the Borrower or the Controlled Person party
thereto, and (ii) the aggregate value of such collateral so pledged
by the Borrower and the Controlled Persons together in favor of any
counterparty does not at any time exceed $10,000,000;
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(i) a Lien over an Asset of a member of the Dey Group which
is subject to a sale and leaseback, hire purchase or other similar
transaction to secure the obligations of a member of the Dey Group
under that transaction;
(j) a Lien created over an Asset of a member of the Dey
Group which secured all or part of the acquisition cost or
development cost, or both, of that Asset;
(k) a Lien created over an Asset of a member of the Dey
Group to secure the obligations of a member of the Dey Group under a
securities lending arrangement or other similar arrangement where the
Lien is discharged within 90 days of its creation;
(l) a Lien created by one member of the Dey Group in favor
of another member of the Dey Group;
(m) any arrangement involving the deposit of documents of
title in relation to an Asset of a member of the Dey Group or any
other Lien created over an Asset of a member of the Dey Group which
secured the obligation of a member of the Dey Group under the sale or
deferred sale of that Asset, or any put or call option over the
Asset;
(n) any Lien over an Asset where the Debt secured thereby is
Non-Recourse Indebtedness incurred solely in relation to the Assets
that are the subject of the Lien;
(o) Liens arising under any provision in a Guarantee
requiring the guarantor to hold sums received from the primary
obligor in trust for the beneficiary of that Guarantee; and
(p) any other Lien created or outstanding with the prior
consent of the Lender.
SECTION 5.6 Ranking of Loans. The obligations of the Borrower
hereunder and under the Notes will rank pari passu in priority of payment with
all other unsecured Debt (other than Subordinated Debt) of the Borrower.
SECTION 5.7 Provision of Notice. If one of the following events shall
have occurred and be continuing:
(a) any Event of Default;
(b) any action, suit or proceeding is commenced against the
Borrower or any other member of the Dey Group before any court or
arbitrator or any governmental body, agency or official of competent
jurisdiction, which, if adversely determined, has or would be likely
to have a Material Adverse Effect on the Borrower;
(c) any of the representations or warranties made by the
Borrower in this Agreement shall prove to have been incorrect in any
material respect when made;
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(d) a change occurs in the business or condition (financial
or otherwise) of any member of the Dey Group has or is likely to have
a Material Adverse Effect on any member of the Dey Group; or
(e) a change occurs in the authorized signatories of the
Borrower in respect of this Agreement;
then, within 10 Business Days of the Borrower's obtaining knowledge of any
such event, if such event is then continuing, the Borrower shall deliver a
notice to the Lender setting forth the details thereof and the action which
the Borrower is taking or proposes to take with respect thereto.
SECTION 5.8 Existence of the Borrower. The Borrower shall not
consolidate or amalgamate with, or merge with or into, or transfer all or
substantially all its assets to, another Person unless, at the time of such
consolidation, amalgamation, merger or transfer and immediately thereafter:
(a) the resulting, surviving or transferee Person assumes all the
obligations of the Borrower under this Agreement by operation of law or
pursuant to an agreement reasonably satisfactory to the Lender; and
(b) no Default shall have occurred and be continuing.
SECTION 5.9 Further Assurances. The Borrower shall from time to time
do and perform such other and further acts and execute and deliver any and all
such other and further instruments as may be required by law or reasonably
requested by the Lender to establish, maintain and protect the rights and
remedies of the Lender hereunder and to carry out and effect the intent and
purposes of this Agreement.
ARTICLE 6
DEFAULT
SECTION 6.1 Events of Default. If one or more of the following events
("Events of Default") shall have occurred and be continuing:
(a) the Borrower shall fail to pay any principal of any
Loan, interest or fees payable hereunder within two Business Days of
the due date thereof, or shall fail to pay within two Business Days
following notice from the Lender of demand therefor any other amount
payable hereunder;
(b) the Borrower shall fail to observe or perform any
covenant contained in Section 5.5;
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(c) the Borrower shall fail to observe or perform any
covenant or agreement contained in this Agreement (other than those
covered by clause (a) or (b) above) for 14 days after notice thereof
has been given to the Borrower by the Lender;
(d) any representation, warranty or certification made by
the Borrower in this Agreement or in any certificate, financial
statement or other document delivered pursuant to this Agreement
shall prove to have been incorrect in any material respect when made
(or deemed made);
(e) the Borrower or any of its Controlled Persons shall fail
to make any payment (whether of principal or interest and regardless
of amount) in respect of any Material Debt, when and as the same
shall become due and payable (after allowance for all applicable
grace periods and except to the extent and only for so long as the
obligation to pay such Material Debt is being contested in good faith
by appropriate means by the obligor thereof); or any event or
condition occurs that results in any Material Debt becoming due, or
required to be prepaid, repurchased, redeemed or defeased, in each
case prematurely, prior to its scheduled maturity;
(f) the Borrower or any Material Controlled Person 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
other than for reorganization, or shall fail generally to pay its
debts as they become due, or shall take any action to authorize any
of the foregoing;
(g) other than in respect of any Non-Recourse Indebtedness,
an involuntary case or other proceeding shall be commenced against
the Borrower or any Material Controlled Person 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, administrator, 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
days; or an order for relief shall be entered against the Borrower or
any Material Controlled Person under the federal or other applicable
bankruptcy laws as now or hereafter in effect;
(h) other than in respect of any Non-Recourse Indebtedness,
an order of attachment, execution or other legal seizure is issued,
levied or enforced on or against the Assets of the Borrower or a
Material Controlled Person and is not discharged or stayed within 60
days; provided however, no Event of Default will occur under this
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clause (h), unless and until the aggregate amount of any judgment or
Debt (whether of one or more Persons) in respect of which one or more
of the events mentioned above in this clause (h) has occurred equals
or exceeds $5,000,000 or its equivalent (as reasonably determined by
the Lender);
(i) an event occurs which has a Material Adverse Effect and
is not remedied within 14 days after notice thereof has been given to
the Borrower by the Lender;
(j) if the Borrower or any Material Controlled Person (i)
suspends generally payment of its debts; (ii) ceases or threatens to
cease to carry on all or a material part of its business; or (iii) is
or states that it is, or is deemed by applicable law to be, unable to
pay its debts generally;
(k) the Borrower resolves to amend its constituent documents
which if given effect will have a Material Adverse Effect;
(l) the Borrower passes a resolution to reduce its share
capital which if given effect will have a Material Adverse Effect; or
(m) if all or any material provision of this Agreement
constituting an obligation of the Borrower (i) does not have legal
effect or ceases to have legal effect in accordance with its terms;
or (ii) is or becomes void, voidable, illegal or unenforceable other
than by reason of the application of equitable principles or laws
regarding bankruptcy, insolvency, moratorium, receivership and the
enforcement of creditors' rights generally;
then, and in every such event, the Lender may at its absolute discretion by
notice to the Borrower (i) terminate the Commitment and it shall thereupon
terminate, and (ii) declare the Loans (together with accrued interest thereon)
and all other amounts owing hereunder to be, which shall thereupon become,
immediately due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Borrower; provided
that in the case of any of the Events of Default specified in Section 6.1(f)
or 6.1(g) above with respect to the Borrower, without any notice to the
Borrower or any other act by the Lender, the Commitment shall thereupon
terminate and the Loans (together with accrued interest thereon) shall become
immediately due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Borrower.
SECTION 6.2 Notice of Default. The Lender shall give notice to the
Borrower under Section 6.1(c) or Section 6.1(i) promptly upon being requested
to do so by the Lender.
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ARTICLE 7
CHANGE IN CIRCUMSTANCES
SECTION 7.1 Illegality. If, on or after the date of this Agreement,
the adoption of any applicable law, rule or regulation, or any change in any
applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof,
or compliance by the Lender with any request or directive of any such
authority, central bank or comparable agency shall make it unlawful or
impossible for the Lender to make, maintain or fund its Loans, the Lender
shall forthwith give notice thereof to the Borrower, whereupon until the
Lender notifies the Borrower that the circumstances giving rise to such
suspension no longer exist, the obligation of the Lender to make Loans shall
be suspended. Before giving any notice to the Borrower pursuant to this
Section, the Lender shall designate a different Lending Office if such
designation will avoid the need for giving such notice and will not, in the
judgment of the Lender, be otherwise disadvantageous to the Lender.
SECTION 7.2 Increased Cost and Reduced Return. (a) If on or after the
date hereof, the adoption of any applicable law, rule or regulation, or any
change in any applicable law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Lender (or its Lending Office)
with any request or directive of any such authority, central bank or
comparable agency shall impose, modify or deem applicable any reserve, special
deposit, insurance assessment or similar requirement against assets of,
deposits with or for the account of, or credit extended by, the Lender (or its
Lending Office) or shall impose on the Lender (or its Lending Office) any
other condition affecting its Loans, its Note or its obligation to make Loans
and the result of any of the foregoing is to increase the cost to the Lender
(or its Lending Office) of making or maintaining any Loan, or to reduce the
amount of any sum received or receivable by the Lender (or its Lending Office)
under this Agreement or under its Note with respect thereto, by an amount
deemed by the Lender to be material, then, within 15 days after demand by the
Lender, the Borrower shall pay to the Lender such additional amount or amounts
as will compensate the Lender for such increased cost or reduction.
(b) If the Lender shall have determined that, after the date
hereof, the adoption of any applicable law, rule or regulation regarding
capital adequacy), or any change in any such law, rule or regulation, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation
or administration thereof, or any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing
the rate of return on capital of the Lender as a consequence of the Lender's
obligations hereunder to a level below that which the Lender could have
achieved but for such adoption, change, request or directive (taking into
consideration its policies with respect
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to capital adequacy) by an amount deemed by the Lender to be material, then
from time to time, within 15 days after demand by the Lender, the Borrower
shall pay to the Lender such additional amount or amounts as will compensate
the Lender for such reduction.
(c) The Lender will promptly notify the Borrower of any
event of which it has knowledge, occurring after the date hereof, which will
entitle the Lender to compensation pursuant to this Section and will designate
a different Lending Office if such designation will avoid the need for, or
reduce the amount of, such compensation and will not, in the judgment of the
Lender, be otherwise disadvantageous to the Lender. A certificate of the
Lender claiming compensation under this Section and setting forth in
reasonable detail the calculation of the additional amount or amounts to be
paid to it hereunder shall be conclusive in the absence of manifest error. In
determining such amount, the Lender may use any reasonable averaging and
attribution methods.
(d) Failure or delay on the part of the Lender to demand
compensation pursuant to this Section shall not constitute a waiver of the
Lender's right to demand such compensation; provided that the Borrower shall
not be required to compensate the Lender pursuant to this Section for any
increased costs or reductions incurred more than 90 days prior to the date
that the Lender notifies the Borrower of the event or circumstance giving rise
to such increased costs or reductions and of the Lender's intention to claim
compensation therefor; provided further that, if the event or circumstance
giving rise to such increased costs or reductions is retroactive, then the 90
day period referred to above shall be extended to include the period of
retroactive effect thereof.
SECTION 7.3 Taxes. (a) For the purposes of this Section 7.3, the
following terms have the following meanings:
"Taxes" means any and all present or future taxes, duties,
levies, imposts, deductions, charges or withholdings with respect to any
payment by the Borrower pursuant to this Agreement or under any Note, and all
liabilities with respect thereto, excluding in the case of the Lender, taxes
imposed on its income, and franchise or similar taxes imposed on it, by a
jurisdiction under the laws of which the Lender is organized or in which its
principal executive office is located or in which its Lending Office is
located.
"Other Taxes" means any present or future stamp or
documentary taxes and any other excise or property taxes, or similar charges
or levies, which arise from any payment made pursuant to this Agreement or
under any Note from the execution or delivery of, or otherwise with respect
to, this Agreement or any Note.
(b) Any and all payments by the Borrower to or for the
account of the Lender hereunder or under any Note shall be made without
deduction for any Taxes or Other Taxes; provided that, if the Borrower shall
be required by law to deduct any Taxes or Other Taxes from any such payments,
(i) the sum payable shall be increased as necessary so that after making all
required deductions (including deductions applicable to additional sums
payable under this
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Section) the Lender receives an amount equal to the sum it would have received
had no such deductions been made, (ii) the Borrower shall make such
deductions, (iii) the Borrower shall pay the full amount deducted to the
relevant taxation authority or other authority in accordance with applicable
law and (iv) the Borrower shall furnish to the Lender, at its address referred
to in Section 8.1, the original or a certified copy of a receipt evidencing
payment thereof.
(c) The Borrower agrees to indemnify the Lender for the full
amount of Taxes or Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed or asserted by any jurisdiction on amounts payable under
this Section) paid by the Lender and any liability (including penalties,
interest and expenses) arising therefrom or with respect thereto; provided
that the Lender shall not have the right to be indemnified hereunder for its
own gross negligence or willful misconduct as determined by a court of
competent jurisdiction without a right of further appeal. This indemnification
shall be paid within 15 days after the Lender makes demand therefor.
(d) The Lender, on or prior to the date of its execution and
delivery of this Agreement, and from time to time thereafter if requested in
writing by the Borrower (but only so long as the Lender remains lawfully able
to do so), shall provide the Borrower with Internal Revenue Service form 1001
or 4224, as appropriate, or any successor form prescribed by the Internal
Revenue Service, certifying that the Lender is entitled to benefits under an
income tax treaty to which the United States is a party which exempts the
Lender from United States withholding tax or reduces the rate of withholding
tax on payments of interest for the account of the Lender or certifying that
the income receivable pursuant to this Agreement is effectively connected with
the conduct of a trade or business in the United States.
(e) For any period with respect to which the Lender has
failed to provide the Borrower or the Lender with the appropriate form
pursuant to Section 7.3(d) (unless such failure is due to a change in treaty,
law or regulation occurring subsequent to the date on which such form
originally was required to be provided), the Lender shall not be entitled to
indemnification under Section 7.3(b) or (c) with respect to Taxes imposed by
the United States; provided that if the Lender, which is otherwise exempt from
or subject to a reduced rate of withholding tax, becomes subject to Taxes
because of its failure to deliver a form required hereunder, the Borrower
shall take such steps as the Lender shall reasonably request to assist the
Lender to recover such Taxes.
ARTICLE 8
MISCELLANEOUS
SECTION 8.1 Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including facsimile transmission
or similar writing) and shall be given to such party at its address or
facsimile number set forth on the signature pages hereof, or such other
address or facsimile number as such party may hereafter specify for the
purpose
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by notice to the other party. Each such notice, request or other communication
shall be effective (i) if given by facsimile transmission, when transmitted to
the facsimile number specified pursuant to this Section and confirmation of
receipt is received, (ii) if given by mail, 10 Business Days after such
communication is deposited with the postal service, certified or registered
mail, first class if international, postage prepaid, addressed as aforesaid or
(iii) if given by any other means, when delivered at the address specified
pursuant to this Section; provided that notices to the Lender under Article 2
or Article 7 shall not be effective until received.
SECTION 8.2 Exercise of Rights. The Lender may exercise a right,
power or remedy at its discretion and separately or concurrently with another
right, power or remedy. A single or partial exercise of a right, power or
remedy by the Lender does not prevent any further exercise of that or an
exercise of any other right, power or remedy. Failure by the Lender to
exercise or delay in exercising a right, power or remedy does not prevent its
exercise.
SECTION 8.3 Expenses. The Borrower shall pay (i) all reasonable
out-of-pocket expenses of the Lender, including reasonable fees and
disbursements of counsel for the Lender, in connection with the preparation
and documentation of this Agreement.
SECTION 8.4 Right of Setoff. If (i) an Event of Default or Default
shall have occurred and be continuing and the Lender shall have declared the
Loans immediately due and payable pursuant to Article 6 or (ii) an Event of
Default or a Default specified in Section 6.1(a) shall have occurred, the
Lender is hereby authorized at any time and from time to time, to the fullest
extent permitted by law, to set off and apply any indebtedness at any time
owing by the Lender to or for the credit or the account of the Borrower
against any and all of the obligations of the Borrower then due and payable
under this Agreement, whether by acceleration or otherwise, irrespective of
whether or not the Lender shall have made any demand under this Agreement. The
rights of the Lender under this Section are in addition to other rights and
remedies (including other rights of setoff) which the Lender may have.
SECTION 8.5 Amendments and Waivers. Any provision of this Agreement
or the Notes may be amended or waived if, but only if, such amendment or
waiver is in writing and is signed by the Borrower and the Lender.
SECTION 8.6 Severability. In the event any one or more of the
provisions contained in this Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby. The parties shall endeavor in good-faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid provisions
the economic effect of which comes as close as possible to that of the
invalid, illegal or unenforceable provisions.
SECTION 8.7 Time of the Essence. The parties hereto agree that time
shall be of the essence with respect to payment of amounts due hereunder.
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SECTION 8.8 Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that the Borrower may not
assign or otherwise transfer any of its rights under this Agreement without
the prior written consent of the Lender.
(b) The Lender may, without the consent of the Borrower,
sell participations to one or more banks or other financial institutions or
Affiliates of the Lender (a "Participant") in all or a portion of the Lender's
right and obligations under this Agreement (including all or a portion of its
Commitment and the Loans owing to it); provided that (i) the Lender's
obligations under this Agreement shall remain unchanged, (ii) the Lender shall
remain solely responsible to the other parties hereto for the performance of
such obligations and (iii) the Borrower shall continue to deal solely and
directly with the Lender in connection with the Lender's rights and
obligations under this Agreement. Any agreement or instrument pursuant to
which the Lender sells such a participation shall provide that the Lender
shall retain the sole right to enforce this Agreement and to approve any
amendment, modification or waiver of any provision of this Agreement; provided
that such agreement or instrument may provide that the Lender will not,
without the consent of the Participant, agree to any amendment, modification
or waiver described in the proviso to Section 8.5 that affects such
Participant.
(c) The Lender may at any time assign to one or more banks
or other financial institutions or Affiliates of the Lender (each an
"Assignee") all, or a proportionate part (equivalent to an initial Commitment
of not less than $10,000,000) of all, of its rights and obligations under this
Agreement and the Notes, and such Assignee shall assume such rights and
obligations, pursuant to an assignment and assumption agreement in form and
substance satisfactory to the Borrower, such Assignee and the Lender, with
(and subject to) the written consent of the Borrower, which shall not be
unreasonably withheld, and the Lender; provided that if an Assignee is an
Affiliate of the Lender or was the Lender immediately prior to such
assignment, no such consent shall be required. Upon execution and delivery of
such instrument and payment by such Assignee to the Lender of an amount equal
to the purchase price agreed between the Lender and such Assignee, such
Assignee shall be the Lender party to this Agreement and shall have all the
rights and obligations of the Lender with a Commitment as set forth in such
instrument of assumption, and the Lender shall be released from its
obligations hereunder to a corresponding extent, and no further consent or
action by any party shall be required. Upon the consummation of any assignment
pursuant to this subsection (c), the Lender and the Borrower shall make
appropriate arrangements so that, if required, a new Note is issued to the
Assignee. If the Assignee is not incorporated under the laws of the United
States of America or a state thereof, it shall deliver to the Borrower and the
Lender certification as to exemption from deduction or withholding of any
United States federal income taxes in accordance with Section 7.3.
SECTION 8.9 Governing Law; Submission to Jurisdiction. This Agreement
and each Note shall be governed by and construed in accordance with the laws
of the State of New York. The Borrower hereby submits to the nonexclusive
jurisdiction of the United States District Court for the Southern District of
New York and of any New York State court sitting
26
<PAGE>
in New York City for purposes of all legal proceedings arising out of or
relating to this Agreement or the transactions contemplated hereby. The
Borrower irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of any
such proceeding brought in such a court and any claim that any such proceeding
brought in such a court has been brought in an inconvenient forum.
SECTION 8.10 Counterparts; Integration; Effectiveness. This Agreement
may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were
upon the same instrument. This Agreement constitutes the entire agreement and
understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Agreement shall become effective upon receipt by the Lender of
counterparts hereof signed by each of the parties hereto (or, in the case of
any party as to which an executed counterpart shall not have been received,
receipt by the Lender in form satisfactory to it of telegraphic, telex,
facsimile or other written confirmation from such party of execution of a
counterpart hereof by such party).
SECTION 8.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE
LENDER HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 8.12 Confidentiality. The Lender agrees to maintain the
confidentiality of the Information (as defined below), except that Information
may be disclosed (a) to its and its Affiliates' directors, officers, employees
and agents who are engaged in evaluating, approving, structuring or
administering this Agreement, including accountants, legal counsel and other
advisors (it being understood that the Persons to whom such disclosure is made
will be informed of the confidential nature of such Information and instructed
to keep such Information confidential), (b) to the extent required by any
regulatory authority, (c) to the extent required by applicable laws or
regulations or by any subpoena or similar legal process, (d) to any other
party to this Agreement, (e) in connection with the exercise of any remedies
hereunder or any suit, action or proceeding relating to this Agreement or the
enforcement of rights hereunder, (f) subject to an agreement containing
provisions substantially the same as those of this Section, to any Assignee of
or Participant in, or any prospective Assignee of or Participant in, any of
its rights or obligations under this Agreement, (g) with the consent of the
Borrower or (h) to the extent such Information (i) becomes publicly available
other than as a result of a breach of this Section or (ii) becomes available
to the Lender from a source other than the Borrower, which source is not bound
by a confidentiality undertaking to the Borrower. For the purposes of this
Section, "Information" means all information received from or on behalf of the
Borrower relating to the Borrower or its business, other than any such
information that is available to the Lender on a nonconfidential basis, from a
source not bound by a confidentiality undertaking to the Borrower, prior to
disclosure by the Borrower; provided that, in the case of information received
from the Borrower after the date hereof, such information is clearly
identified at the time of delivery as confidential. Any Person required to
maintain the confidentiality of
27
<PAGE>
Information as provided in this Section shall be considered to have complied
with its obligation to do so if such Person has exercised the same degree of
care to maintain the confidentiality of such Information as such Person would
accord to its own confidential information.
SECTION 8.13 Certificates. A certificate by the Lender as to any
amount payable to it under this Agreement or the Notes, and any other
certificate, determination, notification or the like of the Lender provided
for in this Agreement, shall be prima facie evidence of the amount stated
therein at the date stated on the certificate in respect of such amount or if
such date is not stated therein, the date of such certificate. Any such
certificate as to any amount shall set out the basis of computation of that
amount in reasonable detail but shall not be required to disclose any
information reasonably considered to be confidential.
28
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and
year first above written.
DEY, INC.
By /s/ Charles A. Rice
------------------------------------
Name: Charles A. Rice
Title: President and CEO
Address: 2751 Napa Valley Corporate Drive
Napa, CA, 94558
United States of America
Facsimile
Transmission: 707-224-8916
Attention: Chief Financial Officer
MERCK KGaA
By /s/ Jurgen Schupp
------------------------------------
Name: Jurgen Schupp
Title: Vice President/Group Treasurer
By /s/ Wolfgang Welge
------------------------------------
Name: Wolfgang Welge
Title: Treasurer
Address: Frankfurter Str. 250
64271 Darmstadt
Germany
Facsimile
Transmission: 49-61-5172-6570
Attention: Group Treasurer
29
<PAGE>
EXHIBIT A
NOTICE OF BORROWING
[Letterhead of Dey, Inc.]
[Date]
Re: Facility Agreement dated ______, 1998
Ladies and Gentlemen:
Reference is made to the Facility Agreement dated ________, 1998 (the
"Facility Agreement") between Dey, Inc., a Delaware corporation (the
"Borrower") and Merck KGaA, a Kommanditgesellschaft auf Aktien organized under
the laws of Germany (the "Lender"). Capitalized terms not otherwise defined
herein shall have the respective meanings ascribed to them in the Facility
Agreement.
The Borrower hereby requests a Borrowing in accordance with Section
2.2 of the Facility Agreement to be advanced on ________ in the principal
amount of _______ Dollars ($_________ ) with the applicable Interest Period
being ________, subject to the provisions of the definition of "Interest
Period" in Section 1.1 of the Facility Agreement. You are requested to advance
such principal amount by [provide payment instructions including, if by wire
transfer, the location of the Borrower's account, ABA number, account name,
account number and reference number, as applicable].
The Borrower hereby confirms the accuracy and completeness of each of
its representations and warranties as set forth in the Facility Agreement and
restates such representations and warranties in their entirety as of the date
hereof.
The Borrower hereby represents and warrants that the proceeds of the
Loan to be made upon receipt of this Notice of Borrowing will be used for the
Borrower's general working capital purposes.
Yours truly,
DEY, INC.
By:
---------------------------------
Name:
Title:
<PAGE>
EXHIBIT B
PROMISSORY NOTE
$___,000,000 ______________, ____
New York, New York
FOR VALUE RECEIVED, DEY, INC., a Delaware corporation (the
"Borrower"), hereby promises to pay to Merck KGaA (the "Lender"), or to its
order, at [ADDRESS OF LENDER], the principal sum of __________ MILLION DOLLARS
($___,000,000) or such lesser amount as shall equal the aggregate unpaid
principal amount of the Loans made by the Lender to the Borrower under the
Facility Agreement (as defined below), in lawful money of the United States of
America and in immediately available funds, on the dates and in the principal
amounts provided in the Facility Agreement and to pay interest on the unpaid
principal amount of each such Loan, at such office, in like money and funds,
for the period commencing on the date of such Loan until such Loan shall be
paid in full, at the rates per annum and on the dates provided in the Facility
Agreement.
The Lender is hereby authorized by the Borrower to endorse on the
schedule attached to this Note (or any continuation thereof) the date such
Loan is made, the interest rate and the duration of each Interest Period for
such Loan made by the Lender to the Borrower under the Facility Agreement, and
the amount of each payment or prepayment of principal of such Loan received by
the Lender; provided that any failure by the Lender to make any such
endorsement shall not affect the obligations of the Borrower hereunder or
under the Facility Agreement in respect of such Loan.
This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Facility Agreement (as amended, modified, supplemented,
restated, refunded, refinanced or renewed from time to time and in effect, the
"Facility Agreement") dated as of __________________, 1998 between the
Borrower and the Lender. Capitalized terms used in this Note have the
respective meanings ascribed to them in the Facility Agreement.
<PAGE>
The Facility Agreement, among other things, contains provisions for
accelerating the maturity hereof upon the happening of certain stated events.
The Borrower may at its option prepay all or any part of the principal of this
Note before maturity upon the terms provided in the Facility Agreement.
DEY, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
2
<PAGE>
SCHEDULE TO PROMISSORY NOTE
<TABLE>
<CAPTION>
Duration of
Date Loan Interest Rate Interest Period Payments/Prepayments
- ---- ---- ------------- --------------- --------------------
<S> <C> <C> <C> <C>
(a) $ $
(b) $ $
(c) $ $
</TABLE>
3
<PAGE>
EXHIBIT C
FORM OF OPINION OF COUDERT BROTHERS,
NEW YORK COUNSEL TO THE BORROWER
August __, 1998
Facility Agreement dated as of _______, 1998
Dear Sirs:
We have acted as New York counsel to Dey, Inc., a Delaware corporation
(the "Borrower"), in connection with the loan facility being provided under
the Facility Agreement dated as of ______, 1998 (the "Facility Agreement")
between the Borrower and Merck KGaA, a Kommanditgesellschaft auf Aktien
organized under the laws of Germany (the "Lender"), providing for, among other
things, Loans to be advanced by the Lender to the Borrower in an aggregate
principal amount not exceeding $220,000,000. Our opinion has been requested
pursuant to Section 3.1(b) of the Facility Agreement. Except as otherwise
defined in this opinion, capitalized terms used in this opinion shall have the
meanings respectively ascribed to them in the Facility Agreement.
I. Documents in respect of which this opinion is given
In rendering this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of the following
documents governed by New York law:
(a) the Facility Agreement; and
(b) the Notes (collectively with the Facility Agreement
hereinafter referred to as the "Loan Documents");
and such other instruments and documents, and we have made such other
inquiries and investigations, as we have deemed necessary or appropriate for
rendering the opinion set forth herein. In rendering this opinion we have
also, with your permission, relied upon, among other things, a certificate of
the Borrower dated on or about the date hereof, substantially in the form of
Exhibit A hereto.
<PAGE>
II. General Assumptions
In rendering this opinion, we have assumed:
(a) the capacity, power and authority of each of the parties
to the Loan Documents (other than the Borrower) to enter
into, execute, deliver and perform their respective
obligations under each of the Loan Documents;
(b) that each party to the Loan Documents (other than the
Borrower) has taken all necessary action to authorize the
execution, delivery and performance of the Loan Documents
to which it is a party and that, with respect to each
party thereto other than the Borrower, the Loan Documents
create legal, valid and binding obligations of the parties
thereto;
(c) that each party to the Loan Documents (other than the
Borrower) is duly incorporated or organized and validly
existing under the laws of its place of incorporation or
organization;
(d) the authenticity of all Loan Documents and other documents
submitted to us as originals and the conformity with the
originals of all documents submitted to us as copies or
certified copies thereof;
(e) the genuineness of all signatures and seals on all of the
Loan Documents and other documents submitted to us, and
that the Loan Documents and other documents which have
been submitted to us have been duly executed by the
persons authorized; and
(f) that no resolution or power of attorney adopted or granted
in connection with the execution, delivery or performance
of any of the Loan Documents has been revoked, rescinded,
amended or modified in any manner.
Nothing has come to our attention that would lead us to conclude that
reliance on any of the foregoing assumptions is not reasonable.
In connection with any statement or qualification herein regarding our
knowledge or lack of knowledge of any matter referred to herein, our
investigation has been limited to (i) such inquiry as we have deemed necessary
or appropriate of certain officers and directors of the Borrower and its
representatives and of the attorneys within our firm who have devoted
substantive attention to the representation of the Borrower in connection with
this transaction or (ii) consideration or review as of a recent date of such
applicable laws and regulations and such records of, or filings with, one or
more governmental agencies or judicial forums as we have
2
<PAGE>
deemed necessary or appropriate, and we have not undertaken any further
investigation or inquiry except as expressly stated herein.
III. Opinion
Based upon the foregoing examinations and assumptions, and subject to
the other qualifications and limitations set forth herein, we are of the
opinion that:
(a) The Borrower is a corporation incorporated, validly
existing and in good standing under the laws of the state
of Delaware, and has all corporate powers to carry on its
business as it is presently conducted.
(b) The Borrower has all requisite corporate power to execute
and deliver, and to perform its obligations and to incur
liabilities under, the Loan Documents.
(c) The Borrower has taken corporate action required on its
part to authorize the execution, delivery and performance
of the Loan Documents. The Facility Agreement, when duly
executed and delivered by the Borrower, will constitute
the legal, valid, and binding obligation of the Borrower
and each Note, when executed and delivered in accordance
with the terms of the Facility Agreement, will constitute
a legal, valid and binding obligation of the Borrower.
(d) The execution and delivery by the Borrower of, the
performance and incurrence by the Borrower of its
obligations and liabilities under, and the consummation by
the Borrower of the other transactions contemplated by,
the Loan Documents do not and will not (a) violate any
provision of the certificate of incorporation or bylaws of
the Borrower, (b) violate any provision of the Delaware
General Corporation Law, (c) violate any law, rule or
regulation of the United States of America or the State of
New York applicable to the Borrower, or (d) to the best of
our knowledge, result in a breach of, constitute a default
under, require any consent under, or result in the
acceleration or required prepayment of any indebtedness
pursuant to the terms of, any agreement or instrument to
which the Borrower is a party or by which it is bound or
to which it is subject, or result in the creation or
imposition of any Lien upon any property of the Borrower
pursuant to the terms of any such agreement or instrument.
(e) The choice of New York law to govern the Loan Documents
would be recognized and upheld by courts of the State of
New York and Federal courts located in the State of New
York, and the submission by the
3
<PAGE>
Borrower to the non-exclusive jurisdiction of those courts
is valid and binding on the Borrower.
The opinion expressed herein is subject to the following qualifications
and limitations. We express no opinion as to the provisions of Sections
2.11(c) and Section 2.11(d) of the Facility Agreement.
We are attorneys admitted to the Bar of the State of New York. The
opinions set forth herein are limited to matters governed by the laws of the
State of New York, without regard to the principles of conflicts of law
thereunder, the Federal laws of the United States of America and the Delaware
General Corporation Law, and we express no opinion as to any other laws.
This opinion has been prepared solely for your use in connection with
the execution and delivery of the Loan Documents and the transactions
contemplated thereby and may not be otherwise used, published, quoted or
otherwise referred to by you without our prior written consent, except that
this opinion may be disclosed to any assignees or participants of the Lender
under the Facility Agreement and under the circumstances contemplated by the
Facility Agreement. This opinion may not be relied upon in any respect by you
for any purpose other than in connection with the Loan Documents and the
transactions contemplated thereby, or by any other persons for any purpose
whatsoever, without our prior written consent. The opinion expressed herein is
strictly limited to the law in effect as of the date hereof, is specific to
the Loan Documents and the transactions contemplated thereby and should not be
assumed to express general principles of law applicable to transactions of
this kind. We disclaim any undertaking to inform you of any changes in law
after the date hereof which might affect or modify the opinions expressed
herein.
Very truly yours,
4
<PAGE>
EXHIBIT 23.2
When the filing of the Restated Certificate of Incorporation and stock
split referred to in Note 11 of the Notes to the consolidated financial
statements have been consummated, we will be in a position to render the
following report and consent, assuming that no other events will have occurred
which would affect the consolidated financial statements and consolidated
financial statement schedule being reported on.
KPMG PEAT MARWICK LLP
INDEPENDENT AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
AND CONSENT
The Board of Directors
Dey, Inc.:
The audits referred to in our report dated January 16, 1998, except as to
Note 11, which is as of ,1998, included the related consolidated financial
statement schedule for each of the years in the three-year period ended
December 31, 1997, included in the registration statement. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this consolidated financial
statement schedule based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
San Francisco, California
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the
consolidated financial statements for the year ended December 31, 1997 and the
consolidated financial statements for the six-month period ended June 30, 1998
and is qulified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<CASH> 18,615,000 17,215,000
<SECURITIES> 0 0
<RECEIVABLES> 17,354,000 20,405,000
<ALLOWANCES> 983,000 1,101,000
<INVENTORY> 21,445,000 15,737,000
<CURRENT-ASSETS> 79,835,000 81,487,000
<PP&E> 84,933,000 93,132,000
<DEPRECIATION> 27,492,000 30,603,000
<TOTAL-ASSETS> 188,954,000 194,835,000
<CURRENT-LIABILITIES> 41,095,000 56,153,000
<BONDS> 0 0
0 0
0 0
<COMMON> 729,000 729,000
<OTHER-SE> 123,259,000 114,093,000
<TOTAL-LIABILITY-AND-EQUITY> 188,954,000 194,835,000
<SALES> 219,810,000 135,675,000
<TOTAL-REVENUES> 219,810,000 135,675,000
<CGS> 77,204,000 48,745,000
<TOTAL-COSTS> 77,204,000 48,745,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 300,000 150,000
<INTEREST-EXPENSE> 1,267,000 597,000
<INCOME-PRETAX> 91,182,000 55,394,000
<INCOME-TAX> 37,160,000 21,310,000
<INCOME-CONTINUING> 54,022,000 34,084,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 54,022,000 34,084,000
<EPS-PRIMARY> 0.74 0.47
<EPS-DILUTED> 0.74 0.47
</TABLE>
