<PAGE>
AS FILED WITH THE SECURITIES EXCHANGE COMMISSION ON MARCH 16, 1998
REGISTRATION NO. 333-45743
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SCHEIN PHARMACEUTICAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2726505
(STATE OF OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
AND SUBSIDIARY GUARANTORS
SCHEIN PHARMACEUTICAL INTERNATIONAL, INC.
SCHEIN PHARMACEUTICAL PA, INC.
SCHEIN PHARMACEUTICAL SERVICE COMPANY
STERIS LABORATORIES, INC.
MARSAM PHARMACEUTICALS INC.
DANBURY PHARMACAL, INC.
DANBURY PHARMACAL PUERTO RICO, INC.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR RESPECTIVE CHARTERS)
DELAWARE 22-3338994
DELAWARE 22-3271171
DELAWARE 22-3331174
DELAWARE 86-0564234
DELAWARE 11-2718528
DELAWARE 52-1760757
DELAWARE 06-0863666
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
2834
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
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100 CAMPUS DRIVE, CORPORATION SERVICE COMPANY
FLORHAM PARK 1013 CENTRE ROAD
NEW JERSEY 07932 WILMINGTON, DELAWARE 19805
(973) 593-5500 (302) 636-5454
(NAME, ADDRESS, INCLUDING ZIP (NAME, ADDRESS, INCLUDING ZIP CODE, AND
CODE, AND TELEPHONE NUMBER, TELEPHONE NUMBER, INCLUDING AREA CODE, OF
INCLUDING AREA CODE, OF REGISTRANTS' AGENT FOR SERVICE)
REGISTRANTS' AGENT FOR SERVICE)
COPY TO:
EDWARD W. KERSON, ESQ.
PROSKAUER ROSE LLP
1585 BROADWAY
NEW YORK, NEW YORK 10036-8299
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 16, 1998
PROSPECTUS
SCHEIN PHARMACEUTICAL, INC.
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF ITS
SENIOR FLOATING RATE NOTES DUE 2004
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 FOR
EACH $1,000 IN PRINCIPAL AMOUNT OF ITS OUTSTANDING
SENIOR FLOATING RATE NOTES DUE 2004,
OF WHICH $100,000,000 PRINCIPAL AMOUNT IS OUTSTANDING
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME
ON , 1998, UNLESS EXTENDED
----------------
Schein Pharmaceutical, Inc., a Delaware corporation ("Schein" or the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying letter of transmittal (the
"Letter of Transmittal," and together with this Prospectus, the "Exchange
Offer"), to exchange $1,000 principal amount of Senior Floating Rate Notes due
2004 of the Company (the "New Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to an
Exchange Offer Registration Statement (as defined herein) of which this
Prospectus constitutes a part, for each $1,000 principal amount of the
outstanding Senior Floating Rate Notes due 2004 of the Company (the "Old
Notes"), of which $100,000,000 aggregate principal amount is outstanding. The
form and terms of the New Notes are in all material respects the same as the
form and terms of the Old Notes, except that the New Notes will not bear
legends restricting their transfer. The New Notes will evidence the same debt
as the Old Notes (which they replace) and will be issued under and be entitled
to the benefits of the Indenture, dated as of December 24, 1997 (the
"Indenture"), among the Company, the Guarantors (as defined herein) and the
Bank of New York, as trustee (the "Trustee"). The Old Notes and the New Notes
are sometimes referred to herein collectively as the "Notes." See "The
Exchange Offer" and "Description of Notes."
The indebtedness evidenced by the New Notes will be senior unsecured
obligations of the Company, will rank pari passu with all existing and future
senior indebtedness of the Company and will rank senior in right of payment to
all existing and future indebtedness of the Company that is, by its terms,
expressly subordinated to the New Notes. Holders of secured indebtedness of
the Company, including the lenders under the Senior Credit Agreement (as
defined herein), will have claims with respect to the assets constituting
collateral for such indebtedness that are prior to the claims of holders of
the New Notes. As of December 27, 1997, the Company and its subsidiaries had
secured indebtedness of approximately $154.4 million outstanding. The
obligations of the Company and the Guarantors under the Senior Credit
Agreement are secured by substantially all of the assets of the Company and
the Guarantors. Secured indebtedness under the Senior Credit Agreement is the
only material secured indebtedness of the Company and its subsidiaries. In the
event of a default on the New Notes, or a bankruptcy, liquidation or
reorganization of the Company, such assets will be available to satisfy
obligations with respect to the indebtedness secured thereby before any
payment therefrom could be made on the New Notes. To the extent that the value
of such collateral is not sufficient to satisfy the indebtedness secured
thereby, amounts remaining outstanding on such indebtedness would be entitled
to share with the Notes and their claims with respect to any other assets of
the Company. As of December 27, 1997, the Company had $56.0 million of undrawn
availability under the Senior Credit Agreement. The Indenture permits the
Company and the Restricted Subsidiaries to incur additional Indebtedness (as
defined herein), including Secured Indebtedness (as defined herein), subject
to certain limitations. See "Description of Notes."
All of the Company's existing and future Restricted Subsidiaries (as defined
herein) will jointly and severally, fully and unconditionally, guarantee on a
senior unsecured basis the performance and punctual payment when due, whether
at maturity, by acceleration or otherwise, of all obligations of the Company
under the Indenture and the Notes (the "Subsidiary Guarantees"). Each of the
Guarantors has guaranteed the Company's indebtedness under the Senior Credit
Agreement on a senior secured basis. The Subsidiary Guarantees will rank pari
passu in right of payment with all existing and future unsecured senior
indebtedness of the Guarantors and senior in right of payment to all future
subordinated indebtedness of the Guarantors. The Subsidiary Guarantee of each
Guarantor is effectively subordinated to the prior payment in full of all
secured indebtedness of the Company, including secured indebtedness under the
Senior Credit Agreement. See "Description of Notes--Guarantees."
(Continued on Next Page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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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.
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The date of this Prospectus is March , 1998.
<PAGE>
(Continued from Cover Page)
Interest on each New Note will accrue from the last Interest Payment Date
(as defined herein) on which interest was paid on the Old Note tendered in
exchange therefor. Holders of Old Notes whose Old Notes are accepted for
exchange will be deemed to have waived the right to receive any payment in
respect of interest on the Old Notes accrued from the last Interest Payment
Date to the date of the issuance of the New Notes. Interest on the New Notes
is payable quarterly on January 15, April 15, July 15 and October 15 of each
year, accruing from the last Interest Payment Date at a rate equal to the
Applicable LIBOR Rate (as defined herein). The Notes will be redeemable, in
whole or in part, at the option of the Company, at any time, at the redemption
prices set forth herein, plus accrued and unpaid interest thereon, to the date
of redemption. See "Description of Notes--Optional Redemption." The Notes will
mature on December 15, 2004, unless previously redeemed. The Notes will be
redeemable in cash at the option of the Company, in whole or in part, at any
time, at the redemption prices set forth herein, together with accrued
interest thereon to the date of redemption. Upon a Change of Control (as
defined herein), the Company will be required to offer to repurchase the Notes
at a purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest thereon to the date of repurchase.
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time on , 1998,
unless extended by the Company in its sole discretion (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the
Expiration Date. The Exchange Offer is subject to certain customary
conditions. See "The Exchange Office--Conditions."
The Old Notes were sold in an aggregate principal amount of $100.0 million
by the Company on December 24, 1997 to Societe Generale Securities Corporation
(the "Initial Purchaser") in a transaction not registered under the Securities
Act in reliance upon the private offering exemption under Section 4(2) of the
Securities Act (the "Initial Offering"). The Initial Purchaser subsequently
placed the Old Notes with qualified institutional buyers in reliance upon Rule
144A under the Securities Act and with a limited number of accredited
investors (as defined in Rule 501(A)(1), (2), (3) or (7) under the Securities
Act). Accordingly, the Old Notes may not be reoffered, resold or otherwise
transferred in the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The New Notes are being offered hereunder in
order to satisfy the obligations of the Company and the Guarantors under the
Registration Rights Agreement (as defined herein) entered into by the Company
and the Initial Purchaser in connection with the Initial Offering. See "The
Exchange Offer."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder has no arrangement or understanding with any person to participate in
the distribution of such New Notes. See "The Exchange Offer--Resale of the New
Notes." Each broker-dealer (a "Participating Broker-Dealer") that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. However, if any
holder acquires New Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Notes, such holder
cannot rely on the position of the staff of the Commission enunciated in such
no-action letters or any similar interpretative letters, and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration
is otherwise available. Further, each Participating Broker-Dealer that
receives New Notes for its own account in exchange for Old Notes, where such
Old Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a Prospectus in connection with any resale of such New Notes.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a Participating Broker-Dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such Participating Broker-Dealer as a result of marketmaking activities or
other trading activities. The Company has agreed that, for a period of 90 days
after the Expiration Date, it will make this Prospectus available to any
participating Broker-Dealer for use in connection with any such resale. See
"Plan of Distribution."
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. The Company
will pay all the expenses incurred by it incident to the Exchange Offer. See
"The Exchange Offer."
There has not previously been any public market for the Old Notes or the New
Notes. There can be no assurance that an active market for the New Notes will
develop. See "Risk Factors--Lack of Public Market; Restrictions on
Transferability." Moreover, to the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected.
Except as set forth below, the New Notes will initially be issued in the
form of one or more Global Notes (as defined herein), which will be deposited
with, or on behalf of, The Depository Trust Company ("DTC" or the
"Depository") and registered in its name or in the name of Cede & Co., it
nominee. Beneficial interests in the Global Notes representing the New Notes
will be shown on, and transfers thereof will be effected through, records
maintained by DTC and its participants. New Notes that are issued in respect
of Old Notes that were originally issued to Institutional Accredited Investors
(as defined herein) will be issued as Certificated Securities (as defined
herein). See "Description of Notes--Book Entry, Delivery and Form."
The Company has filed a Registration Statement on Form S-1 (File No. 333-
41413) in connection with its proposed initial public offering (the "Equity
Offering" or the "IPO") of common stock, par value $.01 per share ("Common
Stock").
<PAGE>
AVAILABLE INFORMATION
The Company and the Guarantors will file with the Commission a Registration
Statement on Form S-4 (the "Exchange Offer Registration Statement," which term
shall encompass all amendments, exhibits, annexes and schedules thereto)
pursuant to the Securities Act, and the rules and regulations promulgated
thereunder, covering the New Notes being offered hereby. This Prospectus does
not contain all the information set forth in the Exchange Offer Registration
Statement. For further information with respect to the Company and the
Exchange Offer, reference is made to the Exchange Offer Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document
filed as an exhibit to the Exchange Offer Registration Statement, reference is
made to the exhibit for a more complete description of the document or matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Exchange Offer Registration Statement, including exhibits
thereto, can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, at the Regional Offices of the Commission at 7 World Trade Center,
13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, the Company and the Guarantors will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Commission. The obligation of
the Company and the Guarantors to file periodic reports and other information
with the Commission will be suspended if the New Notes are held of record by
fewer than 300 holders as of the beginning of any fiscal year of the Company
and the Guarantors other than the fiscal year in which the Exchange Offer
Registration Statement is declared effected. The Company has agreed that,
whether or not it is required to do by the rules and regulations of the
Commission, for so long as any of the Notes remain outstanding, it will
furnish to the holders of the New Notes and file with the Commission (unless
the Commission will not accept such a filing) (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file
such forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's independent auditors and
(ii) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports.
i
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus, including information
under "Risk Factors". All references to the Company's operations for a
particular fiscal year refer to the 52-53 week period ended on the last
Saturday in December of that year, and all references to the Company's
operations for a particular fiscal quarter refer to the three month period
ended on the last Saturday in that quarter. Unless otherwise indicated, all
references to "Schein Pharmaceutical," "Schein" or the "Company" refer
collectively to Schein Pharmaceutical, Inc. and its predecessors and
subsidiaries.
THE COMPANY
Schein Pharmaceutical is one of the leading generic pharmaceutical companies
in the United States. The Company develops, manufactures and markets one of the
broadest generic product lines in the pharmaceutical industry through the
integration of its product development expertise, diverse, high-volume
production capacity and direct sales and marketing force. The Schein product
line includes both solid dosage and sterile dosage generic products, and the
Company is also developing a line of specialty branded pharmaceuticals. The
Company's primary branded product, INFeD, is the leading injectable iron
product in the United States. The Company has a substantial pipeline of
products under development. The Company enhances its internal product
development, manufacturing and marketing capabilities through strategic
collaborations. Schein generated net revenues of $490.2 million and operating
income of $39.0 million during 1997.
The Company believes it manufactures and markets the broadest generic product
line of any U.S. pharmaceutical company in terms of number and types of
products. The Company manufactures and markets approximately 160 chemical
entities formulated in approximately 325 different dosages under approximately
200 Abbreviated New Drug Applications ("ANDAs") approved by the United States
Food and Drug Administration ("FDA"). Schein is currently the sole
manufacturing source for 47 generic pharmaceutical products, of which 45 are
sterile dosage products. The Company's solid dosage products include both
immediate-release and extended-release capsules and tablets; sterile dosage
products include solutions, suspensions, powders and lyophilized (freeze-dried)
products primarily for administration as injections, ophthalmics and otics. The
manufacture of sterile dosage products is significantly more complex than the
manufacture of solid dosage products, which limits competition in this product
area. The Company currently manufactures approximately four billion solid
dosage tablets and capsules and 75 million sterile dosage vials and ampules
annually. Solid dosage generic products and sterile dosage generic products
each accounted for approximately 40% of the Company's net revenues in 1997.
Since introducing INFeD in 1992, the Company has been developing a portfolio
of branded products, primarily in select therapeutic markets, such as iron
management for the nephrology, oncology and hematology markets. INFeD is used
in the treatment of certain types of anemia, particularly in dialysis patients,
and accounted for approximately 21% of the Company's net revenues in 1997. The
Company markets INFeD through a 20-person dedicated sales and marketing force,
as well as through co-marketing collaborations with Bayer Corporation in the
nephrology market and MGI Pharma, Inc. ("MGI") in the oncology market.
The Company believes its 130-person direct sales and marketing force is one
of the largest in the U.S. generic pharmaceutical industry. Through its
customized marketing programs, the Company markets its products to
approximately 60,000 customers representing all major customer channels,
including pharmaceutical wholesalers, chain and independent drug retailers,
hospitals, managed care organizations, other group purchasing organizations and
physicians.
Schein's objective is to become the leading generic pharmaceutical company in
the approximately $7.4 billion generic prescription pharmaceutical industry in
the United States. The Company's growth strategy is to:
1
<PAGE>
(i) leverage its diverse pharmaceutical development and manufacturing
capabilities to extend the breadth of its generic product line; (ii) focus its
product development on complex and other generic drugs that require specialized
development or manufacturing technology and are therefore expected to encounter
limited competition; (iii) develop and market branded drugs for select
therapeutic categories; (iv) pursue strategic collaborations to supplement its
product development and manufacturing resources; and (v) expand market
penetration through direct sales and innovative marketing programs.
The Company's commitment to product development has resulted in 24 ANDA
approvals during the past three years. During the past three fiscal years, the
Company, directly and through its strategic collaborations, has expended
approximately $84.7 million on product pipeline development activities, which
the Company believes is among the highest product development expenditure
levels for any independent generic drug company. The Company pursues product
development through its 150-person product development staff and various
collaborations and licensing arrangements with other pharmaceutical and drug
delivery technology companies. The Company's product development efforts focus
on: (i) major branded drugs coming off patent; (ii) drugs for which patent
protection has lapsed and for which there are few or no generic producers;
(iii) drugs whose patents may be susceptible to challenge; (iv) proprietary and
branded products focused in select therapeutic areas; and (v) generic products
that require specialized development, formulation, drug delivery or
manufacturing technology.
The Company supplements its internal product development, manufacturing and
marketing capabilities with external sources. During 1994, Schein entered into
a strategic alliance with Bayer Corporation, through which Bayer Corporation
became a 28.3% stockholder of Schein, and Bayer Corporation currently
participates with Schein in several collaborations. In 1995, the Company
acquired Marsam Pharmaceuticals Inc. ("Marsam"), expanding the Company's
ability to develop and manufacture sterile penicillins and oral and sterile
cephalosporins. In addition, the Company has entered into strategic
collaborations involving product development arrangements with companies such
as Ethical Holdings plc ("Ethical") and Elan Corporation plc ("Elan"); raw
material supply arrangements with companies such as Johnson Matthey plc
("Johnson Matthey") and Abbott Laboratories ("Abbott"); and sales and marketing
arrangements with Bayer Corporation and other companies such as MGI.
INFeD(R) is a registered trademark of the Company; Ferrlecit(R) is a
registered trademark of A. Nattermann & Cie. GmbH. S.M.A.R.T.(TM) and
G.A.I.N.(TM) are trademarks of the Company.
2
<PAGE>
THE INITIAL OFFERING
NOTES
Pursuant to a Purchase Agreement dated as of December 19, 1997 (the "Purchase
Agreement"), the Company sold Old Notes in an aggregate principal amount of
$100.0 million to the Initial Purchaser on December 24, 1997. The Initial
Purchaser subsequently resold the Old Notes purchased from the Company to
qualified institutional buyers pursuant to Rule 144A under the Securities Act
and to certain accredited investors (as defined in Rule 501(A)(1), (2), (3) or
(7) under the Securities Act). The net proceeds from the Initial Offering of
$100.0 million were used to repay the Senior Subordinated Loan (as defined
herein).
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Purchase Agreement, the Company and the Initial Purchaser
entered into an Exchange and Registration Rights Agreement dated as of December
24, 1997 (the "Registration Rights Agreement"), which grants the holders of the
Old Notes certain exchange and registration rights. The Exchange Offer is
intended to satisfy such exchange rights which terminate upon the consummation
of the Exchange Offer.
THE EXCHANGE OFFER
SECURITIES OFFERED.......... $100,000,000 aggregate principal amount of Senior
Floating Rate Notes due 2004 of the Company.
THE EXCHANGE OFFER.......... $1,000 principal amount of New Notes will be
issued in exchange for each $1,000 principal
amount of Old Notes validly tendered pursuant to
the Exchange Offer. As of the date hereof,
$100,000,000 in aggregate principal amount of Old
Notes are outstanding. The Company will issue the
New Notes to tendering holders of Old Notes on or
promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that New
Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by any holder
thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that such New Notes are acquired in the
ordinary course of such holder's business and
that such holder does not intend to participate
and has no arrangement or understanding with any
person to participate in the distribution of such
New Notes. Each holder accepting the Exchange
Offer is required to represent to the Company in
the Letter of Transmittal that, among other
things, the New Notes will be acquired by the
holder in the ordinary course of business and the
holder does not intend to participate and has no
arrangement or understanding with any person to
participate in the distribution of such New
Notes.
Any Participating Broker-Dealer that acquired Old
Notes for its own account as a result of market-
making activities or other trading
3
<PAGE>
activities may be a statutory underwriter. Each
Participating Broker-Dealer that receives New
Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any
resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in
connection with resale of New Notes received in
exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer as a
result of market-making activities or other
trading activities. The Company has agreed that,
for a period of 90 days after the Expiration
Date, it will make this Prospectus available to
any Participating Broker-Dealer for use in
connection with any such resale. See "Plan of
Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose
of participating, in a distribution of the New
Notes could not rely on the position of the staff
of the Commission enunciated in no-action letters
and, in the absence of an exemption therefrom,
must comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. Failure
to comply with such requirements in such instance
may result in such holder incurring liability
under the Securities Act for which the holder is
not indemnified by the Company.
MINIMUM CONDITION........... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes
being tendered or accepted for exchange.
EXPIRATION DATE.............
5:00 p.m., New York City time, on , 1998
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended (which in no event shall be more than 60
days after the date of this Prospectus). See "The
Exchange Offer--Expiration Date; Extensions;
Amendments."
CONDITIONS TO THE EXCHANGE The Exchange Offer is subject to certain
OFFER...................... customary conditions, which may be waived by the
Company. See "The Exchange Offer--Conditions."
The Company reserves the right to terminate or
amend the Exchange Offer at any time prior to the
Expiration Date upon the occurrence of any such
condition.
PROCEDURES FOR TENDERING Each holder of Old Notes wishing to accept the
OLD NOTES.................. Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile, or an Agent's
Message (as defined herein) in connection with a
book entry transfer together with the Old Notes
and other required documentation to the Exchange
Agent (as defined herein) at the address set
forth herein. By executing the Letter of
Transmittal, each holder will represent to
4
<PAGE>
the Company that, among other things, the New
Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business
of the person receiving such New Notes, whether
or not such person is the holder, and that
neither the holder nor any such other person (i)
has any arrangement or understanding with any
person to participate in the distribution of such
New Notes, (ii) is engaging or intends to engage
in the distribution of such New Notes, or (iii)
is an "affiliate," as defined under Rule 405 of
the Securities Act, of the Company. See "The
Exchange Offer--Purpose and Effect of the
Exchange Offer" and "--Procedures for Tendering."
UNTENDERED OLD NOTES........ Following the consummation of the Exchange Offer,
holders of Old Notes eligible to participate but
who do not tender their Old Notes will not have
any further exchange rights and such Old Notes
will continue to be subject to certain
restrictions on transfer. Accordingly, the
liquidity of the market for such Old Notes could
be adversely affected.
CONSEQUENCES OF FAILURE TO The Old Notes that are not exchanged pursuant to
EXCHANGE................... the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may be
resold only (i) to the Company, (ii) pursuant to
Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under the
Securities Act, (iii) outside the United States
to a non-U.S. person pursuant to the requirements
of Rule 904 under the Securities Act, or (iv)
pursuant to an effective registration statement
under the Securities Act. See "The Exchange
Offer--Consequences of Failure to Exchange."
SHELF REGISTRATION If (i) any change in law or applicable
STATEMENT.................. interpretations of the staff of the Commission
does not permit the Company to effect the
Registered Exchange Offer as contemplated thereby
or (ii) the Initial Purchaser, as a holder of Old
Notes, (A) is not eligible to participate in the
Exchange Offer or (B) participates in the
Exchange Offer and does not receive freely
transferable New Notes in exchange for tendered
Old Notes, the Company will file with the
Commission and use commercially reasonable
efforts to cause to be declared effective on or
prior to the latter of (x) 120 days after the
Issue Date (as defined herein) or (y) 45 days
after the publication of the change in law or
interpretation, a registration statement on an
appropriate form under the Securities Act
relating to the offer and sale of the Notes by
the holders thereof, from time to time, in
accordance with such registration statement and
Rule 415 under the Securities Act (the "Shelf
Registration Statement"). The Company will use
commercially reasonable efforts to have the
Exchange Offer Registration Statement or, if
applicable, a Shelf Registration Statement (each
a "Registration Statement") declared effective by
the Commission as promptly as practicable after
the filing thereof. Unless the Exchange Offer
would not be permitted by a policy of the
Commission, the Company will commence the
Exchange Offer and will use its reasonable best
efforts to consummate the Exchange Offer as
promptly as practicable, but in any event on or
prior to 150
5
<PAGE>
days after the Issue Date. If applicable, the
Company will use commercially reasonable best
efforts to keep the Shelf Registration Statement
effective for the earlier of three years from the
Issue Date or such shorter period that will
terminate when all the Notes covered by the Shelf
Registration Statement have been sold, subject to
certain exceptions, including suspending the
effectiveness thereof as required by law or for
certain valid business reasons.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS..........
Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such owner
must, prior to completing and executing the
Letter of Transmittal and delivering its Old
Notes, either make appropriate arrangements to
register ownership of the Old Notes in such
owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time.
The Company will keep the Exchange Offer open for
not less than 30 business days in order to
provide for the transfer of registered ownership.
GUARANTEED DELIVERY Holders of Old Notes who wish to tender their Old
PROCEDURES................. Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent (as defined herein) (or comply
with the procedures for book-entry transfer)
prior to the Expiration Date must tender their
Old Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date.
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF NEW NOTES...... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
Time, on the Expiration Date. The New Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer--Terms of the Exchange
Offer."
FEDERAL INCOME TAX The exchange of Old Notes for New Notes by
CONSEQUENCES............... tendering holders will not be a taxable exchange
for federal income tax purposes, and such holders
should not recognize any taxable gain or loss or
any interest income as a result of such exchange.
USE OF PROCEEDS............. There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange Offer.
EXCHANGE AGENT.............. The Bank of New York (the "Exchange Agent").
6
<PAGE>
THE NEW NOTES
GENERAL.....................
The form and terms of the New Notes are the same
as the form and terms of the Old Notes (which
they replace) except that (i) the New Notes have
been registered under the Securities Act and,
therefore, will not bear legends restricting the
transfer thereof, and (ii) the holders of New
Notes will not be entitled to certain rights
under the Registration Rights Agreement,
including the provisions providing for an
increase in the interest rate on the Old Notes in
certain circumstances relating to the timing of
the Exchange Offer, which rights will terminate
when the Exchange Offer is consummated. See "The
Exchange Offer--Purpose and Effect of the
Exchange Offer." The New Notes will evidence the
same debt as the Old Notes and will be entitled
to the benefits of the Indenture. See
"Description of Notes." The Old Notes and the New
Notes are referred to collectively hereinafter as
the "Notes."
ISSUER...................... Schein Pharmaceutical, Inc.
SECURITIES OFFERED.......... $100,000,000 principal amount of Senior Floating
Rate Notes due 2004.
MATURITY DATE............... December 15, 2004.
INTEREST PAYMENT DATES...... January 15, April 15, July 15 and October 15 of
each year, commencing on April 15, 1998 (each an
"Interest Payment Date").
OPTIONAL REDEMPTION......... The Notes will be redeemable, in whole or in
part, at the option of the Company, at any time,
at the redemption prices set forth herein, plus
accrued and unpaid interest thereon, to the date
of redemption. See "Description of Notes--
Optional Redemption."
SUBSIDIARY GUARANTEES.......
All of the Company's existing and future
Restricted Subsidiaries will jointly and
severally, fully and unconditionally, guarantee
on a senior unsecured basis the performance and
punctual payment when due, whether at maturity,
by acceleration or otherwise, of all obligations
of the Company under the Indenture and the Notes.
The Subsidiary Guarantees will rank pari passu in
right of payment with all existing and future
unsecured senior indebtedness of the Guarantors
and senior in right of payment to all future
subordinated indebtedness of the Guarantors. Each
of the Guarantors has guaranteed the Company's
indebtedness under the Senior Credit Agreement on
a senior secured basis. The Subsidiary Guarantee
of each Guarantor will be effectively
subordinated to the prior payment in full of all
secured indebtedness of such Guarantors,
including secured indebtedness under the Senior
Credit Agreement. See "Description of Notes--
Guarantees."
RANKING..................... The indebtedness evidenced by the Notes will be
senior unsecured obligations of the Company, will
rank pari passu with all existing and future
senior indebtedness of the Company and will rank
senior
7
<PAGE>
in right of payment to all existing and future
indebtedness of the Company that is, by its
terms, expressly subordinated to the Notes.
Holders of secured indebtedness of the Company,
including the lenders under the Senior Credit
Agreement, will have claims with respect to the
assets constituting collateral for such
indebtedness that are prior to the claims of
holders of the Notes. As of December 27, 1997,
the Company and its Restricted Subsidiaries had
secured indebtedness of approximately $154.4
million outstanding. The obligations of the
Company and the Guarantors under the Senior
Credit Agreement are secured by substantially all
of the assets of the Company and the Guarantors.
Secured indebtedness under the Senior Credit
Agreement is the only material secured
indebtedness of the Company and its subsidiaries.
In the event of a default on the Notes, or a
bankruptcy, liquidation or reorganization of the
Company, such assets will be available to satisfy
obligations with respect to the indebtedness
secured thereby before any payment therefrom
could be made on the Notes. To the extent that
such collateral is not sufficient to satisfy the
indebtedness secured thereby, amounts remaining
outstanding on such indebtedness would be
entitled to share with the Notes and their claims
with respect to any other assets of the Company.
As of December 27, 1997, the Company had $56.0
million of undrawn availability under the Senior
Credit Agreement. The Indenture relating to the
Notes will permit the Company and its Restricted
Subsidiaries to incur additional Indebtedness,
including Secured Indebtedness, subject to
certain limitations. See "Description of Notes."
CHANGE OF CONTROL........... Upon a Change of Control, each holder of Notes
may require the Company to repurchase any or all
outstanding Notes owned by such holder at 101% of
the principal amount thereof, plus accrued and
unpaid interest thereon, to the date of
repurchase. See "Description of Notes--Change of
Control."
RESTRICTIVE COVENANTS.......
The Indenture under which the New Notes will be
issued contains certain covenants pertaining to
the Company and its Restricted Subsidiaries,
including but not limited to covenants with
respect to the following matters: (i) limitations
on indebtedness; (ii) limitations on restricted
payments such as dividends, repurchases of the
Company's or subsidiaries' stock, repurchases of
subordinated obligations and investments; (iii)
limitations on liens; (iv) limitations on
engaging in certain lines of business; (v)
limitations on mergers, consolidations and
transfers of all or substantially all assets;
(vi) limitations on restrictions on distributions
from restricted subsidiaries; (vii) limitations
on sales of assets and of stock of subsidiaries;
(viii) limitations on transactions with
affiliates; (ix) limitations on the sale of
capital stock of restricted subsidiaries; and (x)
limitations on sale and leaseback transactions.
However, all of these covenants are subject to a
number of important qualifications and
exceptions. See "Description of Notes--Certain
Covenants."
8
<PAGE>
EXCHANGE OFFER AND Pursuant to the Registration Rights Agreement,
REGISTRATION............... the Company has agreed (i) to file with the
Commission on or prior to 45 days after the Issue
Date an Exchange Offer Registration Statement,
with respect to an offer to exchange the Old
Notes for the New Notes with terms identical in
all material respects to those of the Old Notes
and (ii) to use commercially reasonable efforts
to cause the Exchange Offer Registration
Statement to be declared effective under the
Securities Act within the earlier of (A) 90 days
after the Issue Date or (B) 30 days after the
consummation of the Equity Offering. Upon the
effectiveness of the Exchange Offer Registration
Statement, the Company will commence the Exchange
Offer to holders of the Notes who are not
prohibited by any law or policy of the Commission
from participating in the Exchange Offer. The
Company will keep the Exchange Offer open for not
less than 30 days (or longer, if required by
applicable law) after the date notice of the
Exchange Offer is mailed to the holders of the
Old Notes. If (i) any change in law or applicable
interpretations of the staff of the Commission
does not permit the Company to effect the
Exchange Offer as contemplated thereby or (ii)
the Initial Purchaser, as a holder of Notes, (A)
is not eligible to participate in the Exchange
Offer or (B) participates in the Exchange Offer
and does not receive freely transferable Exchange
Notes in exchange for tendered Old Notes, the
Company will file with the Commission and use
commercially reasonable efforts to cause to be
declared effective on or prior to the latter of
(x) 120 days after the Issue Date or (y) 45 days
after the publication of the change in law or
interpretation, the Shelf Registration Statement.
The Company will use commercially reasonable
efforts to have the Exchange Offer Registration
Statement or, if applicable, a Shelf Registration
Statement (each a "Registration Statement")
declared effective by the Commission as promptly
as practicable after the filing thereof. Unless
the Exchange Offer would not be permitted by a
policy of the Commission, the Company will
commence the Exchange Offer and will use its
reasonable best efforts to consummate the
Exchange Offer as promptly as practicable, but in
any event on or prior to 150 days after the Issue
Date. If applicable, the Company will use
commercially reasonable best efforts to keep the
Shelf Registration Statement effective for the
earlier of three years from the Issue Date or
such shorter period that will terminate when all
the Notes covered by the Shelf Registration
Statement have been sold, subject to certain
exceptions, including suspending the
effectiveness thereof as required by law or for
certain valid business reasons.
TRANSFER RESTRICTIONS;
ABSENCE OF A PUBLIC MARKET The Old Notes have not been registered under the
FOR THE NOTES.............. Securities Act and are subject to restrictions on
transferability and resale. If issued, the New
Notes will generally be freely transferable
(subject to the
9
<PAGE>
restrictions discussed elsewhere herein) but will
be new securities for which there will not
initially be a market. Accordingly, there can be
no assurance as to the development or liquidity
of any market for the Old Notes or, if issued,
the New Notes. The Notes have been designated
eligible for trading in the PORTAL market. The
Initial Purchaser has advised the Company that it
currently intends to make a market in the Notes.
However, the Initial Purchaser is not obligated
to do so, and any market making with respect to
the Notes may be discontinued at any time without
notice. The Company does not intend to apply for
a listing of the Old Notes, or, if issued, the
New Notes, on any securities exchange or on any
automated dealer quotation system.
RISK FACTORS
Before tendering the Old Notes for the New Notes offered hereby, holders of
the Old Notes should carefully consider the information set forth under the
caption "Risk Factors" and all other information set forth in this Prospectus.
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
-------------------------------------------------
1993 1994 1995(1) 1996 1997
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues............... $393,926 $385,428 $ 391,846 $476,295 $490,170
Cost of sales.............. 217,653 237,380 250,507 320,675 329,761
-------- -------- --------- -------- --------
Gross profit.............. 176,273 148,048 141,339 155,620 160,409
Costs and expenses:
Selling, general and
administrative........... 64,489 71,783 75,274 87,329 81,809
Research and development.. 18,055 19,170 28,324 27,030 29,387
Amortization of goodwill
and other intangibles.... -- -- 3,399 10,195 10,196
Special compensation,
restructuring and
relocation(2)............ 8,426 33,594 -- -- --
Acquired in-process Marsam
research and
development(1)........... -- -- 30,000 -- --
-------- -------- --------- -------- --------
Operating income........... 85,303 23,501 4,342 31,066 39,017
Interest expense, net..... 1,467 1,493 10,005 23,285 26,578
Other expense (income),
net(3)................... 9,215 212 (1,245) 1,193 (9,318)
-------- -------- --------- -------- --------
Income (loss) before taxes
on income and minority
interest................. 74,621 21,796 (4,418) 6,588 21,757
Provision for income
taxes.................... 29,096 15,165 10,482 5,191 10,655
Minority interest......... (343) -- -- -- --
-------- -------- --------- -------- --------
Net income (loss).......... $ 45,868 $ 6,631 $ (14,900) $ 1,397 $ 11,102
======== ======== ========= ======== ========
OTHER DATA:
EBITDA(4).................. $ 83,864 $ 32,035 $ 52,232 $ 53,147 $ 70,834
Adjusted EBITDA(5) 91,864 61,074 50,396 54,932 61,344
Net cash provided by
operating activities...... 48,789 26,169 19,626 10,756 34,875
Net cash (used in) provided
by investing activities... (23,376) (20,683) (251,443) (20,016) 87
Net cash (used in) provided
by financing activities... (35,621) (1,986) 228,931 3,562 (36,297)
Depreciation and
amortization.............. 7,328 8,464 17,395 25,450 25,474
Capital expenditures, net.. 22,806 16,135 13,986 11,309 14,446
Ratio of earnings to fixed
charges(6)................ 26.9x 8.0x 0.6x 1.3x 1.8x
Pro forma interest
expense(7)................ 25,147
</TABLE>
<TABLE>
<CAPTION>
DECEMBER
--------------------------------------------
1993 1994 1995(1) 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................... $ 87,035 $ 98,610 $ 92,021 $ 99,111 $ 73,249
Total assets...................... 227,861 269,729 522,410 544,312 534,126
Short-term debt, including current
portion of long-term debt........ 1,838 3,465 40,078 41,090 56,440
Long-term debt, less current
portion.......................... 25,725 42,462 240,480 245,390 198,705
Stockholders' equity.............. 130,336 140,164 125,692 129,980 139,715
</TABLE>
- --------
(1) Includes the results of Marsam from September 1995, the date of purchase.
In connection with the purchase of Marsam, the Company recognized acquired
in-process research and development. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 2 to
the Consolidated Financial Statements of the Company.
(2) Special compensation, restructuring and relocation expenses includes costs
recognized by the Company in connection with its restructuring and
relocation of its corporate headquarters. From 1992 to 1994, the Company
engaged in a series of corporate reorganization transactions, including the
separation of the Company from Henry Schein, Inc., which is engaged in the
direct marketing of health care products and services to office-based
health care practitioners. In connection with these transactions, Bayer
Corporation purchased from the Company's stockholders 28.3% of the
Company's outstanding shares, and agreed with the Company to pursue future
strategic alliances. Charges for special compensation, restructuring and
relocation incurred in connection with the reorganization aggregated $8.4
million and $33.6 million for 1993 and 1994, respectively.
(3) Other expense (income), net, includes equity in earnings (loss) of
unconsolidated international ventures of $(0.4) million, $(3.4) million and
$(3.4) million in 1995, 1996 and 1997, respectively, gain on sales of
marketable securities of $12.7 million in 1997, and a settlements
contingency of $8.0 million in 1993.
11
<PAGE>
(4) EBITDA is defined as income (loss) before provision for income taxes and
minority interest, interest expense, depreciation and amortization and the
$30 million charge in fiscal 1995 for acquired in-process Marsam research
and development. The Company has included information concerning EBITDA in
this Registration Statement because it believes that such information may
be used by certain investors as one measure of a company's historical
ability to service debt. EBITDA is not a measurement presented in
accordance with generally accepted accounting principles. EBITDA should not
be considered in isolation; as a substitute for net income, cash flow
provided by operating activities or other income or cash flow data prepared
in accordance with generally accepted accounting principles; or as a
measure of the Company's profitability or liquidity. EBITDA as used in this
Registration Statement may not be comparable to "EBITDA" as reported by
other companies.
(5) Adjusted EBITDA is defined as EBITDA, as adjusted to reflect gains on sales
of securities and non-cash items (special compensation, contingent
settlement accruals, equity in net losses of international investments and
other non-cash items). The Company has included information concerning
Adjusted EBITDA in this Registration Statement because it believes that
such information may be used by certain investors as one measure of a
company's historical ability to service debt. Adjusted EBITDA should not be
considered as an alternative to, or more meaningful than, earnings from
operations or other traditional indications of a company's operating
performance. See footnote (4) above.
(6) The ratio of earnings to fixed charges is computed by dividing (i) income
(loss) before provision for income taxes and minority interest plus fixed
charges by (ii) fixed charges. Fixed charges consist of interest on
indebtedness, including amortization of debt issuance costs and the
estimated interest component of rental expense (assumed to be one-third).
In fiscal 1995, fixed charges exceeded income (loss) before provision for
income taxes and minority interest by $4.4 million.
(7) Pro forma interest expense represents what interest expense, including
amortization of debt issuance costs, would have been had the Initial
Offering occurred on December 29, 1996 and the proceeds thereof used by the
Company to retire the Senior Subordinated Loan.
12
<PAGE>
RISK FACTORS
An investment in the New Notes involves a high degree of risk. Prospective
investors in the New Notes should carefully consider the following risk
factors, in addition to the other information set forth in this Prospectus,
before making an investment in the New Notes offered hereby. This Prospectus
contains forward-looking statements. Those statements appear in a number of
places herein and include statements regarding the intent, belief or current
expectations of the Company, primarily with respect to the future operating
performance of the Company or related industry developments. Prospective
purchasers of the New Notes are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results and industry developments may differ
from those described in the forward-looking statements as a result of various
factors, many of which are beyond the control of the Company. The information
contained herein, including, without limitation, the information set forth
below and the information under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations," identifies
important factors that could cause such differences.
RISK FACTORS RELATED TO THE NOTES
Consequences of Failure to Exchange
Untendered Old Notes not exchanged for New Notes pursuant to the Exchange
Offer will remain subject to the existing restrictions upon transfer of such
Old Notes. Additionally, holders of any Old Notes not tendered in the Exchange
Offer prior to the Expiration Date will not be entitled to require the Company
to file the Shelf Registration Statement.
Substantial Leverage
The Company is highly leveraged. As of December 27, 1997, the Company had
total consolidated indebtedness of $255.1 million. In addition, subject to
certain restrictions set forth in the Senior Credit Agreement and the
Indenture, the Company may incur additional indebtedness in the future for
acquisitions, capital expenditures and other corporate purposes.
The Company's high degree of leverage could have important consequences,
including the following: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired;
(ii) a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on the Notes and its other
indebtedness, thereby reducing the funds available to the Company for other
purposes; (iii) the financial covenants and other restrictions contained in
the Senior Credit Agreement and the Indenture and other agreements relating to
the Company's indebtedness require the Company to meet certain financial
tests, restrict its ability to borrow additional funds and impose limitations
on the disposition of assets; (iv) obligations in respect of the Senior Credit
Agreement are, and the Notes will be, and other indebtedness of the Company
may be, at variable rates of interest, which expose the Company to the risk of
increased interest rates; (v) all of the indebtedness outstanding under the
Senior Credit Agreement is secured by substantially all the assets of the
Company and matures prior to the maturity of the Notes; (vi) the Company may
be substantially more leveraged than certain of its competitors, which may
place the Company at a competitive disadvantage; and (vii) the Company's
substantial degree of leverage may limit its flexibility to adjust to changing
market conditions and make it more vulnerable to a downturn in general
economic conditions or its business. See "Description of Notes."
The Company's ability to make scheduled payments of the principal of, or
interest on, or to refinance its indebtedness (including the Notes) depends on
its future operating performance, which to a certain extent is subject to
economic, financial, competitive and other factors beyond its control. The
Company believes that, based on its current level of operations and
anticipated growth, its cash flow from operations will be adequate to meet its
anticipated requirements for working capital, capital expenditures, interest
payments and scheduled
13
<PAGE>
principal payments over the next 12 months. There can be no assurance,
however, that the Company's business will generate cash flow at or above
expected levels. If the Company is unable to generate sufficient cash flow
from operations in the future to service its debt, fund working capital
requirements and make necessary capital expenditures, or its future earnings
are insufficient to make all required principal payments out of internally
generated funds, the Company may be required to refinance all or a portion of
its existing debt, sell assets or obtain additional financing. There can be no
assurance that any such refinancing or asset sales would be possible or that
any additional financing could be obtained on terms acceptable to the Company
or at all, particularly in view of the Company's high level of debt. See "--
Limitation on Change in Control; Asset Sale Offer" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Ability to Service Debt
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness will depend on its financial and
operating performance, which in turn will be subject to prevailing economic
conditions and to certain financial, business and other factors beyond its
control. If the Company's cash flow and capital resources are insufficient to
fund its debt service obligations, the Company may be forced to reduce or
delay planned expansion and capital expenditures, sell assets, obtain
additional equity capital or restructure its debt. There can be no assurance
that the Company's operating results, cash flow and capital resources will be
sufficient for payment of its indebtedness in the future. In the absence of
such operating results and resources, the Company could face substantial
liquidity problems and might be required to dispose of material assets or
operations to meet its debt service and other obligations, and there can be no
assurance as to the timing of such sales or the proceeds that the Company
could realize therefrom. In addition, because the Notes will bear interest at
floating rates and the Senior Credit Agreement bears interest at floating
rates, an increase in interest rates could adversely affect, among other
things, the Company's ability to meet its debt service obligations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "--Risk Management" and
"Description of Notes."
Ranking of Notes
The New Notes will be senior unsecured obligations of the Company and will
rank pari passu in right of payment with all current and future unsecured
senior indebtedness of the Company. The New Notes will (i) rank senior in
right of payment to all subordinated indebtedness of the Company and (ii) be
guaranteed, on a senior unsecured basis, by the Restricted Subsidiaries of the
Company. The New Notes will also be effectively subordinated to all existing
and future indebtedness of any subsidiary of the Company that is not a
Guarantor of the Notes.
The indebtedness incurred under the Senior Credit Agreement is secured by
substantially all of the assets of the Company. In addition, the Indenture
will permit the Company and the Guarantors to incur certain other secured
indebtedness. The holders of all existing and future secured indebtedness will
have a claim prior to the holders of the Notes with respect to any assets
pledged by the Company and the Guarantors as security for such indebtedness.
As of December 27, 1997, the aggregate principal amount of secured
indebtedness of the Company and the Guarantors, which effectively ranks senior
to the Notes and the Subsidiary Guarantees, was $154.4 million. Secured
indebtedness under the Senior Credit Agreement is the only material secured
indebtedness of the Company and its subsidiaries. As of December 27, 1997, the
Senior Credit Agreement provided the Company with $56.0 million of undrawn
availability, which, if drawn, also would effectively rank prior to the Notes
and the Subsidiary Guarantees. Upon an event of default under the Senior
Credit Agreement, the lenders thereunder would be entitled to foreclose on the
assets of the Company and the Guarantors pledged as security for the
indebtedness incurred thereunder. In such event, the assets of the Company and
the Guarantors remaining after payment of such secured indebtedness may be
insufficient to satisfy the obligations of the Company and the Guarantors with
respect to the Notes and the Subsidiary Guarantees. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Description of Notes."
14
<PAGE>
Fraudulent Conveyance
The issuance of the Notes and the Subsidiary Guarantees may be subject to
review by a court under federal bankruptcy law or comparable provisions of
state fraudulent transfer law. Under federal or state fraudulent transfer
laws, if a court were to find that, at the time the Notes and Subsidiary
Guarantees were issued, the Company or a Guarantor, as the case may be, (i)
issued the Notes or a Subsidiary Guarantee with the intent of hindering,
delaying or defrauding current or future creditors or (ii)(A) received less
than fair consideration or reasonably equivalent value for incurring the
indebtedness represented by the Notes or a Subsidiary Guarantee and (B)(1) was
insolvent or was rendered insolvent by reason of the issuance of the Notes or
such Subsidiary Guarantee, (2) was engaged, or about to engage, in a business
or transaction for which its remaining assets constituted unreasonably small
capital or (3) intended to incur, or believed (or should have believed) it
would incur, debts beyond its ability to pay as such debts mature (as all of
the foregoing terms are defined in or interpreted under such fraudulent
transfer statutes), such court could avoid all or a portion of the Company's
or a Guarantor's obligations to the holders of the Notes or subordinate the
Company's or a Guarantor's obligations to the holders of the Notes to other
existing and future indebtedness of the Company or such Guarantor, as the case
may be, the effect of which would be to entitle such other creditors to be
paid in full before any payment could be made on the Notes, and take other
action detrimental to the holders of the Notes, including in certain
circumstances, invalidating the Notes. In that event, there would be no
assurance that any repayment on the Notes would ever be recovered by the
holders of the Notes.
The definition of insolvency for purposes of the foregoing considerations
varies among jurisdictions depending upon the federal or state law that is
being applied in any such proceeding. However, the Company or a Guarantor
generally would be considered insolvent at the time it incurs the indebtedness
constituting the Notes or a Subsidiary Guarantee, as the case may be, if (i)
the fair market value (or fair saleable value) of its assets is less than the
amount required to pay its total existing debts and liabilities (including the
probable liability on contingent liabilities) as they become absolute or
matured or (ii) it is incurring debts beyond its ability to pay as such debts
mature.
There can be no assurance as to what standard a court would apply in order
to evaluate the parties' intent or to determine whether the Company or a
Guarantor, as the case may be, was insolvent at the time, or rendered
insolvent upon consummation, of the sale of the Notes or the issuance of a
Subsidiary Guarantee or that, regardless of the method of valuation, a court
would not determine that the Company or a Guarantor, as the case may be, was
insolvent at the time, or rendered insolvent upon consummation, of the Initial
Offering. Nor can there be any assurance that a court would not determine,
regardless of whether the Company or a Guarantor was insolvent on the date the
Notes and Subsidiary Guarantees were issued, that the payments constituted
fraudulent transfers on another ground.
In addition, the Subsidiary Guarantees could also be subject to the claim
that, since the Subsidiary Guarantees were incurred for the benefit of the
Company (and only indirectly for the benefit of the Guarantors), the
obligations of the Guarantors thereunder were incurred for less than
reasonably equivalent value or fair consideration. A court could avoid a
Guarantor's obligation under its Subsidiary Guarantee, subordinate the
Subsidiary Guarantee to other indebtedness of such Guarantor or take other
action detrimental to the holders of the Notes.
Restrictions Imposed by Terms of the Company's Indebtedness
The Indenture contains certain covenants that, among other things: (i) limit
the ability of the Company and its Restricted Subsidiaries to incur additional
indebtedness, repay other indebtedness and amend other debt instruments; (ii)
restrict the ability of the Company and its Restricted Subsidiaries to make
dividends and other restricted payments (including investments); (iii) limit
the ability of the Company and its Restricted Subsidiaries to incur certain
liens; (iv) limit the ability of the Company to engage in other lines of
business; (v) limit the ability of the Company to consolidate or merge with or
into, or to sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of its assets to, another person; (vi) limit the ability
of the Restricted Subsidiaries to create restrictions on the payment of
dividends and other payments; (vii) limit the ability of the
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Company and its Restricted Subsidiaries to make sales of assets and stock of a
subsidiary; (viii) limit transactions by the Company and its Restricted
Subsidiaries with affiliates; (ix) limit the sale of capital stock of
Restricted Subsidiaries; and (x) limit the ability of the Company and its
Restricted Subsidiaries to enter into sale and leaseback transactions. In
addition, the Senior Credit Agreement also contains certain other restrictive
covenants which are generally more restrictive than those contained in the
Indenture and limit the Company's ability to prepay its other indebtedness
(including the Notes). The Senior Credit Agreement also requires the Company
to maintain specified consolidated financial ratios and satisfy certain
consolidated financial tests. See "Description of Certain Indebtedness" and
"Description of Notes."
The Company's ability to comply with the covenants in the Indenture and the
Senior Credit Agreement may be affected by events beyond its control,
including prevailing economic, financial, competitive, legislative, regulatory
and other conditions. The breach of any such covenants or restrictions could
result in a default under the Indenture and/or the Senior Credit Agreement,
which would permit the holders of the Notes and/or the lenders under the
Senior Credit Agreement, as the case may be, to declare all amounts borrowed
thereunder to be due and payable, together with accrued and unpaid interest,
and the commitments of the lenders to make further extensions of credit under
the Senior Credit Agreement could be terminated. If the Company was unable to
repay its indebtedness to the lenders under the Senior Credit Agreement, such
lenders could proceed against any or all of the collateral securing the
indebtedness under the Senior Credit Agreement, which collateral will consist
of substantially all of the assets of the Company and the Guarantors. In
addition, if the Company fails to comply with the financial and operating
covenants contained in the Senior Credit Agreement, such failure could result
in an event of default thereunder, which could permit the acceleration of the
debt incurred thereunder and, in some cases, cross-acceleration and cross-
default of indebtedness outstanding under other debt instruments of the
Company, including the Notes. See "Description of Notes."
Limitation on Change in Control; Asset Sale Offer
Upon a Change of Control, the Company will be required to offer to purchase
all of the outstanding Notes at a price equal to 101% of the principal amount
thereof plus accrued and unpaid interest thereon to the date of repurchase.
The Senior Credit Agreement prohibits the Company from repurchasing the
Notes without the consent of the lenders (except that the proceeds from an
equity or subordinated debt offering may be used to repurchase the Notes). In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing the Notes, the Company could seek the consent of its lenders
to purchase the Notes or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or
refinance such borrowings, the Company will remain prohibited from purchasing
the Notes. In such case, the Company's failure to purchase tendered Notes
would constitute an Event of Default as defined under the Indenture. If, as a
result thereof, a default occurs with respect to any other senior
indebtedness, payments to the holders of the Notes could be limited.
In addition, the Change of Control provisions may not be waived by the Board
of Directors of the Company or the Trustee without the consent of holders of
at least a majority in principal amount of the Notes. As a result, the Change
of Control provisions of the Notes may in certain circumstances discourage or
make more difficult a sale, merger, tender offer or other takeover of the
Company and, thus, the removal of incumbent management, and may in the future
have an adverse effect on (i) on the market price of the Company's securities
and (ii) the ability of the Company to obtain additional financing. The Equity
Offering will not constitute a Change of Control. See "Description of Notes--
Change of Control."
Under certain circumstances, upon a disposition of assets having a fair
market value in excess of $5.0 million, the Company will be required to
purchase all of the outstanding Notes ("Asset Sale Offer") at a price equal to
100% of the principal amount thereof plus accrued and unpaid interest to the
purchase date from resulting net available cash (as defined in the Indenture).
The obligation to repurchase Notes pursuant to an Asset Sale Offer arise only
to the extent the Company does not apply proceeds from asset sales to the
indebtedness
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under the Senior Credit Agreement or to reinvestment in additional assets. If
an Asset Sale Offer was required to be made at a time when the Company is
prohibited from purchasing the Notes, the consent of the lenders under the
Senior Credit Agreement would be required. If such consent was not obtained,
an Event of Default would occur under the Indenture by virtue of the Company's
failure to purchase the Notes.
Lack of Public Market; Restrictions on Transferability
Pursuant to the Registration Rights Agreement, the Company and the
Guarantors have filed the Exchange Offer Registration Statement with the
Commission. If issued, the New Notes generally will be permitted to be resold
or otherwise transferred by each holder without the requirement of further
registration. The New Notes, however, will also constitute a new issue of
securities with no established trading market. The Exchange Offer will not be
conditioned upon any minimum or maximum aggregate principal amount of Old
Notes being tendered for exchange. No assurance can be given as to the
liquidity of the trading market for the New Notes following the Exchange
Offer. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "The Exchange
Offer."
The liquidity of, and trading market for, the New Notes also may be
adversely affected by a general decline in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
Waiver of Past Default or Compliance with Indenture
Subject to certain exceptions concerning, among other things, prescribed
principal, interest and premium payments, and stated maturity, which can be
changed only with the consent of each holder of Notes, the Indenture may be
amended with the consent of the holders of a majority in principal amount of
the Notes then outstanding and any past default or compliance with any
provisions may be waived (except with respect to payment of principal or
interest or other provision requiring unanimous consent of holders of Notes)
with the consent of the holders of a majority in principal amount of the Notes
then outstanding. As a result, the holder or holders of a majority in
principal amount of the Notes could amend the Indenture, and permit a default
under or non-compliance with the terms of the Indenture, which may be contrary
to the interests of other holders of Notes.
Dependence on Company's Subsidiaries for Repayment of Debt
The Company is dependent on the earnings and cash flow of, and dividends and
distributions or advances from, its subsidiaries to provide a portion of the
funds necessary to meet its debt service obligations, including the payment of
principal and interest on the Notes. There can be no assurance that the
Company's subsidiaries will generate sufficient cash flow, and dividend,
distribute or advance funds to the Company, or that the Company itself will
generate sufficient funds, to meet the Company's obligations on the Notes as
they become due.
RISK FACTORS RELATED TO THE COMPANY'S OPERATIONS
Dependence Upon New Products and Effect of Product Lifecycles
The Company's results of operations depend, to a significant extent, upon
its ability to develop and commercialize new pharmaceutical products in
response to the competitive dynamics within the pharmaceutical industry.
Generally, following the expiration of patents and any other market
exclusivity periods for branded drugs, the first pharmaceutical manufacturers
successfully to market generic equivalents of such drugs achieve higher
revenues and gross profit from the sale of such generic drugs than do others
from the sale of generic equivalents subsequently approved. As competing
generic products reach the market, the prices, sales volumes and profit
margins of the first generic versions often decline significantly. For these
reasons, the Company's ability to achieve growth in revenues and profitability
depends on its being among the first companies regularly to introduce new
generic products. While the Company believes the pipeline of generic drugs and
branded drugs it currently has under development will allow it to compete
effectively, no assurance can be given that any of the drugs in its pipeline
will be successfully developed or approved by FDA, will be among the first to
the market or will achieve significant revenues and profitability. See "--
Dependence on Successful Patent Litigation," "--Competition," "--Dependence on
Regulatory Approval and Compliance," "--Pending Regulatory Matters,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
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Dependence on Certain Existing Products
The Company derives and is expected to continue to derive a significant
portion of its revenues and gross profit from a limited number of products.
Net revenues from INFeD in 1997 were $104.4 million or 21% of the Company's
total net revenues, with gross profit from INFeD as a percentage of total
gross profit being significantly greater. Any material decline in revenues or
gross profit from these products could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Products."
Dependence on Successful Patent Litigation
A significant portion of the Company's revenues and gross profit has been
derived from generic versions of branded drug products covered by patents the
Company has challenged under the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Waxman-Hatch Act"). In several successful
proceedings, the Company has been advised and represented by an independent
patent attorney, Alfred B. Engelberg (the "Consultant"), whose involvement has
been substantial. The Company expects that the Consultant will be involved
with the Company in no more than two additional patent challenges, one of
which is currently being litigated. Through its internal efforts, and with the
assistance of third-party collaborators and advisors, the Company has
identified a number of additional patents that may be susceptible to
challenge. There can be no assurance the Company will successfully complete
the development of any additional products involving patent challenges,
succeed in any pending or future patent challenges or, if successful, receive
significant revenues or profit from the products covered by successfully
challenged patents. See "--Dependence Upon New Products and Effect of Product
Lifecycles," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Government Regulations."
Competition
The pharmaceutical industry is intensely competitive. The Company competes
with numerous companies in the pharmaceutical industry generally and the
generic segment of the industry specifically. These competitors include
generic drug manufacturers and large pharmaceutical companies that continue to
manufacture the branded and/or generic versions of drugs after the expiration
of their patents relating to these drugs. Many of the Company's competitors
have greater financial and other resources than the Company and, therefore,
are able to spend more than the Company on research, product development and
marketing. In addition, following the expiration of patents on branded drugs,
manufacturers of these products have employed various strategies intended to
maximize their share of the markets for these products, as well as, in some
cases, generic equivalents of these products, and are expected to continue to
do so in the future. There can be no assurance that developments by others
will not render any product the Company produces or may produce obsolete or
otherwise non-competitive. See "--Dependence Upon New Products and Effect of
Product Lifecycles," "--Consolidation of Distribution Network; Customer
Concentration" and "Business--Competition."
Dependence on Regulatory Approval and Compliance
The development, manufacture, marketing and sale of pharmaceutical products
is subject to extensive federal, state and local regulation in the U.S. and
similar regulation in other countries. The Company, like its competitors, must
obtain approval from FDA before marketing most drugs, and must demonstrate
continuing compliance with current Good Manufacturing Practices ("cGMP")
regulations. Generally, for generic products an ANDA is submitted to FDA, and
for new drugs, a New Drug Application ("NDA") is submitted. Under certain
circumstances following product approval and market introduction, FDA can
request product recalls, seize inventories and merchandise in commerce, move
to enjoin further manufacture and product distribution, suspend distribution
or withdraw FDA approval of the product, and debar a company from submitting
new applications. FDA also can take administrative action against a company to
suspend substantive review of pending applications and withhold approvals, if
it concludes that the data and applications from that company may not be
reliable or that there are significant unresolved cGMP issues pertinent to the
manufacture of drugs at a particular facility of that company. Any such
actions are likely to have a material adverse effect on a company's
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business. The Company has ANDAs currently pending before FDA and intends to
file additional ANDAs in the future. Delays in the review of these
applications or the inability of the Company to obtain approval of certain of
these applications or to market the product following approval could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "--Dependence Upon New Products and Effect of Product
Lifecycles," "--Pending Regulatory Matters" and "Business--Government
Regulations."
Pending Regulatory Matters
Over the past several years, FDA has inspected the Company's facilities and
in certain instances has reported inspectional observations that included
significant cGMP and application reporting deficiencies. As a result of these
inspectional observations, for varying periods of time, each of the Company's
facilities (other than its Humacao, Puerto Rico oral solid manufacturing
facility) has been ineligible (and one facility is currently ineligible) to
receive new product approvals.
As a result of its 1996 inspection of the Company's subsidiary, Steris
Laboratories, Inc. ("Steris"), FDA advised Steris that it will not approve any
ANDAs for products manufactured at the Steris facility until cGMP and
application reporting deficiencies noted during the inspection have been
corrected. In a 1997 inspection of the Steris facility, FDA identified
additional cGMP deficiencies, and Steris currently continues to be ineligible
to receive new product approvals. Therefore, none of the 11 pending ANDAs that
have been filed from the Steris facility (out of the Company's total of 23
pending ANDAs) is expected to be approved until FDA has confirmed that Steris
has satisfactorily resolved the noted deficiencies. In addition, as a result
of observations made in the 1996 inspection and an investigation by the FDA's
Office of Regulatory Affairs, Steris entered into a plea agreement with the
U.S. Department of Justice. Under the agreement, Steris pled guilty in January
1998 to misdemeanor violations for failure to observe application reporting
requirements for drug stability problems for two drugs during 1994 and 1995
and, consequently, paid a fine of $1.0 million. Also in early 1998, FDA issued
to Steris a Warning Letter relating to the deficiencies observed in the 1997
inspection of the Steris facility, including FDA's request that Steris
delineate its timetable for correction of cGMP deficiencies and provide FDA
with additional information regarding products for which corrective actions
have not been completed. FDA advised Steris in the Warning Letter that failure
to take prompt corrective action could result in seizure of product, an
injunction, and/or prosecution.
In 1995, FDA's inspection of the Company's subsidiary, Danbury Pharmacal,
Inc. ("Danbury"), which operates facilities in Carmel, New York and Danbury,
Connecticut, resulted in observations regarding compliance with cGMP
requirements and the reliability of data submitted by Danbury in support of
certain ANDAs. As a consequence, Danbury voluntarily engaged independent
experts to audit all critical data in a representative sampling of its pending
and approved ANDAs. Reports of the audits, all of which have been completed,
have been submitted to FDA for evaluation. FDA has not advised Danbury about
its review of the audit reports; however, the agency continues to review and
approve ANDAs submitted by Danbury.
Marsam Pharmaceuticals Inc. ("Marsam") was inspected by FDA during 1997 to
evaluate whether certain pending ANDAs could be approved. Certain cGMP
deficiencies were observed during the inspection, and ANDA approvals were
withheld pending completion of remedial actions by Marsam. Following a
reinspection in late 1997, Marsam has received new ANDA approvals.
There can be no assurance that FDA will determine that the Company has
adequately corrected the alleged deficiencies at its operating sites, that
subsequent inspections will not result in additional significant observations,
that approval of any of the pending or subsequently submitted ANDAs by the
Company will be forthcoming or that FDA will not seek to impose additional
regulatory sanctions against the Company or any of its subsidiaries. The range
of possible sanctions includes FDA issuance of adverse publicity, product
recalls or seizures, injunctions, and civil or criminal prosecution. Any such
sanctions, if imposed, could have a material adverse effect on the Company's
business, results of operations or financial condition. See "--Dependence Upon
New Products and Effect of Products Lifecycles," "--Dependence on Regulatory
Approval and Compliance" and "Business--Government Regulations."
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Consolidation of Distribution Network; Customer Concentration
The Company's principal customers are wholesale drug distributors and major
drug store chains. These customers comprise a significant part of the
distribution network for pharmaceutical products in the United States. This
distribution network is continuing to undergo significant consolidation marked
by mergers and acquisitions among wholesale distributors and the growth of
large retail drug store chains. As a result, a small number of large wholesale
distributors control a significant share of the market, and the number of
independent drug stores and small drug store chains has decreased. The Company
expects that consolidation of drug wholesalers and retailers will increase
pricing and other competitive pressures on generic drug manufacturers. The
Company believes this consolidation has caused and may continue to cause the
Company's customers to reduce purchases of the Company's products. In August
1997, Cardinal Health Inc. announced its intention to merge with Bergen
Brunswig Corporation. In addition, in September 1997 McKesson Corporation
announced its intention to merge with AmeriSource Health Corporation. The
proposed mergers among the four largest pharmaceutical wholesalers in the
United States, if consummated, would result in greater consolidation of the
pharmaceutical wholesaling industry and may intensify pricing and other
competitive pressures on generic pharmaceutical manufacturers. Specifically
for Schein, if the Cardinal Health--Bergen Brunswig merger had been
consummated at the beginning of 1997, the resulting combined customer would
have accounted for approximately 37% of the Company's total net revenues in
1997. The Federal Trade Commission ("FTC") has voted to oppose both of these
proposed mergers. While these companies may appeal the FTC decision, the
Company cannot predict whether, or on what terms, if any, these proposed
mergers would be consummated.
For the year ended December 1997, sales to the Company's ten largest
customers represented approximately 69% of the Company's total net revenues.
For the year ended December 1997, three customers accounted for 19%, 18% and
10%, respectively, of the Company's total net revenues. The same three
customers accounted for 16%, 15% and 11%, respectively, of the Company's total
net revenues in 1996. The loss of any of these customers could materially and
adversely affect the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Industry Overview."
Dependence on Collaborative Relationships
The Company develops and markets certain products through collaborative
arrangements with other companies through which it gains access to dosage
forms, proprietary drug delivery technology, specialized formulation
capabilities and active pharmaceutical ingredients. The Company relies on its
collaborative partners for any number of functions, including product
formulation, approval and supply. There can be no assurance these products
will be successfully developed or that the Company's partners will perform
their obligations under these collaborative arrangements. Further, there can
be no assurance that the Company will be able to enter into future
collaborative arrangements on favorable terms, or at all. Even if the Company
enters into such collaborative arrangements, there can be no assurance that
any such arrangement will be successful. See "Business--Strategy" and
"Business--Strategic Collaborations."
Supply of Raw Materials
The principal components of the Company's products are active and inactive
pharmaceutical ingredients and certain packaging materials. Many of these
components are available only from a single source and, in many of the
Company's ANDAs, only one supplier of raw materials has been identified, even
in instances when multiple sources exist. Because FDA approval of drugs
requires manufacturers to specify their proposed suppliers of active
ingredients and certain packaging materials in their applications, FDA
approval of any new supplier would be required if active ingredients or such
packaging materials were no longer available from the specified supplier. The
qualification of a new supplier could delay the Company's development and
marketing efforts. Any interruption of supply could have a material adverse
effect on the Company's ability to manufacture
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its products or to obtain or maintain regulatory approval of such products. In
addition, the Company obtains a significant portion of its raw materials from
foreign suppliers. Arrangements with international raw material suppliers are
subject, among other things, to FDA regulation, various import duties and
other government clearances. Acts of governments outside the U.S. may affect
the price or availability of raw materials needed for the development or
manufacture of generic drugs. In addition, recent changes in patent laws in
jurisdictions outside the U.S. may make it increasingly difficult to obtain
raw materials for research and development prior to the expiration of the
applicable U.S. patents. There can be no assurance that the Company will
establish or, if established, maintain good relationships with its suppliers
or that such suppliers will continue to supply ingredients in conformity with
legal or regulatory requirements. See "Business--Strategy" and "Business--
Manufacturing and Distribution."
Risk of Product Liability Claims; No Assurance of Adequate Insurance
The testing, manufacture and sale of pharmaceutical products involve a risk
of product liability claims and the adverse publicity that may accompany such
claims. The Company is a defendant in a number of product liability cases, the
outcome of which the Company believes should not materially and adversely
affect the Company's business, financial condition or results of operations.
Although the Company maintains what it believes to be an adequate amount of
product liability insurance coverage, there can be no assurance that the
Company's existing product liability insurance will cover all current and
future claims or that the Company will be able to maintain existing coverage
or obtain, if it determines to do so, insurance providing additional coverage
at reasonable rates. No assurance can be given that one or more of the claims
arising under any pending or future product liability cases, whether or not
covered by insurance, will not have a material adverse effect on the Company's
business, results of operations or financial condition. See "Business--Product
Liability; Insurance" and "Business--Legal Proceedings."
Control of the Company
Several of the Company's current principal stockholders are parties to the
Restructuring Agreements (as defined herein), one of which governs the voting
of their Common Stock and remains in effect until March 2000, subject to
earlier termination under certain circumstances. Upon such termination, the
stockholders who are parties to these agreements may be able to control all
matters requiring stockholder approval, including the election of directors.
The shares subject to these agreements represent a majority of the shares of
Common Stock to be outstanding immediately following the Equity Offering.
Under these agreements, the voting trustee (currently Martin Sperber, the
Chairman of the Board, Chief Executive Officer and President of the Company),
has the right to vote, or direct the vote of, the shares subject to these
agreements. As a result, Mr. Sperber will continue to control substantially
all matters requiring stockholder approval, including the election of
directors, following the Equity Offering.
Bayer Corporation, which owns 28.3% of the outstanding shares of Common
Stock immediately prior to the Equity Offering, may purchase shares of the
Company up to a maximum, in the aggregate, of 30% of the Company's outstanding
Common Stock between May 15, 1997 and May 15, 1999, 33 1/3% between May 16,
1999 and May 15, 2000 and 36 2/3% between May 16, 2000 and May 15, 2001. Bayer
Corporation is a party to an agreement (the "Standstill") with the Company
that, among other things, prevents Bayer Corporation from acquiring or seeking
to acquire control of the Company prior to May 15, 2001. After such date,
Bayer Corporation has the right to acquire control through open market
purchases, and under certain circumstances within six months of the end of the
Standstill, to acquire from certain principal stockholders of the Company or
from the Company at fair market value a number of shares that would enable
Bayer Corporation to own a majority of the outstanding shares of Common Stock.
During the Standstill, under the terms of the Restructuring Agreements, Bayer
Corporation has the right to acquire, including under certain circumstances
the right to acquire from the Company and certain of its principal
stockholders, unless Bayer Corporation has sold shares of Common Stock other
than to certain permitted transferees, (i) shares in connection with its
exercise of certain preemptive rights, (ii) after the Qualified Public
Offering Date (as defined below) and before May 15, 2001,
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shares necessary to acquire ownership of at least 21% more of the outstanding
Common Stock than any other holder of 10% or more of the Common Stock (other
than an employee benefit plan or a current stockholder) (the "Investment
Spread"), (iii) if, within 30 days after the Qualified Public Offering Date,
Bayer Corporation has the right to acquire ownership of at least 21% more of
the outstanding Common Stock than any other holder of 10% or more of the
Common Stock (other than a current stockholder or employee benefit plan) and
the total number of shares issued and outstanding (less restricted securities,
as defined therein) (the "Public Float") is less than 133% of the Investment
Spread, shares equal to the amount such Public Float is less than 133% of the
Investment Spread and (iv) if, on May 15, 2001, the Public Float is less than
133% of the number of shares that, when added to Bayer Corporation's shares,
equals a majority of the shares then outstanding, shares equal to such amount.
Until Bayer Corporation owns less than 10% of the outstanding Common Stock
(the "Governance Termination Date"), Bayer Corporation has the right to
nominate a number of members of the Board of Directors of the Company, rounded
down to the nearest whole number, (until Bayer holds more than 50% of the
outstanding Common Stock, then rounded up to the nearest whole number), equal
to the product of (a) the number of members of the Board of Directors and (b)
Bayer Corporation's percentage stockholding of Common Stock of the Company at
the time of nomination. Currently, Bayer Corporation has the right to nominate
one director. During the period that Bayer has the right to nominate only one
director, Bayer may designate a second individual to attend Board meetings
solely as an observer without any right to vote or participate in these
meetings.
Until May 15, 2001, the Company may not undertake certain actions without
the consent of Bayer Corporation, including, among other things, (a) engaging
in any business not principally in a segment of the pharmaceutical or health
care industry (b) amending the Company's charter or by-laws to require more
than majority approval to elect a majority of the Board of Directors, or (c)
engaging in transactions with affiliates on terms more favorable to the
affiliate than could be obtained in arm's length transactions, other than
intercompany transactions and transactions under the Restructuring Agreements.
In addition, until the shares of the Company's Common Stock held by more than
300 persons who are neither current stockholders, their permitted transferees
nor employees of the Company have a total market value in excess of $100.0
million (the "Qualified Public Offering Date"), the Company may not undertake
certain other actions (including incurring funded debt in excess of certain
ratios, or declaring certain dividends or making certain distributions in
respect of the Company's Common Stock) without the consent of Bayer
Corporation.
Each of the provisions described above may make it more difficult for a
third party to acquire, or may discourage acquisition bids for, Schein and
could limit the price that certain investors might be willing to pay in the
future for shares of the Common Stock. See "Principal Stockholders--
Restructuring Agreements."
Fluctuating Results of Operations
During the past three years, the Company's results of operations have
fluctuated materially on both an annual and a quarterly basis. These
fluctuations have resulted from several factors, including, among others, the
timing of introductions of new products by the Company and its competitors,
timing of receipt of patent settlement revenues, dependence by the Company on
a limited number of products, the Marsam Acquisition (as defined herein) in
1995 and weak performance by the generic drug industry in the second half of
1996 and continuing into the first half of 1997. The Company believes that it
will continue to experience fluctuations in net revenues, gross profit and net
income as a result of, among other things, the timing of regulatory approvals
and market introduction of new products by the Company and its competitors,
and downward pressure on pricing for generic products available from multiple
approved sources. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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THE COMPANY
The Company was founded in 1985. From 1992 to 1994, the Company engaged in a
series of corporate reorganization transactions, including the separation of
the Company from Henry Schein, Inc., a company engaged in the direct marketing
of health care products and services to office-based health care
practitioners, and the Company's reincorporation from New York to Delaware by
way of the merger of the Company's parent into the Company. In 1994, Bayer
Corporation purchased 28.3% of the Company's outstanding shares and agreed to
pursue future strategic alliances with the Company. In September 1995, the
Company acquired all the outstanding shares of Marsam, a developer,
manufacturer and marketer of generic injectable prescription drugs.
The Company is a Delaware corporation with its corporate offices at 100
Campus Drive, Florham Park, New Jersey 07932. Its telephone number is (973)
593-5500.
USE OF PROCEEDS
There will be no cash proceeds to the Company from the exchange pursuant to
the Exchange Offer. The net proceeds from the Initial Offering of $100.0
million were used to repay the Senior Subordinated Loan.
23
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of December 27, 1997. This table should be read in conjunction with
the Consolidated Financial Statements of the Company and the notes thereto
included elsewhere in this Prospectus. See "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 1997
--------------
(IN THOUSANDS)
<S> <C>
SHORT-TERM DEBT:
Revolving credit facility (1)................................. $ 44,000
Current portion of term loan facility......................... 11,579
Current portion of capitalized lease obligations and other.... 861
--------
Total short-term debt....................................... $ 56,440
========
LONG-TERM DEBT:
Term loan facility............................................ $ 98,421
Senior Floating Rate Notes Due 2004........................... 100,000
Capitalized lease obligations................................. 284
--------
Total long-term debt........................................ 198,705
--------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; 952 authorized shares, 273
issued and outstanding....................................... 3
Additional paid-in capital.................................... 38,778
Retained earnings............................................. 99,483
Other......................................................... 1,451
--------
Total stockholders' equity.................................. 139,715
--------
Total capitalization...................................... $338,420
========
</TABLE>
- --------
(1) As of December 27, 1997, the Company had approximately $56.0 million of
borrowing availability under the Senior Credit Agreement, subject to
satisfaction of certain conditions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
The following selected consolidated financial data with respect to the
Company's financial position at December 1996 and 1997, and its results of
operations for the years ended December 1995, 1996 and 1997, has been derived
from the audited consolidated financial statements of the Company included
elsewhere in this Prospectus. The selected consolidated financial information
with respect to the Company's financial position at December 1993, 1994 and
1995, and its results of operations for the years ended December 1993 and
1994, has been derived from the audited consolidated financial statements of
the Company which are not included in this Prospectus. The selected
consolidated financial data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
-------------------------------------------------
1993 1994 1995(1) 1996 1997
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues............... $393,926 $385,428 $ 391,846 $476,295 $490,170
Cost of sales.............. 217,653 237,380 250,507 320,675 329,761
-------- -------- --------- -------- --------
Gross profit.............. 176,273 148,048 141,339 155,620 160,409
Costs and expenses:
Selling, general and
administrative........... 64,489 71,783 75,274 87,329 81,809
Research and development.. 18,055 19,170 28,324 27,030 29,387
Amortization of goodwill
and other intangibles.... -- -- 3,399 10,195 10,196
Special compensation,
restructuring and
relocation(2)............ 8,426 33,594 -- -- --
Acquired in-process Marsam
research and
development(1)........... -- -- 30,000 -- --
-------- -------- --------- -------- --------
Operating income........... 85,303 23,501 4,342 31,066 39,017
Interest expense, net..... 1,467 1,493 10,005 23,285 26,578
Other expense (income),
net(3)................... 9,215 212 (1,245) 1,193 (9,318)
-------- -------- --------- -------- --------
Income (loss) before taxes
on income and minority
interest................. 74,621 21,796 (4,418) 6,588 21,757
Provision for income
taxes.................... 29,096 15,165 10,482 5,191 10,655
Minority interest......... (343) -- -- -- --
-------- -------- --------- -------- --------
Net income (loss).......... $ 45,868 $ 6,631 $ (14,900) $ 1,397 $ 11,102
======== ======== ========= ======== ========
OTHER DATA:
EBITDA(4).................. $ 83,864 $ 32,035 $ 52,232 $ 53,147 $ 70,834
Adjusted EBITDA(5) 91,864 61,074 50,396 54,932 61,344
Net cash provided by
operating activities...... 48,789 26,169 19,626 10,756 34,875
Net cash (used in) provided
by investing activities... (23,376) (20,683) (251,443) (20,016) 87
Net cash (used in) provided
by financing activities... (35,621) (1,986) 228,931 3,562 (36,297)
Depreciation and
amortization.............. 7,328 8,464 17,395 25,450 25,474
Capital expenditures, net.. 22,806 16,135 13,986 11,309 14,446
Ratio of earnings to fixed
charges(6)................ 26.9x 8.0x 0.6x 1.3x 1.8x
Pro forma interest
expense(7)................ 25,147
</TABLE>
<TABLE>
<CAPTION>
DECEMBER
--------------------------------------------
1993 1994 1995(1) 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................... $ 87,035 $ 98,610 $ 92,021 $ 99,111 $ 73,249
Total assets...................... 227,861 269,729 522,410 544,312 534,126
Short-term debt, including current
portion of long-term debt........ 1,838 3,465 40,078 41,090 56,440
Long-term debt, less current
portion.......................... 25,725 42,462 240,480 245,390 198,705
Stockholders' equity.............. 130,336 140,164 125,692 129,980 139,715
</TABLE>
25
<PAGE>
- --------
(1) Includes the results of Marsam from September 1995, the date of purchase.
In connection with the purchase of Marsam, the Company recognized acquired
in-process research and development. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 2 to
the Consolidated Financial Statements of the Company.
(2) Special compensation, restructuring and relocation expenses includes costs
recognized by the Company in connection with its restructuring and
relocation of its corporate headquarters. From 1992 to 1994, the Company
engaged in a series of corporate reorganization transactions, including
the separation of the Company from Henry Schein, Inc., which is engaged in
the direct marketing of health care products and services to office-based
health care practitioners. In connection with these transactions, Bayer
Corporation purchased from the Company's stockholders 28.3% of the
Company's outstanding shares, and agreed with the Company to pursue future
strategic alliances. Charges for special compensation, restructuring and
relocation incurred in connection with the reorganization aggregated $8.4
million and $33.6 million for 1993 and 1994, respectively.
(3) Other expense (income), net, includes equity in earnings (loss) of
unconsolidated international ventures of $(0.4) million, $(3.4) million
and $(3.4) million in 1995, 1996 and 1997, respectively, gain on sales of
marketable securities of $12.7 million in 1997, and a settlements
contingency of $8.0 million in 1993.
(4) EBITDA is defined as income (loss) before provision for income taxes and
minority interest, interest expense, depreciation and amortization and the
$30 million charge in fiscal 1995 for acquired in-process Marsam research
and development. The Company has included information concerning EBITDA in
this Registration Statement because it believes that such information may
be used by certain investors as one measure of a company's historical
ability to service debt. EBITDA is not a measurement presented in
accordance with generally accepted accounting principles. EBITDA should
not be considered in isolation; as a substitute for net income, cash flow
provided by operating activities or other income or cash flow data
prepared in accordance with generally accepted accounting principles; or
as a measure of the Company's profitability or liquidity. EBITDA as used
in this Registration Statement may not be comparable to "EBITDA" as
reported by other companies.
(5) Adjusted EBITDA is defined as EBITDA, as adjusted to reflect gains on
sales of securities and non-cash items (special compensation, contingent
settlement accruals, equity in net losses of international investments and
other non-cash items). The Company has included information concerning
Adjusted EBITDA in this Registration Statement because it believes that
such information may be used by certain investors as one measure of a
company's historical ability to service debt. Adjusted EBITDA should not
be considered as an alternative to, or more meaningful than, earnings from
operations or other traditional indications of a company's operating
performance. See footnote (4) above.
(6) The ratio of earnings to fixed charges is computed by dividing (i) income
(loss) before provision for income taxes and minority interest plus fixed
charges by (ii) fixed charges. Fixed charges consist of interest on
indebtedness, including amortization of debt issuance costs and the
estimated interest component of rental expense (assumed to be one-third).
In fiscal 1995, fixed charges exceeded income (loss) before provision for
income taxes and minority interest by $4.4 million.
(7) Pro forma interest expense represents what interest expense, including
amortization of debt issuance costs, would have been had the Initial
Offering occurred on December 29, 1996 and the proceeds thereof used by
the Company to retire the Senior Subordinated Loan.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial
Statements of the Company and Notes thereto included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements that involve
risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in
this Prospectus should be read as being applicable to all related forward-
looking statements wherever they appear in this Prospectus. See "Risk
Factors."
OVERVIEW
The Company currently manufactures and markets two classes of pharmaceutical
products, generic products and branded products. Generic products are
comprised of the Company's core products (including methylphenidate and
ketoprofen ER) and patent review products and settlements resulting from the
Company's patent challenge activities. The Company's primary branded product,
INFeD, is the leading injectable iron product in the United States.
The Company's results of operations depend on the Company's ability to
develop and commercialize new pharmaceutical products. Generally, following
the expiration of patents and any other market exclusivity periods for branded
drugs, the first pharmaceutical manufacturers successfully to market generic
equivalents of such drugs achieve higher revenues and gross profit from the
sale of such generic drugs than do others from the sale of generic equivalents
subsequently approved. As competing generic equivalents reach the market, the
prices, sales volumes and profit margins of the earliest generic versions
often decline significantly. For these reasons, the Company's ability to
achieve growth in revenues and profitability depends on its being among the
first companies to introduce new generic products. During the past five years,
the Company has introduced a number of generic products to the market at
patent expiration dates and in a number of cases prior to patent expiration of
the branded product by successful challenges to the patent under the Waxman-
Hatch Act.
The Company's dependence on a limited number of products, the product cycles
of such products, and the timing of receipt of patent settlement revenues have
resulted in significant fluctuations in the Company's earnings. Continued
growth in the Company's revenues will depend on continued market demand for
its products, as well as the successful introduction and marketing of new
products.
The development, manufacture, marketing and sale of pharmaceutical products
is subject to extensive federal, state and local regulation. The Company, like
other industry participants, must obtain approval from the FDA before
marketing most drugs, and must demonstrate continuing compliance with cGMP
regulations in its production. Over the last several years, FDA has inspected
various Company manufacturing facilities. As a result of these inspections,
FDA has required that the Company modify certain of its manufacturing and
other practices and, at times, withheld approval of certain applications for
new products, pending satisfactory resolution of issues identified during the
inspections. However, all the Company's manufacturing facilities have
continued production, and there has been no significant impact on overall
production. Certain significant delays in the review or approval of
applications for new products could have a material adverse effect on the
Company's future prospects. See "Risk Factors--Dependence on Regulatory
Approval and Compliance," "--Pending Regulatory Matters" and "Business--
Government Regulations."
The Company acquired all the outstanding capital stock of Marsam (the
"Marsam Acquisition") in September 1995 for $245.0 million in cash, which
expanded the Company's ability to manufacture sterile penicillins and oral and
sterile cephalosporins.
27
<PAGE>
The following table sets forth the net revenues of the Company's generic and
branded businesses for each of the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
--------------------
1995 1996 1997
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Generic business:
Core products........................................... $284.8 $322.3 $306.2
Patent reviews
Patent challenge product revenues..................... 35.0 52.5 54.6
Settlement revenues................................... 5.0 13.5 25.0
------ ------ ------
Total patent review revenues.......................... 40.0 66.0 79.6
Total generic revenues................................ 324.8 388.3 385.8
------ ------ ------
Branded business:
INFeD................................................... 67.0 88.0 104.4
------ ------ ------
Total net revenues.................................... $391.8 $476.3 $490.2
====== ====== ======
</TABLE>
Patent challenge product revenues and settlement revenues resulted from the
Company's patent review activities. Settlement revenues in 1995, 1996 and 1997
reflect funds received from a pharmaceutical company pursuant to an agreement
reached with the Company in 1994. Under the agreement, which provides that
certain contingent payments may be made to the Company, the Company received a
final payment of $30 million in the first quarter of 1998, half of which was
paid to the Consultant. In addition to the amounts paid to the Consultant, the
Company incurs substantial other costs related to its patent review activities
as part of its overall product development activities. See Note 10 to the
Consolidated Financial Statements of the Company.
In 1992, the Company entered the branded pharmaceutical segment of the
market by introducing INFeD, which is currently the leading iron injectable
product in the U.S. Net revenues from INFeD as a portion of total net revenues
increased from 17% in 1995 to 21% in 1997. Gross profit margins on INFeD
generally exceed gross profit margins on the Company's generic products.
Accordingly, the gross profit from increased sales of INFeD have offset the
reduction in gross profit from generic products during the periods presented.
The Company's product line includes both solid dosage and sterile dosage
generic products. The Company is also developing a line of specialty branded
pharmaceuticals. The following table sets forth the percentages of the
Company's net revenues attributable to its generic and branded businesses:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Generic business:
Manufactured sterile dosage..................... 30% 38% 33%
Manufactured solid dosage....................... 35 28 33
Purchased products.............................. 18 15 13
------ ------ ------
Total generic................................. 83 81 79
Branded business:
INFeD........................................... 17 19 21
------ ------ ------
Total......................................... 100% 100% 100%
====== ====== ======
</TABLE>
During the period from 1995 to 1996, the Company's percentage of net
revenues from manufactured sterile dosage products and INFeD increased and the
percentage of net revenues from solid dosage products declined. This reflects
(i) the Company including Marsam's results (predominantly sterile dosage
products) since its acquisition by the Company in September 1995, (ii) INFeD
sales rising faster than the Company's total net revenues, and (iii) older
solid dosage products experiencing declines in selling prices as competitors
have entered the market. The increase in percentage of net revenues from solid
dosage products in 1997 reflects the approval and launch in that year of
methylphenidate and ketoprofen ER.
28
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain selected statement of operations data
as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
-----------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net revenues.......................................... 100.0% 100.0% 100.0%
Cost of sales......................................... 63.9 67.3 67.3
------ ------ ------
Gross profit.......................................... 36.1 32.7 32.7
Costs and expenses:
Selling, general and administrative................. 19.2 18.3 16.6
Research and development............................ 7.2 5.7 6.0
Amortization of goodwill and other intangibles...... 0.9 2.1 2.1
Acquired in-process Marsam research and
development........................................ 7.7 -- --
------ ------ ------
Operating income...................................... 1.1 6.6 8.0
Interest expense, net............................... 2.5 4.9 5.4
Other expense (income), net......................... (0.3) 0.3 (1.9)
------ ------ ------
Income (loss) before provision for income taxes....... (1.1) 1.4 4.5
Provision for income taxes.......................... 2.7 1.1 2.2
------ ------ ------
Net income (loss)..................................... (3.8)% 0.3% 2.3%
====== ====== ======
</TABLE>
1997 COMPARED TO 1996
Net revenues increased $13.9 million, or 2.9%, from $476.3 million in 1996
to $490.2 million in 1997. In the branded business, sales increased $16.4
million, partially offset by a $2.5 million decline in the generic business.
The increase in branded product sales reflected primarily an increase in units
sold. The decline in generic business resulted from $32.2 million of price
erosion in core products and $20.6 million resulting from a strategic decision
in the second half of 1996 to discontinue certain lower-margin manufacturing
and lower margin outsourced products, partially offset by a $26.6 million
increase in sales of new products, a $10.1 million volume increase in sales of
core products and a $13.6 million increase in total patent review revenues.
The increase in patent review revenues resulted primarily from an $11.5
million increase in settlement revenues. Two new generic products that were
launched in the fourth quarter of 1997 are methlyphenidate and ketoprofen ER,
which had combined revenues of $17.8 million.
Gross profit increased $4.8 million, or 3.1%, from $155.6 million in 1996 to
$160.4 million in 1997. The gross margin was flat at 32.7% in 1996 and 1997.
The increase in gross profit was principally the result of increased revenues
of INFeD, new products and an increase in settlement revenues offset by price
erosion in core products. Gross profit reflects, among other things, net
revenues from sales of patent challenge products and settlement revenues,
offset, in part, by payments to the Consultant under the Consulting Agreement,
which payments are included in cost of sales. In that regard, for projects in
which the Consultant has rendered an opinion setting forth the basis for a
possible patent challenge, the Company pays the Consultant half the adjusted
gross profits (as defined) from the Company's sale of generic versions of the
patented product until the date on which the patent would normally have
expired or half the proceeds of any settlement.
Selling, general and administrative expenses decreased $5.5 million, or
6.3%, from $87.3 million in 1996 to $81.8 million in 1997. Selling, general
and administrative expenses as a percentage of net revenues decreased from
18.3% in 1996 to 16.6% in 1997. The decrease in selling, general and
administrative expenses was due primarily to a reduction in the generic field
sales force due to consolidation of the customer base and overall cost control
efforts.
Research and development expenses increased $2.4 million, or 8.7%, from
$27.0 million in 1996 to $29.4 million in 1997 as a result of increased
research and development activities generally.
Amortization of goodwill and other intangibles was unchanged from 1996 to
1997.
As a result of the factors discussed above, operating income increased $7.9
million, or 25.6%, from $31.1 million in 1996 to $39.0 million in 1997.
29
<PAGE>
Interest expense, net, increased $3.3 million, or 14.1%, from $23.3 million
in 1996 to $26.6 million in 1997 principally due to higher amortization of
deferred financing expenses of $2.6 million and increased interest costs of
$0.7 million resulting from refinancing of senior debt with higher cost
subordinated debt in December 1996. The higher cost subordinated debt was
exchanged for lower cost senior floating rate debt in December 1997.
Other expense (income), net, changed by $10.5 million from an expense of
$1.2 million in 1996 to income of $9.3 million in 1997 primarily due to gains
on the sale of marketable securities of $12.7 million.
The Company's effective tax rate is higher than the statutory rate due to
the effect of significant non-deductible expenses. The effective tax rate
decreased from 78.8% in 1996 to 49.0% in 1997, primarily as a result of higher
income offsetting fixed non-deductible expenses.
1996 COMPARED TO 1995
Net revenues increased $84.5 million, or 21.6%, from $391.8 million in 1995
to $476.3 million in 1996. In the branded business, sales increased $21.0
million while generic sales increased $63.5 million. The increase in branded
product sales largely reflected an increase in units sold. The increase in the
generic business is primarily due to $32.2 million in sales from the Marsam
Acquisition in the third quarter of 1995, and a $20.3 million increase in core
product volume, partially offset by $15.0 million in price erosion. Patent
review revenues increased $26.0 million, due to a $17.5 million increase in
patent challenge product revenues and an increase in settlement revenues of
$8.5 million.
Gross profit increased $14.3 million, or 10.1%, from $141.3 million in 1995
to $155.6 million in 1996. The gross margin decreased from 36.1% in 1995 to
32.7% in 1996. The increase in gross profit was largely attributable to
increased revenues of INFeD, increases in patent challenge product revenues
and settlement revenues and the full year of Marsam results. These increases
were partially offset by significant price erosion primarily in solid dosage
core products in the second half of 1996.
Selling, general and administrative expenses increased $12.0 million, or
15.9%, from $75.3 million in 1995 to $87.3 million in 1996, but decreased as a
percentage of net revenues from 19.2% in 1995 to 18.3% in 1996. Selling,
general and administrative expenses increased due primarily to increased sales
volume, the full year impact of the Marsam Acquisition and an increase in
promotional activities in support of new product launches.
Research and development expenses decreased $1.3 million, or 4.6%, from
$28.3 million in 1995 to $27.0 million in 1996. Acquired in-process Marsam
research and development charges of $30.0 million were fully reflected in
1995.
Amortization of goodwill and other intangibles increased $6.8 million from
$3.4 million in 1995 to $10.2 million in 1996, giving effect to the full year
impact of the Marsam Acquisition.
As a result of the factors discussed above, operating income increased $26.8
million from $4.3 million in 1995 to $31.1 million in 1996.
Interest expense, net, increased $13.3 million from $10.0 million in 1995 to
$23.3 million in 1996. The increase was due primarily to the increase in
average debt associated with the financing for the Marsam Acquisition and
higher interest rates.
Other expense (income), net, increased $2.4 million from income of $1.2
million in 1995 to an expense of $1.2 million in 1996. Equity losses from the
Company's investment in international joint ventures accounted for $3.0
million of the increase.
The Company's effective tax rate is higher than the statutory rate due to
the effect of significant non-deductible expenses, which were largely
comprised of amortization of intangibles and the acquired in-process Marsam
research and development charge.
30
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its business operations primarily
through a revolving credit facility and used long-term bank financing to fund
acquisitions. The Company intends to finance future acquisitions through the
issuance of new common shares, the incurrence of new debt or both. The
incurrence of new debt is subject to certain limitations under the Senior
Credit Agreement and the Notes and the Indenture.
Net cash provided by operating activities was $34.9 million and $10.8
million for the years 1997 and 1996, respectively. The net cash provided by
operating activities during 1997 was attributable to net income, as adjusted
for non-cash charges, of $24.9 million and an increase in accounts payable and
accrued expenses and a decline in inventories of $27.6 million, offset by an
increase in accounts receivable and prepaid expenses and other assets of $17.6
million. The net cash provided by operating activities during 1996 was
attributable to net income, as adjusted for non-cash charges, of $27.9 million
and an increase in accounts payable and accrued expenses and a decrease in
prepaid expenses and other assets of $13.9 million, offset by an increase in
inventories and accounts receivable of $31.0 million.
Net cash provided by investing activities for 1997 was $0.1 million compared
to net cash used in investing activities in 1996 of $20.0 million. Cash
provided by investing activities in 1997 resulted from the proceeds of
sales of marketable securities of $14.7 million, offset primarily by capital
expenditures, net of $14.4 million. The 1996 use of cash in investing
activities was primarily due to (i) capital expenditures, net, (ii) purchase
of product rights and licenses and (iii) investments in international joint
ventures aggregating $17.4 million.
Net cash used in financing activities for the year 1997 of $36.3 million
resulted from the net repayment of debt. Net cash provided by financing
activities for the year 1996 of $3.6 million was primarily due to net proceeds
of debt.
In September 1995, the Company entered into the Senior Credit Agreement with
a group of banks to provide funds for the Marsam Acquisition, the repayment of
certain debt, working capital and general corporate purposes. The Senior
Credit Agreement, which expires in December 2001, provided a term loan
facility of $250.0 million and a revolving credit facility of $100.0 million.
Amounts outstanding under the revolving credit facility were $41.0 million and
$44.0 million as of year-end 1996 and 1997, respectively.
In December 1996, the Company prepaid $100.0 million of the term loan
portion of the Senior Credit Agreement using the proceeds from a $100.0
million senior subordinated loan (the "Senior Subordinated Loan"). As a result
of this payment and a scheduled payment, the term loan facility was reduced to
$145.0 million by December 1996. In the year 1997, the Company made voluntary
principal payments of $35.0 million, thus reducing the term loan portion to
$110.0 million by year end. Quarterly principal payments on the term loan will
begin in September 1998 and end in the year 2001. In addition to such
principal payments, the Company is required to make additional principal
payments from its excess cash flow, as defined in the agreement, if its
leverage exceeds certain levels, and if the Company raises new capital from
either the issuance of securities or certain asset sales not in the ordinary
course of business. Borrowings under the Senior Credit Agreement bear
interest, which is payable at least quarterly, at a rate equal to a floating
base rate plus a premium ranging from zero to 1.50% or at a rate equal to
LIBOR plus a premium ranging from 0.75% to 2.50%, depending on the type of
borrowing and the Company's performance against certain criteria. The Senior
Credit Agreement also contains restrictions on the payment of dividends by the
Company. The agreement provides that dividends may not be paid unless Total
Debt is below 2.5 times the trailing four quarters of EBITDA, each such term
as defined in the agreement. Dividends may not exceed 25% of the cumulative
net income less any losses from October 1, 1995 to the most recent fiscal
quarter end.
In December 1997, the Company issued the Old Notes, the proceeds of which
were used to repay the Senior Subordinated Loan. Interest on the Notes is
payable quarterly at a rate per annum equal to LIBOR plus 3%. The Notes will
mature in December 2004, unless previously redeemed. The Notes will be
redeemable, in whole or in part, at the option of the Company, at any time at
the specified redemption prices. Upon the occurrence of a change of control,
each holder of Notes may require the Company to repurchase such holder's
Notes, in whole or in part, at a repurchase price of 101% of the principal
amount, plus accrued and unpaid interest. The Equity
31
<PAGE>
Offering does not constitute a "change of control" under the Notes. The Notes,
which are unsecured obligations of the Company, rank pari passu with all
existing and future senior indebtedness of the Company, and will rank senior
in right of payment to all existing and future indebtedness of the Company
that is, by its terms, expressly subordinated to the Notes. The Notes also
provide that additional indebtedness may be incurred as long as, after giving
effect to such incurrence, the consolidated coverage ratio (the ratio of
consolidated cash flows to consolidated interest expense, as each such term is
defined in the Indenture) is greater than 2.5 times for the years 1998 and
1999 and 3.0 times thereafter. Dividends can be paid only if, at the time of
payment, the Company is able to incur an additional dollar of indebtedness by
complying with such ratio. In addition, cumulative dividends cannot exceed 50%
of the cumulative net income and the net proceeds of any equity offering to
the most recent fiscal quarter.
The Company in February 1998 entered into a strategic alliance agreement
with Cheminor Drugs Limited and its subsidiaries ("Cheminor") and Dr. Reddy's
Laboratories Limited and its subsidiaries ("Reddy"). Pursuant to the
agreement, Cheminor will make available to the Company its present and future
dosage form generic products on an exclusive basis in the United States and
certain other countries, and the Company will make available to Cheminor and
Reddy its present and future products on an exclusive basis for sale in India
and certain other countries. Cheminor and Reddy will make available to the
Company bulk active pharmaceutical ingredients. As part of the arrangement,
the Company purchased 2.0 million publicly traded shares of Cheminor Drugs
Limited (12.79% of the currently outstanding shares of Cheminor Drugs Limited)
for $10.0 million using funds from the revolving credit facility under the
Senior Credit Agreement, and under certain circumstances has the right and the
obligation to purchase an additional 1.0 million shares for $5.0 million.
Cheminor will have the right to make fair market value purchases of the
Company's Common Stock, once the shares are publicly traded; the purchase
price may be payable from profits otherwise due Cheminor from the alliance.
Each party will also be entitled to representation on the other company's
board of directors consistent with its equity interest.
The Company believes that cash generated from its operations, its existing
credit facilities and the availability of $56.0 million under such facilities
as of December 1997 are sufficient to finance its current level of operations
and currently contemplated capital expenditures and strategic investments
through the next 12 months. In the event the Company makes any significant
acquisitions, it may be required to raise additional funds, through the
issuance of additional debt or equity securities. There can be no assurance
that such funds, if required, would be available or, if available, would be on
terms acceptable to the Company.
The Company intends to use all of the proceeds of the Equity Offering to
repay a portion of the revolving and/or term loan facility under the Senior
Credit Agreement, which matures on December 31, 2001 and bears interest at a
rate at December 1997 of 7.91%, and/or to repurchase and retire a portion of
the Notes, which bear interest at a rate at December 1997 of 8.94% and which
were issued in exchange for the Company's Senior Subordinated Loan. Reductions
to the revolving loan facility may be reborrowed. All repayments or
repurchases of the term loan facility and Notes will be permanent. See
"Capitalization" and "Business--Strategic Collaborations."
QUARTERLY INFORMATION
As a result of a variety of factors, including the introduction of new
products by the Company, the timing of receipt of patent settlement revenues
and changes in the degree of competition for the Company's products, the
Company's quarterly results of operations have fluctuated significantly and
are expected to fluctuate significantly in the future.
32
<PAGE>
The following tables present unaudited quarterly financial data for the
years 1996 and 1997. The Company believes all necessary adjustments have been
included in the amounts stated below to present fairly the selected quarterly
information when read in conjunction with the Consolidated Financial
Statements of the Company and the notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 1996 YEAR ENDED DECEMBER 1997
(UNAUDITED) (UNAUDITED)
-------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Net product sales...... $109,949 $120,398 $108,325 $124,123 $106,839 $114,441 $107,549 $136,341
Settlements revenues... 13,500 -- -- -- 25,000 -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total net revenues..... 123,449 120,398 108,325 124,123 131,839 114,441 107,549 136,341
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 42,420 37,620 35,411 40,169 44,722 36,568 31,977 47,142
Cost and expenses:
Selling, general and
administrative........ 20,636 21,480 21,229 23,984 19,942 19,129 20,885 21,853
Research and
development........... 7,242 8,119 7,683 3,986 6,744 7,434 8,676 6,533
Amortization of
goodwill and other
intangibles........... 2,548 2,550 2,615 2,482 2,550 2,598 2,574 2,474
-------- -------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................. 11,994 5,471 3,884 9,717 15,486 7,407 (158) 16,282
Interest expense, net.. 5,321 5,379 5,382 7,203 6,884 6,850 6,722 6,122
Other expenses
(income), net......... (603) (646) 797 1,645 1,094 (1,077) (6,559) (2,776)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
provision for income
taxes.................. 7,276 738 (2,295) 869 7,508 1,634 (321) 12,936
Provision for income
taxes.................. 3,343 733 (503) 1,618 3,625 1,315 155 5,560
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 3,933 $ 5 $ (1,792) $ (749) $ 3,883 $ 319 $ (476) $ 7,376
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
INFLATION
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards.
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
Reporting Comprehensive Income, establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
Disclosures about Segments of an Enterprise and Related Information, which
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
33
<PAGE>
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Results of operations and financial position
will be unaffected by implementation of these new standards. The Company has
not determined whether either of these two standards will have a material
impact on its financial statement disclosure.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("SFAS No. 132"), Employers'
Disclosures about Pensions and Other Postretirement Benefits, which
standardizes the disclosure requirements for pensions and other postretirement
benefits. The adoption of SFAS No. 132 in 1998 is not expected to materially
impact the Company's current disclosures.
RISK MANAGEMENT
The Company is potentially subject to a concentration of credit risk with
respect to its trade receivables, the majority of which are due from
wholesalers, drug store chains and distributors. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company maintains sufficient allowances and insurance to cover potential
or anticipated losses for uncollectible accounts.
The Company from time to time hedges a portion of its floating rate interest
exposure using various financial instruments. At December 1997, the Company
had no interest rate hedges in place. In February 1998, the Company entered
into $100.0 million of notional amount interest rate hedge agreements for a
minimum of two years.
The Company considers its investment in international subsidiaries and joint
ventures to be both long-term and strategic. As a result, the Company does not
hedge the long-term translation exposure to its balance sheet. Foreign
currency translations to date have not been material.
YEAR 2000 COMPLIANCE
The Company is modifying its computer systems to be Year 2000 compliant. The
Company does not expect that the cost of modifying such systems will be
material. The Company believes it will achieve Year 2000 compliance in advance
of the year 2000, and does not anticipate any material disruption in its
operations as the result of any failure by the Company to be in compliance.
The Company does not have any information concerning the Year 2000 compliance
status of its suppliers and customers.
34
<PAGE>
BUSINESS
GENERAL
Schein Pharmaceutical is one of the leading generic pharmaceutical companies
in the United States. The Company develops, manufactures and markets one of
the broadest generic product lines in the pharmaceutical industry through the
integration of its product development expertise, diverse, high-volume
production capacity and direct sales and marketing forces. The Schein product
line includes both solid dosage and sterile dosage generic products, and the
Company is also developing a line of specialty branded pharmaceuticals. The
Company's primary branded product, INFeD, is the leading injectable iron
product in the United States. The Company has a substantial pipeline of
products under development. The Company enhances its internal product
development, manufacturing and marketing capabilities through strategic
collaborations. Schein generated net revenues of $490.2 million and operating
income of $39.0 million during 1997.
The Company believes it manufactures and markets the broadest product line
of any U.S. pharmaceutical company in terms of number and types of products.
The Company manufactures and markets approximately 160 chemical entities
formulated in approximately 325 different dosages under approximately 200
ANDAs approved by FDA. Schein is currently the sole manufacturing source for
47 generic pharmaceutical products, of which 45 are sterile dosage products.
The Company's solid dosage products include both immediate-release and
extended-release capsules and tablets; sterile dosage products include
solutions, suspensions, powders and lyophilized (freeze-dried) products
primarily for administration as injections, ophthalmics and otics. The
manufacture of sterile dosage products is significantly more complex than the
manufacture of solid dosage products, which limits competition in this product
area. The Company currently manufactures approximately four billion solid
dosage tablets and capsules and 75 million sterile dosage vials and ampules
annually. Solid dosage generic products and sterile dosage generic products
each accounted for approximately 40% of the Company's net revenues in 1997.
Since introducing INFeD in 1992, the Company has been developing a portfolio
of branded products, primarily in select therapeutic markets, such as iron
management for the nephrology, oncology and hematology markets. INFeD is used
in the treatment of certain types of anemia, particularly in dialysis
patients, and accounted for approximately 21% of the Company's net revenues in
1997. The Company markets INFeD through a 20-person dedicated sales and
marketing force, as well as through co-marketing collaborations with Bayer
Corporation in the nephrology market and MGI in the oncology market.
The Company believes its 130-person direct sales and marketing force is one
of the largest in the U.S. generic pharmaceutical industry. Through its
customized marketing programs, the Company markets its products to
approximately 60,000 customers representing all major customer channels,
including pharmaceutical wholesalers, chain and independent drug retailers,
hospitals, managed care organizations, other group purchasing organizations
and physicians.
Schein's objective is to become the leading generic pharmaceutical company
in the approximately $7.4 billion generic prescription pharmaceutical industry
in the United States. The Company's growth strategy is to: (i) leverage its
diverse pharmaceutical formulation and manufacturing capabilities to extend
the breadth of its generic product line; (ii) focus its product development
activities on complex and other generic drugs that require specialized
development or manufacturing technology and are therefore expected to
encounter limited competition; (iii) develop and market branded drugs for
select therapeutic categories; (iv) pursue strategic collaborations to
supplement product development and manufacturing resources; and (v) expand
market penetration through direct sales and innovative marketing programs.
The Company's commitment to product development has resulted in 24 ANDA
approvals during the past three years. During the past three fiscal years, the
Company, directly and through its strategic collaborations, has expended $84.7
million on product pipeline development activities, which the Company believes
is among the highest product development expenditure levels for any
independent generic drug company. The Company pursues product development
through its 150-person product development staff and various collaborations
and
35
<PAGE>
licensing arrangements with other pharmaceutical and drug delivery technology
companies. The Company's product development efforts focus on: (i) major
branded drugs coming off patent; (ii) drugs for which patent protection has
lapsed and for which there are few or no generic producers; (iii) drugs whose
patents may be susceptible to challenge; (iv) proprietary and branded products
focused in select therapeutic areas; and (v) generic products that require
specialized development, formulation, drug delivery or manufacturing
technology.
The Company supplements its internal product development, manufacturing and
marketing capabilities from external sources. During 1994, Schein entered into
a strategic alliance with Bayer Corporation, through which Bayer Corporation
became a 28.3% stockholder of Schein, and Bayer Corporation currently
participates with Schein in several collaborations. In 1995, the Company
acquired Marsam, expanding the Company's ability to develop and manufacture
sterile penicillins and oral and sterile cephalosporins. In addition, the
Company has entered into strategic collaborations involving product
development arrangements with companies such as Ethical and Elan; raw material
supply arrangements with companies such as Johnson Matthey and Abbott; and
sales and marketing arrangements with Bayer and other companies such as MGI.
INDUSTRY OVERVIEW
In the U.S., pharmaceutical products are marketed as either branded or
generic. Branded products are marketed under brand names and through programs
designed to attract physician and consumer loyalty. Branded drugs generally
are covered by patents at the time of their market introduction, thereby
resulting in periods of market exclusivity for the patent holders. Following
the expiration of these patents, marketing of branded drugs often continues,
particularly in cases where there is significant physician or consumer
loyalty.
Generic pharmaceuticals (also known as "multi-source" or "off-patent"
pharmaceuticals) are the chemical and therapeutic equivalents of branded
drugs. Under the Waxman-Hatch Act, generic drugs generally may be sold in the
United States following (i) FDA approval of an ANDA that includes evidence
that the generic drug is bioequivalent to its branded counterpart and (ii) the
expiration, invalidation or circumvention of any patents on the corresponding
branded drug and the expiration of any other market exclusivity periods
applicable to the branded drug.
Since the adoption of the Waxman-Hatch Act, generic pharmaceuticals have
become an increasingly important segment of the U.S. pharmaceutical market,
particularly when measured in terms of the increasing rate at which doctors'
prescriptions have allowed generic drugs to be substituted for branded drugs.
In 1996, prescriptions dispensed in the United States for generic drugs
reached 40% of the total drug prescriptions dispensed. In terms of dollar
sales, however, generic drugs have accounted for a much lower percentage of
the total U.S. pharmaceutical market. In the 12 months ended September 1997,
sales of generic drugs accounted for approximately $7.4 billion out of a total
U.S. prescription pharmaceutical market of approximately $80.9 billion.
The lower percentage of total dollar sales attributable to generic
pharmaceuticals compared to the growth in the number of generic pharmaceutical
prescriptions dispensed reflects the pricing dynamics for generic
pharmaceuticals. As the number of commercially available generic competitors
of a branded drug increases, their selling prices and gross margins decline
substantially. Generic drugs are generally sold at a 20% to 80% discount from
their branded counterparts. Intense price competition in the generic drug
industry requires companies to introduce new generic drug products regularly
in order to maintain and increase revenues.
Growth of the generic drug industry has been driven primarily by the dollar
volume of branded drugs that have lost patent protection and the rising rate
at which generic drugs have been substituted for branded drugs. Industry
sources estimate that, during the next five years, branded drugs with 1996
U.S. sales of more than $13.0 billion will lose patent protection. The rising
rate of generic substitution has resulted in large part from increasing
pressure within the U.S. health care industry to contain costs. Due to the
lower cost of generic drugs compared to their branded counterparts, third
party payors, such as insurance companies, company health plans, health
36
<PAGE>
maintenance organizations, managed care organizations, pharmacy benefit
managers, group purchasing organizations, government-based programs and
others, have adopted policies that encourage or mandate generic substitution.
In addition, physicians, pharmacists and consumers are becoming increasingly
comfortable with the quality and therapeutic equivalence of generic drugs.
A significant portion of pharmaceuticals are distributed in the United
States through wholesale drug distributors and major retail drug store chains.
During the past several years, there has been a consolidation of these
distribution channels, resulting in a smaller number of wholesale distributors
and the emergence of fewer, larger regional and nationwide retail drug store
chains. In addition to pressuring generic drug manufacturers to lower their
prices and/or provide volume discounts, these customers have also been seeking
to reduce the number of sources from which they purchase pharmaceutical
products.
Participants in the generic drug market include independent generic drug
manufacturers such as the Company, generic drug subsidiaries of large branded
pharmaceutical companies and joint ventures and collaborations between branded
pharmaceutical companies and generic drug manufacturers. The participation of
branded pharmaceutical companies in the U.S. generic industry accelerated
during the first half of the 1990s as pricing pressure and generic
substitution grew. The extent to which the branded pharmaceutical companies
will continue to participate in the generic drug industry segment cannot be
predicted by the Company.
The Company believes it is well positioned to capitalize on these industry
trends by leveraging its product development, manufacturing and marketing
capabilities to expand its market penetration.
STRATEGY
The Company's objective is to become the leading generic pharmaceutical
company in the approximately $7.4 billion generic prescription pharmaceutical
industry in the United States. An important focus of the Company includes the
development, manufacture and marketing of complex generic products and branded
products for select therapeutic categories. The Company's strategy for
achieving this objective comprises the following five elements:
Leverage Diverse Pharmaceutical Formulation and Manufacturing Capabilities
to Extend the Breadth of Its Generic Product Line. The Company believes it
manufactures and markets the broadest product line of any U.S. pharmaceutical
company. This product line includes both solid dosage and sterile dosage
products comprising approximately 160 chemical entities in approximately 325
dosage forms and strengths under approximately 200 approved ANDAs. Solid
dosage forms include both immediate-release and extended-release capsules and
tablets; sterile dosage forms include solutions, suspensions, powders and
lyophilized (freeze-dried) products primarily for administration as
injections, ophthalmics and otics. The Company believes its diverse high-
volume manufacturing capabilities enable it to participate in segments of the
generic drug industry where competition is limited. As the U.S. generic drug
market consolidates and major drug buyers increasingly purchase from fewer
suppliers, the Company believes its high volume and diverse drug formulation
and manufacturing capabilities will constitute an important competitive
advantage.
Focus Product Development on Complex and Other Generic Drugs that Require
Specialized Development or Manufacturing Technology and Encounter Limited
Competition. The Company targets generic drugs for which it believes it can
achieve relatively high margins by being the first or among the first generic
manufacturers to launch the product. The Company is currently the sole generic
source for 47 products, and the Company is developing several "complex
generic" drugs that are difficult to duplicate due to formulation and/or
manufacturing complexities and other generic drugs for which raw materials are
in limited supply. In addition, the Company closely analyzes pharmaceutical
patents and initiates patent challenges where appropriate opportunities exist.
Products currently being considered for development include several that could
lead to patent challenges. The Company has generated significant revenues and
profits from generic products that have been the subject of successful patent
challenges initiated by the Company.
Develop and Market Branded Drugs for Select Therapeutic
Categories. Leveraging its broad pharmaceutical formulation, development and
manufacturing capabilities, the Company targets branded drug
37
<PAGE>
development and marketing opportunities in select therapeutic categories with
limited competition. The Company's branded drug development and marketing
efforts currently focus on injectable products used in the management of iron-
related disorders. The Company's first branded product, INFeD, is the leading
injectable iron product in the U.S. Schein's near-term development plan is to
expand the Company's iron management expertise into the oncology, hematology
and gastroenterology markets, and an NDA for its next generation injectable
iron product was filed with FDA in December 1997. The Company also is pursuing
opportunities to broaden its branded pharmaceutical product line by: (i)
formulating and developing, either internally or through development
collaborations, unique products that may be patented; (ii) acquiring products
developed by other drug companies; and (iii) acquiring formulation
technologies for developing new dosage forms of existing drugs.
Pursue Strategic Collaborations to Supplement Product Development and
Manufacturing Resources. Schein has formed product development and marketing
alliances with several bulk pharmaceutical producers, drug delivery technology
companies and other drug manufacturers to expand the breadth of its product
development capabilities. Included among these are collaborations with drug
delivery companies, Elan and Ethical, and several bulk pharmaceutical and
finished dosage form producers. The Company plans to utilize collaborative and
licensing arrangements with third parties to share product development risk
and gain access to sales and marketing rights, dosage forms, proprietary drug
delivery technologies, specialized formulation capabilities and active
pharmaceutical ingredients.
Expand Market Penetration through Direct Sales and Innovative Marketing
Programs. The Company believes its 130-person direct sales and marketing force
is one of the largest in the U.S. generic pharmaceutical industry. This sales
and marketing force includes 90 field representatives, 20 telemarketing
representatives and 20 marketing personnel and covers all major customer
groups, including chain and independent drug retailers, managed care
organizations, pharmaceutical wholesalers, hospitals and group purchasing
organizations. The Company has developed market share initiatives with
selected leading chain and wholesale customers and has implemented customized
marketing programs to meet specific customer needs, including customer
inventory management, patient-focused education and compliance programs. With
respect to its branded product business, the Company has a team of
approximately 20 sales representatives dedicated to marketing INFeD. This
sales and marketing force is complemented by marketing collaborations with
Bayer in the nephrology market and MGI in the oncology market.
PRODUCTS
The Company believes it manufactures and markets the broadest number of
products of any U.S. pharmaceutical company in terms of number and types of
products. The Company's product line includes both solid dosage and sterile
dosage generic products; the Company is also developing a line of specialty
branded pharmaceuticals. The Company manufactures and markets approximately
160 chemical entities in approximately 325 dosage forms and strengths under
approximately 200 approved ANDAs. Schein is currently the sole generic source
for 47 pharmaceutical products.
The following table sets forth the percentages of the Company's net revenues
attributable to its generic and branded businesses:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
----------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Generic business:
Manufactured sterile dosage..................... 18% 25% 30% 38% 33%
Manufactured solid dosage....................... 55 40 35 28 33
Purchased products.............................. 16 19 18 15 13
--- --- --- --- ---
Total generic................................. 89 84 83 81 79
Branded business:
INFeD........................................... 11 16 17 19 21
--- --- --- --- ---
Total......................................... 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
38
<PAGE>
During the period from 1993 to 1996, the Company's percentage of net
revenues from manufactured sterile dosage products and INFeD increased and the
percentage of net revenues from solid dosage products declined. This reflects
(i) the Company including Marsam's results (predominantly sterile dosage
products) since its acquisition by the Company in September 1995, (ii) INFeD
sales rising faster than the Company's total net revenues and (iii) older
solid dosage products experiencing declines in selling prices as competitors
have entered the market. The increase in percentage of net revenues from solid
dosage products in 1997 reflects the approval and launch in that year of
methylphenidate and ketoprofen ER.
GENERIC PRODUCTS
The Company's generic business consists of the manufacturing and marketing
of sterile and solid dosage products and the marketing of certain additional
purchased products.
The Company's manufactured sterile dosage product portfolio is comprised of
approximately 110 products and accounted for approximately 33% of the
Company's total net revenues in 1997. This portfolio includes vecuronium
bromide, an anesthetic product that is currently the Company's largest selling
generic product, sales of which comprised approximately 8% of the Company's
total net revenues during this period. The Company is manufacturing and
marketing vecuronium bromide prior to expiration of the patent covering this
product pursuant to a licensing arrangement. None of the Company's other
generic sterile dosage products accounted for more than 6% of net revenues in
1997. Included in the sterile dosage product portfolio are 45 products for
which the Company is currently the sole generic source, one of which is
vecuronium bromide.
The Company's manufactured solid dosage product portfolio is comprised of
approximately 50 products and accounted for approximately 33% of the Company's
total net revenues in 1997. None of the Company's solid dosage products
accounted for more than 6% of net revenues in 1997. The Company's solid dosage
portfolio includes two products for which the Company is currently the sole
generic source.
In the fourth quarter of 1997, the Company launched two significant solid
dosage products. Each of these launches represent generic products that
require specialized development or manufacturing expertise and where
competition is expected to be limited. Methylphenidate is the generic
equivalent of Ritalin(R), which is used in the treatment of attention deficit
disorder. Methylphenidate is a controlled substance that is difficult to
produce and although the branded product has been off patent for a number of
years, Schein is only the second generic producer of methylphenidate.
Ketoprofen ER, a once-a-day non-steroidal anti-inflammatory drug developed
using Elan's extended release technology, was introduced late in the fourth
quarter of 1997 as the first generic equivalent to Oruvail(R), a branded
product that has been off patent for a number of years.
Pursuant to a custom manufacturing agreement dated as of July 1, 1995
between Johnson Matthey and the Company, the Company has exclusive purchase
and supply rights for bulk active methylphenidate hydrochloride produced by
Johnson Matthey. The agreement terminates on December 31, 2005, as amended,
with automatic renewals for additional successive three-year terms. Either
party may terminate the agreement on December 31, 2005 or the end of each
renewal with 24-months' prior notice.
Pursuant to a product development, license and supply agreement dated August
16, 1994, as amended, between Elan and the Company, the Company has the right
to package, market, sell and distribute ketoprofen ER in the U.S. under Elan's
ANDA. Pursuant to the agreement, the Company has paid approximately $2.5
million in development and license fees. Currently, the term of the agreement
is 18 years or, if longer, for the life of Elan's patents.
The Company supplements its manufactured product line with purchased
products from other generic pharmaceutical manufacturers. Generally, the
Company purchases products through purchase orders without formal arrangements
or material long-term commitments. The gross margins received by the Company
on these products are generally lower than the gross margins received by the
Company on products that it manufactures. In addition, the Company believes
its customers are increasingly seeking to purchase products directly from
manufacturers. The percentage of the Company's total net revenues of generic
products manufactured by others has declined from approximately 18% in 1995 to
13% in 1997.
39
<PAGE>
BRANDED PRODUCTS
Until 1992, the Company's exclusive focus was on generic pharmaceutical
products. In 1992, the Company introduced INFeD, its primary branded product,
and currently has other branded products under development. The Company
focuses on products used in the management of iron-related disorders.
Currently, INFeD, an injectable iron dextran used in the treatment of severe
anemia or iron deficiency, accounts for approximately 21% of the Company's net
revenues. INFeD is most commonly used in the U.S. to treat iron deficiency
anemia in patients with end-stage renal disease who are receiving therapy with
recombinant human erythropoietin (EPO). In addition to the dialysis market,
the high incidence of iron deficiency anemia related to other medical
conditions presents further opportunities for the Company to leverage its
existing INFeD sales and marketing capabilities.
The Company is seeking to expand its branded pharmaceutical business through
internal development and collaborative arrangements with other companies, with
a particular view to leveraging its expertise in iron management into the
nephrology, hematology and oncology markets. The following table identifies
the Company's branded product marketing and development activities:
<TABLE>
<CAPTION>
PRODUCT THERAPEUTIC APPLICATION STATUS
------- ----------------------- ------
<S> <C> <C>
INFeD.......................... Iron management Launched in U.S. in 1992
Ferrlecit...................... Iron management NDA filed by Makoff R&D
Laboratories, Inc. in
December 1997
Nifedipine OD.................. Hypertension Launched in U.K. in 1996
</TABLE>
Iron Management Market
In recent years, there has been increasing focus on improving the quality of
life of patients undergoing chronic disease therapy through, among other
means, iron management. The oxygen carrying component of red blood cells,
hemoglobin, requires iron to function efficiently. In some cases, iron
management requires the treatment of iron deficiency and, in other cases, the
treatment of iron overload disorders. The Company is currently marketing and
developing prescription products for the treatment of anemia in the dialysis
and oncology markets, and seeks to market INFeD for the gastroenterology and
bloodless medicine markets.
Dialysis Market. The dialysis market is currently the largest market for
injectable iron and iron replacement products. Orally administered iron has
historically been, and continues to be, the first form of treatment used by
doctors to treat anemia in dialysis patients. Research has shown, however,
that orally administered iron inadequately treats iron deficiency in dialysis
patients and that injectable iron is more rapidly and directly absorbed in the
body. The National Kidney Foundation's Dialysis Outcome Quality Improvement
(DOQI) guidelines encourage more consistent use of injectable iron to
supplement the use of oral iron in dialysis patients. Approximately 60% to 65%
of dialysis patients are given injectable iron at least once a year. EPO
therapy is currently used to treat approximately 92% of all dialysis patients.
EPO allows patients to generate their own red blood cells, thus greatly
reducing the need for blood transfusions. One of the effects of EPO treatment,
however, is rapid mobilization of iron reserves and depletion of iron stores.
The Company believes that certain studies indicate that INFeD can be used
together with EPO to overcome this iron depletion effect. Accordingly, the use
of EPO therapy has created a need for iron management techniques.
Oncology Market. In the oncology market, which includes patients with cancer
and cancer-related illnesses, anemia is a significant side effect of the
disease and the drugs used in treatment of the disease. Fatigue associated
with anemia is not widely recognized or treated as part of cancer treatment
regimens. Although there is a small base of injectable iron users in this
area, the Company believes there is potential for market expansion.
Hematology and Gastroenterology. INFeD may also have applications in the
area of bloodless medicine. Bloodless medicine is surgery without the use of
blood infusions or transfusions; instead, plasma is supplemented with iron
that is administered to the patient before surgery to build up red blood cells
or after surgery to more
40
<PAGE>
rapidly replace red blood cells lost during surgery. In the gastroenterology
market, of the over one million patients with inflammatory bowel disease, 30%
to 70% experience anemia, mostly due to iron deficiency.
INFeD. INFeD (iron dextran injection, USP 50 mg/mL) is a liquid complex of
ferric hydroxide and dextran that is used in the treatment of patients with
documented iron deficiency in whom oral administration is unsatisfactory or
impossible. INFeD's product label includes the following warning: "Warning:
The parenteral use of complexes of iron and carbohydrates has resulted in
anaphylactic-type reactions. Deaths associated with such administration have
been reported. Therefore, INFeD (iron dextran injection, USP 50 mg/mL) should
be used only in those patients in whom the indications have been clearly
established and laboratory investigations confirm an iron-deficient state not
amenable to oral iron therapy."
Currently, iron dextran is the only injectable iron formulation in the U.S.
market. The Company introduced its injectable iron product, INFeD, in May
1992. INFeD currently has approximately 85% of the injectable iron market, and
iron dextran products are marketed by one other company in the U.S. Net sales
of INFeD in 1997 were $104.4 million and accounted for 21%, of the Company's
net revenues. Growth in sales of INFeD has been driven by the expanding use of
EPO and the growing recognition of patient outcomes and quality of life issues
associated with iron deficiency anemia in dialysis patients. For patients
being treated with EPO, injectable iron therapy has become adjunctive therapy
rather than supportive therapy, as studies have shown that anemic patients may
become resistant to EPO and that injectable iron can help to maintain EPO
responsiveness and optimize its effectiveness. The Company believes that the
dialysis market should continue to expand with the expected increase in the
ESRD population, as well as the expanding use of hemodialysis in the treatment
of ESRD patients.
Pursuant to a supply agreement dated May 1, 1992, as amended on December 2,
1993 and June 9, 1995, between Abbott and the Company, Abbott supplies iron
dextran bulk solution to the Company on an exclusive basis. The agreement
terminates on December 31, 1999. Abbott retains the right to manufacture,
sell, ship, market or distribute a finished iron dextran drug product,
provided the product is not manufactured with bulk solution or technology
relating to bulk solution obtained from Abbott or a licensee or sublicensee of
Abbott.
Ferrlecit. Ferrlecit (sodium ferric gluconate complex in sucrose injection)
is intended to be the Company's next generation injectable iron product.
Ferrlecit is administered parenterally to treat hemodialysis patients with
iron deficiency anemia.
Ferrlecit was developed by the Nattermann Company, of Cologne (now Rhone-
Poulenc Rorer GmbH) and is widely used in Europe. Makoff R&D Laboratories,
Inc. ("R&DL"), a specialty renal pharmaceutical company, acquired the rights
to Ferrlecit from Rhone-Poulenc Rorer GmbH under a distribution agreement
dated June 24, 1993 and a trademark agreement dated August 26, 1993. In 1996,
pursuant to an exclusive trademark and distribution agreement with R&DL, the
Company acquired from R&DL the exclusive right to market and distribute
Ferrlecit in the U.S. and several other countries for a period of ten years
after market authorization has been granted by FDA. R&DL filed its NDA in
December 1997. See "--Government Regulations--NDA Process."
Other Products
Nifedipine OD. In the U.K., the Company is currently marketing a brand
version of Nifedipine OD, a once-a-day version of nifedipine used in the
treatment of hypertension. Pursuant to a license obtained from Ethical, this
product is being produced by a U.K. contract manufacturer. The Company is also
preparing for the product's launch in Israel, South Africa, the Caribbean and
selected markets in Latin America and Asia.
PRODUCT DEVELOPMENT
The Company seeks to expand its product portfolio through continuing
investment in research and development. As a result of its $84.7 million
investment in product development over the past three years, the Company has
23 ANDAs pending with FDA as of February 28, 1998 (11 of which were filed from
the Company's Steris facility and are not expected to be approved until FDA
has confirmed that Steris has
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satisfactorily resolved certain inspectional observations) and over 60
products under development internally and with third parties. The Company
believes that this level of investment in development activities should
accelerate its ANDA filings and launches in the next several years. The
Company's product development activities are conducted by 150 research and
development professionals and supported by others with expertise in
manufacturing, technology, legal, regulatory and intellectual property issues.
See "Risk Factors--Pending Regulatory Matters" and "Business--Pending
Regulatory Matters."
The Company's generic product development efforts focus on: (i) major
branded drugs coming off patent; (ii) drugs for which patent protection has
lapsed and for which there are few or no generic producers; (iii) drugs whose
patents may be susceptible to challenge; (iv) proprietary and branded products
in select therapeutic areas; and (v) generic products that require specialized
development, formulation, drug delivery or manufacturing technology. In
furtherance of its strategy to be among the first to market generic versions
of brand drugs, the Company uses its scientific, pharmacologic, manufacturing
and legal expertise to identify brand products covered by patents that are
susceptible to challenge or circumvention. When the Company decides to pursue
development of a generic version of a brand product so identified, it seeks a
source for the drug's active pharmaceutical ingredient, develops a formulation
for the drug, conducts bioequivalence studies on its formulation (where
required) and prepares an ANDA filing. The ANDA filing must include a
certification from the Company that the patent on the brand product is invalid
or not infringed, and the patent holder must be provided with notice of the
filing and basis for the certification. If the patent holder commences
litigation within 45 days of the notice, FDA may not approve the ANDA for a
period of 30 months, unless the case is resolved earlier in court or by
settlement. A successful patent challenge may result in a court determination
that the patent on the brand product is invalid, not infringed or
unenforceable. Alternatively, a settlement with the patent holder may include
a license to the Company to sell the generic version of the brand product
prior to the expiration of the patent covering the product.
Since 1985, the Company has had a series of non-exclusive agreements
(collectively, the "Consulting Agreement") with the Consultant. Under the
Consulting Agreement, the Consultant and the Company have identified certain
patents on branded pharmaceutical products that might be susceptible to a
challenge, and the Consultant has acted as litigation counsel or advising
counsel to the Company in those instances where the Company decided to proceed
with a patent challenge. For projects in which the Consultant has rendered an
opinion setting forth the basis for a possible patent challenge, the Company
pays the Consultant half the adjusted gross profit from the Company's sale of
generic versions of the patented product until the date on which the patent
would normally have expired or half the proceeds of any settlement.
The Consultant's services are provided on a non-exclusive basis to the
Company. The Consulting Agreement does not have a specific term and continues
until the current projects under the Consulting Agreement are completed and
all payments due to the Consultant are made. There are two projects under the
Consulting Agreement that are currently identified, one of which has resulted
in a pending patent challenge initiated by the Company. In accordance with the
Consultant's right to delegate responsibility for defending patent challenge
litigation to other counsel selected with the consent of the Company,
responsibility for the pending patent challenge has been delegated to other
counsel. The Consultant may terminate the Consulting Agreement for certain
specified reasons at any time. Without regard to who terminates the Consulting
Agreement or the reasons therefor, the Consultant will be entitled to payment
in conjunction with any sales or settlements with respect to any patented
product for which the Consultant has previously rendered an opinion. The
Consultant has rendered opinions with respect to each of the two patented drug
products that are the respective subjects of the current projects under the
Consulting Agreement, and the Company will owe the Consultant payments to the
extent that the Company successfully develops one or both of these products
and challenges the applicable patents and thereafter markets one or both of
these products, or otherwise favorably settles any such challenge. See "Risk
Factors--Dependence on Successful Patent Litigation" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations."
In its branded product business, the Company intends to develop products for
the management of iron-related disorders and select other businesses, as well
as to promote the use of its primary branded product, INFeD, beyond the
dialysis market to other therapeutic areas, such as oncology and
gastroenterology.
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STRATEGIC COLLABORATIONS
To expand its product portfolio and improve its profitability, the Company
will continue to pursue strategic collaborations to access additional dosage
forms, proprietary drug delivery technology, specialized formulation
capabilities and sources of bulk active materials. The Company has product
development arrangements with companies such as Ethical and Elan;
collaborative arrangements for direct access to raw materials with, among
others, Johnson Matthey and Abbott; and sales and marketing arrangements with
companies such as Bayer Corporation and MGI.
Under the arrangements with Ethical and Elan, the Company funds development
costs for designated products. The strategic partner develops the products.
Following regulatory approval, the strategic partner supplies, and the Company
markets, the products and pays the strategic partner a royalty or profit share
from sales. The product covered by the strategic collaboration with Elan is
ketoprofen ER, which the Company is currently marketing. Several products are
in various stages of development under the Company's arrangement with Ethical.
See "--Products."
The Company in February 1998 entered into a strategic alliance agreement
with Cheminor and Reddy. Pursuant to the agreement, Cheminor will make
available to the Company its present and future dosage form generic products
on an exclusive basis in the United States and certain other countries, and
the Company will make available to Cheminor and Reddy its present and future
products on an exclusive basis for sale in India and certain other countries.
Cheminor and Reddy will make available to the Company bulk active
pharmaceutical ingredients. As part of the arrangement, the Company purchased
2.0 million publicly traded shares of Cheminor Drugs Limited (12.79% of the
currently outstanding shares of Cheminor Drugs Limited) for $10.0 million, and
under certain circumstances has the right and the obligation to purchase an
additional 1.0 million shares for $5.0 million. Cheminor will have the right
to make fair market value purchases of the Company's Common Stock, once the
shares are publicly traded; the purchase price may be payable from profits
otherwise due Cheminor from the alliance. Each party will also be entitled to
representation on the other company's board of directors consistent with its
equity interest. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and "--
Products."
MANUFACTURING AND DISTRIBUTION
The Company operates five manufacturing facilities and two distribution
centers. The following table presents the facilities owned or leased by the
Company and indicates the location and type of each of these facilities.
<TABLE>
<CAPTION>
OWN OR LEASE
PROPERTY LOCATION LEASE SQUARE FEET EXPIRATION
-------- ------------------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Manufacturing Facilities
Solid dosage.......... Carmel, NY(/1/)(/2/) Own 112,000 --
Solid dosage.......... Humacao, PR Own 75,000 --
Solid dosage.......... Danbury, CT(/2/) Lease 88,000 2005
Sterile dosage........ Phoenix, AZ(/1/)(/2/) Own 175,000 --
Sterile dosage........ Cherry Hill, NJ(/1/)(/2/) Own 99,700 --
Lease(/3/) 109,800 1999
Distribution Centers
Eastern Distribution.. Brewster, NY(/1/) Lease 98,500 2007
Western Distribution.. Phoenix, AZ Lease 76,000 2000
Corporate Offices....... Florham Park, NJ(/1/) Lease 53,000 2005
</TABLE>
- --------
(1) The Company maintains administrative offices at this facility.
(2) The Company maintains research laboratories at this facility.
(3) In 1998, the Company intends to exercise its option to purchase this
facility. See Note 10 to the Consolidated Financial Statements of the
Company.
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MANUFACTURING FACILITIES
The Company's aggregate manufacturing capacity is among the largest of any
generic pharmaceutical company in the United States. The diversity and
capacity of these facilities are important elements of the
Company's strategy to expand the range of its existing product line and
provide several significant benefits, including (i) the ability to satisfy the
growing preference among many of the Company's customers for buying
pharmaceuticals directly from manufacturers and from fewer sources, (ii) added
flexibility in raw materials sourcing and manufacturing cost control, and
(iii) economies of scale with respect to manufacturing infrastructure
functions common to solid dosage manufacturing and/or sterile dosage
manufacturing, such as water distillation, air purification, drug formulation
systems, filling and packaging lines, and quality control and regulatory
compliance. See "--Strategy" and "--Government Regulations."
The Company has made a substantial investment in plant and equipment and
believes that it is unique in its capacity to produce a broad line of both
sterile dosage products and solid dosage products. The Company manufactures a
variety of product forms and types, including immediate-release and extended-
release solid dosage products and sterile anti-infectives, injectables,
penicillins, cephalosporins, ophthalmics and otics. The Company currently
produces approximately four billion tablets and capsules and 75 million vials
and ampules annually and has the capacity to increase production to six
billion tablets and capsules and 100 million vials and ampules annually. This
range of manufacturing capabilities allows the Company to participate in
segments of the generic industry where competition is limited. Further, the
Company's high-volume production enables it to obtain favorable access to raw
materials, which typically represent a substantial portion of the cost of
producing drug products. See "Risk Factors--Dependence on Regulatory Approval
and Compliance."
The Company believes that it is one of only two U.S. generic manufacturers
with dedicated sterile filling facilities for cephalosporin and penicillin
antibiotics, which target the high volume institutional injectable market. In
addition, the Company's ophthalmic and otic drug manufacturing facilities
target higher margin specialty markets.
In accordance with FDA requirements for manufacturers of finished
pharmaceutical products, the Company has developed strict quality control
procedures to ensure the quality and safety of its products. The Company
employs sanitary handling procedures, customized systems for monitoring and
regulating environmental conditions and back-up systems for many of the
critical steps in the production processes. The Company performs sample
testing of raw materials and packaging supplies used in manufacturing its
products and conducts on-site audits of raw material suppliers. In its
manufacturing process, the Company maintains strict quality control procedures
and believes it is in material compliance with FDA's cGMP standards. The
Company has approximately 380 employees dedicated to quality control and
quality assurance. Because developing and obtaining approval of new generic
products requires a large investment and several years of lead time, the
Company believes that companies like itself that have modern, versatile
manufacturing facilities will have a competitive advantage in responding to
market opportunities. See "Risk Factors--Dependence on Regulatory Approval and
Compliance," "Risk Factors--Pending Regulatory Matters" and "--Government
Regulations."
The Company does not manufacture the active pharmaceutical ingredients used
in the preparation of its products. Instead, the Company purchases these
active pharmaceutical ingredients from international and domestic sources. FDA
requires pharmaceutical manufacturers to identify in their drug applications
the supplier(s) of all the raw materials for its products. If raw materials
for a particular product become unavailable from an approved supplier
specified in a drug application, any delay in the required FDA approval of a
substitute supplier could interrupt manufacture of the product, which could
materially and adversely affect the Company's profit margins and market share
for the product. To the extent practicable, the Company attempts to identify
more than one supplier in each drug application. However, in the case of
certain products (including certain products that contribute (or may
contribute) significantly to its sales and net income), the Company has
submitted drug applications that identify only one supplier. The Company has a
program of identifying alternative suppliers where practicable and, in many
cases, filing supplemental applications with FDA for approval.
The Company obtains a significant portion of its raw materials from
international suppliers. Arrangements with international raw material
suppliers are subject, among other things, to FDA, customs and other
government clearances, various duties and regulation by the country of origin.
The Company has a number of collaborative arrangements for exclusive access to
some difficult to source products.
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SALES AND MARKETING
The Company believes that it has one of the largest direct sales and
marketing forces in the generic drug industry, with 90 field representatives,
20 telemarketing representatives and 20 marketing personnel. This team is
focused on enhancing pharmacist and payor knowledge of the Schein product line
and providing a differentiated level of customer service and support. The
sales and marketing force promotes Schein's newly approved products and
supports customers with innovative, value added services in inventory
management and patient education.
The Company's broad customer base, which purchases from wholesalers and
directly from the Company, includes: retail customers, including chain drug
stores, mass merchandisers, food stores and independent drug stores; wholesale
distributors; managed care providers, including group purchasing
organizations, HMOs and mail order companies; alternative site customers, such
as long term care companies, home infusion companies and surgery centers; and
medical/surgical suppliers.
Most pharmaceuticals today are sold through national and regional
wholesalers, who command approximately 80% of the U.S. drug distribution
market. While pharmaceutical products are typically distributed via these
wholesalers, pharmaceutical companies often directly enter into contracts with
the retail chains, managed care and institutional customers covering the
actual acquisition price. Under these arrangements, wholesalers often service
substantially all of a customer's product needs, allowing it to maintain
minimal inventories and receive overnight deliveries of several manufacturers'
products from a single source. Currently, approximately 64% of the Company's
net revenues are sold through wholesalers, with approximately 82% of these net
revenues subject to direct contracts between the Company and its customers. In
general, it is the Company's strategy to seek to enter into purchase contracts
with retail, managed care and institutional customers. Sales to Bergen
Brunswig Corporation, Cardinal Health, Inc. and McKesson Drug Company
accounted for 19%, 18% and 10%, respectively, of the Company's total net
revenues for 1997. In August 1997, Cardinal Health Inc. announced its
intention to merge with Bergen Brunswig Corporation. In addition, in September
1997 McKesson Corporation announced its intention to merge with AmeriSource
Health Corporation. The proposed mergers among the four largest pharmaceutical
wholesalers in the United States, if consummated, would result in greater
consolidation of the pharmaceutical wholesaling industry and may intensify
pricing and other competitive pressures on generic pharmaceutical
manufacturers. Specifically for Schein, if the Cardinal Health--Bergen
Brunswig merger had been consummated at the beginning of 1997, the resulting
combined customer would have accounted for approximately 37% of the Company's
total net revenues in 1997. The Federal Trade Commission ("FTC") has voted to
oppose both of these proposed mergers. While these companies may appeal the
FTC decision, the Company cannot predict whether, or on what terms, if any,
these proposed mergers would be consummated.
The vast majority of the Company's products are sold under the "Schein
Pharmaceutical," "Marsam Pharmaceuticals" and "Steris Laboratories" labels. In
addition, the Company sells a limited number of products to distributors under
private labels.
The Company directs its sales and marketing activities through programs
specific to its generic product and branded product businesses.
GENERIC PRODUCTS
The Company believes it has one of the largest generic sales and marketing
organizations in the U.S. generic pharmaceutical industry, with a sales and
marketing organization of 130 people serving the retail, institutional,
alternative site, managed care and other generic drug purchasing markets,
including a 20-person telemarketing sales force and 20 marketing personnel
supporting the 90-person field sales organization. The Company's large sales
and marketing force permits effective coverage of all purchasers of generic
products. The sales and marketing force promotes newly approved products,
encourages substitution of the Company's generic products for branded products
and supports the customer with value added services in inventory management
and patient education.
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<PAGE>
The Company has developed market share initiatives with selected leading
chain and wholesale customers and has implemented customized marketing
programs to meet specific customer needs, including the following:
. The Company has implemented a unique vendor managed inventory program,
Schein Pharmaceutical Managed Auto Replenishment Technology
("S.M.A.R.T."), which monitors customers' inventory levels daily to
ensure adequate stocking levels, minimize the occurrence of back orders
and returned goods and enhance inventory turnover for such key
customers.
. The Company uses state-of-the-art electronic data interchange ("EDI")
systems, which enable it to efficiently exchange data with its key
wholesale and retail customers for a variety of transactions.
. The Company has designed the Generic Acceptance and Intervention Network
("G.A.I.N."), a patient-focused education program to promote the use of
generic products.
BRANDED PRODUCTS
The Company has a sales and marketing organization of 20 people dedicated to
marketing INFeD. In 1994, the Company entered into a three-year co-promotion
arrangement with Bayer Corporation covering the Company's INFeD product. Under
this agreement, certain of Bayer's specialty sales representatives in the
United States and Puerto Rico, on a full-time equivalent basis (aggregating
16), detail INFeD to the nephrology market. In early 1998, this agreement was
extended to December 1998. In addition, as part of its marketing effort in the
oncology market, the Company entered into a co-promotion arrangement with MGI
in March 1997 for MGI's 21-person sales force to support INFeD in the oncology
market.
COMPETITION
In the generic pharmaceutical business, the Company competes with a number
of companies, including independent generic manufacturers and larger
pharmaceutical companies, which sell the same generic equivalents of the
Company's products. Many companies, including large pharmaceutical firms with
financial and marketing resources and development capabilities substantially
greater than those of the Company, are engaged in developing, marketing and
selling products that compete with those offered by the Company. The selling
prices of the Company's products may decline as competition increases.
Further, other products now in use or under development by others may be more
effective than the Company's current or future products. The pharmaceutical
industry is characterized by intense competition and rapid product development
and technological change. The Company's pharmaceuticals could be rendered
obsolete or made uneconomical by the development of new pharmaceuticals to
treat the indications addressed by the Company's products, technological
advances affecting the cost of production, or marketing or pricing actions by
one or more of the Company's competitors. The Company's business, results of
operations and financial condition could be materially adversely affected by
any one or more of such developments. Competitors may also be able to complete
the regulatory process for certain products before the Company and, therefore,
may begin to market their products in advance of the Company's products. The
Company believes that competition among prescription pharmaceuticals and
generics will be based on, among other things, product efficacy, safety,
reliability, availability and price. The Company believes that various
competitive factors, including pressure from major wholesalers and delays in
generic drug approvals by FDA, led to price declines beginning in mid-1996 for
generic drugs, largely offsetting growth in unit sales.
From time to time, the Company may compete for the in-license or acquisition
of certain branded products with other pharmaceutical companies pursuing a
similar strategy. The Company's branded product competes with generic
pharmaceuticals which claim to offer equivalent therapeutic benefits at a
lower cost. In some cases, third-party payors encourage the use of lower cost
generic products by paying or reimbursing a user or supplier of a branded
prescription product a lower purchase price than would be paid or reimbursed
for a generic product, making branded products less attractive, from a cost
perspective, to buyers. The aggressive pricing activities of the Company's
generic competitors and the payment and reimbursement policies of third-party
payors could have a material adverse effect on the Company's business, results
of operations and financial condition.
GOVERNMENT REGULATIONS
The research, development and commercial activities relating to branded and
generic prescription pharmaceutical products are subject to extensive
regulation by U.S. and foreign governmental authorities. Certain
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<PAGE>
pharmaceutical products are subject to rigorous pre-clinical testing and
clinical trials and to other approval requirements by FDA in the United States
under the Federal Food, Drug and Cosmetic Act (the "FDCA") and the Public
Health Services Act and by comparable agencies in most foreign countries.
The FDCA, the Public Health Services Act, the Controlled Substances Act and
other federal statutes and regulations govern or influence all aspects of the
Company's business. Noncompliance with applicable requirements can result in
fines and other judicially imposed sanctions, including product seizures,
injunctive actions and criminal prosecutions. In addition, administrative or
judicial actions can result in the recall of products and the total or partial
suspension of the manufacturing of products, as well as the refusal of the
government to approve pending applications or supplements to approved
applications. FDA also has the authority to withdraw approvals of drugs in
accordance with statutory due process procedures. See "Risk Factors--
Dependence on Regulatory Approval and Compliance" and "Risk Factors--Pending
Regulatory Matters."
FDA approval is required before any dosage form of any new unapproved drug,
including a generic equivalent of a previously approved drug, can be marketed.
All applications for FDA approval must contain information relating to product
formulation, stability, manufacturing processes, packaging, labeling and
quality control. In addition, acts of foreign governments may affect the price
or availability of raw materials needed for the development or manufacture of
generic drugs.
ANDA PROCESS
The Waxman-Hatch Act established abbreviated application procedures for
obtaining FDA approval for those drugs which are off-patent and whose non-
patent exclusivity under the Waxman-Hatch Act has expired and which are shown
to be bioequivalent to previously approved brand name drugs. Approval to
manufacture these drugs is obtained by filing an ANDA. An ANDA is a
comprehensive submission which must contain data and information pertaining to
the formulation, specifications and stability of the generic drug as well as
analytical methods and manufacturing process validation data and quality
control procedures. As a substitute for clinical studies, FDA requires data
indicating that the ANDA drug formulation is bioequivalent to a previously
approved NDA drug. In order to obtain an ANDA approval of a strength or dosage
form which differs from the referenced brand name drug, an applicant must file
and have granted an ANDA Suitability Petition. A product is not eligible for
ANDA approval if it is not bioequivalent to the referenced brand name drug or
if it is intended for a different use. However, such a product might be
approved under an NDA with supportive data from clinical trials.
The advantage of the ANDA approval process is that an ANDA applicant
generally can rely upon bioequivalence data in lieu of conducting pre-clinical
testing and clinical trials to demonstrate that a product is safe and
effective for its intended use(s). The Company files ANDAs to obtain approval
to manufacture and market its generic products. No assurance can be given that
ANDAs or other abbreviated applications will be suitable or available for the
Company's products or that the Company's proposed products will receive FDA
approval on a timely basis, if at all. While the FDCA provides for a 180-day
review period, the Company believes the average length of time between initial
submission of an ANDA and receiving FDA approval is approximately two years.
While the Waxman-Hatch Act established the ANDA, it has also fostered
pharmaceutical innovation through such incentives as market exclusivity and
patent restoration. The Waxman-Hatch Act provides two distinct market
exclusivity provisions which either preclude the submission or delay the
approval of a competitive drug application. A five-year marketing exclusivity
period is provided for new chemical compounds and a three-year marketing
exclusivity period is provided for applications containing new clinical
investigations essential to the approval of the application. The non-patent
market exclusivity provisions apply equally to patented and non-patented drug
products. Any entitlement to patent marketing exclusivity under the Waxman-
Hatch Act is based upon the term of the original patent plus any patent
extension granted under the Waxman-Hatch Act as compensation for reduction of
the effective life of a patent as a result of time spent by FDA in reviewing
the innovator's NDA. The patent and non-patent marketing exclusivity
provisions do not prevent the filing or the approval of an NDA. Additionally,
the Waxman-Hatch Act provides 180-day market exclusivity against effective
approval of another ANDA for the first ANDA applicant who (a) submits a
certificate
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<PAGE>
challenging a listed patent as being invalid or not infringed and (b)
successfully defends in court any patent infringement action based on such
certification. The brand product segment of the pharmaceutical industry has
initiated legislative efforts to limit the impact of the Waxman-Hatch Act,
both on the federal and state levels. Recently, legislation has been
introduced designed to extend the patent protection on certain brand
pharmaceuticals and efforts have been made by the brand pharmaceutical
industry to introduce legislation to limit generic firms' ability to begin
research and development activities prior to patent expiration. In addition,
the brand product pharmaceutical companies have also initiated legislative
efforts in various states to limit the substitution of generic versions of
certain types of branded pharmaceuticals. The Company cannot predict whether
any such legislation will be enacted.
NDA PROCESS
An NDA is a filing submitted to FDA to obtain approval for a drug not
eligible for an ANDA and must contain complete pre-clinical and clinical
safety and efficacy data or a right of reference to such data. Before dosing a
new drug in healthy human subjects or patients may begin, stringent government
requirements for pre-clinical data must be satisfied. The pre-clinical data,
typically obtained from studies in animal species, as well as from laboratory
studies, are submitted in an Investigational New Drug ("IND") application, or
its equivalent in countries outside the United States, where clinical trials
are to be conducted. The pre-clinical data must provide an adequate basis for
evaluating both the safety and the scientific rationale for the initiation of
clinical trials.
Clinical trials are typically conducted in three sequential phases, although
the phases may overlap. In Phase I, which frequently begins with the initial
introduction of the compound into healthy human subjects prior to introduction
into patients, the product is tested for safety, adverse effects, dosage,
tolerance, absorption, metabolism, excretion and other elements of clinical
pharmacology. Phase II typically involves studies in a small sample of the
intended patient population to assess the efficacy of the compound for a
specific indication, to determine dose tolerance and the optional dose range
as well as to gather additional information relating to safety and potential
adverse effects. Phase III trials are undertaken to further evaluate clinical
safety and efficacy in an expanded patient population at typically dispersed
study sites, in order to determine the overall risk-benefit ratio of the
compound and to provide an adequate basis for product labeling. Each trial is
conducted in accordance with certain standards under protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to FDA as
part of the IND.
Data from pre-clinical testing and clinical trials may be submitted to FDA
as an NDA for marketing approval and to foreign health authorities as a
marketing authorization application. The process of completing clinical trials
for a new drug is likely to take several years and require the expenditure of
substantial resources. Preparing an NDA or marketing authorization application
involves considerable data collection, verification, analysis and expense, and
there can be no assurance that approval from FDA or any other health authority
will be granted on a timely basis, if at all. The approval process is affected
by a number of factors, primarily the risks and benefits demonstrated in
clinical trials as well as the severity of the disease and the availability of
alternative treatments. FDA or other health authorities may deny an NDA or
marketing authorization application if the regulatory criteria are not
satisfied, or such authorities may require additional testing or information.
Even after initial FDA or other health authority approval has been obtained,
further studies, including Phase IV post-marketing studies, may be required to
provide, for example, additional data on safety, and will be required to gain
approval for the use of a product as a treatment for clinical indications
other than those for which the product was initially tested. Also, FDA or
other regulatory authorities require post-marketing reporting to monitor
serious and unanticipated adverse effects of the drug. Results of post-
marketing programs may limit or expand the further marketing of the products.
Further, if there are any modifications to the drug, including changes in
indication, manufacturing process or labeling or a change in manufacturing
facility, an application seeking approval for such changes must be submitted
to FDA or other regulatory authority. Additionally, FDA
regulates post-approval promotional labeling and advertising activities to
assure that such activities are being conducted in conformity with statutory
and regulatory requirements. Failure to adhere to such requirements can result
in regulatory actions which could have a material adverse effect on the
Company's business, results of operations and financial condition.
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PENDING REGULATORY MATTERS
Over the past several years, FDA has inspected the Company's facilities and
in certain instances has reported inspectional observations that included
significant cGMP and application reporting deficiencies. As a result of these
inspectional observations, for varying periods of time, each of the Company's
facilities (other than its Humacao, Puerto Rico oral solid manufacturing
facility) has been ineligible (and one facility is currently ineligible) to
receive new product approvals.
As a result of its 1996 inspection of the Company's subsidiary, Steris
Laboratories, Inc. ("Steris") located in Phoenix, Arizona, FDA advised Steris
that it will not approve any ANDAs for products manufactured at the Steris
facility until cGMP and application reporting deficiencies noted during the
inspection have been corrected. In a 1997 inspection of the Steris facility,
FDA identified additional cGMP deficiencies, and Steris currently continues to
be ineligible to receive new product approvals. Therefore, none of the 11
pending ANDAs that have been filed from the Steris facility (out of the
Company's total of 23 pending ANDAs) is expected to be approved until FDA has
confirmed that Steris has satisfactorily resolved the noted deficiencies. In
addition, as a result of observations made in the 1996 inspection and an
investigation by the FDA's Office of Regulatory Affairs, Steris entered into a
plea agreement with the U.S. Department of Justice. Under the agreement,
Steris pled guilty in January 1998 to misdemeanor violations for failure to
observe application reporting requirements for drug stability problems for two
drugs during 1994 and 1995 and, consequently, paid a fine of $1.0 million.
Also in early 1998, FDA issued to Steris a Warning Letter relating to the
deficiencies observed in the 1997 inspection of the Steris facility, including
FDA's request that Steris delineate its timetable for correction of cGMP
deficiencies and provide FDA with additional information regarding products
for which corrective actions have not been completed.
The Warning Letter addressed five deficient areas at Steris: polymorph
testing to ensure products conform to appropriate standards of identity,
strength, quality, and purity; process validation; method validation;
microbiological controls; and handling of out-of-specification test results
for finished products. FDA advised Steris in the Warning Letter that failure
to take prompt corrective action with regard to these areas could result in
seizure of product, an injunction, and/or prosecution. Steris has responded to
the Warning Letter and anticipates meeting with FDA in the near future to
determine what additional corrective actions, if any, FDA might require.
In 1995, FDA's inspection of the Company's subsidiary, Danbury Pharmacal,
Inc. ("'Danbury"), which operates facilities in Carmel, New York and Danbury,
Connecticut, resulted in observations regarding compliance with cGMP
requirements and the reliability of data submitted by Danbury in support of
certain ANDAs. As a consequence, Danbury voluntarily engaged independent
experts to audit all critical data in a representative sampling of its pending
and approved ANDAs. Reports of the audits, all of which have been completed,
have been submitted to FDA for evaluation. FDA has not advised Danbury about
its review of the audit reports; however, the agency continues to review and
approve ANDAs submitted by Danbury.
Marsam Pharmaceuticals Inc. ("'Marsam"), located in Cherry Hill, New Jersey,
was inspected by FDA during 1997 to evaluate whether certain pending ANDA's
could be approved. Certain cGMP deficiencies were observed during the
inspection, and ANDA approvals were withheld pending completion of remedial
actions by Marsam. Following a reinspection in late 1997, Marsam has received
five new ANDA approvals.
See "Risk Factors--Pending Regulatory Matters."
OTHER REGULATION
The Prescription Drug Marketing Act (the "PDMA"), which amends various
sections of the FDCA, imposes requirements and limitations upon drug sampling
and prohibits states from licensing distributors of prescription drugs unless
the state licensing program meets certain federal guidelines that include,
among other things, state licensing of wholesale distributors of prescription
drugs under federal guidelines that include minimum standards for storage,
handling and record keeping. In addition, the PDMA sets forth civil and
criminal penalties for violations of these and other provisions. Various
sections of the PDMA are still being implemented by FDA and the states.
Nevertheless, failure by the Company's distributors to comply with the
requirements of
49
<PAGE>
the PDMA could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Risk Factors--Dependence
on Regulatory Approval and Compliance" and "Risk Factors--Pending Regulatory
Matters."
Manufacturers of marketed drugs must comply with cGMP regulations and other
applicable laws and regulations required by FDA, the Drug Enforcement Agency,
the Environmental Protection Agency and other regulatory agencies. Failure to
do so could lead to sanctions, which may include an injunction suspending
manufacturing, the seizure of drug products and the refusal to approve
additional marketing applications. Manufacturers of controlled substances are
also subject to the licensing, quota and regulatory requirements of the
Controlled Substances Act. Failure to comply with the Controlled Substances
Act and the regulations promulgated thereunder could subject the Company to
loss or suspension of those licenses and to civil or criminal penalties. The
Company seeks to ensure that any third party with whom it contracts for
product manufacturing or packaging will comply with cGMPs with which the
Company must also comply. FDA conducts periodic inspections to ensure
compliance with these rules. However, there can be no assurance that any such
third parties will be found to be in compliance with cGMP standards. Any such
non-compliance could result in a temporary or permanent interruption in the
development and testing of the Company's planned products or in the marketing
of approved products, as well as increased costs. Such non-compliance could
have a material adverse effect on the Company's business, results of
operations and financial condition.
Products marketed outside the United States, which are manufactured in the
United States, are subject to certain FDA regulations as well as regulation by
the country in which the products are to be sold. The Company is required to
obtain approval for and maintain compliance with applicable regulations
relating to the marketing of its products outside the United States. There can
be no assurance that any such approval may be obtained or such compliance
maintained.
PRODUCT LIABILITY; INSURANCE
The testing, manufacturing and distribution of the Company's products
involve a risk of product liability claims. Pursuant to the Company's various
insurance policies, the Company is self-insured up to the first $500,000 of
claims for each occurrence and $2,500,000 in the aggregate per policy year.
Although no assurance can be given, the Company believes that its product
liability insurance is adequate. Product liability insurance, however, could
cease to be available or could cease to be available on acceptable terms,
either as a function of the market for product liability insurance for
pharmaceutical companies or the Company's own claims experience. See "Risk
Factors--Risk of Product Liability Claims; No Assurance of Adequate
Insurance."
EMPLOYEES
At December 1997, the Company had approximately 1,850 employees, of which
800 were engaged in manufacturing, 380 were engaged in quality control and
quality assurance, 250 were engaged in administration, finance and human
resources, 150 were engaged in research and product development, 150 were
engaged in sales and marketing, 80 were engaged in distribution and 40 were
engaged in regulatory affairs. No employee is represented by a union, and the
Company has never experienced a work stoppage. Management believes its
relationship with its employees is good.
LEGAL PROCEEDINGS
The Company is a defendant in several product liability cases typical for a
company in the pharmaceutical industry. The Company also is involved in other
proceedings and claims of various types. Management believes the disposition
of these matters will not have a material adverse effect on the Company's
financial position, operations or liquidity.
In October 1997, the Company received a subpoena from the Department of
Health and Human Services, Office of Inspector General seeking pricing
information for two products formerly marketed by the Company, vinblastine
sulfate and vincristine sulfate. The Company is aware of a number of other
pharmaceutical manufacturers and distributors that have been served with
similar subpoenas, which the Company believes is in connection with a
government investigation into claims for reimbursement by Medicare and/or
Medicaid. The Company has complied with the subpoena.
50
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Martin Sperber.................. 66 Chairman of the Board of Directors, Chief
Executive Officer and President
Dariush Ashrafi................. 51 Executive Vice President, Chief Financial
Officer and Director
Javier Cayado................... 52 Senior Vice President, Technical Operations
Paul Feuerman................... 38 Senior Vice President, General Counsel, and
Director
Paul Kleutghen.................. 45 Senior Vice President, Strategic
Development
David R. Ebsworth*.............. 43 Director
Richard L. Goldberg*............ 62 Director
</TABLE>
- --------
* Members of the Compensation Committee.
Martin Sperber has been Chairman, Chief Executive Officer, President and
Director of the Company since 1989. From 1985 until 1989, Mr. Sperber was
President and Chief Operating Officer of the Company. Mr. Sperber has been
employed in various positions in the Schein organization for over 40 years.
Mr. Sperber is a member of the Board of the Generic Pharmaceutical Industry
Association, a member of the Board of the American Foundation for
Pharmaceutical Education, a member of the American Pharmaceutical Association
and a member of the Council of Overseers of the Long Island University Arnold
and Marie Schwartz College of Pharmacy. Mr. Sperber received his B.S. degree
in Pharmacy from Columbia University.
Dariush Ashrafi has been Executive Vice President and Chief Financial
Officer since October 1995, and Director since September 1997 and from May
1995 until September 1995 was Senior Vice President and CFO. From 1990 to
1995, Mr. Ashrafi was Senior Vice President, Chief Financial Officer and
director of The Warnaco Group, Inc., an apparel company. Prior to joining
Warnaco, he spent 18 years with Ernst & Young and became a partner in 1983.
Mr. Ashrafi received his B.S. degrees in Aeronautical and Astronautical
Engineering and in Management Science from the Massachusetts Institute of
Technology and his M.S. in Finance from the Massachusetts Institute of
Technology Sloan School.
Javier Cayado has been Senior Vice President of Technical Operations of the
Company since February 1998. From 1993 to 1998, Mr. Cayado was successively
Vice President, Senior Vice President and General Manager of Danbury
Pharmacal, a wholly owned subsidiary of the Company. Prior to joining Schein
in 1993, Mr. Cayado had a 14-year career with Pfizer Pharmaceutical
culminating with his assignment as General Manager of Pfizer's bulk chemical
and pharmaceutical products plants in Puerto Rico. He received his B.S. in
Chemical Engineering from the University of Connecticut.
Paul Feuerman has been General Counsel since 1991. He has been a Vice
President of the Company since January 1992, Senior Vice President since
February 1997, and a Director since September 1997. Mr. Feuerman previously
was associated with the law firm of Proskauer Rose LLP. He received his B.A.
from Trinity College and his J.D. from Columbia Law School.
Paul Kleutghen has been Senior Vice President of Strategic Development of
the Company since February 1998. From 1993 to 1998, he was Vice President of
Business Development. Between 1989 and 1993, he was Vice President of
Materials and Operations. Prior to joining Schein, Mr. Kleutghen was with
Pfizer Pharmaceutical culminating with his assignment as Director of
Production Planning for the U.S. pharmaceutical division. Mr. Kleutghen earned
an undergraduate degree in Engineering and Computer Science from the
University of Leuven in Belgium and an MBA in Finance from the University of
Chicago.
David R. Ebsworth became a Director of the Company in September 1994 as part
of Bayer Corporation's investment in the Company. He is currently Executive
Vice President, Bayer Corporation and President, Pharmaceutical Division North
America. Between 1983 and 1993, Dr. Ebsworth held various management and
51
<PAGE>
sales marketing positions with the Bayer companies in Germany and Canada. Dr.
Ebsworth received his B.S. and Doctor of Philosophy degrees from the
University of Surrey (England).
Richard L. Goldberg has been a director of the Company since September 1994.
He is currently a Senior Partner at Proskauer Rose LLP and has been a member
of that law firm since 1990. Prior to 1990, he was a Senior Partner at Botein
Hays & Sklar. Mr. Goldberg is also a member of the Board of Directors of
Comtech Telecommunications Corp. (NASDAQ). He is a graduate of Brooklyn
College and received his J.D. from Columbia Law School.
BOARD OF DIRECTORS
The Board of Directors has five directors, three of whom--Martin Sperber,
Dariush Ashrafi and Paul Feuerman--are also officers of the Company and two of
whom--David R. Ebsworth and Richard L. Goldberg--are not officers of the
Company. The Company intends to add two independent directors to the Board of
Directors within one year of the date of the Equity Offering.
Non-employee directors may receive meeting fees and annual grants of options
to purchase shares of the Company's Common Stock pursuant to the Non-Employee
Director Plan. To date, no meeting fees have been paid to non-employee
directors. See "--Stock Options."
The Company's certificate of incorporation as in effect upon the completion
of the Equity Offering divides the board of directors into three classes, with
each class holding office for staggered three-year terms. The terms of one-
third of the current directors will expire at the annual meeting of
stockholders in each of 1999, 2000 and 2001. At each annual election,
commencing at the annual meeting of stockholders in 1999, the successors to
the class of directors whose term expires at that time will be elected to hold
office for a term of three years to succeed those directors whose term
expires, so that the term of one class of directors will expire each year. The
classification of directors has the effect of making it more difficult to
change the composition of the Board of Directors in a relatively short period.
In addition, the classified board provision could discourage a third party
from attempting to obtain control of the Company, even though such an attempt
might be beneficial to the Company and its stockholders or could delay, defer
or prevent a change in control of the Company.
Pursuant to the Restructuring Agreements (as defined herein), until Bayer
(as defined herein) owns less than 10% of the Company's outstanding Common
Stock, Bayer Corporation is entitled to nominate a number of members of the
Board of Directors of the Company, rounded down to the nearest whole number
(until Bayer holds more than 50% of the Company's outstanding stock, then
rounded up to the nearest whole number), equal to the product of (a) the
number of members of the Board of Directors and (b) its percentage
stockholdings of Common Stock at the time of nomination. In this regard, Bayer
Corporation nominated David R. Ebsworth as a member of the Board of Directors.
The Voting Trustee (currently Mr. Sperber) is entitled under the Restructuring
Agreements to nominate the balance of the members of the Board of Directors
until the Voting Trust Termination Date (as defined herein). Until May 15,
2001, the Voting Trustee and certain of the Company's principal stockholders
must vote for the election of Bayer Corporation's nominee(s). Until the Voting
Trust Termination Date, Bayer Corporation and certain of the Company's
principal stockholders must vote for the election of the Voting Trustee's
nominees.
The Company in February 1998 entered into a strategic alliance agreement
with Cheminor and Reddy. As part of the arrangement, the Company purchased 2.0
million publicly traded shares of Cheminor Drugs Limited (12.79% of the
currently outstanding shares of Cheminor Drugs Limited) for $10.0 million, and
under certain circumstances has the right and the obligation to purchase an
additional 1.0 million shares for $5.0 million. Cheminor will have the right
to make fair market value purchases of the Company's Common Stock, once the
shares are publicly traded; the purchase price may be payable from profits
otherwise due Cheminor from the alliance. Each party will also be entitled to
representation on the other company's board of directors consistent with its
equity interest, at all times during which each party owns at least ten
percent of the total issued and outstanding shares of the other party.
Currently, Cheminor does not own shares of the Company's Common Stock and,
accordingly, is not entitled to representation on the Company's board of
directors.
52
<PAGE>
The Company's officers are elected by the Board of Directors for one-year
terms and serve at the discretion of the Board of Directors. See "Principal
Stockholders," "Risk Factors--Control of the Company" and "Description of
Capital Stock."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has one standing committee: the
Compensation Committee.
The Compensation Committee approves the compensation for senior executives
of the Company, makes recommendations to the Board of Directors with respect
to compensation levels and administers the Company's stock option plans. The
members of the Compensation Committee are Messrs. Ebsworth and Goldberg.
The Company's Board of Directors is expected to appoint directors who are
not affiliated with the Company to an Audit Committee of the Board of
Directors. The Audit Committee will have general responsibility for
surveillance of financial controls, as well as for accounting and audit
activities of the Company. The Audit Committee will annually review the
qualifications of the Company's independent certified public accountants, make
recommendations to the Board of Directors as to their selection and review the
plan, fees and results of their audit.
LIMITATIONS ON LIABILITY
The Company's certificate of incorporation contains a provision that,
subject to certain exceptions, limits the personal liability of the Company's
directors for monetary damages to the Company and its stockholders for
breaches of fiduciary duty owed to the Company or its stockholders.
In addition, the Company has entered into agreements with its directors and
officers providing for indemnification of those individuals under certain
circumstances.
The Company has obtained director and officer liability insurance that
insures the Company's directors and officers against certain liabilities.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and each of the Company's remaining executive officers
(the "Named Executive Officers") for the years ended December 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
------------------------------ ---------- -------------
SECURITIES
OTHER ANNUAL UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION(9)(10) SALARY BONUS COMPENSATION OPTIONS(#) PAYOUTS($)(2) COMPENSATION
- ---------------------------------- -------- -------- ------------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Martin Sperber........... 1997 $700,000 $400,000 $ 9,436 -- -- $10,880 (3)
Chairman of the Board of 1996 700,000 -- 9,929 -- -- 10,305 (3)
Directors, Chief
Executive Officer and
President
Dariush Ashrafi.......... 1997 341,000 93,000 10,300 550 $ 75,000 22,709 (4)
Executive Vice 1996 341,000 59,700 143,725 200 75,000 24,321 (4)
President, Chief
Financial Officer and
Director
Javier Cayado............ 1997 220,000 37,000 398 100 100,000 29,343 (5)
Senior Vice President 1996 220,000 40,500 969 100 125,000 16,910 (5)
Technical Operations
Paul Feuerman............ 1997 225,000 61,000 8,596 150 100,000 17,625 (6)
Senior Vice President, 1996 185,000 32,400 7,738 200 100,000 13,799 (6)
General Counsel and
Director
Paul Kleutghen........... 1997 211,000 37,300 9,362 85 100,000 36,531 (7)
Senior Vice President 1996 211,000 38,800 24,415 200 100,000 47,115 (7)
Strategic Development
Marvin Samson............ 1997 400,000 -- 2,659 1,750 -- 24,754 (8)
Former Executive Vice 1996 400,000 70,000 -- 200 -- 21,126 (8)
President
</TABLE>
53
<PAGE>
- --------
(1) The compensation described in this table does not include medical, dental
or other benefits available generally to all salaried employees of the
Company, as well as certain perquisites and other personal benefits, the
value of which does not exceed the lesser of $50,000 or 10% of the named
executive officer's total salary and bonus reported in this table.
(2) LTIP payouts, reflect Long Term Incentive Plan ("LTIP") payments pursuant
to various deferred compensation agreements.
(3) In 1997 All Other Compensation includes $8,000 for the Company Retirement
Plan discretionary contribution, $1,680 for the cost of term life
insurance coverage provided by the Company and $1,200 for the Company
Retirement Plan matching contribution. In 1996 All Other Compensation
includes $7,500 for the Company Retirement Plan discretionary
contribution, $1,680 for the cost of term life insurance coverage provided
by the Company and $1,125 for the Company Retirement Plan matching
contribution.
(4) In 1997 All Other Compensation includes $12,363 for the Supplemental
Retirement Plan contribution, $8,000 for the Company Retirement Plan
discretionary contribution, $1,200 for the Company Retirement Plan
employer matching contribution and $1,146 for the cost of term life
insurance coverage provided by the Company. In 1996 All Other Compensation
includes $14,550 for the Supplemental Retirement Plan contribution, $7,500
for the Company Retirement Plan contribution, $1,146 for the cost of term
life insurance coverage provided by the Company and $1,125 for the Company
Retirement Plan employer matching contribution.
(5) In 1997 All Other Compensation includes $6,458 for the value of the BEARs
Program, $8,000 for the Company Retirement Plan discretionary
contribution, $7,543 for the value of the Life Insurance Plan, $5,402 for
the Supplemental Retirement Plan contribution, $1,200 for the Company
Retirement Plan employer matching contribution and $740 for the cost of
term life insurance coverage provided by the Company. In 1996 All Other
Compensation includes $1,005 for the value of the BEARs Program, $7,500
for the Company Retirement Plan discretionary contribution, $6,541 for the
Supplemental Retirement Plan contribution, $1,125 for the Company
Retirement Plan employer matching contribution and $739 for the cost of
term life insurance provided by the Company.
(6) In 1997 All Other Compensation includes $2,583 for the value of the BEARs
Program, $8,000 for the Company Retirement Plan discretionary
contribution, $5,086 for the Supplemental Retirement Plan contribution,
$1,200 for the Company Retirement Plan matching contribution and $756 the
cost of term life insurance coverage provided by the Company. In 1996 All
Other Compensation includes $402 for the value of the BEARs Program,
$7,500 for the Company Retirement Plan discretionary contribution, $4,150
for the Supplemental Retirement Plan contribution, $1,125 for the Company
Retirement Plan employer matching contribution, and $622 for the cost of
term life insurance provided by the Company.
(7) In 1997 All Other Compensation includes $3,229 for the value of the BEARs
Program, $12,095 for a forgiven equity loss loan, $8,000 for the Company
Retirement Plan discretionary contribution, $5,713 for a forgiven personal
loan, $4,693 for the Supplemental Retirement Plan contribution, $1,200 for
the Company Retirement Plan matching contribution, $892 for the value of
the Life Insurance Plan and $709 for the cost of term life insurance
provided by the Company. In 1996 All Other Compensation includes $502 for
the value of the BEARs Program, $19,884 for a forgiven personal loan,
$12,095 for a forgiven equity loss loan, $7,500 for the Company Retirement
Plan discretionary contribution, $5,300 for the Supplemental Retirement
Plan, $1,125 for the Company Retirement Plan employer matching
contribution and $709 for the cost of term life insurance provided by the
Company. Mr. Kleutghen has a balance on his equity loss loan of $12,095.
The equity loss loan was issued August 1993 for $60,476. The terms of the
loan state that 1/5 of the loan be forgiven each year. Interest at the
rate of 7% on the balance of the loan is due annually. The balance on the
personal loan is $8,730. The personal loan was issued July 1989 for
$75,000. The terms of the loan state the loan and interest will be
forgiven over a period of 10 years.
(8) Marvin Samson served as the Company's Executive Vice President until
January 7, 1998. In 1997 All Other Compensation includes $15,333 for the
value of the Life Insurance Plan, $8,000 for the Company Retirement Plan
discretionary contribution, $1,200 for the Company Retirement Plan
matching contribution and $221 for the cost of term life insurance
coverage provided by the Company. In 1996 All Other Compensation includes
$12,467 for the value of the Life Insurance Plan, $7,500 for the Company
Retirement Plan discretionary contribution, $909 for the cost of term life
insurance coverage provided by the Company and $250 for the Company
Retirement Plan matching contribution.
(9) Michael Casey served as the Company's Executive Vice President until
September 5, 1997. In 1997 Mr. Casey received $242,308 in Salary, options
covering 850 shares of Common Stock, $75,000 in LTIP payouts and $1,984 in
All Other Compensation. All Other Compensation includes $1,200 for the
Company Retirement Plan matching contribution and $784 for the cost of
term life insurance provided by the Company. After Mr. Casey left the
Company he received additional payments totaling $60,577. In 1996 Mr.
Casey received $326,442 in Salary, $61,300 in Bonus, $102,309 in Other
Annual Compensation, options covering 200 shares of Common Stock, $75,000
in LTIP payouts and $9,477 in All Other Compensation. All Other
Compensation includes $7,260 for the Company Retirement Plan discretionary
contribution, $1,125 in for the Company Retirement Plan matching
contribution and $1,092 for the cost of term life insurance coverage
provided by the Company.
(10) James McGee served as the Company's Executive Vice President and Chief
Operating Officer until December 31, 1996. In 1997 after Mr. McGee left
the Company he received additional payments totaling $1,643,861. In 1996
Mr. McGee received $431,000 in Salary, $75,400 in Bonus $98,825 in Other
Annual Compensation, options covering 200 shares of Common Stock,
$2,000,000 in LTIP payments and $180,833 in All Other Compensation. All
Other Compensation includes $104,540 for a forgiven equity loss loan,
$44,670 for the value of the Life Insurance Plan, $21,550 for the
Supplemental Retirement Plan contribution, $7,500 for the Company
Retirement Plan discretionary contribution, $1,448 for the cost of term
life insurance coverage provided by the Company, and $1,125 for the
Company Retirement Plan matching contribution.
54
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
------------------------------------------------------- ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED 1997 SHARE DATE 5% 10%
---- ------------------ --------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Martin Sperber.......... -- -- -- -- -- --
Dariush Ashrafi......... 550 6.5% $1500 2007 $ 586,030 $ 1,421,829
Paul Feuerman........... 150 1.8 1500 2007 159,826 387,772
Jay Cayado.............. 100 1.2 1500 2007 106,551 285,514
Paul Kleutghen.......... 85 1.0 1500 2007 90,568 219,737
Marvin Samson........... 1,750 20.7 1500 2007 1,864,641 4,524,003
Michael Casey........... 850 10.1 1500 2007 905,683 2,197,373
</TABLE>
FISCAL YEAR--END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
SHARES ACQUIRED ------------------------- -------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Martin Sperber.......... -- -- 4,795 -- -- --
Dariush Ashrafi......... -- -- 347 1,103 -- $ 41,033
Paul Feuerman........... -- -- 242 328 -- 11,183
Jay Cayado.............. -- -- 233 217 -- 7,455
Paul Kleutghen.......... -- -- 290 275 -- 6,337
Marvin Samson........... -- -- 67 1,883 -- 130,463
Michael Casey........... -- -- 347 -- -- --
James McGee............. -- -- 4,577 -- $ 863,100 --
</TABLE>
- --------
(1) Assumes that a 105-for-one stock split will occur immediately prior to the
effective date of the Equity Offering and that the price per share of Common
Stock is $15.00.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Martin Sperber dated
September 30, 1994, as amended as of March 6, 1998, pursuant to which Mr.
Sperber serves as Chairman of the Board, Chief Executive Officer and President
of the Company. Under this agreement, the term of Mr. Sperber's employment
commenced on January 1, 1994 and terminates on January 1, 2000, unless earlier
terminated by the death of Mr. Sperber, by action of the Board of Directors
with or without cause, due to the disability of Mr. Sperber or by Mr. Sperber
upon 30 days written notice or a material breach by the Company of his
employment or stock option agreement that is not cured within 30 days. If Mr.
Sperber is terminated without cause, in addition to all accrued but unpaid
compensation to the date of termination, he is entitled to receive as
severance compensation his base salary from the date of termination through
January 1, 2000 and an amount equal to the product of (i) a fraction, the
numerator of which is the amount of earned incentive compensation for the last
full year before termination and the denominator of which is 365 and (ii) the
number of days from termination until January 1, 2000. If Mr. Sperber
voluntarily terminates his employment prior to January 1, 2000 (other than for
an uncured breach by the Company), he is only entitled to such severance pay
as is determined by the Compensation Committee. Mr. Sperber currently receives
base annual compensation of $700,000. Mr. Sperber may also receive incentive
compensation in an amount to be determined by the Compensation Committee. If
Mr. Sperber's employment is terminated prior to January 1, 2000, such
incentive compensation shall be based on objective criteria established by the
Compensation Committee or $250,000 plus the product of (x) the fraction
derived by dividing (i) the sum of the actual cash incentive compensation
earned by each of the three most senior executives of the Company
55
<PAGE>
other than Mr. Sperber in the year Mr. Sperber's employment is terminated less
the sum of the minimum cash incentive compensation contemplated for such
executives for such year, by (ii) the sum of the maximum cash incentive
compensation contemplated for such executives for such year less the sum of
the minimum cash incentive compensation contemplated for such executives for
such year and (y) $250,000. Mr. Sperber is prohibited from competing with the
Company during the term of the agreement and until the second anniversary of
the date the Company makes its final base salary payment to Mr. Sperber
pursuant to the agreement.
Following termination of Mr. Sperber's employment other than for cause, Mr.
Sperber will be entitled during his lifetime and for the life of his spouse to
continue to participate in, or receive benefits that, on an after-tax basis,
are the same as those under all medical and dental benefit plans, policies and
programs in effect at the termination of his employment. In addition, unless
Mr. Sperber's employment is terminated for cause, Mr. Sperber will be entitled
to a pension, beginning after the termination of his employment and continuing
until the later of the death of Mr. Sperber or his spouse, in an amount equal
to 45% of the average total cash compensation for the highest three of the
last six years prior to termination, reduced generally by the sum of the
amount Mr. Sperber would be entitled to receive under all of the Company's
qualified retirement plans within the meaning of Section 401(a) of the
Internal Revenue Code and under Social Security if he commenced receiving such
benefit payments at age 65. See "--Stock Options."
The Company entered an Option Agreement with Mr. Sperber dated September 30,
1994 under which Mr. Sperber was granted, as a key employee pursuant to the
Company's 1993 Stock Option Plan, a non-qualified option to purchase from the
Company up to 4,795 shares of Common Stock at a price of $2,000 per share. The
option expires on the earlier of September 30, 2004 or upon Termination of
Employment (as defined in the 1993 Stock Option Plan). In the event of Mr.
Sperber's death, disability, retirement or termination without cause, the
option remains exercisable for one year (but may be extended by the Company at
its discretion). Upon termination of Mr. Sperber's employment for cause (or
discovery of justification for termination for cause after termination for
another reason), all outstanding options are immediately cancelled. In the
event Mr. Sperber's employment is terminated for any other reason, all
outstanding options will remain exercisable for three months from the date of
termination (but may be extended at the discretion of the Company).
The Company entered into an employment agreement with Dariush Ashrafi dated
May 1, 1995, pursuant to which Mr. Ashrafi serves as Executive Vice President
and Chief Financial Officer of the Company. Under this agreement, the term of
Mr. Ashrafi's employment began on May 1, 1995 and terminates 60 days after
either Mr. Ashrafi or the Company gives written notice that he or it does not
wish to continue the employment, unless earlier terminated for cause or upon
the death or disability of Mr. Ashrafi. In 1997, the Company's Board of
Directors determined to award a $93,000 bonus to Mr. Ashrafi, payable to Mr.
Ashrafi in 1998. Pursuant to a 1995 deferred compensation agreement, between
the Company and Mr. Ashrafi, Mr. Ashrafi is entitled to receive an LTIP
payment of $300,000, payable in quarterly payments in the amount of $18,750.
If Mr. Ashrafi's employment with the Company is terminated under certain
circumstances, he is entitled to receive 100% of his base salary and annual
cash bonus paid or payable by the Company to him in respect of the last full
fiscal year preceding the termination date as one lump sum payment. Further,
if Mr. Ashrafi is terminated other than for cause or disability, or if he
voluntarily terminates his employment in certain instances, he is entitled to
receive basic health and medical benefits until the earlier of one year
following termination and his full-time employment elsewhere.
The Company entered into an employment agreement with Paul Feuerman dated
November 29, 1993, pursuant to which Mr. Feuerman serves as Senior Vice
President and General Counsel to the Company. Under this agreement, the term
of Mr. Feuerman's employment began on November 29, 1993 and terminates 60 days
after either Mr. Feuerman or the Company gives written notice that he or it
does not wish to continue the employment, unless earlier terminated for cause
or upon the death or disability of Mr. Feuerman. In 1997, the Company's Board
of Directors determined to award a $61,000 bonus, payable to Mr. Feuerman in
1998. Pursuant to a deferred compensation agreement dated August 8, 1996,
between the Company and Mr. Feuerman, Mr. Feuerman is entitled to receive an
LTIP payment of $500,000, payable in two annual installments of $100,000
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<PAGE>
each followed by two annual installments of $150,000 each. If Mr. Feuerman's
employment with the Company is terminated under certain circumstances, he is
entitled to receive 100% of his base salary and annual cash bonus paid or
payable by the Company to him in respect of the last full fiscal year
preceding the termination date as one lump sum payment. Further, if Mr.
Feuerman is terminated other than for cause or disability, or if he
voluntarily terminates his employment in certain instances, he is entitled to
receive basic health and medical benefits until the earlier of one year
following termination and his full-time employment elsewhere.
The Company entered into an employment agreement with Jay Cayado dated
November 22, 1993, pursuant to which Mr. Cayado serves as Senior Vice
President Technical Operations of the Company. Under this agreement, the term
of Mr. Cayado's employment began on November 22, 1993 and terminates 60 days
after either Mr. Cayado or the Company gives written notice that he or it does
not wish to continue the employment, unless earlier terminated for cause or
upon the death or disability of Mr. Cayado. In 1997, the Company's Board of
Directors determined to award a $37,000 bonus to Mr. Cayado, payable to Mr.
Cayado in 1998. Pursuant to a deferred compensation agreement dated Feb. 7,
1996, between the Company and Mr. Cayado, Mr. Cayado is entitled to receive an
LTIP payment of $450,000, payable annually in one installment of $125,000, one
installment of $100,000 and three installments of $75,000 each. If Mr.
Cayado's employment with the Company is terminated under certain
circumstances, he is entitled to receive 100% of his base salary and annual
cash bonus paid or payable by the Company to him in respect of the last full
fiscal year preceding the termination date as one lump sum payment. Further,
if Mr. Cayado is terminated other than for cause or disability, or if he
voluntarily terminates his employment in certain instances, he is entitled to
receive basic health and medical benefits until the earlier of one year
following termination and his full-time employment elsewhere.
The Company entered into an employment agreement with Paul Kleutghen dated
November 29, 1993, pursuant to which Mr. Kleutghen serves as Senior Vice
President, Strategic Development, to the Company. This agreement terminates 60
days after either Mr. Kleutghen or the Company gives written notice that he or
it does not wish to continue the employment, unless earlier terminated for
cause or upon the death or disability of Mr. Kleutghen. In 1997, the Company's
Board of Directors determined to award a $37,300 bonus, payable to Mr.
Kleutghen in 1998. Pursuant to a deferred compensation agreement dated August
8, 1996, between the Company and Mr. Kleutghen, Mr. Kleutghen is entitled to
receive a bonus of $500,000, payable in two annual installments of $100,000
each followed by two annual installments of $150,000 each. If Mr. Kleutghen's
employment with the Company is terminated under certain circumstances, he is
entitled to receive 100% of his base salary and annual cash bonus paid or
payable by the Company to him in respect of the last full fiscal year
preceding the termination date as one lump sum payment. Further, if Mr.
Kleutghen is terminated other than for cause or disability, or if he
voluntarily terminates his employment in certain instances, he is entitled to
receive basic health and medical benefits for one year following termination
and the full-time employment elsewhere.
The Company entered into an agreement dated November 29, 1993 with James C.
McGee, pursuant to which Mr. McGee served as the Company's Executive Vice
President. Mr. McGee ceased full-time employment and became a consultant to
the Company on December 31, 1996. Under an agreement dated September 20, 1996,
Mr. McGee has received payments totaling $1,527,461 and is entitled to receive
(a) $116,400 when bonuses are paid to certain senior executives in respect of
fiscal 1997, and (b) continuing health and dental insurance coverage. Until
December 31, 1998, Mr. McGee will serve as a consultant to the Company and is
entitled to receive base consulting fees equal to his annual base salary of
$431,000, plus an additional consulting fee equal to a fraction of his annual
base salary (determined by dividing the aggregate bonuses to be paid to
certain senior executive officers of the Company by such senior executive
officers' aggregate annual base salaries) to be paid as and when bonuses are
paid to senior executive officers of the Company in respect of fiscal 1998.
Pursuant to an agreement dated July 28, 1995, Marvin Samson was appointed an
Executive Vice President and Director of the Company, as well as President,
Chief Executive Officer and Chief Operating Officer and Director of Marsam.
Mr. Samson ceased to be an employee and director of the Company and Marsam on
January 7, 1998. In connection with Mr. Samson's employment agreement, the
Company is paying Mr. Samson compensation through 2000, currently at the
annual rate of $400,000. During this period, the Company also is providing
certain insurance and automobile benefits.
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<PAGE>
A compensation continuation agreement provides for pension payments to Mr.
Samson in the first year following commencement of retirement (as defined) in
an amount equal to his annual base salary immediately prior to retirement and,
thereafter, 50% of that amount for each of the next nine years. The Company
has also agreed to provide certain benefits to Mr. Samson in the form of
payments on a split dollar life insurance contract insuring the lives of Mr.
Samson and his wife.
STOCK OPTIONS
The Company's 1997 Stock Option Plan (the "1997 Plan") provides for the
granting of options to purchase not more than an aggregate of 27,400 shares of
Common Stock, subject to adjustment under certain circumstances. In addition,
the Company's 1993 Stock Option Plan (the "1993 Plan") provided for the
granting of options to purchase not more than an aggregate of 27,400 shares of
Common Stock, subject to adjustment under certain circumstances. In addition,
the Company's 1995 Non-Employee Director Stock Option Plan (the "Non-Employee
Director Plan" and, together with the 1997 Plan and the 1993 Plan, the "Stock
Option Plan") provides for the granting of options to purchase not more than
an aggregate of 1,000 shares of Common Stock, subject to adjustment under
certain circumstances. Although options granted under the 1993 Plan to
purchase 25,278 shares are still outstanding, no further grants will be made
pursuant to the 1993 Plan. Some or all of the options granted under the 1997
Plan may be "incentive stock options" within the meaning of section 422 of the
Internal Revenue Code of 1986 (the "Code"). The Company has granted options to
purchase 10,173 shares under the 1997 Plan at the then fair market value and
plans to grant 8,923 additional options to purchase shares of Common Stock
under the 1997 Plan prior to or at the completion of the Equity Offering at an
exercise price equal to the public offering price. The Company intends to
reduce the exercise price to the public offering price in the Equity Offering
for all options granted under the 1997 Plan and the 1993 Plan to non-director
employees that have an exercise price above such price. Currently, options to
purchase a total of 18,490 shares of Common Stock would be subject to such a
reduction in exercise price.
The Compensation Committee administers the 1997 Plan. The Compensation
Committee has full power and authority to interpret the 1997 Plan, set the
terms and conditions of individual options and supervise the administration of
the 1997 Plan.
The Compensation Committee determines, subject to the provisions of the 1997
Plan, to whom options are granted, the number of shares of Common Stock
subject to an option, whether stock options will be incentive or non-
qualified, the exercise price of the options (which, in the case of non-
qualified options, may be less than the fair market value of the shares on the
date of grant) and the period during which options may be exercised. All
employees of the Company are eligible to participate in the 1997 Plan. No
options may be granted under the 1997 Plan after March 3, 2007.
The Compensation Committee may amend the 1997 Plan from time to time.
However, the Compensation Committee may not, without stockholder approval,
amend the 1997 Plan to increase the number of shares of Common Stock under the
1997 Plan (except for changes in capitalization as specified in the 1997
Plan).
The Non-Employee Director Plan provides for automatic annual grants of
options to purchase shares of the Company's Common Stock to non-employee
directors of the Company in amounts calculated using a formula provided in the
plan. The Company has granted options to purchase 215 shares of Common Stock
under the Non-Employee Director Plan and plans to grant 90 additional options
to purchase shares of Common Stock under the Non-Employee Director Plan to
certain directors prior to or at the completion of the Equity Offering.
The Board of Directors of the Company may amend the Non-Employee Director
Plan from time to time. However, the Board of Directors may not, without
stockholder approval, amend the plan to increase the number of shares of
Common Stock available for option grants under the plan (except for changes in
capitalization specified in the plan).
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<PAGE>
CERTAIN OTHER EMPLOYEE BENEFIT PLANS
The Company maintains The Retirement Plan of Schein Pharmaceutical, Inc. &
Affiliates (the "Company Retirement Plan"), under which employees (other than
temporary employees) of the Company may participate
on the first day of the first pay period after completing six consecutive
calendar months during which they complete at least 500 hours of service.
Effective July 1, 1996, the Company Retirement Plan became the successor to
the Marsam Pharmaceuticals Retirement Plan.
Participants generally may make basic contributions to the Company
Retirement Plan, by salary deduction, of up to 14% of their compensation from
the Company, subject to applicable federal tax limitations ($10,000 for the
1998 plan year, subject to cost of living adjustments); the amount of a
participant's basic contribution is generally excluded from gross income for
federal or state income tax purposes. In 1998 the Company will make a
mandatory matching contribution to the Company Retirement Plan of $0.50 for
each dollar contributed to the Company Retirement Plan as a basic
contribution, up to the first 6% of a participant's contribution; the Company
also may make additional matching contributions and may make other non-
matching contributions to the Company Retirement Plan at the discretion of the
Board of Directors. In 1998, the Company made a discretionary, non-matching
contribution under the Company Retirement Plan for 1997 equal to 5% of
compensation (as defined in the Company Retirement Plan).
Concurrently with the IPO, participants in the Company Retirement Plan will
be permitted to invest up to the lesser of 5% or $15,000 of their account
balance in Common Stock at the IPO price. After the Equity Offering,
participants will be permitted to invest, at the then current market price, up
to 5% of their and the Company's contributions to the Company Retirement Plan
in Common Stock. Participants will be allowed to sell their shares of Common
Stock at any time.
Participants in the Company Retirement Plan have a 100% vested and
nonforfeitable interest in the value of their basic contribution and the
Company's matching contribution, and they acquire a 100% vested and
nonforfeitable interest in the Company's non-matching amounts at retirement,
death, disability or termination pursuant to an employee reduction plan. If
their employment terminates prior to the normal retirement date for any other
reason, participants acquire a 10% vested and nonforfeitable interest in the
Company's non-matching contribution amounts for each of the first four years
of service; and a 20% vested and nonforfeitable interest in the Company's non-
matching contribution amounts for each of the fifth, sixth and seventh years
of service; accordingly, after seven years of service, participants have a
100% vested and nonforfeitable interest in the value of the Company's non-
matching contribution amounts.
Participants are entitled to receive the amounts in their Company Retirement
Plan accounts in a single lump-sum payment on death, disability, retirement or
termination of employment. At the election of the participant, the
participant's Company Retirement Plan account is eligible for payment in
installments of either 5 or 10 years. In certain circumstances, participants
may receive loans and hardship withdrawals from their accounts in the Company
Retirement Plan.
Supplemental Retirement Plan. The Company maintains a Supplemental
Retirement Plan (the "Supplemental Retirement Plan"). Under the Supplemental
Retirement Plan, the Company pays non-qualified deferred compensation to
certain of its employees consisting of benefits based on annual compensation
in excess of limitations imposed by the Code on contributions under the
Company Retirement Plan. The Supplemental Retirement Plan is an unfunded
"pension benefit plan" subject to the Employee Retirement Income Security Act
of 1974, as amended.
Split Dollar Life Insurance Plan. The Company maintains a Split Dollar Life
Insurance Plan (the "Life Insurance Plan"). Under the Life Insurance Plan,
each participating officer owns a life insurance policy. Each policy is
designed to provide at age 65 an annuity equal to a specified percentage of
the participant's projected average annual salary for the final three years of
employment (less Social Security benefits and certain benefits under the
Company Retirement Plan and Supplemental Retirement Plan). A cash surrender
value, which is owned by the individual and designed to fund the annuity,
accumulates under each participant's policy. The Company and the employee will
share the cost of premiums. The premiums advanced by the Company will be
repaid out of the cash value of the policies or the proceeds of the death
benefits.
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1993 Book Equity Appreciation Rights Program. The Company maintains a Book
Equity Appreciation Rights Program (the "Program") to allow certain employees
to benefit from an increase in the Company's book
value (calculated according to a formula defined in the Program). All
participants are fully vested in their book equity appreciation rights
("BEARs"). The Company does not intend to make any additional grants of BEARs.
1998 Employee Stock Purchase Plan. The Company adopted an Employee Stock
Purchase Plan on January 23, 1998, which provides employees an opportunity to
purchase stock of the Company through payroll deductions upon completion of
the Offering. Employees may elect to withhold from 1% to 20% of their
compensation and purchase Common Stock directly from the Company. Each
employee's annual purchase is limited to Common Stock with a fair market value
of $25,000 per year, which Common Stock will be purchased at 85% of the fair
market value of the Stock. The maximum number of shares of the Company's
Common Stock available for purchase under the plan is 4,762 shares.
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CERTAIN TRANSACTIONS
In 1994, the Company entered into a Heads of Agreement with Bayer
Corporation and Bayer A.G. (collectively, "Bayer"), pursuant to which the
Company and Bayer committed together to explore business opportunities for the
U.S. and abroad. Under the agreement, the parties agreed to share expertise,
personnel, products and production facilities where appropriate to (i) explore
potential areas of mutual interest and cooperation in the U.S. domestic
market, (ii) identify multisource pharmaceutical business opportunities abroad
and (iii) explore the use of Bayer's chemical synthesis expertise to provide
the Company with chemical drug ingredients. The agreement provides that any
decision to pursue a project must be approved by both parties and based on a
separately negotiated contractual agreement.
In 1994, the Company entered into a three-year co-promotion agreement with
Bayer Corporation covering the Company's INFeD product. Under the terms of the
agreement, during the periods from 1995 to 1997, in exchange for promotional
support, the Company shared with Bayer the net profits of INFeD in excess of
specified threshold amounts. In early 1998, this agreement was amended and
extended to December 1998. This amended agreement provides that in exchange
for promotional support, the Company pays Bayer Corporation a fixed dollar
amount plus a fixed percentage of sales above a threshold amount. The Company
incurred selling expenses under these agreements of approximately $3.0 million
in 1996 and $4.2 million in 1997. There were no selling expenses under the
first agreement for 1995. See "Principal Stockholders."
Since 1994, the Company and Bayer, through their respective affiliates, have
entered into several joint ventures to own, manage or develop generic
pharmaceutical businesses outside of the U.S. Each of Schein and Bayer have
contributed various assets and rights and funded the operations of these
ventures, and in certain circumstances have guaranteed certain liabilities of
these ventures, such as leases and lines of credit. It is contemplated that
the Company and Bayer will sell products to certain of these ventures for
resale in their local markets.
During 1995, 1996 and 1997, the Company invested approximately $3.5 million,
$2.0 million and $0.2 million, respectively, to acquire up to a 50% interest
in each of several international pharmaceutical businesses. These businesses
are jointly owned with subsidiaries of Bayer AG, the parent of Bayer
Corporation, a minority investor in the Company. Each party's interest in
profits and losses is proportional to that party's equity investment in a
venture. The Company recorded losses of approximately $0.4 million, $3.4
million and $3.4 million in 1995, 1996 and 1997, respectively, as its share of
the operating results of these businesses. The Company generally anticipates
that these international businesses will not have significant revenues or
operations for a period of two to three years, during which time the
businesses incur expenses to register products in anticipation of future
sales. The Company incurred expenses of approximately $2.1 million, $2.9
million and $2.8 million in 1995, 1996 and 1997, respectively, to identify,
evaluate, and establish these and other potential international business
ventures. Each of Bayer and Schein currently is evaluating the extent of its
continued participation in certain of these ventures.
In 1997, the Company, together with the Pharmaceutical, Consumer Healthcare,
Afga Film and Diagnostics divisions of Bayer Corporation, has created a
marketing collaboration called Bayer Healthcare Partners. Through Bayer
Healthcare Partners, the participants combine their sales and marketing
efforts to offer, on a case-by-case basis, a package of goods and services
designed to be more attractive to a customer, most likely a managed healthcare
provider. The participants share in the costs of these combined marketing
efforts. The Company's participation in Bayer Healthcare Partners is
determined on a year to year basis. In the last six months of 1997, the
Company incurred expenses of approximately $0.1 million and the rate of the
Company's expenditures in 1998 is expected to be similar. Under its existing
arrangement with Bayer Healthcare Partners, the Company is not required to
share revenues or profits with other participants.
In the conduct of its business, the Company sells pharmaceutical products to
Henry Schein, Inc. for distribution to its customers. Net sales to Henry
Schein, Inc. were $5.3 million, $8.6 million and $10.0 million in 1995, 1996
and 1997, respectively. Certain of the Company's principal stockholders also
are principal stockholders of Henry Schein, Inc. All transactions between the
Company and Henry Schein, Inc. are on an arm's-length basis.
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In connection with Mr. Ashrafi's relocation, the Company loaned Mr. Ashrafi
$150,000 at an interest rate of 6.875% per annum evidenced by a promissory note
dated May 31, 1996. As of December 1997, an aggregate principal amount of
$150,000 was outstanding on that loan.
Richard L. Goldberg, who is a Director of the Company, is a member of
Proskauer Rose LLP, which has been retained by the Company to provide legal
services.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 12, 1998, by
(i) each person (or affiliated group of persons) known by the Company to own
beneficially more than 5% of the Company's Common Stock, (ii) each director of
the Company, (iii) each of the named executive officers and (iv) all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
(2) (3)
----------------------
BENEFICIAL OWNER(1) NUMBER PERCENT
- ------------------- ----------- ----------
<S> <C> <C>
Martin Sperber (4)....................................... 195,283 66.6%
Marvin H. Schein (5) (6)................................. 90,020 30.7%
135 Duryea Road
Melville, NY 11747
Bayer Corporation........................................ 77,542 26.4%
100 Bayer Road
Pittsburgh, PA 15205
Trust established by Pamela Schein (5) (6)............... 68,042 23.2%
Pamela Joseph (6) (7).................................... 26,528 9.0%
Dariush Ashrafi.......................................... 346 *
Javier Cayado............................................ 233 *
Paul Feuerman............................................ 242 *
Paul Kleutghen........................................... 290 *
David R. Ebsworth........................................ 19 *
Richard L. Goldberg...................................... 19 *
Directors and Executive Officers as
Group (7 persons) (4)................................... 196,432 67.0%
</TABLE>
- --------
* Denotes less than 1%.
(1) Unless otherwise indicated, the address for each person is c/o Schein
Pharmaceutical, Inc., 100 Campus Drive, Florham Park, New Jersey 07932.
(2) The persons and entities named in the table have sole voting and
investment powers with respect to all of the Common Stock shown as
beneficially owned by them, except as noted below.
(3) The 293,259 shares of Common Stock deemed outstanding includes:
(a) 273,264 shares of Common Stock outstanding; and
(b) 19,995 shares of Common Stock issuable pursuant to the exercise of
options held by the respective person or group or reserved for issuance
to management, which may be exercised within 60 days after the date of
the Equity Offering prospectus.
(4) Includes:
(a) 5,898 shares for which Mr. Sperber is either the direct beneficial
owner or holds in trusts for his family members' benefit; and
(b) 4,795 shares issuable pursuant to the exercise of stock options that
are held by Mr. Sperber and are currently exercisable; and
(c) 184,590 shares over which Mr. Sperber has voting control pursuant to
the voting trust agreement dated September 30, 1994 (the "Voting Trust
Agreement"). Mr. Sperber, acting as voting trustee, is able to control
substantially all matters requiring stockholder approval, including the
election of directors.
(5) Includes all shares for which such stockholder is either the direct
beneficial owner or holds in trust for his or her family members' benefit
and/or charities for which such stockholder is trustee.
(6) All shares are held by Mr. Sperber as voting trustee under the Voting
Trust Agreement. See "--Restructuring Agreements."
(7) Includes 1,737 shares held in trust, of which Ms. Joseph is a principal
beneficiary.
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Restructuring Agreements
At the time of Bayer Corporation's acquisition of its 28.3% interest in the
Company, the Company, Bayer Corporation, Mr. Sperber, and certain other
principal stockholders entered into certain agreements (the "Restructuring
Agreements") relating to the governance of the Company and certain other
matters.
Agreements Relating to Control of the Company. The Restructuring Agreements
provide that, until the earlier of March 1, 2000 and the effective date of a
merger, consolidation or combination that results in the Voting Trustee
(currently Mr. Sperber) (the "Voting Trustee") neither holding the position of
chairman of the board, president, chief executive officer or chief operating
officer of the resulting entity nor having the right to designate a majority
of the members of the board of the resulting entity (such earlier date, the
"Voting Trust Termination Date"), the Voting Trustee will have the right to
vote, or direct the vote of, all the shares of Common Stock owned by Marvin
Schein, Pamela Schein and Pamela Joseph and certain trusts established by them
or for their issue (collectively, the "Family Stockholders") (i.e., 67.5% of
the outstanding shares of Common Stock. As a result of the foregoing, the
Voting Trustee as a practical matter will be able to control substantially all
matters requiring stockholder approval, including the election of directors,
until March 1, 2000 (without giving effect to any future public issuance of
Common Stock by the Company or sales of Common Stock by Continuing
Stockholders). The Restructuring Agreements provide that Mr. Sperber may
designate certain individuals to succeed him as Voting Trustee under the
Restructuring Agreements.
The Restructuring Agreements provide that, until the Governance Termination
Date, Bayer Corporation shall be entitled to nominate a number of members of
the Board of Directors of the Company, rounded down to the nearest whole
number (until Bayer holds more than 50% of the outstanding Common Stock, then
rounded up to the nearest whole number), equal to the product of (a) the
number of members of the Board of Directors and (b) its percentage
stockholdings of Common Stock of the Company at the time of nomination. The
Voting Trustee is entitled, until the Voting Trust Termination Date, to
nominate the balance of the members of the Board of Directors. Until May 15,
2001, the Voting Trustee and the other Continuing Stockholders (as defined
herein) (to the extent their shares of Common Stock are not voted by the
Voting Trustee) must vote for the election of Bayer Corporation's nominee(s).
Until the Voting Trust Termination Date, Bayer Corporation and the Continuing
Stockholders (to the extent their shares of Common Stock are not voted by the
Voting Trustee) must vote for the election of the Voting Trustee's nominees.
Until the earlier of May 15, 2001 and a sale of shares by Bayer Corporation
other than to a Permitted Assignee (as defined herein), the Company may not,
without Bayer Corporation's consent, among other things, (a) own, manage or
operate any business not principally engaged in a segment of the
pharmaceutical or health care industry or any business ancillary thereto, (b)
amend or restate the Company's charter or by-laws to require more than
majority approval to elect a majority of the Board of Directors, or (c) engage
in transactions with any affiliate on terms more favorable to the affiliate
than could be obtained in an arm's-length transactions, other than
intercompany transactions and transactions under the Restructuring Agreements.
In addition, until the earlier of (i) the Governance Termination Date, (ii)
the Qualified Public Offering Date and (iii) a sale of shares by Bayer
Corporation other than to a Permitted Assignee, the Company may not undertake
certain other actions (including incurring funded debt in excess of certain
ratios or declaring certain dividends or making certain distributions in
respect of the Company's Common Stock) without the consent of Bayer
Corporation.
The Restructuring Agreements include the Standstill, which imposes certain
restrictions on Bayer Corporation and its affiliates until May 15, 2001 (the
"Standstill Period"). During the Standstill Period, Bayer Corporation and its
affiliates may not among other things (a) acquire, announce an intention to
acquire or offer to acquire any assets of the Company or its subsidiaries
(other than in the ordinary course) or equity securities of the Company, (b)
participate in or encourage the formation of a group or entity that seeks to
acquire equity securities of the Company, (c) solicit proxies or become a
participant in any election contest with respect to the Company, (d) initiate
or otherwise solicit stockholders for the approval of stockholder proposals or
induce any
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other person to initiate any stockholder proposal, (e) seek to place designees
on, or remove any member of, the Board or Directors, (f) deposit any equity
securities in a voting trust or like arrangement, (g) seek to control the
management of the Company or negotiate with any person with respect to any
form of extraordinary transaction with the Company or other transaction not in
the ordinary course of business, or be involved in a tender or exchange offer
or other attempt to violate the Standstill or (h) request the Company or
otherwise seek to amend or waive any provision of the Standstill. In addition,
until the Qualified Public Offering Date, the Company may not undertake
certain other actions (including incurring funded debt in excess of certain
ratios or declaring certain dividends or making certain distributions in
respect of the Company's Common Stock) without the consent of Bayer
Corporation.
After the Standstill Period, Bayer Corporation has the right to acquire
control through open market purchases, and under certain circumstances within
six months of the end of the Standstill Period, to acquire from certain
principal stockholders of the Company or from the Company a number of shares
that would enable Bayer Corporation to own a majority of the outstanding
shares of Common Stock. During the Standstill Period, under the terms of the
Restructuring Agreements, Bayer Corporation has the right to acquire,
including under certain circumstances the right to acquire from the Company
and certain of its principal stockholders at fair market value unless Bayer
Corporation has sold shares of Common Stock other than to certain permitted
transferees, (i) shares in connection with its exercise of certain preemptive
rights, (ii) after the Qualified Public Offering Date (as defined below) and
before May 15, 2001, shares necessary to acquire the Investment Spread, (iii)
if, within 30 days after the Qualified Public Offering Date, Bayer Corporation
has the right to acquire ownership of at least 21% more of the outstanding
Common Stock than any other holder of 10% or more of the Common Stock (other
than a current stockholder or employee benefit plan) and the Public Float is
less than 133% of the Investment Spread, shares equal to the amount such
Public Float is less than 133% of the Investment Spread and (iv) if, on May
15, 2001, the Public Float is less than 133% of the number of shares that,
when added to Bayer Corporation's shares, equals a majority of the shares then
outstanding, shares equal to such amount. Notwithstanding the foregoing, Bayer
Corporation may purchase additional shares up to a maximum ownership, in the
aggregate, of 30% of the Company's outstanding Common Stock between May 15,
1997 and May 15, 1999, 33 1/3% between May 16, 1999 and May 15, 2000 and 36
2/3% between May 16, 2000 and the end of the Standstill Period.
Under the Reorganization Documents, if Bayer Corporation for any reason
acquires shares in excess of the New Percentage, until May 15, 2001, Bayer
shall vote those excess shares in accordance with the Voting Trustee's
instructions and those excess shares will not be considered in determining the
number of director nominees to which Bayer Corporation is entitled.
Under the Restructuring Agreements, each of Marvin Schein, Pamela Schein and
Pamela Joseph has agreed that such individual, and such individual's Family
Group, shall not acquire shares if, as a consequence of the acquisition such
individual, together with such individual's Family Group (as defined herein),
owns in excess of (a) in the case of Marvin Schein and his Family Group,
35.85% of the Common Stock, (b) in the case of Pamela Schein and her Family
Group, 27.55% of the Common Stock and (c) in the case of Pamela Joseph and her
Family Group, 12.97% of the Common Stock.
Restrictions on Transfer. The Restructuring Agreements generally provide
that Marvin Schein, Pamela Schein, Pamela Joseph, Mr. Sperber, Stanley
Bergman, certain trusts established by these individuals (collectively, the
"Continuing Stockholders") and certain of their transferees may not transfer
any of their shares of Common Stock until March 1, 2000, except (a) pursuant
to Rule 144 under the Securities Act, but subject to volume limitations
intended to equal the volume limitations applicable to affiliates as set forth
in Rule 144(e)(1) (the "Maximum Rule 144 Sales Amount"), (b) in a wide
distribution in an amount that exceeds the Maximum Rule 144 Sales Amount,
regardless of whether the seller is an affiliate or Rule 144(k) is applicable,
in connection with which the seller or the underwriter confirms that no direct
or indirect purchaser in that distribution is intended to acquire more than
the Maximum Rule 144 Sales Amount, (c) to certain family members of the
transferor, related trusts or estates, or other entities owned exclusively by
such transferor, family members, trusts or estates (collectively, a "Family
Group"), (d) in private placements, to persons who own fewer than 1% of the
outstanding Common Stock immediately prior to the transfer and who are not
affiliated with or Family Group members of the transferor, of no more than (I)
1% of the outstanding Common Stock to any one person, its
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affiliates or Family Group members in any three-month period and (II) 4% of
the outstanding Common Stock to all persons in any twelve-month period, (e) in
connection with the exercise of certain registration rights granted to the
Company's stockholders under the Restructuring Agreements, but only if, to the
extent the number of shares sold exceeds the Maximum Rule 144 Sales Amount, it
is confirmed to the Company that it is intended that no purchaser will acquire
more than the Maximum Rule 144 Sales Amount, (f) pledges to a financial
institution or transfers to a financial institution in the exercise of its
pledge rights, (g) to Bayer Corporation as provided under the Restructuring
Agreements, (h) pursuant to a merger or a consolidation that has been approved
by the Board of Directors and stockholders of the Company, (i) in a tender
offer in which Mr. Sperber (or any member of his Family Group who acquired
shares from Mr. Sperber) sells shares and (j) in a tender offer for a majority
of the shares of Common Stock of the Company by a bidder not affiliated with
Bayer Corporation, if Bayer Corporation and its affiliates have failed to
pursue a tender offer or other acquisition permitted under the Restructuring
Agreements. In addition, Continuing Stockholders have been granted
registration rights.
In addition to the above restrictions, the Restructuring Agreements
generally provide that Bayer Corporation may not transfer any of their shares
until May 15, 1999. However, Bayer Corporation may transfer its shares in
connection with certain registration rights granted to Bayer Corporation under
the Restructuring Agreements or to a Permitted Assignee. A "Permitted
Assignee" is (a) a successor to all or substantially all the business and
assets of Bayer or a majority-owned subsidiary of Bayer Corporation who agrees
to be bound by the Restructuring Agreements, (b) with respect to certain
preemptive rights, rights of first refusal and rights of first offer, a single
purchaser who, immediately after the purchase and for 60 days thereafter, owns
at least 10% of the shares then owned by Bayer Corporation and who agrees to
be bound by the Standstill and (c) with respect to certain registration
rights, any person referred to in (a) above and up to three non-affiliated
purchasers who, immediately after the respective purchases and for 60 days
thereafter, own in the aggregate at least 20% of the shares then owned by
Bayer Corporation and who agree to be bound by the Standstill.
If Bayer Corporation sells any of its shares in the Company to any
unaffiliated third party, then the following of Bayer Corporation's rights
under the Restructuring Agreements terminate: the right to consent to certain
transactions of the Company; the right to purchase additional shares on
Company issuances of equity securities; the right to acquire shares to
maintain an ownership percentage of more than 21% of outstanding shares over
certain 10% holders; the right to acquire from the Company or the Family
Stockholders under certain circumstances after the Standstill Period, shares
for a controlling interest in the Company; and rights of first refusal with
regard to share transfers by Continuing Stockholders. However, certain of
those rights (i.e., rights to purchase additional shares on Company issuances
of equity securities and rights of first refusal) may be transferred to a
single purchaser who owns at least 10% of the Company's shares then owned by
Bayer Corporation and who agrees to be bound by the Standstill obligations.
Mr. Sperber and Mr. Bergman may not transfer any of their shares to Bayer
Corporation except in certain open market transactions and except to the
extent that Bayer Corporation first offered to purchase such shares from the
Family Stockholders and the Family Stockholders did not sell such shares.
The Company may not transfer any of its shares to Bayer Corporation, except
to the extent that Bayer Corporation is entitled to purchase shares under the
Restructuring Agreements and those shares are not purchased in the open market
or from Family Stockholders.
Rights of Inclusion and First Refusal. The Restructuring Agreements provide
that, if at any time prior to the Voting Trust Termination Date, any Family
Stockholder or Family Group member (an "Offeree") receives an offer from a
third party to purchase some or all of the Offeree's shares of Common Stock,
the Offeree wishes to sell the shares (other than in a transaction described
in clauses (a) through (i) of the first paragraph of "--Restrictions on
Transfer" above) and Mr. Sperber, as Voting Trustee, consents to the
transaction, the Company or its designee shall have the right of first refusal
to purchase those shares on the same terms as in the third party offer.
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Under the Restructuring Agreements, if the Company fails to exercise its
right of first refusal and Bayer Corporation has not sold shares other than to
a Permitted Assignee, such right will be deemed assigned to Bayer Corporation,
provided that (a) the stockholdings of Bayer Corporation may not as a result
of its exercising such right exceed the New Percentage and (b) if as a result
of its exercising such right, Bayer Corporation would own a majority of the
shares of Common Stock. Bayer Corporation will exercise such right at a price
per share equal to the greater of (I) the price contained in the third party
offer and (II) the price determined by an investment banking firm, who will
take into consideration, among other things, that control of the Company will
pass at that time to Bayer Corporation.
In addition, if, prior to the end of the Standstill or the time that Bayer
Corporation sells shares other than to a Permitted Assignee, the Company is
not entitled to exercise the right of first refusal described above and a
Continuing Stockholder is permitted under the Restructuring Agreements, and in
good faith wishes, to sell shares of Common Stock to a third party (other than
sales under Rule 144 under the Securities Act and sales under clauses (b), (i)
and (j) of the first paragraph of "--Restrictions on Transfer" above), Bayer
Corporation shall have the right of first offer to purchase those shares of
Common Stock on the same terms as the Continuing Stockholder wishes to sell
the shares of Common Stock.
The Restructuring Agreements provide that if at any time prior to the
earlier of the second anniversary of the Qualified Public Offering Date and
May 15, 2001, Bayer Corporation is permitted under the Restructuring
Agreements, and in good faith wishes, to sell shares of Common Stock to a
third party, the Company and the Continuing Stockholders shall have the right
of first offer to purchase those shares of Common Stock on the same terms as
the Bayer Corporation wishes to sell the shares of Common Stock.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
As of September 5, 1995, the Company entered into the Senior Credit
Agreement with a group of lenders. The Chase Manhattan Bank (formerly Chemical
Bank) acts as credit agent thereunder. The Senior Credit Agreement, as
amended, provides a term loan facility of $250.0 million and a revolving
credit facility of $100.0 million, each maturing on December 31, 2001. As of
December 27, 1997, the Company had pre-paid $140 million of the term loan
portion of the Senior Credit Agreement and had permanently reduced the
lenders' commitments with respect thereto and had outstandings under the
revolving credit facility of $44.0 million.
The Company's borrowing can be based, at the option of the Company, on a
spread above LIBOR or an alternate base rate ("ABR"). The interest rate spread
applicable to term loan and revolving credit borrowings fluctuates based on
leverage. The spread, in the case of LIBOR loans, can range from 0.75% to
2.50% and, in the case of ABR loans, from 0% to 1.50%. The ABR is based on a
per annum rate which is the greater of (i) the prime rate of the Credit Agent
(as defined herein), (ii) the secondary market rate for three-month
certificates of deposit as published in Federal Reserve Statistical Release H-
15 (519), plus 1%, and (iii) the Federal Funds rate, plus one-half of 1%. A
commitment fee ranging from 0.25% to 0.50% per annum of the unused daily
amount of the total commitment is payable quarterly.
The term loan facility may be prepaid at any time by the Company. Such
facility is subject to quarterly amortization payments, beginning on September
30, 1998. Annual amortization payments will total $11.6 million, $28.9
million, $34.8 million, and $34.7 million in total between the years 1998
through 2001, respectively. In addition to scheduled amortization, the term
loan facility is subject to mandatory prepayment, without penalty or premium,
to the extent of (a) 75% of excess cash flow for any fiscal year, (b) a
specified percentage, based on leverage, from net proceeds derived from an
equity issuance, (c) 100% of net proceeds from a permitted debt issuance, and
(d) 100% of net proceeds from an asset sale in excess of $1.0 million, all as
more fully set forth in the Senior Credit Agreement.
The Senior Credit Agreement contains a number of affirmative covenants,
including those relating to existence; business and properties; insurance;
taxes; recordkeeping and financial reporting; and notice of certain events, as
well as negative covenants, including: limitations on indebtedness; liens;
sale and lease-back transactions; investments, loans and advances; mergers,
consolidations and sales of assets; dividends and distributions; payment of
dividends by subsidiaries; capital expenditures; transactions with affiliates;
and changes in line of business. The Company is required to maintain specified
financial ratios with respect to leverage, senior debt, fixed charge coverage
and working capital and a minimum net worth.
The Senior Credit Agreement contains customary events of default, including
covenant default, breach of representation and warranty, failure to pay
principal or interest or fees when due, cross-default to other indebtedness,
bankruptcy default, ERISA default, the occurrence of a change in control, the
guarantee agreement or any security document (as defined therein) ceasing to
be in full force and effect and any interest created by a security document
ceasing to be enforceable or ceasing to have the effect and priority purported
to be created thereby.
Borrowings under the Senior Credit Agreement are secured on a senior basis
by mortgages on real property, liens on inventory and receivables and a pledge
of subsidiary stock, which represents substantially all of the Company's
assets. The Company's obligations under the Senior Credit Agreement are
jointly and severally guaranteed on a senior secured basis by the Company's
domestic subsidiaries.
Societe Generale, an affiliate of Societe Generale Securities Corporation,
was the lender under the Senior Subordinated Loan Agreement, dated as of
December 20, 1996, as amended (the "Senior Subordinated Loan Agreement"). All
borrowings under the Senior Subordinated Loan Agreement (the "Senior
Subordinated Loan") were repaid from the proceeds of the Initial Offering. See
"Use of Proceeds."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company to the Initial Purchaser
pursuant to the Purchase Agreement. The Initial Purchaser subsequently resold
the Old Notes to qualified institutional buyers in reliance on Rule 144A under
the Securities Act and to a limited number of accredited investors (as defined
in Rule 501(A)(1), (2), (3) or (7) under the Securities Act). As a condition
to the Purchase Agreement, the Company entered into the Registration Rights
Agreement with the Initial Purchaser pursuant to which the Company agreed, for
the benefit of the holders of the Old Notes, at the Company's cost, to (i)
file the Exchange Offer Registration Statement within 45 days after the date
of the original issue of the Old Notes with the Commission with respect to the
Exchange Offer for the New Notes, (ii) use their reasonable best efforts to
cause the Exchange Offer Registration Statement to be declared effective under
the Securities Act within the earlier of (a) 90 days after the Issue Date or
(b) 30 days after the consummation of the Equity Offering and (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
commence the Exchange Offer and use their reasonable best efforts to issue as
soon as practicable, but in any event prior to 150 days after the date of the
original issue of the Old Notes, New Notes in exchange for all Old Notes
tendered prior thereto in the Exchange Offer. Upon the Exchange Offer
Registration Statement being declared effective, the Company will offer the
New Notes in exchange for surrender of the Old Notes. The Company will keep
the Exchange Offer open for not less than 30 business days (or longer if
required by applicable law) after the date on which notice of the Exchange
Offer is mailed to the holders of the Old Notes. For each Old Note surrendered
to the Company pursuant to the Exchange Offer, the holder of such Old Note
will receive a New Note having a principal amount equal to that of the
surrendered Old Note. Each New Note will bear interest from the last Interest
Payment Date. Such interest will be paid with the first interest payment on
the New Notes. Interest on the Old Notes accepted for exchange will cease to
accrue upon issuance of the New Notes. If (i) any change in law or applicable
interpretations of the staff of the Commission does not permit the Company to
effect the Exchange Offer as contemplated hereby or (ii) the Initial
Purchaser, as a holder of Notes, (A) is not eligible to participate in the
Exchange Offer or (B) participates in the Exchange Offer and does not receive
freely transferable Exchange Notes in exchange for tendered Old Notes, the
Company will file with the Commission and use commercially reasonable efforts
to cause to be declared effective on or prior to the latter of (x) 120 days
after the date of issuance of the Old Notes (the "Issue Date") or (y) 45 days
after the publication of the change in law or interpretation, a registration
statement on an appropriate form under the Securities Act relating to the
offer and sale of the Notes by the holders thereof, from time to time, in
accordance with such registration statement and Rule 415 under the Securities
Act (the "Shelf Registration Statement").
The Company will use commercially reasonable efforts to have the Exchange
Offer Registration Statement or, if applicable, a Shelf Registration Statement
(each a "Registration Statement") declared effective by the Commission as
promptly as practicable after the filing thereof. Unless the Exchange Offer
would not be permitted by a policy of the Commission, the Company will
commence the Exchange Offer and will use its reasonable best efforts to
consummate the Exchange Offer as promptly as practicable, but in any event on
or prior to 150 days after the Issue Date. If applicable, the Company will use
commercially reasonable best efforts to keep the Shelf Registration Statement
effective for the earlier of three years from the Issue Date or such shorter
period that will terminate when all the Notes covered by the Shelf
Registration Statement have been sold, subject to certain exceptions,
including suspending the effectiveness thereof as required by law or for
certain valid business reasons.
In the event (to the extent applicable) that (i) (A) the Exchange Offer
Registration Statement is not filed on or prior to the 45th day following the
Issue Date, (B) the Exchange Offer Registration Statement is not declared
effective within the earlier of (x) 90 days after the Issue Date or (y) 30
days after the consummation of the initial public offering of the Company's
Common Stock or (C) the Exchange Offer is not consummated on or prior to the
150th day following the Issue Date or (ii) the Shelf Registration Statement is
not declared effective on or prior to the later of (x) the 120th day after the
Issue Date and (y) the 45th day after the publication of the
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change in law or interpretation referred to in the second preceding paragraph,
the interest rate borne by the Notes shall be increased by one-half of one
percent per annum following, in the case of clause (i)(A) such 45-day period,
in the case of clauses (i)(B) such 90- or 30-day period, as the case may be,
or in the case of clause (i)(C), such 150-day period, or, in the case of
clause (ii), such 45- or 120-day period, as applicable. The aggregate amount
of such increase from the original interest rate pursuant to these provisions
will in no event exceed one-half of one percent per annum. Such increase will
cease to be effective on the date of filing of the Exchange Offer Registration
Statement, effectiveness of the Exchange Offer Registration Statement,
consummation of the Exchange Offer or the effectiveness of a Shelf
Registration Statement, as the case may be.
Any amounts of additional interest due pursuant to the preceding paragraph
will be payable in cash, on the same original interest payment dates as the
Notes. The amount of additional interest will be determined by multiplying the
applicable additional interest rate by the principal amount of the affected
Notes of such holders, multiplied by a fraction, the numerator of which is the
number of days such additional interest rate was applicable during such
period, and the denominator of which is 360.
The Registration Rights Agreement provides that the Company (i) shall cause
the Exchange Offer Registration Statement to remain continuously effective for
a period of at least 30 Business Days (or longer if required by applicable
law) from its effective date, and shall supplement or amend the Prospectus to
the extent necessary to permit the Prospectus (as supplemented or amended) to
be delivered by broker-dealers in connection with any resale of any such New
Notes and (ii) shall pay all expenses incident to the Exchange Offer and will
indemnify certain holders of the Notes (including any broker-dealer) against
certain liabilities, including liabilities under the Securities Act. A broker-
dealer that delivers such a prospectus to purchasers in connection with such
resales will be subject to certain of the civil liability provisions under the
Securities Act, and will be bound by the provisions of the Registration Rights
Agreement (including certain indemnification rights and obligations).
Each holder of Old Notes that wishes to exchange such Old Notes for New
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any New Notes to be received by it will be
acquired in the ordinary course of its business, (ii) it has no arrangement
with any person to participate in the distribution of the New Notes and (iii)
it is not an "affiliate," as defined in Rule 405 of the Securities Act, of the
Company or, if it is an affiliate, it will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent
applicable.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the New Notes will in general be
freely tradeable after the Exchange Offer without further registration under
the Securities Act. However, any purchaser of Old Notes who is an "affiliate"
of the Company or who intends to participate in the Exchange Offer for the
purpose of distributing the New Notes (i) will not be able to rely on the
interpretation of the staff of the Commission, (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the New Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting New Notes in the Exchange Offer is required
to represent to the Company in the Letter of Transmittal that (i) the New
Notes are to be acquired by the holder or the person receiving such New Notes,
whether or not such person is the holder, in the ordinary course of business,
(ii) the holder or any such other person (other than a broker-dealer referred
to in the next sentence) is not engaging, and does not intend to engage, in a
distribution of the New Notes, (iii) the holder or any such other person has
no arrangement or understanding with any person to participate in the
distribution of the New Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act, and (v) the holder or any such other person acknowledges
that if such holder or any other person participates in the Exchange Offer for
the purpose of distributing the New Notes it must comply with the registration
and prospectus delivery requirements of the
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Securities Act in connection with any resale of the New Notes and cannot rely
on those no-action letters. Each Participating Broker-Dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. See "Plan of
Distribution."
If a holder is not a broker-dealer, it will be required to represent that it
is not engaged in, and does not intend to engage in, the distribution of the
New Notes. If a holder is a broker-dealer that will receive New Notes for its
own account in exchange for Notes that were acquired as a result of market
making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
Holders of the Notes will be required to make certain representations to the
Company in order to participate in the Exchange Offer, and will be required to
deliver information to be used in connection with the Shelf Registration
Statement in order to have their Notes included in the Shelf Registration
Statement. A holder who sells Notes pursuant to the Shelf Registration
Statement generally will be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act
in connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such a holder (including
certain indemnification obligations).
A holder whose Notes are included in a Registration Statement will be
required to agree not to effect any public sale or distribution of the issue
being registered or a similar security of the Company or any securities
convertible into or exchangeable or exercisable for such securities, including
a sale pursuant to Rule 144 under the Securities Act, during the 14 days prior
to, and during the 90-day period beginning on, the effective date of such
Registration Statement (except as part of such registration), if and to the
extent requested by the Company in the case of a non-underwritten public
offering or if and to the extent requested by the managing Underwriter or
Underwriters in the case of an underwritten public offering.
Unless the Company is then subject to Section 13 or 15(d) of the Exchange
Act, the Company will continue to provide to holders of the Notes and to
prospective purchasers of the Notes, for so long as the Notes are outstanding,
the information required by Rule 144A under the Securities Act ("Rule 144A"),
as such Rule may be amended, or any similar rule or regulation adopted by the
Commission.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of New Notes in exchange for each $1,000 principal amount of Old Notes
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only
in integral multiples of $1,000.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes in all material respects except that (i) the New Notes bear a
different CUSIP number from the Old Notes and (ii) the New Notes have been
registered under the Securities Act and hence will not bear legends
restricting the transfer thereof. The New Notes will evidence the same debt as
the Old Notes and will be entitled to the benefits of the Indenture.
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As of the date of this Prospectus, $100,000,000 aggregate principal amount
of Old Notes were outstanding. The Company has fixed the close of business on
, 1998 as the record date for the Exchange Offer for the purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware or the Indenture in connection with
the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company in its sole discretion extends the Exchange Offer,
in which case the term "Expiration Date" shall mean the latest date and time
to which the Exchange Offer is extended, which in no event shall be more than
60 days after the date of this Prospectus.
In order to extend the Exchange Offer, the Company will issue a notice of
such extension by press release or other public announcement prior to 9:00
a.m., New York City time, on the next business day following the previously
scheduled Expiration Date.
The Company expressly reserves the right, in its sole discretion, prior to
the Expiration Date (i) to delay accepting any Old Notes, to extend the
Exchange Offer or to terminate the Exchange Offer if any of the conditions set
forth below under "Conditions" shall not have been satisfied, by giving oral
or written notice of such delay, extension or termination to the Exchange
Agent or (ii) to amend the terms of the Exchange Offer in any manner. Any such
delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the registered
holders. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will disclose any such
material change or material changes to the terms of the Exchange Offer in a
post-effective amendment to the Exchange Offer Registration Statement.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes and any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. To be tendered effectively,
the Old Notes, Letter of Transmittal or an Agent's Message (as defined herein)
in connection with a book-entry transfer, and other required documents must be
completed and received by the Exchange Agent at the address set forth below
under "Exchange Agent" prior to 5:00 p.m., New York City time, on the
Expiration Date. Delivery of the Old
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Notes may be made by book-entry transfer in accordance with the procedures
described below. Confirmation of such book-entry transfer must be received by
the Exchange Agent prior to the Expiration Date.
The term "Agent's Message" means a message transmitted by a book-entry
transfer facility to, and received by, the Exchange Agent forming a part of a
confirmation of a book-entry transfer, which states that such book-entry
transfer facility has received an express acknowledgment from the participant
in such book-entry transfer facility tendering the Notes that such participant
has received and agrees to be bound by the terms of the Letter of Transmittal
and that the Company may enforce such agreement against such participant.
By executing the Letter of Transmittal, each holder will make the
representations set forth above in the seventh and ninth paragraphs under the
heading "--Purpose and Effect of the Exchange Offer."
Each Participating Broker-Dealer that receives New Notes for its own account
in exchange for Old Notes, where such Old Notes were acquired by such
Participating Broker-Dealer as a result of market-making activities, or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined) unless the
Old Notes tendered pursuant thereto are tendered (i) by a registered holder
who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be by a member firm of the Medallion System
(an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Old Notes with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Old Notes at DTC for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in DTC's system may make book-entry delivery of Old Notes by
causing DTC to transfer such Old Notes into the
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Exchange Agent's account with respect to the Old Notes in accordance with
DTC's procedures for such transfer. Although delivery of the Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at DTC,
an appropriate Letter of Transmittal properly completed and duly executed with
any required signature guarantee and all other required documents must in each
case be transmitted to and received or confirmed by the Exchange Agent at its
address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to DTC does
not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right in its sole
discretion to waive any defects, irregularities or conditions of tender as to
particular Old Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Old Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give notification. Tenders of Old
Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes (or a confirmation of book-entry transfer of
such Notes into the Exchange Agent's account at DTC), and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account of DTC), and
all other documents required by the Letter of Transmittal are received by
the Exchange Agent upon five New York Stock Exchange trading days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
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To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must: (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the "Depositor"); (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case
of Old Notes transferred by book-entry transfer, the name and number of the
account at the DTC to be credited); (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Old Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes into the name
of the person withdrawing the tender; and (iv) specify the name in which any
such Old Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the
holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate or amend the Exchange Offer as provided herein prior to the
Expiration Date, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the above
conditions are not satisfied, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders to withdraw
such Old Notes (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer, accept all properly tendered
Old Notes which have not been withdrawn and extend the Exchange Offer for at
least an additional five business days. See "--Expiration Date; Extensions;
Amendments."
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
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By Mail By Overnight Courier or Hand Delivery:
THE BANK OF NEW YORK THE BANK OF NEW YORK
101 Barclay Street, 7E 101 Barclay Street
New York, New York 10286 New York, New York 10286
Corporate Trust Services Window
Ground Level
Attention: Reorganization Section--7E;
Diana Torres
(registered or certified mail
recommended) Attention: Reorganization Section--7E;
Diana Torres
Facsimile Transmission:
(212) 815-6339
Confirm by Telephone:
(212) 815-5789
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the term of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so
long as the Old Notes are eligible for resale pursuant to Rule 144A, to a
person inside the United States whom the seller reasonable believes is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, (iii)
in accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Company), (iv) outside
the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, or (v) pursuant to an
effective registration under the Securities Act, in each case in accordance
with any applicable securities laws of any state of the United States.
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RESALE OF THE NEW NOTES
With respect to resales of New Notes, based on interpretations by the staff
of the Commission set forth in no-action letters issued to third parties, the
Company believes that a holder or other person who receives New Notes, whether
or not such person is the holder (other than a person that is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) who
receives New Notes in exchange for Old Notes in the ordinary course of
business and who is not participating, does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the New Notes a prospectus that satisfies the
requirements of Section 10 of the Securities Act. However, if any holder
acquires New Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the New Notes, such holder cannot rely on
the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretative letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration
is otherwise available. Further, each Participating Broker-Dealer that
receives New Notes for its own account in exchange for Old Notes, where such
Old Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Company in the Letter of Transmittal that (i) the New Notes are to be
acquired by the holder in the ordinary course of business, (ii) the holder
(other than a broker-dealer referred to in the next sentence) is not engaging,
and does not intend to engage in the distribution of the New Notes, (iii) the
holder has no arrangement or understanding with any person to participate in
the distribution of the New Notes and (iv) the holder is not an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act. As
indicated above, each Participating Broker-Dealer that receives a New Note for
its own account in exchange for Old Notes must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. For a
description of the procedures for such resales by Participating Broker-
Dealers, see "Plan of Distribution."
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DESCRIPTION OF NOTES
GENERAL
The New Notes are to be issued under an indenture, dated as of December 24,
1997 (the "Indenture") between the Company, the Guarantors and The Bank of New
York, as Trustee (the "Trustee"), a copy of which is available upon request to
the Company. The form and terms of the New Notes are the same as the form and
terms of the Old Notes (which they replace) except that (i) the New Notes have
been registered under the Securities Act and (ii) the holders of New Notes
will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for an increase in the interest
rate of the Old Notes in certain circumstances relating to the timing of the
Exchange Offer, which rights will terminate when the Exchange Offer is
consummated. The following summary of all the material terms of the Indenture
and the Notes does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Indenture
(including the definitions of certain terms therein and those terms made a
part thereof by the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act")) and the Notes. Capitalized terms used herein and not
otherwise defined have the meanings set forth in "--Certain Definitions."
Under certain circumstances, the Company will be able to designate current
or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries
will not be subject to the restrictive covenants set forth in the Indenture.
As of the date of the Indenture, all of the Company's Subsidiaries other than
Schein Pharmaceutical (Netherlands) B.V., Schein Pharmaceutical (Bermuda) Ltd.
and Schein Farmaceutica de Peru will be Restricted Subsidiaries.
TERMS OF THE NOTES
Interest on each New Note will accrue from the last Interest Payment Date on
which interest was paid on the Old Note tendered in exchange therefor. Holders
of Old Notes whose Old Notes are accepted for exchange will be deemed to have
waived the right to receive any payment in respect of interest on the Old
Notes accrued from the last Interest Payment Date to the date of the issuance
of the New Notes. Consequently, holders who exchange their Old Notes for New
Notes will receive the same interest payment on the same Interest Payment Date
that they would have received had they not accepted the Exchange Offer.
Interest on the New Notes is payable quarterly on January 15, April 15, July
15 and December 15 of each year accruing from the last Interest Payment Date
at a rate equal to the Applicable LIBOR Rate.
The "Applicable LIBOR Rate" means, for each quarterly period during which
any Note is outstanding subsequent to the initial quarterly period, 300 basis
points over the rate determined by the Company (notice of such rate to be sent
to the Trustee by the Company on the date of determination thereof) equal to
the average (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the
offered rates for deposits in U.S. dollars for a period of three months, as
set forth on the Reuters Screen LIBO Page as of 11:00 a.m., London time, on
the Interest Rate Determination Date for such quarterly period; provided,
however, that if only one such offered rate appears on the Reuters Screen LIBO
Page, the Applicable LIBOR Rate for such quarterly period will mean such
offered rate. If such rate is not available at 11:00 a.m., London time, on the
Interest Rate Determination Date for such quarterly period, then the
Applicable LIBOR Rate for such quarterly period will mean the arithmetic mean
(rounded upwards, if necessary, to the nearest 1/16 of 1%) of the interest
rates per annum at which deposits in amounts equal to US$1 million are offered
by the Reference Banks to leading banks in the London interbank market for a
period of three months as of 11:00 a.m., London time, on the Interest Rate
Determination Date for such quarterly period. If on any Interest Rate
Determination Date, at least two of the Reference Banks provide such offered
quotations, then the Applicable LIBOR Rate for such quarterly period will be
determined in accordance with the preceding sentence on the basis of the
offered quotations of those Reference Banks providing such quotations;
provided, however, that if fewer than two of the Reference Banks are so
quoting such interest rates as mentioned above, the Applicable LIBOR Rate for
such quarterly period shall be deemed to be the
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applicable LIBOR Rate for the next preceding quarterly period and in the case
of the quarterly period next succeeding the initial quarterly period, the
Applicable LIBOR Rate shall be 8.6875%.
"Interest Rate Determination Date" means, with respect to each quarterly
period, the second London Banking Day prior to the first day of such quarterly
period.
"LIBOR Fraction" means the actual number of days in the quarterly period
divided by 360; provided, however, that the number of days in each quarterly
period shall be calculated by including the first day of such quarterly period
and excluding the last.
"London Banking Day" means any day in which dealings in U.S. dollars are
transacted or, with respect to any future date, are expected to be transacted
in the London interbank market.
"quarterly period" means the period from and including a scheduled payment
date (or December 24, 1997, in the case of the initial quarterly period)
through the day next preceding the following scheduled interest payment date.
"Reference Banks" means each of: Societe Generale, London Branch; The Chase
Manhattan Bank, London Branch; Deutsche Bank, London Branch; and Rabobank
Nederland, London Branch and any such replacement bank thereof as listed on
the Reuters Screen LIBO Page and their respective successors, and if any such
banks are not at the applicable time providing interest rates as contemplated
within the definition of the "Applicable LIBOR Rate," Reference Banks shall
mean the remaining bank or banks so providing such rates. In the event that
less than two of such banks are providing such rates, the Company shall use
reasonable efforts to appoint additional Reference Banks so that there are at
least two such banks providing such rates; provided, however, that such banks
appointed by the Company shall be London offices of leading banks engaged in
the London interbank market.
"Reuters Screen LIBO Page" means the display designated as page "LIBO" on
the Reuter Monitor Money Rates Service (or such other page as may replace the
LIBO page on that service for the purpose of displaying London Interbank
Offered Rates of leading banks).
If the date due for payment of interest on or principal of the Notes or the
date fixed for redemption of any Note shall not be a Business Day (as defined
herein), then payment of interest or principal need not be made on such date,
but may be made on the next succeeding Business Day with the same force and
effect as if made on the date of maturity or the date fixed for redemption,
and no interest shall accrue for the period after such date.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the option of the Company, in whole or in
part, at any time, upon not less than 30 nor more than 60 days' prior notice,
at 103.000% of the principal amount thereof, plus accrued and unpaid interest
thereon to, but excluding the date of redemption, and at the following
redemption prices (expressed as a percentage of principal amount), plus
accrued and unpaid interest thereon to, but excluding, the date of redemption,
if redeemed during the 12-month period commencing on January 15 of each year:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
1998.......................................................... 103.000%
1999.......................................................... 101.500%
2000.......................................................... 100.750%
2001 and thereafter........................................... 100.000%
</TABLE>
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes or portions thereof to be redeemed pro rata, by lot or by any other
method the Trustee shall deem fair and reasonable, although no Note of $1,000
in original principal amount will be redeemed in part.
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SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund or other
mandatory redemption obligation prior to maturity.
GUARANTEES
All of the Company's existing and future Restricted Subsidiaries (referred
to herein as the "Guarantors"), will jointly and severally, fully and
unconditionally, guarantee on a senior unsecured basis the performance and
punctual payment when due, whether at maturity, by acceleration or otherwise,
of all obligations of the Company under the Indenture and the Notes. Each of
the Guarantors has guaranteed the Company's indebtedness under the Senior
Credit Agreement on a senior secured basis. The Subsidiary Guarantee of each
Guarantor will be effectively subordinated to the prior payment in full of all
secured indebtedness of such Guarantors, including secured indebtedness under
the Senior Credit Agreement.
Each Subsidiary Guarantee will be limited to an amount not to exceed the
maximum amount that can, after giving effect to all other contingent and fixed
liabilities of the applicable Guarantor, be guaranteed by such Guarantor,
without rendering such Subsidiary Guarantee voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. Each Guarantor will agree to pay,
in addition to the amount stated above, any and all costs and expenses
(including reasonable counsel fees and expenses) incurred by the Trustee or
any holder of a Note in enforcing any rights under the Subsidiary Guarantee
with respect to such Guarantor.
Each Subsidiary Guarantee is a continuing guarantee and shall (a) remain in
full force and effect until payment in full of all the Notes, (b) be binding
upon the relevant Guarantor and (c) enure to the benefit of and be enforceable
by the Trustee, the holders of Notes and their successors, transferees and
assigns.
RANKING
The indebtedness evidenced by the Notes will be senior unsecured obligations
of the Company, will rank pari passu in right of payment with all existing and
future senior indebtedness of the Company and will rank senior in right of
payment to all existing and future indebtedness of the Company that is, by its
terms, expressly subordinated to the Notes. The Notes will also be effectively
subordinated to all existing and future indebtedness of any Subsidiary of the
Company that is not a Guarantor of the Notes.
Holders of secured indebtedness of the Company, including the lenders under
the Senior Credit Agreement, will have claims with respect to the assets
constituting collateral for such indebtedness that are prior to the claims of
holders of the Notes. In the event of a default on the Notes, or a bankruptcy,
liquidation or reorganization of the Company, such assets will be available to
satisfy obligations with respect to the indebtedness secured thereby before
any payment therefrom could be made on the Notes. To the extent that the value
of such collateral is not sufficient to satisfy the indebtedness secured
thereby, amounts remaining outstanding on such indebtedness would be entitled
to share with the Notes and their claims with respect to any other assets of
the Company. As of December 27, 1997, the Company and its Restricted
Subsidiaries had secured indebtedness of approximately $154.4 million
outstanding. The obligations of the Company and the Guarantors under the
Senior Credit Agreement are secured by substantially all of the assets of the
Company and the Guarantors. Secured indebtedness under the Senior Credit
Agreement is the only material secured indebtedness of the Company and its
subsidiaries. As of December 27, 1997, the Company had $56.0 million of
undrawn availability under the Senior Credit Agreement. The Indenture will
permit the Company and its Restricted Subsidiaries to incur additional
Indebtedness, including Secured Indebtedness, subject to certain limitations.
CHANGE OF CONTROL
If a Change of Control shall occur at any time, then each holder of Notes
shall have the right to require that the Company purchase such holder's Notes
in whole or in part in any integral multiple of $1,000, for a cash
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purchase price (the "Change of Control Purchase Price") equal to 101% of the
principal amount of such Notes, plus accrued and unpaid interest, if any, on
such Notes to the date of purchase (the "Change of Control Purchase Date"),
pursuant to the offer described below (the "Change of Control Offer") and the
other procedures set forth in the Indenture.
Within 15 days following any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each
holder of Notes by first-class mail, postage prepaid, at his address appearing
in the security register, stating, among other things: (i) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase each Holder's Notes, in whole or in part, at the Change of Control
Purchase Price; (ii) the Change of Control Purchase Price and the Change of
Control Purchase Date which shall be a Business Day no earlier than 30 days
nor later than 60 days from the date such notice is mailed, or such later date
as is necessary to comply with requirements under the Exchange Act; (iii) that
any Note not tendered for purchase will continue to accrue interest; (iv)
that, unless the Company defaults in the payment of the Change of Control
Purchase Price, any Notes accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest after the Change of Control
Purchase Date; and (v) certain other procedures that a holder of Notes must
follow to accept a Change of Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer. The Senior Credit
Agreement generally prohibits the purchase of the Notes by the Company prior
to full repayment of Indebtedness thereunder (except that the proceeds from an
equity or subordinated debt offering may be used to repurchase the Notes) and,
upon a Change of Control, all amounts outstanding under the Senior Credit
Agreement may become due and payable. There can be no assurance that, in the
event of a Change of Control, the Company will be able to obtain the necessary
consents from the lenders under the Senior Credit Agreement to consummate a
Change of Control Offer. The failure of the Company to make or consummate the
Change of Control Offer or pay the Change of Control Purchase Price when due
would result in an Event of Default.
The existence of a right of the holder of Notes to require the Company to
purchase such holder's Notes upon a Change of Control may deter a third party
from acquiring the Company in a transaction which constitutes a Change of
Control.
The phrase "all or substantially all," as used with respect to a sale of
assets in the definition in the Indenture of "Change of Control," varies
according to the facts and circumstances of the subject transaction, has no
firmly established meaning under New York law (the law governing the
Indenture) and is subject to judicial interpretation. Accordingly, in certain
circumstances, there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of "all or substantially
all" of the assets of a Person and therefore it may be unclear whether a
Change of Control has occurred. Any dispute as to whether or not a Change of
Control was triggered as a result of an asset disposition could require
judicial intervention.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
The Company will not, and will not permit any Subsidiary to, create or
permit to exist or become effective any restriction (other than restrictions
in effect on the Issue Date with respect to Indebtedness outstanding on the
Issue Date and refinancing thereof and customary default provisions) that
would materially impair the ability of the Company to make a Change of Control
Offer to purchase the Notes or, if such Change of Control Offer is made, to
pay for the Notes tendered for purchase.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
Limitation on Indebtedness. (a) The Company shall not, and shall not permit
any of its Restricted Subsidiaries to, incur any Indebtedness; provided,
however, that the Company may incur Indebtedness (including
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through the issuance of Disqualified Capital Stock) if on the date of such
incurrence the Consolidated Coverage Ratio would be greater than (i) 2.50:1,
if such Indebtedness is incurred prior to the expiration of 24 months after
the Issue Date, and (ii) 3.00:1 if such Indebtedness is incurred on or
subsequent to the expiration of 24 months after the Issue Date.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may incur Indebtedness to the extent set forth below:
(i) the incurrence by the Company of Indebtedness under the Senior Credit
Agreement and the issuance of letters of credit thereunder (with letters of
credit being deemed to have a principal amount equal to the undrawn amount of
the letters of credit plus any unreimbursed drawings thereon) up to an
aggregate principal amount of $250.0 million outstanding at any one time, less
principal repayments of term loans and permanent commitment reductions with
respect to revolving loans and letters of credit under the Senior Credit
Agreement made after the Issuance Date with the Net Cash Proceeds of Asset
Dispositions, if any; (ii) Indebtedness (x) of the Company to any Restricted
Subsidiary and (y) of any Restricted Subsidiary to the Company or any other
Restricted Subsidiary; (iii) Indebtedness of the Company represented by the
Notes; (iv) any Indebtedness of the Company (other than the Indebtedness
described in clauses (i) and (ii) above) outstanding on the date of the
Indenture; (v) Indebtedness represented by the Guarantees of the Notes and
Guarantees of Indebtedness incurred pursuant to clause (i) above; (vi)
Indebtedness of the Company or any Restricted Subsidiary under Interest Rate
Agreements that are entered into by the Company or such Restricted Subsidiary
for bona fide hedging purposes (as determined in good faith by the Board of
Directors or senior management of the Company or such Restricted Subsidiary)
with respect to Indebtedness of the Company or such Restricted Subsidiary
incurred without violation of the Indenture or with respect to customary
commercial transactions of the Company or such Restricted Subsidiary entered
into in the ordinary course of business; (vii) Indebtedness (including
Capitalized Lease Obligations) incurred by the Company or any Restricted
Subsidiary to finance the purchase, lease or improvement of property (real or
personal) or equipment (whether through the direct purchase of assets or the
Capital Stock of any Person owning such assets) in an aggregate principal
amount which, when aggregated with the principal amount of all other
Indebtedness then outstanding and incurred pursuant to this clause (vii), does
not exceed $25.0 million; (viii) Indebtedness incurred by the Company or any
Restricted Subsidiary constituting reimbursement obligations with respect to
letters of credit issued in the ordinary course of business, including,
without limitation, letters of credit in respect of workers' compensation
claims or self-insurance, or other Indebtedness with respect to reimbursement
type obligations regarding workers' compensation claims; provided, that upon
the drawing of such letters of credit or the incurrence of such Indebtedness,
such obligations are reimbursed within 30 days following such incurrence; (ix)
Acquired Indebtedness; provided, however, that such Indebtedness is not
incurred in contemplation of such acquisition or merger; and provided, further
that the Company would have been able to incur such Indebtedness at the time
of the incurrence thereof pursuant to clause (a) above, determined on a pro
forma basis as if such transaction had occurred at the beginning of such four-
quarter period and such Indebtedness and the operating results of such merged
or acquired entity had been included for all purposes in such pro forma
calculation as if such entity had been a Restricted Subsidiary at the
beginning of such four-quarter period; (x) obligations in respect of
performance and surety bonds and completion guarantees provided by the Company
or any Restricted Subsidiary in the ordinary course of business; (xi)
additional indebtedness in an aggregate amount not to exceed $10.0 million at
any one time outstanding; and (xii) Refinancing Indebtedness; provided,
however, that (A) the principal amount of such Refinancing Indebtedness shall
not exceed the principal or accreted amount (in the case of any Indebtedness
issued with original issue discount, as such) of Indebtedness so extended,
refinanced, renewed, replaced, substituted or refunded (the "Refinanced
Indebtedness"), (B) the Refinancing Indebtedness shall have a Weighted Average
Life to Maturity of not less than the stated maturity of the Refinanced
Indebtedness and (C) the Refinancing Indebtedness shall rank in right of
payment relative to the Notes on terms at least as favorable to the holders of
Notes as those contained in the documentation governing the Refinanced
Indebtedness.
(c) Notwithstanding any other provision of this covenant, neither the
Company nor any Restricted Subsidiary shall incur any Indebtedness (i)
pursuant to paragraph (b) above, if the proceeds thereof are used, directly or
indirectly, to repay, prepay, redeem, defease, retire, refund or refinance any
Subordinated Indebtedness unless such Indebtedness shall be subordinated to
the Notes to at least the same extent as such Subordinated
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Indebtedness or (ii) pursuant to paragraph (a) or (b) if such Indebtedness is
subordinate or junior in ranking in any respect to any Senior Indebtedness
unless such Indebtedness is expressly subordinated in right of payment to such
Senior Indebtedness.
(d) The Company shall not incur any Secured Indebtedness that is not Senior
Indebtedness.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of its Capital Stock (other than dividends or distributions
payable solely in shares of its Capital Stock (other than Disqualified
Capital Stock) or in options, warrants or other rights to acquire such
Capital Stock and other than dividends and distributions paid by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any shares of the Capital Stock of the Company or any
Restricted Subsidiary or options, warrants or other rights to acquire such
Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to the relevant scheduled
principal payment, sinking fund or maturity, any Subordinated Indebtedness;
or
(iv) make any Investment in any Person, including, without limitation,
any Unrestricted Subsidiary (other than a Permitted Investment)
(the foregoing actions described in clauses (i) through (iv) above being
hereinafter collectively referred to as "Restricted Payments") unless after
giving effect to the proposed Restricted Payment, (A) no Default or Event of
Default shall have occurred and be continuing and such Restricted Payment
shall not cause or constitute a Default or an Event of Default; (B)
immediately before and immediately after giving effect to such transaction on
a pro forma basis, the Company could incur $1.00 of additional Indebtedness
pursuant to paragraph (a) under "Limitation of Indebtedness"; and (C) the
aggregate amount of all such Restricted Payments (the amount of any such
Restricted Payment, if other than cash, to be determined in good faith by the
Board of Directors of the Company, whose determination shall be conclusive and
evidenced by a resolution of the Board of Directors) declared or made after
the Issue Date (including such Restricted Payment) does not exceed the sum of:
(i) 50% of the aggregate cumulative Consolidated Net Income (or, if such
aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of
such loss) of the Company accrued on a cumulative basis during the period
(taken as one accounting period) from the fiscal quarter that first begins
after the Issue Date to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the time
of such Restricted Payment;
(ii) the aggregate Net Cash Proceeds received after the Issue Date by the
Company from the issuance or sale (other than to any of its Subsidiaries)
of its shares of Capital Stock (other than Disqualified Capital Stock) or
any options, warrants or rights to purchase such shares of Capital Stock
(other than Disqualified Capital Stock) or other cash contributions to its
capital (excluding amounts used pursuant to clauses (ii) or (iii) of
paragraph (b) below);
(iii) the aggregate Net Cash Proceeds received after the Issue Date by
the Company (other than from any of its Subsidiaries) upon the exercise of
any options, warrants or rights to purchase shares of Capital Stock (other
than Disqualified Capital Stock) of the Company;
(iv) the aggregate Net Cash Proceeds received after the Issue Date by the
Company from Indebtedness of the Company or Disqualified Capital Stock of
the Company that has been converted into or exchanged for Capital Stock
(other than Disqualified Capital Stock) of the Company or options, warrants
or rights to acquire such Capital Stock, to the extent such Indebtedness of
the Company or Disqualified Capital Stock
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of the Company was originally incurred or issued for cash, plus the
aggregate Net Cash Proceeds received by the Company at the time of such
conversion or exchange;
(v) to the extent not included in Consolidated Net Income, the net
reduction (received by the Company or any Restricted Subsidiary in cash) in
Investments (other than Permitted Investments) made by the Company and the
Restricted Subsidiaries since the Issue Date, not to exceed, in the case of
any Investments in any Person, the amount of Investments (other than
Permitted Investments) made by the Company and the Restricted Subsidiaries
in such Person since the Issue Date.
(e) Notwithstanding the foregoing, and in the case of clauses (v) and (vii)
below, so long as there is no Default or Event of Default continuing, the
foregoing provisions shall not prohibit the following actions:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would be
permitted by the provisions of paragraph (a) of this "Limitation on
Restricted Payments" covenant (such payment being deemed to have been paid
on such date of declaration for purposes of the calculation required by
paragraph (a) of this "Limitation on Restricted Payments" covenant);
(ii) the repurchase, redemption, or other acquisition or retirement of
any shares of any class of Capital Stock of the Company or warrants,
options or other rights to acquire such stock in exchange for, or out of
the Net Cash Proceeds of a substantially concurrent issue and sale (other
than to a Subsidiary) for cash of, any Capital Stock (other than
Disqualified Capital Stock) of the Company or warrants, options or other
rights to acquire such Capital Stock;
(iii) any repurchase, redemption, defeasance, retirement, refinancing or
acquisition for value or payment of principal of any Subordinated
Indebtedness in exchange for, or out of the net proceeds of a substantially
concurrent issuance and sale (other than to a Subsidiary) for cash of, any
Capital Stock (other than Disqualified Capital Stock) of the Company or
warrants, options or other rights to acquire such Capital Stock;
(iv) the repurchase, redemption, defeasance, retirement or other
acquisition for value or payment of principal of any Subordinated
Indebtedness through the issuance of Refinancing Indebtedness;
(v) Investments in Permitted Foreign Companies in a net aggregate amount
not to exceed $10.0 million in any fiscal year, provided, however, that, to
the extent the net aggregate amount of such Investments in any fiscal year
is less than $10.0 million, 50% of such difference may be carried forward
and added to the $10.0 million permitted amount for the subsequent fiscal
year;
(vi) Investments in Cheminor Drugs Limited and Dr. Reddy's Laboratories
Limited having an aggregate fair market value, taken together with all
other Investments made pursuant to this clause (vi) that are at the time
outstanding, not to exceed $10.0 million; and
(vii) Additional Investments (including, without limitation, Unrestricted
Subsidiaries) having an aggregate fair market value, taken together with
all other Investments made pursuant to this clause (vii) that are at the
time outstanding, not to exceed $15.0 million at the time of such
Investment (with the fair market value of each Investment being measured at
the time made and without giving effect to subsequent changes in value).
The actions described in clauses (i) and (vii) of this paragraph (b) shall be
Restricted Payments that shall be permitted to be taken in accordance with
this paragraph (b) but shall reduce the amount that would otherwise be
available for Restricted Payments under clause (C) of paragraph (a) of this
"Limitation on Restricted Payments" covenant (provided that any dividend paid
pursuant to clause (i) of this paragraph (b) shall reduce the amount that
would otherwise be available under clause (C) of paragraph (a) of this
"Limitation on Restricted Payments" covenant when declared, but not also when
paid pursuant to such clause (i)) and the actions described in clauses (ii),
(iii), (iv), (v) and (vi) of this paragraph (b) shall be permitted to be taken
in accordance with this paragraph
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and shall not reduce the amount that would otherwise be available for
Restricted Payments under clause (C) of paragraph (a).
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, incur, assume or suffer to
exist any Lien of any kind upon any of its property or assets (including any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary), whether
owned on the Issue Date or acquired after the Issue Date, or any income or
profits therefrom, except if the Notes (or the Guarantee of the Notes, in the
case of Liens on properties or assets of any Guarantor) and all other amounts
due under the Indenture are directly secured equally and ratably with (or
prior to in the case of Liens with respect to Subordinated Indebtedness) the
obligation or liability secured by such Lien, excluding, however, from the
operation of the foregoing any of the following:
(a) any Lien existing as of the Issue Date;
(b) any Lien arising by reason of (i) any judgment, decree or order of
any court, so long as such Lien is in existence less than 30 days after the
entry thereof or adequately bonded or the payment of such judgment, decree
or order is covered (subject to a customary deductible) by insurance
maintained with responsible insurance companies; (ii) taxes, assessments or
other governmental charges that are not yet delinquent or are being
contested in good faith; (iii) security for payment of workers'
compensation or other insurance; (iv) good faith deposits in connection
with tenders, leases or contracts (other than contracts for the payment of
borrowed money); (v) zoning restrictions, easements, licenses,
reservations, provisions, covenants, conditions, waivers, restrictions on
the use of property or minor irregularities of title (and with respect to
leasehold interests, mortgages, obligations, liens and other encumbrances
incurred, created, assumed or permitted to exist and arising by, through or
under a landlord or owner of the leased property, with or without consent
of the lessee), none of which materially impairs the use of any property or
assets material to the operation of the business of the Company or any
Restricted Subsidiary or the value of such property or assets for the
purpose of such business; (vi) deposits to secure public or statutory
obligations, or in lieu of surety or appeal bonds with respect to matters
not yet finally determined and being contested in good faith by
negotiations or by appropriate proceedings that suspend the collection
thereof; or (vii) operation of law in favor of mechanics, materialmen,
laborers, employees or suppliers, incurred in the ordinary course of
business for sums that are not yet delinquent or are being contested in
good faith by negotiations or by appropriate proceedings that suspend the
collection thereof;
(c) any Lien now or hereafter existing on property or assets of the
Company or any Guarantor securing Indebtedness of such Person incurred
pursuant to the Senior Credit Agreement;
(d) any Lien securing Acquired Indebtedness created prior to (and not
created in connection with, or in contemplation of) the incurrence of such
Indebtedness by the Company or a Restricted Subsidiary; provided that any
such Lien extends only to the assets that were subject to such Lien
securing such Acquired Indebtedness prior to the related acquisition;
(e) leases or subleases granted by the Company or any of its Subsidiaries
to any other Person in the ordinary course of business;
(f) Liens in the nature of trustees' Liens granted pursuant to any
indenture governing any indebtedness permitted by the "Limitation on
Indebtedness" covenant in each case in favor of the trustee under such
indenture and securing only obligations to pay any compensation to such
trustee, to reimburse its expenses and to indemnify it under the terms
thereof;
(g) Liens to secure Indebtedness (including Capitalized Lease
Obligations) permitted by clause (vii) of paragraph (b) of the "Limitation
on Indebtedness" covenant covering only the assets acquired with such
Indebtedness; and
(h) any extension, renewal, refinancing or replacement, in whole or in
part, of any Lien described in the foregoing clauses (a) through (g) so
long as the amount of property or assets subject to such Lien is not
increased thereby.
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Limitations on Lines of Business. The Company shall not, and shall not
permit its Restricted Subsidiaries to, engage in any business other than those
engaged in on the date of the Indenture and any other segment of the
pharmaceutical or health-care industry or ancillary thereto.
Commission Reports. Notwithstanding that the Company may not be subject to
the reporting requirements of Sections 13 or 15(d) of the Exchange Act, so
long as any Notes are outstanding, the Company will furnish to the Trustee and
the holders of Notes (i) within 45 days after the end of each of the first
three fiscal quarters of each fiscal year and 90 days of the end of each
fiscal year all quarterly and annual financial information, as the case may
be, that would be required to be contained in a filing with the Commission on
Forms 10-Q and 10-K if the Company were required to file any such Forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make
such information available to securities analysts and prospective investors
upon request. Furthermore, for so long as any of the Notes remain outstanding,
the Company has agreed to make available to any prospective purchaser of the
Notes or beneficial owner of the Notes, in connection with any sale thereof,
the information required by Rule 144(d)(4) under the Securities Act.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary (a) to pay dividends or make any other distributions on
its Capital Stock or pay any Indebtedness owed to the Company or any
Restricted Subsidiary, (b) to make any loans or advances to the Company or any
Restricted Subsidiary or (c) to transfer any of its property or assets to the
Company or any Restricted Subsidiary, except: (i) any encumbrance or
restriction pursuant to an agreement in effect at or entered into on the Issue
Date; (ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness incurred by
such Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Indebtedness incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date; (iii)
any encumbrance or restriction pursuant to an agreement effecting a
refinancing of Indebtedness incurred pursuant to an agreement referred to in
clause (i) or (ii) of this covenant or contained in any amendment to an
agreement referred to in clause (i) or (ii) of this covenant; provided,
however, that the encumbrances and restrictions with respect to such
Restricted Subsidiary contained in any such refinancing agreement or amendment
are no less favorable in any material respect to the holders of the Notes than
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in such agreements; (iv) in the case of clause (c) above, any
encumbrance or restriction (A) that restricts in a customary manner the
subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset that is the
subject of such encumbrance or restriction, (B) existing by virtue of any
transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indenture or (C) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do
not, individually or in the aggregate, detract from the value of property or
assets of the Company or any Restricted Subsidiary in any manner material to
the Company or any Restricted Subsidiary; provided that, in each case, such
encumbrance or restriction relates to, and restricts dealings with, only the
property or asset that is the subject of such encumbrance or restriction; and
provided, further, that such encumbrance or restriction does not prohibit,
limit or otherwise restrict the making or payment of any dividend or other
distribution to the Company or any Restricted Subsidiary; (v) any restriction
with respect to a Restricted Subsidiary imposed pursuant to an agreement
entered into for the sale or disposition of all or substantially all the
Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition; and (vi)
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any restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration (including by way of relief from, or by any other Person
assuming sole responsibility for, any liabilities, contingent or otherwise) at
the time of such Asset Disposition at least equal to the Fair Market Value of
the shares or assets that are the subject matter of such Asset Disposition,
(ii) at least 80% of the consideration therefor received by the Company or
such Restricted Subsidiary is in the form of cash and (iii) an amount equal to
100% of the Net Available Cash from such Asset Disposition is applied by the
Company (or such Restricted Subsidiary, as the case may be) (A) first, to the
extent the Company elects (or is required by the terms of the Senior Credit
Agreement), to prepay, repay or purchase such indebtedness incurred under the
Senior Credit Agreement within 180 days after the later of the date of such
Asset Disposition or the receipt of such Net Available Cash, (B) second, to
the extent of the balance of Net Available Cash after application in
accordance with clause (A), to the extent the Company elects, to secure letter
of credit obligations to the extent such related letters of credit have not
been drawn upon or returned undrawn; (C) third, to the extent of the balance
of Net Available Cash after application in accordance with clauses (A) and
(B), to the extent the Company or such Restricted Subsidiary elects, within
one year from the later of the date of such Asset Disposition or the receipt
of such Net Available Cash, to reinvest in, Additional Assets; and (D) fourth,
to the extent of the balance of such Net Available Cash after application in
accordance with clauses (A), (B) and (C), to make an offer to purchase Notes
pursuant and subject to the conditions of the Indenture to the holders of the
Notes at a purchase price of 100% of the principal amount thereof plus accrued
and unpaid interest to the purchase date; provided, however, that, in
connection with any prepayment, repayment or purchase of Indebtedness pursuant
to clause (A) or (B) above, the Company or such Restricted Subsidiary shall
retire such Indebtedness and shall cause the related loan commitment (if any)
to be permanently reduced in an amount equal to the principal amount so
prepaid, repaid or purchased. The Company shall not be required to make an
offer for Notes pursuant to this covenant if the Net Available Cash available
therefor (after application of the proceeds as provided in clauses (A), (B)
and (C)) is less than $15.0 million (which lesser amount shall be carried
forward for purposes of determining whether an offer is required with respect
to the Net Available Cash from any subsequent Asset Disposition).
For the purposes of clause (a)(ii) of this covenant, the following will be
deemed to be cash: (x) the assumption of Indebtedness (other than Disqualified
Capital Stock) of the Company or any Restricted Subsidiary and the release of
the Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition and (y) securities
received by the Company or any Restricted Subsidiary of the Company from the
transferee that are promptly converted by the Company or such Restricted
Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (a)(iii)(D) of this covenant, the Company will be required
to purchase Notes tendered pursuant to an offer by the Company for the Notes
at a purchase price of 100% of their principal amount plus accrued interest to
the purchase date in accordance with the procedures (including prorating in
the event of oversubscription) set forth in the Indenture.
(c) The Company shall comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant.
Limitation on Affiliate Transactions. The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, enter into or
conduct any transaction (including the purchase, sale, lease or exchange of
any property or the rendering of any service) with any Affiliate of the
Company (an "Affiliate Transaction") unless: (i) the terms of such Affiliate
Transaction are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time
of such transaction in arm's-length dealings with a Person who is not an
Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $1.0 million (unless such Affiliate Transaction
constitutes an agreement with
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Bayer A.G. or its Affiliate relating to an Investment by the Company and an
Investment by Bayer A.G. or its Affiliate in a Permitted Foreign Company in
which case the requirements of this clause shall be applicable only if the
amount being invested by the Company exceeds $10.0 million), the terms of such
transaction have been approved by a majority of the members of the Board of
Directors of the Company and by a majority of the disinterested members of
such Board, if any (and such majority or majorities, as the case may be,
determines that such Affiliate Transaction satisfies the criteria in (i)
above) and (iii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $15.0 million (unless such Affiliate Transaction
constitutes an agreement with Bayer A.G. or its Affiliate relating to an
Investment by the Company and an Investment by Bayer A.G. or its Affiliate in
a Permitted Foreign Company in which case the requirements of this clause
shall be applicable only if the amount being invested by the Company exceeds
$25.0 million), the Company has received a written opinion from an independent
investment banking firm of nationally recognized standing that such Affiliate
Transaction is fair to the Company or such Restricted Subsidiary, as the case
may be, from a financial point of view.
The provisions of the foregoing paragraph will not prohibit (i) any
Restricted Payment permitted to be paid or made pursuant to the covenant
described under "Limitation on Restricted Payments," (ii) the performance of
the Company's or a Restricted Subsidiary's obligations under any employment
contract, stock option, collective bargaining agreement, employee benefit
plan, related trust agreement or any other similar arrangement heretofore or
hereafter entered into in the ordinary course of business, (iii) payment of
compensation to employees, officers, directors or consultants in the ordinary
course of business, (iv) maintenance in the ordinary course of business of
benefit programs or arrangements for employees, officers or directors,
including vacation plans, health and life insurance plans, deferred
compensation plans, and retirement or savings plans and similar plans, (v) any
transaction between the Company and a Restricted Subsidiary or between
Restricted Subsidiaries, (vi) any agreement in effect as of the Issue Date or
any amendment thereto or any transaction contemplated thereby, (vii)
transactions required of the Company or any Restricted Subsidiary under, or
contemplated by, the General Shareholders Agreement dated September 30, 1994,
and the Continuing Shareholders Agreement dated September 30, 1994, in each
case as in effect on the date of this Indenture or (viii) any agreement
entered into in the ordinary course or business between the Company and a
Person who constitutes an Affiliate solely by reason of such Person being an
officer or director of the Company which agreement provides for the repurchase
by the Company, upon or following the termination of such Person's employment
or directorship with the Company, of shares of Capital Stock of the Company
owned by such Person.
Limitation on Sale of Capital Stock of Restricted Subsidiaries. The Company
(i) shall not, and shall not permit any Restricted Subsidiary to, transfer,
convey, sell or otherwise dispose of any Capital Stock of any Restricted
Subsidiary to any Person (other than to the Company or a Restricted
Subsidiary) and (ii) shall not permit any Restricted Subsidiary to issue any
of its Capital Stock to any Person other than to the Company or a Restricted
Subsidiary; provided, however, that the foregoing shall not prohibit the
transfer, conveyance, sale or other disposition of all the Capital Stock of a
Restricted Subsidiary if the Net Cash Proceeds from such transfer, conveyance,
sale or other disposition are applied in accordance with the covenant
described above under "Limitation on Sales of Assets and Subsidiary Stock";
and, provided, further, that this covenant shall not prohibit the transfer,
conveyance, sale or other disposition of less than all of the Capital Stock of
a Restricted Subsidiary or the issuance by any Restricted Subsidiary of any of
its Capital Stock to any Person as long as (A) the Net Cash Proceeds from such
transfer, conveyance, sale or other disposition or issuance are applied in
accordance with the "Limitation on Sales of Assets and Subsidiary Stock"
covenant, (B) immediately after giving effect to such transaction, no Event of
Default shall have occurred and be continuing, (C) immediately after giving
pro forma effect to such transaction, as if such transaction had occurred at
the beginning of the applicable four-quarter period, the Company would be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Coverage Ratio test as set forth in paragraph (a) of the
"Limitation on Indebtedness" covenant and (D) immediately after giving effect
to such transaction, such Restricted Subsidiary remains a Restricted
Subsidiary of the Company.
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Limitation on Sale and Leaseback Transactions. The Indenture will provide
that the Company shall not, and shall not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
the Company may enter into a sale and leaseback transaction if (i) the Company
could have (a) incurred Indebtedness in an amount equal to the Attributable
Debt (as defined herein) relating to such sale and leaseback transaction
pursuant to the Consolidated Coverage Ratio test set forth in paragraph (a) of
the covenant "Limitation on Indebtedness" and (b) incurred a Lien to secure
such Indebtedness pursuant to the "Limitation on Liens" covenant, (ii) the
gross cash proceeds of such sale and leaseback transaction are at least equal
to the fair market value (as determined in good faith by the Board of
Directors and set forth in an Officers' Certificate delivered to the Trustee)
of the property that is the subject of such sale and leaseback transaction and
(iii) the transfer of assets in such sale and leaseback transaction is
permitted by, and the Company applies the net proceeds of such transaction in
compliance with, the "Limitation on Sales of Assets and Subsidiary Stock"
covenant.
MERGER AND CONSOLIDATION
The Company shall not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company")
shall be a Person organized and existing under the laws of the United States
of America, any state thereof or the District of Columbia and the Successor
Company (if not the Company) shall expressly assume, by an indenture
supplemental to the Indenture, executed and delivered to the Trustee, in form
reasonably satisfactory to the Trustee, all the obligations of the Company
under the Notes and the Indenture; (ii) immediately after giving effect to
such transaction (and treating any Indebtedness which becomes an obligation of
the Successor Company or any Restricted Subsidiary as a result of such
transaction as having been incurred by such Successor Company or such
Restricted Subsidiary at the time of such transaction), no Event of Default
shall have occurred and be continuing; (iii) immediately after giving pro
forma effect to such transaction, as if such transaction had occurred at the
beginning of the applicable four-quarter period, the Successor Company would
be permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Consolidated Coverage Ratio test set forth in paragraph (a) of the
"Limitation on Indebtedness" covenant; and (iv) the Company shall have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger or transfer and each supplemental
indenture (if any) comply with the Indenture.
The Successor Company shall be the successor of the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the Notes.
EVENTS OF DEFAULT
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due and payable, continued for 30 days,
(ii) a default in the payment of principal of any Note when due and payable at
its Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by the Company to comply with its
obligations under "--Merger and Consolidation," (iv) the failure by the
Company to comply for 30 days after notice with any of its obligations under
"--Change of Control" or under the covenants described under "Certain
Covenants" above (in each case, other than a failure to purchase Notes which
shall constitute an Event of Default under clause (ii) above), (v) the failure
by the Company to comply for 30 days after notice with its other covenants and
agreements contained in the Indenture or the Notes, (vi) Indebtedness of the
Company or any Restricted Subsidiary is not paid within any applicable grace
period after final maturity or is accelerated by the holders thereof because
of a default and the total amount of such Indebtedness unpaid or accelerated
exceeds $10.0 million or its foreign currency equivalent at the time (the
"cross acceleration provision"), (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Material Subsidiary (the
"bankruptcy provisions"), (viii) any judgment or decree for the payment of
money in excess of $10.0 million or its foreign currency equivalent at the
time (to the extent not
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covered by insurance) is entered against the Company or a Material Subsidiary
and is not discharged and either (A) an enforcement proceeding has been
commenced by any creditor upon such judgment or decree and is not promptly
stayed or (B) such judgment or decree shall remain undischarged or unstayed
for a period of 60 days following the entry of such judgment or decree (the
"judgment default provision") or (ix) the failure of any Subsidiary Guarantee
of the Notes to be in full force and effect (except as contemplated by the
terms thereof) or the denial or disaffirmation by any Guarantor of its
obligations under the Indenture or any Subsidiary Guarantee of the Notes if
such failure is not cured, or such denial or disaffirmation is not rescinded
or revoked, within 10 days. However, a default under clauses (iv) and (v) will
not constitute an Event of Default until the Trustee or the holders of at
least 25% in principal amount of the outstanding Notes notify the Company in
writing of the default and the Company does not cure such default within the
time specified in clauses (iv) and (v) hereof after receipt of such notice.
If an Event of Default (other than an Event of Default specified in clause
(vii) above with respect to the Company) occurs and is continuing, the
Trustee, by written notice to the Company, or the holders of at least 25% in
outstanding principal amount of the Notes, by written notice to the Company
and the Trustee, may declare the principal of, and accrued and unpaid interest
on, all the Notes to be due and payable. Upon such a declaration, such
principal and interest shall be due and payable (i) if no Indebtedness is
outstanding under the Senior Credit Agreement, immediately, and (ii) if any
Indebtedness is outstanding under the Senior Credit Agreement, upon the first
to occur of (x) the acceleration of any such Indebtedness or (y) the fifth
Business Day after receipt by the Company and the Credit Agent of such written
notice of acceleration. If an Event of Default specified in clause (vii) above
occurs and is continuing, the principal of, and accrued and unpaid interest
on, all the Notes shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any
holders. Under certain circumstances, the holders of a majority in principal
amount of the outstanding Notes may rescind any such acceleration with respect
to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any trust or power under the Indenture at the
request, order or direction of any of the holders unless such holders have
offered to the Trustee indemnification satisfactory to it in its sole
discretion against all losses and expenses. Except to enforce the right of any
holder to receive payment of the principal of and interest on the Notes held
by such holder on or after the respective due dates expressed in the Notes, no
holder may pursue any remedy with respect to the Indenture or the Notes unless
(i) such holder has previously given the Trustee notice that an Event of
Default is continuing, (ii) holders of at least 25% in outstanding principal
amount of the outstanding Notes have requested the Trustee to pursue the
remedy, (iii) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense, (iv) the Trustee has not
complied with such request within 60 days after the receipt of the request and
the offer of security or indemnity, and (v) the holders of a majority in
principal amount of the outstanding Notes have not given the Trustee a
direction that is inconsistent with such request within such 60 day period.
Subject to certain restrictions, the holders of a majority in outstanding
principal amount of the Notes may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. However, the Trustee
may refuse to follow any direction that conflicts with law or the Indenture
or, subject to the provisions of the Indenture relating to the duties of the
Trustee, that the Trustee determines is unduly prejudicial to the rights of
other holders (it being understood that, subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee shall have no
duty to ascertain whether or not such actions or forbearances are unduly
prejudicial to such holders) or would subject the Trustee to personal
liability; provided, however, that the Trustee may take any other action
deemed proper by the Trustee that is not inconsistent with such direction.
Prior to taking or refraining from taking any such action hereunder, the
Trustee shall be entitled to indemnification satisfactory to it in its sole
discretion against all losses and expenses caused by its taking or refraining
from taking such action.
The Indenture provides that if a Default or Event of Default occurs and is
continuing and if a Trust Officer has actual knowledge thereof, the Trustee
shall mail to each holder notice of the Default or Event of Default within 90
days after it occurs. Except in the case of a Default or Event of Default in
payment of principal of, or
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interest on, any Note (including payments pursuant to the optional redemption
or required repurchase provisions of such Note, if any), the Trustee may
withhold the notice if and so long as its board of directors, the Executive
Committee of its board of directors or a committee of its Trust Officers in
good faith determines that withholding the notice is in the interests of the
holders of the Notes. In addition, the Company is required to deliver to the
Trustee: (i) within 5 days after the occurrence thereof, written notice in the
form of an Officers' Certificate of any Event of Default under clause (vi)
above and any event which with the giving of notice or the lapse of time would
become an Event of Default under clause (iv), (v) or (viii), its status and
what action the Company is taking or proposes to take with respect thereto and
(ii) within 120 days after the end of each fiscal year, written notice in the
form of an Officers' Certificate indicating whether the officers signing such
Officers' Certificate had actual knowledge of any Default that occurred during
such previous fiscal year.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
and any past default or compliance with any provisions may be waived with the
consent of the holders of a majority in principal amount of the Notes then
outstanding. However, without the consent of each holder of an outstanding
Note affected, no amendment may, among other things, (i) reduce the amount of
Notes whose holders must consent to an amendment, (ii) reduce the rate of or
extend the time for payment of interest on any Note, (iii) reduce the
principal of or extend the Stated Maturity of any Note, (iv) reduce the
premium payable upon the redemption or repurchase of any Note or change the
time at which any Note may or shall be redeemed or repurchased in accordance
with the Indenture, (v) make any Note payable in money other than that stated
in the Note, (vi) modify or affect in any manner adverse to the holders of the
Notes, the terms and conditions of the obligation of the Company for the due
and punctual payment of the principal of or interest on the Notes or (vii)
make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Without the consent of any holder, the Company and the Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the
Company under the Indenture, to provide for uncertificated Notes in addition
to or in place of certificated Notes (provided that the uncertificated Notes
are issued in registered form for purposes of Section 163(f) of the Code, or
in a manner such that the uncertificated Notes are described in Section
163(f)(2)(B) of the Code), to add Guarantees with respect to the Notes, to
secure the Notes, to add to the covenants of the Company for the benefit of
the holders of the Notes or to surrender any right or power conferred upon the
Company, to make any change that does not adversely affect the rights of any
holder or to comply with any requirement of the Commission in connection with
the qualification of the Indenture under the Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to the holders a notice briefly describing such amendment.
However, the failure to give such notice to all the holders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A holder of Notes may transfer or exchange Notes in accordance with the
Indenture. The Company or the Trustee may require any Note presented for
registration of transfer, exchange, redemption or payment to be duly endorsed
by, or be accompanied by a written instrument or instruments of transfer in
form satisfactory to the Company and the Trustee duly executed by, the holder
or his attorney duly authorized in writing. The Company may require payment of
a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection with any exchange or registration of transfer of Notes.
No service charge may be imposed for any such transaction. The Trustee may not
be required to exchange or register a transfer of (i) any Notes for a period
of 15 days next preceding the first mailing of notice of redemption of Notes
to be redeemed or (ii) any Notes
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selected, called or being called for redemption except, in the case of any
Note where public notice has been given that such Note is to be redeemed in
part, the portion thereof not so to be redeemed. The Notes will be issued in
registered form and the registered holder of a Note will be treated as the
owner of such Note for all purposes.
DEFEASANCE
Subject to certain conditions and to the survival of certain of the
Company's obligations under the Indenture, the Company at any time may
terminate (i) all its obligations under the Notes and the Indenture and all
obligations of the Subsidiary Guarantors under the Subsidiary Guarantee and
the Indenture ("legal defeasance option") or (ii) its obligations under
certain covenants described under "Certain Covenants," the operation of the
cross acceleration provision and the judgement default provision described
under "Events of Default" above and the limitations contained in clauses (iii)
and (iv) under "--Merger and Consolidation" above ("covenant defeasance"). The
Senior Credit Agreement prohibits the legal defeasance and covenant defeasance
of the Notes as long as there are obligations outstanding under the Senior
Credit Agreement. However, no deposit of funds shall be effective to terminate
the obligations of the Company under the Notes or the Indenture prior to 123
days following any such deposit.
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default. If the Company exercises its covenant defeasance
option, payment of the Notes may not be accelerated because of an Event of
Default specified in clause (iv), (v), (vi), (viii) or (ix) under "Events of
Default" above or because of the failure of the Company to comply with clause
(iii) or (iv) under "--Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal of and interest on the
Notes to maturity or redemption, as the case may be, and must comply with
certain other conditions, including delivery to the Trustee of an Opinion of
Counsel to the effect that holders of the Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such defeasance
had not occurred (and, in the case of legal defeasance only, such Opinion of
Counsel must be based on a ruling of the Internal Revenue Service or other
change in applicable federal income tax law).
CONCERNING THE TRUSTEE
The Bank of New York is to be the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the
Notes. The Bank of New York is a lender under the Senior Credit Agreement.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflict of laws to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary or (ii) assumed by the
Company or a Restricted Subsidiary in connection with the acquisition of
assets from such Person. Acquired Indebtedness shall be deemed to be incurred
on the date of the related acquisition of assets from any Person or the date
the acquired Person becomes a Restricted Subsidiary.
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"Additional Assets" mean (i) any property or assets (other than Indebtedness
and Capital Stock) to be used by the Company or a Restricted Subsidiary in a
Related Business; or (ii) the Capital Stock of a Person that becomes a
Restricted Subsidiary as a result of the acquisition of such Capital Stock by
the Company or another Restricted Subsidiary; provided, however, that, in the
case of clause (ii), such Person is primarily engaged in a Related Business.
"Affiliate" of any specified Person means (i) any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any Person who is a director or
officer (a) of such Person, (b) of any Subsidiary of such Person or (c) of any
Person described in clause (i) above. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the covenants described under "Certain Covenants--
Limitation on Sales of Assets and Subsidiary Stock", "--Limitation on
Restricted Payments" and "--Limitation on Affiliate Transactions" only,
"Affiliate" shall also mean any beneficial owner of (x) shares and (y) rights
or warrants to purchase shares (whether or not currently exercisable)
representing in the aggregate 10% or more of the total voting power (assuming
the exercise of any such rights or warrants) of the outstanding voting shares
of Capital Stock of the Company on a fully diluted basis and any Person who
would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares), property or
other assets (each referred to for the purposes of this definition as a
"disposition") by the Company or any of its Restricted Subsidiaries (including
any disposition by means of a merger, consolidation or similar transaction)
other than (i) a disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Restricted Subsidiary, (ii) a
disposition of inventory in the ordinary course of business, (iii) a
disposition of obsolete or worn out equipment or equipment that is no longer
useful in the conduct of the business of the Company and its Restricted
Subsidiaries and that is disposed of in each case in the ordinary course of
business, (iv) a transfer involving assets with a Fair Market Value not in
excess of $5 million, (v) any sale of equity interests in, or Indebtedness or
other securities of, an Unrestricted Subsidiary, and (vi) a disposition of all
or substantially all of the assets of the Company in a manner permitted
pursuant to the provisions described under "--Merger and Consolidation"; and
(vii) any exchange or assignment in the ordinary course of business with any
Person engaged in a Related Business of rights to manufacture and market drugs
or other pharmaceutical products.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bayer A.G." shall mean Bayer A.G., a German corporation.
"Board of Directors" means either the Board of Directors of the Company or
any committee of such Board of Directors duly authorized to act hereunder.
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"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York City are authorized or required by law to
close.
"Capital Stock" means (i) any and all shares, interests, participations or
other equivalents of or interests in (however designated) corporate stock,
including, without limitation, shares of preferred or preference stock, (ii)
all partnership interests (whether general or limited) in any Person which is
a partnership, (iii) all membership interests or limited liability company
interests in any limited liability company, and (iv) all equity or ownership
interests in any Person of any other type.
"Capitalized Lease Obligations" means, without duplication, all monetary
obligations of the Company or any of its Restricted Subsidiaries under any
leasing or similar arrangement which, in accordance with GAAP, would be
classified as capitalized leases and, for purposes of the Indenture, the
amount of such obligations shall be the capitalized amount thereof, determined
in accordance with GAAP, and the stated maturity thereof shall be the date of
the last payment of rent or any other amount due under such lease prior to the
first date upon which such lease may be terminated by the lessee without
payment of a penalty.
"Change of Control" means (i) any sale, lease or other transfer (other than
a bona fide pledge of assets to secure Indebtedness incurred in accordance
with the Indenture or under the Senior Credit Agreement) by the Company or any
Restricted Subsidiary of all or substantially all of the assets of the Company
to any Person as an entirety or substantially as an entirety in one
transaction or a series of related transactions; (ii) the Company consolidates
or merges with or into another Person pursuant to a transaction in which the
outstanding Voting Shares of the Company are changed into or exchanged for
cash, securities or other property, other than any such transaction where (a)
the outstanding Voting Shares of the Company are changed into or exchanged for
Voting Shares (other than Disqualified Stock) of the surviving corporation and
(b) the holders of the Voting Shares of the Company immediately prior to such
transaction own, directly or indirectly, not less than a majority of the
Voting Shares of the surviving corporation immediately after such transaction;
(iii) a "person" or "group" (within the meaning of Section 13(d) or 14(d)(2)
of the Exchange Act), other than a Permitted Holder or a group consisting
solely of Permitted Holders, is or becomes the "beneficial owner" (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act) of more than 35% of all
Voting Shares of the Company then outstanding; (iv) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors of the Company (together with any new directors whose
election by such Board of Directors or whose nomination for election by the
shareholders of the Company was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors of the
Company then in office; or (v) the shareholders of the Company shall approve
any plan or proposal for the liquidation or dissolution of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Consolidated Cash Flow" for any period means the Consolidated Net Income of
the Company and its consolidated Restricted Subsidiaries for such period, plus
the following to the extent deducted in calculating such Consolidated Net
Income: (i) income tax expense; (ii) Consolidated Interest Expense; (iii)
depreciation expense; (iv) amortization expense; and (v) any other non-cash
expenses, in each case for such period.
"Consolidated Coverage Ratio," as of any date of determination, means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period
consisting of the most recent four consecutive fiscal quarters ending prior to
the date of such determination to (ii) Consolidated Interest Expense for such
period; provided, however, that (A) if the Company or any of its Restricted
Subsidiaries has incurred any Indebtedness since the beginning of such period
that remains outstanding or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an incurrence of Indebtedness, or
both, Consolidated Cash Flow and Consolidated Interest Expense for such period
shall be calculated after giving effect on a pro forma basis to such
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Indebtedness as if such Indebtedness had been incurred on the first day of
such period and the discharge of any other Indebtedness repaid, repurchased,
defeased or otherwise discharged with the proceeds of such new Indebtedness as
if such discharge had occurred on the first day of such period, (B) if since
the beginning of such period the Company or any of its Restricted Subsidiaries
shall have made any Asset Disposition, Consolidated Cash Flow for such period
shall be reduced by an amount equal to the Consolidated Cash Flow (if
positive) attributable to the assets which are the subject of such Asset
Disposition for such period or increased by an amount equal to the
Consolidated Cash Flow (if negative) attributable thereto for such period, and
Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense attributable to any Indebtedness of
the Company or any of its Restricted Subsidiaries repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its
continuing Restricted Subsidiaries in connection with such Asset Disposition
for such period (or, if the Capital Stock of any Restricted Subsidiary of the
Company is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent
the Company and its continuing Restricted Subsidiaries are no longer liable
for such Indebtedness after such sale), (C) if since the beginning of such
period the Company or any of its Restricted Subsidiaries (by merger or
otherwise) shall have made an Investment in any Restricted Subsidiary of the
Company (or any Person which becomes a Restricted Subsidiary of the Company)
or an acquisition of assets, including any Investment in a Restricted
Subsidiary of the Company or any acquisition of assets occurring in connection
with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business,
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto (including the incurrence
of any Indebtedness) as if such Investment or acquisition occurred on the
first day of such period, and (D) if since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary of the Company or was
merged with or into the Company or any Restricted Subsidiary of the Company
since the beginning of such period) shall have made any Asset Disposition or
any Investment or acquisition of assets that would have required an adjustment
pursuant to clause (B) or (C) above if made by the Company or a Restricted
Subsidiary of the Company during such period, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of such period. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting Officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be calculated as if
the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a
remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Restricted Subsidiaries, plus, to the extent
not included in such interest expense and without duplication, (i) interest
expense attributable to Capitalized Lease Obligations, (ii) amortization of
debt discount and debt issuance cost, (iii) capitalized interest, (iv) non-
cash interest expense, (v) commissions, discounts and other fees and charges
owed with respect to letters of credit and bankers' acceptance financing, (vi)
interest actually paid by the Company or any such Restricted Subsidiary under
any Guarantee of Indebtedness or other obligation of any other Person, (vii)
net costs associated with Interest Rate Agreements (including amortization of
fees), and (viii) the product of (a) all Preferred Stock dividends in respect
of all Preferred Stock of Restricted Subsidiaries of the Company and
Disqualified Capital Stock of the Company held by Persons other than the
Company or a Restricted Subsidiary multiplied by (b) a fraction, the numerator
of which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of the Company, expressed
as a decimal, in each case, determined on a consolidated basis in accordance
with GAAP.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Restricted Subsidiaries; provided, however,
that there shall not be included in such Consolidated Net Income: (i) any net
income (loss) of any Person if such Person is not a Restricted Subsidiary,
except that
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subject to the limitations contained in clause (iv) below, the Company's
equity in the net income of any such Person for such period shall be included
in such Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution to a Restricted Subsidiary, to the limitations
contained in clause (iii) below); (ii) any net income (loss) of any person
acquired by the Company or a Restricted Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition; (iii) any
net income (loss) of any Restricted Subsidiary if such Restricted Subsidiary
is subject to restrictions, directly or indirectly, on the payment of
dividends or the making of distributions by such Restricted Subsidiary,
directly or indirectly, to the Company, except that subject to the limitations
contained in (iv) below, the Company's equity in the net income of any such
Restricted Subsidiary for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash that could have been distributed
by such Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend (subject, in the case of a dividend that
could have been made to another Restricted Subsidiary, to the limitation
contained in this clause); (iv) any gain or loss realized upon the sale or
other disposition of any assets of the Company or its consolidated Restricted
Subsidiaries which are not sold or otherwise disposed of in the ordinary
course of business and any gain or loss realized upon the sale or other
disposition of any Capital Stock of any Person; (v) any extraordinary gain or
loss; (vi) the cumulative effect of a change in accounting principles; and
(vii) any loss resulting from a charge for acquired in-process research and
development expenses incurred in connection with the acquisition of any other
Person permitted under the Indenture.
"Credit Agent" means The Chase Manhattan Bank, in its capacity as issuing
bank, administrative agent and collateral agent for the lenders party to the
Senior Credit Agreement, or any successor or successors thereto.
"Default" means any event that is or, with the passage of time or the giving
of notice or both, would be an Event of Default.
"Disqualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person which by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable) or upon the happening
of any event (i) matures or is mandatorily redeemable pursuant to a sinking
fund obligation or otherwise, (ii) is convertible or exchangeable for
Indebtedness or Disqualified Capital Stock or (iii) is redeemable at the
option of the holder thereof, in whole or in part, in each case on or prior to
the first anniversary of the final Stated Maturity of the Notes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy as determined by the Board of
Directors in good faith and evidenced by a resolution of the Board of
Directors.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting
profession. All ratios and computations based on GAAP contained in the
Indenture shall be computed in conformity with GAAP as in effect on the date
of the Indenture.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and
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
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Indebtedness or other obligation of any other Person (whether arising by
virtue of partnership arrangements, or 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 purposes
of assuring in any other manner the obligee of such Indebtedness of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, 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.
"Guarantor" means (i) each of the Company's Restricted Subsidiaries existing
on the date hereof and (ii) each other Person that executes a Guarantee of the
obligations of the Company under the Notes and the Indenture from time to
time, and their respective successors and assigns; provided, however, that
"Guarantor" shall not include any Person that is released from its Guarantee
of the obligations of the Company under the Notes and the Indenture.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of Indebtedness of such Person for borrowed money, (ii) the
principal of and premium (if any) in respect of obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments, (iii) all
obligations of such Person in respect of letters of credit or other similar
instruments (including reimbursement obligations with respect thereto) (other
than obligations with respect to letters of credit securing obligations (other
than obligations described in clauses (i), (ii) and (v)) entered into in the
ordinary course of business of such Person to the extent that such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the third business day following receipt by such
Person of a demand for reimbursement following payment on the letter of
credit), (iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (other than accounts payable to trade
creditors arising in the ordinary course of business), which purchase price is
due more than six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services, (v) all
Capitalized Lease Obligations of such Person, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided, however, that the amount of
Indebtedness of such Person shall be the lesser of (A) the Fair Market Value
of such asset at such date of determination or (B) the amount of such
Indebtedness of such other Persons, (vii) all Indebtedness of other Persons to
the extent Guaranteed by such Person, (viii) the amount of all obligations of
such Person with respect to the redemption, repayment or other repurchase of
any Disqualified Capital Stock or, with respect to any Restricted Subsidiary
of the Company, any Preferred Stock (but excluding, in each case, any accrued
dividends), and (ix) to the extent not otherwise included in this definition,
obligations of such Person under Interest Rate Agreements. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and the
liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Indenture" means the Indenture as amended from time to time.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar
agreement or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for
the account or use of others), or any purchase or acquisition of Capital
Stock, Indebtedness or other similar instruments issued by such Person.
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"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any security interest, mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or otherwise),
charge against or interest in property, or any filing or recording of any
instrument or document in respect of the foregoing, to secure payment of a
debt or performance of an obligation or other priority or preferential
arrangement of any kind or nature whatsoever.
"Material Subsidiary" means (i) any Subsidiary of the Company which is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under
the Securities Act and the Exchange Act (as such Regulation is in effect on
the date hereof), and (ii) any other Subsidiary of the Company which is
material to the business, earnings, prospects, assets or condition, financial
or otherwise, of the Company and its Subsidiaries taken as a whole.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and
when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other noncash form) therefrom, in each case net
of (i) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all federal, state, foreign and local taxes
required to be paid or accrued as a liability under GAAP, as a consequence of
such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with
the terms of any Lien upon such assets, or which must by its terms, or in
order to obtain a necessary consent to such Asset Disposition, or by
applicable law, be repaid out of the proceeds from such Asset Disposition,
(iii) all distributions and other payments required to be made to any Person
owning a beneficial interest in assets subject to sale or minority interest
holders in Subsidiaries or joint ventures as a result of such Asset
Disposition and (iv) the deduction of appropriate amounts to be provided by
the seller as a reserve, in accordance with GAAP, against any liabilities
associated with the assets disposed of in such Asset Disposition and retained
by the Company or any Restricted Subsidiary of the Company after such Asset
Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"Officer" means any senior executive officer, the chief financial officer,
the principal accounting officer, the Controller, the Treasurer, the Secretary
or the Assistant Secretary of the Company.
"Officers' Certificate" means a certificate signed by any senior executive
officer and by the chief financial officer, the principal accounting officer,
the Controller, the Treasurer or the Secretary or any Assistant Secretary of
the Company and delivered to the Trustee. Each such certificate shall comply
with Section 314 of the Trust Indenture Act and include the statements
provided for in the Indenture.
"Opinion of Counsel" means an opinion in writing signed by legal counsel who
may be an employee of or counsel to the Company or who may be other counsel
satisfactory to the Trustee. Each such opinion shall comply with Section 314
of the Trust Indenture Act and include the statements provided for in the
Indenture, if and to the extent required thereby.
"Permitted Foreign Company" means (a) any corporation, business trust, joint
venture, association, company or partnership formed under the laws of a
country (or any political subdivision thereof) other than the United States,
engaged primarily in any segment of the pharmaceutical or health-care industry
or ancillary thereto and at least 50% of the equity interest of which is held,
directly or indirectly, by the Company and Bayer A.G. (provided that, if
applicable local law would not permit 50% of the equity interest in such an
entity to be held by
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the Company and Bayer A.G., such percentage may be as low as 49% if the
Company and Bayer A.G. otherwise control the applicable entity), (b) any
subsidiary of a Permitted Foreign Company described in clause (a) above and
(c) any wholly owned foreign subsidiary the only material assets of which are
securities of Permitted Foreign Companies described in clause (a) above.
"Permitted Holders" means (a)(i) Marvin H. Schein; Trust established by
Marvin H. Schein under trust agreement dated September 9, 1994 (including
trustee thereunder); Trust established by Marvin H. Schein under trust
agreement dated December 31, 1993 (including trustee thereunder); Trust
established by Pamela Schein under trust agreement dated October 26, 1994
(including trustee thereunder); trust established by the trustees under
article fourth of the Will of Jacob M. Schein for the benefit of Pamela Schein
and her issue under trust agreement dated September 29, 1994 (including
trustee thereunder); Pamela Joseph; Trust established by Pamela Joseph under
trust agreement dated September 28, 1994 (including trustee thereunder);
Martin Sperber; Trust established by Martin Sperber under trust agreement
dated December 31, 1993 (including trustee thereunder); Trust established by
Martin Sperber under trust agreement dated April 28, 1995 (including trustee
thereunder); Stanley M. Bergman; Trust established by Stanley M. Bergman under
trust agreement dated April 28, 1995 (including trustee thereunder); Trust
established by Stanley M. Bergman under trust agreement dated April 14, 1995
(including trustee thereunder); and Voting Trustee under Voting Trust
Agreement dated September 30, 1994 (including trustee thereunder), (ii) any
individual forming part of the senior management of the Company on the date of
this Indenture, (iii) any trust for the benefit of any of the foregoing and/or
any member of their immediate families and (iv) the estate or personal
representative of any of the foregoing, (b) any employee benefit plan (or
related trust) for the benefit of the employees of the Company and its
Restricted Subsidiaries and (c) Bayer A.G. and any of its subsidiaries.
"Permitted Investment" means an Investment by the Company or any of its
Subsidiaries in (i) a Restricted Subsidiary of the Company or a Person which
will, upon making such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Subsidiary is a Related Business;
(ii) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Subsidiary of the Company;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
of its Subsidiaries, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans or
advances to employees (other than those referred to in clause (xi) below) made
in the ordinary course of business not in excess of $2.5 million outstanding
at any time; (vii) stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to the Company or
any of its Subsidiaries or in satisfaction of judgments or claims; (viii)
Interest Rate Agreements which are entered into by the Company for bona fide
hedging purposes (as determined in good faith by the Board of Directors or
senior management of the Company) with respect to Indebtedness of the Company
incurred without violation of the Indenture or to customary commercial
transactions of the Company entered into in the ordinary course of business;
(ix) any Investment (other than a Temporary Cash Investment) evidenced by
securities or other assets received in connection with an Asset Disposition
pursuant to the "Limitations on Sales of Assets and Subsidiary Stock"
covenant; (x) Investments, the payment for which consists exclusively of
Equity Interests (exclusive of Disqualified Capital Stock) in the Company; or
(xi) loans to employees made in connection with the exercise by them of
options to purchase shares of the common stock of the Company, provided that
the proceeds of such loans are used to purchase such shares and that such
loans are secured by a pledge of such shares so purchased.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision hereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets
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upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in
the most recent consolidated balance sheet of such Person under GAAP.
"Refinancing Indebtedness" means Indebtedness issued in exchange for, or the
proceeds of which are used to extend, refinance, renew, replace or refund any
Indebtedness permitted to be incurred under the "Limitations on Indebtedness"
covenant.
"Related Business" means any segment of the pharmaceutical or health-care
industry or ancillary thereto.
"Representative" for any issue of Indebtedness shall mean the Person acting
as agent, trustee or in a similar representative capacity for the holders of
such Indebtedness, provided that if, and for so long as, any issue of
Indebtedness lacks such a representative, then the Representative for such
issue of Indebtedness shall at all such times constitute the holders of a
majority in outstanding principal amount of the respective issue of
Indebtedness.
"Restricted Subsidiary" shall mean any Subsidiary other than an Unrestricted
Subsidiary.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Credit Agreement" means, collectively, the Senior Credit Agreement,
dated as of September 5, 1995, by and among the Company, the lenders named
therein, and The Chase Manhattan Bank (formerly Chemical Bank) as Credit Agent
for the lenders, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, as
such credit agreement and/or related documents may be amended, restated,
supplemented, renewed, replaced or otherwise modified from time to time
whether or not with the same agent or lenders and irrespective of any changes
in the terms and conditions thereof. Without limiting the generality of the
foregoing, the term "Senior Credit Agreement" shall include any amendment,
amendment and restatement, renewal, extension, restructuring, supplement or
modification to the Senior Credit Agreement and all refundings, refinancing
and replacements of any facility provided for therein, including any agreement
or agreements, (i) extending the maturity of any Indebtedness incurred
thereunder or contemplated thereby, (ii) adding or deleting borrowers or
guarantors thereunder, or (iii) increasing the amount of Indebtedness incurred
thereunder or available to be borrowed thereunder to the extent permitted
under this Indenture.
"Senior Indebtedness" means all Indebtedness of the Company other than
Subordinated Indebtedness.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
"Subordinated Indebtedness" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter incurred) that is subordinate or
junior in right of payment to the Notes.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity (a) of which more than 50% of the total voting power
of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such
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Person or (b) that is or would otherwise be treated on a consolidated basis
with such Person under, and in accordance with, GAAP. Unless otherwise
specified herein, each reference to a Subsidiary shall refer to a Subsidiary
of the Company.
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized
by the United States of America having capital, surplus and undivided profits
aggregating in excess of $500 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar equivalent rating) or higher by at least
one nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act), (iii) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clause (i) above entered into with a bank meeting the qualifications described
in clause (ii) above, or (iv) Investments in commercial paper, maturing not
more than 180 days after the date of acquisition, issued by a corporation
(other than an Affiliate of the Company) organized and in existence under the
laws of the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's Investors Service,
Inc. or "A-1" (or higher) according to Standard and Poor's Ratings Group.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Trust Officer" means the Chairman of the Board, President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable or redeemable at the issuer's option.
"Unrestricted Subsidiary" means (i) Schein Pharmaceutical (Netherlands)
B.V., Schein Pharmaceutical (Bermuda) Ltd., and Schein Farmaceutica de Peru,
and (ii) any Subsidiary (other than a Subsidiary which would constitute a
Material Subsidiary) that at the time of determination shall have been
designated an Unrestricted Subsidiary by the Board of Directors of the Company
in the manner provided below and which remains so designated at the time of
determination. The Board of Directors of the Company may, by a Board
resolution delivered to the Trustee, designate any Restricted Subsidiary of
the Company (other than a Material Subsidiary) (including any newly acquired
or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary
unless such Restricted Subsidiary owns any Capital Stock of or holds any Lien
on any property of, the Company or any Restricted Subsidiary, and provided
that no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such designation. The Board of Directors
of the Company may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary of the Company, provided that (i) no Default or Event of Default
shall have occurred and be continuing at the time of or after giving effect to
such designation and (ii) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately following such designation would, if
incurred at such time, have been permitted to be incurred for all purposes of
the Indenture. Any designation by the Board of Directors of the Company
pursuant to the Indenture shall be evidenced to the Trustee by promptly filing
with the Trustee a copy of the Board resolutions giving effect to such
designation and an Officer's Certificate certifying that such designation
complied with the foregoing provisions.
"voting shares" of a Person means all classes of Capital Stock of such
Person then outstanding and normally entitled to vote in the election of
directors or managers.
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"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or Disqualified Capital Stock, as the case may be, at any date, the number of
years obtained by dividing (a) the sum of the products obtained by multiplying
(x) the amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment at final
maturity, in respect thereof, by (y) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of such
payment, by (b) the then outstanding principal amount or liquidation
preference, as applicable, of such Indebtedness or Disqualified Stock, as the
case may be.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the New Notes will initially be issued in the
form of one or more registered Notes in global form without coupons (each a
"Global Note"). Each Global Note will be deposited upon issuance with, or on
behalf of, the Depository and registered in the name of Cede & Co., as nominee
of the Depository, or will remain in the custody of the Trustee pursuant to
the FAST Balance Certificate Agreement between the Depository and the Trustee.
New Notes that are issued in respect of Notes that were (i) originally
issued to or transferred to institutional "accredited investors," as defined
in Rule 501(a) (1), (3) or (7) under the Securities Act ("Institutional
Accredited Investors"), who are not QIBs or to any other persons who are not
QIBs or (ii) issued as described below under "Certificated Securities," will
be issued in registered definitive form without coupons (the "Certificated
Securities"). Upon the transfer to a QIB of Certificated Securities, such
Certificated Securities may, unless the Global Note has previously been
exchanged for Certificated Securities, be exchanged for an interest in the
Global Note representing the principal amount of Notes being transferred.
The Depository has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation" within the
meaning of the Uniform Commercial Code, as amended, and (iv) a "Clearing
Agency" registered pursuant to Section 17A of the Exchange Act. The Depository
was created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical
transfer and delivery of certificates. The Depository's Participants include
securities brokers and dealers (including the Initial Purchaser), banks and
trust companies, clearing corporations and certain other organizations. Access
to the Depository's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. QIBs may elect to hold Notes
purchased by them through the Depository. QIBs who are not Participants may
beneficially own securities held by or on behalf of the Depository only
through Participants or Indirect Participants. Persons that are not QIBs may
not hold Notes through the Depository.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Notes, the Depository will credit
the accounts of Participants designated by the Initial Purchaser with an
interest in the Global Note and (ii) ownership of the Notes will be shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by the Depository (with respect to the interest of Participants),
the Participants and the Indirect Participants. The laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own and that security interests in negotiable instruments
can only be perfected by delivery of certificates representing the
instruments. Consequently, the ability to transfer Notes or to pledge the
Notes as collateral will be limited to such extent.
So long as the Depository or its nominee is the registered owner of the
Global Note, the Depository or such nominee, as the case may be, will be
considered the sole owner or Holder of the Notes represented by the Global
Note for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in a Global Note will not be entitled to have Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of Certificated Securities, and will
not be considered the owners
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or holders thereof under the Indenture for any purpose, including with respect
to giving of any directions, instruction or approval to the Trustee
thereunder. As a result, the ability of a person having a beneficial interest
in Notes represented by a Global Note to pledge such interest to persons or
entities that do not participate in the Depository's system or to otherwise
take action with respect to such interest, may be affected by the lack of a
physical certificate evidencing such interest.
Accordingly, each QIB owning a beneficial interest in a Global Note must
rely on the procedures of the Depository and, if such QIB is not a Participant
or an Indirect Participant, on the procedures of the Participant through which
such QIB owns its interest, to exercise any rights of a Holder under the
Indenture or such Global Note. The Company understands that under existing
industry practice, in the event the Company requests any action of holders or
a QIB that is an owner of a beneficial interest in a Global Note desires to
take any action that the Depository, as the Holder of such Global Note, is
entitled to take, the Depository would authorize the Participants to take such
action and the Participant would authorize QIBs owning through such
Participants to take such action or would otherwise act upon the instruction
of such QIBs. Neither the Company nor the Trustee will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of Notes by the Depository, or for maintaining, supervising or
reviewing any records of the Depository relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any Notes represented by a Global Note registered in the name of the
Depository or its nominee on the applicable record date will be payable by the
Paying Agent to or at the direction of the Depository or its nominee in its
capacity as the registered Holder of the Global Note representing such Notes
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee may treat the persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payment and for any and all other purposes whatsoever. Consequently, neither
the Company nor the Trustee nor the Paying Agent (if other than the Trustee)
has or will have any responsibility or liability for the payment of such
amounts to beneficial owners of Notes (including principal, premium, if any,
and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the Global Note as
shown on the records of the Depository. Payments by the Participants and the
Indirect Participants to the beneficial owners of Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Participants or the Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depository is no
longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes
in definitive form under the Indenture or (iii) upon the occurrence of certain
other events, then, upon surrender by the Depository of its Global Notes,
Certificated Securities will be issued to each person that the Depository
identifies as the beneficial owner of the Notes represented by the Global
Note. Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of such person or persons (or the nominee
of any thereof), and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depository or any Participant or Indirect Participant in identifying the
beneficial owners of the related Notes and each such person may conclusively
rely on, and shall be protected in relying on, instructions from the
Depository for all purposes (including with respect to the registration and
delivery, and the respective principal amounts, of the Notes to be issued).
103
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative ruling and practice. There can be no assurance
that the Internal Revenue Service (the "IRS") will not take a contrary view,
and no rules from the IRS has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States) may be subject to special rules and not discussed below. The Company
recommends that each holder consult such holder's own tax adviser as to the
particular tax consequences of exchanging such holder's Old Notes for New
Notes, including the applicability and effect of any state, local or foreign
tax laws.
The Company believes that the exchange of Old Notes for New Notes pursuant
to the Exchange Offer will not be treated as an "exchange" for federal income
tax purposes because the New Notes will not be considered to differ materially
in kind or extent from the Old Note. Rather, the New Notes received by a
holder will be treated as a continuation of the Old Notes in the hands of such
holder. As a result, there will be no federal income tax consequence to
holders exchanging Old Notes for New Notes pursuant to the Exchange Offer.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 90 days after the Expiration Date, it will make this
Prospectus available to any Participating Broker-Dealer for use in connection
with any such resale. Until , 1998 (90 days after the commencement
of the Exchange Offer), all dealers effecting transactions in the New Notes,
whether or not participating in this distribution, may be required to deliver
a prospectus.
The Company will not receive any proceeds from any sales of the New Notes by
Participating Broker-Dealers. New Notes received by Participating Broker-
Dealers for their own account pursuant to the Exchange Offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Participating Broker-
Dealer and/or the purchasers of any such New Notes. Any Participating Broker-
Dealer that resells the New Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit or any such resale of New Notes
and any commissions or concessions received by any such persons may be deemed
to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by
delivering a Prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date the Company will promptly
send additional copies of the Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in a Letter
of Transmittal. The Company agreed to pay all expenses incident to the
Exchange Offer other than commissions or concessions of any broker-dealers and
will indemnify holders of the Notes (including any broker-dealer) against
certain liabilities, including liabilities under the Securities Act.
104
<PAGE>
LEGAL MATTERS
The validity of the issuance of the New Notes being offered hereby is being
passed upon for the Company by Proskauer Rose LLP, New York, New York. Richard
L. Goldberg, a partner of Proskauer Rose LLP, is a member of the Board of
Directors of the Company.
EXPERTS
The financial statements and schedule of the Company included in this
Prospectus and in the Registration Statement have been audited by BDO Seidman
LLP, independent certified public accountants, to the extent and for the
periods set forth in their reports appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of said firm as experts in auditing and accounting.
105
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants......................... F-2
Consolidated Balance Sheets as of December 28, 1996 and December 27, 1997.. F-3
Consolidated Statements of Operations for each of the years ended December
30, 1995, December 28, 1996, and December 27, 1997........................ F-4
Consolidated Statements of Stockholders' Equity for each of the years ended
December 30, 1995, December 28, 1996, and December 27, 1997 .............. F-5
Consolidated Statements of Cash Flows for each of the years ended December
30, 1995, December 28, 1996, and December 27, 1997........................ F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Schein Pharmaceutical, Inc.
We have audited the accompanying consolidated balance sheets of Schein
Pharmaceutical, Inc. and subsidiaries as of December 28, 1996 and December 27,
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
27, 1997. These consolidated financial statements are the responsibility of
the management of Schein Pharmaceutical, Inc. and subsidiaries. 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 audits 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
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated 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 Schein Pharmaceutical, Inc. and subsidiaries as of December 28, 1996 and
December 27, 1997, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 27, 1997
in conformity with generally accepted accounting principles.
BDO Seidman, LLP
New York, New York
January 30, 1998
F-2
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................... $ 2,139 $ 804
Accounts receivable, less allowance for possible
losses of
$2,434 and $2,260................................. 72,261 88,781
Inventories........................................ 131,265 119,142
Prepaid expenses and other current assets.......... 4,070 3,831
Deferred income taxes.............................. 9,354 10,204
-------- --------
Total Current Assets............................. 219,089 222,762
Property, Plant and Equipment, net................... 107,740 110,432
Product Rights, Licenses and Regulatory Approvals,
net................................................. 92,685 86,564
Goodwill, net........................................ 102,695 98,366
Other Assets......................................... 22,103 16,002
-------- --------
$544,312 $534,126
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................... $ 31,492 $ 36,453
Accrued expenses................................... 40,755 45,025
Income taxes....................................... 6,641 11,595
Revolving credit and current maturities of long-
term debt......................................... 41,090 56,440
-------- --------
Total Current Liabilities........................ 119,978 149,513
Long-Term Debt, less current maturities.............. 245,390 198,705
Deferred Income Taxes................................ 40,166 37,080
Other Liabilities.................................... 8,798 9,113
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value; 952 authorized
shares;
issued and outstanding 273 shares at December 28,
1996
and December 27, 1997............................. 3 3
Additional paid-in capital......................... 38,876 38,778
Retained earnings.................................. 88,381 99,483
Other.............................................. 2,720 1,451
-------- --------
Total Stockholders' Equity....................... 129,980 139,715
-------- --------
$544,312 $534,126
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net Revenues............................ $391,846 $476,295 $490,170
Cost of Sales........................... 250,507 320,675 329,761
-------- -------- --------
Gross profit.......................... 141,339 155,620 160,409
Costs and Expenses:
Selling, general and administrative... 75,274 87,329 81,809
Research and development.............. 28,324 27,030 29,387
Amortization of goodwill and other
intangibles.......................... 3,399 10,195 10,196
Acquired in-process Marsam research
and development...................... 30,000 -- --
-------- -------- --------
Operating Income........................ 4,342 31,066 39,017
Interest expense, net................. 10,005 23,285 26,578
Other expenses (income), net.......... (1,245) 1,193 (9,318)
-------- -------- --------
Income (Loss) Before Provision for
Income Taxes........................... (4,418) 6,588 21,757
Provision for Income Taxes.............. 10,482 5,191 10,655
-------- -------- --------
Net Income (Loss)....................... $(14,900) $ 1,397 $ 11,102
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 27, 1997
IN THOUSANDS
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS OTHER
------ ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994......... 274 $ 3 $39,832 $101,884 $(1,555)
Net loss......................... -- -- -- (14,900) --
Amortization of options issued as
compensation.................... -- -- -- -- 389
Unrealized gains from marketable
securities...................... -- -- -- -- 39
--- --- ------- -------- -------
Balance, December 30, 1995......... 274 3 39,832 86,984 (1,127)
Net income....................... -- -- -- 1,397 --
Amortization of options issued as
compensation.................... -- -- -- -- 389
Unrealized gains from marketable
securities...................... -- -- -- -- 4,293
Repurchase and retirement of
shares.......................... (1) -- (956) -- --
Foreign currency translation
adjustments..................... -- -- -- -- (835)
--- --- ------- -------- -------
Balance, December 28, 1996......... 273 3 38,876 88,381 2,720
Net income....................... -- -- -- 11,102 --
Amortization of options issued as
compensation.................... -- -- (98) -- 727
Decline in unrealized gains on
marketable securities........... -- -- -- -- (2,046)
Foreign currency translation
adjustments..................... -- -- -- -- 50
--- --- ------- -------- -------
Balance, December 27, 1997 ........ 273 $ 3 $38,778 $ 99,483 $ 1,451
=== === ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Operating activities:
Net income (loss)...................... $ (14,900) $ 1,397 $ 11,102
Depreciation and amortization.......... 17,395 25,450 25,474
Provision (benefit) for deferred income
taxes................................. 3,084 (3,342) (2,676)
Acquired in-process Marsam research
and development....................... 30,000 -- --
Gain on sale of marketable securities.. -- -- (12,745)
Other.................................. 694 4,360 3,698
Changes in assets and liabilities:
Accounts receivable.................... (579) (15,743) (16,346)
Inventories............................ 69 (15,305) 12,123
Prepaid expenses and other assets...... (3,744) 2,048 (1,205)
Accounts payable, income taxes, accrued
expenses and other liabilities........ (12,393) 11,891 15,450
--------- --------- --------
Net cash provided by operating
activities............................. 19,626 10,756 34,875
--------- --------- --------
Cash flows from investing activities:
Capital expenditures, net.............. (13,986) (11,309) (14,446)
Product rights and licenses............ (3,035) (4,089) (150)
Acquisition of Marsam, net of cash
acquired.............................. (229,746) -- --
Investment in international joint
ventures.............................. (3,520) (2,036) (173)
Proceeds from sale of marketable
securities............................ -- -- 14,737
Other, net............................. (1,156) (2,582) 119
--------- --------- --------
Net cash provided by (used in) investing
activities............................. (251,443) (20,016) 87
--------- --------- --------
Cash flows from financing activities:
Principal payments on, or repayments
of, debt.............................. (167,119) (261,078) (287,090)
Proceeds from issuance of debt......... 401,750 267,000 255,755
Increase in other non-current
assets................................ (5,700) (2,360) (4,962)
--------- --------- --------
Net cash provided by (used in) financing
activities............................. 228,931 3,562 (36,297)
--------- --------- --------
Net decrease in cash and cash
equivalents............................ (2,886) (5,698) (1,335)
Cash and cash equivalents, beginning of
year................................... 10,723 7,837 2,139
--------- --------- --------
Cash and cash equivalents, end of year.. $ 7,837 $ 2,139 $ 804
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF ACCOUNTING POLICIES
THE COMPANY AND PRINCIPLES OF CONSOLIDATION
Schein Pharmaceutical, Inc. and its subsidiaries (the "Company") are engaged
in developing, manufacturing, marketing and distributing generic
pharmaceutical products and a line of specialty branded pharmaceuticals. The
Company sells to drug store chains, independent retail pharmacies, managed
care organizations, hospitals and other institutions, both through drug
wholesalers and directly, primarily in the U.S.
The Company's Board of Directors authorized the filing of a registration
statement with the Securities and Exchange Commission permitting the Company
to sell shares of its common stock in a proposed initial public offering.
In 1995, Schein Holdings, Inc. ("SHI"), the former parent holding
corporation of the Company, was merged into the Company. The Company was the
only asset held then by SHI, and, as such, the accompanying financial
statements reflect the operations of the Company for the periods reported.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Investments in unconsolidated affiliated
companies are accounted for on the equity method. All material intercompany
accounts and transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
FISCAL YEAR
The Company reports its operations on a 52-53 week basis ending on the last
Saturday of December. All of the years presented in these statements include
52 weeks.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments and other short-
term investments with an initial maturity date of three months or less from
purchase date to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method.
PROPERTY, PLANT, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Depreciation and
amortization are computed primarily under the straight-line method over
estimated useful lives. Amortization of capital leases is computed using the
straight-line method over the lease term.
F-7
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-LIVED ASSETS
The Company adopted in 1995 Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of. In accordance with SFAS No. 121, the carrying
values of long-lived assets are periodically reviewed by the Company and
impairments would be recognized if the expected future operating non-
discounted cash flows derived from an asset were less than its carrying value.
DEFERRED LOAN FEES
Costs incurred in connection with entering into or amending debt agreements
are capitalized to Other Assets and amortized to interest expense using the
effective interest method over the lives of the related debt.
GOODWILL AND PRODUCT RIGHTS, LICENSES AND REGULATORY APPROVALS
Goodwill is being amortized over 25 years on a straight-line basis. Product
rights, licenses and regulatory approvals are amortized on a straight-line
basis over the expected profitable and useful lives of the underlying products
and manufacturing facilities, generally for periods ranging from 10 to 15
years.
INVESTMENTS IN MARKETABLE SECURITIES
The Company's available-for-sale marketable securities are carried at fair
market value and are included in Other Assets in the accompanying balance
sheets. Unrealized gains are recorded directly to stockholders' equity, net of
applicable income taxes. The Company uses the specific identification method
of determining cost in calculating related gains and losses. The Company does
not own held-to-maturity or trading securities.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities,
approximate fair value because of the current nature of these instruments. The
carrying amounts reported for revolving credit and long-term debt approximate
fair value because the interest rates on these instruments are subject to
changes with market interest rates.
REVENUE RECOGNITION
Revenues are recognized when products are shipped. Provisions for estimated
sales allowances, returns and losses are accrued at the time revenues are
recognized.
RESEARCH AND DEVELOPMENT EXPENDITURES
Expenditures for research and development are expensed as incurred.
TAXES ON INCOME
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this standard, deferred taxes on income are
provided for those items for which the reporting period and methods for income
tax purposes differ from those used for financial statement purposes using the
asset and liability method. Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
F-8
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOREIGN CURRENCY TRANSLATIONS
Assets and liabilities of international affiliates are translated at current
exchange rates and related translation adjustments are reported as a component
of stockholders' equity. Income statement accounts are translated at the
average rates during the period.
CONCENTRATION OF CREDIT RISK
The Company is potentially subject to a concentration of credit risk with
respect to its trade receivables, the majority of which are due from
wholesalers, drug store chains and distributors. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company maintains sufficient allowances and insurance to cover potential
or anticipated losses for uncollectible accounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company 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.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards.
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
Reporting Comprehensive Income, establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
Disclosures about Segments of an Enterprise and Related Information, which
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Results of operations and financial position
will be unaffected by implementation of these new standards.The Company,
however, has not determined whether either of these two standards will have a
material impact on its financial statement disclosure.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("SFAS No. 132"), Employers'
Disclosures about Pensions and Other Postretirement Benefits, which
standardizes the disclosure requirements for pensions and other postretirement
benefits. The adoption of SFAS No. 132 in 1998 is not expected to materially
impact the Company's current disclosures.
F-9
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--ACQUISITIONS AND INVESTMENTS IN INTERNATIONAL AFFILIATES
The Company acquired all the outstanding capital stock of Marsam
Pharmaceuticals Inc. ("Marsam") in September 1995 for $245.0 million in cash.
Marsam develops, manufactures and markets generic injectable prescription
drugs. The acquisition was accounted for as a purchase. The purchase price of
$245.0 million exceeded the book value of the net assets acquired by $193.0
million. Of the excess purchase price, $92.0 million was allocated to increase
the net assets acquired to fair value, principally related to regulatory
facility and product approvals and is being amortized over 15 years. Acquired
in-process Marsam research and development projects were valued at $30.0
million and were expensed at the time of the acquisition. Goodwill of $108.0
million, consisting of the remaining excess purchase price of $71.0 million
and a $37.0 million deferred tax liability resulting from the write-up of the
net assets to fair value is being amortized over 25 years. Marsam's results of
operations have been included in the consolidated statements of operations
since the date of acquisition.
During 1995, 1996 and 1997, the Company invested approximately $3.5 million,
$2.0 and $0.2 million, respectively, to acquire up to a 50% interest in each
of several international pharmaceutical businesses. At December 1997, the
Company has guaranteed $4.7 million of borrowings of these businesses. These
businesses are jointly owned with subsidiaries of Bayer AG, the parent of
Bayer Corp., a minority investor in the Company. These investments are
accounted for under the equity method and are included in Other Assets in the
accompanying balance sheets. Equity losses resulting from the Company's
investments in international businesses in 1995, 1996 and 1997 are included in
Other expenses (income), net, in the accompanying statements of operations.
The Company generally anticipates that these international businesses will not
have significant revenues or operations for a period of two to three years
following their establishment, during which time the businesses are expected
to incur expenses to register products in anticipation of future sales.
NOTE 3--INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Finished products.................................. $ 59,632 $ 45,568
Work-in-process.................................... 27,332 33,160
Raw materials and supplies......................... 44,301 40,414
-------- --------
$131,265 $119,142
======== ========
</TABLE>
F-10
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land.......................................... $ 4,725 $ 5,043
Buildings and improvements.................... 63,019 64,026
Plant and office equipment.................... 97,825 104,260
Construction-in-progress...................... 3,310 9,553
-------- --------
168,879 182,882
Less: Accumulated depreciation and amortiza-
tion......................................... 61,139 72,450
-------- --------
$107,740 $110,432
======== ========
</TABLE>
Depreciation and amortization expense for property, plant and equipment
amounted to $10.5 million, $12.1 million and $11.7 million in 1995, 1996 and
1997, respectively.
NOTE 5--INTANGIBLE ASSETS
Product Rights, Licenses and Regulatory Approvals, net, consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Product rights and licenses.................... $ 12,611 $ 12,732
Regulatory approvals, products................. 78,000 78,000
Regulatory approvals, facilities............... 10,000 10,000
-------- --------
100,611 100,732
Less: Accumulated amortization................. 7,926 14,168
-------- --------
$ 92,685 $ 86,564
======== ========
</TABLE>
Accumulated amortization of goodwill was $5.8 million and $10.2 million at
December 28, 1996 and December 27, 1997, respectively.
NOTE 6--MARKETABLE SECURITIES
Included in Other Assets in the accompanying balance sheets are marketable
equity securities consisting of:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cost........................................... $ 5,660 $3,677
Gross unrealized gains......................... 6,686 3,399
------- ------
Fair value..................................... $12,346 $7,076
======= ======
</TABLE>
Included in Stockholders' Equity--Other as of December 30, 1995, December
28, 1996 and December 27, 1997 are the gross unrealized gain of the above
marketable securities, net of the related tax effect, of $0.1 million, $4.2
million and $2.2 million, respectively.
Included in other income for 1997 is realized gains of $12.7 million from
the sale of marketable securities (see Note 13).
F-11
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Included in Accounts Payable are outstanding checks of approximately $6.2
million and $6.9 million as of December 28, 1996 and December 27, 1997,
respectively.
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries and related expenses.................. $18,300 $16,554
Profit-sharing expenses........................ 8,637 12,567
Other.......................................... 13,818 15,904
------- -------
$40,755 $45,025
======= =======
</TABLE>
NOTES 8--TAXES ON INCOME
Provisions for Federal, state and Puerto Rico income taxes consist of the
following:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................. $ 5,736 $7,404 $10,952
State and Puerto Rico................ 1,662 1,129 2,379
------- ------ -------
7,398 8,533 13,331
------- ------ -------
Deferred:
Federal.............................. 2,131 (2,215) (1,705)
State and Puerto Rico................ 953 (1,127) (971)
------- ------ -------
3,084 (3,342) (2,676)
------- ------ -------
$10,482 $5,191 $10,655
======= ====== =======
</TABLE>
The Company has a tax grant in Puerto Rico. The grant provides a 90%
exclusion from Puerto Rico income tax. The grant began in 1996 and expires in
15 years. The grant benefits are recognized in conjunction with the Company's
election to compute its US tax under Internal Revenue Code Section 936 which
reduces the tax by an amount based on the Company's operations. The 936 credit
is estimated to reduce the US tax in 1997 by $0.8 million and in 1996 by $0.5
million.
F-12
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income tax assets and liabilities are classified as current and
non-current as follows:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred Income Taxes, Current:
Deferred tax assets........................... $ 9,354 $ 10,204
Deferred tax liabilities...................... -- --
-------- --------
9,354 10,204
-------- --------
Deferred Income Taxes, Non-Current:
Deferred tax assets........................... 8,268 7,341
Deferred tax liabilities...................... (48,434) (44,421)
-------- --------
(40,166) (37,080)
-------- --------
$(30,812) $(26,876)
======== ========
</TABLE>
Differences between the Federal statutory rate and the Company's effective
tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory rate....................... $(1,546) $2,309 $ 7,615
State and Puerto Rico taxes.......... 1,722 241 1,642
Amortization of goodwill............. 505 1,515 1,515
Effect of partially tax-exempt
operations in Puerto Rico........... -- (519) (752)
Equity in net loss of unconsolidated
affiliates.......................... -- 1,202 494
Write-off of acquired in-process
Marsam research and development..... 10,500 -- --
Other, net........................... (699) 443 141
------- ------ -------
$10,482 $5,191 $10,655
======= ====== =======
</TABLE>
Temporary differences which give rise to a significant portion of deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Gross Deferred Tax Assets:
Inventory valuation.............................. $ 5,220 $ 4,682
Accounts receivable allowances................... 2,694 3,961
Net operating loss carryforwards, state and
Puerto Rico..................................... 1,880 1,648
Deferred compensation expense.................... 4,806 4,648
Other............................................ 3,022 2,606
-------- --------
17,622 17,545
-------- --------
Gross Deferred Tax Liabilities:
Write-up of acquired Marsam assets to fair
value........................................... (32,692) (30,309)
Depreciation and amortization.................... (12,461) (12,883)
Unrealized gains from marketable securities...... (2,489) (1,229)
Other............................................ (792) --
-------- --------
(48,434) (44,421)
-------- --------
$(30,812) $(26,876)
======== ========
</TABLE>
F-13
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--BORROWINGS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit and term loan agreement.......... $186,000 $154,000
Senior subordinated loan.......................... 100,000 --
Senior floating rate notes........................ -- 100,000
Capitalized lease obligations and other........... 480 1,145
-------- --------
286,480 255,145
Less: Current maturities.......................... 41,090 56,440
-------- --------
$245,390 $198,705
======== ========
</TABLE>
In September 1995, the Company entered into a secured revolving credit and
term loan agreement (as amended, the "credit agreement") with a group of banks
to provide funds for the acquisition of Marsam, the repayment of certain of
its debt, working capital and general corporate purposes. The credit agreement
provided a term loan facility of $250.0 million and a revolving credit
facility of $100.0 million available through December 2001. The borrowings
outstanding under the revolving credit facility were $41.0 million and $44.0
million as of December 28, 1996 and December 27, 1997, respectively. Amounts
borrowed under the revolving credit facility are expected to be repaid during
the next year and, accordingly, are classified as current in the accompanying
balance sheets.
In December 1996, the Company entered into an agreement for a $100.0 million
senior subordinated loan with a lead manager of the credit agreement. The
proceeds of the loan were used to prepay principal on the term loan of the
credit agreement. The effective borrowing rate of the senior subordinated loan
was 9.60% as of December 28, 1996. As a result of this payment and scheduled
payments, the term loan facility was reduced to $110.0 million at December
1997. Quarterly principal payments on the term loan commence in September 1998
and end in the year 2001.
In December 1997, the senior subordinated loan was repaid when the Company
issued $100.0 million of senior floating rate notes due 2004. Interest on the
notes is payable quarterly at a rate per annum equal to LIBOR plus 3.0%. The
effective borrowing rate was 8.94% as of December 27, 1997.
Borrowings under the credit agreement bear interest, which is payable at
least quarterly, at a rate equal to the bank's floating base rate plus a
premium ranging from zero to 1.50%, or at a rate equal to LIBOR plus a premium
ranging from 0.75% to 2.50%, depending on the type of borrowing and the
Company's performance against certain criteria. The effective borrowing rate
was 8.10% and 7.91% at December 28, 1996 and December 27, 1997, respectively.
A commitment fee ranging from 0.25% to 0.50% per annum of the unused daily
amount of the total commitment is payable quarterly.
Borrowings under the credit agreement are secured by a mortgage on all real
property, liens on inventory and receivables and a pledge of subsidiaries'
stock. The debt is guaranteed by the Company's domestic subsidiaries.
The credit agreement contains limitations and restrictions concerning
investments, acquisitions, capital expenditures, debt, liens, transactions
with stockholders, dividend payments and borrowings. In addition, the
agreement requires the Company to maintain minimum net worth levels and
certain ratios (as defined therein) of leverage to EBITDA, working capital and
fixed charge coverage. Amounts available for dividends as permitted by the
credit agreement as of December 27, 1997 were not material. Currently, the
Company's senior credit agreement and its senior floating rate notes contain
restrictions on the payment of dividends. In addition, the Company, under
certain circumstances, may not declare dividends on Common Stock without the
consent of Bayer Corporation.
F-14
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The senior floating rate notes are guaranteed by the Company's wholly-owned
domestic subsidiaries. These subsidiaries sell all of their products to Schein
Pharmaceutical, Inc., the parent company. Summarized financial information for
these wholly-owned subsidiary guarantors (using the push-down method of
accounting) are as follows:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Current Assets:
Inventory.................................... $ 72,586 $ 74,924
Intercompany receivables..................... 107,941 119,191
Other current assets......................... 1,238 4,197
Property, Plant and Equipment, net............. 100,936 104,807
Goodwill, net; Product Rights, Licenses and
Regulatory Approvals, net and Other Assets.... 191,903 178,548
Current Liabilities............................ 89,817 109,800
Deferred Income Taxes and Other Liabilities.... 45,193 44,921
Long Term Debt (pushed down)................... 204,000 186,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Revenues....................... $264,575 $355,262 $373,712
Gross Profit....................... 74,993 91,689 100,151
Operating Income................... (19,268) 14,152 27,193
Net Income (Loss).................. (28,773) (4,179) 7,383
</TABLE>
Separate financial statements of the wholly-owned domestic subsidiary
guarantors are not presented because management believes that they would not
be meaningful to investors.
In connection with entering into the credit agreement, the Company incurred
costs of $5.9 million in 1995. During 1996, the Company incurred costs of $2.3
million in connection with entering into the senior subordinated loan and
amending the credit agreement. The Company capitalized these costs, which are
included in Other Assets in the accompanying balance sheets. In December 1997,
the Company incurred costs of $4.4 million in connection with the senior
floating rate notes. The amounts amortized in 1995, 1996 and 1997 were $0.7
million, $2.6 million and $3.3 million, respectively.
At December 27, 1997, aggregate required principal payments for the
succeeding four years, the remaining term under existing long-term debt
agreements, excluding the revolving credit facility, are $11.6 million in
1998, $28.9 million in 1999, $34.8 million in 2000 and $34.7 million in 2001.
NOTE 10--COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Consulting Agreement
The Company has a series of agreements (collectively, the "Consulting
Agreement") with a patent attorney (the "Consultant"). The Consulting
Agreement generally provides that if a challenge based on an opinion of the
Consultant results in either a favorable judicial determination which enables
the Company to market a generic version of the product or in a settlement, the
Company will pay the Consultant one half of the adjusted gross profit (as
defined) from its sales of the generic versions of the patented product (until
the date on which the patent
F-15
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
would normally have expired) or one half of the proceeds of any settlement.
Under the Consulting Agreement, the Consultant, together with the Company, has
identified certain patents on branded pharmaceutical products susceptible to a
challenge and the Consultant acted as counsel to the Company in those
instances where it decided to proceed with a patent challenge.
In 1994, the Company settled two such patent challenges. One of the
settlements involved a license grant to the Company to begin manufacturing and
marketing the product in 1996. The second settlement allows for cash payments
and/or license rights to the Company. In connection with the second settlement
the Company received revenues of $5.0 million, $12.5 million and $25.0 million
in 1995, 1996 and 1997, respectively, and such amounts are included in Net
revenues in the accompanying statements of operations.
Expenses pursuant to the Consulting Agreement (which include both profit
sharing payments and cash settlement amounts referred to above) and included
in Cost of Sales were $2.5 million in fiscal 1995, $14.9 million in fiscal
1996 and $27.0 million in fiscal 1997.
Operating Leases
The Company leases facilities and equipment under operating leases expiring
through 2007. Some of the leases have renewal options and most contain
provisions for passing through certain incremental costs. At December 27,
1997, future net minimum annual rental payments under noncancelable leases are
as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 5,817
1999................................................................ 5,277
2000................................................................ 4,714
2001................................................................ 3,848
2002................................................................ 3,498
2003-2007........................................................... 11,505
-------
Total minimum lease payments........................................ $34,659
=======
</TABLE>
Total rental expense for the years ended 1995, 1996 and 1997 was
approximately $4.7 million, $5.4 million and $5.6 million, respectively.
The Company has an agreement to lease warehousing space through September
1999, and then purchase this property for $5.3 million in October 1999. In
1998 the Company intends to exercise its option to purchase this property. The
property consists of a building of approximately 109,800 square feet on
approximately 8.5 acres of land. The purchase price includes a $0.3 million
deposit paid in 1994.
Employee Benefit Plans
During 1996, the Company merged its defined contribution retirement plans
into one plan. The discretionary contributions to the plan vest to employees
over several years. Additionally, employees are permitted to make pre-tax
contributions to the plan with the Company making matching contributions. The
contributions to these plans which were charged to operations, as determined
by the Board of Directors, amounted to approximately $4.9 million, $3.5
million and $4.6 million for the years ended 1995, 1996 and 1997,
respectively.
The Company has entered into deferred compensation agreements with certain
officers of the Company. As of December 1997, future obligations under these
agreements were approximately $2.3 million, assuming the officers remain with
the Company over the remaining vesting period of one to two years. These
agreements provide for accelerated vesting if there is a change in control of
the Company under certain other conditions. The Company expensed $2.0 million,
$4.8 million and $0.8 million in the fiscal years ended 1995, 1996 and 1997,
respectively, in connection with these agreements.
F-16
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company established an unfunded supplemental retirement program for its
CEO during 1994. The estimated obligation of $5.0 million is included in Other
Liabilities in the accompanying balance sheets.
The Company maintains a Book Equity Appreciation Rights Program (the
"Program") to allow certain employees to benefit from an increase in the
Company's book value as calculated according to a formula defined in the
Program. All participants are fully vested in their book equity appreciation
rights ("BEARs") and the Company does not intend to make any additional grants
of BEARs. Amounts charged to results of operations were not material in any
period presented.
Product Technology Licensing and Development
On September 1, 1994, the Company entered into a worldwide technology
licensing and development agreement with a U.K.-based pharmaceutical
development company for the development of a portfolio of oral controlled
release and/or transdermal products. Under the terms of the agreement, the
Company is obligated to pay product licensing fees and development costs
totaling $32.0 million, dependent on achievement of interim milestones. In
1994, the Company incurred obligations totaling $5.5 million under the
agreement, consisting of a $5.0 million licensing fee, which was capitalized.
The Company paid and expensed $2.4 million in development costs in 1995. In
1996, the Company incurred obligations totaling $3.0 million, consisting of a
$0.5 million licensing fee, which was capitalized, and $2.5 million in
development costs which were charged to research and development expense. In
1997, the Company incurred and expensed $2.3 million in development costs. The
remaining commitment under the agreement as of December 27, 1997 was $18.8
million, subject to the completion of interim milestones.
On September 30, 1996, the Company entered into a marketing and distribution
agreement with a corporation to jointly commercialize a certain product. Under
the terms of the agreement, the Company is obligated to pay product licensing
fees and development costs of $12.0 million, dependent on the achievement of
certain milestones. In 1996, the Company paid and capitalized a $2.0 million
product license fee.
CONTINGENCIES
Litigation
The Company is a defendant in several product liability cases. These cases
are typical for a company in the pharmaceutical industry. The Company also is
involved in other proceedings and claims of various types. Management
presently believes that the disposition of all such known proceedings and
claims, individually or in the aggregate, will not have a material adverse
effect on the Company's financial position, operations or liquidity.
NOTE 11--STOCKHOLDERS' EQUITY AND STOCK OPTIONS
COMMON STOCK
The Company has Class A Common Shares ("Class A") and Class B Common Shares
("Class B"). Each of the two classes of stock are identical except that Class
B shares are currently non-voting. Upon the earlier occurrence of an initial
public offering or May 15, 1999, each authorized share of Class B will be
automatically reclassified as and converted into one new Class A share.
Upon the closing of the Company's planned initial public offering, the Class
A and Class B will convert on a one-for-one basis to new shares of the
Company's common stock.
At December 28, 1996 and December 27, 1997, the Company had 183,244 Class A
and 90,020 Class B issued and outstanding.
During 1996, the Company agreed to repurchase 478 Class A for approximately
$1.0 million from a former executive of the Company. These shares were retired
in 1996.
F-17
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK OPTION PLAN
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock- Based Compensation. SFAS No. 123 encourages
entities to adopt that method in place of the provisions of Accounting
Principles Board Opinion Number 25, Accounting for Stock Issued to Employees
("APB No. 25"), for all arrangements under which employees receive shares of
stock or other equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of its stock. The
Company continues to account for such transactions in accordance with APB No.
25 and, as required by SFAS No. 123, has provided pro forma information
regarding net income as if compensation cost for the Company's stock option
plan had been determined in accordance with the fair value method prescribed
by SFAS No. 123.
Under the Company's 1993 Stock Option Plan, 1995 Non-Employee Director Stock
Option Plan and 1997 Stock Option Plan the Company may grant non-qualified and
incentive stock options to certain officers, employees and directors. The
options expire ten years from the grant date. The options may be exercised
subject to continued service (three to five years) and certain other
conditions. Accelerated vesting occurs following a change in control of the
Company and under certain other conditions. The Company may grant an aggregate
of 55,800 shares under the plans. However, 2,122 shares under the 1993 Stock
Option Plan will not be granted.
The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1995 and 1996: no dividend yield,
expected volatility of 0.01%, risk free interest rates of 5% to 7%, expected
lives of 10 years and a discount for marketability of 25%. For 1997 the
Company used the following assumptions: no dividend yield, expected volatility
of 24%, risk free interest rates of 6% to 7%, and expected lives of 10 years.
If compensation cost for the Company's stock option plan had been determined
in accordance with SFAS No. 123, net income (loss) would have been reduced in
1995, 1996 and 1997 by approximately $1.0 million, $2.3 million and $3.7
million, respectively.
The following table summarizes information about stock options outstanding
at December 27, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE
OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE
----------- ------------ -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Exercise Prices
$1,000....... 1,775 5.8 $1,000 1,720 $1,000
$1,500....... 6,994 9.2 1,500 146 1,500
$2,000....... 20,978 7.4 2,000 16,395 2,000
------ ------
29,747 8.1 1,823 18,261 1,902
====== ======
</TABLE>
F-18
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Transactions under the stock option plans and individual non-qualified
options not under the plans are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Shares under option at December 31, 1994............. 16,356 $1,878
Granted (at $2,000 per share)...................... 3,601 2,000
Exercised.......................................... -- --
Canceled (at $2,000 per share)..................... (77) 2,000
------ ------
Shares under option at December 30, 1995............. 19,880 1,901
Granted (at $2,000 per share)...................... 4,887 2,000
Exercised.......................................... -- --
Canceled (at $1,500 to $2,000 per share)........... (752) 1,832
------ ------
Shares under option at December 28, 1996............. 24,015 1,923
Granted (at $1,500 per share)...................... 8,449 1,500
Exercised.......................................... -- --
Canceled (at $1,000 to $2,000 per share)........... (2,717) 1,750
------ ------
Shares under option at December 27, 1997 (at $1,000
to $2,000 per share)................................ 29,747 $1,823
====== ======
Options exercisable at December
1995............................................... 10,780 $1,926
1996............................................... 15,256 $1,886
1997............................................... 18,261 $1,902
Options available for grant:
1995............................................... 8,520
1996............................................... 4,385
1997............................................... 18,261
Weighted average fair value of options granted dur-
ing:
1995............................................... $ 916
1996............................................... $ 897
1997............................................... $ 657
</TABLE>
The Company recorded deferred stock compensation of approximately $2.0
million in 1993, reflecting options granted with exercise prices at less than
fair value. This amount is being amortized over five years.
NOTE 12--INTEREST EXPENSE, NET
Interest expense, net, consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest expense...................... $10,150 $23,715 $26,686
Interest income....................... (145) (430) (108)
------- ------- -------
$10,005 $23,285 $26,578
======= ======= =======
</TABLE>
F-19
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--OTHER EXPENSES (INCOME), NET
Other expenses (income), net, consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Equity (earnings) loss of
unconsolidated international
ventures........................... $ 388 $ 3,439 $ 3,372
Gain on sales of marketable
securities......................... -- -- (12,745)
Other, net.......................... (1,633) (2,246) 55
------- ------- --------
$(1,245) $ 1,193 $ (9,318)
======= ======= ========
</TABLE>
NOTE 14--RELATED PARTY TRANSACTIONS
In the conduct of its business, the Company sells pharmaceutical products to
Henry Schein for distribution to its customers. Net sales to Henry Schein were
$5.3 million, $8.6 million and $10.0 in fiscal 1995, 1996 and 1997,
respectively. Included in accounts receivable at both, December 28, 1996 and
December 27, 1997 are amounts due from Henry Schein for sale of products of
approximately $0.8 million and $2.7 million, respectively.
In 1994, the Company entered into a three-year co-promotion agreement with
Bayer Corp. covering a certain product of the Company. Under the terms of the
agreement, in exchange for promotional support, the Company shared with Bayer
Corp. financial results in excess of specified threshold amounts. Included in
selling, general and administrative expenses, the Company recorded selling
expenses under the agreement of approximately $3.0 million in 1996 and $4.2
million in 1997. There were no selling expenses under this agreement for 1995.
Included in Accrued expenses in the accompanying balance sheet as of December
28, 1996 and December 27, 1997 are approximately $1.3 million and $1.9
million, respectively, of selling expenses under the agreement.
NOTE 15--SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid taxes of approximately $8.9 million, $5.8 million and $7.6
million for the years ended 1995, 1996 and 1997, respectively. The Company
paid interest of approximately $8.0 million, $23.5 million and $25.2 million
for the years ended 1995, 1996 and 1997, respectively.
As discussed in Note 3, the Company acquired all the capital stock of Marsam
for $245.0 million in 1995. In connection with the acquisition, liabilities
were assumed as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Fair value of assets acquired.................................. $ 293.0
Cash paid for Marsam stock..................................... (245.0)
-------
Liabilities assumed............................................ $ 48.0
=======
</TABLE>
As discussed in Note 11, the Company accrued approximately $1.0 million as
of December 28, 1996 in connection with the repurchase of 478 common shares.
F-20
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--MAJOR PRODUCT AND CUSTOMERS
One product generated 17%, 19% and 21% of net revenues for 1995, 1996 and
1997 respectively.
Three customers generated 13%, 11% and 10%, respectively, of 1995 net
revenues. Three customers contributed 16%, 15% and 11%, respectively, of 1996
net revenues. Three customers contributed 19%, 18% and 10%, respectively, of
1997 net revenues. In all periods, these customers are nationwide wholesalers
through which the majority of the Company's products are distributed to the
retail, institutional and managed care markets.
NOTE 17--SUBSEQUENT EVENT
The Company has filed a registration statement covering an initial public
offering under which it anticipates generating net proceeds of approximately
$40 million upon the sale of its common stock. If the offering is consummated,
the net proceeds will be used in whole or in part to pay down the Company's
debt.
In connection with the offering, the Company's Board of Directors authorized
the issuance of up to 2,000,000 shares of Preferred Stock, par value $.01 per
share.
Subsequent to year end, the Company acquired 2.0 million shares or 12.79% of
Cheminor Drugs Limited, a publicly traded pharmaceutical company based in
India, for $10.0 million, and under certain circumstances has the right and
the obligation to purchase an additional 1.0 million shares for $5.0 million.
F-21
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... i
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 13
The Company............................................................... 23
Use of Proceeds........................................................... 23
Capitalization............................................................ 24
Selected Consolidated Financial Data...................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 27
Business.................................................................. 35
Management................................................................ 51
Certain Transactions...................................................... 61
Principal Stockholders.................................................... 63
Description of Certain Indebtedness....................................... 68
The Exchange Offer........................................................ 69
Description of Notes...................................................... 78
Certain U.S. Federal Income Tax Considerations............................ 104
Plan of Distribution...................................................... 104
Legal Matters............................................................. 105
Experts................................................................... 105
Index to Consolidated Financial Statements................................ F-1
</TABLE>
UNTIL , 1998 (90 DAYS AFTER THE COMMENCEMENT OF THE EXCHANGE
OFFER), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THE 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$100,000,000
[LOGO] SCHEIN
PHARMACEUTICAL
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF ITS SENIOR FLOATING RATE NOTES
DUE 2004 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR EACH $1,000
IN PRINCIPAL AMOUNT OF ITS OUTSTANDING SENIOR FLOATING RATE
NOTES DUE 2004
THE EXCHANGE AGENT FOR THE
EXCHANGE OFFER IS:
THE BANK OF NEW YORK
BY FACSIMILE:
(212) 815-6339
CONFIRMATION BY TELEPHONE:
(212) 815-5789
BY OVERNIGHT COURIER OR HAND DELIVERY
101 BARCLAY STREET
NEW YORK, NEW YORK 10286
CORPORATE TRUST SERVICES WINDOW
GROUND LEVEL
ATTENTION: REORGANIZATION SECTION-7E;
DIANA TORRES
BY MAIL
101 BARCLAY STREET, 7E
NEW YORK, NEW YORK 10286
ATTENTION: REORGANIZATION SECTION-7E;
DIANA TORRES
---------------
PROSPECTUS
---------------
MARCH , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Capitalized terms used but not defined in Part II have the meanings ascribed
to them in the Prospectus.
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article SEVENTH of the Company's Certificate of Incorporation provides that
the Company shall indemnify and hold harmless, to the fullest extent
authorized by the Delaware General Corporation Law, its officers and directors
against all expenses, liability and loss actually and reasonably incurred in
connection with any civil, criminal, administrative or investigative action,
suit or proceeding. The Certificate of Incorporation also extends
indemnification to those serving at the request of the Company as directors,
officers, employees or agents of other enterprises.
In addition, Article SEVENTH of the Company's Certificate of Incorporation
provides that no director shall be personally liable for any breach of
fiduciary duty. Article SEVENTH does not eliminate a director's liability (i)
for a breach of his or her duty of loyalty to the Company or its stockholders,
(ii) for acts of or omissions of such director not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any
transactions from which the director derived an improper personal benefit.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation to indemnify its directors and officers against expenses
(including attorney's fees), judgments, fines and amounts paid in settlements
actually and reasonably incurred by them in connection with any action, suit
or proceeding brought by third parties, if such directors or officers acted in
good faith and in a manner they 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 reason to believe their conduct was unlawful. In a
derivative action, i.e., one by or in the right of the corporation,
indemnification may be made only for expenses actually and reasonably incurred
by directors and officers in connection with the defense or settlement of an
action or suit, and only with respect to a matter as to which they shall have
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interest of the corporation, except that no
indemnification shall be made if such person shall have been adjudged liable
to the corporation, unless and only to the extent that the court in which the
action or suit was brought shall determine upon application that the defendant
officers or directors are reasonably entitled to indemnity for such expenses
despite such adjudication of liability.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a corporation may eliminate or limit the personal liability of a
director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the General Corporation
Law of the State of Delaware, or (iv) for any transaction from which the
director derived an improper personal benefit. No such provision shall
eliminate or limit the liability of a director for any act or omission
occurring prior to the date when such provision becomes effective.
Pursuant to Section 145 of the DGCL and the Certificate of Incorporation and
the By-Laws of the Company, the Company maintains directors' and officers'
liability insurance coverage.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<C> <S>
3.1* Restated Certificate of Incorporation of the Company.
3.2* Amended and Restated By-Laws of the Company.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
3.3 Restated Certificate of Incorporation of the Company adopted by the
Company on March 6, 1998. (1)
3.4 Amended and Restated By-Laws of the Company adopted by the Company on
March 6, 1998. (1)
3.5* Certificate of Incorporation of Schein Pharmaceutical International,
Inc.
3.6* By-Laws of Schein Pharmaceutical International, Inc.
3.7* Certificate of Incorporation of Schein Pharmaceutical PA, Inc.
3.8* By-Laws of Schein Pharmaceutical PA, Inc.
3.9* Certificate of Incorporation of Schein Pharmaceutical Service Company.
3.10* By-Laws of Schein Pharmaceutical Service Company.
3.11* Certificate of Incorporation of Steris Laboratories, Inc.
3.12* By-Laws of Steris Laboratories, Inc.
3.13* Certificate of Incorporation of Marsam Pharmaceuticals Inc.
3.14* By-Laws of Marsam Pharmaceuticals Inc.
3.15* Certificate of Incorporation of Danbury Pharmacal, Inc.
3.16* By-Laws of Danbury Pharmacal, Inc.
3.17* Certificate of Incorporation of Danbury Pharmacal Puerto Rico, Inc.
3.18* By-Laws of Danbury Pharmacal Puerto Rico, Inc.
4.1 Credit Agreement dated as of September 5, 1995 among the Company, the
Lenders (as defined therein), and Chemical Bank as Issuing Bank,
Administrative Agent and as Collateral Agent for the Lenders. (1)
4.2* First, Second, Third and Fourth Amendments to the Credit Agreement.
4.3* Senior Subordinated Loan Agreement dated as of December 20, 1996 among
the Company, the Lenders (as defined therein) and Societe Generale as
Administrative Agent.
4.4* Indenture dated as of December 24, 1997 among the Company, the
Guarantors (as defined therein) and The Bank of New York.
4.5* Registration Rights Agreement dated as of December 24, 1997 between the
Company and Societe Generale Securities Corporation.
4.6* Purchase Agreement dated December 19, 1997 among the Company, the
Guarantors (as defined therein) and Societe Generale Securities
Corporation.
4.7* Offering Memorandum, dated December 19, 1997 for the Company's
$100,000,000 Senior Floating Rate Note due 2004.
5.1 Form of Opinion of Proskauer Rose LLP.
9.1 Voting Trust Agreement, dated September 30, 1994, by and among the
Company, Marvin H. Schein, the trust established by Marvin H. Schein
under trust agreement dated December 31, 1993, the trust established by
Marvin H. Schein under trust agreement dated September 9, 1994, Pamela
Schein, the trust established by the Trustees under Article Fourth of
the Will of Jacob M. Schein for the benefit of Pamela Schein and her
issue under trust agreement dated September 29, 1994, Pamela Joseph,
and the trust established by Pamela Joseph under trust agreement dated
September 28, 1994, and Martin Sperber, as voting trustee. (1)
10.1 Supply Agreement, dated May 1, 1992, between Abbott Laboratories, and
Steris Laboratories, Inc., including Letter Amendment, dated December
2, 1993, and Letter Amendment, dated June 9, 1995. (1)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.2 Agreement, dated June 10, 1994, between Steris Laboratories, Inc., Akzo
Pharma International B.V., and Organon Inc. (1)
10.3 [Intentionally omitted.]
10.4 Sublicense, Co-marketing and Supply Agreement, dated September 30,
1996, between the Company and Makoff R&D Laboratories, Inc., including
Operating Agreement, dated September 30, 1996. (1)
10.5 Agreement, dated August 16, 1994, between the Company and Elan Pharma
Ltd. (currently Elan Corporation plc). (1)
10.6 Custom Manufacturing Agreement, dated July 1, 1995, between the Company
and Johnson Matthey, Inc. (1)
10.7 Letter of Intent, dated October 7, 1997, by and among the Company,
Cheminor Drugs Limited and Dr. Reddy's Laboratories Limited. (1)
10.8* Lease Agreement, dated March 30, 1992, between the Company and Harold
Lepler.
10.9* Lease Agreement, dated February 16, 1992, between the Company and
Ronald G. Roth.
10.10* Memorandum of Lease for Danbury, dated December 1, 1995 between Danbury
Pharmacal, Inc. and Albert J. Salame.
10.11* Agreement of Lease for Florham Park Corporate Office, dated April 16,
1993, between the Company and Sammis Morristown Associates, including
First Amendment and Second Amendment thereto.
10.12* Cherry Hill Lease Agreement, dated November 12, 1996, between the
Company and Cherry Hill Industrial Sites, Inc.
10.13 Schein Holdings, Inc. 1993 Stock Option Plan (formerly the Schein
Pharmaceutical, Inc. 1993 Stock Option Plan) dated as of November 5,
1993. (1)
10.14 Schein Pharmaceutical, Inc. 1997 Stock Option Plan. (1)
10.15 Schein Pharmaceutical, Inc. 1995 Non-Employee Director Stock Option
Plan (amended and restated as of August 8, 1996). (1)
10.16 Employment Agreement, dated November 29, 1993 between the Company and
Paul Feuerman. (1)
10.17 Deferred Compensation Agreement, dated August 8, 1996, between the
Company and Paul Feuerman. (1)
10.18 Employment Agreement, dated May 1, 1995, between the Company and
Dariush Ashrafi. (1)
10.19 Employment offer letter, dated April 17, 1995, from the Company to
Dariush Ashrafi. (1)
10.20 Employment Agreement, dated September 30, 1994, as amended, between the
Company and Martin Sperber. (1)
10.21 Option Agreement Pursuant to 1993 Stock Option Plan dated September 30,
1994 between Schein Holdings, Inc. and Martin Sperber. (1)
10.22 Employment Agreement, dated as of July 28, 1995, between the Company
and Marvin Samson. (1)
10.23 Compensation Continuation Agreement, dated October 19, 1991 between the
Company and Marvin Samson. (1)
10.24 Split Dollar Insurance Agreement, dated March 25, 1991 between the
Company, Michael Samson and Andrew Samson, Trustees under Indenture of
Trust of Marvin Samson. (1)
10.25 Retirement Plan of Schein Pharmaceutical, Inc. and Affiliates;
including Amendment No. 4. (1)
10.26 Amendment No. 1 to the Retirement Plan of Schein Pharmaceutical, Inc.
and Affiliates. (1)
10.27 1993 Book Equity Appreciation Rights Program. (1)
10.28 Form of Book Equity Appreciation Rights Award. (1)
10.29 Form of Split Dollar Life Insurance Agreement. (1)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.30 General Shareholders Agreement, dated September 30, 1994, by and among
the Corporation, Bayer Corporation (formerly Miles Inc.), each of the
family shareholders listed as such on schedule A thereto, each of the
other shareholders listed as such on schedule A thereto and Martin
Sperber, as trustee under the Voting Trust Agreement. (1)
10.31 Continuing Shareholders Agreement, dated September 30, 1994, by and
among the Company and each of the shareholders listed on schedule A
thereto. (1)
10.32 Heads of Agreement, dated September 30, 1994, by and among the Company,
Bayer Corporation (formerly Miles Inc.) and Bayer A.G. (1)
10.33 Second Consolidated Agreement, dated December 15, 1992, between the
Company, its affiliates, and Alfred B. Engelberg. (1)
10.34 License and Development Agreement, dated January 15, 1993, between the
Company and Ethical Holdings PLC, including Amendment, dated November
4, 1994. (1)
10.35 License and Development Agreement, dated January 16, 1993, between the
Company and Ethical Holdings Limited. (1)
10.36 Letter Agreement, dated June 23, 1995, between the Company and Ethical
Holdings, Inc., including Revised Schedule 5, effective July 21, 1995.
(1)
10.37 [Intentionally omitted.]
10.38 Multiproduct Technology Transfer, Development and License Agreement,
dated August 30, 1994, between the Company and Ethical Holdings PLC.
(1)
10.39 License and Development Agreement, dated March 31, 1994, between the
Company and Ethical Holdings PLC. (1)
10.40* Employment Agreement, dated November 29, 1993, between the Company and
Paul Kleutghen.
10.41* Employment Agreement, dated November 22, 1993 between the Company and
Javier Cayado.
10.42* Deferred Compensation Agreement, dated August 8, 1996, between the
Company and Paul Kleutghen.
10.43* Deferred Compensation Agreement, dated November 22, 1993, between the
Company and Jay Cayado.
10.44 Co-Promotion Agreement, dated August 1, 1994, between the Company and
Bayer Corporation (formerly Miles Inc.), including Amendment Number 1,
dated January 1, 1997, Amendment Number 2, dated January 1, 1997 and
Amendment Number 3 dated as of January 28, 1998. (1)
10.45* Schein Pharmaceutical, Inc. 1998 Stock Purchase Plan dated January 28,
1998.
12.1* Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
21.1 List of Subsidiaries. (1)
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Proskauer Rose LLP (contained in opinion filed as Exhibit
5.1).
24.1 Power of Attorney (set forth on signature page of this registration
statement).
25.1* Statement of Eligibility of Trustee.
27.1 Financial Data Schedule. (1)
99.1 Revised Form of Letter of Transmittal.
99.2 Revised Form of Notice of Guaranteed Delivery.
99.3 Revised Form of Exchange Agent Agreement.
</TABLE>
- --------
* Previously filed.
(1) Previously filed and incorporated herein by reference from the Company's
Registration Statement on Form S-1 filed with the Commission on December
3, 1997 (File No. 333-41413).
II-4
<PAGE>
(b) Financial Statement Schedules:
Schedule II--Valuation Allowances
ITEM 22. UNDERTAKINGS.
The Registrant hereby undertakes:
(a) To file, during any period in which offerings or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(d) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(e) That every prospectus (i) that is filed pursuant to paragraph (d)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415 (Section 230.415 of this
chapter), will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that,
for purposes of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(f) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(g) 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 15, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in
II-5
<PAGE>
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 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.
(h) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of Form
S-4, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(i) To supply by means of post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE UNDERSIGNED
REGISTRANT CERTIFIES THAT IT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK, ON THE 16TH DAY OF MARCH, 1998.
Schein Pharmaceutical, Inc.
/s/ Martin Sperber
By:
-----------------------------------
MARTIN SPERBER CHAIRMAN OF THE
BOARD, CHIEF EXECUTIVE OFFICER AND
PRESIDENT
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below hereby constitutes and appoints Martin Sperber,
Dariush Ashrafi and Paul Feuerman, or any of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his
behalf individually and in any and all capacities (until revoked in writing),
any and all amendments (including post-effective amendments) to this
Registration Statement on Form S-4, and any registration statement relating to
the same offering as this Registration Statement, to file the same with all
exhibits thereto and all other documents in connection therewith with the
Securities and Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, full power and authority to do all such other acts
and things requisite or necessary to be done, and to execute all such other
documents as they, or either of them, may deem necessary or desirable in
connection with the foregoing, as fully as the undersigned might or could do
in person, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or either of them, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Martin Sperber Chairman of the
- ------------------------------------- Board, Chief March 16, 1998
MARTIN SPERBER Executive Officer
and President
(principal
executive officer)
/s/ Dariush Ashrafi Chief Financial
- ------------------------------------- Officer, Executive March 16, 1998
DARIUSH ASHRAFI Vice President and
Director (principal
financial and
accounting officer)
/s/ Paul Feuerman Senior Vice
- ------------------------------------- President, General March 16, 1998
PAUL FEUERMAN Counsel and
Director
Director
/s/ David R. Ebsworth March 16, 1998
- -------------------------------------
DAVID R. EBSWORTH
/s/ Richard L. Goldberg Director
- ------------------------------------- March 16, 1998
RICHARD L. GOLDBERG
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
registrant certifies that it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 16th day of March, 1998.
Schein Pharmaceutical International,
Inc.
/s/ Martin Sperber
By: _________________________________
MARTIN SPERBER
CHAIRMAN OF THE BOARD
AND PRESIDENT
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below hereby constitutes and appoints Martin Sperber,
Dariush Ashrafi and Paul Feuerman, or any of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his
behalf individually and in any and all capacities (until revoked in writing),
any and all amendments (including post-effective amendments) to this
Registration Statement on Form S-4, and any registration statement relating to
the same offering as this Registration Statement, to file the same with all
exhibits thereto and all other documents in connection therewith with the
Securities and Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, full power and authority to do all such other acts
and things requisite or necessary to be done, and to execute all such other
documents as they, or either of them, may deem necessary or desirable in
connection with the foregoing, as fully as the undersigned might or could do
in person, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or either of them, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Martin Sperber Chairman of the
- ------------------------------------- Board and President March 16, 1998
MARTIN SPERBER (principal
executive officer)
/s/ Dariush Ashrafi Chief Financial
- ------------------------------------- Officer and March 16, 1998
DARIUSH ASHRAFI Director (principal
financial and
accounting officer)
/s/ Paul Feuerman Secretary and
- ------------------------------------- Director March 16, 1998
PAUL FEUERMAN
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
registrant certifies that it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 16th day of March, 1998.
Schein Pharmaceutical Pa, Inc.
/s/ Martin Sperber
By: _________________________________
MARTIN SPERBER
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below hereby constitutes and appoints Martin Sperber,
Dariush Ashrafi and Paul Feuerman, or any of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his
behalf individually and in any and all capacities (until revoked in writing),
any and all amendments (including post-effective amendments) to this
Registration Statement on Form S-4, and any registration statement relating to
the same offering as this Registration Statement, to file the same with all
exhibits thereto and all other documents in connection therewith with the
Securities and Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, full power and authority to do all such other acts
and things requisite or necessary to be done, and to execute all such other
documents as they, or either of them, may deem necessary or desirable in
connection with the foregoing, as fully as the undersigned might or could do
in person, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or either of them, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Martin Sperber Chairman of the
- ------------------------------------- Board, Chief March 16, 1998
MARTIN SPERBER Executive Officer
and President
(principal
executive officer)
/s/ Dariush Ashrafi Chief Financial
- ------------------------------------- Officer and March 16, 1998
DARIUSH ASHRAFI Director (principal
financial and
accounting officer)
/s/ Paul Feuerman Secretary and
- ------------------------------------- Director March 16, 1998
PAUL FEUERMAN
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
registrant certifies that it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 16th day of March, 1998.
Schein Pharmaceutical Service
Company
/s/ Martin Sperber
By: _________________________________
MARTIN SPERBER
CHAIRMAN OF THE BOARD
AND PRESIDENT
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below hereby constitutes and appoints Martin Sperber,
Dariush Ashrafi and Paul Feuerman, or any of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his
behalf individually and in any and all capacities (until revoked in writing),
any and all amendments (including post-effective amendments) to this
Registration Statement on Form S-4, and any registration statement relating to
the same offering as this Registration Statement, to file the same with all
exhibits thereto and all other documents in connection therewith with the
Securities and Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, full power and authority to do all such other acts
and things requisite or necessary to be done, and to execute all such other
documents as they, or either of them, may deem necessary or desirable in
connection with the foregoing, as fully as the undersigned might or could do
in person, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or either of them, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Martin Sperber Chairman of the
- ------------------------------------- Board and President March 16, 1998
MARTIN SPERBER (principal
executive officer)
/s/ Dariush Ashrafi Chief Financial
- ------------------------------------- Officer and March 16, 1998
DARIUSH ASHRAFI Director (principal
financial and
accounting officer)
/s/ Paul Feuerman Secretary and
- ------------------------------------- Director March 16, 1998
PAUL FEUERMAN
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
registrant certifies that it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 16th day of March, 1998.
Steris Laboratories, Inc.
/s/ Martin Sperber
By: _________________________________
MARTIN SPERBER
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below hereby constitutes and appoints Martin Sperber,
Dariush Ashrafi and Paul Feuerman, or any of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his
behalf individually and in any and all capacities (until revoked in writing),
any and all amendments (including post-effective amendments) to this
Registration Statement on Form S-4, and any registration statement relating to
the same offering as this Registration Statement, to file the same with all
exhibits thereto and all other documents in connection therewith with the
Securities and Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, full power and authority to do all such other acts
and things requisite or necessary to be done, and to execute all such other
documents as they, or either of them, may deem necessary or desirable in
connection with the foregoing, as fully as the undersigned might or could do
in person, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or either of them, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Martin Sperber Chairman of the Board
- ------------------------------------- and Chief Executive March 16, 1998
MARTIN SPERBER Officer (principal
executive officer)
/s/ Dariush Ashrafi Chief Financial Officer
and
Director (principal financial
and accounting
officer)
- ------------------------------------- March 16, 1998
DARIUSH ASHRAFI
/s/ Paul Feuerman Secretary and
- ------------------------------------- Director March 16, 1998
PAUL FEUERMAN
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
registrant certifies that it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 16th day of March, 1998.
Marsam Pharmaceuticals Inc.
/s/ Martin Sperber
By
-----------------------------------
MARTIN SPERBER
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
TREASURER
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below hereby constitutes and appoints Martin Sperber,
Dariush Ashrafi and Paul Feuerman, or any of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his
behalf individually and in any and all capacities (until revoked in writing),
any and all amendments (including post-effective amendments) to this
Registration Statement on Form S-4, and any registration statement relating to
the same offering as this Registration Statement, to file the same with all
exhibits thereto and all other documents in connection therewith with the
Securities and Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, full power and authority to do all such other acts
and things requisite or necessary to be done, and to execute all such other
documents as they, or either of them, may deem necessary or desirable in
connection with the foregoing, as fully as the undersigned might or could do
in person, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or either of them, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Martin Sperber Chairman of the
- ------------------------------------- Board, Chief March 16, 1998
MARTIN SPERBER Executive Officer
and Treasurer
(principal
executive officer)
Chief Financial
/s/ Dariush Ashrafi* Officer and March 16, 1998
- ------------------------------------- Director (principal
DARIUSH ASHRAFI financial and
accounting officer)
/s/ Paul Feuerman Assistant Secretary
- ------------------------------------- and Director March 16, 1998
PAUL FEUERMAN
*By:
/s/ Paul Feuerman
---------------------------------
PAUL FEUERMAN
ATTORNEY-IN-FACT
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
registrant certifies that it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 16th day of March, 1998.
Danbury Pharmacal, Inc.
/s/ Martin Sperber
By __________________________________
MARTIN SPERBER
CHAIRMAN OF THE BOARD
CHIEF EXECUTIVE OFFICER
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below hereby constitutes and appoints Martin Sperber,
Dariush Ashrafi and Paul Feuerman, or any of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his
behalf individually and in any and all capacities (until revoked in writing),
any and all amendments (including post-effective amendments) to this
Registration Statement on Form S-4, and any registration statement relating to
the same offering as this Registration Statement, to file the same with all
exhibits thereto and all other documents in connection therewith with the
Securities and Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, full power and authority to do all such other acts
and things requisite or necessary to be done, and to execute all such other
documents as they, or either of them, may deem necessary or desirable in
connection with the foregoing, as fully as the undersigned might or could do
in person, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or either of them, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Martin Sperber Chairman of the
- ------------------------------------- Board and Chief March 16, 1998
MARTIN SPERBER Executive Officer
(principal
executive officer)
/s/ Dariush Ashrafi Chief Financial
- ------------------------------------- Officer and March 16, 1998
DARIUSH ASHRAFI Director (principal
financial and
accounting officer)
/s/ Paul Feuerman Secretary and
- ------------------------------------- Director March 16, 1998
PAUL FEUERMAN
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
registrant certifies that it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 16th day of March, 1998.
Danbury Pharmacal Puerto Rico, Inc.
/s/ Martin Sperber
By __________________________________
MARTIN SPERBER
CHAIRMAN OF THE BOARD
CHIEF EXECUTIVE OFFICER
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below hereby constitutes and appoints Martin Sperber,
Dariush Ashrafi and Paul Feuerman, or any of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his
behalf individually and in any and all capacities (until revoked in writing),
any and all amendments (including post-effective amendments) to this
Registration Statement on Form S-4, and any registration statement relating to
the same offering as this Registration Statement, to file the same with all
exhibits thereto and all other documents in connection therewith with the
Securities and Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, full power and authority to do all such other acts
and things requisite or necessary to be done, and to execute all such other
documents as they, or either of them, may deem necessary or desirable in
connection with the foregoing, as fully as the undersigned might or could do
in person, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or either of them, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Martin Sperber Chairman of the
- ------------------------------------- Board and Chief March 16, 1998
MARTIN SPERBER Executive Officer
(principal
executive officer)
/s/ Dariush Ashrafi Chief Financial
- ------------------------------------- Officer and March 16, 1998
DARIUSH ASHRAFI Director (principal
financial and
accounting officer)
/s/ Paul Feuerman Secretary and
- ------------------------------------- Director March 16, 1998
PAUL FEUERMAN
II-14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
Schein Pharmaceutical, Inc.
The audits referred to in our report to Schein Pharmaceutical, Inc. and
Subsidiaries, dated January 30, 1998, which is contained in the Prospectus
constituting part of this Registration Statement included the audit of the
schedule listed under Item 16(b) for each of the three years in the period
ended December 27, 1997. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based upon our audits.
In our opinion, such schedule presents fairly, in all material respects, the
information set forth therein.
BDO Seidman, LLP
New York, New York
January 30, 1998
II-15
<PAGE>
SCHEIN PHARMACEUTICAL, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END
OF PERIOD ADDITIONS DEDUCTIONS(1) OTHER OF PERIOD
---------- --------- ------------- ----- ----------
<S> <C> <C> <C> <C> <C>
Allowance For Doubtful
Accounts:
Year Ended December 30,
1995.................. $3,847 $-- $ (506) $494(2) $3,835
====== ==== ======= ==== ======
Year Ended December 28,
1996.................. $3,835 $366 $(1,801) $ 34 $2,434
====== ==== ======= ==== ======
Year Ended December 27,
1997.................. $2,434 $-- $ (174) $-- $2,260
====== ==== ======= ==== ======
</TABLE>
- --------
(1) Accounts written off--net of recoveries
(2) Relates to the acquisition of Marsam
II-16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
3.1* Restated Certificate of Incorporation of the Company.
3.2* Amended and Restated By-Laws of the Company.
3.3 Restated Certificate of Incorporation of the Company adopted by
the Company on March 6, 1998. (1)
3.4 Amended and Restated By-Laws of the Company adopted by the
Company on March 6, 1998. (1)
3.5* Certificate of Incorporation of Schein Pharmaceutical
International, Inc.
3.6* By-Laws of Schein Pharmaceutical International, Inc.
3.7* Certificate of Incorporation of Schein Pharmaceutical PA, Inc.
3.8* By-Laws of Schein Pharmaceutical PA, Inc.
3.9* Certificate of Incorporation of Schein Pharmaceutical Service
Company.
3.10* By-Laws of Schein Pharmaceutical Service Company.
3.11* Certificate of Incorporation of Steris Laboratories, Inc.
3.12* By-Laws of Steris Laboratories, Inc.
3.13* Certificate of Incorporation of Marsam Pharmaceuticals Inc.
3.14* By-Laws of Marsam Pharmaceuticals Inc.
3.15* Certificate of Incorporation of Danbury Pharmacal, Inc.
3.16* By-Laws of Danbury Pharmacal, Inc.
3.17* Certificate of Incorporation of Danbury Pharmacal Puerto Rico,
Inc.
3.18* By-Laws of Danbury Pharmacal Puerto Rico, Inc.
4.1 Credit Agreement dated as of September 5, 1995 among the
Company, the Lenders (as defined therein), and Chemical Bank as
Issuing Bank, Administrative Agent and as Collateral Agent for
the Lenders. (1)
4.2* First, Second, Third and Fourth Amendments to the Credit
Agreement.
4.3* Senior Subordinated Loan Agreement dated as of December 20,
1996 among the Company, the Lenders (as defined therein) and
Societe Generale as Administrative Agent.
4.4* Indenture dated as of December 24, 1997 among the Company, the
Guarantors (as defined therein) and The Bank of New York.
4.5* Registration Rights Agreement dated as of December 24, 1997
between the Company and Societe Generale Securities
Corporation.
4.6* Purchase Agreement dated December 19, 1997 among the Company,
the Guarantors (as defined therein) and Societe Generale
Securities Corporation.
4.7* Offering Memorandum, dated December 19, 1997 for the Company's
$100,000,000 Senior Floating Rate Note due 2004.
5.1 Form of Opinion of Proskauer Rose LLP.
9.1* Voting Trust Agreement, dated September 30, 1994, by and among
the Company, Marvin H. Schein, the trust established by Marvin
H. Schein under trust agreement dated December 31, 1993, the
trust established by Marvin H. Schein under trust agreement
dated September 9, 1994, Pamela Schein, the trust established
by the Trustees under Article Fourth of the Will of Jacob M.
Schein for the benefit of Pamela Schein and her issue under
trust agreement dated September 29, 1994, Pamela Joseph, and
the trust established by Pamela Joseph under trust agreement
dated September 28, 1994, and Martin Sperber, as voting
trustee. (1)
10.1 Supply Agreement, dated May 1, 1992, between Abbott
Laboratories, and Steris Laboratories, Inc., including Letter
Amendment, dated December 2, 1993, and Letter Amendment, dated
June 9, 1995. (1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.2 Agreement, dated June 10, 1994, between Steris Laboratories,
Inc., Akzo Pharma International B.V., and Organon Inc. (1)
10.3 [Intentionally omitted.]
10.4 Sublicense, Co-marketing and Supply Agreement, dated September
30, 1996, between the Company and Makoff R&D Laboratories,
Inc., including Operating Agreement, dated September 30, 1996.
(1)
10.5 Agreement, dated August 16, 1994, between the Company and Elan
Pharma Ltd. (currently Elan Corporation plc). (1)
10.6 Custom Manufacturing Agreement, dated July 1, 1995, between the
Company and Johnson Matthey, Inc. (1)
10.7 Letter of Intent, dated October 7, 1997, by and among the
Company, Cheminor Drugs Limited and Dr. Reddy's Laboratories
Limited. (1)
10.8* Lease Agreement, dated March 30, 1992, between the Company and
Harold Lepler.
10.9* Lease Agreement, dated February 16, 1992, between the Company
and Ronald G. Roth.
10.10* Memorandum of Lease for Danbury, dated December 1, 1995 between
Danbury Pharmacal, Inc. and Albert J. Salame.
10.11* Agreement of Lease for Florham Park Corporate Office, dated
April 16, 1993, between the Company and Sammis Morristown
Associates, including First Amendment and Second Amendment
thereto.
10.12* Cherry Hill Lease Agreement, dated November 12, 1996, between
the Company and Cherry Hill Industrial Sites, Inc.
10.13 Schein Holdings, Inc. 1993 Stock Option Plan (formerly the
Schein Pharmaceutical, Inc. 1993 Stock Option Plan) dated as of
November 5, 1993. (1)
10.14 Schein Pharmaceutical, Inc. 1997 Stock Option Plan. (1)
10.15 Schein Pharmaceutical, Inc. 1995 Non-Employee Director Stock
Option Plan (amended and restated as of August 8, 1996). (1)
10.16 Employment Agreement, dated November 29, 1993 between the
Company and Paul Feuerman. (1)
10.17 Deferred Compensation Agreement, dated August 8, 1996, between
the Company and Paul Feuerman. (1)
10.18 Employment Agreement, dated May 1, 1995, between the Company
and Dariush Ashrafi. (1)
10.19 Employment offer letter, dated April 17, 1995, from the Company
to Dariush Ashrafi. (1)
10.20 Employment Agreement, dated September 30, 1994, as amended,
between the Company and Martin Sperber. (1)
10.21 Option Agreement Pursuant to 1993 Stock Option Plan dated
September 30, 1994 between Schein Holdings, Inc. and Martin
Sperber. (1)
10.22 Employment Agreement, dated as of July 28, 1995, between the
Company and Marvin Samson. (1)
10.23 Compensation Continuation Agreement, dated October 19, 1991
between the Company and Marvin Samson. (1)
10.24 Split Dollar Insurance Agreement, dated March 25, 1991 between
the Company, Michael Samson and Andrew Samson, Trustees under
Indenture of Trust of Marvin Samson. (1)
10.25 Retirement Plan of Schein Pharmaceutical, Inc. and Affiliates;
including Amendment No. 4. (1)
10.26 Amendment No. 1 to the Retirement Plan of Schein
Pharmaceutical, Inc. and Affiliates. (1)
10.27 1993 Book Equity Appreciation Rights Program. (1)
10.28 Form of Book Equity Appreciation Rights Award. (1)
10.29 Form of Split Dollar Life Insurance Agreement. (1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.30 General Shareholders Agreement, dated September 30, 1994, by
and among the Corporation, Bayer Corporation (formerly Miles
Inc.), each of the family shareholders listed as such on
schedule A thereto, each of the other shareholders listed as
such on schedule A thereto and Martin Sperber, as trustee under
the Voting Trust Agreement. (1)
10.31 Continuing Shareholders Agreement, dated September 30, 1994, by
and among the Company and each of the shareholders listed on
schedule A thereto. (1)
10.32 Heads of Agreement, dated September 30, 1994, by and among the
Company, Bayer Corporation (formerly Miles Inc.) and Bayer A.G.
(1)
10.33 Second Consolidated Agreement, dated December 15, 1992, between
the Company, its affiliates, and Alfred B. Engelberg. (1)
10.34 License and Development Agreement, dated January 15, 1993,
between the Company and Ethical Holdings PLC, including
Amendment, dated November 4, 1994. (1)
10.35 License and Development Agreement, dated January 16, 1993,
between the Company and Ethical Holdings Limited. (1)
10.36 Letter Agreement, dated June 23, 1995, between the Company and
Ethical Holdings, Inc., including Revised Schedule 5, effective
July 21, 1995. (1)
10.37 [Intentionally omitted.]
10.38 Multiproduct Technology Transfer, Development and License
Agreement, dated August 30, 1994, between the Company and
Ethical Holdings PLC. (1)
10.39 License and Development Agreement, dated March 31, 1994,
between the Company and Ethical Holdings PLC. (1)
10.40* Employment Agreement, dated November 29, 1993, between the
Company and Paul Kleutghen.
10.41* Employment Agreement, dated November 22, 1993 between the
Company and Javier Cayado.
10.42* Deferred Compensation Agreement, dated August 8, 1996, between
the Company and Paul Kleutghen.
10.43* Deferred Compensation Agreement, dated November 22, 1993,
between the Company and Jay Cayado.
10.44 Co-Promotion Agreement, dated August 1, 1994, between the
Company and Bayer Corporation (formerly Miles Inc.), including
Amendment Number 1, dated January 1, 1997, and Amendment
Number 2, dated January 1, 1997. (1)
10.45 Schein Pharmaceutical, Inc. 1998 Stock Purchase Plan. (1)
12.1* Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
21.1 List of Subsidiaries. (1)
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Proskauer Rose LLP (contained in opinion filed as
Exhibit 5.1).
24.1 Power of Attorney (set forth on signature page of this
registration statement).
25.1 Statement of Eligibility of Trustee.
27.1* Financial Data Schedule.
99.1 Revised Form of Letter of Transmittal.
99.2 Revised Form of Notice of Guaranteed Delivery.
99.3 Revised Form of Exchange Agent Agreement.
</TABLE>
- --------
* Previously filed.
(1) Previously filed and incorporated herein by reference from the Company's
Registration Statement on Form S-1 filed with the Commission on December
3, 1997 (File No. 333-41413).
<PAGE>
[Letterhead of Proskauer Rose LLP]
Exhibit 5.1
March __, 1998
Schein Pharmaceutical, Inc.
Florham Park, New Jersey
Ladies and Gentlemen:
You have requested our opinion in connection with the filing by Schein
Pharmaceutical, Inc., a Delaware corporation (the "Company"), with the
Securities and Exchange Commission of a Registration Statement on Form S-4
(Commission File No.: 333-45743) (the "Registration Statement") under the
Securities Act of 1933 (the "Securities Act") with respect to $100,000,000
principal amount of the Company's Senior Floating Rate Notes Due 2004 (the "New
Notes"). The Registration Statement relates to the offer (the "Exchange Offer")
by the Company to exchange the New Notes for $100,000,000 principal amount of
the Company's outstanding Senior Floating Rate Notes Due 2004 (the "Old Notes").
We have examined such records, documents and other instruments as we have deemed
relevant and necessary as a basis for the opinions hereinafter set forth. We
have also assumed without investigation the authenticity of any document
submitted to us as an original, the conformity to originals of any document
submitted to us as a copy, the authenticity of the originals of such latter
documents, the genuineness of all signatures and the legal capacity of natural
persons signed such documents.
Based upon the foregoing, it is our opinion that:
The New Notes, when duly executed by the Company, authenticated by the trustee
pursuant to the terms of the related Indenture and exchanged for the Old Notes
in accordance with the terms of the Exchange Offer, will be duly authorized and
legally issued and will constitute binding obligations of the Company entitled
to the benefits of the Indenture in accordance with their terms, subject as to
their binding nature to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally and subject to general principles of equity,
including principles of commercial reasonableness, good faith and fair dealing
(regardless of whether enforcement is sought in a proceeding at law or in
equity).
The foregoing opinions relate only to matters of the internal law of the State
of New York and to the general corporate law of the State of Delaware and to
matters of Federal law and do not purport to express any opinion on the laws of
any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to our firm under the caption,
"Legal Matters," in the Prospectus contained in the Registration Statement. In
so doing, we do not admit that we are in the category of persons whose consent
is required under Section 7 of the Securities Act or the rules and regulations
of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Proskauer Rose LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Schein Pharmaceutical, Inc.
Florham Park, New Jersey
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated January 30, 1998, relating to the
consolidated financial statements of Schein Pharmaceutical, Inc. and
Subsidiaries, which is contained in that Prospectus, and of our report dated
January 30, 1998 relating to the Schedule, which is contained in Part II of
the Registration Statement.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
March 10, 1998
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
OFFER FOR ANY AND ALL OUTSTANDING
SENIOR FLOATING RATE NOTES DUE 2004
OF
SCHEIN PHARMACEUTICAL, INC.
IN EXCHANGE FOR
SENIOR FLOATING RATE NOTES DUE 2004
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
PURSUANT TO THE PROSPECTUS DATED MARCH , 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON MARCH , 1998, UNLESS THE OFFER IS EXTENDED. TENDERS MAY BE
WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
By Hand Or Overnight Facsimile Transmissions: By Registered Or Certified
Delivery: (Eligible Institutions Mail:
Only)
The Bank of New York The Bank of New York
101 Barclay Street (212) 815-6339 101 Barclay Street, 7E
Corporate Trust Services New York, New York 10286
Window To Confirm by Telephone Attention: Reorganization
Ground Level or for Information Call: Section,
Attention: Reorganization 7E; Diana Torres
Section, (212) 815-5789
7E; Diana Torres
Delivery of this letter of transmittal to an address other than as set forth
above or transmission of this letter of transmittal via facsimile to a number
other than as set forth above does not constitute a valid delivery.
The undersigned acknowledges that he or she has received the Prospectus,
dated March , 1998 (the "Prospectus"), of Schein Pharmaceutical, Inc., a
Delaware corporation (the "Company"), and this Letter of Transmittal, which
together constitute the Company's offer (the "Exchange Offer") to exchange
$1,000 principal amount of its Senior Floating Rate Notes due 2004 (the "New
Notes"), which have been registered under the Securities Act of 1933, as
amended (the "Securities Act") of the Company for a like amount of the issued
and outstanding Senior Floating Rate Notes due 2004 (the "Old Notes") of the
Company from the holders thereof.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
<PAGE>
DESCRIPTION OF OLD NOTES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
AMOUNT TENDERED
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S): CERTIFICATE (IF
(PLEASE FILL IN, IF BLANK) NUMBER(S)* LESS THAN ALL)**
- ---------------------------------------------------------------------------------------
<S> <C> <C>
---------------- -------------------
---------------- -------------------
---------------- -------------------
---------------- -------------------
TOTAL PRINCIPAL AMOUNT OF OLD NOTES TEN-
DERED
- ---------------------------------------------------------------------------------------
</TABLE>
* Need not be completed if Old Notes are being tendered by book-entry
transfer or in accordance with DTC's ATOP procedure for transfer.
** Need not be completed by holders who wish to tender with respect to all
Old Notes listed. See Instruction 4.
- --------------------------------------------------------------------------------
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined herein).
This Letter of Transmittal is to be used by holders of Old Notes if: (i)
certificates representing Old Notes are to be physically delivered to the
Exchange Agent herewith by such holders; (ii) tender of Old Notes is to be
made by book-entry transfer to the Exchange Agent's account at The Depository
Trust Company ("DTC" or the "Book-Entry Transfer Facility") pursuant to the
procedures set forth in the Prospectus under the caption "The Exchange Offer--
Procedures For Tendering" by any financial institution that is a participant
in the Book-Entry Transfer Facility and whose name appears on a security
position listing as the owner of Old Notes; or (iii) tender of Old Notes is to
be made according to the guaranteed delivery procedures described in the
Prospectus under the captions "The Exchange Offer--Procedures for Tendering"
and "--Guaranteed Delivery Procedures;" and, in each case, instructions are
not being transmitted through DTC's Automated Tender Offer Program ("ATOP")
pursuant to the procedures set forth in the Prospectus under the caption "The
Exchange Offer--Procedures For Tendering."
Holders of Old Notes who are tendering by book-entry transfer to the
Exchange Agent's account at DTC can tender Old Notes through ATOP, where
eligible. DTC participants that are accepting a tender of Old Notes may
transfer their acceptance to DTC, which will verify the acceptance and execute
a book-entry delivery to the Exchange Agent's account at DTC. DTC will then
send an Agent's Message to the Exchange Agent for its acceptance. Delivery of
the Agent's Message by DTC will satisfy the terms of the Exchange Offer as to
execution and delivery of a Letter of Transmittal by the DTC participant
identified in the Agent's Message.
Holders of Old Notes whose certificates (the "Certificates") for such Old
Notes are not immediately available or who cannot deliver their Certificates
and all other required documents to the Exchange Agent on or prior to the
Expiration Date (as defined in the Prospectus) or who cannot complete the
procedures for book-entry transfer on a timely basis, must tender their Old
Notes according to the guaranteed delivery procedures set forth in "The
Exchange Offer--Procedures for Tendering" and "--Guaranteed Delivery
Procedures" in the Prospectus.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. NOTE: SIGNATURES MUST BE PROVIDED
BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
2
<PAGE>
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
[_] CHECK HERE IF TENDERED NOTES ARE ENCLOSED
[_] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER (INCLUDING BY ATOP) MADE TO THE ACCOUNT MAINTAINED BY THE
EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE
FOLLOWING:
Name of Tendering Institution: ___________________________________________
Account Number: __________________________________________________________
Transaction Code Number: _________________________________________________
[_] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY
IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name of Registered Holder(s): ____________________________________________
Window Ticket Number (if any): ___________________________________________
Date of Execution of Notice of Guaranteed Delivery: ______________________
Name of Institution which Guaranteed Delivery: ___________________________
If Guaranteed Delivery is to be made By Book-Entry Transfer:
Name of Tendering Institution: ___________________________________________
Account Number: __________________________________________________________
Transaction Code Number: _________________________________________________
[_] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES
OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name: ____________________________________________________________________
Address: _________________________________________________________________
3
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company, the above described aggregate
principal amount of the Company's Senior Floating Rate Notes due 2004 (the
"Old Notes") in exchange for a like aggregate principal amount of the
Company's Senior Floating Rate Notes due 2004 (the "New Notes") which have
been registered under the Securities Act upon the terms and subject to the
conditions set forth in the Prospectus dated March , 1998 (as the same may be
amended or supplemented from time to time, the "Prospectus"), receipt of which
is acknowledged, and in this Letter of Transmittal (which, together with the
Prospectus, constitute the "Exchange Offer").
Subject to and effective upon the acceptance for exchange of all or any
portion of the Old Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Old Notes as are being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent as its agent and attorney-in-fact (with full knowledge that
the Exchange Agent is also acting as agent of the Company in connection with
the Exchange Offer) with respect to the tendered Old Notes, with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest) subject only to the right of withdrawal described in
the Prospectus, to (i) deliver Certificates for Old Notes to the Company, or
transfer ownership of such Old Notes on the account books maintained by DTC,
together in either such case, with all accompanying evidences of transfer and
authenticity to, or upon the order of, the Company, upon receipt by the
Exchange Agent, as the undersigned's agent, of the New Notes to be issued in
exchange for such Old Notes, (ii) present Certificates for such Old Notes for
transfer, and to transfer the Old Notes on the books of the Company, and (iii)
receive for the account of the Company all benefits and otherwise exercise all
rights of beneficial ownership of such Old Notes, all in accordance with the
terms and conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE OLD
NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE
COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND
CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE OLD
NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES. THE
UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS
DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY OR DESIRABLE TO
COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE OLD NOTES TENDERED
HEREBY. THE UNDERSIGNED HAS READ AND AGREES TO ALL OF THE TERMS OF THE
EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Old Notes
tendered hereby should be printed above, if they are not already set forth
above, as they appear on the Certificates representing such Old Notes. The
Certificate number(s) and the Old Notes that the undersigned wishes to tender
should be indicated in the appropriate boxes above.
If any tendered Old Notes are not exchanged pursuant to the Exchange Offer
for any reason, or if Certificates are submitted for more Old Notes than are
tendered or accepted for exchange, Certificates for such nonexchanged or
nontendered Old Notes will be returned (or, in the case of Old Notes tendered
by book-entry transfer, such Old Notes will be credited to an account
maintained at DTC), without expense to the tendering holder, promptly
following the expiration or termination of the Exchange Offer.
4
<PAGE>
The undersigned understands that tenders of Old Notes pursuant to any one of
the procedures described in "The Exchange Offer--Procedures for Tendering" in
the Prospectus and in the instruction, attached hereto will, upon the
Company's acceptance for exchange of such tendered Old Notes, constitute a
binding agreement between the undersigned, and the Company upon the terms and
subject to the conditions of the Exchange Offer. The undersigned recognizes
that, under certain circumstances set forth in the Prospectus, the Company may
not be required to accept for exchange any of the Old Notes tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby directs that the New Notes be
issued in the name(s) of the undersigned or, in the case of a book-entry
transfer of Old Notes, that such New Notes be credited to the account
indicated above maintained at DTC. If applicable, substitute Certificates
representing Old Notes not exchanged or not accepted for exchange will be
issued to the undersigned or, in the case of a book-entry transfer of Old
Notes, will be credited to the account indicated above maintained at DTC.
Similarly, unless otherwise indicated under "Special Delivery Instructions,"
please deliver New Notes to the undersigned at the address shown below the
undersigned's signature.
BY TENDERING OLD NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (I) THE UNDERSIGNED IS NOT AN
"AFFILIATE" OF THE COMPANY, (II) ANY NEW NOTES TO BE RECEIVED BY THE
UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS, (III)
THE UNDERSIGNED HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO
PARTICIPATE IN A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF
NEW NOTES TO BE RECEIVED IN THE EXCHANGE OFFER, AND (IV) IF THE UNDERSIGNED IS
NOT A BROKER- DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND DOES NOT INTEND
TO ENGAGE IN, A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF
SUCH NEW NOTES. BY TENDERING OLD NOTES PURSUANT TO THE EXCHANGE OFFER AND
EXECUTING THIS LETTER OF TRANSMITTAL, A HOLDER OF OLD NOTES WHICH IS A BROKER-
DEALER REPRESENTS AND AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS
ISSUED BY THE STAFF OF THE DIVISION OF CORPORATION FINANCE OF THE SECURITIES
AND EXCHANGE COMMISSION TO THIRD PARTIES, THAT (A) SUCH OLD NOTES HELD BY THE
BROKER-DEALER ARE HELD ONLY AS A NOMINEE, OR (B) SUCH OLD NOTES WERE ACQUIRED
BY SUCH BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING
ACTIVITIES OR OTHER TRADING ACTIVITIES AND IT WILL DELIVER THE PROSPECTUS (AS
AMENDED OR SUPPLEMENTED FROM TIME TO TIME) MEETING THE REQUIREMENTS OF THE
SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SUCH NEW NOTES (PROVIDED THAT,
BY SO ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, SUCH BROKER-DEALER WILL
NOT BE DEEMED TO ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE
SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM
TIME TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER (AS DEFINED BELOW)
IN CONNECTION WITH RESALES OF NEW NOTES RECEIVED IN EXCHANGE FOR OLD NOTES,
WHERE SUCH OLD NOTES WERE ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING
ACTIVITIES, FOR A PERIOD ENDING 90 DAYS AFTER THE EXPIRATION DATE (SUBJECT TO
EXTENSION UNDER CERTAIN LIMITED CIRCUMSTANCES DESCRIBED IN THE PROSPECTUS) OR,
IF EARLIER, WHEN ALL SUCH NEW NOTES HAVE BEEN DISPOSED OF BY SUCH
PARTICIPATING BROKER-DEALER. IN THAT REGARD, EACH BROKER-DEALER WHO ACQUIRED
OLD NOTES FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING
ACTIVITIES (A "PARTICIPATING BROKER-DEALER"), BY TENDERING SUCH OLD NOTES AND
EXECUTING THIS LETTER OF TRANSMITTAL, AGREES THAT, UPON RECEIPT OF NOTICE
FROM/OR THE TRUST OF THE OCCURRENCE OF ANY EVENT OR THE DISCOVERY OF ANY FACT
WHICH MAKES ANY
5
<PAGE>
STATEMENT CONTAINED OR INCORPORATED BY REFERENCE IN THE PROSPECTUS UNTRUE IN
ANY MATERIAL RESPECT OR WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE A
MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED OR
INCORPORATED BY REFERENCE THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH
THEY WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OF CERTAIN OTHER EVENTS
SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT, SUCH PARTICIPATING BROKER-
DEALER WILL SUSPEND THE SALE OF NEW NOTES PURSUANT TO THE PROSPECTUS UNTIL THE
COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH
MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS
GIVEN NOTICE THAT THE SALE OF THE NEW NOTES MAY BE RESUMED, AS THE CASE MAY
BE. IF THE COMPANY GIVES SUCH NOTICE TO SUSPEND THE SALE OF THE NEW NOTES,
THEY SHALL EXTEND THE 90-DAY PERIOD REFERRED TO ABOVE DURING WHICH
PARTICIPATING BROKER-DEALERS ARE ENTITLED TO USE THE PROSPECTUS IN CONNECTION
WITH THE RESALE OF NEW NOTES BY THE NUMBER OF DAYS DURING THE PERIOD FROM AND
INCLUDING THE DATE OF THE GIVING OF SUCH NOTICE TO AND INCLUDING THE DATE WHEN
PARTICIPATING BROKER-DEALERS SHALL HAVE RECEIVED COPIES OF THE SUPPLEMENTED OR
AMENDED PROSPECTUS NECESSARY TO PERMIT RESALES OF THE NEW NOTES OR TO AND
INCLUDING THE DATE ON WHICH THE COMPANY HAS GIVEN NOTICE THAT THE SALE OF NEW
NOTES MAY BE RESUMED, AS THE CASE MAY BE.
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive accrued interest on such Old Notes for any period from and after the
last Interest Payment Date to which interest has been paid or duty provided
for on such Old Notes prior to the original issue date of the New Notes.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
herein conferred or agreed to be conferred in this Letter of Transmittal shall
survive the death or incapacity of the undersigned and any obligation of the
undersigned hereunder shall be binding upon the heirs, executors,
administrators, personal representatives, trustees in bankruptcy, legal
representatives, successors and assigns of the undersigned. Except as stated
in the Prospectus, this tender is irrevocable.
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES
AS SET FORTH IN SUCH BOX.
HOLDER(S) SIGN HERE
SEE INSTRUCTIONS 2, 5 AND 6 (NOTE: SIGNATURE(S) MUST BE GUARANTEED IF
REQUIRED BY INSTRUCTION 2). PLEASE COMPLETE SUBSTITUTE FORM W-9 ON PAGE 14.
This Letter of Transmittal must be signed by registered holder(s) exactly as
name(s) appear(s) on Certificate(s) for the Old Notes hereby tendered, or by
any person(s) authorized to become the registered holder(s) by endorsements
and documents transmitted herewith (including such opinions of counsel,
certifications and other information as may be required by the Trustee for the
Old Notes to comply with the restrictions on transfer applicable to the Old
Notes). If signature is by an attorney-in-fact, executor, administrator,
trustee, guardian, officer of a corporation or another acting in a fiduciary
capacity or representative capacity, please set forth the signer's full title.
See Instruction 5.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6
<PAGE>
(SIGNATURE(S) OF HOLDER(S)) GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 2 AND 5)
Date: , 1998
Name(s): _________________________ __________________________________
__________________________________ (AUTHORIZED SIGNATURE)
(PLEASE PRINT) Date: . 1998
Capacity (full title): ___________ Name of Firm: ____________________
Address: _________________________ Capacity (full title): ___________
__________________________________ (PLEASE PRINT)
__________________________________ Address: _________________________
(INCLUDE ZIP CODE)
__________________________________
Area Code and __________________________________
Telephone Number: ________________ (INCLUDE ZIP CODE)
Area Code and
__________________________________ Telephone Number: ________________
(TAX IDENTIFICATION OR SOCIAL
SECURITY NUMBER(S))
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6) (SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if the New To be completed ONLY if New
Notes or Old Notes not tendered Notes or Old Notes not tendered
are to be issued in the name of are to be sent to someone other
someone other than the registered than the registered holder of the
holder of the Old Notes whose Old Notes whose name(s) appear(s)
name(s) appear(s) above. above, or such registered
holder(s) at an address other
Issue than that shown above.
[_]Old Notes not tendered to:
[_]New Notes, to: Mail
[_]Old Notes not tendered to:
Name(s): _________________________ [_]New Notes, to:
Address: _________________________
__________________________________ Name(s): _________________________
(INCLUDE ZIP CODE) Address: _________________________
Area Code and __________________________________
Telephone Number: ________________ (INCLUDE ZIP CODE)
__________________________________ Area Code and
__________________________________ Telephone number: ________________
(TAX IDENTIFICATION OR SOCIAL __________________________________
SECURITY NUMBER(S)) (TAX IDENTIFICATION OR SOCIAL
SECURITY NUMBER(S))
7
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES. To tender Old Notes in the Exchange Offer, physical delivery of
certificates for Old Notes, a properly completed and duly executed copy or
facsimile of this Letter of Transmittal (or a confirmation of a book-entry
transfer into the Exchange Agent's account with the Book-Entry Transfer
Facility of Old Notes tendered electronically) and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
at one of its addresses set forth herein prior to the Expiration Date. The
Exchange Agent and DTC have confirmed that the Exchange Offer is eligible for
ATOP. Accordingly, DTC participants may electronically transmit their
acceptance of the Exchange Offer by causing DTC to transfer Old Notes to the
Exchange Agent in accordance with DTC's ATOP procedures for transfer. DTC WILL
THEN SEND an Agent's Message (as defined in the Prospectus) to the Exchange
Agent. Tenders of Old Notes in the Exchange Offer will be accepted prior to
the Expiration Date in accordance with the procedures described in the
preceding sentence and otherwise in compliance with this Letter of
Transmittal. The method of delivery of this Letter of Transmittal, Old Notes
and all other required documents to the Exchange Agent is at the election and
risk of holders of Old Notes. If such delivery is by mail, it is suggested
that holders of Old Notes use properly insured registered mail and return
receipt requested, and that the mailing be made sufficiently in advance of the
Expiration Date, to permit delivery to the Exchange Agent prior to such date.
No alternative, conditional or contingent tenders of Old Notes will be
accepted. Except as otherwise provided below, the delivery will be deemed made
when actually received or confirmed by the Exchange Agent. THIS LETTER OF
TRANSMITTAL AND THE OLD NOTES SHOULD BE SENT ONLY TO THE EXCHANGE AGENT.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY FACILITY DOES NOT CONSTITUTE DELIVERY
TO THE EXCHANGE AGENT.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter
of Transmittal and all other required documents to the Exchange Agent on or
prior to the Expiration Date or (iii) who cannot complete the procedures for
delivery by book-entry transfer on a timely basis, may tender their Old Notes
by properly completing and duly executing a Notice of Guaranteed Delivery
pursuant to the guaranteed delivery procedures set forth in "The Exchange
Offer--Procedures for Tendering" in the Prospectus. Pursuant to such
procedures: (i) such tender must be made by or through an Eligible Institution
(as defined below); (ii) a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form made available by the Company,
must be received by the Exchange Agent on or prior to the Expiration Date; and
(iii) the Certificates (or a book-entry confirmation (as defined in the
Prospectus)) representing all tendered Old Notes, in proper form for transfer,
together with a Letter of Transmittal (or facsimile thereof), properly
completed and duly executed, with any required signature guarantees and any
other documents required by this Letter of Transmittal, must be received by
the Exchange Agent within five New York Stock Exchange, Inc. trading days
after the date of execution of such Notice of Guaranteed Delivery, all as
provided in "The Exchange Offer--Procedures for Tendering" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Old Notes to be
properly tendered pursuant to the guaranteed delivery procedure, the Exchange
Agent must receive a Notice of Guaranteed Delivery on or prior to the
Expiration Date. As used herein and in the Prospectus, "Eligible Institution"
means a firm or other entity identified in Rule 17Ad-15 under the Exchange Act
as "an eligible guarantor institution," including (as such terms are defined
therein): (i) a bank; (ii) a broker, dealer, municipal securities broker or
dealer or government securities broker or dealer; (iii) a credit union; (v) a
national securities exchange, registered securities association or clearing
agency; or (v) a savings association that is a participant in a Securities
Transfer Association.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
8
<PAGE>
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof,) waives any right to receive any notice of the acceptance
of such tender.
2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of
Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder (which
term, for purposes of this document, shall include any participant in DTC
whose name appears on the register of holders maintained by the Trust as
the owner of the Old Notes) of Old Notes tendered herewith, unless such
holder(s) has completed either the box entitled "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" above, or
(ii) such Old Notes are tendered for the account of a firm that is an
Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box captioned "Description
of Old Notes" is inadequate, the Certificate number(s) and/or the principal
amount of Old Notes and any other required information should be listed on a
separate signed schedule which is attached to this Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Old Notes will be
accepted only in integral multiples of $1,000. If less than all the Old Notes
evidenced by any Certificate submitted are to be tendered, fill in the
principal amount of Old Notes which are to be tendered in the box entitled
"Aggregate Principal Amount of Old Notes Tendered (if less than all)." In such
case, new Certificate(s) for the remainder of the Old Notes that were
evidenced by your old Certificate(s) will only be sent to the holder of the
Old Notes, promptly after the Expiration Date. All Old Notes represented by
Certificates delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date. In order for a withdrawal to
be effective on or prior to that time, a written, telegraphic, telex or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at one of its addresses set forth above or in the
Prospectus on or prior to the Expiration Date. Any such notice of withdrawal
must specify the name of the person who tendered the Old Notes to be
withdrawn, the aggregate principal amount of Old Notes to be withdrawn, and
(if Certificates for Old Notes have been tendered) the name of the registered
holder of the Old Notes as set forth on the Certificate for the Old Notes, if
different from that of the person who tendered such Old Notes. If Certificates
for the Old Notes have been delivered or otherwise identified to the Exchange
Agent, then prior to the physical release of such Certificates for the Old
Notes, the tendering holder must submit the serial numbers shown on the
particular Certificates for the Old Notes to be withdrawn and the signature on
the notice of withdrawal must be guaranteed by an Eligible Institution, except
in the case of Old Notes tendered for the account of an Eligible Institution.
If Old Notes have been tendered pursuant to the procedures for book-entry
transfer set forth in the Prospectus under "The Exchange Offer--Procedures for
Tendering," the notice of withdrawal must specify the name and number of the
account at DTC to be credited with the withdrawal of Old Notes, in which case
a notice of withdrawal will be effective if delivered to the Exchange Agent by
written, telegraphic, telex or facsimile transmission. Withdrawals of tenders
of Old Notes may not be rescinded. Old Notes properly withdrawn will not be
deemed validly tendered for purposes of the Exchange Offer, but may be
retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described in the Prospectus under "The
Exchange Offer--Procedures for Tendering."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all
parties. Neither the Company nor the Exchange Agent or any other person shall
be under any duty to give any notification of any irregularities in any notice
of withdrawal or incur any liability for failure to give any such
notification. Any Old Notes which have been tendered but which are withdrawn
will be returned to the holder thereof without cost to such holder promptly
after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the Old
Notes tendered hereby, the signature(s) must correspond exactly with the
name(s) as written on the face of the Certificate(s) without alteration,
enlargement or any change whatsoever.
9
<PAGE>
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any, tendered Old Notes are registered in different name(s) on several
Certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing and must submit proper evidence
satisfactory to the Company, in its sole discretion, of each such person's
authority so to act.
When this Letter of Transmittal is signed by the registered owner(s) of the
Old Notes listed and transmitted hereby, no endorsement(s) of Certificate(s)
or separate bond power(s) are required unless New Notes are to be issued in
the name of a person other than the registered holder(s). Signature(s) on such
Certificate(s) or bond power(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Old Notes listed, the Certificates must be endorsed
or accompanied by appropriate bond powers, signed exactly as the name or names
of the registered owner(s) appear(s) on the Certificates, and also must be
accompanied by such opinions of counsel, certifications and other information
as the Company or the Trustee for the Old Notes may require in accordance with
the restrictions on transfer applicable to the Old Notes. Signatures on such
Certificates or bond powers must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If New Notes are to be issued
in the name of a person other than the signer of this Letter of Transmittal,
or if New Notes are to be sent to someone other than the signer of this Letter
of Transmittal or to an address other than that shown above, the appropriate
boxes on this Letter of Transmittal should be completed. Certificates for Old
Notes not exchanged will be returned by mail or, if tendered by book-entry
transfer, by crediting the account indicated above maintained at DTC. See
Instruction 4.
7. IRREGULARITIES. The Company will determine, in its sole discretion, all
questions as to the form of documents, validity, eligibility (including time
of receipt) and acceptance for exchange of any tender of Old Notes, which
determination shall be final and binding on all parties the Company reserves
the absolute right to reject any and all tenders determined by either of them
not to be in proper form or the acceptance of which, or exchange for which,
may, in the view of counsel to the Company, be unlawful. The Company also
reserves the absolute right, subject to applicable law, to waive any of the
conditions of the Exchange Offer set forth in the Prospectus under "The
Exchange Offer--Conditions" or any conditions or irregularity in any tender of
Old Notes of any particular holder whether or not similar conditions or
irregularities are waived in the case of other holders. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
this Letter of Transmittal and the instructions hereto) will be final and
binding. No tender of Old Notes will be deemed to have been validly made until
all irregularities with respect to such tender have been cured or waived. The
Company and the Exchange Agent, or any other person shall not be under any
duty to give notification of any irregularities in tenders or incur any
liability for failure to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions and
requests for assistance may be directed to the Exchange Agent at its address
and telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Prospectus, the Notice of Guaranteed Delivery and the
Letter of Transmittal may be obtained from the Exchange Agent or from your
broker, dealer, commercial bank, trust company or other nominee.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9. Under U.S. Federal income
tax law, a holder whose tendered Old Notes are accepted for exchange is
required to provide the Exchange Agent with such holder's correct taxpayer
identification number ("TIN") on Substitute Form W-9 below. If the Exchange
Agent is not provided with the correct TIN, the Internal Revenue Service (the
"IRS") may subject the holder or other payee to a $50 penalty. In addition,
payments to such holders or other payees with respect to Old Notes exchanged
pursuant to the Exchange Offer may be subject to 31% backup withholding.
10
<PAGE>
The box in Part 2 of the Substitute Form W-9 may be checked if the tendering
holder has not been issued a TIN and has applied for a TIN or intends to apply
for a TIN in the near future. If the box in Part 2 is checked, the holder or
other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below in order to avoid backup withholding.
Notwithstanding that the box in Part 2 is checked and the Certificate of
Awaiting Taxpayer Identification Number is completed, the Exchange Agent will
withhold 31% of all payments made prior to the time a properly certified TIN
is provided to the Exchange Agent. The Exchange Agent will retain such amounts
withheld during the 60 day period following the date of the Substitute Form W-
9. If the holder furnishes the Exchange Agent with its TIN within 60 days
after the date of the Substitute Form W-9, the amounts retained during the 60
day period will be remitted to the holder and no further amounts shall be
retained or withheld from payments made to the holder thereafter. If, however,
the holder has not provided the Exchange Agent with its TIN within such 60 day
period, amounts withheld will be remitted to the IRS as backup withholding. In
addition, 31% of all payments made thereafter will be withheld and remitted to
the IRS until a correct TIN is provided.
The holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered owner of
the Old Notes or of the last transferee appearing on the transfers attached
to, or endorsed on, the Old Notes. If the Old Notes are registered in more
than one name or are not in the name of the actual number, consult the
enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for additional guidance on which number to report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below, and write "exempt" on the
face thereof, to avoid possible erroneous backup withholding. A foreign person
may qualify), as an exempt recipient by submitting a properly completed IRS
Form W-8, signed under penalties of perjury, attesting to that holder's exempt
status. Please consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather, the
U.S. Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive
satisfaction of any or all conditions enumerated in the Prospectus.
11. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or
contingent tenders will be accepted. All tendering holders of Old Notes, by
execution of this Letter of Transmittal, shall waive any right to receive
notice of the acceptance of their Old Notes for exchanges.
Neither the Company, the Exchange Agent nor any other person is obligated to
give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
12. LOST, DESTROYED OR STOLEN CERTIFICATES. If any Certificate(s)
representing Old Notes have been lost, destroyed or stolen, the holder should
promptly notify the Exchange Agent. The holder will then be instructed as to
the steps that must be taken in order to replace the Certificate(s). This
Letter of Transmittal and related documents cannot be processed until the
procedures for replacing lost, destroyed or stolen Certificate(s) have been
followed.
13. SECURITY TRANSFER TAXES. Holders who tender their Old Notes for exchange
will not be obligated to pay any transfer taxes in connection therewith. If,
however, New Notes are to be delivered to, or are to be issued in the name of,
any person other than the registered holder of the Old Notes tendered, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes in
connection with the Exchange Offer, then the amount of any such transfer tax
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
11
<PAGE>
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
TO BE COMPLETED BY ALL TENDERING NOTEHOLDERS
(SEE INSTRUCTION 9)
PAYER'S NAME: THE BANK OF NEW YORK
PART I--PLEASE PROVIDE YOUR TIN: _________________
SUBSTITUTE TIN ON THE LINE AT RIGHT Social Security Number
FORM W-9 AND CERTIFY BY SIGNING AND or Employee
DATING BELOW Identification Number
DEPARTMENT OF
THE TREASURY --------------------------------------------------------
INTERNAL PART II--TIN Applied For [_]
REVENUE --------------------------------------------------------
SERVICE CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I CER-
TIFY THAT:
(1) the number shown on this form is my correct
taxpayer identification number (or I am waiting
PAYER'S REQUEST FOR for a number to be issued to me).
TAXPAYER IDENTIFICATION
NUMBER ("TIN") AND (2) I am not subject to backup withholding either
CERTIFICATION because (i) I am exempt from backup withholding,
(ii) have not been notified by the Internal
Revenue Service ("IRS") that I am subject to
backup withholding as a result of a failure to
report all interest or dividends, or (iii) the
IRS has notified me that I am no longer subject
to backup withholding, and
(3) any other information provided on this form is
true and correct.
Signature: _______________ Date: __, 1998
--------------------------------------------------------
You must cross out item (iii) in Part (2) above if
you have been notified by the IRS that you are
subject to backup withholding because of
underreporting interest or dividends on your tax
return and you have not been notified by the IRS that
you are no longer subject to backup withholding.
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN CERTAIN CIRCUMSTANCES
RESULT IN BACKUP WITHHOLDING OF 31% OF ANY AMOUNTS PAID TO YOU PURSUANT
TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9
FOR ADDITIONAL DETAILS.
12
<PAGE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 2
OF SUBSTITUTE FORM W-9 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of payment, 31% of all payments made to me on account of the New Notes
shall be retained until I provide a taxpayer identification number to the
Exchange Agent and that, if I do not provide my taxpayer identification number
within 60 days, such retained amounts shall be remitted to the Internal
Revenue Service as backup withholding and 31% of all reportable payments made
to me thereafter will be withheld and remitted to the Internal Revenue Service
until I provide a taxpayer identification number.
Signature: Date: , 1998
13
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
ANY AND ALL OUTSTANDING
SENIOR FLOATING RATE NOTES DUE 2004
OF
SCHEIN PHARMACEUTICAL, INC.
This Notice of Guaranteed Delivery, or one substantially equivalent to this
form, must be used to accept the Exchange Offer (as defined below) if (i)
certificates for the Company's (as defined below) Senior Floating Rate Notes
due 2004 (the "Old Notes") are not immediately available, (ii) Old Notes, the
Letter of Transmittal and all other required documents cannot be delivered to
The Bank of New York (the "Exchange Agent") on or prior to 5:00 P.M. New York
City time, on the Expiration Date (as defined in the Prospectus referred to
below) or (iii) the procedures for delivery by book-entry transfer cannot be
completed on a timely basis. This Notice of Guaranteed Delivery may be
delivered by hand, overnight courier or mail, or transmitted by facsimile
transmission, to the Exchange Agent. See "The Exchange Offer--Procedures for
Tendering" in the Prospectus. In addition, in order to utilize the guaranteed
delivery procedure to tender Old Notes pursuant to the Exchange Offer, a
completed, signed and dated Letter of Transmittal relating to The Old Notes
(or facsimile thereof) must also be received by the Exchange Agent prior to
5:00 P.M. New York City time, on the Expiration Date. Capitalized terms not
defined herein have the meanings assigned to them in the Prospectus.
The Exchange Agent for The Exchange Offer Is:
The Bank Of New York
By Registered or Facsimile Transmissions: By Hand Or Overnight
Certified Mail (Eligible Institutions Only) Delivery
The Bank of New York (212) 815-6339 The Bank of New York
101 Barclay Street, 7E 101 Barclay Street
New York, New York 10286 Confirm By Telephone: Corporate Trust Services
Attn: Reorganization (212) 815-5789 Window
Section, Ground Level
7E; Diana Torres For Information Call: New York, New York 10286
(212) 815-5789 Attn: Reorganization
Section,
Delivery of this Notice Of Guaranteed Delivery to an address other than as
set forth above or transmission of this Notice of Guaranteed Delivery via
facsimile to a number other than as set forth above will not constitute a
valid delivery.
7E; Diana Torres
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Schein Pharmaceutical, Inc., a Delaware
corporation (the "Company") upon the terms and subject to the conditions set
forth in the Prospectus dated March , 1998 (as the same may be amended or
supplemented from time to time, the "Prospectus"), and the related Letter of
Transmittal (which together constitute the "Exchange Offer"), receipt of which
is hereby acknowledged, the aggregate principal amount of Old Notes set forth
below pursuant to the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer--Procedures for Tendering."
Signature if the Registered Owner(s) Name(s) of Registered Holder(s): ____
or _____________________________________
Authorized Signatory: _______________
Address: ____________________________
Aggregate Amount of Old Notes _____________________________________
Tendered:
_____________________________________ Area Code and Tel. No.: _____________
Certificate No(s). of Old Notes (if If Old Notes will be delivered by
available): book-entry at The Depository Trust
_____________________________________ Company, Depository Account No.: ____
Date: _______________________________
This Notice of Guaranteed Delivery must be signed by the holder(s) of the
Old Notes as their name(s) appear(s) on certificates for Old Notes or on a
security position listing, or by person(s) authorized to become registered
holder(s) by endorsement and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must set forth his or her full title
below.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):_______________________________________________________________________
___________________________________________________________________
___________________________________________________________________
Capacity:______________________________________________________________________
Address(es):___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
2
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as an
"eligible guarantor institution," including (as such terms are defined
therein): (i) a bank; (ii) a broker, dealer, municipal securities broker,
municipal securities dealer, government securities broker, government
securities dealer; (iii) a credit union; (iv) a national securities exchange,
registered securities association or learning agency; or (v) a savings
association that is a participant in a Securities Transfer Association
recognized program (each of the foregoing being referred to as an "Eligible
Institution"), hereby guarantees to deliver to the Exchange Agent, at one of
its addresses set forth above, either the Old Notes tendered hereby in proper
form for transfer, or confirmation of the book-entry transfer of such Old
Notes to the Exchange Agent's account at The Depositary Trust Company ("DTC"),
pursuant to the procedures for book-entry transfer set forth in the
Prospectus, in either case together with one or more properly completed and
duly executed Letter(s) of Transmittal (or facsimile thereof) and any other
required documents within five business days after the date of execution of
this Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Old Notes tendered hereby to the Exchange Agent within the
time period set forth above and that failure to do so could result in a
financial loss to the undersigned.
_____________________________________ _____________________________________
Name of Firm Authorized Signature
_____________________________________ _____________________________________
Address Name
_____________________________________ _____________________________________
Zip Code Title
Area Code and Telephone No.: ________ Date: _______________________________
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
3
<PAGE>
EXHIBIT 99.3
March , 1998
EXCHANGE AGENT AGREEMENT
The Bank of New York Corporate Trust Trustee Administration 101 Barclay
Street--21st Floor New York, New York 10286
Ladies and Gentlemen:
Schein Pharmaceutical, Inc. (the "Company") proposes to make an offer (the
"Exchange Offer") to exchange its Senior Floating Rate Notes due 2004 (the
"New Notes") which have been registered under the Securities Act of 1933, as
amended (the "Securities Act") for its Senior Floating Rate Notes due 2004
(the "Old Notes"). The terms and conditions of the Exchange Offer as currently
contemplated are set forth in a prospectus, dated March , 1998 (the
"Prospectus"), proposed to be distributed to all record holders of the Old
Notes. The Old Notes and the New Notes are collectively referred to herein as
the "Notes".
The Company hereby appoints The Bank of New York to act as exchange agent
(the "Exchange Agent") in connection with the Exchange Offer. References
hereinafter to "you" shall refer to The Bank of New York.
The Exchange Offer is expected to be commenced by the Company on or about
March , 1998. The Letter of Transmittal accompanying the Prospectus (or in
the case of book entry securities, the ATOP system) is to be used by the
holders of the Old Notes to accept the Exchange Offer and contains
instructions with respect to the delivery of certificates for Old Notes
tendered in connection therewith.
The Exchange Offer shall expire at 5:00 P.M., New York City time, on April
, 1998 or on such later date or time to which the Company may extend the
Exchange Offer (the "Expiration Date"). Subject to the terms and conditions
set forth in the Prospectus, the Company expressly reserves the right to
extend the Exchange Offer from time to time and may extend the Exchange Offer
by press release or other public announcement prior to 9:00 A.M., New York
City time, on the business day following the previously scheduled Expiration
Date.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted
for exchange, upon the occurrence of any of the conditions of the Exchange
Offer specified in the Prospectus under the caption "The Exchange Offer--
Conditions". The Company will give oral or written notice of any amendment,
termination or nonacceptance to you as promptly as practicable.
In carrying out your duties as Exchange Agent, you are to act in accordance
with the following instructions:
1. You will perform such duties and only such duties as are specifically set
forth in the section of the Prospectus captioned "The Exchange Offer" or as
specifically set forth herein; provided, however, that in no way will your
general duty to act in good faith be discharged by the foregoing.
2. You will establish an account with respect to the Old Notes at The
Depository Trust Company (the "Book-Entry Transfer Facility") for purposes of
the Exchange Offer within two business days after the date of the Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of the Old Notes by causing
the Book-Entry Transfer Facility to transfer such Old Notes into your account
in accordance with the Book-Entry Transfer Facility's procedure for such
transfer.
3. You are to examine each of the Letters of Transmittal and certificates
for Old Notes (or confirmation of book-entry transfer into your account at the
Book-Entry Transfer Facility) and any other documents delivered or mailed to
you by or for holders of the Old Notes to ascertain whether: (i) the Letters
of Transmittal and any such other documents are duly executed and properly
completed in accordance with instructions set forth therein and
<PAGE>
(ii) the Old Notes have otherwise been properly tendered. In each case where
the Letter of Transmittal or any other document has been improperly completed
or executed or any of the certificates for Old Notes are not in proper form
for transfer or some other irregularity in connection with the acceptance of
the Exchange Offer exists, you will endeavor to inform the presenters of the
need for fulfillment of all requirements and to take any other action as may
be necessary or advisable to cause such irregularity to be corrected.
4. With the approval of the President, Executive Vice President or Senior
Vice President of the Company (such approval, if given orally, to be confirmed
in writing) or any other party designated by such an officer in writing, you
are authorized to waive any irregularities in connection with any tender of
Old Notes pursuant to the Exchange Offer.
5. Tenders of Old Notes may be made only as set forth in the Letter of
Transmittal and in the section of the Prospectus captioned "The Exchange
Offer--Procedures for Tendering", and Old Notes shall be considered properly
tendered to you only when tendered in accordance with the procedures set forth
therein.
Notwithstanding the provisions of this paragraph 5, Old Notes which the
President, Executive Vice President or Senior Vice President of the Company
shall approve as having been properly tendered shall be considered to be
properly tendered (such approval, if given orally, shall be confirmed in
writing).
6. You shall advise the Company with respect to any Old Notes received
subsequent to the Expiration Date and accept its instructions with respect to
disposition of such Old Notes.
7. You shall accept tenders:
(a) in cases where the Old Notes are registered in two or more names only
if signed by all named holders;
(b) in cases where the signing person (as indicated on the Letter of
Transmittal) is acting in a fiduciary or a representative capacity only
when proper evidence of his or her authority so to act is submitted; and
(c) from persons other than the registered holder of Old Notes provided
that customary transfer requirements, including any applicable transfer
taxes, are fulfilled.
You shall accept partial tenders of Old Notes where so indicated and as
permitted in the Letter of Transmittal and deliver certificates for Old Notes
to the transfer agent for split-up and return any untendered Old Notes to the
holder (or such other person as may be designated in the Letter of
Transmittal) as promptly as practicable after expiration or termination of the
Exchange Offer.
8. Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Company will notify you (such notice if given orally, to be
confirmed in writing) of its acceptance, promptly after the Expiration Date,
of all Old Notes properly tendered and you, on behalf of the Company, will
exchange such Old Notes for New Notes and cause such Old Notes to be
cancelled. Delivery of New Notes will be made on behalf of the Company by you
at the rate of $1,000 principal amount of New Notes for each $1,000 principal
amount of the Old Notes tendered promptly after notice (such notice if given
orally, to be confirmed in writing) of acceptance of said Old Notes by the
Company; provided, however, that in all cases, Old Notes tendered pursuant to
the Exchange Offer will be exchanged only after timely receipt by you of
certificates for such Old Notes (or confirmation of book-entry transfer into
your account at the Book-Entry Transfer Facility), a properly completed and
duly executed Letter of Transmittal (or facsimile thereof) with any required
signature guarantees and any other required documents. You shall issue New
Notes only in denominations of $1,000 or any integral multiple thereof.
9. Tenders pursuant to the Exchange Offer are irrevocable, except that,
subject to the terms and upon the conditions set forth in the Prospectus and
the Letter of Transmittal, Old Notes tendered pursuant to the Exchange Offer
may be withdrawn at any time prior to the Expiration Date.
2
<PAGE>
10. The Company shall not be required to exchange any Old Notes tendered if
any of the conditions set forth in the Exchange Offer are not met. Notice of
any decision by the Company not to exchange any Old Notes tendered shall be
given (and confirmed in writing) by the Company to you.
11. If, pursuant to the Exchange Offer, the Company does not accept for
exchange all or part of the Old Notes tendered because of an invalid tender,
the occurrence of certain other events set forth in the Prospectus under the
caption "The Exchange Offer--Conditions" or otherwise, you shall as soon as
practicable after the expiration or termination of the Exchange Offer return
those certificates for unaccepted Old Notes (or effect appropriate book-entry
transfer), together with any related required documents and the Letters of
Transmittal relating thereto that are in your possession, to the persons who
deposited them.
12. All certificates for reissued Old Notes, unaccepted Old Notes or for New
Notes shall be forwarded by first-class mail.
13. You are not authorized to pay or offer to pay any concessions,
commissions or solicitation fees to any broker, dealer, bank or other persons
or to engage or utilize any person to solicit tenders.
14. As Exchange Agent hereunder you:
(a) shall have no duties or obligations other than those specifically set
forth herein or as may be subsequently agreed to in writing by you and the
Company;
(b) will be regarded as making no representations and having no
responsibilities as to the validity, sufficiency, value or genuineness of
any of the certificates or the Old Notes represented thereby deposited with
you pursuant to the Exchange Offer, and will not be required to and will
make no representation as to the validity, value or genuineness of the
Exchange Offer;
(c) shall not be obligated to take any legal action hereunder which might
in your reasonable judgment involve any expense or liability, unless you
shall have been furnished with reasonable indemnity;
(d) may reasonably rely on and shall be protected in acting in reliance
upon any certificate, instrument, opinion, notice, letter, telegram or
other document or security delivered to you and reasonably believed by you
to be genuine and to have been signed by the proper party or parties;
(e) may reasonably act upon any tender, statement, request, comment,
agreement or other instrument whatsoever not only as to its due execution
and validity and effectiveness of its provisions, but also as to the truth
and accuracy of any information contained therein, which you shall in good
faith believe to be genuine or to have been signed or represented by a
proper person or persons;
(f) may rely on and shall be protected in acting upon written or oral
instructions from any officer of the Company;
(g) may consult with your counsel with respect to any questions relating
to your duties and responsibilities and the advice or opinion of such
counsel shall be full and complete authorization and protection in respect
of any action taken, suffered or omitted to be taken by you hereunder in
good faith and in accordance with the advice or opinion of such counsel;
and
(h) shall not advise any person tendering Old Notes pursuant to the
Exchange Offer as to the wisdom of making such tender or as to the market
value or decline or appreciation in market value of any Old Notes.
15. You shall take such action as may from time to time be requested by the
Company or its counsel (and such other action as you may reasonably deem
appropriate) to furnish copies of the Prospectus, Letter of Transmittal and
the Notice of Guaranteed Delivery (as defined in the Prospectus) or such other
forms as may be approved from time to time by the Company, to all persons
requesting such documents and to accept and comply with telephone requests for
information relating to the Exchange Offer, provided that such information
shall relate only to the procedures for accepting (or withdrawing from) the
Exchange Offer. The Company will furnish you with copies of such documents at
your request. All other requests for information relating to the Exchange
Offer shall be directed to the Company, Attention: General Counsel.
3
<PAGE>
16. You shall advise by facsimile transmission or telephone, and promptly
thereafter confirm in writing to the General Counsel of the Company and such
other person or persons as it may request, daily (and more frequently during
the week immediately preceding the Expiration Date and if otherwise requested)
up to and including the Expiration Date, as to the number of Old Notes which
have been tendered pursuant to the Exchange Offer and the items received by
you pursuant to this Agreement, separately reporting and giving cumulative
totals as to items properly received and items improperly received. In
addition, you will also inform, and cooperate in making available to, the
Company or any such other person or persons upon oral request made from time
to time prior to the Expiration Date of such other information as it or he or
she reasonably requests. Such cooperation shall include, without limitation,
the granting by you to the Company and such person as the Company may request
of access to those persons on your staff who are responsible for receiving
tenders, in order to ensure that immediately prior to the Expiration Date the
Company shall have received information in sufficient detail to enable it to
decide whether to extend the Exchange Offer. You shall prepare a final list of
all persons whose tenders were accepted, the aggregate principal amount of Old
Notes tendered, the aggregate principal amount of Old Notes accepted and
deliver said list to the Company.
17. Letters of Transmittal and Notices of Guaranteed Delivery shall be
stamped by you as to the date and the time of receipt thereof and shall be
preserved by you for a period of time at least equal to the period of time you
preserve other records pertaining to the transfer of Notes. You shall dispose
of unused Letters of Transmittal and other surplus materials by returning them
to the Company.
18. You hereby expressly waive any lien, encumbrance or right of set-off
whatsoever that you may have with respect to funds deposited with you for the
payment of transfer taxes by reasons of amounts, if any, borrowed by the
Company, or any of its subsidiaries or affiliates pursuant to any loan or
credit agreement with you or for compensation owed to you hereunder.
19. For services rendered as Exchange Agent hereunder, you shall be entitled
to such compensation as set forth on Schedule I attached hereto.
20. You hereby acknowledge receipt of the Prospectus and the Letter of
Transmittal and further acknowledge that you have examined each of them. Any
inconsistency between this Agreement, on the one hand, and the Prospectus and
the Letter of Transmittal (as they may be amended from time to time), on the
other hand, shall be resolved in favor of the latter two documents, except
with respect to the duties, liabilities and indemnification of you as Exchange
Agent, which shall be controlled by this Agreement.
21. The Company covenants and agrees to indemnify and hold you harmless in
your capacity as Exchange Agent hereunder against any loss, liability, cost or
expense, including attorneys' fees and expenses, arising out of or in
connection with any act, omission, delay or refusal made by you in reliance
upon any signature, endorsement, assignment, certificate, order, request,
notice, instruction or other instrument or document reasonably believed by you
to be valid, genuine and sufficient and in accepting any tender or effecting
any transfer of Old Notes reasonably believed by you in good faith to be
authorized, and in delaying or refusing in good faith to accept any tenders or
effect any transfer of Old Notes; provided, however, that the Company shall
not be liable for indemnification or otherwise for any loss, liability, cost
or expense to the extent arising out of your gross negligence or willful
misconduct. In no case shall the Company be liable under this indemnity with
respect to any claim against you unless the Company shall be notified by you,
by letter or by facsimile confirmed by letter, of the written assertion of a
claim against you or of any other action commenced against you, promptly after
you shall have received any such written assertion or notice of commencement
of action. The Company shall be entitled to participate at its own expense in
the defense of any such claim or other action, and, if the Company so elects,
the Company shall assume the defense of any suit brought to enforce any such
claim. In the event that the Company shall assume the defense of any such
suit, the Company shall not be liable for the fees and expenses of any
additional counsel thereafter retained by you so long as the Company shall
retain counsel satisfactory to you to defend such suit, and so long as you
have not determined, in your reasonable judgment, that a conflict of interest
exists between you and the Company.
4
<PAGE>
22. You shall arrange to comply with all requirements under the tax laws of
the United States, including those relating to missing Tax Identification
Numbers, and shall file any appropriate reports with the Internal Revenue
Service. The Company understands that you are required to deduct 31% on
payments to holders who have not supplied their correct Taxpayer
Identification Number or required certification. Such funds will be turned
over to the Internal Revenue Service in accordance with applicable
regulations.
23. You shall deliver or cause to be delivered, in a timely manner to each
governmental authority to which any transfer taxes are payable in respect of
the exchange of Old Notes, the Company's check in the amount of all transfer
taxes so payable, and the Company shall reimburse you for the amount of any
and all transfer taxes payable in respect of the exchange of Old Notes;
provided, however, that you shall reimburse the Company for amounts refunded
to you in respect of your payment of any such transfer taxes, at such time as
such refund is received by you.
24. This Agreement and your appointment as Exchange Agent hereunder shall be
construed and enforced in accordance with the laws of the State of New York
applicable to agreements made and to be performed entirely within such state,
and without regard to conflicts of law principles, and shall inure to the
benefit of, and the obligations created hereby shall be binding upon, the
successors and assigns of each of the parties hereto.
25. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
26. In case any provision of this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
27. This Agreement shall not be deemed or construed to be modified, amended,
rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged. This Agreement may not be modified orally.
28. Unless otherwise provided herein, all notices, requests and other
communications to any party hereunder shall be in writing (including facsimile
or similar writing) and shall be given to such party, addressed to it, at its
address or telecopy number set forth below:
If to the Company:
Schein Pharmaceutical, Inc.
100 Campus Drive
Florham Park, New Jersey 07932
Facsimile: (973) 593-5820
Attention: General Counsel
If to the Exchange Agent:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Facsimile: (212) 815-5915
Attention: Corporate Trust Trustee Administration
29. Unless terminated earlier by the parties hereto, this Agreement shall
terminate 90 days following the Expiration Date. Notwithstanding the
foregoing, Paragraphs 19, 21 and 23 shall survive the termination of this
Agreement. Upon any termination of this Agreement, you shall promptly deliver
to the Company any certificates for Notes, funds or property then held by you
as Exchange Agent under this Agreement.
30. This Agreement shall be binding and effective as of the date hereof.
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Please acknowledge receipt of this Agreement and confirm the arrangements
herein provided by signing and returning the enclosed copy.
Schein Pharmaceutical, Inc.
By: _________________________________
Paul Feuerman
Senior Vice President and General
Counsel
Accepted as of the date first above written:
The Bank of New York, as Exchange Agent
By: _____________________________
Name:
Title:
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SCHEDULE I
FEES
[TO BE INSERTED]
7
